Edgar Filing: BERKSHIRE BANCORP INC /DE/

Unassociated Document

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2010

¨	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. Employer
Incorporation or Organization)		Identification No.)

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

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

N/A

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

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

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

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

Large accelerated filer ¨ Accelerated filer ¨

Non-accelerated filer ¨ Smaller reporting company x

(Do not check if a smaller reporting company)

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

As of November 9, 2010, there were 7,054,183 outstanding shares of the issuer's Common Stock, $.10 par value.

BERKSHIRE BANCORP INC. AND SUBSIDIARIES

FORWARD-LOOKING STATEMENTS

Forward-Looking Statements. Statements in this Quarterly Report on Form 10-Q that are not based on historical fact may be "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as "believe", "may", "will", "expect", "estimate", "anticipate", "continue" or similar terms identify forward-looking statements. A wide variety of factors could cause the actual results and experiences of Berkshire Bancorp Inc. (the "Company") to differ materially from the results expressed or implied by the Company's forward-looking statements. Some of the risks and uncertainties that may affect operations, performance, results of the Company's business, the interest rate sensitivity of its assets and liabilities, and the adequacy of its loan loss allowance, include, but are not limited to: (i) deterioration in local, regional, national or global economic conditions which could result, among other things, in an increase in loan delinquencies, a decrease in property values, or a change in the housing turnover rate; (ii) changes in market interest rates or changes in the speed at which market interest rates change; (iii) changes in laws and regulations affecting the financial services industry; (iv) changes in competition; (v) changes in consumer preferences, (vi) changes in banking technology; (vii) ability to maintain key members of management, (viii) possible disruptions in the Company's operations at its banking facilities, (ix) cost of compliance with new corporate governance requirements, and other factors referred to in this Quarterly Report and in Item 1A, "Risk Factors", of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2009.

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

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

BERKSHIRE BANCORP INC. AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q

INDEX

		Page No.
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Balance Sheets as of September 30, 2010 and December 31, 2009 (unaudited)	4

	Consolidated Statements of Operations For The Three and Nine Months Ended September 30, 2010 and 2009 (unaudited)	5

	Consolidated Statement of Stockholders' Equity For The Nine Months Ended September 30, 2010 and 2009 (unaudited)	6

	Consolidated Statements of Cash Flows For The Nine Months Ended September 30, 2010 and 2009 (unaudited)	7

	Notes to Consolidated Financial Statements (unaudited)	8

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	25

Item 3.	Quantitative and Qualitative Disclosure About Market Risk	45

Item 4.	Controls and Procedures	45

PART II OTHER INFORMATION

Item 6.	Exhibits	46

Signature		47

Index of Exhibits		48

BERKSHIRE BANCORP INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands)

(unaudited)

	September 30, 2010			December 31, 2009
ASSETS
Cash and due from banks	$	4,659		$	5,427
Interest bearing deposits		72,088			55,376
Total cash and cash equivalents		76,747			60,803
Investment Securities:
Available-for-sale		356,557			357,478
Held-to-maturity, fair value of $322 in 2010 and $337 in 2009		324			340
Total investment securities		356,881			357,818
Loans, net of unearned income		375,923			430,349
Less: allowance for loan losses		(14,605	)		(11,416	)
Net loans		361,318			418,933
Accrued interest receivable		3,877			4,253
Premises and equipment, net		8,296			8,532
Goodwill, net		18,549			18,549
Other assets		35,808			40,379
Total assets	$	861,476		$	909,267

LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing	$	73,574		$	62,870
Interest bearing		607,816			650,574
Total deposits		681,390			713,444
Securities sold under agreements to repurchase		50,000			50,000
Borrowings		11,760			31,004
Subordinated debt		22,681			22,681
Accrued interest payable		2,673			3,578
Other liabilities		4,383			3,324
Total liabilities		772,887			824,031

Stockholders' equity
Preferred stock - $.01 Par value:
Authorized — 2,000,000 shares Issued — 60,000 shares Outstanding — September 30, 2010, 60,000 shares December 31, 2009, 60,000 shares		1			1
Common stock - $.10 par value
Authorized — 25,000,000 shares Issued — 7,698,285 shares Outstanding — September 30, 2010, 7,054,183 shares December 31, 2009, 7,054,183 shares		770			770
Additional paid-in capital		150,985			150,985
Accumulated Deficit		(47,023	)		(46,833	)
Accumulated other comprehensive loss, net		(9,733	)		(13,276	)
Treasury Stock at cost September 30, 2010, 644,102 shares December 31, 2009, 644,102 shares		(6,411	)		(6,411	)
Total stockholders' equity		88,589			85,236
Total liabilities and stockholders' equity	$	861,476		$	909,267

The accompanying notes are an integral part of these statements

BERKSHIRE BANCORP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands, Except Per Share Data)

(unaudited)

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

The accompanying notes are an integral part of these statements.

BERKSHIRE BANCORP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

For The Nine Months Ended September 30, 2010 and 2009

(In Thousands)

(Unaudited)

	Common Shares		Preferred Shares		Common Stock Par Value		Preferred Stock Par Value		Additional paid-in capital		Accumulated other comprehensive (loss), net			Retained Earnings/ (Accumulated deficit)			Treasury stock			Comprehensive income (loss)			Total stockholders' equity
Balance at December 31, 2008		7,698		60	$	770	$	1	$	150,985	$	(39,598	)	$	(39,795	)	$	(6,411	)				$	65,952
Net loss															(3,759	)					(3,759	)		(3,759	)
Other comprehensive income net of taxes												18,582									18,582			18,582
Comprehensive income																				$	14,823
Cash dividends - Preferred Stock															(3,600	)								(3,600	)
Balance at September 30, 2009		7,698		60	$	770	$	1	$	150,985	$	(21,016	)	$	(47,154	)	$	(6,411	)				$	77,175

Balance at December 31, 2009		7,698		60	$	770	$	1	$	150,985	$	(13,276	)	$	(46,833	)	$	(6,411	)				$	85,236
Net income															3,410						3,410			3,410
Other comprehensive income net of taxes												3,543									3,543			3,543
Comprehensive income																				$	6,953
Cash dividends - Preferred Stock															(3,600	)								(3,600	)

Balance at September 30, 2010		7,698		60	$	770	$	1	$	150,985	$	(9,733	)	$	(47,023	)	$	(6,411	)				$	88,589

The accompanying notes are an integral part of these statements.

BERKSHIRE BANCORP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	For The Nine Months Ended September 30,
	2010			2009
Cash flows from operating activities:
Net income (loss)	$	3,410		$	(3,759	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Realized gains on investment securities		(464	)		(440	)
Gain on sale of foreclosed real estate		(229	)		—
Other than temporary impairment charges on securities		1,202			10,263
Net amortization of premiums of investment securities		1,709			708
Depreciation and amortization		387			402
Provision for loan losses		4,250			1,550
Decrease in accrued interest receivable		376			1,395
Decrease in other assets		4,571			25,872
Increase (decrease) in accrued interest payable and other liabilities		154			(16,969	)
Net cash provided by operating activities		15,366			19,022

Cash flows from investing activities:
Investment securities available for sale
Purchases		(187,057	)		(205,666	)
Sales, maturities and calls		189,074			164,292
Investment securities held to maturity
Maturities		16			16
Net decrease in loans		41,046			25,306
Proceeds from sale of foreclosed real estate		12,548			—
Acquisition of premises and equipment		(151	)		(96	)
Net cash provided by (used in) investing activities		55,476			(16,148	)

Cash flows from financing activities:
Net increase in non interest bearing deposits		10,704			6,466
Net decrease in interest bearing deposits		(42,758	)		(45,020	)
Decrease in securities sold under agreements to repurchase		—			(2,504	)
Repayment of borrowings		(19,244	)		(10,662	)
Dividends paid on preferred stock		(3,600	)		(3,600	)
Net cash (used in) financing activities		(54,898	)		(55,320	)

Net increase (decrease) in cash and cash equivalents		15,944			(52,446	)
Cash and cash equivalents at beginning of period		60,803			102,387
Cash and cash equivalents at end of period	$	76,747		$	49,941

Supplemental disclosure of cash flow information:
Cash used to pay interest	$	9,595		$	17,039
Cash used to pay income taxes, net of refunds	$	(1,080	)	$	1,330
Schedule of non-cash investing activities:
Transfer from loans to real estate owned	$	12,318		$	—

The accompanying notes are an integral part of these statements.

BERKSHIRE BANCORP INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 30, 2010 and 2009

(unaudited)

Note 1. General

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

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

We have prepared the accompanying financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC") for interim financial reporting. These consolidated financial statements, including the notes thereto, are unaudited and, in our opinion, include all adjustments, consisting of normal recurring adjustments and accruals, necessary for a fair presentation of our consolidated balance sheets, operating results, and cash flows for the periods presented. Operating results for the periods presented are not necessarily indicative of the results that may be expected for the remaining quarter of fiscal 2010 due to a variety of factors. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States ("GAAP") have been omitted in accordance with the rules and regulations of the SEC. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in our 2009 Annual Report on Form 10-K.

BERKSHIRE BANCORP INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)

(unaudited)

Note 2. Earnings (Loss) Per Share

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

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

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

BERKSHIRE BANCORP INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)

(unaudited)

Note 3. Loan Portfolio

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

	September 30, 2010						December 31, 2009
	Amount			% of Total			Amount			% of Total
	(Dollars in thousands)
Commercial and professional loans	$	22,310			5.9	%	$	50,672			11.7	%
Secured by real estate
1-4 family		117,159			31.1			129,925			30.1
Multi family		6,174			1.6			7,432			1.7
Non-residential (commercial)		230,438			61.2			242,927			56.4
Consumer		793			0.2			396			0.1

Total loans		376,874			100.0	%		431,352			100.0	%
Deferred loan fees		(951	)					(1,003	)
Allowance for loan losses		(14,605	)					(11,416	)
Loans, net	$	361,318					$	418,933

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

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

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

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

BERKSHIRE BANCORP INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)

(unaudited)

Note 3. - (continued)

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

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

Note 4. Investment Securities

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

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

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

BERKSHIRE BANCORP INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)

(unaudited)

Note 4. - (continued)

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

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

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

BERKSHIRE BANCORP INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)

(unaudited)

Note 4. - (continued)

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

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

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

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

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

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

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

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

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

BERKSHIRE BANCORP INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)

(unaudited)

Note 4. - (continued)

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

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

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

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

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

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

BERKSHIRE BANCORP INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)

(unaudited)

Note 4. - (continued)

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

The Company has investments in certain debt securities that have unrealized losses or may be otherwise impaired, but an OTTI has not been recognized in the financial statements as management believes the decline is due to the credit markets coupled with the interest rate environment.

The following table indicates the length of time individual securities that we consider temporarily impaired have been in a continuous unrealized loss position at September 30, 2010 (in thousands):

	Less than 12 months				12 months or longer				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Description of Securities

U.S. Government Agencies	$	14,993	$	8	$	—	$	—	$	14,993	$	8
Mortgage-backed securities		24,417		127		8,215		224		32,632		351
Corporate notes		8,301		960		—		—		8,301		960
Single Issuer Trust Preferred CDO		—		—		660		363		660		363
Pooled Trust Preferred CDO		—		—		606		5,853		606		5,853
Auction rate securities		4,442		723		54,523		11,777		58,965		12,500

Total temporarily impaired scurities	$	52,153	$	1,818	$	64,004	$	18,217	$	116,157	$	20,035

BERKSHIRE BANCORP INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)

(unaudited)

Note 4. - (continued)

The Company had a total of 39 debt securities with a fair market value of $116.2 million which were temporarily impaired at September 30, 2010. The total unrealized loss on these securities was $20.0 million, which is attributable to the market interest volatility, the continued illiquidity of the debt markets, and uncertainty in the financial markets. It is not more likely than not that we would sell these securities before maturity, and we have the intent to hold all of these securities to maturity and will not be required to sell these securities, due to our ratio of cash and cash equivalents of approximately 8.9% of total assets at September 30, 2010. Therefore, the unrealized losses associated with these securities are not considered to be other than temporary.

The amortized cost and fair value of investment securities available for sale and held to maturity, by contractual maturity, at September 30, 2010 are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	September 30, 2010
	Available for Sale				Held to Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(In thousands)
Due in one year or less	$	55,634	$	55,589	$	—	$	—
Due after one through five years		52,457		52,222		—		—
Due after five through ten years		44,372		45,897		—		—
Due after ten years		139,902		138,288		324		322
Auction rate securities		73,993		61,541		—		—
Marketable equity securities and other		2,870		3,020		—		—
Totals	$	369,228	$	356,557	$	324	$	322

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

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

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

BERKSHIRE BANCORP INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)

(unaudited)

Note 5. Deposits

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

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

Note 6. Comprehensive Income (Loss)

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

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

BERKSHIRE BANCORP INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)

(unaudited)

Note 7. Employee Benefit Plans

Until it was frozen and terminated on December 31, 2009, the Company had a Retirement Income Plan (the "Plan"), a noncontributory defined benefit plan covering substantially all full-time, non-union United States employees of the Company. The following interim-period information is being provided in accordance with FASB ASC 715, Compensation-Retirement Benefits, based upon the most recent actuarial valuation dated December 31, 2009.

	For The Three Months Ended September 30,					For The Nine Months Ended September 30,
	2010		2009			2010		2009

Service cost	$	—	$	103,250		$	—	$	309,750
Interest cost		—		64,250			—		192,750
Expected return on plan assets		—		(70,500	)		—		(211,500	)
Amortization and Deferral:
Prior service cost		—		4,500			—		13,500
Loss		—		36,500			—		109,500
Net periodic pension cost	$	—	$	138,000		$	—	$	414,000

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

The Pension Protection Act of 2006 (the "PPA") changed the funding rules for defined benefit pension plans, beginning in 2008. A key element of the PPA is the introduction of benefit restrictions on plans that are funded below 80% of the plan's target liabilities. In order to avoid these restrictions, during the nine months ended September 30, 2010 and 2009, we contributed approximately $112,000 and $1.1 million, respectively, to the Plan.

Note 8. Fair Value of Financial Instruments

The Company is required to disclose the estimated fair value of its assets and liabilities considered to be financial instruments. For the Company, as for most financial institutions, the majority of its assets and liabilities are considered financial instruments. However, many such instruments lack an available trading market, as characterized by a willing buyer and seller engaging in an exchange transaction. Also, it is the Company's general practice and intent to hold its financial instruments to maturity and not to engage in trading or sales activities, except for certain loans. Therefore, the Company had to use significant estimations and present value calculations to prepare this disclosure.

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

BERKSHIRE BANCORP INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)

(unaudited)

Note 8. - (continued)

Estimated fair values have been determined by the Company using the best available data and an estimation methodology suitable for each category of financial instruments. The estimation methodologies used, the estimated fair values, and recorded book balances at September 30, 2010 and December 31, 2009 are outlined below.

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

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

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

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

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

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

BERKSHIRE BANCORP INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)

(unaudited)

Note 8. - (continued)

The fair value of interest rate caps, included in borrowings, are based upon the estimated amount the Company would receive or pay to terminate the contracts or agreements, taking into account current interest rates and, when appropriate, the current creditworthiness of the counterparties. The aggregate fair value for the interest rate caps was approximately $19,000 and $117,000 at September 30, 2010 and December 31, 2009, respectively.

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

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

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

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

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

Assets and Liabilities Measured at Fair Value on a Recurring Basis

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

Securities Available for Sale

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

BERKSHIRE BANCORP INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)

(unaudited)

Note 8. - (continued)

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

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

	At September 30, 2010 Fair Value Measurement Using
	Quoted Prices in Active Markets for Identical Assets/Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance September 30, 2010
	(Dollars in thousands)
Assets
Impaired loans	$	—	$	—	$	2,000	$	2,000	(1)
Investment securities available for sale		87,240		207,776		61,541		356,557	(2)
Total	$	87,240	$	207,776	$	63,541	$	358,557

(1) Non-recurring basis

(2) Recurring basis

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

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

BERKSHIRE BANCORP INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)

(unaudited)

Note 8. - (continued)

	At December 31, 2009 Fair Value Measurement Using
	Quoted Prices in Active Markets for Identical Assets/Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance December 31, 2009
	(Dollars in thousands)
Assets
Impaired loans	$	—	$	—	$	15,468	$	15,468	(1)
Investment securities available for sale		56,006		235,793		66,942		358,741	(2)
Total assets	$	56,006	$	235,793	$	82,410	$	374,209

(1) Non-recurring basis

(2) Recurring basis

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

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

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

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

(Dollars in thousands)	Investment Securities Available for Sale

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

The amount of total gains (losses) for the period included in earnings attributable to the change in unrealized gains or losses relating to assets still held at September 30, 2010	$	—

BERKSHIRE BANCORP INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)

(unaudited)

Note 9. New Accounting Pronouncements

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

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

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

Note 10. Subsequent Events

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

Internal Control Over Financial Reporting

The objective of the Company's Internal Control Program is to allow the Bank and management to comply with Part 363 of the FDIC's regulations ("FDICIA") and to allow the Company to comply with Sections 302 and 404 of the Sarbanes-Oxley Act of 2002 ("SOX"). In November 2005, the FDIC amended Part 363 of its regulations by raising the asset-size threshold from $500 million to $1 billion for internal control assessments by management and external auditors. The final rule was effective December 28, 2005.

Section 302 of SOX requires the CEOs and CFOs of the Company to (i) certify that the annual and quarterly reports filed with the Securities and Exchange Commission are accurate and (ii) acknowledge that they are responsible for establishing, maintaining and periodically evaluating the effectiveness of the disclosure controls and procedures. Section 404 of SOX requires management to (i) report on internal control over financial reporting, (ii) assess the effectiveness of such internal controls, and (iii) obtain an external auditor's report on management's assessment of its internal control.

The Company is not an accelerated filer as defined in Rule 12b-2 of the Securities Exchange Act of 1934. On October 2, 2009, the SEC issued a final extension of SOX 404(b) for non-accelerated filers, which would have required them to first comply with the provisions of Section 404(b) of SOX with respect to fiscal years ending on or after June 15, 2010. Section 404(b) of SOX requires a registrant to provide an attestation report on management's assessment of internal controls over financial reporting by the registrant's external auditor. Therefore, the Company would have been required to obtain an external auditor's attestation report on internal control over financial reporting for the fiscal year ending December 31, 2010. However, on July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") into law. The Dodd-Frank Act includes a provision which permanently exempts non-accelerated filers, including the Company, from the requirement to obtain an external audit on the effectiveness of internal financial reporting controls provided in Section 404(b) of SOX. Disclosure of management's attestations on internal control over financial reporting under Section 404(a) of SOX is still required.

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

ITEM 2 -

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

Executive Summary

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

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

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

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

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

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

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

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

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

Critical Accounting Policies, Judgments and Estimates

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

The Company considers that the determination of the allowance for loan losses involves a higher degree of judgment and complexity than any of its other significant accounting policies. The allowance for loan losses is calculated with the objective of maintaining a reserve level believed by management to be sufficient to absorb estimated credit losses. Management's determination of the adequacy of the allowance is based on periodic evaluations of the loan portfolio and other relevant factors. However, this evaluation is inherently subjective as it requires material estimates, including, among others, expected default probabilities, loss given default, the amounts and timing of expected future cash flows on impaired loans, mortgages, and general amounts for historical loss experience. The process also considers economic conditions, uncertainties in estimating losses and inherent risks in the loan portfolio. All of these factors may be susceptible to significant change. To the extent actual outcomes differ from management estimates, additional provisions for loan losses may be required that would adversely impact earnings in future periods. See "Provision for Loan Losses" below in this Item 2 for further discussion of the allowance for loan losses.

Goodwill is subject to impairment testing at least annually or when triggering events occur to determine whether write-downs of the recorded balances are necessary. The Company tests for impairment based on the goodwill maintained at the Bank, the reporting unit. A fair value is determined for each reporting unit based on at least one of three various market valuation methodologies. If the fair value of the reporting units exceed the book value, no write-down of recorded goodwill is necessary. If the fair value of the reporting unit is less, an expense may be required on the Company's books to write down the related goodwill to the fair value, which would then become the new carrying value. As of December 31, 2009, the goodwill was evaluated for impairment with no recognition of impairment considered necessary. The fair value of the reporting unit was substantially greater than the carrying value at the date of valuation. Management determined that there were no additional impairment indicators subsequent to the December 31, 2009 evaluation.

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

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

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

	For The Three Months Ended September 30,
	2010							2009
	Average Balance		Interest and Dividends		Average Yield/Rate			Average Balance		Interest and Dividends		Average Yield/Rate
					(Dollars in Thousands)
INTEREST-EARNING ASSETS:
Loans (1)	$	379,983	$	6,295		6.63	%	$	440,146	$	7,290		6.63	%
Investment securities		354,049		3,542		4.00			315,395		3,486		4.42
Other (2)(5)		64,543		41		0.25			56,314		129		0.92
Total interest-earning assets		798,575		9,878		4.95			811,855		10,905		5.37
Noninterest-earning assets		59,125							55,456
Total Assets	$	857,700						$	867,311

INTEREST-BEARING LIABILITIES:
Interest bearing deposits		222,710		333		0.60	%		201,817		533		1.06	%
Time deposits		392,832		1,415		1.44			414,620		2,028		1.96
Other borrowings		84,918		790		3.72			115,044		1,187		4.13
Total interest-bearing liabilities		700,460		2,538		1.45			731,481		3,748		2.05

Demand deposits		70,865							56,821
Noninterest-bearing liabilities		7,603							7,611
Stockholders' equity (5)		78,772							71,398

Total liabilities and stockholders' equity	$	857,700						$	867,311

Net interest income			$	7,340						$	7,157

Interest-rate spread (3)						3.50	%						3.32	%

Net interest margin (4)						3.68	%						3.53	%

Ratio of average interest-earning assets to average interest bearing liabilities		1.14							1.11

(1) Includes nonaccrual loans.

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

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

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

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

	For The Nine Months Ended September 30,
	2010							2009
	Average Balance		Interest and Dividends		Average Yield/Rate			Average Balance		Interest and Dividends		Average Yield/Rate
					(Dollars in Thousands)
INTEREST-EARNING ASSETS:
Loans (1)	$	397,356	$	19,301		6.48	%	$	450,176	$	22,510		6.67	%
Investment securities		361,229		11,062		4.08			303,555		11,931		5.24
Other (2)(5)		68,364		157		0.30			61,669		582		1.26
Total interest-earning assets		826,949		30,520		4.92			815,400		35,023		5.73
Noninterest-earning assets		59,838							62,109
Total Assets	$	886,787						$	877,509

INTEREST-BEARING LIABILITIES:
Interest bearing deposits		226,120		1,237		0.73	%		202,314		1,809		1.19	%
Time deposits		404,980		4,724		1.56			426,918		8,006		2.50
Other borrowings		93,399		2,729		3.90			118,491		3,707		4.17
Total interest-bearing liabilities		724,499		8,690		1.60			747,723		13,522		2.41

Demand deposits		69,545							54,825
Noninterest-bearing liabilities		7,940							8,961
Stockholders' equity (5)		84,803							66,000

Total liabilities and stockholders' equity	$	886,787						$	877,509

Net interest income			$	21,830						$	21,501

Interest-rate spread (3)						3.32	%						3.32	%

Net interest margin (4)						3.52	%						3.52	%

Ratio of average interest-earning assets to average interest bearing liabilities		1.14							1.09

(1) Includes nonaccrual loans.

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

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

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

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

Results of Operations

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

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

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

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

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

Net Interest Margin. Net interest margin, or annualized net interest income as a percentage of average interest-earning assets, was 3.68% and 3.52% for the three and nine months ended September 30, 2010, respectively, compared to 3.53% and 3.52% during the three and nine months ended September 30, 2009. We seek to secure and retain customer deposits with competitive products and rates, while making strategic use of the prevailing interest rate environment to borrow funds at what we believe to be attractive rates. We invest such deposits and borrowed funds in a prudent mix of fixed and adjustable rate loans, investment securities and short-term interest-earning assets.

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

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

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

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

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

Loans, which are inherently risky and therefore command a higher return than our portfolio of investment securities and other interest-earning assets, decreased to 47.6% and 48.1% of total average interest-earning assets during the three and nine months ended September 30, 2010, respectively, from 54.2% and 55.2% of total interest-earning assets during the three and nine months ended September 30, 2009, respectively. The average amounts of investment securities increased to 44.3% and 43.7% of total average interest-earning assets during the three and nine months ended September 30, 2010, respectively, from 38.8% and 37.2% of total interest-earning assets during the three and nine months ended September 30, 2009, respectively. While we actively seek to originate new loans with qualified borrowers who meet the Bank's underwriting standards, our strategy has been to maintain those standards, sacrificing some current income to avoid possible large future losses in the loan portfolio.

At September 30, 2010, total non-performing loans were $2.0 million, all of which were non-accrual loans. Additions to non-performing loans, were such additions to occur, would have an adverse effect on our results of operations.

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

Federal Home Loan Bank Stock. The Bank owns stock of the Federal Home Loan Bank New York ("FHLB-NY") which is necessary for it to be a member of the FHLB-NY. Membership requires the purchase of stock equal to 1% of the Bank's residential mortgage loans or 5% of the outstanding borrowings, whichever is greater. The stock is redeemable at par, therefore, its cost is equivalent to its redemption value. The Bank's ability to redeem FHLB-NY shares is dependent upon the redemption practices of the FHLB-NY. At September 30, 2010, the FHLB-NY neither placed restrictions on redemption of shares in excess of a member's required investment in stock, nor stated that it will cease paying dividends. The Bank did not consider this asset impaired at either September 30, 2010 or December 31, 2009.

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

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

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

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

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

Non-Interest Income. Non-interest income consists primarily of realized gains on sales of marketable securities and service fee income. For the three and nine months ended September 30, 2010, non-interest income amounted to $306,000 and $1.4 million, respectively, compared to non-interest income of $502,000 and $1.3 million for the three and nine months ended September 30, 2009, respectively.

Non-Interest Expense. Non-interest expense includes salaries and employee benefits, occupancy and equipment expenses, legal and professional fees, OTTI charges on investment securities and other operating expenses associated with the day-to-day operations of the Company. Total non-interest expense decreased by $3.4 million to $5.9 million for the quarter ended September 30, 2010 from $9.3 million for the quarter ended September 30, 2009. The decrease was primarily due to OTTI charges of $5.1 million during the 2009 quarter which were not incurred during the 2010 quarter, partially offset by the $1.5 million increase in other non-interest expense during the 2010 quarter.

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

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

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

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

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

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

Issuer Purchases of Equity Securities

On May 15, 2003, The Company's Board of Directors authorized the purchase of up to an additional 450,000 shares of its Common Stock in the open market, from time to time, depending upon prevailing market conditions, thereby increasing the maximum number of shares which may be purchased by the Company from 1,950,000 shares of Common Stock to 2,400,000 shares of Common Stock. Since 1990 through September 30, 2009, the Company has purchased a total of 1,898,909 shares of its Common Stock. We did not repurchase shares of the Company's Common Stock during the first three quarters of 2010. At September 30, 2010, there were 501,091 shares of Common Stock which may yet be purchased under our stock repurchase plan.

Provision for Loan Losses. The allowance for loan losses is the estimated amount considered necessary to cover credit losses inherent in the loan portfolio at the balance sheet date. The allowance is established through the provision for loan losses that is charged against income. In determining the allowance for loan losses, management makes significant estimates and therefore has identified the allowance as a critical accounting policy. The methodology for determining the allowance for loan losses is considered a critical accounting policy by management due to the high degree of judgment involved, the subjectivity of the assumptions utilized, and the potential for changes in the economic environment that could result in changes to the amount of the recorded allowance for loan losses.

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

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

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

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

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

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

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

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

Loan Portfolio.

Loan Portfolio Composition. The Company's loans consist primarily of mortgage loans secured by residential and non-residential properties as well as commercial loans which are either unsecured or secured by personal property collateral. Most of the Company's loans are either made to individuals or personally guaranteed by the principals of the business to which the loan is made. At September 30, 2010 and December 31, 2009, the Company had loans, net of unearned income, of $375.9 million and $430.3 million, respectively, and an allowance for loan losses of $14.6 million and $11.4 million, respectively. From time to time, the Bank may originate residential mortgage loans, sell them on the secondary market, normally recognizing fee income in connection with the sale.

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

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

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

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

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

Commercial Loans. The Bank makes commercial loans to businesses for inventory financing, working capital, machinery and equipment purchases, expansion, and other business purposes. These loans generally have higher yields than mortgages loans, with maturities of one year, after which the borrower's financial condition and the terms of the loan are re-evaluated. At September 30, 2010 and December 31 2009, approximately $22.3 million and $50.7 million, respectively, or 5.9% and 11.7%, respectively, of the Company's total loan portfolio consisted of such loans.

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

Residential Mortgage Loans (1 to 4 family loans). The Bank makes residential mortgage loans secured by first liens on one-to-four family owner-occupied or rental residential real estate. At September 30, 2010 and December 31, 2009, approximately $117.2 million and $129.9 million, respectively, or 31.1% and 30.1%, respectively, of the Company's total loan portfolio consisted of such loans. The Bank offers both adjustable rate mortgages ("ARMS") and fixed-rate mortgage loans. The relative proportion of fixed-rate loans versus ARMs originated by the Bank depends principally upon current customer preference, which is generally driven by economic and interest rate conditions and the pricing offered by the Bank's competitors. At September 30, 2010 and December 31, 2009, approximately 13.1% and 13.9%, respectively, of the Bank's residential one-to-four family owner-occupied first mortgage portfolio were ARMs and approximately 87.0% and 86.1%, respectively, were fixed-rate loans. The percentage represented by fixed-rate loans tends to increase during periods of low interest rates. The ARMs generally carry annual caps and life-of-loan ceilings, which limit interest rate adjustments.

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

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

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

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

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

The Bank offers a variety of other loan products including residential single family construction loans to persons who intend to occupy the property upon completion of construction, home equity loans secured by junior mortgages on one-to-four family owner-occupied residences, and short-term fixed-rate consumer loans either unsecured or secured by monetary assets such as bank deposits and marketable securities or personal property. At September 30, 2010 and December 31, 2009, the Company's loan portfolio was comprised of $237.4 million and $250.8 million, respectively, or 63.0% and 58.2%, respectively, of other loan products.

Capital Adequacy

Quantitative measures established by regulations to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk- weighted assets, and of Tier I capital to average assets. Management believes that, as of September 30, 2010, the Bank meets all capital adequacy requirements to which it is subject.

As of September 30, 2010, the Bank met all regulatory requirements for classification as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the following table. There are no conditions or events since that date that management believes have changed the Bank's category.

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

											To be well
											capitalized under
			For capital								prompt corrective
	Actual		adequacy purposes								action provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
September 30, 2010
Total Capital (to Risk-Weighted Assets)
Company	$	106,635		22.5	%	$	38,004		>8.0	%		—		N/A
Bank		94,817		20.5	%		37,012		>8.0	%	$	46,265		>10.0	%
Tier I Capital (to Risk-Weighted Assets)
Company		99,721		21.0	%		19,062		>4.0	%		—		N/A
Bank		88,925		19.2	%		18,506		>4.0	%		27,759		>6.0	%
Tier I Capital (to Average Assets)
Company		99,721		11.3	%		35,471		>4.0	%		—		N/A
Bank		88,925		10.3	%		34,489		>4.0	%		43,111		>5.0	%

Liquidity

The management of the Company's liquidity focuses on ensuring that sufficient funds are available to meet loan funding commitments, withdrawals from deposit accounts, the repayment of borrowed funds, and ensuring that the Bank and the Company comply with regulatory liquidity requirements. Liquidity needs of the Bank have historically been met by deposits, investments in federal funds sold, principal and interest payments on loans, and maturities of investment securities. Additional liquidity, up to approximately $305 million is available from the Federal Reserve Bank and the FHLB-NY.

The current uncertainties in the credit markets have negatively impacted our ability to liquidate, if necessary, investments in auction rate securities. We are not certain as to when the liquidity issues relating to these investments will improve; however, we have the intent to hold these available for sale securities to maturity, and do not believe we will be required to sell these securities prior to maturity.

At September 30, 2010, our portfolio of investment securities included approximately $6.5 million, at cost, of TPCDO's for which an OTTI charge has not been recorded in our financial statements. Due primarily to liquidity issues, the fair value of these securities, presently $606,000, may be negatively impacted in the future.

Based on our expected operating cash flows, strategic contraction of our balance sheet and our other sources of cash, we do not expect the potential lack of liquidity in these auction rate securities and corporate notes to affect our capital, liquidity or our ability to execute our current business plan. We have cash and cash equivalents totaling $76.7 million, or 8.9% of total assets at September 30, 2010. In addition, we have the capacity to borrow up to approximately $194 million from the Federal Reserve Bank and approximately $111 million from the FHLB-NY if the need should arise.

For the parent company, Berkshire Bancorp Inc., liquidity means having cash available to fund its operating expenses and to pay stockholder dividends on its preferred and common stock, when and if declared by the Company's Board of Directors. On March 31, 2009, the Company announced that it would temporarily suspend its previously announced policy of paying a regular cash dividend on the Company's common stock. We are current as to dividend payments on our preferred stock.

The ability of the Company to meet these obligations, including the payment of dividends on its preferred and common stock when and if declared by the Board of Directors, is not currently dependent upon the receipt of dividends from the Bank. At September 30, 2010, the Company had cash of approximately $1.0 million and investment securities with a fair market value of $6.9 million.

The Bank maintains financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments, approximately $6.6 million at September 30, 2010, include commitments to extend credit, stand-by letters of credit and loan commitments. The Bank also had interest rate caps with a notional amount of $40.0 million.

At September 30, 2010, the Bank had outstanding commitments of approximately $403.7 million; including $11.8 million of borrowings, $1.9 million of operating leases, and $390.0 million of time deposits. These commitments include $291.4 million that mature or renew within one year, $111.8 million that mature or renew after one year and within three years, $379,000 that mature or renew after three years and within five years and $130,000 that mature or renew after five years.

Impact of Inflation and Changing Prices

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

ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

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

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

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

ITEM 4 - CONTROLS AND PROCEDURES

Disclosure Controls and Procedures.

As of the end of the period covered by this Quarterly Report on Form 10-Q, the Company evaluated the effectiveness of the design and operation of its "disclosure controls and procedures" as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended ("Disclosure Controls"). The Disclosure Controls are designed to allow the Company to reach a reasonable level of assurance that information required to be disclosed by the Company is recorded, processed, summarized and reported within the time period specified in the SEC's rules and forms and that any information relating to the Company is accumulated and communicated with management, including its principal executive/financial officer to allow timely decisions regarding required disclosure. The evaluation of the Disclosure Controls ("Controls Evaluation") was done under the supervision and with the participation of the Company's management, including the Chief Executive Officer ("CEO"), who is also the Chief Financial Officer ("CFO"). Based upon the Controls Evaluation and subsequent discussions and actions by the Company as described in its Annual Report on Form 10-K for the fiscal year ended December 31, 2009 ("Form 10-K"), the CEO/CFO has concluded that as of September 30, 2010, due to the remediation described in the Form 10-K, along with the commencement of a more rigorous review of the investment portfolio for securities with OTTI indicators, the enhancement of the related documentation, and the refinement of the cash flow analysis, the Company's Disclosure Controls are effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting.

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

Limitations on the Effectiveness of Controls.

The Company's management, including the CEO/CFO, does not expect that its Disclosure Controls and/or its Internal Control will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.

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

PART II. OTHER INFORMATION

Item 6. Exhibits

Exhibit
Number		Description

31		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.

SIGNATURES

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

			BERKSHIRE BANCORP INC.
			(Registrant)

Date:	November 10, 2010	By:	/s/ Steven Rosenberg
			Steven Rosenberg
			President and Chief
			Financial Officer

EXHIBIT INDEX

Exhibit
Number		Description

31		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.