UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-K





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





For the
fiscal year ended December 31,
2008





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
      number)





160
      Broadway, New York, New York
              10038(Address
      of principal executive offices)
              (Zip
      Code)





Registrant's
telephone number, including area code: (212) 791-5362





Securities
registered pursuant to Section 12(b) of the Act:





Title of Each Class
              
              Name of Each Exchange on Which
      TradedCommon
      Stock, par value $.10 per share
              
              The
      NASDAQ Stock Market LLC(The
      NASDAQ Global Market)





Securities
registered pursuant to Section 12(g) of the Act:None





Indicate
by check mark if the Registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.  Yes  ̈   No
x





Indicate
by check mark if the Registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.  Yes  ̈   No
x





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 if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  x





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










Large
      accelerated filer  ̈
                Accelerated
      filer  ̈Non-accelerated
      filer  ̈
                Smaller
      reporting company x(Do
      not check if a smallerreporting
      company)





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





Aggregate
market value of voting and non-voting common stock held by non-affiliates of the
Registrant as of June 30, 2008: $40,224,002.





Number of
shares of Common Stock outstanding as of March 27, 2009: 7,054,183.





DOCUMENTS INCORPORATED BY
REFERENCE: None




Forward-Looking Statements.
Statements in this Annual Report on Form 10-K 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 and the Berkshire Bank's ability to continue
its status as "well capitalized", 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 the sections of this
Annual Report entitled "Business", "Risk Factors" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."





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 Annual
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.







PART
I





ITEM
1. Business





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





We file annual, quarterly and current
reports, proxy statements and other information with the Securities and Exchange
Commission (the "SEC"). You may read and copy our reports or other filings made
with the SEC at the SEC's Public Reference Room, located at 450 Fifth Street,
N.W., Washington, DC 20549.  You can also access information that we
file electronically on the SEC's website at WWW.SEC.GOV.





We do not presently have a website.
However, as soon as practicable after filing with or furnishing to the SEC, we
will provide at no cost, paper or electronic copies of our Annual Reports on
Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and
amendments to those reports.  Requests should be directed
to:





Berkshire Bancorp Inc.


Investor Relations


160 Broadway, First Floor


New York, NY 10038





Trust Preferred
Securities.  As of May 18 2004, the Company established
Berkshire Capital Trust I, a Delaware statutory trust, ("BCTI").  The
Company owns all the common capital securities of BCTI.  BCTI issued
$15.0 million of preferred capital securities to investors in a private
transaction and invested the proceeds, combined with the proceeds from the sale
of BCTI's common capital securities, in the Company through the purchase of
$15.464 million aggregate principal amount of Floating Rate Junior Subordinated
Debentures (the 2004 "Debentures") issued by the Company. The 2004 Debentures,
the sole assets of BCTI, mature on July 23, 2034 and bear interest at a floating
rate, three month LIBOR plus 2.70%, currently 6.53%.





On April 1, 2005, the Company
established Berkshire Capital Trust II, a Delaware statutory trust,
("BCTII").  The Company owns all the common capital securities of
BCTII.  BCTII issued $7.0 million of preferred capital securities to
investors in a private transaction and invested the proceeds, combined with the
proceeds from the sale of BCTII's common capital securities, in the Company
through the purchase of $7.217 million aggregate principal amount of Floating
Rate Junior Subordinated Debentures (the "2005 Debentures") issued by the
Company. The 2005 Debentures, the sole assets of BCTII, mature on May 23, 2035
and bear interest at a floating rate, three month LIBOR plus 1.95%, currently
4.10%.  See Note A of Notes to Consolidated Financial Statements for
further discussion of Trust Preferred Securities.




2


Series A Preferred
Shares.  On October 31, 2008, the Company sold an aggregate of
60,000 shares of its 8% Non-Cumulative Mandatorily Convertible Perpetual Series
A Preferred Stock (the "Series A Preferred Shares") at $1,000 per share, or $60
million in the aggregate, to the Company's Chairman of the Board and majority
stockholder, and two non-affiliated investors.  Each Series A
Preferred Share bears non-cumulative cash dividends at the rate of 8% per annum,
payable quarterly, is mandatorily convertible into 123.153 shares of our Common
Stock on October 31, 2011, unless previously redeemed, and is redeemable at the
option of the Company between April 30, 2009 and November 1, 2010 at a
redemption price of $1,100.  So long as any share of Series A
Preferred Shares remains outstanding, unless the full dividends for the most
recent dividend payment date have been paid or declared, no dividends may be
paid or declared on the Company's Common Stock.





Business of the Bank -
General.  The Bank's principal business consists of gathering
deposits from the general public and investing those deposits primarily in
loans, debt obligations issued by the U.S. Government and its agencies, debt
obligations of business corporations, and mortgage-backed securities. The Bank
currently operates from seven deposit-taking offices in New York City, four
deposit-taking offices in Orange and Sullivan Counties, New York and one
deposit-taking office in Ridgefield, NJ.





Branch
      Locations of The Berkshire Bank
                              December
      31, 20084
      East 39th Street
                              New
      York, NY
                            
                            2
      South Church Street
                              Goshen,
      NY5
      Broadway
                              New
      York, NY
                            
                            214
      Harriman Drive
                              Goshen,
      NY5010
      13th Avenue
                              Brooklyn,
      NY
                            
                            80
      Route 17M
                              Harriman,
      NY1421
      Kings Highway
                              Brooklyn,
      NY
                            
                            60
      Main Street
                              Bloomingburg,
      NY4917
      16th Avenue
                              Brooklyn,
      NY
                            
                            1119
      Avenue J
                              Brooklyn,
      NY600
      Broad Avenue
                              Ridgefield,
      NJ
                            
                            210
      Pinehurst Avenue
                              New
      York, NY
10033





Principal Loan
Types.  The Bank's principal loan types are residential and
commercial mortgage loans and commercial non-mortgage loans, both unsecured and
secured by personal property.  The Bank's revenues come principally
from interest on loans and investment securities.  The Bank's primary
sources of funds are deposits, borrowings and proceeds from principal and
interest payments on loans and investment securities.





Operating Plan.  The
Bank's operating plan concentrates on obtaining deposits from a variety of
businesses, professionals and retail customers and investing those funds in
conservatively underwritten loans.  Due to the Bank's underwriting
criteria, its deposits have significantly exceeded the level of satisfactory
loans available for investment in recent years.  Hence, the Bank has,
in recent years, invested a portion of its available funds in investment,
mortgage-backed and auction rate securities.




3


Market Area.  The
Bank draws its customers principally from the New York City metropolitan area
and the Villages of Goshen and Harriman, New York and their surrounding
communities, representing most of Orange County, NY.  The Bank also
has a branch in Bloomingburg, New York, just over the border between Orange and
Sullivan Counties.  Predominantly rural with numerous small towns,
many residents of Orange and Sullivan Counties work in New York
City.  Consequently, the health of the economy in the New York City
metropolitan area has, and will continue to have a direct effect on the economic
well being of residents and businesses in these counties.  From time
to time, the Bank may make loans or accept deposits from outside these areas,
but such transactions generally represent outgrowths of existing local customer
relationships.





Competition.  The
Bank's principal competitors for deposits are other commercial banks, savings
banks, savings and loan associations and credit unions in the Bank's market
areas, as well as money market mutual funds, insurance companies, securities
brokerage firms and other financial institutions, many of which are
substantially larger in size than the Bank.  The Bank's competition
for loans comes principally from commercial banks, savings banks, savings and
loan associations, mortgage bankers, finance companies and other institutional
lenders.  Many of the institutions which compete with the Bank have
much greater financial and marketing resources than the Bank.  The
Bank's principal methods of competition include loan and deposit pricing,
maintaining close ties with its local communities, the quality of the personal
service it provides, the types of business services it provides, and other
marketing programs.





Operations of the
Bank.  Reference is made to the information set forth in Item 7
herein ("Management's Discussion and Analysis of Financial Condition and Results
of Operations") for information as to various aspects of the Bank's operations,
activities and conditions.





Subsidiary
Activities.  The Bank is permitted under New York State law and
federal law to own subsidiaries for certain limited purposes, generally to
engage in activities which are permissible for a subsidiary of a national
bank.  The Bank has two subsidiaries, Berkshire Agency, Inc., a
company engaged in the title insurance agency business, and Berkshire 1031, a
company that acts as a qualified intermediary in connection with tax free
exchanges under Section 1031 of the Internal Revenue Code of 1986.





Regulation.  The
Company is a bank holding company under federal law and registered as such with
the Federal Reserve.  The Bank is a commercial bank chartered under
the laws of New York State.  It is subject to regulation at the state
level by the New York Superintendent of Banks and the New York Banking Board,
while at the federal level its primary regulator is the Federal Deposit
Insurance Corporation (the "FDIC").





Both the Company and the Bank are
subject to extensive state and federal regulation of their
activities.  The following discussion summarizes certain banking laws
and regulations that affect Berkshire and the Bank.  Proposals to
change these laws and regulations are frequently proposed in Congress, in the
New York State legislature, and before state and federal bank regulatory
agencies. The likelihood and timing of any changes and the impact such changes
might have on the Company are impossible to determine with any
certainty.  A change in applicable laws or regulations, or a change in
the way such laws or regulations re interpreted by regulatory agencies or
courts, may have a material impact on the business, operations and earnings of
the Company, the nature and effect of which cannot be predicted.




4


Bank Holding Company
Regulation.  The Federal Reserve is authorized to make regular
examinations of the Company and its nonbank subsidiaries.  Under
federal law and Federal Reserve regulations, the activities in which the Company
and its nonbank subsidiaries may engage are limited.  The Company may
not acquire direct or indirect ownership or control of more than 5% of the
voting shares of any company, including a bank, without the prior approval of
the Federal Reserve, except as specifically authorized under federal law and
Federal Reserve regulations.  The Company, subject to the approval of
the Federal Reserve, may acquire more than 5% of the voting shares of
non-banking corporations if those corporations engage in activities which the
Federal Reserve deems to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto.  These
limitations also apply to activities in which the Company engages directly
rather than through a subsidiary.





The Federal Reserve has enforcement
powers over the Company and its non-bank subsidiaries. This allows the Federal
Reserve, among other things, to stop activities that represent unsafe or unsound
practices or constitute violations of law, rules, regulations, administrative
orders or written agreements with a federal bank regulator.  These
powers may be exercised through the issuance of cease-and-desist orders, the
imposition of civil money penalties or other actions.





Federal Reserve Capital
Requirements.  The Federal Reserve requires that the Company,
as a bank holding company, must maintain certain minimum ratios of capital to
assets.  The Federal Reserve's regulations divide capital into two
categories.  Primary capital includes common equity, surplus,
undivided profits, perpetual preferred stock, mandatory convertible instruments,
the allowance for loan and lease losses, contingency and other capital reserves,
and minority interests in equity accounts of consolidated
subsidiaries.  Secondary capital includes limited-life preferred
stock, subordinated notes and debentures and certain unsecured long term
debt.





The Federal Reserve requires that bank
holding companies maintain a minimum ratio of primary capital to total assets of
5.5% and a minimum level of total capital (primary plus secondary capital) equal
to 6% of total assets. In calculating capital ratios, the allowance for loan
losses, which is a component of primary capital, is added back in determining
total assets.  Certain capital components, such as debt and perpetual
preferred stock, are includable as capital only if they satisfy certain
definitional tests.





The Company must also meet a risk-based
capital standard.  Capital, for the risk-based capital requirement, is
divided into Tier I capital and Supplementary capital, determined as discussed
below in connection with the FDIC capital requirements imposed on the
Bank.  The Federal Reserve requires that the Bank maintain a ratio of
total capital (defined as Tier I plus Supplementary capital) to risk-weighted
assets of at least 8%, of which at least 4% must be Tier I
capital.  Risk weighted assets are also determined in a manner
comparable to the determination of risk-weighted assets under FDIC regulations
as discussed below.





At December 31, 2008 and 2007, the
Company met the definition of a "well capitalized" bank holding
company.




5


Inter-state
Banking.  Bank holding companies may generally acquire banks in
any state.  Federal law also permits a bank to merge with an
out-of-state bank and convert any offices into branches of the resulting bank if
both states have not opted out of interstate branching; permits a bank to
acquire branches from an out-of-state bank if the law of the state where the
branches are located permits the interstate branch acquisition; and permits
banks to establish and operate new interstate branches whenever the host state
opts-in to that authority.  Bank holding companies and banks that want
to engage in such activities must be adequately capitalized and
managed.





The New York Banking Law generally
authorizes interstate branching in New York as a result of a merger, purchase of
assets or similar transaction. An out of state bank may not first enter New York
by opening a new branch in New York, but once
a branch is acquired as described in the preceding sentence, additional new
branches may be opened state wide.





Regulation of the
Bank.  In general, the powers of the Bank are limited to the
express powers described in the New York Banking Law and powers incidental to
the exercise of those express powers.  The Bank is generally
authorized to accept deposits and make loans on terms and conditions determined
to be acceptable to the Bank. Loans may be unsecured, secured by real estate, or
secured by personal property. The Bank may also invest assets in bonds, notes or
other debt securities which are not in default and certain limited classes of
equity securities including certain publicly traded equity securities in an
amount aggregating not more than 2% of assets or 20% of capital.  The
Bank may also engage in a variety of other traditional activities for commercial
banks, such as the issuance of letters of credit.





The exercise of these state-authorized
powers is limited by FDIC regulations and other federal laws and
regulations.  In particular, FDIC regulations limit the investment
activities of state-chartered, FDIC-insured banks such as the Bank.





Under FDIC regulations, the Bank
generally may not directly or indirectly acquire or retain any equity investment
that is not permissible for a national bank.  In addition, the Bank
may not directly or indirectly through a subsidiary, engage as "principal" in
any activity that is not permissible for a national bank unless the FDIC has
determined that such activities would pose no risk to the applicable FDIC
insurance fund and the Bank is in compliance with applicable regulatory capital
requirements.  FDIC regulations permit real estate investments under
certain circumstances.  The Bank does not engage in real estate
investing activity.





Loans to One
Borrower.  With certain exceptions, the Bank may not make loans
or other extensions of credit to a single borrower, or certain related groups of
borrowers, in an aggregate amount in excess of 15% of the Bank's net worth, plus
an additional 10% of the Bank's net worth if such amount is secured by certain
types of readily marketable collateral.  In addition, the Bank is not
permitted to make a mortgage loan in excess of 15% of capital stock, surplus
fund and undivided profits.




6


FDIC Capital
Requirements.  The FDIC requires that the Bank maintain certain
minimum ratios of capital to assets.  The FDIC's regulations divide
capital into two tiers.  The first tier ("Tier I") includes common
equity, retained earnings, certain non-cumulative perpetual preferred stock
(excluding auction rate issues) and minority interests in equity accounts of
consolidated subsidiaries, minus goodwill and other intangible assets (except
mortgage servicing rights and purchased credit card relationships subject to
certain limitations).  Supplementary ("Tier II") capital includes,
among other items, cumulative perpetual and long-term limited-life preferred
stock, mandatorily convertible securities, certain hybrid capital instruments,
term subordinated debt and the allowance for loan, subject to certain
limitations, less required deductions.





The FDIC requires that the highest
rated banks maintain a Tier I leverage ratio (Tier I capital to adjusted total
assets) of at least 3.0%. All other banks subject to FDIC capital requirements
must maintain a Tier I leverage ratio of 4.0% to 5.0% or more.  As of
December 31, 2008 and 2007, the Bank's Tier I leverage capital ratio was 8.9%
and 9.7%, respectively.





The Bank must also meet a risk-based
capital standard.  The risk-based standard requires the Bank to
maintain total capital (defined as Tier I and Tier II capital) to risk-weighted
assets of at least 8%, of which at least 4% must be Tier I
capital.  In determining the amount of risk-weighted assets, all
assets, plus certain off-balance sheet assets, are multiplied by a risk-weight
of 0% to 100%, based on the risks the FDIC believes are inherent in the type of
asset.  As of December 31, 2008 and 2007, the Bank maintained a 12.2%
and 13.9% Tier I risk-based capital ratio and a 13.4% and 14.5% total risk-based
capital ratio, respectively.





In addition to the foregoing regulatory
capital requirements, the FDIC Improvements Act of 1991 created a "prompt
corrective action" framework, under which decreases in a depository
institution's capital category trigger various supervisory
actions.  Pursuant to implementing regulations adopted by the FDIC,
for purposes of the prompt corrective action provisions, a state-chartered,
nonmember bank, such as the Bank, is deemed to be well capitalized if it
has:  a total risk-based capital ratio of 10% or greater; a Tier I
risk-based capital ratio of 6% or greater; and a leverage ratio of 5% or
greater.  As of December 31, 2008 and 2007, the Bank met the
definition of a "well capitalized" financial institution.





Community Reinvestment
Act.  The Bank must, under federal law, meet the credit needs
of its community, including low and moderate income segments of its
community.  The FDIC is required, in connection with its examination
of the Bank, to assess whether the Bank has satisfied this
requirement.  Failure to satisfy this requirement could adversely
affect certain applications which the Bank may make, such as branch
applications, merger applications, and applications for permission to purchase
branches.  In the case of Berkshire, the Federal Reserve will assess
the record of each subsidiary bank in considering certain applications by
Berkshire.  The New York Banking Law contains similar provisions
applicable to the Bank.  As of the most recent Community Reinvestment
Act examinations by the FDIC and the New York State Banking Department, the Bank
received "satisfactory" ratings.





Dividends From the Bank to the
Company.  One source of funds for Berkshire to pay dividends to
its stockholders is dividends from the Bank to Berkshire. Under the New York
Banking Law, the Bank may pay dividends to Berkshire, without regulatory
approval, equal to its net profits for the year in which the payment is made,
plus retained net profits for the two previous years, subject to certain limits
not generally relevant.  The Bank's aggregate retained net profits for
the 2006 and 2007 calendar years totaled approximately $10.23
million.




7


Under federal law, the Bank may not
make any capital distribution to Berkshire, including any dividend or repurchase
of the Bank's stock, if, after making such distribution, the Bank fails to meet
the required minimum capital ratio requirements discussed above.  The
FDIC may prohibit the Bank from paying dividends if, in its opinion, the payment
of dividends would constitute an unsafe or unsound practice.





Transactions With Related
Parties.  The Company, its direct non-banking subsidiaries and
other companies controlled by stockholders who control the Company are
affiliates, within the meaning of the Federal Reserve Act, of the Bank and its
subsidiaries.  The Bank's authority to engage in transactions with its
"affiliates" is limited by Sections 23A and 23B of the Federal Reserve Act.
Section 23A limits the aggregate amount of transactions with any individual
affiliate to 10% of the capital and surplus of the Bank and also limits the
aggregate amount of transactions with all affiliates to 20% of the Bank's
capital and surplus.  Extensions of credit to affiliates must be
secured by certain specified collateral, and the purchase of low quality assets
from affiliates is generally prohibited.  Section 23B provides that
certain transactions with affiliates, including loans and asset purchases, must
be on terms and under circumstances, including credit standards, that are at
least as favorable to the Bank as those prevailing at the time for comparable
transactions with non-affiliated companies.  In the absence of
comparable transactions, such transactions may only occur under terms and
circumstances, including credit standards, that in good faith would be offered
to or would apply to non-affiliated companies.





In accordance with banking regulations,
the Bank may make loans to its and the Company's directors, executive officers,
and 10% stockholders, as well as to entities controlled by them, subject to
specific federal and state limits.  Among other things, these loans
must (a) be made on terms that are substantially the same as, and follow credit
underwriting procedures that are not less stringent than, those prevailing for
comparable transactions with unaffiliated persons and that do not involve more
than the normal risk of repayment or present other unfavorable features and (b)
not exceed certain limitations on the amount of credit extended to such persons,
individually and in the aggregate, which limits are based, in part, on the
amount of the Bank's capital.  In addition, extensions of credit in
excess of certain limits must be approved by the Bank's Board of
Directors.  However, the Bank may make loans to executive officers,
directors and principal stockholders on preferential terms, provided the
extension of credit is made pursuant to a benefit or compensation program of the
Bank that is widely available to employees of the Bank or its affiliates and
does not give preference to any insider over other employees of the Bank or
affiliate.  The Bank has no such benefit or compensation
programs.





Enforcement.  The
FDIC and the Banking Department have enforcement authority over the
Bank.  The Superintendent of the Banking Department (the
"Superintendent") may order the Bank to appear and explain an apparent violation
of law, to discontinue unauthorized or unsafe practices and to keep prescribed
books and accounts.  If any director or officer of the Bank has
violated any law, or has continued unauthorized or unsafe practices in
conducting the business of the Bank after having been notified by the
Superintendent to discontinue such practices, the New York Banking Board may
remove the individual from office after notice and an opportunity to be heard.
The Superintendent also may take over control of the Bank under specified
statutory criteria.




8


The FDIC's enforcement authority
includes, among other things, the ability to assess civil money penalties, to
issue cease and desist orders and to remove directors and
officers.  As indicated above, the FDIC is required to take prompt
action to correct deficiencies in banks which do not satisfy specified FDIC
capital ratio requirements. Dividends, other capital distributions or the
payment of management fees to any controlling person are prohibited if,
following such distribution or payment, a bank would be undercapitalized. An
undercapitalized bank must file a plan to restore its capital within 45 days
after being notified that it is undercapitalized.  Undercapitalized,
significantly undercapitalized and critically undercapitalized institutions are
subject to increasing prohibitions on permitted activities, and increasing
levels of regulatory supervision, based upon the severity of their capital
problems. The FDIC is required to monitor closely the condition of an
undercapitalized bank.  Enforcement action taken by the FDIC can
escalate to the appointment of a conservator or receiver of a critically
undercapitalized bank.





Insurance of
Accounts.  Deposit insurance premiums payable to the FDIC are
based upon the perceived risk of the institution to the FDIC insurance
fund.  The FDIC assigns an institution to one of three capital
categories: (a) well capitalized, (b) adequately capitalized or (c)
undercapitalized.  The FDIC also assigns an institution to one of
three supervisory categories based on an evaluation by the institution's primary
federal regulator and information that the FDIC considers relevant to the
institution's financial condition and the risk posed to the deposit insurance
funds.  Deposit insurance premiums depend on an institution's capital
and supervisory categories.  At present, the Bank pays no deposit
insurance premium based upon its risk-based categorization.





However, the Bank must pay a share of
the cost of the bonds issued in the late 1980s to recapitalize the now defunct
Federal Savings and Loan Insurance Corporation.  The Bank must pay an
annual assessment for this purpose, which for fiscal 2008 and 2007 was equal to
0.1075% and 0.0122%, respectively, of its insured deposits and which is recorded
as a deposit insurance premium expense for financial statement
purposes.  Beginning in 2009, the assessment was revised to 0.361% of
the Bank's insured deposits. This 236% increase over the 2008 assessment will
negatively impact the Bank's results of operations for the current fiscal
year.





In October 2008, with the passage of
the Emergency Economic Stabilization Act, the amount of FDIC insurance coverage
was temporarily increased from $100,000 to $250,000 through December 31,
2009.





Reserve
Requirements.  The Bank must maintain non-interest-earning
reserves against its transaction accounts (primarily NOW and regular checking
accounts). The Bank is generally able to satisfy reserve requirements with cash
on hand and other non-interest bearing deposits which it maintains for other
purposes, so the reserve requirements do not impose a material financial burden
on the Bank.




9


Governmental
Policies.  Our earnings are significantly affected by the
monetary and fiscal policies of governmental authorities, including the Federal
Reserve.  Among the instruments of monetary policy used by the Federal
Reserve to implement these objectives are open-market operations in U.S.
Government securities and Federal funds, changes in the discount rate on member
bank borrowings and changes in reserve requirements against member bank
deposits.  These instruments of monetary policy are used in varying
combinations to influence the overall level of bank loans, investments and
deposits, and the interest rates charged on loans and paid for
deposits.  The Federal Reserve frequently uses these instruments of
monetary policy, especially its open-market operations and the discount rate, to
influence the level of interest rates and to affect the strength of the economy,
the level of inflation or the price of the dollar in foreign exchange markets.
The monetary policies of the Federal Reserve have had a significant effect on
the operating results of banking institutions in the past and are expected to
continue to do so in the future.  It is not possible to predict the
nature of future changes in monetary and fiscal policies, or the effect which
they may have on our business and earnings.





Personal Holding Company
Status.  For the fiscal years ended December 31, 2008, 2007 and
2006, the Company has been deemed to be a Personal Holding Company (a "PHC"), as
defined in the Internal Revenue Code.  As a PHC, we may be required to
pay an additional income tax or issue a dividend to our stockholders in an
amount based upon the PHC Internal Revenue Code formulas, which is primarily
based upon net income.  No such dividend was required to be paid in
fiscal 2008, 2007 and 2006. (See Dividends in Item 5).





Employees.  On March
27, 2009, the Company had one full time employee and the Bank employed
approximately 110 full time and 5 part time employees.  The Bank's
employees are not represented by a collective bargaining unit, and the Bank
considers its relationship with its employees to be good.





ITEM
1A.  Risk Factors.





Our business faces significant
risks.  These risks include those described below and may include
additional risks and uncertainties not presently known to us or that we
currently deem immaterial. Our business, financial condition and results of
operations could be materially adversely affected by any of these risks, and the
trading price of our common stock could decline.





Our
future success depends on our ability to compete effectively in a highly
competitive market and geographic area.





Our ability to return to and maintain
profitability may depend in part on our ability to expand our scope of available
financial services as needed to meet the needs and demands of our customers. Our
business model focuses on using superior customer service to provide traditional
banking services to a growing customer base. However, we face substantial
competition in all phases of our operations from a variety of different
competitors. We encounter competition from other commercial banks, savings and
loan associations, mutual savings banks, credit unions and other financial
institutions. Our competitors, including credit unions, consumer finance
companies, factors, insurance companies and money market mutual funds, compete
with lending and deposit-gathering services offered by us. In addition, our
competitors now include securities dealers, brokers, mortgage bankers,
investment advisors and finance and insurance companies who seek to offer
one-stop financial services to their customers that may include services that we
have not been able or allowed to offer to our customers in the past. This
increasingly competitive environment is primarily a result of changes in
regulation, changes in technology and product delivery systems and the
accelerating pace of consolidation among financial services providers. There is
very strong competition for financial services in the New York state areas in
which we currently conduct our business. This geographic area includes offices
of many of the largest financial institutions in the world. Many of those
competing institutions have much greater financial and marketing resources than
we have. Due to their size, many competitors can achieve larger economies of
scale and as a result may offer a broader range of products and services than we
do. If we are unable to offer competitive products and services, our earnings
may be negatively affected. Some of the financial services organizations with
which we compete are not subject to the same degree of regulation as is imposed
on bank holding companies like ourselves and on federally insured financial
institutions like our banking subsidiary, The Berkshire Bank.  As a
result, these nonbank competitors have certain advantages over us in accessing
funding and in providing various services. The banking business in our current
primary market area is very competitive, and the level of competition we face
may increase further, which may limit our asset growth and
profitability.




10


Economic
conditions either nationally or locally in areas in which our operations are
concentrated may be less favorable than expected.





Deterioration in local, regional,
national or global economic conditions could result in, among other things, an
increase in loan delinquencies, a decrease in property values, a change in
housing turnover rate or a reduction in the level of bank deposits.
Particularly, a weakening of the real estate or employment market in our primary
market areas could result in an increase in the number of borrowers who default
on their loans and a reduction in the value of the collateral securing their
loans, which in turn could have an adverse effect on our profitability.
Substantially all of our real estate loans are collateralized by properties
located in these market areas, and substantially all of our loans are made to
borrowers who live in and conduct business in these market areas.  Any
material economic deterioration in these market areas could have an
adverse impact on our profitability.





Much of the Bank's lending is in New
York City and upstate New York. As a result of this geographic concentration, a
significant broad-based deterioration in economic conditions in the New York
City metropolitan area and upstate New York could have a material adverse impact
on the quality of the Bank's loan portfolio, and accordingly, our results of
operations.  Such a decline in economic conditions could restrict
borrowers' ability outstanding principal and interest on loans when due, and,
consequently, adversely affect the cash flows of our business.





The Bank's loan portfolio is largely
secured by real estate collateral. A substantial portion of the real and
personal property securing the loans in the Bank's portfolio is located in New
York City and upstate New York.  Conditions in real estate markets in
which the collateral for the Bank's loans are located strongly influence the
level of the Bank's non-performing loans and results of operations.  A
decline in the New York City metropolitan area and upstate New York real estate
markets, as well as other external factors, could adversely affect the Bank's
loan portfolio.




11


Recent
negative developments in the financial services industry and U.S. and global
credit markets may adversely impact our operations and results.





Negative developments in the capital
markets during the latter half of 2007, throughout 2008 and during 2009 to date
have resulted in uncertainty in the financial markets in general with the
expectation of the general economic downturn continuing for the remainder of
2009 and possibly beyond.  Loan portfolio performances have
deteriorated at many institutions resulting from, among other factors, a weak
economy and a decline in the value of the collateral supporting their
loans.  The competition for our deposits has increased significantly
due to liquidity concerns at many of these same institutions.  Stock
prices of bank holding companies like ours have been negatively affected by the
current condition of the financial markets, as has our ability, if needed, to
raise capital or borrow in the debt markets compared to recent
years.  As a result, there is a potential for new federal or state
laws and regulations regarding lending and funding practices and liquidity
standards, and financial institution regulatory agencies are expected to be very
aggressive in responding to concerns and trends identified in
examinations.  Negative developments in the financial services
industry and the impact of new legislation in response to those developments
could negatively impact our operations by restricting our business operations,
including our ability to originate or sell loans, and adversely impact our
financial performance.





Changes
in interest rates could reduce our income and cash flows.





Our income and cash flow and the value
of our assets and liabilities depend to a great extent on the difference between
the interest rates earned on interest-earning assets such as loans and
investment securities, and the interest rates paid on interest-bearing
liabilities such as deposits and borrowings. These rates are highly sensitive to
many factors which are beyond our control, including general economic conditions
and policies of various governmental and regulatory agencies, in particular, the
Board of Governors of the Federal Reserve System. Changes in monetary policy,
including changes in interest rates, will influence the origination of loans,
the returns on our portfolio of investment securities and the amounts paid on
deposits. If the rate of interest we pay on deposits and other borrowings
increases more than the rate of interest we earn on loans and other investments,
our net interest income, and therefore our earnings, could be adversely
affected. Our earnings could also be adversely affected if the rates on our
loans and other investments fall more quickly than those on our deposits and
other borrowings.  During 2008, interest rates continued to decrease,
a situation which has negatively affected and continues to negatively affect the
yield we achieve on interest-earning assets.





Due
to the recent downturn in the market, certain of the marketable securities we
own may take longer to auction than initially anticipated, if at
all.





Our portfolio of investment securities
includes auction rate securities. From the first quarter of 2008 to the present,
our balance of auction rate securities failed to auction due to sell orders
exceeding buy orders.  Unless we hold these securities to maturity,
these funds will not be available to us until a successful auction occurs or a
buyer is found outside the auction process. As a result, approximately $101
million of auction rate securities, at cost, have been written down to
approximately $63 million, based on our analysis, as an unrealized temporary
decrease in fair value, which is reflected as a component of accumulated other
comprehensive loss in the stockholders' equity section of our consolidated
balance sheet.  This is in addition to the other than temporary
impairment charge recognized on auction rate securities which have preferred
shares of the Federal National Mortgage Association ("Fannie Mae") and the
Federal Home Loan Mortgage Corporation ("Freddie Mac") as the underlying
collateral, as described elsewhere in this Report. We estimate the fair value of
our auction rate securities using a discounted cash flow model where we used the
expected rate of interest to be received.  We believe this decrease in
fair value is temporary due to general macroeconomic market conditions, and
interest is being paid in full as scheduled.  Further, we have the
ability to hold the securities until maturity, and we have no reason to believe
that any of the underlying issuers of these auction rate securities or its
third-party insurers are currently at risk of default.  In fact,
approximately $15 million principal amount of auction rate securities that
became due in the first quarter of 2009 were paid.  However, if we
need to access the funds invested in the auction rate securities we continue to
hold, prior to maturity, there are no assurances that a successful auction will
occur, or that we can find a buyer outside the auction process.




12


Declines
in value may adversely impact the investment portfolio.





As of December 31, 2008, we had
approximately $298,763,000 and $360,000 in available for sale and held to
maturity investment securities, respectively.  We may be required to
record impairment charges (or mark-to-market adjustments) on our investment
securities if they suffer a decline in value that is considered
other-than-temporary.  Numerous factors, including lack of liquidity
for re-sales of certain investment securities, absence of reliable pricing
information for investment securities, adverse changes in business climate,
adverse actions by regulators, or unanticipated changes in the competitive
environment, could have a negative effect on our investment portfolio in future
periods. If an impairment charge is significant enough it could affect the
ability of the Bank to upstream dividends to us, which could have a material
adverse effect on our liquidity and our ability to pay dividends to stockholders
and could also negatively impact our regulatory capital ratios and result in the
Bank not being classified as "well-capitalized" for regulatory
purposes.  The auction rate securities which have preferred shares of
Fannie Mae and Freddie Mac as the underlying collateral sustained an impairment
charge of $80.15 million, pre-tax, due to the US Treasury and FHFA plan to place
Fannie Mae and Freddie Mac into conservatorship and eliminate the dividends on
Fannie Mae and Freddie Mac common and preferred stock for the foreseeable
future.  There can be no assurances that further impairment charges
will not have to be recognized.





We
operate in a highly regulated environment; changes in laws and regulations and
accounting principles may adversely affect us.





We are subject to extensive state and
federal regulation, supervision, and legislation which govern almost all aspects
of our operations. These laws may change from time to time and are primarily
intended for the protection of customers, depositors, and the deposit insurance
funds. The impact of any changes to these laws may negatively impact our ability
to expand our services and to increase the value of our business. Regulatory
authorities have extensive discretion in the exercise of their supervisory and
enforcement powers. They may, among other things, impose restrictions on the
operation of a banking institution, the classification of assets by such
institution and such institution's allowance for loan losses. Regulatory and law
enforcement authorities also have wide discretion and extensive enforcement
powers under various consumer protection, civil rights and other laws, including
the Gramm-Leach-Blilely Act, the Bank Secrecy Act, the Truth-in-Lending Act, the
Equal Credit Opportunity Act, the Fair Housing Act and the Real Estate
Settlement Procedures Act. These laws also permit private individual and class
action lawsuits and provide for the recovery of attorneys fees in certain
instances. Any changes to these laws or any applicable accounting principles may
negatively impact our results of operations and financial condition. While we
cannot predict what effect any presently contemplated or future changes in the
laws or regulations or their interpretations would have, these changes could be
materially adverse to our investors and stockholders.




13


We
are required to maintain an allowance for loan losses. These reserves are based
on management's judgment and may have to be adjusted in the
future.  Any adjustment to the allowance for loan losses, whether due
to regulatory changes, economic conditions or other factors, may affect our
financial condition and earnings.





We maintain an allowance for loan
losses at a level believed adequate by management to absorb losses specifically
identifiable and inherent in the loan portfolio. In conjunction with an internal
loan review function that operates independently of the lending function,
management monitors the loan portfolio to identify risks on a timely basis so
that an appropriate allowance can be maintained. Based on an evaluation of the
loan portfolio, management presents a periodic review of the loan loss reserve
to the board of directors of the Bank, indicating any changes in the reserve
since the last review and any recommendations as to adjustments in the reserve.
In making its evaluation, in addition to the factors discussed below, management
considers the results of recent regulatory examinations, which typically include
a review of the allowance for loan losses as an integral part of the examination
process.





In establishing the allowance,
management evaluates individual large classified loans and nonaccrual loans, and
determines an aggregate reserve for those loans based on that review. An
allowance for the remainder of the loan portfolio is also determined based on
historical loss experience within the components of the portfolio. These
allocations may be modified if current conditions indicate that loan losses may
differ from historical experience, based on economic factors and changes in
portfolio mix and volume.





In addition, a portion of the allowance
is established for losses inherent in the loan portfolio which have not been
identified by the more quantitative processes described above. This
determination inherently involves a higher degree of subjectivity, and considers
risk factors that may not have yet manifested themselves in historical loss
experience. Those factors include changes in levels and trends of charge-offs,
delinquencies, and nonaccrual loans, trends in volume and terms of loans,
changes in underwriting standards and practices, portfolio mix, tenure of loan
officers and management, entrance into new geographic markets, changes in credit
concentrations, and national and local economic trends and conditions. While the
allowance for loan losses is maintained at a level believed to be adequate by
management for estimated losses in the loan portfolio, determination of the
allowance is inherently subjective, as it requires estimates, all of which may
be susceptible to significant change. Changes in these estimates may impact the
provisions charged to expense in future periods.  Federal and state
regulatory authorities, as an integral part of their examination process, review
our loans and allowance for loan losses. We cannot assure
you that we will not increase the allowance for loan losses or the regulators
will not require us to increase this allowance. Either of these occurrences
could negatively impact Berkshire Bancorp's results of operations.





We
may be adversely affected by the soundness of other financial
institutions.





Financial services institutions are
interrelated as a result of trading, clearing, counterparty, or other
relationships.  We have exposure to many different industries and
counterparties, and routinely execute transactions with counterparties in the
financial service industry, including the Federal Home Loan Bank of New York
(the "FHLBNY"), commercial banks, brokers and dealers, investment banks, and
other institutional clients.  Many of these transactions expose us to
credit risk in the event of a default by a counterparty or client.  In
addition, our credit risk may be exacerbated when the collateral held by us
cannot be realized or is liquidated at prices not sufficient to recover the full
amount due to us.  Any such losses could have a material adverse
effect on our financial condition and results of operations.




14


It
may be difficult for a third party to acquire us and this could depress our
common stock price.





Under our amended and restated
certificate of incorporation, we have authorized 2,000,000 shares of preferred
stock, of which 60,000 shares have been designed as Series A Preferred Stock,
and of which the remaining 1,940,000 shares may be issued by the board of
directors with terms, rights, preferences and designations as the board of
directors may determine and without any vote of the stockholders, unless
otherwise required by law. Issuing the preferred stock, depending upon the
rights, preferences and designations set by the board of directors, may delay,
deter, or prevent a change in control of the Company.  At December 31,
2008, there are 60,000 shares of preferred stock outstanding which have been
issued to the Company's majority stockholder and two unaffiliated entities. The
preferred stock may be redeemed by the Company between April 30, 2009 and
November 1, 2010 at $1,100 per share.





In addition, we have authorized
25,000,000 shares of common stock of which approximately 7,000,000 shares are
issued and outstanding.  The price of our common stock may be volatile
at times since our common stock is thinly traded and one individual owns or
controls more than 50% of our outstanding shares. It may be difficult for a
stockholder to sell a significant number of shares at a time and at a price of
their choosing or for a third party to purchase sufficient shares on the open
market to cause a change in control of the Company, all of which could depress
the price of the Company's common stock.





In addition, federal and state banking
laws may restrict the ability of the stockholders to approve a merger or
business combination or obtain control of the Company. This may tend to make it
more difficult for shareholders to replace existing management or may prevent
shareholders from receiving a premium for their shares of our common
stock.





Our
common stock is not insured by any governmental agency and, therefore,
investment in them involves risk.





Our securities are not deposit accounts
or other obligation of any bank, and are not insured by the FDIC, or any other
governmental agency, and are subject to investment risk, including the possible
loss of principal.





Our
Series A Preferred Shares impact net income available to our common stockholders
and our earnings per share.





As long as there are Series A Preferred
Shares outstanding, no dividends may be paid on our Common Stock unless all
dividends on the Series A Preferred Shares have been paid in
full.  The dividends declared on our fixed rate Series A Preferred
Shares will reduce the net income available to holders of our Common Stock and
our earnings per share of Common Stock.  The Series A Preferred Shares
will also receive preferential treatment in the event of liquidation,
dissolution or winding up of the Company.




15


Moreover, holders of our Common Stock
are entitled to receive dividends only when, as and if declared by our board of
directors.  Although until the most recent fiscal semi-annual period,
we have historically declared cash dividends on our Common Stock, we are not
required to do so and our board of directors may reduce or eliminate our Common
Stock dividend in the future and indeed, determined not to declare or pay a
semi-annual dividend in April 2009.  This could adversely affect the
market price of our Common Stock.





The
Financial Sector Is Experiencing An Economic Downturn. An Increase In The Number
of Non-performing Loans Will Have An Adverse Effect On Our
Operations.





Virtually all of our real estate loans
are secured by real estate in New York. At December 31, 2008, loans secured by
real estate, including home equity loans and lines of credit, represented 85.3%
of our total loans. Both nationally and in the State of New York, we are
experiencing an economic downturn that is having a significant impact on the
prices of real estate and related assets. The residential and commercial real
estate sectors have been adversely affected by weakening economic conditions and
may negatively impact our loan portfolio. While we believe that our total
non-performing loans as a percentage of total assets are relatively low by
industry standards, if loans that are currently performing become non-performing
loans, we may need to increase our allowance for loan losses, which would have
an adverse impact on our financial condition and results of
operations.  We added approximately $5.0 million to the allowance for
loan losses during the fiscal year ended December 31, 2008.





Our
FDIC Premium Could Be Substantially Higher In The Future, Which Would Have An
Adverse Effect On Our Future Earnings.





Our
FDIC insurance assessment was $1.08 million for 2008 compared to $86,000 for
2007.  During 2007 our assessment was substantially reduced by a
$219,000 special One Time Credit, which was fully utilized during
2007.  The FDIC has recently raised our insurance assessment as a
percentage of insured deposits by 236%, which will likely cause the assessment
in actual dollars to be substantially higher in 2009 and in future
periods.  Any increases in our FDIC premium rates will reduce future
earnings.





ITEM
1B.  Unresolved Staff Comments.





Not Applicable





ITEM
2. Properties.





The following are Berkshire's and the
Bank's principal facilities as of March 27, 2009:





Approximate
                                
                                
                                ApproximateFloor Area
                                
                                
                                Annual LeaseLocation
                                
                                Operations
                                
                                (Sq. Ft.)
                                
                                
                                Rent
                                
                                
                                ExpirationNew
      York, NY
                                
                                Executive
      Offices
                                
                                
                                1,500
                                
                                
                                $
                                18,000
                                
                                
                                (1)(3)New
      York, NY
                                
                                Main
      Bank Office and Bank Branch
                                
                                
                                9,729
                                
                                
                                Owned
                                
                                
                                March
      2013Brooklyn,
      NY
                                
                                Bank
      Branch
                                
                                
                                4,500
                                
                                
                                $
                                200,418
                                
                                
                                March
      2013Brooklyn,
      NY
                                
                                Bank
      Branch
                                
                                
                                2,866
                                
                                
                                $
                                59,130
                                
                                
                                March
      2013Brooklyn,
      NY
                                
                                Bank
      Branch
                                
                                
                                2,592
                                
                                
                                $
                                108,212
                                
                                
                                December 2012Brooklyn,
      NY
                                
                                Bank
      Branch
                                
                                
                                1,640
                                
                                
                                $
                                72,000
                                
                                
                                June
      2015New
      York, NY
                                
                                Bank
      Branch
                                
                                
                                9,924
                                
                                
                                $
                                405,000
                                
                                
                                June
      2010(2)(3)New
      York, NY
                                
                                Bank
      Branch
                                
                                
                                3,300
                                
                                
                                $
                                60,000
                                
                                
                                November 2016(2)(3)Goshen,
      NY
                                
                                Bank
      Branch
                                
                                
                                10,680
                                
                                
                                OwnedHarriman,
      NY
                                
                                Bank
      Branch
                                
                                
                                1,623
                                
                                
                                OwnedBloomingburg,
      NY
                                
                                Bank
      Branch
                                
                                
                                1,530
                                
                                
                                $
                                20,871
                                
                                
                                August
      2010Ridgefield,
      NJ
                                
                                Bank
      Branch
                                
                                
                                6,120
                                
                                
                                Owned




16


_____________


(1)
              Rented
      on a month to month basis from a company affiliated with Mr. Moses Marx, a
      director of the Company.


(2)
              Leased
      from a company affiliated with Mr. Marx, a director of the
      Company.


(3)
              Management
      believes the annual rent paid is comparable to the annual rent that would
      be paid to non-affiliated parties in a similar commercial transaction for
      similar commercial space.





ITEM
3. Legal Proceedings.





In the ordinary course of operations,
the Bank is a party to routine litigation involving claims incidental to its
banking business.  Management believes that no current litigation,
threatened or pending, to which we or our assets are a party, poses a
substantial likelihood of potential loss or exposure which would have a material
adverse effect on the financial condition or results of our
operations.





ITEM
4. Submission of Matters to a Vote of Security Holders.





On November 17, 2008, in connection
with the issuance of the Series A Preferred Shares, stockholders owning a
majority of the Company's outstanding Common Stock as of such date, by written
consent in lieu of a meeting of the stockholders, approved (i) the issuance,
upon conversion of the Series A Preferred Shares in accordance with their terms,
of shares of Common Stock that could exceed 19.99% of the number of shares of
Common Stock outstanding immediately prior to the issuance of the Series A
Preferred Shares, and (ii) the filing of an amendment to the Company's
Certificate of Incorporation increasing the number of authorized shares of the
Company's Common Stock from 10,000,000 to 25,000,000.





PART
II





ITEM
5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.





The Company's Common Stock trades on
the Nasdaq Global Market under the symbol BERK. The following table sets forth,
for the periods indicated, the high and low sales prices for the Company's
Common Stock as reported by NASDAQ.





Fiscal Year Ended December 31,
      2008
                  
                  High
                  
                  
                  LowJanuary
      1, 2008 to March 31, 2008
                  
                  $
                  16.94
                  
                  
                  $
                  13.52April
      1, 2008 to June 30, 2008
                  
                  
                  15.98
                  
                  
                  
                  12.05July
      1, 2008 to September 30, 2008
                  
                  
                  14.71
                  
                  
                  
                  4.71October
      1, 2008 to December 31, 2008
                  
                  
                  8.99
                  
                  
                  
                  4.16




17





Fiscal Year Ended December 31,
      2007
                  
                  High
                  
                  
                  LowJanuary
      1, 2007 to March 31, 2007
                  
                  $
                  16.60
                  
                  
                  $
                  15.54April
      1, 2007 to June 30, 2007
                  
                  
                  16.34
                  
                  
                  
                  14.90July
      1, 2007 to September 30, 2007
                  
                  
                  18.23
                  
                  
                  
                  14.86October
      1, 2007 to December 31, 2007
                  
                  
                  16.49
                  
                  
                  
                  14.89





As of the close of business on March
20, 2009, there were 1,010 holders of record of the Company's Common
Stock.





Dividends





For the fiscal years ended December 31,
2008, 2007 and 2006, the Company has been deemed to be a PHC, as defined in the
Internal Revenue Code.  As a PHC, we may be required to pay an
additional income tax or issue a dividend to our shareholders in an amount based
upon applicable Internal Revenue Code formulas, which is primarily based upon
net income.  No such dividend was required to be paid in fiscal 2008,
2007 or 2006.





On March 23, 1999, the Board of
Directors adopted a policy of paying regular cash dividends in respect of the
Common Stock of the Company, payable in equal semi-annual
installments.  Pursuant to said policy, the Board of Directors
declared and the Company paid cash dividends on its Common Stock as
follows:




Declaration
      Date
              
              Record
      Date
              
              Payment
      Date
              
              Per
      Share
                AmountMarch
      9, 2006
              
              April
      18, 2006
              
              April
      27, 2006
              
              $
              .08October
      10, 2006
              
              October
      20, 2006
              
              October
      27, 2006
              
              $
              .08April
      2, 2007
              
              April
      18, 2007
              
              April
      26, 2007
              
              $
              .09October
      3, 2007
              
              October
      18, 2007
              
              October
      25, 2007
              
              $
              .09April
      2, 2008
              
              April
      18, 2008
              
              April
      28, 2008
              
              $
              .10October
      8, 2008
              
              October
      23, 2008
              
              October
      30, 2008
              
              $
              .10





On March 31, 2009, the Company
announced that it would temporarily suspend its previously announced Common
Stock dividend policy and not declare or pay a semi-annual dividend in April
2009.





The declaration, payment and amount of
such dividends in the future are within the discretion of the Board of Directors
and will depend upon our earnings, capital requirements, financial condition and
other relevant factors. So long as any Series A Preferred Shares remain
outstanding, unless the full dividends for the most recent dividend payment date
have been paid or declared, no dividends may be paid or declared on the
Company's Common Stock.




18


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. From 1990 through December 31, 2006, the Company has
purchased a total of 1,898,909 shares of its Common Stock. During fiscal years
2007 and 2008 we did not purchase any shares, and at December 31, 2008 there
were 501,091 shares of Common Stock which may yet be purchased under our stock
repurchase plan.





Equity
Compensation Plans





See Part
III, Item 12 for information concerning the Company's equity compensation
plans.





ITEM
6.  Selected Financial Data





Not
Applicable





ITEM
7.  Managements' Discussion and Analysis of Financial Condition and
Results of Operations.





The following discussion and analysis
is intended to provide a better understanding of the consolidated financial
condition and results of operations of Berkshire Bancorp Inc. and subsidiaries
for the fiscal years ended December 31, 2008, 2007 and 2006.  All
references to earnings per share, unless stated otherwise, refer to earnings per
basic shares for the 2008 period and diluted shares for the 2007 and 2006
periods.  The discussion should be read in conjunction with the
consolidated financial statements and related notes (Notes located in Item 8
herein).  Reference is also made to Part I, Item 1 "Business"
herein.





Segments





Management has determined that the
Company through its wholly owned bank subsidiary, the Bank, operates in one
business segment, community banking.  The Bank's principal business
activity consists of gathering deposits from the general public and investing
those deposits in residential and commercial mortgage loans and commercial
non-mortgage loans, both unsecured and secured by personal
property.  In addition, the Bank invests those deposits in debt
obligations issued by the U.S. Government, its agencies, business corporations
and mortgage-backed securities.





General





Trust Preferred
Securities.  As of May 18 2004, the Company established BCTI.
The Company owns all the common capital securities of BCTI. BCTI issued $15.0
million of preferred capital securities to investors in a private transaction
and invested the proceeds, combined with the proceeds from the sale of BCTI's
common capital securities, in the Company through the purchase of $15.464
million aggregate principal amount of the Floating Rate Junior Subordinated
Debentures issued by the Company. The 2004 Debentures, the sole assets of BCTI,
mature on July 23, 2034 and bear interest at a floating rate, three month LIBOR
plus 2.70%, currently 6.53%.




19


On April 1, 2005, the Company
established BCTII.  The Company owns all the common capital securities
of BCTII.  BCTII issued $7.0 million of preferred capital securities
to investors in a private transaction and invested the proceeds, combined with
the proceeds from the sale of BCTII's common capital securities, in the Company
through the purchase of $7.217 million aggregate principal amount of the 2005
Debentures issued by the Company. The 2005 Debentures, the sole assets of BCTII,
mature on May 23, 2035 and bear interest at a floating rate, three month LIBOR
plus 1.95%, currently 4.10%.  See Note A of Notes to Consolidated
Financial Statements for a further discussion of the Trust Preferred
Securities.





Series A Preferred
Shares.  On October 31, 2008, the Company sold an aggregate of
60,000 Series A Preferred Shares at $1,000 per share, or $60 million in the
aggregate, to the Company's Chairman of the Board and majority stockholder, and
two non-affiliated investors.  Each Series A Preferred Share bears
non-cumulative cash dividends at the rate of 8% per annum, payable quarterly, is
mandatorily convertible into 123.153 shares of our Common Stock on October 31,
2011, unless previously redeemed, and is redeemable at the option of the Company
between April 30, 2009 and November 1, 2010 at a redemption price of
$1,100.  So long as any share of Series A Preferred Shares remains
outstanding, unless the full dividends for the most recent dividend payment date
have been paid or declared, no dividends may be paid or declared on the
Company's Common Stock. (See Note A of Notes to Consolidated Financial
Statements for further discussion of Series A Preferred Shares).





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 ("US GAAP") and general practices within the financial
services industry.  The preparation of financial statements in
conformity with US 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.




20


With the adoption of Statement of
Financial Accounting Standards ("SFAS") No. 142 "Goodwill and Other Intangible
Assets" ("SFAS No. 142") on January 1, 2002, the Company discontinued the
amortization of goodwill resulting from acquisitions.  Goodwill is now
subject to impairment testing at least annually to determine whether write-downs
of the recorded balances are necessary.  The Company tests for
impairment based on the goodwill maintained at the Bank.  A fair value
is determined for each reporting unit based on at least one of three various
market valuation methodologies.  If the fair values of the reporting
units exceed their book values, 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 proper carrying value.  As of December 31, 2008, the
goodwill was evaluated for impairment with no recognition of impairment
considered necessary.





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.




21


Discussion
of Financial Condition and Results of Operations





Overview





Fiscal Year Ended December 31, 2008
Compared to Fiscal Year Ended December 31, 2007.  Net loss for
the fiscal year ended December 31, 2008 was $79.91 million, or $11.45 per basic
share, as compared to net income of $5.35 million, or $.76 per diluted share,
for the fiscal year ended December 31, 2007.  Net loans increased by
approximately 6%. Investment securities and total assets decreased by
approximately 50% and 16%, respectively.





As
      and for the
    fiscal Year Ended December 31,2008
                              
                              
                              2007
                              
                              
                              %Inc/(Dec)(In millions, except per share data and percentages)Total
      Assets
                              
                              $
                              943.7
                              
                              
                              $
                              1,120.5
                              
                              
                              
                              (16
                              )%Loans,
      net
                              
                              
                              457.5
                              
                              
                              
                              430.6
                              
                              
                              
                              6
                              %Investment
      Securities
                              
                              
                              299.1
                              
                              
                              
                              599.4
                              
                              
                              
                              (50
                              )%Total
      Liabilities
                              
                              
                              877.8
                              
                              
                              
                              996.3
                              
                              
                              
                              (12
                              )%Deposits
                              
                              
                              726.1
                              
                              
                              
                              853.2
                              
                              
                              
                              (15
                              )%Borrowings
                              
                              
                              127.5
                              
                              
                              
                              131.1
                              
                              
                              
                              (3
                              )%Stockholders'
      Equity
                              
                              
                              66.0
                              
                              
                              
                              124.3
                              
                              
                              
                              (47
                              )%Total
      Income
                              
                              
                              60.3
                              
                              
                              
                              60.2
                              
                              
                              
                              0
                              %Interest
      Income
                              
                              
                              59.6
                              
                              
                              
                              58.5
                              
                              
                              
                              2
                              %Total
      Expense
                              
                              
                              141.1
                              
                              
                              
                              52.1
                              
                              
                              
                              171
                              %Interest
      Expense
                              
                              
                              30.5
                              
                              
                              
                              37.8
                              
                              
                              
                              (19
                              )%Net
      Interest Income
                              
                              
                              29.1
                              
                              
                              
                              20.7
                              
                              
                              
                              41
                              %Net
      Income (Loss)
                              
                              
                              (79.9
                              )
                              
                              
                              5.4
                              
                              
                              
                              (1,580
                              )%Diluted
      Income (Loss) Per Share
                              
                              
                              (11.45
                              )
                              
                              
                              .76
                              
                              
                              
                              (1,591
                              )%Bank
      Branches
                              
                              
                              12
                              
                              
                              
                              12
                              
                              
                              
                              -




22




Fiscal Year Ended December 31, 2007
Compared to Fiscal Year Ended December 31, 2006.




Fiscal Year Ended December 31,2007
                  
                  
                  2006
                  
                  
                  %Inc/(Dec)(In millions, except per share data and percentages)Total
      Assets
                  
                  $
                  1,120.5
                  
                  
                  $
                  948.7
                  
                  
                  
                  18
                  %Loans,
      net
                  
                  
                  430.6
                  
                  
                  
                  367.2
                  
                  
                  
                  17
                  %Investment
      Securities
                  
                  
                  599.4
                  
                  
                  
                  515.2
                  
                  
                  
                  16
                  %Total
      Liabilities
                  
                  
                  996.3
                  
                  
                  
                  832.9
                  
                  
                  
                  20
                  %Deposits
                  
                  
                  853.2
                  
                  
                  
                  681.5
                  
                  
                  
                  25
                  %Borrowings
                  
                  
                  131.1
                  
                  
                  
                  138.1
                  
                  
                  
                  (5
                  )%Stockholders'
      Equity
                  
                  
                  124.3
                  
                  
                  
                  115.8
                  
                  
                  
                  7
                  %Total
      Income
                  
                  
                  60.2
                  
                  
                  
                  51.9
                  
                  
                  
                  16
                  %Interest
      Income
                  
                  
                  58.5
                  
                  
                  
                  48.2
                  
                  
                  
                  21
                  %Total
      Expense
                  
                  
                  52.1
                  
                  
                  
                  42.8
                  
                  
                  
                  22
                  %Interest
      Expense
                  
                  
                  37.8
                  
                  
                  
                  29.2
                  
                  
                  
                  29
                  %Net
      Interest Income
                  
                  
                  20.7
                  
                  
                  
                  19.0
                  
                  
                  
                  9
                  %Net
      Income
                  
                  
                  5.4
                  
                  
                  
                  4.9
                  
                  
                  
                  10
                  %Diluted
      Income Per Share
                  
                  
                  .76
                  
                  
                  
                  .70
                  
                  
                  
                  9
                  %Bank
      Branches
                  
                  
                  12
                  
                  
                  
                  11
                  
                  
                  
                  -





Net
Interest Income





Net interest income, represents the
difference between total interest income earned on earning assets and total
interest expense paid on interest-bearing liabilities.  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.


23


The
Company's average balances, interest, and average yields are set forth on the
following table (in thousands, except percentages):





Twelve Months Ended
                      December 31, 2008
                    
                    
                    Twelve Months Ended
                      December 31, 2007
                    
                    
                    Twelve Months Ended
                      December 31, 2006Average
                      Balance
                    
                    
                    Interest
                      and
                      Dividends
                    
                    
                    Average
                      Yield/Rate
                    
                    
                    Average
                      Balance
                    
                    
                    InterestandDividends
                    
                    
                    AverageYield/Rate
                    
                    
                    AverageBalance
                    
                    
                    InterestandDividends
                    
                    
                    AverageYield/RateINTEREST-EARNING
      ASSETS:Loans
      (1)
                    
                    $
                    461,678
                    
                    
                    $
                    32,754
                    
                    
                    
                    7.09
                    %
                    
                    $
                    389,520
                    
                    
                    $
                    29,804
                    
                    
                    
                    7.65
                    %
                    
                    $
                    327,210
                    
                    
                    $
                    23,844
                    
                    
                    
                    7.29
                    %Investment
      securities
                    
                    
                    464,927
                    
                    
                    
                    25,456
                    
                    
                    
                    5.48
                    
                    
                    
                    558,742
                    
                    
                    
                    27,178
                    
                    
                    
                    4.86
                    
                    
                    
                    550,443
                    
                    
                    
                    24,027
                    
                    
                    
                    4.37Other
      (2)(5)
                    
                    
                    54,157
                    
                    
                    
                    1,380
                    
                    
                    
                    2.55
                    
                    
                    
                    31,678
                    
                    
                    
                    1,553
                    
                    
                    
                    4.90
                    
                    
                    
                    8,509
                    
                    
                    
                    350
                    
                    
                    
                    4.11Total
      interest-earning assets
                    
                    
                    980,762
                    
                    
                    
                    59,590
                    
                    
                    
                    6.08
                    
                    
                    
                    979,940
                    
                    
                    
                    58,535
                    
                    
                    
                    5.97
                    
                    
                    
                    886,162
                    
                    
                    
                    48,221
                    
                    
                    
                    5.44Noninterest-earning
      assets
                    
                    
                    55,244
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    46,070
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    46,882Total
      Assets
                    
                    $
                    1,036,006
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    1,026,010
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    933,044INTEREST-BEARING
      LIABILITIES:Interest
      bearing deposits
                    
                    
                    287,772
                    
                    
                    
                    7,645
                    
                    
                    
                    2.66
                    
                    
                    
                    291,049
                    
                    
                    
                    10,338
                    
                    
                    
                    3.55
                    
                    
                    
                    206,745
                    
                    
                    
                    5,283
                    
                    
                    
                    2.56Time
      deposits
                    
                    
                    456,803
                    
                    
                    
                    17,323
                    
                    
                    
                    3.79
                    
                    
                    
                    449,754
                    
                    
                    
                    21,745
                    
                    
                    
                    4.83
                    
                    
                    
                    410,729
                    
                    
                    
                    17,276
                    
                    
                    
                    4.21Other
      borrowings
                    
                    
                    127,343
                    
                    
                    
                    5,555
                    
                    
                    
                    4.36
                    
                    
                    
                    103,112
                    
                    
                    
                    5,710
                    
                    
                    
                    5.54
                    
                    
                    
                    144,722
                    
                    
                    
                    6,627
                    
                    
                    
                    4.58Total
      interest-bearingliabilities
                    
                    
                    871,918
                    
                    
                    
                    30,523
                    
                    
                    
                    3.50
                    
                    
                    
                    843,915
                    
                    
                    
                    37,793
                    
                    
                    
                    4.48
                    
                    
                    
                    762,196
                    
                    
                    
                    29,186
                    
                    
                    
                    3.83Demand
      deposits
                    
                    
                    54,452
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    50,647
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    47,890Noninterest-bearing
      liabilities
                    
                    
                    9,077
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    12,285
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    9,731Stockholders'
      equity (5)
                    
                    
                    100,559
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    119,163
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    113,227Total
      liabilities andstockholders'
      equity
                    
                    $
                    1,036,006
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    1,026,010
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    933,044Net
      interest income
                    
                    
                    
                    
                    
                    $
                    29,067
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    20,742
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    19,035Interest-rate
      spread (3)
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    2.58
                    %
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    1.49
                    %
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    1.61
                    %Net
      interest margin (4)
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    2.96
                    %
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    2.12
                    %
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    2.15
                    %Ratio
      of average interest-earning assets to average interest bearing
      liabilities
                    
                    
                    1.12
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    1.16
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    1.16




24


______________________


(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 for Berkshire Bancorp Inc. (parent only) have been calculated on a
monthly basis.





Changes in net interest income may also
be analyzed by segregating the volume and rate components of interest income and
interest expense.  The following tables set forth certain information
regarding changes in interest income and interest expense of the Company for the
years indicated.  For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(1) changes in rate (change in rate multiplied by prior volume), (2) changes in
volume (changes in volume multiplied by prior rate) and (3) changes in
rate-volume (change in rate multiplied by change in volume) (in
thousands):





Twelve Months Ended December 31, 2008
                      Versus
                      Twelve Months Ended December 31, 2007
                      Increase (Decrease) Due ToRate
                    
                    
                    Volume
                    
                    
                    TotalInterest-earning
      assets:Loans
                    
                    $
                    (2,181
                    )
                    
                    $
                    5,131
                    
                    
                    $
                    2,950Investment
      securities
                    
                    
                    3,464
                    
                    
                    
                    (5,186
                    )
                    
                    
                    (1,722
                    )Other
                    
                    
                    (744
                    )
                    
                    
                    571
                    
                    
                    
                    (173
                    )Total
                    
                    
                    539
                    
                    
                    
                    516
                    
                    
                    
                    1,055Interest-bearing
                      liabilities:Deposit
      accounts:Interest
      bearing deposits
                    
                    
                    (2,590
                    )
                    
                    
                    (103
                    )
                    
                    
                    (2,693
                    )Time
      deposits
                    
                    
                    (4,677
                    )
                    
                    
                    255
                    
                    
                    
                    (4,422
                    )Other
      borrowings
                    
                    
                    (1,217
                    )
                    
                    
                    1,062
                    
                    
                    
                    (155
                    )Total
                    
                    
                    (8,484
                    )
                    
                    
                    1,214
                    
                    
                    
                    (7,270
                    )Net
      interest income
                    
                    $
                    9,023
                    
                    
                    $
                    (698
                    )
                    
                    $
                    8,325





Twelve Months Ended December 31, 2007
                      Versus
                      Twelve Months Ended December 31, 2006
                      Increase (Decrease) Due ToRate
                    
                    
                    Volume
                    
                    
                    TotalInterest-earning
      assets:Loans
                    
                    $
                    1,228
                    
                    
                    $
                    4,732
                    
                    
                    $
                    5,960Investment
      securities
                    
                    
                    2,777
                    
                    
                    
                    374
                    
                    
                    
                    3,151Other
                    
                    
                    79
                    
                    
                    
                    1,124
                    
                    
                    
                    1,203Total
                    
                    
                    4,084
                    
                    
                    
                    6,230
                    
                    
                    
                    10,314Interest-bearing
                      liabilities:Deposit
      accounts:Interest
      bearing deposits
                    
                    
                    2,461
                    
                    
                    
                    2,594
                    
                    
                    
                    5,055Time
      deposits
                    
                    
                    2,717
                    
                    
                    
                    1,752
                    
                    
                    
                    4,469Other
      borrowings
                    
                    
                    1,220
                    
                    
                    
                    (2,137
                    )
                    
                    
                    (917
                    )Total
                    
                    
                    6,398
                    
                    
                    
                    2,209
                    
                    
                    
                    8,607Net
      interest income
                    
                    $
                    (2,314
                    )
                    
                    $
                    4,021
                    
                    
                    $
                    1,707




25


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 U.S. GAAP, principally SFAS No. 5, "Accounting for Contingencies" and
SFAS No. 114, "Accounting by Creditors for Impairment of a Loan, an
amendment to FASB Statements No. 5 and 15," as amended. Under the above
accounting principles, we are required to maintain an allowance for probable
losses at the balance sheet date. We are responsible for the timely and periodic
determination of the amount of the allowance required. Management believes that
the allowance for loan losses is adequate to cover specifically identifiable
losses, as well as estimated losses inherent in our portfolio for which certain
losses are probable but not specifically identifiable.





Management performs a quarterly
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
SFAS No. 114.





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.




26


On a quarterly 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.  Based upon our
analysis, we added $4.90 million to the allowance for loan losses during the
fiscal year ended December 31, 2008.





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.


27


Results
of Operations Fiscal Year Ended December 31, 2008 Compared to Fiscal Year Ended
December 31, 2007.





General.  References
to per share amounts below, unless stated otherwise, refer to diluted
shares.





Net Income
(Loss).  Net loss for the fiscal year ended December 31, 2008
was $79.91 million, or $11.45 per share, as compared to net income of $5.35
million, or $.76 per share, for the fiscal year ended December 31,
2007.  The net loss in fiscal 2008 was primarily due to the other than
temporary impairment charges on securities of $94.35 million or $13.37 per
share.  The other than temporary impairment charge was due to our
investment, directly and indirectly through auction rate securities, in
preferred shares of Fannie Mae and Freddie Mac. These government sponsored
agencies were taken over by the federal government in September 2008 resulting
in, among other things, the suspension of dividend payments.




28


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 on earning assets,
such as loans and investment securities, and interest expense on
interest-bearing liabilities such as deposits and borrowings.





For the fiscal year ended December 31,
2008, net interest income increased by approximately $8.33 million to $29.07
million from $20.74 million for the fiscal year ended December 31,
2007.  The year over year increase in net interest income was the
result of the 98 basis point decrease in the average rates paid on the average
amount of total interest-bearing liabilities and the 11 basis point increase in
the average yields earned on the average amount of total interest-earning
assets.  The Company's interest-rate spread, the difference between
the average yield on interest-earning assets and the average cost of
interest-bearing liabilities, widened by 109 basis points to 2.58% during fiscal
2008 from 1.49% during fiscal 2007.





Net Interest
Margin.  Net interest margin, or annualized net interest income
as a percentage of average interest-earning assets, increased by 84 basis points
to 2.96% during fiscal 2008 from 2.12% during fiscal 2007.  We seek to
secure and retain customer deposits with competitive products and rates, and to
make 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 rate and adjustable rate loans,
investment securities and short-term interest-earning assets which provided an
aggregate average yield of 6.08% and 5.97% in fiscal 2008 and 2007,
respectively.





The average amount of loans increased
by $72.16 million to $461.68 million during fiscal 2008 from $389.52 million
during fiscal 2007, though the average yield on such loans decreased by 56 basis
points to 7.09% in fiscal 2008 from 7.65% in fiscal 2007. The average amount of
investment securities decreased by $93.81 million to $464.93 million in fiscal
2008 from $558.74 million in fiscal 2007 and the average yield on investment
securities improved by 62 basis points, to 5.48% in 2008 from 4.86% in 2007. The
average amount of other interest-earning assets, primarily cash and short-term
investments, increased by $22.48 million to $54.16 million in 2008 from $31.68
million in 2007 and returned an average yield of 2.55% and 4.90% during the
fiscal years ended December 31, 2008 and 2007, respectively.




29


Interest Income. Total
interest income for the fiscal year ended December 31, 2008 increased by $1.05
million to $59.59 million from $58.54 million for the fiscal year ended December
31, 2007.  The increase in interest income in fiscal 2008 was
primarily due to the increase in the average amount of higher yielding loans and
the decrease in lower yielding investment securities as a percentage of our
total interest-earning assets.





The following table presents the
composition of interest income for the indicated periods:





Fiscal 2008
                    
                    
                    Fiscal 2007Interest
                      Income
                    
                    
                    % of
                      Total
                    
                    
                    InterestIncome
                    
                    
                    % of
                      Total(In thousands, except percentages)Loans
                    
                    $
                    32,754
                    
                    
                    
                    54.96
                    %
                    
                    $
                    29,804
                    
                    
                    
                    50.92
                    %Investment
      Securities
                    
                    
                    25,456
                    
                    
                    
                    42.72
                    
                    
                    
                    27,178
                    
                    
                    
                    46.43Other
                    
                    
                    1,380
                    
                    
                    
                    2.32
                    
                    
                    
                    1,553
                    
                    
                    
                    2.65Total
      Interest Income
                    
                    $
                    59,590
                    
                    
                    
                    100.00
                    %
                    
                    $
                    58,535
                    
                    
                    
                    100.00
                    %





Loans, which are inherently risky and
therefore command a higher return than our conservative portfolio of investment
securities, grew to 54.96% of our total average interest-earning assets in
fiscal 2008 from 50.92% in fiscal 2007. While we actively seek to originate new
loans with qualified borrowers who meet the Bank's underwriting standards, our
long-term strategy has been to maintain those standards, sacrificing some
current income to avoid possible large future losses in the loan
portfolio.





The following table presents the
composition of interest-earning assets for the indicated periods:





Fiscal 2008
                    
                    
                    Fiscal 2007Average
                      Amount
                    
                    
                    % of
                      Total
                    
                    
                    Average
                      Amount
                    
                    
                    % of
                      Total(In
      thousands, except percentages)Loans
                    
                    $
                    461,678
                    
                    
                    
                    47.08
                    %
                    
                    $
                    389,520
                    
                    
                    
                    39.75
                    %Investment
      Securities
                    
                    
                    464,927
                    
                    
                    
                    47.40
                    
                    
                    
                    558,742
                    
                    
                    
                    57.02Other
                    
                    
                    54,157
                    
                    
                    
                    5.52
                    
                    
                    
                    31,678
                    
                    
                    
                    3.23Total
      Interest-Earning Assets
                    
                    $
                    980,762
                    
                    
                    
                    100.00
                    %
                    
                    $
                    979,940
                    
                    
                    
                    100.00
                    %





Interest
Expense.  Total interest expense for the fiscal year ended
December 31, 2008 decreased by $7.27 million to $30.52 million from $37.79
million for the fiscal year ended December 31, 2007. The decrease in interest
expense was due to the decrease in the average rates paid on such liabilities,
3.50% and 4.48% in fiscal years 2008 and 2007, respectively, partially offset by
the $28.00 million increase in the average amount of total interest-bearing
liabilities during fiscal year 2008.





The following table presents the
composition of interest expense for the indicated periods:


30





Fiscal 2008
                    
                    
                    Fiscal 2007Interest
                      Expense
                    
                    
                    % of
                      Total
                    
                    
                    InterestExpense
                    
                    
                    % of
                      Total(In
      thousands, except percentages)Interest-Bearing
      Deposits
                    
                    $
                    7,645
                    
                    
                    
                    25.05
                    %
                    
                    $
                    10,338
                    
                    
                    
                    27.35
                    %Time
      Deposits
                    
                    
                    17,323
                    
                    
                    
                    56.75
                    
                    
                    
                    21,745
                    
                    
                    
                    57.54Other
      Borrowings
                    
                    
                    5,555
                    
                    
                    
                    18.20
                    
                    
                    
                    5,710
                    
                    
                    
                    15.11Total
      Interest Expense
                    
                    $
                    30,523
                    
                    
                    
                    100.00
                    %
                    
                    $
                    37,793
                    
                    
                    
                    100.00
                    %





The following table presents the
composition of interest-bearing liabilities for the indicated
periods:





Fiscal 2008
                  
                  
                  Fiscal 2007Average
                    Amount
                  
                  
                  % of
                    Total
                  
                  
                  Average
                    Amount
                  
                  
                  % of
                    Total(In thousands, except percentages)Interest-Bearing
      Deposits
                  
                  $
                  287,772
                  
                  
                  
                  33.00
                  %
                  
                  $
                  291,049
                  
                  
                  
                  34.49
                  %Time
      Deposits
                  
                  
                  456,803
                  
                  
                  
                  52.40
                  
                  
                  
                  449,754
                  
                  
                  
                  53.29Other
      Borrowings
                  
                  
                  127,343
                  
                  
                  
                  14.60
                  
                  
                  
                  103,112
                  
                  
                  
                  12.22Total
      Interest-Bearing Liabilities
                  
                  $
                  871,918
                  
                  
                  
                  100.00
                  %
                  
                  $
                  843,915
                  
                  
                  
                  100.00
                  %





Non-Interest
Income.  Non-interest income consists primarily of realized
gains on sales of marketable securities and service fee income. For the fiscal
year ended December 31, 2008, total non-interest income decreased by $901,000 to
$758,000 from $1.66 million for the fiscal year ended December 31, 2007. The
decrease is primarily due to realized loss of $685,000 on sales of investment
securities during fiscal 2008.





The following table presents the
composition of non-interest income for the indicated periods:





Fiscal 2008
                    
                    
                    Fiscal 2007Non-Interest
                      Income
                    
                    
                    % of
                      Total
                    
                    
                    Non-Interest
                      Income
                    
                    
                    % of
                      Total(In thousands, except percentages)Service
      Charges on Deposits
                    
                    $
                    585
                    
                    
                    
                    77.18
                    %
                    
                    $
                    658
                    
                    
                    
                    39.66
                    %Investment
      Securities (Losses) Gains
                    
                    
                    (685
                    )
                    
                    
                    (90.37
                    )
                    
                    
                    86
                    
                    
                    
                    5.18Other
                    
                    
                    858
                    
                    
                    
                    113.19
                    
                    
                    
                    915
                    
                    
                    
                    55.16Total
      Non-Interest Income
                    
                    $
                    758
                    
                    
                    
                    100.00
                    %
                    
                    $
                    1,659
                    
                    
                    
                    100.00
                    %





Non-Interest
Expense.  Non-interest expense includes salaries and employee
benefits, occupancy and equipment expenses, legal and professional fees and
other operating expenses associated with the day-to-day operations of the
Company. Total non-interest expense for the fiscal year ended December 31, 2008,
including the other than temporary impairment charges on securities of $94.35
million, increased by $96.30 million to $110.62 million from $14.32 million for
the fiscal year ended December 31, 2007.  Excluding the other than
temporary impairment charges, total non-interest expense for fiscal 2008
increased by $1.95 million to $16.27 million. This increase was primarily due to
the increase of approximately $1.0 million in our FDIC assessment.




31


The following table presents the
composition of non-interest expense for the indicated period.





Fiscal 2008
                  
                  
                  Fiscal 2007Non-Interest
                    Expense
                  
                  
                  % of
                    Total
                  
                  
                  Non-Interest
                    Expense
                  
                  
                  % of
                    Total(In
      thousands, except percentages)Salaries
      and Employee Benefits
                  
                  $
                  9,366
                  
                  
                  
                  8.46
                  %
                  
                  $
                  8,971
                  
                  
                  
                  62.66
                  %Net
      Occupancy Expense
                  
                  
                  2,079
                  
                  
                  
                  1.88
                  
                  
                  
                  2,050
                  
                  
                  
                  14.32Equipment
      Expense
                  
                  
                  386
                  
                  
                  
                  0.35
                  
                  
                  
                  80
                  
                  
                  
                  0.56FDIC
      Assessment
                  
                  
                  1,082
                  
                  
                  
                  0.98
                  
                  
                  
                  86
                  
                  
                  
                  0.60Data
      Processing Expense
                  
                  
                  442
                  
                  
                  
                  0.40
                  
                  
                  
                  417
                  
                  
                  
                  2.91Other
      than temporary impairment charges on securities
                  
                  
                  94,346
                  
                  
                  
                  85.29
                  
                  
                  
                  —Other
                  
                  
                  2,915
                  
                  
                  
                  2.64
                  
                  
                  
                  2,714
                  
                  
                  
                  18.95Total
      Non-Interest Expense
                  
                  $
                  110,616
                  
                  
                  
                  100.00
                  %
                  
                  $
                  14,318
                  
                  
                  
                  100.00
                  %





Provision for Income
Tax.  For the fiscal year ended December 31, 2008, the Company
recorded an income tax benefit of $5.79 million as compared to income tax
expense of $2.37 million for the fiscal year ended December 31, 2007. The tax
benefit recorded in fiscal 2008 relates to the other than temporary impairment
charge on securities, including (i) a Lehman Brothers corporate note, (ii)
direct investments in Fannie Mae and Freddie Mac securities, and (iii) indirect
investments in Fannie Mae and Freddie Mac securities through our investments in
certain auction rate securities and is a carryback claim.  The
Emergency Economic Stabilization Act of 2008 (the "EESA"), enacted on October 3,
2008, provides for, among other things, the characterization of the losses on
direct and indirect investments in Fannie Mae and Freddie Mac securities as
ordinary losses which may be used to offset income taxes on ordinary
income.





Results
of Operations Fiscal Year Ended December 31, 2007 Compared to Fiscal Year Ended
December 31, 2006.





General.  References
to per share amounts below, unless stated otherwise, refer to diluted
shares.





Net Income.  Net
income for the fiscal year ended December 31, 2007 was $5.35 million, or $.76
per share, as compared to $4.88 million, or $.70 per share, for the fiscal year
ended December 31, 2006.





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. The difference between the yield on
short-term, 3 month U.S. Treasury Notes, and long-term, 10 year U.S. Treasury
Bonds, referred to as the yield curve is at historic lows.  Inflation
fighting actions taken by the Federal Reserve Board during 2007  have
moved short-term rates up while long-term rates have remained relatively
flat.  The Company's rising cost of funds in 2007, the rates paid on
deposits and borrowings, has not been matched by the ability to safely increase
the yields on interest-earning assets.




32


Net Interest
Income.The Company's primary source of revenue is net
interest income, or the difference between interest income on earning assets,
such as loans and investment securities, and interest expense on
interest-bearing liabilities such as deposits and borrowings.





For the fiscal year ended December 31,
2007, net interest income increased by approximately $1.70 million to $20.74
million from $19.04 million for the fiscal year ended December 31,
2006.  The year over year increase in net interest income was the
result of the $93.78 million increase in the average amount of total
interest-earning assets, including $62.31 million increase in the average amount
of higher yielding loans as a percentage of total interest-earning assets, the
53 basis point increase in the average yields earned on total interest-earning
assets and the $41.61 million decrease in the average amount of borrowed funds
during fiscal 2007 compared to 2006.  Partially offsetting these
factors was the $123.60 million increase in interest-bearing and time deposits,
and the 65 basis point increase in the average rates paid on the average amount
of total interest-bearing liabilities during fiscal 2007 compared to fiscal
2006.





The Company's interest-rate spread, the
difference between the average yield on interest-earning assets and the average
cost of interest-bearing liabilities, narrowed by 12 basis points to 1.49%
during fiscal 2007 from 1.61% during fiscal 2006.





Net Interest
Margin.  Net interest margin declined by 3 basis points to
2.12% during fiscal 2007 from 2.15% during fiscal 2006.  We seek to
secure and retain customer deposits with competitive products and rates, and to
make 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 rate and adjustable rate loans,
investment securities and short-term interest-earning assets which provided an
aggregate average yield of 5.97% and 5.44% in fiscal 2007 and 2006,
respectively.  The small decrease in net interest margin is primarily
due to the substantial increase in the average amount of total interest-earning
assets during the fiscal year ended December 31, 2007.





The average amount of loans increased
by $62.31 million to $389.52 million during fiscal 2007 from $327.21 million
during fiscal 2006, and the average yield on such loans increased by 36 basis
points to 7.65% in fiscal 2007 from 7.29% in fiscal 2006. The average amount of
investment securities increased by $8.30 million to $558.74 million in fiscal
2007 from $550.44 million in fiscal 2006. The average yield on investment
securities improved by 49 basis points, to 4.86% in 2007 from 4.37% in 2006. The
average amount of other interest-earning assets, primarily cash and short-term
investments, increased by $23.16 million to $31.68 million in 2007 from $8.52
million in 2006 and returned an average yield of 4.90% and 4.11% during the
fiscal years ended December 31, 2007 and 2006, respectively.




33


Interest Income. Total
interest income for the fiscal year ended December 31, 2007 increased by $10.32
million, or 21.42%, to $58.54 million from $48.22 million for the fiscal year
ended December 31, 2006.  The increase in interest income in fiscal
2007 was primarily due to the increase in the average yields earned on
interest-earning assets and the increase in the average amount of total
interest-earning assets. Loans contributed $29.80 million of interest income in
fiscal 2007, an increase of $5.96 million from the $23.84 million of interest
income contributed in fiscal 2006.  Investment securities contributed
$27.18 million of interest income in fiscal 2007, a increase of $3.15 million
from the $24.03 million of interest income earned on securities in fiscal
2006.





The following table presents the
composition of interest income for the indicated periods:




Fiscal 2007
                    
                    
                    Fiscal 2006Interest
                      Income
                    
                    
                    % of
                      Total
                    
                    
                    Interest
                      Income
                    
                    
                    % of
                      Total(In thousands, except percentages)Loans
                    
                    $
                    29,804
                    
                    
                    
                    50.92
                    %
                    
                    $
                    23,844
                    
                    
                    
                    49.45
                    %Investment
      Securities
                    
                    
                    27,178
                    
                    
                    
                    46.43
                    
                    
                    
                    24,027
                    
                    
                    
                    49.82Other
                    
                    
                    1,553
                    
                    
                    
                    2.65
                    
                    
                    
                    350
                    
                    
                    
                    0.73Total
      Interest Income
                    
                    $
                    58,535
                    
                    
                    
                    100.00
                    %
                    
                    $
                    48,221
                    
                    
                    
                    100.00
                    %





Loans, which are inherently risky and
therefore command a higher return than our conservative portfolio of investment
securities, grew to 39.75% of our total average interest-earning assets in
fiscal 2007 from 36.92% in fiscal 2006. While we actively seek to originate new
loans with qualified borrowers who meet the Bank's underwriting standards, our
long-term strategy has been to maintain those standards, sacrificing some
current income to avoid possible large future losses in the loan
portfolio.





The following table presents the
composition of interest-earning assets for the indicated periods:





Fiscal 2007
                    
                    
                    Fiscal 2006Average
                      Amount
                    
                    
                    % of
                      Total
                    
                    
                    Average
                      Amount
                    
                    
                    % of
                      Total(In
      thousands, except percentages)Loans
                    
                    $
                    389,520
                    
                    
                    
                    39.75
                    %
                    
                    $
                    327,210
                    
                    
                    
                    36.92
                    %Investment
      Securities
                    
                    
                    558,742
                    
                    
                    
                    57.02
                    
                    
                    
                    550,443
                    
                    
                    
                    62.12Other
                    
                    
                    31,678
                    
                    
                    
                    3.23
                    
                    
                    
                    8,509
                    
                    
                    
                    .96Total
      Interest-Earning Assets
                    
                    $
                    979,940
                    
                    
                    
                    100.00
                    %
                    
                    $
                    886,162
                    
                    
                    
                    100.00
                    %





Interest
Expense.  Total interest expense for the fiscal year ended
December 31, 2007 increased by $8.60 million, or 29.46%, to $37.79 million from
$29.19 million for the fiscal year ended December 31, 2006. The increase in
interest expense was primarily due to the increase in the average rate paid on
such liabilities, 4.48% and 3.83% in fiscal years 2007 and 2006, respectively,
and the $81.72 million increase in the average amount of total interest-bearing
liabilities during fiscal year 2007. Partially offsetting these factors was the
$41.61 million decrease in the average amount of other borrowings which carry
the highest average rate of all interest-bearing liabilities.  As
short-term rates moved higher during fiscal year 2007, interest expense
increased as we priced our deposit products to meet the competition and the
adjustable rates paid on other borrowings increased as well. In April 2005 and
May 2004, we sold $7.22 million and $15.46 million, respectively, of floating
rate junior subordinated debentures which mature in 2035 and 2034, respectively.
The net proceeds of said sales were used to augment the Bank's
capital.  The interest expense on these debentures, which is included
in other borrowings, was $1.83 million and $1.77 million during fiscal 2007 and
2006, respectively.




34


The following tables presents the
composition of interest expense for the indicated periods:





Fiscal 2007
                    
                    
                    Fiscal 2006Interest
                      Expense
                    
                    
                    % of
                      Total
                    
                    
                    Interest
                      Expense
                    
                    
                    % of
                      Total(In thousands, except percentages)Interest-Bearing
      Deposits
                    
                    $
                    10,338
                    
                    
                    
                    27.35
                    %
                    
                    $
                    5,283
                    
                    
                    
                    18.10
                    %Time
      Deposits
                    
                    
                    21,745
                    
                    
                    
                    57.54
                    
                    
                    
                    17,276
                    
                    
                    
                    59.19Other
      Borrowings
                    
                    
                    5,710
                    
                    
                    
                    15.11
                    
                    
                    
                    6,627
                    
                    
                    
                    22.71Total
      Interest Expense
                    
                    $
                    37,793
                    
                    
                    
                    100.00
                    %
                    
                    $
                    29,186
                    
                    
                    
                    100.00
                    %





The following table presents the
composition of interest-bearing liabilities for the indicated
periods:





Fiscal 2007
                  
                  
                  Fiscal 2006Average
                    Amount
                  
                  
                  % of
                    Total
                  
                  
                  Average
                    Amount
                  
                  
                  % of
                    Total(In thousands, except percentages)Interest-Bearing
      Deposits
                  
                  $
                  291,049
                  
                  
                  
                  34.49
                  %
                  
                  $
                  206,745
                  
                  
                  
                  27.12
                  %Time
      Deposits
                  
                  
                  449,754
                  
                  
                  
                  53.29
                  
                  
                  
                  410,729
                  
                  
                  
                  53.89Other
      Borrowings
                  
                  
                  103,112
                  
                  
                  
                  12.22
                  
                  
                  
                  144,722
                  
                  
                  
                  18.99Total
      Interest-Bearing Liabilities
                  
                  $
                  843,915
                  
                  
                  
                  100.00
                  %
                  
                  $
                  762,196
                  
                  
                  
                  100.00
                  %





Non-Interest
Income.  Non-interest income consists primarily of realized
gains on sales of marketable securities and service fee income. For the fiscal
year ended December 31, 2007, total non-interest income decreased by $2.03
million to $1.66 million from $3.69 million for the fiscal year ended December
31, 2006. In 2006, we recorded gains of $2.34 million on the sales and issuer
redemptions of investment securities. In 2007, such gains amounted to
$86,000.  Service charges on deposit accounts increased by $70,000 and
other income increased by $146,000.





The following table presents the
composition of non-interest income for the indicated periods:





Fiscal 2007
                    
                    
                    Fiscal 2006Non-Interest
                      Income
                    
                    
                    % of
                      Total
                    
                    
                    Non-Interest
                      Income
                    
                    
                    % of
                      Total(In thousands, except percentages)Service
      Charges on Deposits
                    
                    $
                    658
                    
                    
                    
                    39.66
                    %
                    
                    $
                    588
                    
                    
                    
                    15.92
                    %Investment
      Securities gains
                    
                    
                    86
                    
                    
                    
                    5.18
                    
                    
                    
                    2,336
                    
                    
                    
                    63.26Other
                    
                    
                    915
                    
                    
                    
                    55.16
                    
                    
                    
                    769
                    
                    
                    
                    20.82Total
      Non-Interest Income
                    
                    $
                    1,659
                    
                    
                    
                    100.00
                    %
                    
                    $
                    3,693
                    
                    
                    
                    100.00
                    %




35


Non-Interest
Expense.  Non-interest expense includes salaries and employee
benefits, occupancy and equipment expenses, legal and professional fees and
other operating expenses associated with the day-to-day operations of the
Company. Total non-interest expense for the year ended December 31, 2007
increased by approximately $740,000, or 5.45%, to $14.32 million from $13.58
million for the year ended December 31, 2006.  The largest component
of non-interest expense are salaries and employee benefits which increased by
$490,000 to $8.97 million in fiscal 2007 from $8.48 million in fiscal
2006.  The increase is primarily due to the addition of personnel in
our internal control and compliance departments.





The following table presents the
composition of non-interest expense for the indicated periods:





Fiscal 2007
                  
                  
                  Fiscal 2006Non-Interest
                    Expense
                  
                  
                  % of
                    Total
                  
                  
                  Non-Interest
                    Expense
                  
                  
                  % of
                    Total(In thousands, except percentages)Salaries
      and Employee Benefits
                  
                  $
                  8,971
                  
                  
                  
                  62.66
                  %
                  
                  $
                  8,481
                  
                  
                  
                  62.44
                  %Net
      Occupancy Expense
                  
                  
                  2,050
                  
                  
                  
                  14.32
                  
                  
                  
                  1,961
                  
                  
                  
                  14.44Equipment
      Expense
                  
                  
                  80
                  
                  
                  
                  0.56
                  
                  
                  
                  108
                  
                  
                  
                  0.80FDIC
      Assessment
                  
                  
                  86
                  
                  
                  
                  0.60
                  
                  
                  
                  85
                  
                  
                  
                  0.63Data
      Processing Expense
                  
                  
                  417
                  
                  
                  
                  2.91
                  
                  
                  
                  366
                  
                  
                  
                  2.69Other
                  
                  
                  2,714
                  
                  
                  
                  18.95
                  
                  
                  
                  2,581
                  
                  
                  
                  19.00Total
      Non-Interest Expense
                  
                  $
                  14,318
                  
                  
                  
                  100.00
                  %
                  
                  $
                  13,582
                  
                  
                  
                  100.00
                  %





Provision for Income
Tax.  During the years ended December 31, 2007 and 2006, we
recorded income tax expense of $2.37 million and $3.86 million, respectively.
The tax provisions for federal, state and local taxes recorded for 2007 and 2006
represent effective tax rates of 30.72% and 44.14%, respectively.  The
decline in the effective tax rate in 2007 compared to 2006 is primarily due to
the Bank's investment in certain securities which carry a larger tax benefit
because of their dividend payments.





Investment
Activities





General.  The
investment policy of the Bank is designed primarily to provide satisfactory
yields while maintaining adequate liquidity, a balance of high quality,
diversified investments, and minimal risk.  The Bank does not, as a
rule, invest in equity securities. The largest component of the Bank's
securities investments, representing more than 50% of total investment
securities, are debt securities issued by U.S. Government agencies including Freddie
Mac, Fannie Mae or the Government National Mortgage Association ("Ginnie
Mae").  The remainder of the Bank's debt securities investments are
primarily short term debt securities issued by the United States or its
agencies.  The Bank maintains a small portfolio of less than $4
million of high-yield corporate debt securities.  Recognizing the
higher credit risks of these securities, the Bank underwrites these securities
in a manner similar to its loan underwriting procedures.




36


At December 31, 2007, our portfolio of
investment securities included approximately $185 million of auction rate
securities. These investments had high credit quality ratings of AA or AAA and
were fully collateralized by bonds and other financial instruments. Auction rate
securities are generally long-term debt instruments that provide liquidity
through a Dutch auction process that resets the applicable interest rate at
pre-determined calendar intervals, generally every 28 days.





During the first quarter of 2008, due
to uncertainties in the credit markets which negatively impacted our ability to
liquidate, if necessary, investments in auction rate securities, we wrote down
the auction rate securities held by us by approximately $8.90
million.





On September 7, 2008, the United States
Department of the Treasury("US Treasury") and the Federal Housing Finance Agency
("FHFA") announced a plan to place Fannie Mae and Freddie Mac into
conservatorship under the authority of the FHFA, a plan which eliminated
dividends on Fannie Mae and Freddie Mac common and preferred stock for the
foreseeable future.





As of June 30, 2008, the Bank held
auction rate securities with a cost basis of $86.3 million, including securities
which were collateralized by Fannie Mae or Freddie Mac preferred shares. The
Bank also held preferred shares of Fannie Mae and Freddie Mac with a cost basis
of $8.7 million, and a $6.9 million corporate note from Lehman Brothers which
filed for bankruptcy protection on September 15, 2008.  Due to the
U.S. Treasury actions and the bankruptcy of Lehman Brothers, we determined that
these securities were other than temporarily impaired and recognized a pre-tax
charge totaling $94.35 million, consisting of $80.15 million related to the
auction rate securities; $8.10 million related to the Fannie Mae and Freddie Mac
preferred shares and $6.10 million charge for the Lehman Brothers corporate
note.





At September 30, 2008, the other than
temporary impairment ("OTTI") charge related to the Lehman Brothers corporate
note was considered an ordinary loss under the current federal tax
code.  Therefore, we recognized a deferred tax asset, and related tax
benefit, related to this ordinary loss of $6.10 million.  The other
than temporary charge related to the Fannie Mae and Freddie Mac preferred
shares, both direct investments and through the auction rate securities, were
considered capital losses under the federal tax code.  As such, we
recognized a tax benefit of $760,000 relating to $1.735 million of previously
recognized capital gains.  A valuation allowance was recorded on the
remaining deferred tax asset.





In October 2008, the U.S. Congress
passed the Emergency Economic Stabilization Act (the "EESA") which changed the
characteristics of direct and indirect ownership of the Fannie Mae and Freddie
Mac capital losses to ordinary losses.  Due to this change in the tax
law, we carried back as much loss as could be utilized and recognized a deferred
tax asset for the remainder.  In addition to this change in the nature
of the losses, the EESA also provided for financial institutions to apply for
funds under the Troubled Asset Repurchase Program which will provide capital
from the US Treasury in the form of Preferred Shares.  We have applied
to participate in this program.  If we receive approval to
participate, management will review the terms of the transaction and determine
if it is in the best interest of the Company to accept the funds.




37





At December 31, 2008, our portfolio of
investment securities included approximately $101 million at cost of auction
rate securities and $64.15 million of corporate notes for which an other than
temporary impairment charge has not been recorded in our financial statements.
The fair value of these securities, presently $63.08 million and $42.32 million,
respectively, could be negatively impacted in the future. Were this to occur, we
may be required to reflect a write down of certain of our securities in future
periods as a charge to earnings if any of our securities are deemed to be other
than temporarily impaired. Such impairment charge would be recorded as
non-interest expense and could be material to our results of
operations.





We are currently negotiating a
potential settlement of claims we asserted against the issuing financial
institutions of the auction rate securities in our investment portfolio pursuant
to the agreement these financial institutions have reached with the SEC and the
Attorney General of the State of New York. The outcome of these negotiations and
the amount we may recover in a settlement agreement, if any, is uncertain at
this time.





As required by SFAS No. 115, 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 Bank does not have a trading securities portfolio and has
no current plans to maintain such a portfolio in the future.  The Bank
generally classifies all newly purchased debt securities as available for sale
in order to maintain the flexibility to sell those securities if the need
arises.  The Bank has a limited portfolio of securities classified as
held to maturity, represented principally by securities purchased a number of
years ago.





Federal Home Loan Bank
Stock.  The Bank owns stock of the FHLBNY which is necessary
for it to be a member of the FHLBNY.  Membership requires the purchase
of stock equal to 1% of the Bank's residential mortgage loans or 5% of the
outstanding borrowings, whichever is greater.  The stock is redeemable
at par, therefore, its cost is equivalent to its redemption
value.  The Bank's ability to redeem FHLBNY shares is dependent upon
the redemption practices of the FHLBNY. At December 31, 2008, the FHLBNY neither
placed restrictions on redemption of shares in excess of a member's required
investment in stock, nor stated that it will cease paying dividends. The Bank
did not consider this asset impaired at either December 31, 2008 or
2007.





The following table sets forth the cost
and fair value of available-for-sale and held-to-maturity securities as of the
dates indicated:





December 31,2008
                
                
                2007
                
                
                2006Cost
                
                
                Fair Value
                
                
                Cost
                
                
                Fair Value
                
                
                Cost
                
                
                Fair Value(In
      thousands)Available-For-SaleU.S.
      Treasury Notes
                
                $
                —
                
                
                $
                —
                
                
                $
                —
                
                
                $
                —
                
                
                $
                5,002
                
                
                $
                4,990U.S.
      Government Agencies
                
                
                91,467
                
                
                
                91,159
                
                
                
                272,789
                
                
                
                272,318
                
                
                
                322,986
                
                
                
                317,164Mortgage-backed
      securities
                
                
                83,845
                
                
                
                83,821
                
                
                
                53,886
                
                
                
                53,057
                
                
                
                67,472
                
                
                
                65,853Corporate
      notes
                
                
                64,150
                
                
                
                42,324
                
                
                
                71,147
                
                
                
                67,601
                
                
                
                44,366
                
                
                
                44,038Municipal
      securities
                
                
                1,973
                
                
                
                1,603
                
                
                
                1,973
                
                
                
                3,004
                
                
                
                5,698
                
                
                
                7,187Auction
      rate securities
                
                
                101,110
                
                
                
                63,080
                
                
                
                184,597
                
                
                
                184,597
                
                
                
                71,500
                
                
                
                71,500Marketable
      equity securities and other
                
                
                17,960
                
                
                
                16,776
                
                
                
                18,698
                
                
                
                18,384
                
                
                
                3,919
                
                
                
                4,066Total
                
                $
                360,505
                
                
                $
                298,763
                
                
                $
                603,090
                
                
                $
                598,961
                
                
                $
                520,943
                
                
                $
                514,798Held-To-MaturityU.S.
      Government Agencies
                
                $
                360
                
                
                $
                362
                
                
                $
                395
                
                
                $
                405
                
                
                $
                433
                
                
                $
                436




38


The following tables summarize the
Company's available-for-sale and held- to-maturity securities:





December
      31, 2008Weighted
                    Average
                    Yield
                  
                  
                  Cost
                  
                  
                  Fair Value(Dollars
      in thousands)Available-For-SaleU.S.
      Government Agencies ObligationsDue
      after one year through five years
                  
                  
                  4.19
                  %
                  
                  $
                  9,997
                  
                  
                  $
                  10,042Due
      after five years through ten years
                  
                  
                  5.06
                  
                  
                  
                  47,639
                  
                  
                  
                  47,440Due
      after ten years
                  
                  
                  5.91
                  
                  
                  
                  33,831
                  
                  
                  
                  33,67791,467
                  
                  
                  
                  91,159Municipal
      ObligationsDue
      after ten years
                  
                  
                  9.41
                  
                  
                  
                  1,973
                  
                  
                  
                  1,6031,973
                  
                  
                  
                  1,603Mortgage-backed
      securitiesDue
      after one year through five years
                  
                  
                  4.59
                  
                  
                  
                  3,770
                  
                  
                  
                  3,781Due
      after five years through ten years
                  
                  
                  4.13
                  
                  
                  
                  6,765
                  
                  
                  
                  6,863Due
      after ten years
                  
                  
                  5.74
                  
                  
                  
                  73,310
                  
                  
                  
                  73,17783,845
                  
                  
                  
                  83,821Corporate
      NotesDue
      within one year
                  
                  
                  3.14
                  
                  
                  
                  21,701
                  
                  
                  
                  21,565Due
      after one year through five years
                  
                  
                  9.24
                  
                  
                  
                  8,367
                  
                  
                  
                  5,233Due
      after five years through ten years
                  
                  
                  5.57
                  
                  
                  
                  11,198
                  
                  
                  
                  6,281Due
      after ten years
                  
                  
                  7.04
                  
                  
                  
                  22,884
                  
                  
                  
                  9,24564,150
                  
                  
                  
                  42,324Auction
      rate and other securitiesCommon
      Stocks
                  
                  
                  —
                  
                  
                  
                  1,681
                  
                  
                  
                  960Preferred
      Stocks
                  
                  
                  7.42
                  
                  
                  
                  2,253
                  
                  
                  
                  1,816Auction
      Market Securities
                  
                  
                  4.84
                  
                  
                  
                  101,110
                  
                  
                  
                  63,080Money
      market funds
                  
                  
                  2.36
                  
                  
                  
                  11,253
                  
                  
                  
                  11,227Federal
      Home Loan Bank Stock
                  
                  
                  1.09
                  
                  
                  
                  2,773
                  
                  
                  
                  2,773119,070
                  
                  
                  
                  79,856$
                  360,505
                  
                  
                  $
                  298,763Held-To-MaturityU.S.
      Government Agencies Obligations Due after ten years
                  
                  
                  6.68
                  
                  
                  
                  360
                  
                  
                  
                  362$
                  360
                  
                  
                  $
                  362




39


Loan
Portfolio





Loan Portfolio
Composition.  The Company's loans consist primarily of mortgage
loans secured by residential and non-residential properties as well as
commercial loans which are either unsecured or secured by personal property
collateral.  Most of the Company's loans are either made to
individuals or personally guaranteed by the principals of the business to which
the loan is made.  At December 31, 2008, 2007 and 2006, the Company
had total loans, net of unearned income of $466.75 million, $434.79 million and
$370.92 million, respectively, and an allowance for loan losses of $9.20
million, $4.18 million and $3.77 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.


40


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





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





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 December 31, 2008 and 2007, approximately $68.42
million and $76.13 million, respectively, or 14.6% and 17.4%, 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 December 31, 2008 and 2007, approximately
$138.74 million and $145.65 million, respectively, or 30% and 33%, 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 December 31, 2008 and
2007, approximately 11% and 10%, respectively, of the Bank's residential
one-to-four family owner-occupied first mortgage portfolio were ARMs and
approximately 89% and 90%, respectively, were fixed-rate loans.  The
percentage represented by fixed-rate loans tends to increase during periods of
low interest rates.  The ARMs generally carry annual caps and
life-of-loan ceilings, which limit interest rate adjustments.


41


The Bank's residential loan
underwriting criteria are generally comparable to those required by 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 December 31, 2008 and 2007, the Company's loan portfolio
was comprised of $260.7 million and $300.3 million, respectively, or 55.7% and
68.8%, respectively, of other loan products.





Origination of
Loans.  Loan originations can be attributed to depositors,
retail customers, phone inquiries, advertising, the efforts of the Bank's loan
officers, and referrals from other borrowers, real estate brokers and builders.
The Bank originates loans primarily through its own efforts, occasionally
obtaining loan opportunities as a result of referrals from loan
brokers.


42


At December 31, 2008, the Bank was
generally not permitted to make loans to one borrower in excess of approximately
$12.27 million, with an additional amount of approximately $8.18 million being
permitted if secured by readily marketable collateral.  The Bank was
also not permitted to make any single loan in an amount in excess of
approximately $12.27 million.  At December 31, 2008, the Bank was in
compliance with these standards.





Delinquency
Procedures.  When a borrower fails to make a required payment
on a loan, the Bank attempts to cause the deficiency to be cured by contacting
the borrower.  The Bank reviews past due loans on a case by case
basis, taking the action it deems appropriate in order to collect the amount
owed.  Litigation may be necessary if other procedures are not
successful. Judicial resolution of a past
due loan can be delayed if the borrower files a bankruptcy petition because
collection action cannot be continued unless the Bank first obtains relief from
the automatic stay provided by the Bankruptcy Code.





If a non-mortgage loan becomes
delinquent and satisfactory arrangements for payment cannot be made, the Bank
seeks to realize upon any personal property collateral to the extent feasible
and collect any remaining amount owed from the borrower through legal
proceedings, if necessary.





It is the Bank's policy to discontinue
accruing interest on a loan when it is 90 days past due or if management
believes that continued interest accruals are unjustified.  The Bank
may continue interest accruals if a loan is more than 90 days past due if the
Bank determines that the nature of the delinquency and the collateral are such
that collection of the principal and interest on the loan in full is reasonably
assured.  When the accrual of interest is discontinued, all accrued
but unpaid interest is charged against current period income.  Once
the accrual of interest is discontinued, the Bank records interest as and when
received until the loan is restored to accruing status.  If the Bank
determines that collection of the loan in full is in reasonable doubt, then
amounts received are recorded as a reduction of principal until the loan is
returned to accruing status.


43


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





December
      31,2008
                          
                          
                          2007
                          
                          
                          2006
                          
                          
                          2005
                          
                          
                          2004Amount
                          
                          
                          %
      of
                            Total
                          
                          
                          Amount
                          
                          
                          %
      of
                            Total
                          
                          
                          Amount
                          
                          
                          %
      of
                            Total
                          
                          
                          Amount
                          
                          
                          %
      of
                            Total
                          
                          
                          Amount
                          
                          
                          %
      of
                            TotalCommercial
      and professional loans
                          
                          $
                          68,418
                          
                          
                          
                          14.6
                          %
                          
                          $
                          76,132
                          
                          
                          
                          17.4
                          %
                          
                          $
                          63,331
                          
                          
                          
                          17.0
                          %
                          
                          $
                          33,370
                          
                          
                          
                          10.8
                          %
                          
                          $
                          16,498
                          
                          
                          
                          5.7
                          %Secured
      by real estate1 -
      4 family
                          
                          
                          140,150
                          
                          
                          
                          30.0
                          
                          
                          
                          142,140
                          
                          
                          
                          32.6
                          
                          
                          
                          139,611
                          
                          
                          
                          37.5
                          
                          
                          
                          139,931
                          
                          
                          
                          45.1
                          
                          
                          
                          155,079
                          
                          
                          
                          53.9Multi
      family
                          
                          
                          4,031
                          
                          
                          
                          0.9
                          
                          
                          
                          3,506
                          
                          
                          
                          0.8
                          
                          
                          
                          4,013
                          
                          
                          
                          1.1
                          
                          
                          
                          2,874
                          
                          
                          
                          0.9
                          
                          
                          
                          4,600
                          
                          
                          
                          1.6Non-residential 
      (commercial)
                          
                          
                          254,831
                          
                          
                          
                          54.4
                          
                          
                          
                          212,850
                          
                          
                          
                          48.8
                          
                          
                          
                          160,417
                          
                          
                          
                          43.1
                          
                          
                          
                          132,142
                          
                          
                          
                          42.6
                          
                          
                          
                          109,597
                          
                          
                          
                          38.1Consumer
                          
                          
                          460
                          
                          
                          
                          0.1
                          
                          
                          
                          1,691
                          
                          
                          
                          0.4
                          
                          
                          
                          4,763
                          
                          
                          
                          1.3
                          
                          
                          
                          2,018
                          
                          
                          
                          0.6
                          
                          
                          
                          1,989
                          
                          
                          
                          0.7Total
      loans
                          
                          
                          467,890
                          
                          
                          
                          100.0
                          %
                          
                          
                          436,319
                          
                          
                          
                          100.0
                          %
                          
                          
                          372,135
                          
                          
                          
                          100.0
                          %
                          
                          
                          310,335
                          
                          
                          
                          100.0
                          %
                          
                          
                          287,763
                          
                          
                          
                          100.0
                          %Less:
      Allowance for loan losses
                          
                          
                          (9,204
                          )
                          
                          
                          
                          
                          
                          
                          (4,183
                          )
                          
                          
                          
                          
                          
                          
                          (3,771
                          )
                          
                          
                          
                          
                          
                          
                          (3,266
                          )
                          
                          
                          
                          
                          
                          
                          (2,927
                          )Unearned
      fees
                          
                          
                          (1,137
                          )
                          
                          
                          
                          
                          
                          
                          (1,534
                          )
                          
                          
                          
                          
                          
                          
                          (1,212
                          )
                          
                          
                          
                          
                          
                          
                          (1,105
                          )
                          
                          
                          
                          
                          
                          
                          (784
                          )Loans,
      net
                          
                          $
                          457,549
                          
                          
                          
                          
                          
                          
                          $
                          430,602
                          
                          
                          
                          
                          
                          
                          $
                          367,152
                          
                          
                          
                          
                          
                          
                          $
                          305,964
                          
                          
                          
                          
                          
                          
                          $
                          284,052




44


Impaired
loan balance, nonaccrual loans and loans greater than 90 days still
accruing





The following table sets forth certain
information regarding nonaccrual loans, including the ratio of such loans to
total assets as of the dates indicated, and certain other related
information.  The Bank had no foreclosed real estate during these
periods and loans past due more than 90 days still accruing were $99,000 and
$314,000 at December 31, 2008 and 2007, respectively.





December
      31,2008
                  
                  
                  2007
                  
                  
                  2006
                  
                  
                  2005
                  
                  
                  2004(Dollars
      in Thousands)Nonaccrual
      loans:Commercial
      and professional loans
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  —Consumer
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  3
                  
                  
                  
                  1Secured
      by real estate
                  
                  
                  130
                  
                  
                  
                  153
                  
                  
                  
                  201
                  
                  
                  
                  253
                  
                  
                  
                  342Total
      nonaccrual loans
                  
                  
                  130
                  
                  
                  
                  153
                  
                  
                  
                  201
                  
                  
                  
                  256
                  
                  
                  
                  343Accruing
      loans delinquent 90 days or more
                  
                  
                  99
                  
                  
                  
                  314
                  
                  
                  
                  —
                  
                  
                  
                  74
                  
                  
                  
                  50Total
      nonperforming loans
                  
                  $
                  229
                  
                  
                  $
                  467
                  
                  
                  $
                  201
                  
                  
                  $
                  330
                  
                  
                  $
                  393Total
      nonperforming loans to total assets
                  
                  
                  .02
                  %
                  
                  
                  .04
                  %
                  
                  
                  .02
                  %
                  
                  
                  .03
                  %
                  
                  
                  .04
                  %





The following tables present
information regarding the Company's total allowance for loan losses as well as
the allocation of such amounts to the various categories of loans at the dates
indicated. (dollars in thousands):





December 31, 2008Allowance
                    for Loan
                    Losses
                  
                  
                  Percent of
                    Allowance
                  
                  
                  Percent of
                    Total LoansCommercial
      and professional loans
                  
                  $
                  898
                  
                  
                  
                  9.7
                  %
                  
                  
                  0.19
                  %Secured
      by real estate1 -
      4 family
                  
                  
                  696
                  
                  
                  
                  7.6
                  
                  
                  
                  0.15Multi
      family
                  
                  
                  19
                  
                  
                  
                  0.2
                  
                  
                  
                  0.00Non-residential
                  
                  
                  7,512
                  
                  
                  
                  81.6
                  
                  
                  
                  1.61Consumer
      and other
                  
                  
                  4
                  
                  
                  
                  0.1
                  
                  
                  
                  0.02General
      allowance (1)
                  
                  
                  75
                  
                  
                  
                  0.8
                  
                  
                  
                  0.00Total
      allowance for loan losses
                  
                  $
                  9,204
                  
                  
                  
                  100.0
                  %
                  
                  
                  1.97
                  %





(1) The
allowance for loan losses is allocated to specific loans as
necessary.


45





December 31, 2007Allowance
                          for Loan
                          Losses
                        
                        
                        Percent of
                          Allowance
                        
                        
                        Percent of
                          Total LoansCommercial
      and professional loans
                        
                        $
                        929
                        
                        
                        
                        22.2
                        %
                        
                        
                        0.21
                        %Secured
      by real estate1 -
      4 family
                        
                        
                        591
                        
                        
                        
                        14.2
                        
                        
                        
                        0.14Multi
      family
                        
                        
                        43
                        
                        
                        
                        1.0
                        
                        
                        
                        0.01Non-residential
                        
                        
                        2,597
                        
                        
                        
                        62.1
                        
                        
                        
                        0.60Consumer
      and other
                        
                        
                        21
                        
                        
                        
                        0.5
                        
                        
                        
                        0.00General
      allowance (1)
                        
                        
                        3
                        
                        
                        
                        0.0
                        
                        
                        
                        0.00Total
      allowance for loan losses
                        
                        $
                        4,183
                        
                        
                        
                        100.0
                        %
                        
                        
                        0.96
                        %





(1) The
allowance for loan losses is allocated to specific loans as
necessary.





December 31, 2006Allowance
                    for Loan
                    Losses
                  
                  
                  Percent of
                    Allowance
                  
                  
                  Percent of
                    Total LoansCommercial
      and professional loans
                  
                  $
                  852
                  
                  
                  
                  22.6
                  %
                  
                  
                  0.23
                  %Secured
      by real estate1 -
      4 family
                  
                  
                  634
                  
                  
                  
                  16.8
                  
                  
                  
                  0.17Multi
      family
                  
                  
                  54
                  
                  
                  
                  1.4
                  
                  
                  
                  0.01Non-residential
                  
                  
                  2,166
                  
                  
                  
                  57.5
                  
                  
                  
                  0.58Consumer
      and other
                  
                  
                  64
                  
                  
                  
                  1.7
                  
                  
                  
                  0.02General
      allowance (1)
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Total
      allowance for loan losses
                  
                  $
                  3,771
                  
                  
                  
                  100.0
                  %
                  
                  
                  1.01
                  %





(1) The
allowance for loan losses is allocated to specific loans as
necessary.





December
      31, 2005Allowance
                              for Loan
                              Losses
                            
                            
                            Percent of
                              Allowance
                            
                            
                            Percent of
                              Total LoansCommercial
      and professional loans
                            
                            $
                            450
                            
                            
                            
                            13.8
                            %
                            
                            
                            0.15
                            %Secured
      by real estate1 -
      4 family
                            
                            
                            937
                            
                            
                            
                            28.7
                            
                            
                            
                            0.31Multi
      family
                            
                            
                            39
                            
                            
                            
                            1.2
                            
                            
                            
                            0.01Non-residential
                            
                            
                            1,784
                            
                            
                            
                            54.6
                            
                            
                            
                            0.58Consumer
      and other
                            
                            
                            27
                            
                            
                            
                            0.8
                            
                            
                            
                            0.00General
      allowance (1)
                            
                            
                            29
                            
                            
                            
                            0.9
                            
                            
                            
                            0.00Total
      allowance for loan losses
                            
                            $
                            3,266
                            
                            
                            
                            100.0
                            %
                            
                            
                            1.03
                            %





(1) The
allowance for loan losses is allocated to specific loans as
necessary.


46





December
      31, 2004Allowance
                      for Loan
                      Losses
                    
                    
                    Percent of
                      Allowance
                    
                    
                    Percent of
                      Total LoansCommercial
      and professional loans
                    
                    $
                    223
                    
                    
                    
                    7.6
                    %
                    
                    
                    0.08
                    %Secured
      by real estate1 -
      4 family
                    
                    
                    775
                    
                    
                    
                    26.5
                    
                    
                    
                    0.27Multi
      family
                    
                    
                    62
                    
                    
                    
                    2.1
                    
                    
                    
                    0.02Non-residential
                    
                    
                    1,398
                    
                    
                    
                    47.8
                    
                    
                    
                    0.49Consumer
      and other
                    
                    
                    27
                    
                    
                    
                    0.9
                    
                    
                    
                    0.01General
      allowance (1)
                    
                    
                    442
                    
                    
                    
                    15.1
                    
                    
                    
                    0.15Total
      allowance for loan losses
                    
                    $
                    2,927
                    
                    
                    
                    100.0
                    %
                    
                    
                    1.02
                    %





(1) The
allowance for loan losses is allocated to specific loans as
necessary.





The following table sets forth
information regarding the aggregate maturities of the Company's loans in the
specified categories and the amount of such loans which have fixed and variable
rates.





December
      31, 2008Within
                      1 Year
                    
                    
                    1
      to
                      5 Years
                    
                    
                    After
                      5 Years
                    
                    
                    Total(In
      thousands)Fixed
      RateCommercial
      and professional
                    
                    $
                    1,624
                    
                    
                    $
                    24,358
                    
                    
                    $
                    966
                    
                    
                    $
                    26,948Non-residential
                    
                    
                    15,752
                    
                    
                    
                    40,607
                    
                    
                    
                    165,292
                    
                    
                    
                    221,651Total
      fixed rate
                    
                    $
                    17,376
                    
                    
                    $
                    64,965
                    
                    
                    $
                    166,258
                    
                    
                    $
                    248,599Adjustable
      RateCommercial
      and professional
                    
                    
                    27,874
                    
                    
                    
                    9,840
                    
                    
                    
                    3,756
                    
                    
                    
                    41,470Non-residential
                    
                    
                    69,765
                    
                    
                    
                    16,054
                    
                    
                    
                    92,002
                    
                    
                    
                    177,821Total
      adjustable rate
                    
                    $
                    97,639
                    
                    
                    $
                    25,894
                    
                    
                    $
                    95,758
                    
                    
                    $
                    219,291Total
                    
                    $
                    115,015
                    
                    
                    $
                    90,859
                    
                    
                    $
                    262,016
                    
                    
                    $
                    467,890




47


Demand loans, loans with no stated
maturity, are included in the table above in the Within One Year
category.





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):





Years
      Ended December 31,2008
                    
                    
                    2007
                    
                    
                    2006
                    
                    
                    2005
                    
                    
                    2004Average
      loans outstanding
                    
                    $
                    461,678
                    
                    
                    $
                    389,520
                    
                    
                    $
                    327,210
                    
                    
                    $
                    287,178
                    
                    
                    $
                    290,774Allowance
      at beginning of period
                    
                    
                    4,183
                    
                    
                    
                    3,771
                    
                    
                    
                    3,266
                    
                    
                    
                    2,927
                    
                    
                    
                    2,593Charge-offs:Commercial
      and other loans
                    
                    
                    1
                    
                    
                    
                    —
                    
                    
                    
                    42
                    
                    
                    
                    26
                    
                    
                    
                    24Real
      estate loans
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Total
      loans charged-off
                    
                    
                    1
                    
                    
                    
                    —
                    
                    
                    
                    42
                    
                    
                    
                    26
                    
                    
                    
                    24Recoveries:Commercial
      and other loans
                    
                    
                    118
                    
                    
                    
                    57
                    
                    
                    
                    137
                    
                    
                    
                    185
                    
                    
                    
                    178Real
      estate loans
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Total
      loans recovered
                    
                    
                    118
                    
                    
                    
                    57
                    
                    
                    
                    137
                    
                    
                    
                    185
                    
                    
                    
                    178Net
      recoveries (charge-offs)
                    
                    
                    117
                    
                    
                    
                    57
                    
                    
                    
                    95
                    
                    
                    
                    159
                    
                    
                    
                    154Provision
      for loan losses charged to operating expenses
                    
                    
                    4,904
                    
                    
                    
                    355
                    
                    
                    
                    410
                    
                    
                    
                    180
                    
                    
                    
                    180Allowance
      at end of period
                    
                    $
                    9,204
                    
                    
                    $
                    4,183
                    
                    
                    $
                    3,771
                    
                    
                    $
                    3,266
                    
                    
                    $
                    2,927Ratio
      of net recoveries(charge-offs) to average loans
outstanding
                    
                    
                    .03
                    %
                    
                    
                    .01
                    %
                    
                    
                    .03
                    %
                    
                    
                    .06
                    %
                    
                    
                    .05
                    %Allowance
      as a percent of total loans
                    
                    
                    1.97
                    %
                    
                    
                    0.96
                    %
                    
                    
                    1.01
                    %
                    
                    
                    1.05
                    %
                    
                    
                    1.02
                    %Total
      loans at end of period
                    
                    $
                    467,890
                    
                    
                    $
                    436,319
                    
                    
                    $
                    372,135
                    
                    
                    $
                    310,335
                    
                    
                    $
                    287,763





Deposits





The Bank concentrates on obtaining
deposits from a variety of businesses, professionals and retail
customers.  The Bank offers a number of different deposit programs,
including statement savings accounts, NOW accounts, money market deposits
accounts, checking accounts and certificates of deposits with terms from seven
days to five years.  Deposit account terms vary according to the
minimum balance required, the time period the funds must remain on deposit and
the interest rate, among other factors.  The Bank prices its deposit
offerings competitively within the market it serves.  These products
are designed to attract new customers, retain existing customers and create
opportunities to offer other bank products or services.  While the
market and pricing for deposit funds are very competitive, the Bank believes
that personalized, quality service is also an important element in retaining
core deposit customers.


48


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





December
      31,2008
                    
                    
                    2007
                    
                    
                    2006Average
                      Amount
                    
                    
                    Average
                      Yield
                    
                    
                    Average
                      Amount
                    
                    
                    Average
                      Yield
                    
                    
                    Average
                      Amount
                    
                    
                    Average
                      Yield(Dollars
      in thousands)Demand
      deposits
                    
                    $
                    54,452
                    
                    
                    
                    —
                    
                    
                    $
                    50,647
                    
                    
                    
                    —
                    
                    
                    $
                    47,890
                    
                    
                    
                    —NOW
      and money market
                    
                    
                    39,849
                    
                    
                    
                    1.58
                    %
                    
                    
                    29,984
                    
                    
                    
                    0.76
                    %
                    
                    
                    35,141
                    
                    
                    
                    0.61
                    %Savings
      deposits
                    
                    
                    247,923
                    
                    
                    
                    2.84
                    
                    
                    
                    261,065
                    
                    
                    
                    3.83
                    
                    
                    
                    171,604
                    
                    
                    
                    2.95Time
      deposits
                    
                    
                    456,803
                    
                    
                    
                    3.79
                    
                    
                    
                    449,754
                    
                    
                    
                    4.83
                    
                    
                    
                    410,729
                    
                    
                    
                    4.21Total
      deposits
                    
                    $
                    799,027
                    
                    
                    
                    3.13
                    %
                    
                    $
                    791,450
                    
                    
                    
                    4.04
                    %
                    
                    $
                    665,364
                    
                    
                    
                    3.39
                    %





The aggregate amount of jumbo
certificates of deposit, each with a minimum denomination of $100,000, was
approximately $213.58 million at December 31, 2008.





The following table summarizes the
maturity distribution of time deposits of $100,000 or more as of December 31,
2008:





(In
      thousands)3
      months or less
                  
                  $
                  121,288Over
      3 months but within 6 months
                  
                  
                  69,751Over
      6 months but within 12 months
                  
                  
                  19,920Over
      12 months
                  
                  
                  2,619Total
                  
                  $
                  213,578




It has
been the Bank’s experience that these certificates will
renew.




49


Short-Term
Borrowings





Securities sold under agreements to
repurchase generally mature within 30 days from the date of the
transactions.  Short-term borrowings consist of securities sold under
agreements to repurchase and various other borrowings which generally have
maturities of less than one year.  The details of these categories are
presented below:





Years
      Ended December 31,2008
                            
                            
                            2007
                            
                            
                            2006(Dollars
      in thousands)Securities
      sold under repurchase agreements and federal funds
    purchasedBalance
      at year-end
                            
                            $
                            59,504
                            
                            
                            $
                            76,842
                            
                            
                            $
                            62,652Average
      during the year
                            
                            $
                            61,162
                            
                            
                            $
                            40,049
                            
                            
                            $
                            56,236Maximum
      month-end balance
                            
                            $
                            72,324
                            
                            
                            $
                            76,842
                            
                            
                            $
                            79,154Weighted
      average rate during the year
                            
                            
                            3.83
                            %
                            
                            
                            4.93
                            %
                            
                            
                            3.75
                            %Rate
      at December 31
                            
                            
                            3.76
                            %
                            
                            
                            4.65
                            %
                            
                            
                            4.94
                            %





Capital
Resources and Liquidity





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.





On September 7, 2008, the US Treasury
and the FHFA announced a plan to place Fannie Mae and Freddie Mac into
conservatorship under the authority of the FHFA, a plan which eliminated
dividends on Fannie Mae and Freddie Mac common and preferred stock for the
foreseeable future.





As of June 30, 2008, the Bank held
auction rate securities with a cost basis of $86.3 million, including securities
which were collateralized by Fannie Mae or Freddie Mac preferred shares. The
Bank also held preferred shares of Fannie Mae and Freddie Mac with a cost basis
of $8.7 million, and a $6.9 million corporate note from Lehman Brothers which
filed for bankruptcy protection on September 15, 2008.  Due to the
U.S. Treasury actions and the bankruptcy of Lehman Brothers, we determined that
these securities were other than temporarily impaired and recognized a pre-tax
charge totaling $94.35 million, consisting of $80.15 million related to the
auction rate securities; $8.10 million related to the Fannie Mae and Freddie Mac
preferred shares and $6.10 million charge for the Lehman Brothers corporate
note.


50


The OTTI charge related to the Lehman
Brothers corporate note was considered an ordinary loss under the current
federal tax code.  Therefore, we recognized a deferred tax asset, and
related tax benefit, related to this ordinary loss of $6.10
million.  The other than temporary charge related to the Fannie Mae
and Freddie Mac preferred shares, both direct investments and through the
auction rate securities, were originally considered capital losses under the
federal tax code.  As such, we recognized a tax benefit of $760,000
relating to $1.735 million of previously recognized capital gains.  A
valuation allowance was recorded on the remaining deferred tax
asset.





In October 2008, the U.S. Congress
passed EESA which changed the characteristics of direct and indirect ownership
of the Fannie Mae and Freddie Mac capital losses to ordinary losses.In addition
to this change in the nature of the losses, the EESA also provided for financial
institutions to apply for funds under the Troubled Asset Repurchase Program
which will provide capital from the US Treasury in the form of Preferred
Shares.  We have applied to participate in this program.





As a result of this OTTI charge, the
Bank no longer met the definition of a "well capitalized" institution as of
September 30, 2008.  In order to restore our "well capitalized"
position, in October 2008, the Company's Chairman of the Board and majority
stockholder, and two non-affiliated investors, purchased an aggregate of 60,000
Series A Preferred Shares at $1,000 per share, or $60 million in the
aggregate.  Each Series A Preferred Share bears non-cumulative cash
dividends at the rate of 8% per annum, payable quarterly, is mandatorily
convertible into 123.153 shares of our Common Stock on October 31, 2011, unless
previously redeemed, and is redeemable at the option of the Company between
April 30, 2009 and November 1, 2010 at a redemption price of $1,100. The
transaction was consummated on October 31, 2008.  After the sale of
the Series A Preferred Stock, we met the definition of "well capitalized" as
disclosed in Note 11.





At December 31, 2008, our portfolio of
investment securities included approximately $101 million at cost of auction
rate securities for which an other than temporary impairment charge has not been
recorded in our financial statements. Auction rate securities are generally
long-term debt instruments that provide liquidity through a Dutch auction
process that resets the applicable interest rate at pre-determined calendar
intervals, generally every 28 days. As a result of the auction failures
beginning in February 2008, the fair value of these securities, presently $63.08
million, 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
"New Accounting Pronouncements - Accounting For Fair Value Measurement" below
for further discussion of this policy.





The current uncertainties in the credit
markets have negatively impacted our ability to liquidate, if necessary,
investments in auction rate securities. We are not certain as to when the
liquidity issues relating to these investments will improve; however, we have
the ability to hold these available for sale securities to maturity,
(predominately 19 years after December 31, 2008) thereby recovering our
investment.  We may be required to reflect a write-down of certain of
our auction rate securities in future periods as a charge to earnings if any of
our auction rate securities are deemed to be other-than-temporarily impaired.
Such impairment charge would be recorded as other expense and could be material
to our results of operations. The auction rate securities in our investment
portfolio are currently paying interest with rates ranging from 1.77% to
8.99%.


51


Approximately $15.0 million principal
amount of auction rate securities that became due during the first quarter of
2009 were paid.





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





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.  The Company
paid cash dividends per common share of $.20, $.18 and $.16 in fiscal 2008, 2007
and 2006, respectively. The ability of the Company to meet these obligations,
including the payment of dividends on its common stock, is not currently
dependent upon the receipt of dividends from the Bank.  At December
31, 2008, the Company had cash of approximately $10.9 million and investment
securities with a fair market value of $4.3 million.





Contingent
Liabilities and Commitments





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 include commitments to extend credit and stand-by letters
of credit.  The following table presents the Company's commitments at
December 31, 2008.





Expiration By PeriodTotal
                
                
                Less
                  Than
                  1 Year
                
                
                1-3
                  Years
                
                
                3-5
                  Years
                
                
                More
                  Than
                  5 Years(In
      thousands)Lines
      of Credit
                
                $
                29,533
                
                
                $
                23,523
                
                
                $
                1,262
                
                
                $
                161
                
                
                $
                4,587Standby
      Letters of Credit
                
                
                1,349
                
                
                
                1,349
                
                
                
                —
                
                
                
                —
                
                
                
                —Loan
      Commitments
                
                
                12,491
                
                
                
                12,491
                
                
                
                —
                
                
                
                —
                
                
                
                —Total
                
                $
                43,373
                
                
                $
                37,363
                
                
                $
                1,262
                
                
                $
                161
                
                
                $
                4,587




52


Contractual
Obligations





The following table presents the
Company's contractual obligations at December 31, 2008.





Payments Due By PeriodsTotal
                
                
                Less
                  Than
                  1 Year
                
                
                1-3
                  Years
                
                
                3-5
                  Years
                
                
                More
                  Than
                  5 Years(In
      thousands)Long-Term
      Debt
                
                $
                67,953
                
                
                $
                10,087
                
                
                $
                16,000
                
                
                $
                19,185
                
                
                $
                22,681Operating
      Leases
                
                
                3,791
                
                
                
                977
                
                
                
                1,464
                
                
                
                939
                
                
                
                411Time
      Deposits
                
                
                464,931
                
                
                
                461,827
                
                
                
                908
                
                
                
                2,196
                
                
                
                —Trade
      Date Securities
                
                
                13,431
                
                
                
                13,431
                
                
                
                —
                
                
                
                —
                
                
                
                —Total
      Contractual Obligations
                
                $
                550,106
                
                
                $
                486,322
                
                
                $
                18,372
                
                
                $
                22,320
                
                
                $
                23,092





The Company currently has two
unconsolidated subsidiaries and no special purpose entities.





Capital





The capital ratios of the Bank and the
Company are presently in excess of the requirements necessary to meet the "well
capitalized" capital category established by bank regulators.  See
Note O to the Consolidated Financial Statements.





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.


53


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, when written, 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.


54


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





Berkshire
      Bancorp Inc.
                        Interest
      Rate Sensitivity Gap at December 31, 2008
                        (in
      thousands, except for percentages)3
      Months
                        or
      Less
                      
                      
                      3
      Through
                        12
      Months
                      
                      
                      1
      Through
                        3
      Years
                      
                      
                      Over
                        3
      Years
                      
                      
                      Total
                      
                      
                      Fair
      ValueFederal
      funds sold
                      
                      
                      30,000
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      30,000
                      
                      
                      
                      30,000(Rate)
                      
                      
                      1.28
                      %Interest
      bearing deposits in banks
                      
                      
                      54,097
                      
                      
                      
                      15,000
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      69,097
                      
                      
                      
                      69,097(Rate)
                      
                      
                      1.58
                      %
                      
                      
                      3.60
                      %
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      2.02
                      %Loans
      (1)(2)Adjustable
      rate loans
                      
                      
                      128,680
                      
                      
                      
                      10,620
                      
                      
                      
                      31,620
                      
                      
                      
                      48,371
                      
                      
                      
                      219,291
                      
                      
                      
                      211,983(Rate)
                      
                      
                      6.47
                      %
                      
                      
                      6.00
                      %
                      
                      
                      6.93
                      %
                      
                      
                      7.05
                      %
                      
                      
                      6.64
                      %Fixed
      rate loans
                      
                      
                      11,011
                      
                      
                      
                      6,365
                      
                      
                      
                      39,337
                      
                      
                      
                      191,886
                      
                      
                      
                      248,599
                      
                      
                      
                      254,818(Rate)
                      
                      
                      7.25
                      %
                      
                      
                      6.65
                      %
                      
                      
                      8.37
                      %
                      
                      
                      6.43
                      %
                      
                      
                      6.78
                      %Total
      loans
                      
                      
                      139,691
                      
                      
                      
                      16,985
                      
                      
                      
                      70,957
                      
                      
                      
                      240,257
                      
                      
                      
                      467,890
                      
                      
                      
                      466,801Investments
      (3)(4)
                      
                      
                      167,617
                      
                      
                      
                      18,296
                      
                      
                      
                      24,183
                      
                      
                      
                      150,769
                      
                      
                      
                      360,865
                      
                      
                      
                      299,125(Rate)
                      
                      
                      4.88
                      %
                      
                      
                      5.20
                      %
                      
                      
                      5.31
                      %
                      
                      
                      5.77
                      %
                      
                      
                      5.30
                      %Total
      rate-sensitive assets
                      
                      
                      391,405
                      
                      
                      
                      50,281
                      
                      
                      
                      95,140
                      
                      
                      
                      391,026
                      
                      
                      
                      927,852Deposit
      accounts (5)Savings
      and NOW
                      
                      
                      198,858
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      198,858
                      
                      
                      
                      198,858(Rate)
                      
                      
                      1.77
                      %
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      1.77
                      %Money
      market
                      
                      
                      11,008
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      11,008
                      
                      
                      
                      11,008(Rate)
                      
                      
                      1.49
                      %
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      1.49
                      %Time
      Deposits
                      
                      
                      239,487
                      
                      
                      
                      222,340
                      
                      
                      
                      908
                      
                      
                      
                      2,196
                      
                      
                      
                      464,931
                      
                      
                      
                      467,756(Rate)
                      
                      
                      3.15
                      %
                      
                      
                      3.29
                      %
                      
                      
                      2.44
                      %
                      
                      
                      1.80
                      %
                      
                      
                      3.21
                      %Total
      deposit accounts
                      
                      
                      449,353
                      
                      
                      
                      222,340
                      
                      
                      
                      908
                      
                      
                      
                      2,196
                      
                      
                      
                      674,797Repurchase
      Agreements
                      
                      
                      2,504
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      57,000
                      
                      
                      
                      59,504
                      
                      
                      
                      64,519(Rate)
                      
                      
                      1.15
                      %
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      3.92
                      %
                      
                      
                      3.80
                      %Other
      borrowings
                      
                      
                      5,000
                      
                      
                      
                      5,087
                      
                      
                      
                      16,000
                      
                      
                      
                      41,866
                      
                      
                      
                      67,953
                      
                      
                      
                      69,739(Rate)
                      
                      
                      2.72
                      %
                      
                      
                      4.25
                      %
                      
                      
                      5.97
                      %
                      
                      
                      4.89
                      %
                      
                      
                      4.94
                      %Total
      rate-sensitive liabilities
                      
                      
                      456,857
                      
                      
                      
                      227,427
                      
                      
                      
                      16,908
                      
                      
                      
                      101,062
                      
                      
                      
                      802,254Interest
      rate caps
                      
                      
                      40,000
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (40,000
                      )Gap
      (repricing differences)
                      
                      
                      (105,452
                      )
                      
                      
                      (177,146
                      )
                      
                      
                      78,232
                      
                      
                      
                      249,964
                      
                      
                      
                      45,598Cumulative
      Gap
                      
                      
                      (105,452
                      )
                      
                      
                      (282,598
                      )
                      
                      
                      (204,366
                      )
                      
                      
                      45,598Cumulative
      Gap to Total Rate Sensitive Assets
                      
                      
                      (11.37
                      )%
                      
                      
                      (30.46
                      )%
                      
                      
                      (22.03
                      )%
                      
                      
                      4.91
                      %




55




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


(2) Includes
nonaccrual loans.


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


(4) Investments
are stated at book value.


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


56


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.





New
Accounting Pronouncements





Accounting
For Fair Value Measurement





In September 2006, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards ("SFAS") No. 157, "Fair Value Measurements."
This Statement defines fair value, establishes a framework for measuring fair
value in accordance with generally accepted accounting principles, and expands
disclosures about fair value measurements. This Statement applies to other
accounting pronouncements that require or permit fair value measurements, but
does not require any new fair value measurements.  SFAS No. 157 was
adopted as required on January 1, 2008 without material effect to the Company's
consolidated balance sheet or consolidated statement of income
(loss).





In February 2008, the FASB issued FASB
Staff Position ("FSP") 157-1 to clarify that leases are excluded from the scope
of SFAS No. 157 and to clarify that assets acquired and liabilities assumed in
connection with a business combination are required to be measured under SFAS
No. 141 "Business Combinations" or SFAS No. 141 (Revised December 2007)
"Business Combinations" regardless of whether those assets and liabilities are
related to leases.  This FSP does not have a material impact on the
Company's consolidated statement of condition or results of
operations.





In February 2008, the FASB issued FSP
157-2 to delay the effective date of implementing SFAS No. 157 for nonfinancial
assets and liabilities, except  for items that are recognized or
disclosed at fair value in the financial statements on a recurring basis (at
least annually).  At December 31, 2008, the Company did not have any
nonfinancial assets or nonfinancial liabilities that are recognized or disclosed
at fair value in the financial statements on a recurring basis.





In October 2008, the FASB issued FSP
157-3 to clarify the application of SFAS No. 157, in a market that is not active
and provides an example to illustrate key considerations in determining the fair
value of a financial asset when the market for that financial asset is not
active.  FSP 157-3 applies to certain investment securities owned by
the Bank in order to calculate the unrealized gain/(loss) on securities
available for sale.


57


In February 2007, the FASB issued SFAS
No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities",
including an amendment of SFAS No. 115 and permits entities to choose to measure
many financial instruments and certain other items at fair value. The objective
is to improve financial reporting by providing entities with the opportunity to
mitigate volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. SFAS No. 159 is effective as of the beginning of an entity's first
fiscal year that begins after November 15, 2007, or January 1, 2008 as to the
Company.  The Company has chosen to not measure financial instruments
identified under SFAS No. 159 at fair value and therefore, the adoption of SFAS
No. 159 did not have a material impact on our consolidated balance sheet or
consolidated statement of income (loss).





In February 2008, FASB issued FASB
Staff Position ("FSP") FAS 140-3, "Accounting for Transfers of Financial Assets
and Repurchase Financing Transactions", which provides guidance on accounting
for a transfer of a financial asset and a repurchase financing. The FSP presumes
that an initial transfer of a financial asset and a repurchase financing are
considered part of the same arrangement under FASB Statement No. 140 "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities". However, if certain criteria are met, the initial transfer and
repurchase shall not be evaluated as a linked transaction and therefore
evaluated separately under FASB 140. The FSP is effective for repurchase
financing in which the initial transfer is entered in fiscal years beginning
after November 15, 2008, or January 1, 2009 as to the Company.  The
Company adopted FSP FAS 140-3 without material effect to the consolidated
balance sheet or consolidated statement of income (loss).





In March 2008, the FASB issued SFAS No.
161, "Disclosures about Derivative Instruments and Hedging Activities." The
objective of SFAS No. 161 is to improve financial reporting about derivative
instruments and hedging activities by requiring enhanced disclosures to enable
investors to better understand their effects on an entity's financial position,
financial performance, and cash flows beyond the disclosure requirements of SFAS
No. 133, "Accounting for Derivative Instruments and Hedging
Activities".  SFAS No. 161 also improves transparency with respect to
the location and amounts of derivative instruments in an entity's financial
statements and with respect to how derivative instruments and related hedged
items affect its financial position, financial performance, and cash
flows.  The disclosures required by SFAS No. 161, clarified by FASB
Staff Position No. 133-1 and FIN 45-4 issued on September 12, 2008, should be
provided for any reporting period (annual or quarterly interim) beginning after
November 15, 2008, or January 1, 2009 as to the Company, with early application
encouraged. The Company adopted SFAS No. 161 as required on January 1, 2009
without material impact on the Company's results of operations or financial
condition.





In May 2008, FASB Issued SFAS No. 162,
"The Hierarchy of Generally Accepted Accounting Principles". This statement
identifies the sources of accounting principles and the framework for selecting
the accounting principles to be used in the preparation of financial statements
prepared in conformity with U.S. GAAP. The statement is not expected to result
in changes to current practices nor have a material effect on the
Company.





In November 2008, FASB ratified a
consensus opinion reached by the Emerging Issues Task Force ("EITF") on EITF
Issue 08-6, "Equity Method Investment Accounting Considerations," to clarify
accounting and impairment considerations involving equity method investments
after the effective date of both FASB Statement 141 (revised 2007), "Business
Combinations", and FASB Statement 160, "Noncontrolling Interests in Consolidated
Financial Statements." EITF Issue 08-6 includes the Task Force's conclusions on
how an equity method investor should (1) initially measure its equity method
investment, (2) account for impairment charges recorded by its investee, and (3)
account for shares issued by the investee.  EITF Issue 08-6 is
effective for fiscal years beginning on or after December 15, 2008. The Company
intends to adopt EITF Issue 08-6 effective January 1, 2009 on a prospective
basis.  The Company has periodically purchased equity method
investments and is in the process of evaluating the impact that the adoption of
EITF Issue 08-6 will have on its financial statements.


58


In December 2008, the FASB issued FSP
FAS 132R-1, "Employers' Disclosures about Postretirement Benefit Plan Assets,"
to require employers to provide more transparency about the assets in their
postretirement benefit plans, including defined benefit pension plans. FSP FAS
132R-1 requires employers to consider the following objectives in providing more
detailed disclosures about plan assets:





*How
investment decisions are made, including factors necessary to understanding
investment policies and strategies





*The
major categories of plan assets





*The
inputs and valuation techniques used to measure the fair value of plan
assets





*The
effect of fair value measurements using significant unobservable inputs (Level 3
measurements in SFAS No.  "Fair Value Measurements") on changes in
plan assets for the period





*Significant
concentrations of risk within plan assets





The disclosures relating to the above
objectives are required by the FSP for fiscal years ending after December 15,
2009. The Company intends to adopt FSP FAS 132R-1 effective December 31,
2009.





Internal
Control Over Financial Reporting





The objective of the Company's Internal
Control Program is to allow the Bank and management to comply with Part 363 of
the FDIC's regulations ("FDICIA") and to allow the Company to comply with
Section 302 of the Sarbanes-Oxley Act of 2002 (the "Act").





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 SEC 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, in a
later phase of the effectiveness of Section 404, (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.  Therefore, the Company
was first required to comply with the portions of Section 404 described in (i)
and (ii) above for the fiscal year ended December 31, 2007.


59


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.





ITEM
8. Financial Statements and Supplementary Data.





60


Report of
Independent Registered Public Accounting Firm





Board of
Directors and Shareholders


of
Berkshire Bancorp Inc.





We have
audited the accompanying consolidated balance sheets of Berkshire Bancorp Inc.
(the "Company") as of December 31, 2008 and 2007, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended December 31, 2008.  These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.


We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.  We
believe that our audits provide a reasonable basis for our opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Berkshire
Bancorp Inc. and subsidiaries as of December 31, 2008 and 2007, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 2008, in conformity
with accounting principles generally accepted in the United States of
America.




We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Berkshire Bancorp Inc.’s internal control over
financial reporting as of December 31, 2008, based on criteria established in
Internal Control—Integrated
Frameworkissued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) and our report, not included herein, dated March 31,
2009 expressed an unqualified opinion.


/s/ GRANT
THORNTON LLP





New York,
New York


March 31,
2009


61


BERKSHIRE
BANCORP INC. AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS


(Dollars
in Thousands)





December 31,
                                                    2008
                                                  
                                                  
                                                  December 31,
                                                    2007ASSETSCash
      and due from banks
                                                  
                                                  $
                                                  3,290
                                                  
                                                  
                                                  $
                                                  8,614Interest
      bearing deposits
                                                  
                                                  
                                                  69,097
                                                  
                                                  
                                                  
                                                  7,579Federal
      funds sold
                                                  
                                                  
                                                  30,000
                                                  
                                                  
                                                  
                                                  31,000Total
      cash and cash equivalents
                                                  
                                                  
                                                  102,387
                                                  
                                                  
                                                  
                                                  47,193Investment
      Securities:Available-for-sale
                                                  
                                                  
                                                  298,763
                                                  
                                                  
                                                  
                                                  598,961Held-to-maturity,
      fair value of $362 in 2008 and $405 in 2007
                                                  
                                                  
                                                  360
                                                  
                                                  
                                                  
                                                  395Total
      investment securities
                                                  
                                                  
                                                  299,123
                                                  
                                                  
                                                  
                                                  599,356Loans,
      net of unearned income
                                                  
                                                  
                                                  466,753
                                                  
                                                  
                                                  
                                                  434,785Less:
      allowance for loan losses
                                                  
                                                  
                                                  (9,204
                                                  )
                                                  
                                                  
                                                  (4,183
                                                  )Net
      loans
                                                  
                                                  
                                                  457,549
                                                  
                                                  
                                                  
                                                  430,602Accrued
      interest receivable
                                                  
                                                  
                                                  5,866
                                                  
                                                  
                                                  
                                                  8,602Premises
      and equipment, net
                                                  
                                                  
                                                  8,844
                                                  
                                                  
                                                  
                                                  9,362Goodwill,
      net
                                                  
                                                  
                                                  18,549
                                                  
                                                  
                                                  
                                                  18,549Trade
      date securities receivable
                                                  
                                                  
                                                  13,431
                                                  
                                                  
                                                  
                                                  —Other
      assets
                                                  
                                                  
                                                  37,963
                                                  
                                                  
                                                  
                                                  6,854Total
      assets
                                                  
                                                  $
                                                  943,712
                                                  
                                                  
                                                  $
                                                  1,120,518LIABILITIES
      AND STOCKHOLDERS' EQUITYDeposits:Non-interest
      bearing
                                                  
                                                  $
                                                  51,312
                                                  
                                                  
                                                  $
                                                  53,805Interest
      bearing
                                                  
                                                  
                                                  674,797
                                                  
                                                  
                                                  
                                                  799,410Total
      deposits
                                                  
                                                  
                                                  726,109
                                                  
                                                  
                                                  
                                                  853,215Securities
      sold under agreements to repurchase
                                                  
                                                  
                                                  59,504
                                                  
                                                  
                                                  
                                                  76,842Long
      term borrowings
                                                  
                                                  
                                                  45,272
                                                  
                                                  
                                                  
                                                  31,607Subordinated
      debt
                                                  
                                                  
                                                  22,681
                                                  
                                                  
                                                  
                                                  22,681Accrued
      interest payable
                                                  
                                                  
                                                  6,522
                                                  
                                                  
                                                  
                                                  9,089Other
      liabilities
                                                  
                                                  
                                                  17,672
                                                  
                                                  
                                                  
                                                  2,826Total
      liabilities
                                                  
                                                  
                                                  877,760
                                                  
                                                  
                                                  
                                                  996,260Stockholders'
      equityPreferred
      stock - $.01 Par value:Authorized
      — 2,000,000 sharesIssued
      — 60,000 sharesOutstanding
      —December
      31, 2008, 60,000 shares
                                                  
                                                  
                                                  1
                                                  
                                                  
                                                  
                                                  —December
      31, 2007, noneCommon
      stock - $.10 par valueAuthorized
      - December 31, 2008, 25,000,000 shares
                                                    -
      December 31, 2007, 10,000,000 sharesIssued—
      7,698,285 sharesOutstanding
      —December
      31, 2008, 7,054,183 shares
                                                  
                                                  
                                                  770
                                                  
                                                  
                                                  
                                                  770December
      31, 2007, 7,054,183 sharesAdditional
      paid-in capital
                                                  
                                                  
                                                  150,985
                                                  
                                                  
                                                  
                                                  90,986Retained
      earnings (accumulated deficit)
                                                  
                                                  
                                                  (39,795
                                                  )
                                                  
                                                  
                                                  42,352Accumulated
      other comprehensive loss, net
                                                  
                                                  
                                                  (39,598
                                                  )
                                                  
                                                  
                                                  (3,439
                                                  )Treasury
      Stock at cost December 31, 2008 and 2007, 644,102 shares
                                                  
                                                  
                                                  (6,411
                                                  )
                                                  
                                                  
                                                  (6,411
                                                  )Total
      stockholders' equity
                                                  
                                                  
                                                  65,952
                                                  
                                                  
                                                  
                                                  124,258Total
      liabilities and stockholders' equity
                                                  
                                                  $
                                                  943,712
                                                  
                                                  
                                                  $
                                                  1,120,518





The
accompanying notes are an integral part of these statements


62


BERKSHIRE
BANCORP INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF INCOME


(In
Thousands, Except Per Share Data)





For The Years Ended December
      31,2008
                
                
                2007
                
                
                2006INTEREST
      INCOMEFederal
      funds sold and interest bearing deposits
                
                $
                1,380
                
                
                $
                1,553
                
                
                $
                350Investment
      securities
                
                
                25,456
                
                
                
                27,178
                
                
                
                24,027Loans,
      including related fees
                
                
                32,754
                
                
                
                29,804
                
                
                
                23,844Total
      interest income
                
                
                59,590
                
                
                
                58,535
                
                
                
                48,221INTEREST
      EXPENSEDeposits
                
                
                24,968
                
                
                
                32,083
                
                
                
                22,559Securities
      sold under agreements to repurchase
                
                
                2,344
                
                
                
                1,976
                
                
                
                2,110Long-term
      borrowings and subordinated debt
                
                
                3,211
                
                
                
                3,734
                
                
                
                4,517Total
      interest expense
                
                
                30,523
                
                
                
                37,793
                
                
                
                29,186Net
      interest income
                
                
                29,067
                
                
                
                20,742
                
                
                
                19,035PROVISION
      FOR LOAN LOSSES
                
                
                4,904
                
                
                
                355
                
                
                
                410Net
      interest income afterprovision
      for loan losses
                
                
                24,163
                
                
                
                20,387
                
                
                
                18,625NON-INTEREST
      INCOMEService
      charges on deposit accounts
                
                
                585
                
                
                
                658
                
                
                
                588Investment
      securities gains (losses)
                
                
                (685
                )
                
                
                86
                
                
                
                2,336Other
      income
                
                
                858
                
                
                
                915
                
                
                
                769Total
      non-interest income
                
                
                758
                
                
                
                1,659
                
                
                
                3,693NON-INTEREST
      EXPENSESalaries
      and employee benefits
                
                
                9,366
                
                
                
                8,971
                
                
                
                8,481Net
      occupancy expense
                
                
                2,079
                
                
                
                2,050
                
                
                
                1,961Equipment
      expense
                
                
                386
                
                
                
                80
                
                
                
                108FDIC
      assessment
                
                
                1,082
                
                
                
                86
                
                
                
                85Data
      processing expense
                
                
                442
                
                
                
                417
                
                
                
                366Other
      than temporary impairment chargeson
      securities
                
                
                94,346
                
                
                
                —
                
                
                
                —Other
                
                
                2,915
                
                
                
                2,714
                
                
                
                2,581Total
      non-interest expense
                
                
                110,616
                
                
                
                14,318
                
                
                
                13,582Income
      (loss) before provision for income taxes
                
                
                (85,695
                )
                
                
                7,728
                
                
                
                8,736Provision
      (benefit) for income taxes
                
                
                (5,790
                )
                
                
                2,374
                
                
                
                3,856Net
      income (loss)
                
                $
                (79,905
                )
                
                $
                5,354
                
                
                $
                4,880Net
      income (loss) per share:Basic
                
                $
                (11.45
                )
                
                $
                .77
                
                
                $
                .71Diluted
                
                $
                —
                
                
                $
                .76
                
                
                $
                .70Number
      of shares used to computenet
      income (loss) per share:Basic
                
                
                7,054
                
                
                
                6,987
                
                
                
                6,891Diluted
                
                
                7,054
                
                
                
                7,005
                
                
                
                6,976Dividends
      per common share
                
                $
                .20
                
                
                $
                .18
                
                
                $
                .16





The
accompanying notes are an integral part of these statements


63




BERKSHIRE
BANCORP INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENT OF STOCKHOLDERS' EQUITY


For
The Years Ended December 31, 2008, 2007 and 2006


(In
Thousands)




Common
      Shares
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              Preferred
                                                                                                                                                                                                                                                                                                                                Shares
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              Common
                                                                                                                                                                                                                                                                                                                                Stock
                                                                                                                                                                                                                                                                                                                                Par
                                                                                                                                                                                                                                                                                                                                value
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              Preferred
                                                                                                                                                                                                                                                                                                                                Stock
                                                                                                                                                                                                                                                                                                                                Par
                                                                                                                                                                                                                                                                                                                                Value
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              Additional
      paid-in
      capital
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              Accumulated
                                                                                                                                                                                                                                                                                                                                other
                                                                                                                                                                                                                                                                                                                                comprehensive
                                                                                                                                                                                                                                                                                                                                (loss) net
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              Retained
                                                                                                                                                                                                                                                                                                                                Earnings
                                                                                                                                                                                                                                                                                                                                (Accumulated
                                                                                                                                                                                                                                                                                                                                deficit)
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              Treasury
                                                                                                                                                                                                                                                                                                                                stock
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              Comprehensive
                                                                                                                                                                                                                                                                                                                                income
                                                                                                                                                                                                                                                                                                                                (loss)
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              Total
                                                                                                                                                                                                                                                                                                                                stockholders'
                                                                                                                                                                                                                                                                                                                                equityBalance
      at January 1, 2006
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              7,698
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              $
                                                                                                                                                                                                                                                                                                                              770
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              $
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              $
                                                                                                                                                                                                                                                                                                                              90,594
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              $
                                                                                                                                                                                                                                                                                                                              (8,415
                                                                                                                                                                                                                                                                                                                              )
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              $
                                                                                                                                                                                                                                                                                                                              33,504
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              $
                                                                                                                                                                                                                                                                                                                              (7,743
                                                                                                                                                                                                                                                                                                                              )
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              $
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              $
                                                                                                                                                                                                                                                                                                                              108,710Net
      income
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              4,880
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              4,880
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              4,880Acquisition
      of treasury shares
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              (790
                                                                                                                                                                                                                                                                                                                              )
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              (790
                                                                                                                                                                                                                                                                                                                              )Exercise
      of stock options
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              (19
                                                                                                                                                                                                                                                                                                                              )
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              368
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              349Tax
      benefit from exercise  of stock options
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              84
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              84Other
      comprehensive income net  of reclassification
      adjustment  and taxes
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              3,643
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              3,643
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              3,643Comprehensive
      income
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              $
                                                                                                                                                                                                                                                                                                                              8,523Cash
      dividends
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              (1,099
                                                                                                                                                                                                                                                                                                                              )
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              (1,099
                                                                                                                                                                                                                                                                                                                              )Balance
      at December 31, 2006
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              7,698
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              770
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              90,659
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              (4,772
                                                                                                                                                                                                                                                                                                                              )
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              37,285
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              (8,165
                                                                                                                                                                                                                                                                                                                              )
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              115,777Adoption
      of FIN 48
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              965
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              965Adjusted
      balance at January 1, 2007
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              38,250
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              116,742Net
      income
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              5,354
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              5,354
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              5,354Exercise
      of stock options
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              (32
                                                                                                                                                                                                                                                                                                                              )
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              1,754
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              1,722Tax
      benefit from exercise  of stock options
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              359
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              359Other
      comprehensive income net  of reclassification
      adjustment  and taxes
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              1,333
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              1,333
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              1,333Comprehensive
      income
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              $
                                                                                                                                                                                                                                                                                                                              6,687Cash
      dividends
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              (1,252
                                                                                                                                                                                                                                                                                                                              )
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              (1,252
                                                                                                                                                                                                                                                                                                                              )Balance
      at December 31, 2007
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              7,698
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              770
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              90,986
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              (3,439
                                                                                                                                                                                                                                                                                                                              )
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              42,352
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              (6,411
                                                                                                                                                                                                                                                                                                                              )
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              124,258Net
      (loss)
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              (79,905
                                                                                                                                                                                                                                                                                                                              )
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              (79,905
                                                                                                                                                                                                                                                                                                                              )
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              (79,905
                                                                                                                                                                                                                                                                                                                              )Issuance
      of Series A Preferred Stock
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              60
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              1
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              59,999
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              60,000Other
      comprehensive loss net  of reclassification
      adjustment  and taxes
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              (36,159
                                                                                                                                                                                                                                                                                                                              )
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              (36,159
                                                                                                                                                                                                                                                                                                                              )
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              (36,159
                                                                                                                                                                                                                                                                                                                              )Comprehensive
      loss
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              $
                                                                                                                                                                                                                                                                                                                              (116,064
                                                                                                                                                                                                                                                                                                                              )Cash
      dividends - Preferred Stock
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              (837
                                                                                                                                                                                                                                                                                                                              )
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              (837
                                                                                                                                                                                                                                                                                                                              )Cash
      dividends - Common Stock
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              (1,405
                                                                                                                                                                                                                                                                                                                              )
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              (1,405
                                                                                                                                                                                                                                                                                                                              )Balance
      at December 31, 2008
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              7,698
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              60
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              $
                                                                                                                                                                                                                                                                                                                              770
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              $
                                                                                                                                                                                                                                                                                                                              1
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              $
                                                                                                                                                                                                                                                                                                                              150,985
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              $
                                                                                                                                                                                                                                                                                                                              (39,598
                                                                                                                                                                                                                                                                                                                              )
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              $
                                                                                                                                                                                                                                                                                                                              (39,795
                                                                                                                                                                                                                                                                                                                              )
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              $
                                                                                                                                                                                                                                                                                                                              (6,411
                                                                                                                                                                                                                                                                                                                              )
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              
                                                                                                                                                                                                                                                                                                                              $
                                                                                                                                                                                                                                                                                                                              65,952


The
accompanying notes are an integral part of these statements


64


BERKSHIRE
BANCORP INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(in
thousands)





For The Years Ended December
      31,2008
                      
                      
                      2007
                      
                      
                      2006CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      (loss) income
                      
                      $
                      (79,905
                      )
                      
                      $
                      5,354
                      
                      
                      $
                      4,880Adjustments
      to reconcile net (loss) income to net cash
      (used in) provided by operating activities:Realized
      gains (losses) on investment securities
                      
                      
                      685
                      
                      
                      
                      (86
                      )
                      
                      
                      (2,336
                      )Other
      than temporary impairment charges on securities
                      
                      
                      94,346
                      
                      
                      
                      —
                      
                      
                      
                      —Net
      accretion of premiums of investment securities
                      
                      
                      (225
                      )
                      
                      
                      (1,339
                      )
                      
                      
                      (595
                      )Depreciation
      and amortization
                      
                      
                      604
                      
                      
                      
                      739
                      
                      
                      
                      727Provision
      for loan losses
                      
                      
                      4,904
                      
                      
                      
                      355
                      
                      
                      
                      410CHANGES
      IN ASSETS AND LIABILITIES:Decrease
      (increase) in accrued interest receivable
                      
                      
                      2,757
                      
                      
                      
                      (2,205
                      )
                      
                      
                      387(Increase)
      decrease in other assets
                      
                      
                      (44,540
                      )
                      
                      
                      1,184
                      
                      
                      
                      2,021(Decrease)
      increase in accrued interest payable and other liabilities
                      
                      
                      12,280
                      
                      
                      
                      (439
                      )
                      
                      
                      3,763Net
      cash (used in) provided by operating activities
                      
                      
                      (9,094
                      )
                      
                      
                      3,563
                      
                      
                      
                      9,257CASH
      FLOWS FROM INVESTING ACTIVITIES:Investment
      securities available for salePurchases
                      
                      
                      (3,648,701
                      )
                      
                      
                      (1,439,103
                      )
                      
                      
                      (489,737
                      )Sales,
      maturities and calls
                      
                      
                      3,817,912
                      
                      
                      
                      1,357,643
                      
                      
                      
                      580,923Investment
      securities held to maturityMaturities
                      
                      
                      35
                      
                      
                      
                      93
                      
                      
                      
                      129Net
      (increase) in loans
                      
                      
                      (31,851
                      )
                      
                      
                      (63,806
                      )
                      
                      
                      (61,598
                      )Acquisition
      of premises and equipment
                      
                      
                      (86
                      )
                      
                      
                      (763
                      )
                      
                      
                      (1,463
                      )Net
      cash provided by (used in) investing activities
                      
                      
                      137,309
                      
                      
                      
                      (145,936
                      )
                      
                      
                      28,254CASH
      FLOWS FROM FINANCING ACTIVITIES:Net
      (decrease) increase in non interest bearing deposits
                      
                      
                      (2,493
                      )
                      
                      
                      4,387
                      
                      
                      
                      (851
                      )Net
      (decrease) increase in interest bearing deposits
                      
                      
                      (124,613
                      )
                      
                      
                      167,339
                      
                      
                      
                      2,080(Decrease)
      increase in securities sold under agreements to repurchase
                      
                      
                      (17,338
                      )
                      
                      
                      14,190
                      
                      
                      
                      (10,392
                      )Proceeds
      from long term debt
                      
                      
                      25,000
                      
                      
                      
                      19,000
                      
                      
                      
                      2,000Repayment
      of long term debt
                      
                      
                      (11,335
                      )
                      
                      
                      (40,131
                      )
                      
                      
                      (32,463
                      )Proceeds
      from issuance of Series A preferred stock, net
                      
                      
                      60,000
                      
                      
                      
                      —
                      
                      
                      
                      —Acquisition
      of treasury stock
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      (790
                      )Proceeds
      from exercise of common stock options
                      
                      
                      —
                      
                      
                      
                      1,363
                      
                      
                      
                      349Tax
      benefits from exercise of common stock options
                      
                      
                      —
                      
                      
                      
                      359
                      
                      
                      
                      84Dividends
      paid
                      
                      
                      (2,242
                      )
                      
                      
                      (1,252
                      )
                      
                      
                      (1,099
                      )Net
      cash (used in) provided by financing activities
                      
                      
                      (73,021
                      )
                      
                      
                      165,255
                      
                      
                      
                      (41,082
                      )Net
      increase (decrease) in cash and cash equivalents
                      
                      
                      55,194
                      
                      
                      
                      22,882
                      
                      
                      
                      (3,571
                      )Cash
      and cash equivalents at beginning of year
                      
                      $
                      47,193
                      
                      
                      $
                      24,311
                      
                      
                      $
                      27,882Cash
      and cash equivalents at end of year
                      
                      $
                      102,387
                      
                      
                      $
                      47,193
                      
                      
                      $
                      24,311SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATION:Cash
      used to pay interest
                      
                      $
                      33,090
                      
                      
                      $
                      36,814
                      
                      
                      $
                      26,807Cash
      used to pay income taxes, net of refunds
                      
                      $
                      1,280
                      
                      
                      $
                      3,575
                      
                      
                      $
                      4,163SUPPLEMENTAL
      DISCLOSURES OF NON-CASH INVESTING ACTIVITIESTrade
      date securities receivable
                      
                      $
                      13,431
                      
                      
                      $
                      —
                      
                      
                      $
                      —





The
accompanying notes are an integral part of these statements


65


BERKSHIRE
BANCORP INC. AND SUBSIDIARIES


Notes
to Consolidated Financial Statements


December
31, 2008 and 2007





Note
A - ORGANIZATION AND CAPITALIZATION





Organization





Berkshire Bancorp Inc. ("Berkshire" or
the "Company" or "we" and similar pronouns), a Delaware corporation, is a bank
holding company registered under the Bank Holding Company Act of
1956.  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 Bank was established in 1989 to
provide highly personalized services to high net worth individuals and to small
and mid-sized commercial businesses primarily from the New York City
metropolitan area.  In March 2001, the Company expanded its customer
base and market area with the acquisition of GSB Financial
Corporation.  The Bank's main office and branch is in mid-town
Manhattan.  The Bank has one other branch in lower Manhattan, four
branches in Brooklyn, New York, four branches in Orange and Sullivan Counties in
New York State, and one branch in Ridgefield, New Jersey.





The Bank competes with other banking
and financial institutions in its markets.  Commercial banks, savings
banks, savings and loan associations, mortgage bankers and brokers, and credit
unions actively compete for deposits and loans.  Such institutions, as
well as consumer finance, mutual funds, insurance companies, and brokerage and
investment banking firms may be considered to be competitors of the Bank with
respect to one or more of the services provided by the Bank.





The Company and the Bank are subject to
the regulations of certain state and federal agencies and, accordingly, are
periodically examined by those regulatory authorities.  As a
consequence of such regulation of banking activities, the Bank's business may be
affected by state and federal legislation.





Trust Preferred
Securities.





As of May 18 2004, the Company
established Berkshire Capital Trust I, a Delaware statutory trust,
("BCTI").  The Company owns all the common capital securities of
BCTI.  BCTI issued $15.0 million of preferred capital securities to
investors in a private transaction and invested the proceeds, combined with the
proceeds from the sale of BCTI's common capital securities, in the Company
through the purchase of $15.464 million aggregate principal amount of Floating
Rate Junior Subordinated Debentures (the 2004 "Debentures") issued by the
Company. The 2004 Debentures, the sole assets of BCTI, mature on July 23, 2034
and bear interest at a floating rate, three month LIBOR plus 2.70%, currently
6.53%.





On April 1, 2005, the Company
established Berkshire Capital Trust II, a Delaware statutory trust,
("BCTII").  The Company owns all the common capital securities of
BCTII.  BCTII issued $7.0 million of preferred capital securities to
investors in a private transaction and invested the proceeds, combined with the
proceeds from the sale of BCTII's common capital securities, in the Company
through the purchase of $7.217 million aggregate principal amount of Floating
Rate Junior Subordinated Debentures (the "2005 Debentures") issued by the
Company. The 2005 Debentures, the sole assets of BCTII, mature on May 23, 2035
and bear interest at a floating rate, three month LIBOR plus 1.95%, currently
4.10%.  See Note A of Notes to Consolidated Financial Statements for
further discussion of Trust Preferred Securities.




66


BERKSHIRE
BANCORP INC. AND SUBSIDIARIES


Notes
to Consolidated Financial Statements (continued)





Note
A - (continued)




Debentures
and related documents, taken together, constitute a full, irrevocable and
unconditional guarantee on a subordinated basis by the Company of the
obligations of BCTI and BCTII under the preferred capital securities sold by
BCTI and BCTII to investors.  FIN46(R) precludes consideration of the
call option embedded in the preferred capital securities when determining if the
Company has the right to a majority of BCTI and BCTII expected residual returns.
Accordingly, BCTI and BCTII are not included in the consolidated balance sheet
of the Company.





The Federal Reserve has issued guidance
on the regulatory capital treatment for the trust-preferred securities issued by
BCTI and BCTII.  This rule would retain the current maximum percentage
of total capital permitted for Trust Preferred Securities at 25%, but would
enact other changes to the rules governing Trust Preferred Securities that
affect their use as part of the collection of entities known as "restricted core
capital elements."  The rule would take effect March 31, 2009;
however, a five year transition period starting March 31, 2004 and leading up to
that date would allow bank holding companies to continue to count Trust
Preferred Securities as Tier 1 Capital after applying
FIN-46(R).  Management has evaluated the effects of this rule and does
not anticipate a material impact on its capital ratios when the proposed rule is
finalized.





Series A Preferred
Shares.  On October 31, 2008, the Company sold an aggregate of
60,000 shares of its 8% Non-Cumulative Mandatorily Convertible Perpetual Series
A Preferred Stock (the "Series A Preferred Shares") at $1,000 per share, or $60
million in the aggregate, to the Company's Chairman of the Board and majority
stockholder, and two non-affiliated investors.  Each Series A
Preferred Share bears non-cumulative cash dividends at the rate of 8% per annum,
payable quarterly, is mandatorily convertible into 123.153 shares of our Common
Stock on October 31, 2011, unless previously redeemed, and is redeemable at the
option of the Company between April 30, 2009 and November 1, 2010 at a
redemption price of $1,100.  So long as any share of Series A
Preferred Shares remains outstanding, unless the full dividends for the most
recent dividend payment date have been paid or declared, no dividends may be
paid or declared on the Company's Common Stock.





Note
B - SUMMARY OF ACCOUNTING POLICIES





1.
            Basis of Financial Statement
      Presentation





The consolidated financial statements
have been prepared in accordance with accounting principles generally accepted
in the United States of America ("U.S. GAAP") and predominant practice within
the banking industry, and include the accounts of Berkshire Bancorp Inc. and its
wholly owned subsidiaries, Greater American Finance Group, Inc. ("GAFG"), and
GAFG's wholly owned subsidiary, the Bank, and East 39, LLC, (collectively, the
"Company").  All significant intercompany accounts and transactions
have been eliminated.





In preparing the financial statements
in conformity with U.S. GAAP, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the balance
sheets, and the reported amounts of revenues and expenses during the reporting
period.  Actual results could differ from those
estimates.





The principal estimates that are
susceptible to significant change in the near term relate to the allowance for
loan losses, goodwill, carrying value of investments designated as available for
sale, and deferred tax assets and liabilities.  The evaluation of the
adequacy of the allowance for loan losses includes an analysis of the individual
loans and overall risk characteristics and size of the different loan
portfolios, and takes into consideration current economic and market conditions,
the capability of specific borrowers to pay specific loan obligations, as well
as current loan collateral values.  However, actual losses on specific
loans, which also are encompassed in the analysis, may vary from estimated
losses.


67


BERKSHIRE
BANCORP INC. AND SUBSIDIARIES


Notes
to Consolidated Financial Statements (continued)





Note
B - (continued)





The carrying value of investments
designated as available for sale are based upon quoted market prices or prices
for similar assets.  If these prices are not accurate or the similar
assets are not similar enough, additional impairment charges may be
required.





Substantially all outstanding goodwill
resulted from the acquisition of The Berkshire Bank and Goshen Savings Bank,
depository institutions concentrating in the New York City and Orange and
Sullivan County communities, respectively.  As the result of the
market penetration in these New York areas, the Company had formulated its own
strategy to create such a market role.  Accordingly, implicit in the
purchase of these franchises was the acquisition of that
role.  However, if such benefits, including new business, are not
derived or the Company changes its business plan, an impairment may be
recognized.





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.





2.
            Investment
      Securities





The Company accounts for its investment
securities in accordance with Statement of Financial Accounting Standard
("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity
Securities". Investments in securities are classified in one of three
categories:  held to maturity, trading or available for
sale.  Investments for which management has both the ability and
intent to hold to maturity, are carried at cost, adjusted for the amortization
of premiums and accretion of discounts computed by the interest
method.  Investments which management believes may be sold prior to
maturity due to changes in interest rates, prepayment risk and equity, liquidity
requirements or other factors, are classified as available for
sale.  Available-for-sale securities are carried at fair value, with
the unrealized gains and losses, net of tax, reported as a separate component of
stockholders' equity and excluded from the determination of net
income.  Gains or losses on disposition are based on the net proceeds
and cost of the securities sold, adjusted for amortization of premiums and
accretion of discounts, using the specific identification method.





At December 31, 2007, our portfolio of
investment securities included approximately $185 million of auction rate
securities. These investments had high credit quality ratings of AA or AAA and
were fully collateralized by bonds and other financial instruments. Auction rate
securities are generally long-term debt instruments that provide liquidity
through a Dutch auction process that resets the applicable interest rate at
pre-determined calendar intervals, generally every 28 days.





During the first quarter of 2008, due
to uncertainties in the credit markets which negatively impacted our ability to
liquidate, if necessary, investments in auction rate securities, we wrote down
the auction rate securities held by us by approximately $8.90
million.


68


BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements (continued)
 
 Note
B - (continued)
 
 On September 7, 2008, the United States
Department of the Treasury("US Treasury") and the Federal Housing Finance Agency
("FHFA") announced a plan to place the Federal National Mortgage Association
("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac")
into conservatorship under the authority of the FHFA, a plan which eliminated
dividends on Fannie Mae and Freddie Mac common and preferred stock for the
foreseeable future.
 
 As of June 30, 2008, the Bank held
auction rate securities with a cost basis of $86.3 million, including securities
which were collateralized by Fannie Mae or Freddie Mac preferred shares. The
Bank also held preferred shares of Fannie Mae and Freddie Mac with a cost basis
of $8.7 million, and a $6.9 million corporate note from Lehman Brothers which
filed for bankruptcy protection on September 15, 2008.  Due to the
U.S. Treasury actions and the bankruptcy of Lehman Brothers, we determined that
these securities were other than temporarily impaired and recognized a pre-tax
charge totaling $94.35 million, consisting of $80.15 million related to the
auction rate securities; $8.10 million related to the Fannie Mae and Freddie Mac
preferred shares and $6.10 million charge for the Lehman Brothers corporate
note.
 
 At September 30, 2008, the other than
temporary impairment ("OTTI") charge related to the Lehman Brothers corporate
note was considered an ordinary loss under the current federal tax
code.  Therefore, we recognized a deferred tax asset, and related tax
benefit, related to this ordinary loss of $6.10 million.  The other
than temporary charge related to the Fannie Mae and Freddie Mac preferred
shares, both direct investments and through the auction rate securities, were
considered capital losses under the federal tax code.  As such, we
recognized a tax benefit of $760,000 relating to $1.735 million of previously
recognized capital gains.  A valuation allowance was recorded on the
remaining deferred tax asset.
 
 In October 2008, the U.S. Congress
passed the Emergency Economic Stabilization Act (the "EESA") which changed the
characteristics of direct and indirect ownership of the Fannie Mae and Freddie
Mac capital losses to ordinary losses.  Due to this change in the tax
law, we carried back as much loss as could be utilized and recognized a deferred
tax asset for the remainder.  In addition to this change in the nature
of the losses, the EESA also provided for financial institutions to apply for
funds under the Troubled Asset Repurchase Program which will provide capital
from the US Treasury in the form of Preferred Shares.  We have applied
to participate in this program.  If we receive approval to
participate, management will review the terms of the transaction and determine
if it is in the best interest of the Company to accept the funds.
 
 At December 31, 2008, our portfolio of
investment securities included approximately $101 million at cost of auction
rate securities for which an other than temporary impairment charge has not been
recorded in our financial statements as, based upon our analysis, the impairment
is due to market illiquidity. The fair value of these securities, presently
$63.08 million, could be negatively impacted in the future. Were this to occur,
we may be required to reflect a write down of certain of our auction rate
securities in future periods as a charge to earnings if any of our auction rate
securities are deemed to be other than temporarily impaired. Such impairment
charge would be recorded as non-interest expense and could be material to our
results of operations.
 
 We are currently negotiating a
potential settlement of claims we have asserted against the issuing financial
institutions of the auction rate securities in our investment portfolio pursuant
to the agreement these financial institutions have reached with
the Securities and Exchange Commission (“SEC”) and the Attorney
General of the State of New York. The outcome of these negotiations and the
amount we may recover in a settlement agreement, if any, is uncertain at this
time.
 
 Based on our expected operating cash
flows, and our other sources of cash, including available lines of credit, we do
not expect the potential lack of liquidity in these investments to affect our
ability to execute our current business plan.
  69
 BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements (continued)
 
 Note
B - (continued)
 
 3.
                Loans and Allowance for Loan
      Losses
 
 Loans that management has the intent
and ability to hold for the foreseeable future or until maturity or payoff are
stated at the amount of unpaid principal and are net of unearned discount,
unearned loan fees and an allowance for loan losses.  The
allowance for loan losses is established through a provision for loan losses
charged to expense.  Loan principal considered to be uncollectible by
management is charged against the allowance for credit losses. The allowance is
an amount that management believes will be adequate to absorb specifically
identifiable losses and losses on existing loans that may become uncollectible
based upon an evaluation of known and inherent risks in the loan
portfolio.  The evaluation takes into consideration such factors as
changes in the nature and size of the loan portfolio, overall portfolio quality,
specific problem or impaired loans, and current economic conditions which may
affect the borrowers' ability to pay.  The evaluation details
historical losses by loan category, the resulting loss rates for which are
projected at current loan total amounts.
 
 The Company accounts for its impaired
loans in accordance with SFAS No. 114, "Accounting by Creditors for Impairment
of a Loan," as amended by SFAS No. 118, "Accounting by Creditors for Impairment
of a Loan - Income Recognition and Disclosures" and SFAS No. 5, "Accounting for
Contingencies."  Management considers its investment in one-to-four
family real estate loans and consumer loans to be homogeneous groups of
loans.  As such, these loans are not individually evaluated for
impairment but rather are collectively evaluated under SFAS
No.5.  These standards require that a creditor measure impairment
based on the present value of expected future cash flows discounted at the
loan's effective interest rate, except that as a practical expedient, a creditor
may measure impairment based on a loan's observable market price, or the fair
value of the collateral if the loan is
collateral-dependent.  Regardless of the measurement method, a
creditor must measure impairment based on the fair value of the collateral when
the creditor determines that foreclosure is probable.
 
 Interest income is accrued as earned on
a simple interest basis.  Accrual of interest is discontinued on a
loan when management believes, after considering economic and business
conditions and collection efforts, that the borrower's financial condition is
such that collection of interest is doubtful.  When a loan is placed
on such non-accrual status, all accumulated accrued interest
receivable
 applicable
to periods prior to the current year is charged off to the allowance for loan
losses.  Interest which had accrued in the current year is reversed
out of current period income.  Loans 90 days or more past due and
still accruing interest must have both principal and accruing interest
adequately secured and must be in the process of collection.
 
 4.
                Interest Rate
      Swap
 
 The Bank, from time to time, has
entered into interest rate cap agreements in order to hedge its exposure to
interest rate fluctuations.  The Company adopted the provisions of
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", as
amended, as of January 1, 2001.  The statement requires the Company to
recognize all derivative instruments at fair value as either assets or
liabilities.  Financial derivatives are reported at fair value in
other assets or other liabilities.  For derivatives not designated as
hedges, the gain or loss is recognized in current earnings.  Amounts
reclassed into earnings, when the hedged transaction culminates, are included in
interest income.  At December 31, 2008 and 2007, the Company had $40.0
million and $10.0
million, respectively, outstanding.
  70
  BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements (continued)
 
 Note
B - (continued)
 
 5.
                Bank Premises and
      Equipment
 
 Bank premises and equipment, including
leasehold improvements, are stated at cost less accumulated
depreciation.  Depreciation expense is computed on the straight-line
method over the estimated useful lives of the assets.  Leasehold
improvements are amortized over the shorter of the estimated useful lives of the
improvements or the terms of the related leases.  An accelerated
depreciation method is used for tax purposes.
 
 6.
                Other Real Estate
      Owned
 
 Other real estate owned, representing
property acquired through foreclosure, is recorded at the lower of cost or
estimated fair market value, less costs of disposal.  When property is
acquired, the excess, if any, of the loan balance over fair market value is
charged to the allowance for loan losses.  Periodically thereafter,
the asset is reviewed for subsequent declines in the estimated
fair market value.  Subsequent declines, if any, and holding costs, as
well as gains and losses on subsequent sale, are included in the consolidated
statements of income.
 
 7.
                Goodwill
 
 Goodwill resulting from the acquisition
of The Berkshire Bank in 1999 and GSB Financial Corporation in 2001 is accounted
for under SFAS No. 142, "Goodwill and Intangible Assets".  SFAS No.
142 includes requirements to test goodwill and indefinite lived intangible
assets for impairment rather than amortize them.  The Company performs
such tests annually and did not identify any impairment on its outstanding
goodwill and its identifiable intangible assets from its most recent testing,
performed at December 31, 2008.
 
 8.
                Income
    Taxes
 
 The Company accounts for income taxes
under the liability method of accounting for income taxes.  Deferred
tax assets and liabilities are determined based on the difference between the
financial statement and tax bases of assets and liabilities as measured by the
enacted tax rates that will be in effect when these differences
reverse.  Deferred tax expense is the result of changes in deferred
tax assets and liabilities.  The principal types of differences
between assets and liabilities for financial statement and tax return purposes
are allowance for loan losses, deferred loan fees, deferred compensation and
securities available for sale.
 
 As of January 1, 2007, the Company
adopted FASB Interpretation No. 48 "Accounting for Uncertainty in Income Taxes,
an interpretation of FASB Statement No. 109".  The result of adoption
was an increase to retained earnings totaling $965,000 as a previously accrued
liability was evaluated and determined to be no longer necessary as the tax year
had expired.
 
 9.
                Net Income Per
      Share
 
 The Company follows the provisions of
SFAS No. 128, "Earnings Per Share." Basic earnings per share excludes dilution
and is computed by dividing income available to common shareholders by the
weighted-average common shares outstanding during the period.  Diluted
earnings per share takes into account the potential dilution that could occur if
securities or other contracts to issue common stock were exercised and converted
into common stock.
  71
  BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements (continued)
 
 Note
B - (continued)
 
 10.
                Stock Based
      Compensation
 
 At December 31, 2008, the Company has
one stock-based employee compensation plan, which is more fully described in
Note J.  The Company accounts for the plan in accordance with SFAS
Statement No. 123(R), "Share Based Payment" ("SFAS 123R").  Under the
fair value recognition provisions of SFAS 123R, share-based compensation cost is
measured at the grant date based on the fair value of the award and is
recognized as expense over the vesting period.  Determining the fair
value of share-based awards at the grant date requires judgment, including
estimating the Company's stock price volatility, employee stock option exercise
behaviors and employee option forfeiture rates.
  The Company did not grant stock options
in fiscal 2008, 2007 and 2006, as a result of which, no stock based compensation
expense was recorded in each of those years.
 
 11.
                Cash
      Equivalents
 
 For purposes of reporting cash flows,
cash and cash equivalents are comprised of cash and due from banks, interest
bearing deposits in other financial institutions with an original maturity of
less than ninety days, and federal funds sold.
 
 12.
                Restrictions on Cash and Due
      From Banks
 
 The Bank is required to maintain
reserves against customer demand deposits by keeping cash on hand or cash
balances with the Federal Reserve Bank in a non-interest bearing
account.  The amounts of those reserve and cash balances was
approximately $3,097,000 and $3,258,000 at December 31, 2008 and 2007,
respectively.
 
 13.
                Federal Home Loan Bank
      Stock
 
 The Company is required as a condition
of membership in the Federal Home Loan Bank of New York ("FHLBNY") to maintain
an investment in FHLBNY common stock. The stock is redeemable at par, and
therefore, its cost is equivalent to its redemption value. At December 31, 2008
and 2007, management does not believe this asset is impaired.
 
 14.
                Comprehensive
      Income
 
 The Company follows the provisions of
SFAS No. 130, "Reporting Comprehensive Income"  which includes net
income as well as certain other items, which results in a change to equity
during the period. (In thousands.)
 
 Year
      Ended December 31, 2008Before
      tax
                                                      amount
                                                    
                                                    
                                                    Tax
                                                      (expense)
                                                      benefit
                                                    
                                                    
                                                    Net
      of tax
                                                      AmountUnrealized
      gains (losses) on investment securities:Unrealized
      holding losses arising during the period
                                                    
                                                    $
                                                    (52,252
                                                    )
                                                    
                                                    $
                                                    20,514
                                                    
                                                    
                                                    $
                                                    (31,738
                                                    )Less:
      reclassification adjustment for losses realized in net
    income
                                                    
                                                    
                                                    (5,361
                                                    )
                                                    
                                                    
                                                    2,144
                                                    
                                                    
                                                    
                                                    (3,217
                                                    )(57,613
                                                    )
                                                    
                                                    
                                                    22,658
                                                    
                                                    
                                                    
                                                    (34,955
                                                    )Change
      in minimum pension liability
                                                    
                                                    
                                                    (1,204
                                                    )
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    
                                                    (1,204
                                                    )Other
      comprehensive loss, net
                                                    
                                                    $
                                                    (58,817
                                                    )
                                                    
                                                    $
                                                    22,658
                                                    
                                                    
                                                    $
                                                    (36,159
                                                    )
  72
  BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements (continued)
 
 Note
B - (continued)
 
 Year
      Ended December 31, 2007Before
      tax
                          amount
                        
                        
                        Tax
                          (expense)
                          benefit
                        
                        
                        Net
      of tax
                          AmountUnrealized
      gains (losses) on investment securities:Unrealized
      holding gains arising during period
                        
                        $
                        2,278
                        
                        
                        $
                        (964
                        )
                        
                        $
                        1,314Less
      reclassification adjustment for gains realized in net
    income
                        
                        
                        86
                        
                        
                        
                        (34
                        )
                        
                        
                        52Unrealized
      gain on investment securities
                        
                        
                        2,192
                        
                        
                        
                        (930
                        )
                        
                        
                        1,262Change
      in minimum pension liability
                        
                        
                        71
                        
                        
                        
                        —
                        
                        
                        
                        71Other
      comprehensive income, net
                        
                        $
                        2,263
                        
                        
                        $
                        (930
                        )
                        
                        $
                        1,333
 
 Year
      Ended December 31, 2006Before
      tax
                          amount
                        
                        
                        Tax
                          (expense)
                          benefit
                        
                        
                        Net
      of tax
                          AmountUnrealized
      gains (losses) on investment securities:Unrealized
      holding gains (losses) arising during period
                        
                        $
                        8,673
                        
                        
                        $
                        (3,511
                        )
                        
                        $
                        5,162Less
      reclassification adjustment for gains realized in net
    income
                        
                        
                        2,336
                        
                        
                        
                        (934
                        )
                        
                        
                        1,402Unrealized
      gain on investment securities
                        
                        
                        6,337
                        
                        
                        
                        (2,577
                        )
                        
                        
                        3,760Change
      in minimum pension liability
                        
                        
                        (117
                        )
                        
                        
                        —
                        
                        
                        
                        (117
                        )Other
      comprehensive income, net
                        
                        $
                        6,220
                        
                        
                        $
                        (2,577
                        )
                        
                        $
                        3,643
  Note
C - INVESTMENT SECURITIES
 
 The following is a summary of held to
maturity investment securities:
 
 December
      31, 2008Amortized
                          Cost
                        
                        
                        Gross
                          unrealized
                          gains
                        
                        
                        Gross
                          unrealized
                          losses
                        
                        
                        Fair
                          value(In
      thousands)U.S.
      Government Agencies
                        
                        $
                        360
                        
                        
                        $
                        3
                        
                        
                        $
                        (1
                        )
                        
                        $
                        362
 
 December
      31, 2007Amortized
                          Cost
                        
                        
                        Gross
                          unrealized
                          gains
                        
                        
                        Gross
                          unrealized
                          losses
                        
                        
                        Fair
                          value(In
      thousands)U.S.
      Government Agencies
                        
                        $
                        395
                        
                        
                        $
                        11
                        
                        
                        $
                        (1
                        )
                        
                        $
                        405
  73
  BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements (continued)
 
 Note
C - (continued)
 
 The following is a summary of
available-for-sale investment securities:
 
 December
      31, 2008Amortized
                            Cost
                          
                          
                          Gross
                            unrealized
                            gains
                          
                          
                          Gross
                            unrealized
                            losses
                          
                          
                          Fair
                            value(In
      thousands)U.S.
      Government Agencies
                          
                          $
                          91,467
                          
                          
                          $
                          72
                          
                          
                          $
                          (380
                          )
                          
                          $
                          91,159Mortgage-backed
      securities
                          
                          
                          83,845
                          
                          
                          
                          1,037
                          
                          
                          
                          (1,061
                          )
                          
                          
                          83,821Corporate
      notes
                          
                          
                          64,150
                          
                          
                          
                          112
                          
                          
                          
                          (21,938
                          )
                          
                          
                          42,324Municipal
      securities
                          
                          
                          1,973
                          
                          
                          
                          125
                          
                          
                          
                          (495
                          )
                          
                          
                          1,603Auction
      rate securities
                          
                          
                          101,110
                          
                          
                          
                          —
                          
                          
                          
                          (38,030
                          )
                          
                          
                          63,080Marketable
      equity securities and other
                          
                          
                          17,960
                          
                          
                          
                          80
                          
                          
                          
                          (1,264
                          )
                          
                          
                          16,776Totals
                          
                          $
                          360,505
                          
                          
                          $
                          1,426
                          
                          
                          $
                          (63,168
                          )
                          
                          $
                          298,763
 
 December
      31, 2007Amortized
                            Cost
                          
                          
                          Gross
                            unrealized
                            gains
                          
                          
                          Gross
                            unrealized
                            losses
                          
                          
                          Fair
                            value(In
      thousands)U.S.
      Government Agencies
                          
                          $
                          272,789
                          
                          
                          $
                          151
                          
                          
                          $
                          (622
                          )
                          
                          
                          272,318Mortgage-backed
      securities
                          
                          
                          53,886
                          
                          
                          
                          100
                          
                          
                          
                          (929
                          )
                          
                          
                          53,057Corporate
      notes
                          
                          
                          71,147
                          
                          
                          
                          79
                          
                          
                          
                          (3,625
                          )
                          
                          
                          67,601Municipal
      securities
                          
                          
                          1,973
                          
                          
                          
                          1,031
                          
                          
                          
                          —
                          
                          
                          
                          3,004Auction
      rate securities
                          
                          
                          184,597
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          184,597Marketable
      equity securities and other
                          
                          
                          18,698
                          
                          
                          
                          106
                          
                          
                          
                          (420
                          )
                          
                          
                          18,384Totals
                          
                          $
                          603,090
                          
                          
                          $
                          1,467
                          
                          
                          $
                          (5,596
                          )
                          
                          $
                          598,961
 
 The Company has investments in certain
debt and equity securities that have unrealized losses or may be otherwise
impaired, but an other-than-temporary impairment has not been recognized in the
financial statements as management believes the decline is due to the credit
markets coupled with the interest rate environment. The following table
indicates the length of time individual securities have been in a continuous
unrealized loss position at December 31, 2008 (in thousands):
 
 Less
      than 12 months
                      
                      
                      12
      months or longer
                      
                      
                      TotalFair
      Value
                      
                      
                      Unrealized
                        Losses
                      
                      
                      Fair
      Value
                      
                      
                      Unrealized
                        Losses
                      
                      
                      Fair
      Value
                      
                      
                      Unrealized
                        LossesDescription
      of SecuritiesU.S.
      Government Agencies
                      
                      $
                      71,241
                      
                      
                      $
                      378
                      
                      
                      $
                      5,072
                      
                      
                      $
                      3
                      
                      
                      $
                      76,313
                      
                      
                      $
                      381Mortgage-backed
      securities
                      
                      
                      6,135
                      
                      
                      
                      58
                      
                      
                      
                      21,769
                      
                      
                      
                      1,003
                      
                      
                      
                      27,904
                      
                      
                      
                      1,061Corporate
      notes
                      
                      
                      14,480
                      
                      
                      
                      3,407
                      
                      
                      
                      8,230
                      
                      
                      
                      18,531
                      
                      
                      
                      22,710
                      
                      
                      
                      21,938Municipal
      securities
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      1,478
                      
                      
                      
                      495
                      
                      
                      
                      1,478
                      
                      
                      
                      495Auction
      rate securities
                      
                      
                      38,098
                      
                      
                      
                      38,030
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      38,098
                      
                      
                      
                      38,030Subtotal,
      debt securities
                      
                      
                      129,954
                      
                      
                      
                      41,873
                      
                      
                      
                      36,549
                      
                      
                      
                      20,032
                      
                      
                      
                      166,503
                      
                      
                      
                      61,905Marketable
      equity securities and other
                      
                      
                      2,664
                      
                      
                      
                      352
                      
                      
                      
                      1,144
                      
                      
                      
                      912
                      
                      
                      
                      3,808
                      
                      
                      
                      1,264Total
      temporarily impaired securities
                      
                      $
                      132,618
                      
                      
                      $
                      42,225
                      
                      
                      $
                      37,693
                      
                      
                      $
                      20,944
                      
                      
                      $
                      170,311
                      
                      
                      $
                      63,169
  74
  BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements (continued)
 
 Note
C - (continued)
 
 The Company had a total of 65 debt
securities with a fair market value of $166.50 million which were temporarily
impaired at December 31, 2008.  The total unrealized loss on these
securities was $61.90 million, of which $23.87 million is attributable to
changes in interest rates which have decreased the market value of these
securities. The remaining unrealized loss of $38.03 million is on 11 auction
rate securities which have declined in value due to the auction failures
beginning in February 2008. We have the ability to hold these securities to
maturity if necessary, therefore, the unrealized losses associated with these
securities are not considered to be other than temporary.
 
 The Company also had 12 equity
securities with an aggregated fair market value of $3.81 million which were
temporarily impaired at December 31, 2008.  The total unrealized loss
on these securities was $1.26 million.  Based upon our review of the
available information, such unrealized losses are not considered to be other
than temporary.
 
 The following table indicates the
length of time individual securities have been in a continuous unrealized loss
position at December 31, 2007 (in thousands):
 
 Less
      than 12 months
                    
                    
                    12
      months or longer
                    
                    
                    TotalFair
      Value
                    
                    
                    Unrealized
                      Losses
                    
                    
                    Fair
      Value
                    
                    
                    Unrealized
                      Losses
                    
                    
                    Fair
      Value
                    
                    
                    Unrealized
                      LossesDescription
      of SecuritiesU.S.
      Government Agencies
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    204,397
                    
                    
                    $
                    623
                    
                    
                    $
                    204,397
                    
                    
                    $
                    623Mortgage-backed
      securities
                    
                    
                    3,058
                    
                    
                    
                    7
                    
                    
                    
                    41,427
                    
                    
                    
                    922
                    
                    
                    
                    44,485
                    
                    
                    
                    929Corporate
      notes
                    
                    
                    27,468
                    
                    
                    
                    2,428
                    
                    
                    
                    17,885
                    
                    
                    
                    1,197
                    
                    
                    
                    45,353
                    
                    
                    
                    3,625Subtotal,
      debt securities
                    
                    
                    30,526
                    
                    
                    
                    2,435
                    
                    
                    
                    263,709
                    
                    
                    
                    2,742
                    
                    
                    
                    294,235
                    
                    
                    
                    5,177Marketable
      equity securities and other
                    
                    
                    1,406
                    
                    
                    
                    324
                    
                    
                    
                    213
                    
                    
                    
                    96
                    
                    
                    
                    1,619
                    
                    
                    
                    420Total
      temporarily impaired securities
                    
                    $
                    31,932
                    
                    
                    $
                    2,759
                    
                    
                    $
                    263,922
                    
                    
                    $
                    2,838
                    
                    
                    $
                    295,854
                    
                    
                    $
                    5,597
 
 The Company had a total of 90 debt
securities with a fair market value of $294.24 million which were temporarily
impaired at December 31, 2007.  The total unrealized loss on these
securities was $5.18 million, of which $1.55 million is attributable to changes
in interest rates which have decreased the market value of these securities. The
remaining unrealized loss of $3.63 million is on 4 corporate notes which are
currently reorganizing in U.S. bankruptcy court. We have the ability to hold
these securities to maturity, all but 4 of which are US Government Agency
securities and mortgage-backed securities, therefore, the unrealized losses
associated with these securities are not considered to be other than
temporary.
 
 The Company also had 8 equity
securities with an aggregated fair market value of $1.62 million which were
temporarily impaired at December 31, 2007.  The total unrealized loss
on these securities was $420,000.  Based upon our review of the
available information, such unrealized losses are not considered to be other
than temporary.
  75
  BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements (continued)
 
 Note
C - (continued)
 
 The amortized cost and fair value of
investment securities available for sale and held to maturity, by contractual
maturity, at December 31, 2008 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.
  December
      31, 2008Available
      for Sale
                          
                          
                          Held
      to MaturityAmortized
                            Cost
                          
                          
                          Fair
                            Value
                          
                          
                          Amortized
      Cost
                          
                          
                          Fair
                            Value(In
      thousands)Due
      in one year or less
                          
                          $
                          21,701
                          
                          
                          $
                          21,565
                          
                          
                          $
                          —
                          
                          
                          $
                          —Due
      after one through five years
                          
                          
                          22,134
                          
                          
                          
                          19,056
                          
                          
                          
                          —
                          
                          
                          
                          —Due
      after five through ten years
                          
                          
                          65,602
                          
                          
                          
                          60,584
                          
                          
                          
                          —
                          
                          
                          
                          —Due
      after ten years
                          
                          
                          131,998
                          
                          
                          
                          117,702
                          
                          
                          
                          360
                          
                          
                          
                          362Auction
      rate securities
                          
                          
                          101,110
                          
                          
                          
                          63,080
                          
                          
                          
                          —
                          
                          
                          
                          —Marketable
      equity securities and other
                          
                          
                          17,960
                          
                          
                          
                          16,776
                          
                          
                          
                          —
                          
                          
                          
                          —Totals
                          
                          $
                          360,505
                          
                          
                          $
                          298,763
                          
                          
                          $
                          360
                          
                          
                          $
                          362
 
 Gross gains realized on the sales of
investment securities for the years ended December 31, 2008, 2007 and 2006 were
approximately $313,000, $125,000, and $2,342,000 respectively.  Gross
losses were approximately $998,000, $39,000, and $5,000 for the years ended
December 31, 2008, 2007 and 2006, respectively.
 
 As of December 31, 2008 and 2007,
securities sold under agreements to repurchase with a book value of
approximately $59.50 million and $76.84 million, respectively, were
outstanding.  The book value of the securities pledged for these
repurchase agreements was $69.60 million and $78.95 million, respectively. As of
December 31, 2008 and 2007, the Company did not have any investment securities
of any one issuer where the carrying value exceeded 10% of shareholders'
equity.
  As previously disclosed by the Company,
as of June 30, 2008, the Bank had held auction rate securities with a cost basis
of $86.3 million, including securities which were collateralized by Fannie Mae
or Freddie Mac preferred shares. The Bank also held preferred shares of Fannie
Mae and Freddie Mac with a cost basis of $8.7 million, and a $6.9 million
corporate note from Lehman Brothers which filed for bankruptcy protection on
September 15, 2008.  Due to the U.S. Treasury actions and the
bankruptcy of Lehman Brothers, we determined that these securities were other
than temporarily impaired and recognized a pre-tax charge totaling $94.35
million, consisting of $80.15 million related to the auction rate securities;
$8.10 million related to the Fannie Mae and Freddie Mac preferred shares and
$6.10 million charge for the Lehman Brothers corporate note.
  76
  BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements (continued)
 
 Note
C - (continued)
 
 At September 30, 2008, the other than
temporary impairment ("OTTI") charge related to the Lehman Brothers corporate
note was considered an ordinary loss under the current federal tax
code.  Therefore, we recognized a deferred tax asset, and related tax
benefit, related to this ordinary loss of $6.10 million.  The other
than temporary charge related to the Fannie Mae and Freddie Mac preferred
shares, both direct investments and through the auction rate securities, were
considered capital losses under the federal tax code.  As such, we
recognized a tax benefit of $760,000 relating to $1.735 million of previously
recognized capital gains.  A valuation allowance was recorded on the
remaining deferred tax asset.
 
 In October 2008, the U.S. Congress
passed the Emergency Economic Stabilization Act (the "EESA") which changed the
characteristics of direct and indirect ownership of the Fannie Mae and Freddie
Mac capital losses to ordinary losses.  Due to this change in the tax
law, we carried
back as much loss as could be utilized and recognized a deferred tax asset for
the remainder.  In addition to this change in the nature of the
losses, the EESA also provided for financial institutions to apply for funds
under the Troubled Asset Repurchase Program which will provide capital from the
US Treasury in the form of Preferred Shares.  We have applied to
participate in this program and initial indications are that we will be
approved. Upon such approval, management will review the terms of the
transaction and determine if it is in the best interest of the Company to accept
the funds.
 
 As a result of this OTTI charge, the
Bank no longer met the definition of a "well capitalized"
institution.  In order to restore our "well capitalized" position, in
October 2008, the Company's Chairman of the Board and majority stockholder, and
two non-affiliated investors, purchased an aggregate of 60,000 shares of our 8%
Non-Cumulative Mandatorily Convertible Perpetual Series A Preferred Stock (the
"Preferred Shares") at $1,000 per share, or $60 million in the
aggregate.  Each Preferred Share is convertible into 123.153 shares of
our Common Stock and redeemable at the option of the Company between April 15,
2009 and October 15, 2010 at a redemption price of $1,100.  The
transaction was consummated on October 31, 2008.  After the sale of
the Preferred Shares, we met the definition of "well capitalized" as discussed
in Note O.
  77
  BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements (continued)
 
 Note
D - LOANS
 
 Major classifications of loans are as
follows:
 
 December
      31,
                          2008
                        
                        
                        December
      31,
                          2007(In
      thousands)Commercial
      and professional loans
                        
                        $
                        68,418
                        
                        
                        $
                        76,132Secured
      by real estate1 -
      4 family
                        
                        
                        140,150
                        
                        
                        
                        142,140Multi
      family
                        
                        
                        4,031
                        
                        
                        
                        3,506Non-residential
                        
                        
                        254,831
                        
                        
                        
                        212,850Consumer
                        
                        
                        460
                        
                        
                        
                        1,691467,890
                        
                        
                        
                        436,319Deferred
      loan fees
                        
                        
                        (1,137
                        )
                        
                        
                        (1,534
                        )Allowance
      for loan losses
                        
                        
                        (9,204
                        )
                        
                        
                        (4,183
                        )$
                        457,549
                        
                        
                        $
                        430,602
 
 Changes in the allowance for loan
losses are as follows:
 
 For
      The Years Ended December 31,2008
                        
                        
                        2007
                        
                        
                        2006(In
      thousands)Balance
      at beginning  of year
                        
                        $
                        4,183
                        
                        
                        $
                        3,771
                        
                        
                        $
                        3,266Provision
      charged to operations
                        
                        
                        4,904
                        
                        
                        
                        355
                        
                        
                        
                        410Loans
      charged off
                        
                        
                        (1
                        )
                        
                        
                        —
                        
                        
                        
                        (42
                        )Recoveries
                        
                        
                        118
                        
                        
                        
                        57
                        
                        
                        
                        137Balance
      at end of year
                        
                        $
                        9,204
                        
                        
                        $
                        4,183
                        
                        
                        $
                        3,771
 
 The Bank had $130,000, $153,000 and
$256,000 of non accrual loans as of December 31, 2008, 2007 and 2006,
respectively, and $99,000, $314,000 and $0
 of loans
delinquent more than ninety days and still accruing interest at December 31,
2008, 2007 and 2006, respectively. The Bank classified the non-accrual loans of
$130,000 and $153,000 as impaired loans at December 31, 2008 and 2007,
respectively. However, no specific allocation from the allowance for loan losses
was made because the collateral underlying each loan was deemed to be sufficient
to cover any loss in the event of a default.  Therefore, the allowance
for loan loss is includable in the calculation of regulatory capital up to a
maximum of 125% of risk-weighted assets or approximately $8.0
million.
 
 In accordance with banking regulations,
the Bank, from time to time, enters into lending transactions in the ordinary
course of business with directors, executive officers, principal stockholders
and affiliates of such persons on the same terms as those prevailing for
comparable transactions with other borrowers. The following table summarizes the
activity in loans to related parties.
 
 Balance
      at 12/31/07
                          
                          $
                          13,118,546New
      Loans
                          
                          
                          10,977,574Repayments
                          
                          
                          8,998,610Balance
      at 12/31/08
                          
                          $
                          15,097,510
  78
  BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements (continued)
 
 Note
E - PREMISES AND EQUIPMENT
 
 Major classifications of premises and
equipment are summarized as follows:
 
 Estimated
                          useful
      lives
                        
                        December
      31,
                          2008
                        
                        
                        December
      31,
                          2007(In
      thousands)Land
                        
                        Indefinite
                        
                        $
                        3,572
                        
                        
                        $
                        3,572Buildings
                        
                        39
      years
                        
                        
                        5,203
                        
                        
                        
                        5,190Furniture
      and equipment
                        
                        3 to 10
      years
                        
                        
                        3,315
                        
                        
                        
                        3,262Leasehold
      improvements
                        
                        2
      to 10 years
                        
                        
                        2,226
                        
                        
                        
                        2,20714,316
                        
                        
                        
                        14,231Accumulated
      depreciation and amortization
                        
                        
                        
                        
                        (5,472
                        )
                        
                        
                        (4,869
                        )Total
                        
                        
                        
                        $
                        8,844
                        
                        
                        $
                        9,362
 
 Depreciation and amortization expense
was approximately $604,000, $739,000 and $727,000 for the years ended December
31, 2008, 2007 and 2006, respectively.
 
 Note
F - DEPOSITS
 
 The aggregate amount of jumbo
certificates of deposits greater than $100,000 were approximately $213.58
million and $247.53 million as of December 31, 2008 and 2007,
respectively.
 
 The
scheduled maturities of all certificates of deposit are as follows:
 
 December 31, 2008(In
      thousands)2009
                      
                      $
                      461,8272010
                      
                      
                      7822011
                      
                      
                      1262012
                      
                      
                      —2013
                      
                      
                      2,196$
                      464,931
  It has
been the Bank’s experience that the majority of the certificates of deposit will
renew with the Bank.
  Note
G - BORROWINGS
 
 Short-Term
Borrowings  Securities sold under agreements to repurchase
generally mature within 30 days from the date of the
transactions.  Short-term borrowings consist of various borrowings
which generally have maturities of less than one year.  The details of
these categories are presented below:
 
 Year
      Ended December 31,2008
                        
                        
                        2007
                        
                        
                        2006(Dollars
      in Thousands)Securities
      sold under repurchase agreements and federal funds
    purchasedBalance
      at year-end
                        
                        $
                        59,504
                        
                        
                        $
                        76,842
                        
                        
                        $
                        62,652Average
      during the year
                        
                        $
                        61,162
                        
                        
                        $
                        40,049
                        
                        
                        $
                        56,236Maximum
      month-end balance
                        
                        $
                        72,324
                        
                        
                        $
                        76,842
                        
                        
                        $
                        79,154Weighted
      average rate during the year
                        
                        
                        3.83
                        %
                        
                        
                        4.93
                        %
                        
                        
                        3.75
                        %Rate
      at December 31
                        
                        
                        3.76
                        %
                        
                        
                        4.65
                        %
                        
                        
                        4.94
                        %
  79
  BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements (continued)
 
 Note
G - (continued)
 
 Long-Term
Borrowings  At December 31, 2008, advances from the Federal
Home Loan Bank (the "FHLB") totaling $45.27 million will mature within one to
five years and are reported as long-term borrowings.  The advances are
collateralized by FHLB stock and certain first mortgage loans totaling $107.45
million.  The advances had a weighted average rate of
4.52%.  Unused lines of credit at the FHLB were $62.2 million at
December 31, 2008.
 
 Outstanding long-term borrowings mature
as follows (in thousands):
 
 Year
                        
                        Amount2009
                        
                        $
                        10,0882010
                        
                        
                        16,0002011
                        
                        
                        —2012
                        
                        
                        3,1992013
                        
                        
                        15,985Total
                        
                        $
                        45,272
  The
borrowings with the Federal Home Loan Bank Board are generally
renewed.
 Note
H - EARNINGS (LOSS) PER SHARE
 
 Basic earnings (loss) per share is
calculated by dividing income available to common stockholders by the weighted
average common shares outstanding, excluding stock options from the calculation.
In calculating diluted earnings per share, the dilutive effect of stock options
is calculated using the average market price for the Company's common stock
during the period.  There is no effect for dilutive shares for the
year ended December 31, 2008 due to the net loss recognized. The following
tables present the Company's calculation of earnings (loss) per share in
accordance with SFAS No. 128:
  Year
      Ended December 31, 2008
                                                  (In
      thousands, except per share data)Income
                                                  (loss)
                                                  (numerator)
                                                
                                                
                                                Shares
                                                  (denominator)
                                                
                                                
                                                Per
      Share
                                                  AmountBasic
      earnings (loss) per shareNet
      loss
                                                
                                                $
                                                (79,905
                                                )Dividends
      payable to preferred shareholders
                                                
                                                
                                                (837
                                                )Net
      loss available to common shareholders
                                                
                                                $
                                                (80,742
                                                )
                                                
                                                $
                                                7,054
                                                
                                                
                                                $
                                                (11.45
                                                )Diluted
      earnings per share
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
 
 Year
      Ended December 31, 2007
                          (In
      thousands, except per share data)Income
                          (numerator)
                        
                        
                        Shares
                          (denominator)
                        
                        
                        Per
      share
                          amountBasic
      earnings per shareNet
      income available to common stockholders
                        
                        $
                        5,354
                        
                        
                        
                        6,987
                        
                        
                        $
                        .77Effect
      of dilutive securities Options
                        
                        
                        —
                        
                        
                        
                        18
                        
                        
                        
                        (.01
                        )Diluted
      earnings per shareNet
      income available to common stockholders plus assumed
      conversions
                        
                        $
                        5,354
                        
                        
                        
                        7,005
                        
                        
                        $
                        .76
  80
  BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements (continued)
 
 Note
H - (continued)
 
 Year
      Ended December 31, 2006
                        (In
      thousands, except per share data)Income
                        (numerator)
                      
                      
                      Shares
                        (denominator)
                      
                      
                      Per
      share
                        amountBasic
      earnings per shareNet
      income available to common stockholders
                      
                      $
                      4,880
                      
                      
                      
                      6,891
                      
                      
                      $
                      .71Effect
      of dilutive securities Options
                      
                      
                      —
                      
                      
                      
                      85
                      
                      
                      
                      (.01
                      )Diluted
      earnings per shareNet
      income available to common stockholders plus assumed
      conversions
                      
                      $
                      4,880
                      
                      
                      
                      6,976
                      
                      
                      $
                      .70
 
 Note
I - INCOME TAXES
 
 The components of income tax (benefit)
expense are as follows:
 
 Years
      Ended December 31,2008
                      
                      
                      2007
                      
                      
                      2006Current
                      
                      $
                      (1,476,000
                      )
                      
                      $
                      2,723,000
                      
                      
                      $
                      4,282,000Deferred
      Taxes (Benefit)
                      
                      
                      (4,314,000
                      )
                      
                      
                      (349,000
                      )
                      
                      
                      (426,000
                      )$
                      (5,790,000
                      )
                      
                      $
                      2,374,000
                      
                      
                      $
                      3,856,000
 
 A reconciliation of the (benefit)
provision for income taxes for the years ended December 31, 2008, 2007 and 2006
and the amount computed by applying the statutory Federal income tax rate to
loss/income from continuing operations follows:
 
 Years
      Ended December 31,2008
                      
                      
                      2007
                      
                      
                      2006Effective
      Tax ReconciliationTax
      at statutory rate
                      
                      $
                      (29,136,000
                      )
                      
                      $
                      2,627,000
                      
                      
                      $
                      2,970,000State
      and City, net of federal income tax benefit
                      
                      
                      (750,000
                      )
                      
                      
                      1,195,000
                      
                      
                      
                      1,123,109Permanent
      items
                      
                      
                      (2,244,000
                      )
                      
                      
                      (1,430,000
                      )
                      
                      
                      (337,670
                      )Increase
      in Federal valuation allowance
                      
                      
                      26,340,000
                      
                      
                      
                      —
                      
                      
                      
                      —Other
                      
                      
                      —
                      
                      
                      
                      (18,000
                      )
                      
                      
                      100,561Actual
      (benefit) provision for income taxes
                      
                      $
                      (5,790,000
                      )
                      
                      $
                      2,374,000
                      
                      
                      $
                      3,856,000
  81
  BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements (continued)
 
 Note
I - (continued)
 
 The tax effect of the principal
temporary differences at December 31, 2008 and 2007 are as follows:
 
 December
      31,2008
                              
                              
                              2007Net
      deferred tax assetsLoan
      loss provision
                              
                              $
                              4,166,000
                              
                              
                              $
                              1,950,000Depreciation
                              
                              
                              299,000
                              
                              
                              
                              230,000Other
                              
                              
                              851,000
                              
                              
                              
                              315,000Other
      than temporary impairment
                              
                              
                              35,396,000
                              
                              
                              
                              —Valuation
      reserve
                              
                              
                              (33,903,000
                              )
                              
                              
                              —Unrealized
      loss on investment securities
                              
                              
                              24,673,000
                              
                              
                              
                              2,015,000Net
      deferred tax asset included in other assets
                              
                              $
                              31,482,000
                              
                              
                              $
                              4,510,000
 
 The Company recorded a valuation
reserve of approximately $33.9 million relating primarily to Other Than
Temporary Impairment, net of sales, of approximately $35.4
million.  Of the remaining deferred tax asset, management has
determined that it is more likely than not that it will realize the net deferred
tax asset based upon the nature and timing of the items listed above. In order
to fully realize the net deferred tax asset, the Company will need to generate
future taxable income.  Management has projected that the Company will
generate sufficient taxable income to utilize the net deferred tax asset;
however, there can be no assurance that such levels of taxable income will be
generated.
 
 Note
J - STOCK PLANS
 
 In March 1999, the stockholders of the
Company approved the 1999 Stock Incentive Plan (the "1999 Stock Incentive
Plan").  The 1999 Stock Incentive Plan permits the granting of awards
in the form of nonqualified stock options, incentive stock options, restricted
stock, deferred stock, and other stock-based incentives.  Up to
600,000 shares of common stock of the Company may be issued pursuant to the 1999
Stock Incentive Plan. Officers, directors and other key employees of the Company
or any subsidiary are eligible to receive awards under the 1999 Stock Incentive
Plan. Options outstanding under the 1999 Stock Incentive Plan were 2,076 as of
December 31, 2008 and 2007. The Company did not grant options in 2008, 2007 and
2006.
  82
  BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements (continued)
 
 Note
J - (continued)
 
 A summary
of activity with respect to the Stock Option Plan follows:
 
 December
      31,2008
                        
                        
                        2007
                        
                        
                        2006Shares
                        
                        
                        Weighted
                          Average
                          Exercise
                          Price
                        
                        
                        Shares
                        
                        
                        Weighted
                          Average
                          Exercise
                          Price
                        
                        
                        Shares
                        
                        
                        Weighted
                          Average
                          Exercise
                          PriceOutstanding
      at beginning of year
                        
                        
                        2,076
                        
                        
                        $
                        8.29
                        
                        
                        
                        185,878
                        
                        
                        $
                        9.76
                        
                        
                        
                        223,203
                        
                        
                        $
                        9.70Granted
                        
                        
                        —
                        
                        
                        $
                        —
                        
                        
                        
                        —
                        
                        
                        $
                        —
                        
                        
                        
                        —
                        
                        
                        $
                        —Cancelled
                        
                        
                        —
                        
                        
                        $
                        —
                        
                        
                        
                        (7,500
                        )
                        
                        $
                        10.00
                        
                        
                        
                        —
                        
                        
                        $
                        —Exercised
                        
                        
                        —
                        
                        
                        $
                        —
                        
                        
                        
                        (176,302
                        )
                        
                        $
                        9.77
                        
                        
                        
                        (37,325
                        )
                        
                        $
                        9.34Outstanding
      atend
      of year
                        
                        
                        2,076
                        
                        
                        $
                        8.29
                        
                        
                        
                        2,076
                        
                        
                        $
                        8.29
                        
                        
                        
                        185,878
                        
                        
                        $
                        9.76Exercisable
      atend
      of year
                        
                        
                        2,076
                        
                        
                        $
                        8.29
                        
                        
                        
                        2,076
                        
                        
                        $
                        8.29
                        
                        
                        
                        185,878
                        
                        
                        $
                        9.76Weighted
      average fair value of options granted during the year
                        
                        
                        
                        
                        
                        $
                        —
                        
                        
                        
                        
                        
                        
                        $
                        —
                        
                        
                        
                        
                        
                        
                        $
                        —
 
 The following table summarizes
information about options outstanding and exercisable at December 31,
2008:
 
 Options
      Outstanding and ExercisableRange
      of
                              exercise prices
                            
                            Number
                              outstanding
                              at
                              December
      31,
                              2008
                            
                            
                            Weighted
                              average
                              remaining
                              contractual
                              life (years)
                            
                            
                            Weighted
                              average
                              exercise
                              price$
      5.98 - $8.64
                            
                            
                            2,076
                            
                            
                            
                            1.45
                            
                            
                            $
                            8.29
  83
  BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements (continued)
 
 Note
K - EMPLOYEE BENEFIT PLANS
 
 1.
                Retirement
      Income Plan
 
 The Company's Retirement Income Plan
(the "Plan") covers substantially all full-time employees. Benefits are based
upon a combination of employee compensation and years of service.  The
Company pays the entire cost of the Plan and funds such costs as they
accrue.  The Company's funding policy is to make annual contributions
within minimum and maximum levels required by applicable
regulations.  The Company's customary contributions are designed to
fund normal cost on a current basis and to fund over 30 years the estimated
prior service cost of benefit improvements (15 years of annual gains and
losses). The projected unit cost method was used to determine the annual
cost.
 
 The following table summarizes the
major categories of Plan assets as of the dates indicated:
 
 December
      31,2008
                      
                      
                      2007Fair
      Value
                      
                      
                      %
      of Total
                      
                      
                      Fair
      Value
                      
                      
                      %
      of Total(In
      thousands, except percentagesMutual
      FundsInternational
      Equity Fund
                      
                      $
                      72
                      
                      
                      
                      2.97
                      %
                      
                      $
                      266
                      
                      
                      
                      10.86
                      %Large
      Cap Equity Growth Fund
                      
                      
                      308
                      
                      
                      
                      12.70
                      
                      
                      
                      608
                      
                      
                      
                      24.82International
      Investment Grade Bond Fund
                      
                      
                      874
                      
                      
                      
                      36.03
                      
                      
                      
                      844
                      
                      
                      
                      34.45Small
      Cap Equity Growth Fund
                      
                      
                      401
                      
                      
                      
                      16.53
                      
                      
                      
                      58
                      
                      
                      
                      2.36Large
      Cap Equity Value Fund
                      
                      
                      703
                      
                      
                      
                      28.97
                      
                      
                      
                      528
                      
                      
                      
                      21.55Corporate
      Common Stocks(1)
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      138
                      
                      
                      
                      5.63Cash
      and cash equivalents
                      
                      
                      68
                      
                      
                      
                      2.80
                      
                      
                      
                      8
                      
                      
                      
                      0.33Total
      Plan Assets
                      
                      $
                      2,426
                      
                      
                      
                      100.00
                      %
                      
                      $
                      2,450
                      
                      
                      
                      100.00
                      %
 
 (1)Includes
4,500 shares of the Company's Common Stock with a market value of $72,045 at
December 31, 2007.
 
 The assets of the Plan are primarily
invested in well diversified common stock and fixed income funds designed to
minimize risk while maximizing expected portfolio returns.  To achieve
the long term rate of return, Plan assets are invested in a mixture of
instruments, including but not limited to, corporate common stock, investment
grade bond funds, small and large cap equity funds and international equity
funds.  The allocation of assets is determined by the Investment
Manager, and typically include 50% to 70% equities, with the remainder invested
in fixed income and a minimal amount of cash. Presently, this diversified
portfolio is expected to return approximately 8.50% in the long
run.
 
 The expected rate of return on Plan
assets was determined based upon a review of historical returns, both for our
Plan and for medium to large-sized defined benefit pension funds with similar
asset allocations.  This review generated separate expected future
long-term returns for each asset class listed in the above
table.  These expected future returns were then blended based upon our
Plan's target asset allocation.
  84
  BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements (continued)
 
 Note
K - (continued)
 
 Assumptions
 
 Weighted-average assumptions used to
determine benefit obligations were as follows at the dates
indicated:
 
 December
      31,2008
                      
                      
                      2007Discount
      rate
                      
                      
                      6.10
                      %
                      
                      
                      6.30
                      %Rate
      of compensation increase
                      
                      
                      5.00
                      %
                      
                      
                      5.00
                      %
 
 Weighted-average assumptions used to
determine net periodic benefit cost for the years ended December 31, 2008 and
2007 were as follows:
 
 December
      31,2008
                      
                      
                      2007Discount
      rate
                      
                      
                      6.30
                      %
                      
                      
                      5.75
                      %Rate
      of compensation increase
                      
                      
                      5.00
                      %
                      
                      
                      5.00
                      %Expected
      return on plan assets
                      
                      
                      8.50
                      %
                      
                      
                      8.50
                      %Measurement
      date
                      
                      12/31/2008
                      
                      
                      12/31/2007
 
 The following table sets forth the
Plan's benefit obligations, fair value of the Plan assets and the funded status
of the Plan in accordance with FAS 158 for the years ended December 31, 2008 and
2007:
 
 December
      31,2008
                      
                      
                      2007Change
      in benefit obligationBenefit
      obligation at beginning of year
                      
                      $
                      3,560,406
                      
                      
                      $
                      3,103,843Service
      cost
                      
                      
                      384,718
                      
                      
                      
                      407,623Interest
      cost
                      
                      
                      231,767
                      
                      
                      
                      177,221Actuarial
      (gain) loss
                      
                      
                      291,131
                      
                      
                      
                      63,668Benefits
      paid
                      
                      
                      (133,489
                      )
                      
                      
                      (191,949
                      )Benefits
      obligation at end of year
                      
                      $
                      4,334,533
                      
                      
                      $
                      3,560,406Change
      in plan assetsFair
      value of plan assets at beginning of year
                      
                      $
                      2,450,590
                      
                      
                      $
                      2,075,998Actual
      return on plan assets
                      
                      
                      (759,513
                      )
                      
                      
                      177,141Employer
      contribution
                      
                      
                      868,500
                      
                      
                      
                      389,400Benefits
      paid
                      
                      
                      (133,489
                      )
                      
                      
                      (191,949
                      )Fair
      value of plan assets at end of year
                      
                      $
                      2,426,088
                      
                      
                      $
                      2,450,590Amounts
      recognized in the statement of financialposition
      consist of:Liabilities
                      
                      $
                      (1,908,445
                      )
                      
                      $
                      (1,109,816
                      )Prepaid
      benefit cost
                      
                      
                      N/A
                      
                      
                      
                      N/AAccrued
      benefit cost
                      
                      
                      N/A
                      
                      
                      
                      N/AIntangible
      asset
                      
                      
                      N/A
                      
                      
                      
                      N/AAccumulated
      other comprehensive charge
                      
                      
                      N/A
                      
                      
                      
                      N/ANet
      amount recognized at year end
                      
                      $
                      1,908,445
                      
                      
                      $
                      1,109,816Additional
      year-end information for pension plans with accumulated benefit
      obligations in excess of plan assetsProjected
      benefit obligation
                      
                      $
                      4,334,533
                      
                      
                      $
                      3,560,406Accumulated
      benefit obligation
                      
                      
                      4,334,533
                      
                      
                      
                      3,560,406Fair
      value of plan assets
                      
                      
                      2,426,088
                      
                      
                      
                      2,450,590
  85
  BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements (continued)
 
 Note
K - (continued)
 
 A summary
of the components of net periodic benefit cost and other amounts recognized in
other comprehensive income in accordance with FAS 158 for the years ended
December 31, 2008, 2007 and 2006 is as follows:
 
 December
      31,2008
                        
                        
                        2007
                        
                        
                        2006Service
      cost
                        
                        $
                        384,718
                        
                        
                        $
                        407,623
                        
                        
                        $
                        353,071Interest
      cost
                        
                        
                        231,767
                        
                        
                        
                        177,221
                        
                        
                        
                        149,594Expected
      return on assets
                        
                        
                        (245,909
                        )
                        
                        
                        (182,142
                        )
                        
                        
                        (151,131
                        )AmortizationPrior
      service cost
                        
                        
                        18,370
                        
                        
                        
                        18,370
                        
                        
                        
                        18,370(Gain)
      loss
                        
                        
                        61,810
                        
                        
                        
                        52,649
                        
                        
                        
                        60,286Net
      periodic pension cost
                        
                        $
                        450,756
                        
                        
                        $
                        473,721
                        
                        
                        $
                        430,190
 
 The following table sets forth other
changes in plan assets and benefit obligations recognized in other comprehensive
income in accordance with FAS 158 at December 31, 2008 and 2007:
 
 December
      31,2008
                      
                      
                      2007Net
      loss (gain)
                      
                      $
                      1,296,553
                      
                      
                      $
                      68,669Prior
      service cost
                      
                      
                      N/A
                      
                      
                      
                      N/AIncrease
      (decrease) in minimum liability included in other comprehensive income
      prior to FAS 158 application
                      
                      
                      N/A
                      
                      
                      
                      N/AInitial
      OCI charge upon FAS 158 application
                      
                      
                      N/A
                      
                      
                      
                      N/AAmortization
      of prior service cost
                      
                      
                      (18,370
                      )
                      
                      
                      (18,370
                      )Amortization
      of transition obligation
                      
                      
                      (61,810
                      )
                      
                      
                      (52,649
                      )Total
      recognized in other comprehensive income
                      
                      
                      1,216,373
                      
                      
                      
                      (2,350
                      )Total
      recognized in net periodic benefit cost and other comprehensive
      income
                      
                      $
                      1,667,129
                      
                      
                      $
                      471,371
 
 The
estimated net loss (gain), prior service cost and net transition obligation that
will be amortized from the accumulated other comprehensive income into net
periodic benefit cost over the next fiscal year are $146,000, $18,000 and zero,
respectively.
 
 Estimated
Future Benefit Payments
 
 We estimate future benefit payments to
be as follows:
 
 Years
                    
                    Benefit
                      Payments2009
                    
                    $
                    271,8672010
                    
                    
                    208,2742011
                    
                    
                    2,542,0302012
                    
                    
                    242,2132013
                    
                    
                    180,864Years
      2014-2018
                    
                    
                    1,669,887
  86
  BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements (continued)
 
 Note
K - (continued)
 
 Company
Contributions
 
 The Company contributed $868,500 and
$389,400 to its Retirement Plan in the fiscal years ended December 31, 2008 and
2007, respectively.  During the fiscal year ending December 31, 2009,
we expect to contribute approximately $1.43 million to the Plan.
 
 2.           Postretirement
Welfare Plan
 
 The Bank, as successor to Goshen Bank
provides certain health care and life insurance benefits for retired employees
and their spouses.  The postretirement health care and life insurance
benefits plan was terminated for persons retiring after December 31,
1998.  Eligible employees retired on or before that date will have
benefits paid through the plan under the agreed upon terms existing at the
employee's retirement date.
 
 December
      31,2008
                          
                          
                          2007(In
      thousands)Change
      in benefit obligationBenefit
      obligation at beginning of year
                          
                          $
                          678
                          
                          
                          $
                          698Service
      cost
                          
                          
                          —
                          
                          
                          
                          —Interest
      cost
                          
                          
                          42
                          
                          
                          
                          41Adjustment
      for measurement date change
                          
                          
                          11
                          
                          
                          
                          —Actual
      loss (gain)
                          
                          
                          33
                          
                          
                          
                          (6
                          )Benefits
      paid
                          
                          
                          (56
                          )
                          
                          
                          (55
                          )Benefits
      obligation at end of year
                          
                          
                          708
                          
                          
                          
                          678Change
      in plan assetsFair
      value of plan assets at beginning of year
                          
                          
                          —
                          
                          
                          
                          —Actual
      return on plan assets
                          
                          
                          —
                          
                          
                          
                          —Employer
      contribution
                          
                          
                          56
                          
                          
                          
                          55Benefits
      paid
                          
                          
                          (56
                          )
                          
                          
                          (55
                          )Fair
      value of plan assets at end of year
                          
                          
                          —
                          
                          
                          
                          —Funded
      status
                          
                          
                          (708
                          )
                          
                          
                          (678
                          )Unrecognized
      net actuarial loss
                          
                          
                          N/A
                          
                          
                          
                          N/AAccrued
      benefit cost (included in other liabilities)
                          
                          $
                          708
                          
                          
                          $
                          678
 
 Net
benefit cost included the following components:
 Year
      Ended December 31,2008
                        
                        
                        2007(In
      thousands)Service
      cost
                        
                        $
                        —
                        
                        
                        $
                        —Interest
      cost on projectedbenefit
      obligation
                        
                        
                        42
                        
                        
                        
                        41Actual
      return on plan assets
                        
                        
                        —
                        
                        
                        
                        —Net
      periodic benefit cost
                        
                        $
                        42
                        
                        
                        $
                        41
 
 The
assumed discount rate used in determining the actuarial present value of the
projected benefit obligation was 6.125% and 6.50% in 2008 and 2007,
respectively.
  87
  BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements (continued)
 
 Note
K - (continued)
 
 3.
                401(k)
      Plans
 
 The Bank has a 401(k) plan in which
employees can contribute up to 15% of their salary.  The Bank also
matches 50% of the employee contribution up to a maximum of 3% of the employee's
salary.  The matching expense was $132,000, $124,000 and $124,000 for
the years ended December 31, 2008, 2007 and 2006, respectively.
 
 4.
                Deferred
      Compensation Arrangements
 
 GSB Financial and Goshen Bank
established deferred compensation arrangements for certain directors and
executives.  These deferred compensation arrangements were terminated
as a result of the acquisition.  At December 31, 2008 and 2007, the
balance accumulated under these arrangements was approximately $194,000 and
$228,000, respectively, and will be paid out when the individual (i) ceases to
be a director and/or executive of the Company; (ii) attains the age of 75; or
(iii) specifies a particular date.
 
 In July 2006, the Bank established the
Deferred Compensation Plan of The Berkshire Bank (the "Plan") to provide for a
systematic method by which key employees of the Bank may defer payment of all or
part of the compensation that may be earned by them.  The Plan is
intended to be a nonqualified and unfunded plan maintained primarily for the
purpose of providing deferred compensation for a select group of management or
highly compensated employees pursuant to Sections 201(2), 301(a)(3) and
401(a)(1) of the Employee Retirement Income Security Act of 1974, as
amended.  At December 31, 2008 and 2007, the balances accumulated
under the Plan were approximately $271,000 and $95,000,
respectively.
 
 Note
L - COMMITMENTS AND CONTINGENCIES
 
 1.
                Leases
      and Other Commitments
 
 The Company leases certain of its
operating facilities under non-cancelable operating leases expiring in 2009
through 2016.  The leases require payment by the Company of the real
estate taxes and insurance on the leased properties.  Approximate
future minimum annual rental payments are as follows:
 
 Year
      Ending
                        December
      31,
                      
                      (In
      thousands)2009
                      
                      $
                      9772010
                      
                      
                      8172011
                      
                      
                      6472012
                      
                      
                      6362013
                      
                      
                      303Thereafter
                      
                      
                      404$
                      3,784
 
 Rental expense was approximately
$1,433,000, $1,329,000 and $1,286,000 for the fiscal years ended December 31,
2008, 2007 and 2006, respectively.  Included in rental expense was
approximately $405,000, $368,000 and $328,000 for the fiscal years ended
December 31, 2008, 2007 and 2006, respectively, which was paid to a company
affiliated with a director of the Company.
  88
  BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements (continued)
 
 Note
M - FAIR VALUE OF FINANCIAL INSTRUMENTS
 
 SFAS No. 107 requires disclosure of the
estimated fair value of an entity's 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 as defined in SFAS No. 107.  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 December 31, 2008 and 2007 are outlined below.
 
 For cash and cash equivalents, the
recorded book values of $102.39 million and $47.19 million at December 31, 2008
and 2007, respectively, approximate fair values.
 
 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.
 
 December
      31,2008
                    
                    
                    2007Carrying
                      amount
                    
                    
                    Estimated
                      fair
      value
                    
                    
                    Carrying
                      amount
                    
                    
                    Estimated
                      fair
      value(In
      thousands)Investment
      securities
                    
                    $
                    299,123
                    
                    
                    $
                    299,125
                    
                    
                    $
                    599,356
                    
                    
                    $
                    599,366Loans,
      net of unearned income
                    
                    
                    466,753
                    
                    
                    
                    465,664
                    
                    
                    
                    434,785
                    
                    
                    
                    441,569Time
      Deposits
                    
                    
                    464,931
                    
                    
                    
                    467,756
                    
                    
                    
                    477,502
                    
                    
                    
                    477,802Repurchase
      Agreements
                    
                    
                    59,504
                    
                    
                    
                    64,519
                    
                    
                    
                    76,842
                    
                    
                    
                    77,267Long-term
      Debt
                    
                    
                    67,953
                    
                    
                    
                    69,739
                    
                    
                    
                    54,288
                    
                    
                    
                    55,160
 
 The net loan portfolio at December 31,
2008 and 2007 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.
  89
  BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements (continued)
 
 Note
M - (continued)
 
 The fair value of interest rate caps,
included in long-term debt, are based upon the estimated amount the Company
would receive or pay to terminate the contracts or agreements, taking into
account current interest rates and, when appropriate, the current
creditworthiness of the counterparties.  The aggregate fair value for
the interest rate caps were approximately $23.6 million and $0 at December 31,
2008 and 2007, respectively.
 
 The fair value of the long term debt
approximates the carrying value due to the re-pricing of the debt.
 
 Effective January 1, 2008, the Company
adopted SFAS No. 157, "Fair Value Measurements."  SFAS No. 157 defines
fair value, establishes a framework for measuring fair value, and expands
disclosure about fair value. SFAS No. 157 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. SFAS No. 157 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 SFAS No.
157.
 
 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
 
 Securities classified as available for
sale are reported using Level 1, Level 2 and Level 3 inputs. 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 instruments that are not readily marketable and may only be
redeemed with the issuer at par such as Federal Home Loan Bank and Federal
Reserve Bank stock. These securities are stated at par value.
  90
  BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements (continued)
 
 Note
M - (continued)
 
 Assets measured at fair value on a
recurring basis are summarized below.
  Fair
      Value Measurement UsingQuoted
      Prices in
                            Active
      Markets
                            for
      Identical
                            Assets/Liabilities
                            (Level 1)
                          
                          
                          Significant
                            Other
                            Observable
                            Inputs
                            (Level 2)
                          
                          
                          Significant
                            Unobservable
                            Inputs
                            (Level 3)
                          
                          
                          Balance
                            December
      31,
                            2008(Dollars
      in thousands)AssetsInvestment
      securities available for sale
                          
                          $
                          4,290
                          
                          
                          $
                          231,393
                          
                          
                          $
                          63,080
                          
                          
                          $
                          298,763Total
      assets
                          
                          $
                          4,290
                          
                          
                          $
                          231,393
                          
                          
                          $
                          63,080
                          
                          
                          $
                          298,763
 
 The above table includes $37.46 million
in net unrealized losses on the Company's available for sale
securities.  The Company has reviewed its investment portfolio at
December 31, 2008, and has determined that the unrealized losses, except as
discussed in Note C, are temporary. Such determination was based upon an
evaluation of the creditworthiness of the issuers and/or guarantors, the
underlying collateral, if applicable, as well as the continuing performance of
the securities.  Management also evaluates other facts and
circumstances that may be indicative of an other-than-temporary impairment
condition. This includes, but is not limited to, an evaluation of the type of
security and length of time and extent to which the fair value has been less
than cost, as well as certain collateral related characteristics. In addition,
management considers the Company's ability to hold such securities to maturity,
if necessary, thereby recovering its investment.
  The fair
value of the derivative is approximately $20,000 and valued as a level 3 input.
Further disclosures are waived due to materiality.
 Assets
and Liabilities Measured at Fair Value on a Recurring Basis Using Significant
Unobservable Inputs (Level 3)
 
 The following table presents a
reconciliation for assets measured at fair value on a recurring basis for which
the Company has utilized significant unobservable inputs (Level 3).
 
 (Dollars
      in thousands)
                    
                    Investment
                      Securities
                      Available
                      for
      SaleBalance,
      January 1, 2008
                    
                    $
                    184,597Total
      gains/losses (realized/unrealized)Included
      in earnings
                    
                    
                    —Included
      in other comprehensive income
                    
                    
                    (38,023
                    )Purchases,
      Sales, Issuances and Settlements
                    
                    
                    13,128Redemptions
                    
                    
                    (16,450
                    )Interest
                    
                    
                    —Other
      than temporary impairment expense
                    
                    
                    (80,172
                    )Capital
      deductions for operating expenses
                    
                    
                    —Balance,
      December 31, 2008
                    
                    $
                    63,080The
      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 December 31, 2008
                    
                    $
                    —
  Impaired
loans totaling $130,000 are measured for fair value using level 3 inputs,
primarily appraisals by independent third parties.
 91
  BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements (continued)
 
 Note N - FINANCIAL
INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF
 CREDIT RISK
 
 The Bank is party to financial
instruments with off-balance-sheet risk in the normal course of business to meet
the financing needs of its customers. These financial instruments include
commitments to extend credit and standby letters of credit.  Such
financial instruments are recorded in the financial statements when they become
payable.  Those instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the
consolidated balance sheets.  The contract or notional amounts of
those instruments reflect the extent of involvement the Banks have in particular
classes of financial instruments.
 
 The Bank's exposure to credit loss in
the event of non-performance by the other party to the financial instrument for
commitments to extend credit and standby letters of credit is represented by the
contractual or notional amount of those instruments.  The Bank uses
the same credit policies in making commitments and conditional obligations as
they do for on-balance-sheet instruments.
 
 Unless noted otherwise, the Bank does
not require collateral or other security to support financial instruments with
credit risk.  The approximate contract amounts are as
follows:
 
 December
      31,2008
                          
                          
                          2007(In
      thousands)Unused
      lines of credit
                          
                          $
                          29,533
                          
                          
                          $
                          18,635Commitments
      to extend credit
                          
                          
                          12,491
                          
                          
                          
                          28,645Trade
      date securities
                          
                          
                          13,431
                          
                          
                          
                          —Standby
      letters of credit and financialguarantees
      written
                          
                          
                          1,349
                          
                          
                          
                          5,374$
                          56,804
                          
                          
                          $
                          52,654Interest
      rate caps-notional amount
                          
                          $
                          40,000
                          
                          
                          $
                          10,000
  Commitments to extend credit are
agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a
fee.  Since many of the commitments are expected to expire without
being drawn upon, the total commitment amounts do not necessarily represent
future cash requirements.  The Bank evaluates each customer's
creditworthiness on a case-by-case basis.  The amount of collateral
obtained, if deemed necessary by the Bank upon extension of credit, is based on
management's credit evaluation.
 
 Standby letters of credit are
conditional commitments issued by the Bank to guarantee the performance of a
customer to a third party.  Those guarantees are primarily issued to
support public and private borrowing arrangements, including commercial paper,
bond financing and similar transactions.  The credit risk involved in
issuing letters of credit is essentially the same as that involved in extending
loan facilities to customers.  The Bank holds residential or
commercial real estate, accounts receivable, inventory and equipment as
collateral supporting those commitments for which collateral is deemed
necessary.  The extent of collateral held for those commitments at
December 31, 2008 varies up to 100%.
  92


BERKSHIRE
BANCORP INC. AND SUBSIDIARIES
 Notes
to Consolidated Financial Statements (continued)
 
 Note
N - (continued)
 
 The Company defines the initial fair
value of these letters of credit as the fee received from the customer. The
maximum potential undiscounted amount of future payments of these letters of
credit as of December 31, 2008 are $1,349,000 and they expire through
2009.  Amounts due under these letters of credit would be reduced by
any proceeds the Company would be able to obtain in liquidating the collateral
for the loans, which varies depending on the customer.
 
 The Bank grants loans primarily to
customers in New York and its immediately adjacent suburban
communities.  Although the Bank has a diversified loan portfolio, a
large portion of their loans are secured by commercial or residential real
property.  The Bank does not generally engage in non-recourse lending
and typically will require the principals of any commercial borrower to obligate
themselves personally on the loan.  Although the Bank has diversified
loan portfolios, a substantial portion of their debtors' ability to honor their
contracts is dependent upon the economic sector.  Commercial and
standby letters of credit were granted primarily to commercial
borrowers.




The Bank has entered into interest rate
cap agreements in order to hedge its exposure to interest rate
fluctuations.  The Company adopted the provisions of SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", as amended, as
of January 1, 2001.  The statement requires the Company to recognize
all derivative instruments at fair value as either assets or
liabilities.  Financial derivatives are reported at fair value in
other assets or other liabilities.  For derivatives not designated as
hedges, the gain or loss is recognized in current earnings.  Amounts
reclassed into earnings, when the hedged transaction culminates, are included in
interest income.





The trade date securities represent the
contractual agreement to purchase $13.43 million of agency mortgage-backed
securities which settled in January 2009.





Note
O - REGULATORY MATTERS





The Bank is subject to various
regulatory capital requirements administered by the federal banking
agencies.  Failure to meet minimum capital requirements can initiate
certain mandatory - and possible additional discretionary - actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's consolidated financial statements.  Under capital adequacy
guidelines and


the
regulatory framework for prompt corrective action, the Company must meet
specific capital guidelines that involve quantitative measures of the Bank's
assets, liabilities and certain off-balance-sheet items as calculated under
regulatory accounting practices.  The Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings and other factors.





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 1 capital
(as defined in the regulations) to risk-weighted assets, and of Tier 1 capital
to average assets.  Management believes that, as of December 31, 2008,
the Bank meets all capital adequacy requirements to which it is
subject.





As of December 31, 2008, 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 1
risk-based and Tier 1 leverage ratios as set forth in the following
table.  There are no conditions or events since that date that
management believes have changed the institution's category.





93





BERKSHIRE
BANCORP INC. AND SUBSIDIARIES


Notes
to Consolidated Financial Statements (continued)





Note
O - (continued)





The following table sets forth the
actual and required regulatory capital amounts and ratios of, the Company and
the Bank as of December 31, 2008 and 2007 (dollars in thousands):





To
      be wellcapitalized
      underFor
      capital
                                            
                                            
                                            prompt
      correctiveActual
                                            
                                            
                                            adequacy purposes
                                            
                                            
                                            action provisionsAmount
                                            
                                            
                                            Ratio
                                            
                                            
                                            Amount
                                            
                                            Ratio
                                            
                                            
                                            Amount
                                            
                                            
                                            RatioDecember
      31, 2008Total
      Capital (to Risk-Weighted Assets)Company
                                            
                                            $
                                            111,533
                                            
                                            
                                            
                                            16.9
                                            %
                                            
                                            $
                                            52,830
                                            
                                            >8.0
                                            %
                                            
                                            $
                                            —
                                            
                                            
                                            
                                            N/ABank
                                            
                                            
                                            87,178
                                            
                                            
                                            
                                            13.4
                                            %
                                            
                                            
                                            51,948
                                            
                                            >8.0
                                            %
                                            
                                            
                                            64,935
                                            
                                            
                                            >10.0
                                            %Tier
      I Capital (to Risk-Weighted Assets)Company
                                            
                                            
                                            102,329
                                            
                                            
                                            
                                            15.5
                                            %
                                            
                                            
                                            26,415
                                            
                                            >4.0
                                            %
                                            
                                            
                                            —
                                            
                                            
                                            
                                            N/ABank
                                            
                                            
                                            79,129
                                            
                                            
                                            
                                            12.2
                                            %
                                            
                                            
                                            25,974
                                            
                                            >4.0
                                            %
                                            
                                            
                                            38,961
                                            
                                            
                                            >6.0
                                            %Tier
      I Capital (to Average Assets)Company
                                            
                                            
                                            102,329
                                            
                                            
                                            
                                            9.9
                                            %
                                            
                                            
                                            41,440
                                            
                                            >4.0
                                            %
                                            
                                            
                                            —
                                            
                                            
                                            
                                            N/ABank
                                            
                                            
                                            79,129
                                            
                                            
                                            
                                            8.9
                                            %
                                            
                                            
                                            35,774
                                            
                                            >4.0
                                            %
                                            
                                            
                                            44,718
                                            
                                            
                                            >5.0
                                            %





To
      be wellcapitalized
      underFor
      capital
                                  
                                  prompt
      correctiveActual
                                  
                                  
                                  adequacy purposes
                                  
                                  action provisionsAmount
                                  
                                  
                                  Ratio
                                  
                                  
                                  Amount
                                  
                                  Ratio
                                  
                                  Amount
                                  
                                  
                                  RatioDecember
      31, 2007Total
      Capital (to Risk-Weighted Assets)Company
                                  
                                  
                                  136,012
                                  
                                  
                                  
                                  18.3
                                  %
                                  
                                  
                                  59,461
                                  
                                  >8.0
                                  %
                                  
                                  —
                                  
                                  
                                  
                                  N/ABank
                                  
                                  
                                  104,500
                                  
                                  
                                  
                                  14.5
                                  %
                                  
                                  
                                  57,753
                                  
                                  >8.0
                                  %
                                  
                                  72,191
                                  
                                  
                                  >10.0
                                  %Tier
      I Capital (to Risk-Weighted Assets)Company
                                  
                                  
                                  131,829
                                  
                                  
                                  
                                  17.7
                                  %
                                  
                                  
                                  29,731
                                  
                                  >4.0
                                  %
                                  
                                  —
                                  
                                  
                                  
                                  N/ABank
                                  
                                  
                                  100,317
                                  
                                  
                                  
                                  13.9
                                  %
                                  
                                  
                                  28,876
                                  
                                  >4.0
                                  %
                                  
                                  43,314
                                  
                                  
                                  >6.0
                                  %Tier
      I Capital (to Average Assets)Company
                                  
                                  
                                  131,829
                                  
                                  
                                  
                                  12.9
                                  %
                                  
                                  
                                  41,040
                                  
                                  >4.0
                                  %
                                  
                                  —
                                  
                                  
                                  
                                  N/ABank
                                  
                                  
                                  100,317
                                  
                                  
                                  
                                  9.7
                                  %
                                  
                                  
                                  41,288
                                  
                                  >4.0
                                  %
                                  
                                  51,610
                                  
                                  
                                  >5.0
                                  %





94





BERKSHIRE
BANCORP INC. AND SUBSIDIARIES


Notes
to Consolidated Financial Statements (continued)





Note
P - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY





The condensed financial information for
Berkshire Bancorp Inc. (parent company only) is as follows:





CONDENSED
BALANCE SHEETS


(In
Thousands)





December
      31,2008
                        
                        
                        2007ASSETSCash
                        
                        $
                        10,877
                        
                        
                        $
                        12,478Equity
      investment in subsidiaries
                        
                        
                        67,746
                        
                        
                        
                        121,896Investment
      in securities available for sale
                        
                        
                        4,290
                        
                        
                        
                        12,297Accrued
      interest receivable
                        
                        
                        230
                        
                        
                        
                        215Other
      assets
                        
                        
                        7,715
                        
                        
                        
                        1,455Total
      assets
                        
                        $
                        90,858
                        
                        
                        $
                        148,341LIABILITIES
      AND STOCKHOLDERS' EQUITYSubordinated
      debt
                        
                        $
                        22,681
                        
                        
                        $
                        22,681Other
      liabilities
                        
                        
                        2,225
                        
                        
                        
                        1,402Total
      liabilities
                        
                        
                        24,906
                        
                        
                        
                        24,083Stockholders'
      equityCommon
      stock
                        
                        
                        770
                        
                        
                        
                        770Series
      A preferred stock
                        
                        
                        1
                        
                        
                        
                        —Additional
      paid-in capital
                        
                        
                        150,985
                        
                        
                        
                        90,986Retained
      earnings (accumulated deficit)
                        
                        
                        (39,795
                        )
                        
                        
                        42,352Accumulated
      other comprehensiveloss,
      net
                        
                        
                        (39,598
                        )
                        
                        
                        (3,439
                        )Common
      stock in treasury, at cost
                        
                        
                        (6,411
                        )
                        
                        
                        (6,411
                        )Total
      stockholders' equity
                        
                        
                        65,952
                        
                        
                        
                        124,258$
                        90,858
                        
                        
                        $
                        148,341





95





BERKSHIRE
BANCORP INC. AND SUBSIDIARIES


Notes
to Consolidated Financial Statements (continued)





Note
P - (continued)





CONDENSED
STATEMENTS OF OPERATIONS


(In
Thousands)





For
      The Years Ended December 31,2008
                              
                              
                              2007
                              
                              
                              2006INCOMEInterest
      income from the Bank
                              
                              $
                              32
                              
                              
                              $
                              51
                              
                              
                              $
                              65Interest
      income
                              
                              
                              1,175
                              
                              
                              
                              1,271
                              
                              
                              
                              1,115Gain
      on sales ofinvestment
      securities
                              
                              
                              —
                              
                              
                              
                              125
                              
                              
                              
                              1,600Other
      income
                              
                              
                              319
                              
                              
                              
                              235
                              
                              
                              
                              235Total
      income
                              
                              
                              1,526
                              
                              
                              
                              1,682
                              
                              
                              
                              3,015EXPENSESSalaries
      and employee benefits
                              
                              
                              761
                              
                              
                              
                              771
                              
                              
                              
                              697Interest
      expense
                              
                              
                              1,234
                              
                              
                              
                              1,840
                              
                              
                              
                              1,780Other
      expenses
                              
                              
                              732
                              
                              
                              
                              746
                              
                              
                              
                              602Total
      expenses
                              
                              
                              2,727
                              
                              
                              
                              3,357
                              
                              
                              
                              3,079


Loss
      before income taxesand
      equity in undistributed net(loss)
      income of the Bank
                                                                
                                                                
                                                                (1,201
                                                                )
                                                                
                                                                
                                                                (1,675
                                                                )
                                                                
                                                                
                                                                (64
                                                                )Equity
      in undistributednet
      (loss) income of the Bank
                                                                
                                                                
                                                                (78,866
                                                                )
                                                                
                                                                
                                                                6,727
                                                                
                                                                
                                                                
                                                                5,203(Loss)
      income before taxes
                                                                
                                                                
                                                                (80,067
                                                                )
                                                                
                                                                
                                                                5,052
                                                                
                                                                
                                                                
                                                                5,139(Benefit)
      provision forincome
      taxes
                                                                
                                                                
                                                                (162
                                                                )
                                                                
                                                                
                                                                (302
                                                                )
                                                                
                                                                
                                                                259Net
      (loss) income
                                                                
                                                                $
                                                                (79,905
                                                                )
                                                                
                                                                $
                                                                5,354
                                                                
                                                                
                                                                $
                                                                4,880
  96





BERKSHIRE
BANCORP INC. AND SUBSIDIARIES


Notes
to Consolidated Financial Statements (continued)





Note
P - (continued)





CONDENSED
STATEMENTS OF CASH FLOWS


(In
Thousands)





For
      The Years Ended December 31,2008
                  
                  
                  2007
                  
                  
                  2006Operating
      activities:Net
      (loss) income
                  
                  $
                  (79,905
                  )
                  
                  $
                  5,354
                  
                  
                  $
                  4,880Adjustments
      to reconcile net (loss)income
      to net cash provided by(used
      in) operating activities:Gain
      on sales of investment securities
                  
                  
                  —
                  
                  
                  
                  (125
                  )
                  
                  
                  (1,600
                  )Equity
      in undistributed net loss (income) of the Bank
                  
                  
                  78,866
                  
                  
                  
                  (6,727
                  )
                  
                  
                  (5,203
                  )Equity
      in undistributed net income of East 39, LLC
                  
                  
                  (319
                  )
                  
                  
                  (235
                  )
                  
                  
                  (235
                  )Dividends
      received from the Bank
                  
                  
                  2,013
                  
                  
                  
                  1,810
                  
                  
                  
                  1,730Increase
      (decrease) in other liabilities
                  
                  
                  (359
                  )
                  
                  
                  (1,748
                  )
                  
                  
                  23Decrease
      in other assets
                  
                  
                  16
                  
                  
                  
                  136
                  
                  
                  
                  1,051Net
      cash provided by (used in) operating activities
                  
                  
                  312
                  
                  
                  
                  (1,535
                  )
                  
                  
                  646Investing
      activities:Investment
      securities available for salePurchases
                  
                  
                  —
                  
                  
                  
                  (1,635
                  )
                  
                  
                  (3,725
                  )Sales
      and redemptions
                  
                  
                  47
                  
                  
                  
                  6,670
                  
                  
                  
                  4,854Net
      decrease in loans
                  
                  
                  —
                  
                  
                  
                  (3,007
                  )
                  
                  
                  —Contributions
      to the Bank
                  
                  
                  (59,718
                  )
                  
                  
                  —
                  
                  
                  
                  —Net
      cash (used in) provided by investing activities
                  
                  
                  (59,671
                  )
                  
                  
                  2,028
                  
                  
                  
                  1,129Financing
      activities:Proceeds
      from exercise of common stock options
                  
                  
                  —
                  
                  
                  
                  1,363
                  
                  
                  
                  349Tax
      benefits from exercise of common stock options
                  
                  
                  —
                  
                  
                  
                  359
                  
                  
                  
                  84Acquisition
      of treasury stock
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (790
                  )Issuance
      of Series A Preferred Stock
                  
                  
                  60,000
                  
                  
                  
                  —
                  
                  
                  
                  —Dividends
      paid
                  
                  
                  (2,242
                  )
                  
                  
                  (1,252
                  )
                  
                  
                  (1,099
                  )Net
      cash provided by (used in) financing activities
                  
                  
                  57,758
                  
                  
                  
                  470
                  
                  
                  
                  (1,456
                  )Net
      (decrease) increase in cash and cash equivalents
                  
                  
                  (1,601
                  )
                  
                  
                  963
                  
                  
                  
                  319Cash
      and cash equivalents at beginning of year
                  
                  
                  12,478
                  
                  
                  
                  11,515
                  
                  
                  
                  11,196Cash
      and cash equivalents at end of year
                  
                  $
                  10,877
                  
                  
                  $
                  12,478
                  
                  
                  $
                  11,515





97





ITEM 9.
            Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure.





Not Applicable.





ITEM
9A(T).  Controls and Procedures





Disclosure
Controls and Procedures.





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





Management's
Report on Internal Control over Financial Reporting.





Management
of the Company is responsible for establishing and maintaining adequate
"internal control over financial reporting" for the Company as defined in Rule
13a-15(f) under the Securities Exchange Act of 1934 ("Internal Control"). The
Company's Internal Control is designed to provide reasonable assurance to the
Company's management and Board of Directors regarding the preparation and fair
presentation of published financial statements and the reliability of financial
reporting.





Management
of the Company, including the CEO/CFO, assessed the effectiveness of the
Company's Internal Control as of December 31, 2008. In making this assessment,
management used the criteria set forth by COSO in Internal Control-Integrated
Framework. Based on its assessment, management believes that, as of December 31,
2008, the Company's Internal Control is effective based on those
criteria.





This
Annual Report on Form 10-K does not include an attestation report of the
Company's registered public accounting firm regarding Internal Control.
Management's report was not subject to attestation by the Company's registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the Company to provide only management's report
in this annual report.





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 error and all
fraud.  A control system, no matter how well conceived and operated,
can provide only reasonable, not absolute, assurance that the objectives of the
control system are met.  Further, the design of a control system must
reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs.





98





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.





Changes
in Internal Control over Financial Reporting.





In
accordance with SEC requirements, the CEO/CFO notes that during the fiscal
quarter ended December 31, 2008, no changes in the Company's Internal Control
have occurred that have materially affected or are reasonably likely to
materially affect the Company's Internal Control.





ITEM
9B. Other Information





The Bank's Deferred Compensation Plan
(the "Plan") was established in July 2006 to provide for a systematic method by
which key employees of the Bank may defer payment of not less than 3% and not
more than 50% of his or her compensation that would otherwise be payable during
the year. The Deferred Compensation Plan is intended to be a nonqualified and
unfunded plan maintained primarily for the purpose of providing deferred
compensation for a select group of management or highly compensated employees
pursuant to Sections 201(2), 301(a)(3) and 401(a)(1) of the Employee Retirement
Income Security Act of 1974, as amended.  Effective as of December 31,
2008, the Plan was amended to conform certain Plan provisions with the final
Internal Revenue Service regulations issued under Section 409A of the Internal
Revenue Code of 1986, as amended.





PART
III





ITEM
10.            Directors,
Executive Officers and Corporate Governance





The
following are the current directors and executive officers of the
Company:





Name
            
            Age
            
            Position(s)Steven
      Rosenberg
            
            60
            
            President,
      Chief Executive Officer,Chief
      Financial Officer and DirectorWilliam
      L. Cohen
            
            67
            
            DirectorMartin
      A. Fischer
            
            71
            
            DirectorMoses
      Marx
            
            73
            
            DirectorRandolph
      B. Stockwell
            
            62
            
            DirectorMoses
      Krausz
            
            68
            
            President
      of The Berkshire Bank and DirectorDavid
      Lukens
            
            59
            
            Executive
      Vice President, Chief Financial Officer of The Berkshire
    Bank





99





Mr. Rosenberg has served as President
and Chief Executive Officer of the Company since March 1999 and as Vice
President and Chief Financial Officer of the Company from April 1990 to March
1999.  He continues to serve as Chief Financial
Officer.  Mr. Rosenberg was elected a director in May
1995.  From September 1987 through April 1990, he served as President
and Director of Scomel Industries, Inc., a company engaged in international
marketing and consulting.  Mr. Rosenberg is a director of The Cooper
Companies, Inc. (a developer and manufacturer of healthcare
products).





Mr. Cohen was elected a director in
July 1993. He has served as the Chief Executive Officer of Andover Properties,
LLC, a real estate development company specializing in self storage facilities
since November 2003, and has been a private investor for over five
years.  Mr. Cohen served as President, Chief Executive Officer and
Chairman of the Board of The Andover Apparel Group, Inc., an apparel
manufacturing company, from 1980 to 2000.





Mr. Fischer was elected a director on
December 6, 2006.  He has been the President and Chief Executive of
Mount Carmel Cemetery Association, a New York State not-for-profit corporation
since April 2001.  Mr. Fischer was counsel to Warshaw, Burstein,
Cohen, Schlesinger and Kuh, a New York City law firm, from 1987 until 2001 and
served as President, Chief Operating Officer and a director of Kinney System,
Inc. and The Katz Parking System, Inc. from 1981 to 1986.  Mr. Fischer
was appointed Commissioner of the New York State Insurance Fund in 1977 and
served as its Chairman until January 1995.





Mr. Marx was elected a director in May
1995.  Mr. Marx has been the Managing Member of United
Equities Company LLC since 2000 and the General Partner in its predecessor,
United Equities Company, since 1954, and General Partner in United
Equities Commodities Company since 1972.  He is also President of
Momar Corp. All of these are private investment companies.  Mr. Marx
is a director of The Cooper Companies, Inc.





Mr. Stockwell was elected a director in
July 1988.  He has been a private investor for over five
years.  Since April 1999, Mr. Stockwell has served as President of
Yachting Systems of America, LLC.  In addition, he served in various
capacities with the Community Bank, a commercial bank, from September 1972 to
January 1987.





Mr. Krausz has held the position of
President of the Bank since March 1992 and Chief Executive Officer since
November 1993.  He was elected a director in May 2007. Prior to
joining the Bank, Mr. Krausz was Managing Director of SFS Management Co., L.P.,
a mortgage banker, from 1987 to 1992 and was President of UMB Bank and Trust
Company, a New York State chartered bank, from 1978 to 1987.





Mr. Lukens has held the position of
Senior Vice President and Chief Financial Officer of the Bank since December
1999 and Executive Vice President since December 2003.  Prior to
joining the Bank, Mr. Lukens was Senior Vice President and Chief Financial
officer of First Washington State Bank, a New Jersey commercial bank, from 1994
to 1999 and was Vice President and Controller at the Philadelphia, PA branch of
Bank Leumi Le-Israel B.M., an international commercial bank, from 1978 to
1994.





100





There are no family relationships
(whether by blood, marriage or adoption) among any of the Company's current
directors or executive officers.





At each annual meeting of stockholders,
the successors to the directors then serving are elected to serve from the time
of their election and qualification until the next annual meeting following
their election or until their successors have been duly elected and qualified,
or until their earlier death, resignation or removal.  All of our
current directors have been elected to serve until the annual meeting of
stockholders to be held in 2009. The Company's officers, in their capacities as
such, serve at the discretion of the Board of Directors.





Audit
Committee Members, Financial Expert and Independence





Our Board of Directors has established
an Audit Committee comprised of three independent directors, Messrs. William L.
Cohen, Martin A. Fischer and Randolph B. Stockwell.  All of the
members of the Audit Committee meet the independence requirements under current
NASDAQ corporate governance standards for companies whose securities are listed
on NASDAQ.  Based upon their education and relevant experience, our
Board has determined that Messrs. Cohen and Stockwell each qualify as financial
experts as defined by the Sarbanes-Oxley Act of 2002 and the rules of the
Securities and Exchange Commission.





Corporate
Code of Ethics





We have adopted a Corporate Code of
Ethics that applies to the directors, officers and employees, including the
senior management: the chief executive officer, chief financial officer,
controller and persons performing similar functions, of Berkshire Bancorp Inc.
and its subsidiaries. Copies of our Corporate Code of Ethics are available
without charge upon written request to the Company, Attention President, at its
principal executive office.





ITEM
11.            Executive
Compensation





Our Board of Directors has delegated
primary authority for executive compensation to the three independent members of
the Board, or Independent Directors, who, though not a formal compensation
committee of the Board, act in such capacity.





Executive
Compensation





The following table shows the
compensation paid in or with respect to the periods indicated to the individual
who served as our Chief Executive Officer and Chief Financial Officer for the
fiscal year ended December 31, 2008 and to each of the other executive officers
of the Bank whose total compensation was more than $100,000 during the fiscal
year ended December 31, 2008 (our "named executive officers").





101





Summary
Compensation Table


Name and Principal
                          Position
                        
                        Year
                        
                        
                        Salary
                          $
                        
                        
                        Bonus
                          $
                        
                        
                        Change in
                          Pension Value
                          and
                          Nonqualified
                          Deferred
                          Compensation
                          Earnings
                          $
                        
                        
                        All Other
                          Compensation
                          $
                        
                        
                        Total
                          $Steven
      Rosenberg
                          President,
      Chief Executive Officer and Chief Financial Officer
                        
                        
                        2007
                          2008
                        
                        
                        
                        220,000
                          230,000
                        
                        
                        
                        30,000
                          30,000
                        
                        
                        
                        301,822
                          356,393
                        
                        
                        
                        —
                          —
                        
                        
                        
                        551,822
                          616,393Moses
      Krausz
                          President
      and Chief Executive Officer of The Berkshire Bank
                        
                        
                        2007
                          2008
                        
                        
                        
                        436,201
                          465,398
                        
                        
                        
                        275,000
                          150,000
                        
                        
                        
                        818
                          13,740
                        
                        
                        
                        11,575
                          11,725
                        
                        
                        
                        723,594
                          640,863David
      Lukens
                          Executive
      Vice President and Chief Financial Officer of The Berkshire
      Bank
                        
                        
                        2007
                          2008
                        
                        
                        
                        183,000192,000
                        
                        
                        
                        30,000
                          30,000
                        
                        
                        
                        11,822
                          20,127
                        
                        
                        
                        8,736
                          9,258
                        
                        
                        
                        235,558
                          251,385





Narrative
To Summary Compensation Table





Mr.
Rosenberg does not have an employment agreement with us.  The amounts
reported for Change in Pension Value and Nonqualified Deferred Compensation
Earnings includes only the change in the value of his benefit payable under our
Retirement Income Plan.  Mr. Rosenberg does not participate in the
Bank's 401(k) Plan or its Deferred Compensation Plan.





Mr.
Krausz has an employment agreement with the Bank.  The agreement
expires on April 30, 2010 unless automatically renewed for up to three
additional years as provided for in the agreement.  The agreement
provides for the payment to Mr. Krausz of a specified base salary with fixed
annual increases, the payment of a discretionary bonus and participation in our
employee benefit plans. There are no change in control provisions in Mr.
Krausz's employment agreement. Mr. Krausz is a participant in the Bank's 401(k)
Plan and its Deferred Compensation Plan. The amounts reported for Change in
Pension Value and Nonqualified Deferred Compensation Earnings includes only the
earnings on the Deferred Compensation Plan.  Mr. Krausz does not
participate in the Retirement Income Plan. The amounts reported in All Other
Compensation consists of contributions we made to Mr. Krausz's 401(k) account of
$6,900 and $6,750 in 2008 and 2007, respectively, and income associated with
life insurance coverage.





Mr.
Lukens has an employment agreement with the Bank.  The agreement will
expire on June 30, 2010 unless automatically renewed for up to three additional
years as provided for in the agreement.  The agreement provides for
the payment to Mr. Lukens of a base salary and annual bonus, and participation
in our employee benefit plans. There are no change in control provisions Mr.
Lukens' employment agreement.  Mr. Lukens is a participant in the
Bank's 401(k) Plan and its Deferred Compensation Plan. The amounts reported for
Change in Pension Value and Nonqualified Deferred Compensation Earnings includes
the change in the value of Mr. Lukens' benefit payable under our Retirement
Income Plan and earnings on the Deferred Compensation Plan.  The
amounts reported in All Other Compensation consists of contributions we made to
Mr. Lukens' 401(k) account of $6,683 and $6,161, in 2008 and 2007, respectively,
and income associated with life insurance coverage.





102





Grants
of Plan-Based Awards in Fiscal Year Ended December 31, 2008





There were no grants of awards made to
any of our named executive officers in 2008 under any non-equity or equity
incentive plan.





1999
Stock Incentive Plan





Our 1999 Stock Incentive Plan permits
the granting of awards in the form of nonqualified stock options, incentive
stock options, restricted stock, deferred stock, and other stock-based
incentives.  Up to 600,000 shares of our common stock may be issued
pursuant to the 1999 Stock Incentive Plan (subject to appropriate adjustment in
the event of changes in our corporate structure). Officers, directors and other
key employees of us or any of our subsidiaries are eligible to receive awards
under the 1999 Stock Incentive Plan.  The option exercise price of all
options which are granted under the 1999 Stock Incentive Plan must be at least
equal to 100% of the fair market value of a share of common stock of the Company
on the date of grant.  At December 31, 2008, options to acquire
550,257 shares of our common stock have been granted under this plan, 2,076
options are outstanding and exercisable, and 49,743 options are available for
future grants.





Post-Employment
Compensation





Retirement Income Plan. Our
Retirement Income Plan is a noncontributory defined benefit plan covering
substantially all of our full-time, non-union United States employees. Under the
Retirement Income Plan, our benefits were based upon a combination of employee
compensation and years of service.  We paid the entire cost of the
plan for our employees and funded such costs as they accrued. Our funding policy
was to make annual contributions within minimum and maximum levels required by
applicable regulations.  Our customary contributions were designed to
fund normal cost on a current basis and fund over 30 years the estimated prior
service cost of benefit improvements (15 years of annual gains and
losses).  The projected unit cost method was used to determine the
annual cost.  Plan assets consist principally of equity and fixed
income mutual funds.





Benefit accruals were frozen as of
September 15, 1988, resulting in a plan curtailment.  As a result of
such curtailment, we did not accrue benefits for future
services;  however, we did continue to contribute as necessary for any
unfunded liabilities.  In 2000, we reinstated the Retirement Income
Plan to cover substantially all of our full-time, non-union United States
employees.





Except for Mr. Rosenberg whose benefit
is subject to the laws governing the Retirement Income Plan, a participant in
the Retirement Income Plan accumulates a balance in his or her retirement
account by receiving: (i) an annual retirement credit of 5% of gross wages paid
during the year, but not in excess of the applicable annual maximum compensation
permitted to be taken into account under Internal Revenue Service guidelines for
each year of service; and (ii) an annual interest credit based upon the 30-year
U. S. Treasury securities rate.  We pay the entire cost of the
Retirement Income Plan for our employees and fund such costs as they
accrue.





103





Our plan provides for a normal
retirement age of 65. However, the estimated annual reduced benefits payable
under the Retirement Income Plan upon earlier retirement at age 62 for Messrs.
Rosenberg and Lukens are approximately $156,280 and $7,310,
respectively.  In accordance with the laws currently governing the
Retirement Income Plan, the estimated annual benefit payable to Mr. Rosenberg is
not expected to increase.  Mr. Krausz is not a participant in the
Retirement Income Plan. (See Note K of Notes to Consolidated Financial
Statements for more information concerning the Retirement Income
Plan).





Deferred Compensation Plan.
The Bank's deferred compensation plan was established in July 2006 to provide
for a systematic method by which key employees of the Bank may defer payment of
not less than 3% and not more than 50% of his or her compensation that would
otherwise be payable during the year. The Deferred Compensation Plan is intended
to be a nonqualified and unfunded plan maintained primarily for the purpose of
providing deferred compensation for a select group of management or highly
compensated employees pursuant to Sections 201(2), 301(a)(3) and 401(a)(1) of
the Employee Retirement Income Security Act of 1974, as amended.





On June 30 and December 31 of each
year, account balances are credited with the applicable earnings rate, the
highest deposit rate paid by the Bank on its generally available interest
bearing deposit accounts (excluding time deposits), in effect at that time.
Distributions from the Deferred Compensation Plan may be made upon (i)
termination of employment, (ii) an unforeseeable emergency, (iii) death, (iv)
disability, as defined under Section 409A of the Internal Revenue Code of 1986,
as amended, (the "Code") and (v) a Change in Control Event, to the extent such
Change in Control Event constitutes permissible payment under Section 409A of
the Code.





Compensation
of Directors





Director
Compensation for the Fiscal Year Ended December 31, 2008.




Name
                  
                  Fees Earned
                    or Paid in
                    Cash
                    $
                  
                  
                  All Other
                    Compensation
                    $
                  
                  
                  Total
                    $William
      L. Cohen
                  
                  
                  32,000
                  
                  
                  
                  —
                  
                  
                  
                  32,000Moses
      Marx
                  
                  
                  29,000
                  
                  
                  
                  —
                  
                  
                  
                  29,000Martin
      A. Fischer
                  
                  
                  36,000
                  
                  
                  
                  —
                  
                  
                  
                  36,000Randolph
      B. Stockwell
                  
                  
                  34,000
                  
                  
                  
                  —
                  
                  
                  
                  34,000





Each director who is not also an
employee receives a stipend of $25,000 per annum and $1,500 for each day during
which he participates in a meeting of the Board or a Committee of the Board.
Each of these directors also receives a fee of $1,000 for telephonic meetings of
the Board or a Board Committee.  The directors are eligible to
participate in the Company's 1999 Stock Incentive Plan, but have not received
grants under that plan during 2008.





104





ITEM 12.
            Security
      Ownership of Certain Beneficial Owners and Related Stockholder
      Matters.





The following table sets forth certain
information as of March 20, 2009 with respect to the beneficial ownership of our
Common Stock by (i) each person who is known by us to own beneficially more than
5% of our Common Stock, (ii) each of our directors and persons named in the
Summary Compensation Table, and (iii) all executive officers and directors as a
group.





Title
      of Class
                
                Name
      and Address of
                  Beneficial
      Owner
                
                Amount
      and Nature
                  of
      Beneficial
                  Ownership
                
                
                Percent
                  of
      ClassCommon
      Stock
                
                William
      L. Cohen
                
                
                7,500
                
                
                
                *Common
      Stock
                
                Martin
      A. Fischer
                
                
                10,800
                
                
                
                *Common
      Stock
                
                Moses
      Krausz
                
                
                90,464
                (1)
                
                
                1.3
                %Common
      Stock
                
                David
      Lukens
                
                
                600
                
                
                
                *Common
      Stock
                
                Moses
      Marx
                  160
      Broadway
                  New
      York, NY 10038
                
                
                3,850,484
                (2)
                
                
                54.6
                %Common
      Stock
                
                Steven
      Rosenberg
                
                
                62,580
                
                
                
                *Common
      Stock
                
                Randolph
      B. Stockwell
                
                
                21,000
                
                
                
                *Common
      Stock
                
                All
      executive officers and directors as a group (7 persons)
                
                
                4,043,428
                
                
                
                57.3
                %*
      Less than 1%





(1)Includes
      2,100 shares owned by Mr. Krausz's
spouse.


(2)Includes
      285,000 shares owned by Momar Corporation and 386,163 shares owned by
      Terumah Foundation.  Does not include 37,302.32 shares
      representing 23.0% of the shares owned by Eva and Esther, L.P., of which
      Mr. Marx has a 23.0% limited partnership interest.  Mr. Marx's
      daughters and their husbands are the general partners of Eva and Esther,
      L.P.





Equity
Compensation Plans





The following table details information
regarding our existing equity compensation plans as of December 31,
2008.





Plan Category
                
                (a)
                  Number of securities to
                  be issued upon exercise
                  of outstanding options,
                  warrants and rights
                
                
                (b)
                  Weighted-average
                  exercise price of
                  outstanding options,
                  warrants and rights
                
                
                (c)
                  Number of securities
                  remaining available for
                  future issuance under
                  equity compensation plans
                  (excluding securities
                  reflected in column (a))Equity
      compensationplans
      approved bysecurity
      holders
                
                
                2,076
                
                
                $
                8.29
                
                
                
                49,743Equity
      compensationplans
      not approved bysecurity
      holders
                
                
                —
                
                
                
                —
                
                
                
                —Total
                
                
                2,076
                
                
                $
                8.29
                
                
                
                49,743





105





ITEM
13.            Certain
Relationships and Related Transactions and
Director Independence.





The Bank has made loans to certain of
its directors and their affiliates and, assuming continued compliance with
generally applicable credit standards, it expects to continue to make such
loans.  All of these loans (i) were made in the ordinary course of
business, (ii) were made on the same terms, including interest rates, as those
available to other persons not related to the Company, and (iii) did not involve
more than the normal risk of collectibility or present other unfavorable
features.





In January 2000, the Bank entered into
a lease agreement with Bowling Green Associates, LP, the principal owner of
which is Mr. Marx, for commercial space to open a bank branch.  We
obtained an appraisal of the market rental value of the space from an
independent appraisal firm and management believes that the terms of the lease,
including the annual rent paid, $405,000 and $368,000 in fiscal 2008 and 2007,
is comparable to the terms and annual rent that would be paid to non-affiliated
parties in a similar commercial transaction for similar commercial
space.





On October 31, 2008, the Company's
Chairman of the Board purchased 30,000 Series A Preferred Shares for an
aggregate purchase price of $30,000,000.





See Item 1. Business - Transactions
With Related Parties and Item 2. Properties for additional
information.





Independence
of Directors





Our board has determined that Messrs.
William L. Cohen, Martin A. Fischer and Randolph B. Stockwell are independent
under the independence standards of the NASDAQ Stock Market LLC.





ITEM
14. Principal Accounting Fees and Services





The Company's principal accountant is
Grant Thornton LLP ("Grant Thornton"). The total fees paid to Grant Thornton for
the last two fiscal years are as follows:





106





Fiscal Year Ended
                          December 31, 2008
                        
                        
                        Fiscal Year Ended
                          December 31, 2007Audit
      Fees
                        
                        $
                        338,379
                        
                        
                        $
                        316,380Audit Related Fees:
      Professional services rendered for employee benefit plan audits,
      accounting assistance in connection with acquisitions and consultations
      related to financial accounting and reporting standards
                        
                        
                        —
                        
                        
                        
                        —Tax Fees: Tax
      consulting, preparation of returns
                        
                        
                        71,695
                        
                        
                        
                        68,910All Other Fees:
      Professional services rendered for corporate support
                        
                        
                        —
                        
                        
                        
                        —





The Audit Committee has established its
pre-approval policies and procedures, pursuant to which the Audit Committee
approved the foregoing audit and permissible non-audit services provided by
Grant Thornton LLP in 2008 and 2007. Consistent with the Audit Committee's
responsibility for engaging our independent auditors, all audit and permitted
non-audit services require pre-approval by the Audit Committee.  The
full Audit Committee approves proposed services and fee estimates for these
services.  The Audit Committee chairperson has been designated by the
Audit Committee to approve any services arising during the year that were not
pre-approved by the Audit Committee and services that were
pre-approved.  Service approved by the Audit Committee chairperson are
communicated to the full Audit Committee at its next regular quarterly meeting
and the Audit Committee reviews services and fees for the fiscal year at each
such meeting.  Pursuant to these procedures, the Audit Committee
approved the foregoing audit and permissible non-audit services provided by
Grant Thornton LLP.





107





PART
IV





ITEM
15. Exhibits, Financial Statement Schedules.





(a) Documents filed as part of this
Report:





(1)  Financial
Statements




Report
      of Independent Registered Public Accounting FirmConsolidated
      Balance Sheets as of December 31, 2008 and 2007Consolidated
      Statements of Income for the Years Ended December 31, 2008, 2007 and
      2006Consolidated
      Statements of Stockholders' Equity for the Years Ended December 31, 2008,
      2007 and 2006Consolidated
      Statements of Cash Flows for the Years Ended December 31, 2008, 2007 and
      2006Notes
      to Consolidated Financial Statements





Schedule


Number                      Description





None





All schedules for which provision is
made in the applicable accounting regulations of the Securities and Exchange
Commission are not required under the related instructions or are not applicable
and, therefore, have been omitted.





(3)  Exhibits




108




ExhibitNumber
                
                Description2.1
                
                Agreement
      and Plan of Reorganization, dated as of August 16, 2000, by and between
      Berkshire Bancorp Inc., Greater American Finance Group, Inc., The
      Berkshire Bank, GSB Financial Corporation and Goshen Savings Bank
      (incorporated by reference to the Companies Registration Statement on Form
      S-4 dated October 13, 2000.3.1
                
                Amended
      and Restated Certificate of Incorporation of the Company (incorporated by
      reference to Exhibit 3.1 to the Company's Current Report on Form 8-K dated
      March 30, 1999, and the Company's Quarterly Report on Form 10-Q for the
      Quarterly Period Ended June 30, 2004).3.2
                
                Certificate
      of Amendment to the Certificate of Incorporation of the Company effective
      December 15, 2008 (incorporated by reference to Exhibit 3.1 to the
      Company's Current Report on Form 8-K dated December 16,
    2008).




3.3
                
                Certificate
      of Designations of the Series A Preferred Stock of the Company
      (incorporated by reference to Exhibit 3.1 to the Company's Current Report
      on Form 8-K dated November 5, 2008).3.4
                
                Amended
      and Restated By-laws of the Company (incorporated by reference to Exhibit
      3.2 to the Company's Current Report on Form 8-K dated March 30,
      1999).10.1
                
                1999
      Stock Incentive Plan of the Company (incorporated by reference to Exhibit
      10.8 to the Company's Current Report on Form 8-K dated March 30,
      1999).+10.2
                
                Employment
      Agreement, dated as of May 1, 1999, between The Berkshire Bank and Moses
      Krausz (incorporated by reference to Exhibit 10.3 to the Company's Annual
      Report on Form 10-K for the Fiscal Year Ended December 31,
      2000).+10.3
                
                Amendment
      No. 3, dated as of July 31, 2007, to Employment Agreement, dated as of May
      1, 1999, by and between The Berkshire Bank and Moses Krausz (incorporated
      by reference to Exhibit 10.1 to the Company's Quarterly Report on Form
      10-Q for the Quarterly Period Ended June 30,
  2007).+
  109
  ExhibitNumber
                
                Description10.4
                
                Employment
      Agreement, dated as of January 1, 2001, between The Berkshire Bank and
      David Lukens (incorporated by reference to Exhibit 10.4 to the Company's
      Annual Report on Form 10-K for the Fiscal Year Ended December 31,
      2000).+10.5
                
                Amendment
      No. 3, dated as of May 1, 2008, to Employment Agreement, dated as of
      January 1, 2001, by and between The Berkshire Bank and David Lukens
      (incorporated by reference to Exhibit 10.1 to the Company's Quarterly
      Report on Form 10-Q for the Quarterly Period Ended March 31,
      2008).+10.6
                
                Lease
      Agreement, dated October 26, 1999, between Braun Management, Inc. as agent
      for Bowling Green Associates, L.P., and The Berkshire Bank (incorporated
      by reference to Exhibit 10.5 to the Company's Quarterly Report on Form
      10-Q for the Quarterly Period Ended March 31, 2001).10.7
                
                Deferred
      Compensation Plan of The Berkshire Bank, effective July 1, 2006,
      (incorporated by reference to Exhibit 10.2 to the Company's Quarterly
      Report on Form 10-Q for the Quarterly Period Ended June 30,
      2006).+10.8
                
                Amendment
      No. 1 to Deferred Compensation of The Berkshire Bank, dated August 17,
      2006 (incorporated by reference to Exhibit 10.1 to the Company's Quarterly
      Report on Form 10-Q for the Quarterly Period Ended September 30,
      2006).+10.9
                
                Amendment
      No. 2 to Deferred Compensation of The Berkshire Bank, dated November 29,
      2007 (incorporated by reference to Exhibit 10.9 to the Company's Annual
      Report on Form 10-K for the Fiscal Year Ended December 31,
      2007).+10.10
                
                Amendment
      No. 3 to Deferred Compensation of The Berkshire Bank, dated December 31,
      2008.+10.11
                
                Stock
      Purchase Agreement by and among Berkshire Bancorp Inc. and the Purchasers
      named therein, dated October 30, 2008.10.12
                
                Registration
      Rights Agreement among Berkshire Bancorp Inc. and the Purchasers named
      therein, dated as of October 30, 2008.21.
                
                Subsidiaries
      of the Company.23.
                
                Consent
      of Independent Registered Public Accounting Firm31.
                
                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.
 
 + Denotes
a management compensation plan or arrangement.


110





SIGNATURES





Pursuant to the requirements of Section
13 or 15(d) 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.By:
                                /s/ Steven RosenbergSteven RosenbergPresident,
      (Chief Executive Officer)Date:
                                March 31,
2009





Pursuant to the requirements of the
Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.





111





Signature
                        
                        Title
                        
                        DatePresident,
      (ChiefExecutive
      Officer,Principal
      FinancialOfficer
      and PrincipalAccounting
      Officer);/s/ Steven Rosenberg
                        
                        Director
                        
                        March
      31, 2009Steven
      Rosenberg/s/ William L. Cohen
                        
                        Director
                        
                        March
      31, 2009William
      L. Cohen/s/ Martin A. Fischer
                        
                        Director
                        
                        March
      31, 2009Martin
      A. Fischer/s/ Moses Krausz
                        
                        Director
                        
                        March
      31, 2009Moses
      Krausz/s/ Moses Marx
                        
                        Director
                        
                        March
      31, 2009Moses
      Marx/s/ Randolph B. Stockwell
                        
                        Director
                        
                        March
      31, 2009Randolph
      B. Stockwell





112