UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

x Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

  For the fiscal year ended December 31, 2007

or

¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

  For the transition period from              to             

Commission file number 0-21845

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)

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

Title of each class	Name of each exchange on which registered
Common Stock, par value $0.01 per share	The Nasdaq Stock Market LLC

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

None.

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

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

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

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

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

Large accelerated filer  ¨    Accelerated filer  x    Non-accelerated filer  ¨    Smaller reporting company  ¨

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

At June 29, 2007 (the last business day of the registrant’s most recently completed second fiscal quarter), the registrant’s common stock held by non-affiliates had an aggregate market value of approximately $115,223,923 based on the closing price on that date of $7.83 per share and approximately 14,715,699 shares of common stock held by non-affiliates.

As of February 29, 2008, 18,787,094 shares of common stock, par value $0.01 per share, were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

None.

BEVERLY HILLS BANCORP INC. AND SUBSIDIARIES

FORM 10-K

INDEX

Item	Page
PART I	4
1. Business	4
1A. Risk Factors	22
1B. Unresolved Staff Comments	25
2. Properties	25
3. Legal Proceedings	25
4. Submission of Matters to a Vote of Security Holders	25
PART II	26
5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	26
6. Selected Financial Data	28
7. Management’s Discussion and Analysis of Financial Condition and Results of Operations	31
7A. Quantitative and Qualitative Disclosures About Market Risk	46
8. Financial Statements and Supplementary Data	46
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	46
9A. Controls and Procedures	47
9B. Other Information	49
PART III	50
10. Directors and Executive Officers of the Registrant	50
11. Executive Compensation	51
12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	62
13. Certain Relationships and Related Transactions	63
14. Principal Accountant Fees and Services	64
PART IV	66
15. Exhibits and Financial Statement Schedules	66

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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 Annual Report on Form 10-K which are not identified as historical should be considered forward-looking. In connection with certain forward-looking statements contained in this Annual Report on Form 10-K 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 Annual Report on Form 10-K 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 Annual Report on Form 10-K should consider these facts in evaluating the information contained herein. The inclusion of the forward-looking statements contained in this Annual Report on Form 10-K should not be regarded as a representation by the Company or any other person that the forward-looking statements contained in this Annual Report on Form 10-K will be achieved. In light of the foregoing, readers of this Annual Report on Form 10-K are cautioned not to place undue reliance on the forward-looking statements contained herein.

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PART I

ITEM 1. Business

General

The Company

Beverly Hills Bancorp Inc. (“BHBC”) is a financial holding company that conducts banking and lending operations in southern California and surrounding states primarily through its bank subsidiary, First Bank of Beverly Hills (“FBBH” or the “Bank”). 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 is regulated by the Federal Deposit Insurance Corporation (“FDIC”). The Company was incorporated in 1996 and was known as Wilshire Financial Services Group Inc. (“WFSG”) until August 2004. References in this Form 10-K to the “Company,” “we” or “our” mean BHBC and its consolidated subsidiaries.

The Company is principally a real estate lender focusing on permanent and construction loans for commercial and multifamily properties in California and other western states. In addition, the Company invests in AAA-rated and government-sponsored enterprise (“GSE”) mortgage-backed securities. The Company’s primary sources of funding are deposits and Federal Home Loan Bank (“FHLB”) advances.

The administrative headquarters of BHBC and the Bank are located at 23901 Calabasas Road, Suite 1050, Calabasas, California 91302, and the main telephone number is (818) 223-8084. The Bank conducts its retail operations through its branch facility adjacent to the Company’s offices in Calabasas, California. As of December 31, 2007, the Company had 47 full-time-equivalent employees.

We maintain an internet web site at www.bhbc.com and makes available our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and other relevant information free of charge.

Business Strategy

We have adopted a “wholesale” banking strategy pursuant to which we originate assets and liabilities primarily through independent sources and maintain a low level of operating expenses with only one branch/office and a relatively low number of employees. We originate primarily adjustable rate construction and income property loans obtained from independent loan brokers, which generate higher yields and fees than single family residential loans and require lower operating costs and expenses than commercial and asset-based loans. Our assets are funded with deposits generated principally through brokers and our money desk (“wholesale deposits”), advances from the Federal Home Loan Bank of San Francisco (“FHLB advances”), repurchase agreements and other short-term borrowings. Our goal is to maximize net interest income and fee income consistent with acceptable levels of credit and interest rate risk.

The objective of our present lending strategy is to provide real estate financing to a diversified customer base, representing developers, investors and owners/users. We believe we can maintain and expand our base of borrowers by providing rapid response and loan processing and tailoring our loans to meet the specific needs of our borrowers. In 2006, we expanded our product line to include construction lending for commercial and multifamily properties. Construction loans have higher margins than many other types of loans, generate fee income and create the potential for additional lending business upon completion of the construction.

We originate adjustable rate loans in order to match to the extent possible the repricing periods of our liabilities. Adjustable rate loans represented 88% of our total loans at December 31, 2007. The interest rates on these loans are tied to the prime rate, LIBOR or the Constant-Maturity Treasury index and adjust with changes in the rate on a daily, monthly or quarterly basis, sometimes after an initial three to five year period at a fixed rate.

At December 31, 2007, approximately 95% of our deposits were wholesale deposits. Wholesale deposit funding is a function of setting and advertising our deposit interest rates with trust departments and institutional

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investment fund managers. We believe that although the interest rates on other borrowings and wholesale deposits may be greater than the interest rates on retail deposits of comparable maturities, the cost of generating and maintaining retail deposits is greater because of the facilities and personnel expense of those deposits.

Due to uncertainty in the real estate and credit markets, we expect loan origination and purchase volumes to be substantially lower during 2008 than in prior years. We may also sell whole loans or loan participations to reduce certain real estate loan concentrations. At the same time, we anticipate the investment securities portfolio will represent a lower percentage of our total assets due to principal paydowns and fewer security purchases.

In June 2007, we engaged an investment banking firm as its financial advisor to assist us in reviewing our strategic alternatives, including whether a sale of the Company would be in the best interest of the stockholders. We terminated the agreement with the investment banking firm in January 2008. Our Board of Directors continues to review the strategy and direction of the Company and our business strategy may change from time to time.

Lending Activities

Our lending activities involve primarily the origination and purchase of adjustable rate real estate loans. These loans include principally loans secured by commercial and multifamily properties and loans for the construction of these types of properties. Our borrowers are typically entities that operate their businesses at the properties or derive their primary source of income from their portfolio of real properties or the construction of these types of properties.

We set the interest rate on any loan based on a number of factors including, but not limited to, servicing costs, risk and desirability of the credit and competitive conditions. Of our total loans outstanding, approximately 88% and 87% had adjustable rates (including loans with a fixed rate for the first three to five years which subsequently convert to adjustable rate) at December 31, 2007 and 2006, respectively.

Our real estate loans are secured by real properties located throughout the United States, but primarily in California and other western states. At December 31, 2007, approximately $512 million principal amount of our real estate loans, or approximately 51% of our total portfolio, were secured by real properties in California. No more than 10% of the principal amount of our total loans was secured by real properties in any other state.

We do not believe any of our residential loans have features that would cause them to be characterized as interest-only loans or loans with negative amortization and which, would give rise to any additional concentration of credit risk required to be disclosed by Financial Accounting Standards Board Statement of Position (“FSP SOP”) No. 94-6-1 “Terms of Loan Products that May Give Rise to a Concentration of Credit Risk”.

Loan Policies and Procedures.    We have detailed written policies and procedures for our lending activities. Our board of directors reviews and approves these policies annually. These lending policies address the types of loans we seek, our target markets, underwriting and collateral requirements, the loan terms, interest rate and yield considerations, and compliance with applicable laws and regulations. All loans are subject to approval procedures and amount limitations. These limitations apply to the borrower’s total outstanding indebtedness, including indebtedness as a guarantor.

Our Officers’ Loan Committee oversees the loan approval process, including originations and purchases. The Officers’ Loan Committee reviews all loans and has loan approval authority of loan originations up to $2 million and participations and whole loan purchases up to $2 million as a pool. The Directors’ Loan Committee approves all individual loans over $2 million, up to and including $12 million, and participations and purchases over $2 million and up to and including $20 million as a pool. Loans in excess of these limits must be approved by our Board of Directors.

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Under applicable regulations, we may not make loans in excess of the regulatory legal lending limit under California law applicable to all California-chartered banks. In general, the legal limit for loans to any single borrower is equal to 25% of a bank’s unimpaired capital and surplus for amortizing loans secured by a first trust deed on real estate. As of December 31, 2007, our loan-to-one borrower limit for secured loans was approximately $35.4 million.

We require a current appraisal in connection with the origination of all real estate loans.

Commercial and Multifamily Lending.    Our commercial and multifamily loans generally have terms of approximately 10 years and payments based on a 25- or 30-year amortization schedule, often resulting in a balloon payment at maturity. Our commercial loans are generally secured by office, retail and industrial types of properties, and our multifamily loans are secured by small- to medium –sized apartment buildings. The original principal amount of our commercial and multifamily loans ranges primarily from $2 million to $20 million. More than half of these loans had loan-to-value ratios of less than 65% of the appraised value of the property at the time of origination. These loans generally have fixed rates for the first three to five years which subsequently convert to adjustable rates. The adjustable rates are typically tied to LIBOR or the Constant-Maturity Treasury index, and adjust with changes in the rate on a daily, monthly or quarterly basis. These loans also include bridge loans secured by commercial real estate. The loans typically have terms of two to three years, and include an interest reserve, and tenant improvement or rehabilitation costs to reposition the property.

Construction Lending.    Our construction loans finance the construction of multifamily properties and commercial properties such as retail and industrial properties, office buildings and restaurants. Our construction loans generally have terms from one to three years and have adjustable interest rates tied to the prime rate that adjust when prime rate is changed. We do not typically originate a construction loan with a loan to value ratio in excess of 75% of the property’s estimated cost to complete as of the time of origination. We use independent due diligence/fund control specialists to perform all cost and completion analyses prior to loan funding. We also retain firms that specialize in construction loan fund control to perform all required site/progress inspections and necessary due diligence prior to loan funding, and all subsequent draw requests. Construction lending has been centered primarily in Southern California; however, we provided construction financing for a condominium development in the Tribeca area of New York, and we are a participant in two projects in Chicago, Illinois. Loans currently range from a minimum of $2 million to a maximum of $21.5 million, with an average loan size of approximately $10 million.

Single-family Lending.    We do not originate (or purchase) prime or sub-prime single-family mortgage loans. Our loan portfolio, however, does include fixed rate single-family mortgage loans that were purchased prior to 2002.

Other Lending.    Other loans include primarily “mezzanine” loans made through a non-bank subsidiary. Mezzanine loans are generally loans to single purpose entities to provide financing to purchase real estate, where the borrower needs additional “equity” to support the senior lender’s mortgage loan on the real estate. The mezzanine loan is secured by the all of the equity interests in the borrower, not the underlying real estate, and thus upon foreclosure we would acquire ownership of the entity, not the real estate. These loans have terms of one to three years, and typically bear interest at fixed or adjustable rates that are materially greater than the rates offered by us for loans secured by a first priority interest in comparable real estate, reflecting the greater risk inherent in the loans.

Loan Purchases and Sales.    We may from time to time purchase multifamily, commercial and construction loans or participation interests in these loans. Generally, we purchase pools of these loans, but we may occasionally purchase a single loan or a participation interest in a single loan from a financial institution. We underwrite all loans purchased (including participation interests) in accordance with our standard underwriting practices, including ratios for loan-to-value, debt service coverage, etc. We normally obtain the same information to evaluate the inherent risk in lending directly to the borrower that we would obtain in

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originating a loan directly to the borrower. Before purchasing a participation interest in a loan, we will perform due diligence with regard to the lead lender to assess its financial capacity and overall stability.

We will from time to time sell a participation interest in a loan if the total loan amount exceeds our loan to one borrower limitation or we want to mitigate our risk exposure on the loan. We retain the servicing on loans in which we sell participations. As a matter of policy, we do not subordinate our interest to the interest of the participants.

We have not sold whole loans since 2004.

The following table sets forth our total loan originations and purchases for the periods indicated:

Loan Originations and Purchases

	For the Year Ended December 31,
	2007		2006		2005
	(Dollars in thousands)
Originations (1)
Multifamily residential	$	52,857	$	26,602	$	44,225
Commercial real estate		94,774		185,199		74,764
Construction		80,261		34,148		—
Other		18,447		2,800		—
Total originations		246,339		248,749		118,989
Purchases
Multifamily residential		2,053		—		95,760
Commercial real estate		4,049		19,046		47,055
Construction		3,980		69,614		—
Total purchases		10,082		88,660		142,815
Total originations and purchases
Multifamily residential		54,910		26,602		139,985
Commercial real estate		98,823		204,245		121,819
Construction		84,241		103,762		—
Other		18,447		2,800		—
Total	$	256,421	$	337,409	$	261,804

(1) Includes disbursements on existing loans.

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The following table sets forth the composition of the Company’s portfolio of loans by type of loan as of the dates indicated.

Composition of Loan Portfolio

	December 31,
	2007			2006			2005			2004			2003
	(Dollars in thousands)
Single-family residential	$	16,938		$	19,914		$	31,151		$	47,237		$	73,260
Multifamily residential		313,154			356,992			436,805			412,074			231,375
Commercial real estate		503,086			569,840			483,718			465,523			312,336
Construction		153,178			98,869			—			—			—
Other (1)		14,731			2,255			1,059			1,684			34,012
Loan portfolio principal balance		1,001,087			1,047,870			952,733			926,518			650,983
Premium and deferred fees		743			1,990			4,379			2,008			2,417
Allowance for loan losses (2)		(21,882	)		(7,977	)		(7,289	)		(10,783	)		(38,776	)
Investor participation interest (3)		—			—			—			(773	)		(1,169	)
Total loan portfolio, net	$	979,948		$	1,041,883		$	949,823		$	916,970		$	613,455

(1) In December 2004, we sold $24 million unpaid principal balance of discounted loans.

(2) For discussion of the allowance for loan losses allocation for purchase discount, see “Asset Quality—Allowance for Loan Losses”

(3) In September 2005, WFC Inc. acquired a 100% interest in the cash flows on certain loan portfolios that previously were shared with a co-investor.

The following table sets forth certain information at December 31, 2007 regarding the dollar amount of loans based on their contractual terms to maturity and includes scheduled payments but not potential prepayments, as well as the dollar amount of those loans which have fixed or adjustable interest rates. Loan balances have not been adjusted for unamortized discounts or premiums, deferred loan fees and the allowance for loan losses.

Maturity of Loans

	Maturing in
	One Year or Less		After One Year Through Five Years		After Five Years Through Ten Years		After Ten Years		Total
	(Dollars in thousands)
Single-family residential	$	43	$	307	$	1,491	$	15,097	$	16,938
Multifamily residential		23,901		22,144		101,345		165,764		313,154
Commercial real estate		58,694		95,500		324,773		24,119		503,086
Construction		119,864		33,314		—		—		153,178
Other		14,397		29		40		265		14,731
Interest rate terms on amounts due:
Fixed		39,443		32,614		34,433		13,135		119,625
Adjustable (1)		177,456		118,680		393,216		192,110		881,462

(1) Includes loans with interest rates that are fixed for the first three to five years, which subsequently convert to adjustable rates.

Scheduled contractual principal repayments do not reflect the actual maturities of mortgage loans because of prepayments and, in the case of conventional mortgage loans, due-on-sale clauses. The average life of mortgage loans, particularly fixed-rate loans, tends to increase when current mortgage loan rates are substantially higher than rates on existing mortgage loans and, conversely, decrease when current mortgage loan rates are substantially lower than rates on existing mortgages.

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Mortgage-Backed and Investment Securities

We invest in securities to earn positive net interest spread pending deployment into loans or other assets. The following table sets forth our holdings of mortgage-backed and other securities as of the dates indicated:

Mortgage-Backed and Investment Securities

	December 31,
	2007		2006		2005
	(Dollars in thousands)
Available for sale, at fair value:
AAA mortgage-backed securities	$	191,740	$	216,844	$	222,290
GSE mortgage-backed securities		216,542		237,288		98,091
Other mortgage-backed securities		5,593		6,762		12,191
Trust preferred securities		1,210		3,228		8,000
Mutual funds		5,731		5,691		5,728
Held to maturity, at amortized cost:
Agency securities (fair value of $10,147, $9,735 and $9,650)		9,809		9,759		9,708
Total mortgage-backed and investment securities	$	430,625	$	479,572	$	356,008

The amortized cost and fair value of our securities, by contractual maturity, are shown below as of December 31, 2007:

Amortized Cost and Fair Value by Maturity

	Amortized Cost		Fair Value		Weighted Average Yield
	(Dollars in thousands)
Due in five to ten years	$	18,551	$	18,798	5.03	%
Due after ten years		408,568		406,434	5.65	%
Mutual funds		5,750		5,731	4.46	%
Total	$	432,869	$	430,963	5.61	%

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, at December 31, 2007 and 2006:

Unrealized Losses and Fair Values

	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, 2007
GSE mortgage-backed securities	$	39,585	$	168	$	46,388	$	732	$	85,973	$	900
AAA and other mortgage-backed securities		42,832		343		134,686		2,409		177,518		2,752
Mutual funds		—		—		1,908		92		1,908		92
Agency securities		—		—		—		—		—		—
Total	$	82,417	$	511	$	182,982	$	3,233	$	265,399	$	3,744

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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, 2006
GSE mortgage-backed securities	$	18,509	$	79	$	72,595	$	1,610	$	91,104	$	1,689
AAA and other mortgage-backed securities		16,033		66		175,045		3,667		191,078		3,733
Mutual funds		—		—		1,916		84		1,916		84
Agency securities		9,735		24		—		—		9,735		24
Total	$	44,277	$	169	$	249,556	$	5,361	$	293,833	$	5,530

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, we consider, 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) our intent and ability to retain the 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 December 31, 2007, 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 December 31, 2007 and 2006, 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.

Funding Sources

Our principal funding sources consist of deposits FHLB advances, short-term borrowings, repurchase agreements, and junior subordinated notes payable. The following table sets forth information relating to our deposits and borrowings at the dates indicated.

Deposits and Other Borrowings

	December 31,
	2007		2006		2005
	(Dollars in thousands)
Deposits (1)	$	652,345	$	863,470	$	625,635
FHLB advances		611,000		496,337		530,837
Short-term borrowings		—		20,000		—
Repurchase agreements		40,000		40,000		63,000
Junior subordinated notes payable to trusts		46,393		46,393		20,619
Total	$	1,349,738	$	1,466,200	$	1,240,091

(1) The Bank’s deposits at December 31, 2007, 2006 and 2005 included a total of $14.9 million, $12.6 million and $21.0 million, respectively, in money market deposits 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.

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Deposits.    We offer checking, NOW, money market and savings accounts and certificates of deposit generated through brokers and our money desk (“wholesale deposits”) and at our Calabasas branch. Our deposits generally are not collateralized, with the exception of $60.0 million of public fund certificates of deposit from the State of California, which are secured by mortgage-backed securities. The following table sets forth information relating to our deposits at the dates indicated.

Composition of Deposits

	December 31,
	2007				2006				2005
	Amount		Weighted Average Rate		Amount		Weighted Average Rate		Amount		Weighted Average Rate
	(Dollars in thousands)
Checking accounts	$	886	0.00	%	$	2,038	0.00	%	$	4,655	0.00	%
NOW and money market accounts (1)		21,335	2.76	%		24,630	3.43	%		84,179	2.81	%
Savings accounts		983	1.51	%		2,012	1.33	%		2,723	1.09	%
Certificates of deposit:
Less than $100,000		45,796	4.92	%		36,357	4.95	%		99,843	3.88	%
$100,000 or more		583,345	4.96	%		798,433	4.88	%		434,235	3.79	%
Total deposits	$	652,345	4.88	%	$	863,470	4.82	%	$	625,635	3.64	%

(1) The Bank’s deposits at December 31, 2007, 2006 and 2005 included a total of $14.9 million, $12.6 million and $21.0 million, respectively, in money market deposits held by BHBC and WFC. These deposits are eliminated in consolidation and are not reflected in total deposits on the Company’s consolidated statements of financial condition.

The following table presents the sources of our deposits as of the dates indicated.

Source of Deposits

	December 31,
	2007				2006				2005
	Amount		Percent of Total		Amount		Percent of Total		Amount		Percent of Total
	(Dollars in thousands)
Retail deposit accounts (1)	$	31,506	4.8	%	$	47,492	5.5	%	$	202,323	32.3	%
Brokered deposits		524,775	80.5			722,843	83.7			346,272	55.4
Money desk		96,064	14.7			93,135	10.8			77,040	12.3
Total deposits	$	652,345	100.0	%	$	863,470	100.0	%	$	625,635	100.0	%

(1) The decline in retail deposits in 2006 was due primarily to the sale of the Bank’s Beverly Hills branch in November 2006.

Wholesale deposit funding is a function of setting and advertising our deposit interest rates with trust departments and institutional investment fund managers. The wholesale deposit marketplace (primarily certificates of deposit) consists of the following three sources of funds: (i) indirect deposits placed by independent brokers; (ii) direct wholesale deposits received from credit unions, savings associations, trust departments of banks, pension funds, insurance companies and government agencies; and (iii) Depository Trust Corporation brokered deposits, which consist of retail deposits which have been pooled into large blocks by Wall Street firms and regional brokerage houses. We use all of these sources, depending on our funding and liquidity needs.

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Under FDIC regulations, FDIC-insured institutions that are not “well-capitalized” under the prompt corrective action rules may not accept brokered deposits without the prior approval of the FDIC. In addition, we believe that if the Bank is not “well-adequately capitalized” it would have greater difficulty in obtaining certificates of deposit through our money desk or deposit brokers and may have to pay higher rates to continue to attract those deposits. Accordingly, the failure of the Bank to remain “well-capitalized” could have a material adverse effect on the Bank.

We also obtain deposits through our retail branch in Calabasas, California. We compete for deposits to a large extent on the basis of rates and, therefore, could experience difficulties in attracting deposits if we could not continue to offer deposit rates at levels competitive with those of other banks and savings institutions. Accordingly, our retail deposit balances, primarily certificates of deposit, decreased during 2007 as other financial institutions offered deposit interest rates that we did not match as these rates were higher than the cost of our wholesale funding sources.

The following table sets forth, by various interest rate categories, our certificates of deposit at December 31, 2007.

Interest Rates for Certificates of Deposit

	December 31, 2007
	(Dollars in thousands)
2.51-3.50%	$	19,579
3.51-4.50%		45,031
4.51-5.50%		544,531
5.51-6.50%		20,000
Total	$	629,141

The following table sets forth the amount and maturities of our certificates of deposit at December 31, 2007.

Maturities of Certificates of Deposit

	Original Maturity in Months
	12 or Less			Over 12 to 36			Over 36
	(Dollars in thousands)
Balances maturing in 3 months or less	$	271,857		$	43,305		$	—
Weighted average rate		4.88	%		4.94	%		—
Balances maturing in over 3 months to 12 months	$	234,060		$	23,097		$	10,175
Weighted average rate		5.04	%		4.50	%		3.42	%
Balances maturing in over 12 months to 36 months	$	—		$	1,050		$	665
Weighted average rate		—			5.36	%		4.88	%
Balances maturing in over 36 months		—			—		$	44,932
Weighted average rate		—			—			5.62	%

At December 31, 2007, we had outstanding an aggregate of $583.3 million of certificates of deposit in face amounts equal to or greater than $100,000 maturing as follows: $293.5 million within three months, $207.9 million over three months through six months, $36.3 million over six months through 12 months, and $45.6 million thereafter.

FHLB Advances.    We obtain FHLB advances based on the security of certain of our assets, provided we have met certain standards related to our creditworthiness. FHLB advances are available to member financial institutions such as the Bank for investment and lending activities and other general business purposes. FHLB advances are made pursuant to several different credit programs (each of which has its own interest rate, which may be fixed or adjustable). We are currently authorized to obtain FHLB advances in amounts up to 45% of the Bank’s total assets measured as of each previous quarter-end and for terms of up to 10 years.

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

FHLB Advances

	At or for the Year Ended December 31,
	2007			2006			2005
	(Dollars in thousands)
Average amount outstanding during the period	$	577,445		$	482,068		$	508,298
Maximum month-end balance outstanding during the period		641,337			557,837			555,837
Weighted average rate:
During the period		4.72	%		3.96	%		3.06	%
At end of period		4.61	%		4.53	%		3.42	%

As of December 31, 2007, we had $251.0 million of FHLB advances maturing within one year, $150.0 million maturing between one and two years, $140.0 million maturing between two and three years, and $70.0 million maturing between three and four years. These advances are secured by mortgage-backed securities and loans.

Short-Term Borrowings.    We have a revolving line of credit with a financial institution. The credit agreement expired on November 30, 2007, and we did not have any outstanding borrowings at December 31, 2007. In January 2008, the credit agreement was amended with the borrowing line reduced from $20 million to $15 million. The revised line of credit bears interest at the 3-month LIBOR rate, plus 1.90%, and is due and payable in full on December 31, 2008. The maximum ratio of nonperforming loans to total gross loans was also increased to 3.50%. The credit is collateralized by 50% of the outstanding shares of the Bank’s common stock. We terminated the credit agreement in March 2008.

Repurchase Agreements.    We borrow funds under repurchase agreements that provide immediate liquidity and financing for purchases of investment securities and pools of loans. Our repurchase agreements generally have maturities up to three years. The following table sets forth certain information related to our repurchase agreements at and for the periods indicated:

Repurchase Agreements

	At or for the Year Ended December 31,
	2007			2006			2005
	(Dollars in thousands)
Average amount outstanding during the period	$	40,000		$	43,538		$	116,000
Maximum month-end balance outstanding during the period		40,000			63,000			143,000
Weighted average rate:
During the period		4.81	%		3.53	%		3.17	%
At end of period		4.81	%		4.81	%		3.43	%

At December 31, 2007, all of our $40.0 million in repurchase agreements mature in 2008.

Junior Subordinated Notes Payable.    At December 31, 2007, we had outstanding $46.4 million in floating-rate junior subordinated notes payable to three wholly owned statutory business trusts. We issued the notes to the trusts in separate placements occurring in July 2002, May 2006 and December 2006. The trusts purchased the notes using the proceeds from private placements of trust preferred securities to unaffiliated third parties and from the issuance of common securities to BHBC.

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The following table presents a summary of our junior subordinated notes payable outstanding at the dates indicated:

Junior Subordinated Notes Payable—Summary

	Year Ended December 31, 2007
	(Dollars in thousands)
Date of borrowing	7/11/2002		5/16/2006		12/28/2006
Amount of borrowing	$20,619		$20,619		$5,155
Interest terms (to be reset quarterly)	LIBOR + 3.65%		LIBOR + 1.55	%	LIBOR + 1.78	%
Interest rate at end of year	8.89	%	6.43	%	6.93	%
Maturity date	10/7/2032		6/23/2036		3/6/2037
First date redeemable at par (quarterly thereafter)	7/07/2007		6/23/2011		3/6/2012

In January 2008, we redeemed at par $10.3 million of the junior subordinated notes payable due in October 2032.

The following table sets forth information related to our junior subordinated notes payable at and for the periods indicated:

Junior Subordinated Notes Payable—Amounts and Rates

	Year Ended December 31,
	2007			2006			2005
	(Dollars in thousands)
Average amount outstanding during the year	$	46,393		$	33,704		$	20,619
Maximum month-end balance outstanding during the year		46,393			46,393			20,619
Weighted average rate:
During the period		8.64	%		8.23	%		7.21	%
At end of period		7.58	%		7.88	%		7.80	%

Asset Quality

We are exposed to certain credit risks related to the value of the collateral that secures loans and the ability and willingness of borrowers to repay their loans. We closely monitor our loans and foreclosed real estate for potential problems on a periodic basis.

Allowance for Loan Losses.    We maintain an allowance for loan losses at a level believed adequate by management to absorb estimated losses inherent in the loan portfolios. The allowance is increased by provisions for loan losses charged against operations and recoveries of previously charged off loans, and is decreased by loan charge-offs. Loans are charged off when they are deemed to be uncollectible.

Although we believe that we have established adequate allowances for loan losses as of December 31, 2007, 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. In addition, the FDIC and DFI, as an integral part of their examination process, periodically review our allowance for loan losses and could require additional provisions for loan losses. Material future additions to the allowance for loan losses may also be necessary due to increases in the size and changes in the composition of our loan portfolio. Increases in our provisions for loan losses would adversely affect our results of operations.

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For a complete discussion of our policies and procedures with respect to the allowance for loan losses, see “Critical Accounting Policies” in Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following table sets forth information with respect to our allowance for loan losses by category of loan at the dates indicated:

Allocation of the Allowance for Loan Losses

	December 31,
	2007			2006			2005			2004			2003
	(Dollars in thousands)
Allowance for loan losses:
Real estate – construction	$	14,452		$	1,354		$	—		$	—		$	—
Real estate – mortgage		6,750			6,137			6,855			9,141			8,888
Other loans		96			37			35			1,294			29,888
Unallocated		584			449			399			348			—
Total allowance for loan losses	$	21,882		$	7,977		$	7,289		$	10,783		$	38,776
Percentage of loans in each category to total loans:
Real estate – construction		66.0	%		17.0	%		—	%		—	%		—	%
Real estate – mortgage		30.8			76.9			94.0			84.8			22.9
Other loans		0.5			0.5			0.5			12.0			77.1
Unallocated		2.7			5.6			5.5			3.2			—
Total allowance for loan losses		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%

Loan loss reserves for construction loans increased during 2007 due to specific reserves of $11.4 million for nonperforming construction loans as a result of a decrease in the fair market value of the collateral.

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The following table sets forth the activity in the allowance for loan losses during the periods indicated.

Analysis of the Allowance for Loan Losses

	December 31,
	2007			2006			2005			2004			2003
	(Dollars in thousands)
Balance, beginning of period	$	7,977		$	7,289		$	10,783		$	38,776		$	47,955
Charge-offs:
Real estate – mortgage		(371	)		(231	)		(2,481	)		(4	)		(117	)
Other loans (1)		(121	)		(78	)		(512	)		(5,729	)		(8,520	)
Total charge-offs		(492	)		(309	)		(2,993	)		(5,733	)		(8,637	)
Recoveries:
Real estate – mortgage		36			27			118			112			32
Other loans		12			23			8			37			36
Total recoveries		48			50			126			149			68
Net (charge-offs) recoveries		(444	)		(259	)		(2,867	)		(5,584	)		(8,569	)
Amortization of fresh-start adjustment		(7	)		(10	)		(19	)		(19	)		(71	)
Sale of loans		—			—			—			(22,741	)		—
Reclassification to investor participant’s share		—			—			(567	)		—			—
Provision for (recapture of) loan losses		14,356			957			(41	)		351			(539	)
Balance, end of period	$	21,882		$	7,977		$	7,289		$	10,783		$	38,776
Ratio of net charge-offs during the period to average loans outstanding during the period		0.4	%		0.0	%		0.3	%		0.7	%		1.5	%

(1) Includes discounted loan charge-offs for 2003 and 2004 of $8,146 and $5,708, respectively.

Non-Performing Loans.    It is our policy to place a loan on non-accrual status when it is 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. When a loan is placed on non-accrual status, previously accrued but unpaid interest is reversed by a charge to interest income.

The table below sets forth the delinquency status of our loans at the dates indicated.

Loan Delinquency Experience

	December 31,
	2007			2006			2005			2004			2003 (1)
	(Dollars in thousands)
Balance of delinquent loans:
31-60 days	$	31,457		$	2,032		$	6,433		$	2,570		$	2,326
61-90 days		4,663			2,634			972			1,037			123
91 days or more (2)		20,934			677			5,875			8,559			5,816
Total loans delinquent	$	57,054		$	5,343		$	13,280		$	12,166		$	8,265
Delinquent loans as a percentage of total loan portfolio:
31-60 days		3.1	%		0.2	%		0.7	%		0.3	%		0.4	%
61-90 days		0.5			0.2			0.1			0.1			—
91 days or more (2)		2.1			0.1			0.6			0.9			0.9
Total		5.7	%		0.5	%		1.4	%		1.3	%		1.3	%

(1) Does not include discounted loans.

(2) All loans delinquent over 90 days are on nonaccrual status.

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Nonaccrual loans at December 31, 2007 were $29.9 million and increased primarily due to construction loans totaling $27.6 million. Two construction loans totaling $9.0 million were placed on nonaccrual status even though they were not delinquent 91 days or more.

Loans delinquent from 31 to 60 days at December 31, 2007 included an $8.9 million construction loan and an $8.0 million participation interest in a commercial real estate loan. The $8.9 million construction loan was delinquent as it had matured and at December 31, 2007 we were negotiating an extension of the loan with the borrower. We subsequently extended the loan maturity date to June 30, 2008 and the loan is current as of March 15, 2008. The loan in which we held the participation interest was past due at December 31, 2007 as a result of a billing error in December 2007 by the lead bank. This loan was brought current by the borrower in 2008.

Foreclosed Real Estate.    We carry our holdings of foreclosed real estate at the lower of the net carrying value of the underlying loan or fair value less estimated costs to sell. Holding and maintenance costs related to properties are recorded as expenses in the period incurred. Declines in values of foreclosed real estate subsequent to acquisition are charged to income and recorded as a provision for losses. The following table sets forth the aggregate carrying value of our foreclosed real estate (by source of acquisition) at the dates indicated.

Foreclosed Real Estate by Loan Type

	December 31,
	2007		2006			2005			2004			2003
	(Dollars in thousands)
Loans:
Single-family residential	$	44	$	99		$	63		$	1,953		$	281
Multifamily residential		—		1,330			—			—			—
Commercial real estate		—		—			—			21			—
Other		—		13			9			—			52
Total		44		1,442			72			1,974			333
Allowance for losses		—		(865	)		(10	)		(205	)		(66	)
Foreclosed real estate owned, net	$	44	$	577		$	62		$	1,769		$	267

Competition

We compete for loans primarily with other commercial banks, mortgage companies, commercial finance companies, and savings institutions. Competition has also increased as out-of-state financial institutions have recently entered the California market. Many of our competitors have greater financial strength, marketing capability and name recognition than we do, and operate on a statewide or nationwide basis. Due to our wholesale funding strategy, we do not compete with other financial institutions for retail deposits. In order to attract wholesale deposits, primarily CDs, we have to offer interest rates comparable to those interest rates offered nationwide by other financial institutions.

Supervision and Regulation

Banking is a highly regulated industry. Congress and the states have enacted numerous laws that govern banks, bank holding companies and the financial services industry, and have created several largely autonomous regulatory agencies that have authority to examine and supervise banks and bank holding companies, and to adopt regulations furthering the purpose of the statutes. The primary goals of the regulatory agencies are to maintain a safe and sound banking system, to protect depositors and the FDIC insurance fund, and to facilitate the conduct of sound monetary policy. As a result, our financial condition and results of operation, and our

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ability to grow and engage in various business activities, can be affected not only by management decisions and general economic conditions, but the requirements of applicable federal and state laws, regulations and the policies of the various regulatory authorities.

These laws, regulations and policies are often under review by Congress, state legislatures and federal and state regulatory agencies. Changes in laws, regulations and policies can materially increase in the cost of doing business, limit certain business activities or materially and adversely affect competition between banks and other financial intermediaries. While it can be predicted that changes will occur, what changes, when they will occur, and how they will impact us cannot be predicted.

The following is not intended to be an exhaustive description of the statutes and regulations applicable to the business of BHBC or the Bank. The description of statutory and regulatory provisions is qualified in its entirety by reference to the particular statutory or regulatory provisions.

Bank Holding Companies

Bank holding companies are regulated under the Bank Holding Company Act (the “BHC Act”) and are supervised by the Federal Reserve Board (the “FRB”). Under the BHC Act, BHBC files reports of its operations and other information with the FRB, and the FRB conducts examinations of BHBC and the Bank.

The BHC Act requires, among other things, the FRB’s prior approval whenever a bank holding company proposes to (i) acquire all or substantially all the assets of a bank; (ii) acquire direct or indirect ownership or control of more than 5% of the voting shares of a bank; (iii) merge or consolidate with another bank holding company; (iv) with certain exceptions, acquire more than 5% of the voting shares of any company that is not a bank; and (v) engage in any activities without the FRB’s prior approval other than managing or controlling banks and other subsidiaries authorized by the BHC Act, furnishing services to, or performing services for, its subsidiaries, or conducting a safe deposit business. The BHC Act authorizes the FRB to approve the ownership of shares in any company, the activities of which have been determined to be so closely related to banking or to managing or controlling banks as to be a proper incident thereto.

Under the BHC Act and regulations adopted by the FRB, a bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit, lease or sale of property or financing of services.

The FRB may, among other things, issue cease-and-desist orders with respect to activities of bank holding companies and nonbanking subsidiaries that represent unsafe or unsound practices or violate a law, administrative order or written agreement with a federal banking regulator. The FRB can also assess civil money penalties against companies or individuals who violate the BHC Act or other federal laws or regulations, order termination of nonbanking activities by nonbanking subsidiaries of bank holding companies and order termination of ownership and control of a nonbanking subsidiary by a bank holding company.

A bank holding company may become a “financial holding company” which may engage in a range of activities that are financial in nature, including insurance and securities underwriting, insurance sales, merchant banking, providing financial, investment, or economic advisory services, any activity that a bank holding company may engage in outside of the United States, and additional activities that the FRB, in consultation with the Secretary of the Treasury, determines to be financial in nature, incidental to a financial activity, or complementary to a financial activity. The FRB is the primary regulator of financial holding companies.

FDIC

The Bank is subject to examination and regulation by the FDIC under the Federal Deposit Insurance Act (“FDIA”) because its deposit accounts are insured by the FDIC. The FDIC has adopted regulations which affect a broad range of the Bank’s activities, including, among other things, lending, appraisals, formation of subsidiaries, and obtaining deposits through brokers.

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Under FDIC regulations, each insured depository institution is assigned to one of the following three capital groups for insurance premium purposes: “well capitalized,” “adequately capitalized” and “undercapitalized.” These capital groups are defined in the same manner as the regulations establishing the prompt corrective action system of the FDIA, as discussed under “Capital Adequacy Requirements” below. These three groups are then divided into subgroups that are based on supervisory evaluations by the institution’s primary federal regulator, resulting in nine assessment classifications. Assessment rates for BIF-insured banks range from five to seven basis points of insured deposits for well-capitalized banks with minor supervisory concerns to 43 basis points of insured deposits for undercapitalized banks with substantial supervisory concerns.

The FDIC may terminate the deposit insurance of any insured depository institution if the FDIC determines, after a hearing, that the institution has engaged or is engaging in unsafe or unsound practices which are not limited to cases of capital inadequacy, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation or order or any condition imposed in writing by the FDIC. In addition, FDIC regulations provide that any insured institution that falls below a 2% minimum leverage ratio (see below) will be subject to FDIC deposit insurance termination proceedings unless it has submitted, and is in compliance with, a capital plan with its primary federal regulator and the FDIC. The FDIC may also suspend deposit insurance temporarily during the hearing process if the institution has no tangible capital. The FDIC is additionally authorized by statute to appoint itself as conservator or receiver of an insured depository institution (in addition to the powers of the institution’s primary federal regulatory authority) in cases, among others and upon compliance with certain procedures, of unsafe or unsound conditions or practices or willful violations of cease and desist orders.

Capital Adequacy Requirements

The FRB and the FDIC have adopted similar, but not identical, “risk-based” and “leverage” capital adequacy guidelines for bank holding companies and insured banks, respectively. Under the risk-based capital guidelines, different categories of assets are assigned different risk weights, ranging from zero percent for risk-free assets (e.g., cash) to 100% for higher-risk assets (e.g., commercial loans). These risk weights are multiplied by corresponding asset balances to determine a risk-adjusted asset base. Certain off-balance sheet items, such as standby letters of credit, are added to the risk-adjusted asset base. The minimum required ratio of total capital to risk-weighted assets for both bank holding companies and insured banks is presently 8%. At least half of the total capital is required to be “Tier 1 capital,” consisting principally of common stockholders’ equity, a limited amount of perpetual preferred stock, and minority interests in the equity. The remainder, designated “Tier 2 capital,” may consist of a limited amount of subordinated debt, certain hybrid capital instruments, the remaining portion of trust preferred securities and other debt securities, preferred stock and a limited amount of the general loan loss allowance.

Our junior subordinated notes are considered regulatory capital for purposes of determining BHBC’s capital ratios. In December 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 46R (“FIN 46R”), “Consolidation of Variable Interest Entities,” which required companies that have issued junior subordinated notes, such as ours, to deconsolidate the related entities and restate their balance sheets. However, the Board of Governors of the Federal Reserve System (“FRB”), BHBC’s banking regulator, continues to allow inclusion of junior subordinated notes in regulatory capital following the issuance of FIN 46R.

The minimum Tier 1 leverage ratio, consisting of Tier 1 capital to average adjusted total assets, is 3% for bank holding companies and insured banks that have the highest regulatory examination rating and are not contemplating significant growth or expansion. All other bank holding companies and insured banks are expected to maintain a ratio of at least 1% to 2% or more above the stated minimum.

Under the prompt corrective action provisions of the FDIA, the FDIC has adopted regulations establishing five capital categories for insured banks designated as well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. If any one or more of a bank’s ratios are below the

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minimum ratios required to be classified as undercapitalized, it will be classified as significantly undercapitalized, and if its ratio of tangible equity to total assets is 2% or less, it will be classified as critically undercapitalized. A bank may be reclassified by the FDIC to the next level below that determined by the criteria described above if the FDIC finds that it is in an unsafe or unsound condition or if it has received a less-than-satisfactory rating for any of the categories of asset quality, management, earnings or liquidity in its most recent examination and the deficiency has not been corrected, except that a bank cannot be reclassified as critically undercapitalized for such reasons.

The FDIC may subject undercapitalized banks to a broad range of restrictions and regulatory requirements. An undercapitalized bank may not pay management fees to any person having control of the institution, nor, except under certain circumstances and with prior regulatory approval, make any capital distribution if, after doing so, it would be undercapitalized. Significantly undercapitalized banks are subject to increased monitoring by the FDIC, are restricted in their asset growth, must obtain regulatory approval for certain corporate activities, such as acquisitions, new branches and new lines of business, and, in most cases, must submit to the FDIC a plan to bring their capital levels to the minimum required in order to be classified as adequately capitalized. The FDIC may not approve a capital restoration plan unless each company that controls the bank guarantees that the bank will comply with it. Significantly and critically undercapitalized banks are subject to additional mandatory and discretionary restrictions and, in the case of critically undercapitalized institutions, must be placed into conservatorship or receivership unless the FDIC agrees otherwise.

Under FRB policy, a bank holding company is expected to act as a source of financial strength to its subsidiary banks and to commit resources to support each such bank. In addition, a bank holding company is required to guarantee that its subsidiary bank will comply with any capital restoration plan. The amount of such a guarantee is limited to the lesser of (i) 5% of the bank’s total assets at the time it became undercapitalized or (ii) the amount which is necessary (or would have been necessary) to bring the bank into compliance with all applicable capital standards as of the time the bank fails to comply with the capital restoration plan. A holding company guarantee of a capital restoration plan results in a priority claim to the holding company’s assets ahead of its other unsecured creditors and shareholders that is enforceable even in the event of the holding company’s bankruptcy or the subsidiary bank’s insolvency.

Capital Distributions

BHBC may make capital distributions (dividends in cash or property, or repurchases of capital stock) subject to the California General Corporation Law and the policies, rules and regulations of the FRB. Under the California General Corporation Law, BHBC may not pay dividends in cash or property except (i) out of positive retained earnings or (ii) if, after giving effect to the distribution, BHBC’s assets would be at least 1.25 times its liabilities and its current assets would exceed its liabilities (determined on a consolidated basis under generally accepted accounting principles). The FRB has stated that, as a matter of prudent banking, a bank holding company generally should not pay cash dividends unless its net income available to common shareholders has been sufficient to fully fund the dividends, and that the prospective rate of earnings retention appears consistent with its capital needs, asset quality and overall financial condition.

The ability of BHBC to continue to pay dividends will depend upon its cash resources. BHBC’s principal source of liquidity consists of proceeds received from the sale of its former loan subsidiary in 2004. In addition, the Bank paid dividends to its parent company, Wilshire Acquisitions Corporation (“WAC”), in 2006 and 2007 of $11.4 million and $19.6 million, respectively. WAC paid dividends to its parent, WFC, Inc., in 2006 and 2007 of $11.4 million and $9.6 million, respectively. WFC, Inc. paid dividends to its parent, BHBC in 2006 and 2007 of $11.4 million and $9.6 million. As a California-chartered bank, without the approval of the California DFI, the Bank may pay dividends in an amount which does not exceed the lesser of its retained earnings or its net income for the last three fiscal years. Under regulations of the FDIC, the Bank may not make a capital distribution without prior approval of the FDIC if it would be undercapitalized, significantly undercapitalized or critically undercapitalized under the prompt corrective action rules.

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Community Reinvestment Act

Banks and bank holding companies are also subject to the Community Reinvestment Act of 1977, as amended (the “CRA”). The CRA requires the Bank to ascertain and meet the credit needs of the communities it serves, including low and moderate income neighborhoods. The Bank’s compliance with CRA is reviewed and evaluated by the FDIC, which assigns the Bank a publicly available CRA rating at the conclusion of the examination. Further, an assessment of CRA compliance is also required in connection with applications for FDIC approval of certain activities, including establishing or relocating a branch office that accepts deposits or merging or consolidating with, or acquiring the assets or assuming the liabilities of, a federally regulated financial institution. An unfavorable rating may be the basis for FDIC denial of such an application, or approval may be conditioned upon improvement of the applicant’s CRA record. In the case of a bank holding company applying for approval to acquire a bank or other bank holding company, the FRB will assess the CRA record of each subsidiary bank of the applicant, and such records may be the basis for denying the application.

CRA regulations emphasize measurements of performance in the area of lending (specifically, a bank’s home mortgage, small business, small farm and community development loans), investment (a bank’s community development investments) and service (a bank’s community development services and the availability of its retail banking services), although examiners are still given a degree of flexibility in taking into account unique characteristics and needs of a bank’s community and its capacity and constraints in meeting such needs. The regulations also require certain levels of collection and reporting of data regarding certain kinds of loans.

In the most recently completed CRA compliance examination conducted in October 2007, the Bank received a rating of “Substantial Noncompliance.” Due to the recent examination, the Bank was required to develop and submit a CRA Plan to the FDIC by March 2008 to address the performance deficiencies. The CRA Plan was submitted in March 2008. The Bank is also required to submit quarterly reports to the FDIC detailing the Bank’s progress in improving its CRA performance. To adequately address these issues, the Bank has hired a full-time CRA Officer.

USA PATRIOT Act and Anti-Money Laundering Compliance

The USA PATRIOT Act of 2001 and its implementing regulations significantly expanded the anti-money laundering and financial transparency laws, including the Bank Secrecy Act. The Bank has adopted comprehensive policies and procedures to address the requirements of the USA PATRIOT Act. Material deficiencies in anti-money laundering compliance can result in public enforcement actions by the banking agencies, including the imposition of civil money penalties and supervisory restrictions on growth and expansion. Such enforcement actions could also have serious reputation consequences for the Company and the Bank.

The Sarbanes-Oxley Act

The Company is subject to the accounting oversight and corporate governance requirements of the Sarbanes-Oxley Act of 2002. This act requires executive certification of financial presentations and increased the requirements for board audit committees and their members. The Company has also had to enhance its disclosure of controls and procedures and internal control over financial reporting.

California Banking Law

The Bank, as a California-chartered bank, is subject to examination, supervision and regulation by the DFI under the California Banking Law. These laws and regulations affect many aspects of the Bank’s operations, including investments, mergers and acquisitions, borrowings, dividends, locations of branch offices, issuances of securities and other corporate governance provisions.

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ITEM 1A. Risk Factors

We are subject to a number of business risks that may adversely impact our financial position or results of operations. These risks could make our common stock a speculative investment. We believe that the following factors represent the most significant risks to our future financial performance.

We face risk from changes in interest rates.

The success of our business depends, to a large extent, on our net interest income. Changes in market interest rates can affect our net interest income by affecting the spread between our interest-earning assets and interest-bearing liabilities. This may be due to the different maturities of our interest-earning assets and interest-bearing liabilities, as well as an increase in the general level of interest rates. Changes in market interest rates also affect, among other things:

• Our ability to originate loans;

• The ability of our borrowers to make payments on their loans;

• The value of our interest-earning assets and our ability to realize gains from the sale of these assets;

• The average life of our interest-earning assets;

• Our ability to generate deposits instead of other available funding alternatives; and

• Our ability to access the wholesale funding market.

Interest rates are highly sensitive to many factors, including governmental monetary policies, domestic and international economic and political conditions and other factors beyond our control.

We face risk from possible declines in the quality of our assets.

Our financial condition depends significantly on the quality of our assets. If the level of our non-performing assets rises, our results of operations and financial condition will be affected. A borrower’s ability to pay its loan in accordance with its terms can be adversely affected by a number of factors, such as a decrease in the borrower’s revenues and cash flows due to adverse changes in economic conditions or a decline in the demand for the borrower’s products and/or services.

Our allowances for loan losses may be inadequate.

We establish allowances for loan losses against each segment of our loan portfolio. At December 31, 2007, our allowance for loan losses equaled 2.2% of our total loans. Although we believe that we have established adequate allowances for loan losses as of December 31, 2007, 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. In addition, the FDIC and DFI, as an integral part of their examination processes, periodically review our allowance for loan losses and could require additional provisions for loan losses. Material future additions to the allowance for loan losses may also be necessary due to increases in the size and changes in the composition of our loan portfolio. Increases in our provisions for loan losses would adversely affect our financial condition and results of operations.

Economic conditions may decline.

Our business is strongly influenced by economic conditions in our market area (principally Southern California) as well as regional and national economic conditions. Should the economic condition in these areas

22

deteriorate, the financial condition of our borrowers could weaken, which could lead to higher levels of loan defaults or a decline in the value of collateral for our loans. In addition, an unfavorable economy could reduce the demand for our loans and other products and services.

We have a significant concentration of loans in California.

At December 31, 2007, approximately 51% unpaid principal balance of our loans were collateralized by real estate located in California, and no more than 10% of our loans were collateralized in any other state. Because of this concentration, our financial position and results of operations have been and are expected to continue to be influenced by general trends in the California economy and its real estate market. Real estate market declines may adversely affect the values of the properties collateralizing loans. If the principal balances of our loans, together with any primary financing on the mortgaged properties, equal or exceed the value of the mortgaged properties, we could incur higher losses on sales of properties collateralizing foreclosed loans. In addition, California historically has been vulnerable to certain natural disaster risks, such as earthquakes and erosion-caused mudslides, which are not typically covered by the standard hazard insurance policies maintained by borrowers.

An increasing portion of our loan portfolio consists of construction loans to developers for properties for resale to unidentified buyers.

At December 31, 2007, we had outstanding construction loans to developers for multi-family and commercial properties for sale (or lease) totaling $153.2 million, representing 15.3% of our loan portfolio, and additional commitments for these projects in the amount of $100.6 million. These types of loans generally have greater risks than loans on completed residential and commercial properties. A construction loan generally does not cover the full amount of the construction costs; however, the borrower’s equity is required at loan closing. Risks include price increases, delays and unanticipated difficulties that may materially increase these costs, which are typically borne by the borrower. Further, even if completed, there is no assurance that the borrower will be able to sell the project on a timely or profitable basis, as these are closely related to real estate market conditions, which can fluctuate substantially between the start and completion of the project. If the borrower defaults prior to completion of the project, the value of the project will likely be less than the outstanding loan, and we could be required to complete construction with our own funds to minimize losses on the project.

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

Negative developments in the latter half of 2007 in the subprime mortgage market and the securitization markets for such loans have resulted in uncertainty in the financial markets in general with the expectation of the general economic downturn continuing in 2008. Commercial, as well as consumer, loan portfolio performances have deteriorated at many institutions and the competition for deposits and quality loans has increased significantly. In addition, the values of real estate collateral supporting many commercial loans and home mortgages have declined and may continue to decline. Bank and bank holding company stock prices have been negatively affected as has the ability of banks and bank holding companies to raise capital or borrow in the debt markets compared to recent years. As a result, there is a potential for new federal or state laws and regulations regarding lending and funding practices and liquidity standards, and bank regulatory agencies are expected to be very aggressive in responding to concerns and trends identified in examinations, including the expected issuance of many formal enforcement orders.

Liquidity risk could impair our ability to fund operations and jeopardize our financial condition.

Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, the sale of loans and other sources could have a substantial negative effect on our liquidity. Our access to funding sources in

23

amounts adequate to finance our activities could be impaired by factors that affect us specifically or the financial services industry in general. Factors that could detrimentally impact the Company’s access to liquidity sources include a decrease in the level of our business activity due to a market downturn or adverse regulatory action against us. Our ability to borrow could also be impaired by factors that are not specific to us, such as a severe disruption of the financial markets or negative views and expectations about the prospects for the financial services industry as a whole as the recent turmoil faced by banking organizations in the domestic and worldwide credit markets deteriorates.

Managing reputational risk is important to attracting and maintaining customers, investors and employees.

Threats to our reputation can come from many sources, including unethical practices, employee misconduct, failure to deliver minimum standards of service or quality, compliance deficiencies, and questionable or fraudulent activities of our customers. We have policies and procedures in place to protect our reputation and promote ethical conduct, but these policies and procedures may not be fully effective. Negative publicity regarding our business, employees, or customers, with or without merit, may result in the loss of customers, investors and employees, costly litigation, a decline in revenues and increased governmental regulation.

Our business is highly competitive.

There is intense competition in Southern California and elsewhere in the United States for banking customers. We compete for loans primarily with other commercial banks, mortgage companies, commercial finance companies and savings institutions. In recent years, out-of-state financial institutions have entered the California market, which has also increased competition. Many of our competitors have greater financial strength, marketing capability and name recognition than we do, and operate on a statewide or nationwide basis. In addition, recent developments in technology and mass marketing have permitted larger companies to market loans more aggressively to our small business customers. Such advantages may give our competitors opportunities to realize greater efficiencies and economies of scale than we can. We can provide no assurance that we will be able to compete effectively against our competition.

Our business is heavily regulated.

Both BHBC, as a bank holding company, and the Bank, as a California-chartered FDIC-insured bank, are subject to significant governmental supervision, regulation and legislation, which are intended primarily to maintain a safe and sound banking system, to protect depositors and the FDIC insurance fund, and to facilitate the conduct of sound monetary policy, and are not intended to protect bank and bank holding company shareholders. Statutes, regulations and regulatory policies affecting us may be changed at any time, and the interpretation of these statutes and regulations by examining authorities also may change. We cannot provide assurance that future changes in applicable statutes, regulations, legislation and policies or in their interpretation will not materially adversely affect our business.

We may not be able to fully utilize our deferred tax assets.

At December 31, 2007, we had net deferred tax assets totaling $28.3 million. This amount includes $25.7 million in anticipated tax savings that would result from the future usage of $75.5 million in available federal net operating loss (NOL) carryforwards. However, the maximum amount of NOL carryforward we may utilize in any year is limited to $6.0 million, as a result of our “ownership change” within the meaning of Section 382 of the Internal Revenue Code in 2002. Therefore, to fully utilize this NOL, we must earn an average of at least $6.0 million in taxable income per year through the year ended December 31, 2020, at which date the NOL carryforward will expire. There can be no assurance that we will generate sufficient taxable income in the next 13 years to enable us to utilize all of our available NOL. If at any time it appears more likely than not that we will not be able to realize this deferred tax asset, we would be required to increase the valuation allowance against the

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asset and record a corresponding charge to current earnings. This would have an adverse effect on our financial condition and results of operations.

ITEM 1B. Unresolved Staff Comments

None.

ITEM 2. Properties

The headquarters of BHBC and the Bank are located in Calabasas, California, where we lease approximately 16,500 square feet of office space pursuant to a lease agreement expiring in August 2014. This space includes our branch facility which opened in March 2005.

We believe that our facilities are suitable and adequate for its present business purposes and for the foreseeable future.

ITEM 3. Legal Proceedings

The Company was 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 demanded that the Company reimburse WCC for certain costs purportedly incurred by WCC in connection with WCC’s performance under one of its loan servicing contracts. The Company disagreed that it was liable for such costs. To resolve this dispute, in July 2005, the Company filed a complaint for declaratory relief against WCC and Merrill Lynch. The complaint sought, among other things, a declaration that the Company had no obligation to reimburse WCC for those costs, and that if such an obligation was found to exist, it was 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. Merrill Lynch claimed that WCC had incurred and would continue to incur costs totaling approximately $3.7 million. In January 2008, a jury found that the Company had no liability to WCC and Merrill Lynch relating to the claims being litigated.

The Company has contractually agreed to indemnify Merrill Lynch for claims asserted against WCC by third parties arising out of acts taken by WCC prior to its sale on April 30, 2004. The indemnity is for settlements of judgments paid and for defense costs, and is for amounts which, in the aggregate, exceed $2.0 million. Merrill Lynch has notified the Company of a number of claims that have been or are being asserted against WCC, and for which Merrill Lynch is seeking indemnity from the Company. As of December 31, 2007, the total payments and defense costs of such claims which Merrill Lynch has formally tendered to the Company were approximately $1.5 million. Although the Company expects that Merrill Lynch will demand indemnity for additional costs and expenses, it is probable that the total claims for which Merrill Lynch asserts the Company is responsible will surpass the $2.0 million threshold and this potential liability has been accrued for by the Company.

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

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

Not applicable.

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PART II

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

BHBC’s Common Stock trades under the symbol “BHBC” and is traded on the Nasdaq Global Select Market. At February 15, 2008, there were 70 holders of record of our Common Stock.

The following table sets forth the range of high and low sales prices of the Common Stock and the cash dividends declared per share for the periods indicated:

	Sales Prices				Cash Dividends Declared
Period	High		Low
Year ended December 31, 2007:
Fourth Quarter	$	6.33	$	4.99	$	0.125
Third Quarter	$	7.88	$	6.14	$	0.125
Second Quarter	$	7.89	$	6.60	$	0.125
First Quarter	$	8.07	$	7.21	$	0.125
Year ended December 31, 2006:
Fourth Quarter	$	8.94	$	7.98	$	0.125
Third Quarter	$	9.27	$	7.89	$	0.125
Second Quarter	$	10.60	$	8.97	$	0.125
First Quarter	$	10.80	$	10.22	$	0.125

BHBC has paid regular quarterly dividends of $0.125 per share, or $0.50 annually, since the second quarter of 2004. BHBC will not pay a quarterly dividend in the first quarter of 2008. Although the payment of future dividends will be evaluated and determined on a quarterly basis, dividend payments are not currently contemplated for 2008. As discussed earlier, BHBC’s ability to pay dividends is subject to regulation by California General Corporation Law and the FRB.

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PERFORMANCE GRAPH

The following graph shows the stockholder return on the Company’s common stock based on the market price of the common stock assuming the reinvestment of dividends, with the cumulative total returns for the S&P 500 and a peer group of other banks in California. This graph is historical only and may not be indicative of possible future performance of the common stock.

	Period Ending
Index	12/31/02	12/31/03	12/31/04	12/31/05	12/31/06	12/31/07
Beverly Hills Bancorp Inc.	100.00	181.82	318.11	342.88	289.85	194.16
S&P 500	100.00	128.68	142.69	149.70	173.34	182.86
Peer Group*	100.00	160.09	223.11	221.87	250.45	124.22

* Peer Group: First California Financial Group, Inc. (FCAL), First Regional Bancorp (FRGB), Imperial Capital Bancorp, Inc. (IMP), Provident Financial Holdings, Inc. (PROV) and Vineyard National Bancorp (VNBC).

Source : SNL Financial LC, Charlottesville, VA, (434) 977-1600, www.snl.com

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ITEM 6. Selected Financial Data

The following tables present selected financial information for the Company at the dates and for the periods indicated. The historical statements of operations and financial condition data for the five years presented have been derived from the audited consolidated financial statements of the Company. The financial data related to WCC in the Statements of Operations are presented separately under the caption “Discontinued operations.”

	Year Ended December 31,
	2007		2006		2005			2004		2003
	(Dollars in thousands, except per-share amounts)
Statements of Operations Data:
Total interest income	$	103,135	$	88,167	$	77,397		$	60,041	$	46,527
Total interest expense		72,359		55,172		38,343			26,494		23,685
Net interest income		30,776		32,995		39,054			33,547		22,842
Provision for (recapture of) loan losses		14,356		957		(41	)		351		(539	)
Net interest income after provision for (recapture of) loan losses		16,420		32,038		39,095			33,196		23,381
Other income		2,286		10,036		1,832			1,462		661
Other expenses		17,822		16,324		15,351			16,241		18,111
Income from continuing operations before income tax provision		884		25,750		25,576			18,417		5,931
Income tax provision		388		10,940		10,524			4,585		2,539
Income from continuing operations		496		14,810		15,052			13,832		3,392
Discontinued operations:
Income from operations of discontinued segment (including gain on sale of $21,716 in 2004)		—		—		—			22,200		5,726
Income tax provision		—		—		—			9,307		2,231
Income from discontinued operations		—		—		—			12,893		3,495
Net income	$	496	$	14,810	$	15,052		$	26,725	$	6,887
Earnings per share – basic:
Income from continuing operations	$	0.03	$	0.73	$	0.71		$	0.67	$	0.18
Discontinued operations		—		—		—			0.62		0.19
Net income	$	0.03	$	0.73	$	0.71		$	1.29	$	0.37
Earnings per share – diluted:
Income from continuing operations	$	0.03	$	0.72	$	0.70		$	0.65	$	0.17
Discontinued operations		—		—		—			0.60		0.17
Net income	$	0.03	$	0.72	$	0.70		$	1.25	$	0.34

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	As of December 31,
	2007			2006			2005			2004			2003
	(Dollars in thousands, except per-share amounts)
Financial Condition Data:
Cash and cash equivalents	$	12,964		$	27,005		$	20,954		$	15,526		$	16,739
Portfolio assets:
Mortgage-backed and other investment securities		430,625			479,572			356,008			330,937			258,005
Loans and discounted loans, net		979,948			1,041,883			949,823			917,743			614,624
Real estate owned, net		44			577			62			1,769			267
Total portfolio assets		1,410,617			1,522,032			1,305,893			1,250,449			872,896
Total assets		1,500,114			1,623,836			1,403,739			1,335,623			975,282
Deposits		637,471			850,890			604,649			541,960			473,409
Short-term borrowings		—			20,000			—			—			—
Repurchase agreements		40,000			40,000			63,000			120,000			88,000
FHLB advances		611,000			496,337			530,837			474,837			249,337
Long-term investment financing		—			—			—			—			681
Junior subordinated notes payable to trusts		46,393			46,393			20,619			20,619			20,619
Stockholders’ equity		148,108			155,438			173,870			171,062			125,483
	Year Ended December 31,
	2007			2006			2005			2004			2003
Financial Ratios and Other Data:
Return on average assets		0.03	%		1.02	%		1.08	%		2.22	%		0.80	%
Return on average equity		0.31	%		8.93	%		8.70	%		19.31	%		6.55	%
Average interest yield on total loans and discounted loans		7.43	%		6.99	%		6.41	%		5.64	%		6.31	%
Net interest spread (1)		1.63	%		2.02	%		2.66	%		2.59	%		2.34	%
Net interest margin (2)		2.01	%		2.38	%		2.94	%		2.88	%		2.76	%
Ratio of earnings to fixed charges (3):
Including interest on deposits		1.01			1.47			1.67			1.70			1.25
Excluding interest on deposits		1.03			2.10			2.23			2.31			1.48
Long-term debt to total capitalization (4)		0.81			0.78			0.76			0.74			0.69
Total financial liabilities to equity		8.46			9.45			7.07			6.81			6.78
Dividend payout ratio (5)		1,666.67	%		69.44	%		71.43	%		57.69	%		—
Average equity to average assets		9.95	%		11.42	%		12.40	%		11.50	%		12.24	%
Non-performing loans to loans at end of period (6)		2.99	%		0.15	%		0.62	%		0.92	%		0.95	%
Allowance for loan losses to total loans at end of period		2.19	%		0.76	%		0.77	%		1.16	%		5.96	%

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	Year Ended December 31,
	2007			2006			2005			2004			2003
	(Dollars in thousands)
Operating Data:
Investments and originations:
Loan purchases	$	10,082		$	88,660		$	142,814		$	149,652		$	86,930
Loan originations		246,339			248,749			118,989			289,353			206,042
Mortgage-backed and other investment securities		34,922			197,621			126,828			238,407			151,830
Total		291,343			535,030			388,631			677,412			444,802
Repayments		(362,081	)		(318,672	)		(323,989	)		(259,314	)		(312,411	)
Loan sales		(24,999	)		—			—			(369	)		(8,072	)
Net change in portfolio assets		(111,415	)		216,139			55,444			377,553			105,802

(1) Net interest spread represents average yield on interest-earning assets minus average rate paid on interest-bearing liabilities.

(2) Net interest margin represents net interest income divided by total average interest-earning assets.

(3) The ratios of earnings to fixed charges were computed by dividing (x) income from continuing operations before income taxes plus fixed charges by (y) fixed charges. Fixed charges represent total interest expense, including and excluding interest on deposits, as applicable.

(4) Total capitalization equals long-term debt plus equity.

(5) Dividend payout ratio represents declared dividends per share divided by diluted income from continuing operations per share.

(6) Non-performing loans include all loans that have been placed on non-accrual status by the Company. Loans are placed on non-accrual status when they became past due more than 90 days or sooner when, in the judgment of management, the probability of collection of interest is deemed to be insufficient to warrant further accrual. Discounted loans are not included in non-performing loans for the year ended December 31, 2003.

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ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with the 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 Beverly Hills Bancorp Inc. and its consolidated subsidiaries, 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 its bank subsidiary, First Bank of Beverly Hills (the “Bank” or “FBBH”). Our business strategy is focused on the growth and profitability of the Bank through (1) originations and purchases of income property and construction 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 is regulated by the Federal Deposit Insurance Corporation (“FDIC”).

Our net income for the year ended December 31, 2007 was $0.5 million, or $0.03 per diluted share, compared with $14.8 million, or $0.72 per diluted share, for the year ended December 31, 2006. The pre-tax earnings for 2007 were $24.9 million below the 2006 per-tax earnings due to a $13.4 million increase in the provision for loan losses, a $2.2 million reduction in net interest income and a goodwill impairment charge in 2007 of $3.1 million. The year 2007 results also reflect a $0.7 million increase in other operating income and a $1.6 million decrease in other operating expenses. The results for 2006 included a pre-tax gain of $8.5 million on the sale of our Beverly Hills branch.

Our stockholders’ equity decreased by $7.3 million for the year ended December 31, 2007 to $148.1 million, or $7.87 book value per diluted share. This decrease was due to declared cash dividends of $9.4 million, which were offset by net earnings of $0.5 million, net after-tax unrealized gains of $1.1 million on the portfolio of available-for-sale securities, a $0.3 million increase in paid-in capital representing stock-based compensation expense, and a $0.2 million increase in paid-in-capital relating to exercise of stock options.

The U.S. and global financial markets have experienced significant disruptions in recent months, due largely to a downturn in the housing market. Interest rates on many subprime mortgage loans have reset, causing borrowers to delay payments or default on their loans. The significant increase in foreclosure activity and rising interest rates during the first half of 2007 depressed housing prices further as problems in the subprime markets spread to the near-prime and prime mortgage markets. The recent housing market crisis has also forced many institutions that held large amounts of financial hybrid paper to liquidate their assets and were forced to sell them at liquidation discounts. This has created extremely unfavorable market conditions that have resulted in greater volatility, less liquidity, widening credit spreads, and has pulled back many investors from purchasing mortgage-backed securities.

In light of these unprecedented challenges faced by the financial services industry, we want to reinforce that the Bank does not originate or have subprime residential mortgage loans nor does the Company hold investments backed by subprime residential mortgage loans in its available-for-sale portfolio. We have been monitoring and will continue to vigilantly monitor our loan portfolio on a loan-by-loan basis. Overall, we believe our loan portfolio is sound. We further believe that the principal and interest related to our investment portfolio are collectible in the future and that we have the financial resources and the intent to hold investment securities with unrealized losses until their market values recover to cost.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

This “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as disclosures included elsewhere in this Form 10-K, are based upon our consolidated financial statements, which

31

have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingencies. On an ongoing basis, we evaluate the estimates used, including, but not limited to, those related to allowances for loan losses, other than temporary impairment in the market values of investment securities, the realizability of deferred tax assets, and contingencies. We base our estimates on historical experience, current conditions and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources as well as identifying and assessing our accounting treatment with respect to commitments and contingencies. Actual results may differ from these estimates under different assumptions or conditions.

We believe the following critical accounting policies involve the more significant judgments and estimates used in the preparation of the consolidated financial statements:

Mortgage-Backed and Other Investment Securities Available for Sale.    The Company’s mortgage-backed and other investment securities available for sale are reported at their current fair market value. The fair values of the Company’s investment securities are generally determined by quoted market prices obtained from independent external brokers or independent external pricing service providers who have experience in valuing these securities. In obtaining such valuation information from third parties, the Company has evaluated the methodologies used to develop the resulting fair values. The Company evaluates the market prices for reasonableness by comparing the market prices with prices from another independent pricing service provider. If the change in market value is considered temporary, the unrealized holding gains and losses are reported net of tax, when applicable, as a separate component of accumulated other comprehensive income in stockholders’ equity. In the event of a decline in market value, management must evaluate whether the decline is temporary in nature or other than temporary. In making this evaluation, management must consider certain factors, including (a) whether we have the ability and intent to hold the investment for a reasonable period of time sufficient for the recovery of the fair value up to (or beyond) the cost of the investment, and (b) whether evidence indicating that the cost of the investment is recoverable within a reasonable period of time outweighs evidence to the contrary. Declines that are considered other than temporary are reflected as “Market valuation losses and impairments” in the consolidated statements of operations. Our portfolio of mortgage-backed and other investment securities available for sale represented more than 27% of our total assets as of December 31, 2007. Consequently, fluctuations in the securities’ values can have a significant impact on our financial condition and results of operations.

Allowance for Loan Losses.    We maintain an allowance for loan losses at a level we believe is adequate to absorb estimated losses inherent in the loan portfolios. The allowance is increased by provisions for loan losses charged against operations, recoveries of previously charged off loans, and allocations of discounts on purchased loans, and is decreased by loan charge-offs. Loans are charged off when they are deemed to be uncollectible.

We use our internal asset review system to evaluate its loan portfolio and to classify loans as pass, special mention, substandard, substandard well-secured, doubtful or loss. These terms correspond to varying degrees of risk that the loans will not be collected in part or in full. The frequency at which a specific loan is subjected to internal asset review depends on the type and size of the loan and the presence or absence of other risk factors, such as delinquency and changes in collateral values. The allowance for loan losses consists of general valuation allowances (“GVAs”), which are derived from our loss migration factors and other qualitative factors. Specific valuation allowances (“SVAs”) are established for impaired loans, and are equal to the excess of the unpaid principal balance over the fair value of the collateral for each impaired loan.

GVAs are based on loss migration factors that are updated each quarter. GVAs, however, consist primarily of qualitative adjustments which we evaluate after consideration of certain credit risk characteristics. These risk characteristics include, but are not limited to, the following: our historical and recent loss experience in its

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portfolios; the volume, severity and trend of non-performing assets; the extent to which refinances or loan modifications are made to maintain loans in a current status; known deterioration in credit concentrations or certain classes of loans; loan to value ratios of real estate-secured loans; risks associated with specific types of collateral; the quality and effectiveness of the lending policy, loan purchase policy, internal asset review policy, charge-off, collection and recovery policies; current and anticipated conditions in the general and local economies which might affect the collectability of our asset; anticipated changes in the composition or volume of the loan portfolio; and reasonableness standards in accordance with regulatory agency policies. The evaluation of the inherent loss with respect to these risk characteristics is subject to a higher degree of uncertainty because they are not identified with specific problem credits or portfolio components. Apart from the qualitative adjustment, management currently maintains a risk-modeling reserve 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.

To assess the adequacy of our allowance for loan losses, the portfolio is segmented into three components: impaired loans, homogeneous loans, and non-homogeneous loans.

• In determining which loans are impaired, we apply Statement of Financial Accounting Standards No. 114 (“SFAS No. 114”), Accounting by Creditors for Impairment of a Loan. Our impaired loans include all loan types classified as substandard, doubtful or loss (including loans which may have been upgraded but which are troubled debt restructurings). SVAs are measured on a loan-by-loan basis utilizing either the discounted cash flow or fair market value approaches, as defined under SFAS No. 114.

• Homogeneous loans have been defined as loans secured by one to four single-family residences, mobile home loans and consumer loans, and are analyzed for impairment collectively by their respective loan group. GVA loss estimates are measured utilizing our loss migration factors.

• Non-homogeneous loans include the following loan types: multifamily, commercial real estate, “bridge” loans, construction loans, land loans and commercial unsecured. The non-homogeneous loans are analyzed individually for impairment. GVA loss estimates are measured utilizing our loss migration factors. A loss horizon of seven years has been developed with the objective of achieving loss data to capture a full business cycle.

When we increase the allowance for loan losses, we record a corresponding increase to the provision for loan losses in the statement of operations. The DFI and FDIC, as part of their examination process, periodically review our allowance for losses and the carrying values of our assets. There can be no assurance that the DFI or FDIC will not require additional reserves following future examinations.

Income Taxes.    At December 31, 2007 we had a total gross deferred tax asset of $36.2 million. This asset represents the tax effect of future deductible or taxable amounts and is attributable to net operating loss carryforwards and also to temporary differences between amounts that have been recognized in the financial statements and amounts that have been recognized in our income tax returns. In accounting for the deferred tax assets, we apply SFAS No. 109, Accounting for Income Taxes, which requires, among other things, that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized.

As of December 31, 2007, we evaluated the positive and negative evidence regarding the future realization of the deferred tax assets. Pursuant to this evaluation, we concluded that the available objective positive evidence regarding our ability to generate future federal taxable income substantially outweighed the available objective negative evidence regarding future federal taxable income. We also concluded that the objective negative evidence regarding the ability to generate certain future state taxable income outweighed the available objective positive evidence regarding certain future state taxable income, due primarily to the curtailment of our operations in the state of Oregon following the sale of WCC. As a result, we believe it is more likely than not that a substantial amount of our deferred tax asset will be realized in future years. Consequently, we believe that as of

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December 31, 2007, that the only valuation allowance required is approximately $7.9 million related to net operating loss carryforwards in Oregon and certain other states. As portions of the deferred tax asset are realized and the valuation allowance is reduced, the related benefits, to the extent they related to our post-reorganizational period, are recorded as a deferred tax benefit in our consolidated statements of operations. As benefits relating to our pre-reorganizational period are realized, they are recorded as a direct increase to stockholders’ equity.

The net deferred tax asset of $28.3 million is reported as an asset in our consolidated statement of financial condition as of December 31, 2007. However, there can be no assurance that the amount, if any, that we ultimately realize will not differ materially from our assessment.

We adopted the provisions of FIN No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”), on January 1, 2007. FIN 48 prescribes a recognition threshold that a tax position is required to meet before being recognized in the financial statements and provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition issues. Pursuant to FIN 48, we examine our financial statements, income tax provision, and federal and state income tax returns and analyze our tax positions, including permanent and temporary differences, as well as the major components of income and expense to determine whether a tax benefit is more likely than not to be sustained upon examination by tax authorities.

There was no effect on the financial statements upon adoption of FIN 48. We did not have any unrecognized tax benefits as a result of uncertainty at or during the year ended December 31, 2007. It is our policy to record any penalties or interest arising from the application of federal or state income taxes as other expense. There were no penalties or interest paid during the year ended December 31, 2007.

Newly Issued Accounting Standards.    For a discussion of new accounting pronouncements and their expected impact on the Company’s consolidated financial statements, refer to Note 1—“Recent Accounting Pronouncements” in the accompanying Notes to the Consolidated Financial Statements included elsewhere in this report.

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RESULTS OF OPERATIONS—2007 COMPARED TO 2006

Interest Income

A significant portion of our consolidated earnings arises from net interest income, which is the difference between interest income earned and interest expense incurred. Net interest income is affected by the relative amount of interest-earning assets and interest-bearing liabilities and the degree of mismatch in the maturity and repricing characteristics of interest-earning assets and interest-bearing liabilities.

The following table sets forth, for the periods indicated, information regarding the total amount of our income from interest-earning assets and the resulting average yields, the interest expense associated with interest-bearing liabilities, expressed in dollars and rates, and the net interest spread and net interest margin. (The interest income and expense amounts in the table below are consolidated, but reflect primarily the results of our banking operations.) Information is based on monthly balances during the indicated periods.

Interest-Earning Assets and Interest-Bearing Liabilities

	Year Ended December 31,
	2007							2006							2005
	Average Balance			Interest		Weighted Average Yield/ Rate		Average Balance			Interest		Weighted Average Yield/ Rate		Average Balance			Interest		Weighted Average Yield/ Rate
Assets:
Mortgage-backed securities	$	444,622		$	23,244	5.23	%	$	374,394		$	18,483	4.94	%	$	335,128		$	14,753	4.40	%
Loans, net of unaccreted discounts/ unamortized premium (1)		1,052,530			78,191	7.43	%		966,479			67,527	6.99	%		950,140			60,895	6.41	%
Federal funds and other investments		34,244			1,700	4.96	%		43,926			2,157	4.91	%		42,793			1,749	4.09	%
Total interest-earning assets		1,531,396			103,135	6.73	%		1,384,799			88,167	6.37	%		1,328,061			77,397	5.83	%
Non-interest earning cash		565							1,698							2,082
Allowance for loan losses		(8,876	)						(7,280	)						(8,337	)
Other assets		73,393							73,060							73,994
Total assets	$	1,596,478						$	1,452,277						$	1,395,800
Liabilities and Stockholders’ Equity:
Interest-bearing deposits:
Savings, NOW and money market accounts	$	9,654		$	378	3.92	%	$	55,619		$	1,888	3.39	%	$	111,134		$	2,974	2.68	%
Certificates of deposit		738,160			38,226	5.18	%		652,875			29,814	4.57	%		452,601			14,649	3.24	%
Total interest-bearing deposits		747,814			38,604	5.16	%		708,494			31,702	4.47	%		563,735			17,623	3.13	%
Short-term borrowings		7,834			563	7.19	%		712			50	7.02	%		—			—	—
Repurchase agreements		40,000			1,952	4.81	%		43,538			1,539	3.53	%		116,000			3,681	3.17	%
FHLB advances		577,445			27,233	4.72	%		482,068			19,108	3.96	%		508,298			15,552	3.06	%
Other borrowings		46,393			4,007	8.64	%		33,704			2,773	8.23	%		20,619			1,487	7.21	%
Total interest-bearing liabilities		1,419,486			72,359	5.10	%		1,268,516			55,172	4.35	%		1,208,652			38,343	3.17	%
Noninterest-bearing deposits		1,363							4,857							4,375
Other liabilities		16,708							13,023							9,742
Total liabilities		1,437,557							1,286,396							1,222,769
Stockholders’ equity		158,921							165,881							173,031
Total liabilities and stockholders’ equity	$	1,596,478						$	1,452,277						$	1,395,800
Net interest income				$	30,776						$	32,995						$	39,054
Net interest spread (2)						1.63	%						2.02	%						2.66	%
Net interest margin (3)						2.01	%						2.38	%						2.94	%
Ratio of average interest-earning assets to average interest-bearing liabilities		107.88	%						109.17	%						109.88	%

(1) The average balances of the loan portfolio include discounted loans and non-performing loans, on which interest is recognized on a cash basis.

(2) Net interest spread represents the weighted-average yield on interest-earning assets minus the weighted-average rate paid on interest-bearing liabilities.

(3) Net interest margin represents net interest income divided by total average interest-earning assets.

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The following table describes the extent to which changes in interest rates and changes in volume of interest-earning assets and interest-bearing liabilities have affected our interest income and expense during the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (change in volume multiplied by prior rate), (ii) changes in rate (change in rate multiplied by prior volume) and (iii) total change in rate and volume. Changes attributable to both volume and rate have been allocated proportionately to the change due to volume and the change due to rate.

Changes in Net Interest Income

	Year Ended December 31,
	2007 v. 2006									2006 v. 2005
	Increase Rate			Increase (Decrease) Volume			Net Change			Increase Rate			Increase (Decrease) Volume			Net Change
	(Dollars in thousands)
Interest-earning assets:
Mortgage-backed securities	$	1,139		$	3,622		$	4,761		$	1,898		$	1,832		$	3,730
Loans		4,429			6,235			10,664			5,570			1,062			6,632
Federal funds and other investments		23			(480	)		(457	)		361			47			408
Total interest-earning assets		5,591			9,377			14,968			7,829			2,941			10,770
Interest-bearing liabilities:
Savings, NOW and money market accounts		252			(1,762	)		(1,510	)		659			(1,745	)		(1,086	)
Certificates of deposit		4,260			4,152			8,412			7,302			7,863			15,165
Total interest-bearing deposits		4,512			2,390			6,902			7,961			6,118			14,079
Short-term borrowings		1			512			513			—			50			50
Repurchase agreements		547			(134	)		413			379			(2,521	)		(2,142	)
FHLB advances		3,978			4,147			8,125			4,394			(838	)		3,556
Other borrowings		144			1,090			1,234			234			1,052			1,286
Total interest-bearing liabilities		9,182			8,005			17,187			12,968			3,861			16,829
(Decrease) increase in net interest income	$	(3,591	)	$	1,372		$	(2,219	)	$	(5,139	)	$	(920	)	$	(6,059	)

Our net interest income was $30.8 million for 2007, compared with $33.0 million for 2006. This decrease was due to a decline in our net interest margin, as average interest earning assets in 2007 were approximately $146.6 million above the average interest earning assets in 2006.

Our net interest margin was 2.01% for 2007, compared with 2.38% for 2006. The 37 basis point decline in the margin was primarily the result of the increase in market interest rates during 2006 and the first half of 2007. Our balance sheet is structured such that our interest bearing liabilities reprice more frequently than our interest earning assets. This liability-sensitive balance sheet generally results in a declining net interest margin as interest rates rise. Our weighted average cost of interest bearing liabilities increased by 75 basis points to 5.10% for the year ended December 31, 2007, compared with 4.35% for the year ended December 31, 2006. This increase in the cost of funds compares with a 36 basis point increase in our interest-earning assets yield from 6.47% for 2006 to 6.73% for 2007. Our cost of funds also increased in 2007 as we became more dependent on wholesale deposits and FHLB advances than retail deposits. During 2007, the maturity terms of our FHLB advances and brokered CDs were generally less than one year. We expect the margin compression to be lessened as market interest rates declined in the fourth quarter of 2007 and into 2008.

Interest income on mortgage-backed securities was $23.2 million for 2007, compared with $18.5 million for 2006. The increase in 2007 reflects both an increase in yields and a higher average earning-asset balance.

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Although the balance of our mortgage-backed securities at the end of 2007 was lower than the prior year-end, the average balance for 2007 was $70.2 million above the 2006 average balance. The higher average balance in 2007 was due to security purchases of $197.6 million in 2006. The average yield on mortgage-backed securities increased 29 basis points from 4.94% for 2006 to 5.23% for 2007. The higher average yield resulted from the 2006 security purchases occurring in a rising interest rate environment. The higher interest rate environment also reduced the premium amortization as the expected lives of the securities were extended.

Interest income on loans was $78.2 million for 2007, compared with $67.5 million for 2006. This increase was due primarily to a 44-basis point increase in the weighted-average yield on our loans and an $86.1 million increase in average loan balances from 2006 to 2007. The increase in the average balances was due to substantial loan originations and purchases in the fourth quarter of 2006 which did not fully affect the yearly average loan balances until 2007. The average loan yield increased during 2007 as market interest rates increased, and loans with initial fixed rates for three or five years reached the initial rate reset date and converted to fully adjustable loans. The yield was also enhanced by the increase in construction and land loans which generally have higher margins and loans fees than permanent commercial real estate and multifamily mortgage loans.

Interest expense on deposits was $38.6 million for 2007, compared with $31.7 million for 2006. This increase was due to both a 69-basis point increase in the average cost of our interest-bearing deposits and a $39.3 million increase in the average balance of interest-bearing deposits during the year. The higher average cost of funds in 2007 was mainly due to an increase in market interest rates, which raised our cost of deposits as we increased our reliance on wholesale deposits in the fourth quarter of 2006 after the sale of the Beverly Hills branch. We began utilizing FHLB advances as our primary funding source during 2007 due to its lower funding cost as compared with brokered CDs. The proportion of CDs to total interest-bearing deposits increased to an average of 98.7% for 2007, compared with an average of 92.1% for 2006.

Interest expense on repurchase agreements and FHLB advances totaled $29.2 million for 2007, compared with $20.6 million for 2006. This increase was due to a higher market interest rates and an increased utilization of FHLB advances during 2007. Due to the increase in market interest rates during 2006 and the first half of 2007, the cost of our repurchase agreements increased by 128 basis points, from 3.53% in 2006 to 4.81% in 2007, and the cost of our FHLB advances increased by 76 basis points, from 3.96% to 4.72% over the same periods. Average FHLB advances increased by $95.4 million from 2006 to 2007, as FHLB advances were the primary funding source in 2007 due to their lower cost relative to brokered CDs. The average balance of repurchase agreements declined by $3.5 million from 2006 to 2007 as we effected no repurchase agreement transactions during 2007.

Interest expense on our junior subordinated notes payable was $4.0 million 2007, compared with $2.8 million for 2006. This increase in interest expense was primarily due to a $12.7 million increase in average borrowing balances during 2007. The average balance was higher in 2007 due to a $20.6 million note issued in May 2006 and a $5.2 million note issued in December 2006. Although the 3-month LIBOR rate declined in the fourth quarter of 2007, the average cost of the junior subordinated notes payable in 2007 was 41 basis points higher than the average cost for the prior year as the 3-month LIBOR rate increased throughout 2006.

Provision for Loan Losses

Provision for losses on loans is 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. Specific reserves are established for impaired loans when the fair value of the collateral for each impaired loan is less than the unpaid principal balance of the loan. We currently intend to maintain an unallocated allowance in the range of 3% to 6% of the estimated allowance for loan losses, excluding specific reserves, due to the inherent risk associated with the imprecision in estimating the allowance.

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We recorded a provision for loan losses of $14.4 million for 2007, compared with a provision for loan losses of $957,000 for 2006. The increase in the provision primarily reflects specific reserves totaling $11.4 million for nonperforming construction loans due to a decrease in the fair market value of the collateral.

Other Income

Our other income was $2.3 million for 2007, compared with $10.0 million for 2006. Other income for 2006 included an $8.5 million pre-tax gain on the sale of our Beverly Hills branch. FHLB stock dividend income increased $220,000 to $1.6 million as we increased our holdings of FHLB stock. Stock in the FHLB at December 31, 2007 and 2006 was $31.9 million and $29.0 million, respectively. Other income for 2007 also included $400,000 pursuant to a settlement agreement with a former officer.

Other Expenses

Compensation and employee benefits expense totaled $7.2 million for 2007, compared with $7.1 million for 2006. This increase was due primarily to stay bonus expense of $803,000 in 2007. In June 2007, the Company approved stay bonus agreements totaling $2.1 million for certain executive officers and employees. These employees are entitled to receive the stay bonus payment if they are employees either 60 days after a change in control (as defined in the agreement) or on December 31, 2008. Accordingly, the stay bonus payments are being accrued on a straight-line basis to December 2008.

Our legal expenses declined by $1.0 million from 2006 to $581,000 for 2007. In 2006, we incurred significant litigation-related costs in connection with our disputes with a former officer of the Company, and our former loan servicing subsidiary, Wilshire Credit Corporation, and its parent company, Merrill Lynch. The Company did not incur a similar level of legal costs in 2007 as the matter with the former officer was resolved in 2006. We did not incur significant costs in our dispute with WCC during 2007 as this matter went to trial in 2008. In January 2008, a jury found that the Company had no liability to WCC and Merrill Lynch relating to the claims being litigated.

Occupancy expenses were $600,000 for 2007, compared with $930,000 for 2006. The reduction in expense from 2006 was due to the sale of the Beverly Hills branch in November 2006.

Real estate owned expenses declined by $566,000 from 2006 to 2007. Writedowns on properties acquired through foreclosure totaled $289,000 in 2007, and included $266,000 on a multi-family property in Texas. We also incurred $166,000 in operating expenses for the foreclosed properties. Expenses for 2006 included an $865,000 writedown on the Texas multi-family property.

We evaluate goodwill for impairment on an annual basis. Our evaluation as of March 31, 2007 indicated that no impairment existed. Due to the significant decline in the price of our common stock during the fourth quarter of 2007, we reevaluated goodwill for impairment at year-end. We concluded that the fair value of the Company was below the carrying value and that goodwill was impaired. Accordingly, the goodwill of $3.1 million was written-off in 2007.

Other general and administrative expenses were $1.8 million for 2007, compared with $1.4 million for 2006. Marketing and business travel costs for 2007 declined $172,000 from the prior year as the Company generally focused its lending efforts on direct loan originations in California rather than nationwide loan originations and purchases. Expenses in 2006 included a bonus payment to our legal counsel for work completed on a legal matter and costs associated with the 2006 stock tender offer.

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RESULTS OF OPERATIONS—2006 COMPARED TO 2005

Our net interest income was $33.0 million for 2006, compared with $39.1 million for 2005. This decrease was due primarily to a decline in our net interest margin, as the net interest earning assets in 2006 were comparable to those in 2005.

Our net interest margin was 2.38% for 2006, compared with 2.94% for 2005. This decline in the margin was 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 118 basis points to 4.35% for the year ended December 31, 2006, compared with 3.17% for the year ended December 31, 2005. In contrast, our yield on interest-earning assets increased by only 54 basis points, to 6.37% for 2006 compared with 5.83% for 2005. We anticipate that the net interest margin may narrow further in future periods if the treasury yield remains relatively flat. In addition, the sale of the Beverly Hills branch may cause a reduction in the net interest margin, due to our reduced retail presence and our increasing reliance on higher-costing brokered deposits.

Interest income on mortgage-backed securities was $18.5 million for 2006, compared with $14.8 million for 2005. The increase in 2006 reflects both an increase in yields and a higher average earning-asset balance. The higher yields, which were precipitated by rising market interest rates, 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 4.40% for 2005 to 4.94% for 2006. The increase in the average investment balance from 2005 to 2006 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 $67.5 million for 2006, compared with $60.9 million for 2005. This increase was due primarily to a 58-basis point increase in the weighted-average yield on our loans, from 6.41% for 2005 to 6.99% for 2006, reflecting the continuing increase in market interest rates. Our adjustable-rate loans (including loans with an initial fixed rate for 3 or 5 years which subsequently convert to adjustable-rate) comprised between 85-88% of our total loans for 2006, and therefore our portfolio was highly sensitive to interest rate fluctuations. The higher yield in 2006 was also a result of our expansion into construction loans, which had a weighted-average yield of 9.31% for the year. To a lesser extent, the increase in loan interest income was due to a $16.3 million increase in the average balance of loans from 2005 to 2006. This increase in average loan volume reflects the moderate growth in our loan portfolio throughout 2005 (the effects of which are realized in future periods) and loan portfolio acquisitions in the second and fourth quarters of 2006.

Interest expense on deposits was $31.7 million for 2006, compared with $17.6 million for 2005. This increase was due to both a 134-basis point increase in the average cost of our interest-bearing deposits (from 3.13% for 2005 to 4.47% for 2006) and a significant increase in the average balance of deposits during the year. 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 92.1% for 2006, compared with an average of 80.3% for 2005. We have increasingly utilized deposits as our primary funding source in 2006 and raised a significant volume of wholesale CDs, resulting in a $144.8 million increase in the average balance of interest-bearing deposits over 2005.

Interest expense on repurchase agreements and FHLB advances totaled $20.6 million for 2006, compared with $19.2 million for 2005. This increase was due to the higher market interest rates in 2006. As a result, the cost of our repurchase agreements increased by 36 basis points, from 3.17% in 2005 to 3.53% in 2006, and the cost of our FHLB advances increased by 90 basis points, from 3.06% to 3.96% over the same periods. The effects of the higher rates more than offset a decline in the average balance of borrowings. The average volume or repurchase agreements and FHLB advances declined by $70.5 million and $26.2 million, respectively, from 2005 to 2006, as we increasingly utilized CDs as our primary funding source in 2006.

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Interest expense on our junior subordinated notes payable was $2.8 million for 2006, compared with $1.5 million for 2005. This increase reflects both higher average borrowing balances and higher rates in 2006. In May 2006 we issued $20.6 million of junior subordinated notes payable to fund our anticipated stock repurchase, and in December 2006 we issued an additional $5.2 million. This new debt increased the average liability balance for 2006 by $13.1 million over the average balance for 2005. 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 102 basis points from 2005 to 2006.

Provision for Loan Losses

We recorded a provision for loan losses of $957,000 for 2006, compared with net recaptures of loan loss reserves of $41,000 for 2005. The increase in the provision for 2006 was due primarily to a change in the composition of our loan portfolio. In 2006, we expanded our product line to include construction loans, and also saw a substantial increase in our loans secured by land. Because these categories of loans carry more risk than commercial and multifamily real estate loans, we increased our reserves accordingly to provide for possible estimated losses.

Other Income

Our other income was $10.0 million for 2006, compared with $1.8 million for 2005. The increase in 2006 was due to the $8.5 million pre-tax gain on the sale of our Beverly Hills branch in the fourth quarter. In addition, our other income for 2005 included a one-time gain of $404,000 resulting 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 $7.1 million for 2006, compared with $6.8 million for 2005. This increase was due primarily to a $347,000 increase in bonus expense in 2006. These higher bonuses included incentive bonuses paid to our Chief Executive Officer pursuant to our stock repurchase and sale of the Beverly Hills branch and a signing bonus paid to a new executive.

Our legal expenses declined by $469,000 from 2005 to 2006. This decrease was due to the reversal of $746,000 in expenses previously accrued on behalf of a former officer after we received a favorable ruling from an arbitrator in May 2006. We continued to incur litigation-related costs in connection with our disputes with our former loan servicing subsidiary, WCC, and its parent company, Merrill Lynch.

Other professional fees increased by $425,000 from 2005 to 2006. This increase was largely due to $177,000 in consulting fees relating to our stock repurchase in 2006. In addition, on an ongoing basis we incur consulting fees in connection with our information systems, which we began outsourcing in the fourth quarter of 2005.

Regulatory assessments were $145,000 for the year ended December 31, 2006, compared with $338,000 for the year ended December 31, 2005. The decrease in 2006 was 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 in 2005 included fees paid to the Bank’s former regulator, the Office of Thrift Supervision, for the first three quarters of the year.

We did not 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.

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Our directors expenses declined by $132,000 from the year ended December 31, 2005 to the year ended December 31, 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.

Real estate owned, net was $984,000 for the year ended December 31, 2006, compared with a credit of $187,000 for the year ended December 31, 2006. The increase in 2006 was due to an $865,000 a provision for loss on a multifamily property which was acquired through foreclosure.

CHANGES IN FINANCIAL CONDITION

General

At December 31, 2007, our total assets were $1.5 billion, a decrease of $123.7 million, or 7.6%, from total assets at December 31, 2006. This decrease was due to an increased level of loan payoffs and paydowns that more than offset new loan originations. We also reduced the level of investment securities purchases in 2007, as compared with prior years. The following discussion summarizes the significant changes in our financial condition for 2007.

Mortgage-Backed and Other Securities Available for Sale

Our portfolio of mortgage-backed securities available for sale decreased by $47.0 million during the year ended December 31, 2007. This increase was due primarily to purchases of securities of $34.9 million, offset by principal repayments of $83.5 million. Our purchases included $24.9 million in GSE mortgage-backed securities with a weighted-average yield of 6.04% and $10.0 million in AAA-rated mortgage-backed securities with a weighted-average yield of 6.05%. In 2007, we significantly reduced our investment purchases due to the narrow spreads to our cost of funds and increased volatility in the mortgage markets.

Our mortgage-backed securities recovered approximately $1.8 million of their previously-recorded unrealized holding losses during 2007. This increase in market value was a result of the decline in treasury yields as the Federal Reserve Bank began decreasing interest rates in the third quarter of 2007. As of December 31, 2007, the net unrealized holding losses on our mortgage-backed securities totaled $2.2 million.

The balance of our other investment securities available for sale (consisting of trust preferred securities and mutual funds) declined by $2.0 million during the year ended December 31, 2007, primarily as a result of repayments.

Loans

Our portfolio of loans, net of discounts and allowances, decreased by $61.9 million for the year ended December 31, 2007 to a total of $979.9 million at year-end. The loan portfolio declined in 2007 as loan originations and purchases of $256.4 million were more than offset by loan repayments and sales of $303.5 million. Loan repayments increased in 2007 as certain borrowers were able to obtain lower-cost refinancing from third parties. Our loan origination activity did not increase in 2007 due to our conservative loan pricing and concerns regarding real estate valuations and general economic conditions.

Real Estate Owned

Real estate owned decreased by $533,000 during 2007. During 2007, we acquired $1.3 million of new properties through foreclosure. These acquisitions were offset by sales of $1.6 million and valuation writedowns of $289,000. Real estate owned at December 31, 2007 consisted of one property with a fair value of $44,000.

Deposits

Deposits decreased by $213.4 million during 2007. This decrease was due to a reduction in brokered CDs during 2007. We generally replaced maturing brokered CDs with FHLB advances due to their lower cost for

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comparable maturity terms. The weighted average interest cost of our deposits was 4.88% at December 31, 2007, compared with 4.82% at December 31, 2006. The average cost of deposits increased during 2007 due to our reliance on wholesale deposits and the need to offer competitive market interest rates for these deposits. At December 31, 2007, CDs comprised 96.4% of our total deposits, compared with 96.7% at December 31, 2006.

Short-Term Borrowings

Short-term borrowings decreased by $20.0 million during the year ended December 31, 2007. At December 31, 2007, we had no outstanding borrowings under a revolving line of credit with another financial institution. The line of credit agreement expired on November 30, 2007, but was amended in January 2008 to expire on December 31, 2008. The line of credit amount was reduced in January 2008 from $20 million to $15 million. This borrowing line bears interest at the 3-month LIBOR rate, plus 1.90%, adjusting quarterly. The maximum ratio on nonperforming loans to total gross loans was also increased to 3.50%. The credit is collateralized by 50% of the outstanding shares of the Bank’s common stock. We terminated the credit agreement in March 2008.

Repurchase Agreements

Repurchase agreements did not change at any time during the year ended December 31, 2007. The weighted-average cost of our repurchase agreements was 4.81% at December 31, 2007 and December 31, 2006. We did not enter into any new repurchase agreements during 2007, as our funding requirements were met with new brokered CDs and FHLB advances.

FHLB Advances

FHLB advances increased by $114.7 million during the year ended December 31, 2007. This increase reflects $595.0 million in new advances, partially offset by matured advances of $480.3 million. The FHLB advances were our primary funding source during 2007 as the advances generally had a lower cost than brokered CDs. 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. As of December 31, 2007, we had FHLB borrowing availability of $76.5 million.

Junior Subordinated Notes Payable to Trusts

The amount of our junior subordinated notes payable to trusts did not change at any time during 2007. The weighted-average cost of these notes was 7.58% at December 31, 2007 and 7.88% at December 31, 2006. The interest rates for the notes are at various spreads to 3-month LIBOR and reset quarterly. In January 2008, we redeemed at par $10.3 million of the notes due in 2032.

Stockholders’ Equity

Our stockholders’ equity decreased by $7.3 million for the year ended December 31, 2007 to $148.1 million, or $7.87 book value per diluted share. This decrease was due to declared cash dividends of $9.4 million, which were offset by net earnings of $0.5 million, net after-tax unrealized gains of $1.1 million on the portfolio of available-for-sale securities, a $0.3 million increase in paid-in capital representing stock-based compensation expense, and a $0.2 million increase in paid-in-capital relating to exercise of stock options.

Off-Balance Sheet Arrangements

We are a party to financial instruments with off-balance-sheet risk in the normal course of business. These financial instruments include debt obligations and commitments to extend credit and involve, to varying degrees, elements of risk in excess of the amount recognized in the balance sheet.

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At December 31, 2007, we had outstanding commitments to extend credit of $150.4 million. These commitments expose us to credit risk in excess of amounts reflected in the consolidated financial statements. We receive collateral to support loans and commitments to extend credit for which collateral is deemed necessary. As of December 31, 2007, we did not have an allowance for unfunded loan commitments.

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 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 December 31, 2007, we had $629.1 million of CDs. Scheduled maturities of CDs during the 12 months ending December 31, 2008 and thereafter amounted to $582.5 million and $46.6 million, respectively. Wholesale deposits generally are more responsive to changes in interest rates than core deposits, and thus are more likely to be withdrawn by the investor upon maturity as changes in interest rates and other factors are perceived by investors to make other investments more attractive. Management continues its effort to reduce our exposure to interest rate changes by utilizing funding sources whose repricing characteristics more closely match those of our interest-earning assets.

We are party to various contractual financial obligations, including repayment of borrowings, operating lease payments and commitments to extend credit. The table below presents the Company’s future financial obligations (principal and interest payments) outstanding as of December 31, 2007:

Contractual Obligations

	Payments due within time period at December 31, 2007
	0-12 Months		1-3 Years		4-5 Years		After 5 Years		Total
	(Dollars in thousands)
Certificates of deposit	$	592,846	$	6,831	$	45,941	$	—	$	645,618
Repurchase agreements		41,445		—		—		—		41,445
Employment contracts		545		—		—		—		545
Operating leases		463		881		907		775		3,026
FHLB advances		269,924		307,037		72,737		—		649,698
Junior subordinated notes payable to trust		12,911		5,202		5,202		93,816		117,131
Commitments to originate loans		150,398		—		—		—		150,398
Total	$	1,068,532	$	319,951	$	124,787	$	94,591	$	1,607,861

With the exception of the operating leases, employment contracts and loan commitments, the expected obligations presented above include anticipated interest accruals based on the current respective contractual terms. The amounts for the three issuances of junior subordinated notes are based on the assumption that the notes will be repaid in full at their respective maturities in July 2032, June 2036 and March 2037. However, the notes may be repaid in full or in part at par commencing in July 2007, June 2011 and March 2012, respectively, and quarterly thereafter.

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DFI regulations require each California-chartered bank to maintain adequate liquidity to assure safe and sound operation. It is the Bank’s responsibility to establish a liquidity policy that sets minimum liquidity requirements. As of December 31, 2007, the Bank was in compliance with its liquidity policy.

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 December 31, 2007, 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 December 31, 2007:

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)	$	181,728	17.05	%	$	85,282	³	8.00	%	Not Applicable
Tier 1 capital to risk-weighted assets		168,297	15.79	%		42,641	³	4.00	%	Not Applicable
Tier 1 capital to average assets		168,297	11.16	%		60,346	³	4.00	%	Not Applicable
FBBH
Total capital to risk-weighted assets (Risk-based capital)	$	141,432	13.54	%	$	83,583	³	8.00	%	$104,479	³10.00	%
Tier 1 capital to risk-weighted assets		128,266	12.28	%		41,792	³	4.00	%	62,687	³ 6.00	%
Tier 1 leverage ratio		128,266	8.62	%		59,540	³	4.00	%	74,425	³ 5.00	%

In addition to the requirements shown in the above table, FBBH is required by the DFI to maintain a ratio of tangible stockholder’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 December 31, 2007, the Bank was in compliance with the DFI’s requirement.

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, management’s 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 board and management asset/liability committees (collectively, “ALCO”) which reviews,

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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.

We regularly 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.

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

The following table quantifies the potential changes in our net portfolio value at December 31, 2007, 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	$	116,254	$	(53,676	)	(32	)%	8.07	%	(305	) bp
+ 200bp		131,161		(38,769	)	(23	)	8.94		(218	) bp
+ 100bp		149,418		(20,512	)	(12	)	9.98		(114	) bp
0bp		169,930		—		—		11.12		—
- 100bp		171,862		1,932		1		11.15		3	bp
- 200bp		170,979		1,049		1		11.02		(10	) bp
- 300bp		172,677		2,747		2		11.04		(8	) bp

In determining net portfolio value, we make 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 we deem 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 used to identify and manage our interest rate risk profile is the static gap analysis. Interest sensitivity gap analysis measures the difference between the assets and liabilities repricing or maturing within specific time periods. The following table summarizes the scheduled maturities or repricing of the Company’s assets and liabilities based on their contractual terms as of December 31, 2007.

	Within Twelve Months			More Than One Year to Three Years			More Than Three Years to Five Years			Over Five Years			Total
	(Dollars in thousands)
Assets:
Cash and due from banks	$	12,964		$	—		$	—		$	—		$	12,964
Mortgage-backed and other investment securities		54,510			118,269			29,106			228,740			430,625
Single-family residential loans		8,682			406			127			7,723			16,938
Multifamily residential loans		160,039			89,926			45,125			18,064			313,154
Commercial real estate loans		174,257			173,051			122,475			33,303			503,086
Construction loans		119,864			22,143			11,171			—			153,178
Other loans		14,397			10			19			305			14,731
Other assets (1)		—			—			—			55,438			55,438
Total assets		544,713			403,805			208,023			343,573			1,500,114
Liabilities:
Demand deposits		—			—			—			886			886
NOW and money market accounts		6,461			—			—			—			6,461
Savings accounts		983			—			—			—			983
Certificates of deposit		582,494			1,715			44,932			—			629,141
Short-term borrowings		—			—			—			—			—
Repurchase agreements		40,000			—			—			—			40,000
FHLB advances		251,000			290,000			70,000			—			611,000
Junior subordinated notes payable to trusts		46,393			—			—			—			46,393
Other liabilities		—			—			—			17,142			17,142
Total liabilities		927,331			291,715			114,932			18,028			1,352,006
(Deficiency) excess of assets over liabilities	$	(382,618	)	$	112,090		$	93,091		$	325,545		$	148,108
Cumulative (deficiency) excess	$	(382,618	)	$	(270,528	)	$	(177,437	)	$	148,108
Cumulative (deficiency) excess as a percent of total assets		(25.37	)%		(17.94	)%		(11.76	)%		9.87	%

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

ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk

See Item 7—Qualitative and Quantitative Disclosures About Market Risk—Asset and Liability Management—of Part II of this Report.

ITEM 8. Financial Statements and Supplementary Data

See Item 15 of Part IV of this Report.

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

Not Applicable.

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ITEM 9A. Controls and Procedures

Evaluation of Disclosure 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 SEC’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.

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, and for performing an assessment of the effectiveness of internal control over financial reporting as of December 31, 2007. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

The Company’s system of internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in “Internal Control—Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission.

Based on the above evaluation, our management has concluded that, as of December 31, 2007, we did not have any material weaknesses in our internal control over financial reporting and our internal control over financial reporting was effective.

The independent registered public accounting firm of Deloitte & Touche LLP, as auditors of Beverly Hills Bancorp Inc.’s consolidated financial statements, has issued an attestation report on the effectiveness of management’s internal control over financial reporting based on criteria established in Internal Control— Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission.

Changes in Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting during our fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Beverly Hills Bancorp Inc.

Calabasas, California

We have audited the internal control over financial reporting of Beverly Hills Bancorp Inc. and subsidiaries (the “Company”) as of December 31, 2007, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

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We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 2007 of the Company and our report dated March 17, 2008 expressed an unqualified opinion on those financial statements.

/s/    Deloitte & Touche LLP

Los Angeles, California

March 17, 2008

ITEM 9B. Other Information

Not Applicable.

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PART III

ITEM 10. Directors and Executive Officers of the Registrant

Directors

Larry B. Faigin, age 65, was appointed to the Board of Directors in June 1999 and has been Chairman since September 1999. In addition, Mr. Faigin has been a director of FBBH since April 2001. Mr. Faigin has been the Chief Executive Officer of the Company since August 2005 and the Chief Executive Officer and President of FBBH since June 2006. From December 2005 to June 2006, Mr. Faigin was the Bank’s Executive Vice President of Development. From 2003 to 2005, Mr. Faigin was President and Chief Executive Officer of China Housing Partners, LLC, a residential developer in China. Previously, he was President and Chief Executive Officer of GreenPark Remediation, LLC, a company that specializes in acquiring environmentally impacted land and remediating and improving the property for further development.

Howard Amster, age 60, has been a director of the Company since November 2001 and a director of FBBH since October 2001. Mr. Amster is a professional real estate operator and also is a principal of Ramat Securities Ltd., a Cleveland-based investment firm. Mr. Amster also is a director of Horizon Group Properties, Inc., and Astrex Inc.

Stephen P. Glennon, age 63, has been a director of the Company since December 1999 and a director of FBBH since April 2001. Mr. Glennon is a retired financial executive. He was the Company’s Chief Executive Officer from September 1999 to May 2004 and its Chief Financial Officer from April 2003 to May 2004.

Robert H. Kanner, age 60, has been a director of the Company and FBBH since January 2002. Mr. Kanner has been Chairman of the Board of Pubco Corporation, a manufacturer and marketer of computer printer supplies and specialized construction products, since 1987.

Kathleen L. Kellogg, age 54, has been a director of the Company since August 2005 and a director of FBBH since October 2001. Ms. Kellogg has been President of her own independent consulting company since 2000. Ms. Kellogg also is a director of First General Bank, and is a Trustee of the San Marino Schools Foundation.

William D. King, age 66, has been a director of the Company since May 2004 and a director of FBBH since April 2001. He has been Chairman of the Board of FBBH since December 2002. Mr. King is a retired Chairman and Chief Executive Officer of Aviation Distributors, Inc.

John J. Lannan, age 61, has been a director of the Company since May 2004 and a director of FBBH since June 2003. Mr. Lannan has been a Principal with Brentwood Partners, Inc., a real estate financing firm specializing in institutional equity and mezzanine debt placement, since 1998.

Executive Officers

Craig W. Kolasinski, age 45, has been employed by FBBH since 2001. He has been Executive Vice President of Business Development of FBBH since November 2006. Previously, from April 2006 to November 2006, he was Executive Vice President and Chief Lending Officer and also held that position from October 2001 to February 2005. From February 2005 to April 2006, he served as Executive Vice President and Chief Credit Officer.

Bryce W. Miller, age 45, has been employed by the Bank since 2000. He has been Executive Vice President and Chief Administrative Officer of FBBH since January 2007. Previously, he served as Senior Vice President, Technology and Compliance (February 2003 to January 2007) and Vice President and Information Services Manager (July 2001 through February 2003) and Vice President and Controller (June 2000 through June 2001).

Takeo K. Sasaki, age 39, joined the Company in July 2001. He has been Chief Financial Officer of BHBC since February 2005, an Executive Vice President of BHBC since January 2007, and Chief Financial Officer of

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the Bank since 2003. Mr. Sasaki served as Senior Vice President of the Bank from February 2003 through January 2007 and Vice President and Controller of the Bank from July 2001 to February 2003.

Annette J. Vecchio, age 57, has been employed by the Bank since 1985. She has been Executive Vice President and Chief Credit Officer of the Bank since April 2006 and served as the Bank’s Senior Vice President and Portfolio Manager from March 2002 to April 2006.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934 requires a company’s directors and executive officers, and beneficial owners of more than 10% of the common stock of such company, to file with the Securities and Exchange Commission initial reports of ownership and periodic reports of changes in ownership of the company’s securities. To the knowledge of the Company, no director, officer, or beneficial owner of more than 10% of the Company’s Common Stock failed to timely furnish reports required of such person by Section 16(a) on Forms 3, 4 and 5 during the year ended December 31, 2007.

Code of Ethics

Beverly Hills Bancorp Inc. has adopted a written code of ethics that applies to all employees and members of the Board of Directors. A copy of the Company’s code of ethics is available on the Company’s web site at www.bhbc.com.

Audit Committee

The Audit Committee of the Board of Directors consists of William D. King (Chairman), Robert H. Kanner and Kathleen L. Kellogg. All of the Audit Committee members are non-employee directors who are independent within the listing standards of the Nasdaq Stock Market and the Securities Exchange Act of 1934. The Board of Directors has determined that Mr. King is a financial expert as defined in Item 407(d)(5)(ii) of Regulation S-K.

ITEM 11. Executive Compensation

Compensation Discussion and Analysis

Overview

The Company’s executive compensation program is designed to attract, retain, and motivate highly competent executives and to focus the interests of the executives on objectives that enhance stockholder value. The Company seeks to attain these goals by structuring the executives’ compensation so that a portion of each executive’s pay is a function of that executive’s performance for the year, and a portion is tied to the overall profitability of the Company.

Process

The Company’s Board of Directors has overall responsibility for the Company’s compensation policies and procedures. The Board of Directors has delegated to its Compensation Committee the responsibility to review and recommend all employment contracts and compensation arrangements, including salaries, bonuses, programs and benefits, for executive officers. All actions of the Compensation Committee pertaining to executive compensation must be submitted to the Board of Directors for approval.

The CEO generally makes recommendations to the Compensation Committee and participates in discussions with the Compensation Committee regarding the form and amount of compensation for executive officers other than himself. He may also discuss with the Compensation Committee his expectations for his own

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compensation. The CEO does not participate in Board or Compensation Committee deliberations regarding his own compensation and abstains from voting on any matters regarding his own compensation.

Elements of Executive Compensation

The principal elements of the Company’s executive compensation program are base salary, performance bonuses, stock-based compensation, long-term incentives and other benefits. The Company does not utilize a specific formula to determine the allocation of each element of compensation for its executives. However, the Company does attempt to provide each executive with a number of incentives to improve individual performance as it relates to the objectives of the Company. Consequently, the executive officers’ total compensation is typically weighted heavily toward bonuses and incentive compensation.

Base Salary.    Base salaries for the Company’s executives are intended to reflect the scope of each executive’s responsibilities, the success of the Company, and contributions of each executive toward the Company’s attainment of its objectives. In setting the base salary for an executive officer, the Board and Compensation Committee may consider some or all of the following factors: the executive officer’s current base salary, the base salaries of the Company’s other executive officers, base salaries of executive officers of other financial institutions, the scope of the executive officer’s duties and responsibilities (and changes in the scope of such responsibilities), and the executive officer’s performance.

Performance Bonuses.    The Company historically considers performance bonuses for its executive officers on an annual basis. Factors that affect the amount the bonus for any executive officer may include some or all of the following: the individual officer’s performance generally; the individual executive officer’s achievement of specific goals; the financial performance of the Company; and the executive officer’s overall compensation. The Company does not have a policy addressing whether the executives’ bonuses would be adjusted in the event the Company’s financial statements are later restated.

Stock Based Compensation.    The Company from time to time grants stock-based compensation, such as stock options and stock appreciation rights (“SARs”), to its executive officers. These forms of compensation are intended to provide further incentive for the executive officers to contribute towards meeting the Company’s goals by (i) aligning part of the executives’ compensation with the overall performance of the Company and (ii) encouraging the executives to remain with the Company at least through the vesting period of the award (typically three to five years).

The Company has two stock plans, the 1999 Equity Participation Plan (the “1999 Plan”) and the 2002 Equity Participation Plan (the “2002 Plan”). Both the 1999 Plan and the 2002 Plan were approved by the shareholders of the Company. Under these plans, the Company may grant stock options and other forms of stock-based compensation. The exercise prices of awards granted under these plans may not be less than the fair value of the underlying shares on the date of grant.

In the past two years, the Company has also granted SARs outside these plans. These SARs are payable in cash only.

Long-Term Incentives.    The Company has from time to time entered agreements with its executive officers to induce them to remain with the Company and to provide them with protection in the event of adverse changes in their employment conditions.

Other Benefits.    Executive officers may participate in various employee benefits offered to employees generally, including medical, dental and vision insurance coverage and the Company’s matching contributions to its 401(k) plan. The Company may also from time to time provide other benefits to specific executive officers, such as use of a Company automobile or an automobile allowance.

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Employment Agreements

Larry Faigin.    Mr. Faigin is employed pursuant to an Employment Agreement dated March 7, 2006. Under the Employment Agreement, Mr. Faigin is entitled to a base salary of $275,000 for 2006, $285,000 for 2007, $295,000 for 2008, and an amount to be agreed upon each year thereafter, but in no event less than his base salary in the prior year. The base salaries for Mr. Faigin were set at levels the Compensation Committee believed were approximately the average of base salaries of chief executive officers of similar-sized banks in Southern California at the time the parties entered into the Employment Agreement. The Employment Agreement contemplates that each year the Company and Mr. Faigin will negotiate in good faith to establish an incentive compensation plan for him for the year. The Company may terminate Mr. Faigin’s employment at any time with or without cause. If the Company terminates Mr. Faigin’s employment without cause, or Mr. Faigin terminates his employment under circumstances constituting “good reason,” Mr. Faigin will be entitled to a continuation of base salary and benefits until the later to occur of two years from the date of termination or December 31, 2008. “Good reason” includes, among other things, a change of control of the Company, the failure of the Board of Directors to nominate Mr. Faigin as a director, or the appointment of any officer senior to Mr. Faigin. Mr. Faigin may terminate his employment at any time upon 60 days’ written notice.

In July 2007 the Company and Mr. Faigin amended his Employment Agreement. The amendment provides that Mr. Faigin will be entitled to receive a stay bonus equal to 150% of his base salary if he is an employee either 60 days after a change in control or on December 31, 2008. He is also entitled to this payment if the Company terminates his employment without cause or he terminates his employment for good reason prior to December 31, 2008. The Board approved this amendment because in June 2007 the Company engaged an investment banking firm as its financial advisor to assist the Company in reviewing its strategic alternatives, including whether a sale of the Company would be in the best interests of the stockholders. The Board approved similar arrangements with the other executive officers. The Board determined that these arrangements were advisable and in the best interests of the Company and its stockholders as they would motivate Mr. Faigin and the other executive officers to remain with the Company notwithstanding the uncertainty about their future employment should the Company become involved in negotiations for a sale of the Company.

Eric Rosa.    Mr. Rosa was employed pursuant to an Employment Agreement dated October 31, 2006. Mr. Rosa’s Employment Agreement provided for a base salary of $250,000 per year, a signing bonus of $150,000, 30,000 SARS payable in cash, and discretionary performance bonuses. Mr. Rosa was entitled to severance equal to continuation of his base salary through December 31, 2008 if prior to that date the Company terminated his employment without cause or he terminated his employment for good reason. Mr. Rosa’s employment terminated in January 2008, and he did not receive any severance under his Employment Agreement in connection with such termination.

2007 Compensation

The following discusses the compensation paid or awarded for 2007 to the Chief Executive Officer, the Chief Financial Officer and each other Named Executive Officer.

Base Salary.    In fiscal 2007, the Compensation Committee utilized the DFI’s Annual Executive Officer & Director Compensation Survey to assist in determining whether to adjust base salaries. In general, the Compensation Committee sets base salaries within the peer group average for comparable positions.

The base salaries for Mr. Faigin and Mr. Rosa were determined pursuant to their respective Employment Agreements.

Ms. Vecchio’s base salary was increased in May 2006 in connection with her promotion to Chief Credit Officer and her base salary did not change in 2007 because the Board believed her base salary was appropriate.

Mr. Kolasinski’s base salary was not increased due to his stay bonus agreement pursuant to which he would receive stay bonuses if he remained in employment with the Company through January 1, 2008.

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Mr. Sasaki’s base salary was increased from $150,000 to $200,000 to reflect additional responsibilities in 2007 and to bring his base salary to a level more comparable to other executive officers of the Company and peer averages for chief financial officers of similar-sized banks.

Performance Bonuses.    Mr. Faigin’s Employment Agreement provides that each year he and the Company will negotiate in good faith to establish an incentive compensation plan for him. Mr. Faigin’s plan for 2007 provided that he would receive a bonus ranging from $150,000 to $500,000 based on the Company’s consolidated earnings excluding extraordinary or unusual events, satisfactory ratings from regulatory examinations and internal audits and absence of regulatory restrictions on dividends. Mr. Faigin’s bonus could be zero if the above criteria were not met. The earnings condition did not include quantitative target levels, and no weights or amounts were assigned to any component of the bonus. Based on the Company’s results of operations for the year, Mr. Faigin did not receive a performance bonus for 2007.

None of the named executive officers other than Mr. Faigin had specific individual goals upon which their performance bonuses for 2007 were based. Their performance bonuses for 2007 were lower than in prior years because the Company’s results of operations were not as good as in the prior several years and because they (with the exception of Mr. Kolasinski) received stay bonus agreements entitling them to stay bonuses for remaining employed by the Company through December 31, 2008 (see Long-Term Incentives below). Based on these factors, Mr. Sasaki received a cash bonus of $55,000 for 2007 and Ms. Vecchio received a cash bonus of $40,000. Mr. Kolasinski did not receive a cash bonus for 2007 because he received a stay bonus payment of $150,000 in January 2008, and Mr. Rosa did not receive a performance bonus for 2007 as his employment terminated prior to the consideration of bonuses by the Compensation Committee.

Stock-Based Compensation.    In January 2007, the Company granted SARs with respect to 30,000 shares to Mr. Rosa as required by his Employment Agreement. The SARs terminated upon termination of Mr. Rosa’s employment in January 2008. The SARs were exercisable at $7.80 per share (the fair market value of the common stock on the date of grant), were payable in cash only, and were to vest in three equal annual installments of 10,000 shares beginning January 25, 2008.

In June 2007, the Company granted SARs with respect to 400,000 shares to Mr. Faigin. The SARs are exercisable at $7.86 per share, are payable in cash only and expire on September 27, 2008. These SARs were granted at the time the Company engaged an investment banking firm as its financial advisor to assist the Company in reviewing its strategic alternatives. The Board granted the SARS in order to provide further incentive for Mr. Faigin to remain with the Company through the consummation of a potential sale. In this regard, the Board considered that his existing stock options have an exercise price of $10.50 per share, and thus Mr. Faigin would be unlikely to realize any financial benefit from the options in the event of a sale of the Company within the next one to two years, given the then current market price of the common stock. For this reason, the Company set an expiration date for the SARs of 15 months from the grant date, instead of a more typical three to five years.

Long-Term Incentives.    The Company has entered into various other agreements with its named executive officers to induce them to remain with the Company and to provide them with protection in the event of adverse changes in their employment conditions.

In 2004 the Company entered into a stay bonus agreement with Craig Kolasinski. This agreement provided that Mr. Kolasinski would receive a cash bonus of $300,000 if he remained as an employee through January 1, 2007 and an additional cash bonus of $150,000 if he remained as an employee through January 1, 2008. Mr. Kolasinski would receive a prorated portion of these bonuses if his employment terminated prior to these dates due to death, disability, termination by the Company without cause or termination by Mr. Kolasinski for good reason. Because Mr. Kolasinski remained employed by the Company through January 1, 2008, he received both stay bonuses.

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As discussed above, in June 2007 the Company engaged an investment banking firm as its financial advisor to assist the Company in reviewing its strategic alternatives, including whether a sale of the Company would be in the best interests of the stockholders. Because of this, the Board approved amendments to existing change of control agreements for Messrs. Sasaki and Rosa and Ms. Vecchio and provided stay bonus agreements to these executive officers. In addition, as discussed above, the Company amended Mr. Faigin’s Employment Agreement to provide a stay bonus. The Board effected these changes to encourage these executive officers to remain as employees in this period of uncertainty regarding their future employment.

Each amended change of control agreement provides that, in the event of a change in control of the Company or Bank, the executive officer would be entitled to receive a severance payment if at any time following the execution of a definitive agreement for a change of control and one year after a change in control either of the following occurs: (i) the executive’s employment is involuntarily terminated by the Company or the Bank for any reason other than cause or death or disability or (ii) the executive officer terminates his or her employment for “good reason”, as defined in the change of control agreement. The amount of the severance payment for each executive is a multiple of his or her base salary less any stay bonus received by the executive. The multiple is three for Ms. Vecchio and Mr. Rosa, and two and one-half for Mr. Sasaki. Mr. Rosa’s change of control agreement terminated in January 2008 upon termination of his employment.

Each stay bonus agreement provides that the executive officer will be entitled to receive a stay bonus payment if the executive is an employee either 60 days after a change in control (as defined in the agreement) or on December 31, 2008. The amount of the stay bonus for Mr. Rosa and Ms. Vecchio would be equal to their annual base salary, and the amount of the stay bonus for Mr. Sasaki would be equal to 18 months’ base salary. Mr. Rosa received his stay bonus in connection with the termination of his employment in January 2008.

The Company also has a change of control agreement with Mr. Kolasinski. This agreement was amended in February 2008 to be in the form of the amended change of control agreement provided to the other executive officers in 2007. The amount of the severance payment for Mr. Kolasinski is his annual base salary.

Compensation Committee Report

The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis with the Company’s management. Based on such review and discussions, the Compensation Committee recommended to the board of directors that the Compensation Discussion and Analysis be included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007, for filing with the Securities and Exchange Commission.

COMPENSATION COMMITTEE

Robert H. Kanner, Chair

Howard Amster

Kathleen L. Kellogg

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Summary Compensation Table

The following table sets forth the total compensation paid or accrued by the Company for services rendered during the year ended December 31, 2007 to (i) the principal executive officer, (ii) the principal financial officer and (iii) each of the three other most highly compensated executive officers of the Company who were serving as executive officers at December 31, 2007 (the “Named Executive Officers”).

Summary Compensation Table

Name and Principal Position	Year	Salary ($)			Bonus ($)		Option Awards ($)			Non-Equity Incentive Plan Compen- sation ($)			All Other Compen- sation ($)			Total Compen- sation ($)
Larry B. Faigin	2007	$	285,000		$	—	$	284,892	(2)	$	—		$	26,916	(3)	$	596,808
Chief Executive Officer	2006	$	275,000		$	—	$	225,780		$	430,406		$	26,308		$	957,494
	2005	$	91,667	(1)	$	—	$	—		$	—		$	—		$	91,667
Takeo K. Sasaki	2007	$	181,481		$	55,000	$	—		$	—		$	11,267	(4)	$	247,748
Executive Vice President and Chief Financial Officer	2006	$	150,000		$	95,000	$	438		$	—		$	10,618		$	256,056
	2005	$	146,667		$	82,000	$	—		$	—		$	11,151		$	239,818
Craig W. Kolasinski	2007	$	185,000		$	—	$	—		$	300,000	(7)	$	6,888	(4)	$	491,888
Executive Vice President of Development, FBBH	2006	$	185,000		$	—	$	2,189		$	—		$	7,579		$	194,768
	2005	$	185,000		$	160,000	$	—		$	—		$	11,383		$	356,383
Annette J. Vecchio	2007	$	225,000		$	40,000	$	—		$	—		$	11,316	(4)	$	276,316
Executive Vice President and Chief Credit Officer, FBBH	2006	$	193,750		$	85,000	$	2,573		$	—		$	10,440		$	291,763
	2005	$	135,000		$	82,000	$	—		$	—		$	6,546		$	223,546
Eric C. Rosa (5)	2007	$	250,000		$	—	$	416	(2)	$	—		$	21,875	(6)	$	272,291
Executive Vice President and Chief Lending Officer, FBBH	2006	$	34,135	(5)	$	150,000	$	—		$	—		$	—		$	184,135

(1) Mr. Faigin was appointed Chief Executive Officer in August 2005.

(2) This amount represents the 2007 compensation cost of options and SARs granted in 2007 and prior years, as determined in accordance with Statement of Financial Accounting Standards No. 123R. The assumptions made in determining the value of the option awards are discussed in Note 4 (“Stock-Based Compensation”) of Notes to the Consolidated Financial Statements.

(3) Amount includes Company matching contributions to 401(k) plan of $14,916 and an automobile allowance of $12,000.

(4) Amount represents Company matching contributions to 401(k) plan.

(5) Mr. Rosa was named Chief Lending Officer in November 2006. Mr. Rosa’s employment terminated in January 2008.

(6) Amount includes Company matching contributions to 401(k) plan of $9,875 and an automobile allowance of $12,000.

(7) Amount represents stay bonus paid in January 2007.

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Grants of Plan-Based Awards

The following table provides information concerning option awards granted by the Company during the year ended December 31, 2007 to named executive officers.

Grants of Plan-Based Awards

Name	Grant Date	Date of Board of Directors Action	Estimated possible payouts under Non- Equity Incentive Plan Awards				Number of Securities Underlying SARs (#)	Exercise or Base Price of SAR Awards ($/Sh)		Grant Date Fair Value of SAR Awards ($)
			Threshold($)		Maximum($)
Larry B. Faigin
SAR	6/28/2007	6/28/2007					400,000	$	7.86	$	206,556
2007 Incentive Compensation Plan	6/28/2007	6/28/2007	$	150,000	$	500,000
2007 Incentive Compensation Plan	6/28/2007	6/28/2007	$	427,500	$	427,500
Eric C. Rosa
SAR	1/25/2007	1/25/2007					30,000	$	7.80	$	18,258

Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards

Mr. Faigin’s employment agreement provided for a base salary of $285,000 for the year 2007. In July 2007 the Company and Mr. Faigin amended his Employment Agreement. The amendment provides that Mr. Faigin will be entitled to receive a stay bonus equal to 150% of his base salary if he is an employee either 60 days after a change in control or on December 31, 2008. He is also entitled to this payment if the Company terminates his employment without cause or he terminates his employment for good reason prior to December 31, 2008. Mr. Faigin’s Employment Agreement provides that each year he and the Company will negotiate in good faith to establish an incentive compensation plan for him. Mr. Faigin’s plan for 2007 provided that he would receive a bonus ranging from $150,000 to $500,000 based on the Company’s consolidated earnings excluding extraordinary or unusual events, satisfactory ratings from regulatory examinations and internal audits and absence of regulatory restrictions on dividends. Mr. Faigin’s bonus could be zero if the above criteria were not met. The earnings condition did not include quantitative target levels, and no weights or amounts were assigned to any component of the bonus. Based on the Company’s results of operations for the year, Mr. Faigin did not receive a performance bonus for 2007.

Mr. Faigin’s SARs are exercisable at $7.86 per share and payable in cash only. They were vested upon issuance and expire on September 27, 2008.

Mr. Rosa’s SARs are exercisable at $7.80 per share and payable in cash only. His SARs vest in three equal annual installments of 10,000 shares beginning January 25, 2008, and expire on January 25, 2012.

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Outstanding Equity Awards at Fiscal Year-End

The following table sets forth the outstanding equity awards at December 31, 2007 for the Named Executive Officers.

Outstanding Equity Awards at Fiscal Year-End

	Number of Securities Underlying Unexercised Options/SARs (#)			Option Exercise Price ($)		Option Expiration Date
Name	Exercisable	Unexercisable
Larry B. Faigin	200,000	400,000	(1)	$	10.50	1/3/2016
	400,000	—			7.86	9/27/2008
Annette J. Vecchio	12,000	24,000	(2)		8.23	9/28/2011
Eric C. Rosa	—	30,000	(3)		7.80	1/25/2012

(1) Mr. Faigin’s options vest in quarterly installments of 50,000 and vest in full on October 1, 2008.

(2) Ms. Vecchio’s SARs vest in annual installments of 12,000 and vest in full on September 28, 2009.

(3) Mr. Rosa’s SARs vest in annual installments of 10,000 and vest in full on January 25, 2012.

Option Exercises

The following table presents the number and value of shares received upon the exercise of options during 2007 for the Named Executive Officers.

Option Exercises

Name	Number of Shares Acquired on Exercise (#)	Value Realized on Exercise ($)
Takeo K. Sasaki	5,928	$	27,205
Craig W. Kolasinski	60,000		285,450

Potential Payments Upon Termination or Change in Control

Mr. Faigin’s employment agreement provides that if he is terminated by the Company without cause or he resigns for “Good Reason” (as defined in the agreement, which includes a change in control of the Company), he would be entitled to receive a continuation of his base salary and benefits as provided for in his employment agreement for two years following the change in control. This agreement requires that for two years following his termination, Mr. Faigin shall comply with certain provisions, including, but not limited to (1) a covenant not to participate in a business that is in competition with the Company and (2) a covenant not to offer employment to any person still employed by the Company. In addition, in the event Mr. Faigin is terminated without cause or there is a change in control of the Company, all of his unexercised stock options would immediately vest and become exercisable.

The Company has change of control agreements with Ms. Vecchio and Messrs. Sasaki and Rosa. The change of control agreement provides that, in the event of a change in control of the Company or Bank, the executive officer would be entitled to receive a severance payment if at any time following the execution of a definitive agreement for a change of control and one year after a change in control either of the following occurs: (i) the executive’s employment is involuntarily terminated by the Company or the Bank for any reason other than cause or death or disability or (ii) the executive officer terminates his or her employment for “good reason”, as defined in the change of control agreement. The amount of the severance payment for each executive is a multiple of his or her base salary less any stay bonus received by the executive. The multiple is three for Ms. Vecchio and Mr. Rosa, and two and one-half for Mr. Sasaki. Mr. Rosa’s change of control agreement terminated in January 2008 upon termination of his employment.

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Each stay bonus agreement provides that the executive officer will be entitled to receive a stay bonus payment if the executive is an employee either 60 days after a change in control (as defined in the agreement) or on December 31, 2008. The amount of the stay bonus for Mr. Rosa and Ms. Vecchio would be equal to their annual base salary, and the amount of the stay bonus for Mr. Sasaki would be equal to 18 months’ base salary. Mr. Rosa received his stay bonus in connection with the termination of his employment in January 2008.

The Company also has a change of control agreement with Mr. Kolasinski. This agreement was amended in February 2008 to be in the form of the amended change of control agreement provided to the other executive officers in 2007. The amount of the severance payment for Mr. Kolasinski is his annual base salary.

The following table summarizes the potential payments to the Company’s named executive officers upon their termination, assuming such termination occurred on December 31, 2007 and such termination did not follow a change of control (see table following this table).

Termination Payments and Benefits

Name	Termination Payments ($)		Health Benefits ($)	Unexercised Options / SARs ($) (3)	Total ($)
Larry B. Faigin
By Company for “Cause”	—		N/A	—	—
By Company without “Cause”	1,017,500	(1)	6,345	—	1,023,845
Resignation	—		N/A	—	—
Resignation for “Good Reason”	1,017,500	(1)	6,345	—	1,023,845
Takeo K. Sasaki
By Company for “Cause”	—		N/A	N/A	—
By Company without “Cause”	300,000	(2)	N/A	N/A	300,000
Resignation	—		N/A	N/A	—
Resignation for “Good Reason”	300,000	(2)	N/A	N/A	300,000
Annette J. Vecchio
By Company for “Cause”	—		N/A	—	—
By Company without “Cause”	225,000	(2)	N/A	—	225,000
Resignation	—		N/A	—	—
Resignation for “Good Reason”	225,000	(2)	N/A	—	225,000
Eric C. Rosa
By Company for “Cause”	—		N/A	—	—
By Company without “Cause”	250,000	(2)	N/A	—	250,000
Resignation	—		N/A	—	—
Resignation for “Good Reason”	250,000	(2)	N/A	—	250,000
Craig W. Kolasinski
By Company for “Cause”	—		N/A	N/A	—
By Company without “Cause”	150,000	(2)	N/A	N/A	150,000
Resignation	—		N/A	N/A	—
Resignation for “Good Reason”	150,000	(2)	N/A	N/A	150,000
Death	150,000	(2)	N/A	N/A	150,000
Disability	150,000	(2)	N/A	N/A	150,000

(1) Amount represents two years salary continuation totaling $590,000 and payment of $427,500 pursuant to stay bonus agreement.

(2) Represents payment pursuant to stay bonus agreement.

(3) No values for unexercised options or SARs are provided as the Company’s closing stock price of $5.14 as of December 31, 2007, was below the exercise prices.

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No named executive officer is entitled to any payment based solely upon the occurrence of a change of control. The following table sets forth the amount of payments that would be due named executive officers upon specified conditions following a change of control assuming a change of control had occurred on December 31, 2007. Amounts under “Termination of Employment” are based on termination of employment by the Company without cause or termination of employment by the executive officer for “good reason” within one year following the change of control.

Payments and Benefits Following a Change of Control

Name	Termination Payments ($) (1) (2)		Health Benefits ($)	Unexercised Options / SARs ($) (6)	Total ($)
Larry B. Faigin
Stay bonus	427,500	(3)	N/A	—	427,500
Termination of Employment (4)	1,017,500	(5)	6,345	—	1,023,845
Takeo K. Sasaki
Stay bonus	300,000	(3)	N/A	N/A	300,000
Termination of Employment	500,000		N/A	N/A	500,000
Annette J. Vecchio
Stay bonus	225,000	(3)	N/A	—	225,000
Termination of Employment	675,000		N/A	—	675,000
Eric C. Rosa
Stay bonus	250,000	(3)	N/A	—	250,000
Termination of Employment	750,000		N/A	—	750,000
Craig W. Kolasinski
Stay bonus	150,000	(3)	N/A	N/A	150,000
Termination of Employment	335,000		N/A	N/A	335,000
Death	150,000		N/A	N/A	150,000
Disability	150,000		N/A	N/A	150,000

(1) Unless otherwise noted all payments are lump sum payments.

(2) All payments based on Termination of Employment are reduced by the stay bonus payment if such payment had been made.

(3) Payable only if executive is employed on the 60th day following the change of control.

(4) For Mr. Faigin only, “Good Reason” includes, among other things, the occurrence of a change of control.

(5) Amount represents two years salary continuation totaling $590,000 and stay bonus amount of $427,500.

(6) No values for unexercised options or SARs are provided as the Company’s closing stock price of $5.14 as of December 31, 2007, was below the exercise prices.

Director Compensation

All of the members of our Board of Directors serve as directors of BHBC and the Bank. Officers and employees of the BHBC and the Bank who also serve as directors do not receive any retainer or additional fees for serving as a director. For 2007, Directors Kellogg, King and Lannan received a yearly stipend of $60,000, and directors Amster, Glennon and Kanner accepted a reduced yearly stipend of $30,000. The chair of the Audit Committee receives an additional yearly stipend of $30,000, and the chair of the Compensation Committee receives additional yearly stipend of $5,000.

The Chairman of the Board of the Bank receives an additional yearly stipend of $30,000. The chairs of the Bank’s Asset and Liability Committee and Internal Asset Review Committee receive additional yearly stipends of $10,000.

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The following table sets forth the compensation of the Company’s non-employee directors for the year ended December 31, 2007.

Name	Fees Earned or Paid in Cash ($)		Option Awards ($) (1)			Total ($)
Howard Amster	$	30,000	$	—	(2)	$	30,000
Stephen P. Glennon		40,000		—	(3)		40,000
Robert H. Kanner		30,417		—	(4)		30,417
Kathleen L. Kellogg		74,167		—	(5)		74,167
William D. King		120,000		—	(6)		120,000
John J. Lannan		60,000		—	(7)		60,000

(1) No compensation expense was recorded in 2007 for SARs granted in 2006 as the stock price for the Company’s common stock was below the exercise price of the SARs. The assumptions made in determining the value of the awards are discussed in Note 4 (“Stock-Based Compensation”) of Notes to the Consolidated Financial Statements.

(2) Mr. Amster had 50,000 options to purchase 50,000 shares and 30,000 SARs outstanding at December 31, 2007.

(3) Mr. Glennon had 30,000 SARs outstanding at December 31, 2007.

(4) Mr. Kanner had 23,334 options to purchase 23,334 shares and 30,000 SARs outstanding at December 31, 2007.

(5) Ms. Kellogg had 30,000 SARs outstanding at December 31, 2007.

(6) Mr. King had 30,000 SARs outstanding at December 31, 2007.

(7) Mr. Lannan had 30,000 SARs outstanding at December 31, 2007.

Compensation Committee Interlocks and Insider Participation

Directors Amster, Kanner and Kellogg served on the Compensation Committee of the Board of Directors during 2007. Ms. Kellogg was the chair of the Compensation Committee during 2007 until replaced by Mr. Kanner in October 2007. None of the members of the Compensation Committee is or was an officer or employee of the Company or any of its subsidiaries, and during 2007 there existed no interlocking relationship between any member of the Compensation Committee and any member of any other company’s board of directors or compensation committee of the type required to be disclosed under Section 404 of Regulation S-K of the Securities Act.

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

The following table shows, as of February 15, 2008, the beneficial ownership of common stock with respect to (i) each person who was known by the Company to own beneficially more than 5% of the outstanding shares of common stock, (ii) each director, (iii) each Named Executive Officer, and (iv) all directors and executive officers as a group.

Name, Title and Address of Beneficial Owner	Amount and Nature of Beneficial Ownership(1)		Percent of Class
Wilshire 19, LLC (2)	1,538,800		8.2	%
Namco Financial, Inc. (2)
Ezri Namvar (2) 12121 Wilshire Blvd., Suite 1400 Los Angeles, CA 90025
Dimensional Fund Advisors LP 1299 Ocean Avenue Santa Monica, CA 90401	1,507,422	(3)	8.0	%
Directors and executive officers:
Larry B. Faigin (4)	667,550	(5)	3.5	%
Howard Amster 23811 Chagrin Blvd. #200 Beachwood, OH 44122	1,586,512	(6)	8.4	%
Stephen P. Glennon (4)	626,789		3.3	%
Robert H. Kanner 3830 Kelley Ave Cleveland, OH 44114	1,120,001	(7)	6.0	%
Kathleen L. Kellogg (4)	15,000			*
William D. King (4)	51,250			*
John J. Lannan (4)	502,100		2.7	%
Takeo K. Sasaki (4)	5,928			*
Annette J. Vecchio (4)	7,040			*
Bryce W. Miller (4)	7,059			*
Craig W. Kolasinski (4)	60,000			*
All directors and executive officers as a group (11 persons)	4,644,229	(8)	24.0	%

(1) Amounts include stock options vesting within 60 days of February 15, 2008.

(2) These beneficial owners have shared voting and dispositive power with respect to 1,538,800 shares.

(3) Dimensional Fund Advisors LP (formerly, Dimensional Fund Advisors Inc.) (“Dimensional”), an investment advisor registered under Section 203 of the Investment Advisors Act of 1940, furnishes investment advice to four investment companies registered under the Investment Company Act of 1940, and serves as investment manager to certain other commingled group trusts and separate accounts. These investment companies, trusts and accounts are the “Funds.” In its role as investment advisor or manager, Dimensional possesses investment and/or voting power over the shares that are owned by the Funds, and may be deemed to be the beneficial owner of the shares held by the Funds. However, all shares are owned by the Funds. Dimensional disclaims beneficial ownership of such shares.

(4) The address for this stockholder is c/o Beverly Hills Bancorp Inc., 23901 Calabasas Road, Suite 1050, Calabasas, CA 91302.

(5) Includes 500,000 shares that may be acquired upon the exercise of options.

(6) Includes 50,000 shares that may be acquired upon the exercise of options.

(7) Includes 23,334 shares that may be acquired upon the exercise of options.

(8) Includes 573,334 shares that may be acquired upon the exercise of options.

 * Less than 1%

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The following table presents information as of December 31, 2007 regarding compensation plans under which equity securities of the Company are authorized for issuance to employees and non-employees for services:

Plan Category	Number of securities to be issued upon exercise of outstanding options	Weighted-average exercise price of outstanding options		Number of securities remaining available for future issuance under equity compensation plans
Equity compensation plans approved by security holders	675,002	$	9.63	580,935
Equity compensation plans not approved by security holders	—		—	—
Total	675,002	$	9.63	580,935

ITEM 13. Certain Relationships and Related Transactions

Related Party Transactions

The Company has written policies and procedures that govern the review and approval of all transactions with affiliates and related persons. These policies cover the following types of transactions:

• Any loan to a related person;

• A purchase under repurchase agreement of securities, other assets or obligations;

• An advance by means of an overdraft, cash item, or otherwise;

• Issuance of a standby letter of credit or other similar arrangement;

• An acquisition by discount, purchase, exchange, or otherwise of any note, draft, bill or exchange, or other evidence of indebtedness upon which a related person may be liable as maker, drawer, endorser, guarantor, or surety;

• An increase of an existing indebtedness, but not if the additional funds are advanced by the Company for its own protection for accrued interest or taxes, insurance, or other expenses incidental to the existing indebtedness;

• An advance of unearned salary or other unearned compensation for a period in excess of 30 days; and

• Any other similar transaction as a result of which a person becomes obligated to pay money to the Company, whether the obligation arises directly or indirectly, or because of an endorsement on an obligation or otherwise.

The Company’s policy is to ensure proper adherence to the provisions and intent of Federal banking regulations with respect to transactions with affiliates and related persons. These regulations require, among other things, that an extension of credit (1) be made on substantially the same terms as those prevailing at the time for comparable transactions with other persons who are not related and (2) must not include more than the normal risk of repayment or present other favorable features.

On an annual basis, the board of directors reviews and approves the Company’s policies and procedures with respect to transactions with related persons.

Director Independence

The Company’s Board of Directors has determined that Howard Amster, Stephen P. Glennon, Robert H. Kanner, Kathleen L. Kellogg and William D. King are “independent” directors within the listing standards of the Nasdaq Stock Market. In making this determination, the Board considered whether the director had any

63

relationship with the Company which, in the opinion of the board of directors, would interfere with the director’s exercise of independent judgment in carrying out his or her responsibilities.

ITEM 14. Principal Accountant Fees and Services

Principal Accounting Firm Fees

Aggregate fees billed to the Company for the fiscal years ended December 31, 2007 and 2006 by the Company’s principal accounting firm, Deloitte & Touche LLP, the member firms of Deloitte Touche Tohmatsu, and their respective affiliates (collectively, “Deloitte & Touche”), were as follows:

	Year ended December 31,
	2007		2006
	(Dollars in thousands)
Audit fees	$	650	$	560
Audit-related fees		—		—
Total audit and audit-related fees		650		560
Tax fees (a)		151		153
All other fees		—		—
Total fees	$	801	$	713

(a) Includes fees for tax compliance and tax consulting services, including tax planning and tax research. The Audit Committee of the Board of Directors determined that the provision of such services is compatible with maintaining the principal accountant’s independence.

Pre-Approval Policy

The services performed by Deloitte & Touche in 2007 and 2006 were pre-approved in accordance with the pre-approval policy and procedures adopted by the Audit Committee. This policy describes the permitted audit, audit-related, tax, and other services (collectively, the “Disclosure Categories”) that Deloitte & Touche may perform. The policy requires that prior to the beginning of each fiscal year, a description of the services (the “Service List”) expected to be performed by Deloitte & Touche in each of the Disclosure Categories in the following fiscal year be presented to the Audit Committee for approval.

Any requests for audit, audit-related, tax, and other services not contemplated on the Service List must be submitted to the Audit Committee for specific pre-approval and may not commence until such approval has been granted. Normally, pre-approval is provided at regularly scheduled meetings. However, the Audit Committee has delegated its duties to pre-approve auditing services and permitted non-audit services to its chairman. The chairman must update the Audit Committee at the next regularly scheduled meeting of any services that were granted specific pre-approval.

In addition, although not required by the rules and regulations of the SEC, the Audit Committee generally requests an estimate of the maximum fees associated with each proposed service on the Service List and any services that were not originally included on the Service List. Providing an estimate of the maximum fees for a service incorporates appropriate oversight and control of the Company’s relationship with Deloitte & Touche, while permitting the Company to receive immediate assistance from Deloitte & Touche when time is of the essence.

On a quarterly basis, the Audit Committee reviews the status of services and fees incurred year-to-date against the original Service List and the forecast of remaining services and fees for the fiscal year.

64

The policy contains a de minimis provision that permits retroactive approval for permissible non-audit services under certain circumstances. The provision allows for the pre-approval requirement to be waived if all of the following criteria are met:

1. The service is not an audit, review or other attest service;

2. The aggregate amount of all such services provided under this provision does not exceed 5% of total fees paid to Deloitte & Touche in a given fiscal year;

3. Such services were not recognized at the time of the engagement to be non-audit services;

4. Such services are promptly brought to the attention of the Audit Committee and approved by the Audit Committee or its designee prior to the completion of the audit; and

5. The service and fee are specifically disclosed in the Proxy Statement as meeting the de minimis requirements.

65

PART IV

ITEM 15. Exhibits and Financial Statement Schedules

(a) Financial Statements

See Index to Financial Statements immediately following Exhibit Index.

(b) Exhibits

See Exhibit Index immediately following the signature page.

66

SIGNATURES

Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf on March 17, 2008 by the undersigned, thereunto duly authorized.

BEVERLY HILLS BANCORP INC.
By:	/s/ LARRY B. FAIGIN
	Larry B. Faigin
	Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on March 17, 2008 by the following persons on behalf of the Registrant and in the capacities indicated.

	Signature	Title
By	/S/    LARRY B. FAIGIN Larry B. Faigin	Chairman of the Board and Chief Executive Officer
By	/S/    TAKEO K. SASAKI Takeo K. Sasaki	Chief Financial Officer
By	/S/    HOWARD AMSTER Howard Amster	Director
By	/S/    STEPHEN P. GLENNON Stephen P. Glennon	Director
By	/S/    ROBERT H. KANNER Robert H. Kanner	Director
By	/S/    KATHLEEN L. KELLOGG Kathleen L. Kellogg	Director
By	/S/    WILLIAM D. KING William D. King	Director
By	/S/    JOHN J. LANNAN John J. Lannan	Director

67

Exhibit Index

The following exhibits are filed as part of this report.

3.1	Certificate of Incorporation, as amended (incorporated by reference to the Company’s Report on Form 10-Q as filed on November 7, 2005)
3.2	Third Amended and Restated Bylaws (incorporated by reference to the Company’s Report on Form 10-Q as filed on August 13, 2004)
4.1	Trust Indenture dated July 11, 2002 between Wilshire Acquisitions Corporation and Wilmington Trust Company (incorporated by reference to the Company’s Report on Form 10-K as filed on March 31, 2006)
4.2	Form of Beverly Hills Bancorp Inc. Floating Rate Junior Subordinated Debt Security due 2036 (incorporated by reference to the Company’s Report on Form 8-K as filed on May 22, 2006)
4.3	Form of Beverly Hills Bancorp Inc. Floating Rate Junior Subordinated Debt Security due 2037 (incorporated by reference to the Company’s Report on Form 8-K as filed on January 3, 2007)
10.1	Amended and Restated Stock Purchase Agreement dated April 30, 2004 by and between the Company and Merrill Lynch Mortgage Capital Inc. (incorporated by reference to the Company’s Report on Form 8-K as filed on May 14, 2004)
10.2	Amended and Restated 1999 Equity Participation Plan dated January 31, 2001 (incorporated by reference to the Company’s Report on Form 10-K as filed on March 30, 2001)
10.3	2002 Equity Participation Plan (incorporated by reference to the Company’s Report on Form 10-Q as filed on August 14, 2002)
10.4	Lease dated June 28, 2004 between Century National Properties, Inc. and First Bank of Beverly Hills (incorporated by reference to the Company’s Report on Form 10-K as filed on March 16, 2005)
10.5	Change In Control Agreement dated November 1, 2003 between First Bank of Beverly Hills and Craig W. Kolasinski (incorporated by reference to the Company’s Report on Form 10-K dated March 16, 2005)
10.6	Stay Bonus Agreement dated January 1, 2004 between First Bank of Beverly Hills and Craig W. Kolasinski (incorporated by reference to the Company’s Report on Form 10-K dated March 16, 2005)
10.7	Employment Agreement between Beverly Hills Bancorp Inc. and Larry B. Faigin dated March 7, 2006 (incorporated by reference to the Company’s Report on Form 10-Q as filed on May 5, 2006)
10.8	Incentive Stock Option Agreement between Beverly Hills Bancorp Inc. and Larry B. Faigin dated January 3, 2006 (incorporated by reference to the Company’s Report on Form 10-Q as filed on May 5, 2006)
10.9	Nonqualified Stock Option Agreement between Beverly Hills Bancorp Inc. and Larry B. Faigin dated January 3, 2006 (incorporated by reference to the Company’s Report on Form 10-Q as filed on May 5, 2006)
10.10	Placement Agreement, dated May 16, 2006, among Beverly Hills Bancorp Inc., Beverly Hills Bancorp Statutory Trust 2006, and ABN AMRO, Inc. (incorporated by reference to the Company’s Report on Form 8-K as filed on May 22, 2006)
10.11	Amended and Restated Declaration of Trust, dated May 16, 2006, among Beverly Hills Bancorp Inc., as sponsor, the Administrators named therein, Wilmington Trust Company, as institutional and Delaware trustee (incorporated by reference to the Company’s Report on Form 8-K as filed on May 22, 2006)

68

10.12	Guarantee Agreement, dated May 16, 2006, between Beverly Hills Bancorp Inc. and Wilmington Trust Company, as guarantee trustee (incorporated by reference to the Company’s Report on Form 8-K as filed on May 22, 2006)
10.13	Indenture, dated May 16, 2006, between Beverly Hills Bancorp Inc. and Wilmington Trust Company, as indenture trustee (incorporated by reference to the Company’s Report on Form 8-K as filed on May 22, 2006)
10.14	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 (incorporated by reference to the Company’s Report on Form 10-Q as filed on November 7, 2006)
10.15	Employment Agreement between First Bank of Beverly Hills and Eric Rosa dated October 31, 2006 (incorporated by reference to the Company’s Report on Form 10-K as filed on March 16, 2007)
10.16	Loan Agreement between the Company, Wilshire Acquisitions Corporation and First Tennessee Bank National Association dated November 30, 2006 (incorporated by reference to the Company’s Report on Form 10-K as filed on March 16, 2007)
*10.17	First Amendment to Loan Agreement Company, Wilshire Acquisitions Corporation and First Tennessee Bank National Association dated January 1, 2008
10.18	Revolving Credit Note Agreement between the Company and First Tennessee Bank National Association dated November 30, 2006 (incorporated by reference to the Company’s Report on Form 10-K as filed on March 16, 2007)
10.19	Commercial Guaranty Agreement between the Company and First Tennessee Bank National Association dated November 30, 2006 (incorporated by reference to the Company’s Report on Form 10-K as filed on March 16, 2007)
10.20	Purchase Agreement, dated December 28, 2006, among Beverly Hills Bancorp Inc., Beverly Hills Bancorp Statutory Trust II, and Zions First National Bank (incorporated by reference to the Company’s Report on Form 8-K as filed on January 3, 2007)
10.21	Amended and Restated Declaration of Trust among Beverly Hills Bancorp Inc., as sponsor, the Administrators named therein, and Wilmington Trust Company, as institutional and Delaware trustee (incorporated by reference to the Company’s Report on Form 8-K as filed on January 3, 2007)
10.22	Guarantee Agreement between Beverly Hills Bancorp Inc. and Wilmington Trust Company, as guarantee trustee (incorporated by reference to the Company’s Report on Form 8-K as filed on January 3, 2007)
10.23	Indenture between Beverly Hills Bancorp Inc. and Wilmington Trust Company, as indenture trustee (incorporated by reference to the Company’s Report on Form 8-K as filed on January 3, 2007)
10.24	Stock Appreciation Right Agreement dated January 25, 2007 between Beverly Hills Bancorp Inc. and Eric Rosa (incorporated by reference to the Company’s Report on Form 10-K as filed on March 16, 2007)
10.25	Amendment No. 1 to Employment Agreement between Beverly Hills Bancorp Inc. and Larry B. Faigin dated July 26, 2007 (incorporated by reference to the Company’s Report on Form 10-Q as filed on November 9, 2007)
*10.26	Form of Change In Control Agreement dated June 27, 2007 between First Bank of Beverly Hills and Bryce W. Miller, Eric C. Rosa, Takeo K. Sasaki and Annette J. Vecchio
*10.27	Form of Stay Bonus Agreement dated June 27, 2007 between First Bank of Beverly Hills and Bryce W. Miller, Eric C. Rosa, Takeo K. Sasaki and Annette J. Vecchio

69

*10.28	Stock Appreciation Right Agreement dated June 27, 2007 between Beverly Hills Bancorp Inc. and Larry B. Faigin
*21	Subsidiaries
*23	Consent of Independent Registered Public Accounting Firm
*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

* Filed herewith

70

INDEX TO FINANCIAL STATEMENTS

	Page
Beverly Hills Bancorp Inc. and Subsidiaries
Report of Independent Registered Public Accounting Firm	F-2
Consolidated Financial Statements:
Consolidated Statements of Financial Condition December 31, 2007 and 2006	F-3
Consolidated Statements of Operations Years ended December 31, 2007, 2006 and 2005	F-4
Consolidated Statements of Stockholders’ Equity Years ended December 31, 2007, 2006 and 2005	F-5
Consolidated Statements of Cash Flows Years ended December 31, 2007, 2006 and 2005	F-6
Notes to Consolidated Financial Statements	F-8

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Beverly Hills Bancorp Inc.

Calabasas, California

We have audited the accompanying consolidated statements of financial condition of Beverly Hills Bancorp Inc. and subsidiaries (the “Company”) as of December 31, 2007 and 2006, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2007. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Beverly Hills Bancorp Inc. and subsidiaries as of December 31, 2007 and 2006, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2007, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2007, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 17, 2008 expressed an unqualified opinion on the Company’s internal control over financial reporting.

/s/    Deloitte & Touche LLP

Los Angeles, California

March 17, 2008

F-2

BEVERLY HILLS BANCORP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Dollars in thousands)

	December 31,
	2007			2006
ASSETS
Cash and cash equivalents	$	12,964		$	27,005
Mortgage-backed securities available for sale, at fair value		413,875			460,893
Investment securities available for sale, at fair value		6,941			8,920
Investment securities held to maturity, at amortized cost (fair value of $10,147 in 2007 and $9,735 in 2006)		9,809			9,759
Loans, net of allowance for loan losses of $21,882 in 2007 and $7,977 in 2006		979,948			1,041,883
Stock in Federal Home Loan Bank of San Francisco, at cost		31,880			29,015
Real estate owned, net		44			577
Leasehold improvements and equipment, net		927			1,244
Accrued interest receivable		8,663			8,685
Income taxes receivable		3,601			—
Deferred tax asset, net		28,340			28,276
Goodwill		—			3,054
Prepaid expenses and other assets		3,122			4,525
TOTAL	$	1,500,114		$	1,623,836
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Noninterest-bearing deposits	$	886		$	2,038
Interest-bearing deposits		636,585			848,852
Total deposits		637,471			850,890
Short-term borrowings		—			20,000
Repurchase agreements		40,000			40,000
Federal Home Loan Bank advances		611,000			496,337
Junior subordinated notes payable to trusts		46,393			46,393
Accounts payable and other liabilities		17,142			14,778
Total liabilities		1,352,006			1,468,398
COMMITMENTS AND CONTINGENCIES (NOTE 14)
STOCKHOLDERS’ EQUITY:
Common stock, $0.01 par value, 30,000,000 shares authorized, 27,176,462 and 27,107,534 shares issued (including 8,389,368 treasury shares)		272			271
Additional paid-in capital		166,430			165,972
Treasury stock, 8,389,368 shares, at cost		(39,974	)		(39,974	)
Retained earnings		22,902			31,800
Accumulated other comprehensive loss		(1,522	)		(2,631	)
Total stockholders’ equity		148,108			155,438
TOTAL	$	1,500,114		$	1,623,836

See notes to consolidated financial statements

F-3

BEVERLY HILLS BANCORP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except per-share data)

	Year Ended December 31,
	2007		2006		2005
INTEREST INCOME:
Loans	$	78,191	$	67,527	$	60,895
Mortgage-backed securities		23,244		18,483		14,753
Securities and federal funds sold		1,700		2,157		1,749
Total interest income		103,135		88,167		77,397
INTEREST EXPENSE:
Deposits		38,604		31,702		17,623
Borrowings		33,755		23,470		20,720
Total interest expense		72,359		55,172		38,343
NET INTEREST INCOME		30,776		32,995		39,054
PROVISION FOR (RECAPTURE OF) LOSSES ON LOANS		14,356		957		(41	)
NET INTEREST INCOME AFTER PROVISION FOR (RECAPTURE OF) LOSSES ON LOANS		16,420		32,038		39,095
OTHER INCOME:
Federal Home Loan Bank stock dividend income		1,617		1,397		1,120
Gain on sale of Beverly Hills branch		—		8,531		—
Other income, net		669		108		712
Total other income		2,286		10,036		1,832
OTHER EXPENSES:
Compensation and employee benefits		7,230		7,069		6,773
Professional fees		2,518		3,644		3,555
Occupancy		600		930		989
Loan expenses		243		245		360
Regulatory assessments		212		145		338
Data processing		332		420		406
Insurance		608		686		689
Depreciation		364		366		327
Amortization of intangibles		—		—		129
Directors expense		417		407		539
Real estate owned, net		418		984		(187	)
Goodwill impairment charges		3,054		—		—
Other general and administrative expense		1,826		1,428		1,433
Total other expenses		17,822		16,324		15,351
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAX PROVISION		884		25,750		25,576
INCOME TAX PROVISION		388		10,940		10,524
NET INCOME	$	496	$	14,810	$	15,052
Earnings per share – basic	$	0.03	$	0.73	$	0.71
Earnings per share – diluted	$	0.03	$	0.72	$	0.70
Dividends declared per common share	$	0.50	$	0.50	$	0.50
Weighted average number of shares – basic		18,773,289		20,360,919		21,220,777
Weighted average number of shares – diluted		18,808,177		20,501,857		21,503,961

See notes to consolidated financial statements

F-4

BEVERLY HILLS BANCORP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Dollars in thousands)

	Common Stock			Additional Paid-In Capital		Treasury Stock					Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
	Shares	Amount				Shares		Amount
BALANCE, January 1, 2005	26,777,554	$	268	$	164,515	(5,639,368	)	$	(15,224	)	$	22,590		$	(1,087	)	$	171,062
Comprehensive income:
Net income												15,052						15,052
Unrealized holding losses on available for sale securities – net of tax benefit of $2,042 (1)															(2,818	)		(2,818	)
Total comprehensive income																		12,234
Cash dividends on common stock												(10,623	)					(10,623	)
Tax benefit from recognition of pre- reorganizational deferred tax assets					203													203
Exercise of stock options	188,320		2		410													412
Tax benefit from exercise of non-qualified stock options					582													582
BALANCE, December 31, 2005	26,965,874		270		165,710	(5,639,368	)		(15,224	)		27,019			(3,905	)		173,870
Comprehensive income:
Net income												14,810						14,810
Unrealized holding gains on available for sale securities – net of tax provision of $926 (1)															1,274			1,274
Total comprehensive income																		16,084
Cash dividends on common stock												(10,029	)					(10,029	)
Stock-based compensation					231													231
Exercise of stock options	141,660		1		16													17
Tax benefit from exercise of non-qualified stock options					15													15
Repurchase of common stock						(2,750,000	)		(24,750	)								(24,750	)
BALANCE, December 31, 2006	27,107,534		271		165,972	(8,389,368	)		(39,974	)		31,800			(2,631	)		155,438
Comprehensive income:
Net income												496						496
Unrealized holding gains on available for sale securities – net of tax provision of $803 (1)															1,109			1,109
Total comprehensive income																		1,605
Cash dividends on common stock												(9,394	)					(9,394	)
Stock-based compensation					284													284
Exercise of stock options	68,428		1		174													175
Conversion of pre-reorganizational Company Stock	500
BALANCE, December 31, 2007	27,176,462	$	272	$	166,430	(8,389,368	)	$	(39,974	)	$	22,902		$	(1,522	)	$	148,108

(1) Disclosure of reclassification amount:
	Year Ended December 31,
	2007		2006		2005
Unrealized holding gain (loss) on securities arising during the year, net of tax provision (benefit) of $803 in 2007, $926 in 2006 and ($2,042) in 2005	$	1,109	$	1,274	$	(2,818	)
Less: Reclassification adjustment for gain included in net income, net of tax expense		—		—		—
Net unrealized gain (loss) on securities, net of tax provision (benefit) of $803 in 2007, $926 in 2006 and ($2,042) in 2005	$	1,109	$	1,274	$	(2,818	)

See notes to consolidated financial statements

F-5

BEVERLY HILLS BANCORP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

	Year Ended December 31,
	2007			2006			2005
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	496		$	14,810		$	15,052
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for (recapture of) estimated losses on loans		14,356			957			(41	)
Provision for losses on real estate owned		289			872			10
Depreciation and amortization		364			366			456
Goodwill impairment charges		3,054			—			—
Stock-based compensation		277			240			—
Deferred tax (benefit) provision		(1,238	)		1,537			6,276
(Gain) loss on sale of real estate owned		(37	)		22			(214	)
Loss on disposal of equipment		10			6			15
Gain on sale of loans		(2	)		—			—
Gain on sale of Beverly Hills branch		—			(8,531	)		—
Gain on extinguishment of investor participation liability		—			—			(404	)
(Accretion) amortization of premiums and deferred fees		(615	)		434			2,825
Tax benefit from exercise of non-qualified stock options		—			—			582
Federal Home Loan Bank stock dividends		(1,528	)		(1,363	)		(1,025	)
Change in:
Accrued interest receivable		22			(2,402	)		(951	)
Income taxes receivable		(3,601	)		3,910			(3,759	)
Prepaid expenses and other assets		1,403			(708	)		(292	)
Accounts payable and other liabilities		394			5,382			3,627
Net cash provided by operating activities		13,644			15,532			22,157
CASH FLOWS FROM INVESTING ACTIVITIES:
Loan originations		(246,339	)		(248,749	)		(118,989	)
Purchase of loans		(10,082	)		(88,660	)		(142,814	)
Loan repayments		278,544			242,553			227,636
Proceeds from sale of loans		24,999			—			—
Purchase of mortgage-backed securities available for sale		(34,922	)		(197,621	)		(126,828	)
Repayments of mortgage-backed securities available for sale		83,537			71,348			96,353
Repayment of investment securities available for sale		2,018			4,771			—
Purchases of Federal Home Loan Bank stock		(2,485	)		(6,472	)		(3,919	)
Proceeds from sale of Federal Home Loan Bank stock		1,148			6,445			—
Proceeds from sale of real estate owned		1,581			33			2,031
Purchases of leasehold improvements and equipment		(64	)		(141	)		(1,029	)
Proceeds from sale of leasehold improvements and equipment		7			—			2
Net payment in settlement of branch sale		—			(148,885	)		—
Net cash provided by (used in) investing activities		97,942			(365,378	)		(67,557	)

See notes to consolidated financial statements

F-6

BEVERLY HILLS BANCORP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS – (Continued)

(Dollars in thousands)

	Year Ended December 31,
	2007			2006			2005
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in deposits	$	(213,419	)	$	402,370		$	62,689
(Decrease) increase in short-term borrowings		(20,000	)		20,000			—
(Decrease) increase in repurchase agreements		—			(23,000	)		(57,000	)
Proceeds from Federal Home Loan Bank advances		595,000			813,500			366,000
Repayments of Federal Home Loan Bank advances		(480,337	)		(848,000	)		(310,000	)
Repayment of investor participation liability		—			—			(650	)
Issuance of junior subordinated notes payable		—			25,774			—
Issuance of common stock		175			17			412
Tax benefit from exercise of non-qualified stock options		—			15			—
Repurchase of common stock		—			(24,750	)		—
Dividends on common stock		(7,046	)		(10,029	)		(10,623	)
Net cash (used in) provided by financing activities		(125,627	)		355,897			50,828
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(14,041	)		6,051			5,428
CASH AND CASH EQUIVALENTS:
Beginning of the year		27,005			20,954			15,526
End of year	$	12,964		$	27,005		$	20,954
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION – Cash paid during the year for:
Interest	$	70,109		$	50,630		$	34,286
Income taxes, net		6,892			4,132			7,344
NONCASH INVESTING ACTIVITIES:
Additions to real estate owned acquired in settlement of loans		1,300			1,518			120
NONCASH FINANCING ACTIVITIES:
Dividends on common stock declared and not yet paid		2,348			—			—

See notes to consolidated financial statements

F-7

BEVERLY HILLS BANCORP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations—Beverly Hills Bancorp Inc. (“Company,” and with its consolidated subsidiaries, the “Company”) is a financial holding company that conducts primarily banking and lending operations through a subsidiary bank, First Bank of Beverly Hills (“FBBH” or the “Bank”).

The Bank is engaged in a banking business focused primarily on commercial and multifamily real estate lending and construction loans for multifamily and commercial properties. The Bank also invests in primarily AAA-rated and government-sponsored enterprise (“GSE”) mortgage-backed securities. 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”).

Administrative headquarters of the Company and the Bank are located in Calabasas, California, where the Bank also maintains its only retail branch.

Principles of Consolidation—The Company was incorporated in 1996 to be the holding company for Wilshire Acquisitions Corporation (“WAC”), which is the holding company for the Bank. The Company formed certain non-bank subsidiaries, and completed an initial public offering of common stock and a public debt offering in the fourth quarter of 1996. All intercompany accounts have been eliminated in consolidation. The Company had outstanding $46.4 million in floating rate junior subordinated notes payable to three wholly owned statutory business trusts. In accordance with Financial Accounting Standards Board (“FASB”) Interpretation No. 46R, Consolidation of Variable Interest Entities (“FIN No. 46R”), the trusts are not consolidated into the accounts of the Company.

Fresh-Start Reporting—Effective May 31, 1999, the Company completed a restructuring under Chapter 11 of the U.S. Bankruptcy Code. The Company accounted for its reorganization in accordance with the American Institute of Certified Public Accountants Statement of Position 90-7, Financial Reporting by Entities in Reorganization Under the Bankruptcy Code (“SOP 90-7”), which resulted in the creation of a new entity for financial reporting purposes. Pursuant to SOP 90-7, the Company adopted “fresh-start” reporting, whereby the carrying values of its assets and liabilities were adjusted to reflect their estimated fair values as of the May 31, 1999 effective date. The Company amortizes the fresh-start adjustments on a monthly basis over the expected remaining life of the related assets and liabilities.

Use of Estimates in the Preparation of the Consolidated Financial Statements—The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements. Significant estimates include allowances for loan losses, valuation allowances for real estate owned and net deferred tax assets, the evaluation of other-than-temporary impairment in the market values of investment securities and other assets, and the outcome of pending legal matters. Estimates and assumptions also affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents—For purposes of reporting financial condition and cash flows, cash and cash equivalents include cash and due from banks, federal funds sold, and securities with original maturities less than 90 days.

Mortgage-Backed and Other Securities—The Company’s securities portfolios consist of mortgage-backed and other debt securities that are classified as held to maturity and available for sale. Securities are classified as

F-8

BEVERLY HILLS BANCORP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

held to maturity when the Company has the ability and the positive intent to hold the securities to maturity. Securities classified as held to maturity are carried at their cost basis, adjusted for the amortization of premiums and accretion of discounts using the effective yield method. Holding losses on securities classified as held to maturity that are determined by management to be other than temporary are recorded as market valuation losses and impairments in the consolidated statements of operations. Securities not classified as held to maturity are classified as available for sale. Securities classified as available for sale are reported at their fair market values with unrealized holding gains and losses on securities reported, net of tax, when applicable, as a separate component of accumulated other comprehensive income (loss) in stockholders’ equity. Holding losses on securities classified as available for sale that are determined by management to be other than temporary in nature are reclassified from the unrealized holding losses included in accumulated other comprehensive income to current operations. Realized gains and losses from the sales of available-for-sale securities are reported separately in the consolidated statements of operations and are calculated using the specific-identification method.

The fair values of the Company’s investment securities are generally determined by quoted market prices obtained from independent external brokers or independent external pricing service providers who have experience in valuing these securities. In obtaining such valuation information from third parties, the Company has evaluated the methodologies used to develop the resulting fair values. The Company evaluates the market prices for reasonableness by comparing the market prices with prices from another independent pricing service provider.

Loans and Allowance for Loan Losses—Loans are presented in the consolidated statements of financial condition net of unamortized deferred origination fees and costs and net of allowance for loan losses. Deferred fees and costs are recognized in interest income over the terms of the loans using the effective yield method. Interest income is recognized on an accrual basis.

The Company evaluates commercial and multifamily real estate loans and construction loans (whether purchased or originated and whether classified as loans or discounted loans) for impairment. Loans are considered to be impaired, for financial reporting purposes, when it is probable that the Company will be unable to collect all principal or interest when due. Specific valuation allowances (“SVAs”) are established through provisions for losses for impaired loans based on the fair value of the underlying real estate collateral, less estimated costs to sell, or the present value of anticipated cash flows.

The Company evaluates single-family real estate, consumer and other smaller balance, homogeneous loans for impairment on a collective basis. Management evaluates these loans for impairment by comparing management’s estimate of net realizable value to the net carrying value of the portfolios.

All specific and general valuation allowances established for pools of loans are recorded in the allowance for loan losses. The allowance for each pool is decreased by the amount of loans charged off and is increased by the provision for estimated losses on loans and recoveries of previously charged-off loans. The allowance for each pool is maintained at a level believed adequate by management to absorb probable losses. Management’s determination of the adequacy of the allowance is based on a number of factors, including, but not limited to, the following: the Company’s historical and recent loss experience in its loan portfolios; the volume, severity and trend of non-performing assets; the extent to which refinances or loan modifications are made to maintain loans in a current status; known deterioration in credit concentrations or certain classes of loans; loan-to-value ratios of real estate secured loans; risks associated with specific types of collateral; the quality and effectiveness of the lending policy, loan purchase policy, internal asset review policy, charge-off, collection and recovery policies; current conditions in the general and local economies which might affect the collectability of the loan; anticipated changes in the composition or volume of the portfolio; and reasonableness standards in accordance with regulatory agency policies.

F-9

BEVERLY HILLS BANCORP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

It is the Company’s policy to place loans on non-accrual status when they are past due more than 90 days, or sooner when, in the judgment of management, the probability of collection of interest is deemed to be insufficient to warrant further accrual. When a loan is placed on non-accrual status, previously accrued but unpaid interest is reversed by a charge to interest income.

Goodwill—The Company accounts for goodwill in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets. Accordingly, the Company tests goodwill for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. During the year ended December 31, 2007, the Company recorded a goodwill impairment charge of $3.1 million – See Note 9 for more information on this charge.

Real Estate Owned— Real estate acquired through foreclosure is recorded at the lower of cost or fair value at the time of foreclosure. Loan balances in excess of fair value of the real estate acquired at the date of foreclosure are charged against the allowance for loan losses. After foreclosure, valuations are periodically performed by management and the real estate is carried at the lower of carrying value or fair value less costs to sell. Any subsequent operating expenses or income, reduction in estimated values, and gains or losses on disposition of such properties are charged to current operations.

Leasehold Improvements and Equipment—Office leasehold improvements and equipment are stated at cost, less accumulated depreciation and amortization, computed on the straight-line method over the estimated useful lives of the assets, which currently range from one to seven years. Leasehold improvements are amortized over the lives of the respective leases or the service lives of the improvements, whichever is shorter.

Income Taxes—The provision for income taxes is based on income recognized for financial statement purposes. The Company files a consolidated U.S. federal income tax return with its eligible subsidiaries.

Income taxes are accounted for using the asset and liability method. Under this method, a deferred tax asset or liability is determined based on the enacted tax rates which will be in effect when the differences between the financial statement carrying amounts and tax basis of existing assets and liabilities are expected to be reported in the Company’s income tax returns. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established to reduce the net carrying amount of deferred tax assets if it is determined to be more likely than not that all or some portion of the potential deferred tax asset will not be realized.

Company and its subsidiaries have entered into a tax-sharing agreement under which the tax liability is to be allocated pro rata among entities that would have paid tax if they had filed separate income tax returns. In addition, those entities reimburse loss entities pro rata for the reduction in tax liability as a result of their losses.

Stock-Based Compensation—The Company issues stock-based compensation to certain employees, officers and directors. The Company adopted SFAS No. 123(R), Share-Based Payment (“SFAS No. 123(R)”), on January 1, 2006 using the modified prospective method. SFAS No. 123(R) requires companies to account for stock options using the fair value method, which generally results in compensation expense recognition. Prior to December 31, 2005, the Company accounted for its fixed stock options using the intrinsic-value method, as prescribed in Accounting Practices Bulletin (“APB”) Opinion No. 25. Accordingly, no stock option expense was recorded in periods prior to December 31, 2005.

The Company adopted the revised accounting standards for stock based compensation effective January 1, 2006. SFAS No. 123(R) allows for two alternative transition methods. The Company follows the modified prospective method, which requires application of the new Statement to new awards and to awards modified,

F-10

BEVERLY HILLS BANCORP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

repurchased or cancelled after the required effective date. Accordingly, prior period amounts have not been restated. Additionally, compensation cost for the portion of awards for which the requisite service has not been rendered that are outstanding as of January 1, 2006 will be recognized as the requisite services are rendered on or after January 1, 2006. The compensation cost of that portion of awards is based on the grant-date fair value of those awards as calculated for pro forma disclosures under the original SFAS No. 123.

The Company uses the “simplified” method for determining the expected term of its stock awards. The Company expects to continue using the “simplified” method as its stock awards have the characteristics of “plain vanilla” options and its historical share option exercise experience does not provide a reasonable basis upon which to estimate expected terms.

Earnings per Share—Basic earnings per share (“EPS”) excludes dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if the Company’s outstanding stock option contracts were exercised and resulted in the issuance of common stock that then shared in the earnings of the Company.

New Accounting Pronouncements—In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”). FIN 48 is an interpretation of FASB SFAS No. 109, Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The cumulative effect, if any, of applying FIN 48 is to be reported as an adjustment to the opening balance of retained earnings in the year of adoption. On January 1, 2007, the Company adopted the provisions of FIN 48 and no cumulative effect of adoption of FIN 48 was required to be recognized. In addition, the Company does not have any unrecognized tax benefits as a result of uncertainty. It is the Company’s policy to record any penalties or interest arising from the application of federal or state income taxes as other expense. There were no penalties or interest paid during the year ended December 31, 2007.

In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets—an amendment of FASB Statement No. 140 (“SFAS No. 156”). SFAS No.156 requires an entity to recognize a servicing asset or liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract if a) a transfer of the servicer’s assets meets the requirements for sale accounting b) a transfer of the servicer’s financial assets to a qualifying special-purpose entity in a guaranteed mortgage securitization in which the transferor retains all of the resulting securities and c) an acquisition or assumption of an obligation to service a financial asset does not relate to financial assets of the servicer or its consolidated affiliates. Further, SFAS No. 156 requires all separately recognized servicing asset and liabilities to be initially measured at fair value, if practicable. The Company adopted SFAS No. 156 as of January 1, 2007 and the adoption has had no material impact on the consolidated financial statements or results of operations of the Company.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS No. 157”), which provides a definition of fair value, establishes a framework for measuring fair value, and requires expanded disclosures about fair value measurements. The standard applies when GAAP requires or allows assets or liabilities to be measured at fair value and, therefore, does not expand the use of fair value in any new circumstance. SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an arm’s-length transaction between market participants in the markets where the Company conducts business. SFAS No. 157 clarifies that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The fair value hierarchy gives the highest priority to quoted prices available

F-11

BEVERLY HILLS BANCORP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

in active markets and the lowest priority to data lacking transparency. The level of the reliability of inputs utilized for fair value calculations drives the extent of disclosure requirements of the valuation methodologies used under the standard. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those years. The provisions of SFAS No. 157 should be applied prospectively, except for certain financial instruments for which the standard should be applied retrospectively. The adoption of SFAS No. 157 is not expected to have material impact on our consolidated financial condition or results of operations.

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 companies to recognize an asset or liability for the overfunded or underfunded status of their benefit plans in their financial statements. The asset or liability is the offset to other accumulated comprehensive income, consisting of previously unrecognized prior service costs and credits, actuarial gains or losses, and accumulated transition obligations and assets. SFAS 158 also requires the measurement date for plan assets and liabilities to coincide with the sponsor’s year-end. We do not expect the adoption of SFAS No. 158 to have a material impact on the Company’s consolidated financial condition, results of operations, or cash flows.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115 (“SFAS No. 159”). SFAS No. 159 permits entities to choose to measure at fair value many financial instruments and certain other items that are not currently required to be measured at fair value. Subsequent changes in fair value for designated items will be required to be reported in earnings in the current period. SFAS No. 159 also establishes presentation and disclosure requirements for similar types of assets and liabilities measured at fair value. SFAS No. 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company has elected not to measure any new or existing financial instruments at fair value, except as required by other accounting pronouncements, but to continue recording its financial instruments in accordance with current practice.

In December 2007, the FASB issued SFAS No. 141R, Business Combinations (“SFAS No. 141R”), which replaces SFAS No. 141, Business Combinations. SFAS No. 141R establishes principles and requirements for how an acquiring company (1) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree, (2) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase, and (3) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS No. 141R is effective for business combinations occurring on or after the beginning of the fiscal year beginning on or after December 15, 2008. SFAS No. 141R, effective for the Company on January 1, 2009, applies to all transactions or other events in which the Company obtains control in one or more businesses. The Company will assess each transaction on a case-by-case basis as it occurs.

In December 2007, the FASB also issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51 (“SFAS No. 160”), which requires the ownership interests in subsidiaries held by parties other than the parent be clearly identified, labeled, and presented in the consolidated statement of financial position within equity, but separate from the parent’s equity. It also requires the amount of consolidated net income attributable to the parent and to the noncontrolling interest be clearly identified and presented on the face of the consolidated statement of income. SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008, and early adoption is prohibited. SFAS No. 160 must be applied prospectively as of the beginning of the fiscal year in which it is initially applied, except for the presentation and disclosure requirements. The presentation and disclosure requirements must be applied retrospectively for all periods presented. The adoption of SFAS No. 160 is not expected to have a material impact on the Company’s financial condition and results of operations.

F-12

BEVERLY HILLS BANCORP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Reclassifications—Certain items in the Consolidated Statements of Financial Condition and Consolidated Statements of Operations for 2006 and 2005 were reclassified to conform to the 2007 presentation, none of which effected previously reported net income. In fiscal 2007, the Company consolidated discounted loans, net with loans, net, on our Consolidated Statements of Financial Condition and reclassified real estate owned, net from other income to other expenses on our Consolidated Statements of Operations. We also reclassified sale proceeds from real estate owned to prepaid expenses and other assets on our Consolidated Statements of Financial Condition as of December 31, 2006.

2. 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 continues to operate its Calabasas branch and will continue its deposit gathering strategies. The Company recorded a gain on the sale of $8.5 million, after related selling expenses.

3. STOCK-BASED COMPENSATION

The Company has two stock-based employee compensation plans, the 1999 Equity Participation Plan and the 2002 Equity Participation Plan, pursuant to which stock options have been granted to its directors and certain employees. All stock options have an exercise price that is equal to the fair value of the Company’s common stock on the date of grant. The stock 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 period indicated is presented below:

	Year Ended December 31, 2007
	Shares		Weighted Average Exercise Price
Outstanding at beginning of period	747,502		$	8.98
Granted	—			—
Exercised	(68,428	)		2.81
Forfeited	(4,072	)		3.24
Outstanding at end of period	675,002			9.63
Exercisable at end of period	475,002			9.27

The Company granted no stock options in 2007.

In January 2006, the Company granted an option to purchase 600,000 shares of common stock at an exercise price of $10.50 per share. The weighted average fair value of this option was $1.28 per share. This fair value was estimated using the Black-Scholes option-pricing model based on the following assumptions: expected volatility of 19%, risk-free interest rate of 4.30%, a dividend yield of 5% and an expected life of six years. There were no grants of stock options in 2005. The volatility assumption was based on the historical weekly price data of the Company’s common stock over the one-year period prior to the grant. The Company believes the volatility over this period is a reasonable predictor of future volatility. The Company did not believe the historical volatility

F-13

BEVERLY HILLS BANCORP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

over the most recent period equal to the expected life of the option (i.e., the 5-year period ended January 2006) was indicative of future volatility, because the price of the Company’s common stock increased more than 800% during that period, and similar volatility is considered unlikely to recur over the following 5-year period. The risk-free interest rate was equal to the 5-year U. S. Treasury rate in effect on the date of the grant. The dividend yield was based on the most recent year and is considered a reasonable estimate of future dividend yields. The expected life of the stock option represents the period that the stock options are expected to be outstanding and is based on historical experience. The Company has assumed a forfeiture rate of 0% as all of these options were granted to its Chief Executive Officer.

Additional information on the Company’s stock option activity for the years ended December 31, 2007, 2006 and 2005 is presented below:

	Year Ended December 31,
	2007		2006		2005
Weighted average grant date fair value	$	N/A	$	1.28		N/A
Intrinsic value of options exercised	$	320,280	$	1,080,949	$	1,550,921
Fair value of shares vested	$	255,340	$	247,758	$	666,934

Additional information regarding stock options outstanding as of December 31, 2007 is as follows:

	Total Shares	Weighted Average Exercise Price		Aggregate Intrinsic Value		Weighted Average Remaining Term (Years)
Total options outstanding at year-end	675,002	$	9.63	$	181,970	7.58
Fully-vested options exercisable at year-end	475,002	$	9.27	$	181,970	7.41
Options expected to vest at year-end	200,000	$	10.50	$	—	8.01

In 2007, the Company granted stock appreciation rights (“SARs”) to certain executive officers. The SARs are exercisable only for cash, and are classified as liabilities, and not equity instruments, per SFAS No. 123R. Consequently, the Company is required to remeasure the fair value of the liability at the end of each reporting period and record a corresponding adjustment to the related compensation expense. As the stock price of the Company’s common stock declined significantly below the exercise price of the SARs, the weighted-average fair value of the Company’s SARs was $0.01 per share at December 31, 2007. This fair value was estimated using the Black-Scholes option-pricing model based on the following assumptions:

	Expected Volatility		Dividend Yield		Risk-free Interest Rate		Expected Life (Years)
216,000 share units	23.00	%	9.73	%	3.06	%	2.25
30,000 share units	23.00		9.73		3.06		2.58
400,000 share units	23.00		9.73		2.94		0.13

The Company in 2006 also granted stock SARs to certain directors and an executive officer. The SARs are exercisable only for cash, and are classified as liabilities, and not equity instruments, per SFAS No. 123R. Consequently, the Company is required to remeasure the fair value of the liability at the end of each reporting period and record a corresponding adjustment to the related compensation expense. The weighted-average fair value of the Company’s SARs was $0.51 per share at December 31, 2006. This fair value was estimated using the Black-Scholes option-pricing model based on the following assumptions: expected volatility of 19%, dividend yield of 6.03%, risk-free interest rate of 4.70% and an expected life of four years. The Company granted no SARs in 2005.

F-14

BEVERLY HILLS BANCORP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

A summary of the Company’s SARs activity for the year ended December 31, 2007 is presented below:

	Share Units	Weighted Average Exercise Price		Aggregate Intrinsic Value	Weighted Average Remaining Term (Years)
Outstanding at beginning of period	216,000	$	8.87
Granted	430,000		7.86
Exercised	—		—
Forfeited	—		—
Outstanding at end of period	646,000		8.20	N/A	1.90
Exercisable at end of period	472,000		8.01	N/A	1.20

There is no intrinsic value for the SARs as the strike price is greater than the fair market value of the Company’s common stock as of December 31, 2007.

Additional information regarding SARs outstanding as of December 31, 2007 is as follows:

Exercise Prices	Total Share Units	Exercisable Share Units	Weighted Average Remaining Life (Years)	Weighted Average Exercise Price
				Share Units Outstanding		Share Units Exercisable
$7.80	30,000	—	4.07	$	7.80	$	7.80
$7.86	400,000	400,000	0.74		7.86		7.86
$8.23	36,000	12,000	3.74		8.23		8.23
$9.00	180,000	60,000	3.74		9.00		9.00

For the year ended December 31, 2007, the application of SFAS No. 123R resulted in stock-based compensation expense of $277,685, deferred tax benefits of $110,999 and a net reduction in net income of $166,686, reducing basic and diluted earnings per share by $0.01.

For the year ended December 31, 2006, the application of SFAS No. 123R resulted in stock-based compensation expense of $239,817, deferred tax benefits of $94,671 and a net reduction in net income of $145,146, reducing diluted earnings per share by $0.01. There was a negligible effect on basic earnings per share.

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. There were no exercises of non-qualified stock options in 2007. The Company recorded tax benefits from the exercise of non-qualified stock options of $14,441, which are included in cash flows from financing activities for the year ended December 31, 2006. Prior to the adoption of SFAS No. 123R, such tax benefits were presented as adjustments to cash flows from operating activities.

At December 31, 2007, the Company had $255,339 of unrecognized compensation cost related to unvested stock options. This cost is expected to be amortized over a weighted-average period of one year, ending in December 2008. The unrecognized compensation related to the SARs at December 31, 2007 was $2,993 and is expected to be amortized over the following 1.75 years, ending in September 2009. Compensation cost related to the SARs may vary based on changes in the awards’ total estimated fair value.

F-15

BEVERLY HILLS BANCORP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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 year ended December 31, 2005:

	(Dollars in thousands, except per-share amounts)
Net income to common shareholders:
As reported	$	15,052
Add: Stock-based employee compensation 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		392
Pro forma	$	14,660
Net income per common and common share equivalent:
Basic earnings per share:
As reported	$	0.71
Pro forma		0.69
Diluted earnings per share:
As reported	$	0.70
Pro forma		0.68

4. SETTLEMENT OF LITIGATION

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. 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 the second quarter of 2006, following this ruling, the Company reversed $746,000 in unpaid expenses it had previously accrued on behalf of the former officer.

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. The Company received an initial payment of $200,000 in 2006 and two payments totaling $400,000 in 2007. These three payments were deferred 90-days before being recognized in income. All subsequent payments are to be made in semi-annual installments of $200,000 each, until the balance, including interest, is paid in full. All future payments will be recorded in income when received.

F-16

BEVERLY HILLS BANCORP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

5. SECURITIES

The amortized cost, fair value and gross unrealized gains and losses on the Company’s mortgage-backed and other investment securities as of December 31, 2007 and 2006 are shown below. Fair market value estimates were obtained using discounted cash-flow models or from independent parties.

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Market Values
	(Dollars in thousands)
December 31, 2007
Available-for-sale:
GSE mortgage-backed securities	$	216,208	$	1,234	$	900	$	216,542
AAA mortgage-backed securities		194,419		73		2,752		191,740
Other mortgage-backed securities		5,473		120		—		5,593
Trust preferred securities		1,210		—		—		1,210
Mutual funds		5,750		73		92		5,731
Total available for sale		423,060		1,500		3,744		420,816
Held-to-maturity:
Agency securities		9,809		338		—		10,147
Total	$	432,869	$	1,838	$	3,744	$	430,963
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Market Values
	(Dollars in thousands)
December 31, 2006
Available-for-sale:
GSE mortgage-backed securities	$	237,903	$	1,074	$	1,689	$	237,288
AAA mortgage-backed securities		220,435		142		3,733		216,844
Other mortgage-backed securities		6,602		160		—		6,762
Trust preferred securities		3,228		—		—		3,228
Mutual funds		5,750		25		84		5,691
Total available for sale		473,918		1,401		5,506		469,813
Held-to-maturity:
Agency securities		9,759		—		24		9,735
Total	$	483,677	$	1,401	$	5,530	$	479,548

F-17

BEVERLY HILLS BANCORP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following tables show the gross unrealized losses and fair value of the Company’s investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at the dates indicated:

	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, 2007
GSE mortgage-backed securities	$	39,585	$	168	$	46,388	$	732	$	85,973	$	900
AAA and other mortgage-backed securities		42,832		343		134,686		2,409		177,518		2,752
Mutual funds		—		—		1,908		92		1,908		92
Total	$	82,417	$	511	$	182,982	$	3,233	$	265,399	$	3,744
	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, 2006
GSE mortgage-backed securities	$	18,509	$	79	$	72,595	$	1,610	$	91,104	$	1,689
AAA and other mortgage-backed securities		16,033		66		175,045		3,667		191,078		3,733
Mutual funds		—		—		1,916		84		1,916		84
Agency securities		9,735		24		—		—		9,735		24
Total	$	44,277	$	169	$	249,556	$	5,361	$	293,833	$	5,530

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.

The Company has the ability and intent to hold the securities classified as held to maturity until they mature, at which time the Company expects to receive full value for the securities. Furthermore, as of December 31, 2007 the Company 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. Management does not believe any of the securities are impaired due to reasons of credit quality. Accordingly, as of December 31, 2007 and 2006, management believes the impairments detailed in the table above are temporary, and as a result, no impairment loss has been realized in the Company’s consolidated statements of operations.

As of December 31, 2007 the Company had no debt securities maturing in less than five years, $18.8 million fair value and $18.6 million unamortized cost of securities maturing in over five years through ten years, and

F-18

BEVERLY HILLS BANCORP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

$406.5 million fair value and $408.6 million unamortized cost of securities maturing after ten years. However, the Company expects to receive payments on its securities over periods considerably shorter than their contractual maturities.

The Company sold no securities during 2007, 2006 and 2005.

At December 31, 2007 and 2006, securities with amortized cost of $382.1 million and $362.6 million, respectively, and market values of $380.3 million and $358.8 million, respectively, were pledged to secure repurchase agreements, FHLB advances and public deposits.

6. LOANS

The following is a summary of the Company’s loans by each loan category at the dates indicated:

	December 31,
	2007			2006
	(Dollars in thousands)
Real estate loans:
Single-family	$	16,938		$	19,914
Multifamily		313,154			356,992
Commercial		503,086			569,840
Construction		153,178			98,869
Total real estate loans		986,356			1,045,615
Other		14,731			2,255
		1,001,087			1,047,870
Add: Net premium on loans and deferred fees		743			1,990
Less: Allowance for loan losses		(21,882	)		(7,977	)
	$	979,948		$	1,041,883

As of December 31, 2007 and 2006, loans and discounted loans with adjustable rates of interest (including loans with an initial fixed rate for 3 or 5 years which subsequently convert to adjustable) totaled $881.5 million and $906.0 million, respectively, and loans with fixed rates of interest were $119.6 million and $141.9 million, respectively. Adjustable-rate loans are generally indexed to constant maturity treasury rates, LIBOR, Prime or the FHLB’s Eleventh District Cost of Funds Index, and are subject to limitations on the timing and extent of adjustment. Most variable-rate loans adjust within six months of changes in the index.

Apart from construction loans, which are always interest only, the Company frequently provides interest-only loans for commercial real estate developments that have not been stabilized. This structure is typical for bridge loans, or for newly constructed projects that have not reached breakeven on a principal and interest basis. Interest-only periods are generally from one to three years, after which the loan converts to an amortizing loan. As of December 31, 2007 and 2006, interest-only loans totaled $380.7 million and $318.0 million, respectively.

At December 31, 2007 and 2006, loans with unpaid principal balances totaling $984.0 million and $1.0 billion, respectively, were pledged against Federal Home Loan Bank advances.

F-19

BEVERLY HILLS BANCORP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Activity in the allowance for loan losses is summarized as follows:

	Year Ended December 31,
	2007			2006			2005
	(Dollars in thousands)
Balance, beginning of year	$	7,977		$	7,289		$	10,783
Net change pursuant to fresh-start reporting		(7	)		(10	)		(19	)
Charge-offs		(492	)		(309	)		(2,993	)
Recoveries		48			50			126
Reclassification to investor participant’s share		—			—			(567	)
Provision for (recapture of) losses on loans		14,356			957			(41	)
Balance, end of year	$	21,882		$	7,977		$	7,289

The recorded investment in loans that are considered to be impaired is as follows:

	At or for the Year Ended December 31,
	2007			2006			2005
	(Dollars in thousands)
Impaired loans without specific valuation allowances	$	3,939		$	6,919		$	9,615
Impaired loans with specific valuation allowances		29,260			126			311
Specific valuation allowance related to impaired loans		(11,637	)		(64	)		(175	)
Impaired loans, net	$	21,562		$	6,981		$	9,751
Average investment in impaired loans	$	21,692		$	10,763		$	9,364
Interest income recognized on impaired loans	$	1,157		$	842		$	649
Interest income recognized on impaired loans on a cash basis	$	1,157		$	842		$	649

When the Company receives payments on impaired loans that are more than 90 days past due, the payment is applied to principal and interest if the payment brings the loan to less than 90 days delinquent (or, in cases where payments are made in accordance with a bankruptcy plan, the borrower is current under the terms of that plan). If a payment is received on a loan in foreclosure, the payment is returned to the borrower. In some instances, a partial payment is accepted if the borrower executes a forbearance agreement. Payments received on impaired loans less than 90 days past due are recorded as both principal and interest in accordance with the terms of the loan. No additional funds are committed to be advanced in connection with impaired loans. For the year ended December 31, 2007, the Company recognized approximately $1.2 million in interest income on impaired loans.

At December 31, 2007 and 2006, the Company had a total of $29.9 million and $1.6 million, respectively, of loans on nonaccrual status. Nonaccrual and impaired loans at December 31, 2007 included construction loans totaling $27.6 million.

The Company has a geographic concentration of mortgage loans in the western United States, primarily in southern California. The five states with the greatest concentration of the Company’s loans at December 31, 2007 were California, Nevada, Arizona, Texas and Illinois, which had $512.7 million, $79.5 million, $67.9 million, $37.6 million and $37.3 million of loans, respectively. The Company does not believe any of its residential loans have features that would cause them to be characterized as interest-only loans or loans with negative amortization and which would give rise to any additional concentration of credit risk required to be disclosed by FSP SOP 94-6-1.

F-20

BEVERLY HILLS BANCORP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The provision for loan losses during 2007 primarily reflects specific reserves totaling $11.4 million for nonperforming construction loans due to a decrease in the fair market value of the collateral. Management’s estimates are utilized to determine the adequacy of the allowance for loan losses. Estimates are also involved in determining the ultimate recoverability of purchased loans. These estimates are inherently uncertain and depend on the outcome of future events. Although management believes the levels of the allowance as of December 31, 2007 and 2006 are sufficient to absorb losses inherent in the loan portfolio, changes in interest rates, various other economic factors and regulatory requirements may result in increasing levels of losses. Those losses will be recognized if and when these events occur.

7. REAL ESTATE OWNED

Activity in real estate owned is as follows for the years indicated:

	Year Ended December 31,
	2007			2006			2005
	(Dollars in thousands)
Balance, beginning of year	$	577		$	62		$	1,769
Foreclosures		1,300			1,518			120
Sales and exchanges, net		(1,544	)		(131	)		(1,817	)
Provision for losses		(289	)		(872	)		(10	)
Balance, end of year	$	44		$	577		$	62

Activity in the valuation allowance on real estate owned is summarized as follows for the dates indicated:

	Year Ended December 31,
	2007			2006			2005
	(Dollars in thousands)
Balance, beginning of year	$	865		$	10		$	205
Specific reserves on properties sold		(1,144	)		(17	)		(205	)
Charge-offs		—			—			—
Provision for losses		289			872			10
Balance, end of year	$	10		$	865		$	10

8. LEASEHOLD IMPROVEMENTS AND EQUIPMENT

Leasehold improvements and equipment consisted of the following at the dates indicated:

	December 31,
	2007			2006
	(Dollars in thousands)
Leasehold improvements	$	1,208		$	1,208
Furniture and equipment		1,687			1,756
Construction in progress		—			4
Total cost		2,895			2,968
Accumulated depreciation and amortization		(1,968	)		(1,724	)
Leasehold improvements and equipment, net	$	927		$	1,244

F-21

BEVERLY HILLS BANCORP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

9. GOODWILL AND INTANGIBLE ASSETS

Through December 31, 2001, 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, ceased amortizing goodwill, but began testing it at least annually for impairment. The Company tested goodwill for impairment as of March 31, 2007 and determined that no impairment charge was required.

In the fourth quarter of 2007, the Company determined that the goodwill should be reevaluated for impairment because the price of the Company’s common stock declined below the diluted book value per share. The fair value of the Company was calculated by averaging the year-end closing price of the Company’s common stock and the closing price adjusted for an expected market premium. Based on this average share price, the Company’s fair value was less than the carrying amount of the Company. The Company then calculated the fair value of its net assets (assets less liabilities) which was greater than the fair value of the Company. As such, the fair value of the Company was not sufficient to support the goodwill and a goodwill impairment charge of $3.1 million was recorded.

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.

10. DEPOSITS

Deposits consisted of the following at the dates indicated:

	December 31,
	2007		2006
	(Dollars in thousands)
Savings accounts	$	983	$	2,012
NOW and money market accounts		6,461		12,050
Noninterest-bearing deposit accounts		886		2,038
Certificates of deposit:
Less than $100,000		45,796		36,357
$100,000 or more		583,345		798,433
Total deposits	$	637,471	$	850,890

At December 31, 2007, the Bank held $14.9 million in money market deposits for Company and WFC. These deposits have been eliminated in consolidation and are not reflected in the above amounts.

A summary of certificates of deposit by maturity is as follows at the date indicated:

	December 31, 2007
	(Dollars in thousands)
2008	$	582,494
2009		1,435
2010		280
2011		44,932
	$	629,141

F-22

BEVERLY HILLS BANCORP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The Bank’s deposits generally are not collateralized, with the exception of $60.0 million of public fund certificates of deposit from the State of California, which are secured by mortgage-backed securities.

11. BORROWINGS

At December 31, 2007 and 2006, the Company had outstanding repurchase agreements totaling $40.0 million, which provide liquidity and financing for the Company’s acquisitions of loan pools and mortgage-backed securities. Following is information about repurchase agreements for the years indicated:

	Year Ended December 31,
	2007			2006			2005
	(Dollars in thousands)
Repurchase agreements:
Average amount outstanding during the year	$	40,000		$	43,538		$	116,000
Maximum month-end balance outstanding during the year		40,000			63,000			143,000
Weighted average rate:
During the period		4.81	%		3.53	%		3.17	%
At end of period		4.81	%		4.81	%		3.43	%

The Company’s repurchase agreements outstanding at December 31, 2007 mature in 2008. These borrowings are secured by mortgage-backed securities.

The Company has an agreement with the Federal Home Loan Bank of San Francisco (the “FHLB”) whereby the Company can apply for advances not to exceed 45% of the Bank’s total assets as of the previous quarter-end. These advances are secured by mortgage-backed securities and loans. The balances of FHLB advances outstanding as of December 31, 2007 and 2006 were $611.0 million and $496.3 million, respectively. At December 31, 2007, the Company had $76.5 million in unused FHLB borrowing capacity.

The following table sets forth the Company’s FHLB advances at and for the years indicated:

	Year Ended December 31,
	2007			2006			2005
	(Dollars in thousands)
FHLB advances:
Average amount outstanding during the year	$	577,445		$	482,068		$	508,298
Maximum month-end balance outstanding during the year		641,337			557,837			555,837
Weighted average rate:
During the period		4.72	%		3.96	%		3.06	%
At end of period		4.61	%		4.53	%		3.42	%

The Company’s repurchase agreements and FHLB advances at the date indicated mature as follows:

	December 31, 2007
	(Dollars in thousands)
2008	$	291,000
2009		150,000
2010		140,000
2011		70,000
Total	$	651,000

F-23

BEVERLY HILLS BANCORP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The Company has a loan agreement with a financial institution pursuant to which it may borrow up to $20.0 million under a revolving line of credit. This loan agreement matured on November 30, 2007, and the Company had no outstanding borrowings under this agreement at December 31, 2007. In January 2008, the loan agreement was amended to mature on December 31, 2008. The line of credit amount was reduced to $15.0 million and the interest rate is at the 3-month LIBOR rate, plus 1.90%, adjusting quarterly. The maximum ratio of nonperforming loans to total gross loans was increased to 3.50%. The Company terminated the loan agreement in March 2008.

12. JUNIOR SUBORDINATED NOTES PAYABLE TO TRUSTS

At December 31, 2007, the Company had outstanding $46.4 million in floating-rate junior subordinated notes payable to three wholly owned statutory business trusts. The Company issued the notes to the trusts in separate placements occurring in July 2002, May 2006 and December 2006. The trusts purchased the notes using the proceeds from private placements of trust preferred securities to unaffiliated third parties and from the issuance of common securities to the Company. In accordance with FASB Interpretation No. 46R (“FIN 46R”), the trusts are not consolidated into the accounts of the Company and the Company has reflected the notes under the caption “Junior subordinated notes payable to trust” and included its common securities in the trust in “other assets” in its consolidated statements of financial condition.

The following table summarizes the Company’s subordinated notes payable outstanding as of December 31, 2007:

	Year Ended December 31, 2007
	(Dollars in thousands)
Date of borrowing		7/11/2002			5/16/2006			12/28/2006
Amount of borrowing	$	20,619		$	20,619		$	5,155
Interest terms (to be reset quarterly)		LIBOR + 3.65	%		LIBOR + 1.55	%		LIBOR + 1.78	%
Interest rate at end of year		8.89	%		6.43	%		6.93	%
Maturity date		10/7/2032			6/23/2036			3/6/2037
First date redeemable at par (quarterly thereafter)		7/7/2007			6/23/2011			3/6/2012

In January 2008, the Company redeemed at par $10.3 million of the subordinated notes payable due in October 2032.

The following table sets forth the Company’s total subordinated notes payable at and for the years indicated:

	Year Ended December 31,
	2007			2006			2005
	(Dollars in thousands)
Average amount outstanding during the year	$	46,393		$	33,704		$	20,619
Maximum month-end balance outstanding during the year		46,393			46,393			20,619
Weighted average rate:
During the period		8.64	%		8.23	%		7.21	%
At end of period		7.58	%		7.88	%		7.80	%

F-24

BEVERLY HILLS BANCORP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

13. INCOME TAXES

The Company files consolidated federal and state income tax returns with its eligible subsidiaries. The components of the income tax provision were as follows for the years indicated:

	Year Ended December 31,
	2007			2006			2005
	(Dollars in thousands)
Current tax provision:
Federal	$	555		$	5,977		$	3,982
State		1,071			3,426			266
Total current tax provision		1,626			9,403			4,248
Deferred tax (benefit) provision:
Federal		(375	)		1,767			3,887
State		(863	)		(230	)		2,186
Total deferred tax (benefit) provision		(1,238	)		1,537			6,073
Allocation to stockholders’ equity:
Utilization of pre-reorganizational deferred tax assets		—			—			203
Total allocation to stockholders’ equity		—			—			203
Total income tax provision	$	388		$	10,940		$	10,524

The difference between the effective tax rate applicable to income from continuing operations and the statutory federal income tax rate can be attributed to the following for the years indicated:

	Year Ended December 31,
	2007		2006		2005
Federal income tax provision at statutory rate	34.0	%	35.0	%	34.0	%
State taxes, net of federal tax effect	8.2		7.0		6.8
Current permanent differences	1.1		—		—
Other	0.6		0.5		0.3
Effective income tax rate	43.9	%	42.5	%	41.1	%

The Company’s deferred tax assets and liabilities represent the tax effect of future deductible or taxable amounts. They are attributable to net operating loss carryforwards and also to temporary timing differences between amounts that have been recognized in the financial statements and amounts that have been recognized in the income tax returns. A tax rate of approximately 41.0% is applied to each attribute in determining the amount of the related deferred tax asset or liability.

F-25

BEVERLY HILLS BANCORP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The Company’s deferred income tax assets and liabilities are summarized as follows at the dates indicated:

	December 31,
	2007			2006
	(Dollars in thousands)
Deferred tax assets:
Loans – purchase discounts, allowances for loan losses and market valuation adjustments	$	3,693		$	1,031
Market adjustment on mortgage-backed securities		—			1,594
Depreciation and amortization		324			433
Net operating loss carryforward, net of cancellation of debt income		33,768			33,862
Accrued expenses		539			36
State taxes		363			910
Stock-based compensation		174			92
Goodwill		227			—
Prepaid insurance		692			—
Legal settlement		475			—
Unrealized loss on securities		1,102			—
Other		—			177
Gross deferred tax assets		41,357			38,135
Deferred tax liabilities:
FHLB stock dividends		(2,605	)		—
Pass-through income		(1,977	)		(1,977	)
Deferred loan fees		(388	)		(1,087	)
Goodwill		—			(1,064	)
Other		(134	)		—
Gross deferred tax liabilities		(5,104	)		(4,128	)
Total deferred tax asset, net		36,253			34,007
Valuation allowance		(7,913	)		(5,731	)
Net deferred tax asset	$	28,340		$	28,276

SFAS No, 109, Accounting for Income Taxes, requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized. As of December 31, 2007, the Company evaluated the positive and negative evidence regarding the future realization of the deferred tax assets. Pursuant to this evaluation, the Company concluded that the available objective positive evidence regarding its ability to generate future federal taxable income substantially outweighed the available objective negative evidence regarding future federal taxable income. The Company also concluded that the objective negative evidence regarding the ability to generate certain future state taxable income outweighed the available objective positive evidence regarding certain future state taxable income, due primarily to the significant reduction in its operations in the state of Oregon following the sale of WCC. As a result, the Company believes it is more likely than not that its deferred tax assets will be realized in future years with the exception of those deferred tax assets that have been offset by the valuation allowance of $7.9 million as of December 31, 2007. This valuation allowance relates to net operating loss carryforwards in Oregon and certain other states. The increase in the valuation allowance of $2.2 million is the result of adjustments in the amount of the gross Oregon net operating loss carryforward that were necessary to reflect the amounts on the tax returns actually filed for that state. The net deferred tax asset of $28.3 million is reported as an asset in the Consolidated Statement of Financial Condition as of December 31, 2007.

F-26

BEVERLY HILLS BANCORP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

In accordance with AICPA Statement of Position 90-7, Financial Reporting by Entities in Reorganization Under the Bankruptcy Code (“SOP 90-7”), as portions of the deferred tax asset are realized and the valuation allowance is reduced, the related benefits, to the extent they relate to the Company’s post-reorganizational period, are recorded as a tax benefit in the consolidated statements of operations. As benefits relating to the Company’s pre-reorganizational period are realized, they are recorded as a direct increase to stockholders’ equity.

In June 2002 the Company experienced a change in control as set forth by Section 382 of the Internal Revenue Code. In general, a change in control is defined as a greater than 50% ownership shift as measured over the prior three-year period. The change in control will limit the Company’s ability to utilize its net operating loss carryforwards in future periods. The Company has determined that the limitation on the amount that may be used annually to offset taxable income is approximately $6 million.

As of December 31, 2007, the Company had federal net operating loss carryforwards (NOLs) of approximately $75.5 million, and also had NOLs in various states. The federal carryforward period runs through 2020. As discussed above, 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.

On January 1, 2007, the Company adopted the provisions of FIN 48 and there was no effect on the financial statements. As a result, there was no cumulative effect recognized upon adoption of FIN 48. In addition, the Company did not have any unrecognized tax benefits as a result of uncertainty at January 1, 2007 or during the year ended December 31, 2007. It is the Company’s policy to record any penalties or interest arising from the application of federal or state income taxes as other expense. There were no penalties or interest paid during the year ended December 31, 2007.

The Company is subject to income tax in the U.S. federal jurisdiction and numerous state jurisdictions. The Internal Revenue Service (“IRS”) has completed its examinations of our federal income tax returns through the 2003 tax year. California and other state jurisdictions are subject to examinations for the tax years 2004 through 2006. Presently, there are no federal or state income tax examinations in process.

14. COMMITMENTS AND CONTINGENCIES

Lease Commitments—The following is a schedule of future minimum rental payments under operating leases as of the date indicated:

	December 31, 2007
	(Dollars in thousands)
2008	$	463
2009		436
2010		445
2011		445
2012		462
Thereafter		775
Total	$	3,026

The Company’s lease expense totaled $493,000, $699,000 and $745,000 for the years ended December 31, 2007, 2006 and 2005, respectively.

F-27

BEVERLY HILLS BANCORP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Loan Commitments—At December 31, 2007, the Company had outstanding commitments to fund $150.4 million of loans. Loan commitments expose the Bank to credit risk in excess of amounts reflected in the consolidated financial statements. The Bank receives collateral to support loans and commitments to extend credit for which collateral is deemed necessary. As of December 31, 2007, the Company did not have an allowance for unfunded loan commitments.

Purchase Commitments—From time to time, the Company enters into various commitments and letters of intent relating to purchases of loans, foreclosed real estate portfolios and other investments. There can be no assurance that any of these transactions will ultimately be consummated. It is the Company’s policy generally to record such transactions in the financial statements in the period in which such transactions are closed. There were no such commitments outstanding at December 31, 2007.

Litigation—The Company was 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 demanded that the Company reimburse WCC for certain costs purportedly incurred by WCC in connection with WCC’s performance under one of its loan servicing contracts. The Company disagreed that it was liable for such costs. To resolve this dispute, in July 2005, the Company filed a complaint for declaratory relief against WCC and Merrill Lynch. The complaint sought, among other things, a declaration that the Company had no obligation to reimburse WCC for those costs, and that if such an obligation was found to exist, it was 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. Merrill Lynch claimed that WCC had incurred and would continue to incur costs totaling approximately $3.7 million. The trial began in January 2008 and, on January 23, 2008, a jury in the Superior Court of Los Angeles County, California, found that the Company had no liability to WCC and Merrill Lynch relating to the claims being litigated.

The Company has contractually agreed to indemnify Merrill Lynch for claims asserted against WCC by third parties arising out of acts taken by WCC prior to its sale on April 30, 2004. The indemnity is for settlements of judgments paid and for defense costs, and is for amounts which, in the aggregate, exceed $2.0 million. Merrill Lynch has notified the Company of a number of claims that have been or are being asserted against WCC, and for which Merrill Lynch is seeking indemnity from the Company. As of December 31, 2007, the total payments and defense costs of such claims which Merrill Lynch has formally tendered to the Company was approximately $1.5 million. Although the Company expects that Merrill Lynch will demand indemnity for additional costs and expenses, it is probable that the total claims for which Merrill Lynch asserts the Company is responsible will surpass the $2.0 million threshold and this potential liability has been accrued for by the Company.

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

15. REGULATORY MATTERS

Capital Requirements—Bank holding companies, such as Company, and FDIC-insured banks, such as FBBH, are required to meet certain minimum regulatory capital requirements. At December 31, 2007, Company and FBBH met all applicable regulatory capital requirements and FBBH met the conditions to be categorized as “well capitalized,” as defined under applicable regulations.

F-28

BEVERLY HILLS BANCORP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following table sets forth the regulatory standards for well capitalized and adequately capitalized institutions and capital ratios for Company and FBBH at the dates indicated:

Regulatory Capital Ratios

					Amount Required
	Actual				For Capital Adequacy Purposes					To be Categorized as “Well Capitalized”
	Amount		Ratio		Amount		Ratio			Amount		Ratio
	(Dollars in thousands)
December 31, 2007
Company
Total capital to risk-weighted assets (Risk-based capital)	$	181,728	17.05	%	$	85,282	³	8.00	%		Not Applicable
Tier 1 capital to risk-weighted assets		168,297	15.79	%		42,641	³	4.00	%		Not Applicable
Tier 1 leverage ratio		168,297	11.16	%		60,346	³	4.00	%		Not Applicable
FBBH
Total capital to risk-weighted assets (Risk-based capital)	$	141,432	13.54	%	$	83,583	³	8.00	%	$	104,479	³	10.00	%
Tier 1 capital to risk-weighted assets		128,266	12.28	%		41,792	³	4.00	%		62,687	³	6.00	%
Tier 1 capital to average assets		128,266	8.62	%		59,540	³	4.00	%		74,425	³	5.00	%

					Amount Required
	Actual				For Capital Adequacy Purposes					To be Categorized as “Well Capitalized”
	Amount		Ratio		Amount		Ratio			Amount		Ratio
	(Dollars in thousands)
December 31, 2006
Company
Total capital to risk-weighted assets (Risk-based capital)	$	181,753	16.00	%	$	90,865	³	8.00	%		Not Applicable
Tier 1 capital to risk-weighted assets		173,811	15.30	%		45,433	³	4.00	%		Not Applicable
Tier 1 leverage ratio		173,811	11.85	%		58,654	³	4.00	%		Not Applicable
FBBH
Total capital to risk-weighted assets (Risk-based capital)	$	149,022	13.46	%	$	88,565	³	8.00	%	$	110,706	³	10.00	%
Tier 1 capital to risk-weighted assets		141,309	12.76	%		44,283	³	4.00	%		66,424	³	6.00	%
Tier 1 capital to average assets		141,309	9.75	%		57,965	³	4.00	%		72,456	³	5.00	%

In addition to the requirements shown in the above table, FBBH is required by the DFI to maintain a ratio of tangible stockholder’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 December 31, 2007, FBBH was in compliance with the DFI’s requirement.

F-29

BEVERLY HILLS BANCORP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

16. EARNINGS PER SHARE

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 years indicated:

	Year Ended December 31,
	2007		2006		2005
	(Dollars in thousands, except per-share amounts)
Net income	$	496	$	14,810	$	15,052
Weighted average number of common shares outstanding – basic		18,773,289		20,360,919		21,220,777
Net effect of dilutive stock options – based on treasury stock method (1)		34,888		140,938		283,184
Weighted average number of common shares outstanding – diluted		18,808,177		20,501,857		21,503,961
Earnings per share – basic	$	0.03	$	0.73	$	0.71
Earnings per share – diluted	$	0.03	$	0.72	$	0.70

(1) Does not include options to purchase a weighted-average 600,000 shares and 596,712 shares outstanding during the year ended December 31, 2007 and 2006, respectively, whose exercise would have had an anti-dilutive effect on earnings per share.

17. EMPLOYEE BENEFITS AND AGREEMENTS

Profit Sharing Plan—The Company’s employees may participate in a defined contribution profit sharing and 401(k) plan. The Company may elect to contribute to the plan based on profits of the Company or based on matching participants’ contributions. The Company contributed $203,000, $202,000 and $96,000, respectively, for the years ended December 31, 2007, 2006 and 2005.

Employment Agreements—The Company has employment, stay bonus and change-in-control agreements with certain executive officers. These agreements provide for the payment of base salaries, performance bonuses subject to certain restrictions, and/or the payment of severance benefits upon termination.

Stock Plans—The Company has two stock plans, the 1999 Equity Participation Plan (the “1999 Plan”) and the 2002 Equity Participation Plan (the “2002 Plan”). The 1999 Plan and the 2002 Plan were approved by the shareholders of the Company.

Under the 1999 Plan, the Company may issue to directors, employees and consultants up to an aggregate of 4,000,000 shares of common stock upon exercise of incentive stock options (“ISOs”), non-statutory stock options (“NSOs”) or stock appreciation rights (“SARs”), or the grant of restricted stock. No participant may receive awards under the 1999 Plan of more than 1,000,000 shares per year. The exercise price of any ISO or NSO, and the base value of any SAR, may not be less than the fair value of the underlying shares on the date of grant. The Company may sell restricted stock under the 1999 Plan at any price and any terms and conditions. The 1999 Plan expires in 2009.

F-30

BEVERLY HILLS BANCORP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Under the 2002 Plan, the Company may issue to directors, employees and consultants up to an aggregate of 1,000,000 shares of common stock upon exercise of ISOs or NSOs or the grant or sale of restricted stock. The exercise price of any ISO may not be less than the fair value of the underlying shares on the date of grant; there is no restriction under the 2002 Plan regarding the exercise price of any NSO. The Company may sell restricted stock under the 1999 Plan at any price and any terms and conditions. The 2002 Plan expires in 2012.

18. ESTIMATED FAIR VALUES OF FINANCIAL INSTRUMENTS

The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of SFAS No. 107, Disclosures about Fair Value of Financial Instruments. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data to develop estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

	December 31, 2007				December 31, 2006
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
	(Dollars in thousands)
Assets:
Cash and cash equivalents	$	12,964	$	12,964	$	27,005	$	27,005
Mortgage-backed securities available for sale		413,875		413,875		460,893		460,893
Investment securities available for sale		6,941		6,941		8,920		8,920
Investment securities held to maturity		9,809		10,147		9,759		9,735
Loans, net		979,948		1,009,459		1,041,883		1,046,348
Accrued interest receivable		8,663		8,663		8,685		8,685
Federal Home Loan Bank stock		31,880		31,880		29,015		29,015
Liabilities:
Deposits		637,471		637,299		850,890		848,021
Short-term borrowings		—		—		20,000		20,000
Repurchase agreements		40,000		40,437		40,000		39,829
FHLB advances		611,000		622,012		496,337		492,098
Junior subordinated notes payable to trusts		46,393		44,308		46,393		46,393
Accrued interest payable		11,086		11,086		10,676		10,676

The methods and assumptions used to estimate the fair value of each class of financial instrument for which it is practicable to estimate that value are explained below:

Cash and Cash Equivalents—The carrying amounts approximate fair values due to the short-term nature of these instruments.

Investment Securities and Mortgage-Backed Securities—The fair values of the investment securities are generally determined by quoted market prices obtained from independent external brokers or independent external pricing service providers who have experience in valuing these securities. In obtaining such valuation information from third parties, the Company has evaluated the methodologies used to develop the resulting fair values. The Company evaluates the market prices for reasonableness by comparing the market prices with prices from another independent pricing service provider.

F-31

BEVERLY HILLS BANCORP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Loans—Loans are segregated by type, such as fixed- and adjustable-rate interest terms. The fair values of fixed-rate mortgage loans are based on discounted cash flows utilizing applicable risk-adjusted spreads relative to the current pricing of similar fixed-rate loans as well as anticipated prepayment schedules. The fair values of adjustable-rate mortgage loans are based on discounted cash flows utilizing discount rates that approximate the pricing of available mortgage-backed securities having similar rate and repricing characteristics, as well as anticipated prepayment schedules. It is management’s opinion that the allowance for estimated loan losses pertaining to loans results in a fair value adjustment of the credit risk of such loans. For other loans, fair values are estimated for portfolios of loans with similar financial characteristics.

Accrued Interest Receivable and Accrued Interest Payable—The carrying amounts approximate fair values due to the short-term nature of these assets and liabilities.

Federal Home Loan Bank Stock—The carrying amounts approximate fair values because the stock may be sold back to the Federal Home Loan Bank at carrying value.

Deposits—The fair values of deposits are estimated based on the type of deposit. Demand accounts, which include passbook and transaction accounts, are presumed to have equal book and fair values, since the interest rates paid on these accounts are based on prevailing market rates. The estimated fair values of time deposits are determined by discounting the cash flows of settlements of deposits having similar maturities and rates, utilizing a yield curve that approximated the prevailing rates offered to depositors as of the reporting date.

Short-Term Borrowings—The carrying value of the Company’s borrowings under the revolving line of credit agreement is a reasonable approximation of fair value, as this debt agreement expires in less than one year, is repaid on a continual basis, and bears interest at prevailing market rates, adjusting quarterly.

Repurchase Agreements and FHLB Advances—The carrying value of repurchase agreements and FHLB advances maturing within one year is a reasonable approximation of fair value. The fair value of repurchase agreements and FHLB advances with maturities greater than one year is estimated using rates currently offered for borrowings and advances of similar maturities.

Junior Subordinated Notes Payable to Trusts—The carrying value of the Company’s notes payable to trusts is a reasonable approximation of fair value, as these borrowings bear interest at prevailing market rates, adjusting quarterly.

The fair value estimates presented herein are based on pertinent information available to management as of each reporting date. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date, and therefore, current estimates of fair value may differ significantly from the amounts presented herein.

19. 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, 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 years ended December 31, 2007 and

F-32

BEVERLY HILLS BANCORP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

2006 are not presented as a separate segment but are included in the Holding Company and Other Operations segment. Segment data for the year ended December 31, 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 subsidiary FBBH, the Company conducts a banking business focused primarily on products tailored to commercial, multifamily and construction real estate lending, in addition to investments in primarily AAA-rated and GSE mortgage-backed securities. The primary sources of funding for the Bank are deposits, FHLB advances and repurchase agreements. The Bank is a state-chartered commercial bank and is regulated by the DFI and the 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 junior subordinated notes payable, general corporate expenses and eliminations of intercompany accounts and transactions.

Segment results for the years ended December 31, 2007, 2006 and 2005 are shown in the following tables. This data has been prepared in accordance with the accounting principles discussed in Note 1.

	Year Ended December 31, 2007
	Banking		Holding Company and Other			Total
	(Dollars in thousands)
Interest income	$	100,131	$	3,004		$	103,135
Interest expense		67,836		4,523			72,359
Net interest income (expense)		32,295		(1,519	)		30,776
Provision for loan losses		14,317		39			14,356
Net interest income (expense) after provision for loan losses		17,978		(1,558	)		16,420
Other income (loss)		1,785		501			2,286
Compensation and employee benefits expense		6,502		728			7,230
Other expenses		7,535		3,057			10,592
Income (loss) before taxes		5,726		(4,842	)		884
Income tax provision (benefit)		2,247		(1,859	)		388
Net income (loss)	$	3,479	$	(2,983	)	$	496
Goodwill	$	—	$	—		$	—
Total assets	$	1,452,779	$	47,335		$	1,500,114

F-33

BEVERLY HILLS BANCORP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

	Year Ended December 31, 2006
	Banking		Holding Company and Other			Total
	(Dollars in thousands)
Interest income	$	86,536	$	1,631		$	88,167
Interest expense		52,784		2,388			55,172
Net interest income (expense)		33,752		(757	)		32,995
Provision for loan losses		820		137			957
Net interest income (expense) after provision for loan losses		32,932		(894	)		32,038
Realized gains		8,531		—			8,531
Other income (loss)		1,508		(3	)		1,505
Compensation and employee benefits expense		6,152		917			7,069
Other expenses		5,676		3,579			9,255
Income (loss) before taxes		31,143		(5,393	)		25,750
Income tax provision (benefit)		12,978		(2,038	)		10,940
Net income (loss)	$	18,165	$	(3,355	)	$	14,810
Goodwill	$	3,054	$	—		$	3,054
Total assets	$	1,565,328	$	58,508		$	1,623,836

	Year Ended December 31, 2005
	Banking			Holding Company and Other			Total
	(Dollars in thousands)
Interest income	$	76,442		$	955		$	77,397
Interest expense		37,150			1,193			38,343
Net interest income (expense)		39,292			(238	)		39,054
(Recapture of) provision for loan losses		(65	)		24			(41	)
Net interest income (expense) after (recapture of) provision for loan losses		39,357			(262	)		39,095
Other income		1,229			603			1,832
Compensation and employee benefits expense		6,392			381			6,773
Other expenses		5,381			3,197			8,578
Income (loss) before taxes		28,813			(3,237	)		25,576
Income tax provision (benefit)		11,732			(1,208	)		10,524
Net income (loss)	$	17,081		$	(2,029	)	$	15,052
Goodwill	$	3,054		$	—		$	3,054
Total assets	$	1,367,320		$	36,419		$	1,403,739

F-34

BEVERLY HILLS BANCORP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

20. QUARTERLY RESULTS OF OPERATIONS (Unaudited)

	Quarter Ended
	December 31, 2007			September 30, 2007		June 30, 2007		March 31, 2007
	(Dollars in thousands, except per-share amounts)
Statements of Operations
Interest income	$	24,790		$	26,499	$	26,369	$	25,477
Interest expense		17,617			18,556		18,365		17,821
Net interest income		7,173			7,943		8,004		7,656
Provision for loan losses		12,328			1,182		661		185
Net interest (expense) income after provision for loan losses		(5,155	)		6,761		7,343		7,471
Other income		659			434		567		626
Compensation and employee benefits expense		1,548			1,868		2,005		1,809
Other expenses		5,168			1,491		2,208		1,725
(Loss) income before income tax (benefit) provision		(11,212	)		3,836		3,697		4,563
Income tax (benefit) provision		(4,584	)		1,498		1,554		1,920
Net (loss) income	$	(6,628	)	$	2,338	$	2,143	$	2,643
(Loss) earnings per share – basic	$	(0.34	)	$	0.12	$	0.11	$	0.14
(Loss) earnings per share – diluted	$	(0.34	)	$	0.12	$	0.11	$	0.14

	Quarter Ended
	December 31, 2006		September 30, 2006		June 30, 2006			March 31, 2006
	(Dollars in thousands, except per-share amounts)
Statements of Operations
Interest income	$	23,811	$	22,471	$	21,530		$	20,355
Interest expense		16,273		14,488		12,932			11,479
Net interest income		7,538		7,983		8,598			8,876
Provision for (recapture of) loan losses		906		120		(109	)		40
Net interest income after provision for (recapture of) loan losses		6,632		7,863		8,707			8,836
Realized gains		8,531		—		—			—
Other income		395		402		345			363
Compensation and employee benefits expense		1,312		1,726		2,018			2,013
Other expenses		2,547		2,364		1,508			2,836
Income before income tax provision		11,699		4,175		5,526			4,350
Income tax provision		5,298		1,540		2,250			1,852
Net income	$	6,401	$	2,635	$	3,276		$	2,498
Earnings per share – basic	$	0.33	$	0.13	$	0.15		$	0.12
Earnings per share – diluted	$	0.32	$	0.13	$	0.15		$	0.12

F-35

BEVERLY HILLS BANCORP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

21. PARENT COMPANY INFORMATION

Condensed Statements of Financial Condition

	December 31,
	2007		2006
	(Dollars in thousands)
ASSETS
Cash and cash equivalents	$	14,874	$	12,579
Loans, net		—		27,557
Investment in subsidiaries		140,185		145,784
Prepaid expenses and other assets		33,006		32,064
	$	188,065	$	217,984
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable and other liabilities	$	4,028	$	574
Intercompany borrowings		25,774		25,774
Due to affiliates, net		10,155		36,198
Total liabilities		39,957		62,546
Stockholders’ equity		148,108		155,438
	$	188,065	$	217,984

Condensed Statements of Operations

	Year Ended December 31,
	2007			2006			2005
	(Dollars in thousands)
Interest income	$	345		$	1,302		$	293
Interest expense		1,703			863			—
Net interest (expense) income		(1,358	)		439			293
(Recapture of) provision for loan losses		(130	)		130			—
Net interest (expense) income after (recapture of ) provision for losses on loans		(1,228	)		309			293
Other income (loss)		619			(9	)		81
Other expenses		3,735			4,404			3,505
Loss before income tax benefit and equity in net earnings of subsidiaries		(4,344	)		(4,104	)		(3,131	)
Income tax benefit		(1,941	)		(2,106	)		(1,748	)
Equity in net earnings of subsidiaries		2,899			16,808			16,435
Net income	$	496		$	14,810		$	15,052

F-36

BEVERLY HILLS BANCORP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Condensed Statements of Cash Flows

	Year Ended December 31,
	2007			2006			2005
	(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	496		$	14,810		$	15,052
Adjustments to reconcile net income to net cash used in operating activities:
(Recapture of) provision for loan losses		(130	)		130			—
Accretion of discounts		(17	)		(178	)		—
Stock-based compensation		277			240			—
Deferred tax provision		1,631			1,050			222
Equity in net earnings of subsidiaries		(2,899	)		(16,808	)		(16,435	)
Tax benefit from exercise of non-qualified stock options		—			—			582
Change in:
Prepaid expenses and other assets		(2,586	)		1,456			(3,508	)
Accounts payable and other liabilities		1,126			(230	)		(418	)
Due to affiliates, net		(26,043	)		16,205			170
Net cash (used in) provided by operating activities		(28,145	)		16,675			(4,335	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Loan originations		—			(36,929	)		—
Loan repayments		27,704			9,420			—
Capital contribution to subsidiary		(3	)		—			(2,241	)
Proceeds from dissolution of subsidiary		10			—			—
Dividends from subsidiary		9,600			11,400			—
Net cash provided by (used in) investing activities		37,311			(16,109	)		(2,241	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings from affiliates		—			25,774			—
Issuance of common stock		175			17			412
Tax benefit from exercise of non-qualified stock options		—			15			—
Repurchase of common stock		—			(24,750	)		—
Dividends on common stock		(7,046	)		(10,029	)		(10,623	)
Net cash used in financing activities		(6,871	)		(8,973	)		(10,211	)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		2,295			(8,407	)		(16,787	)
CASH AND CASH EQUIVALENTS:
Beginning of year		12,579			20,986			37,773
End of year	$	14,874		$	12,579		$	20,986
NONCASH FINANCING ACTIVITIES:
Release of additional valuation allowance related to pre-reorganizational net operating losses	$	—		$	—		$	203

F-37