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

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

2

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

3

BEVERLY HILLS BANCORP INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(Dollars in thousands, except share data)

	Three Months Ended September 30,						Nine Months Ended September 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

4

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

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 Ended September 30,					Nine Months Ended September 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

6

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		Weighted Average Exercise Price		Shares		Weighted Average Exercise Price
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 Ended September 30, 2006				Nine Months Ended September 30, 2006
	Shares		Weighted Average Grant Date Fair Value		Shares		Weighted Average Grant Date Fair 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

7

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	Total Shares	Exercisable Shares	Weighted Average Remaining Life (Years)	Weighted Average Exercise Price
				Options Outstanding		Options Exercisable
$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 Ended September 30, 2006
	Share Units	Weighted Average Exercise Price
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
	Share Units	Weighted Average Grant Date Fair Value
Nonvested at beginning of period	—	$	—
Granted	216,000		0.48
Vested	—		—
Forfeited	—		—
Nonvested at end of period	216,000	$	0.48

8

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	Total Share Units	Exercisable Share Units	Weighted Average Remaining Life (Years)	Weighted Average Exercise Price
				Options Outstanding		Options Exercisable
$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.

9

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

10

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.

11

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

12

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

13

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

14

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.

15

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 in thousands)
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.

16

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.

17

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

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.

19

	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

20

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

21

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.

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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 Ended September 30,						Nine Months Ended September 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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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 Ended September 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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Regulatory Capital Ratios

	Actual				Amount Required
					For Capital Adequacy Purposes					To be Categorized as “Well Capitalized”
	Amount		Ratio		Amount		Ratio			Amount		Ratio
	(Dollars in thousands)
BHBC
Total capital to risk-weighted assets (Risk-based capital)	$	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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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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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.

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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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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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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.

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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 to serve 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.

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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

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SIGNATURES

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

	BEVERLY HILLS BANCORP INC.
Date: 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

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