UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q


(Mark
One)





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





For the
quarterly period ended March
31, 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 o   No
x





As of
June 17, 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 ofMarch
      31, 2010 andDecember
      31, 2009 (unaudited)
                                          4Consolidated
      Statements of OperationsFor
      The Three Months EndedMarch
      31, 2010 and 2009 (unaudited)
                                          5Consolidated
      Statements of Stockholders'Equity
      For The Three Months EndedMarch
      31, 2010 and 2009 (unaudited)
                                          6Consolidated
      Statements of Cash FlowsFor
      The Three Months Ended March 31,2010
      and 2009 (unaudited)
                                          7Notes
      to Consolidated FinancialStatements
      (unaudited)
                                          8Item
      2.
                                          Management's
      Discussion and Analysisof
      Financial Condition and Resultsof
      Operations
                                          24Item
      3.
                                          Quantitative
      and Qualitative DisclosureAbout
      Market Risk
                                          40Item
      4.
                                          Controls
      and Procedures
                                          41




PART II
                  OTHER
      INFORMATIONItem
      6.
                  Exhibits
                  42Signature
                  
                  43Index
      of Exhibits
                  44




3


BERKSHIRE
BANCORP INC. AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS


(Dollars
in Thousands)


(unaudited)





March 31,
                  2010
                
                
                December 31,
                  2009ASSETSCash
      and due from banks
                
                $
                4,974
                
                
                $
                5,427Interest
      bearing deposits
                
                
                67,546
                
                
                
                55,376Total
      cash and cash equivalents
                
                
                72,520
                
                
                
                60,803Investment
      Securities:Available-for-sale
                
                
                369,088
                
                
                
                357,478Held-to-maturity,
      fair value of $338 in 2010 and $337 in 2009
                
                
                334
                
                
                
                340Total
      investment securities
                
                
                369,422
                
                
                
                357,818Loans,
      net of unearned income
                
                
                403,811
                
                
                
                430,349Less:
      allowance for loan losses
                
                
                (11,900
                )
                
                
                (11,416
                )Net
      loans
                
                
                391,911
                
                
                
                418,933Accrued
      interest receivable
                
                
                4,314
                
                
                
                4,253Real
      estate owned
                
                
                12,318
                
                
                
                —Premises
      and equipment, net
                
                
                8,421
                
                
                
                8,532Goodwill,
      net
                
                
                18,549
                
                
                
                18,549Other
      assets
                
                
                37,570
                
                
                
                40,379Total
      assets
                
                $
                915,025
                
                
                $
                909,267LIABILITIES
      AND STOCKHOLDERS' EQUITYDeposits:Non-interest
      bearing
                
                $
                70,212
                
                
                $
                62,870Interest
      bearing
                
                
                646,283
                
                
                
                650,574Total
      deposits
                
                
                716,495
                
                
                
                713,444Securities
      sold under agreements to repurchase
                
                
                50,000
                
                
                
                50,000Borrowings
                
                
                27,933
                
                
                
                31,004Subordinated
      debt
                
                
                22,681
                
                
                
                22,681Accrued
      interest payable
                
                
                4,015
                
                
                
                3,578Other
      liabilities
                
                
                5,537
                
                
                
                3,324Total
      liabilities
                
                
                826,661
                
                
                
                824,031Stockholders'
      equityPreferred
      stock - $.01 Par value:Authorized   —
      2,000,000 sharesIssued       —    60,000
      sharesOutstanding  —March
      31, 2010,    60,000 shares
                
                
                1
                
                
                
                1December
      31, 2009, 60,000 sharesCommon
      stock - $.10 par valueAuthorized
      — 25,000,000 sharesIssued     —  7,698,285
      sharesOutstanding
      —March
      31, 2010,    7,054,183 sharesDecember
      31, 2009, 7,054,183 shares
                
                
                770
                
                
                
                770Additional
      paid-in capital
                
                
                150,985
                
                
                
                150,985Accumulated
      Deficit
                
                
                (46,879
                )
                
                
                (46,833
                )Accumulated
      other comprehensive loss, net
                
                
                (10,102
                )
                
                
                (13,276
                )Treasury
      Stock at costMarch
      31, 2010,    644,102
                
                
                (6,411
                )
                
                
                (6,411
                )December
      31, 2009, 644,102 sharesTotal
      stockholders' equity
                
                
                88,364
                
                
                
                85,236Total
      liabilities and stockholders' equity
                
                $
                915,025
                
                
                $
                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
                      March 31,2010
                    
                    
                    2009INTEREST
      INCOMELoans,
      including related fees
                    
                    $
                    6,533
                    
                    
                    $
                    7,771Investment
      securities
                    
                    
                    3,800
                    
                    
                    
                    4,403Federal
      funds sold and interest bearing deposits
                    
                    
                    51
                    
                    
                    
                    271Total
      interest income
                    
                    
                    10,384
                    
                    
                    
                    12,445INTEREST
      EXPENSEDeposits
                    
                    
                    2,260
                    
                    
                    
                    4,017Securities
      sold under agreements to repurchase
                    
                    
                    498
                    
                    
                    
                    584Borrowings
      and subordinated debt
                    
                    
                    517
                    
                    
                    
                    767Total
      interest expense
                    
                    
                    3,275
                    
                    
                    
                    5,368Net
      interest income
                    
                    
                    7,109
                    
                    
                    
                    7,077PROVISION
      FOR LOAN LOSSES
                    
                    
                    1,250
                    
                    
                    
                    150Net
      interest income after provision for loan losses
                    
                    
                    5,859
                    
                    
                    
                    6,927NON-INTEREST
      INCOMEService
      charges on deposit accounts
                    
                    
                    126
                    
                    
                    
                    122Investment
      securities gains
                    
                    
                    155
                    
                    
                    
                    75Other
      income
                    
                    
                    102
                    
                    
                    
                    202Total
      non-interest income
                    
                    
                    383
                    
                    
                    
                    399NON-INTEREST
      EXPENSETotal
      other than temporary impairment ("OTTI") charges on
    securities
                    
                    
                    —
                    
                    
                    
                    1,025Less
      non-credit portion of OTTI recorded in other comprehensive
      loss
                    
                    
                    —
                    
                    
                    
                    —Net
      OTTI recognized in earnings
                    
                    
                    —
                    
                    
                    
                    1,025Salaries
      and employee benefits
                    
                    
                    2,341
                    
                    
                    
                    2,361Net
      occupancy expense
                    
                    
                    566
                    
                    
                    
                    506Equipment
      expense
                    
                    
                    91
                    
                    
                    
                    99FDIC
      assessment
                    
                    
                    468
                    
                    
                    
                    683Data
      processing expense
                    
                    
                    126
                    
                    
                    
                    94Other
                    
                    
                    820
                    
                    
                    
                    912Total
      non-interest expense
                    
                    
                    4,412
                    
                    
                    
                    5,680Income
      before provision for taxes
                    
                    
                    1,830
                    
                    
                    
                    1,646Provision
      for income taxes
                    
                    
                    676
                    
                    
                    
                    577Net
      income
                    
                    $
                    1,154
                    
                    
                    $
                    1,069Dividends
      on preferred stock
                    
                    
                    1,200
                    
                    
                    
                    1,200(Loss)
      allocated to common stockholders
                    
                    $
                    (46
                    )
                    
                    $
                    (131
                    )Net
      (loss) per common share:Basic
                    
                    $
                    (.01
                    )
                    
                    $
                    (.02
                    )Diluted
                    
                    $
                    (.01
                    )
                    
                    $
                    (.02
                    )Number
      of shares used to compute net (loss) per share:Basic
                    
                    
                    7,054
                    
                    
                    
                    7,054Diluted
                    
                    
                    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 Three Months Ended March 31, 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
      income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,069
              
              
              
              
              
              
              $
              1,069
              
              
              
              1,069Other
      comprehensive (loss) netof
      taxes
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (6,980
              )
              
              
              
              
              
              
              
              
              
              
              (6,980
              )
              
              
              (6,980
              )Comprehensive
      (loss)
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              (5,911
              )Cash
      dividends - Preferred Stock
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (1,200
              )
              
              
              
              
              
              
              
              
              
              
              (1,200
              )Balance
      at March 31, 2008
              
              
              7,698
              
              
              
              60
              
              
              $
              770
              
              
              $
              1
              
              
              $
              150,985
              
              
              $
              (46,578
              )
              
              $
              (39,926
              )
              
              $
              (6,411
              )
              
              
              
              
              
              $
              58,841Balance
      at December 31, 2009
              
              
              7,698
              
              
              
              60
              
              
              $
              770
              
              
              $
              1
              
              
              $
              150,985
              
              
              $
              (13,276
              )
              
              $
              (46,833
              )
              
              $
              (6,411
              )
              
              
              
              
              
              $
              85,236Net
      income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,154
              
              
              
              
              
              
              $
              1,154
              
              
              
              1,154Other
      comprehensive income netof
      taxes
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              3,174
              
              
              
              
              
              
              
              
              
              
              
              3,174
              
              
              
              3,174Comprehensive
      income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              4,328Cash
      dividends - Preferred Stock
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (1,200
              )
              
              
              
              
              
              
              
              
              
              
              (1,200
              )Balance
      at March 31, 2010
              
              
              7,698
              
              
              
              60
              
              
              $
              770
              
              
              $
              1
              
              
              $
              150,985
              
              
              $
              (10,102
              )
              
              $
              (46,879
              )
              
              $
              (6,411
              )
              
              
              
              
              
              $
              88,364





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 Three Months Ended
                  March 31,2010
                
                
                2009Cash
      flows from operating activities:Net
      income
                
                $
                1,154
                
                
                $
                1,069Adjustments
      to reconcile net income to net cash (used in) provided by operating
      activities:Realized
      gains on investment securities
                
                
                (155
                )
                
                
                (75
                )Other
      than temporary impairment charges on securities
                
                
                —
                
                
                
                1,025Net
      amortization (accretion) of premiums of investment
    securities
                
                
                646
                
                
                
                (222
                )Depreciation
      and amortization
                
                
                130
                
                
                
                138Provision
      for loan losses
                
                
                1,250
                
                
                
                150(Increase)
      decrease in accrued interest receivable
                
                
                (61
                )
                
                
                444Decrease
      in other assets
                
                
                2,809
                
                
                
                9,789Increase
      (decrease) in accrued interest payable and other
    liabilities
                
                
                2,650
                
                
                
                (14,546
                )Net
      cash provided by (used in) operating activities
                
                
                8,423
                
                
                
                (2,228
                )Cash
      flows from investing activities:Investment
      securities available for sale Purchases
                
                
                (59,706
                )
                
                
                (81,958
                )Sales,
      maturities and calls
                
                
                50,779
                
                
                
                67,139Investment
      securities held to maturity Maturities
                
                
                6
                
                
                
                4Net
      decrease in loans
                
                
                13,454
                
                
                
                12,817Acquisition
      of premises and equipment
                
                
                (19
                )
                
                
                (17
                )Net
      cash provided by (used in) investing activities
                
                
                4,514
                
                
                
                (2,015
                )Cash
      flows from financing activities:Net
      increase in non interest bearing deposits
                
                
                7,342
                
                
                
                2,212Net
      decrease in interest bearing deposits
                
                
                (4,291
                )
                
                
                (40,347
                )Decrease
      in securities sold under agreements to repurchase
                
                
                —
                
                
                
                (2,504
                )Repayment
      of borrowings
                
                
                (3,071
                )
                
                
                (6,881
                )Dividends
      paid on preferred stock
                
                
                (1,200
                )
                
                
                (1,200
                )Net
      cash used in financing activities
                
                
                (1,220
                )
                
                
                (48,720
                )Net
      increase (decrease) in cash and cash equivalents
                
                
                11,717
                
                
                
                (52,963
                )Cash
      and cash equivalents at beginning of period
                
                
                60,803
                
                
                
                102,387Cash
      and cash equivalents at end of period
                
                $
                72,520
                
                
                $
                49,424Supplemental
      disclosures of cash flow information:Cash
      used to pay interest
                
                $
                2,838
                
                
                $
                5,869Cash
      used to pay income taxes, net of refunds
                
                $
                —
                
                
                $
                110Schedule
      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


March
31, 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 months ended
March 31, 2010 and 2009 due to the net loss allocated to common stockholders
recognized. The following table presents the Company's calculation of (loss) per
common share for the periods indicated:





For The Three Months EndedMarch 31, 2010
                
                
                March 31, 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
                
                $
                1,154
                
                
                
                
                
                
                
                
                $
                1,069Dividends
      paid to preferred shareholders
                
                
                (1,200
                )
                
                
                
                
                
                
                
                
                (1,200
                )Net
      income (loss) availableto
      common stockholders
                
                
                (46
                )
                
                
                7,054
                
                
                $
                (.01
                )
                
                
                (131
                )
                
                
                7,054
                
                
                $
                (.02
                )Effect
      of dilutive securities options
                
                
                —
                
                
                
                —
                
                
                
                .—
                
                
                
                —
                
                
                
                —
                
                
                
                .—Diluted
      earnings (loss) per common shareNet
      income (loss) available to common stockholders plus assumed
      conversions
                
                $
                (46
                )
                
                
                7,054
                
                
                $
                (.01
                )
                
                $
                (131
                )
                
                
                7,054
                
                
                $
                (.02
                )





No
options to purchase common shares were outstanding at March 31, 2010. Options to
purchase 2,076 common shares at a weighted average exercise price of $8.29 were
not included in the dilutive earnings per common shares as of March 31, 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:





March 31, 2010
                      
                      
                      December 31, 2009Amount
                      
                      
                      % of
                        Total
                      
                      
                      Amount
                      
                      
                      % of
                        Total(Dollars
      in thousands)Commercial
      and professional loans
                      
                      $
                      36,312
                      
                      
                      
                      9.0
                      %
                      
                      $
                      50,672
                      
                      
                      
                      11.7
                      %Secured
      by real estate1-4
      family
                      
                      
                      127,261
                      
                      
                      
                      31.4
                      
                      
                      
                      129,925
                      
                      
                      
                      30.1Multi
      family
                      
                      
                      7,307
                      
                      
                      
                      1.8
                      
                      
                      
                      7,432
                      
                      
                      
                      1.7Non-residential
      (commercial)
                      
                      
                      233,664
                      
                      
                      
                      57.7
                      
                      
                      
                      242,927
                      
                      
                      
                      56.4Consumer
                      
                      
                      339
                      
                      
                      
                      0.1
                      
                      
                      
                      396
                      
                      
                      
                      0.1Total
      loans
                      
                      
                      404,883
                      
                      
                      
                      100.0
                      %
                      
                      
                      431,352
                      
                      
                      
                      100.0
                      %Deferred
      loan fees
                      
                      
                      (1,072
                      )
                      
                      
                      
                      
                      
                      
                      (1,003
                      )Allowance
      for loan losses
                      
                      
                      (11,900
                      )
                      
                      
                      
                      
                      
                      
                      (11,416
                      )Loans,
      net
                      
                      $
                      391,911
                      
                      
                      
                      
                      
                      
                      $
                      418,933





The Bank had $3.2 million and $13.9
million of non accrual loans as of March 31, 2010 and December 31, 2009,
respectively, and no loans delinquent more than ninety days and still accruing
interest at March 31, 2010 and December 31, 2009. During the quarter ended March
31, 2010, the Bank foreclosed on a real estate loan in the amount of $12.3
million.




The
activity in the allowance for loan losses for the three months ended (in
thousands)


March
      31, 2010
              
              
              March
      31, 2009Balance
      at beginning of period
              
              $
              11,416
              
              
              $
              9,204Provision
      for loan losses
              
              
              1,250
              
              
              
              150Charge-offs
              
              
              (766
              )
              
              
              (120
              )Recoveries
              
              
              —
              
              
              
              105Balance
      at end of period
              
              $
              11,900
              
              
              $
              11,416


Note
4. Investment Securities





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





March 31, 2010Amortized
                      Cost
                    
                    
                    Gross
                      unrealized
                      gains
                    
                    
                    Gross
                      unrealized
                      losses
                    
                    
                    Fair
                      value(In thousands)U.S.
      Government Agencies
                    
                    $
                    334
                    
                    
                    $
                    4
                    
                    
                    $
                    —
                    
                    
                    $
                    338




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




10


BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements (continued)
 (unaudited)
 
 Note
4. - (continued)
 
 The following is a summary of
available-for-sale investment securities:
 
 March 31, 2010Amortized
                      Cost
                    
                    
                    Gross
                      unrealized
                      gains
                    
                    
                    Gross
                      unrealized
                      losses
                    
                    
                    Fair
                      value(In thousands)U.S.
      Treasury Notes
                    
                    $
                    60,224
                    
                    
                    $
                    80
                    
                    
                    $
                    (15
                    )
                    
                    $
                    60,289U.S.
      Government Agencies
                    
                    
                    81,863
                    
                    
                    
                    145
                    
                    
                    
                    (256
                    )
                    
                    
                    81,752Mortgage-backed
      securities
                    
                    
                    129,493
                    
                    
                    
                    3,082
                    
                    
                    
                    (586
                    )
                    
                    
                    131,989Corporate
      notes
                    
                    
                    18,380
                    
                    
                    
                    1,643
                    
                    
                    
                    (1,655
                    )
                    
                    
                    18,368Single
      Issuer Trust Preferred CDO
                    
                    
                    1,021
                    
                    
                    
                    35
                    
                    
                    
                    --
                    
                    
                    
                    1,056Pooled
      Trust Preferred CDO
                    
                    
                    6,459
                    
                    
                    
                    --
                    
                    
                    
                    (6,165
                    )
                    
                    
                    294Municipal
      securities
                    
                    
                    1,973
                    
                    
                    
                    322
                    
                    
                    
                    --
                    
                    
                    
                    2,295Auction
      rate securities
                    
                    
                    78,895
                    
                    
                    
                    --
                    
                    
                    
                    (10,690
                    )
                    
                    
                    68,205Marketable
      equitysecurities
      and other
                    
                    
                    4,509
                    
                    
                    
                    332
                    
                    
                    
                    (1
                    )
                    
                    
                    4,840Totals
                    
                    $
                    382,817
                    
                    
                    $
                    5,639
                    
                    
                    $
                    (19,368
                    )
                    
                    $
                    369,088
 
 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
  11
 
 BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements (continued)
 (unaudited)
 
 Note
4. - (continued)
 
 Management uses a multi-factor approach
to determine whether each investment security in an unrealized loss position is
other-than-temporarily impaired ("OTTI"). An unrealized loss position exists
when the current fair value of an investment is less than its amortized cost
basis. The valuation factors utilized by management incorporate the ideas and
concepts outlined in relevant accounting guidance. These include such factors
as:
 
 *The
length of time and the extent to which the market value has been less than
cost;
 
 *The
financial condition of the issuer of the security as well as the near and
long-term prospect for the issuer;
 
 *The
rating of the security by a national rating agency;
 
 *Historical
volatility and movement in the fair market value of the security;
and
 
 *Adverse
conditions relative to the security, issuer or industry.
 
 In accordance with ASC 320-10,
Investment - Debt and Equity Securities, Management's impairment analysis for
the corporate and auction rate securities that were in a loss position as of
March 31, 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.
 
 For the three months ended March 31,
2010, there has been no change to the composition of our auction rate
securities.  The fair value of the auction rate securities increased
by approximately $1.3 million to $68.2 million at March 31, 2010 from $66.9
million at December 31, 2009.
 
 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 March
31, 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 March 31, 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 March 31, 2010 and December 31,
2009, we had six and six auction rate securities, respectively, with an
aggregate fair market value of $20.4 million and $19.4 million, respectively,
which were below investment grade.
  12
 
 BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements (continued)
 (unaudited)
 
 Note
4. - (continued)
 
 Based upon our methodology for
determining the fair value of the auction rate securities, we concluded that, as
of March 31, 2010, 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 security 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 three months ended March 31, 2010, no
auction rate securities were redeemed.
 
 At March 31, 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 $294,000 and $150,000, respectively.  We own a Class B
tranch of the TPCDO, which was considered below investment grade at both March
31, 2010 and December 31, 2009.  We obtain discounted cash flow
scenarios from independent third parties and use the most conservative result in
order to value the TPCDO, which we believe also reflects the most likely
expected cash flow.  Based upon the discounted cash flow analysis, no
additional credit related OTTI charges were recognized during the quarter ended
March 31, 2010.
 
 There have been no credit rating down
grades on any of our credit securities subsequent to December 31,
2009.
 
 At March 31, 2010 and December 31,
2009, the Company owned preferred and common stock (collectively "equity
securities").  During the quarter ended March 31, 2010, we disposed of
equity securities with a cost basis of approximately $1.0 million, realizing a
gain of approximately $3,000.  The fair value of the remaining equity
securities at March 31, 2010 increased by approximately $261,000 from the fair
value at December 31, 2009.
 
 The Company has investments in certain
debt securities that have unrealized losses or may be otherwise impaired, but an
OTTI has not been recognized in the financial statements as management believes
the decline is due to the credit markets coupled with the interest rate
environment.
  13
 
 BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements (continued)
 (unaudited)
 
 Note
4. - (continued)
 
 The following table indicates the
length of time individual securities that we consider temporarily impaired have
been in a continuous unrealized loss position at March 31, 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.
      Treasury Notes
                  
                  $
                  10,056
                  
                  
                  $
                  15
                  
                  
                  $
                  --
                  
                  
                  $
                  --
                  
                  
                  $
                  10,056
                  
                  
                  $
                  15U.S.
      Government Agencies
                  
                  
                  30,424
                  
                  
                  
                  256
                  
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  30,424
                  
                  
                  
                  256Mortgage-backed
      securities
                  
                  
                  13,990
                  
                  
                  
                  70
                  
                  
                  
                  12,262
                  
                  
                  
                  517
                  
                  
                  
                  26,252
                  
                  
                  
                  586Corporate
      notes
                  
                  
                  2,584
                  
                  
                  
                  9
                  
                  
                  
                  7,517
                  
                  
                  
                  1,646
                  
                  
                  
                  10,101
                  
                  
                  
                  1,655Pooled
      Trust Preferred CDO
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  294
                  
                  
                  
                  6,165
                  
                  
                  
                  294
                  
                  
                  
                  6,165Auction
      rate securities
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  59,765
                  
                  
                  
                  10,690
                  
                  
                  
                  59,765
                  
                  
                  
                  10,690Subtotal,
      debt securities
                  
                  
                  57,054
                  
                  
                  
                  350
                  
                  
                  
                  79,838
                  
                  
                  
                  19,018
                  
                  
                  
                  136,892
                  
                  
                  
                  19,367Marketable
      equity securities and other
                  
                  
                  11
                  
                  
                  
                  1
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  11
                  
                  
                  
                  1Total
      temporarilyimpaired
      securities
                  
                  $
                  57,065
                  
                  
                  $
                  351
                  
                  
                  $
                  79,838
                  
                  
                  $
                  19,018
                  
                  
                  $
                  136,903
                  
                  
                  $
                  19,368
 
 The Company had a total of 64 debt
securities with a fair market value of $136.9 million which were temporarily
impaired at March 31, 2010.  The total unrealized loss on these
securities was $19.4 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 7.9% of total
assets at March 31, 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 March 31, 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.
 
 March 31, 2010Available for Sale
                      
                      
                      Held to MaturityAmortized
                        Cost
                      
                      
                      Fair
                        Value
                      
                      
                      Amortized
                        Cost
                      
                      
                      Fair
                        Value(In
      thousands)Due
      in one year or less
                      
                      $
                      26,034
                      
                      
                      $
                      26,409
                      
                      
                      $
                      —
                      
                      
                      $
                      —Due
      after one through five years
                      
                      
                      63,691
                      
                      
                      
                      63,431
                      
                      
                      
                      —
                      
                      
                      
                      —Due
      after five through ten years
                      
                      
                      26,564
                      
                      
                      
                      26,641
                      
                      
                      
                      —
                      
                      
                      
                      —Due
      after ten years
                      
                      
                      183,124
                      
                      
                      
                      179,562
                      
                      
                      
                      334
                      
                      
                      
                      338Auction
      rate securities
                      
                      
                      78,895
                      
                      
                      
                      68,205
                      
                      
                      
                      —
                      
                      
                      
                      —Marketable
      equity securities and other
                      
                      
                      4,509
                      
                      
                      
                      4,840
                      
                      
                      
                      —
                      
                      
                      
                      —Totals
                      
                      $
                      382,817
                      
                      
                      $
                      369,088
                      
                      
                      $
                      334
                      
                      
                      $
                      338
 
 Gross
gains realized on the sales of investment securities for the three months ended
March 31, 2010, and 2009 were approximately $155,000 and $75,000,
respectively.  Gross losses realized were approximately $0 and $1.0
million for the three months ended March 31, 2010 and 2009,
respectively.
 
 As of
March 31, 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 $57.0 million and $55.6 million,
respectively. As of March 31, 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.
 
 Note
5. Deposits
 
 The following table summarizes the
composition of the average balances of major deposit categories:
 
 Three Months Ended
                      March 31, 2010
                    
                    
                    Twelve Months Ended
                      December 31, 2009Average
                      Amount
                    
                    
                    Average
                      Yield
                    
                    
                    Average
                      Amount
                    
                    
                    Average
                      Yield(Dollars
      in thousands)Demand
      deposits
                    
                    $
                    66,323
                    
                    
                    
                    —
                    
                    
                    $
                    56,544
                    
                    
                    
                    —NOW
      and money market
                    
                    
                    25,817
                    
                    
                    
                    0.25
                    %
                    
                    
                    23,900
                    
                    
                    
                    0.31
                    %Savings
      deposits
                    
                    
                    198,555
                    
                    
                    
                    0.99
                    
                    
                    
                    180,729
                    
                    
                    
                    1.24Time
      deposits
                    
                    
                    419,678
                    
                    
                    
                    1.67
                    
                    
                    
                    426,892
                    
                    
                    
                    2.32Total
      deposits
                    
                    $
                    710,373
                    
                    
                    
                    1.27
                    %
                    
                    $
                    688,065
                    
                    
                    
                    1.78
                    %
 
 15
  BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements (continued)
 (unaudited)
 
 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), based on the provisions of ASC 220:
 
 For
      The Three Months EndedMarch
      31, 2010
                        
                        
                        March
      31, 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
      holdinggains
      (losses) arisingduring
      period
                        
                        $
                        5,445
                        
                        
                        $
                        (2,178
                        )
                        
                        $
                        3,267
                        
                        
                        $
                        (10,708
                        )
                        
                        $
                        4,283
                        
                        
                        $
                        (6,425
                        )Less
      reclassificationadjustment
      for gains(losses)
      realized innet
      income
                        
                        
                        155
                        
                        
                        
                        (62
                        )
                        
                        
                        93
                        
                        
                        
                        (950
                        )
                        
                        
                        380
                        
                        
                        
                        (570
                        )Unrealized
      gain (loss) on investment securities
                        
                        
                        5,290
                        
                        
                        
                        (2,116
                        )
                        
                        
                        3,174
                        
                        
                        
                        (11,658
                        )
                        
                        
                        4,663
                        
                        
                        
                        (6,995
                        )Change
      in minimumpension
      liability
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        15
                        
                        
                        
                        —
                        
                        
                        
                        15Other
      comprehensiveincome
      (loss), net
                        
                        $
                        5,290
                        
                        
                        $
                        (2,116
                        )
                        
                        $
                        3,174
                        
                        
                        $
                        (11,643
                        )
                        
                        $
                        4,663
                        
                        
                        $
                        (6,980
                        )
 
 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
                          March 31,2010
                        
                        
                        2009Service
      cost
                        
                        $
                        —
                        
                        
                        $
                        103,250Interest
      cost
                        
                        
                        —
                        
                        
                        
                        64,250Expected
      return on plan assets
                        
                        
                        —
                        
                        
                        
                        (70,500
                        )Amortization
      and Deferral:Prior
      service cost
                        
                        
                        —
                        
                        
                        
                        4,500Loss
                        
                        
                        —
                        
                        
                        
                        36,500Net
      periodic pension cost
                        
                        $
                        —
                        
                        
                        $
                        138,000
  16
 
 BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements (continued)
 (unaudited)
 
 Note
7. - (continued)
 
 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 was 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 three months ended March 31, 2009
we contributed approximately $1.1 million 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.
 
 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 March 31, 2010 and December 31, 2009 are outlined
below.
 
 March 31, 2010
                              
                              
                              December 31, 2009Carrying
                                amount
                              
                              
                              Estimated
                                fair value
                              
                              
                              Carrying
                                amount
                              
                              
                              Estimated
                                fair value(In thousands)Investment
      securities
                              
                              $
                              369,422
                              
                              
                              $
                              369,426
                              
                              
                              $
                              357,818
                              
                              
                              $
                              357,815Loans,
      net of unearned income
                              
                              
                              403,811
                              
                              
                              
                              407,783
                              
                              
                              
                              430,349
                              
                              
                              
                              428,990Time
      Deposits
                              
                              
                              414,690
                              
                              
                              
                              429,449
                              
                              
                              
                              427,777
                              
                              
                              
                              429,449Repurchase
      Agreements
                              
                              
                              50,000
                              
                              
                              
                              49,841
                              
                              
                              
                              50,000
                              
                              
                              
                              49,842Borrowings
                              
                              
                              27,933
                              
                              
                              
                              28,447
                              
                              
                              
                              31,004
                              
                              
                              
                              31,756Subordinated
      debt
                              
                              
                              22,681
                              
                              
                              
                              22,681
                              
                              
                              
                              22,681
                              
                              
                              
                              22,681
  17
 
 BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements (continued)
 (unaudited)
 
 Note
8. - (continued)
 
 For cash and cash equivalents, the
recorded book value of $72.5 million and $60.8 million at March 31, 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.
 
 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 $32,000 and $117,000 at March 31, 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.
  18
 
 BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements (continued)
 (unaudited)
 
 Note
8. - (continued)
 
 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 on a
recurring basis during fiscal year 2010 and fiscal year 2009 are summarized
below.
 
 At
      March 31, 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
                        March 31,
                        2010(Dollars in thousands)AssetsImpaired
      loans
                      
                      $
                      —
                      
                      
                      $
                      —
                      
                      
                      $
                      3,150
                      
                      
                      $
                      3,150Investment
      securities available for sale
                      
                      
                      67,321
                      
                      
                      
                      233,562
                      
                      
                      
                      68,205
                      
                      
                      
                      369,088Total
                      
                      $
                      67,321
                      
                      
                      $
                      233,562
                      
                      
                      $
                      71,355
                      
                      
                      $
                      372,238
 
 The above
table includes $13.7 million in net unrealized losses on the Company's available
for sale securities.  The Company has reviewed its investment
portfolio at March 31, 2010 and has determined that the unrealized losses are
temporary.
 
 The fair
value of the derivative is approximately $32,000 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
                        
                        $
                        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 $20.8 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 is 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 derivative 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
      Sale
                              
                              
                              Impaired
                                LoansBalance,
      January 1, 2010
                              
                              $
                              66,942
                              
                              
                              $
                              15,468Total
      gains/losses (realized/unrealized)Included
      in earnings
                              
                              
                              —Included
      in other comprehensive income
                              
                              
                              1,263Purchases,
      Sales, Issuances and Settlements
                              
                              
                              —Redemptions
      (Transfer to Other Real Estate Owned)
                              
                              
                              —
                              
                              
                              
                              (12,318
                              )Interest
                              
                              
                              —Other
      than temporary impairment expense
                              
                              
                              —Capital
      deductions for operating expenses
                              
                              
                              —Balance,
      March 31, 2010
                              
                              $
                              68,205
                              
                              
                              $
                              3,150The
      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 March 31, 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.
 
 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, except as
disclosed in Form 10-K as and for the year ended December 31,
2009.
  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 (the "Act"). In November
2005, the FDIC amended Part 363 of its regulations by raising the asset-size
threshold from $500 million to $1 billion for internal control assessments by
management and external auditors.  The final rule was effective
December 28, 2005.
 
 Section 302 of the Act requires
the CEOs and CFOs of the Company to (i) certify that the annual and quarterly
reports filed with the Securities and Exchange Commission are accurate and (ii)
acknowledge that they are responsible for establishing, maintaining and
periodically evaluating the effectiveness of the disclosure controls and
procedures.  Section 404 of the Act requires management to (i) report
on internal control over financial reporting, (ii) assess the effectiveness of
such internal controls, and (iii) obtain an external auditor's report on
management's assessment of its internal control.  The Company is not
an accelerated filer as defined in Rule 12b-2 of the Securities Exchange Act of
1934.
 
 On October 2, 2009, the SEC issued a
final extension of SOX 404(b) for non-accelerated filers to fiscal years ending
on or after June 15, 2010. Therefore, the Company, which would have been
required to comply with Section 404 for the fiscal year ended December 31, 2007,
will be required to obtain an external auditor's report on internal control over
financial reporting for the fiscal year ending December 31, 2010.
 
 The Committee of Sponsoring
Organizations (COSO) methodology may be used to document and test the internal
controls pertaining to the accuracy of Company issued financial statements and
related disclosures. COSO requires a review of the control environment
(including anti-fraud and audit committee effectiveness), risk assessment,
control activities, information and communication, and ongoing
monitoring.
  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 $1.25 million during the three months ended March 31, 2010, which was a $1.1
million increase from the $150,000 provision recorded during the three months
ended March 31, 2009.  The provision 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" in Item 2 for further discussion of
the allowance for loan losses.
 
 Net income, before dividends on our
Series A Preferred Stock, for the three months ended March 31, 2010 was $1.15
million, compared to net income of $1.07 million for the three months ended
March 31, 2009.  Net loss allocated to common stockholders, including
dividends on our Series A Preferred Stock, was $46,000 and $131,000 for the
three months ended March 31, 2010 and 2009, respectively.
 
 The following discussion and analysis
is intended to provide a better understanding of the consolidated financial
condition and results of operations of Berkshire Bancorp Inc. and
subsidiaries.  All references to earnings per share, unless stated
otherwise, refer to earnings per diluted share.  References to Notes
herein are references to the "Notes to Consolidated Financial Statements" of the
Company located in Item 1 herein.
 
 Critical
Accounting Policies, Judgments and Estimates
 
 The accounting and reporting policies
of the Company conform with accounting principles generally accepted in the
United States of America ("GAAP") and general practices within the financial
services industry.  The preparation of financial statements in
conformity with GAAP requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and the accompanying
notes.  Actual results could differ from those estimates.
 
 The Company considers that the
determination of the allowance for loan losses involves a higher degree of
judgment and complexity than any of its other significant accounting
policies.  The allowance for loan losses is calculated with the
objective of maintaining a reserve level believed by management to be sufficient
to absorb estimated credit losses.  Management's determination of the
adequacy of the allowance is based on periodic evaluations of the loan portfolio
and other relevant factors.  However, this evaluation is inherently
subjective as it requires material estimates, including, among others, expected
default probabilities, loss given default, the amounts and timing of expected
future cash flows on impaired loans, mortgages, and general amounts for
historical loss experience.  The process also considers economic
conditions, uncertainties in estimating losses and inherent risks in the loan
portfolio.  All of these factors may be susceptible to significant
change.  To the extent actual outcomes differ from management
estimates, additional provisions for loan losses may be required that would
adversely impact earnings in future periods.  See "Provision for Loan
Losses" in Item 3 for further discussion of the allowance for loan
losses.
  25
 
 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 March 31,2010
                          
                          
                          2009Average
                            Balance
                          
                          
                          Interest
                            and
                            Dividends
                          
                          
                          Average
                            Yield/Rate
                          
                          
                          Average
                            Balance
                          
                          
                          Interest
                            and
                            Dividends
                          
                          
                          Average
                            Yield/Rate(Dollars
      in Thousands)INTEREST-EARNING
      ASSETS:Loans
      (1)
                          
                          $
                          419,820
                          
                          
                          $
                          6,533
                          
                          
                          
                          6.22
                          %
                          
                          $
                          458,820
                          
                          
                          $
                          7,771
                          
                          
                          
                          6.77
                          %Investment
      securities
                          
                          
                          363,083
                          
                          
                          
                          3,800
                          
                          
                          
                          4.19
                          
                          
                          
                          302,347
                          
                          
                          
                          4,403
                          
                          
                          
                          5.83Other
      (2)(5)
                          
                          
                          59,780
                          
                          
                          
                          51
                          
                          
                          
                          0.34
                          
                          
                          
                          68,368
                          
                          
                          
                          271
                          
                          
                          
                          1.59Total
      interest-earning assets
                          
                          
                          842,683
                          
                          
                          
                          10,384
                          
                          
                          
                          4.93
                          
                          
                          
                          829,535
                          
                          
                          
                          12,445
                          
                          
                          
                          6.00Noninterest-earning
      assets
                          
                          
                          62,539
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          64,368Total
      Assets
                          
                          $
                          905,222
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          $
                          893,903INTEREST-BEARING
      LIABILITIES:Interest
      bearing deposits
                          
                          
                          224,372
                          
                          
                          
                          508
                          
                          
                          
                          0.91
                          %
                          
                          
                          204,515
                          
                          
                          
                          716
                          
                          
                          
                          1.40
                          %Time
      deposits
                          
                          
                          419,678
                          
                          
                          
                          1,752
                          
                          
                          
                          1.67
                          
                          
                          
                          435,326
                          
                          
                          
                          3,301
                          
                          
                          
                          3.03Other
      borrowings
                          
                          
                          101,168
                          
                          
                          
                          1,015
                          
                          
                          
                          4.01
                          
                          
                          
                          123,564
                          
                          
                          
                          1,351
                          
                          
                          
                          4.38Total
      interest-bearingliabilities
                          
                          
                          745,218
                          
                          
                          
                          3,275
                          
                          
                          
                          1.76
                          
                          
                          
                          763,405
                          
                          
                          
                          5,368
                          
                          
                          
                          2.81Demand
      deposits
                          
                          
                          66,323
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          53,844Noninterest-bearing
      liabilities
                          
                          
                          7,682
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          10,099Stockholders'
      equity (5)
                          
                          
                          85,999
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          66,555Total
      liabilities andstockholders'
      equity
                          
                          $
                          905,222
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          $
                          893,903Net
      interest income
                          
                          
                          
                          
                          
                          $
                          7,109
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          $
                          7,077Interest-rate
      spread (3)
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          3.17
                          %
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          3.19
                          %Net
      interest margin (4)
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          3.37
                          %
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          3.41
                          %Ratio
      of average interest-earning assets to average interest bearing
      liabilities
                          
                          
                          1.13
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          1.09
 ______________________
 (1)
Includes nonaccrual loans.
 (2)
Includes interest-bearing deposits, federal funds sold and securities purchased
under agreements to resell.
 (3)
Interest-rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest bearing
liabilities.
 (4) Net
interest margin is net interest income as a percentage of average
interest-earning assets.
 (5)
Average balances are daily average balances except for the parent company which
have been calculated on a monthly basis.
  27
  Results
of Operations
 
 Results
of Operations for the Three Months Ended March 31, 2010 Compared to the Three
Months Ended March 31, 2009.
 
 Net Income (Loss) Allocated to Common
Stockholders.  Net loss allocated to common stockholders for
the three-month period ended March 31, 2010 was $46,000 or $.01 per common
share, compared to a net loss of $131,000, or $.02 per common share, for the
three-month period ended March 31, 2009.  The net loss for the 2010
quarter includes dividends on our Series A Preferred Stock of $1.2 million, or
$.17 per common share.  The net loss in the 2009 quarter includes
other than temporary impairment ("OTTI") charges on securities of $1.03 million,
or $.14 per common share, and dividends on our Series A Preferred Stock of $1.2
million, or $.17 per common share.
 
 The Company's net income is largely
dependent on interest rate levels, the demand for the Company's loan and deposit
products and the strategies employed to manage the interest rate and other risks
inherent in the banking business.
 
 Net Interest
Income.  The Company's primary source of revenue is net
interest income, or the difference between interest income earned on
interest-earning assets, such as loans and investment securities, and interest
expense on interest-bearing liabilities such as deposits and
borrowings.  The amount of interest income is dependent upon many
factors including: (i) the amount of interest-earning assets that the Company
can maintain based upon its funding sources; (ii) the relative amounts of
interest-earning assets versus interest-bearing liabilities; and (iii) the
difference between the yields earned on those assets and the rates paid on those
liabilities.  Non-performing loans adversely affect net interest
income because they must still be funded by interest-bearing liabilities, but
they do not provide interest income.  Furthermore, when we designate
an asset as non-performing, all interest which has been accrued but not actually
received is deducted from current period income, further reducing net interest
income.
 
 For the quarter ended March 31, 2010,
net interest income increased by approximately $30,000 to $7.11 million from
$7.08 million for the quarter ended March 31, 2009. The increase in net interest
income was due to the decrease in the average amounts of interest-bearing
liabilities to $745.2 million during the 2010 quarter from $763.4 million during
the 2009 quarter, and the decrease in the average rates paid on interest-bearing
liabilities to 1.76% from 2.81% during the three months ended March 31, 2010 and
2009, respectively. The increase in net interest income was also due to the
increase in the average amounts of interest-earning assets to $842.7 million
during the 2010 quarter from $829.5 million during the 2009 quarter, partially
offset by the decrease in the averages yield on interest-earning assets to 4.93%
from 6.00% during the three months ended March 31, 2010 and 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,
was relatively flat at 3.17% and 3.19% during the three months ended March 31,
2010 and 2009, respectively.
  28
  Net Interest
Margin.  Net interest margin, or annualized net interest income
as a percentage of average interest-earning assets, decreased by 4 basis points to 3.37%
during the quarter ended March 31, 2010 from 3.41% during the quarter ended
March 31, 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. The decrease in net interest margin is primarily due to
the decrease in the average amount of higher yielding loans as a percentage of
our total mix of interest-earning assets.
 
 Interest Income. Total
interest income for the quarter ended March 31, 2010 decreased by approximately
$2.0 million to $10.4 million from $12.4 million for the quarter ended March 31,
2009.  The decrease in total interest income was due to the decrease
in the average yields earned on the average amounts of interest-earning assets,
partially offset by the increase in the average amounts of such assets as
discussed above.
 
 The following table presents the
composition of interest income for the indicated periods.
 
 Three Months Ended March 31,2010
                    
                    
                    2009Interest
                      Income
                    
                    
                    % of
                      Total
                    
                    
                    Interest
                      Income
                    
                    
                    % of
                      Total(In
      thousands, except percentages)Loans
                    
                    $
                    6,533
                    
                    
                    
                    62.92
                    %
                    
                    $
                    7,771
                    
                    
                    
                    62.44
                    %Investment
      Securities
                    
                    
                    3,800
                    
                    
                    
                    36.59
                    
                    
                    
                    4,403
                    
                    
                    
                    35.38Other
                    
                    
                    51
                    
                    
                    
                    0.49
                    
                    
                    
                    271
                    
                    
                    
                    2.18Total
      Interest Income
                    
                    $
                    10,384
                    
                    
                    
                    100.00
                    %
                    
                    $
                    12,445
                    
                    
                    
                    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 50.0% of our total amount of
average interest-earning assets during the quarter ended March 31, 2010 from
55.3% during the quarter ended March 31, 2009. During the three months ended
March 31, 2010, the average amounts of investment securities increased to 43.1%
of total interest-earning assets from 36.4% of total interest-earning assets
during the three months ended March 31, 2009.  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.
  29
  At March 31, 2010, total non-performing
loan assets were $15.5 million, comprised of $3.2 million of non-accrual loans
and $12.3 million of foreclosed real estate.  Additions to
non-performing loan assets, 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
March 31, 2010 or 2009.
 
 Interest
Expense.  Total interest expense during the quarter ended March
31, 2010 decreased
by $2.1 million to $3.3 million from $5.4 million during the quarter ended March
31, 2009.  The decrease in total interest expense was due to the
decrease in the average amounts of interest-bearing liabilities, to $745.2
million during the 2010 quarter from $763.4 million during the 2009 quarter, and
the decrease in the average rates paid on the average amounts of
interest-bearing liabilities to 1.8% in the 2010 quarter from 2.8% in the 2009
quarter.
  30
 
 The following table presents the
composition of interest expense for the indicated periods.
 
 Three Months Ended March 31,2010
                    
                    
                    2009Interest
                      Expense
                    
                    
                    % of
                      Total
                    
                    
                    Interest
                      Expense
                    
                    
                    % of
                      Total(In
      thousands, except percentages)Interest-Bearing
      Deposits
                    
                    $
                    508
                    
                    
                    
                    15.51
                    %
                    
                    $
                    716
                    
                    
                    
                    13.34
                    %Time
      Deposits
                    
                    
                    1,752
                    
                    
                    
                    53.50
                    
                    
                    
                    3,301
                    
                    
                    
                    61.49Borrowings
      and Subordinated Debt
                    
                    
                    1,015
                    
                    
                    
                    30.99
                    
                    
                    
                    1,351
                    
                    
                    
                    25.17Total
      Interest Expense
                    
                    $
                    3,275
                    
                    
                    
                    100.00
                    %
                    
                    $
                    5,368
                    
                    
                    
                    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
months ended March 31, 2010, total non-interest income decreased by $16,000 to
$383,000 from $399,000 for the three months ended March 31, 2009.
 
 Non-Interest
Expense.  Non-interest expense includes salaries and employee
benefits, occupancy and equipment expenses, legal and professional fees, OTTI
charges on investment securities and other operating expenses associated with
the day-to-day operations of the Company.  Total non-interest expense
for the three months ended March 31, 2010 was $4.4 million, compared to total
non-interest expense of $5.7 million, including other than temporary impairment
charges on securities of $1.0 million,for the three months ended March 31, 2009.
Excluding the OTTI charges on securities in the 2009 quarter, total non-interest
expense decreased by approximately $243,000 to $4.4 million from $4.7 million
for the three months ended March 31, 2010 and 2009, respectively.  The
decrease was primarily due to the $215,000 decrease in our FDIC
assessment.
  31
 
 The following table presents the
components of non-interest expense for the indicated periods.
 
 Three Months Ended March 31,2010
                    
                    
                    2009Non-Interest
                      Expense
                    
                    
                    % of
                      Total
                    
                    
                    Non-Interest
                      Expense
                    
                    
                    % of
                      Total(In
      thousands, except percentages)Salaries
      and Employee Benefits
                    
                    $
                    2,341
                    
                    
                    
                    53.05
                    
                    
                    $
                    2,361
                    
                    
                    
                    41.57
                    %Net
      Occupancy Expense
                    
                    
                    566
                    
                    
                    
                    12.83
                    
                    
                    
                    506
                    
                    
                    
                    8.91Equipment
      Expense
                    
                    
                    91
                    
                    
                    
                    2.06
                    
                    
                    
                    99
                    
                    
                    
                    1.74FDIC
      Assessment
                    
                    
                    468
                    
                    
                    
                    10.61
                    
                    
                    
                    683
                    
                    
                    
                    12.02Data
      Processing Expense
                    
                    
                    126
                    
                    
                    
                    2.86
                    
                    
                    
                    94
                    
                    
                    
                    1.65Other
      than temporary impairment charges on securities
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    1,025
                    
                    
                    
                    18.05Other
                    
                    
                    820
                    
                    
                    
                    18.59
                    
                    
                    
                    912
                    
                    
                    
                    16.06Total
      Non-Interest Expense
                    
                    $
                    4,412
                    
                    
                    
                    100.00
                    %
                    
                    $
                    5,680
                    
                    
                    
                    100.00
                    %
 
 Provision for Income
Tax.  During the three-month periods ended March 31, 2010 and
2009, we recorded income tax expense of $676,000 and $577,000,
respectively.
 The
effective tax rate was 36.9% for the three months ended March 31, 2010 as
compared to 35.1% for the three months ended March 31, 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 March 31, 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 quarter of 2010. At March
31, 2010, there were 501,091 shares of Common Stock which may yet be purchased
under our stock repurchase plan.
 
 Provision for Loan
Losses.  The allowance for loan losses is the estimated amount
considered necessary to cover credit losses inherent in the loan portfolio at
the balance sheet date. The allowance is established through the provision for
loan losses that is charged against income. In determining the allowance for
loan losses, management makes significant estimates and therefore has identified
the allowance as a critical accounting policy.  The methodology for
determining the allowance for loan losses is considered a critical accounting
policy by management due to the high degree of judgment involved, the
subjectivity of the assumptions utilized, and the potential for changes in the
economic environment that could result in changes to the amount of the recorded
allowance for loan losses.
 
 The allowance for loan losses has been
determined in accordance with GAAP, principally FASB ASC 450, Contingencies,
("ASC 450") and FASB ASC 310, Receivables, ("ASC 310").  Under the
above accounting principles, we are required to maintain an allowance for
probable losses at the balance sheet date. We are responsible for the timely and
periodic determination of the amount of the allowance required. Management
believes that the allowance for loan losses is adequate to cover specifically
identifiable losses, as well as estimated losses inherent in our portfolio for
which certain losses are probable but not specifically
identifiable.
  32
 
 Management performs a monthly
evaluation of the adequacy of the allowance for loan losses. The analysis of the
allowance for loan losses has two components: specific and general allocations.
Specific allocations are made for loans determined to be impaired. Impairment is
measured by determining the present value of expected future cash flows or, as a
practical expedient for collateral-dependent loans, the fair value of the
collateral adjusted for market conditions and selling expenses.  The
Bank considers its investment in one-to-four family real estate loans and
consumer loans to be smaller balance homogeneous loans and therefore excluded
from separate identification for evaluation of impairment.  These
homogeneous loan groups are evaluated for impairment on a collective basis under
FASB ASC 310.
 
 The general allocation is determined by
segregating the remaining loans by type of loan, risk weighting (if applicable)
and payment history.  Management also analyzes historical loss
experience, delinquency trends, general economic conditions, geographic
concentrations, and industry and peer comparisons. This analysis establishes
factors that are applied to the loan segments to determine the amount of the
general allocations. This evaluation is inherently subjective as it requires
material estimates that may be susceptible to significant revisions based upon
changes in economic and real estate market conditions. Actual loan losses may be
significantly more than the allowance for loan losses management has established
which could have a material negative effect on the Company's financial
results.
 
 On a monthly basis, the Bank's
management committee reviews the current status of various loan assets in order
to evaluate the adequacy of the allowance for loan losses. In this evaluation
process, specific loans are analyzed to determine their potential risk of loss.
This process includes all loans, concentrating on non-accrual and classified
loans. Each non-accrual or classified loan is evaluated for potential loss
exposure. Any shortfall results in a recommendation of a specific allowance if
the likelihood of loss is evaluated as probable. To determine the adequacy of
collateral on a particular loan, an estimate of the fair market value of the
collateral is based on the most current appraised value available. This
appraised value is then reduced to reflect estimated liquidation
expenses.
 
 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.
  33
 
 Although management believes that we
have established and maintained the allowance for loan losses at adequate
levels, additions may be necessary if future economic and other conditions
differ substantially from the current operating environment. Although management
uses what it believes is the best information available, the level of the
allowance for loan losses remains an estimate that is subject to significant
judgment and short-term change. In addition, the Federal Deposit Insurance
Corporation, New York State Banking Department, and other regulatory bodies, as
an integral part of their examination process, will periodically review our
allowance for loan losses. Such agencies may require us to recognize adjustments
to the allowance based on its judgments about information available to them at
the time of their examination.
 
 The following table sets forth
information with respect to activity in the Company's allowance for loan losses
during the periods indicated (in thousands, except percentages):
 
 Three
      Months Ended
                              March
      31,2010
                            
                            
                            2009Average
      loans outstanding
                            
                            $
                            419,820
                            
                            
                            $
                            458,820Allowance
      at beginning of period
                            
                            
                            11,416
                            
                            
                            
                            9,204Charge-offs:Commercial
      and other loans
                            
                            
                            —
                            
                            
                            
                            102Real
      estate loans
                            
                            
                            766
                            
                            
                            
                            —Total
      loans charged-off
                            
                            
                            766
                            
                            
                            
                            102Recoveries:Commercial
      and other loans
                            
                            
                            —
                            
                            
                            
                            105Total
      loans recovered
                            
                            
                            —
                            
                            
                            
                            105Net
      (charge-offs) recoveries
                            
                            
                            (766
                            )
                            
                            
                            3Provision
      for loan lossescharged
      to operating expenses
                            
                            
                            1,250
                            
                            
                            
                            150Allowance
      at end of period
                            
                            $
                            11,900
                            
                            
                            $
                            9,357Ratio
      of net (charge-offs) recoveries toaverage
      loans outstanding
                            
                            
                            (0.18
                            )%
                            
                            
                            0.00
                            %Allowance
      as a percent of total loans
                            
                            
                            2.94
                            %
                            
                            
                            2.06
                            %Total
      loans at end of period
                            
                            $
                            404,883
                            
                            
                            $
                            454,986
  34
 
 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 March 31, 2010 and December 31, 2009, the
Company had loans, net of unearned income, of $403.8 million and $430.3 million,
respectively, and an allowance for loan losses of $11.9 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.
  35
 
 The Bank generally makes commercial
mortgage loans with loan to value ratios not to exceed 75% and with terms to
maturity that do not exceed 15 years.  Loans secured by commercial
properties generally involve a greater degree of risk than one-to four-family
residential mortgage loans.  Because payments on such loans are often
dependent on successful operation or management of the properties, repayment may
be subject, to a greater extent, to adverse conditions in the real estate market
or the economy.  The Bank seeks to minimize these risks through its
underwriting policies.  The Bank evaluates the qualifications and
financial condition of the borrower, including credit history, profitability and
expertise, as well as the value and condition of the underlying
property.  The factors considered by the Bank include net operating
income; the debt coverage ratio (the ratio of cash net income to debt service);
and the loan to value ratio.  When evaluating the borrower, the Bank
considers the financial resources and income level of the borrower, the
borrower's experience in owning or managing similar property and the Bank's
lending experience with the borrower.  The Bank's policy requires
borrowers to present evidence of the ability to repay the loan without having to
resort to the sale of the mortgaged property.  The Bank also seeks to
focus its commercial mortgage loans on loans to companies with operating
businesses, rather than passive real estate investors.
 
 Commercial
Loans.  The Bank makes commercial loans to businesses for
inventory financing, working capital, machinery and equipment purchases,
expansion, and other business purposes.  These loans generally have
higher yields than mortgages loans, with maturities of one year, after which the
borrower's financial condition and the terms of the loan are
re-evaluated.  At March 31, 2010 and December 31 2009, approximately
$36.3 million and $50.7 million, respectively, or 9.0% and 11.70%, 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 March 31, 2010 and December 31, 2009,
approximately $127.3 million and $129.9 million, respectively, or 31.4% 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 March 31, 2010
and December 31, 2009, approximately 14.6% and 14.0%, respectively, of the
Bank's residential one-to-four family owner-occupied first mortgage portfolio
were ARMs and approximately 85.4% and 86.0%, 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.
  36
 
 The Bank's residential loan
underwriting criteria are generally comparable to those required by the Federal
National Mortgage Association ("FNMA") and other major secondary market loan
purchasers.  Generally, ARM credit risks are somewhat greater than
fixed-rate loans primarily because, as interest rates rise, the borrowers'
payments rise, increasing the potential for default. The Bank's teaser rate ARMs
(ARMs with low initial interest rates that are not based upon the index plus the
margin for determining future rate adjustments) were underwritten based on the
payment due at the fully-indexed rate.
 
 In addition to verifying income and
assets of borrowers, the Bank obtains independent appraisals on all residential
first mortgage loans and title insurance is required at
closing.  Private mortgage insurance is required on all loans with a
loan-to-value ratio in excess of 80% and the Bank requires real estate tax
escrows on such loans.  Real estate tax escrows are voluntary on
residential mortgage loans with loan-to-value ratios of 80% or
less.
 
 Fixed-rate residential mortgage loans
are generally originated by the Bank for terms of 15 to 30
years.  Although 30 year fixed-rate mortgage loans may adversely
affect our net interest income in periods of rising interest rates, the Bank
originates such loans to satisfy customer demand.  Such loans are
generally originated at initial interest rates which exceed the fully indexed
rate on ARMs offered at the same time.  Fixed-rate residential
mortgage loans originated by the Bank generally include due-on-sale clauses,
which permit the Bank to demand payment in full if the borrower sells the
property without the Bank's consent.
 
 Due-on-sale clauses are an important
means of adjusting the rates on the Bank's fixed-rate mortgage loan portfolio,
and the Bank will generally exercise its rights under these clauses if necessary
to maintain market yields.
 
 ARMs originated in recent years have
interest rates that adjust annually based upon the movement of the one year
treasury bill constant maturity index, plus a margin of 2.00% to
2.75%.  These loans generally have a maximum interest rate adjustment
of 2% per year, with a lifetime maximum interest rate adjustment, measured from
the initial interest rate, of 5.5% or 6.0%.
 
 The Bank offers a variety of other loan
products including residential single family construction loans to persons who
intend to occupy the property upon completion of construction, home equity loans
secured by junior mortgages on one-to-four family owner-occupied residences, and
short-term fixed-rate consumer loans either unsecured or secured by monetary
assets such as bank deposits and marketable securities or personal
property.  At March 31, 2010 and December 31, 2009, the Company's loan
portfolio was comprised of $241.3 million and $250.8 million, respectively, or
59.6% and 58.2%, respectively, of other loan products.
  37
 
 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 March 31, 2010,
the Bank meets all capital adequacy requirements to which it is
subject.
 
 As of March 31, 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 March 31, 2010. (dollars in thousands):
 
 Actual
                                          
                                          
                                          For capital
                                            adequacy purposes
                                          
                                          To be well
                                            capitalized under
                                            prompt corrective
                                            action provisionsAmount
                                          
                                          
                                          Ratio
                                          
                                          
                                          Amount
                                          
                                          Ratio
                                          
                                          Amount
                                          
                                          
                                          RatioMarch
      31, 2010Total
      Capital (to Risk-Weighted Assets)Company
                                          
                                          $
                                          106,810
                                          
                                          
                                          
                                          20.1
                                          %
                                          
                                          $
                                          42,453
                                          
                                          >8.0
                                          %
                                          
                                          —
                                          
                                          
                                          
                                          N/ABank
                                          
                                          
                                          91,936
                                          
                                          
                                          
                                          17.8
                                          %
                                          
                                          
                                          41,308
                                          
                                          >8.0
                                          %
                                          $
                                          51,635
                                          
                                          
                                          >10.0
                                          %Tier
      I Capital (to Risk-Weighted Assets)Company
                                          
                                          
                                          99,896
                                          
                                          
                                          
                                          18.8
                                          %
                                          
                                          
                                          21,226
                                          
                                          >4.0
                                          %
                                          
                                          —
                                          
                                          
                                          
                                          N/ABank
                                          
                                          
                                          85,414
                                          
                                          
                                          
                                          16.5
                                          %
                                          
                                          
                                          20,654
                                          
                                          >4.0
                                          %
                                          
                                          30,981
                                          
                                          
                                          >6.0
                                          %Tier
      I Capital (to Average Assets)Company
                                          
                                          
                                          99,896
                                          
                                          
                                          
                                          11.0
                                          %
                                          
                                          
                                          36,209
                                          
                                          >4.0
                                          %
                                          
                                          —
                                          
                                          
                                          
                                          N/ABank
                                          
                                          
                                          85,414
                                          
                                          
                                          
                                          9.8
                                          %
                                          
                                          
                                          34,824
                                          
                                          >4.0
                                          %
                                          
                                          45,531
                                          
                                          
                                          >5.0
                                          %
  38
  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 March 31, 2010, our portfolio of
investment securities included approximately $16.5 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 $15.0 million
and $294,000, respectively, may be negatively impacted in the
future.
 
 OTTI is a non-cash charge and not
necessarily an indicator of a permanent decline in value.  Security
valuations require significant estimates, judgments and assumptions by
management and are considered a critical accounting policy of the Company. See
Note 8, "Fair Value of Financial Instruments" for further discussion of this
policy.
 
 Based on our expected operating cash
flows, and our other sources of cash, we do not expect the potential lack of
liquidity in these auction rate securities and corporate notes to affect our
capital, liquidity or our ability to execute our current business
plan.  We have cash and cash equivalents totaling $72.5 million, or
7.9% of total assets at March 31, 2010.  In addition, we have the
capacity to borrow up to approximately $205 million from the Federal Reserve
Bank and approximately $86 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.
  39
 
 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 March 31,
2010, the Company had cash of approximately $5.3 million and investment
securities with a fair market value of $7.0 million.
 
 The Bank maintains financial
instruments with off-balance sheet risk in the normal course of business to meet
the financing needs of its customers.  These financial instruments,
approximately $12.0 million at March 31, 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 March 31, 2010, the Bank had
outstanding commitments of approximately $446.7 million; including $27.9 million
of borrowings, $4.1 million of operating leases, and $414.7 million of time
deposits.  These commitments include $354.0 million that mature or
renew within one year, $89.9 million that mature or renew after one year and
within three years, $2.7 million that mature or renew after three years and
within five years and $178,000 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.
  40
 
 Most of the Bank's deposits are either
interest-bearing demand deposits or short term certificates of deposit and other
interest-bearing deposits with interest rates that fluctuate as market rates
change.  Management of the Bank seeks to reduce the risk of interest
rate fluctuations by concentrating on loans and securities investments with
either short terms to maturity or with adjustable rates or other features that
cause yields to adjust based upon interest rate fluctuations.  In
addition, to cushion itself against the potential adverse effects of a
substantial and sustained increase in market interest rates, the Bank has from
time to time purchased off balance sheet interest rate cap contracts which
generally provide that the Bank will be entitled to receive payments from the
other party to the contract if interest rates exceed specified
levels.  These contracts are entered into with major financial
institutions.
 
 The Company seeks to maximize its net
interest margin within an acceptable level of interest rate
risk.  Interest rate risk can be defined as the amount of the
forecasted net interest income that may be gained or lost due to favorable or
unfavorable movements in interest rates.  Interest rate risk, or
sensitivity, arises when the maturity or repricing characteristics of assets
differ significantly from the maturity or repricing characteristics of
liabilities.
 
 ITEM
4 - CONTROLS AND PROCEDURES
 
 Disclosure
Controls and Procedures.
 
 As of the
end of the period covered by this Quarterly Report on Form 10-Q, the Company
evaluated the effectiveness of the design and operation of its "disclosure
controls and procedures" as defined in Rule 13a-15(e) under the Securities
Exchange Act of 1934, as amended ("Disclosure Controls").  The
Disclosure Controls are designed to allow the Company to reach a reasonable
level of assurance that information required to be disclosed by the Company is
recorded, processed, summarized and reported within the time period specified in
the SEC's rules and forms and that any information relating to the Company is
accumulated and communicated with management, including its principal
executive/financial officer to allow timely decisions regarding required
disclosure.  The evaluation of the Disclosure Controls ("Controls
Evaluation") was done under the supervision and with the participation of the
Company's management, including the Chief Executive Officer ("CEO"), who is also
the Chief Financial Officer ("CFO"). Based upon the Controls Evaluation and
subsequent discussions and actions by the Company as described in its Annual
Report on Form 10-K for the fiscal year ended December 31, 2009 ("Form 10-K"),
the CEO/CFO has concluded that as of March 31, 2010, the Disclosure Controls
were not effective due to a material weakness pertaining to evaluation of other
than temporary impairment and related tax accounting as described in the Form
10-K.  However, as of June 7, 2010, due to the remediation described
in the Form 10-K, the Company believes its 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 March 31, 2010, 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.
  41
 
 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.
  42
 
 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:
                June 18 , 2010
                
                By:
                /s/ Steven RosenbergSteven
      RosenbergPresident
      and ChiefFinancial
      Officer
  43
 
 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.
  44