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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 September 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 October 31,
2006
|Common Stock, par value $0.01 per share |  | 18,718,166 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                            |  | 30
|           |  |                                                                                      
|Item 4.    |  | Controls and Procedures                                                               |  | 33
|           |  |                                                                                      
|PART II.   |  | OTHER INFORMATION                                                                     |  |   
|           |  |                                                                                      
|Item 1.    |  | Legal Proceedings                                                                     |  | 34
|           |  |                                                                                      
|Item 1A.   |  | Risk Factors                                                                          |  | 34
|           |  |                                                                                      
|Item 2.    |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 34
|           |  |                                                                                      
|Item 3.    |  | Defaults Upon Senior Securities                                                       |  | 34
|           |  |                                                                                      
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                   |  | 34
|           |  |                                                                                      
|Item 5.    |  | Other Information                                                                     |  | 34
|           |  |                                                                                      
|Item 6.    |  | Exhibits                                                                              |  | 35
|           |  |                                                                                      
|Signatures |  |                                                                                       |  | 36



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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)



|                                                                                                                                                         |  |                    |           |   |                   |   |           |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | --------- | - | ----------------- | - | --------- | -
|                                                                                                                                                         |  | September 30, 2006 |           |   | December 31, 2005 |  
|ASSETS                                                                                                                                                   |  |                    |           |   |                   |   |           |  
|Cash and cash equivalents                                                                                                                                |  | $                  | 40,192    |   |                   | $ | 20,954    |  
|Mortgage-backed securities available for sale, at fair value                                                                                             |  |                    | 397,272   |   |                   |   | 332,572   |  
|Investment securities available for sale, at fair value                                                                                                  |  |                    | 13,699    |   |                   |   | 13,728    |  
|Investment securities held to maturity, at amortized cost (fair value of $9,752 and $9,650)                                                              |  |                    | 9,746     |   |                   |   | 9,708     |  
|Loans, net of allowance for loan losses of $7,068 and $7,080                                                                                             |  |                    | 933,451   |   |                   |   | 948,144   |  
|Discounted loans, net of allowance for loan losses of $174 and $209                                                                                      |  |                    | 1,248     |   |                   |   | 1,679     |  
|Stock in Federal Home Loan Bank of San Francisco, at cost                                                                                                |  |                    | 25,699    |   |                   |   | 27,625    |  
|Real estate owned, net                                                                                                                                   |  |                    | 13        |   |                   |   | 62        |  
|Leasehold improvements and equipment, net                                                                                                                |  |                    | 1,326     |   |                   |   | 1,539     |  
|Accrued interest receivable                                                                                                                              |  |                    | 6,904     |   |                   |   | 6,284     |  
|Income taxes receivable                                                                                                                                  |  |                    |          |   |                   |   | 3,910     |  
|Deferred tax asset, net                                                                                                                                  |  |                    | 29,081    |   |                   |   | 30,739    |  
|Goodwill, net                                                                                                                                            |  |                    | 3,054     |   |                   |   | 3,054     |  
|Prepaid expenses and other assets                                                                                                                        |  |                    | 4,400     |   |                   |   | 3,741     |  
|                                                                                                                                                         |  |                    |           |   |                   |   |           |  
|TOTAL                                                                                                                                                    |  | $                  | 1,466,085 |   |                   | $ | 1,403,739 |  
|                                                                                                                                                         |  |                    |           |   |                   |   |           |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                     |  |                    |           |   |                   |   |           |  
|LIABILITIES:                                                                                                                                             |  |                    |           |   |                   |   |           |  
|Deposits:                                                                                                                                                |  |                    |           |   |                   |   |           |  
|Noninterest-bearing deposits                                                                                                                             |  | $                  | 6,145     |   |                   | $ | 4,655     |  
|Interest-bearing deposits                                                                                                                                |  |                    | 815,295   |   |                   |   | 599,994   |  
|                                                                                                                                                         |  |                    |           |   |                   |   |           |  
|Total deposits                                                                                                                                           |  |                    | 821,440   |   |                   |   | 604,649   |  
|Repurchase agreements                                                                                                                                    |  |                    | 40,000    |   |                   |   | 63,000    |  
|FHLB advances                                                                                                                                            |  |                    | 397,837   |   |                   |   | 530,837   |  
|Junior subordinated notes payable to trust                                                                                                               |  |                    | 41,238    |   |                   |   | 20,619    |  
|Accounts payable and other liabilities                                                                                                                   |  |                    | 14,357    |   |                   |   | 10,764    |  
|                                                                                                                                                         |  |                    |           |   |                   |   |           |  
|Total liabilities                                                                                                                                        |  |                    | 1,314,872 |   |                   |   | 1,229,869 |  
|                                                                                                                                                         |  |                    |           |   |                   |   |           |  
|COMMITMENTS AND CONTINGENCIES (NOTE 4)                                                                                                                   |  |                    |           |   |                   |   |           |  
|                                                                                                                                                         |  |                   
|STOCKHOLDERS EQUITY:                                                                                                                                    |  |                    |           |   |                   |   |           |  
|Common stock, $0.01 par value, 30,000,000 shares authorized, 27,107,534 and 26,965,874 shares issued (including 8,389,368 and 5,639,368
treasury shares) |  |                    | 271       |   |                   |   | 270       |  
|Additional paid-in capital                                                                                                                               |  |                    | 165,915   |   |                   |   | 165,710   |  
|Treasury stock, 8,389,368 and 5,639,368 shares, at cost                                                                                                  |  |                    | (39,974   | ) |                   |   | (15,224   | )
|Retained earnings                                                                                                                                        |  |                    | 27,739    |   |                   |   | 27,019    |  
|Accumulated other comprehensive loss, net                                                                                                                |  |                    | (2,738    | ) |                   |   | (3,905    | )
|                                                                                                                                                         |  |                    |           |   |                   |   |           |  
|Total stockholders equity                                                                                                                               |  |                    | 151,213   |   |                   |   | 173,870   |  
|                                                                                                                                                         |  |                    |           |   |                   |   |           |  
|TOTAL                                                                                                                                                    |  | $                  | 1,466,085 |   |                   | $ | 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 EndedSeptember 30, |            |   | Nine Months EndedSeptember 30, |  
|                                                                       |  | 2006                            |            |   | 2005                           |   |            | 2006 |  |   | 2005       |  
|INTEREST INCOME:                                                       |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Loans                                                                  |  | $                               | 16,807     |   |                                | $ | 16,606     |      |  | $ | 49,415     |   |  | $ | 44,571     |  
|Mortgage-backed securities                                             |  |                                 | 5,095      |   |                                |   | 3,846      |      |  |   | 13,329     |   |  |   | 10,848     |  
|Securities and federal funds sold                                      |  |                                 | 569        |   |                                |   | 438        |      |  |   | 1,612      |   |  |   | 1,217      |  
|                                                                       |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Total interest income                                                  |  |                                 | 22,471     |   |                                |   | 20,890     |      |  |   | 64,356     |   |  |   | 56,636     |  
|                                                                       |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|INTEREST EXPENSE:                                                      |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Deposits                                                               |  |                                 | 8,522      |   |                                |   | 4,665      |      |  |   | 22,309     |   |  |   | 12,044     |  
|Borrowings                                                             |  |                                 | 5,966      |   |                                |   | 5,695      |      |  |   | 16,590     |   |  |   | 15,051     |  
|                                                                       |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Total interest expense                                                 |  |                                 | 14,488     |   |                                |   | 10,360     |      |  |   | 38,899     |   |  |   | 27,095     |  
|                                                                       |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|NET INTEREST INCOME                                                    |  |                                 | 7,983      |   |                                |   | 10,530     |      |  |   | 25,457     |   |  |   | 29,541     |  
|PROVISION FOR (RECAPTURE OF) LOSSES ON LOANS                           |  |                                 | 120        |   |                                |   | (48        | )    |  |   | 51         |   |  |   | (52        | )
|                                                                       |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|NET INTEREST INCOME AFTER PROVISION FOR (RECAPTURE OF) LOSSES ON LOANS |  |                                 | 7,863      |   |                                |   | 10,578     |      |  |   | 25,406     |   |  |   | 29,593     |  
|OTHER INCOME:                                                          |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Deposit fees and charges                                               |  |                                 | 21         |   |                                |   | 16         |      |  |   | 60         |   |  |   | 52         |  
|Real estate owned, net                                                 |  |                                 | (21        | ) |                                |   |           |      |  |   | (32        | ) |  |   | 192        |  
|Gain (loss) on sale of loans                                           |  |                                 |           |   |                                |   | 13         |      |  |   |           |   |  |   | (8         | )
|FHLB stock dividends                                                   |  |                                 | 352        |   |                                |   | 285        |      |  |   | 1,025      |   |  |   | 795        |  
|Other income, net                                                      |  |                                 | 29         |   |                                |   | 522        |      |  |   | 25         |   |  |   | 596        |  
|                                                                       |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Total other income                                                     |  |                                 | 381        |   |                                |   | 836        |      |  |   | 1,078      |   |  |   | 1,627      |  
|                                                                       |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|OTHER EXPENSES:                                                        |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Compensation and employee benefits                                     |  |                                 | 1,726      |   |                                |   | 1,911      |      |  |   | 5,757      |   |  |   | 5,675      |  
|Professional fees                                                      |  |                                 | 1,064      |   |                                |   | 718        |      |  |   | 3,095      |   |  |   | 2,346      |  
|Occupancy                                                              |  |                                 | 249        |   |                                |   | 235        |      |  |   | 749        |   |  |   | 746        |  
|Loan expenses                                                          |  |                                 | 30         |   |                                |   | 76         |      |  |   | 257        |   |  |   | 272        |  
|Regulatory assessments                                                 |  |                                 | 53         |   |                                |   | 85         |      |  |   | 92         |   |  |   | 252        |  
|Data processing                                                        |  |                                 | 88         |   |                                |   | 95         |      |  |   | 285        |   |  |   | 325        |  
|Insurance                                                              |  |                                 | 178        |   |                                |   | 171        |      |  |   | 524        |   |  |   | 518        |  
|Depreciation                                                           |  |                                 | 93         |   |                                |   | 92         |      |  |   | 274        |   |  |   | 238        |  
|Amortization of intangibles                                            |  |                                 |           |   |                                |   |           |      |  |   |           |   |  |   | 129        |  
|Directors expense                                                      |  |                                 | 120        |   |                                |   | 149        |      |  |   | 306        |   |  |   | 419        |  
|Other general and administrative expense                               |  |                                 | 468        |   |                                |   | 407        |      |  |   | 1,094      |   |  |   | 1,098      |  
|                                                                       |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Total other expenses                                                   |  |                                 | 4,069      |   |                                |   | 3,939      |      |  |   | 12,433     |   |  |   | 12,018     |  
|                                                                       |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|INCOME BEFORE INCOME TAX PROVISION                                     |  |                                 | 4,175      |   |                                |   | 7,475      |      |  |   | 14,051     |   |  |   | 19,202     |  
|INCOME TAX PROVISION                                                   |  |                                 | 1,540      |   |                                |   | 3,053      |      |  |   | 5,642      |   |  |   | 8,019      |  
|                                                                       |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|NET INCOME                                                             |  | $                               | 2,635      |   |                                | $ | 4,422      |      |  | $ | 8,409      |   |  | $ | 11,183     |  
|                                                                       |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Earnings per sharebasic                                               |  | $                               | 0.13       |   |                                | $ | 0.21       |      |  | $ | 0.40       |   |  | $ | 0.53       |  
|Earnings per sharediluted                                             |  | $                               | 0.13       |   |                                | $ | 0.21       |      |  | $ | 0.40       |   |  | $ | 0.52       |  
|                                                                       |  |                                 |            |  
|Weighted average number of sharesbasic                                |  |                                 | 20,030,488 |   |                                |   | 21,243,550 |      |  |   | 20,906,593 |   |  |   | 21,187,687 |  
|Weighted average number of sharesdiluted                              |  |                                 | 20,112,420 |   |                                |   | 21,517,100 |      |  |   | 21,069,377 |   |  |   | 21,488,239 |  

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)



|                                                                                    |  |                                 |          |   |      |   |          |  
|----------------------------------------------------------------------------------- |  | ------------------------------- | -------- | - | ---- | - | -------- | -
|                                                                                    |  | Nine Months Ended September 30, |         
|                                                                                    |  | 2006                            |          |   | 2005 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                               |  |                                 |          |   |      |   |          |  
|Net income                                                                          |  | $                               | 8,409    |   |      | $ | 11,183   |  
|Adjustments to reconcile net income to net cash provided by operating activities:   |  |                                 |          |   |      |   |          |  
|Provision for (recapture of) losses on loans                                        |  |                                 | 51       |   |      |   | (52      | )
|Write-down of real estate owned                                                     |  |                                 | 6        |   |      |   | 10       |  
|Depreciation and amortization                                                       |  |                                 | 274      |   |      |   | 367      |  
|Stock-based compensation                                                            |  |                                 | 174      |   |      |   |         |  
|Deferred tax provision                                                              |  |                                 | 811      |   |      |   | 1,484    |  
|Loss (gain) on sale of real estate owned                                            |  |                                 | 22       |   |      |   | (214     | )
|Loss on sale of equipment                                                           |  |                                 | 5        |   |      |   | 11       |  
|Loss on sale of loans                                                               |  |                                 |         |   |      |   | 8        |  
|Gain on extinguishment of investor participation liability                          |  |                                 |         |   |      |   | (404     | )
|Amortization of discounts and deferred fees                                         |  |                                 | 353      |   |      |   | 1,947    |  
|Federal Home Loan Bank stock dividends                                              |  |                                 | (1,006   | ) |      |   | (713     | )
|Tax benefit from exercise of nonqualified stock options                             |  |                                 |         |   |      |   | 305      |  
|Change in:                                                                          |  |                                 |          |   |      |   |          |  
|Accrued interest receivable                                                         |  |                                 | (620     | ) |      |   | (817     | )
|Income taxes receivable                                                             |  |                                 | 3,910    |   |      |   |         |  
|Prepaid expenses and other assets                                                   |  |                                 | (659     | ) |      |   | (362     | )
|Accounts payable and other liabilities                                              |  |                                 | 3,593    |   |      |   | 2,566    |  
|                                                                                    |  |                                 |          |   |      |   |          |  
|Net cash provided by operating activities                                           |  |                                 | 15,323   |   |      |   | 15,319   |  
|                                                                                    |  |                                 |          |   |      |   |          |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                               |  |                                 |          |   |      |   |          |  
|Purchase of loans                                                                   |  |                                 | (36,197  | ) |      |   | (105,425 | )
|Loan originations                                                                   |  |                                 | (147,536 | ) |      |   | (75,494  | )
|Loan repayments                                                                     |  |                                 | 198,553  |   |      |   | 159,294  |  
|Purchase of mortgage-backed securities available for sale                           |  |                                 | (117,902 | ) |      |   | (112,508 | )
|Repayments of mortgage-backed securities available for sale                         |  |                                 | 55,094   |   |      |   | 72,350   |  
|Purchases of FHLB stock                                                             |  |                                 |         |   |      |   | (3,919   | )
|Proceeds from sale of FHLB stock                                                    |  |                                 | 2,932    |   |      |   |         |  
|Proceeds from sale of real estate owned                                             |  |                                 | 34       |   |      |   | 2,031    |  
|Purchases of leasehold improvements and equipment                                   |  |                                 | (66      | ) |      |   | (900     | )
|Proceeds from sale of leasehold improvements and equipment                          |  |                                 |         |   |      |   | 2        |  
|                                                                                    |  |                                 |          |   |      |   |          |  
|Net cash used in investing activities                                               |  |                                 | (45,088  | ) |      |   | (64,569  | )
|                                                                                    |  |                                 |          |   |      |   |          |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                               |  |                                 |          |   |      |   |          |  
|Net increase in deposits                                                            |  |                                 | 216,791  |   |      |   | 32,625   |  
|Decrease in repurchase agreements                                                   |  |                                 | (23,000  | ) |      |   | (17,000  | )
|Proceeds from FHLB advances                                                         |  |                                 | 395,000  |   |      |   | 286,000  |  
|Repayments of FHLB advances                                                         |  |                                 | (528,000 | ) |      |   | (235,000 | )
|Issuance of junior subordinated notes payable                                       |  |                                 | 20,619   |   |      |   |         |  
|Proceeds from exercise of stock options                                             |  |                                 | 17       |   |      |   | 373      |  
|Tax benefit from exercise of nonqualified stock options                             |  |                                 | 15       |   |      |   |         |  
|Repurchase of common stock                                                          |  |                                 | (24,750  | ) |      |   |         |  
|Dividends paid on common stock                                                      |  |                                 | (7,689   | ) |      |   | (7,957   | )
|                                                                                    |  |                                 |          |   |      |   |          |  
|Net cash provided by financing activities                                           |  |                                 | 49,003   |   |      |   | 59,041   |  
|                                                                                    |  |                                 |          |   |      |   |          |  
|NET INCREASE IN CASH AND CASH EQUIVALENTS                                           |  |                                 | 19,238   |   |      |   | 9,791    |  
|CASH AND CASH EQUIVALENTS:                                                          |  |                                 |          |   |      |   |          |  
|Beginning of period                                                                 |  |                                 | 20,954   |   |      |   | 15,526   |  
|                                                                                    |  |                                 |          |   |      |   |          |  
|End of period                                                                       |  | $                               | 40,192   |   |      | $ | 25,317   |  
|                                                                                    |  |                                 |          |   |      |   |          |  
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period for: |  |                                 |          |   |      |   |          |  
|Interest                                                                            |  | $                               | 35,167   |   |      | $ | 25,512   |  
|Income taxes, net                                                                   |  |                                 | 748      |   |      |   | 5,104    |  
|NONCASH INVESTING ACTIVITIES:                                                       |  |                                 |          |   |      |   |          |  
|Additions to real estate owned acquired in settlement of loans                      |  |                                 | 13       |   |      |   | 120      |  
|NONCASH FINANCING ACTIVITIES:                                                       |  |                                 |          |   |      |   |          |  
|Extinguishment of investor participation liability                                  |  |                                 |         |   |      |   | 650      |  

See notes to unaudited interim condensed consolidated financial statements



5



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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 nine months ended September 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 nine months ended September 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 $2,401,000 and $3,264,000, respectively, for the three-month and nine-month periods ended September 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 nine-month periods ended September 30, 2006 and
2005.



|                                                                    |  |                                               |            |                                |      |   |            |  |   |            |     |  |   |           
|------------------------------------------------------------------- |  | --------------------------------------------- | ---------- | ------------------------------ | ---- | - | ---------- |  | - | ---------- | --- |  | - | ----------
|                                                                    |  | Three Months EndedSeptember 30,               |            | Nine Months EndedSeptember 30,
|                                                                    |  | 2006                                          |            |                                | 2005 |   | 2006       |  |   | 2005      
|                                                                    |  | (Dollars in thousands, except per-share data)
|Net income                                                          |  | $                                             | 2,635      |                                |      | $ | 4,422      |  | $ | 8,409      |     |  | $ | 11,183    
|                                                                    |  |                                               |            |                                |      |   |            |  |   |            |     |  |   |           
|Weighted average number of common shares outstandingbasic          |  |                                               | 20,030,488 |                                |      |   | 21,243,550 |  |   | 20,906,593 |     |  |   | 21,187,687
|Net effect of dilutive stock optionsbased on treasury stock method |  |                                               | 81,932     | (1)                            |      |   | 273,550    |  |   | 162,784    | (2) |  |   | 300,552   
|                                                                    |  |                                               |            |                                |      |   |            |  |   |            |     |  |   |           
|Weighted average number of common shares outstandingdiluted        |  |                                               | 20,112,420 |                                |      |   | 21,517,100 |  |   | 21,069,377 |     |  |   | 21,488,239
|                                                                    |  |                                               |            |                                |      |   |            |  |   |            |     |  |   |           
|Earnings per sharebasic                                            |  | $                                             | 0.13       |                                |      | $ | 0.21       |  | $ | 0.40       |     |  | $ | 0.53      
|                                                                    |  |                                               |            |                                |      |   |            |  |   |            |     |  |   |           
|Earnings per sharediluted                                          |  | $                                             | 0.13       |                                |      | $ | 0.21       |  | $ | 0.40       |     |  | $ | 0.52      
|                                                                    |  |                                               |            |                                |      |   |            |  |   |            |     |  |   |           



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BEVERLY HILLS BANCORP INC. AND SUBSIDIARIES

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 595,605 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 granted
stock options and stock appreciation rights (SARs) 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 September 30, 2006 |   | Nine Months Ended September 30, 2006
|                                   |  | Shares                                |   |                                      | WeightedAverageExercisePrice |      | Shares |          |   | Weighted AverageExercisePrice
|Outstanding at beginning of period |  | 757,502                               |   |                                      | $                            | 8.90 |        | 322,106  |   |                               | $ | 2.29 
|Granted                            |  |                                      |   |                                      |                              |     |        | 600,000  |   |                               |   | 10.50
|Exercised                          |  | (6,659                                | ) |                                      |                              | 2.98 |        | (141,660 | ) |                               |   | 1.87 
|Forfeited                          |  | (3,341                                | ) |                                      |                              | 3.24 |        | (32,944  | ) |                               |   | 1.98 
|                                   |  |                                       |   |                                      |                              |      |        |          |   |                               |   |      
|Outstanding at end of period       |  | 747,502                               |   |                                      | $                            | 8.98 |        | 747,502  |   |                               | $ | 8.98 
|                                   |  |                                       |   |                                      |                              |      |        |          |   |                               |   |      
|Exercisable at end of period       |  | 297,502                               |   |                                      | $                            | 6.67 |        | 297,502  |   |                               | $ | 6.67 
|                                   |  |                                       |   |                                      |                              |      |        |          |   |                               |   |      

The total intrinsic value of options exercised was $41,333 and $1,080,949, respectively, for the
three and nine months ended September 30, 2006. At September 30, 2006, the aggregate intrinsic value of fully-vested options outstanding was $794,726.

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



|                                 |  |                                      |   |                                     |                                     |      |        |          |   |                                      |   |     
|-------------------------------- |  | ------------------------------------ | - | ----------------------------------- | ----------------------------------- | ---- | ------ | -------- | - | ------------------------------------ | - | ----
|                                 |  | Three Months EndedSeptember 30, 2006 |   | Nine Months EndedSeptember 30, 2006
|                                 |  | Shares                               |   |                                     | WeightedAverageGrant DateFair Value |      | Shares |          |   | WeightedAverageGrant DateFair TValue
|Nonvested at beginning of period |  | 500,000                              |   |                                     | $                                   | 1.11 |        | 17,502   |   |                                      | $ | 0.79
|Granted                          |  |                                     |   |                                     |                                     |     |        | 600,000  |   |                                      |   | 1.13
|Vested                           |  | (50,000                              | ) |                                     |                                     | 1.21 |        | (167,502 | ) |                                      |   | 1.18
|Forfeited                        |  |                                     |   |                                     |                                     |     |        |         |   |                                      |   |    
|                                 |  |                                      |   |                                     |                                     |      |        |          |   |                                      |   |     
|Nonvested at end of period       |  | 450,000                              |   |                                     | $                                   | 1.10 |        | 450,000  |   |                                      | $ | 1.10
|                                 |  |                                      |   |                                     |                                     |      |        |          |   |                                      |   |     



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BEVERLY HILLS BANCORP INC. AND SUBSIDIARIES

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)



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



|                         |  |             |  |                    |  |                                       |  |                                |       |  |   |      
|------------------------ |  | ----------- |  | ------------------ |  | ------------------------------------- |  | ------------------------------ | ----- |  | - | -----
|Range of Exercise Prices |  | TotalShares |  | ExercisableShares  |  | Weighted Average RemainingLife(Years) |  | Weighted AverageExercise Price
|                         |  |             |  | OptionsOutstanding |  | OptionsExercisable                   
|$1.87                    |  | 55,000      |  | 55,000             |  | 5.12                                  |  | $                              | 1.87  |  | $ | 1.87 
|$2.34  $2.61            |  | 25,000      |  | 25,000             |  | 5.39                                  |  |                                | 2.45  |  |   | 2.45 
|$3.45  $3.80            |  | 67,502      |  | 67,502             |  | 6.15                                  |  |                                | 3.63  |  |   | 3.63 
|$10.50                   |  | 600,000     |  | 150,000            |  | 9.26                                  |  |                                | 10.50 |  |   | 10.50

In the third quarter of 2006, the Company granted SARs with respect to 30,000 shares to each of
its non-employee directors and SARs with respect to 36,000 shares to an executive officer. The directors SARs have an exercise price of $9.00, which was greater than the market price of the Companys stock on the date of grant. The
executive officers SARs have an exercise price of $8.23, which was equal to the market price of the Companys stock on the date of grant. The SARs vest over a three-year period and have a maximum term of five years. The SARs may be
settled only for cash. The weighted-average fair value of this grant of SARs was $0.48 per share. This fair value was estimated using the Black-Scholes option-pricing model based on the following assumptions: expected volatility of 19%, dividend
yield of 6.08%, risk-free interest rate of 4.57% and an expected life of four years.

A summary of the Companys SARs activity for the
period indicated is presented below:



|                                   |  |                                      |  |                              |     
|---------------------------------- |  | ------------------------------------ |  | ---------------------------- | ----
|                                   |  | Three Months EndedSeptember 30, 2006
|                                   |  | ShareUnits                           |  | WeightedAverageExercisePrice
|Outstanding at beginning of period |  |                                     |  | $                            |    
|Granted                            |  | 216,000                              |  |                              | 8.87
|Exercised                          |  |                                     |  |                              |    
|Forfeited                          |  |                                     |  |                              |    
|                                   |  |                                      |  |                              |     
|Outstanding at end of period       |  | 216,000                              |  | $                            | 8.87
|                                   |  |                                      |  |                              |     
|Exercisable at end of period       |  |                                     |  | $                            |    
|                                   |  |                                      |  |                              |     

A summary of the status of the Companys nonvested SARs as of September 30, 2006, and
changes during the three-month period then ended, is presented below:



|                                 |  |                                       |  |                                     |     
|-------------------------------- |  | ------------------------------------- |  | ----------------------------------- | ----
|                                 |  | Three Months Ended September 30, 2006
|                                 |  | ShareUnits                            |  | WeightedAverageGrant DateFair Value
|Nonvested at beginning of period |  |                                      |  | $                                   |    
|Granted                          |  | 216,000                               |  |                                     | 0.48
|Vested                           |  |                                      |  |                                     |    
|Forfeited                        |  |                                      |  |                                     |    
|                                 |  |                                       |  |                                     |     
|Nonvested at end of period       |  | 216,000                               |  | $                                   | 0.48
|                                 |  |                                       |  |                                     |     



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BEVERLY HILLS BANCORP INC. AND SUBSIDIARIES

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)



Additional information regarding SARs outstanding as of September 30, 2006 is as follows:



|                         |  |                  |  |                        |  |                                       |  |                                |      |  |   |  
|------------------------ |  | ---------------- |  | ---------------------- |  | ------------------------------------- |  | ------------------------------ | ---- |  | - | -
|Range of Exercise Prices |  | TotalShare Units |  | ExercisableShare Units |  | Weighted Average RemainingLife(Years) |  | Weighted AverageExercise Price
|                         |  |                  |  | OptionsOutstanding     |  | OptionsExercisable                   
|$8.23                    |  | 36,000           |  |                       |  | 5.00                                  |  | $                              | 8.23 |  | $ | 
|$9.00                    |  | 180,000          |  |                       |  | 5.00                                  |  |                                | 9.00 |  |   | 

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. 123, Accounting for Stock-Based Compensation (SFAS No. 123).

In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment(SFAS No. 123R). Under this standard, companies are no longer able to account for share-based compensation 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. 123R 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. 123R. Results for prior periods have not been restated.

In the third quarter of 2006, the application of SFAS No. 123R resulted in stock-based compensation expense of $56,445, deferred tax benefits of
$22,578 and a net reduction in net income of $33,867. There was a negligible effect on basic and diluted earnings per share. For the nine months ended September 30, 2006, the Company recorded stock-based compensation expense of $174,278,
deferred tax benefits of $68,274 and a net reduction in net income of $106,004, reducing basic earnings per share by $0.01. There was a negligible effect on diluted earnings per share. The Company did not record compensation expense related to the
SARs granted in the third quarter of 2006 because the SARs were granted at the end of the quarter and the related expense would have been immaterial for the periods presented.

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 nine months ended September 30, 2006. Prior
to the adoption of SFAS No. 123R, such tax benefits were presented as adjustments to cash flows from operating activities.

At
September 30, 2006, the Company had $508,001 of unrecognized compensation cost related to unvested stock options. This cost is expected to be amortized over a weighted-average period of 2.25 years, ending in December 2008. The unrecognized
compensation related to the SARs at September 30, 2006 was $102,616 and is expected to be amortized over the following 3.0 years, ending in September 2009. Because the SARs are classified as liabilities and not equity instruments per SFAS
No. 123R, the Company is required to remeasure the fair value of the liability at the end of each subsequent reporting period and record a corresponding adjustment to the related compensation expense. Consequently, compensation cost related to
the SARs may vary based on changes in the awards estimated fair value.



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BEVERLY HILLS BANCORP INC. AND SUBSIDIARIES

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)



Prior to the adoption of SFAS No. 123R, 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. 123R for the period indicated:



|                                                                                                                                          |  |                                               |       |                                      |   |       
|----------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------- | ----- | ------------------------------------ | - | ------
|                                                                                                                                          |  | Three Months Ended September 30, 2005         |       | Nine Months Ended September 30, 2005
|                                                                                                                                          |  | (Dollars in thousands, except per-share data)
|Net income, as reported                                                                                                                   |  | $                                             | 4,422 |                                      | $ | 11,183
|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    |                                      |   | 208   
|                                                                                                                                          |  |                                               |       |                                      |   |       
|Pro forma net income                                                                                                                      |  | $                                             | 4,360 |                                      | $ | 10,975
|                                                                                                                                          |  |                                               |       |                                      |   |       
|                                                                                                                                          |  |                                              
|Earnings per sharebasic:                                                                                                                 |  |                                               |       |                                      |   |       
|As reported                                                                                                                               |  | $                                             | 0.21  |                                      | $ | 0.53  
|                                                                                                                                          |  |                                               |       |                                      |   |       
|Pro forma                                                                                                                                 |  | $                                             | 0.21  |                                      | $ | 0.52  
|                                                                                                                                          |  |                                               |       |                                      |   |       
|                                                                                                                                          |  |                                              
|Earnings per sharediluted:                                                                                                               |  |                                               |       |                                      |   |       
|As reported                                                                                                                               |  | $                                             | 0.21  |                                      | $ | 0.52  
|                                                                                                                                          |  |                                               |       |                                      |   |       
|Pro forma                                                                                                                                 |  | $                                             | 0.20  |                                      | $ | 0.51  
|                                                                                                                                          |  |                                               |       |                                      |   |       



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

At September 30, 2006, the Company had outstanding commitments to fund $173.2 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 $1.5 million and $5.6 million, respectively, for the three and nine months ended September 30, 2006, compared with provisions of
$3.1 million and $8.0 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 $29.1 million and $30.7 million,
respectively, at September 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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BEVERLY HILLS BANCORP INC. AND SUBSIDIARIES

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 asset 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 $29.1 million will
be realized in future periods.

As of September 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 nine months ended September 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 nine months ended September 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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BEVERLY HILLS BANCORP INC. AND SUBSIDIARIES

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)



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



|                                                                             |  |                                       |           |                                      |   |        |       |  |   |          
|---------------------------------------------------------------------------- |  | ------------------------------------- | --------- | ------------------------------------ | - | ------ | ----- |  | - | ---------
|                                                                             |  | Three Months Ended September 30, 2006
|                                                                             |  | Banking                               |           | Holding Company and Other
Operations |   |        | Total
|                                                                             |  | (Dollars in thousands)               
|Interest income                                                              |  | $                                     | 22,040    |                                      | $ | 431    |       |  | $ | 22,471   
|Interest expense                                                             |  |                                       | 13,764    |                                      |   | 724    |       |  |   | 14,488   
|                                                                             |  |                                       |           |                                      |   |        |       |  |   |          
|Net interest income (expense)                                                |  |                                       | 8,276     |                                      |   | (293   | )     |  |   | 7,983    
|Provision for (recapture of) loan losses                                     |  |                                       | 131       |                                      |   | (11    | )     |  |   | 120      
|                                                                             |  |                                       |           |                                      |   |        |       |  |   |          
|Net interest income (expense) after provision for (recapture of) loan losses |  |                                       | 8,145     |                                      |   | (282   | )     |  |   | 7,863    
|Other income (loss)                                                          |  |                                       | 383       |                                      |   | (2     | )     |  |   | 381      
|Compensation and employee benefits expense                                   |  |                                       | 1,497     |                                      |   | 229    |       |  |   | 1,726    
|Other expenses                                                               |  |                                       | 1,196     |                                      |   | 1,147  |       |  |   | 2,343    
|                                                                             |  |                                       |           |                                      |   |        |       |  |   |          
|Income (loss) before taxes                                                   |  |                                       | 5,835     |                                      |   | (1,660 | )     |  |   | 4,175    
|Income tax provision (benefit)                                               |  |                                       | 2,302     |                                      |   | (762   | )     |  |   | 1,540    
|                                                                             |  |                                       |           |                                      |   |        |       |  |   |          
|Net income (loss)                                                            |  | $                                     | 3,533     |                                      | $ | (898   | )     |  | $ | 2,635    
|                                                                             |  |                                       |           |                                      |   |        |       |  |   |          
|Total assets                                                                 |  | $                                     | 1,427,792 |                                      | $ | 38,293 |       |  | $ | 1,466,085
|                                                                             |  |                                       |           |                                      |   |        |       |  |   |          



|                                                                             |  |                                       |           |   |                                      |   |        |       |  |   |           |  
|---------------------------------------------------------------------------- |  | ------------------------------------- | --------- | - | ------------------------------------ | - | ------ | ----- |  | - | --------- | -
|                                                                             |  | Three Months Ended September 30, 2005 |          
|                                                                             |  | Banking                               |           |   | Holding Company and Other
Operations |   |        | Total | 
|                                                                             |  | (Dollars in thousands)                |          
|Interest income                                                              |  | $                                     | 20,648    |   |                                      | $ | 242    |       |  | $ | 20,890    |  
|Interest expense                                                             |  |                                       | 10,131    |   |                                      |   | 229    |       |  |   | 10,360    |  
|                                                                             |  |                                       |           |   |                                      |   |        |       |  |   |           |  
|Net interest income                                                          |  |                                       | 10,517    |   |                                      |   | 13     |       |  |   | 10,530    |  
|(Recapture of) provision for loan losses                                     |  |                                       | (91       | ) |                                      |   | 43     |       |  |   | (48       | )
|                                                                             |  |                                       |           |   |                                      |   |        |       |  |   |           |  
|Net interest income (expense) after (recapture of) provision for loan losses |  |                                       | 10,608    |   |                                      |   | (30    | )     |  |   | 10,578    |  
|Realized losses on sales                                                     |  |                                       |          |   |                                      |   | 13     |       |  |   | 13        |  
|Other income                                                                 |  |                                       | 291       |   |                                      |   | 532    |       |  |   | 823       |  
|Compensation and employee benefits expense                                   |  |                                       | 1,826     |   |                                      |   | 85     |       |  |   | 1,911     |  
|Other expenses                                                               |  |                                       | 1,370     |   |                                      |   | 658    |       |  |   | 2,028     |  
|                                                                             |  |                                       |           |   |                                      |   |        |       |  |   |           |  
|Income (loss) before taxes                                                   |  |                                       | 7,703     |   |                                      |   | (228   | )     |  |   | 7,475     |  
|Income tax provision (benefit)                                               |  |                                       | 3,141     |   |                                      |   | (88    | )     |  |   | 3,053     |  
|                                                                             |  |                                       |           |   |                                      |   |        |       |  |   |           |  
|Net income (loss)                                                            |  | $                                     | 4,562     |   |                                      | $ | (140   | )     |  | $ | 4,422     |  
|                                                                             |  |                                       |           |   |                                      |   |        |       |  |   |           |  
|Total assets                                                                 |  | $                                     | 1,373,301 |   |                                      | $ | 34,450 |       |  | $ | 1,407,751 |  
|                                                                             |  |                                       |           |   |                                      |   |        |       |  |   |           |  



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BEVERLY HILLS BANCORP INC. AND SUBSIDIARIES

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)



Segment data for the nine months ended September 30, 2006 and 2005 are as follows:



|                                                              |  |                                      |           |                                      |   |        |       |  |   |          
|------------------------------------------------------------- |  | ------------------------------------ | --------- | ------------------------------------ | - | ------ | ----- |  | - | ---------
|                                                              |  | Nine Months Ended September 30, 2006
|                                                              |  | Banking                              |           | Holding Company and Other
Operations |   |        | Total
|                                                              |  | (Dollars in thousands)              
|Interest income                                               |  | $                                    | 63,228    |                                      | $ | 1,128  |       |  | $ | 64,356   
|Interest expense                                              |  |                                      | 37,373    |                                      |   | 1,526  |       |  |   | 38,899   
|                                                              |  |                                      |           |                                      |   |        |       |  |   |          
|Net interest income (expense)                                 |  |                                      | 25,855    |                                      |   | (398   | )     |  |   | 25,457   
|Provision for loan losses                                     |  |                                      | 17        |                                      |   | 34     |       |  |   | 51       
|                                                              |  |                                      |           |                                      |   |        |       |  |   |          
|Net interest income (expense) after provision for loan losses |  |                                      | 25,838    |                                      |   | (432   | )     |  |   | 25,406   
|Other income (loss)                                           |  |                                      | 1,094     |                                      |   | (16    | )     |  |   | 1,078    
|Compensation and employee benefits expense                    |  |                                      | 5,050     |                                      |   | 707    |       |  |   | 5,757    
|Other expenses                                                |  |                                      | 3,692     |                                      |   | 2,984  |       |  |   | 6,676    
|                                                              |  |                                      |           |                                      |   |        |       |  |   |          
|Income (loss) before taxes                                    |  |                                      | 18,190    |                                      |   | (4,139 | )     |  |   | 14,051   
|Income tax provision (benefit)                                |  |                                      | 7,442     |                                      |   | (1,800 | )     |  |   | 5,642    
|                                                              |  |                                      |           |                                      |   |        |       |  |   |          
|Net income (loss)                                             |  | $                                    | 10,748    |                                      | $ | (2,339 | )     |  | $ | 8,409    
|                                                              |  |                                      |           |                                      |   |        |       |  |   |          
|Total assets                                                  |  | $                                    | 1,427,792 |                                      | $ | 38,293 |       |  | $ | 1,466,085
|                                                              |  |                                      |           |                                      |   |        |       |  |   |          



|                                                             |  |                                      |           |   |                                      |   |        |       |  |   |           |  
|------------------------------------------------------------ |  | ------------------------------------ | --------- | - | ------------------------------------ | - | ------ | ----- |  | - | --------- | -
|                                                             |  | Nine Months Ended September 30, 2005 |          
|                                                             |  | Banking                              |           |   | Holding Company and Other
Operations |   |        | Total | 
|                                                             |  | (Dollars in thousands)               |          
|Interest income                                              |  | $                                    | 55,889    |   |                                      | $ | 747    |       |  | $ | 56,636    |  
|Interest expense                                             |  |                                      | 26,179    |   |                                      |   | 916    |       |  |   | 27,095    |  
|                                                             |  |                                      |           |   |                                      |   |        |       |  |   |           |  
|Net interest income (expense)                                |  |                                      | 29,710    |   |                                      |   | (169   | )     |  |   | 29,541    |  
|Recapture of loan losses                                     |  |                                      | (91       | ) |                                      |   | 39     |       |  |   | (52       | )
|                                                             |  |                                      |           |   |                                      |   |        |       |  |   |           |  
|Net interest income (expense) after recapture of loan losses |  |                                      | 29,801    |   |                                      |   | (208   | )     |  |   | 29,593    |  
|Realized losses on sales                                     |  |                                      |          |   |                                      |   | (8     | )     |  |   | (8        | )
|Other income                                                 |  |                                      | 1,037     |   |                                      |   | 598    |       |  |   | 1,635     |  
|Compensation and employee benefits expense                   |  |                                      | 5,437     |   |                                      |   | 238    |       |  |   | 5,675     |  
|Other expenses                                               |  |                                      | 4,193     |   |                                      |   | 2,150  |       |  |   | 6,343     |  
|                                                             |  |                                      |           |   |                                      |   |        |       |  |   |           |  
|Income (loss) before taxes                                   |  |                                      | 21,208    |   |                                      |   | (2,006 | )     |  |   | 19,202    |  
|Income tax provision (benefit)                               |  |                                      | 8,869     |   |                                      |   | (850   | )     |  |   | 8,019     |  
|                                                             |  |                                      |           |   |                                      |   |        |       |  |   |           |  
|Net income (loss)                                            |  | $                                    | 12,339    |   |                                      | $ | (1,156 | )     |  | $ | 11,183    |  
|                                                             |  |                                      |           |   |                                      |   |        |       |  |   |           |  
|Total assets                                                 |  | $                                    | 1,373,301 |   |                                      | $ | 34,450 |       |  | $ | 1,407,751 |  
|                                                             |  |                                      |           |   |                                      |   |        |       |  |   |           |  



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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 September 30, 2006.

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 six months ended June 30, 2005, the Company recorded amortization expense of $129,000 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.

As a result
of this ruling, the Company is entitled to recover 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 October 2006, the
Company reached a settlement with the former officer to recover amounts owed to the Company by the former officer. This settlement provides that the former officer will repay the Company a total of $2.0 million, plus interest on the unpaid balance
at 6% per year. In October 2006, the Company received an initial payment of $200,000. All subsequent payments are to be made in semi-annual installments of $200,000 each, until the amount, including interest, is paid in full.

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 performance under one of its loan servicing contracts. Through September 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. This litigation is expected to be resolved in 2007. 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



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BEVERLY HILLS BANCORP INC. AND SUBSIDIARIES

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)



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
$2.3 million and $7.7 million, respectively, for the three and nine months ended September 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. | REPURCHASE OF COMMON STOCK
|--- | --------------------------

Effective
August 14, 2006, pursuant to a Dutch auction tender offer, the Company repurchased 2,750,000 shares of its common stock, or approximately 12.8% of its shares then outstanding. The purchase price was $9.00 per share, for a total
purchase price of $24.75 million. The Company financed the repurchase of this stock primarily with the proceeds from the issuance of $20 million of trust preferred securities in May 2006.



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

In September 2006,
the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS No. 157 is effective
for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The Company is evaluating the impact, if any, that the adoption of SFAS No. 157 will have on its financial
position, results of operations and cash flows.

In September 2006, the FASB issued SFAS No. 158, Employers Accounting for
Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R) (SFAS No. 158). SFAS No. 158 requires an entity to recognize in its statement of financial position an
asset for a defined benefit pension or postretirement plans overfunded status or a liability for a plans underfunded status, and to recognize changes in that funded status through other comprehensive income in the year in which the
changes occur. SFAS No. 158 will not change the amount of net periodic benefit expense recognized in an entitys results of operations. SFAS No. 158 is effective for fiscal years ending after December 15, 2006. The Company
does not expect the adoption of SFAS No. 158 to have an impact on its financial position, results of operations and cash flows.

In
September 2006 the SEC issued Staff Accounting Bulletin (SAB) No. 108 Quantifying Financial Misstatements, which expresses the Staffs views regarding the process of quantifying financial statement misstatements. Registrants are
required to quantify the impact of correcting all misstatements, including both the carryover and reversing effects of prior year misstatements, on the current year financial statements. The techniques most commonly used in practice to accumulate
and quantify misstatements are generally referred to as the rollover (current year income statement perspective) and iron curtain (year-end balance perspective) approaches. The financial statements would require adjustment
when either approach results in quantifying a misstatement that is material, after considering all relevant quantitative and qualitative factors. Management does not expect this guidance to have a material effect on the Companys financial
condition, results of operations and cash flows.



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BEVERLY HILLS BANCORP INC. AND SUBSIDIARIES

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)



|12. | SUBSEQUENT EVENTSALE OF BEVERLY HILLS BRANCH
|--- | ---------------------------------------------

On November 3, 2006, the Company sold its Beverly Hills branch to First Bank, a subsidiary of First Banks, Inc., headquartered in St. Louis, Missouri. In the sale, First Bank assumed all of the deposits at the branch and certain
liabilities associated with the branch, including the branch lease, and acquired certain assets at the branch at their book values. First Bank paid a deposit premium of 5.5% of the deposits. The Company will continue to operate its Calabasas branch
and will continue its deposit gathering strategies. The Company expects to realize a net gain on the sale of approximately $8.4 million, after related selling expenses.

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



|                                          |  |                       |        
|----------------------------------------- |  | --------------------- | -------
|                                          |  | September 30, 2006   
|                                          |  | (Dollars inthousands)
|ASSETS:                                   |  |                       |        
|Cash and cash equivalents                 |  | $                     | 215    
|Loans, net                                |  |                       | 24     
|Accrued interest receivable               |  |                       | 1      
|Leasehold improvements and equipment, net |  |                       | 67     
|                                          |  |                       |        
|Total assets                              |  | $                     | 307    
|                                          |  |                       |        
|LIABILITIES:                              |  |                       |        
|Deposits                                  |  | $                     | 156,917
|Accrued interest payable                  |  |                       | 1,286  
|Other liabilities                         |  |                       | 7      
|                                          |  |                       |        
|Total liabilities                         |  | $                     | 158,210
|                                          |  |                       |        

The assets and liabilities of the Beverly Hills branch as of September 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 expected to realize a gain on the sale and because the branchs assets were to 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 November 3, 2006, we completed the sale of our Beverly Hills branch. We anticipate that this sale will have the following effects on our
financial condition and results of operations: (1) total deposits are expected to decline by approximately $158.2 million; (2) our short-term borrowings, primarily Federal Home Loan Bank (FHLB) advances, will increase by a
similar amount to replace the deposits transferred in the sale; (3) our cost of funds will likely increase in the near term as a result of the new borrowings; and (4) annual operating expenses are expected to decline by approximately $1.0
million due to reduced compensation, occupancy and other branch-related costs. We intend to operate principally as a wholesale bank subsequent to the sale.

Our net income for the three months ended September 30, 2006 was $2.6 million, or $0.13 per diluted share, compared with $4.4 million, or $0.21 per diluted share, for the three months ended September 30,
2005. Our net interest income declined by $2.5 million, reflecting a significant increase in our cost of funds as a result of the continuing rise in market interest rates. The decrease in net income was to a lesser extent due to a decline in other
operating income and slight increases in the loan loss provision and other operating expenses.

For the nine months ended
September 30, 2006, our net income was $8.4 million, or $0.40 per diluted share, compared with $11.2 million, or $0.52 per diluted share, for the nine months ended September 30, 2005. This decrease reflects a $4.1 million decline in net
interest income, a $0.5 million decline in other operating income and a $0.4 million increase in other operating expenses.

Our
stockholders equity declined by $22.7 million for the nine months ended September 30, 2006 to $151.2 million, or $8.05 book value per diluted share, despite our net income of $8.4 million. This decrease was due primarily to our repurchase
of 2.75 million shares of common stock for a total price of $24.75 million and cash dividends of $7.7 million. These decreases were partially offset by net after-tax unrealized gains of $1.2 million on our portfolio of available-for-sale
securities and a $0.2 million increase in paid-in capital representing stock-based compensation expense.

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 nine months ended
September 30, 2006.



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##### Table of Contents

RESULTS OF OPERATIONSTHREE AND NINE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TO THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2005

Net Interest Income

Our net interest income was $8.0 million for the three months ended September 30, 2006, compared with $10.5 million for the three months ended September 30, 2005. For the nine months ended September 30,
2006, net interest income totaled $25.5 million, compared with $29.5 million for the first nine 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 2.28% for the third quarter of 2006, compared with 3.08%
for the third quarter of 2005, and 2.50% for the nine-month period ended September 30, 2006, compared with 3.00% for the corresponding 2005 period. These declines in the margin were primarily the result of the increase in market interest rates
from 2005 to 2006. Because our interest bearing liabilities reprice more frequently than our interest earning assets, our net interest margin tends to decrease as interest rates rise. As a result, our weighted average cost of interest bearing
liabilities increased by 119 basis points to 4.51% for the three months ended September 30, 2006, compared with 3.32% for the three months ended September 30, 2005. Similarly, our weighted average cost of interest bearing liabilities
increased by 116 basis points, to 4.18% for the first nine months of 2006, compared with 3.02% for the first nine months of 2005. In contrast, our yield on interest-earning assets increased by only 31 basis points from the third quarter of 2005 to
the third quarter of 2006, and by only 58 basis points from the nine months ended September 30, 2005 to the corresponding 2006 period. We anticipate that the net interest margin may narrow further in future periods if the treasury yield remains
relatively flat.

To a lesser extent, the net interest margin declined because our portfolio of mortgage-backed securities has comprised a
larger share of our interest-earning assets in 2006 than in 2005. We have made significant investments in these assets in 2006 due to the reduced demand for loans during the year.



18



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##### Table of Contents

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 September 30, 2006 |           |   | Three Months Ended September 30, 2005 |  
|                                           |  | Average Balance                       |           |   | Interest                              |   | Annualized Yield/Rate |  |      | Average Balance |  |   | Interest  |   | Annualized Yield/Rate |  
|                                           |  | (Dollars in thousands)                |          
|Interest-Earning Assets:                   |  |                                       |           |   |                                       |   |                       |  |      |                 |  |   |           |   |                       |   |        |  |      |  
|Mortgage-backed securities                 |  | $                                     | 402,816   |   |                                       | $ | 5,095                 |  | 4.95 | %               |  | $ | 348,656   |   |                       | $ | 3,846  |  | 4.41 | %
|Loans(1)(2)(3)                             |  |                                       | 941,102   |   |                                       |   | 16,807                |  | 6.99 | %               |  |   | 965,390   |   |                       |   | 16,606 |  | 6.73 | %
|Federal funds and other investments        |  |                                       | 45,947    |   |                                       |   | 569                   |  | 4.85 | %               |  |   | 42,817    |   |                       |   | 438    |  | 4.00 | %
|                                           |  |                                       |           |   |                                       |   |                       |  |      |                 |  |   |           |   |                       |   |        |  |      |  
|Total interest-earning assets              |  |                                       | 1,389,865 |   |                                       |   | 22,471                |  | 6.33 | %               |  |   | 1,356,863 |   |                       |   | 20,890 |  | 6.02 | %
|                                           |  |                                       |           |   |                                       |   |                       |  |      |                 |  |   |           |   |                       |   |        |  |      |  
|Noninterest-earning cash                   |  |                                       | 1,259     |   |                                       |   |                       |  |      |                 |  |   | 1,953     |   |                       |   |        |  |      |  
|Allowance for loan losses                  |  |                                       | (7,139    | ) |                                       |   |                       |  |      |                 |  |   | (7,391    | ) |                       |   |        |  |      |  
|Other assets                               |  |                                       | 72,387    |   |                                       |   |                       |  |      |                 |  |   | 75,827    |   |                       |   |        |  |      |  
|                                           |  |                                       |           |   |                                       |   |                       |  |      |                 |  |   |           |   |                       |   |        |  |      |  
|Total assets                               |  | $                                     | 1,456,372 |   |                                       |   |                       |  |      |                 |  | $ | 1,427,252 |   |                       |   |        |  |      |  
|                                           |  |                                       |           |   |                                       |   |                       |  |      |                 |  |   |           |   |                       |   |        |  |      |  
|Interest-Bearing Liabilities:              |  |                                       |           |   |                                       |   |                       |  |      |                 |  |   |           |   |                       |   |        |  |      |  
|Interest-bearing deposits:                 |  |                                       |           |   |                                       |   |                       |  |      |                 |  |   |           |   |                       |   |        |  |      |  
|Savings, NOW and money market accounts     |  | $                                     | 61,170    |   |                                       | $ | 564                   |  | 3.66 | %               |  | $ | 103,678   |   |                       | $ | 753    |  | 2.88 | %
|Certificates of deposit                    |  |                                       | 681,527   |   |                                       |   | 7,958                 |  | 4.63 | %               |  |   | 461,755   |   |                       |   | 3,912  |  | 3.36 | %
|                                           |  |                                       |           |   |                                       |   |                       |  |      |                 |  |   |           |   |                       |   |        |  |      |  
|Total interest-bearing deposits            |  |                                       | 742,697   |   |                                       |   | 8,522                 |  | 4.55 | %               |  |   | 565,433   |   |                       |   | 4,665  |  | 3.27 | %
|Repurchase agreements                      |  |                                       | 40,000    |   |                                       |   | 337                   |  | 3.34 | %               |  |   | 106,750   |   |                       |   | 870    |  | 3.23 | %
|FHLB advances                              |  |                                       | 451,587   |   |                                       |   | 4,769                 |  | 4.19 | %               |  |   | 546,587   |   |                       |   | 4,439  |  | 3.22 | %
|Junior subordinated notes payable          |  |                                       | 41,238    |   |                                       |   | 860                   |  | 8.27 | %               |  |   | 20,619    |   |                       |   | 386    |  | 7.43 | %
|                                           |  |                                       |           |   |                                       |   |                       |  |      |                 |  |   |           |   |                       |   |        |  |      |  
|Total interest-bearing liabilities         |  |                                       | 1,275,522 |   |                                       |   | 14,488                |  | 4.51 | %               |  |   | 1,239,389 |   |                       |   | 10,360 |  | 3.32 | %
|                                           |  |                                       |           |   |                                       |   |                       |  |      |                 |  |   |           |   |                       |   |        |  |      |  
|Noninterest-bearing deposits               |  |                                       | 5,892     |   |                                       |   |                       |  |      |                 |  |   | 4,460     |   |                       |   |        |  |      |  
|Other liabilities                          |  |                                       | 12,966    |   |                                       |   |                       |  |      |                 |  |   | 9,914     |   |                       |   |        |  |      |  
|                                           |  |                                       |           |   |                                       |   |                       |  |      |                 |  |   |           |   |                       |   |        |  |      |  
|Total liabilities                          |  |                                       | 1,294,380 |   |                                       |   |                       |  |      |                 |  |   | 1,253,763 |   |                       |   |        |  |      |  
|Stockholders equity                       |  |                                       | 161,992   |   |                                       |   |                       |  |      |                 |  |   | 173,489   |   |                       |   |        |  |      |  
|                                           |  |                                       |           |   |                                       |   |                       |  |      |                 |  |   |           |   |                       |   |        |  |      |  
|Total liabilities and stockholders equity |  | $                                     | 1,456,372 |   |                                       |   |                       |  |      |                 |  | $ | 1,427,252 |   |                       |   |        |  |      |  
|                                           |  |                                       |           |   |                                       |   |                       |  |      |                 |  |   |           |   |                       |   |        |  |      |  
|Net interest income                        |  |                                       |           |   |                                       | $ | 7,983                 |  |      |                 |  |   |           |   |                       | $ | 10,530 |  |      |  
|                                           |  |                                       |           |   |                                       |   |                       |  |      |                 |  |   |           |   |                       |   |        |  |      |  
|Net interest spread                        |  |                                       |           |   |                                       |   |                       |  | 1.82 | %               |  |   |           |   |                       |   |        |  | 2.70 | %
|Net interest margin                        |  |                                       |           |   |                                       |   |                       |  | 2.28 | %               |  |   |           |   |                       |   |        |  | 3.08 | %

---

|(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 $327 for the quarter ended September 30, 2006 and net amortization of deferred loan costs of $43 for the quarter
ended September 30, 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 September 30, 2005 totaled $2,401.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

|                                           |  |                                      |           |   |                                      |   |                       |  |      |                 |  |   |           |   |                       |   |        |  |      |  
|------------------------------------------ |  | ------------------------------------ | --------- | - | ------------------------------------ | - | --------------------- |  | ---- | --------------- |  | - | --------- | - | --------------------- | - | ------ |  | ---- | -
|                                           |  | Nine Months Ended September 30, 2006 |           |   | Nine Months Ended September 30, 2005 |  
|                                           |  | Average Balance                      |           |   | Interest                             |   | Annualized Yield/Rate |  |      | Average Balance |  |   | Interest  |   | Annualized Yield/Rate |  
|                                           |  | (Dollars in thousands)               |          
|Interest-Earning Assets:                   |  |                                      |           |   |                                      |   |                       |  |      |                 |  |   |           |   |                       |   |        |  |      |  
|Mortgage-backed securities                 |  | $                                    | 362,867   |   |                                      | $ | 13,329                |  | 4.84 | %               |  | $ | 333,718   |   |                       | $ | 10,848 |  | 4.33 | %
|Loans(1)(2)(3)                             |  |                                      | 954,401   |   |                                      |   | 49,415                |  | 6.83 | %               |  |   | 941,289   |   |                       |   | 44,571 |  | 6.24 | %
|Federal funds and other investments        |  |                                      | 43,690    |   |                                      |   | 1,612                 |  | 4.87 | %               |  |   | 43,668    |   |                       |   | 1,217  |  | 3.68 | %
|                                           |  |                                      |           |   |                                      |   |                       |  |      |                 |  |   |           |   |                       |   |        |  |      |  
|Total interest-earning assets              |  |                                      | 1,360,958 |   |                                      |   | 64,356                |  | 6.24 | %               |  |   | 1,318,675 |   |                       |   | 56,636 |  | 5.66 | %
|                                           |  |                                      |           |   |                                      |   |                       |  |      |                 |  |   |           |   |                       |   |        |  |      |  
|Noninterest-earning cash                   |  |                                      | 1,490     |   |                                      |   |                       |  |      |                 |  |   | 2,213     |   |                       |   |        |  |      |  
|Allowance for loan losses                  |  |                                      | (7,224    | ) |                                      |   |                       |  |      |                 |  |   | (8,645    | ) |                       |   |        |  |      |  
|Other assets                               |  |                                      | 74,418    |   |                                      |   |                       |  |      |                 |  |   | 73,435    |   |                       |   |        |  |      |  
|                                           |  |                                      |           |   |                                      |   |                       |  |      |                 |  |   |           |   |                       |   |        |  |      |  
|Total assets                               |  | $                                    | 1,429,642 |   |                                      |   |                       |  |      |                 |  | $ | 1,385,678 |   |                       |   |        |  |      |  
|                                           |  |                                      |           |   |                                      |   |                       |  |      |                 |  |   |           |   |                       |   |        |  |      |  
|Interest-Bearing Liabilities:              |  |                                      |           |   |                                      |   |                       |  |      |                 |  |   |           |   |                       |   |        |  |      |  
|Interest-bearing deposits:                 |  |                                      |           |   |                                      |   |                       |  |      |                 |  |   |           |   |                       |   |        |  |      |  
|Savings, NOW and money market accounts     |  | $                                    | 64,069    |   |                                      | $ | 1,593                 |  | 3.32 | %               |  | $ | 108,298   |   |                       | $ | 2,135  |  | 2.64 | %
|Certificates of deposit                    |  |                                      | 623,134   |   |                                      |   | 20,716                |  | 4.44 | %               |  |   | 441,324   |   |                       |   | 9,909  |  | 3.00 | %
|                                           |  |                                      |           |   |                                      |   |                       |  |      |                 |  |   |           |   |                       |   |        |  |      |  
|Total interest-bearing deposits            |  |                                      | 687,203   |   |                                      |   | 22,309                |  | 4.34 | %               |  |   | 549,622   |   |                       |   | 12,044 |  | 2.93 | %
|Repurchase agreements                      |  |                                      | 44,600    |   |                                      |   | 1,120                 |  | 3.36 | %               |  |   | 123,900   |   |                       |   | 2,833  |  | 3.06 | %
|FHLB advances                              |  |                                      | 480,637   |   |                                      |   | 13,549                |  | 3.77 | %               |  |   | 504,537   |   |                       |   | 11,146 |  | 2.95 | %
|Junior subordinated notes payable          |  |                                      | 30,929    |   |                                      |   | 1,921                 |  | 8.30 | %               |  |   | 20,619    |   |                       |   | 1,072  |  | 6.95 | %
|                                           |  |                                      |           |   |                                      |   |                       |  |      |                 |  |   |           |   |                       |   |        |  |      |  
|Total interest-bearing liabilities         |  |                                      | 1,243,369 |   |                                      |   | 38,899                |  | 4.18 | %               |  |   | 1,198,678 |   |                       |   | 27,095 |  | 3.02 | %
|                                           |  |                                      |           |   |                                      |   |                       |  |      |                 |  |   |           |   |                       |   |        |  |      |  
|Noninterest-bearing deposits               |  |                                      | 5,313     |   |                                      |   |                       |  |      |                 |  |   | 4,364     |   |                       |   |        |  |      |  
|Other liabilities                          |  |                                      | 11,853    |   |                                      |   |                       |  |      |                 |  |   | 9,905     |   |                       |   |        |  |      |  
|                                           |  |                                      |           |   |                                      |   |                       |  |      |                 |  |   |           |   |                       |   |        |  |      |  
|Total liabilities                          |  |                                      | 1,260,535 |   |                                      |   |                       |  |      |                 |  |   | 1,212,947 |   |                       |   |        |  |      |  
|Stockholders equity                       |  |                                      | 169,107   |   |                                      |   |                       |  |      |                 |  |   | 172,731   |   |                       |   |        |  |      |  
|                                           |  |                                      |           |   |                                      |   |                       |  |      |                 |  |   |           |   |                       |   |        |  |      |  
|Total liabilities and stockholders equity |  | $                                    | 1,429,642 |   |                                      |   |                       |  |      |                 |  | $ | 1,385,678 |   |                       |   |        |  |      |  
|                                           |  |                                      |           |   |                                      |   |                       |  |      |                 |  |   |           |   |                       |   |        |  |      |  
|Net interest income                        |  |                                      |           |   |                                      | $ | 25,457                |  |      |                 |  |   |           |   |                       | $ | 29,541 |  |      |  
|                                           |  |                                      |           |   |                                      |   |                       |  |      |                 |  |   |           |   |                       |   |        |  |      |  
|Net interest spread                        |  |                                      |           |   |                                      |   |                       |  | 2.06 | %               |  |   |           |   |                       |   |        |  | 2.64 | %
|Net interest margin                        |  |                                      |           |   |                                      |   |                       |  | 2.50 | %               |  |   |           |   |                       |   |        |  | 3.00 | %

---

|(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 $897 and $112, respectively, for the nine months ended September 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 nine months ended September 30, 2005 totaled $3,264.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Interest income on mortgage-backed securities was
$5.1 million for the third quarter of 2006, compared with $3.8 million for the third quarter of 2005. For the nine months ended September 30, 2006, interest income on mortgage-backed securities totaled $13.3 million, compared with $10.8 million
for the nine months



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##### Table of Contents

September 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 54 basis points from the third quarter of 2005 to the third quarter of 2006, and by 51 basis points from the
first nine months of 2005 to the first nine months of 2006. To a lesser extent, the increase in interest income reflects an increase in the average investment balance from the 2005 periods to the 2006 periods. This increase in average volume
reflects our purchase of $117.9 million in mortgage-backed securities in the second quarter of 2006, in addition to an increase in mortgage-backed securities throughout 2005.

Interest income on loans was $16.8 million for the quarter ended September 30, 2006, compared with $16.6 million for the quarter ended
September 30, 2005. This slight increase in interest income was due to a 26-basis point increase in yield, from 6.73% for the third quarter of 2005 to 6.99% for the third quarter of 2006. The effects of the higher yield were partially offset by
a $24.3 million decrease in the average loan balance from the 2005 period to the 2006 period, as loan repayments exceeded originations for the first three quarters of 2006. For the nine months ended September 30, 2006, interest income on loans
was $49.4 million, compared with $44.6 million for the first nine months of 2005. The increase for the nine-month period reflects the higher market interest rates in 2006, which increased the weighted average yield on the loan portfolio by 59 basis
points from the nine months ended September 30, 2005 to the nine months ended September 30, 2006. Adjustable-rate loans (including loans with an initial fixed rate for 3 or 5 years which subsequently convert to adjustable-rate) have
comprised between 85-88% of our total loans for the past year, making the portfolio highly sensitive 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 three quarters of 2005 to the first three quarters of 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 $8.5 million for the
quarter ended September 30, 2006, compared with $4.7 million for the quarter ended September 30, 2005. For the nine months ended September 30, 2006, interest on deposits totaled $22.3 million, compared with $12.0 million for the first
nine months of 2005. These increases were primarily the result of an increase in the average cost of our interest-bearing deposits of 128 basis points from the third quarter of 2005 to the third quarter of 2006, and an increase in cost of 141 basis
points from the first nine months of 2005 to the first nine 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 90.7% for the first nine months of 2006, compared with an average of 80.3% for the corresponding 2005 period. We
have increasingly utilized deposits as our primary funding source in 2006 and raised a significant volume of wholesale CDs, resulting in a $137.6 million increase in the average balance of interest-bearing deposits over the first three quarters of
2005.

Interest expense on repurchase agreements and FHLB advances totaled $5.1 million for the three months ended September 30, 2006,
compared with $5.3 million for the three months ended September 30, 2005. The slight decrease was due to a decline in the average balance of borrowings of $161.75 million, as we increasingly utilized CDs as our primary funding source in 2006.
This decrease in the average balance of borrowings more than offset the effects of the increase in cost of funds from the third quarter of 2005 to the third quarter of 2006. For the nine months ended September 30, 2006, interest expense on
repurchase agreements and FHLB advances was $14.7 million, compared with $14.0 million for the nine months ended September 30, 2005. This increase was due to the higher market interest rates in the 2006 period, which more than offset the
decline in our average balance of borrowings. This continuing increase in rates raised the cost of our repurchase agreements and FHLB advances by 30 and 82 basis points, respectively, from the first nine months of 2005 to the first nine months of
2006.

Interest expense on our junior subordinated notes payable was $0.9 million for the third quarter of 2006, compared with $0.4 million
for the third quarter of 2005. For the nine months ended September 30, 2006, interest on junior subordinated notes payable totaled $1.9 million, compared with $1.1 million for the first nine months of



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##### Table of Contents

2005. These increases reflect both higher average borrowing balances and higher rates in the 2006 periods. In May 2006 we issued $20.6 million in trust
preferred securities to fund our anticipated stock repurchase. This new debt increased the average liability balance for the three and nine months ended September 30, 2006 by $20.6 million and $10.3 million, respectively, over the amounts for
the corresponding 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. Consequently, the average cost of our
junior subordinated notes payable increased by 84 basis points from the third quarter of 2005 to the third quarter of 2006 and by 135 basis points from the first nine months of 2005 to the first nine months of 2006.

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 a
provision for loan losses of $120,000 for the three months ended September 30, 2006, compared with net recaptures of loan loss reserves of $48,000 for the three months ended September 30, 2005. For the nine months ended September 30,
2006, our provision for loan losses was $51,000, compared with $52,000 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 Income

Our other income was $0.4
million for the three months ended September 30, 2006, compared with $0.8 million for the three months ended September 30, 2005. For the nine months ended September 30, 2006, other income totaled $1.1 million, compared with $1.6
million for the nine months ended September 30, 2005. The decline in other income from the 2005 periods to the 2006 periods was due primarily to a one-time gain of $404,000 recorded in September 2005 from our payoff of a participation liability
to a co-investor, which previously shared in the returns generated by certain loan portfolios.

Other Expenses

Compensation and employee benefits expense totaled $1.7 million for the three months ended September 30, 2006, compared with $1.9 million for the
three months ended September 30, 2005. This decrease was due to a reduction in bonus expense as a result of (1) the decline in pre-tax income from the third quarter of 2005 to the third quarter of 2006 and (2) a reversal of the
accrued bonus for an officer who resigned in the third quarter of 2006. For the nine months ended September 30, 2006, compensation expense totaled $5.8 million, compared with $5.7 million for the first nine months of 2005. This increase in the
year-to-date period was due primarily to the hiring of our Chief Executive Officer in the prior year. Because he was hired in August 2005, his compensation is reflected throughout the first nine months of 2006 but for only one month of the
nine-month period ended September 30, 2005.



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Our legal expenses (included in Professional fees in the statement of operations) increased
by $102,000 from the third quarter of 2005 to the third quarter of 2006. For the nine months ended September 30, 2006, our legal expenses increased by $292,000 over the total for the nine months ended September 30, 2005, despite the
reversal in May 2006 of $746,000 in expenses previously accrued on behalf of a former officer. These increases in our legal expenses were primarily due to (1) litigation-related costs in connection with our disputes with our former loan
servicing subsidiary, Wilshire Credit Corporation, and its parent company, Merrill Lynch and (2) additional expenses related to our disputes and settlement with our former officer.

Other professional fees (also included in Professional fees in the statement of operations) increased by $204,000 from the third quarter of
2005 to the third quarter of 2006, and by $362,000 from the nine months ended September 30, 2005 to the nine months ended September 30, 2006. These increases were largely due to $152,000 in consulting fees in the third quarter of 2006
relating to our repurchase of common stock in August. On an ongoing basis, we also incur consulting fees in connection with our information systems, which we began outsourcing in the fourth quarter of 2005. In addition, in the first quarter of 2006
we paid substantial professional fees for the preparation of our 2005 year-end tax provision.

Regulatory assessments were $53,000 for the
quarter ended September 30, 2006, compared with $85,000 for the quarter ended September 30, 2005. For the nine months ended September 30, 2006, regulatory assessments were $92,000, compared with $252,000 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 did not incur such fees in 2006 until the third quarter. Our
regulatory assessments for the first three 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 had been amortized in full as of June 30, 2005. We recorded amortization expense of $129,000 on this asset through
the first six months of 2005.

Our directors expenses declined by $29,000 from the third quarter of 2005 to the third quarter of 2006, and
by $113,000 from the first nine months of 2005 to the first nine 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 September 30, 2006, our total assets were $1,466.1 million, an increase of $62.3 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 repayments exceeded loan fundings during the period.
The following discussion summarizes the significant changes in our financial condition for the nine months ended September 30, 2006.

Mortgage-Backed and Other Securities Available for Sale

Our portfolio of mortgage-backed securities available for
sale increased by $64.7 million during the nine months ended September 30, 2006. This increase was due primarily to purchases of securities of $117.9 million, partially offset by principal repayments of $55.1 million. In the second quarter of
2006, we significantly increased our investment activity to 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%.

In the third quarter of 2006, our
mortgage-backed securities recovered approximately $7.2 million of their previously-recorded unrealized holding losses. This increase in market value was a result of the decline in longer-term treasury yields during the quarter. While the
portfolios aggregate market value is still less than its amortized cost, its year-to-date results reflect net holding gains of $2.0 million.



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The balance of our other investment securities available for sale (consisting of trust preferred
securities and mutual funds) declined by $29,000 during the nine months ended September 30, 2006, as a result of unrealized holding losses.

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



|                                                    |  |                        |         |                  |   |        
|--------------------------------------------------- |  | ---------------------- | ------- | ---------------- | - | -------
|                                                    |  | September 30, 2006     |         | December 31,2005
|                                                    |  | (Dollars in thousands)
|Available for sale, at fair value:                  |  |                        |         |                  |   |        
|GSE mortgage-backed securities                      |  | $                      | 164,860 |                  | $ | 98,091 
|AAA mortgage-backed securities                      |  |                        | 225,581 |                  |   | 222,290
|Other mortgage-backed securities                    |  |                        | 6,831   |                  |   | 12,191 
|Trust preferred securities                          |  |                        | 8,000   |                  |   | 8,000  
|Mutual funds                                        |  |                        | 5,699   |                  |   | 5,728  
|                                                    |  |                        |         |                  |   |        
|Total available for sale                            |  |                        | 410,971 |                  |   | 346,300
|Held to maturity:                                   |  |                        |         |                  |   |        
|Agency securities (fair value of $9,752 and $9,650) |  |                        | 9,746   |                  |   | 9,708  
|                                                    |  |                        |         |                  |   |        
|Total investment securities                         |  | $                      | 420,717 |                  | $ | 356,008
|                                                    |  |                        |         |                  |   |        

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



|                         |  |                        |         |            |   |        
|------------------------ |  | ---------------------- | ------- | ---------- | - | -------
|                         |  | Amortized Cost         |         | Fair Value
|                         |  | (Dollars in thousands)
|Due in five to ten years |  | $                      | 17,067  |            | $ | 16,916 
|Due after ten years      |  |                        | 402,179 |            |   | 398,108
|Mutual funds             |  |                        | 5,750   |            |   | 5,699  
|                         |  |                        |         |            |   |        
|Total                    |  | $                      | 424,996 |            | $ | 420,723
|                         |  |                        |         |            |   |        

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 September 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)
|September 30, 2006                       |  |                        |        |                   |   |            |  |                   |         |            |   |                   |  |   |         |  |   |      
|GSE mortgage-backed securities           |  | $                      | 5,300  |                   | $ | 245        |  | $                 | 71,131  |            | $ | 1,621             |  | $ | 76,431  |  | $ | 1,866
|AAA and other mortgage-backed securities |  |                        | 29,030 |                   |   | 165        |  |                   | 169,679 |            |   | 3,836             |  |   | 198,709 |  |   | 4,001
|Mutual funds                             |  |                        |       |                   |   |           |  |                   | 1,920   |            |   | 80                |  |   | 1,920   |  |   | 80   
|                                         |  |                        |        |                   |   |            |  |                   |         |            |   |                   |  |   |         |  |   |      
|Total                                    |  | $                      | 34,330 |                   | $ | 410        |  | $                 | 242,730 |            | $ | 5,537             |  | $ | 277,060 |  | $ | 5,947
|                                         |  |                        |        |                   |   |            |  |                   |         |            |   |                   |  |   |         |  |   |      



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|                                         |  |                        |         |                   |   |            |  |                   |         |            |   |                   |  |   |         |  |   |      
|---------------------------------------- |  | ---------------------- | ------- | ----------------- | - | ---------- |  | ----------------- | ------- | ---------- | - | ----------------- |  | - | ------- |  | - | -----
|                                         |  | 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  |            | $ | 1,239             |  | $ | 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
|                                         |  |                        |         |                   |   |            |  |                   |         |            |   |                   |  |   |         |  |   |      

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 September 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 September 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 $14.7 million in
the first nine months of 2006. This decrease was due to loan repayments of $198.1 million, which exceeded loan originations of $147.5 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. As a result, in 2006 we have expanded our product line to include construction
loans and, through September 30, 2006, originated and purchased $10.9 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 September 30, 2006, we had outstanding commitments to fund $173.2 million in new construction, commercial and multifamily loans. Our asset quality remains strong, as the unpaid principal balance of
nonperforming loans represented only 0.41% of our total loans as of September 30, 2006.



25



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##### Table of Contents

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



|                                 |  |                        |         |   |                   |   |         |  
|-------------------------------- |  | ---------------------- | ------- | - | ----------------- | - | ------- | -
|                                 |  | September 30, 2006     |         |   | December 31, 2005 |  
|                                 |  | (Dollars in thousands) |        
|Single-family residential        |  | $                      | 21,219  |   |                   | $ | 29,393  |  
|Multifamily residential          |  |                        | 357,640 |   |                   |   | 436,805 |  
|Commercial real estate           |  |                        | 548,829 |   |                   |   | 483,718 |  
|Construction                     |  |                        | 7,860   |   |                   |   |        |  
|Consumer and other               |  |                        | 2,090   |   |                   |   | 853     |  
|                                 |  |                        |         |   |                   |   |         |  
|Loan portfolio principal balance |  |                        | 937,638 |   |                   |   | 950,769 |  
|Net premium and deferred fees    |  |                        | 2,881   |   |                   |   | 4,455   |  
|Allowance for loan losses        |  |                        | (7,068  | ) |                   |   | (7,080  | )
|                                 |  |                        |         |   |                   |   |         |  
|Total loan portfolio, net        |  | $                      | 933,451 |   |                   | $ | 948,144 |  
|                                 |  |                        |         |   |                   |   |         |  

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



|                                             |  |                                 |       |   |                                |   |       |      |  |   |       |   |  |   |       |  
|-------------------------------------------- |  | ------------------------------- | ----- | - | ------------------------------ | - | ----- | ---- |  | - | ----- | - |  | - | ----- | -
|                                             |  | Three Months EndedSeptember 30, |       |   | Nine Months EndedSeptember 30, |  
|                                             |  | 2006                            |       |   | 2005                           |   |       | 2006 |  |   | 2005  |  
|                                             |  | (Dollars in thousands)          |      
|Balance, beginning of period                 |  | $                               | 6,939 |   |                                | $ | 7,230 |      |  | $ | 7,080 |   |  | $ | 7,277 |  
|Provision for (recapture of) loan losses (1) |  |                                 | 131   |   |                                |   | (91   | )    |  |   | 17    |   |  |   | (91   | )
|Charge-offs                                  |  |                                 | (1    | ) |                                |   | (148  | )    |  |   | (28   | ) |  |   | (181  | )
|Recoveries                                   |  |                                 | 1     |   |                                |   | 120   |      |  |   | 7     |   |  |   | 122   |  
|Amortization of fresh-start adjustment       |  |                                 | (2    | ) |                                |   | (7    | )    |  |   | (8    | ) |  |   | (23   | )
|                                             |  |                                 |       |   |                                |   |       |      |  |   |       |   |  |   |       |  
|Balance, end of period                       |  | $                               | 7,068 |   |                                | $ | 7,104 |      |  | $ | 7,068 |   |  | $ | 7,104 |  
|                                             |  |                                 |       |   |                                |   |       |      |  |   |       |   |  |   |       |  

---

|(1) | Excludes recapture of loan losses on discounted loans of $11 and provision for losses on discounted loans of $43, $34 and $39, respectively, for the periods presented.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

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



|                                                          |  |                        |       |   |                   |   |        |  
|--------------------------------------------------------- |  | ---------------------- | ----- | - | ----------------- | - | ------ | -
|                                                          |  | September 30, 2006     |       |   | December 31, 2005 |  
|                                                          |  | (Dollars in thousands) |      
|Balance of delinquent loans:                              |  |                        |       |   |                   |   |        |  
|31  60 days                                              |  | $                      | 710   |   |                   | $ | 6,300  |  
|61  90 days                                              |  |                        | 187   |   |                   |   | 916    |  
|91 days or more (1)                                       |  |                        | 3,891 |   |                   |   | 5,138  |  
|                                                          |  |                        |       |   |                   |   |        |  
|Total delinquent loans                                    |  | $                      | 4,788 |   |                   | $ | 12,354 |  
|                                                          |  |                        |       |   |                   |   |        |  
|Delinquent loans as a percentage of total loan portfolio: |  |                        |       |   |                   |   |        |  
|31  60 days                                              |  |                        | 0.1   | % |                   |   | 0.7    | %
|61  90 days                                              |  |                        | 0.0   |   |                   |   | 0.1    |  
|91 days or more (1)                                       |  |                        | 0.4   |   |                   |   | 0.5    |  
|                                                          |  |                        |       |   |                   |   |        |  
|Total                                                     |  |                        | 0.5   | % |                   |   | 1.3    | %
|                                                          |  |                        |       |   |                   |   |        |  

---

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



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##### Table of Contents

Deposits

Deposits increased by $216.8 million during the nine months ended September 30, 2006, due to a significant increase in wholesale CDs. The weighted average interest cost of our deposits was 4.60% at
September 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 from 85.4% at December 31, 2005 to 91.2% at September 30, 2006. Our deposits at September 30, 2006 and December 31, 2005 included $7.6 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 three quarters of 2006 because of the anticipated sale of our Beverly Hills branch. This branch held $155.8 million in deposits,
including $104.3 million in CDs, at September 30, 2006.

Repurchase Agreements

Repurchase agreements decreased by $23.0 million for the nine months ended September 30, 2006, due to the repayment of a facility bearing interest at
3.60%. This repayment reduced the weighted-average cost of our repurchase agreements to 3.34% at September 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 three quarters of 2006, as our funding requirements were met with new wholesale CDs.

FHLB Advances

FHLB advances decreased by $133.0 million for the nine months ended September 30, 2006. This decrease reflects $528.0 million in maturities,
partially offset by $395.0 million in new advances. Because of the sale of our Beverly Hills branch, we maintained 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 nine 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:



|                                                        |  |                                |         |   |      |   |         |  
|------------------------------------------------------- |  | ------------------------------ | ------- | - | ---- | - | ------- | -
|                                                        |  | Nine Months EndedSeptember 30, |        
|                                                        |  | 2006                           |         |   | 2005 |  
|                                                        |  | (Dollars in thousands)         |        
|Amount outstanding at end of period                     |  | $                              | 397,837 |   |      | $ | 525,837 |  
|Average amount outstanding during the period            |  |                                | 480,637 |   |      |   | 504,537 |  
|Maximum month-end balance outstanding during the period |  |                                | 552,837 |   |      |   | 555,837 |  
|Weighted average rate:                                  |  |                                |         |   |      |   |         |  
|During the period                                       |  |                                | 3.77    | % |      |   | 2.95    | %
|At end of period                                        |  |                                | 4.26    | % |      |   | 3.28    | %

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
September 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 September 30, 2006. BHBCs capital includes the $40.0 million in trust preferred securities issued by the Company in July 2002 and May 2006.



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##### Table of Contents

Regulatory Capital Ratios



|                                                           |  |                        |                              |       |                 |                                        |        |   |        |  |   |        |   |       |   |                |  |   |      |  
|---------------------------------------------------------- |  | ---------------------- | ---------------------------- | ----- | --------------- | -------------------------------------- | ------ | - | ------ |  | - | ------ | - | ----- | - | -------------- |  | - | ---- | -
|                                                           |  | Actual                 |                              |       | Amount Required |                                       
|                                                           |  |                        | For Capital AdequacyPurposes |       |                 | 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) |  | $                      | 171,097                      |       | 15.8            | %                                      |        | $ | 86,821 |  | 3 | 8.0    | % |       |   | Not Applicable | 
|Tier 1 capital to risk-weighted assets                     |  |                        | 163,892                      |       | 15.1            | %                                      |        |   | 43,411 |  | 3 | 4.0    | % |       |   | Not Applicable | 
|Tier 1 leverage ratio                                      |  |                        | 163,892                      |       | 11.5            | %                                      |        |   | 57,031 |  | 3 | 4.0    | % |       |   | Not Applicable | 
|FBBH                                                       |  |                        |                              |       |                 |                                        |        |   |        |  |   |        |   |       |   |                |  |   |      |  
|Total capital to risk-weighted assets (Risk-based capital) |  | $                      | 143,329                      |       | 13.3            | %                                      |        | $ | 86,177 |  | 3 | 8.0    | % |       | $ | 107,721        |  | 3 | 10.0 | %
|Tier 1 capital to risk-weighted assets                     |  |                        | 136,298                      |       | 12.7            | %                                      |        |   | 43,089 |  | 3 | 4.0    | % |       |   | 64,633         |  | 3 | 6.0  | %
|Tier 1 leverage ratio                                      |  |                        | 136,298                      |       | 9.6             | %                                      |        |   | 56,507 |  | 3 | 4.0    | % |       |   | 70,634         |  | 3 | 5.0  | %

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 September 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 September 30,
2006, we had $755.9 million of CDs. Scheduled maturities of CDs during the 12 months ending September 30, 2007 and thereafter amounted to $570.3 million and $185.6 million, respectively. (These totals include $104.3 million in CDs at our
Beverly Hills branch, which was sold subsequent to the end of the quarter.) 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.



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##### Table of Contents

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



|                                           |  |                                                       |         |           |   |           |  |               |         |       |   |         |  |   |          
|------------------------------------------ |  | ----------------------------------------------------- | ------- | --------- | - | --------- |  | ------------- | ------- | ----- | - | ------- |  | - | ---------
|                                           |  | Payments due within time period at September 30, 2006
|                                           |  | 0-12 Months                                           |         | 1-3 Years |   | 4-5 Years |  | After 5 Years |         | Total
|                                           |  | (Dollars in thousands)                               
|Certificates of deposit                    |  | $                                                     | 590,280 |           | $ | 146,626   |  | $             | 50,781  |       | $ |        |  | $ | 787,687  
|Repurchase agreements                      |  |                                                       | 30,529  |           |   | 10,232    |  |               |        |       |   |        |  |   | 40,761   
|Employment contracts                       |  |                                                       | 283     |           |   | 366       |  |               |        |       |   |        |  |   | 649      
|Operating leases                           |  |                                                       | 707     |           |   | 1,143     |  |               | 890     |       |   | 1,348   |  |   | 4,088    
|FHLB advances                              |  |                                                       | 145,947 |           |   | 212,496   |  |               | 72,883  |       |   |        |  |   | 431,326  
|Junior subordinated notes payable to trust |  |                                                       | 3,319   |           |   | 6,638     |  |               | 6,638   |       |   | 115,914 |  |   | 132,509  
|Commitments to originate loans             |  |                                                       | 173,215 |           |   |          |  |               |        |       |   |        |  |   | 173,215  
|                                           |  |                                                       |         |           |   |           |  |               |         |       |   |         |  |   |          
|Total                                      |  | $                                                     | 944,280 |           | $ | 377,501   |  | $             | 131,192 |       | $ | 117,262 |  | $ | 1,570,235
|                                           |  |                                                       |         |           |   |           |  |               |         |       |   |         |  |   |          

The sale of the Beverly Hills branch resulted in a decline in CDs and a reduction of future
obligations under existing operating leases. 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.

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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##### Table of Contents

|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 September 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.



30



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##### Table of Contents

The following table quantifies the potential changes in our NPV at September 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         |  | $                      | 121,941 |          | $                  | (40,683 | )        |  | (25 | )%        |  | 8.80  | %      |  | (228 | )bp
|+ 200bp         |  |                        | 135,087 |          |                    | (27,537 | )        |  | (17 | )         |  | 9.56  |        |  | (152 | )bp
|+ 100bp         |  |                        | 147,989 |          |                    | (14,635 | )        |  | (9  | )         |  | 10.28 |        |  | (80  | )bp
|0bp             |  |                        | 162,624 |          |                    |        |          |  |    |           |  | 11.08 |        |  |     |    
|- 100bp         |  |                        | 168,185 |          |                    | 5,541   |          |  | 3   |           |  | 11.31 |        |  | 23   | bp 
|- 200bp         |  |                        | 167,143 |          |                    | 4,519   |          |  | 3   |           |  | 11.15 |        |  | 7    | bp 
|- 300bp         |  |                        | 166,492 |          |                    | 3,868   |          |  | 2   |           |  | 11.01 |        |  | (7   | )bp

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.



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##### Table of Contents

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 our assets and liabilities based
on their contractual terms as of September 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 cash equivalents                                   |  | $                      | 40,192   |    |                                   | $ |         |                                     |  | $ |                |    |  | $     |        |   |  | $ | 40,192   
|Mortgage-backed and other investment securities             |  |                        | 37,973   |    |                                   |   | 127,750  |                                     |  |   | 65,988          |    |  |       | 189,006 |   |  |   | 420,717  
|Single-family residential loans                             |  |                        | 10,675   |    |                                   |   | 1,627    |                                     |  |   | 46              |    |  |       | 9,285   |   |  |   | 21,633   
|Multifamily residential loans                               |  |                        | 114,852  |    |                                   |   | 145,799  |                                     |  |   | 61,661          |    |  |       | 35,328  |   |  |   | 357,640  
|Commercial real estate loans                                |  |                        | 200,755  |    |                                   |   | 136,553  |                                     |  |   | 160,117         |    |  |       | 51,404  |   |  |   | 548,829  
|Construction loans                                          |  |                        | 7,594    |    |                                   |   |         |                                     |  |   | 266             |    |  |       |        |   |  |   | 7,860    
|Consumer and other loans                                    |  |                        | 1,546    |    |                                   |   | 585      |                                     |  |   | 114             |    |  |       | 910     |   |  |   | 3,155    
|Other assets (1)                                            |  |                        |         |    |                                   |   |         |                                     |  |   |                |    |  |       | 66,059  |   |  |   | 66,059   
|                                                            |  |                        |          |    |                                   |   |          |                                     |  |   |                 |    |  |       |         |   |  |   |          
|Total assets                                                |  |                        | 413,587  |    |                                   |   | 412,314  |                                     |  |   | 288,192         |    |  |       | 351,992 |   |  |   | 1,466,085
|                                                            |  |                        |          |    |                                   |   |          |                                     |  |   |                 |    |  |       |         |   |  |   |          
|Liabilities:                                                |  |                        |          |    |                                   |   |          |                                     |  |   |                 |    |  |       |         |   |  |   |          
|Noninterest-bearing deposits                                |  |                        |         |    |                                   |   |         |                                     |  |   |                |    |  |       | 6,145   |   |  |   | 6,145    
|Savings, NOW and money market accounts (2)                  |  |                        | 59,371   |    |                                   |   |         |                                     |  |   |                |    |  |       |        |   |  |   | 59,371   
|Certificates of deposit                                     |  |                        | 570,287  |    |                                   |   | 139,128  |                                     |  |   | 46,509          |    |  |       |        |   |  |   | 755,924  
|Repurchase agreements                                       |  |                        | 40,000   |    |                                   |   |         |                                     |  |   |                |    |  |       |        |   |  |   | 40,000   
|FHLB advances                                               |  |                        | 132,837  |    |                                   |   | 195,000  |                                     |  |   | 70,000          |    |  |       |        |   |  |   | 397,837  
|Junior subordinated notes payable                           |  |                        | 41,238   |    |                                   |   |         |                                     |  |   |                |    |  |       |        |   |  |   | 41,238   
|Other liabilities                                           |  |                        |         |    |                                   |   |         |                                     |  |   |                |    |  |       | 14,357  |   |  |   | 14,357   
|                                                            |  |                        |          |    |                                   |   |          |                                     |  |   |                 |    |  |       |         |   |  |   |          
|Total liabilities                                           |  |                        | 843,733  |    |                                   |   | 334,128  |                                     |  |   | 116,509         |    |  |       | 20,502  |   |  |   | 1,314,872
|                                                            |  |                        |          |    |                                   |   |          |                                     |  |   |                 |    |  |       |         |   |  |   |          
|(Deficiency) excess of assets over liabilities              |  | $                      | (430,146 | )  |                                   | $ | 78,186   |                                     |  | $ | 171,683         |    |  | $     | 331,490 |   |  | $ | 151,213  
|                                                            |  |                        |          |    |                                   |   |          |                                     |  |   |                 |    |  |       |         |   |  |   |          
|Cumulative (deficiency) excess                              |  | $                      | (430,146 | )  |                                   | $ | (351,960 | )                                   |  | $ | (180,277        | )  |  | $     | 151,213 |   |  |   |          
|                                                            |  |                        |          |    |                                   |   |          |                                     |  |   |                 |    |  |       |         |   |  |   |          
|Cumulative (deficiency) excess as a percent of total assets |  |                        | (29.34   | )% |                                   |   | (24.01   | )%                                  |  |   | (12.30          | )% |  |       | 10.31   | % |  |   |          
|                                                            |  |                        |          |    |                                   |   |          |                                     |  |   |                 |    |  |       |         |   |  |   |          

---

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

|(2) | Includes $7,608 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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##### Table of Contents

|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 and 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.



33



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##### Table of Contents

BEVERLY HILLS BANCORP INC. AND SUBSIDIARIES

PART II. OTHER INFORMATION



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

Not applicable.



|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
|------- | ---------------------------------------------------

Beverly Hills Bancorp Inc. held its annual meeting of shareholders on August 31, 2006. A brief description of the matter voted on and the results of the shareholder voting are set forth below:



|                                                                        |  |            |  |         
|----------------------------------------------------------------------- |  | ---------- |  | --------
|                                                                        |  | For        |  | Withheld
|Election of a Board of Directors toserve until the next annual meeting: |  |            |  |         
|Howard Amster                                                           |  | 20,325,958 |  | 160,422 
|Larry B. Faigin                                                         |  | 20,347,406 |  | 138,974 
|Stephen P. Glennon                                                      |  | 20,349,597 |  | 136,783 
|Robert H. Kanner                                                        |  | 19,598,370 |  | 888,010 
|Kathleen L. Kellogg                                                     |  | 19,598,160 |  | 888,220 
|William D. King                                                         |  | 19,622,143 |  | 864,237 
|John J. Lannan                                                          |  | 20,297,834 |  | 188,546 



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

Not applicable.



34



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##### Table of Contents

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



|     |  |                                                                                                                                                                                                                             
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     | 
|10.1 |  | Branch Purchase and Assumption Agreement dated August 7, 2006 between First Bank of Beverly Hills and First Bank                                                                                                            
|     | 
|10.2 |  | Form of Stock Appreciation Right Agreement dated September 28, 2006 between the Company and Howard Amster, Stephen P. Glennon, Robert H. Kanner, Kathleen L. Kellogg, William D. King,
John J. Lannan and Annette J. Vecchio
|     | 
|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                                                                             



35



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##### Table of Contents

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: November 7, 2006 |  |  |  |                           
|                       |  |  |  |                           
|                       |  |  |  |                            |  | By: |  | /s/    LARRY B. FAIGIN 
|                       |  |  |  |                            |  |     |  | Larry B. Faigin        
|                       |  |  |  |                            |  |     |  | Chief Executive Officer
|                       |  |  |  |                           
|                       |  |  |  |                            |  | By: |  | /s/    TAKEO K. SASAKI 
|                       |  |  |  |                            |  |     |  | Takeo K. Sasaki        
|                       |  |  |  |                            |  |     |  | Chief Financial Officer



36