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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 June 30, 2006

or



| ̈ | Transitional Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ------------------------------------------------------------------------------------------

For the transition period from                      to

Commission file
number 0-21845

Beverly Hills Bancorp Inc.

(Exact name of registrant as specified in its charter)



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 93-1223879                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|23901 Calabasas Road, Suite 1050 Calabasas, CA                 |  | 91302                               
|(Address of principal executive offices)                       |  | (Zip Code)                          

(818) 223-8084

(Registrants telephone number, including area code)

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 is a large accelerated
filer, an accelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Large accelerated
filer ̈Accelerated
filer    x            Non-accelerated filer ̈

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

Applicable only to corporate issuers:

Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.



|                                        |  |                             
|--------------------------------------- |  | ----------------------------
|Class                                   |  | Outstanding at July 31,
2006
|Common Stock, par value $0.01 per share |  | 21,461,507 shares           



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##### Table of Contents

BEVERLY HILLS BANCORP INC. AND SUBSIDIARIES

INDEX



|           |  |                                                                                       |  |   
|---------- |  | ------------------------------------------------------------------------------------- |  | --
|PART I.    |  | FINANCIAL INFORMATION                                                                 |  |   
|           |  |                                                                                      
|Item 1.    |  | Interim Condensed Consolidated Financial Statements (Unaudited):                      |  |   
|           |  |                                                                                      
|           |  | Condensed Consolidated Statements of Financial Condition                              |  | 3 
|           |  |                                                                                      
|           |  | Condensed Consolidated Statements of Operations                                       |  | 4 
|           |  |                                                                                      
|           |  | Condensed Consolidated Statements of Cash Flows                                       |  | 5 
|           |  |                                                                                      
|           |  | Notes to Interim Condensed Consolidated Financial Statements                          |  | 6 
|           |  |                                                                                      
|Item 2.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 17
|           |  |                                                                                      
|Item 3.    |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 29
|           |  |                                                                                      
|Item 4.    |  | Controls and Procedures                                                               |  | 31
|           |  |                                                                                      
|PART II.   |  | OTHER INFORMATION                                                                     |  |   
|           |  |                                                                                      
|Item 1.    |  | Legal Proceedings                                                                     |  | 32
|           |  |                                                                                      
|Item 1A.   |  | Risk Factors                                                                          |  | 32
|           |  |                                                                                      
|Item 2.    |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 32
|           |  |                                                                                      
|Item 3.    |  | Defaults Upon Senior Securities                                                       |  | 32
|           |  |                                                                                      
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                   |  | 32
|           |  |                                                                                      
|Item 5.    |  | Other Information                                                                     |  | 32
|           |  |                                                                                      
|Item 6.    |  | Exhibits                                                                              |  | 33
|           | 
|Signatures |  | 34                                                                                   



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##### Table of Contents

BEVERLY HILLS BANCORP INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Unaudited)

(Dollars in thousands, except share data)



|                                                                                                                                           |  |               |           |   |                   |   |           |  
|------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------- | --------- | - | ----------------- | - | --------- | -
|                                                                                                                                           |  | June 30, 2006 |           |   | December 31, 2005 |  
|ASSETS                                                                                                                                     |  |               |           |   |                   |   |           |  
|Cash and cash equivalents                                                                                                                  |  | $             | 17,492    |   |                   | $ | 20,954    |  
|Mortgage-backed securities available for sale, at fair value                                                                               |  |               | 408,139   |   |                   |   | 332,572   |  
|Investment securities available for sale, at fair value                                                                                    |  |               | 13,601    |   |                   |   | 13,728    |  
|Investment securities held to maturity, at amortized cost (fair value of $9,324 and $9,650)                                                |  |               | 9,733     |   |                   |   | 9,708     |  
|Loans, net of allowance for loan losses of $6,939 and $7,080                                                                               |  |               | 940,334   |   |                   |   | 948,144   |  
|Discounted loans, net of allowance for loan losses of $164 and $209                                                                        |  |               | 1,369     |   |                   |   | 1,679     |  
|Stock in Federal Home Loan Bank of San Francisco, at cost                                                                                  |  |               | 25,360    |   |                   |   | 27,625    |  
|Real estate owned, net                                                                                                                     |  |               | 47        |   |                   |   | 62        |  
|Leasehold improvements and equipment, net                                                                                                  |  |               | 1,421     |   |                   |   | 1,539     |  
|Accrued interest receivable                                                                                                                |  |               | 7,174     |   |                   |   | 6,284     |  
|Income taxes receivable                                                                                                                    |  |               | 1,519     |   |                   |   | 3,910     |  
|Deferred tax asset, net                                                                                                                    |  |               | 31,968    |   |                   |   | 30,739    |  
|Goodwill, net                                                                                                                              |  |               | 3,054     |   |                   |   | 3,054     |  
|Prepaid expenses and other assets                                                                                                          |  |               | 4,303     |   |                   |   | 3,741     |  
|                                                                                                                                           |  |               |           |   |                   |   |           |  
|TOTAL                                                                                                                                      |  | $             | 1,465,514 |   |                   | $ | 1,403,739 |  
|                                                                                                                                           |  |               |           |   |                   |   |           |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                       |  |               |           |   |                   |   |           |  
|LIABILITIES:                                                                                                                               |  |               |           |   |                   |   |           |  
|Deposits:                                                                                                                                  |  |               |           |   |                   |   |           |  
|Noninterest-bearing deposits                                                                                                               |  | $             | 5,022     |   |                   | $ | 4,655     |  
|Interest-bearing deposits                                                                                                                  |  |               | 698,437   |   |                   |   | 599,994   |  
|                                                                                                                                           |  |               |           |   |                   |   |           |  
|Total deposits                                                                                                                             |  |               | 703,459   |   |                   |   | 604,649   |  
|Repurchase agreements                                                                                                                      |  |               | 40,000    |   |                   |   | 63,000    |  
|FHLB advances                                                                                                                              |  |               | 497,837   |   |                   |   | 530,837   |  
|Junior subordinated notes payable to trust                                                                                                 |  |               | 41,288    |   |                   |   | 20,619    |  
|Accounts payable and other liabilities                                                                                                     |  |               | 11,625    |   |                   |   | 10,764    |  
|                                                                                                                                           |  |               |           |   |                   |   |           |  
|Total liabilities                                                                                                                          |  |               | 1,294,159 |   |                   |   | 1,229,869 |  
|                                                                                                                                           |  |               |           |   |                   |   |           |  
|COMMITMENTS AND CONTINGENCIES (NOTE 4)                                                                                                     |  |               |           |   |                   |   |           |  
|                                                                                                                                           |  |              
|STOCKHOLDERS EQUITY:                                                                                                                      |  |               |           |   |                   |   |           |  
|Common stock, $0.01 par value, 30,000,000 shares authorized, 27,100,875 and 26,965,874 shares issued (including 5,639,368 treasury
shares) |  |               | 271       |   |                   |   | 270       |  
|Additional paid-in capital                                                                                                                 |  |               | 165,859   |   |                   |   | 165,710   |  
|Treasury stock, 5,639,368 shares, at cost                                                                                                  |  |               | (15,224   | ) |                   |   | (15,224   | )
|Retained earnings                                                                                                                          |  |               | 27,444    |   |                   |   | 27,019    |  
|Accumulated other comprehensive loss, net                                                                                                  |  |               | (6,995    | ) |                   |   | (3,905    | )
|                                                                                                                                           |  |               |           |   |                   |   |           |  
|Total stockholders equity                                                                                                                 |  |               | 171,355   |   |                   |   | 173,870   |  
|                                                                                                                                           |  |               |           |   |                   |   |           |  
|TOTAL                                                                                                                                      |  | $             | 1,465,514 |   |                   | $ | 1,403,739 |  
|                                                                                                                                           |  |               |           |   |                   |   |           |  

See notes to unaudited interim condensed consolidated financial statements



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##### Table of Contents

BEVERLY HILLS BANCORP INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(Dollars in
thousands, except share data)



|                                                       |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|------------------------------------------------------ |  | --------------------------- | ---------- | - | ------------------------- | - | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                                       |  | Three Months Ended June 30, |            |   | Six Months Ended June 30, |  
|                                                       |  | 2006                        |            |   | 2005                      |   |            | 2006 |  |   | 2005       |  
|INTEREST INCOME:                                       |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Loans                                                  |  | $                           | 16,509     |   |                           | $ | 14,538     |      |  | $ | 32,608     |   |  | $ | 27,965     |  
|Mortgage-backed securities                             |  |                             | 4,458      |   |                           |   | 3,575      |      |  |   | 8,284      |   |  |   | 7,002      |  
|Securities and federal funds sold                      |  |                             | 563        |   |                           |   | 428        |      |  |   | 1,043      |   |  |   | 779        |  
|                                                       |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Total interest income                                  |  |                             | 21,530     |   |                           |   | 18,541     |      |  |   | 41,885     |   |  |   | 35,746     |  
|                                                       |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|INTEREST EXPENSE:                                      |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Deposits                                               |  |                             | 7,547      |   |                           |   | 4,165      |      |  |   | 13,787     |   |  |   | 7,379      |  
|Borrowings                                             |  |                             | 5,385      |   |                           |   | 4,773      |      |  |   | 10,624     |   |  |   | 9,356      |  
|                                                       |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Total interest expense                                 |  |                             | 12,932     |   |                           |   | 8,938      |      |  |   | 24,411     |   |  |   | 16,735     |  
|                                                       |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|NET INTEREST INCOME                                    |  |                             | 8,598      |   |                           |   | 9,603      |      |  |   | 17,474     |   |  |   | 19,011     |  
|RECAPTURE OF LOSSES ON LOANS                           |  |                             | (109       | ) |                           |   |           |      |  |   | (69        | ) |  |   | (4         | )
|                                                       |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|NET INTEREST INCOME AFTER RECAPTURE OF LOSSES ON LOANS |  |                             | 8,707      |   |                           |   | 9,603      |      |  |   | 17,543     |   |  |   | 19,015     |  
|OTHER INCOME:                                          |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Deposit fees and charges                               |  |                             | 28         |   |                           |   | 16         |      |  |   | 39         |   |  |   | 36         |  
|Real estate owned, net                                 |  |                             | (6         | ) |                           |   | (15        | )    |  |   | (11        | ) |  |   | 192        |  
|Loss on sale of loans                                  |  |                             |           |   |                           |   | (21        | )    |  |   |           |   |  |   | (21        | )
|FHLB stock dividends                                   |  |                             | 321        |   |                           |   | 264        |      |  |   | 673        |   |  |   | 510        |  
|Other income (loss), net                               |  |                             | 1          |   |                           |   | 54         |      |  |   | (4         | ) |  |   | 74         |  
|                                                       |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Total other income                                     |  |                             | 339        |   |                           |   | 298        |      |  |   | 697        |   |  |   | 791        |  
|                                                       |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|OTHER EXPENSES:                                        |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Compensation and employee benefits                     |  |                             | 2,018      |   |                           |   | 1,895      |      |  |   | 4,031      |   |  |   | 3,764      |  
|Professional fees                                      |  |                             | 389        |   |                           |   | 922        |      |  |   | 2,031      |   |  |   | 1,628      |  
|Occupancy                                              |  |                             | 254        |   |                           |   | 251        |      |  |   | 500        |   |  |   | 511        |  
|Loan expenses                                          |  |                             | 77         |   |                           |   | 102        |      |  |   | 227        |   |  |   | 196        |  
|Regulatory assessments                                 |  |                             | 19         |   |                           |   | 83         |      |  |   | 39         |   |  |   | 167        |  
|Data processing                                        |  |                             | 104        |   |                           |   | 125        |      |  |   | 197        |   |  |   | 280        |  
|Insurance                                              |  |                             | 174        |   |                           |   | 174        |      |  |   | 346        |   |  |   | 347        |  
|Depreciation                                           |  |                             | 92         |   |                           |   | 91         |      |  |   | 181        |   |  |   | 146        |  
|Amortization of intangibles                            |  |                             |           |   |                           |   | 64         |      |  |   |           |   |  |   | 129        |  
|Directors expense                                      |  |                             | 96         |   |                           |   | 135        |      |  |   | 186        |   |  |   | 270        |  
|Other general and administrative expense               |  |                             | 297        |   |                           |   | 398        |      |  |   | 626        |   |  |   | 691        |  
|                                                       |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Total other expenses                                   |  |                             | 3,520      |   |                           |   | 4,240      |      |  |   | 8,364      |   |  |   | 8,079      |  
|                                                       |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|INCOME BEFORE INCOME TAX PROVISION                     |  |                             | 5,526      |   |                           |   | 5,661      |      |  |   | 9,876      |   |  |   | 11,727     |  
|INCOME TAX PROVISION                                   |  |                             | 2,250      |   |                           |   | 2,388      |      |  |   | 4,102      |   |  |   | 4,966      |  
|                                                       |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|NET INCOME                                             |  | $                           | 3,276      |   |                           | $ | 3,273      |      |  | $ | 5,774      |   |  | $ | 6,761      |  
|                                                       |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Earnings per sharebasic                               |  | $                           | 0.15       |   |                           | $ | 0.15       |      |  | $ | 0.27       |   |  | $ | 0.32       |  
|Earnings per sharediluted                             |  | $                           | 0.15       |   |                           | $ | 0.15       |      |  | $ | 0.27       |   |  | $ | 0.31       |  
|                                                       |  |                             |            |  
|Weighted average number of sharesbasic                |  |                             | 21,368,113 |   |                           |   | 21,179,399 |      |  |   | 21,348,213 |   |  |   | 21,159,293 |  
|Weighted average number of sharesdiluted              |  |                             | 21,552,366 |   |                           |   | 21,484,285 |      |  |   | 21,552,981 |   |  |   | 21,473,869 |  

See notes to unaudited interim condensed consolidated financial statements



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##### Table of Contents

BEVERLY HILLS BANCORP INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in
thousands)



|                                                                                    |  |                           |          |   |      |   |          |  
|----------------------------------------------------------------------------------- |  | ------------------------- | -------- | - | ---- | - | -------- | -
|                                                                                    |  | Six Months Ended June 30, |         
|                                                                                    |  | 2006                      |          |   | 2005 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                               |  |                           |          |   |      |   |          |  
|Net income                                                                          |  | $                         | 5,774    |   |      | $ | 6,761    |  
|Adjustments to reconcile net income to net cash provided by operating activities:   |  |                           |          |   |      |   |          |  
|Net recaptures of losses on loans                                                   |  |                           | (69      | ) |      |   | (4       | )
|Write-down of real estate owned                                                     |  |                           | 6        |   |      |   | 10       |  
|Depreciation and amortization                                                       |  |                           | 181      |   |      |   | 275      |  
|Stock-based compensation                                                            |  |                           | 118      |   |      |   |         |  
|Deferred tax provision                                                              |  |                           | 1,006    |   |      |   | 1,487    |  
|Loss (gain) on sale of real estate owned                                            |  |                           | 3        |   |      |   | (218     | )
|Loss on sale of equipment                                                           |  |                           | 5        |   |      |   |         |  
|Loss on sale of loans                                                               |  |                           |         |   |      |   | 21       |  
|Amortization of discounts and deferred fees                                         |  |                           | 396      |   |      |   | 825      |  
|Federal Home Loan Bank stock dividends                                              |  |                           | (667     | ) |      |   | (464     | )
|Tax benefit from exercise of nonqualified stock options                             |  |                           |         |   |      |   | 305      |  
|Change in:                                                                          |  |                           |          |   |      |   |          |  
|Accrued interest receivable                                                         |  |                           | (890     | ) |      |   | (1,075   | )
|Income taxes receivable                                                             |  |                           | 2,391    |   |      |   |         |  
|Prepaid expenses and other assets                                                   |  |                           | (562     | ) |      |   | (607     | )
|Accounts payable and other liabilities                                              |  |                           | 861      |   |      |   | 1,403    |  
|                                                                                    |  |                           |          |   |      |   |          |  
|Net cash provided by operating activities                                           |  |                           | 8,553    |   |      |   | 8,719    |  
|                                                                                    |  |                           |          |   |      |   |          |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                               |  |                           |          |   |      |   |          |  
|Purchase of loans                                                                   |  |                           | (36,197  | ) |      |   | (89,824  | )
|Loan originations                                                                   |  |                           | (87,463  | ) |      |   | (58,281  | )
|Loan repayments                                                                     |  |                           | 131,515  |   |      |   | 89,909   |  
|Purchase of mortgage-backed securities available for sale                           |  |                           | (117,902 | ) |      |   | (83,627  | )
|Repayments of mortgage-backed securities available for sale                         |  |                           | 37,037   |   |      |   | 44,078   |  
|Purchases of FHLB stock                                                             |  |                           |         |   |      |   | (2,744   | )
|Proceeds from sale of FHLB stock                                                    |  |                           | 2,932    |   |      |   |         |  
|Proceeds from sale of real estate owned                                             |  |                           | 19       |   |      |   | 1,987    |  
|Purchases of leasehold improvements and equipment                                   |  |                           | (68      | ) |      |   | (717     | )
|                                                                                    |  |                           |          |   |      |   |          |  
|Net cash used in investing activities                                               |  |                           | (70,127  | ) |      |   | (99,169  | )
|                                                                                    |  |                           |          |   |      |   |          |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                               |  |                           |          |   |      |   |          |  
|Net increase in deposits                                                            |  |                           | 98,810   |   |      |   | 28,283   |  
|Decrease in repurchase agreements                                                   |  |                           | (28,000  | ) |      |   | (2,000   | )
|Proceeds from FHLB advances                                                         |  |                           | 260,000  |   |      |   | 200,000  |  
|Repayments of FHLB advances                                                         |  |                           | (293,000 | ) |      |   | (124,000 | )
|Issuance of junior subordinated notes payable                                       |  |                           | 20,619   |   |      |   |         |  
|Proceeds from exercise of stock options                                             |  |                           | 17       |   |      |   | 163      |  
|Tax benefit from exercise of nonqualified stock options                             |  |                           | 15       |   |      |   |         |  
|Dividends paid on common stock                                                      |  |                           | (5,349   | ) |      |   | (5,294   | )
|                                                                                    |  |                           |          |   |      |   |          |  
|Net cash provided by financing activities                                           |  |                           | 58,112   |   |      |   | 92,152   |  
|                                                                                    |  |                           |          |   |      |   |          |  
|NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                                |  |                           | (3,462   | ) |      |   | 1,702    |  
|CASH AND CASH EQUIVALENTS:                                                          |  |                           |          |   |      |   |          |  
|Beginning of period                                                                 |  |                           | 20,954   |   |      |   | 15,526   |  
|                                                                                    |  |                           |          |   |      |   |          |  
|End of period                                                                       |  | $                         | 17,492   |   |      | $ | 17,228   |  
|                                                                                    |  |                           |          |   |      |   |          |  
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period for: |  |                           |          |   |      |   |          |  
|Interest                                                                            |  | $                         | 28,216   |   |      | $ | 15,365   |  
|Income taxes, net                                                                   |  |                           | 720      |   |      |   | 3,028    |  
|NONCASH INVESTING ACTIVITIES:                                                       |  |                           |          |   |      |   |          |  
|Additions to real estate owned acquired in settlement of loans                      |  |                           | 13       |   |      |   | 120      |  

See notes to unaudited interim condensed consolidated financial statements



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##### Table of Contents

BEVERLY HILLS BANCORP INC. AND SUBSIDIARIES

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



|1. | BASIS OF PRESENTATION
|-- | ---------------------

The accompanying interim
condensed consolidated financial statements of Beverly Hills Bancorp Inc. (BHBC, and with its consolidated subsidiaries, the Company) are unaudited and should be read in conjunction with the Companys 2005 Annual Report
on Form 10-K. A summary of the Companys significant accounting policies is set forth in Note 2 to the Consolidated Financial Statements in such Annual Report on Form 10-K. There were no significant changes to any accounting policies during the
quarter or six months ended June 30, 2006.

In the opinion of management, all adjustments, generally comprised of normal recurring
accruals necessary for a fair presentation of the interim condensed consolidated financial statements, have been included and all intercompany accounts and transactions have been eliminated in consolidation. Operating results for the three and six
months ended June 30, 2006 are not necessarily indicative of the results that may be expected for the year ending December 31, 2006.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual amounts and results could differ from those estimates.

As of December 31, 2005, the Company reclassified its prepayment fees on loans from other operating income to interest income. The
amounts in prior periods have been reclassified to conform to the current format. This change in classification was made pursuant to the conversion of its bank subsidiarys charter from a federal savings and loan charter to a California state
commercial bank charter, effective September 1, 2005. The Company believes this classification of loan prepayment fees is consistent with that of other state-chartered banks. The amount of such fees reclassified as interest income totaled
$550,000 and $863,000, respectively, for the three-month and six-month periods ended June 30, 2005.



|2. | PER-SHARE DATA
|-- | --------------

Basic earnings per share is
computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted average number of common shares and potentially
dilutive stock options outstanding during the period. Following is a reconciliation of the number of shares used in the calculation of basic and diluted earnings per share for the three-month and six-month periods ended June 30, 2006 and 2005.



|                                                                    |  |                                               |            |                           |      |   |            |  |   |            |     |  |   |           
|------------------------------------------------------------------- |  | --------------------------------------------- | ---------- | ------------------------- | ---- | - | ---------- |  | - | ---------- | --- |  | - | ----------
|                                                                    |  | Three Months Ended June 30,                   |            | Six Months Ended June 30,
|                                                                    |  | 2006                                          |            |                           | 2005 |   | 2006       |  |   | 2005      
|                                                                    |  | (Dollars in thousands, except per-share data)
|Net income                                                          |  | $                                             | 3,276      |                           |      | $ | 3,273      |  | $ | 5,774      |     |  | $ | 6,761     
|                                                                    |  |                                               |            |                           |      |   |            |  |   |            |     |  |   |           
|Weighted average number of common shares outstandingbasic          |  |                                               | 21,368,113 |                           |      |   | 21,179,399 |  |   | 21,348,143 |     |  |   | 21,159,293
|Net effect of dilutive stock optionsbased on treasury stock method |  |                                               | 184,253    | (1)                       |      |   | 304,886    |  |   | 204,838    | (2) |  |   | 314,576   
|                                                                    |  |                                               |            |                           |      |   |            |  |   |            |     |  |   |           
|Weighted average number of common shares outstandingdiluted        |  |                                               | 21,552,366 |                           |      |   | 21,484,285 |  |   | 21,552,981 |     |  |   | 21,473,869
|                                                                    |  |                                               |            |                           |      |   |            |  |   |            |     |  |   |           
|Earnings per sharebasic                                            |  | $                                             | 0.15       |                           |      | $ | 0.15       |  | $ | 0.27       |     |  | $ | 0.32      
|                                                                    |  |                                               |            |                           |      |   |            |  |   |            |     |  |   |           
|Earnings per sharediluted                                          |  | $                                             | 0.15       |                           |      | $ | 0.15       |  | $ | 0.27       |     |  | $ | 0.31      
|                                                                    |  |                                               |            |                           |      |   |            |  |   |            |     |  |   |           



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NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)



---

|(1) | Does not include a weighted average of 600,000 options outstanding during the period whose exercise would have had an anti-dilutive effect on earnings per share.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Does not include a weighted average of 593,370 options outstanding during the period whose exercise would have had an anti-dilutive effect on earnings per share.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



|3. | STOCK-BASED COMPENSATION
|-- | ------------------------

The Company has two
stock-based employee compensation plans, the 1999 Equity Participation Plan and the 2002 Equity Participation Plan, pursuant to which stock options have been granted to its directors and certain employees. All stock options have an exercise price
that is equal to the fair value of the Companys stock on the date of grant. Options generally vest over a three-year period and have a maximum term of 10 years.

A summary of the Companys stock option activity for the periods indicated is presented below:



|                                   |  |                                  |   |                                |                              |      |        |          |   |                              |   |      
|---------------------------------- |  | -------------------------------- | - | ------------------------------ | ---------------------------- | ---- | ------ | -------- | - | ---------------------------- | - | -----
|                                   |  | Three Months Ended June 30, 2006 |   | Six Months Ended June 30, 2006
|                                   |  | Shares                           |   |                                | WeightedAverageExercisePrice |      | Shares |          |   | WeightedAverageExercisePrice
|Outstanding at beginning of period |  | 917,106                          |   |                                | $                            | 7.66 |        | 322,106  |   |                              | $ | 2.29 
|Granted                            |  |                                 |   |                                |                              |     |        | 600,000  |   |                              |   | 10.50
|Exercised                          |  | (130,001                         | ) |                                |                              | 1.75 |        | (135,001 | ) |                              |   | 1.81 
|Forfeited                          |  | (29,603                          | ) |                                |                              | 1.84 |        | (29,603  | ) |                              |   | 1.84 
|                                   |  |                                  |   |                                |                              |      |        |          |   |                              |   |      
|Outstanding at end of period       |  | 757,502                          |   |                                | $                            | 8.90 |        | 757,502  |   |                              | $ | 8.90 
|                                   |  |                                  |   |                                |                              |      |        |          |   |                              |   |      
|Exercisable at end of period       |  | 257,502                          |   |                                | $                            | 5.78 |        | 257,502  |   |                              | $ | 5.78 
|                                   |  |                                  |   |                                |                              |      |        |          |   |                              |   |      

A summary of the status of the Companys nonvested options as of June 30, 2006, and
changes during the three- and six-month periods then ended, is presented below:



|                                 |  |                                  |   |                                |                                        |      |        |          |   |                                        |   |     
|-------------------------------- |  | -------------------------------- | - | ------------------------------ | -------------------------------------- | ---- | ------ | -------- | - | -------------------------------------- | - | ----
|                                 |  | Three Months Ended June 30, 2006 |   | Six Months Ended June 30, 2006
|                                 |  | Shares                           |   |                                | Weighted Average Grant Date Fair Value |      | Shares |          |   | Weighted Average Grant Date Fair Value
|Nonvested at beginning of period |  | 567,502                          |   |                                | $                                      | 1.11 |        | 17,502   |   |                                        | $ | 0.79
|Granted                          |  |                                 |   |                                |                                        |     |        | 600,000  |   |                                        |   | 1.13
|Vested                           |  | (67,502                          | ) |                                |                                        | 1.11 |        | (117,502 | ) |                                        |   | 1.16
|Forfeited                        |  |                                 |   |                                |                                        |     |        |         |   |                                        |   |    
|                                 |  |                                  |   |                                |                                        |      |        |          |   |                                        |   |     
|Nonvested at end of period       |  | 500,000                          |   |                                | $                                      | 1.11 |        | 500,000  |   |                                        | $ | 1.11
|                                 |  |                                  |   |                                |                                        |      |        |          |   |                                        |   |     

Prior to 2006, the Company accounted for its stock option plans under the recognition and
measurement provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations (APB 25), as permitted by Financial Accounting Standards Board (FASB)
Statement of Financial Accounting Standards No. 128, Accounting for Stock-Based Compensation (SFAS No. 128).

In December 2004, the FASB issued SFAS No. 128 (revised 2004), Share-Based Payment(SFAS No. 128R). Under this standard, companies are no longer able to account for share-based compensation



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NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)



transactions using the intrinsic value method in accordance with APB 25. Instead, companies are required to account for such transactions using a fair-value
method and recognize the expense in the consolidated statement of operations.

Effective January 1, 2006, the Company adopted SFAS
No. 128R using the modified prospective transition method. Under this method, stock compensation cost recognized beginning January 1, 2006 includes (a) compensation cost for all previously granted stock options that were unvested as
of January 1, 2006 and (b) compensation cost for all stock options granted on or subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 128R. Results for prior
periods have not been restated.

In the second quarter of 2006, the application of SFAS No. 128R resulted in stock-based compensation
expense of $57,649, deferred tax benefits of $22,848 and a net reduction in net income of $34,801. There was a negligible effect on basic and diluted earnings per share. For the six months ended June 30, 2006, the Company recorded stock-based
compensation expense of $117,833, deferred tax benefits of $45,696 and a net reduction in net income of $72,137, reducing basic and diluted earnings per share by $0.01. The compensation expense and deferred tax benefits are reflected as adjustments
to cash flows from operating activities on the Companys consolidated statement of cash flows. The Company recorded tax benefits from the exercise of non-qualified stock options of $14,663, which are included in cash flows from financing
activities for the six months ended June 30, 2006. Prior to the adoption of SFAS No. 128R, such tax benefits were presented as adjustments to cash flows from operating activities.

At June 30, 2006, the Company had $564,444 of unrecognized compensation cost related to unvested stock options. This cost is expected to be
amortized over a weighted-average period of 2.50 years, ending in December 2008.

Additional information regarding options outstanding as
of June 30, 2006 is as follows:



|                         |  |              |  |                    |  |                                       |                    |                                 |                    |  |   |      
|------------------------ |  | ------------ |  | ------------------ |  | ------------------------------------- | ------------------ | ------------------------------- | ------------------ |  | - | -----
|                         |  |              |  |                    |  | Weighted AverageRemaining Life(Years) |                    | Weighted Average Exercise Price
|Range of Exercise Prices |  | Total Shares |  | Exercisable Shares |  |                                       | OptionsOutstanding |                                 | OptionsExercisable
|$1.87                    |  | 55,000       |  | 55,000             |  | 5.37                                  |                    | $                               | 1.87               |  | $ | 1.87 
|$2.34  $2.61            |  | 30,000       |  | 30,000             |  | 5.65                                  |                    |                                 | 2.43               |  |   | 2.43 
|$3.45  $3.80            |  | 72,502       |  | 72,502             |  | 6.43                                  |                    |                                 | 3.64               |  |   | 3.64 
|$10.50                   |  | 600,000      |  | 100,000            |  | 9.51                                  |                    |                                 | 10.50              |  |   | 10.50



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NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)



Prior to the adoption of SFAS No. 128R, the Company applied APB 25 to account for its
stock-based awards. The following table illustrates the effect on net income and earnings per share had the Company accounted for share-based compensation in accordance with SFAS No. 128R for the period indicated:



|                                                                                                                                           |  |                                               |       |                                |   |      
|------------------------------------------------------------------------------------------------------------------------------------------ |  | --------------------------------------------- | ----- | ------------------------------ | - | -----
|                                                                                                                                           |  | Three Months Ended June 30, 2005              |       | Six Months Ended June 30, 2005
|                                                                                                                                           |  | (Dollars in thousands, except per-share data)
|Net income, as reported                                                                                                                    |  | $                                             | 3,273 |                                | $ | 6,761
|Add:  Stock-based employee compensation expense included in reported net income, net of related tax effects                                |  |                                               |      |                                |   |     
|Less:  Total stock-based employee compensation expense determined under fair value-based method for all awards, net of related tax
effects |  |                                               | 62    |                                |   | 146  
|                                                                                                                                           |  |                                               |       |                                |   |      
|Pro forma net income                                                                                                                       |  | $                                             | 3,211 |                                | $ | 6,615
|                                                                                                                                           |  |                                               |       |                                |   |      
|Earnings per sharebasic:                                                                                                                  |  |                                               |       |                                |   |      
|As reported                                                                                                                                |  | $                                             | 0.15  |                                | $ | 0.32 
|                                                                                                                                           |  |                                               |       |                                |   |      
|Pro forma                                                                                                                                  |  | $                                             | 0.15  |                                | $ | 0.31 
|                                                                                                                                           |  |                                               |       |                                |   |      
|Earnings per sharediluted:                                                                                                                |  |                                               |       |                                |   |      
|As reported                                                                                                                                |  | $                                             | 0.15  |                                | $ | 0.31 
|                                                                                                                                           |  |                                               |       |                                |   |      
|Pro forma                                                                                                                                  |  | $                                             | 0.15  |                                | $ | 0.31 
|                                                                                                                                           |  |                                               |       |                                |   |      



|4. | COMMITMENTS, CONTINGENCIES AND OFF-BALANCE SHEET RISK
|-- | -----------------------------------------------------

At June 30, 2006, the Company had outstanding commitments to fund $47.3 million of loans. Loan commitments expose the Company to credit risk in excess of amounts reflected in the consolidated financial statements. The Company receives
collateral to support loans and commitments to extend credit for which collateral is deemed necessary.



|5. | INCOME TAXES
|-- | ------------

The Company files consolidated
federal and state income tax returns with its eligible subsidiaries. The Company recorded income tax provisions of $2.25 million and $4.1 million, respectively, for the three and six months ended June 30, 2006, compared with provisions of $2.4
million and $5.0 million, respectively, for the corresponding 2005 periods. A portion of the Companys income tax provision is not expected to be currently payable in cash, due to the utilization of the Companys net operating loss
carryforward. The Companys deferred tax provision (benefit) is determined on a quarterly basis pursuant to an evaluation of its net deferred tax asset. These deferred tax assets and liabilities represent the tax effect of future deductible or
taxable amounts and are primarily attributable to net operating loss carryforwards, in addition to other differences between amounts that have been recognized in the financial statements and amounts that have been recognized in the income tax
returns. An effective tax rate of approximately 42% is applied to each attribute in determining the amount of the related deferred tax asset or liability. Decreases (increases) in the net deferred tax asset are recorded as a deferred tax provision
(benefit) in the consolidated statements of operations.

The Companys net deferred tax asset was $32.0 million and $30.7 million,
respectively, at June 30, 2006 and December 31, 2005. In accounting for the deferred tax asset, the Company applies SFAS No. 109, Accounting for Income Taxes, which requires, among other things, that deferred tax assets be
reduced by a



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NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)



valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized. The Company has evaluated the
positive and negative evidence regarding the future realization of its deferred tax assets and has recorded a valuation allowance of $5.8 million. The Company believes it is more likely than not that its net deferred tax asset of $32.0 million will
be realized in future periods.

As of June 30, 2006, the Company had federal net operating loss carryforwards of $87.5 million and
also had state net operating loss carryforwards. The federal carryforward period runs through 2020. However, in June 2002 the Company experienced a change in control as defined by Section 382 of the Internal Revenue Code. As a result of the
change in control, the Companys net operating loss carryforwards that were generated prior to the change in control are subject to an annual limitation on the amount that may be used to offset taxable income. The Company has determined that
the limitation on the amount that may be used annually to offset taxable income is approximately $6.0 million.



|6. | OPERATING SEGMENTS
|-- | ------------------

The Companys two
operating segments, as defined by the Companys management, consist of its Banking Operations and its Holding Company and Other Operations. Through the year ended December 31, 2005, the Company reported the results of its investment
subsidiary, WFC Inc. (WFC), as an additional segment known as Mortgage Investments. In 2006, the Company determined that WFC no longer meets the qualitative definition or quantitative thresholds of an operating segment as set
forth in SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. Consequently, WFCs results for the three and six months ended June 30, 2006 are not presented as a separate segment but are included
in the Holding Company and Other Operations segment. Segment data for the three and six months ended June 30, 2005 have been restated to conform to the current format.

The Companys operating segments are described in further detail as follows:



| |  |  | Banking OperationsThrough its bank subsidiary, First Bank of Beverly Hills (FBBH or the Bank), the Company conducts a banking business focused
primarily on products tailored to commercial and multifamily real estate lending, in addition to investments in primarily AAA-rated and government-sponsored enterprise (GSE) mortgage-backed securities. The primary sources of funding for
the Bank are deposits, Federal Home Loan Bank (FHLB) advances and repurchase agreements. The Bank is a state-chartered commercial bank and is regulated by the California Department of Financial Institutions (DFI) and the
Federal Deposit Insurance Corporation (FDIC).
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Holding Company and Other OperationsThe Companys Holding Company and Other Operations consist of other operating revenues and expenses not attributable to its
Banking Operations. This segment includes interest income on loans and other investments, interest expense on $41.2 million of junior subordinated notes payable, general corporate expenses and eliminations of intercompany accounts and transactions.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)



Segment data for the three months ended June 30, 2006 and 2005 are as follows:



|                                                                             |  |                                  |           |   |                                      |   |        |       |  |   |           |  
|---------------------------------------------------------------------------- |  | -------------------------------- | --------- | - | ------------------------------------ | - | ------ | ----- |  | - | --------- | -
|                                                                             |  | Three Months Ended June 30, 2006 |          
|                                                                             |  | Banking                          |           |   | Holding Company and Other
Operations |   |        | Total | 
|                                                                             |  | (Dollars in thousands)           |          
|Interest income                                                              |  | $                                | 21,074    |   |                                      | $ | 456    |       |  | $ | 21,530    |  
|Interest expense                                                             |  |                                  | 12,439    |   |                                      |   | 493    |       |  |   | 12,932    |  
|                                                                             |  |                                  |           |   |                                      |   |        |       |  |   |           |  
|Net interest income (expense)                                                |  |                                  | 8,635     |   |                                      |   | (37    | )     |  |   | 8,598     |  
|(Recapture of) provision for loan losses                                     |  |                                  | (154      | ) |                                      |   | 45     |       |  |   | (109      | )
|                                                                             |  |                                  |           |   |                                      |   |        |       |  |   |           |  
|Net interest income (expense) after (recapture of) provision for loan losses |  |                                  | 8,789     |   |                                      |   | (82    | )     |  |   | 8,707     |  
|Other income (loss)                                                          |  |                                  | 351       |   |                                      |   | (12    | )     |  |   | 339       |  
|Compensation and employee benefits expense                                   |  |                                  | 1,772     |   |                                      |   | 246    |       |  |   | 2,018     |  
|Other expenses                                                               |  |                                  | 1,304     |   |                                      |   | 198    |       |  |   | 1,502     |  
|                                                                             |  |                                  |           |   |                                      |   |        |       |  |   |           |  
|Income (loss) before taxes                                                   |  |                                  | 6,064     |   |                                      |   | (538   | )     |  |   | 5,526     |  
|Income tax provision (benefit)                                               |  |                                  | 2,466     |   |                                      |   | (216   | )     |  |   | 2,250     |  
|                                                                             |  |                                  |           |   |                                      |   |        |       |  |   |           |  
|Net income (loss)                                                            |  | $                                | 3,598     |   |                                      | $ | (322   | )     |  | $ | 3,276     |  
|                                                                             |  |                                  |           |   |                                      |   |        |       |  |   |           |  
|Total assets                                                                 |  | $                                | 1,428,987 |   |                                      | $ | 41,527 |       |  | $ | 1,465,514 |  
|                                                                             |  |                                  |           |   |                                      |   |        |       |  |   |           |  
|                                                                             | 
|                                                                             |  | Three Months Ended June 30, 2005 |          
|                                                                             |  | Banking                          |           |   | Holding Company and Other Operations |   |        | Total | 
|                                                                             |  | (Dollars in thousands)           |          
|Interest income                                                              |  | $                                | 18,329    |   |                                      | $ | 212    |       |  | $ | 18,541    |  
|Interest expense                                                             |  |                                  | 8,580     |   |                                      |   | 358    |       |  |   | 8,938     |  
|                                                                             |  |                                  |           |   |                                      |   |        |       |  |   |           |  
|Net interest income (expense)                                                |  |                                  | 9,749     |   |                                      |   | (146   | )     |  |   | 9,603     |  
|Realized losses on sales                                                     |  |                                  |          |   |                                      |   | (21    | )     |  |   | (21       | )
|Other income                                                                 |  |                                  | 267       |   |                                      |   | 52     |       |  |   | 319       |  
|Compensation and employee benefits expense                                   |  |                                  | 1,832     |   |                                      |   | 63     |       |  |   | 1,895     |  
|Other expenses                                                               |  |                                  | 1,485     |   |                                      |   | 860    |       |  |   | 2,345     |  
|                                                                             |  |                                  |           |   |                                      |   |        |       |  |   |           |  
|Income (loss) before taxes                                                   |  |                                  | 6,699     |   |                                      |   | (1,038 | )     |  |   | 5,661     |  
|Income tax provision (benefit)                                               |  |                                  | 2,835     |   |                                      |   | (447   | )     |  |   | 2,388     |  
|                                                                             |  |                                  |           |   |                                      |   |        |       |  |   |           |  
|Net income (loss)                                                            |  | $                                | 3,864     |   |                                      | $ | (591   | )     |  | $ | 3,273     |  
|                                                                             |  |                                  |           |   |                                      |   |        |       |  |   |           |  
|Total assets                                                                 |  | $                                | 1,401,513 |   |                                      | $ | 34,409 |       |  | $ | 1,435,922 |  
|                                                                             |  |                                  |           |   |                                      |   |        |       |  |   |           |  



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NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)



Segment data for the six months ended June 30, 2006 and 2005 are as follows:



|                                                                             |  |                                |           |   |                                      |   |        |       |  |   |           |  
|---------------------------------------------------------------------------- |  | ------------------------------ | --------- | - | ------------------------------------ | - | ------ | ----- |  | - | --------- | -
|                                                                             |  | Six Months Ended June 30, 2006 |          
|                                                                             |  | Banking                        |           |   | Holding Company and Other
Operations |   |        | Total | 
|                                                                             |  | (Dollars in thousands)         |          
|Interest income                                                              |  | $                              | 41,188    |   |                                      | $ | 697    |       |  | $ | 41,885    |  
|Interest expense                                                             |  |                                | 28,609    |   |                                      |   | 802    |       |  |   | 24,411    |  
|                                                                             |  |                                |           |   |                                      |   |        |       |  |   |           |  
|Net interest income (expense)                                                |  |                                | 17,579    |   |                                      |   | (105   | )     |  |   | 17,474    |  
|(Recapture of) provision for loan losses                                     |  |                                | (114      | ) |                                      |   | 45     |       |  |   | (69       | )
|                                                                             |  |                                |           |   |                                      |   |        |       |  |   |           |  
|Net interest income (expense) after (recapture of) provision for loan losses |  |                                | 17,693    |   |                                      |   | (150   | )     |  |   | 17,543    |  
|Other income (loss)                                                          |  |                                | 711       |   |                                      |   | (14    | )     |  |   | 697       |  
|Compensation and employee benefits expense                                   |  |                                | 3,553     |   |                                      |   | 478    |       |  |   | 4,031     |  
|Other expenses                                                               |  |                                | 2,496     |   |                                      |   | 1,837  |       |  |   | 4,333     |  
|                                                                             |  |                                |           |   |                                      |   |        |       |  |   |           |  
|Income (loss) before taxes                                                   |  |                                | 12,355    |   |                                      |   | (2,479 | )     |  |   | 9,876     |  
|Income tax provision (benefit)                                               |  |                                | 5,140     |   |                                      |   | (1,038 | )     |  |   | 4,102     |  
|                                                                             |  |                                |           |   |                                      |   |        |       |  |   |           |  
|Net income (loss)                                                            |  | $                              | 7,215     |   |                                      | $ | (1,441 | )     |  | $ | 5,774     |  
|                                                                             |  |                                |           |   |                                      |   |        |       |  |   |           |  
|Total assets                                                                 |  | $                              | 1,423,987 |   |                                      | $ | 41,527 |       |  | $ | 1,465,514 |  
|                                                                             |  |                                |           |   |                                      |   |        |       |  |   |           |  
|                                                                             | 
|                                                                             |  | Six Months Ended June 30, 2005 |          
|                                                                             |  | Banking                        |           |   | Holding Company and Other Operations |   |        | Total | 
|                                                                             |  | (Dollars in thousands)         |          
|Interest income                                                              |  | $                              | 35,241    |   |                                      | $ | 505    |       |  | $ | 35,746    |  
|Interest expense                                                             |  |                                | 16,048    |   |                                      |   | 687    |       |  |   | 16,735    |  
|                                                                             |  |                                |           |   |                                      |   |        |       |  |   |           |  
|Net interest income (expense)                                                |  |                                | 19,193    |   |                                      |   | (182   | )     |  |   | 19,011    |  
|Recapture of loan losses                                                     |  |                                |          |   |                                      |   | (4     | )     |  |   | (4        | )
|                                                                             |  |                                |           |   |                                      |   |        |       |  |   |           |  
|Net interest income (expense) after recapture of loan losses                 |  |                                | 19,193    |   |                                      |   | (178   | )     |  |   | 19,015    |  
|Realized losses on sales                                                     |  |                                |          |   |                                      |   | (21    | )     |  |   | (21       | )
|Other income                                                                 |  |                                | 746       |   |                                      |   | 66     |       |  |   | 812       |  
|Compensation and employee benefits expense                                   |  |                                | 3,611     |   |                                      |   | 153    |       |  |   | 3,764     |  
|Other expenses                                                               |  |                                | 2,828     |   |                                      |   | 1,492  |       |  |   | 4,315     |  
|                                                                             |  |                                |           |   |                                      |   |        |       |  |   |           |  
|Income (loss) before taxes                                                   |  |                                | 13,505    |   |                                      |   | (1,778 | )     |  |   | 11,727    |  
|Income tax provision (benefit)                                               |  |                                | 5,728     |   |                                      |   | (762   | )     |  |   | 4,966     |  
|                                                                             |  |                                |           |   |                                      |   |        |       |  |   |           |  
|Net income (loss)                                                            |  | $                              | 7,777     |   |                                      | $ | (1,016 | )     |  | $ | 6,761     |  
|                                                                             |  |                                |           |   |                                      |   |        |       |  |   |           |  
|Total assets                                                                 |  | $                              | 1,401,513 |   |                                      | $ | 34,409 |       |  | $ | 1,435,922 |  
|                                                                             |  |                                |           |   |                                      |   |        |       |  |   |           |  



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BEVERLY HILLS BANCORP INC. AND SUBSIDIARIES

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)





|7. | GOODWILL AND INTANGIBLE ASSETS
|-- | ------------------------------

The Company has
goodwill of $3.1 million as a result of the Banks purchase of its Beverly Hills branch in June 2000. Through December 31, 2001, the goodwill was amortized on a straight-line basis over an estimated useful life of 15 years. In January 2002
the Company adopted SFAS No. 142, Goodwill and Other Intangible Assets, and, as a result, no longer amortizes goodwill, but tests it at least annually for impairment. The Company tested goodwill for impairment as of March 31, 2006
and determined that no impairment charge was required. There were no conditions that indicated impairment at June 30, 2006.

The
Company has entered into an agreement to sell the Banks Beverly Hills branch (see Note 13). After the branch is sold, the goodwill will be written off in full, reducing any potential gain on the sale by $3.1 million.

The Company also recorded a core deposit intangible of $1.3 million in connection with the Banks purchase of the branch. The core deposit
intangible was amortized on a straight-line basis over an estimated useful life of 5 years and had been amortized in full as of June 30, 2005. For the three and six months ended June 30, 2005, the Company recorded amortization expense of
$64,000 and $129,000, respectively, related to the core deposit intangible.



|8. | LEGAL MATTERS
|-- | -------------

In May 2006, the Company received a
favorable ruling from an arbitrator on all matters in connection with the Companys disputes with a former officer. Pursuant to a binding arbitration held in February 2006, the arbitrator ruled that the Company has no obligation to indemnify
the former officer for his monetary penalties or his legal expenses which arose from a criminal investigation of the officer.

In June
2004, the former officer pleaded guilty to two felony counts in connection with criminal proceedings against him arising out of the financial collapse of Capital Consultants LLC in 2000. As part of the plea bargain, the former officer agreed to pay
restitution in the amount of $2.0 million. He subsequently made a claim against the Company for this amount, asserting that he is entitled to indemnity under Delaware law. The Company disagreed with this assertion and also filed a counterclaim to
recover the legal fees and expenses it paid on the former officers behalf in prior years.

The arbitrator dismissed the former
officers claim for reimbursement of the $2.0 million restitution and ruled that under Delaware law, the former officer is not entitled to indemnity for his related legal expenses. As a result of this ruling, the Company is entitled to recover
the $4.1 million in legal fees and expenses previously advanced on the former officers behalf, plus interest on such advances calculated from the date of original payment. In addition, as the prevailing party, the Company is entitled to
reimbursement of its own legal fees and costs incurred in connection with these claims.

In the second quarter of 2006, the Company
recorded a reduction in legal expenses of $746,000 through the reversal of expenses previously accrued through May 31, 2006 on behalf of the former officer that it is no longer obligated to pay. The Company and the former officer are in
negotiations to reach a final resolution. However, there can be no assurance that the Company will ultimately recover all or any of the expenses previously paid in relation to its disputes with the former officer.

The Company is also involved in litigation with its former loan servicing subsidiary, Wilshire Credit Corporation (WCC), and WCCs
parent, Merrill Lynch Mortgage Capital Inc. (Merrill Lynch), which purchased WCC from the Company in April 2004. Beginning in June 2005, WCC made demands on the Company for reimbursement of certain costs purportedly incurred by WCC in
connection with WCCs



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BEVERLY HILLS BANCORP INC. AND SUBSIDIARIES

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)



performance under one of its loan servicing contracts. Through June 30, 2006, WCC had claimed a total of $890,000 of such costs. WCC further asserted
that the Company is obligated to reimburse WCC for similar recurring costs it may incur through April 2008. The Company disagrees with this assertion. As a result, in July 2005 the Company filed a complaint for declaratory relief against WCC and
Merrill Lynch. The complaint seeks, among other things, a declaration that the Company has no obligation to reimburse WCC for those costs, and that if such an obligation is found to exist, it is for a substantially lesser amount than that claimed by
WCC. In September 2005, Merrill Lynch filed a cross-complaint against the Company alleging breach of contract. The Company is not currently able to quantify the impact, if any, that the outcome of these actions may have on its financial condition or
results of operations.

The Company is a defendant in other legal actions arising from transactions conducted in the ordinary course of
business. Some of these claims involve individual borrowers demanding material amounts for alleged damages. Management, after consultation with legal counsel, and based on prior experience with similar litigation, believes the ultimate liability, if
any, arising from such actions will not materially affect the Companys consolidated results of operations, financial position or cash flows.



|9. | CASH DIVIDENDS
|-- | --------------

The Company paid dividends totaling
$2.7 million and $5.3 million, respectively, for the three and six months ended June 30, 2006. Commencing in the second quarter of 2004, the Company has declared regular quarterly cash dividends of $0.125 per share, or $0.50 annually.



|10. | ISSUANCE OF TRUST PREFERRED SECURITIES
|--- | --------------------------------------

On
May 16, 2006, the Company issued $20.6 million in floating-rate junior subordinated notes payable to a newly formed subsidiary, Beverly Hills Statutory Trust 2006 (the Trust). The Trust purchased these notes using the proceeds from
a private placement of $20 million in trust preferred securities and from the issuance of $0.6 million in common trust securities to the Company. The junior subordinated notes bear interest at the 3-month LIBOR rate plus 1.55% (7.00% at
June 30, 2006), payable quarterly, and mature in June 2036. The notes may be prepaid at any time on or after June 28, 2011 at par or at any time before June 28, 2011 at a premium to par. The trust preferred securities have terms that
mirror the junior subordinated notes, and the Company has guaranteed the payments on these securities.

The Company intends to use the
proceeds from the sale of the junior subordinated debentures, together with the other funds of the Company, to repurchase shares of its common stock pursuant to a self-tender offer. See Note 12 below.



|11. | NEW ACCOUNTING PRONOUNCEMENTS
|--- | -----------------------------

In March 2006, the
FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets, which provides the following: 1) revised guidance on when a servicing asset and servicing liability should be recognized; 2) requires all separately recognized
servicing assets and servicing liabilities to be initially measured at fair value, if practicable; 3) permits an entity to elect to measure servicing assets and servicing liabilities at fair value each reporting date and report changes in fair value
in earnings in the period in which the changes occur; 4) upon initial adoption, permits a onetime reclassification of available-for-sale securities to trading securities for securities which are identified as offsetting the entitys exposure to
changes in the fair value of servicing assets or liabilities that a servicer elects to subsequently measure at fair value; and 5) requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair value in the
statement of financial position and additional footnote disclosures. SFAS No. 156 is effective as of the beginning of an entitys first fiscal year



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BEVERLY HILLS BANCORP INC. AND SUBSIDIARIES

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)



that begins after September 15, 2006 with the effects of initial adoption being reported as a cumulative-effect adjustment to retained earnings. The
Company does not believe that the adoption of SFAS No. 156 will have a material effect on its financial position, results of operations or cash flows.

In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48) which supplements SFAS No. 109 by defining the confidence level that a tax position must
meet in order to be recognized in the financial statements. The Interpretation requires that the tax effects of a position be recognized only if it is more-likely-than-not to be sustained based solely on its technical merits as of the
reporting date. The more-likely-than-not threshold represents a positive assertion by management that a company is entitled to the economic benefits of a tax position. If a tax position is not considered more-likely-than-not to be sustained based
solely on its technical merits, no benefits of the position are to be recognized. Moreover, the more-likely-than-not threshold must continue to be met in each reporting period to support continued recognition of a benefit. At adoption, companies
must adjust their financial statement to reflect only those tax positions that are more-likely-than-not to be sustained as of the adoption date. Any necessary adjustment would be recorded directly to retained earnings in the period of adoption and
reported as a change in accounting principle. This Interpretation is effective as of the beginning of the first fiscal year beginning after December 15, 2006. The Company is evaluating the impact, if any, that the adoption of FIN 48 will have
on its financial position, results of operations or cash flows.



|12. | SUBSEQUENT EVENTOFFER TO REPURCHASE COMMON STOCK
|--- | -------------------------------------------------

On July 14, 2006, the Company commenced a tender offer for the repurchase of up to 2,750,000 shares of its common stock, or approximately 12.8% of its outstanding common stock. Unless extended, the tender offer will expire on
August 14, 2006. The Company is making the tender offer through a procedure commonly referred to as a modified Dutch auction. This procedure allows each stockholder to select the price, within the range of $9.00 to $9.50 per share,
at which the stockholder is willing to sell all or a portion of his or her shares to the Company.

Based on the number of shares of common
stock tendered and the prices specified by the tendering stockholders, the Company will select the lowest per-share price within the specified range that would allow it to purchase 2,750,000 shares (or any lesser number of shares that are properly
tendered). All shares will be purchased at the same price, including shares tendered at a lower price. Shareholders whose shares are purchased in the tender offer will be paid in cash, without interest, promptly after expiration of the offer.

If the Company purchases all 2,750,000 shares at $9.50 per share, the total purchase would be $26.1 million. The Company intends to
finance the repurchase of its stock primarily with the proceeds from the issuance of $20 million of trust preferred securities in May 2006, as discussed in Note 10.



|13. | SUBSEQUENT EVENTSALE OF BEVERLY HILLS BRANCH
|--- | ---------------------------------------------

On August 7, 2006, the Company entered into an agreement to sell FBBHs Beverly Hills branch to First Bank, a subsidiary of First Banks, Inc., headquartered in St. Louis, Missouri. Under the terms of the agreement, First Bank will
assume all of the deposits and certain other liabilities at the Beverly Hills branch. In addition, First Bank will assume the lease of the branch premises and will acquire certain assets at the branch at their respective book values. This
transaction, which is subject to regulatory approvals, is expected to close during the fourth quarter of 2006. Subsequent to the sale, FBBH would retain its name and continue to employ the same deposit-gathering strategy at its retail Calabasas
branch.



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BEVERLY HILLS BANCORP INC. AND SUBSIDIARIES

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)



The carrying values of the assets and liabilities to be transferred to First Bank were as follows as
of June 30, 2006:



|                                          |  |                       |        
|----------------------------------------- |  | --------------------- | -------
|                                          |  | June 30, 2006        
|                                          |  | (Dollars inthousands)
|ASSETS:                                   |  |                       |        
|Cash and cash equivalents                 |  | $                     | 177    
|Loans, net                                |  |                       | 18     
|Leasehold improvements and equipment, net |  |                       | 75     
|                                          |  |                       |        
|Total assets                              |  | $                     | 270    
|                                          |  |                       |        
|LIABILITIES:                              |  |                       |        
|Deposits                                  |  | $                     | 156,544
|Accrued interest payable                  |  |                       | 1,091  
|Other liabilities                         |  |                       | 7      
|                                          |  |                       |        
|Total liabilities                         |  | $                     | 157,642
|                                          |  |                       |        

In addition, the Company has goodwill of approximately $3.1 million which would be written off
upon the closing of the sale.

The sale agreement provides that FBBH will receive a premium of 5.50% of the branchs total deposits
and accrued interest. Based on the level of deposits at June 30, 2006, the total premium would be approximately $8.6 million. The company expects to realize a net gain on the sale of approximately $5.0 million, after the write-off of goodwill
and after related selling expenses.

The assets and liabilities of the Beverly Hills branch as of June 30, 2006 are reported at their
carrying values, which the Company believes approximate their market values. It was not considered necessary to record a market value adjustment as required by SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets,because the Company expects to realize a gain on the sale and because the branchs assets will be sold at their book values.



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BEVERLY HILLS BANCORP INC. AND SUBSIDIARIES



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

The following discussion and analysis should be read in conjunction with the Interim Condensed Consolidated Financial Statements of Beverly Hills
Bancorp Inc. (BHBC) and the notes thereto included elsewhere in this filing. References in this filing to the Company, we, our, and us refer to BHBC and its consolidated subsidiaries,
including First Bank of Beverly Hills (FBBH or the Bank), unless the context indicates otherwise.

OVERVIEW

Beverly Hills Bancorp Inc. is a financial holding company that conducts primarily banking and lending operations in southern California and
surrounding states through our bank subsidiary, First Bank of Beverly Hills. Our business strategy is focused on the growth and profitability of the Bank through (1) originations and purchases of commercial real estate and multifamily mortgage
loans and (2) investments in primarily AAA-rated and government-sponsored enterprise (GSE) mortgage-backed securities. The Bank is a California state chartered commercial bank, and its primary regulator is the California Department
of Financial Institutions (DFI). As an insured institution, the Bank continues to be regulated by the Federal Deposit Insurance Corporation (FDIC).

On August 7, 2006, we entered into an agreement to sell the Banks Beverly Hills branch. We intend to operate principally as a wholesale bank
subsequent to the sale, which is expected to close in the fourth quarter of 2006.

Our net income for the three months ended June 30,
2006 was $3.3 million, or $0.15 per diluted share, compared with a similar result for the three months ended June 30, 2005. Our net interest income declined by $1.0 million, reflecting a significant increase in our cost of funds as a result of
the continuing rise in market interest rates. This decrease was partially offset by a $0.7 million decline in other operating expenses due to the reversal of previously accrued and unpaid legal expenses relating to a former officer and a $0.1
million recapture of loan loss provisions.

For the six months ended June 30, 2006, our net income was $5.8 million, or $0.27 per
diluted share, compared with $6.8 million, or $0.31 per diluted share, for the six months ended June 30, 2005. This decrease reflects a $1.5 million decline in net interest income, in addition to increases in operating expenses in the 2006
period.

Our stockholders equity decreased by $2.5 million for the six months ended June 30, 2006 to $171.4 million, or $7.95
book value per diluted share, despite our net income of $5.8 million. This decrease was due to cash dividends of $5.3 million and after-tax unrealized losses of $3.1 million on our portfolio of available-for-sale securities, partially offset by a
$150,000 increase in paid-in capital representing stock-based compensation expense and the issuance of additional common stock from exercise of stock options.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

For a discussion of our Critical Accounting Policies and Estimates, see
Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations, of the Companys Report on Form 10-K for the year ended December 31, 2005. There were no changes to our Critical
Accounting Policies and Estimates in the three or six months ended June 30, 2006.

RESULTS OF OPERATIONSTHREE AND SIX MONTHS ENDED JUNE 30,
2006 COMPARED TO THREE AND SIX MONTHS ENDED JUNE 30, 2005

Net Interest Income

Net interest income was $8.6 million for the three months ended June 30, 2006, compared with $9.6 million for the three months ended June 30,
2005. For the six months ended June 30, 2006, net interest income totaled



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##### Table of Contents

$17.5 million, compared with $19.0 million for the first six months of 2005. These decreases were due primarily to a decline in our net interest margin, as
the amounts of net interest earning assets in the 2006 periods were comparable to those of the 2005 periods.

Our net interest margin was
2.54% for the second quarter of 2006, compared with 2.91% for the second quarter of 2005, and 2.61% for the six-month period ended June 30, 2006, compared with 2.94% for the corresponding 2005 period. These declines in the margin were the
result of increasing market interest rates. Because our interest bearing liabilities reprice more frequently than our interest earning assets, the net interest margin tends to decrease as interest rates rise. As a result, the weighted average cost
of our interest bearing liabilities increased by 120 basis points to 4.18% for the three months ended June 30, 2006, compared to 2.98% for the three months ended June 30, 2005. Similarly, our weighted average cost of funds increased by 115
basis points, to 4.00% for the first six months of 2006, compared with 2.85% for the first six months of 2005. In contrast, the yield on our interest-earning assets increased by only 72 basis points from the 2005 periods to the 2006 periods. We
anticipate that the net interest margin may narrow further in future periods if interest rates continue to rise and the treasury yield remains relatively flat.

The following tables set forth, for the periods indicated, information regarding the total amount of our income from interest-earning assets and the resulting weighted average yields, the interest expense associated
with interest-bearing liabilities along with the resulting weighted average rates, in addition to net interest income, interest rate spread and net interest margin. The interest income and expense amounts in the tables below are consolidated, but
reflect primarily the results of the Bank.



|                                           |  |                                  |           |   |                                  |   |                       |  |      |                 |  |   |           |   |                       |   |        |  |      |  
|------------------------------------------ |  | -------------------------------- | --------- | - | -------------------------------- | - | --------------------- |  | ---- | --------------- |  | - | --------- | - | --------------------- | - | ------ |  | ---- | -
|                                           |  | Three Months Ended June 30, 2006 |           |   | Three Months Ended June 30, 2005 |  
|                                           |  | Average Balance                  |           |   | Interest                         |   | Annualized Yield/Rate |  |      | Average Balance |  |   | Interest  |   | Annualized Yield/Rate |  
|                                           |  | (Dollars in thousands)           |          
|Interest-Earning Assets:                   |  |                                  |           |   |                                  |   |                       |  |      |                 |  |   |           |   |                       |   |        |  |      |  
|Mortgage-backed securities                 |  | $                                | 361,419   |   |                                  | $ | 4,458                 |  | 4.88 | %               |  | $ | 335,998   |   |                       | $ | 3,575  |  | 4.27 | %
|Loans(1)(2)(3)                             |  |                                  | 957,447   |   |                                  |   | 16,509                |  | 6.82 | %               |  |   | 939,758   |   |                       |   | 14,538 |  | 6.12 | %
|Federal funds and other investments        |  |                                  | 40,159    |   |                                  |   | 563                   |  | 5.55 | %               |  |   | 46,843    |   |                       |   | 428    |  | 3.66 | %
|                                           |  |                                  |           |   |                                  |   |                       |  |      |                 |  |   |           |   |                       |   |        |  |      |  
|Total interest-earning assets              |  |                                  | 1,359,025 |   |                                  |   | 21,530                |  | 6.27 | %               |  |   | 1,322,599 |   |                       |   | 18,541 |  | 5.55 | %
|                                           |  |                                  |           |   |                                  |   |                       |  |      |                 |  |   |           |   |                       |   |        |  |      |  
|Noninterest-earning cash                   |  |                                  | 1,853     |   |                                  |   |                       |  |      |                 |  |   | 2,153     |   |                       |   |        |  |      |  
|Allowance for loan losses                  |  |                                  | (7,288    | ) |                                  |   |                       |  |      |                 |  |   | (7,993    | ) |                       |   |        |  |      |  
|Other assets                               |  |                                  | 74,908    |   |                                  |   |                       |  |      |                 |  |   | 71,975    |   |                       |   |        |  |      |  
|                                           |  |                                  |           |   |                                  |   |                       |  |      |                 |  |   |           |   |                       |   |        |  |      |  
|Total assets                               |  | $                                | 1,428,548 |   |                                  |   |                       |  |      |                 |  | $ | 1,388,734 |   |                       |   |        |  |      |  
|                                           |  |                                  |           |   |                                  |   |                       |  |      |                 |  |   |           |   |                       |   |        |  |      |  
|Interest-Bearing Liabilities:              |  |                                  |           |   |                                  |   |                       |  |      |                 |  |   |           |   |                       |   |        |  |      |  
|Interest-bearing deposits:                 |  |                                  |           |   |                                  |   |                       |  |      |                 |  |   |           |   |                       |   |        |  |      |  
|Savings, NOW and money market accounts     |  | $                                | 64,257    |   |                                  | $ | 538                   |  | 3.36 | %               |  | $ | 109,185   |   |                       | $ | 725    |  | 2.66 | %
|Certificates of deposit                    |  |                                  | 626,580   |   |                                  |   | 7,009                 |  | 4.49 | %               |  |   | 448,322   |   |                       |   | 3,440  |  | 3.08 | %
|                                           |  |                                  |           |   |                                  |   |                       |  |      |                 |  |   |           |   |                       |   |        |  |      |  
|Total interest-bearing deposits            |  |                                  | 690,837   |   |                                  |   | 7,547                 |  | 4.38 | %               |  |   | 557,507   |   |                       |   | 4,165  |  | 3.00 | %
|Repurchase agreements                      |  |                                  | 40,000    |   |                                  |   | 337                   |  | 3.38 | %               |  |   | 136,750   |   |                       |   | 1,059  |  | 3.11 | %
|FHLB advances                              |  |                                  | 477,837   |   |                                  |   | 4,412                 |  | 3.70 | %               |  |   | 486,337   |   |                       |   | 3,356  |  | 2.77 | %
|Junior subordinated notes payable          |  |                                  | 30,929    |   |                                  |   | 636                   |  | 8.25 | %               |  |   | 20,619    |   |                       |   | 358    |  | 6.96 | %
|                                           |  |                                  |           |   |                                  |   |                       |  |      |                 |  |   |           |   |                       |   |        |  |      |  
|Total interest-bearing liabilities         |  |                                  | 1,289,603 |   |                                  |   | 12,932                |  | 4.18 | %               |  |   | 1,201,213 |   |                       |   | 8,938  |  | 2.98 | %
|                                           |  |                                  |           |   |                                  |   |                       |  |      |                 |  |   |           |   |                       |   |        |  |      |  
|Noninterest-bearing deposits               |  |                                  | 5,152     |   |                                  |   |                       |  |      |                 |  |   | 4,028     |   |                       |   |        |  |      |  
|Other liabilities                          |  |                                  | 11,006    |   |                                  |   |                       |  |      |                 |  |   | 11,152    |   |                       |   |        |  |      |  
|                                           |  |                                  |           |   |                                  |   |                       |  |      |                 |  |   |           |   |                       |   |        |  |      |  
|Total liabilities                          |  |                                  | 1,255,761 |   |                                  |   |                       |  |      |                 |  |   | 1,216,393 |   |                       |   |        |  |      |  
|Stockholders equity                       |  |                                  | 172,787   |   |                                  |   |                       |  |      |                 |  |   | 172,341   |   |                       |   |        |  |      |  
|                                           |  |                                  |           |   |                                  |   |                       |  |      |                 |  |   |           |   |                       |   |        |  |      |  
|Total liabilities and stockholders equity |  | $                                | 1,428,548 |   |                                  |   |                       |  |      |                 |  | $ | 1,388,734 |   |                       |   |        |  |      |  
|                                           |  |                                  |           |   |                                  |   |                       |  |      |                 |  |   |           |   |                       |   |        |  |      |  
|Net interest income                        |  |                                  |           |   |                                  | $ | 8,598                 |  |      |                 |  |   |           |   |                       | $ | 9,603  |  |      |  
|                                           |  |                                  |           |   |                                  |   |                       |  |      |                 |  |   |           |   |                       |   |        |  |      |  
|Net interest spread                        |  |                                  |           |   |                                  |   |                       |  | 2.09 | %               |  |   |           |   |                       |   |        |  | 2.57 | %
|Net interest margin                        |  |                                  |           |   |                                  |   |                       |  | 2.54 | %               |  |   |           |   |                       |   |        |  | 2.91 | %



18



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##### Table of Contents

---

|(1) | It is the Companys policy to discontinue the accrual of interest on loans that are over 90 days past due, or at any time when, in the judgment of management, the probability
of collection of interest is deemed to be insufficient to warrant further accrual. Upon such a determination, those loans are placed on non-accrual status and deemed to be non-performing. When a loan is placed on non-accrual status, previously
accrued but unpaid interest is reversed by a charge to interest income.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Interest income on loans includes the accretion of loan fees of $350 and $114, respectively, for the quarters ended June 30, 2006 and 2005.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------

|(3) | As of December 31, 2005, the Company reclassified its prepayment fees on loans from other operating income to interest income. The amount of such fees reclassified as interest
income for the three months ended June 30, 2005 totaled $550.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                           |  |                                |           |   |                                |   |                       |  |      |                 |  |   |           |   |                       |   |        |  |      |  
|------------------------------------------ |  | ------------------------------ | --------- | - | ------------------------------ | - | --------------------- |  | ---- | --------------- |  | - | --------- | - | --------------------- | - | ------ |  | ---- | -
|                                           |  | Six Months Ended June 30, 2006 |           |   | Six Months Ended June 30, 2005 |  
|                                           |  | Average Balance                |           |   | Interest                       |   | Annualized Yield/Rate |  |      | Average Balance |  |   | Interest  |   | Annualized Yield/Rate |  
|                                           |  | (Dollars in thousands)         |          
|Interest-Earning Assets:                   |  |                                |           |   |                                |   |                       |  |      |                 |  |   |           |   |                       |   |        |  |      |  
|Mortgage-backed securities                 |  | $                              | 346,507   |   |                                | $ | 8,284                 |  | 4.73 | %               |  | $ | 326,989   |   |                       | $ | 7,002  |  | 4.32 | %
|Loans(1)(2)(3)                             |  |                                | 961,201   |   |                                |   | 32,608                |  | 6.75 | %               |  |   | 933,315   |   |                       |   | 27,965 |  | 6.04 | %
|Federal funds and other investments        |  |                                | 41,778    |   |                                |   | 1,043                 |  | 4.97 | %               |  |   | 43,464    |   |                       |   | 779    |  | 3.61 | %
|                                           |  |                                |           |   |                                |   |                       |  |      |                 |  |   |           |   |                       |   |        |  |      |  
|Total interest-earning assets              |  |                                | 1,349,486 |   |                                |   | 41,885                |  | 6.17 | %               |  |   | 1,303,768 |   |                       |   | 35,746 |  | 5.45 | %
|                                           |  |                                |           |   |                                |   |                       |  |      |                 |  |   |           |   |                       |   |        |  |      |  
|Noninterest-earning cash                   |  |                                | 1,622     |   |                                |   |                       |  |      |                 |  |   | 2,319     |   |                       |   |        |  |      |  
|Allowance for loan losses                  |  |                                | (7,256    | ) |                                |   |                       |  |      |                 |  |   | (9,187    | ) |                       |   |        |  |      |  
|Other assets                               |  |                                | 75,641    |   |                                |   |                       |  |      |                 |  |   | 72,199    |   |                       |   |        |  |      |  
|                                           |  |                                |           |   |                                |   |                       |  |      |                 |  |   |           |   |                       |   |        |  |      |  
|Total assets                               |  | $                              | 1,419,493 |   |                                |   |                       |  |      |                 |  | $ | 1,369,099 |   |                       |   |        |  |      |  
|                                           |  |                                |           |   |                                |   |                       |  |      |                 |  |   |           |   |                       |   |        |  |      |  
|Interest-Bearing Liabilities:              |  |                                |           |   |                                |   |                       |  |      |                 |  |   |           |   |                       |   |        |  |      |  
|Interest-bearing deposits:                 |  |                                |           |   |                                |   |                       |  |      |                 |  |   |           |   |                       |   |        |  |      |  
|Savings, NOW and money market accounts     |  | $                              | 65,521    |   |                                | $ | 1,029                 |  | 3.17 | %               |  | $ | 110,756   |   |                       | $ | 1,382  |  | 2.52 | %
|Certificates of deposit                    |  |                                | 591,583   |   |                                |   | 12,758                |  | 4.35 | %               |  |   | 431,476   |   |                       |   | 5,997  |  | 2.80 | %
|                                           |  |                                |           |   |                                |   |                       |  |      |                 |  |   |           |   |                       |   |        |  |      |  
|Total interest-bearing deposits            |  |                                | 657,104   |   |                                |   | 13,787                |  | 4.28 | %               |  |   | 542,282   |   |                       |   | 7,379  |  | 2.74 | %
|Repurchase agreements                      |  |                                | 46,571    |   |                                |   | 779                   |  | 3.37 | %               |  |   | 132,857   |   |                       |   | 1,962  |  | 2.98 | %
|FHLB advances                              |  |                                | 499,694   |   |                                |   | 8,780                 |  | 3.54 | %               |  |   | 487,128   |   |                       |   | 6,707  |  | 2.78 | %
|Junior subordinated notes payable          |  |                                | 26,510    |   |                                |   | 1,065                 |  | 8.10 | %               |  |   | 20,619    |   |                       |   | 687    |  | 6.72 | %
|                                           |  |                                |           |   |                                |   |                       |  |      |                 |  |   |           |   |                       |   |        |  |      |  
|Total interest-bearing liabilities         |  |                                | 1,229,879 |   |                                |   | 24,411                |  | 4.00 | %               |  |   | 1,182,831 |   |                       |   | 16,735 |  | 2.85 | %
|                                           |  |                                |           |   |                                |   |                       |  |      |                 |  |   |           |   |                       |   |        |  |      |  
|Noninterest-bearing deposits               |  |                                | 4,933     |   |                                |   |                       |  |      |                 |  |   | 4,272     |   |                       |   |        |  |      |  
|Other liabilities                          |  |                                | 11,187    |   |                                |   |                       |  |      |                 |  |   | 9,685     |   |                       |   |        |  |      |  
|                                           |  |                                |           |   |                                |   |                       |  |      |                 |  |   |           |   |                       |   |        |  |      |  
|Total liabilities                          |  |                                | 1,245,999 |   |                                |   |                       |  |      |                 |  |   | 1,196,788 |   |                       |   |        |  |      |  
|Stockholders equity                       |  |                                | 173,494   |   |                                |   |                       |  |      |                 |  |   | 172,311   |   |                       |   |        |  |      |  
|                                           |  |                                |           |   |                                |   |                       |  |      |                 |  |   |           |   |                       |   |        |  |      |  
|Total liabilities and stockholders equity |  | $                              | 1,419,493 |   |                                |   |                       |  |      |                 |  | $ | 1,369,099 |   |                       |   |        |  |      |  
|                                           |  |                                |           |   |                                |   |                       |  |      |                 |  |   |           |   |                       |   |        |  |      |  
|Net interest income                        |  |                                |           |   |                                | $ | 17,474                |  |      |                 |  |   |           |   |                       | $ | 19,011 |  |      |  
|                                           |  |                                |           |   |                                |   |                       |  |      |                 |  |   |           |   |                       |   |        |  |      |  
|Net interest spread                        |  |                                |           |   |                                |   |                       |  | 2.17 | %               |  |   |           |   |                       |   |        |  | 2.60 | %
|Net interest margin                        |  |                                |           |   |                                |   |                       |  | 2.61 | %               |  |   |           |   |                       |   |        |  | 2.94 | %

---

|(1) | It is the Companys policy to discontinue the accrual of interest on loans that are over 90 days past due, or at any time when, in the judgment of management, the probability
of collection of interest is deemed to be insufficient to warrant further accrual. Upon such a determination, those loans are placed on non-accrual status and deemed to be non-performing. When a loan is placed on non-accrual status, previously
accrued but unpaid interest is reversed by a charge to interest income.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Interest income on loans includes the accretion of loan fees of $570 and $154, respectively, for the six months ended June 30, 2006 and 2005.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------

|(3) | As of December 31, 2005, the Company reclassified its prepayment fees on loans from other operating income to interest income. The amount of such fees reclassified as interest
income for the six months ended June 30, 2005 totaled $863.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Interest income on mortgage-backed securities was $4.5 million for the second quarter of 2006, compared
with $3.6 million for the second quarter of 2005. For the six months ended June 30, 2006, interest income on mortgage-backed securities totaled $8.2 million, compared with $7.0 million for the six months June 30, 2005. The increases in the
2006 periods reflect primarily an increase in yields due to rising market interest rates, which extended the expected lives of the securities and reduced the amortization of premiums. As a result, our yield on mortgage-backed securities increased by
61 basis points from the second quarter of 2005 to the second quarter of 2006, and by 41 basis points from the first six months of 2005 to the first six months of 2006. To a lesser extent, the increase in interest income reflects an increase in the
average investment balance, primarily as a result of the increase in mortgage-backed securities throughout 2005. In addition, we purchased $117.9 million in mortgage-backed securities in the second quarter of 2006.

Interest income on loans was $16.5 million for the quarter ended June 30, 2006, compared with $14.5 million for the quarter ended June 30,
2005. For the six months ended June 30, 2006, interest income on loans was $32.6 million, compared with $28.0 million for the first six months of 2005. This increase was due primarily to higher market interest rates in 2006, which increased the
weighted average yield on the loan portfolio by 70 basis points from the second quarter of 2005 to the second quarter of 2006, and by 71 basis points from the six-month period ended June 30, 2005 to the six-month period ended June 30,
2006. Adjustable-rate loans (including loans with an initial fixed rate for 3 or 5 years which subsequently convert to adjustable-rate) comprised 86.7% of our total loans at June 30, 2006, increasing the sensitivity of the portfolio to interest
rate fluctuations. The increase in loan interest income was to a lesser extent due to an increase in the average balance of loans from the first two quarters in 2005 to the first two quarters in 2006. This increase in average volume reflects the
Banks moderate growth in its loan portfolio throughout 2005 (the effects of which are realized in future periods), largely through loan portfolio acquisitions in the second and fourth quarters of 2005.

Interest expense on deposits was $7.5 million for the quarter ended June 30, 2006, compared with $4.2 million for the quarter ended June 30,
2005. For the six months ended June 30, 2006, interest on deposits totaled $13.8 million, compared with $7.4 million for the first six months of 2005. This increase was primarily the result of an increase in the average cost of our
interest-bearing deposits of 138 basis points from the second quarter of 2005 to the second quarter of 2006, and an increase in cost of 149 basis points from the first six months of 2005 to the first six months of 2006. The higher average cost of
funds in 2006 was largely due to the continuing increase in market interest rates, which raised the cost of deposits as maturing certificates of deposit (CDs) were replaced with higher-costing CDs. In addition, the proportion of CDs to total
deposits increased to an average of 90.0% for the first six months of 2006, compared with an average of 79.6% for the corresponding 2005 period. The Bank has utilized deposits as its primary funding source in the first two quarters of 2006 and
raised a significant volume of wholesale CDs, resulting in a $114.9 million increase in the average balance of interest-bearing deposits over the first two quarters of 2005.

Interest expense on repurchase agreements and Federal Home Loan Bank (FHLB) advances totaled $4.7 million for the three months ended
June 30, 2006, compared with $4.4 million for the three months ended June 30, 2005. For the six months ended June 30, 2006, interest expense on repurchase agreements and FHLB advances was $9.6 million, compared with $8.7 million for
the six months ended June 30, 2005. These increases were due to the higher market interest rates in the 2006 periods. This continuing increase in rates raised the cost of our repurchase agreements and FHLB advances by 39 and 76 basis points,
respectively, from the first six months of 2005 to the first six months of 2006. The effects of the higher rates were partially offset by a decline in the average total borrowing balance from the first two quarters of 2005 to the corresponding 2006
periods, as we utilized CDs as our primary funding source.

Interest expense on our junior subordinated notes payable was $0.6 million for
the second quarter of 2006, compared with $0.4 million for the second quarter of 2005. For the six months ended June 30, 2006, interest on junior subordinated notes payable totaled $1.1 million, compared with $0.7 million for the first six
months of 2005. These increases reflect both higher volume and higher rates in the 2006 periods. In May 2006 we issued $20 million in trust preferred securities to fund our anticipated stock repurchase. This new debt increased the



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average liability balance for the three and six months ended June 30, 2006 by $10.3 million and $5.9 million, respectively, over the amounts for the
2005 periods. These new notes and our earlier notes, issued in July 2002, bear interest at a premium over LIBOR, and therefore generate higher interest expense in periods of rising rates.

Provision for Loan Losses

Provisions for
losses on loans are charged to operations to maintain an allowance for losses on the loan portfolio at a level that we believe is adequate based on an evaluation of the inherent risks in the portfolio. Our evaluation is based on an analysis of the
loan portfolio, historical loss experience, credit concentrations, current economic conditions and trends, the effects of interest rate changes on collateral values, and other relevant factors. The evaluation of the inherent loss with respect to
these factors is subject to a higher degree of uncertainty because they are not identified with specific problem credits or portfolio components. We currently intend to maintain an unallocated allowance in the range of 3% to 6% of the total
estimated allowance for loan losses, due to the inherent risk associated with the imprecision in estimating the allowance.

We recorded net
recaptures of loan loss reserves of $109,000 for the three months ended June 30, 2006, compared with no provision or recapture activity in the three months ended June 30, 2005. For the six months ended June 30, 2006, our net loan loss
recaptures were $69,000, compared with $4,000 in net recaptures for the corresponding 2005 period.

The credit quality of our assets is
affected by many factors beyond our control, including local and national economic conditions, and the possible existence of facts which are not known to us which adversely affect the likelihood of repayment of various loans in our loan portfolio
and realization of the collateral upon a default. Accordingly, we can give no assurance that we will not sustain loan losses materially in excess of the allowance for loan losses.

Other Expenses

Compensation and employee benefits expense totaled $2.0 million for the three
months ended June 30, 2006, compared with $1.9 million for the three months ended June 30, 2005. For the six months ended June 30, 2006, compensation expense totaled $4.0 million, compared with $3.8 million for the first six months of
2005. The increases in the 2006 periods were due primarily to two factors: (1) in August 2005 we hired a new Chief Executive Officer, whose compensation is reflected in the first two quarters of 2006 but not the first two quarters of 2005, and
(2) effective January 1, 2006, we adopted SFAS No. 128R, which requires that we record the fair value of stock option grants as compensation expense. As a result, we recorded $58,000 and $118,000, respectively, in compensation costs
pursuant to the adoption of SFAS No. 128R for the quarter and six months ended June 30, 2006. This expense was primarily related to stock options granted to the new Chief Executive Officer in January 2006. We expect to incur similar
amounts of compensation expense related to these options through December 31, 2008, when these options vest in full.

Our legal
expenses (included in Professional fees in the statement of operations) for the second quarter of 2006 reflect a net recapture of $25,000 of expenses, compared with $0.6 million in legal expenses incurred for the second quarter of 2005.
The net recapture in the second quarter of 2006 was due the reversal of $746,000 in previously accrued and unpaid expenses on behalf of a former officer. This reversal of expenses was pursuant to an arbitrators ruling in May 2006 that we are
not liable for such expenses. For the six months ended June 30, 2006, legal expenses were approximately $1.0 million, an increase of $190,000 over the total for the six months ended June 30, 2005. This increase was due to additional
expenses incurred in connection with our disputes with the former officer (some of which we may be able to recover in future periods) and expenses related to our dispute with our former loan servicing subsidiary, Wilshire Credit Corporation, and
Merrill Lynch.

Other professional fees (also included in Professional fees in the statement of operations) increased by
$81,000 from the second quarter of 2005 to the second quarter of 2006, and by $158,000 from the six months



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ended June 30, 2005 to the six months ended June 30, 2006. These increases reflect consulting services relating to our information systems, which
we began outsourcing in the fourth quarter of 2005. In addition, we incurred substantial consulting fees in connection with the preparation of our year-end 2005 tax provision.

Regulatory assessments were $19,000 for the quarter ended June 30, 2006, compared with $83,000 for the quarter ended June 30, 2005. For the six
months ended June 30, 2006, regulatory assessments were $39,000, compared with $167,000 for the corresponding 2005 period. The decreases thus far in 2006 were due to the Banks conversion to a state charter in September 2005. Because the
DFI assesses its annual fee effective July 1, the Bank does not expect to incur such fees until the third quarter of 2006. Our regulatory assessments for the first two quarters of 2005 included fees paid to the Banks former regulator, the
Office of Thrift Supervision.

We no longer incur amortization expense related to our core deposit intangible because this asset was
amortized in full as of June 30, 2005. For the quarter and six months ended June 30, 2005, we incurred amortization expense of $64,000 and $129,000, respectively.

Our directors expenses declined by $39,000 from the second quarter of 2005 to the second quarter of 2006, and by $84,000 from the first six months of
2005 to the first six months of 2006. These decreases were due primarily to the reduction in the size of our board of directors from ten members to seven in August 2005.

CHANGES IN FINANCIAL CONDITION

General

At June 30, 2006, our total assets were $1,465.5 million, an increase of $61.8 million, or 4.4%, from the total as of December 31, 2005. This
increase was due primarily to acquisitions of mortgage-backed securities, which were funded by new certificates of deposit. We experienced a slight decline in our loan portfolio balance, as prepayments exceeded loan fundings during the period. The
following discussion summarizes the significant changes in our financial condition for the six months ended June 30, 2006.

Mortgage-Backed and
Other Securities Available for Sale

Our portfolio of mortgage-backed securities available for sale increased by $75.6 million
during the six months ended June 30, 2006. This increase was due to purchases of securities of $117.9 million, partially offset by principal repayments of $37.0 million. We significantly increased our investment activity in the second quarter
of 2006 to improve net interest margin and maintain our overall asset growth despite the reduced demand for loans. Our purchases included $85.3 million in GSE mortgage-backed securities with a weighted-average yield of 6.00% and $32.6 million in
AAA-rated mortgage-backed securities with a weighted-average yield of 6.25%. During the period, we recorded unrealized holding losses on our portfolio of $5.2 million, as a result of the increase in interest rates during the first half of 2006.

The balance of our other investment securities available for sale (consisting of trust preferred securities and mutual funds) declined by
$0.1 million during the six months ended June 30, 2006, as a result of unrealized holding losses.



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The following table sets forth our holdings of mortgage-backed and other investment securities as of the
dates indicated:



|                                                    |  |                        |         |                  |   |        
|--------------------------------------------------- |  | ---------------------- | ------- | ---------------- | - | -------
|                                                    |  | June 30, 2006          |         | December 31,2005
|                                                    |  | (Dollars in thousands)
|Available for sale, at fair value:                  |  |                        |         |                  |   |        
|GSE mortgage-backed securities                      |  | $                      | 168,860 |                  | $ | 98,091 
|AAA mortgage-backed securities                      |  |                        | 282,358 |                  |   | 222,290
|Other mortgage-backed securities                    |  |                        | 6,921   |                  |   | 12,191 
|Trust preferred securities                          |  |                        | 8,000   |                  |   | 8,000  
|Mutual funds                                        |  |                        | 5,601   |                  |   | 5,728  
|                                                    |  |                        |         |                  |   |        
|Total available for sale                            |  |                        | 421,740 |                  |   | 346,300
|Held to maturity:                                   |  |                        |         |                  |   |        
|Agency securities (fair value of $9,324 and $9,650) |  |                        | 9,733   |                  |   | 9,708  
|                                                    |  |                        |         |                  |   |        
|Total investment securities                         |  | $                      | 431,473 |                  | $ | 356,008
|                                                    |  |                        |         |                  |   |        

The amortized cost and fair value of our securities, by contractual maturity, are
shown below as of June 30, 2006:



|                         |  |                        |         |            |   |        
|------------------------ |  | ---------------------- | ------- | ---------- | - | -------
|                         |  | Amortized Cost         |         | Fair Value
|                         |  | (Dollars in thousands)
|Due in five to ten years |  | $                      | 13,637  |            | $ | 13,051 
|Due after ten years      |  |                        | 428,692 |            |   | 412,412
|Mutual funds             |  |                        | 5,750   |            |   | 5,601  
|                         |  |                        |         |            |   |        
|Total                    |  | $                      | 443,079 |            | $ | 431,064
|                         |  |                        |         |            |   |        

The following tables show the gross unrealized losses and fair value of our investments,
aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, as of June 30, 2006 and December 31, 2005:



|                                         |  |                        |         |                   |   |            |  |                   |         |            |   |                   |  |   |         |  |   |       
|---------------------------------------- |  | ---------------------- | ------- | ----------------- | - | ---------- |  | ----------------- | ------- | ---------- | - | ----------------- |  | - | ------- |  | - | ------
|                                         |  | Less than 12 months    |         | 12 months or more |   | Total     
|                                         |  | Fair Value             |         | Unrealized Losses |   | Fair Value |  | Unrealized Losses |         | Fair Value |   | Unrealized Losses
|                                         |  | (Dollars in thousands)
|June 30, 2006                            |  |                        |        
|GSE mortgage-backed securities           |  | $                      | 117,439 |                   | $ | 2,356      |  | $                 | 51,421  |            | $ | 1,945             |  | $ | 168,860 |  | $ | 4,301 
|AAA and other mortgage-backed securities |  |                        | 91,688  |                   |   | 1,459      |  |                   | 140,670 |            |   | 5,903             |  |   | 282,358 |  |   | 7,362 
|Mutual funds                             |  |                        | 3,689   |                   |   | 61         |  |                   | 1,912   |            |   | 88                |  |   | 5,601   |  |   | 149   
|Agency securities                        |  |                        | 9,324   |                   |   | 409        |  |                   |        |            |   |                  |  |   | 9,324   |  |   | 409   
|                                         |  |                        |         |                   |   |            |  |                   |         |            |   |                   |  |   |         |  |   |       
|Total                                    |  | $                      | 222,140 |                   | $ | 4,285      |  | $                 | 194,003 |            | $ | 7,936             |  | $ | 416,143 |  | $ | 12,221
|                                         |  |                        |         |                   |   |            |  |                   |         |            |   |                   |  |   |         |  |   |       
|                                         |  |                        |        
|                                         |  | Less than 12 months    |         | 12 months or more |   | Total     
|                                         |  | Fair Value             |         | Unrealized Losses |   | Fair Value |  | Unrealized Losses |         | Fair Value |   | Unrealized Losses
|                                         |  | (Dollars in thousands)
|December 31, 2005                        |  |                        |        
|GSE mortgage-backed securities           |  | $                      | 50,251  |                   | $ | 827        |  | $                 | 40,903  |            | $ | 1,289             |  | $ | 91,154  |  | $ | 2,066 
|AAA and other mortgage-backed securities |  |                        | 119,248 |                   |   | 1,751      |  |                   | 97,018  |            |   | 2,817             |  |   | 216,266 |  |   | 4,568 
|Mutual funds                             |  |                        |        |                   |   |           |  |                   | 1,920   |            |   | 80                |  |   | 1,920   |  |   | 80    
|Agency securities                        |  |                        | 9,650   |                   |   | 58         |  |                   |        |            |   |                  |  |   | 9,650   |  |   | 58    
|                                         |  |                        |         |                   |   |            |  |                   |         |            |   |                   |  |   |         |  |   |       
|Total                                    |  | $                      | 179,149 |                   | $ | 2,636      |  | $                 | 139,841 |            | $ | 4,136             |  | $ | 318,990 |  | $ | 6,772 
|                                         |  |                        |         |                   |   |            |  |                   |         |            |   |                   |  |   |         |  |   |       



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Declines in the fair value of held-to-maturity and available-for-sale securities below their cost that
are deemed to be other than temporary are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers, among other things, (i) the length of time and the extent to which the fair value
has been less than cost, (ii) the financial condition and near-term prospects of the issuer, and (iii) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any
anticipated recovery in fair value.

We have the ability and intent to hold the securities classified as held to maturity until they
mature, at which time we expect to receive full value for the securities. Furthermore, as of June 30, 2006, we also had the ability and intent to hold the securities classified as available for sale for a period of time sufficient for a full
recovery of cost. The unrealized losses are due to increases in market interest rates over the yields available at the time the underlying securities were purchased. The fair value is expected to recover as the securities approach their maturity
date or repricing date or if market yields for such investments decline. We do not believe any of the securities are impaired due to reasons of credit quality. Accordingly, as of June 30, 2006 and December 31, 2005, we believe the
impairments detailed in the table above are temporary, and as a result, no impairment loss has been realized in our consolidated statements of operations.

Loans

Our portfolio of loans, net of discounts and allowances, declined by $7.8 million in the first six months of
2006. This decrease was due to loan repayments of $131.5 million, which more than offset loan originations of $87.5 million and loan purchases of $36.2 million. Beginning in the first quarter of 2005, our loan origination activity has been impeded
by increasing competitiveness in loan pricing and by the continuing increase in interest rates, which reduced the number and amount of refinancings. In 2006 we have expanded our product line to include construction loans and, through June 30,
2006, originated and purchased $9.5 million in loans for the construction of commercial and multifamily residential properties. In addition, in the second quarter of 2006 we purchased $29.8 million in commercial and multifamily loans. At
June 30, 2006, our outstanding commitments to fund new loans totaled $47.3 million. Our asset quality remains strong, as the unpaid principal balance of nonperforming loans represented only 0.45% of our total loans as of June 30, 2006.

Following is a summary of our loan portfolio as of the dates indicated:



|                                 |  |                        |         |   |                   |   |         |  
|-------------------------------- |  | ---------------------- | ------- | - | ----------------- | - | ------- | -
|                                 |  | June 30, 2006          |         |   | December 31, 2005 |  
|                                 |  | (Dollars in thousands) |        
|Single-family residential        |  | $                      | 28,827  |   |                   | $ | 29,393  |  
|Multifamily residential          |  |                        | 381,701 |   |                   |   | 436,805 |  
|Commercial real estate           |  |                        | 528,144 |   |                   |   | 483,718 |  
|Construction                     |  |                        | 9,494   |   |                   |   |        |  
|Consumer and other               |  |                        | 697     |   |                   |   | 853     |  
|                                 |  |                        |         |   |                   |   |         |  
|Loan portfolio principal balance |  |                        | 943,863 |   |                   |   | 950,769 |  
|Net premium and deferred fees    |  |                        | 3,410   |   |                   |   | 4,455   |  
|Allowance for loan losses        |  |                        | (6,939  | ) |                   |   | (7,080  | )
|                                 |  |                        |         |   |                   |   |         |  
|Total loan portfolio, net        |  | $                      | 940,334 |   |                   | $ | 948,144 |  
|                                 |  |                        |         |   |                   |   |         |  



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The following table summarizes the activity in our allowance for loan losses for the periods indicated:



|                                       |  |                             |       |   |                           |   |       |      |  |   |       |   |  |   |       |  
|-------------------------------------- |  | --------------------------- | ----- | - | ------------------------- | - | ----- | ---- |  | - | ----- | - |  | - | ----- | -
|                                       |  | Three Months Ended June 30, |       |   | Six Months Ended June 30, |  
|                                       |  | 2006                        |       |   | 2005                      |   |       | 2006 |  |   | 2005  |  
|                                       |  | (Dollars in thousands)      |      
|Balance, beginning of period           |  | $                           | 7,100 |   |                           | $ | 7,260 |      |  | $ | 7,080 |   |  | $ | 7,277 |  
|Recapture of loan losses (1)           |  |                             | (154  | ) |                           |   |      |      |  |   | (114  | ) |  |   |      |  
|Charge-offs                            |  |                             | (8    | ) |                           |   | (27   | )    |  |   | (27   | ) |  |   | (33   | )
|Recoveries                             |  |                             | 3     |   |                           |   | 1     |      |  |   | 6     |   |  |   | 2     |  
|Amortization of fresh-start adjustment |  |                             | (2    | ) |                           |   | (4    | )    |  |   | (6    | ) |  |   | (16   | )
|                                       |  |                             |       |   |                           |   |       |      |  |   |       |   |  |   |       |  
|Balance, end of period                 |  | $                           | 6,939 |   |                           | $ | 7,280 |      |  | $ | 6,939 |   |  | $ | 7,280 |  
|                                       |  |                             |       |   |                           |   |       |      |  |   |       |   |  |   |       |  

---

|(1) | Excludes provision for loan losses of $45 on discounted loans for the three and six months ended June 30, 2006.
|--- | ---------------------------------------------------------------------------------------------------------------

The following table sets forth the delinquency status of our loans as of the dates indicated:



|                                                          |  |                        |       |   |                   |   |        |  
|--------------------------------------------------------- |  | ---------------------- | ----- | - | ----------------- | - | ------ | -
|                                                          |  | June 30, 2006          |       |   | December 31, 2005 |  
|                                                          |  | (Dollars in thousands) |      
|Balance of delinquent loans:                              |  |                        |       |   |                   |   |        |  
|31  60 days                                              |  | $                      | 1,892 |   |                   | $ | 6,300  |  
|61  90 days                                              |  |                        | 246   |   |                   |   | 916    |  
|91 days or more (1)                                       |  |                        | 4,270 |   |                   |   | 5,138  |  
|                                                          |  |                        |       |   |                   |   |        |  
|Total delinquent loans                                    |  | $                      | 6,408 |   |                   | $ | 12,354 |  
|                                                          |  |                        |       |   |                   |   |        |  
|Delinquent loans as a percentage of total loan portfolio: |  |                        |       |   |                   |   |        |  
|31  60 days                                              |  |                        | 0.2   | % |                   |   | 0.7    | %
|61  90 days                                              |  |                        | 0.0   |   |                   |   | 0.1    |  
|91 days or more (1)                                       |  |                        | 0.5   |   |                   |   | 0.5    |  
|                                                          |  |                        |       |   |                   |   |        |  
|Total                                                     |  |                        | 0.7   | % |                   |   | 1.3    | %
|                                                          |  |                        |       |   |                   |   |        |  

---

|(1) | All loans delinquent more than 90 days were on nonaccrual status.
|--- | -----------------------------------------------------------------

Deposits

Deposits increased by $98.8 million during the six months ended June 30, 2006, due to a substantial
increase in wholesale CDs. The weighted average interest cost of the Banks deposits was 4.21% at June 30, 2006, compared with 3.64% at December 31, 2005. This increase was due to both the continuing increase in market interest rates
and the issuance of wholesale CDs during the period, resulting in an increase in CDs as a percentage of total deposits. The Banks deposits at June 30, 2006 and December 31, 2005 included $31.9 million and $21.0 million, respectively,
of balances held by BHBC and WFC. These deposits are eliminated in consolidation and are not reflected in total deposits on our consolidated statements of financial condition.

We utilized new CDs, and not FHLB advances, as our primary funding source in the first two quarters of 2006 because we are anticipating selling the
Banks Beverly Hills branch. This branch held $156.5 million in deposits, including $102.6 million in CDs, at June 30, 2006.

Repurchase
Agreements

Repurchase agreements decreased by $28.0 million for the six months ended June 30, 2006, due to the repayment of a
facility bearing interest at 3.60%. This repayment reduced the weighted-average cost of our



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##### Table of Contents

repurchase agreements to 3.34% at June 30, 2006, compared with the December 31, 2005 weighted-average cost of 3.43%. We did not enter into any new
repurchase agreements during the first two quarters of 2006, as our funding requirements were met with wholesale CDs.

FHLB Advances

FHLB advances decreased by $33.0 million for the six months ended June 30, 2006. This decrease reflects $293.0 million in
maturities, offset by new advances of $260.0 million. Because of the planned sale of the Banks Beverly Hills branch, we intend to maintain sufficient unused borrowing capacity to enable us to fully replace that branchs deposits after the
sale. Consequently, we utilized wholesale CDs as our primary funding source in the first six months of 2006 in lieu of new FHLB advances. The FHLB has authorized a borrowing limit for total FHLB advances of 45% of the Banks total assets as of
the previous quarter-end.

The following table sets forth information about our FHLB advances at the dates and for the periods indicated:



|                                                        |      |                           |         |      |  |   |         |  
|------------------------------------------------------- | ---- | ------------------------- | ------- | ---- |  | - | ------- | -
|                                                        |      | Six Months Ended June 30, |        
|                                                        | 2006 |                           |         | 2005 | 
|                                                        |      | (Dollars in thousands)    |        
|Amount outstanding at end of period                     |      | $                         | 497,837 |      |  | $ | 550,837 |  
|Average amount outstanding during the period            |      |                           | 499,694 |      |  |   | 487,128 |  
|Maximum month-end balance outstanding during the period |      |                           | 552,837 |      |  |   | 550,837 |  
|Weighted average rate:                                  |      |                           |         |      |  |   |         |  
|During the period                                       |      |                           | 3.54    | %    |  |   | 2.78    | %
|At end of period                                        |      |                           | 4.06    | %    |  |   | 3.19    | %

REGULATORY CAPITAL REQUIREMENTS

Bank holding companies, such as BHBC, and FDIC-insured banks, such as FBBH, are required to meet certain minimum regulatory capital requirements. At
June 30, 2006, BHBC and FBBH met all applicable regulatory capital requirements and FBBH was well capitalized, as defined under applicable regulations.

The following table sets forth the regulatory standards for well capitalized and adequately capitalized institutions and capital ratios for BHBC and FBBH at June 30, 2006. BHBCs capital includes the $40.0
million in trust preferred securities issued by the Company in July 2002 and May 2006.

Regulatory Capital Ratios



|                                                           |  |                        |         |       |                               |   |        |                                         |        |  |   |        |   |       |   |                |  |   |      |  
|---------------------------------------------------------- |  | ---------------------- | ------- | ----- | ----------------------------- | - | ------ | --------------------------------------- | ------ |  | - | ------ | - | ----- | - | -------------- |  | - | ---- | -
|                                                           |  |                        |         |       | Amount Required               |  
|                                                           |  | Actual                 |         |       | For Capital Adequacy Purposes |   |        | To be Categorized as Well Capitalized |       
|                                                           |  | Amount                 |         | Ratio |                               |   | Amount |                                         | Ratio  |  |   | Amount |   | Ratio |  
|                                                           |  | (Dollars in thousands) |        
|BHBC                                                       |  |                        |         |       |                               |   |        |                                         |        |  |   |        |   |       |   |                |  |   |      |  
|Total capital to risk-weighted assets (Risk-based capital) |  | $                      | 192,411 |       | 19.8                          | % |        | $                                       | 77,772 |  | 3 | 8.0    | % |       |   | Not Applicable | 
|Tier 1 capital to risk-weighted assets                     |  |                        | 185,348 |       | 19.1                          | % |        |                                         | 38,886 |  | 3 | 4.0    | % |       |   | Not Applicable | 
|Tier 1 leverage ratio                                      |  |                        | 185,348 |       | 13.2                          | % |        |                                         | 56,071 |  | 3 | 4.0    | % |       |   | Not Applicable | 
|FBBH                                                       |  |                        |         |       |                               |   |        |                                         |        |  |   |        |   |       |   |                |  |   |      |  
|Total capital to risk-weighted assets (Risk-based capital) |  | $                      | 142,607 |       | 14.8                          | % |        | $                                       | 77,107 |  | 3 | 8.0    | % |       | $ | 96,384         |  | 3 | 10.0 | %
|Tier 1 capital to risk-weighted assets                     |  |                        | 135,708 |       | 14.1                          | % |        |                                         | 38,554 |  | 3 | 4.0    | % |       |   | 57,830         |  | 3 | 6.0  | %
|Tier 1 leverage ratio                                      |  |                        | 135,708 |       | 9.8                           | % |        |                                         | 55,583 |  | 3 | 4.0    | % |       |   | 69,478         |  | 3 | 5.0  | %



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##### Table of Contents

In addition to the requirements shown in the above table, FBBH is required by the DFI to maintain a ratio
of tangible shareholders equity to total tangible assets of at least 8.0% for the first three years following the effective date of the charter conversion, or through August 31, 2008. As of June 30, 2006, the Bank was in compliance
with the DFIs requirement.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity is the measurement of an entitys ability to meet potential cash requirements, including ongoing commitments to repay borrowings, originate loans, fund investments, purchase pools of loans, and make
payments for general business purposes.

Our sources of liquidity include wholesale and retail deposits, FHLB advances (up to 45% of the
Banks total assets as of the previous quarter-end), repurchase agreements, repayments of loans and mortgage-backed securities, and net interest income. We manage our liquidity on a daily basis, and our Board of Directors periodically reviews
our liquidity. This process is intended to ensure the maintenance of sufficient funds to meet our operating needs. Based on our current and expected asset size, capital levels, and organizational infrastructure, we believe there will be sufficient
available liquidity to meet our operating needs.

At June 30, 2006, we had $635.8 million of CDs. Scheduled maturities of CDs during
the 12 months ending June 30, 2007 and thereafter amounted to $512.5 million and $128.3 million, respectively. Wholesale deposits generally are more responsive to changes in interest rates than core deposits, and thus are more likely to be
withdrawn by the investor upon maturity as changes in interest rates and other factors are perceived by investors to make other investments more attractive. Management continues its effort to reduce our exposure to interest rate changes by utilizing
funding sources whose repricing characteristics more closely match those of our interest-earning assets.

We are party to various
contractual financial obligations, including repayment of borrowings, operating lease payments and commitments to extend credit. The table below presents the Companys future financial obligations, including anticipated interest payments,
outstanding as of June 30, 2006:



|                                           |  |                                                  |         |           |   |           |  |               |         |       |   |         |  |   |          
|------------------------------------------ |  | ------------------------------------------------ | ------- | --------- | - | --------- |  | ------------- | ------- | ----- | - | ------- |  | - | ---------
|                                           |  | Payments due within time period at June 30, 2006
|                                           |  | 0-12 Months                                      |         | 1-3 Years |   | 4-5 Years |  | After 5 Years |         | Total
|                                           |  | (Dollars in thousands)                          
|Certificates of deposit                    |  | $                                                | 527,779 |           | $ | 102,957   |  | $             | 27,678  |       | $ |        |  | $ | 658,414  
|Repurchase agreements                      |  |                                                  | 30,761  |           |   | 10,336    |  |               |        |       |   |        |  |   | 41,097   
|Employment contracts                       |  |                                                  | 280     |           |   | 438       |  |               |        |       |   |        |  |   | 718      
|Operating leases                           |  |                                                  | 702     |           |   | 1,214     |  |               | 887     |       |   | 1,459   |  |   | 4,262    
|FHLB advances                              |  |                                                  | 251,479 |           |   | 188,136   |  |               | 93,875  |       |   |        |  |   | 533,490  
|Junior subordinated notes payable to trust |  |                                                  | 3,242   |           |   | 6,484     |  |               | 6,484   |       |   | 115,197 |  |   | 131,407  
|Commitments to originate loans             |  |                                                  | 47,262  |           |   |          |  |               |        |       |   |        |  |   | 47,262   
|                                           |  |                                                  |         |           |   |           |  |               |         |       |   |         |  |   |          
|Total                                      |  | $                                                | 861,505 |           | $ | 309,565   |  | $             | 128,924 |       | $ | 116,656 |  | $ | 1,416,650
|                                           |  |                                                  |         |           |   |           |  |               |         |       |   |         |  |   |          

The Company has entered into an agreement to sell the Banks Beverly Hills branch in the
fourth quarter of 2006. After this branch is sold, the future obligations under existing operating leases are expected to be lower than the amounts presented in the above table. With the exception of the operating leases and loan commitments, the
expected obligations presented above include anticipated interest accruals based on the current respective contractual terms. The amounts for the two issuances of junior subordinated debentures are based on the assumption that the debentures will be
repaid in full at their respective maturities in July 2032 and June 2036. However, the debentures issued in July 2002 may be repaid in full or in part at par commencing in July 2007, and the debentures issued in May 2006 may be repaid in full or in
part at par commencing in June 2011.



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IMPORTANT FACTORS RELATING TO FORWARD-LOOKING STATEMENTS

The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements so long as those statements are
identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those projected in such statements. All of the statements contained in this
Quarterly Report on Form 10-Q which are not identified as historical should be considered forward-looking. In connection with certain forward-looking statements contained in this Quarterly Report on Form 10-Q and those that may be made in the future
by or on behalf of the Company which are identified as forward-looking, the Company notes that there are various factors that could cause actual results to differ materially from those set forth in any such forward-looking statements. Such factors
include, but are not limited to, the condition of the real estate market, interest rates, regulatory matters, the availability of pools of loans at acceptable prices, and the availability and conditions of financing for loan pool acquisitions and
other financial assets. Accordingly, there can be no assurance that the forward-looking statements contained in this Quarterly Report on Form 10-Q will be realized or that actual results will not be significantly higher or lower. Statements
regarding policies and procedures are not intended, and should not be interpreted, to mean that such policies and procedures will not be amended, modified or repealed at any time in the future. The forward-looking statements have not been audited
by, examined by or subjected to agreed-upon procedures by independent accountants, and no third party has independently verified or reviewed such statements. Readers of this Quarterly Report on Form 10-Q should consider these facts in evaluating the
information contained herein. The inclusion of the forward-looking statements contained in this Quarterly Report on Form 10-Q should not be regarded as a representation by the Company or any other person that the forward-looking statements contained
in this Quarterly Report on Form 10-Q will be achieved. In light of the foregoing, readers of this Quarterly Report on Form 10-Q are cautioned not to place undue reliance on the forward-looking statements contained herein.



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|ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
|------- | -----------------------------------------------------------

Managing risk is an essential part of successfully operating a financial services company. The most prominent risk exposures are credit quality, interest rate sensitivity and liquidity. Credit quality risk is the risk of not collecting
interest and/or the principal balance of a loan or investment when it is due. Interest rate risk is the potential reduction of net interest income as the result of changes in interest rates. Rate movements can affect the repricing of assets and
liabilities differently, as well as their market values, and also can affect the ability of the borrower to repay. Liquidity risk is the possible inability to fund obligations to depositors, investors and borrowers.

Asset and Liability Management

It is our objective
to attempt to control risks associated with interest rate movements. In general, our strategy is to limit our exposure to earnings volatility and variations in the value of assets and liabilities as interest rates change over time. Our asset and
liability management strategy is formulated and monitored by the Asset and Liability Committees of the Company and of the Board of Directors (collectively, ALCO) which reviews, among other things, the sensitivity of our assets and
liabilities to interest rate changes, the book and market values of assets and liabilities, unrealized gains and losses (including those attributable to hedging transactions), purchase activity, and maturities of investments and borrowings. ALCO
establishes rate sensitivity tolerances (within regulatory guidelines) which are approved by our Board of Directors, and coordinates with our Board with respect to overall asset and liability composition.

ALCO is authorized to utilize off-balance sheet financial techniques to assist in the management of interest rate risk. These techniques include interest
rate swap agreements, pursuant to which the parties exchange the difference between fixed-rate and floating-rate interest payments on a specified principal amount (referred to as the notional amount) for a specified period without the
exchange of the underlying principal amount. At June 30, 2006, we were not a party to any swap agreement or other off-balance sheet financial instrument.

We continually monitor the interest rate sensitivity of our portfolios of interest-earning assets and interest-bearing liabilities in conjunction with the current interest rate environment. When new pools of loans or
securities are acquired, we will assess the incremental change in our sensitivity to interest rates, and determine accordingly whether or not to hedge.

In addition, ALCO also regularly reviews interest rate risk by forecasting the impact of alternative interest rate environments on the interest rate sensitivity of Net Portfolio Value (NPV), which is
defined as the net present value of an institutions existing assets, liabilities and off-balance sheet instruments. ALCO further evaluates such impacts against the maximum tolerable change in interest income that is authorized by our Board of
Directors.

The following table quantifies the potential changes in the Companys net portfolio value at June 30, 2006, should
interest rates increase or decrease by 100 to 300 basis points, assuming the yield curves of the rate shocks will be parallel to each other.

Interest Rate Sensitivity of Net Portfolio Value



|                |  |                        |         |          |                    |         |          |  |     |           |  |       |        |  |      |    
|--------------- |  | ---------------------- | ------- | -------- | ------------------ | ------- | -------- |  | --- | --------- |  | ----- | ------ |  | ---- | ---
|                |  | Net Portfolio Value    |         |          | NPV as % of Assets |        
|                |  | $ Amount               |         | $ Change |                    |         | % Change |  |     | NPV Ratio |  |       | Change | 
|                |  | (Dollars in thousands) |         |          |                    |         |          |  |    
|Change in Rates |  |                        |         |          |                    |         |          |  |     |          
|+ 300bp         |  | $                      | 132,907 |          | $                  | (42,834 | )        |  | (24 | )%        |  | 9.69  | %      |  | (239 | )bp
|+ 200bp         |  |                        | 147,607 |          |                    | (28,134 | )        |  | (16 | )         |  | 10.54 |        |  | (154 | )bp
|+ 100bp         |  |                        | 161,121 |          |                    | (14,620 | )        |  | (8  | )         |  | 11.29 |        |  | (79  | )bp
|0bp             |  |                        | 175,741 |          |                    |        |          |  |    |           |  | 12.08 |        |  |     |    
|- 100bp         |  |                        | 185,411 |          |                    | 9,670   |          |  | 6   |           |  | 12.54 |        |  | 46   | bp 
|- 200bp         |  |                        | 185,640 |          |                    | 9,899   |          |  | 6   |           |  | 12.44 |        |  | 36   | bp 
|- 300bp         |  |                        | 184,753 |          |                    | 9,012   |          |  | 5   |           |  | 12.27 |        |  | 19   | bp 



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In determining net portfolio value, we rely upon various assumptions, including, but not limited to,
prepayment speeds on our assets and the discount rates to be used. We review our assumptions regularly and adjust them when it is deemed appropriate based on current and future expected market conditions.

We believe that the assumptions (including prepayment assumptions) we use to evaluate the vulnerability of our operations to changes in interest rates
approximate actual experience and consider them reasonable. However, the interest rate sensitivity of our assets and liabilities and the estimated effects of changes in interest rates on NPV could vary substantially if different assumptions were
used or actual experience differs from the historical experience on which they are based.

Another tool we use to identify and manage our
interest rate risk profile is the static gap analysis. Interest sensitivity gap analysis measures the difference between the assets and liabilities repricing or maturing within specific time periods. The following table summarizes the scheduled
maturities or repricing of the Companys assets and liabilities based on their contractual terms as of June 30, 2006.



|                                                            |  |                        |          |    |                                   |   |          |                                     |  |   |                 |    |  |       |         |   |  |   |          
|----------------------------------------------------------- |  | ---------------------- | -------- | -- | --------------------------------- | - | -------- | ----------------------------------- |  | - | --------------- | -- |  | ----- | ------- | - |  | - | ---------
|                                                            |  | Within Twelve Months   |          |    | More Than One Year to Three Years |   |          | More Than Three Years to Five Years |  |   | Over Five Years |    |  | Total
|                                                            |  | (Dollars in thousands)
|Assets:                                                     |  |                        |          |    |                                   |   |          |                                     |  |   |                 |    |  |       |         |   |  |   |          
|Cash and due from banks                                     |  | $                      | 17,492   |    |                                   | $ |         |                                     |  | $ |                |    |  | $     |        |   |  | $ | 17,492   
|Mortgage-backed and other investment securities             |  |                        | 44,310   |    |                                   |   | 114,095  |                                     |  |   | 83,162          |    |  |       | 189,906 |   |  |   | 431,473  
|Single-family residential loans                             |  |                        | 12,685   |    |                                   |   | 1,460    |                                     |  |   | 66              |    |  |       | 10,122  |   |  |   | 24,333   
|Multifamily residential loans                               |  |                        | 120,571  |    |                                   |   | 130,090  |                                     |  |   | 89,611          |    |  |       | 41,428  |   |  |   | 381,700  
|Commercial real estate loans                                |  |                        | 172,682  |    |                                   |   | 159,071  |                                     |  |   | 147,668         |    |  |       | 48,724  |   |  |   | 528,145  
|Construction loans                                          |  |                        | 9,318    |    |                                   |   |         |                                     |  |   | 176             |    |  |       |        |   |  |   | 9,494    
|Consumer and other loans                                    |  |                        | 142      |    |                                   |   | 523      |                                     |  |   | 171             |    |  |       | 951     |   |  |   | 1,787    
|Other assets (1)                                            |  |                        |         |    |                                   |   |         |                                     |  |   |                |    |  |       | 71,090  |   |  |   | 71,090   
|                                                            |  |                        |          |    |                                   |   |          |                                     |  |   |                 |    |  |       |         |   |  |   |          
|Total assets                                                |  |                        | 377,200  |    |                                   |   | 405,239  |                                     |  |   | 320,854         |    |  |       | 362,221 |   |  |   | 1,465,514
|                                                            |  |                        |          |    |                                   |   |          |                                     |  |   |                 |    |  |       |         |   |  |   |          
|Liabilities:                                                |  |                        |          |    |                                   |   |          |                                     |  |   |                 |    |  |       |         |   |  |   |          
|Noninterest-bearing deposits                                |  |                        |         |    |                                   |   |         |                                     |  |   |                |    |  |       | 5,022   |   |  |   | 5,022    
|Savings, NOW and money market accounts (2)                  |  |                        | 62,588   |    |                                   |   |         |                                     |  |   |                |    |  |       |        |   |  |   | 62,588   
|Certificates of deposit                                     |  |                        | 512,477  |    |                                   |   | 98,043   |                                     |  |   | 25,329          |    |  |       |        |   |  |   | 635,849  
|Repurchase agreements                                       |  |                        | 30,000   |    |                                   |   | 10,000   |                                     |  |   |                |    |  |       |        |   |  |   | 40,000   
|FHLB advances                                               |  |                        | 237,500  |    |                                   |   | 170,337  |                                     |  |   | 90,000          |    |  |       |        |   |  |   | 497,837  
|Junior subordinated notes payable                           |  |                        | 41,238   |    |                                   |   |         |                                     |  |   |                |    |  |       |        |   |  |   | 41,238   
|Other liabilities                                           |  |                        |         |    |                                   |   |         |                                     |  |   |                |    |  |       | 11,625  |   |  |   | 11,625   
|                                                            |  |                        |          |    |                                   |   |          |                                     |  |   |                 |    |  |       |         |   |  |   |          
|Total liabilities                                           |  |                        | 883,803  |    |                                   |   | 278,380  |                                     |  |   | 115,329         |    |  |       | 16,647  |   |  |   | 1,294,159
|                                                            |  |                        |          |    |                                   |   |          |                                     |  |   |                 |    |  |       |         |   |  |   |          
|(Deficiency) excess of assets over liabilities              |  | $                      | (506,603 | )  |                                   | $ | 126,859  |                                     |  | $ | 205,525         |    |  | $     | 345,574 |   |  | $ | 171,355  
|                                                            |  |                        |          |    |                                   |   |          |                                     |  |   |                 |    |  |       |         |   |  |   |          
|Cumulative (deficiency) excess                              |  | $                      | (506,603 | )  |                                   | $ | (379,744 | )                                   |  | $ | (174,219        | )  |  | $     | 171,355 |   |  |   |          
|                                                            |  |                        |          |    |                                   |   |          |                                     |  |   |                 |    |  |       |         |   |  |   |          
|Cumulative (deficiency) excess as a percent of total assets |  |                        | (34.57   | )% |                                   |   | (25.91   | )%                                  |  |   | (11.89          | )% |  |       | 11.69   | % |  |   |          
|                                                            |  |                        |          |    |                                   |   |          |                                     |  |   |                 |    |  |       |         |   |  |   |          

---

|(1) | Includes unamortized premium on loans and allowance for loan losses.
|--- | --------------------------------------------------------------------

|(2) | Includes $31,935 of money market deposits held by BHBC and WFC. These deposits are eliminated in consolidation and are not reflected in the consolidated statement of financial
condition.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|ITEM 4. | CONTROLS AND PROCEDURES
|------- | -----------------------

Evaluation of Controls and Procedures

We maintain a set of disclosure controls and procedures that are designed to ensure that information required to be disclosed in our
reports filed under the Securities Exchange Act of 1934, as amended (the Exchange Act), is recorded, processed, summarized and reported within the time periods specified in the Securities Exchange Commissions rules and forms. As of
the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of
the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 of the Exchange Act. Based on that evaluation, our CEO and CFO concluded that the Companys disclosure controls and procedures are effective in timely
alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Companys Exchange Act filings.

Changes in internal controls

There was no change in the Companys internal control over
financial reporting during the Companys most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.



31



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##### Table of Contents

BEVERLY HILLS BANCORP INC. AND SUBSIDIARIES

PART II. OTHER INFORMATION



|Item 1. | Legal Proceedings.
|------- | ------------------

In May 2006, the Company
received a favorable ruling from an arbitrator on all matters in connection with the Companys disputes with a former officer. Pursuant to a binding arbitration held in February 2006, the arbitrator ruled that the Company has no obligation to
indemnify the former officer for his monetary penalties or his legal expenses which arose from a criminal investigation of the officer.

In
June 2004 the former officer pleaded guilty to two felony counts in connection with criminal proceedings against him arising out of the financial collapse of Capital Consultants LLC in 2000. As part of the plea bargain, the former officer agreed to
pay restitution in the amount of $2.0 million. He subsequently made a claim against the Company for this amount, asserting that he is entitled to indemnity under Delaware law. The Company disagreed with this assertion and also filed a counterclaim
to recover the legal fees and expenses it paid on the former officers behalf in prior years.

The arbitrator dismissed the former
officers claim for reimbursement of the $2.0 million restitution and ruled that under Delaware law, the former officer is not entitled to indemnity for his related legal expenses. As a result of this ruling, the Company is entitled to recover
the $4.1 million in legal fees and expenses previously advanced on the former officers behalf, plus interest on such advances calculated from the date of original payment. In addition, as the prevailing party, the Company is entitled to
reimbursement of its legal fees and costs incurred in connection with these claims.

For the second quarter of 2006, BHBC recorded a
reduction in legal expenses of $746,000 through the reversal of expenses previously accrued through May 31, 2006 on behalf of the former officer that it is no longer obligated to pay. The Company and the former officer are in negotiations to
reach a final resolution. However, there can be no assurance that the Company will ultimately recover all or any of the expenses previously paid in relation to its disputes with the former officer.



|Item 1A. | Risk Factors.
|-------- | -------------

Not applicable.



|Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds.
|------- | ------------------------------------------------------------

Not applicable.



|Item 3. | Defaults Upon Senior Securities
|------- | -------------------------------

Not applicable.



|Item 4. | Submission of Matters to a Vote of Security Holders
|------- | ---------------------------------------------------

Not applicable.



|Item 5. | Other Information.
|------- | ------------------

Not applicable.



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##### Table of Contents

|Item 6. | Exhibits
|------- | --------



|      |  |                                                                                                                                                                                                                
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 4.1 |  | Form of Capital Security Certificate evidencing the capital securities of Beverly Hills Statutory Trust 2006.                                                                                                  
|      | 
|4.2  |  | Form of Common Security Certificate evidencing common securities of Beverly Hills Statutory Trust 2006.                                                                                                        
|      | 
|4.3  |  | Form of Beverly Hills Bancorp Inc. Floating Rate Junior Subordinated Debt Security due 2036.                                                                                                                   
|      | 
|10.1 |  | Placement Agreement, dated May 16, 2006, among Beverly Hills Bancorp Inc., Beverly Hills Bancorp Statutory Trust 2006, and ABN AMRO, INC.                                                                      
|      | 
|10.2 |  | Amended and Restated Declaration of Trust, dated May 16, 2006, among Beverly Hills Bancorp Inc., as sponsor, the Administrators named therein, Wilmington Trust Company, as institutional and
Delaware trustee.
|      | 
|10.3 |  | Guarantee Agreement, dated May 16, 2006, between Beverly Hills Bancorp Inc. and Wilmington Trust Company, as guarantee trustee.                                                                                
|      | 
|10.4 |  | Indenture, dated May 16, 2006, between Beverly Hills Bancorp Inc. and Wilmington Trust Company, as indenture trustee.                                                                                          
|      | 
|31.1  |  | Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                         
|      | 
|31.2  |  | Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                         
|      | 
|32.1  |  | Certification by the Chief Executive Officer pursuant to 18 U.S.C. §1350, as adopted, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                
|      | 
|32.2  |  | Certification by the Chief Financial Officer pursuant to 18 U.S.C. §1350, as adopted, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                

---

| | Incorporated by reference to the Companys Report on Form 8-K filed on May 22, 2006.
|- | ------------------------------------------------------------------------------------



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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.



|                     |  |  |  |                            |  |     |  |                        
|-------------------- |  |  |  | -------------------------- |  | --- |  | -----------------------
|                     |  |  |  | BEVERLY HILLS BANCORP INC.
|                     |  | 
|Date: August 9, 2006 |  |  |  |                           
|                     |  |  |  |                           
|                     |  |  |  |                            |  | By: |  | /s/    LARRY B. FAIGIN 
|                     |  |  |  |                            |  |     |  | Larry B. Faigin        
|                     |  |  |  |                            |  |     |  | Chief Executive Officer
|                     |  |  |  |                           
|                     |  |  |  |                            |  | By: |  | /s/    TAKEO K. SASAKI 
|                     |  |  |  |                            |  |     |  | Takeo K. Sasaki        
|                     |  |  |  |                            |  |     |  | Chief Financial Officer



34