**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, 2005**





**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 0-26960**





**ITLA
      CAPITAL CORPORATION**


(Exact
      Name of Registrant as Specified in its Charter)





**Delaware**
            **95-4596322**(State
                or Other Jurisdiction of Incorporation or Organization)
            (I.R.S.
                Employer Identification No.)**888
                Prospect Street, Suite 110, La Jolla, California**
            **92037**(Address
                of Principal Executive Offices)
            (Zip
                Code)





Registrant’s
      Telephone Number, Including Area Code: **(858)
      551-0511**





Securities
      Registered Pursuant to Section 12(b) of the Act:


**None**





Securities
      Registered Pursuant to Section 12(g) of the Act:


**Common
      Stock, $.01 Par Value**


**(Title
      of Class)**





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





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. [   ]





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer” in Rule 12b-2 of the Exchange Act. Large Accelerated Filer [ ]
      Accelerated Filer [X] Non-Accelerated Filer [ ]





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





As
      of
      March 7, 2006, there were issued and outstanding 5,583,295 shares of the
      Registrant’s Common Stock. The aggregate market value of the voting stock held
      by non-affiliates of the Registrant as of June 30, 2005, computed by reference
      to the closing price of such stock as of June 30, 2005, was $310.9 million.
      (The
      exclusion from such amount of the market value of the shares owned by any person
      shall not be deemed an admission by the Registrant that such person is an
      affiliate of the Registrant.)













**Table
          of Contents**


**ITLA
      CAPITAL CORPORATION**





**FORM
      10-K**





**FOR
      THE FISCAL YEAR ENDED DECEMBER 31, 2005**








**TABLE
      OF CONTENTS**


**Page****PART
                I**Item
                1
            Business
            3Item
                1A.
            Risk
                Factors
            12Item
                1B.
            Unresolved
                Staff Comments
            16Item
                2
            Properties
            17Item
                3
            Legal
                Proceedings
            17Item
                4
            Submission
                of Matters to a Vote of Security
                Holders
            17**PART
                II**Item
                5
            Market
                for Registrant’s Common Equity, Related Stockholder Matters, and Issuer
                Purchasesof
                Equity Securities
            18Item
                6
            Selected
                Financial Data
            19Item
                7
            Management’s
                Discussion and Analysis of Financial Condition
                and Results of Operations
            21Item
                7A.
            Quantitative
                and Qualitative Disclosures About Market
                Risk
            38Item
                8
            Financial
                Statements and Supplementary
                Data
            41Item
                9
            Changes
                in and Disagreements with Accountants on Accounting
                and Financial Disclosure
            68Item
                9A.
            Control
                and Procedures
            68Item
                9B.
            Other
                Information
            68**PART
                III**Item
                10
            Directors
                and Executive Officers of the
                Registrant
            69Item
                11
            Executive
                Compensation
            71Item
                12
            Security
                Ownership of Certain Beneficial Owners and
                Management and Related Stockholder Matters
            78Item
                13
            Certain
                Relationships and Related
                Transactions
            81Item
                14
            Principal
                Accountant Fees and Services
            81**PART
                IV**Item
                15
            Exhibits
                and Financial Statement
                Schedules
            82Signatures
            83Certifications





**Forward-Looking
      Statements**





“Safe
      Harbor” statement under the Private Securities Litigation Reform Act of 1995:
      This Form 10-K contains forward-looking statements that are subject to risks
      and
      uncertainties, including, but not limited to, changes in economic conditions
      in
      our market areas, changes in policies by regulatory agencies, the impact of
      competitive loan products, loan demand risks, the quality or composition of
      our
      loan or investment portfolios, increased costs from pursuing the national
      expansion of our small balance multi-family lending platform and operational
      challenges inherent in implementing this expansion strategy, fluctuations in
      interest rates and changes in the relative differences between short and
      long-term interest rates, levels of non-performing assets and other loans of
      concern, and operating results, the economic impact of any terrorist actions
      on
      our loan originations and loan repayments and other risks detailed from time
      to
      time in our filings with the Securities and Exchange Commission. We caution
      readers not to place undue reliance on forward-looking statements. We do not
      undertake and specifically disclaim any obligation to revise any forward-looking
      statements to reflect the occurrence of anticipated or unanticipated events
      or
      circumstances after the date of such statements. These risks could cause our
      actual results for 2006 and beyond to differ materially from those expressed
      in
      any forward-looking statements by, or on behalf of, us.





As
      used
      throughout this report, the terms “we”, “our”, “us”, or the “Company” refer to
      ITLA Capital Corporation and its consolidated subsidiaries.





-
          2
          -
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          of Contents**


**PART
      I**





**Item
      1. Business**





**General**





ITLA
      Capital Corporation (“ITLA Capital”) is the largest financial services company
      headquartered in San Diego County, California with consolidated assets of $3.1
      billion, consolidated net loans of $2.5 billion, consolidated deposits of $1.7
      billion and consolidated shareholders’ equity of $204.5 million as of December
      31, 2005. We conduct and manage our business principally through our
      wholly-owned subsidiary, Imperial Capital Bank (the “Bank”), an institution with
      $3.0 billion in assets, with six retail branches located in California, (Beverly
      Hills, Costa Mesa, Encino, Glendale, San Diego, and San Francisco), and one
      branch located in Carson City, Nevada. Additionally, the Bank has 27 loan
      production offices serving the Western United States, the Southeast region,
      the
      Mid-Atlantic region, the Ohio Valley, the Metro New York area and New England.
      On January 1, 2003, the Bank converted from a California industrial bank to
      a
      California-chartered commercial bank, and ITLA Capital became a bank holding
      company. The Bank has been in business for 31 years. Our branch offices are
      primarily used for our deposit services and lending business. The Company is
      primarily engaged in:





•
            Originating
                and purchasing real estate loans secured by income producing properties
                for retention in its loan portfolio;





•
            Originating
                entertainment finance loans; and





•
            Accepting
                customer deposits through the following products: certificates of
                deposits, money market, passbook and demand deposit accounts. Our
                deposit
                accounts are insured by the Federal Deposit Insurance Corporation
                (“FDIC”)
                up to the legal limits.





We
      continuously evaluate business expansion opportunities, including acquisitions
      or joint ventures with companies that originate or purchase commercial and
      multi-family real estate loans as well as other types of secured commercial
      loans. In connection with this activity, we periodically have discussions with
      and receive financial information about other companies that may or may not
      lead
      to the acquisition of the company, a segment or division of that company, or
      a
      joint venture opportunity.





Our
      executive offices are located at 888 Prospect Street, Suite 110, La Jolla,
      California 92037 and our telephone number at that address is (858)
      551-0511.





**Lending
      Activities**





*General.* During
      2005, our core lending activities were as follows:





•
            Originating
                and purchasing real estate loans, including construction loans, secured
                by
                income producing properties; and





•
            Originating
                entertainment finance loans.





*Income
      Producing Property Loans.* We
      originate and purchase real estate loans secured primarily by first trust deeds
      on income producing properties. Income property loan collateral consists
      primarily of the following types of properties:





•
            Apartments




•
            Mini-storage
                facilities




•
            Retail
                centers




•
            Mobile
                home parks




•
            Small
                office and light industrial
                buildings




•
            Multi-family
                real estate




•
            Hotels




•
            Other
                mixed use or special purpose commercial
                properties





At
      December 31, 2005, we had $2.0 billion of income producing property loans
      outstanding, representing 83.1% of our total real estate loans, including
      construction loans, and 80.2% of our gross loan portfolio. Most of our real
      estate borrowers are business owners, individual investors, investment
      partnerships or limited liability corporations. The income producing property
      lending that we engage in typically involves loans to a single borrower and
      is
      generally viewed as exposing the lender to a greater risk of loss than one-
      to
      four-family residential lending, because repayment of the loan generally is
      dependent, in large part, on the successful operation of the property securing
      the loan or the business conducted on the property securing the loan. During
      2005, we continued the national expansion of our real estate lending platform,
      and as of December 31, 2005, we had 20 real estate loan production offices
      located outside of California. In 2005, we also opened our eastern area
      headquarters in Times Square in New York City. This office was opened to manage
      and support our eastern seaboard real estate lending efforts.


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          of Contents**


Income
      producing property values are also generally subject to greater volatility
      than
      residential property values. The liquidation values of income producing
      properties may be adversely affected by risks generally incident to interests
      in
      real property, such as:





•
            Changes
                or continued weakness in general or local economic
                conditions;




•
            Declines
                in rental, room or occupancy rates in hotels, apartment complexes
                or
                commercial properties;




•
            Changes
                or continued weakness in specific industry
                segments;




•
            Changes
                in governmental rules, regulations and fiscal policies, including
                rent
                control ordinances, environmental legislation and
                taxation;




•
            Increases
                in other operating expenses (including energy
                costs);




•
            Declines
                in real estate values;




•
            Increases
                in interest rates, real estate and personal property tax rates;
                and




•
            Other
                factors beyond the control of the borrower or the lender.





We
      originate real estate loans through our retail branches and loan production
      offices. These offices are staffed by a total of 57 loan officers. Loan officers
      solicit mortgage loan brokers for loan applications that meet our underwriting
      criteria, and also accept applications directly from borrowers. A majority
      of
      the real estate loans funded by us are originated through mortgage loan brokers.
      Mortgage loan brokers act as intermediaries between us and the property owner
      in
      arranging real estate loans and earn a fee based upon the principal amount
      of
      each loan funded. Since a large portion of our marketing effort is through
      our
      loan officers’ contacts with mortgage loan brokers, we do not incur significant
      expenses for advertising our lending services to the general
      public.





Income
      producing property loans are generally made in amounts up to 75% of the
      appraised value of the property; however, in certain instances, multi-family
      originations may be made at a loan to value ratio of 80%. Loans are generally
      made for terms of between ten and 30 years, with amortization periods up to
      30
      years. Depending on market conditions at the time the loan was originated,
      certain loan agreements may include prepayment penalties.





The
      average yield on our real estate loan portfolio was 6.99% in 2005 compared
      to
      7.05% in 2004. Our real estate loan portfolio is primarily composed of
      adjustable rate mortgages indexed to either six month LIBOR or the Prime
      Rate with interest rate floors, below which the loan’s contractual interest rate
      may not adjust. Approximately 61.8% of our loan portfolio was comprised of
      adjustable rate loans at December 31, 2005, and approximately 35.8% of the
      loan
      portfolio was comprised of hybrid loans, which, after an initial fixed rate
      period of three or five years, will convert to an adjustable interest rate
      for
      the remaining term of the loan. Our adjustable rate loans generally re-price
      on
      a quarterly or semi-annual basis with increases generally limited to maximum
      adjustments of 2% per year up to 5% for the life of the loan. As of December
      31,
      2005, approximately $2.3 billion or 92.7% of our adjustable rate loan portfolio
      contained interest rate floors, below which the loans’ contractual interest rate
      may not adjust. The inability of our loans to adjust downward can contribute
      to
      increased income in periods of declining interest rates, and also assists us
      in
      our efforts to limit the risks to earnings resulting from changes in interest
      rates, subject to the risk that borrowers may refinance these loans during
      periods of declining interest rates. At December 31, 2005, the weighted average
      floor interest rate of our adjustable rate loan portfolio was 6.13%. At that
      date, approximately $172.0 million or 7.1% of our adjustable rate loan portfolio
      was at the floor interest rate. At December 31, 2005, 68.2% of the adjustable
      rate loans outstanding had a lifetime interest rate cap. The weighted-average
      lifetime interest rate cap on our adjustable rate loan portfolio was 11.33%.
      At
      December 31, 2005, none of the loans in our adjustable rate loan portfolio
      were
      at the cap rate.





In
      2005,
      2004, and 2003, we purchased income producing real estate loans totaling $595.3
      million, $136.5 million, and $46.8 million, respectively. In our real estate
      loan purchases, we generally apply the same underwriting criteria as loans
      internally originated and reserve the right to reject particular loans from
      a
      loan pool being purchased that do not meet our underwriting criteria. Loan
      production in 2005 consisted of the origination of $525.8 million of commercial
      real estate loans, $322.8 million of small balance multi-family real estate
      loans, $68.7 million of entertainment finance loans, $2.4 million of franchise
      loans, and wholesale loan operations acquired $595.3 million of small balance
      multi-family and $128.5 million of single-family real estate loans.





*Construction
      Loans.* We
      originate construction loans for income producing properties, as well as for
      single-family residential tract construction. At December 31, 2005, we had
      $302.9 million of construction loans outstanding, representing 11.9% of our
      gross loans receivable. In addition to the lending risks previously discussed,
      construction loans also present risks associated with the accuracy of the
      initial estimate of the property’s value upon completion compared to its actual
      value, the timely completion of construction activities for their allotted
      costs
      and the time needed to stabilize income properties. These risks can be affected
      by a variety of factors, including the oversight of the project, localized
      costs
      for labor and materials, and the weather.





-
          4
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          of Contents**


*Entertainment
      Finance Loans* .
      We
      conduct our entertainment finance operations through ICB Entertainment Finance
      (“ICBEF”), a division of the Bank. Typically, ICBEF lends to independent
      producers of film and television on a senior secured basis. Typically,
      collateral documents include a mortgage of copyright, security agreements and
      assigned sales contracts. Credit decisions are based in part on the
      creditworthiness and reputation of distributors and sales agents who have
      contracted to distribute the films. ICBEF provides loans (with a typical term
      of
      12 to 18 months) and letters of credit for the production of motion pictures
      and
      television shows or series that have a predictable market worldwide, and
      therefore, a predictable level of revenue arising from licensing of the
      distribution rights throughout the world.





ICBEF
      lends to independent producers of film and television, many of which are located
      in California. ICBEF also has borrowing clients outside of the United States.
      Independent producers tend to be those producers that do not have major studio
      distribution outlets for their product. Large film and television studios
      generally maintain their own distribution outlets and finance their projects
      with internally generated financing. In addition to funding production loans
      against a number of distribution contracts, ICBEF may permit an advance,
      generally not to exceed 20% of the budget amount, against its valuation of
      unsold rights. ICBEF uses industry standards in the valuation of unsold rights.
      ICBEF’s lending officers review the quality of the distributors and their
      contracts, the budget, the producer’s track record, the script, the genre,
      talent elements, the schedule of advances, and valuation of all distribution
      rights when considering a new lending opportunity. Generally, ICBEF loans
      require the borrower to provide a completion bond that guarantees the completion
      of the film or the payoff of the outstanding balance of the loan in the event
      the film is not completed. After closing, each requested advance is approved
      by
      the bonding company on a regular basis to ensure that ICBEF is not advancing
      ahead of an agreed-upon cash flow schedule. The loan documentation grants ICBEF
      the right to impose certain penalties on the borrower and exercise certain
      other
      rights, including replacing the sales agent, if sales are not consummated within
      the appropriate time. Loans are repaid principally from revenue received from
      distribution contracts. In many instances, the distribution contracts provide
      for multiple payments payable at certain milestones (such as execution of
      contract, commencement of principal photography or completion of principal
      photography). The maturity date of the loan is generally six to nine months
      after completion of the production. Delivery of the completed production is
      typically made to the various distributors upon or after their minimum
      guarantees have been paid in full. To the extent a distributor fails to make
      payment upon completion of the film, or the predicted level of revenue is less
      than expected, we may incur a loss if rights cannot be resold for the same
      amount or other loan collateral cannot cover required loan
      payments.





ICBEF
      typically charges its customers an interest rate of six month LIBOR plus a
      margin (exclusive of loan fees) on the outstanding balance of the loan. Loan
      fees typically range from 1.00% to 2.25% with an additional fee up to 7.00%
      depending on the unsecured amount of the production budget being
      financed.





At
      December 31, 2005 and 2004, our entertainment finance portfolio totaled $66.5
      million and $99.7 million, respectively, representing 2.6% and 5.5% of our
      gross
      loan portfolio as of these dates. Of these amounts, approximately $3.6 million
      and $12.2 million, respectively, were issued to producers domiciled outside
      of
      the United States. These foreign loans were primarily issued to producers
      located in Australia, Canada and Germany. Approximately $7.7 million, $7.0
      million and $5.1 million of interest income was earned during 2005, 2004 and
      2003, respectively, in connection with these loans.





*Franchise
      Loans* .
      During
      2005, we closed our franchise lending operations and sold approximately $110.0
      million, or 89.0%, of the remaining loans within this portfolio. The Bank does
      not currently anticipate originating or purchasing franchise loans in the
      future. Prior to the closure, we operated our franchise lending operations
      through a division of the Bank, Imperial Franchise Finance, based in Tempe,
      Arizona. Franchise loans are loans to owners of businesses, both franchisors
      and
      franchisees, such as fast food restaurants or gasoline retailers that are
      affiliated with nationally or regionally recognized chains and brand names.
      Various combinations of land, building, business equipment and fixtures may
      secure these loans, or they may be a general obligation of the borrower based
      on
      a valuation of the borrower’s business and debt service ability. These loans may
      be viewed as riskier than our real estate secured loans, as in each case, the
      primary source of repayment of a franchise loan is the cash flow of the business
      and not the underlying value of the collateral. In addition, in certain cases,
      the success of the borrower’s business depends on the management talents and
      efforts of one or two persons or a small group of persons, and the death,
      disability or resignation of one or more of these persons could have a material
      adverse impact on the business. Many of these borrowers have smaller market
      shares than their competition, may be more vulnerable to economic downturns,
      often need additional capital to expand or compete and may experience
      substantial variations in operating results, any of which might impair the
      borrower’s ability to repay a loan. As of December 31, 2005 and 2004, our
      franchise loan portfolio was $13.7 million and $137.5 million, respectively,
      which represented 0.5% and 7.6%, respectively, of our gross loan portfolio
      as of
      those dates.





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          of Contents**


*Loan
      Underwriting.* Many
      of
      our loans are made to lower credit grade borrowers or the property securing
      the
      loan has other factors such as debt-to-income ratios or property location that
      prevent the borrower from obtaining a prime interest rate. We attempt to
      mitigate the risk associated with these loans by charging higher interest rates
      and through our loan approval and loan purchasing process. Initial loan review
      for potential applications is performed by the Regional Directors and Area
      Manager of our loan production offices, in consultation with the Chief
      Underwriter, the respective Deputy Chief Credit Officer, and the Vice
      Chairman/Chief Credit Officer. Our loan underwriters are responsible for
      detailed reviews of borrowers, collateral, and loan terms, and prepare a written
      presentation for every loan application submitted to the real estate loan
      committee, which is comprised of the following Bank officers:





•
            Chairman,
                President, and Chief Executive
                Officer




•
            Vice
                Chairman and Chief Credit Officer




•
            Executive
                Managing Director/Chief Operating
                Officer




•
            Senior
                Managing Director/Chief Lending
                Officer




•
            Senior
                Managing Director/Chief of Lending
                Operations




•
            Managing
                Director/Business Credit




•
            First
                Vice President/Manager Loan
                Underwriting




•
            First
                Vice President/Loan Administration




•
            First
                Vice President/Manager and Chief Underwriter - Express
                Operations





The
      underwriting standards for loans secured by income producing real estate
      consider the borrower’s financial resources and ability to repay and the amount
      and stability of cash flow, if any, from the underlying collateral, to be
      comparable in importance to the loan-to-value ratio as a repayment source.





All
      real
      estate secured loans over $3.0 million must be submitted to the loan committee
      for approval. At least one loan committee member or designee must personally
      conduct on-site inspections of any property involved in connection with a real
      estate loan recommendation of $2.0 million or more. Loans up to $750,000 may
      be
      approved by any loan committee member. Loans of $750,000 to $2.0 million require
      approval by any two members of the Bank’s loan committee, while loans in excess
      of $2.0 million require approval of three loan committee members, one of whom
      must be the Chief of Lending Operations or the Manager Loan Underwriting, and
      only one of whom may be from the Loan Production Unit. Additionally, loans
      over
      $3.0 million require the additional signature of the Vice Chairman and Chief
      Credit Officer; and individual loans over $5.0 million, loans resulting in
      an
      aggregate borrowing relationship to one borrower in excess of $7.5 million,
      and
      all purchased loan pools must be approved by the Executive Committee of the
      Bank’s Board of Directors.





All
      entertainment finance loans over $1.0 million are submitted to the business
      lending loan committee for approval. All loans must be approved by the Managing
      Director/Business Credit and loans over $3.0 million must be approved by the
      Vice Chairman and Chief Credit Officer. Individual loans over $7.5 million,
      loans resulting in an aggregate borrowing relationship to one borrower in excess
      of $10.0 million, and all purchased loan pools must be approved by the executive
      committee of the Bank’s Board of Directors.





Our
      loans
      are originated on both a non-recourse and full recourse basis and we generally
      seek to obtain personal guarantees from the principals of borrowers which are
      single asset or limited liability entities (such as partnerships, corporations
      or trusts).





The
      maximum size of a single loan made by the Bank is limited by California law
      to
      25% of the Bank’s equity capital. At December 31, 2005, that limit was
      approximately $65.0 million. Our largest combined credit extension to related
      borrowers was $34.0 million at December 31, 2005. At December 31, 2005, we
      had a
      total of 144 extensions of credit, with a combined outstanding principal balance
      of $608.3 million, that were over $5.0 million to a single borrower or related
      borrowers. All combined extensions of credit over $5.0 million were performing
      in accordance with their repayment terms, with the exception of two credit
      relationships that are nonaccrual loans and have combined outstanding principal
      balance of $10.1 million and $7.0 million, respectively. At December 31, 2005,
      we had 2,937 real estate loans outstanding, with an average balance per loan
      of
      approximately $837,000.





*Servicing
      and Collections.* Our
      loan
      portfolio is predominantly serviced by the Bank’s loan servicing department,
      which is designed to provide prompt customer service, and accurate and timely
      information for account follow-up, financial reporting and management review.
      We
      monitor our loans to ensure that projects are performing as underwritten. This
      monitoring allows us to take a proactive approach to addressing projects that
      do
      not perform as planned. When payments are not received by their contractual
      due
      date, collection efforts begin on the fifth day of delinquency with a telephone
      contact, and proceed to written notices that progress from reminders of the
      borrower’s payment obligation to an advice that a notice of default may be
      forthcoming. Accounts delinquent for more than 30 days are generally transferred
      to the Bank’s asset management department which, following a review of the
      account and management approval, implements a collection or restructure plan,
      or
      a disposition strategy, and evaluates any potential loss exposure on the
      asset.


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          of Contents**





*Competition.* Our
      competition in originating real estate, construction, and entertainment finance
      loans is principally from community banks, savings and loan associations,
      industrial banks, real estate financing conduits, specialty finance companies,
      small insurance companies, and larger banks. Many of these entities enjoy
      competitive advantages over us relative to a potential borrower in terms of
      a
      prior business relationship, wider geographic presence or more accessible branch
      office locations, the ability to offer additional services or more favorable
      pricing alternatives, or a lower cost of funds structure. We attempt to offset
      the potential effect of these factors by providing borrowers with greater
      individual attention and a more flexible and time-sensitive underwriting,
      approval and funding process than they might obtain elsewhere.





**Imperial
      Capital Real Estate Investment Trust**





During
      2000, we acquired all of the equity and certain collateralized mortgage
      obligations (“CMOs”) of the ICCMAC Multi-family and Commercial Trust 1999-1
      (“ICCMAC Trust”) through our real estate investment trust subsidiary, Imperial
      Capital Real Estate Investment Trust (“Imperial Capital REIT”). During 2004, the
      CMOs were retired and the ICCMAC Trust was dissolved. The remaining outstanding
      loans were contributed to the Imperial Capital REIT. At December 31, 2005,
      the
      Imperial Capital REIT held net real estate loans of $3.1 million. The cash
      flow
      from the Imperial Capital REIT loan pool provides cash flow on a monthly basis
      to ITLA Capital. ITLA Capital recorded $1.5 million of pre-tax income from
      its
      investment in the Imperial Capital REIT during the year ended December 31,
      2005.





**Non-performing
      Assets and Other Loans of Concern**





At
      December 31, 2005, non-performing assets totaled $28.2 million or 0.92% of
      total
      assets. Non-performing assets consisted of $24.3 million of non-accrual loans
      and $4.0 million of other real estate owned consisting of two properties. For
      additional information regarding non-performing assets see “Item 7: Management’s
      Discussion and Analysis of Financial Condition and Results of Operations-Credit
      Risk Elements”.





As
      of
      December 31, 2005, we had loans with an aggregate outstanding balance of $66.4
      million with respect to which known information concerning possible credit
      problems with the borrowers or the cash flows of the properties securing the
      respective loans has caused management to be concerned about the ability of
      the
      borrowers to comply with present loan repayment terms. This may result in the
      future inclusion of such loans in the non-accrual loan category. All of these
      loans are classified as substandard pursuant to the regulatory guidelines
      discussed below.





**Classified
      Assets**





Management
      uses a loan classification system consistent with the classification system
      used
      by bank regulatory agencies to help it evaluate the risks inherent in its real
      estate loan portfolio. Loans are identified as “pass”, “substandard”, “doubtful”
or “loss” based upon consideration of all sources of repayment, underlying
      collateral values, current and anticipated economic conditions, trends and
      uncertainties, and historical experience. Pass loans are further divided into
      four additional sub-categories, based on the borrower’s financial strength and
      ability to service the debt and/or the value and debt service coverage of the
      underlying collateral. Underlying collateral values for real estate dependent
      loans are supported by property appraisals or evaluations. We review our loan
      classifications on at least a quarterly basis. At December 31, 2005, we
      classified $80.1 million of loans as “substandard”, $10.5 million as “doubtful”
and none as “loss” of which, $24.3 million of these classified loans were
      included in the non-performing assets table in “Item 7. Management’s Discussion
      and Analysis of Results of Financial Condition and Operations - Credit Risk
      Elements”.





**Funding
      Sources**





The
      primary source of funding for our lending operations and investments are
      deposits. Our deposits are federally insured by the FDIC to the maximum extent
      permitted by law. Approximately 86.3% of our deposits are term deposits that
      pay
      fixed rates of interest for periods ranging from 90 days to five years, 10.7%
      of
      our deposits are variable rate passbook accounts and variable rate money market
      accounts with limited checking features, and 3.0% are customer demand deposit
      accounts.





In
      connection with the Bank’s charter conversion in 2003, from an industrial bank
      to a commercial bank, we expanded our line of banking products and services
      offered to our customers. The new products and services consist of commercial
      banking products and services, including consumer and business checking
      accounts. Our retail checking account balance was $51.9 million at December
      31,
      2005. We generally accumulate deposits by relying on renewals of term accounts
      by existing depositors, participating in deposit rate surveys which promote
      the
      rates offered by us on our deposit products, and periodically advertising in
      various local market newspapers and other media. Management believes that our
      deposits are a reliable funding source and that the cost of funds resulting
      from
      our deposit gathering strategy is comparable to those of other banks pursuing
      a
      similar strategy. However, because we compete for deposits primarily on the
      basis of rates, we could experience difficulties in attracting deposits if
      we
      could not continue to offer deposit rates at levels above those of other
      financial institutions. Management also believes that any efforts to
      significantly increase the size of our deposit base may require greater
      marketing efforts and/or increases in deposit rates. At December 31, 2005,
      we
      had $152.7 million of brokered deposits.





For
      information concerning overall deposits outstanding during the periods indicated
      and the rates paid thereon, see “Item 7. Management’s Discussion and Analysis of
      Financial Condition and Results of Operations — Net Interest
      Income”.


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The
      Bank
      also uses advances from the FHLB of San Francisco and borrowings from other
      unaffiliated financial institutions as funding sources. FHLB advances are
      collateralized by pledges of qualifying cash equivalents, investment securities,
      mortgage-backed securities and loans. At December 31, 2005, FHLB advances
      outstanding totaled $932.0 million, and the remaining available borrowing
      capacity, based on the loans and securities pledged as collateral, totaled
      $241.4 million, net of the $12.7 million of additional FHLB Stock that we would
      be required to purchase to support the additional borrowings. Additionally,
      the
      Bank has a $60.6 million repurchase agreement borrowing from an unaffiliated
      financial institution that is secured by mortgage-backed securities. The Bank
      also has uncommitted, unsecured lines of credit with other banks renewable
      daily
      in the amount of $80.0 million and ITLA Capital has a $25.0 million revolving
      credit facility with an unaffiliated financial institution. This revolving
      credit facility matures on April 30, 2006, which we intend on renewing upon
      maturity. See “Item 8. Financial Statements and Supplementary Data — Notes to
      Consolidated Financial Statements — Notes 7, 8, and 9”.





**Regulation**





As
      a bank
      holding company, ITLA Capital is regulated by the Board of Governors of the
      Federal Reserve System (the “Federal Reserve Board” or “FRB”). As a
      California-chartered commercial bank, the Bank is regulated by the California
      Department of Financial Institutions (the “DFI”) and the Federal Deposit
      Insurance Corporation (the “FDIC”).





***Holding
      Company Regulation***





Bank
      holding companies are subject to comprehensive regulation by the Federal Reserve
      Board under the Bank Holding Company Act of 1956, and the regulations of the
      Federal Reserve Board. As a bank holding company, ITLA Capital is required
      to
      file reports with the Federal Reserve Board and provide such additional
      information as the Federal Reserve Board may require. ITLA Capital and its
      non-bank subsidiaries are also subject to examination by the Federal Reserve
      Board. The Federal Reserve Board has extensive enforcement authority over bank
      holding companies, including, among other things, the ability to assess civil
      money penalties, to issue cease and desist or removal orders and to require
      that
      a bank holding company divest subsidiaries, including its bank subsidiaries.
      In
      general, enforcement actions may be initiated for violations of law and
      regulation as well as unsafe or unsound practices.





Under
      Federal Reserve Board policy, a bank holding company must serve as a source
      of
      strength for its subsidiary banks. Under this policy, the Federal Reserve Board
      may require, and has required in the past, bank holding companies to contribute
      additional capital to undercapitalized subsidiary banks.





Under
      the
      Bank Holding Company Act of 1956, a bank holding company must obtain Federal
      Reserve Board approval before, among other matters:





•
            acquiring,
                directly or indirectly, ownership or control of any voting shares
                of
                another bank or bank holding company if, after the acquisition, it
                would
                own or control more than 5% of these shares (unless it already owns
                or
                controls a majority of these
                shares);





•
            acquiring
                all or substantially all of the assets of another bank or bank holding
                company; or





•
            merging
                or consolidating with another bank holding company.





This
      statute also prohibits a bank holding company, with certain exceptions, from
      acquiring direct or indirect ownership or control of more than 5% of the voting
      shares of any company which is not a bank or bank holding company, or from
      engaging directly or indirectly in activities other than those of banking,
      managing or controlling banks, or providing services for its subsidiaries.
      The
      principal exceptions to these prohibitions involve certain non-bank activities
      which have been identified as activities closely related to the business of
      banking or managing or controlling banks.





*Dividends* .
      The
      Federal Reserve Board has issued a policy statement on the payment of cash
      dividends by bank holding companies, which expresses the Federal Reserve Board’s
      view that a bank holding company should pay cash dividends only to the extent
      that its net income for the past year is sufficient to cover both the cash
      dividends and a rate of earnings retention that is consistent with the bank
      holding company’s capital needs, asset quality and overall financial condition.
      Furthermore, under its source of strength doctrine, the Federal Reserve Board
      expects a bank holding company to serve as a source of financial strength for
      its bank subsidiaries, which could limit the ability of a holding company to
      pay
      dividends if a bank subsidiary did not have sufficient capital.


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*Repurchase
      or Redemption of Equity Securities.* A
      bank
      holding company is required to give the Federal Reserve Board prior written
      notice of any purchase or redemption of its outstanding equity securities if
      the
      gross consideration for the purchase or redemption, when combined with the
      net
      consideration paid for all such purchases or redemptions during the preceding
      12
      months, is equal to 10% or more of its consolidated net worth. The Federal
      Reserve Board may disapprove such a purchase or redemption if it determines
      that
      the proposal would constitute an unsafe or unsound practice or would violate
      any
      law, regulation, Federal Reserve Board order, or any condition imposed by,
      or
      written agreement with, the Federal Reserve Board. This notification requirement
      does not apply to any company that meets the well-capitalized standard for
      bank
      holding companies, has a safety and soundness examination rating of at least
      a
“2” and is not subject to any unresolved supervisory issues.





*Regulatory
      Capital Requirements* . The
      Federal Reserve has established risk-based measures and a leverage measure
      of
      capital adequacy for bank holding companies.





The
      risk-based capital standards are designed to make regulatory capital
      requirements more sensitive to differences in risk profiles among banks and
      bank
      holding companies, to account for off-balance-sheet exposure, and to minimize
      disincentives for holding liquid assets. Assets and off-balance-sheet items,
      such as letters of credit and unfunded loan commitments, are assigned to broad
      risk categories, each with appropriate risk weights. The resulting capital
      ratios represent capital as a percentage of total risk-weighted assets and
      off-balance-sheet items.





The
      minimum ratio of total capital to risk-weighted assets is 8.0%. Total capital
      consists of two components, Tier 1 capital and Tier 2 capital. Tier 1 capital
      generally consists of common shareholders’ equity, including retained earnings,
      noncumulative perpetual preferred stock, certain trust preferred securities
      and
      minority interest in equity accounts of fully consolidated subsidiaries, less
      goodwill and other specified intangible assets. Tier 1 capital must equal at
      least 4.0% of risk-weighted assets. Tier 2 capital generally consists of
      subordinated debt and other hybrid capital instruments, other preferred stock,
      a
      limited amount of loan loss reserves and a limited amount of unrealized holding
      gains on equity securities. The total amount of Tier 2 capital is limited to
      100% of Tier 1 capital. At December 31, 2005, our ratio of total capital to
      risk-weighted assets was 13.0% and our ratio of Tier 1 capital to risk-weighted
      assets was 11.0%.





In
      addition, the Federal Reserve has established minimum leverage ratio guidelines
      for bank holding companies. These guidelines provide for a minimum ratio of
      Tier
      1 capital to average assets, less goodwill and other specified intangible
      assets, of 3.0% for certain bank holding companies that meet specified criteria,
      including having the highest regulatory rating and implementing the Federal
      Reserve’s risk-based capital measure for market risk. All other bank holding
      companies generally are required to maintain a leverage ratio of at least 4.0%.
      At December 31, 2005, ITLA Capital’s required leverage ratio was 4.0% and
      its actual leverage ratio was 9.1%.





ITLA
      Capital currently is deemed “well capitalized” under the Federal Reserve Board
      capital requirements. To be well capitalized, a bank holding company must have
      a
      ratio of total capital to risk weighted assets of at least 10% and a ratio
      of
      Tier 1 capital to risk weighted assets of at least 6.0%.





Failure
      to meet capital guidelines could subject a bank or bank holding company to
      a
      variety of enforcement remedies, including issuance of a capital directive,
      the
      termination of deposit insurance by the FDIC, a prohibition on accepting
      brokered deposits, and other restrictions on its business. As described below,
      significant additional restrictions can be imposed on FDIC-insured depository
      institutions that fail to meet applicable capital requirements.





***Bank
      Regulation — California Law***





The
      regulations of the DFI govern most aspects of the Bank’s businesses and
      operations, including, but not limited to, the scope of its business,
      investments, the nature and amount of any collateral for loans, the issuance
      of
      securities, the payment of dividends, bank expansion and bank activities. The
      DFI’s supervision of the Bank includes comprehensive reviews of all aspects of
      the Bank’s business and condition, and the DFI possesses broad remedial
      enforcement authority to influence the Bank’s operations, both formally and
      informally.





***Bank
      Regulation — Federal Law***





Because
      our deposits are insured by the Bank Insurance Fund of the FDIC, the FDIC,
      in
      addition to the DFI, also broadly regulates the Bank. As an insurer of deposits,
      the FDIC issues regulations, conducts examinations, requires the filing of
      reports, and generally supervises the operations of institutions to which it
      provides deposit insurance. The FDIC is also the federal agency charged with
      regulating state-chartered banks that are not members of the Federal Reserve
      System, such as the Bank. Insured depository institutions, and their
      institution-affiliated parties, may be subject to potential enforcement actions
      by the FDIC and the DFI for unsafe or unsound practices in conducting their
      businesses or for violations of any law, rule, regulation or any condition
      imposed in writing by the agency or any written agreement with the agency.
      Management is not aware of any pending or threatened enforcement actions against
      the Bank.


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*Regulatory
      Capital Requirements.* Federally-insured,
      state-chartered banks such as the Bank are required to maintain minimum levels
      of regulatory capital as specified in the FDIC’s capital maintenance
      regulations. The FDIC also is authorized to impose capital requirements in
      excess of these standards on individual banks on a case-by-case
      basis.





The
      Bank
      is required to comply with three separate minimum capital requirements: a “tier
      1 capital ratio” and two “risk-based” capital requirements. “Tier 1 capital”
generally includes common shareholders’ equity, including retained earnings,
      qualifying noncumulative perpetual preferred stock and any related surplus,
      and
      minority interests in the equity accounts of fully consolidated subsidiaries,
      less intangible assets, other than properly valued purchased mortgage servicing
      rights up to certain specified limits and less net deferred tax assets in excess
      of certain specified limits.





*Tier
      1 Capital Ratio.* FDIC
      regulations establish a minimum 3.0% ratio of tier 1 capital to total average
      assets for the most highly-rated state-chartered, FDIC-supervised banks. All
      other FDIC supervised banks must maintain at least a 4.0% tier 1 capital ratio.
      At December 31, 2005, the Bank’s required minimum tier 1 capital ratio was 4.0%
      and its actual tier 1 capital ratio was 9.1%.





*Risk-Based
      Capital Requirements.* The
      risk-based capital requirements generally require the Bank to maintain a minimum
      ratio of tier 1 capital to risk-weighted assets of at least 4.0% and a minimum
      ratio of total risk-based capital to risk-weighted assets of at least 8.0%.
      To
      calculate the amount of capital required, assets are placed in one of four
      categories and given a percentage weight (0%, 20%, 50% or 100%) based on the
      relative risk of the category. For example, United States Treasury Bills and
      Ginnie Mae securities are placed in the 0% risk category. Fannie Mae and Freddie
      Mac securities are placed in the 20% risk category, loans secured by one-to
      four-family residential properties and certain privately-issued mortgage-backed
      securities are generally placed in the 50% risk category, and commercial and
      consumer loans and other assets are generally placed in the 100% risk category.
      In addition, certain off-balance-sheet items are converted to balance sheet
      credit equivalent amounts and each amount is then assigned to one of the four
      categories.





For
      purposes of the risk-based capital requirements, “total capital” means tier 1
      capital plus supplementary or tier 2 capital, so long as the amount of
      supplementary or tier 2 capital that is used to satisfy the requirement does
      not
      exceed the amount of tier 1 capital. Tier 2 capital includes cumulative and
      certain other perpetual preferred stock, mandatory convertible subordinated
      debt
      and perpetual subordinated debt, mandatory redeemable preferred stock,
      intermediate-term preferred stock, mandatory convertible subordinated debt
      and
      subordinated debt, the allowance for loan losses up to a maximum of 1.25% of
      risk-weighted assets and a limited amount of unrealized holding gains on
      securities. At December 31, 2005 the Bank’s required minimum tier 1 risk-based
      and total capital ratios were 4.0% and 8.0% respectively and its actual was
      11.0% and 12.2%, respectively.





The
      federal banking agencies have adopted regulations specifying that the agencies
      will include, in their evaluation of a bank’s capital adequacy, an assessment of
      the exposure to declines in the economic value of the bank’s capital due to
      changes in interest rates. The FDIC and the other federal banking agencies
      have
      also promulgated final amendments to their respective risk-based capital
      requirements which identify concentration of credit risk and certain risks
      arising from nontraditional activities, and the management of such risk, as
      important factors to consider in assessing an institution’s overall capital
      adequacy. The FDIC may require higher minimum capital ratios based on certain
      circumstances, including where the institution has significant risks from
      concentration of credit or certain risks arising from nontraditional
      activities.





*Prompt
      Corrective Action Requirements.* The
      FDIC
      has implemented a system requiring regulatory sanctions against state-chartered
      banks that are not adequately capitalized, with the sanctions growing more
      severe the lower the institution’s capital. The FDIC has established specific
      capital ratios for five separate capital categories: “well capitalized”,
“adequately capitalized”, “undercapitalized”, “significantly undercapitalized”,
      and “critically undercapitalized”.





An
      institution is treated as “well capitalized” if its total risk based capital
      ratio is 10.0% or more, its tier 1 risk-based ratio is 6.0% or more, its tier
      1
      capital ratio is 5.0% or greater, and it is not subject to any order or
      directive by the FDIC to meet a specific capital level. The Bank exceeded these
      requirements at December 31, 2005.





The
      FDIC
      is authorized and, under certain circumstances, required to take certain actions
      against institutions that fail to meet their capital requirements. The FDIC
      is
      generally required to take action to restrict the activities of an
“undercapitalized” institution. An undercapitalized institution is one that does
      not meet the FDIC’s minimum capital ratio requirements. Any such institution
      must submit a capital restoration plan and, until such plan is approved by
      the
      FDIC, may not increase its assets, acquire another institution, establish a
      branch or engage in any new activities, and generally may not make capital
      distributions. The capital restoration plan must include a limited guaranty
      by
      the institution’s holding company. In addition, the FDIC must appoint a receiver
      or conservator for an institution, with certain limited exceptions, within
      90
      days after it becomes “critically undercapitalized”.


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The
      FDIC
      is also generally authorized to reclassify an institution into a lower capital
      category and impose the restrictions applicable to such category if the
      institution is engaged in unsafe or unsound practices or is in an unsafe or
      unsound condition.





*Community
      Reinvestment Act and Fair Lending Requirements.* The
      Bank
      is subject to certain fair lending requirements and reporting obligations
      involving lending operations and Community Reinvestment Act activities. Federal
      banking agencies are required to evaluate the record of financial institutions
      in meeting the credit needs of their local communities, including low and
      moderate income neighborhoods. In addition to substantial penalties and
      corrective measures that may be required for a violation of certain fair lending
      laws, the federal banking agencies take compliance with such laws into account
      when regulating and supervising other activities such as mergers and
      acquisitions. In its most recent examination, the FDIC rated the Bank
“satisfactory” in complying with its Community Reinvestment Act
      obligations.





*Fiscal
      and Monetary Policies.* Our
      business and earnings are affected significantly by the fiscal and monetary
      policies of the federal government and its agencies. We are particularly
      affected by the policies of the Federal Reserve Board, which regulates the
      supply of money and credit in the United States. Among the instruments of
      monetary policy available to the Federal Reserve Board are (a) conducting open
      market operations in United States government securities; (b) changing the
      discount rates of borrowings of depository institutions, (c) imposing or
      changing reserve requirements against depository institutions’ deposits, and (d)
      imposing or changing reserve requirements against certain borrowings by banks
      and their affiliates. These methods are used in varying degrees and combinations
      to directly affect the availability of bank loans and deposits, as well as
      the
      interest rates charged on loans and paid on deposits. The policies of the
      Federal Reserve Board may have a material effect on the Company’s business,
      results of operations and financial condition.





*Privacy
      Provisions.* Banking regulators, as required under the Gramm-Leach-Bliley Act (“GLB Act”),
      have adopted rules limiting the ability of banks and other financial
      institutions to disclose nonpublic information about consumers to nonaffiliated
      third parties. The rules generally require disclosure of privacy policies to
      consumers and, in some circumstances, allow consumers to prevent disclosure
      of
      certain personal information to nonaffiliated third parties. The privacy
      provisions of the GLB Act affect how consumer information is transmitted through
      diversified financial services companies and conveyed to outside
      vendors.





The
      state
      of California has adopted The California Financial Information Privacy Act
      (“CFPA”), which took effect in 2004. The CFPA requires a financial institution
      to provide specific information to a consumer related to the sharing of that
      consumer’s nonpublic personal information. A consumer may direct the financial
      institution not to share his or her nonpublic personal information with
      affiliated or nonaffiliated companies with which a financial institution has
      contracted to provide financial products and services, and requires permission
      from the consumer be acquired by a financial institution prior to sharing such
      information. These provisions are more restrictive than the privacy provisions
      of the GLB Act.





In
      December 2003, the U.S. Congress adopted, and President Bush signed, the Fair
      and Accurate Transactions Act (the “FACT Act”). In 2005, federal courts
      determined that the provisions of the CFPA limiting shared information with
      affiliates are preempted by provisions of the GLB Act, the FACT Act and the
      Fair
      Credit Reporting Act.





*International
      Money Laundering Abatement and Financial Anti-Terrorism Act of
      2001.* President Bush signed the USA Patriot Act of 2001 into law in October 2001.
      This act contains the International Money Laundering Abatement and Financial
      Anti-Terrorism Act of 2001 (the “IMLAFA”). The IMLAFA substantially broadened
      existing anti-money laundering legislation and the extraterritorial jurisdiction
      of the United States, imposes new compliance and due diligence obligations,
      creates new crimes and penalties, compels the production of documents located
      both inside and outside the United States, and clarifies the safe harbor from
      civil liability to customers. The U.S. Treasury Department has issued a number
      of regulations implementing the USA Patriot Act that apply certain of its
      requirements to financial institutions such as the Bank. The regulations impose
      obligations on financial institutions to maintain appropriate policies,
      procedures and controls to detect, prevent and report money laundering and
      terrorist financing. The increased obligations of financial institutions,
      including us, to identify their customers, watch for and report suspicious
      transactions, respond to requests for information by regulatory authorities
      and
      law enforcement agencies, and share information with other financial
      institutions, requires the implementation and maintenance of internal
      procedures, practices and controls which have increased, and may continue to
      increase, our costs and may subject us to liability.





Enforcement
      and compliance-related activity by government agencies has increased. Money
      laundering and anti-terrorism compliance are among the areas receiving a high
      level of focus in the present environment.


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*Future
      Legislation.* Various
      legislation, including proposals to change substantially the financial
      institution regulatory system, is from time to time introduced in Congress.
      This
      legislation may change banking statutes and our operating environment in
      substantial and unpredictable ways. If enacted, this legislation could increase
      or decrease the cost of doing business, limit or expand permissible activities
      or affect the competitive balance among banks, savings associations, credit
      unions, and other financial institutions. We cannot predict whether any of
      this
      potential legislation will be enacted and, if enacted, the effect that it,
      or
      any implementing regulations, would have on our business, results of operations
      or financial condition.





**Employees**





As
      of
      December 31, 2005, we had 253 employees. Management believes that its relations
      with employees are satisfactory. We are not subject to any collective bargaining
      agreements.





**Segment
      Reporting**





Financial
      and other information regarding our operating segments is contained in Note
      18
      to our audited consolidated financial statements included in Item 8 of this
      report.





**Internet
      Website**





We
      maintain a website with the address www.itlacapital.com. The information
      contained on our website is not included as a part of, or incorporated by
      reference into, this Annual Report on Form 10-K. Other than an investor’s own
      Internet access charges, we make available free of charge through our website
      our Annual Report on Form 10-K, quarterly reports on Form 10-Q and current
      reports on Form 8-K, and amendments to these reports, as soon as reasonably
      practicable after we have electronically filed such material with, or furnished
      such material to, the Securities and Exchange Commission.





**Item1A.
      Risk Factors**





***An
      investment in our common stock is subject to risks inherent in our business.
      Before making an investment decision, you should carefully consider the risks
      and uncertainties described below together with all of the other information
      included in this report. In addition to the risks and uncertainties described
      below, other*** ***risks
      and uncertainties not currently known to us or that we currently deem to be
      immaterial also may materially and adversely affect our business, financial
      condition and results of operations.***  ***The
      value or market price of our common stock could decline due to any of these
      identified or other risks, and you could lose all or part of your
      investment.***





**Fluctuations
      in interest rates could reduce our profitability and affect the value of our
      assets.**





Like
      other financial institutions, we are subject to interest rate risk. Our primary
      source of income is net interest income, which is the difference between
      interest earned on loans and investments and the interest paid on deposits
      and
      borrowings. We expect that we will periodically experience imbalances in the
      interest rate sensitivities of our assets and liabilities and the relationships
      of various interest rates to each other. Over any defined period of time, our
      interest-earning assets may be more sensitive to changes in market interest
      rates than our interest-bearing liabilities, or vice versa. In addition, the
      individual market interest rates underlying our loan and deposit products may
      not change to the same degree over a given time period. In any event, if market
      interest rates should move contrary to our position, our earnings may be
      negatively affected. In addition, loan volume and quality and deposit volume
      and
      mix can be affected by market interest rates. Changes in levels of market
      interest rates could materially adversely affect our net interest spread, asset
      quality, origination volume and overall profitability.





Interest
      rates have recently been at historically low levels. However, since
      June 30, 2004, the U.S. Federal Reserve has increased its target for the
      federal funds rate thirteen times, from 1.00% to 4.25%. While these
      short-term market interest rates (which we use as a guide to price our deposits)
      have increased, longer-term market interest rates (which we use as a guide
      to
      price our longer-term loans) have not. This “flattening” of the market yield
      curve has had a negative impact on our interest rate spread and net interest
      margin to date. If short-term interest rates continue to rise, and if rates
      on
      our deposits and borrowings continue to reprice upwards faster than the rates
      on
      our long-term loans and investments, we would experience further compression
      of
      our interest rate spread and net interest margin, which would have a negative
      effect on our profitability.





We
      principally manage interest rate risk by managing our volume and mix of our
      earning assets and funding liabilities. In a changing interest rate environment,
      we may not be able to manage this risk effectively. If we are unable to manage
      interest rate risk effectively, our business, financial condition and results
      of
      operations could be materially harmed.


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Changes
      in the level of interest rates also may negatively affect our ability to
      originate real estate loans, the value of our assets and our ability to realize
      gains from the sale of our assets, all of which ultimately affect our
      earnings.





**An
      increase in loan prepayments may adversely affect our profitability.**





Prepayment
      rates are affected by consumer behavior, conditions in the real estate and
      other
      financial markets, general economic conditions and the relative interest rates
      on our fixed-rate and adjustable-rate mortgage loans and mortgage-backed
      securities. Changes in prepayment rates are therefore difficult for us to
      predict.





We
      recognize our deferred loan origination costs and premiums paid in originating
      these loans by adjusting our interest income over the contractual life of the
      individual loans. As prepayments occur, the rate at which net deferred loan
      origination costs and premiums are expensed accelerates. The effect of the
      acceleration of deferred costs and premium amortization may be mitigated by
      prepayment penalties paid by the borrower when the loan is paid in full within
      a
      certain period of time which varies between loans. If prepayment occurs after
      the period of time when the loan is subject to a prepayment penalty, the effect
      of the acceleration of premium and deferred cost amortization is no longer
      mitigated.





We
      may
      not be able to reinvest prepayments on loans or mortgage-backed securities
      at
      rates comparable to the prepaid instrument particularly in period of declining
      interest rates.





**An
      inadequate allowance for loan losses would reduce our earnings.**





We
      are
      exposed to the risk that our borrowers will be unable to repay their loans
      according to their terms and that any collateral securing the payment of their
      loans will not be sufficient to assure full repayment. Credit losses are
      inherent in the lending business and could have a material adverse effect on
      our
      operating results. Volatility and deterioration in the economy may also increase
      our risk for credit losses. We evaluate the collectibility of our loan portfolio
      and provide an allowance for loan losses that we believe is adequate based
      upon
      such factors as:


•
              the
                  risk characteristics of various classifications of loans;
  •
              general
                  portfolio trends relative to asset and portfolio size;
  •
              potential
                  credit and geographic concentrations;
  •
              delinquency
                  trends and nonaccrual levels;
  •
              historical
                  loss and recovery experience and risks associated with changes
                  in
                  economic, social and business conditions;
  •
              the
                  amount and quality of the collateral;
 
 •
              the
                  views of our regulators; and
  •
              the
                  underwriting standards in effect when the loan is made.





If
      our
      evaluation is incorrect and borrower defaults cause losses exceeding our
      allowance for loan losses, our earnings could be materially and adversely
      affected. We cannot assure you that our allowance will be adequate to cover
      loan
      losses inherent in our portfolio. We may experience losses in our loan portfolio
      or perceive adverse trends that require us to significantly increase our
      allowance for loan losses in the future, which would also reduce our earnings.
      In addition, the Bank’s regulators, as an integral part of their examination
      process, may require us to make additional provisions for loan
      losses.


-
          13
          -
 **Table
          of Contents**





**Our
      income producing property loans involve higher principal amounts and expose
      us
      to a greater risk of loss than one-to-four family residential
      loans.**





At
      December 31, 2005, we had $2.0 billion of loans secured by income producing
      properties, both commercial and multi-family residential, representing 83.1%
      of
      our total real estate loans and 80.2% of our gross loan portfolio. The income
      generated from the operation of the property securing the loan is generally
      considered by us to be the principal source of repayment on this type of loan.
      The income producing property lending in which we engage typically involves
      larger loans to a single borrower and is generally viewed as exposing the lender
      to a greater risk of loss than one-four family residential lending because
      these
      loans generally are not fully amortizing over the loan period, but have a
      balloon payment due at maturity. A borrower’s ability to make a balloon payment
      typically will depend on being able to either refinance the loan or timely
      sell
      the underlying property. Income producing property values are also generally
      subject to greater volatility than residential property values. The liquidation
      values of income producing properties may be adversely affected by risks
      generally incident to interests in real property, such as:





•
            changes
                or continued weakness in general or local economic
                conditions;




•
            changes
                or continued weakness in specific industry
                segments;




•
            declines
                in real estate values;




•
            declines
                in rental, room or occupancy rates in hotels, apartment complexes
                or
                commercial properties




•
            increases
                in other operating expenses (including energy
                costs);




•
            the
                availability of refinancing at lower interest rates or better loan
                terms;




•
            changes
                in governmental rules, regulations and fiscal policies, including
                rent
                control ordinances, environmental legislation and
                taxation;




•
            increases
                in interest rates, real estate and personal property tax rates,
                and




•
            other
                factors beyond the control of the borrower or the
                lender.





We
      generally originate and acquire income producing property loans primarily to
      be
      held in our portfolio to maturity. Because the resale market for this type
      of
      loan is less liquid than the well-established secondary market for residential
      loans, should we decide to sell our income producing property loans, we may
      incur losses on any sale.





**The
      unseasoned nature of many of the loans we originated as part of our small
      balance multi-family real estate loan platform, along with our limited
      experience in originating these loans nationwide, may lead to additional
      provisions for loan losses or charge-offs, which would hurt our
      profits.**





The
      national expansion of our small balance multi-family real estate loan platform
      has led to an increase in the number of these types of loans in our portfolio.
      Many of these loans are unseasoned and have not been subjected to unfavorable
      economic conditions. We have limited experience in originating these types
      of
      loans outside the State of California and as a result do not have a significant
      payment history pattern with which to judge future collectibility. As a result,
      it is difficult to predict the future performance of this part of our real
      estate loan portfolio. These loans may have delinquency or charge-off levels
      above our historical experience, which could adversely affect our
      profitability.





**Our
      construction loans are based upon estimates of costs and value associated with
      the complete project. These estimates may be inaccurate.**





We
      originate construction loans for income producing properties, as well as for
      single family home construction. At December 31, 2005, construction loans
      totaled $302.9 million, or 11.9% of gross loans receivable. Construction lending
      involves additional risks because funds are advanced upon the security of the
      project, which is of uncertain value prior to its completion. There are also
      risks associated with the timely completion of the construction activities
      for
      their allotted costs, as a number of factors can result in delays and cost
      overruns, and the time needed to stabilize income producing properties or to
      sell residential tract developments. Because of the uncertainties inherent
      in
      estimating construction costs, as well as the market value of the completed
      project and the effects of governmental regulation of real property, it is
      relatively difficult to evaluate accurately the total funds required to complete
      a project and the related loan-to-value ratio. As a result, construction loans
      often involve the disbursement of substantial funds with repayment dependent,
      in
      part, on the success of the ultimate project and the ability of the borrower
      to
      sell or lease the property or refinance the indebtedness, rather than the
      ability of the borrower or guarantor to repay principal and interest. If our
      appraisal of the value of the completed project proves to be overstated, we
      may
      have inadequate security for the repayment of the loan upon completion of
      construction of the project and may incur a loss.


-
          14
          -
 **Table
          of Contents**





**Our
      real estate lending also exposes us to the risk of environmental
      liabilities.**





In
      the
      course of our business, we may foreclose and take title to real estate, and
      could be subject to environmental liabilities with respect to these properties.
      We may be held liable to a governmental entity or to third persons for property
      damage, personal injury, investigation and clean-up costs incurred by these
      parties in connection with environmental contamination, or may be required
      to
      investigate or clean up hazardous or toxic substances, or chemical releases
      at a
      property. The costs associated with investigation or remediation activities
      could be substantial. In addition, as the owner or former owner of a
      contaminated site, we may be subject to common law claims by third parties
      based
      on damages and costs resulting from environmental contamination emanating from
      the property. If we ever become subject to significant environmental
      liabilities, our business, financial condition and results of operations could
      be materially and adversely affected.





**Repayment
      of our entertainment finance loans is primarily dependent on revenues from
      distribution contracts.**





Through
      ICBEF, a division of the Bank, we originate entertainment finance loans to
      independent producers of film and television on a senior secured basis. Although
      these loans are typically collateralized by a mortgage of copyright, security
      agreements and assigned sales contracts, the primary source of repayment is
      the
      revenue received by the borrower from the licensing of distribution rights.
      For
      this reason, our credit decisions are based in part on the creditworthiness
      and
      reputation of distributors and sales agents who have contracted to distribute
      the films. In many instances, the distribution contracts provide for multiple
      payments payable at certain milestones (such as execution of contract,
      commencement of principal photography or completion of principal photography).
      The maturity date of the loan is generally six to nine months after completion
      of the production. To the extent a distributor fails to make payment upon
      completion of the film, or the predicted level of revenue is less than expected,
      we may incur a loss if rights cannot be resold for the same amount or other
      loan
      collateral cannot cover required loan payments.





**Negative
      events in certain geographic areas, particularly California, could adversely
      affect us.**





Although
      we have significantly increased the geographic diversification of our loan
      portfolio in the last two years, our real estate loans remain heavily
      concentrated in the State of California, with approximately 59.2% of our real
      estate loans as of December 31, 2005 secured by collateral and made to borrowers
      in that state. In addition, as of that date, approximately 9.0% and 5.6% of
      our
      real estate loans were secured by collateral and made to borrowers in the States
      of Arizona and Texas, respectively. A worsening of economic conditions in
      California or in any other state in which we have a significant concentration
      of
      borrowers could have a material adverse effect on our business, by reducing
      demand for new financings, limiting the ability of customers to repay existing
      loans, and impairing the value of our real estate collateral and real estate
      owned properties. Real estate values are affected by various other factors,
      including changes in general or regional economic conditions, governmental
      rules
      or policies and natural disasters such as earthquakes, tornados and
      hurricanes.





**Our
      wholesale funding sources may prove insufficient to replace deposits and support
      our future growth.**





We
      must
      maintain sufficient funds to respond to the needs of depositors and borrowers.
      As a part of our liquidity management, we use a number of funding sources in
      addition to core deposit growth and repayments and maturities of loans and
      investments. As we continue to grow, we are likely to become more dependent
      on
      these sources, which include brokered certificates of deposit, repurchase
      agreements, federal funds purchased and Federal Home Loan Bank advances. Adverse
      operating results or changes in industry conditions could lead to an inability
      to replace these additional funding sources at maturity. Our financial
      flexibility will be severely constrained if we are unable to maintain our access
      to funding or if adequate financing is not available to accommodate future
      growth at acceptable interest rates. Finally, if we are required to rely more
      heavily on more expensive funding sources to support future growth, our revenues
      may not increase proportionately to cover our costs. In this case, our
      profitability would be adversely affected.





**Competition
      with other financial institutions could adversely affect our profitability.**





The
      banking and financial services industry is very competitive. Legal and
      regulatory developments have made it easier for new and sometimes unregulated
      competitors to compete with us. Consolidation among financial service providers
      has resulted in fewer very large national and regional banking and financial
      institutions holding a large accumulation of assets. These institutions
      generally have significantly greater resources, a wider geographic presence
      or
      greater accessibility. Our competitors sometimes are also able to offer more
      services, more favorable pricing or greater customer convenience than we do.
      In
      addition, our competition has grown from new banks and other financial services
      providers that target our existing or potential customers. As consolidation
      continues among large banks, we expect additional institutions to try to exploit
      our market.


-
          15
          -
 **Table
          of Contents**





Technological
      developments have allowed competitors including some non-depository
      institutions, to compete more effectively in local markets and have expanded
      the
      range of financial products, services and capital available to our target
      customers. If we are unable to implement, maintain and use such technologies
      effectively, we may not be able to offer products or achieve cost-efficiencies
      necessary to compete in our industry. In addition, some of these competitors
      have fewer regulatory constraints and lower cost structures.





**We
      rely heavily on the proper functioning of our technology.**





We
      rely
      on our computer systems, and outside servicers providing technology, for much
      of
      our business, including recording our assets and liabilities. If our computer
      systems or outside technology sources fail, are not reliable or there is a
      breach of security, our ability to maintain accurate financial records may
      be
      impaired, which could materially affect our operations and financial condition.





**We
      are dependent upon the services of our management team.**





We
      are
      dependent upon the ability and experience of a number of our key management
      personnel who have substantial experience with our operations, the financial
      services industry and the markets in which we offer our services. It is possible
      that the loss of the services of one or more of our senior executives or key
      managers would have an adverse effect on our operations. Our success also
      depends on our ability to continue to attract, manage and retain other qualified
      personnel as we grow. We cannot assure you that we will continue to attract
      or
      retain such personnel.





**Terrorist
      activities could cause reductions in investor confidence and substantial
      volatility in real estate and securities markets.**





It
      is
      impossible to predict the extent to which terrorist activities may occur in
      the
      United States or other regions, or their effect on a particular security issue.
      It is also uncertain what effects any past or future terrorist activities and/or
      any consequent actions on the part of the United States government and others
      will have on the United States and world financial markets, local, regional
      and
      national economics, and real estate markets across the United States. Among
      other things, reduced investor confidence could result in substantial volatility
      in securities markets, a decline in general economic conditions and real estate
      related investments and an increase in loan defaults. Such unexpected losses
      and
      events could materially affect our results of operations.





**We
      are subject to extensive regulation that could restrict our activities and
      impose financial requirements or limitations on the conduct of our business.**





Bank
      holding companies and California-charted commercial banks operate in a highly
      regulated environment and are subject to supervision and examination by federal
      and state regulatory agencies. We are subject to the Bank Holding Company Act
      of
      1956, as amended, and to regulation and supervision by the FRB. Imperial Capital
      Bank is subject to regulation and supervision by the FDIC, and DFI. The cost
      of
      compliance with regulatory requirements may adversely affect our results of
      operations or financial condition. Federal and state laws and regulations govern
      numerous matters including: changes in the ownership or control of banks and
      bank holding companies; maintenance of adequate capital and the financial
      condition of a financial institution; permissible types, amounts and terms
      of
      extensions of credit and investments; permissible non-banking activities; the
      level of reserves against deposits; and restrictions on dividend payments.





The
      FDIC
      and DFI possess cease and desist powers to prevent or remedy unsafe or unsound
      practices or violations of law by banks subject to their regulation, and the
      FRB
      possesses similar powers with respect to bank holding companies. These and
      other
      restrictions limit the manner in which we may conduct our business and obtain
      financing.





**Item
      1B. UnresolvedStaff Comments**





None.





-
          16
          -
 **Table
          of Contents**


**Item
      2. Properties**





The
      following sets forth the Company’s material facilities as of December 31,
      2005.





**Locations**
            **Office
                Uses**
            **Square
                Footage**
            **Year
                Current Lease**
              **Term
                Expires**La
                Jolla, CA
            West
                Coast Corporate Headquarters
            18,913
            2008La
                Jolla, CA
            Administrative
                and Marketing
            2,325
            2008Glendale,
                CA
            Loan
                Administration/Asset Management/Bank Branch
            6,257
            2006Glendale,
                CA
            Loan
                Operations Division/Real Estate Lending
            8,932
            2008Glendale,
                CA
            Operations
                Support
            6,342
            2006Costa
                Mesa, CA
            Bank
                Branch/Real Estate Lending
            3,609
            2006San
                Francisco, CA
            Bank
                Branch/Real Estate Lending
            5,005
            2007Beverly
                Hills, CA
            Bank
                Branch
            2,218
            2010Encino,
                CA
            Bank
                Branch/Real Estate Lending
            5,145
            2009San
                Diego, CA
            Bank
                Branch/Real Estate Lending
            3,046
            2011Santa
                Monica, CA
            Loan
                Operations/Real Estate Lending
            11,490
            2009Walnut
                Creek, CA
            Real
                Estate Lending
            2,220
            2006Century
                City, CA
            ICB
                Entertainment Finance
            7,003
            2008New
                York, NY
            East
                Coast Corporate Headquarters
            3,810
            2009Carson
                City, NV
            Bank
                Branch
            3,000
            2007Boston,
                MA
            Real
                Estate Lending
            3,309
            2007Atlanta,
                GA
            Real
                Estate Lending
            3,148
            2008Fairfield,
                CT
            Real
                Estate Lending
            1,992
            2007





For
      additional information regarding our premises, see “Item 8. Financial Statements
      and Supplementary Data — Notes to Consolidated Financial Statements - Note 5”.





In
      February 2006, we relocated our loan operations/real estate lending offices
      based in Santa Monica, CA and our Glendale Bank Branch to a new facility in
      Glendale, CA. The combined space occupied by these divisions is 14,164 square
      feet with a lease expiration of 2012.





Management
      believes that our present facilities are adequate for its current needs, and
      that alternative or additional space, if necessary, will be available on
      reasonable terms.





**Item
      3. Legal Proceedings**





We
      are
      party to certain legal proceedings incidental to our business. Management
      believes that the outcome of such proceedings, in the aggregate, will not have
      a
      material effect on our business, financial condition or results of
      operations.


During
            2005, the Company paid an arbitration award stemming from a “glass ceiling”
employment dispute with a former employee who alleged she was passed
            over for
            promotion due to her gender. The cost to the Company after application
            of
            insurance proceeds received was approximately $330,000. As part of the
            arbitration proceedings, sexual harassment allegations were disclosed
            involving former employees. These allegations were dealt with by the
            Company in accordance with Board approved policies and procedures, consistent
            with industry standards and prudent management practices. The Company
            believes
            that this dispute was an isolated incident.No other lawsuits have
            ever been filed against the Company based on either glass ceiling or
            sexual
            harassment grounds.


**Item
      4. Submission of Matters to a Vote of Security
      Holders**





No
      matter
      was submitted to a vote of security holders, through the solicitation of proxies
      or otherwise, during the quarter ended December 31, 2005.


-
          17
          -
 **Table
          of Contents**


**PART
      II**





**Item5. Market for Registrant’sCommon Equity, Related Stockholder
      Matters** , **and
      Issuer Purchases of Equity Securities**





ITLA
      Capital’s common stock is traded on the NASDAQ National Market system under the
      symbol “ITLA”. As of March 7, 2006, there were 123 holders of record of ITLA
      Capital’s common stock representing an estimated 1,450 beneficial shareholders
      with a total of 5,583,295 shares outstanding. We have not paid any cash
      dividends since our holding company reorganization in 1996. As a bank holding
      company, ITLA Capital’s ability to pay dividends may be affected by regulations,
      including those governing the payment of dividends by the Bank to ITLA Capital,
      which could be a source of funds for any dividends paid by ITLA Capital, as
      well
      as by the policies of the Federal Reserve Board. See “Item 1.
      Business—Regulation” and Note 16 to our consolidated financial statements
      included in Item 8 of this report.





The
      following table sets forth, for the periods indicated, the range of high and
      low
      trade prices for ITLA Capital’s common stock. Stock price data on NASDAQ
      reflects inter-dealer prices, without retail mark-up, mark-down or
      commission.





**Market
                Price**
            
            **Average
                Daily****High**
            
            **Low**
            
            **Close**
            
            **Closing
                Price****2005**
              4th
                Quarter
            
            $
            53.55
            
            $
            47.35
            
            $
            48.85
            
            $
            50.533rd
                Quarter
            
            
            59.30
            
            
            50.50
            
            
            52.49
            
            
            54.302nd
                Quarter
            
            
            56.95
            
            
            43.36
            
            
            53.90
            
            
            49.621st
                Quarter
            
            
            58.31
            
            
            49.37
            
            
            49.96
            
            
            53.89**2004**
              4th
                Quarter
            
            $
            58.81
            
            $
            44.14
            
            $
            58.79
            
            $
            51.793rd
                Quarter
            
            
            46.97
            
            
            37.73
            
            
            46.20
            
            
            41.452nd
                Quarter
            
            
            50.00
            
            
            36.70
            
            
            40.41
            
            
            42.641st
                Quarter
            
            
            50.81
            
            
            44.52
            
            
            49.23
            
            
            48.61





The
      following table includes supplementary quarterly operating results and per
      share
      information for the past two years. The data presented should be read along
      with
“Item 7. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations” and with “Item 8. Financial Statements and Supplementary Data”
included elsewhere in this report.





**Quarterly
      Operations (Unaudited)**


**For
                  the Quarters Ended****March
                  31**
              
              **June
                  30**
              
              **September
                  30**
              
              **December
                  31****(in
                  thousands except per share amounts)****2005**Interest
                  income
              
              $
              36,752
              
              $
              41,680
              
              $
              48,830
              
              $
              50,896Interest
                  expense
              
              
              15,010
              
              
              19,551
              
              
              24,991
              
              
              26,934Net
                  interest income before provision for loan losses
              
              
              21,742
              
              
              22,129
              
              
              23,839
              
              
              23,962Provision
                  for loan losses
              
              
              750
              
              
              1,500
              
              
              1,500
              
              
              6,500Non-interest
                  income
              
              
              (20
              )
              
              509
              
              
              485
              
              
              5,600General
                  and administrative expense
              
              
              11,230
              
              
              11,069
              
              
              11,973
              
              
              11,986Total
                  real estate owned expense, net
              
              
              (11
              )
              
              —
              
              
              —
              
              
              204Provision
                  for income taxes
              
              
              4,102
              
              
              4,230
              
              
              4,583
              
              
              4,567Net
                  income
              
              
              5,651
              
              
              5,839
              
              
              6,268
              
              
              6,305Basic
                  earnings per share
              
              $
              0.97
              
              $
              1.01
              
              $
              1.09
              
              $
              1.11Diluted
                  earnings per share
              
              $
              0.93
              
              $
              0.98
              
              $
              1.06
              
              $
              1.08**2004**Interest
                  income
              
              $
              32,083
              
              $
              28,188
              
              $
              30,678
              
              $
              34,005Interest
                  expense
              
              
              9,146
              
              
              8,819
              
              
              10,544
              
              
              12,909Net
                  interest income before provision for loan losses
              
              
              22,937
              
              
              19,369
              
              
              20,134
              
              
              21,096Provision
                  for loan losses
              
              
              1,400
              
              
              950
              
              
              1,100
              
              
              1,275Non-interest
                  income
              
              
              13,394
              
              
              1,045
              
              
              (165
              )
              
              234General
                  and administrative expense
              
              
              11,352
              
              
              10,488
              
              
              9,881
              
              
              10,313Total
                  real estate owned expense, net
              
              
              1,057
              
              
              (330
              )
              
              (29
              )
              
              14Provision
                  for income taxes
              
              
              8,738
              
              
              3,676
              
              
              3,519
              
              
              4,015Net
                  income
              
              
              13,784
              
              
              5,630
              
              
              5,498
              
              
              5,713Basic
                  earnings per share
              
              $
              2.21
              
              $
              0.91
              
              $
              0.91
              
              $
              0.98Diluted
                  earnings per share
              
              $
              2.07
              
              $
              0.86
              
              $
              0.86
              
              $
              0.93


-
          18
          -
 **Table
          of Contents**


**Stock
      Repurchases**





The
      following table sets forth the repurchases of our common stock for the fiscal
      quarter ended December 31, 2005.





**Period**
            
            **Total
                Number of Shares Purchased**
            
            **Average
                Price Paid per Share**
            
            **Total
                Number of Shares Purchased as Part of Publicly Announced Plans or
                Programs**
            
            **Maximum
                Number of Shares that May Yet Be Purchased Under the Plans or
                Programs****(1)**October
                1, 2005 toOctober
                31, 2005
            
            
            —
            
            $
            —
            
            
            —
            
            
            295,626November
                1, 2005 toNovember
                30, 2005
            
            
            2,400
            
            
            52.33
            
            
            2,400
            
            
            293,226December
                1, 2005 toDecember
                31, 2005
            
            
            46,230
            
            
            50.71
            
            
            46,230
            
            
            246,996Total
            
            
            48,630
            
            $
            50.79
            
            
            48,630
            
            
            246,996





*(1)*
              *The**repurchases
                  during October, November and December 2005 were made under the
                  tenth and
                  eleventh extensions of our stock repurchase program, which were
                  announced
                  on March 9, 2005 and October 18, 2005, respectively. These extensions
                  authorized the repurchase of an additional 5% of the outstanding
                  shares as
                  of their respective authorization dates. At December 31, 2005,
                  246,996
                  shares remained available for repurchase under the eleventh extension.*





**Item
      6. Selected FinancialData**





The
      following condensed consolidated statements of operations and financial
      condition and selected performance ratios as of December 31, 2005, 2004, 2003,
      2002, and 2001 and for the years then ended have been derived from our audited
      consolidated financial statements. The information below is qualified in its
      entirety by the detailed information included elsewhere herein and should be
      read along with “Item 7. Management’s Discussion and Analysis of Financial
      Condition and Results of Operations” and “Item 8. Financial Statement and
      Supplementary Data.”





**As
                of and for the years ended December 31,****2005**
            
            **2004**
            
            **2003**
            
            **2002**
            
            **2001****(in
                thousands except per share amount)****Condensed
                Consolidated Statements of Operations**
              Total
                interest income
            
            $
            178,158
            
            $
            124,954
            
            $
            115,977
            
            $
            110,608
            
            $
            123,095Total
                interest expense
            
            
            86,486
            
            
            41,418
            
            
            30,867
            
            
            37,322
            
            
            63,863Net
                interest income before provision for loan losses
            
            
            91,672
            
            
            83,536
            
            
            85,110
            
            
            73,286
            
            
            59,232Provision
                for loan losses
            
            
            10,250
            
            
            4,725
            
            
            7,760
            
            
            9,030
            
            
            4,575Net
                interest income after provision for loan losses
            
            
            81,422
            
            
            78,811
            
            
            77,350
            
            
            64,256
            
            
            54,657Non-interest
                income*(1)*
            
            
            6,574
            
            
            14,508
            
            
            15,240
            
            
            373
            
            
            1,059Non-interest
                expense:Compensation
                and benefits
            
            
            21,737
            
            
            21,444
            
            
            18,870
            
            
            13,954
            
            
            11,778Occupancy
                and equipment
            
            
            7,177
            
            
            5,924
            
            
            4,839
            
            
            3,165
            
            
            2,968Other
                general and administrative expenses
            
            
            17,344
            
            
            14,666
            
            
            13,006
            
            
            9,913
            
            
            8,072Real
                estate owned expense, net
            
            
            193
            
            
            712
            
            
            1,212
            
            
            1,323
            
            
            387Total
                non-interest expense
            
            
            46,451
            
            
            42,746
            
            
            37,927
            
            
            28,355
            
            
            23,205Income
                before provision for income taxes and minority interest in income
                of
                subsidiary
            
            
            41,545
            
            
            50,573
            
            
            54,663
            
            
            36,274
            
            
            32,511Minority
                interest in income of subsidiary*(2)(3)*
            
            
            —
            
            
            —
            
            
            6,083
            
            
            3,481
            
            
            2,967Income
                before provision for income taxes
            
            
            41,545
            
            
            50,573
            
            
            48,580
            
            
            32,793
            
            
            29,544Provision
                for income taxes
            
            
            17,482
            
            
            19,948
            
            
            18,946
            
            
            12,788
            
            
            11,393NET
                INCOME
            
            $
            24,063
            
            $
            30,625
            
            $
            29,634
            
            $
            20,005
            
            $
            18,151BASIC
                EARNINGS PER SHARE
            
            $
            4.19
            
            $
            5.04
            
            $
            4.91
            
            $
            3.35
            
            $
            2.82DILUTED
                EARNINGS PER SHARE
            
            $
            4.04
            
            $
            4.75
            
            $
            4.55
            
            $
            3.16
            
            $
            2.72Dividends
                paid
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            —


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          19
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          of Contents**





**Condensed
                Consolidated Statements of Financial Condition**Cash
                and cash equivalents
            
            $
            93,747
            
            $
            87,580
            
            $
            178,318
            
            $
            160,848
            
            $
            134,241Investment
                securities available for sale, at fair value
            
            
            92,563
            
            
            66,845
            
            
            53,093
            
            
            54,677
            
            
            29,411Investment
                securities held-to-maturity, at amortized cost
            
            
            233,880
            
            
            296,028
            
            
            —
            
            
            —
            
            
            —Stock
                in Federal Home Loan Bank
            
            
            43,802
            
            
            23,200
            
            
            17,966
            
            
            16,934
            
            
            13,464Loans,
                net
            
            
            2,523,480
            
            
            1,793,815
            
            
            1,505,424
            
            
            1,438,234
            
            
            1,284,528Interest
                receivable
            
            
            16,287
            
            
            10,695
            
            
            8,958
            
            
            9,158
            
            
            11,144Other
                real estate owned, net
            
            
            3,960
            
            
            —
            
            
            7,048
            
            
            12,593
            
            
            13,741Premises
                and equipment, net
            
            
            6,718
            
            
            6,645
            
            
            5,766
            
            
            4,197
            
            
            2,177Deferred
                income taxes
            
            
            12,717
            
            
            10,468
            
            
            11,609
            
            
            13,822
            
            
            11,869Goodwill
            
            
            3,118
            
            
            3,118
            
            
            3,118
            
            
            3,118
            
            
            —Other
                assets
            
            
            20,924
            
            
            19,677
            
            
            26,915
            
            
            8,384
            
            
            7,733Total
                Assets
            
            $
            3,051,196
            
            $
            2,318,071
            
            $
            1,818,215
            
            $
            1,721,965
            
            $
            1,508,308Deposit
                accounts
            
            $
            1,735,428
            
            $
            1,432,032
            
            $
            1,147,017
            
            $
            1,065,911
            
            $
            953,654Federal
                Home Loan Bank advances and other borrowings
            
            
            992,557
            
            
            584,224
            
            
            378,003
            
            
            407,762
            
            
            378,933Account
                payable and other liabilities
            
            
            32,130
            
            
            20,491
            
            
            19,696
            
            
            10,006
            
            
            9,674Junior
                subordinated debentures*(3)*
            
            
            86,600
            
            
            86,600
            
            
            86,600
            
            
            —
            
            
            —Guaranteed
                preferred beneficial interests in the Company’s junior subordinated
                deferrable interest debentures*(3)*
            
            
            —
            
            
            —
            
            
            —
            
            
            81,595
            
            
            28,118Shareholders’
                equity
            
            
            204,481
            
            
            194,724
            
            
            186,899
            
            
            156,691
            
            
            137,929Total
                Liabilities and Shareholders’ Equity
            
            $
            3,051,196
            
            $
            2,318,071
            
            $
            1,818,215
            
            $
            1,721,965
            
            $
            1,508,308Book
                value per share
            
            $
            37.85
            
            $
            35.09
            
            $
            31.30
            
            $
            27.11
            
            $
            23.54


____________





*(1)*
            *For
                2004 and 2003, includes fee income earned in connection with the
                tax
                refund lending program pursuant to our strategic alliance with various
                subsidiaries of Household International, Inc. (“Household”), a wholly
                owned subsidiary of HSBC Holdings plc (NYSE-HBC). This program was
                terminated by Household in 2004 subsequent to the tax filing
                season.*





*(2)*
            *Represents
                accrued distributions payable on our trust preferred securities.*





*(3)*
            *As
                a result of our adoption of Financial Interpretation No. 46 (revised)
                issued by the Financial Accounting Standards Board effective December
                31,
                2003, we de-consolidated our trust subsidiaries which issued our
                trust
                preferred securities. The effect of this was to recognize investments
                in
                our trust subsidiaries in other assets, to report the amount of junior
                subordinated debentures we issued to these trusts as a liability
                in our
                consolidated balance sheets and, beginning on the date of adoption,
                to
                recognize the interest expense on the junior subordinated debentures
                in
                our consolidated statements of income. Prior to the de-consolidation,
                we
                reported our trust preferred securities in the mezzanine section
                of our
                balance sheet as “guaranteed preferred beneficial interests in the
                Company’s junior subordinated deferrable interest debentures” and
                recognized distributions paid to the holders of the trust preferred
                securities as “minority interest in income of subsidiary” in our
                consolidated statement of income. See Note 1 to our consolidated
                financial
                statements included in Item 8 of this report for further
                discussion.*





**As
                of and for the years ended December 31,****2005**
            
            **2004**
            
            **2003**
            
            **2002**
            
            **2001****Selected
                Performance Ratios**
              Return
                on average assets
            
            
            0.90
            %
            
            1.47
            %
            
            1.71
            %
            
            1.41
            %
            
            1.32
            %Return
                on average shareholders’ equity
            
            
            12.12
            %
            
            15.44
            %
            
            16.88
            %
            
            13.56
            %
            
            13.28
            %Net
                interest margin*(1)*
            
            
            3.43
            %
            
            4.12
            %
            
            5.03
            %
            
            5.30
            %
            
            4.33
            %Average
                interest earning assets to average interest bearing
                liabilities
            
            
            109.32
            %
            
            127.50
            %
            
            135.03
            %
            
            113.94
            %
            
            113.80
            %Efficiency
                ratio*(2)*
            
            
            47.28
            %
            
            43.60
            %
            
            37.79
            %
            
            38.50
            %
            
            38.49
            %Total
                general and administrative expense to average assets
            
            
            1.73
            %
            
            2.02
            %
            
            2.29
            %
            
            1.90
            %
            
            1.66
            %Average
                shareholders’ equity to average assets
            
            
            7.39
            %
            
            9.51
            %
            
            11.16
            %
            
            10.36
            %
            
            9.93
            %Nonperforming
                assets to total assets
            
            
            0.92
            %
            
            0.63
            %
            
            0.86
            %
            
            1.08
            %
            
            1.92
            %Allowance
                for loan losses to loans held for investment, net*(3)*
            
            
            1.71
            %
            
            1.94
            %
            
            2.14
            %
            
            2.31
            %
            
            2.16
            %Allowance
                for loan loss to nonaccrual loans
            
            
            180.59
            %
            
            242.17
            %
            
            392.26
            %
            
            555.61
            %
            
            174.30
            %Net
                charge-offs (recoveries) to average loans held for investment,
                net
            
            
            0.09
            %
            
            0.16
            %
            
            0.52
            %
            
            0.36
            %
            
            0.39
            %


____________


*(1)*
            *Net
                interest margin represents net interest income divided by total average
                interest earning assets.*




*(2)*
            *Efficiency
                ratio represents non-interest expense divided by non-interest income
                and
                net interest income before provision for loan
                losses.*




*(3)*
            *Loans
                before allowance for loan
                losses.*




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            20
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            of Contents**








**Item
      7. Management’sDiscussion and Analysis of Financial
      Condition and Results**  **of
      Operations**





**Application
      of Critical Accounting Policies and Accounting Estimates**





The
      accounting and reporting policies followed by us conform, in all material
      respects, to accounting principles generally accepted in the United States
      and
      to general practices within the financial services industry. The preparation
      of
      financial statements in conformity with accounting principles generally accepted
      in the United States requires management to make estimates and assumptions
      that
      affect the amounts reported in the financial statements and accompanying notes.
      While we base our estimates on historical experience, current information and
      other factors deemed to be relevant, actual results could differ from those
      estimates.





We
      consider accounting estimates to be critical to reported financial results
      if
      (i) the accounting estimate requires management to make assumptions about
      matters that are highly uncertain and (ii) different estimates that
      management reasonably could have used for the accounting estimate in the current
      period, or changes in the accounting estimate that are reasonably likely to
      occur from period to period, could have a material impact on our financial
      statements. Accounting polices related to the allowance for loan losses are
      considered to be critical, as these policies involve considerable subjective
      judgment and estimation by management. We also consider accounting policies
      related to stock-based compensation to be critical, changes to which will impact
      the way we account for stock options in future periods. We also consider our
      accounting polices related to other real estate owned to be critical due to
      the
      potential significance of these activities and the estimates involved. Critical
      accounting policies, and our procedures related to these policies, are described
      in detail below. Also see Note 1 — Organization and Summary of Significant
      Accounting Policies in the accompanying notes to the consolidated financial
      statements included elsewhere in this report.





*Allowance
      for Loan Losses (“ALL”).* Our
      management assesses the adequacy of the ALL prior to the end of each calendar
      quarter. This assessment includes procedures to estimate the allowance and
      test
      the adequacy and appropriateness of the resulting balance.





We
      establish the ALL amount separately for two different risk groups (1) individual
      loans (loans with specifically identifiable risks); and (2) homogeneous
      loans (groups of loan with similar characteristics). We base the allocation
      for
      individual loans primarily on risk rating grades assigned to each of these
      loans
      as a result of our loan management and review processes. We then assign each
      risk-rating grade a loss ratio, which is determined based on the experience
      of
      management and our independent loan review process. We estimate losses on
      impaired loans based on estimated cash flows discounted at the loan’s original
      effective interest rate or based on the underlying collateral value. Based
      on
      management’s experience, we also assign loss ratios to groups of loans. These
      loss ratios are assigned to the various homogenous categories of the portfolio.





The
      level
      of the allowance also reflects management’s continuing evaluation of geographic
      and credit concentrations, specific credit risks, loan loss experience, current
      loan portfolio quality, present economic, political and regulatory conditions
      and unidentified losses inherent in the current loan portfolio. While management
      utilizes its best judgment and information available, the ultimate adequacy
      of
      the allowance is dependent upon a variety of factors beyond the Company’s
      control, including the performance of our loan portfolio, the economy, changes
      in interest rates and the view of the regulatory authorities toward loan
      classifications.





We
      test
      the ALL balance by comparing the balance in the ALL to historical trends and
      peer information. Our management team then evaluates the result of the
      procedures performed, including the result of our testing, and concludes on
      the
      appropriateness of the balance of the ALL in its entirety. See the section
      captioned “Allowance for Loan Losses and Nonperforming Assets” elsewhere in this
      discussion for further details of the risk factors considered by management
      in
      estimating the necessary level of the allowance for loan losses.





*Stock-based
      Compensation.* We
      currently account for stock-based employee compensation plans based on the
      “intrinsic value method” provided in Accounting Principles Board Opinion
      (“APB”) No. 25, “Accounting for Stock Issued to Employees,” and
      related Interpretations. Because the exercise price of our employee and director
      stock options equals the market price of the underlying stock on the date of
      grant, no compensation expense is recognized on options granted.


-
          21
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          of Contents**





SFAS
      No.
      123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148,
      requires pro forma disclosures of net income and earnings per share for
      companies not adopting its fair value accounting method for stock-based employee
      compensation. The pro forma disclosures presented in Note 1 - Organization
      and
      Summary of Significant Accounting Policies in the accompanying notes to
      consolidated financial statements included elsewhere in this report use the
      fair
      value method of SFAS No. 123 to measure compensation expense for stock-based
      employee compensation plans. The fair value of stock options granted was
      estimated at the date of grant using the Black-Scholes option-pricing model.
      This model was developed for use in estimating the fair value of publicly traded
      options that have no vesting restrictions and are fully transferable.
      Additionally, the model requires the input of highly subjective assumptions.
      Because our employee and director stock options have characteristics
      significantly different from those of publicly traded options, and because
      changes in the subjective input assumptions can materially affect the fair
      value
      estimate, in management’s opinion, the Black-Scholes option-pricing model does
      not necessarily provide a reliable single measure of the fair value of our
      employee stock options.





On
      January 1, 2006, the Company adopted SFAS No. 123(R), “Share-Based Payment”,
      which will require that stock-based compensation be recorded in the Company’s
      financial statements based on their fair value. See “Adoption and Pending
      Adoption of Recent Accounting Pronouncements” for further
      discussion.





*Other
      Real Estate Owned.* Properties acquired through foreclosure, or in lieu of foreclosure, are
      transferred to the other real estate owned portfolio and initially recorded
      at
      estimated fair value less the estimated costs to sell the property. Subsequent
      to foreclosure, valuations are periodically performed by management and the
      assets are carried at the lower of cost or estimated fair value less the
      estimated costs of disposition. The fair value of other real estate owned is
      generally determined from appraisals obtained from independent
      appraisers.





**Adoption
      and Pending Adoption of Recent Accounting Pronouncements**





On
      December 16, 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS
      No. 123 (revised 2004), “Share-Based Payment”, which is a revision of SFAS No.
      123. SFAS No. 123(R) supersedes APB Opinion No. 25. Generally, the approach
      to
      accounting for share-based payments in SFAS No. 123(R) is similar to the
      approach described in SFAS No. 123. However, SFAS No. 123(R) requires
      share-based payments to employees, including grants of employee stock options,
      to be recognized in the financial statements based on their grant date fair
      values (i.e., pro forma disclosure is no longer an alternative to financial
      statement recognition). SFAS No. 123(R) is effective for the Company beginning
      January 1, 2006. The Company plans to adopt SFAS No. 123(R) using a modified
      version of prospective application (“modified prospective application”). Under
      modified prospective application, as it is applicable to the Company, SFAS
      No.
      123(R) applies to new awards and to awards modified, repurchased, or cancelled
      after January 1, 2006. Additionally, compensation cost for the portion of awards
      for which the requisite service has not been rendered (generally referring
      to
      non-vested awards) that are outstanding as of January 1, 2006 must be recognized
      as the remaining requisite service is rendered over periods after the adoption
      of SFAS No. 123(R). The attribution of compensation cost for those earlier
      awards will be based on the same method and on the same grant-date fair values
      previously determined for the pro forma disclosures required for companies
      that
      did not adopt the fair value accounting method for stock-based employee
      compensation.





In
      March
      2005, the Securities and Exchange Commission (“SEC”) issued SEC Staff Accounting
      Bulletin No. 107 (“SAB 107”), which expresses views of the staff regarding the
      interaction between SFAS No. 123(R) and certain SEC rules and regulations and
      provides the staff’s view regarding the valuation of share-based payment
      arrangements for public entities.





Based
      on
      the unvested stock-based compensation awards outstanding as of December 31,
      2005, the Company expects to recognize total pre-tax, compensation cost of
      approximately $250,000 during 2006, or approximately $62,500 during each quarter
      of 2006, in accordance with the accounting requirements of SFAS 123(R). All
      unvested options outstanding as of December 31, 2005 will be fully vested by
      the
      end of 2006. Future levels of compensation cost recognized related to
      stock-based compensation awards may be impacted by new awards and/or
      modifications, repurchases and cancellations of existing awards before and
      after
      the adoption SFAS 123(R).





In
      March
      2005, the FASB issued Interpretation No. 47 (“FIN 47”), “Accounting for
      Conditional Asset Retirement Obligations,” an interpretation of SFAS No. 143,
“Accounting for Asset Retirement Obligations.” FIN 47 generally applies to
      long-lived assets and requires a liability to be recognized for a conditional
      asset retirement obligation if the fair value of that liability can be
      reasonably estimated. The interpretation is effective no later than the end
      of
      fiscal years ending after December 15, 2005. We do not expect the application
      of
      FIN 47 to have a material impact on our financial condition or results of
      operations.





In
      May
      2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections”,
      which is a replacement of APB Opinion No. 20, “Accounting Changes”,  and
      SFAS No. 3, ‘Reporting Accounting Changes in Interim Financial Statements”.
 SFAS No. 154 applies to all voluntary changes in accounting principle, and
      changes the requirements for accounting for and reporting of a change in
      accounting principle.  SFAS No. 154 requires retrospective application to
      prior periods’ financial statements of a voluntary change in accounting
      principle unless it is impracticable. APB Opinion No. 20 previously required
      that most voluntary changes in accounting principle be recognized by including
      in net income of the period of the change the cumulative effect of changing
      to
      the new accounting principle.  SFAS No. 154 will be effective for
      accounting changes and corrections of errors made in fiscal years beginning
      after December 15, 2005. Management does not expect the adoption of SFAS No.
      154
      on January 1, 2006 to have a material impact on the Company’s consolidated
      results of operations or financial position.


-
          22
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          of Contents**





In
      November 2005, the FASB issued FASB Staff Position (FSP) FAS 115-1 and FAS
      124-1, “The Meaning of Other-Than Temporary Impairment and Its Application to
      Certain Investments.” The FSP addresses determining when an investment is
      considered impaired, whether an impairment is other than temporary, and
      measuring an impairment loss. The FSP also addresses the accounting subsequent
      to the recognition of an other-than-temporary impairment and required certain
      disclosures about unrealized losses that have not been recognized as
      other-than-temporary impairments. The FSP is effective for reporting periods
      beginning after December 15, 2005. We are currently evaluating the requirements
      of the FSP and do not expect the application of the FSP to have a material
      impact on our financial condition or results of operations.





In
      December 2005, the FASB issued FSP SOP 94-6-1, “Terms of Loan Products That May
      Give Rise to a Concentration of Credit Risk.” The FSP expands the reporting
      requirements under SFAS No. 107, “Disclosures about Fair Value of Financial
      Instruments,” for loan products that are determined to represent a concentration
      of credit risk, including contractual features where repayments are less than
      the repayments for fully amortizing loans of an equivalent term and high
      loan-to-value ratios. The guidance in this FSP is generally effective for
      interim and annual periods ending after December 19, 2005. We have adopted
      this FSP and incorporated the reporting requirements into our December 31,
      2005
      financial statements.





In
      December 2003, the Accounting Standards Executive Committee of the AICPA issued
      Statement of Position No. 03-3 (“SOP 03-3”), “Accounting for Certain Loans or
      Debt Securities Acquired in a Transfer”, which addresses accounting for
      differences between the contractual cash flows of certain loans and debt
      securities and the cash flows expected to be collected when loans or debt
      securities are acquired in a transfer and those cash flow differences are
      attributable, at least in part, to credit quality. As such, SOP 03-3
      applies to loans and debt securities acquired individually, in pools or as
      part
      of a business combination and does not apply to originated loans. The
      application of SOP 03-3 limits the interest income, including accretion of
      purchase price discounts that may be recognized for certain loans and debt
      securities. Additionally, SOP 03-3 does not allow the excess of contractual
      cash
      flows over cash flows expected to be collected to be recognized as an adjustment
      of yield, loss accrual or valuation allowance, such as the allowance for
      possible loan losses. SOP 03-3 requires that increases in expected cash flows
      subsequent to the initial investment be recognized prospectively through
      adjustment of the yield on the loan or debt security over its remaining life.
      Decreases in expected cash flows should be recognized as impairment. In the
      case
      of loans acquired in a business combination where the loans show signs of credit
      deterioration, SOP 03-3 represents a significant change from current purchase
      accounting practice whereby the acquiree’s allowance for loan losses is
      typically added to the acquirer’s allowance for loan losses. SOP 03-3 is
      effective for loans and debt securities acquired by us beginning January 1,
      2005. The adoption of this new standard is not expected to have a material
      impact on our financial statements.





**General**





The
      following discussion and analysis reviews the financial condition and results
      of
      our consolidated operations, including our consolidated subsidiaries: Imperial
      Capital Bank and Imperial Capital Real Estate Investment Trust.





The
      following discussion and analysis is intended to identify the major factors
      that
      influenced our financial condition as of December 31, 2005 and 2004 and our
      results of operations for the years ended December 31, 2005, 2004 and 2003.
      Our
      primary business involves the acceptance of customer deposits and the
      origination and purchase of loans secured by income producing real estate and,
      to a lesser extent, the origination of entertainment finance loans.





Consolidated
      net income in 2005 was $24.1 million, or $4.04 per diluted share, compared
      to
      $30.6 million, or $4.75 per diluted share in 2004 and $29.6 million, or $4.55
      per diluted share in 2003. The decrease in net income in 2005 was primarily
      due
      to the absence of interest and fee income earned in connection with the Bank’s
      tax refund lending (“RAL”) program, which terminated at the conclusion of the
      2004 tax season. Despite the termination of the RAL program, net interest income
      before provision for loan losses increased 9.7% to $91.7 million for the year
      ended December 31, 2005, compared to $83.5 million for the year ended December
      31, 2004. This increase was due to the growth in the average balance of our
      loan
      portfolio, a decrease in the average balance of low yielding short-term and
      overnight investments, and an increase in the average balance of higher yielding
      investment securities held-to-maturity as compared to last year. The decline
      in
      the average balance of short-term and overnight investment securities was a
      result of the termination of the RAL program, which generated a substantial
      level of liquidity during the quarter ended March 31, 2004. The Bank invested
      this additional liquidity in short-term and overnight investments, which earned
      a lower yield than the Bank earns on its current investment portfolio. The
      increase in interest income was partially offset by additional interest expense
      incurred due to the growth in the average balance of our interest bearing
      liabilities as compared to last year, deposits repricing to higher current
      market interest rates, and the addition of new borrowings at higher current
      market interest rates. Our earnings were negatively impacted by a $5.5 million
      increase in provision for loan losses recorded during the year, as well as
      a
      $3.7 million increase in non-interest expense. Non-interest expense increased
      due to our continued investment in the national expansion of our real estate
      lending platform.


-
          23
          -
 **Table
          of Contents**





The
      increase in net income in 2004 as compared to 2003, was primarily due to an
      increase in interest income to $125.0 million for 2004 as compared to $116.0
      million in 2003, and a decrease in provision for loan losses to $4.7 million
      for
      2004 as compared to $7.8 million for 2003. These changes were partially offset
      by a $4.5 million increase in interest expense, net of the impact of the
      adoption of FIN 46 on January 1, 2004, a $4.8 million increase in non-interest
      expense, and a $1.0 million increase in provision for income taxes.





Total
      loan production including the unfunded portion of loans was $1.6 billion for
      the
      year ended December 31, 2005, as compared to $1.0 billion and $794.8 million,
      respectively, for the years ended December 31, 2004 and 2003. Loan production
      in
      2005 consisted of the origination of $525.8 million of commercial real estate
      loans, $322.8 million of small balance multi-family real estate loans, $68.7
      million of entertainment finance loans, $2.4 million of franchise loans, and
      wholesale loan operations acquired $595.3 million of small balance multi-family
      and $128.5 million of single-family real estate loans.





Our
      average total assets increased approximately 28.8% during 2005 to $2.7 billion.
      Average cash and investment securities totaled $432.8 million in 2005 compared
      to $419.5 million in 2004, an increase of $13.3 million, or 3.2%. Average loans
      receivable totaled $2.2 billion in 2005 compared to $1.6 billion in 2004, an
      increase of $633.1 million, or 39.4%. Average interest bearing deposit accounts
      totaled $1.7 billion in 2005 compared to $1.2 billion in 2004, an increase
      of
      $426.1 million, or 34.8%. FHLB advances and other borrowings averaged $707.4
      million in 2005, compared to $277.8 million in 2004, an increase of $429.6
      million, or 154.6%.





The
      allowance for loan losses as a percentage of our total loans was 1.7% at
      December 31, 2005, as compared to 1.9% at December 31, 2004. During the year
      ended December 31, 2005, we had net charge-offs of $1.9 million, compared to
      $2.6 million during the same period last year.





At
      December 31, 2005, shareholders' equity totaled $204.5 million or 6.7 percent
      of
      total assets. During 2005, we continued our stock repurchase program with the
      implementation of our tenth and eleventh extensions of the stock repurchase
      program. For the year ended December 31, 2005, we repurchased 431,738 shares
      at
      an average price of $52.40 per share. Since beginning share repurchases in
      April
      1997 through December 31, 2005, a total of 3.3 million shares have been
      repurchased, returning approximately $90.0 million of capital to our
      shareholders at an average price of $27.22 per share. Through our stock
      repurchase program, all of our contributed capital has been returned to
      shareholders. ITLA Capital’s book value per share of common stock was $37.85 as
      of December 31, 2005, an increase of 7.9 percent from $35.09 per share as of
      December 31, 2004.





-
            24
            -
 **Table
            of Contents**
  **Results
        of Operations**
 
 **Net
        Interest Income**





The
      following table presents, for the periods indicated, our condensed average
      balance sheet information, together with interest income and yields earned
      on
      average interest earning assets and interest expense and rates paid on average
      interest bearing liabilities. Average balances are computed using daily average
      balances. Nonaccrual loans are included in loans receivable.





**Years
                Ended December 31,****2005**
            
            **2004**
            
            **2003****Average**
              **Balance**
            
            **Income/**
              **Expense**
            
            **Yield/**
              **Rate**
            
            **Average**
              **Balance**
            
            **Income/**
              **Expense**
            
            **Yield/**
              **Rate**
            
            **Average**
              **Balance**
            
            **Income/**
              **Expense**
            
            **Yield/**
              **Rate****(dollars
                in thousands)****Assets**Cash
                and investment securities
            
            $
            432,774
            
            $
            18,438
            
            
            4.26
            %
            $
            419,452
            
            $
            9,291
            
            
            2.22
            %
            $
            277,832
            
            $
            5,399
            
            
            1.94
            %Real
                estate loans*(1)*
            
            
            2,016,691
            
            
            141,061
            
            
            6.99
            %
            
            1,368,384
            
            
            96,460
            
            
            7.05
            %
            
            1,242,875
            
            
            95,307
            
            
            7.67
            %Franchise
                loans*(1)*
            
            
            121,768
            
            
            9,972
            
            
            8.19
            %
            
            125,280
            
            
            8,608
            
            
            6.87
            %
            
            66,101
            
            
            4,772
            
            
            7.22
            %Entertainment
                finance loans*(1)*
            
            
            89,420
            
            
            7,724
            
            
            8.64
            %
            
            96,227
            
            
            7,040
            
            
            7.32
            %
            
            99,104
            
            
            7,433
            
            
            7.50
            %Commercial
                and other loans*(1)*
            
            
            11,382
            
            
            963
            
            
            8.46
            %
            
            16,234
            
            
            3,555
            
            
            21.90
            %
            
            7,732
            
            
            3,066
            
            
            39.65
            %Total
                loans receivable
            
            
            2,239,261
            
            
            159,720
            
            
            7.13
            %
            
            1,606,125
            
            
            115,663
            
            
            7.20
            %
            
            1,415,812
            
            
            110,578
            
            
            7.81
            %Total
                interest earning assets
            
            
            2,672,035
            
            $
            178,158
            
            
            6.67
            %
            
            2,025,577
            
            $
            124,954
            
            
            6.17
            %
            
            1,693,644
            
            $
            115,977
            
            
            6.85
            %Non-interest
                earning assets
            
            
            51,549
            
            
            
            
            
            
            
            
            94,739
            
            
            
            
            
            
            
            
            70,226Allowance
                for loan losses
            
            
            (37,978
            )
            
            
            
            
            
            
            
            (35,214
            )
            
            
            
            
            
            
            
            (33,508
            )Total
                assets
            
            $
            2,685,606
            
            
            
            
            
            
            
            $
            2,085,102
            
            
            
            
            
            
            
            $
            1,730,362**Liabilities
                and Shareholders’ Equity**Interest
                bearing deposit accounts:Interest
                bearing demand accounts
            
            $
            51,684
            
            $
            1,236
            
            
            2.39
            %
            $
            80,052
            
            $
            1,409
            
            
            1.76
            %
            $
            12,571
            
            $
            136
            
            
            1.08
            %Money
                market and passbook accounts
            
            
            177,213
            
            
            5,308
            
            
            3.00
            %
            
            140,637
            
            
            2,680
            
            
            1.91
            %
            
            162,638
            
            
            2,551
            
            
            1.57
            %Time
                certificates
            
            
            1,421,415
            
            
            47,263
            
            
            3.33
            %
            
            1,003,555
            
            
            23,827
            
            
            2.37
            %
            
            832,873
            
            
            21,929
            
            
            2.63
            %Total
                interest bearing deposit accounts
            
            
            1,650,312
            
            
            53,807
            
            
            3.26
            %
            
            1,224,244
            
            
            27,916
            
            
            2.28
            %
            
            1,008,082
            
            
            24,616
            
            
            2.44
            %FHLB
                advances and other borrowings
            
            
            707,391
            
            
            25,508
            
            
            3.61
            %
            
            277,828
            
            
            7,343
            
            
            2.64
            %
            
            246,186
            
            
            6,251
            
            
            2.54
            %Junior
                subordinated debentures
            
            
            86,600
            
            
            7,171
            
            
            8.28
            %
            
            86,600
            
            
            6,159
            
            
            7.11
            %
            
            —
            
            
            —
            
            
            —Total
                interest bearing liabilities
            
            
            2,444,303
            
            $
            86,486
            
            
            3.54
            %
            
            1,588,672
            
            $
            41,418
            
            
            2.61
            %
            
            1,254,268
            
            $
            30,867
            
            
            2.46
            %Non-interest
                bearing demand accounts
            
            
            27,671
            
            
            
            
            
            
            
            
            8,023
            
            
            
            
            
            
            
            
            2,973Other
                non-interest bearing liabilities
            
            
            15,086
            
            
            
            
            
            
            
            
            290,077
            
            
            
            
            
            
            
            
            297,549Shareholders’
                equity
            
            
            198,546
            
            
            
            
            
            
            
            
            198,330
            
            
            
            
            
            
            
            
            175,572Total
                liabilities and shareholders’ equity
            
            $
            2,685,606
            
            
            
            
            
            
            
            $
            2,085,102
            
            
            
            
            
            
            
            $
            1,730,362Net
                interest spread*(2)*
            
            
            
            
            
            
            
            
            3.13
            %
            
            
            
            
            
            
            
            3.56
            %
            
            
            
            
            
            
            
            4.39
            %Net
                interest income before provisions for loan losses
            
            
            
            
            $
            91,672
            
            
            
            
            
            
            
            $
            83,536
            
            
            
            
            
            
            
            $
            85,110Net
                interest margin*(3)*
            
            
            
            
            
            
            
            
            3.43
            %
            
            
            
            
            
            
            
            4.12
            %
            
            
            
            
            
            
            
            5.03
            %





*(1)*  *Before
      allowance for loan losses and net of deferred loan fees and costs. Net loan
      fee
      accretion of $2.9 million, $1.8 million and $2.4 million was included in net
      interest income for 2005, 2004 and 2003, respectively.*


*(2)*  *Average
      yield on interest earning assets minus average rate paid on interest bearing
      liabilities.*


*(3)*  *Net
      interest income divided by total average interest earning assets.*





Our
      primary source of revenue is net interest income. Our net interest income is
      affected by (a) the difference between the yields recognized on interest earning
      assets, including loans and investments, and the interest rates paid on interest
      bearing liabilities, including deposits and borrowings, which is referred to
      as
“net interest spread”, and (b) the relative amounts of interest earning assets
      and interest bearing liabilities. As of December 31, 2005, 2004 and 2003, our
      ratio of average interest earning assets to average interest bearing liabilities
      was 109.3%, 127.5% and 135.0%, respectively.





The
      following table sets forth a summary of the changes in interest income and
      interest expense resulting from changes in average interest earning asset and
      interest bearing liability balances and changes in average interest rates.
      The
      change in interest due to both volume and rate has been allocated to change
      due
      to volume and rate in proportion to the relationship of the absolute dollar
      amounts of each.




**2005
                  vs. 2004**
              
              **2004
                  vs. 2003****Increase
                  (Decrease)**
                **Due
                  to:**
              
              **Increase
                  (Decrease)**
                **Due
                  to:****Volume**
              
              **Rate**
              
              **Total**
              
              **Volume**
              
              **Rate**
              
              **Total****(in
                  thousands)**Interest
                  and fees earned on:Loans,
                  net
              
              $
              45,191
              
              $
              (1,134
              )
              $
              44,057
              
              $
              16,573
              
              $
              (11,488
              )
              $
              5,085Cash
                  and investment securities
              
              
              306
              
              
              8,841
              
              
              9,147
              
              
              3,793
              
              
              99
              
              
              3,892Total
                  increase (decrease) in interest income
              
              
              45,497
              
              
              7,707
              
              
              53,204
              
              
              20,366
              
              
              (11,389
              )
              
              8,977Interest
                  paid on:Deposit
                  accounts
              
              
              11,584
              
              
              14,307
              
              
              25,891
              
              
              5,748
              
              
              (2,448
              )
              
              3,300FHLB
                  advances and other borrowings
              
              
              14,677
              
              
              3,488
              
              
              18,165
              
              
              1,111
              
              
              (19
              )
              
              1,092Junior
                  subordinated debentures
              
              
              —
              
              
              1,012
              
              
              1,012
              
              
              6,159
              
              
              —
              
              
              6,159Total
                  increase (decrease) in interest expense
              
              
              26,261
              
              
              18,807
              
              
              45,068
              
              
              13,018
              
              
              (2,467
              )
              
              10,551Increase
                  (decrease) net interest income
              
              $
              19,236
              
              $
              (11,100
              )
              $
              8,136
              
              $
              7,348
              
              $
              (8,922
              )
              $
              (1,574
              )
 -
              25
              -
 **Table
              of Contents**




*2005
      Compared to 2004*





Net
      interest income before provision for loan losses increased to $91.7 million
      for
      the year ended December 31, 2005, compared to $83.5 million for the prior year,
      an increase of 9.7%. The increase was primarily caused by the growth in the
      average balance of our loan portfolio, a decrease in the average balance of
      low
      yielding short-term and overnight investments, and an increase in the average
      balance of higher yielding investment securities held-to-maturity as compared
      to
      last year. The decline in the average balance of short-term and overnight
      investment securities was a result of the termination of the RAL program, which
      generated a substantial level of liquidity during the quarter ended March 31,
      2004. The Bank invested this additional liquidity in short-term and overnight
      investments, which earned a lower yield than the Bank earns on its current
      investment portfolio. The increase in net interest income was partially offset
      by additional interest expense incurred due to the growth in the average balance
      of our interest bearing liabilities as compared to the same period last year,
      deposits repricing to higher current market interest rates, and the addition
      of
      new borrowings at higher current market interest rates.





The
      average yield on our total loan portfolio was 7.13% in 2005 compared to 7.20%
      in
      2004. The average yield on our real estate loan portfolio was 6.99% in 2005
      compared to 7.05% in 2004. Our adjustable rate mortgages are indexed to either
      six month LIBOR or the Prime Rate with interest rate floors, below which the
      loan’s contractual interest rate may not adjust. Approximately 61.8% of our loan
      portfolio was comprised of adjustable rate loans at December 31, 2005, and
      approximately 35.8% of the loan portfolio was comprised of hybrid loans, which,
      after an initial fixed rate period of three or five years, will convert to
      an
      adjustable interest rate for the remaining term of the loan. Our adjustable
      rate
      loans generally re-price on a quarterly or semi-annual basis with increases
      generally limited to maximum adjustments of 2% per year up to 5% for the life
      of
      the loan. As of December 31, 2005, approximately $2.3 billion or 92.7% of our
      adjustable rate loan portfolio contained interest rate floors, below which
      the
      loans’ contractual interest rate may not adjust. The inability of our loans to
      adjust downward can contribute to increased income in periods of declining
      interest rates, and also assists us in our efforts to limit the risks to
      earnings resulting from changes in interest rates, subject to the risk that
      borrowers may refinance these loans during periods of declining interest rates.
      At December 31, 2005, the weighted average floor interest rate of our adjustable
      rate loan portfolio was 6.13%. At that date, approximately $172.0 million or
      7.1% of our adjustable rate loan portfolio was at the floor interest rate.
      At
      December 31, 2005, 68.2% of the adjustable rate loans outstanding had a lifetime
      interest rate cap. The weighted-average lifetime interest rate cap on our
      adjustable rate loan portfolio was 11.33%. At December 31, 2005, none of the
      loans in our adjustable rate loan portfolio were at the cap rate.





Interest
      expense on interest bearing liabilities increased $45.1 million, or 108.8%,
      to
      $86.5 million in 2005 compared to $41.4 million in 2004. The increase was
      primarily due to an increase in interest expense on deposits and FHLB advances
      and other borrowings. Interest expense from deposit accounts increased $25.9
      million, or 92.7%, to $53.8 million in 2005 compared to $27.9 million in 2004
      due to the growth in interest bearing deposits during 2005 and the increase
      in
      the average rate paid on deposits as a result of higher current market interest
      rates as compared to the prior year. The average rate paid on deposits was
      3.26%
      in 2005 compared to 2.28% in 2004.





Interest
      expense on FHLB advances and other borrowings increased $18.2 million, or
      247.4%, to $25.5 million in 2005 compared to $7.3 million in 2004. This increase
      was primarily caused by additional borrowings utilized to finance lending and
      investment activities during the year. The average balance of FHLB advances
      and
      other borrowings increased $429.6 million, or 154.6%, to $707.4 million in
      2005
      compared to $277.8 million in 2004. The increase was further impacted by an
      increase in the rate paid on FHLB advances and other borrowings, which was
      3.61%
      in 2005 as compared to 2.64% in 2004.





**Provision
      for Loan Losses**





Provision
      for loan losses increased to $10.3 million in 2005 compared to $4.7 million
      in
      2004. The current period provision for loan losses was recorded to provide
      reserves adequate to support the known and inherent risk of loss in the loan
      portfolio, and for specific reserves required at December 31, 2005. The
      provision increased during the year due to an increase in the Bank’s other loans
      of concern, a 40.3% increase in the Bank’s loan portfolio, and the increase in
      non-performing loans. Non-performing loans totaled $24.3 million and $14.7
      million, respectively, at December 31, 2005 and 2004. This increase in
      non-performing loans was primarily attributable to the migration of three loans
      to non-performing status during the year. See also “Credit Risk Elements -
      Allowance for Loan Losses and Nonperforming Assets”.





**Non-interest
      Income**





Non-interest
      income decreased $7.9 million to $6.6 million in 2005 compared to $14.5 million
      in 2004. Non-interest income for the current year consisted primarily of a
      $4.9
      million gain recorded in connection with the sale of franchise loans. During
      2004, non-interest income primarily consisted of fee income earned in connection
      with the Bank’s RAL program. During 2004, the Bank earned $9.3 million of net
      premiums on the sale of RAL loans and $4.6 million of processing and
      administrative fees. Because the RAL program related to the filing of income
      tax
      returns, transaction activity was concentrated during the tax season. This
      resulted in our earning substantially all of our RAL program income in the
      first
      quarter of 2004.


-
          26
          -
 **Table
          of Contents**





**Non-interest
      Expense**





**General
      and Administrative Expense**


General
        and administrative expenses increased to $46.3 million for the year ended
        December 31, 2005, compared to $42.0 million for the same period last year.
        The
        increase in general and administrative expenses was caused by the additional
        overhead expenses incurred in connection with the national expansion of our
        loan
        production platform compared to last year. This increase was primarily the
        result of a full year of overhead expenses incurred during 2005 for offices
        that
        were opened throughout the prior year. The Company’s efficiency ratio (defined
        as general and administrative expenses as percentage of net revenue) was
        47.3
        percent for the year ended December 31, 2005, compared to 43.6 percent for
        the
        same period last year. The variance in our efficiency ratio was primarily
        due to
        the decline in net revenue earned as a result of the termination of the RAL
        program and the continued national expansion of our small balance multi-family
        lending platform. Full time equivalent associates averaged 244 in 2005 compared
        to 236 in 2004.




**Income
      Taxes**





Provision
      for income taxes decreased to $17.5 million in 2005 compared to $19.9 million
      in
      2004. The decrease in provision for income taxes was due to the decline in
      taxable income earned in 2005. The effective tax rate was 42.08% and 39.44%,
      respectively, for 2005 and 2004. The increase in the effective tax rate was
      principally due to a reduction in the allowable deduction on tax exempt income
      earned on loans located in designated redevelopment and enterprise
      zones.





At
      December 31, 2005, we had a net deferred tax asset of $12.7 million. The
      deferred tax asset related primarily to loan loss provisions recognized on
      our
      financial statements that have not yet been recognized on our income tax
      returns. During 2005, we had no deferred tax assets relating to net operating
      loss carry forward deductions. The deferred tax asset was considered fully
      realizable. Accordingly, no valuation allowance on the deferred tax asset was
      established in 2005.





*2004
      Compared to 2003*





Net
      interest income before provision for loan losses decreased to $83.5 million
      for
      the year ended December 31, 2004, compared to $85.1 million for the prior year,
      a decrease of 1.8%. The decrease was primarily caused by the effect of interest
      expense from our trust preferred securities as a result of the adoption of
      FIN
      46 at December 31, 2003. The adoption of FIN 46 required that, beginning on
      January 1, 2004, we record the expense incurred on our junior subordinated
      debentures related to the trust preferred securities as interest expense in
      the
      consolidated statements of income. Prior period financial information has not
      been restated for the adoption of FIN 46, and as a result, amounts recorded
      relating to interest payments to the trusts were recorded as minority interest
      in income of subsidiary for all periods prior to January 1, 2004. Excluding
      the
      effect of the adoption of FIN 46, net interest income before provision for
      loan
      losses increased by $4.6 million, or 5.4 percent, as compared to 2003. This
      increase was primarily a result of an increase in the average balance of loans
      outstanding, reflecting an increase in loan production and a decline in loan
      prepayment speeds experienced during the year, an increase in the average
      balance of investments held-to-maturity, partially offset by a general decline
      in our net interest spread and an increase in the average balance of interest
      bearing liabilities. The decline in net interest spread primarily resulted
      from
      a decline in the yield of our loan portfolio as higher yielding loans were
      repaid and replaced by new loan production at lower current market interest
      rates and the addition of new borrowings at higher current market interest
      rates.





The
      average yield on our total loan portfolio was 7.20% in 2004 compared to 7.81%
      in
      2003. The average yield on our real estate loan portfolio was 7.05% in 2004
      and
      7.67% in 2003. Our commercial real estate loan portfolio is primarily composed
      of adjustable rate mortgages indexed to six month LIBOR with interest rate
      floors, below which the loan’s contractual interest rate may not adjust.
      Approximately 83.2% of our real estate loan portfolio was comprised of
      adjustable rate loans at December 31, 2004, and approximately 14.5% of the
      real
      estate loan portfolio was comprised of loans, which become adjustable rate
      loans
      after an initial fixed rate period of three or five years. As of December 31,
      2004, approximately $1.6 billion or 87.3% of our real estate loan portfolio
      contained interest rate floors, below which the loans’ contractual interest rate
      may not adjust. At December 31, 2004, the weighted average floor interest rate
      of our real estate loan portfolio was 6.32%. At that date, approximately $784.5
      million or 49.2% of our real estate loan portfolio was at the floor interest
      rate. At December 31, 2004, 76.7% of the variable rate loans outstanding in
      our
      real estate loan portfolio had a lifetime interest rate cap. The
      weighted-average lifetime interest rate cap on this portfolio was
      11.25%.





Interest
      expense on interest bearing liabilities increased $10.6 million, or 34.2%,
      to
      $41.4 million in 2004 compared to $30.9 million in 2003. The increase was
      primarily due to an increase of $6.2 million in interest expense caused by
      the
      adoption of FIN 46, discussed above, as well as an increase in interest expense
      on deposits and FHLB advances and other borrowings. Interest expense from
      deposit accounts increased $3.3 million, or 13.4%, to $27.9 million in 2004
      compared to $24.6 million in 2003 due to the growth in interest bearing deposits
      during 2004 partially offset by a decline in the average rate paid on deposits
      as a result of lower current market interest rates as compared to the prior
      year. The average rate paid on deposits was 2.28% in 2004 compared to 2.44%
      in
      2003.


-
          27
          -
 **Table
          of Contents**





Interest
      expense from the CMOs decreased $1.0 million, or 93.4%, to $71,000 in 2004
      as
      compared to $1.1 million in 2003. The decrease was primarily due to a decline
      in
      average balance of CMOs, as a result of the loan prepayment speeds experienced
      in 2004 related to the loans securing the CMOs. The average balance and average
      yield on the CMOs was $3.9 million and 1.81%, respectively, in 2004 as compared
      to $44.8 million and 2.40%, respectively, in 2003.





Interest
      expense from FHLB advances and other borrowings increased $2.1 million to $7.3
      million in 2004 compared to $5.2 million in 2003, due to an increase in the
      average balance and average rate paid on FHLB advances and other borrowings.
      The
      average balance of FHLB advances and other borrowings increased $72.5 million,
      or 36.0%, to $273.9 million in 2004 compared to $201.4 million in 2003. The
      average rate paid on FHLB advances and other borrowings was 2.65% in 2004
      compared to 2.57% in 2003. We have used our borrowing capacity under our FHLB
      credit line, as well as our other borrowing facilities to fund loan production
      and the purchase of investments held-to-maturity.





**Provision
      for Loan Losses**





Provision
      for loan losses decreased to $4.7 million in 2004 compared to $7.8 million
      in
      2003. The provision for loan losses was recorded to provide reserves adequate
      to
      support the known and inherent risk of loss in the loan portfolio, and for
      specific reserves required. The decline in the provision for loan losses in
      2004
      as compared to 2003 reflects the overall geographic diversification of our
      real
      estate loan portfolio and the increase in our small balance multi-family loan
      portfolio caused by the national expansion of this lending platform. See also
      “Credit Risk Elements - Allowance for Loan Losses and Nonperforming
      Assets”.





**Non-interest
      Income**





Non-interest
      income decreased $732,000 to $14.5 million in 2004 compared to $15.2 million
      in
      2003. During 2004 and 2003, non-interest income primarily consisted of fee
      income earned in connection with the Bank’s RAL program with Household. During
      2004, the Bank earned $9.3 million of net premiums on the sale of RAL loans
      and
      $4.6 million of processing and administrative fees. RAL income earned during
      2003 was $9.0 million of net premiums on the sale of RAL loans and $4.6 million
      of processing and administrative fees, respectively. Because the RAL program
      related to the filing of income tax returns, transaction activity was
      concentrated during the tax season. This resulted in our earning substantially
      all of our RAL program income in the first quarters of 2004 and 2003. As a
      result of the termination of the RAL program, we expect non-interest income
      to
      be materially less in 2005.





**Non-interest
      Expense**





**General
      and Administrative Expense**





General
      and administrative expenses increased to $42.0 million during 2004, compared
      to
      $36.7 million in 2003. The increase was attributable to the development and
      continued national expansion of the small balance multi-family real estate
      lending platform. During 2004, we opened twenty loan production offices. Our
      efficiency ratio was 43.6 percent for the year ended December 31, 2004, compared
      to 37.8 percent for 2003, reflecting the national expansion of our small balance
      multi-family lending platform. Full time equivalent associates averaged 236
      in
      2004 compared to 209 in 2003.





**Real
      Estate Owned Expense**





Real
      estate owned expense decreased to $712,000 in 2004 compared to $1.2 million
      in
      2003. The decrease was primarily attributable to a $255,000 decrease in real
      estate owned expenses, caused by the decline in the average balance of other
      real estate owned (“OREO”) maintained during the year and an increase in gain on
      sale of OREO, net of $375,000, partially offset by an increase of $130,000
      in
      the provision for losses on OREO. See also “Credit Risk Elements - Allowance for
      Loan Losses and Nonperforming Assets”.





**Income
      Taxes**





Provision
      for income taxes increased to $19.9 million in 2004 compared to $18.9 million
      in
      2003. The increase in provision for income taxes was due to the increase in
      taxable income earned in 2004. The effective tax rate was 39.44% and 39.00%,
      respectively, for 2004 and 2003. The effective tax rate differed from the
      applicable statutory federal tax rate due to state income taxes and the state
      income tax deduction for tax exempt income on loans located in designated
      redevelopment and enterprise zones and due to federal income tax credits
      received from a low income housing tax credit investment.





At
      December 31, 2004, we had a net deferred tax asset of $10.5 million. The
      deferred tax asset related primarily to loan loss provisions recognized on
      our
      financial statements that have not yet been recognized on our income tax
      returns. During 2004, we had no deferred tax assets relating to net operating
      loss carry forward deductions. The deferred tax asset was considered fully
      realizable. Accordingly, no valuation allowance on the deferred tax asset was
      established in 2004.





**Minority
      Interest in Income of Subsidiary**





Minority
      interest in income of subsidiary, consisting of accrued distributions payable
      on
      our trust preferred securities, was none in 2004 and $6.1 million in 2003.
      As
      discussed above, the adoption of FIN 46 required that, beginning January 1,
      2004, we record the expense incurred on our junior subordinated debentures
      as
      interest expense on the consolidated statement of income. During 2004, we
      recorded $6.2 million of interest expense related to our junior subordinated
      debentures. See “Item 8. Financial Statements and Supplementary Data — Notes to
      Consolidated Financial Statements - Note 8”.


-
          28
          -
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          of Contents**





**Financial
      Condition**





*At
      December 31, 2005 Compared with December 31, 2004*


Total
        assets increased by $733.1 million, or 31.6%, to $3.1 billion at December
        31,
        2005 compared to $2.3 billion at December 31, 2004. The increase in total
        assets
        was primarily due to a $738.0 million increase in our loan portfolio, a $25.7
        million increase in investment securities available-for-sale, and a $20.6
        million increase in FHLB stock, partially offset by a $62.1 million decline
        in
        investment securities held-to-maturity and an $8.3 million increase in the
        allowance for loan losses. The increase in the loan portfolio was primarily
        due
        to the increased loan production and a decline in loan prepayment speeds
        experienced during 2005 as compared to 2004. The growth in assets was primarily
        funded by the increase in deposits of $303.4 million and an increase in FHLB
        advances and other borrowings of $408.3 million. The increase in shareholders’
equity was primarily due to the retention of net income and an $8.7 million
        increase in contributed capital, which is primarily related to the exercise
        of
        stock options, partially offset by treasury stock purchases of $22.6
        million.





*At
      December 31, 2004 Compared with December 31, 2003*





Total
      assets increased by $500.0 million, or 27.5%, to $2.3 billion at December 31,
      2004 compared to $1.8 billion at December 31, 2003. The increase in total assets
      was due primarily to a $288.4 million, or 19.2%, increase in our net loan
      portfolio to $1.8 billion at December 31, 2004 from $1.5 billion at December
      31,
      2003, and a $296.0 million increase in investments held-to-maturity. This
      increase was partially offset by a $90.7 million, or 50.9%, decrease in cash
      and
      cash equivalents. The increase in the loan portfolio was primarily due to the
      increased loan production and a decline in loan prepayment speeds experienced
      during 2004 as compared to 2003. The growth in assets was primarily funded
      by
      the increase in deposits of $285.0 million and an increase in FHLB advances
      and
      other borrowings of $222.1 million, partially offset by a decrease in CMOs
      outstanding of $15.9 million. The increase in shareholders’ equity was primarily
      due to the retention of net income, partially offset by the increase in treasury
      stock purchases of $30.3 million.





**Loans
      Receivable, Net**





The
      following table shows the comparison of our loan portfolio by major categories
      as of the dates indicated.





**December
                31,****2005**
            
            **2004**
            
            **2003**
            
            **2002**
            
            **2001****(in
                thousands)**Real
                estate loans
            
            $
            2,154,372
            
            $
            1,387,973
            
            $
            1,196,729
            
            $
            1,189,258
            
            $
            1,191,688Construction
                loans
            
            
            302,932
            
            
            183,207
            
            
            129,540
            
            
            101,422
            
            
            54,129Total
                real estate loans
            
            
            2,457,304
            
            
            1,571,180
            
            
            1,326,269
            
            
            1,290,680
            
            
            1,245,817Entertainment
                finance loans
            
            
            66,514
            
            
            99,729
            
            
            98,630
            
            
            119,283
            
            
            —Franchise
                loans
            
            
            13,705
            
            
            137,477
            
            
            102,128
            
            
            54,672
            
            
            57,617Commercial
                and other loans
            
            
            7,264
            
            
            11,931
            
            
            6,869
            
            
            4,314
            
            
            —2,544,787
            
            
            1,820,317
            
            
            1,533,896
            
            
            1,468,949
            
            
            1,303,434Unamortized
                premium
            
            
            14,582
            
            
            6,346
            
            
            5,429
            
            
            7,898
            
            
            9,773Deferred
                loan origination costs (fees), net
            
            
            7,928
            
            
            2,635
            
            
            (500
            )
            
            (5,604
            )
            
            (2,029
            )2,567,297
            
            
            1,829,298
            
            
            1,538,825
            
            
            1,471,243
            
            
            1,311,178Allowance
                for loan losses
            
            
            (43,817
            )
            
            (35,483
            )
            
            (33,401
            )
            
            (33,009
            )
            
            (26,650
            )$
            2,523,480
            
            $
            1,793,815
            
            $
            1,505,424
            
            $
            1,438,234
            
            $
            1,284,528





-
          29
          -
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          of Contents**





The
      contractual maturities of our loan portfolio at December 31, 2005 are as
      follows:





**Loans
                Maturing in****Less
                Than**
              **One
                Year**
            
            **Between****One
                and**
              **Five
                Years**
            
            **Greater****Than**
              **Five****Years**
            
            **Total****(dollars
                in thousands)**Real
                estate loans
            
            $
            34,390
            
            $
            209,758
            
            $
            1,910,224
            
            $
            2,154,372Construction
                loans
            
            
            168,786
            
            
            134,146
            
            
            —
            
            
            302,932Entertainment
                finance loans
            
            
            64,673
            
            
            1,841
            
            
            —
            
            
            66,514Franchise
                loans
            
            
            7,217
            
            
            33
            
            
            6,455
            
            
            13,705Commercial
                and other loans
            
            
            5,314
            
            
            1,950
            
            
            —
            
            
            7,264$
            280,380
            
            $
            347,728
            
            $
            1,916,679
            
            $
            2,544,787Loans
                with fixed interest rates
            
            $
            4,495
            
            $
            21,627
            
            $
            4,970
            
            $
            31,092Loans
                with variable interest rates
            
            
            275,885
            
            
            326,101
            
            
            1,911,709
            
            
            2,513,695$
            280,380
            
            $
            347,728
            
            $
            1,916,679
            
            $
            2,544,787Percentage
                with variable interest rates
            
            
            98.4
            %
            
            93.8
            %
            
            99.7
            %
            
            98.8
            %





The
      table
      above should not be regarded as a forecast of future cash collections because
      a
      substantial portion of real estate loans may be renewed or repaid prior to
      contractual maturity and have adjustable interest rates.





The
      following table sets forth certain information regarding the real property
      collateral securing our real estate loan portfolio as of December 31,
      2005.





**Number**
            
            **Gross**
            
            **Percent**
            
            **Range
                of Principal Balance**
            
            **Nonaccrual****of Loans**
            
            **Amount**
            
            **of
                Total**
            
            **Min**
            
            **Max**
            
            **Average**
            
            **Loans****(dollars
                in thousands)**Income
                Producing Property Loans:Multi-family
                (5 or more units)
            
            
            2,188
            
            $
            1,508,292
            
            
            61.38
            %
            $
            4
            
            $
            9,885
            
            $
            689
            
            $
            3,185Retail
            
            
            85
            
            
            97,268
            
            
            3.96
            %
            
            22
            
            
            10,134
            
            
            1,144
            
            
            —Office
            
            
            64
            
            
            101,823
            
            
            4.14
            %
            
            21
            
            
            14,063
            
            
            1,591
            
            
            —Hotel
            
            
            22
            
            
            64,906
            
            
            2.64
            %
            
            13
            
            
            10,964
            
            
            2,950
            
            
            1,151Industrial/warehouse
            
            
            34
            
            
            41,035
            
            
            1.67
            %
            
            88
            
            
            7,000
            
            
            1,207
            
            
            —Mixed-use
            
            
            70
            
            
            65,472
            
            
            2.66
            %
            
            14
            
            
            7,968
            
            
            935
            
            
            325Mobile
                home parks
            
            
            52
            
            
            38,971
            
            
            1.59
            %
            
            265
            
            
            2,206
            
            
            749
            
            
            —Assisted
                living
            
            
            4
            
            
            20,097
            
            
            0.82
            %
            
            1,631
            
            
            7,411
            
            
            5,024
            
            
            —Storage
            
            
            12
            
            
            41,239
            
            
            1.68
            %
            
            724
            
            
            6,200
            
            
            3,437
            
            
            —Other
            
            
            102
            
            
            62,218
            
            
            2.53
            %
            
            1
            
            
            9,110
            
            
            610
            
            
            1,414Total
                income producing
            
            
            2,633
            
            
            2,041,321
            
            
            83.07
            %
            
            
            
            
            
            
            
            
            
            
            6,075Construction
                and Land:Construction
            
            
            67
            
            
            302,932
            
            
            12.33
            %
            
            1
            
            
            17,906
            
            
            4,521
            
            
            —Land
            
            
            5
            
            
            9,969
            
            
            0.41
            %
            
            367
            
            
            6,968
            
            
            1,994
            
            
            —Total
                construction and land
            
            
            72
            
            
            312,901
            
            
            12.74
            %
            
            
            
            
            
            
            
            
            
            
            —Single-family
                mortgages:Single-family
                (1-4 units)
            
            
            232
            
            
            103,082
            
            
            4.19
            %
            
            7
            
            
            2,583
            
            
            444
            
            
            422,937
            
            $
            2,457,304
            
            
            100.00
            %
            
            
            
            
            
            
            
            
            
            $
            6,117





-
          30
          -
 **Table
          of Contents**


The
      following table sets forth the location of the collateral for our real estate
      loan portfolios as of December 31, 2005.





**Number**
              **of****Loans**
            
            **Gross**
              **Amount**
            
            **Percent**
              **of****Total****(dollars
                in thousands)**Southern
                California:Los
                Angeles County
            
            
            890
            
            $
            698,352
            
            
            28.42
            %San
                Diego County
            
            
            66
            
            
            86,207
            
            
            3.51
            %Riverside
                County
            
            
            48
            
            
            87,971
            
            
            3.58
            %Orange
                County
            
            
            51
            
            
            60,402
            
            
            2.46
            %San
                Bernardino County
            
            
            54
            
            
            39,909
            
            
            1.62
            %All
                Other Southern California Counties
            
            
            12
            
            
            22,345
            
            
            0.91
            %Total
                Southern California
            
            
            1,121
            
            
            995,186
            
            
            40.50
            %Northern
                California:Alameda
                County
            
            
            92
            
            
            77,267
            
            
            3.14
            %San
                Francisco County
            
            
            63
            
            
            70,130
            
            
            2.85
            %Contra
                Costa County
            
            
            52
            
            
            46,939
            
            
            1.91
            %Fresno
                County
            
            
            61
            
            
            39,992
            
            
            1.63
            %Santa
                Clara County
            
            
            48
            
            
            28,653
            
            
            1.17
            %San
                Mateo County
            
            
            22
            
            
            26,651
            
            
            1.08
            %Kern
                County
            
            
            40
            
            
            24,965
            
            
            1.02
            %All
                Other Northern California Counties
            
            
            172
            
            
            145,618
            
            
            5.93
            %Total
                Northern California
            
            
            550
            
            
            460,215
            
            
            18.73
            %Outside
                California:Arizona
            
            
            223
            
            
            220,034
            
            
            8.95
            %Texas
            
            
            137
            
            
            137,686
            
            
            5.60
            %Nevada
            
            
            82
            
            
            75,088
            
            
            3.06
            %Colorado
            
            
            82
            
            
            54,869
            
            
            2.23
            %Georgia
            
            
            46
            
            
            53,908
            
            
            2.19
            %Florida
            
            
            59
            
            
            49,998
            
            
            2.03
            %Oregon
            
            
            55
            
            
            38,572
            
            
            1.57
            %Massachusetts
            
            
            62
            
            
            33,580
            
            
            1.37
            %Washington
            
            
            41
            
            
            32,075
            
            
            1.31
            %New
                York
            
            
            55
            
            
            28,530
            
            
            1.16
            %Connecticut
            
            
            70
            
            
            25,163
            
            
            1.02
            %New
                Jersey
            
            
            50
            
            
            24,507
            
            
            1.00
            %Other
                U.S. States
            
            
            304
            
            
            227,893
            
            
            9.28
            %Total
                Outside California
            
            
            1,266
            
            
            1,001,903
            
            
            40.77
            %2,937
            
            $
            2,457,304
            
            
            100.00
            %





Although
      we generally seek to limit risks associated with our portfolio of real estate
      and construction loans by limiting the geographic concentration and by varying
      the types of underlying collateral, significant concentration risks still
      remain. Concentrations of loans in certain geographic regions, for example,
      cause our risk associated with these loans to be closely associated with the
      general economic and social environment of the region. Localized economic and
      competitive conditions, natural disasters, possible terrorist activities or
      social conditions all may affect the values of collateral located within a
      particular geographic area. In addition, certain types of properties may be
      more
      or less subject to changes in prevailing economic, competitive or social
      conditions.





The
      following table sets forth certain information with respect to our loan
      originations and purchases. Fundings related to the tax refund lending programs,
      and premiums paid and discounts taken on loans purchased in the secondary market
      are not included below.




**As
                  of and for the Years Ended December 31,****2005**
              
              **2004**
              
              **2003****(dollars
                  in thousands)**Gross
                  real estate loans originated
              
              $
              846,685
              
              $
              721,090
              
              $
              599,885Gross
                  entertainment finance loans originated
              
              
              68,687
              
              
              92,179
              
              
              90,528Gross
                  franchise loans originated
              
              
              2,352
              
              
              52,145
              
              
              50,333Gross
                  commercial and other loans originated
              
              
              1,863
              
              
              58,342
              
              
              41,054Gross
                  franchise loans purchased
              
              
              —
              
              
              —
              
              
              7,244Gross
                  real estate loans purchased
              
              
              723,822
              
              
              136,452
              
              
              46,809Total
                  loan production
              
              $
              1,643,409
              
              $
              1,060,208
              
              $
              835,853Gross
                  loans at end of period
              
              $
              2,544,787
              
              $
              1,820,317
              
              $
              1,533,896Gross
                  loans weighted-average portfolio yield
              
              
              7.13
              %
              
              7.20
              %
              
              7.81
              %Average
                  size of loans retained in the Company’s portfolio
              
              $
              803
              
              $
              919
              
              $
              943





-
          31
          -
 **Table
          of Contents**





**Investment
      Securities**





At
      December 31, 2005, our investment securities totaled $326.4 million, or
      10.7% of our total assets.  Our investment securities, including the
      mortgage-backed securities portfolio, are managed in accordance with a written
      investment policy adopted by the Board of Directors. It is our general policy
      to
      purchase U.S. Government securities and federal agency obligations and other
      investment grade securities. At December 31, 2005, our entire mortgage-backed
      securities portfolio consisted of investment grade securities issued by Fannie
      Mae. Our investment securities portfolio at December 31, 2005, contained
      neither securities of any issuer nor tax-exempt securities with an aggregate
      book value in excess of 10% of stockholders’ equity, excluding those issued by
      the United States Government, or its agencies, or Fannie Mae.  See “Item 8.
      Financial Statements and Supplementary Data-Notes to Consolidated Financial
      Statements-Note 2”.





The
      following table shows the amortized cost and approximate fair value of
      investment securities at the dates indicated.





**December
                31,****2005**
            
            **2004**
            
            **2003****Amortized**
              **Cost**
            
            **Fair**
              **Value**
            
            **Amortized**
              **Cost**
            
            **Fair**
              **Value**
            
            **Amortized**
              **Cost**
            
            **Fair**
              **Value****(in
                thousands)**Investment
                securities available-for-saleU.S.
                Government Agency
            
            $
            89,897
            
            $
            88,829
            
            $
            61,637
            
            $
            61,347
            
            $
            47,749
            
            $
            47,621Residual
                interest in securitized loans
            
            
            3,257
            
            
            3,570
            
            
            5,055
            
            
            5,368
            
            
            5,055
            
            
            5,368Equity
                securities
            
            
            16
            
            
            164
            
            
            25
            
            
            130
            
            
            25
            
            
            104Total
                investment securities available-for-sale
            
            $
            93,170
            
            $
            92,563
            
            $
            66,717
            
            $
            66,845
            
            $
            52,829
            
            $
            53,093Investment
                securities held-to-maturity
              Mortgage-backed
                securities
            
            $
            233,880
            
            $
            229,025
            
            $
            296,028
            
            $
            295,226
            
            $
            —
            
            $
            —





During
      the first quarter of 2002, we formed a limited liability company to issue $86.3
      million of asset-backed notes in a securitization of substantially all of our
      residential loan portfolio, and we recorded a residual interest of $5.6 million,
      which represented the present value of future cash flows (spread and fees)
      that
      were anticipated to be received over the life of the loans. The residual
      interest is recorded on the consolidated balance sheets in the “Investment
      securities available-for-sale, at fair value”. The value of the residual
      interest is subject to substantial credit, prepayment, and interest rate risk
      on
      the sold residential loans. In accordance with the provisions of SFAS No. 115,
      “Accounting for Certain Investments in Debt and Equity Securities”, the residual
      interest is classified as “available-for-sale” and, as such, recorded at fair
      value with the resultant changes in fair value recorded as unrealized gain
      or
      loss in a separate component of shareholders’ equity in “accumulated other
      comprehensive income or loss”, until realized. Fair value is determined on a
      monthly basis based on a discounted cash flow analysis. These cash flows are
      projected over the lives of the receivables using prepayment, default, and
      interest rate assumptions that we believe market participants would use for
      similar financial instruments.





During
      2005 and 2004, we recognized an other than temporary impairment of $250,000
      and
      $1.0 million, respectively, in connection with the residual interest.
      Impairments that are deemed to be other than temporary are charged to
      non-interest income. In evaluating impairments as other than temporary we
      consider credit risk, as well as the magnitude and trend of default rates and
      prepayment speeds of the underlying residential loans.





At
      December 31, 2005 and 2004, key assumptions used to estimate the fair value
      of
      the residual interest based on projected cash flows, and the sensitivity of
      the
      value to immediate adverse changes in those assumptions were as
      follows:





**December
                31, 2005**
            
            **December
                31, 2004****Dollars
                in thousands****Fair
                value of retained interest**
            
            **$**
            **3,570**
            
            **$**
            **5,368****Weighted
                average life (in years) - securities**
            
            
            **0.56**
            
            
            **0.68****Weighted
                average life (in years) - residual interest**
            
            
            **2.92**
            
            
            **3.61****Weighted
                average annual prepayment speed**
            
            
            **40.0**
            **%**
            
            **26.5**
            **%**Impact
                of 10% adverse change
            
            $
            (22
            )
            $
            (236
            )Impact
                of 25% adverse change
            
            $
            (34
            )
            $
            (630
            )**Weighted
                average annual discount rate**
            
            
            **13.0**
            **%**
            
            **15.0**
            **%**Impact
                of 10% adverse change
            
            $
            (117
            )
            $
            (243
            )Impact
                of 25% adverse change
            
            $
            (284
            )
            $
            (588
            )**Weighted
                average lifetime credit losses**
            
            
            **14.3**
            **%**
            
            **25.0**
            **%**Impact
                of 10% adverse change
            
            $
            (79
            )
            $
            (262
            )Impact
                of 25% adverse change
            
            $
            (211
            )
            $
            (700
            )





These
      sensitivities are hypothetical and should be used with caution. As the figures
      indicate, changes in the fair value of the residual are based on a variation
      in
      assumptions and generally cannot be extrapolated because the relationship of
      the
      change in assumption to the change in fair value may not be linear. Also, in
      the
      above table, the effect of a variation in a particular assumption on the fair
      value of the residual interest is calculated without changing any other
      assumption; in reality, changes in one factor may result in changes in another
      (for example, increases in market interest rates may result in lower prepayments
      but increased credit losses), which might magnify or counteract the
      sensitivities, and depending on the severity of such changes, the results of
      operations may be materially affected.


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          32
          -
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          of Contents**





The
      following table indicates the composition of the investment security portfolio
      assuming these securities are held-to-maturity based on the final maturity
      of
      each investment. Mortgage-backed securities are included in maturity categories
      based on their stated maturity date. Expected maturities may differ from
      contractual maturities because issuers may have the right to prepay obligations.
      Equity securities classified as available-for-sale have no maturity and are
      included in the due in one year or less column.





**Due
                in One**
              **Year
                or Less**
            
            **Due
                after One**
              **Year
                through**
              **Five
                Years**
            
            **Due
                after Five**
              **Years
                through**
              **Ten
                Years**
            
            **Due
                after**
              **Ten
                Years****Balance**
            
            **Weighted**
              **Average**
              **Yield**
            
            **Balance**
            
            **Weighted**
              **Average**
              **Yield**
            
            **Balance**
            
            **Weighted**
              **Average**
              **Yield**
            
            **Balance**
            
            **Weighted**
              **Average**
              **Yield****December
                31, 2005**Investment
                securities available-for-saleU.S.
                Government Agency
            
            $
            32,937
            
            
            2.82
            %
            $
            55,892
            
            
            4.08
            %
            $
            —
            
            
            —
            
            $
            —
            
            
            —Equity
                securities
            
            
            164
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Residual
                interest in securitized loans
            
            
            —
            
            
            —
            
            
            3,570
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Total
                investment securities available-for-sale
            
            $
            33,101
            
            
            
            
            $
            59,462
            
            
            
            
            $
            —
            
            
            
            
            $
            —Investment
                securities held-to-maturityMortgage-backed
                securities
            
            $
            —
            
            
            —
            
            $
            —
            
            
            —
            
            $
            —
            
            
            —
            
            $
            233,880
            
            
            4.15
            %





**Liquidity
      and Deposit Accounts**





Liquidity
      refers to our ability to maintain cash flow adequate to fund operations and
      meet
      obligations and other commitments on a timely basis, including the payment
      of
      maturing deposits and the origination or purchase of new loans. We maintain
      a
      cash and investment securities portfolio designed to satisfy operating and
      regulatory liquidity requirements while preserving capital and maximizing yield.
      As of December 31, 2005 and 2004, the Bank’s liquidity ratios were 10.5% and
      10.0%, respectively, exceeding the DFI regulatory requirement of 1.5%. In
      addition, the Bank’s liquidity position is supported by a credit facility with
      the FHLB of San Francisco. As of December 31, 2005, the Bank had remaining
      available borrowing capacity under this credit facility of $241.4 million,
      net
      of the $12.7 million of additional FHLB Stock that we would be required to
      purchase to support those additional borrowings, and $80.0 million of unused
      federal funds credit facilities under established lines of credit with three
      other banks. Additionally, we have a $25.0 million revolving credit facility
      with an unaffiliated bank that expires on April 30, 2006. We intend on renewing
      this revolving credit facility when it matures.





Total
      deposit accounts increased approximately $303.4 million to $1.7 billion at
      December 31, 2005 from $1.4 billion at December 31, 2004. The increase in
      deposits in 2005 was primarily related to an increase in time certificate of
      deposits of $323.1 million and an increase in money market and passbook accounts
      of $14.4 million, partially offset by a decrease in interest bearing demand
      deposit accounts of $34.6 million. Brokered deposits totaled $152.7 million
      and
      $100.0 million at December 31, 2005 and 2004, respectively. Total deposit
      accounts increased approximately $285.0 million to $1.4 billion at December
      31,
      2004 from $1.1 billion at December 31, 2003. In both 2005 and 2004, the funds
      provided from deposits were used primarily to fund the growth in our loan
      portfolio. Although we compete for deposits primarily on the basis of rates,
      based on our historical experience regarding retention of deposits, management
      believes that a significant portion of deposits will remain with us upon
      maturity on an ongoing basis.





The
      following table sets forth information regarding deposits outstanding at the
      dates indicated.





**December
                31,****2005**
            
            **2004**
            
            **2003****(in
                thousands)**Non-interest
                demand accounts
            
            $
            13,660
            
            $
            13,108
            
            $
            9,074Interest
                demand accounts
            
            
            38,197
            
            
            72,832
            
            
            38,518Money
                market and passbook accounts
            
            
            186,453
            
            
            172,092
            
            
            156,505Time
                certificates under $100,000
            
            
            763,701
            
            
            703,493
            
            
            564,207Time
                certificates $100,000 and over
            
            
            733,417
            
            
            470,507
            
            
            378,713$
            1,735,428
            
            $
            1,432,032
            
            $
            1,147,017





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          33
          -
 **Table
          of Contents**


The
        following table sets forth the maturities of certificates of deposit $100,000
        and over at December 31, 2005 (in thousands):


Certificates
                of deposit $100,000 and over:Maturing
                within three months
            
            $
            298,420After
                three but within six months
            
            
            167,118After
                six but within twelve months
            
            
            205,556After
                twelve months
            
            
            62,323$
            733,417





**Off-Balance
      Sheet Arrangements**





In
      the
      normal course of operations, we engage in a variety of financial transactions
      that, in accordance with generally accepted accounting principles are not
      recorded in the financial statements. These transactions involve, to varying
      degrees, elements of credit, interest rate, and liquidity risk. Such
      transactions are used by us to meet the financing needs of our
      customers.





Our
      off-balance sheet arrangements, which principally include lending commitments,
      are described below. At December 31, 2005, we also had a residual interest
      of
      $3.6 million in a qualified special purpose entity formed in 2002 to issue
      $86.3
      million of asset-backed notes in a securitization of substantially all of our
      residential loan portfolio, and a $2.6 million equity interest in our
      deconsolidated trusts through which we have issued trust preferred securities.
      See Notes 8 and 10 of our consolidated financial statements included in Item
      8
      of this report.





*Lending
      Commitments.* Lending
      commitments include loan commitments and unused lines of credit. The instruments
      are not recorded in the consolidated balance sheet until funds are advanced
      under the commitments. We provide these lending commitments to customers in
      the
      normal course of business.





At
      December 31, 2005, our approved loan origination commitments outstanding totaled
      $252.5 million. Unfunded commercial lines of credit totaled $0.9 million. These
      lines of credit are commitments for possible future extension of credit to
      existing customers. These lines of credit are typically uncollateralized and
      usually do not contain a specified maturity date.





We
      apply
      essentially the same credit policies and standards as we do in the lending
      process when making these commitments. See Note 13 to the consolidated financial
      statements included in Item 8 of this report for additional information
      regarding lending commitments.





**Contractual
      Obligations**





The
      following table shows our contractual obligations by expected payment period,
      as
      of December 31, 2005. Further discussion of these commitments is included in
      Notes 6, 8, 9, and 14 to the consolidated financial statements included in
      Item
      8 of this report.





**Contractual
                Obligations**
            
            **Total**
            
            **One
                Year**
              **or
                Less**
            
            **After
                One**
              **Through**
              **Three
                Years**
            
            **After
                Three**
              **Through**
              **Five
                Years**
            
            **More
                Than**
              **Five
                Years****(in
                thousands)**Long-term
                FHLB advances andother
                borrowings
            
            $
            904,352
            
            $
            161,719
            
            $
            438,269
            
            $
            263,358
            
            $
            41,006Junior
                subordinated debentures
            
            
            86,600
            
            
            —
            
            
            —
            
            
            —
            
            
            86,600Operating
                lease obligations
            
            
            13,660
            
            
            3,940
            
            
            5,690
            
            
            2,596
            
            
            1,434Deposits
                with stated maturity dates
            
            
            1,497,118
            
            
            1,369,067
            
            
            105,582
            
            
            22,026
            
            
            443Purchase
                obligations
            
            
            1,336
            
            
            1,132
            
            
            204
            
            
            —
            
            
            —$
            2,503,066
            
            $
            1,535,858
            
            $
            549,745
            
            $
            287,980
            
            $
            129,483





FHLB
      advances and other borrowings have defined terms and under certain circumstances
      are callable at the option of the lender. The junior subordinated debentures
      are
      callable by us under the circumstances and at the times described in Note 8
      to
      the consolidated financial statements included in Item 8 of this
      report.





Operating
      leases represent obligations entered into by us for office facilities. Certain
      of these noncancelable operating leases contain rental escalation clauses based
      on increases in the consumer price index. At the end of the lease obligations,
      renewal options may be exercised by us for up to an additional ten
      years.





Purchase
      obligations represent our contractual service and other operating and marketing
      obligations.


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          34
          -
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          of Contents**





**Capital
      Resources**





ITLA
      Capital, the Bank’s holding company, had Tier 1 leverage, Tier 1 risk based and
      total risk-based capital ratios at December 31, 2005 of 9.1%, 11.0%, 13.0%,
      respectively, which, in the case of the Tier 1 risk-based and total risk-based
      capital ratios, represents $122.4 million and $72.2 million, respectively,
      of
      capital in excess of the amount required to be “well capitalized” for bank
      holding company regulatory purposes. These ratios were 12.3%, 13.7% and 16.0%,
      respectively, as of December 31, 2004. Portions of our trust preferred
      securities presently qualify as Tier 1 and total risk-based capital. See Note
      8
      to our consolidated financial statements included in Item 8 of this report.





The
      Bank
      had Tier 1 leverage, Tier 1 risk based and total risk-based capital ratios
      at
      December 31, 2005 of 9.1%, 11.0% and  12.2%,
      respectively, which represents $119.8 million, $120.3 million and $53.8 million,
      respectively, of capital in excess of the amount required for the Bank to be
      “well capitalized” for regulatory purposes. These ratios were 11.0%, 12.2% and
      13.5%, respectively, as of December 31, 2004.





Shareholders’
      equity increased to $204.5 million at December 31, 2005 from $194.7 million
      at
      December 31, 2004. The change was primarily due to the increase in retained
      earnings as a result of $24.1 million of net income earned during the year
      and
      an $8.7  million
      increase in contributed capital, which is primarily related to the exercise
      of
      employee stock options, partially offset by the purchase of $22.6 million of
      our
      common stock currently held as treasury stock. There were no dividends declared
      or paid by us during 2005.





**Credit
      Risk Elements**





**Allowance
      for Loan Losses and Nonperforming Assets**





The
      following table provides certain information with respect to our total allowance
      for loan losses, including charge-offs, recoveries and selected ratios, for
      the
      periods indicated.





**As
                of and for the Years Ended December 31,****2005**
            
            **2004**
            
            **2003**
            
            **2002**
            
            **2001****(dollars
                in thousands)**Balance
                at beginning of year
            
            $
            35,483
            
            $
            33,401
            
            $
            33,009
            
            $
            26,650
            
            $
            27,186Provision
                for loan losses
            
            
            10,250
            
            
            4,725
            
            
            7,760
            
            
            9,030
            
            
            4,575Additions
                due to acquisitions
            
            
            —
            
            
            —
            
            
            —
            
            
            2,048
            
            
            —Charge
                offs:Real
                estate loans
            
            
            (1,584
            )
            
            (189
            )
            
            (5,286
            )
            
            (4,730
            )
            
            (2,845
            )Construction
                loans
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (2,419
            )Entertainment
                finance loans
            
            
            (395
            )
            
            (2,180
            )
            
            (800
            )
            
            —
            
            
            —Franchise
                loans
            
            
            (451
            )
            
            —
            
            
            (661
            )
            
            —
            
            
            —Commercial
                and other loans
            
            
            —
            
            
            (1,121
            )
            
            (700
            )
            
            —
            
            
            —Total
                charge-offs
            
            
            (2,430
            )
            
            (3,490
            )
            
            (7,447
            )
            
            (4,730
            )
            
            (5,264
            )Recoveries:Real
                estate loans
            
            
            88
            
            
            89
            
            
            14
            
            
            11
            
            
            153Entertainment
                finance loans
            
            
            426
            
            
            —
            
            
            —
            
            
            —
            
            
            —Commercial
                and other loans
            
            
            —
            
            
            758
            
            
            65
            
            
            —
            
            
            —Total
                recoveries
            
            
            514
            
            
            847
            
            
            79
            
            
            11
            
            
            153Net
                charge-offs
            
            
            (1,916
            )
            
            (2,643
            )
            
            (7,368
            )
            
            (4,719
            )
            
            (5,111
            )Balance
                at end of the year
            
            $
            43,817
            
            $
            35,483
            
            $
            33,401
            
            $
            33,009
            
            $
            26,650Average
                loans outstanding during the year
            
            $
            2,239,261
            
            $
            1,606,125
            
            $
            1,415,812
            
            $
            1,305,902
            
            $
            1,295,097Loans,
                net, at end of the year*(1)*
            
            $
            2,567,297
            
            $
            1,829,298
            
            $
            1,538,825
            
            $
            1,471,243
            
            $
            1,311,178Selected
                Ratios:Net
                charge-offs to average loans outstanding
            
            
            0.09
            %
            
            0.16
            %
            
            0.52
            %
            
            0.36
            %
            
            0.39
            %Net
                charge-offs to loans, net*(1)*
            
            
            0.07
            %
            
            0.14
            %
            
            0.48
            %
            
            0.32
            %
            
            0.39
            %Allowance
                for loan losses to loans, net*(1)*
            
            
            1.71
            %
            
            1.94
            %
            
            2.14
            %
            
            2.31
            %
            
            2.16
            %Allowance
                for loan losses to nonaccrual loans
            
            
            180.59
            %
            
            242.17
            %
            
            392.26
            %
            
            555.61
            %
            
            174.30
            %


____________





*(1)*  *Loans,
      before allowance for loan losses and net of premium, deferred loan origination
      costs and deferred loan fees.*





The
      allowance for loan losses increased to $43.8 million or 1.71% of our total
      loan
      portfolio at December 31, 2005 from $35.5 million or 1.94% of our total loan
      portfolio at December 31, 2004. The increase in the allowance was due primarily
      to the provision for loan losses of $10.3 million, less net charge-offs of
      $1.9
      million. The current period provision for loan losses was recorded to provide
      reserves adequate to support the known and inherent risk of loss in the loan
      portfolio, and for specific reserves required as of December 31, 2005. The
      increase in the provision for loan losses in 2005 as compared to 2004 was
      primarily caused by the growth in our loan portfolio and the increase in
      non-performing and other loans of concern during the year. During 2005, our
      loan
      portfolio increased $738.0 million, non-performing loans increased $9.6 million,
      and other loans of concern increased $29.3 million. Other loans of concern
      consist of performing loans which have known information that have caused
      management to be concerned about the borrowers ability to comply with present
      loan repayment terms. The decrease in the percentage of the allowance for loan
      losses to the total loan portfolio primarily reflects the decline in our overall
      risk profile due to a broader geographic diversification of our real estate
      loan
      portfolio resulting from a higher concentration of non-California small balance
      multi-family loans as a percentage of our total loan portfolio.


-
          35
          -
 **Table
          of Contents**





The
      allowance for loan losses increased to $35.5 million or 1.94% of our total
      loan
      portfolio at December 31, 2004 from $33.4 million or 2.14% of our total loan
      portfolio at December 31, 2003. The increase in the allowance was due primarily
      to the growth in our loan portfolio, which increased $290.5 million in 2004
      as
      compared to 2003. During 2004, we decreased our provision to $4.7 million
      compared to $7.8 million in 2003. The 2004 provision for loan losses was
      recorded to provide reserves adequate to support the known and inherent risk
      of
      loss in the loan portfolio, and for specific reserves required as of December
      31, 2004. The decline in the provision for loan losses in 2004 as compared
      to
      2003 reflects the enhanced overall geographic diversification of our real estate
      loan portfolio and the increase in our small balance multi-family loan portfolio
      caused by the national expansion of this lending platform.





The
      following table sets forth management’s historical allocation of the allowance
      for loan losses by loan or contract category and the percentage of gross loans
      in each category to total gross loans at the dates indicated.





**December
                31,****2005**
            
            **2004**
            
            **2003**
            
            **2002**
            
            **2001****Loan
                Category:**
            
            **Allowance**
              **for
                loan**
              **losses**
            
            **%
                of loans****(1)**
            
            **Allowance**
              **for
                loan**
              **losses**
            
            **%
                of loans****(1)**
            
            **Allowance**
              **for
                loan**
              **losses**
            
            **%
                of**
              **loans****(1)**
            
            **Allowance**
              **for
                loan**
              **losses**
            
            **%
                of loans**
              **(1)**
            
            **Allowance**
              **for
                loan**
              **losses**
            
            **%
                of loans**
              **(1)**Secured
                by real estate
            
            $
            34,222
            
            
            96
            %
            $
            23,543
            
            
            86
            %
            $
            25,522
            
            
            87
            %
            $
            28,348
            
            
            88
            %
            $
            26,650
            
            
            96
            %Entertainment
                finance
            
            
            6,770
            
            
            3
            %
            
            7,828
            
            
            5
            %
            
            4,354
            
            
            6
            %
            
            2,961
            
            
            8
            %
            
            —
            
            
            —Franchise
            
            
            2,685
            
            
            1
            %
            
            4,032
            
            
            8
            %
            
            3,185
            
            
            7
            %
            
            1,490
            
            
            4
            %
            
            —
            
            
            4
            %Commercial
                and other
            
            
            140
            
            
            —
            
            
            80
            
            
            1
            %
            
            340
            
            
            —
            
            
            210
            
            
            —
            
            
            —
            
            
            —Total
            
            $
            43,817
            
            
            100
            %
            $
            35,483
            
            
            100
            %
            $
            33,401
            
            
            100
            %
            $
            33,009
            
            
            100
            %
            $
            26,650
            
            
            100
            %


____________





*(1)*  *Percentage
      represents gross loans in category to total gross loans.*





Management
      believes the allowance for loan losses accounting policy is critical to the
      portrayal and understanding of our financial condition and results of
      operations. As such, selection and application of this “critical accounting
      policy” involves judgments, estimates, and uncertainties that are susceptible to
      change. In the event that different assumptions or conditions were to prevail,
      and depending upon the severity of such changes, the possibility of materially
      different financial condition or results of operations is a reasonable
      likelihood.





Management
      periodically assesses the adequacy of the allowance for loan losses by reference
      to many quantitative and qualitative factors that may be weighted differently
      at
      various times depending on prevailing conditions. These factors include, among
      other elements:





•
            the
                risk characteristics of various classifications of loans;





•
            general
                portfolio trends relative to asset and portfolio size;





•
            asset
                categories;





•
            potential
                credit and geographic concentrations;





•
            delinquency
                trends and nonaccrual loan levels;





•
            historical
                loss experience and risks associated with changes in economic, social
                and
                business conditions; and





•
            the
                underwriting standards in effect when the loan was made.





-
          36
          -
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          of Contents**


Accordingly,
      the calculation of the adequacy of the allowance for loan losses is not based
      solely on the level of nonperforming assets. The quantitative factors, included
      above, are utilized by our management to identify two different risk groups
      (1)
      individual loans (loans with specifically identifiable risks); and (2)
      homogeneous loans (groups of loan with similar characteristics). We base the
      allocation for individual loans primarily on risk rating grades assigned to
      each
      of these loans as a result of our loan management and review processes. We
      then
      assign each risk-rating grade a loss ratio, which is determined based on the
      experience of management and our independent loan review process. We estimate
      losses on impaired loans based on estimated cash flows discounted at the loan’s
      original effective interest rate or based on the underlying collateral value.
      Based on management’s experience, we also assign loss ratios to groups of loans.
      These loss ratios are assigned to the various homogenous categories of the
      portfolio.





The
      qualitative factors, included above, are generally utilized to identify other
      risks inherent in the portfolio and to determine whether the estimated credit
      losses associated with the current portfolio might differ from historical loss
      trends. We estimate a range of exposure for each qualitative factor and evaluate
      the current condition and trend of each factor. Based on this evaluation, we
      assign a positive, negative or neutral grade to each factor to determine whether
      the portion of the qualitative reserve is in the high, middle or low end of
      the
      range for each factor. Because of the subjective nature of these factors and
      the
      judgments required to determine the estimated ranges, the actual losses incurred
      can vary significantly from the estimated amounts.





Management
      believes that our allowance for loan losses as of December 31, 2005 was adequate
      to absorb the known and inherent risks of loss in the loan portfolio at that
      date. While management believes the estimates and assumptions used in its
      determination of the adequacy of the allowance are reasonable, there can be
      no
      assurance that such estimates and assumptions will not be proven incorrect
      in
      the future, or that the actual amount of future provisions will not exceed
      the
      amount of past provisions or that any increased provisions that may be required
      will not adversely impact our financial condition and results of operations.
      In
      addition, the determination of the amount of the Bank’s allowance for loan
      losses is subject to review by bank regulators, as part of the routine
      examination process, which may result in the establishment of additional
      reserves based upon their judgment of information available to them at the
      time
      of their examination.





The
      following table sets forth the delinquency status of our loan portfolios at
      each
      of the dates indicated.





**December
                31,****2005**
            
            **2004**
            
            **2003****Amount**
            
            **Percent
                of**
              **Gross****Portfolio**
            
            **Amount**
            
            **Percent
                of**
              **Gross****Portfolio**
            
            **Amount**
            
            **Percent
                of**
              **Gross****Portfolio****(dollars
                in thousands)****Period
              of Delinquency**30
                - 59 days
            
            $
            5,060
            
            
            0.20
            %
            $
            16,684
            
            
            0.92
            %
            $
            21,455
            
            
            1.39
            %60
                - 89 days
            
            
            3,678
            
            
            0.14
            %
            
            6,018
            
            
            0.33
            %
            
            882
            
            
            0.06
            %90
                days or more
            
            
            22,533
            
            
            0.89
            %
            
            9,401
            
            
            0.52
            %
            
            8,515
            
            
            0.55
            %Total
                loans delinquent
            
            $
            31,271
            
            
            1.23
            %
            $
            32,103
            
            
            1.77
            %
            $
            30,852
            
            
            2.00
            %





The
      decrease in total delinquent loans in 2005 was due primarily to a decrease
      of
      $9.8 million of past due commercial real estate loans, partially offset by
      a
      $6.7 million increase in past due franchise loans.





We
      have
      established a policy that all loans greater than $2.5 million are reviewed
      annually. This review usually involves obtaining updated information about
      the
      collateral and source of repayment. In addition, independent outside consultants
      periodically review the Bank’s loan portfolio and report findings to management
      and the audit committee of the Board of Directors. Loans considered to warrant
      special attention are presented to the review and reserve committee, which
      meets
      at least monthly to review the status of classified loans, consider new
      classifications or declassifications, determine the need for and amount of
      any
      charge offs, and recommend to our executive committee of the Board of Directors
      the level of allowance for loan losses to be maintained. If management believes
      that the collection of the full amount of principal is unlikely and the value
      of
      the collateral securing the obligation is insufficient, the difference between
      the loan balance and the fair market value of the collateral are recognized
      by a
      partial charge-off of the loan balance to the collateral’s fair value. While
      real property collateral is held for sale, it is subject to periodic evaluation
      and/or appraisal. If an evaluation or appraisal indicates that the property
      will
      ultimately sell for less than our recorded value plus costs of disposition,
      the
      loss is recognized by a charge to allowance for other real estate owned
      losses.





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          37
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          of Contents**


Loans
      are
      placed on nonaccrual status when they become 90 days or more contractually
      delinquent, or earlier if the collection of interest is considered by management
      to be doubtful, unless the loan is considered well secured and in the process
      of
      collection. Subsequent cash collections on nonaccrual loans are either
      recognized as interest income on a cash basis, if the loan is well secured
      and
      in management’s judgment the net book value is fully collectible, or recorded
      entirely as a reduction of principal.





The
      following table sets forth our nonperforming assets by category and troubled
      debt restructurings as of the dates indicated:





**December
                31,****2005**
            
            **2004**
            
            **2003**
            
            **2002**
            
            **2001****(dollars
                in thousands)**Nonaccrual
                loans:*(1*)Real
                estate
            
            $
            6,117
            
            $
            7,057
            
            $
            4,686
            
            $
            3,913
            
            $
            13,690Construction
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            1,600Franchise
            
            
            7,366
            
            
            3,874
            
            
            799
            
            
            1,986
            
            
            —Entertainment
                finance
            
            
            10,780
            
            
            3,721
            
            
            3,030
            
            
            —
            
            
            —Total
                nonaccrual loans
            
            
            24,263
            
            
            14,652
            
            
            8,515
            
            
            5,899
            
            
            15,290Other
                real estate owned, net
            
            
            3,960
            
            
            —
            
            
            7,048
            
            
            12,593
            
            
            13,741Total
                nonperforming assets
            
            
            28,223
            
            
            14,652
            
            
            15,563
            
            
            18,492
            
            
            29,031Accruing
                loans past-due 90 days or more with respect to principal or
                interest
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Performing
                troubled debt restructurings
            
            
            10,758
            
            
            3,096
            
            
            4,709
            
            
            7,858
            
            
            3,752$
            38,981
            
            $
            17,748
            
            $
            20,272
            
            $
            26,350
            
            $
            32,783Nonaccrual
                loans to total gross loans
            
            
            0.95
            %
            
            0.80
            %
            
            0.55
            %
            
            0.36
            %
            
            1.17
            %Allowance
                for loan losses to nonaccrual loans
            
            
            180.59
            %
            
            242.17
            %
            
            392.26
            %
            
            555.61
            %
            
            174.30
            %Nonperforming
                assets to total assets
            
            
            0.92
            %
            
            0.63
            %
            
            0.86
            %
            
            1.08
            %
            
            1.92
            %


________________





*(1)*
            *Includes
                six loans with a net book balance of $8.5 million that were nonperforming
                troubled debt restructurings in 2005, four loans with a net book
                balance
                of $5.7 million that were nonperforming troubled debt restructurings
                in
                2004, and three loans with a net book balance of $3.8 million that
                were
                nonperforming troubled debt restructurings in 2003.*





Gross
      interest income that would have been recorded on nonaccrual loans had they
      been
      current in accordance with original terms was $1.6 million and $784,000 for
      the
      years ended December 31, 2005 and 2004, respectively. The amount of interest
      income on such nonaccrual loans included in net income for the years ended
      December 31, 2005 and 2004 was $340,000 and $63,000, respectively. For the
      years
      ended December 31, 2005 and 2004, $1.9 million and $1.1 million, respectively,
      of gross interest income would have been recorded had the restructured loans
      been current in accordance with their original terms compared to $1.4 million
      and $734,000, respectively, of interest income that was included in net income
      for the same periods.





In
      2005,
      $4.0 million of new other real estate owned was acquired, and $70,000 of other
      real estate owned was sold, resulting in $4.0 million of other real estate
      owned
      at December 31, 2005.





As
      of
      December 31, 2005, we had loans with an aggregate outstanding balance of $66.4
      million with respect to which known information concerning possible credit
      problems with the borrowers or the cash flows of the properties securing the
      respective loans has caused management to be concerned about the ability of
      the
      borrowers to comply with present loan repayment terms, which may result in
      the
      future inclusion of such loans in the non-accrual loan category. The increase
      during 2005 in this category of loans was primarily due to the migration of
      three commercial real estate loans to other loans of concern.





**Item
      7A. Quantitativeand Qualitative Disclosures About Market
      Risk**





We
      realize income principally from the differential or spread between the interest
      earned on loans, investments and other interest-earning assets and the interest
      paid on deposits and borrowings. Loan volumes and yields, as well as the volume
      of and rates on investments, deposits and borrowings, are affected by market
      interest rates. Additionally, because of the terms and conditions of many of
      our
      loan agreements and deposit accounts, a change in interest rates could also
      affect the duration of the loan portfolio and/or the deposit base, which could
      alter our sensitivity to future changes in interest rates.





-
          38
          -
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          of Contents**


Interest
      rate risk management focuses on maintaining consistent growth in net interest
      income within board-approved policy limits while taking into consideration,
      among other factors, our overall credit, operating income, operating cost and
      capital profile. The asset/liability management committee, which includes senior
      management representatives and reports to the Board of Directors, monitors
      and
      manages interest rate risk to maintain an acceptable level of change in net
      interest income as a result of changes in interest rates. See “Item 1. Business
      - Nonperforming Assets and Other Loans of Concern”.





In
      evaluating our exposure to changes in interest rates, certain risks inherent
      in
      the method of analysis presented in the following tables must be considered.
      For
      example, although certain assets and liabilities may have similar maturities
      or
      periods to repricing, they may react in different degrees and at different
      times
      to changes in market rates. Additionally, loan prepayments and early withdrawals
      of time certificates could cause interest sensitivities to vary from those
      that
      appear in the following table. Further, certain assets, such as variable rate
      real estate loans, have features that restrict changes in interest rates on
      a
      short-term basis and over the life of the asset. The majority of our variable
      rate real estate loans may not adjust downward below their initial rate, with
      increases generally limited to maximum adjustments of 2% per year and up to
      5%
      over the life of the loan. These loans may also be subject to prepayment
      penalties. At December 31, 2005, 7.1% of our adjustable rate loan portfolio
      would not adjust downward below the floor rate with the weighted-average minimum
      interest rate on this portfolio being 9.35% and 68.2% of the total loans
      outstanding had a lifetime interest rate cap, with the weighted-average lifetime
      interest rate cap on this portfolio being 11.33%. The anticipated effects of
      these various factors are considered by management in implementing interest
      rate
      risk management activities.





We
      use an
      internal earnings simulation model as a tool to identify and manage our interest
      rate risk profile. The model is based on projected cash flows and repricing
      characteristics for all financial instruments and incorporates market-based
      assumptions regarding the impact of changing interest rates on current volumes
      of applicable financial instruments, considering applicable interest rate floors
      and caps and prepayment penalties associated with each financial instrument.
      These assumptions are inherently uncertain and, as a result, the model cannot
      precisely measure net interest income or precisely predict the impact of changes
      in interest rates on net interest income. Actual results will differ from
      simulated results due to timing, magnitude and frequency of interest rate
      changes as well as changes in market conditions and management
      strategies.





The
      following table shows our estimated earnings sensitivity profile to immediate,
      parallel shifts in interest rates as of December 31, 2005:




**Changes
                  in**
                **Interest
                  rates**
                **(Basis
                  Points)**
              
              **Percentage
                  Change in**
                **Net
                  Interest Income**
                **(12
                  Months)**+
                  200 Over One Year
              
              2.26%+
                  100 Over One Year
              
              1.96%-
                  100 Over One Year
              
              -2.97%-
                  200 Over One Year
              
              -3.51%


-
          39
          -
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          of Contents**


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 presents an estimate of our static GAP analysis
        as of
        December 31, 2005.





**Maturing
                or Repricing in****3
                months**
              **or
                less**
            
            **After
                3****Months**
              **But****Within**
              **1
                year**
            
            **After
                1 Year**
              **But
                Within**
              **5
                Years**
            
            **After**
              **5
                Years**
            
            **Non-Interest**
              **Sensitive**
            
            **Total****(dollars
                in thousands)****Assets**Loans*(1)*
            
            $
            1,010,338
            
            $
            766,248
            
            $
            731,351
            
            $
            59,360
            
            $
            —
            
            $
            2,567,297Cash
                and cash equivalents
            
            
            90,977
            
            
            —
            
            
            —
            
            
            —
            
            
            2,770
            
            
            93,747Investment
                securities available-for-sale
            
            
            12,991
            
            
            23,689
            
            
            55,883
            
            
            —
            
            
            —
            
            
            92,563Investment
                securities held-to-maturity
            
            
            13,036
            
            
            34,978
            
            
            112,518
            
            
            73,348
            
            
            —
            
            
            233,880Noninterest-earning
                assets less allowance for loan losses and unearned fees
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            63,709
            
            
            63,709Total
                assets
            
            $
            1,127,342
            
            $
            824,915
            
            $
            899,752
            
            $
            132,708
            
            $
            66,479
            
            $
            3,051,196**Liabilities
                and Shareholders’ Equity**Time
                certificates under $100,000
            
            $
            249,269
            
            $
            449,037
            
            $
            65,395
            
            $
            —
            
            $
            —
            
            $
            763,701Time
                certificates $100,000 and more
            
            
            298,420
            
            
            372,674
            
            
            62,323
            
            
            —
            
            
            —
            
            
            733,417Money
                market and passbook accounts
            
            
            186,453
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            186,453Demand
                deposit accounts
            
            
            38,197
            
            
            —
            
            
            —
            
            
            —
            
            
            13,660
            
            
            51,857FHLB
                advances and other borrowings
            
            
            107,876
            
            
            142,048
            
            
            701,627
            
            
            41,006
            
            
            —
            
            
            992,557Other
                liabilities
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            32,130
            
            
            32,130Junior
                subordinated debentures
            
            
            25,000
            
            
            30,000
            
            
            16,600
            
            
            15,000
            
            
            
            
            
            86,600Shareholders’
                equity
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            204,481
            
            
            204,481Total
                liabilities and shareholders’ equity
            
            $
            905,215
            
            $
            993,759
            
            $
            845,945
            
            $
            56,006
            
            $
            250,271
            
            $
            3,051,196Net
                repricing assets over (under) repricing liabilities equals interest
                rate
                sensitivity GAP
            
            $
            222,127
            
            $
            (168,844
            )
            $
            53,807
            
            $
            76,702
            
            $
            (183,792
            )Cumulative
                interest rate sensitivity GAP
            
            $
            222,127
            
            $
            53,283
            
            $
            107,090
            
            $
            183,792
            
            $
            —Cumulative
                GAP as a percentage of total assets
            
            
            7.28
            %
            
            1.75
            %
            
            3.51
            %
            
            6.02
            %
            
            0.00
            %


____________





*(1)*
            *Approximately
                61.8% of our loan portfolio was comprised of adjustable rate loans
                at
                December 31, 2005, and approximately 35.8% of the loan portfolio
                was
                comprised of hybrid loans, which become adjustable rate loans after
                an
                initial fixed rate period of three or five years. Our adjustable
                rate
                loans generally re-price on a quarterly or semi-annual basis with
                increases generally limited to maximum adjustments of 2% per year
                up to 5%
                for the life of the loan. Nonaccrual loans of approximately $24.3
                million
                are assumed to reprice after five
                years.*





-
          40
          -
 **Table
          of Contents**


**Item
      8. Financial Statementsand Supplementary
      Data**





**INDEX
      TO CONSOLIDATED FINANCIAL STATEMENTS**





**Page**Management’s
                Report on Internal Control Over Financial
                Reporting
            42Reports
                of Independent Registered Public Accounting
                Firm
            43Consolidated
                Balance Sheets as of December 31, 2005 and
                2004
            45Consolidated
                Statements of Income for the Years Ended
                December 31, 2005, 2004 and 2003
            46Consolidated
                Statements of Changes in Shareholders’ Equity
                and Comprehensive Income for the Years Ended December 31, 2005, 2004
                and
                2003
            47Consolidated
                Statements of Cash Flows for the Years Ended
                December 31, 2005, 2004 and 2003
            48Notes
                to Consolidated Financial Statements
            49





-
          41
          -
 **Table
          of Contents**


**MANAGEMENT'S
      REPORT ON INTERNAL CONTROL OVER FINANCIAL
      REPORTING**











Our
      management is responsible for establishing and maintaining adequate internal
      control over financial reporting, as such term is defined in Exchange Act Rules
      13a-15(f) and 15d-15(f). The Company’s 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.  Because
      of its inherent limitations, internal control over financial reporting may
      not
      prevent or detect misstatements. Therefore, even those systems determined to
      be
      effective can provide only reasonable assurance with respect to financial
      statement preparation and presentation. Also, projections of any evaluation
      of
      effectiveness to future periods are subject to the risk that controls may become
      inadequate because of changes in conditions, or that the degree of compliance
      with the policies or procedures may deteriorate.





Under
      the
      supervision and with the participation of our management, including our Chief
      Executive Officer and Chief Financial Officer, we conducted an evaluation of
      the
      effectiveness of our internal control over financial reporting as of December
      31, 2005 based on the framework in Internal Control--Integrated Framework issued
      by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
      Based on that evaluation, our management concluded that our internal control
      over financial reporting was effective as of December 31, 2005.





Management's
      assessment of the effectiveness of our internal control over financial reporting
      as of December 31, 2005 has been audited by Ernst & Young LLP, an
      independent registered public accounting firm, as stated in their report which
      is included elsewhere herein.














/s/
      George W. Haligowski


George
      W.
      Haligowski


Chairman
      of the Board, President and


Chief
      Executive Officer








/s/
      Timothy M. Doyle


Timothy
      M. Doyle


Executive
      Managing Director and


Chief
      Financial Officer





-
          42
          -
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          of Contents**


**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**











To
      the
      Board of Directors and Shareholders of ITLA Capital Corporation:





We
      have
      audited management's assessment, included in the accompanying Management's
      Report on Internal Control Over Financial Reporting, that ITLA Capital
      Corporation (the "Company") maintained effective internal control over financial
      reporting as of December 31, 2005, based on criteria established in "Internal
      Control -- Integrated Framework" issued by the Committee of Sponsoring
      Organizations of the Treadway Commission (the COSO criteria). 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. Our responsibility is to express an opinion
      on
      management's assessment and an opinion on the effectiveness of 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, evaluating management's assessment, testing and evaluating
      the design and operating effectiveness of internal control, 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 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 its inherent limitations, internal control over financial reporting may
      not
      prevent or detect misstatements. Also, projections of any evaluation of
      effectiveness to future periods are subject to the risk that 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, management's assessment that ITLA Capital Corporation maintained
      effective internal control over financial reporting as of December 31, 2005,
      is
      fairly stated, in all material respects, based on the COSO criteria. Also,
      in
      our opinion, ITLA Capital Corporation maintained, in all material respects,
      effective internal control over financial reporting as of December 31, 2005,
      based on the COSO criteria.





We
      have
      also audited, in accordance with the standards of the Public Company Accounting
      Oversight Board (United States), the consolidated balance sheets as of December
      31, 2005 and 2004 and the related consolidated statements of income, changes
      in
      shareholders' equity and comprehensive income, and cash flows for each of the
      three years in the period ended December 31, 2005 of ITLA Capital Corporation
      and our report dated March 14 ,
      2006
      expressed an unqualified opinion thereon.








/s/
      Ernst
& Young LLP





Los
      Angeles, California


March
      14,
      2006








-
          43
          -
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          of Contents**


**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**








To
      the
      Shareholders and the Board of Directors of


ITLA
      Capital Corporation:





We
      have
      audited the accompanying consolidated balance sheets of ITLA Capital Corporation
      and subsidiaries (“the Company”), a Delaware corporation, as of December 31,
      2005 and 2004, and the related consolidated statements of income, changes in
      shareholders’ equity and comprehensive income, and cash flows for each of the
      three years in the period ended December 31, 2005. 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 auditing 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, the consolidated financial statements referred to above present fairly,
      in all material respects, the consolidated financial position of ITLA Capital
      Corporation and subsidiaries at December 31, 2005 and 2004, and the consolidated
      results of their operations and their cash flows for each of the three years
      in
      the period ended December 31, 2005, in conformity with accounting principles
      generally accepted in the United States.





We
      also
      have audited, in accordance with the standards of the Public Company Accounting
      Oversight Board (United States), the effectiveness of ITLA Capital Corporation
      and subsidiaries’ internal control over financial reporting as of December 31,
      2005, based on criteria established in Internal Control—Integrated Framework
      issued by the Committee of Sponsoring Organizations of the Treadway Commission
      and our report dated March 14 ,
      2006
      expressed an unqualified opinion thereon.








/s/
      Ernst
&Young LLP





Los
      Angeles, California


March
      14,
      2006











-
          44
          -
 **Table
          of Contents**


**ITLA
      CAPITAL CORPORATIONAND SUBSIDIARIES**


**CONSOLIDATED
      BALANCE SHEETS**





**December
                31,****2005**
            
            **2004****(in
                thousands except share amounts)****Assets**Cash
                and cash equivalents
            
            $
            93,747
            
            $
            87,580Investment
                securities available-for-sale, at fair value
            
            
            92,563
            
            
            66,845Investment
                securities held-to-maturity, at amortized cost (fair value approximates
                $229,025 and $295,226 in 2005 and 2004, respectively)
            
            
            233,880
            
            
            296,028Stock
                in Federal Home Loan Bank
            
            
            43,802
            
            
            23,200Loans,
                net (net of allowance for loan losses of $43,817 and $35,483 in 2005
                and
                2004, respectively)
            
            
            2,523,480
            
            
            1,793,815Interest
                receivable
            
            
            16,287
            
            
            10,695Other
                real estate owned, net
            
            
            3,960
            
            
            —Premises
                and equipment, net
            
            
            6,718
            
            
            6,645Deferred
                income taxes
            
            
            12,717
            
            
            10,468Goodwill
            
            
            3,118
            
            
            3,118Other
                assets
            
            
            20,924
            
            
            19,677Total
                assets
            
            $
            3,051,196
            
            $
            2,318,071**Liabilities
                and Shareholders’ Equity**Liabilities:Deposit
                accounts
            
            $
            1,735,428
            
            $
            1,432,032Federal
                Home Loan Bank advances and other borrowings
            
            
            992,557
            
            
            584,224Accounts
                payable and other liabilities
            
            
            32,130
            
            
            20,491Junior
                subordinated debentures
            
            
            86,600
            
            
            86,600Total
                liabilities
            
            
            2,846,715
            
            
            2,123,347Commitments
                and contingencies (note 14)Shareholders’
                equity:Preferred
                stock, 5,000,000 shares authorized, none issued
            
            
            —
            
            
            —Contributed
                capital - common stock, $.01 par value; 20,000,000 shares authorized,
                8,978,998 and 8,703,894 issued in 2005 and 2004,
                respectively
            
            
            78,004
            
            
            69,327Retained
                earnings
            
            
            220,095
            
            
            196,032Accumulated
                other comprehensive (loss) income, net
            
            
            (364
            )
            
            78297,735
            
            
            265,437Less
                treasury stock, at cost - 3,576,695 and 3,154,290 shares in 2005
                and 2004,
                respectively
            
            
            (93,254
            )
            
            (70,713
            )Total
                shareholders’ equity
            
            
            204,481
            
            
            194,724Total
                liabilities and shareholders’ equity
            
            $
            3,051,196
            
            $
            2,318,071





See
      accompanying notes to the consolidated financial statements.


-
          45
          -
 **Table
          of Contents**





**ITLA
      CAPITAL CORPORATION AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF INCOME**





**Years
                Ended December 31,****2005**
            
            **2004**
            
            **2003****(in
                thousands except per share amounts)**Interest
                income:Loans
                receivable, including fees
            
            $
            159,720
            
            $
            115,663
            
            $
            110,578Cash,
                cash equivalents and investment securities
            
            
            18,438
            
            
            9,291
            
            
            5,399Total
                interest income
            
            
            178,158
            
            
            124,954
            
            
            115,977Interest
                expense:Deposit
                accounts
            
            
            53,807
            
            
            27,916
            
            
            24,616Federal
                Home Loan Bank advances and other borrowings
            
            
            25,508
            
            
            7,343
            
            
            6,251Junior
                subordinated debentures
            
            
            7,171
            
            
            6,159
            
            
            —Total
                interest expense
            
            
            86,486
            
            
            41,418
            
            
            30,867Net
                interest income before provision for loan losses
            
            
            91,672
            
            
            83,536
            
            
            85,110Provision
                for loan losses
            
            
            10,250
            
            
            4,725
            
            
            7,760Net
                interest income after provision for loan losses
            
            
            81,422
            
            
            78,811
            
            
            77,350Non-interest
                income:Gain
                on sale of loans, net
            
            
            4,911
            
            
            9,284
            
            
            8,983Late
                and collection fees
            
            
            536
            
            
            338
            
            
            252Other
            
            
            1,127
            
            
            4,886
            
            
            6,005Total
                non-interest income
            
            
            6,574
            
            
            14,508
            
            
            15,240Non-interest
                expense:Compensation
                and benefits
            
            
            21,737
            
            
            21,444
            
            
            18,870Occupancy
                and equipment
            
            
            7,177
            
            
            5,924
            
            
            4,839Other
            
            
            17,344
            
            
            14,666
            
            
            13,006Total
                general and administrative
            
            
            46,258
            
            
            42,034
            
            
            36,715Real
                estate owned expense, net
            
            
            204
            
            
            127
            
            
            382Provision
                for losses on other real estate owned
            
            
            —
            
            
            1,000
            
            
            870Gain
                on sale of other real estate owned
            
            
            (11
            )
            
            (415
            )
            
            (40
            )Total
                real estate owned expense
            
            
            193
            
            
            712
            
            
            1,212Total
                non-interest expense
            
            
            46,451
            
            
            42,746
            
            
            37,927Income
                before provision for income taxes and minority interest in income
                of
                subsidiary
            
            
            41,545
            
            
            50,573
            
            
            54,663Minority
                interest in income of subsidiary
            
            
            —
            
            
            —
            
            
            6,083Income
                before provision for income taxes
            
            
            41,545
            
            
            50,573
            
            
            48,580Provision
                for income taxes
            
            
            17,482
            
            
            19,948
            
            
            18,946NET
                INCOME
            
            $
            24,063
            
            $
            30,625
            
            $
            29,634BASIC
                EARNINGS PER SHARE
            
            $
            4.19
            
            $
            5.04
            
            $
            4.91DILUTED
                EARNINGS PER SHARE
            
            $
            4.04
            
            $
            4.75
            
            $
            4.55








See
      accompanying notes to the consolidated financial statements.


-
          46
          -
 **Table
          of Contents**




**ITLA
      CAPITAL CORPORATIONAND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY AND COMPREHENSIVE
      INCOME**


**Common
                  Stock****Number
                  of shares**
              
              **Shareholders’
                  Equity****Gross**
              
              
              
              **Net**
              
              **Contributed
                  Capital**
              
              **Accumulated****Shares**
              
              
              
              **Shares**
              
              
              
              
              
              **Total**
              
              
              
              **Other**
              
              **Treasury****Issued
                  and**
              
              **Treasury**
              
              **Issued
                  and**
              
              **Share**
              
              **Earned**
              
              **Contributed**
              
              **Retained**
              
              **Comprehensive**
              
              **Stock,****Outstanding**
              
              **Shares**
              
              **Outstanding**
              
              **Capital**
              
              **Compensation**
              
              **Capital**
              
              **Earnings**
              
              **Income
                  (Loss)**
              
              **At
                  Cost**
              
              **Total****(in
                  thousands except share amounts)**Balance
                  at January 1, 2003
              
              
              8,226,414
              
              
              (2,447,656
              )
              
              5,778,758
              
              $
              56,753
              
              $
              2,088
              
              $
              58,841
              
              $
              135,773
              
              $
              435
              
              $
              (38,358
              )
              $
              156,691Issuance
                  of common stock - employee stock options
              
              
              220,880
              
              
              —
              
              
              220,880
              
              
              2,897
              
              
              —
              
              
              2,897
              
              
              —
              
              
              —
              
              
              —
              
              
              2,897Earned
                  compensation from Supplemental Executive Retirement Plan /Recognition
                  and
                  Retention Plan, net
              
              
              —
              
              
              24,919
              
              
              24,919
              
              
              —
              
              
              (34
              )
              
              (34
              )
              
              —
              
              
              —
              
              
              224
              
              
              190Common
                  stock repurchased
              
              
              —
              
              
              (52,952
              )
              
              (52,952
              )
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (2,233
              )
              
              (2,233
              )Net
                  income
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              29,634
              
              
              —
              
              
              —
              
              
              29,634Other
                  comprehensive income
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (280
              )
              
              —
              
              
              (280
              )Balance
                  at December 31, 2003
              
              
              8,447,294
              
              
              (2,475,689
              )
              
              5,971,605
              
              
              59,650
              
              
              2,054
              
              
              61,704
              
              
              165,407
              
              
              155
              
              
              (40,367
              )
              
              186,899Issuance
                  of common stock-employee stock options
              
              
              256,600
              
              
              —
              
              
              256,600
              
              
              7,477
              
              
              —
              
              
              7,477
              
              
              —
              
              
              —
              
              
              —
              
              
              7,477Earned
                  compensation from Supplemental Executive Retirement Plan / Recognition
                  and
                  Retention Plan, net
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              146
              
              
              146
              
              
              —
              
              
              —
              
              
              —
              
              
              146Common
                  stock repurchased
              
              
              —
              
              
              (678,601
              )
              
              (678,601
              )
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (30,346
              )
              
              (30,346
              )Net
                  income
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              30,625
              
              
              —
              
              
              —
              
              
              30,625Other
                  comprehensive income
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (77
              )
              
              —
              
              
              (77
              )Balance
                  at December 31, 2004
              
              
              8,703,894
              
              
              (3,154,290
              )
              
              5,549,604
              
              
              67,127
              
              
              2,200
              
              
              69,327
              
              
              196,032
              
              
              78
              
              
              (70,713
              )
              
              194,724Issuance
                  of common stock- employee stock options, net
              
              
              275,104
              
              
              —
              
              
              275,104
              
              
              8,656
              
              
              —
              
              
              8,656
              
              
              —
              
              
              —
              
              
              —
              
              
              8,656Earned
                  compensation from Supplemental Executive Retirement Plan / Recognition
                  and
                  Retention Plan, net
              
              
              —
              
              
              9,333
              
              
              9,333
              
              
              —
              
              
              21
              
              
              21
              
              
              —
              
              
              —
              
              
              84
              
              
              105Common
                  stock repurchased
              
              
              —
              
              
              (431,738
              )
              
              (431,738
              )
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (22,625
              )
              
              (22,625
              )Net
                  income
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              24,063
              
              
              —
              
              
              —
              
              
              24,063Other
                  comprehensive income
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (442
              )
              
              —
              
              
              (442
              )Balance
                  at December 31, 2005
              
              
              8,978,998
              
              
              (3,576,695
              )
              
              5,402,303
              
              $
              75,783
              
              $
              2,221
              
              $
              78,004
              
              $
              220,095
              
              $
              (364
              )
              $
              (93,254
              )
              $
              204,481




[Additional
      columns below]


[Continued
      from above table, first column
      repeated]






**Comprehensive
                  Income****Net
                  Income**
              
              **Unrealized
                  Gain (Loss) on Securities, Net of Tax**
              
              **Reclassification
                  of Realized Gains Previously Recognized in Comprehensive Income,
                  Net of
                  Tax**
              
              **Total
                  Comprehensive Income****(in
                  thousands except share amounts)**Balance
                  at January 1, 2003Issuance
                  of common stock - employee stock optionsEarned
                  compensation from Supplemental Executive Retirement Plan /Recognition
                  and
                  Retention Plan, netCommon
                  stock repurchasedNet
                  incomeOther
                  comprehensive income
              
              $
              29,634
              
              $
              (280
              )
              $
              —
              
              $
              29,354Balance
                  at December 31, 2003Issuance
                  of common stock-employee stock optionsEarned
                  compensation from Supplemental Executive Retirement Plan / Recognition
                  and
                  Retention Plan, netCommon
                  stock repurchasedNet
                  incomeOther
                  comprehensive income
              
              $
              30,625
              
              $
              (77
              )
              $
              —
              
              $
              30,548Balance
                  at December 31, 2004Issuance
                  of common stock- employee stock options, netEarned
                  compensation from Supplemental Executive Retirement Plan / Recognition
                  and
                  Retention Plan, netCommon
                  stock repurchasedNet
                  incomeOther
                  comprehensive income
              
              $
              24,063
              
              $
              (442
              )
              $
              —
              
              $
              23,621Balance
                  at December 31, 2005









See
      accompanying notes to the consolidated financial statements.





-
          47
          -
 **Table
          of Contents**


**ITLA
      CAPITAL CORPORATION AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**Years
                  Ended December 31,****2005**
              
              **2004**
              
              **2003****(in
                  thousands)**Cash
                  Flows From Operating Activities:Net
                  Income
              
              $
              24,063
              
              $
              30,625
              
              $
              29,634Adjustments
                  to reconcile net income to net cash provided by operating
                  activities:Depreciation
                  and amortization of premises and equipment
              
              
              2,682
              
              
              2,086
              
              
              1,722Amortization
                  of premium on purchased loans
              
              
              3,114
              
              
              2,196
              
              
              2,136Accretion
                  of deferred loan origination fees, net of costs
              
              
              (2,897
              )
              
              (1,794
              )
              
              (2,390
              )Provision
                  for loan losses
              
              
              10,250
              
              
              4,725
              
              
              7,760Provision
                  for losses on other real estate owned
              
              
              —
              
              
              1,000
              
              
              870Gain
                  on sale of loans, net
              
              
              (4,911
              )
              
              (9,284
              )
              
              (8,983
              )Deferred
                  income tax (benefit) expense
              
              
              (1,940
              )
              
              1,198
              
              
              2,399Other,
                  net
              
              
              2,928
              
              
              2,565
              
              
              544(Increase)
                  decrease in interest receivable
              
              
              (5,592
              )
              
              (1,737
              )
              
              200(Increase)
                  decrease in other assets
              
              
              (1,247
              )
              
              7,238
              
              
              (13,795
              )Increase
                  in accounts payable and other liabilities
              
              
              11,639
              
              
              795
              
              
              9,690Net
                  cash provided by operating activities
              
              
              38,089
              
              
              39,613
              
              
              29,787Cash
                  Flows From Investing Activities:Purchases
                  of investment securities available-for-sale
              
              
              (42,770
              )
              
              (45,269
              )
              
              (55,395
              )Proceeds
                  from the maturity and calls of investment securities
                  available-for-sale
              
              
              16,238
              
              
              31,048
              
              
              55,894Purchases
                  of investment securities held-to-maturity
              
              
              —
              
              
              (306,047
              )
              
              —Proceeds
                  from the maturity and redemption of investment securities
                  held-to-maturity
              
              
              62,033
              
              
              10,066
              
              
              —Purchase
                  of stock in Federal Home Loan Bank
              
              
              (19,252
              )
              
              (4,462
              )
              
              (479
              )Purchase
                  of loans
              
              
              (723,822
              )
              
              (139,486
              )
              
              (54,053
              )Origination
                  of RAL loans
              
              
              —
              
              
              (12,949,433
              )
              
              (11,387,171
              )Proceeds
                  from the participation in RAL loans
              
              
              —
              
              
              12,958,717
              
              
              11,396,154Proceeds
                  from the sale of franchise loans
              
              
              115,508
              
              
              —
              
              
              —Increase
                  in loans, net
              
              
              (130,937
              )
              
              (155,887
              )
              
              (24,154
              )Proceeds
                  from sale of other real estate owned
              
              
              81
              
              
              8,318
              
              
              8,226Cash
                  paid for capital expenditures
              
              
              (2,755
              )
              
              (2,965
              )
              
              (3,291
              )Net
                  cash used in investing activities
              
              
              (725,676
              )
              
              (595,400
              )
              
              (64,269
              )Cash
                  Flows From Financing Activities:Proceeds
                  from exercise of employee stock options
              
              
              4,650
              
              
              4,159
              
              
              2,897Cash
                  paid to acquire treasury stock
              
              
              (22,625
              )
              
              (30,346
              )
              
              (2,233
              )Principal
                  payments on collateralized mortgage obligations
              
              
              —
              
              
              (15,868
              )
              
              (53,268
              )Increase
                  in deposit accounts
              
              
              303,396
              
              
              285,015
              
              
              81,106Net
                  (repayments of) proceeds from short-term borrowings
              
              
              (77,795
              )
              
              (85,000
              )
              
              64,000Proceeds
                  from long-term borrowings
              
              
              586,215
              
              
              363,689
              
              
              16,000Repayments
                  of long-term borrowings
              
              
              (100,087
              )
              
              (56,600
              )
              
              (56,550
              )Net
                  cash provided by financing activities
              
              
              693,754
              
              
              465,049
              
              
              51,952Net
                  increase (decrease) in cash and cash equivalents
              
              
              6,167
              
              
              (90,738
              )
              
              17,470Cash
                  and cash equivalents, beginning of period
              
              
              87,580
              
              
              178,318
              
              
              160,848Cash
                  and cash equivalents, end of period
              
              $
              93,747
              
              $
              87,580
              
              $
              178,318Supplemental
                  Cash Flow Information:Cash
                  paid during the period for interest
              
              $
              82,326
              
              $
              40,759
              
              $
              31,181Cash
                  paid during the period for income taxes
              
              $
              10,033
              
              $
              14,329
              
              $
              19,965Non-cash
                  Investing Transactions:Loans
                  transferred to other real estate owned
              
              $
              4,030
              
              $
              1,855
              
              $
              9,609Loans
                  to facilitate the sale of other real estate owned
              
              $
              —
              
              $
              1,759
              
              $
              6,098


See
      accompanying notes to the consolidated financial statements.


-
          48
          -
 **Table
          of Contents**


**ITLA
      CAPITAL CORPORATION AND SUBSIDIARIES**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





**DECEMBER
      31, 2005, 2004 AND 2003**





**NOTE
      1—ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
      POLICIES**





**Organization** -
      ITLA
      Capital Corporation and subsidiaries (“ITLA Capital” or “the Company”) is
      primarily engaged in the origination of real estate loans secured by income
      producing real estate and, to a lesser extent, the origination of entertainment
      finance loans. Through our principal operating subsidiary, Imperial Capital
      Bank
      (“Imperial” or “the Bank”), the Company accepts deposits insured by the Federal
      Deposit Insurance Corporation (“FDIC”) which are used primarily to fund loan
      production. The Company also holds certain multi-family and commercial real
      estate loans through its subsidiary, Imperial Capital Real Estate Investment
      Trust (“Imperial Capital REIT”).





In
      2002,
      we formed ITLA Capital Statutory Trust III (“Trust III”), ITLA Capital Statutory
      Trust IV ( “Trust IV”), and ITLA Capital Statutory Trust V (“Trust V”), and in
      2001 and 2000, we formed ITLA Capital Statutory Trust II (“Trust II”) and ITLA
      Capital Statutory Trust I (“Trust I”), respectively. Collectively, these trusts
      are referred to as the “Trusts.” The Trusts were established solely for the
      purpose of issuing Guaranteed Preferred Beneficial Interests in the Company’s
      Junior Subordinated Deferrable Interest Debentures (the “Trust Preferred
      securities”). As discussed further in Note 8 - Junior subordinated debentures,
      the Company deconsolidated the Trusts as of December 31, 2003. As a result,
      at
      December 31, 2003, the Company recorded the $86.6 million of underlying
      debentures issued by the Company to the Trusts as “Junior subordinated
      debentures” and $2.6 million of the Company’s investment in the Trusts and $2.1
      million of deferred debt issuance costs as “Other assets” in the consolidated
      balance sheet. As of January 1, 2004, amounts paid relating to the debentures
      were recognized as interest expense in the income statement. The entries
      recorded in connection with the deconsolidation of the Trusts are non-cash
      investing transactions for cash flow purposes.





In
      November 2002, the Company entered into a strategic business relationship with
      various subsidiaries of Household International, Inc. (“Household”) relating to
      certain tax refund products. In connection with this relationship, the Bank
      originated tax refund anticipation loans (“RAL”) and sold Household a
      non-recourse participation interest representing substantially all of the
      outstanding loan balance. Under the agreement, Household supported the Bank’s
      credit administration, compliance, treasury, and accounting functions with
      a
      range of services relating to the administration of this program. Household
      also
      serviced the loans on behalf of the Bank. The Company also entered into an
      agreement in December 2002 with Household pursuant to which the Bank originated
      private label commercial revolving credit loans to small businesses. This
      agreement was for a two-year term. These loans were used primarily to fund
      purchases from major retailers. Pursuant to this agreement, the Bank sold
      Household a non-recourse participation interest representing substantially
      all
      of the outstanding loan balance. During 2004, Household and its affiliates
      terminated their RAL and private label commercial credit loan programs with
      the
      Bank.





As
      of
      December 31, 2005 and 2004, the Bank had no tax refund anticipation loans
      (“RAL”) outstanding and no private label commercial revolving loans outstanding.
      For the years ended December 31, 2004 and 2003, fee income earned in connection
      with the RAL program, consisted of approximately $9.3 million and $9.0 million,
      respectively, of net premiums on the sale of RAL loans and $4.6 million and
      $4.6
      million, respectively, of processing and administrative fees. Because the RAL
      program related to the filing of income tax returns, transaction activity was
      concentrated during the tax season. This resulted in the Company earning
      substantially all of its RAL program income in the first quarter of each year.
      For the year ended December 31, 2005, no fee income was earned in connection
      with these programs.





Imperial
      began operating as a California industrial bank in 1974, and became a publicly
      traded company in October 1995, when its shares were sold in an initial public
      offering. Imperial operates six retail branches in California and one branch
      in
      Nevada, along with 27 loan production offices serving the Western United States,
      the Southeast region, the Mid-Atlantic region, the Ohio Valley, the Metro New
      York area and New England.





In
      December 2002, the Bank received regulatory approval to convert to a California
      state chartered commercial bank from a California industrial bank. In addition,
      ITLA Capital was approved by the Federal Reserve Bank to become a bank holding
      company. The Bank began operating as a commercial bank and ITLA Capital became
      a
      bank holding company in January 2003.





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**Financial
      Statement Presentation —** The
      accounting and reporting policies of the Company conform to accounting
      principles generally accepted in the United States (“GAAP”) and to prevailing
      practices within the financial services industry. The consolidated financial
      statements include the accounts of the Company and its wholly-owned
      subsidiaries. All material intercompany transactions and balances have been
      eliminated. Certain amounts in prior periods have been reclassified to conform
      to the presentation in the current period. The preparation of financial
      statements in conformity with GAAP 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 financial
      statements and the reported amounts of revenues and expenses during the
      reporting period. Actual results could differ from those estimates.





**Cash
      and Cash Equivalents —** We
      consider all highly liquid investments with original maturities of three months
      or less to be cash equivalents.





**Investment
      Securities —** Investment
      securities available-for-sale are carried at fair value with unrealized gains
      or
      losses reported net of taxes as a component of other comprehensive income (loss)
      until realized. Realized gains and losses are determined using the specific
      identification method. Investment securities held-to-maturity represent
      investments that the Company has the ability and intent to hold to maturity.
      These investments are reported at cost and are adjusted for the accretion and
      amortization of premiums and discounts on the effective interest method.





**Loans
      —** Loans,
      which include real estate loans, franchise loans, entertainment finance loans,
      and commercial and other loans, are generally carried at principal amounts
      outstanding plus purchase premiums, less charge-offs, net deferred loan
      origination fees and other unearned income. Deferred loan origination fees
      and
      other unearned income include deferred unamortized fees net of direct
      incremental loan origination costs. Interest income is accrued as earned. Net
      purchase premiums or discounts and deferred loan origination fees are amortized
      or accreted into interest income using the interest method. Premium on the
      sale
      of loans consists entirely of income earned in connection with the sale of
      refund anticipation loans to Household and recognized as income at the time
      the
      loans were purchased by Household.





Loans
      are
      placed on nonaccrual status when they become 90 days or more contractually
      delinquent or earlier if the collection of interest is considered by management
      to be unlikely. When a loan is placed on nonaccrual status, all previously
      accrued but uncollected interest is reversed against current period operating
      results. Subsequent cash collections on nonaccrual loans are either recognized
      as interest income on a cash basis if the loan is well secured and in
      management’s judgment the net book value is fully collectible, or recorded as a
      reduction of principal.





Loans
      are
      considered impaired when, based upon current information and events, it is
      probable that the Company will be unable to collect all principal and interest
      amounts due according to the original contractual terms of the loan agreement
      on
      a timely basis. The Company evaluates impairment on a loan-by-loan basis. Once
      a
      loan is determined to be impaired, the impairment is measured based on the
      present value of the expected future cash flows discounted at the loan’s
      effective interest rate or by using the loan’s most recent market price or the
      fair value of the collateral if the loan is collateral dependent.





When
      the
      measurement of an impaired loan is less than the recorded amount of the loan,
      a
      valuation allowance is established by recording a charge to the provision for
      loan losses. Subsequent increases or decreases in the valuation allowance for
      impaired loans are recorded by adjusting the existing valuation allowance for
      the impaired loan with a corresponding charge or credit to the provision for
      loan losses.





Our
      policy for recognizing interest income on impaired loans is the same as that
      for
      nonaccrual loans.





**Allowance
      for Loan Losses** —
We
      maintain an allowance for loan losses at a level considered adequate to cover
      probable losses on loans. In evaluating the adequacy of the allowance for loan
      losses, management estimates the amount of the loss for each loan that has
      been
      identified as having more than standard credit risk. Those estimates give
      consideration to, among other factors, economic conditions, estimated real
      estate collateral value and cash flow, and the financial strength and commitment
      of the borrower or guarantors, where appropriate. Additionally, an estimate
      for
      loan loss is calculated for the remaining portion of the portfolio giving
      consideration to the Company’s historical loss experience in the portfolio,
      adjusted, as appropriate, for the estimated effects of current economic
      conditions and changes in the composition of the loan portfolio over time.
      Loan
      losses are charged against the allowance when management believes the
      uncollectibility of a loan balance, or portion thereof, has been
      confirmed.





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**Other
      Real Estate Owned** —
Other
      real estate owned (“OREO”) represents real estate acquired through or in lieu of
      foreclosure. OREO is held for sale and is initially recorded at fair value
      less
      estimated costs of disposition at the date of foreclosure, establishing a new
      cost basis. Subsequent to foreclosure, valuations are periodically performed
      by
      management and the assets are carried at the lower of cost or estimated fair
      value less costs of disposition. The net operating results from OREO are
      recognized as non-interest expense.





**Premises
      and Equipment —** Premises
      and equipment are recorded at cost, less accumulated depreciation and
      amortization. Depreciation is calculated on the straight-line method over the
      estimated useful lives of the assets ranging from three to twelve years.
      Amortization of leasehold improvements is calculated on the straight-line method
      over the shorter of the estimated useful lives of the assets or the
      corresponding contractual lease term, which does not generally include renewal
      options.





**Goodwill
      -** The
      Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 142,
“Goodwill and Other Intangible Assets”, on January 1, 2002. The adoption of SFAS
      No. 142 ceased the amortization of goodwill and requires an annual assessment
      for impairment by applying a fair-value-based test. In accordance with SFAS
      No.
      142, the Company assesses the goodwill for impairment on an annual basis, or
      on
      an interim basis if events or circumstances indicate the fair value of the
      goodwill has decreased below its carrying value. As of December 31, 2005 and
      2004, the Company evaluated its goodwill, and determined that no impairment
      was
      required.





**Income
      Taxes —** Provision
      for income taxes is the amount of estimated tax due reported on our tax returns
      and the change in the amount of deferred tax assets and liabilities. Deferred
      income taxes represent the estimated net income tax expense payable (or benefits
      receivable) for temporary differences between the carrying amounts for financial
      reporting purposes and the amounts used for tax purposes.





**Earnings
      Per Share** —
      Earnings per share (“EPS”) for all periods presented in the consolidated
      statements of income are computed in accordance with the provisions of SFAS
      No.
      128 - “Earnings Per Share”, and are based on the weighted-average number of
      shares outstanding during each year. Basic EPS excludes dilution and is computed
      by dividing income available to common shareholders by the weighted-average
      number of common shares outstanding during the period. Diluted EPS includes
      the
      effect of common stock equivalents of the Company, which include only shares
      issuable on the exercise of outstanding options. A reconciliation of the
      computation of Basic EPS and Diluted EPS is presented in Note 17 — Earnings Per
      Share.





**Stock-Based
      Compensation —** The
      Company’s stock-based compensation plan is accounted for in accordance with
      Accounting Principles Board (“APB”) Opinion No. 25 - “Accounting for Stock
      Issued to Employees.” Under APB Opinion No. 25, no compensation expense is
      recognized for a stock option grant if the exercise price of the stock option
      at
      measurement date is equal to or greater than the fair market value of the common
      stock on the date of grant. The Company applies SFAS No. 123 for disclosure
      purposes only. SFAS No. 123 disclosures include pro forma net income and earning
      per share as if the fair value-based method of accounting had been used. If
      compensation had been determined based on SFAS No. 123, the Company’s pro forma
      net income and pro forma per share data would be as follows:





**For
                the Years Ended****December
                31,****2005**
            
            **2004**
            
            **2003****(in
                thousands, except per share data)**Net
                income, as reported
            
            $
            24,063
            
            $
            30,625
            
            $
            29,634Less:
                Stock-based employee compensation expense determined under the fair
                value
                method, net of tax
            
            
            (4,189
            )
            
            (775
            )
            
            (1,440
            )Pro
                forma net income
            
            $
            19,874
            
            $
            29,850
            
            $
            28,194Earnings
                per share:Basic
                - as reported
            
            $
            4.19
            
            $
            5.04
            
            $
            4.91Basic
                - pro forma
            
            $
            3.46
            
            $
            4.91
            
            $
            4.68Diluted
                - as reported
            
            $
            4.04
            
            $
            4.75
            
            $
            4.55Diluted
                - pro forma
            
            $
            3.33
            
            $
            4.63
            
            $
            4.33





Effective
      December 8, 2005, the Company accelerated the vesting of all unvested stock
      options previously awarded to employees and officers under the Company’s stock
      option plans. The decision to accelerate the vesting of these options was made
      primarily to reduce non-cash compensation expense that would otherwise have
      been
      recorded in the Company’s income statement in future periods upon the adoption
      of SFAS 123 (R), “Share Based Payment”, on January 1, 2006. The stock based
      compensation expense for the year ended December 31, 2005 determined under
      the
      fair value method, net of related tax effects, shown above includes the effect
      of acceleration of the vesting of the options outstanding. The impact on the
      stock based compensation expense disclosure above for fiscal year 2005 was
      an
      additional $0.2 million, or $0.04 per fully diluted weighted average share.


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**Comprehensive
      Income** —
      Comprehensive income is displayed in the Consolidated Statements of Changes
      in
      Shareholders’ Equity and Comprehensive Income and consists entirely of the
      change in net unrealized holding gain or loss on securities classified as
      available for sale, net of the related income tax effect.





**New
      Accounting Pronouncements —** On
      December 16, 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS
      No. 123 (revised 2004), “Share-Based Payment”, which is a revision of SFAS No.
      123. SFAS No. 123(R) supersedes APB Opinion No. 25. Generally, the approach
      to
      accounting for share-based payments in SFAS No. 123(R) is similar to the
      approach described in SFAS No. 123. However, SFAS No. 123(R) requires
      share-based payments to employees, including grants of employee stock options,
      to be recognized in the financial statements based on their grant date fair
      values (i.e., pro forma disclosure is no longer an alternative to financial
      statement recognition). SFAS No. 123(R) is effective for the Company beginning
      January 1, 2006. The Company plans to adopt SFAS No. 123(R) using a modified
      version of prospective application (“modified prospective application”). Under
      modified prospective application, as it is applicable to the Company, SFAS
      No.
      123(R) applies to new awards and to awards modified, repurchased, or cancelled
      after January 1, 2006. Additionally, compensation cost for the portion of awards
      for which the requisite service has not been rendered (generally referring
      to
      non-vested awards) that are outstanding as of January 1, 2006 must be recognized
      as the remaining requisite service is rendered over periods after the adoption
      of SFAS No. 123(R). The attribution of compensation cost for those earlier
      awards will be based on the same method and on the same grant-date fair values
      previously determined for the pro forma disclosures required for companies
      that
      did not adopt the fair value accounting method for stock-based employee
      compensation.





In
      March
      2005, the Securities and Exchange Commission (“SEC”) issued SEC Staff Accounting
      Bulletin No. 107 (“SAB 107”), which expresses views of the staff regarding the
      interaction between SFAS No. 123(R) and certain SEC rules and regulations and
      provides the staff’s view regarding the valuation of share-based payment
      arrangements for public entities.





Based
      on
      the unvested stock-based compensation awards outstanding as of December 31,
      2005, the Company expects to recognize total pre-tax, compensation cost of
      approximately $250,000 during 2006, or approximately $62,500 during each quarter
      of 2006, in accordance with the accounting requirements of SFAS 123R. All
      unvested options outstanding as of December 31, 2005 will be fully vested by
      the
      end of 2006. Future levels of compensation cost recognized related to
      stock-based compensation awards may be impacted by new awards and/or
      modifications, repurchases and cancellations of existing awards before and
      after
      the adoption SFAS 123R.





In
      March
      2005, the FASB issued Interpretation No. 47 (“FIN 47”), “Accounting for
      Conditional Asset Retirement Obligations,” an interpretation of SFAS No. 143,
“Accounting for Asset Retirement Obligations.” FIN 47 generally applies to
      long-lived assets and requires a liability to be recognized for a conditional
      asset retirement obligation if the fair value of that liability can be
      reasonably estimated. The interpretation is effective no later than the end
      of
      fiscal years ending after December 15, 2005. We do not expect the application
      of
      FIN 47 to have a material impact on our financial condition or results of
      operations.





In
      May
      2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections”,
      which is a replacement of APB Opinion No. 20, “Accounting Changes”,  and
      SFAS No. 3, ‘Reporting Accounting Changes in Interim Financial Statements”.
 SFAS No. 154 applies to all voluntary changes in accounting principle, and
      changes the requirements for accounting for and reporting of a change in
      accounting principle.  SFAS No. 154 requires retrospective application to
      prior periods’ financial statements of a voluntary change in accounting
      principle unless it is impracticable. APB Opinion No. 20 previously required
      that most voluntary changes in accounting principle be recognized by including
      in net income of the period of the change the cumulative effect of changing
      to
      the new accounting principle.  SFAS No. 154 will be effective for
      accounting changes and corrections of errors made in fiscal years beginning
      after December 15, 2005. Management does not expect the adoption of SFAS No.
      154
      on January 1, 2006 to have a material impact on the Company’s consolidated
      results of operations or financial position.





In
      November 2005, the FASB issued FASB Staff Position (FSP) FAS 115-1 and FAS
      124-1, “The Meaning of Other-Than Temporary Impairment and Its Application to
      Certain Investments.” The FSP addresses determining when an investment is
      considered impaired, whether an impairment is other than temporary, and
      measuring an impairment loss. The FSP also addresses the accounting subsequent
      to the recognition of an other-than-temporary impairment and required certain
      disclosures about unrealized losses that have not been recognized as
      other-than-temporary impairments. The FSP is effective for reporting periods
      beginning after December 15, 2005. We are currently evaluating the requirements
      of the FSP and do not expect the application of the FSP to have a material
      impact on our financial condition or results of operations.


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In
      December 2005, the FASB issued FSP SOP 94-6-1, “Terms of Loan Products That May
      Give Rise to a Concentration of Credit Risk.” The FSP expands the reporting
      requirements under SFAS No. 107, “Disclosures about Fair Value of Financial
      Instruments,” for loan products that are determined to represent a concentration
      of credit risk, including contractual features where repayments are less than
      the repayments for fully amortizing loans of an equivalent term and high
      loan-to-value ratios. The guidance in this FSP is generally effective for
      interim and annual periods ending after December 19, 2005. We have adopted
      this FSP and incorporated the reporting requirements into our December 31,
      2005
      financial statements.





In
      December 2003, the Accounting Standards Executive Committee of the AICPA issued
      Statement of Position No. 03-3 (“SOP 03-3”), “Accounting for Certain Loans or
      Debt Securities Acquired in a Transfer”, which addresses accounting for
      differences between the contractual cash flows of certain loans and debt
      securities and the cash flows expected to be collected when loans or debt
      securities are acquired in a transfer and those cash flow differences are
      attributable, at least in part, to credit quality. As such, SOP 03-3
      applies to loans and debt securities acquired individually, in pools or as
      part
      of a business combination and does not apply to originated loans. The
      application of SOP 03-3 limits the interest income, including accretion of
      purchase price discounts that may be recognized for certain loans and debt
      securities. Additionally, SOP 03-3 does not allow the excess of contractual
      cash
      flows over cash flows expected to be collected to be recognized as an adjustment
      of yield, loss accrual or valuation allowance, such as the allowance for
      possible loan losses. SOP 03-3 requires that increases in expected cash flows
      subsequent to the initial investment be recognized prospectively through
      adjustment of the yield on the loan or debt security over its remaining life.
      Decreases in expected cash flows should be recognized as impairment. In the
      case
      of loans acquired in a business combination where the loans show signs of credit
      deterioration, SOP 03-3 represents a significant change from current purchase
      accounting practice whereby the acquiree’s allowance for loan losses is
      typically added to the acquirer’s allowance for loan losses. SOP 03-3 is
      effective for loans and debt securities acquired by the Company beginning
      January 1, 2005. The adoption of this new standard is not expected to have
      a material impact on the Company’s financial statements.





**NOTE
      2—INVESTMENT SECURITIES**





The
      amortized cost and fair value of investment securities as of December 31, 2005
      and 2004 are as follows:





**Amortized**
            
            **Fair**
            
            **Gross
                Unrealized****Cost**
            
            **Value**
            
            **Gains**
            
            **Losses****(in
                thousands)****December
                31, 2005:**Investment
                securities available-for-sale:U.S.
                Government Agency
            
            $
            89,897
            
            $
            88,829
            
            $
            —
            
            $
            1,068Residual
                interest in securitized loans
            
            
            3,257
            
            
            3,570
            
            
            313
            
            
            —Equity
                securities
            
            
            16
            
            
            164
            
            
            149
            
            
            1Total
                investment securities available-for-sale
            
            $
            93,170
            
            $
            92,563
            
            $
            462
            
            $
            1,069Investment
                securities held-to-maturity:Mortgage-backed
                securities
            
            $
            233,880
            
            $
            229,025
            
            $
            —
            
            $
            4,855**December
                31, 2004:**Investment
                securities available-for-sale:U.S.
                Government Agency
            
            $
            61,637
            
            $
            61,347
            
            $
            4
            
            $
            294Residual
                interest in securitized loans
            
            
            5,055
            
            
            5,368
            
            
            313
            
            
            —Equity
                securities
            
            
            25
            
            
            130
            
            
            105
            
            
            —Total
                investment securities available-for-sale
            
            $
            66,717
            
            $
            66,845
            
            $
            422
            
            $
            294Investment
                securities held-to-maturity:Mortgage-backed
                securities
            
            $
            296,028
            
            $
            295,226
            
            $
            161
            
            $
            963








The
      amortized cost and approximate fair value of securities at December 31, 2005
      are
      presented below by contractual maturity. Mortgage-backed securities are included
      in maturity categories based on their stated maturity date. Expected maturities
      may differ from contractual maturities because issuers may have the right to
      prepay obligations. Equity securities classified as available-for-sale have
      no
      maturity and are included in the due in one year or less
      column.


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**Available-for-Sale**
            
            **Held-to-Maturity****Amortized**
              **Cost**
            
            **Estimated**
              **Fair
                Value**
            
            **Amortized**
              ******Cost**
            
            **Estimated**
              **Fair
                Value****(in
                thousands)**Due
                in one year or less
            
            $
            33,293
            
            $
            33,101
            
            $
            —
            
            $
            —Due
                after one year through five years
            
            
            59,877
            
            
            59,462
            
            
            —
            
            
            —Due
                after five years through ten years
            
            
            —
            
            
            —
            
            
            —
            
            
            —Due
                after ten years
            
            
            —
            
            
            —
            
            
            233,880
            
            
            229,025$
            93,170
            
            $
            92,563
            
            $
            233,880
            
            $
            229,025





At
      December 31, 2005, the remaining contractual maturity and weighted average
      life
      of the mortgage-backed securities held-to-maturity was approximately 28.6 and
      4.4 years, respectively. The weighted average life of mortgage-backed securities
      differs from the contractual maturity due to anticipated principal
      prepayments.





A
      total
      of 31 securities had unrealized losses at December 31, 2005. These
      securities, with unrealized losses segregated by length of impairment, were
      as
      follows:





**Less
                than 12 months**
            
            **More
                than 12 months**
            
            **Total****Estimated**
              **Fair
                Value**
            
            **Unrealized**
              **Losses**
            
            **Estimated**
              **Fair
                Value**
            
            **Unrealized**
              **Losses**
            
            **Estimated**
              **Fair
                Value**
            
            **Unrealized**
              **Losses****(in
                thousands)**Investment
                securities available-for-saleU.S.
                Government Agency
            
            $
            56,819
            
            $
            582
            
            $
            32,010
            
            $
            486
            
            $
            88,829
            
            $
            1,068Investment
              securities held-to-maturityMortgage-backed
                securities
            
            $
            111,168
            
            $
            2,115
            
            $
            117,857
            
            $
            2,740
            
            $
            229,025
            
            $
            4,855





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.





Management
      has the ability and intent to hold the securities classified as held-to-maturity
      until they mature, at which time the Company will receive full value for the
      securities. Furthermore, as of December 31, 2005, management also had the
      ability and intent to hold the securities classified as available-for-sale
      for a
      period of time sufficient for a recovery of cost. The unrealized losses are
      largely 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 bonds 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, 2005, management believes the impairments detailed in the
      table above are temporary and no other-than-temporary impairment loss has been
      realized in the Company’s consolidated statements of income.





During
      2005 and 2004, no securities were sold prior to their maturity or call date.
      There were no gross realized gains or losses on investment securities for the
      years ended December 31, 2005, 2004 and 2003.





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**NOTE
      3—LOANS**





Loans
      consisted of the following:





**December
                31,****2005**
            
            **2004****(in
                thousands)**Real
                estate loans
            
            $
            2,154,372
            
            $
            1,387,973Construction
                loans
            
            
            302,932
            
            
            183,207Entertainment
                finance loans
            
            
            66,514
            
            
            99,729Franchise
                loans
            
            
            13,705
            
            
            137,477Commercial
                and other loans
            
            
            7,264
            
            
            11,9312,544,787
            
            
            1,820,317Unamortized
                premium
            
            
            14,582
            
            
            6,346Deferred
                loan origination costs, net
            
            
            7,928
            
            
            2,6352,567,297
            
            
            1,829,298Allowance
                for loan losses
            
            
            (43,817
            )
            
            (35,483
            )$
            2,523,480
            
            $
            1,793,815





At
      December 31, 2005, approximately 83.1%, 12.7% and 4.2% of the Bank’s loans
      collateralized by real estate were secured by income producing properties,
      properties under development and residential one-to-four family properties,
      respectively. At December 31, 2005, approximately 59.2% of our loans secured
      by
      real estate were collateralized by properties located in
      California.





At
      December 31, 2004, approximately 88.0%, 11.8% and 0.2% of the Bank’s loans
      collateralized by real estate were secured by income producing properties,
      properties under development and residential one-to-four family properties,
      respectively. At December 31, 2004, approximately 65.4% of our loans secured
      by
      real estate were collateralized by properties located in
      California.





At
      December 31, 2005 and 2004, approximately $1.8 billion and $932.5 million,
      respectively, of loans were pledged to secure a borrowing facility at the
      Federal Home Loan Bank (“FHLB”) of San Francisco.





The
      following is the activity in the allowance for loan losses on loans for the
      periods indicated.





**As
                of and for the Years**
              **Ended
                December 31,****2005**
            
            **2004**
            
            **2003****(in
                thousands)**Balance
                at beginning of year
            
            $
            35,483
            
            $
            33,401
            
            $
            33,009Provision
                for loan losses
            
            
            10,250
            
            
            4,725
            
            
            7,760Charge-offs:Real
                estate loans
            
            
            (1,584
            )
            
            (189
            )
            
            (5,286
            )Entertainment
                finance loans
            
            
            (395
            )
            
            (2,180
            )
            
            (800
            )Franchise
                loans
            
            
            (451
            )
            
            —
            
            
            (661
            )Commercial
                and other loans
            
            
            —
            
            
            (1,121
            )
            
            (700
            )Total
                charge-offs
            
            
            (2,430
            )
            
            (3,490
            )
            
            (7,447
            )Recoveries:Real
                estate loans
            
            
            88
            
            
            89
            
            
            14Entertainment
                finance loans
            
            
            426
            
            
            —
            
            
            —Commercial
                and other loans
            
            
            —
            
            
            758
            
            
            65Total
                recoveries
            
            
            514
            
            
            847
            
            
            79Net
                charge-offs
            
            
            (1,916
            )
            
            (2,643
            )
            
            (7,368
            )Balance
                at end of year
            
            $
            43,817
            
            $
            35,483
            
            $
            33,401





As
      of
      December 31, 2005 and 2004, there were $395,000 and $200,000, respectively,
      of
      entertainment finance loan charge-offs related to borrowers domiciled outside
      of
      the United States.





As
      of
      December 31, 2005 and 2004, the accrual of income had been suspended on
      approximately $24.3 million and $14.7 million, respectively, of loans. Interest
      income that was contractually due on loans that were on nonaccrual status that
      was not recognized during the years ended December 31, 2005, 2004 and 2003
      was
      approximately $1.6 million, $784,000, and $608,000, respectively.





As
      of
      December 31, 2005 and 2004, restructured loans totaled $19.3 million and $8.8
      million, respectively. There were no related commitments to lend additional
      funds on restructured loans. For the years ended December 31, 2005, 2004 and
      2003, $1.9 million, $1.1 million, and $775,000, respectively, of gross interest
      income would have been recorded had the loans been current in accordance with
      their original terms compared to $1.4 million, $734,000, and $696,000,
      respectively, of interest income that was included in net income for the same
      periods. The average yield on restructured loans was 7.37% and 7.47%,
      respectively, at December 31, 2005 and 2004.


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The
      Bank’s recorded investment in impaired loans, and the related valuation
      allowance, was as follows:





**December
                31, 2005**
            
            **December
                31, 2004****Recorded**
              **Investment**
            
            **Valuation**
              **Allowance**
            
            **Recorded**
              **Investment**
            
            **Valuation**
              **Allowance****(in
                thousands****)**Valuation
                allowance required
            
            $
            4,709
            
            $
            682
            
            $
            7,904
            
            $
            716No
                valuation allowance required
            
            
            31,593
            
            
            —
            
            
            10,726
            
            
            —Total
                impaired loans
            
            $
            36,302
            
            $
            682
            
            $
            18,630
            
            $
            716





At
      December 31, 2005, $2.1 million of the impaired loans with a valuation allowance
      were on nonaccrual status. The average recorded investment in impaired loans
      for
      the years ended December 31, 2005, 2004 and 2003 was $28.7 million, $19.5
      million, and $13.1 million, respectively. Interest income recognized on impaired
      loans for the years ended December 31, 2005, 2004 and 2003 was $945,000,
      $430,000, and $475,000, respectively.





Loans
      having carrying values of $4.0 million and $1.9 million were transferred to
      OREO
      in 2005 and 2004, respectively.





During
      2005, the Bank sold approximately $110.0 million, or 89.0%, of its franchise
      loan portfolio resulting in a gain of $4.9  million
      recorded in other non-interest income within the consolidated statement of
      income.





**NOTE
      4—OTHER REAL ESTATE OWNED**





Other
      real estate owned was stated as follows:





**December
                31,****2005**
            
            **2004****(in
                thousands)**Other
                real estate owned held for sale
            
            $
            3,960
            
            $
            —Less:
                valuation allowance
            
            
            —
            
            
            —Other
                real estate owned, net
            
            $
            3,960
            
            $
            —





The
      activity in the valuation allowance for other real estate owned was as
      follows:





**As
                of and for the Years**
              **Ended
                December 31,****2005**
            
            **2004**
            
            **2003****(in
                thousands)**Balance
                at beginning of year
            
            $
            —
            
            $
            500
            
            $
            493Provision
                for losses on other real estate owned
            
            
            —
            
            
            1,000
            
            
            870Charge-offs
                on other real estate owned
            
            
            —
            
            
            (1,500
            )
            
            (863
            )Balance
                at end of year
            
            $
            —
            
            $
            —
            
            $
            500





**NOTE
      5—PREMISES AND EQUIPMENT**





Premises
      and equipment are stated at cost less accumulated depreciation and amortization
      and consist of the following:





**December
                31,****2005**
            
            **2004****(in
                thousands)**Furniture,
                fixtures and equipment
            
            $
            13,361
            
            $
            11,606Leasehold
                improvements
            
            
            6,556
            
            
            6,016Automobiles
            
            
            986
            
            
            1,02820,903
            
            
            18,650Accumulated
                depreciation and amortization
            
            
            (14,185
            )
            
            (12,005
            )$
            6,718
            
            $
            6,645





Depreciation
      and amortization expense on premises and equipment for the years ended December
      31, 2005, 2004 and 2003 was $2.7 million, $2.1 million, and $1.7 million,
      respectively.


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**NOTE
      6—DEPOSIT ACCOUNTS**





Deposit
      accounts consist of the following:





**December
                31,****2005**
            
            **2004****(in
                thousands)**Non-interest
                demand accounts
            
            $
            13,660
            
            $
            13,108Interest
                demand accounts
            
            
            38,197
            
            
            72,832Money
                market and passbook accounts
            
            
            186,453
            
            
            172,092Time
                certificates under $100,000
            
            
            763,701
            
            
            703,493Time
                certificates $100,000 and over
            
            
            733,417
            
            
            470,507$
            1,735,428
            
            $
            1,432,032





Demand
      deposit accounts have no contractual maturity. Interest bearing demand accounts
      paid interest at rates ranging from 2.13% to 2.75% per annum in 2005. The
      weighted average contractual interest rate of the Bank’s interest-bearing demand
      deposit accounts was 2.75% and 2.13% at December 31, 2005 and 2004,
      respectively. Money market and passbook accounts have no contractual maturity
      and paid interest at rates ranging from 2.32% to 3.77% per annum in 2005. The
      weighted average contractual interest rate of the Bank’s money market and
      passbook accounts was 3.77% and 2.31% at December 31, 2005 and 2004,
      respectively. Additionally, some money market accounts have limited checking
      features which allow three check withdrawals per month. Time certificates have
      maturities ranging from 3 months to five years and bear interest at varying
      rates based on market conditions, ranging from 2.69% to 3.93% per annum in
      2005.
      The weighted average contractual interest rate of the Bank’s time certificate
      accounts was 3.93% and 2.63% at December 31, 2005 and 2004,
      respectively.





Interest
      expense on time certificates $100,000 and over for the years ended December
      31,
      2005, 2004 and 2003 amounted to approximately $22.7 million, $10.0 million,
      and
      $8.7 million, respectively.





The
      Bank
      is a member of the FDIC and its deposits are insured up to $100,000 each per
      insured depositor.





As
      of
      December 31, 2005, the contractual maturities of time certificate accounts
      were
      as follows:





**Year
                of Maturity**
            
            **Amount****(in
                thousands)**2006
            
            $
            1,369,0672007
            
            
            83,5942008
            
            
            21,9882009
            
            
            3,6522010
                and thereafter
            
            
            18,817$
            1,497,118





**NOTE
      7 — LINES OF CREDIT**





As
      of
      December 31, 2005 and 2004, the Bank had uncommitted, unsecured lines of credit
      with three unaffiliated financial institutions renewable daily in the amount
      of
      $80.0 million. There were no borrowings against these lines during the years
      ended December 31, 2005 and 2004.





The
      Company also has a $25.0 million revolving credit facility with an unaffiliated
      financial institution. The facility matures on April 30, 2006. There were no
      borrowings against this line of credit during the year ended December 31,
      2005.





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          of Contents**


**NOTE
      8 — JUNIOR**  **SUBORDINATED
      DEBENTURES**





The
      Company has created five trusts, Trust I, Trust II, Trust III, Trust IV, and
      Trust V. Trust I issued $14.0 million of 10.60% cumulative trust preferred
      securities in September 2000, Trust II issued $15.0 million of 10.20% cumulative
      trust preferred securities in February 2001, Trust III issued $20.0 million
      of
      variable rate cumulative trust preferred securities in October 2002, Trust
      IV
      issued $10.0 million of variable rate cumulative trust preferred securities
      in
      December 2002, and Trust V issued $25.0 million of variable rate cumulative
      trust preferred securities in December 2002 (referred to collectively as the
      “Trust Preferred securities”). ITLA Capital has fully and unconditionally
      guaranteed the Trust Preferred securities along with all obligations of each
      trust under their respective trust agreements. Each trust was formed for the
      exclusive purpose of issuing their respective Trust Preferred securities and
      common securities and using the proceeds to acquire ITLA Capital’s junior
      subordinated deferrable interest debentures. Trust I acquired an aggregate
      principal amount of $14.4 million of ITLA Capital’s 10.60% junior subordinated
      deferrable interest debentures due September 7, 2030 that pay interest each
      March 7 and September 7 during the term of this security. Trust II acquired
      an
      aggregate principal amount of $15.5 million of ITLA Capital’s 10.20% junior
      subordinated deferrable interest debentures due February 22, 2031 that pays
      interest each February 22 and August 22 during the term of this security. Trust
      III acquired an aggregate principal amount of $20.6 million of ITLA Capital’s
      variable rate junior subordinated deferrable interest debentures due October
      30,
      2032 that pays interest on each April 30 and October 30 during the term of
      the
      security. Trust IV acquired an aggregate principal amount of $10.3 million
      of
      ITLA Capital’s variable rate junior subordinated deferrable interest debentures
      due December 10, 2032 that pays interest each June 15 and December 15 during
      the
      term of the security. Trust V acquired an aggregate principal amount of $25.8
      million of ITLA Capital’s variable rate junior subordinated deferrable interest
      debentures due December 26, 2032 that pays interest quarterly on March 26,
      June
      26, September 26, and December 26 during the term of the security. The sole
      assets of each trust are the debentures it holds. Each of the debentures is
      redeemable, in whole or in part, at ITLA Capital’s option on or after ten years
      after issuance for Trust I and Trust II (at declining premiums during the 11th
      through the 20th year after issuance and at par during the 21st year and
      thereafter until maturity), and five years after issuance for Trust III, Trust
      IV, and Trust V (at par until maturity). Each of the debentures is also
      redeemable, in whole and not in part, at ITLA Capital’s option any time prior to
      maturity, upon the occurrence of certain special events, which include, among
      others, a determination by the Federal Reserve Board that the Trust Preferred
      securities do not qualify as Tier 1 capital (discussed below).





The
      Company used the proceeds from the debentures for general corporate purposes,
      including an aggregate of $81.3 million in capital contributions to the Bank
      to
      support future growth. The costs associated with the Trust Preferred securities
      issuance were netted with proceeds and are being amortized using a method that
      approximates the interest method over a period of five to ten years.





Prior
      to
      the adoption of FIN 46, the Trust Preferred securities were reflected on the
      Consolidated Balance Sheets as “Guaranteed Preferred Beneficial Interests in the
      Company’s Junior Subordinated Deferrable Interest Debentures” and distributions
      paid on the Trust Preferred securities were reflected as “Minority interest in
      income of subsidiary” in the Consolidated Statements of Income. Minority
      interest in income of subsidiary was $6.1 million for the year ended December
      31, 2003. At December 31, 2003, upon adoption of FIN 46, the Company was
      required to deconsolidate the Trusts from its financial statements. As a result
      of the deconsolidation, the debentures are included in “Junior subordinated
      debentures” and the Company’s investment interests in the Trusts and deferred
      debt issuance costs are included in “Other assets” on the Consolidated Balance
      Sheets. In addition, beginning January 1, 2004, the Company is recognizing
      the
      interest expense on the subordinated debentures. For the years ended December
      31, 2005 and 2004, interest expense incurred in connection with subordinated
      debentures was $7.2 million, and $6.2 million, respectively.





The
      trust
      preferred securities qualify as Tier 1 capital for ITLA Capital to the extent
      permitted under Federal Reserve Board regulations. See “Note 15 - Regulatory
      Requirements.”





**NOTE
      9 — FHLB ADVANCES**  **AND
      OTHER BORROWINGS**





FHLB
      advances represent $932.0 million of collateralized obligations with the FHLB
      of
      San Francisco. Other borrowings consist of $60.6 million of securities sold
      under agreements to repurchase, which mature within one to two years. FHLB
      Advances and other borrowings are summarized by contractual maturity as
      follows:





**Year
                of Maturity**
            
            **Amount****(in
                thousands)**2006
            
            $
            249,9242007
            
            
            255,4752008
            
            
            182,7942009
            
            
            45,5962010
                and thereafter
            
            
            258,768$
            992,557





The
      Company has pledged real estate loans with a carrying value of $1.8 billion
      and
      investment securities held-to-maturity with a carrying and fair value of $148.4
      million and $145.3 million, respectively, to secure FHLB Advances. The total
      FHLB borrowing capacity available from the collateral that has been pledged
      is
      approximately $1.2 billion, of which $241.4 million remained available to borrow
      as of December 31, 2005, net of the $12.7 million of additional FHLB stock
      that
      we would be required to purchase to support the additional borrowing.
      Additionally, the Company has pledged investment securities held-to-maturity
      with a carrying and fair value of $85.5 million and $83.7 million, respectively,
      and investment securities available-for-sale with a carrying and fair value
      of
      $18.8 million and $18.6 million, respectively, to secure securities sold under
      agreements to repurchase.


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          58
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The
      following table represents a summary of short and long-term borrowings for
      the
      periods indicated. Short-term borrowings consist entirely of FHLB
      advances.





**December
                31,****2005**
            
            **2004**
            
            **2003****(dollars
                in thousands)**Short-Term
                Borrowings:Maximum
                amount outstanding at any month-end during the year
            
            $
            112,000
            
            $
            199,000
            
            $
            251,000Weighted-average
                daily balance outstanding
            
            $
            38,566
            
            $
            91,316
            
            $
            54,388Weighted-average
                rate paid during the year
            
            
            3.19
            %
            
            1.53
            %
            
            1.13
            %Weighted-average
                rate on balance at year-end
            
            
            4.18
            %
            
            2.37
            %
            
            1.01
            %Balance
                at year-end
            
            $
            88,205
            
            $
            166,000
            
            $
            251,000Interest
                expense
            
            $
            1,230
            
            $
            1,664
            
            $
            753Long-Term
                Borrowings:Maximum
                amount outstanding at any month-end during the year
            
            $
            906,457
            
            $
            418,224
            
            $
            165,985Weighted-average
                daily balance outstanding
            
            $
            668,825
            
            $
            170,906
            
            $
            146,009Weighted-average
                rate paid during the year
            
            
            3.63
            %
            
            3.28
            %
            
            3.03
            %Weighted-average
                rate on balance at year-end
            
            
            4.00
            %
            
            3.16
            %
            
            3.23
            %Balance
                at year-end
            
            $
            904,352
            
            $
            418,224
            
            $
            111,135Interest
                expense
            
            $
            24,278
            
            $
            5,608
            
            $
            4,422





**NOTE
      10 - RESIDUAL INTEREST IN SECURITIZED LOANS**




During
      the first quarter of 2002, the Company formed a qualified special purpose entity
      (“QSPE”) to issue $86.3 million of asset-backed notes in a securitization of
      substantially all of the Company’s residential loan portfolio. The Company
      recognized a gain of $3.7 million on the securitization of these loans, which
      was included in other non-interest income within the consolidated statement
      of
      income. Concurrent with recognizing the sale, the Company recorded a residual
      interest of $5.6 million, which represented the present value of future cash
      flows (spread and fees) that are estimated to be received over the life of
      the
      loans. The residual interest is recorded on the consolidated balance sheet
      in
“Investment securities available for sale, at fair value”. The value of the
      residual interest is subject to substantial credit, prepayment, and interest
      rate risk on the sold residential loans. The residual interest is classified
      as
“available for sale” and, as such, recorded at fair value with the resulting
      changes in fair value recorded as accumulated unrealized gain or loss in a
      separate component of shareholders’ equity until realized. Fair value is
      estimated on a monthly basis using a discounted cash flow analysis. These cash
      flows are estimated over the lives of the receivables using prepayment, default,
      and interest rate assumptions that management believes market participants
      would
      use for similar financial instruments.





During
      2005 and 2004, the Company recognized an other-than-temporary impairment of
      $250,000 and $1.0 million, respectively, on the residual interest. Impairments
      that are deemed to be other-than-temporary are charged to non-interest income.
      In evaluating impairments as other-than-temporary the Company considers credit
      risk, as well as the magnitude and trend of default rates and prepayment speeds
      of the underlying residential loans .





At
      December 31, 2005 and 2004, key economic assumptions and the sensitivity of
      the
      current fair value of the residual interest based on projected cash flows to
      immediate adverse changes in those assumptions are as follows:





**December
                31, 2005**
            
            **December
                31, 2004**Dollars
              in thousands**Fair
                value of retained interest**
            
            **$**
            **3,570**
            
            **$**
            **5,368****Weighted
                average life (in years) - securities**
            
            
            **0.56**
            
            
            **0.68****Weighted
                average life (in years) - residual interest**
            
            
            **2.92**
            
            
            **3.61****Weighted
                average annual prepayment speed**
            
            
            **40.0**
            **%**
            
            **26.5**
            **%**Impact
                of 10% adverse change
            
            $
            (22
            )
            $
            (236
            )Impact
                of 25% adverse change
            
            $
            (34
            )
            $
            (630
            )**Weighted
                average annual discount rate**
            
            
            **13.0**
            **%**
            
            **15.0**
            **%**Impact
                of 10% adverse change
            
            $
            (117
            )
            $
            (243
            )Impact
                of 25% adverse change
            
            $
            (284
            )
            $
            (630
            )**Weighted
                average lifetime credit losses**
            
            
            **14.3**
            **%**
            
            **25.0**
            **%**Impact
                of 10% adverse change
            
            $
            (79
            )
            $
            (262
            )Impact
                of 25% adverse change
            
            $
            (211
            )
            $
            (700
            )





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          59
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          of Contents**





These
      sensitivities are hypothetical and should be used with caution. As the figures
      indicate, changes in the fair value of the residual interest are based on a
      variation in assumptions and generally cannot be extrapolated because the
      relationship of the change in assumption to the change in fair value may not
      be
      linear. Also, in the above table, the effect of a variation in a particular
      assumption on the fair value of the residual interest is calculated without
      changing any other assumption; in reality, changes in one factor may result
      in
      changes in another (for example, increases in market interest rates may result
      in lower prepayments but increased credit losses), which might magnify or
      counteract the sensitivities, and depending on the severity of such changes,
      the
      results of operations may be materially affected.





**NOTE
      11 — BENEFIT PLANS**





*Salary
      Savings Plan* .
      The
      Company has a salary savings plan (the “Savings Plan”) that qualifies as a
      deferred salary arrangement under Section 401(k) of the Internal Revenue Code.
      Under the Savings Plan, participating employees may contribute a portion of
      their pretax earnings, not to exceed the annual limits established by the
      Internal Revenue Service. We match 50% of each employee’s salary deferral, up to
      a maximum 6% of the employee’s salary. Employees vest in employer contributions
      and the earnings thereon over a five-year period. Matching contributions to
      the
      Savings Plan were $452,000, $458,000, and $357,000 in 2005, 2004 and 2003,
      respectively.





*Nonqualified
      Deferred Compensation Plans* .
      The
      Company has deferred compensation plans designed to provide additional
      retirement benefits for certain officers and key employees who cannot take
      full
      advantage of the Savings Plan. There were no costs associated with these
      deferred compensation plans in 2005, 2004 and 2003.





*Long-Term
      Supplemental Executive Retirement Plan* .
      The
      Company has adopted a Long-Term Supplemental Executive Retirement Plan (the
      “SERP”) for certain officers and key employees which provides for participants
      to be awarded shares of common stock of the Company on a tax deferred basis
      from
      the current Recognition and Retention Plan (“RRP”) previously approved by the
      shareholders. Such shares vest in three-year cycles or earlier at the discretion
      of the Compensation Committee of the Board of Directors, and once vested, may
      be
      distributed to participants upon a change in control or the participant’s death,
      disability, retirement date or date of termination of employment. During 1998,
      the Company issued shares of common stock, representing the remaining number
      of
      unissued shares authorized to be awarded under the RRP, to a Rabbi Trust managed
      by a third-party financial institution. For 2005, 2004 and 2003, 15,055, 23,198
      and 21,158 shares, respectively, were allocated to designated SERP accounts
      for
      the future benefit of certain Company executives. The Company recognized
      $106,000, $144,000, and $189,000 of compensation expense from the SERP/RRP
      in
      2005, 2004 and 2003, respectively.





*Stock
      Plans* .
      The
      Company adopted an employee stock incentive plan and stock option plan for
      nonemployee directors (collectively, “the Stock Plan”) which together provide
      for the award of up to 1,631,500 shares of common stock to officers, directors
      and employees as compensation for future services. An amendment to the Stock
      Plan increasing the number of shares authorized for award under the Stock Plan
      by 320,000 shares and 311,500 shares, respectively, were approved by the
      Company’s shareholders on July 27, 2005 and June 29, 2001. As of December 31,
      2005, the Company has granted an aggregate of 1,890,500 options under the Stock
      Plan, of which 858,998 have been exercised and 400,684 have been forfeited.
      The
      exercise price per share of the options granted ranges from $10.00 to $58.00
      per
      share and generally vest 33-1/3% per year, beginning with the first anniversary
      of the date of each individual grant.





The
      number of options and weighted-average exercise prices of options for each
      of
      the following groups of options, for the periods indicated, are as
      follows:





**Number
                of Options**
            
            **Weighted-Average**
              **Exercise
                Price****2005**
            
            **2004**
            
            **2005**
            
            **2004**Options
                outstanding at the beginning of the year
            
            
            592,339
            
            
            852,783
            
            $
            19.41
            
            $
            18.35Options
                granted during the year
            
            
            322,250
            
            
            13,500
            
            $
            49.53
            
            $
            40.27Options
                exercised during the year
            
            
            (275,104
            )
            
            (256,600
            )
            $
            16.90
            
            $
            16.21Options
                forfeited during the year
            
            
            (8,667
            )
            
            (17,344
            )
            $
            39.94
            
            $
            30.94Options
                outstanding at the end of the year
            
            
            630,818
            
            
            592,339
            
            $
            35.61
            
            $
            19.41Options
                exercisable at the end of the year
            
            
            617,318
            
            
            507,070
            
            $
            35.30
            
            $
            17.53





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          60
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          of Contents**





The
      fair
      value of each option grant was estimated on the date of grant using an option
      pricing model with the following weighted-average assumptions for option
      grants:





**Weighted-Average
                Assumptions**
              **for
                Option****Grants****2005**
            
            **2004**
            
            **2003**Dividend
                Yield
            0.00%
            
            0.00%
            
            0.00%Expected
                Volatility
            37.59%
            
            36.17%
            
            36.36%Risk-Free
                Interest Rates
            4.33%
            
            4.12%
            
            4.05%Expected
                Lives
            5.5
                Years
            
            7
                Years
            
            7
                YearsWeighted-Average
                Fair Value
            $20.69
            
            $18.44
            
            $17.66





**NOTE
      12 — INCOME TAXES**





Deferred
      income taxes reflect the net effect of temporary differences between the
      carrying amounts of assets and liabilities for financial reporting purposes
      and
      the amounts used for income tax purposes.





Significant
      components of our deferred tax assets and liabilities are as
      follows:





**December
                31,****2005**
            
            **2004****(in
                thousands)**Components
                of the deferred tax asset:Allowance
                for loan losses
            
            $
            17,995
            
            $
            14,487Accrued
                expenses
            
            
            2,857
            
            
            2,555State
                income taxes
            
            
            1,061
            
            
            1,230Unrealized
                loss on investment securities available-for-sale
            
            
            255
            
            
            —Other
            
            
            904
            
            
            20Total
                deferred tax assets
            
            
            23,072
            
            
            18,292Components
                of the deferred tax liability:Deferred
                loan origination costs
            
            
            7,445
            
            
            5,447FHLB
                stock dividends
            
            
            2,910
            
            
            2,323Unrealized
                gain on investment securities available-for-sale
            
            
            —
            
            
            54Total
                deferred tax liabilities
            
            
            10,355
            
            
            7,824Net
                deferred tax asset
            
            $
            12,717
            
            $
            10,468





The
      deferred tax asset is considered fully realizable, as when the temporary
      differences associated with the deferred tax asset are recognized for income
      tax
      purposes, those deductions are expected to be fully offset, either by carryback
      against previously taxed income or by reducing future taxable income.
      Accordingly, we have not established a valuation allowance on the deferred
      tax
      asset.





A
      summary
      of the provision for income taxes follows:





**Years
                Ended December 31,****2005**
            
            **2004**
            
            **2003****(in
                thousands)**Current
                provision:Federal
            
            $
            14,709
            
            $
            13,945
            
            $
            13,131State
            
            
            4,713
            
            
            4,805
            
            
            3,41619,422
            
            
            18,750
            
            
            16,547Deferred
                provision (benefit):Federal
            
            
            (1,448
            )
            
            902
            
            
            1,835State
            
            
            (492
            )
            
            296
            
            
            564(1,940
            )
            
            1,198
            
            
            2,399$
            17,482
            
            $
            19,948
            
            $
            18,946





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          61
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          of Contents**


A
      reconciliation of the federal statutory income tax rate to the effective income
      tax rate is as follows:


**Years
                  Ended December 31,****2005**
              
              **2004**
              
              **2003**Federal
                  statutory income tax rate
              
              
              35.0
              %
              
              35.0
              %
              
              35.0
              %State
                  income tax, net of federal income tax benefit
              
              
              7.0
              %
              
              7.0
              %
              
              7.0
              %State
                  income tax credit and other benefits
              
              
              —
              
              
              (2.6
              )%
              
              (3.0
              )%Effective
                  income tax rate
              
              
              42.0
              %
              
              39.4
              %
              
              39.0
              %




The
      income tax benefit component of other comprehensive income was $309,000,
      $57,000, and $186,000 for the years ended December 31, 2005, 2004 and 2003,
      respectively. During 2005 and 2004, the Company recognized a $10.4 million
      and
      $3.3 million income tax benefit related to the exercise of employee stock
      options. The benefit was recorded in contributed capital within the consolidated
      balance sheets. No income tax benefit related to the exercise of employee stock
      options was recorded in December 31, 2003.





**NOTE
      13 — FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK**





We
      are a
      party to financial instruments with off-balance-sheet risk in the normal course
      of business to meet the financing needs of our customers. These financial
      instruments consist of commitments to extend credit. These instruments may
      involve, to varying degrees, elements of credit and interest rate risk in excess
      of the amount recognized in the balance sheet. The contractual amounts of those
      instruments reflect the extent of involvement we have in particular classes
      of
      financial instruments.





We
      have
      exposure to credit loss in the event of nonperformance by the other party to
      the
      financial instrument for commitments to extend credit. This exposure is
      represented by the contractual amount of those instruments and the Company
      uses
      the same lending policies for these instruments as it does for the loan
      portfolio. We had outstanding unfunded loan commitments, consisting primarily
      of
      the unfunded portion of construction and entertainment finance loans, of
      approximately $252.5 million and $248.0 million at December 31, 2005 and 2004,
      respectively.





Unfunded
      commitments under commercial lines of credit, revolving credit lines and
      overdraft protection agreements are commitments for possible extensions of
      future extensions of credit to existing customers. These lines of credit are
      typically uncollateralized and usually do not contain a specific maturity date
      and may not be drawn upon to the total extent to which the Company is committed.
      We had outstanding commercial lines of credit totaling $0.9 million and $1.3
      million at December 31, 2005 and 2004, respectively.





**NOTE
      14 — COMMITMENTS AND CONTINGENCIES**





**Commitments**





We
      lease
      office facilities under noncancelable operating leases. Estimated future minimum
      lease payments required under leases with initial or remaining noncancelable
      terms in excess of one year at December 31, 2005 are as follows:





**(in
                thousands)**2006
            
            $
            3,9402007
            
            
            3,2252008
            
            
            2,4652009
            
            
            1,5742010
            
            
            1,022Thereafter
            
            
            1,434Sub-Lease
                income
            
            
            (383
            )$
            13,277





Certain
      leases contain rental escalation clauses based on increases in the consumer
      price index, and renewal options of up to ten years, which may be exercised
      by
      the Company. We incurred rent expense of $4.2 million, $3.6 million, and $2.9
      million in 2005, 2004 and 2003, respectively.





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          62
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          of Contents**


**Contingencies**





We
      are
      subject to various pending legal actions which arise in the normal course of
      business. We maintain reserves for losses from legal actions which are both
      probable and estimable. Although the amount of the ultimate exposure, if any,
      cannot be determined at this time, in management’s opinion, based upon advice of
      counsel, the disposition of claims currently pending are not expected to have
      a
      material adverse effect on our financial condition or results of
      operations.





**NOTE
      15 — REGULATORY REQUIREMENTS**





The
      Company, the Bank’s holding company, is subject to supervision by the Federal
      Reserve Board (“FRB”). The Bank is subject to supervision and regulation by the
      FDIC and the Department of Financial Institutions (“DFI”) of the State of
      California under the provisions of the California Banking Law. These provisions
      authorize the Bank’s issuance of deposits, place limits on the size of loans the
      Bank can make, and specify the maintenance of minimum liquidity
      levels.





The
      Company and the Bank are also subject to various capital requirements
      administered by the FRB and FDIC, respectively. The FRB and the FDIC have
      substantially similar risk-based capital ratio and leverage ratio guidelines
      for
      banking organizations. Failure to meet minimum capital requirements can initiate
      certain mandatory and possibly additional discretionary action by regulators
      that, if undertaken, could have a direct material effect on the Company’s
      consolidated financial statements and the Bank’s operations. Under the
      applicable capital adequacy guidelines and the regulatory framework for prompt
      corrective action, the Company and the Bank must meet specific capital
      guidelines that involve quantitative measures of the Company’s and the Bank’s
      assets, liabilities and certain off-balance-sheet items as calculated under
      regulatory accounting practices. The Company’s and the Bank’s capital amounts
      and classification are also subject to qualitative judgments by the regulators
      about components, risk weightings and other factors.





Quantitative
      measures established by regulation to ensure capital adequacy require the
      Company and the Bank to maintain minimum amounts and ratios (set forth in the
      following table) of Total and Tier 1 capital to risk-weighted assets, and of
      Tier 1 capital to average total assets (“Leverage Ratio”). Management believes,
      as of December 31, 2005 and 2004, that the Company and the Bank meet all
      applicable capital adequacy requirements.





On
      March
      1, 2005, the FRB adopted a final rule that allows the continued inclusion of
      trust preferred securities in the tier 1 capital of bank holding companies.
      The
      final rule limits restricted core capital elements (which include trust
      preferred securities) to 25 percent of all core capital elements, net of
      goodwill less any associated deferred tax liability. Amounts of restricted
      core
      capital elements in excess of these limits generally may be included in tier
      2
      capital. The final rule provides a five year transition period, ending March
      31,
      2009, for application of the quantitative limits.





As
      of
      December 31, 2005, the most recent notification from the FDIC categorized the
      Bank as “well capitalized” under the applicable regulatory framework. Similarly,
      the Company’s capital levels exceeded the levels necessary to be considered
“well capitalized”. To be categorized as “well capitalized”, the Company and the
      Bank must maintain minimum Total Risk-Based and Tier 1 Risk-Based Ratios, and
      the Bank must also maintain a minimum Tier 1 Leverage Ratio as set forth in
      the
      following table. There are no conditions or events since that notification
      that
      management believes have changed the Company’s and the Bank’s category.





ITLA
      Capital and the Bank’s actual regulatory capital amounts and ratios are
      presented in the following table:





**Actual**
            
            **Minimum
                Requirement**
              **for
                Capital Adequacy****Purposes**
            
            **Capital
                Required****to
                Maintain**
              **“Well
                Capitalized”****Designation****Amount**
            
            **Ratio**
            
            **Amount**
            
            **Ratio**
            
            **Amount**
            
            **Ratio****(dollars
                in thousands)****As
                of December****31,
                2005**Total
                capital (to risk-weighted assets)ITLA
                Capital
            
            $
            316,421
            
            
            13.0
            %
            $
            195,364
            
            
            8.0
            %
            $
            244,205
            
            
            10.0
            %Imperial
                Capital Bank
            
            $
            296,252
            
            
            12.2
            %
            $
            193,964
            
            
            8.0
            %
            $
            242,455
            
            
            10.0
            %Tier
                I capital (to risk-weighted assets)ITLA
                Capital
            
            $
            268,969
            
            
            11.0
            %
            $
            97,683
            
            
            4.0
            %
            $
            146,525
            
            
            6.0
            %Imperial
                Capital Bank
            
            $
            265,787
            
            
            11.0
            %
            $
            96,983
            
            
            4.0
            %
            $
            145,475
            
            
            6.0
            %Tier
                I capital (to average total assets)ITLA
                Capital
            
            $
            268,969
            
            
            9.1
            %
            $
            118,458
            
            
            4.0
            %
            $
            148,073
            
            
            5.0
            %Imperial
                Capital Bank
            
            $
            265,787
            
            
            9.1
            %
            $
            116,769
            
            
            4.0
            %
            $
            145,961
            
            
            5.0
            %**As
                of December****31,
                2004**Total
                capital (to risk-weighted assets)ITLA
                Capital
            
            $
            299,037
            
            
            16.0
            %
            $
            149,498
            
            
            8.0
            %
            $
            186,873
            
            
            10.0
            %Imperial
                Capital Bank
            
            $
            245,018
            
            
            13.5
            %
            $
            145,533
            
            
            8.0
            %
            $
            181,916
            
            
            10.0
            %Tier
                I capital (to risk-weighted assets)ITLA
                Capital
            
            $
            255,371
            
            
            13.7
            %
            $
            74,750
            
            
            4.0
            %
            $
            112,125
            
            
            6.0
            %Imperial
                Capital Bank
            
            $
            222,134
            
            
            12.2
            %
            $
            72,767
            
            
            4.0
            %
            $
            109,151
            
            
            6.0
            %Tier
                I capital (to average total assets)ITLA
                Capital
            
            $
            255,371
            
            
            12.3
            %
            $
            83,274
            
            
            4.0
            %
            $
            104,093
            
            
            5.0
            %Imperial
                Capital Bank
            
            $
            222,134
            
            
            11.0
            %
            $
            80,729
            
            
            4.0
            %
            $
            100,911
            
            
            5.0
            %





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          63
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          of Contents**





Additionally,
      Federal and state banking regulations place certain restrictions on dividends
      paid and loans or advances made by the Bank to the Company. The total amount
      of
      dividends which may be paid at any date is generally limited to the retained
      earnings of the Bank, and loans or advances are limited to 10 percent of the
      Bank's capital stock and surplus on a secured basis.





At
      December 31, 2005, the Bank's retained earnings available for the payment of
      dividends was $115.8 million. Accordingly, $152.4 million of the Company's
      equity in the net assets of the Bank was restricted at December 31, 2005.
 Funds available for loans or advances by the Bank to the Company amounted
      to $15.2 million. In addition, dividends paid by the Bank to the Company would
      be prohibited if the effect thereof would cause the Bank's capital to be reduced
      below applicable minimum capital requirements.





**NOTE
      16—EARNINGS PER SHARE**





The
      following is a reconciliation of the amounts used in the calculation of Basic
      earnings per share and Diluted earnings per share.





**Net
                Income**
            
            **Weighted-****Average**
              **Shares****Outstanding**
            
            **Per
                Share****Amount****(in
                thousands, except per share data)**Year
              ended December 31, 2005Basic
                earnings per share
            
            $
            24,063
            
            
            5,749
            
            $
            4.19Dilutive
                effect of stock options
            
            
            —
            
            
            214
            
            
            (0.15
            )Diluted
                earnings per share
            
            $
            24,063
            
            
            5,963
            
            $
            4.04Year
              ended December 31, 2004Basic
                earnings per share
            
            $
            30,625
            
            
            6,077
            
            $
            5.04Dilutive
                effect of stock options
            
            
            —
            
            
            377
            
            
            (0.29
            )Diluted
                earnings per share
            
            $
            30,625
            
            
            6,454
            
            $
            4.75Year
              ended December 31, 2003Basic
                earnings per share
            
            $
            29,634
            
            
            6,030
            
            $
            4.91Dilutive
                effect of stock options
            
            
            —
            
            
            480
            
            
            (0.36
            )Diluted
                earnings per share
            
            $
            29,634
            
            
            6,510
            
            $
            4.55





**NOTE
      17—DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS**





Fair
      value estimates are based on judgments regarding credit risk, expectations
      of
      future economic conditions, normal cost of administration of these instruments
      and other risk characteristics, including interest rate risk and prepayment
      risk. These estimates are subjective in nature, involve uncertainties and
      matters of significant judgment and therefore cannot be determined with
      precision. Changes in assumptions could significantly affect the estimates.
      The
      fair value estimates presented do not include the value of anticipated future
      business and the value of assets and liabilities that are not considered
      financial instruments.





We
      use
      the following methods and assumptions to estimate the fair value of each class
      of financial instruments for which it is practicable to estimate
      value:





*Cash
      and Cash Equivalents —* The
      carrying values reported in the balance sheet approximate fair values due to
      the
      short-term nature of the assets.





*Investment
      Securities —* Fair
      values are based on bid prices and quotations published and/or received from
      established securities dealers, except for the value of the residual interest
      which is valued using present value of estimated future cash flows.





*Stock
      in Federal Home Loan Bank —* The
      carrying value approximates fair value based on the redemption provisions of
      the
      FHLB.





*Loans
      —* The
      fair
      value is estimated using the present value of future cash flows, discounted
      using the current rate at which similar loans would be made to borrowers with
      similar credit ratings and for the same maturities and giving consideration
      to
      estimated prepayment risk and credit risk.





*Accrued
      Interest Receivable —* The
      carrying values reported in the balance sheet approximate the fair values due
      to
      the short-term nature of the asset.


-
          64
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 **Table
          of Contents**





*Deposit
      Accounts —* The
      fair
      value of demand deposit, money market and passbook accounts is estimated to
      be
      the amount payable on demand due to the short-term nature of these deposits.
      The
      fair values for time certificates, both over and under $100,000, are estimated
      by discounting the expected cash flows at current market rates over expected
      maturities.





*Federal
      Home Loan Bank Advances and Other Borrowings* *—* ** The
      fair
      value is estimated by discounting the expected cash flows at current market
      rates over contractual maturities.





*Junior
      Subordinated Debentures*  *—* The fair
      value is estimated using the present value of future cash flows, discounted
      using the current rate at which a similar debenture would be issued.





The
      carrying amounts and estimated fair values of our financial instruments are
      as
      follows:





**December
                31,****2005**
            
            **2004****Cost
                or****Carrying****Amount**
            
            **Estimated**
              **Fair
                Value**
            
            **Cost
                or****Carrying**
              **Amount**
            
            **Estimated**
              **Fair
                Value****(in
                thousands)**Financial
                assets:Cash
                and cash equivalents
            
            $
            93,747
            
            $
            93,747
            
            $
            87,580
            
            $
            87,580Investment
                securities available-for-sale
            
            
            92,563
            
            
            92,563
            
            
            66,845
            
            
            66,845Investment
                securities held-to-maturity
            
            
            233,880
            
            
            229,025
            
            
            296,028
            
            
            295,226Stock
                in Federal Home Loan Bank
            
            
            43,802
            
            
            43,802
            
            
            23,200
            
            
            23,200Loans,
                net
            
            
            2,523,480
            
            
            2,530,654
            
            
            1,793,815
            
            
            1,825,972Accrued
                interest receivable
            
            
            16,287
            
            
            16,287
            
            
            10,695
            
            
            10,695Financial
                liabilities:Deposit
                accounts
            
            $
            1,735,428
            
            $
            1,733,205
            
            $
            1,432,032
            
            $
            1,423,301Federal
                Home Loan Bank advances and other borrowings
            
            
            992,557
            
            
            985,682
            
            
            584,224
            
            
            575,360Junior
                subordinated debentures
            
            
            86,600
            
            
            92,788
            
            
            86,600
            
            
            93,480





**NOTE
      18—BUSINESS SEGMENT INFORMATION**





SFAS
      No.
      131, “Disclosures About Segments of an Enterprise and Related Information”
requires disclosure of segment information in a manner consistent with the
      “management approach”. The management approach is based on the way the chief
      operating decision-maker organizes segments within a company for making
      operating decisions and assessing performance.





The
      main
      factors used to identify operating segments were the specific product and
      business lines of the various operating segments of the Company. Operating
      segments are organized separately by product and service offered. We have
      identified one operating segment that meets the criteria of being a reportable
      segment in accordance with the provisions of SFAS No. 131. This reportable
      segment is the Company’s lending operations, which by its legal form, is
      identified as operations of the Bank and Imperial Capital REIT. This segment
      derives the majority of its revenue by originating and purchasing loans. Other
      operating segments of the Company that did not meet the criteria of being a
      reportable segment in accordance with SFAS No. 131 have been aggregated and
      reported as “All Other”. Transactions from all of our operating segments occur
      primarily in the United States. The Company has no transactions with a single
      external customer that exceeds ten percent of the Company’s consolidated
      revenues.





Transactions
      between the reportable segment of the Company and its other operating segments
      are made at terms which approximate arm’s-length transactions and in accordance
      with GAAP. There is no significant difference between the measurement of the
      reportable segment’s assets and profits and losses disclosed below and the
      measurement of assets and profits and losses in the consolidated balance sheets
      and statements of income. Accounting allocations are made in the same manner
      for
      all operating segments.


-
          65
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          of Contents**





Required
      reported segment information for 2005, 2004 and 2003 is detailed
      below:





**Lending********Operations**
            
            **All
                Other**
            
            **Eliminations**
            
            **Consolidated**As
              of or for the Year Ended December 31, 2005Revenues
                from external customers
            
            $
            182,580
            
            $
            2,152
            
            $
            —
            
            $
            184,732Total
                interest income
            
            
            175,855
            
            
            2,303
            
            
            —
            
            
            178,158Total
                interest expense
            
            
            79,315
            
            
            7,171
            
            
            —
            
            
            86,486Depreciation
                and amortization expense
            
            
            2,290
            
            
            392
            
            
            —
            
            
            2,682Provision
                for income taxes
            
            
            20,113
            
            
            (2,631
            )
            
            —
            
            
            17,482Capital
                expenditures
            
            
            2,232
            
            
            523
            
            
            —
            
            
            2,755Total
                assets
            
            
            3,029,118
            
            
            302,351
            
            
            (280,273
            )
            
            3,051,196Income
                (loss) before provision for income taxes
            
            
            49,362
            
            
            (7,817
            )
            
            —
            
            
            41,545As
              of or for the Year Ended December 31, 2004Revenues
                from external customers
            
            $
            139,154
            
            $
            308
            
            $
            —
            
            $
            139,462Total
                interest income
            
            
            124,788
            
            
            1,608
            
            
            (1,442
            )
            
            124,954Total
                interest expense
            
            
            36,528
            
            
            6,332
            
            
            (1,442
            )
            
            41,418Depreciation
                and amortization expense
            
            
            1,723
            
            
            362
            
            
            —
            
            
            2,085Provision
                for income taxes
            
            
            22,836
            
            
            (2,888
            )
            
            —
            
            
            19,948Capital
                expenditures
            
            
            2,752
            
            
            242
            
            
            —
            
            
            2,994Total
                assets
            
            
            2,253,190
            
            
            327,763
            
            
            (262,882
            )
            
            2,318,071Income
                (loss) before provision for income taxes
            
            
            59,537
            
            
            (8,964
            )
            
            —
            
            
            50,573As
              of or for the Year Ended December 31, 2003Revenues
                from external customers
            
            $
            130,055
            
            $
            1,162
            
            $
            —
            
            $
            131,217Total
                interest income
            
            
            115,452
            
            
            7,404
            
            
            (6,879
            )
            
            115,977Total
                interest expense
            
            
            31,546
            
            
            6,200
            
            
            (6,879
            )
            
            30,867Depreciation
                and amortization expense
            
            
            1,343
            
            
            379
            
            
            —
            
            
            1,722Provision
                for income taxes
            
            
            20,627
            
            
            (1,681
            )
            
            —
            
            
            18,946Capital
                expenditures
            
            
            2,787
            
            
            504
            
            
            —
            
            
            3,291Total
                assets
            
            
            1,741,092
            
            
            350,013
            
            
            (272,890
            )
            
            1,818,215Income
                (loss) before provision for income taxes
            
            
            56,472
            
            
            (7,892
            )
            
            —
            
            
            48,580





**NOTE
      19—PARENT COMPANY ONLY CONDENSED FINANCIAL STATEMENTS**





The
      parent company only financial statements of ITLA Capital are as follows:





**Condensed
      Balance Sheets**





**December
                31,****2005**
            
            **2004****(in
                thousands)**AssetsCash
                and cash equivalents
            
            $
            7,874
            
            $
            8,206Investment
                securities available-for-sale, at fair value
            
            
            3,734
            
            
            5,499Investments
                in wholly-owned subsidiaries:Imperial
                Capital Bank
            
            
            268,264
            
            
            225,075Imperial
                Capital Real Estate Investment Trust
            
            
            3,479
            
            
            35,705Other
                subsidiaries
            
            
            177
            
            
            218Investments
                in unconsolidated subsidiaries
            
            
            2,600
            
            
            2,600Other
                assets
            
            
            15,952
            
            
            14,496Total
                assets
            
            $
            302,080
            
            $
            291,799Liabilities
                and Shareholders' EquityJunior
                subordinated debentures
            
            $
            86,600
            
            $
            86,600Other
                liabilities
            
            
            10,999
            
            
            10,475Shareholders’
                equity
            
            
            204,481
            
            
            194,724Total
                liabilities and shareholders’ equity
            
            $
            302,080
            
            $
            291,799





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          66
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          of Contents**


**Condensed
      Statements of Income**





**Years
                Ended December 31,****2005**
            
            **2004**
            
            **2003****(in
                thousands)**Interest
                income
            
            $
            2,303
            
            $
            1,608
            
            $
            1,321Interest
                expense
            
            
            7,171
            
            
            6,332
            
            
            6,200Net
                interest expense
            
            
            (4,868
            )
            
            (4,724
            )
            
            (4,879
            )Provision
                for loan losses
            
            
            (64
            )
            
            —
            
            
            150Non-interest
                expense:General
                and administrative expense
            
            
            2,809
            
            
            2,883
            
            
            2,589Other
            
            
            140
            
            
            1,300
            
            
            180Total
                non-interest expense
            
            
            2,949
            
            
            4,183
            
            
            2,769Loss
                before income tax benefit and equity in net income of
                subsidiaries
            
            
            (7,753
            )
            
            (8,907
            )
            
            (7,798
            )Income
                tax benefit
            
            
            (2,609
            )
            
            (2,866
            )
            
            (1,642
            )Loss
                before equity in net income of subsidiaries
            
            
            (5,144
            )
            
            (6,041
            )
            
            (6,156
            )Equity
                in net income of subsidiaries
            
            
            29,207
            
            
            36,666
            
            
            35,790Net
                income
            
            $
            24,063
            
            $
            30,625
            
            $
            29,634





**Condensed
      Statements of Cash Flows**


Years
                  Ended December 31,2005
              
              2004
              
              2003(in
                  thousands)Cash
                  Flows From Operating Activities:Net
                  income
              
              $
              24,063
              
              $
              30,625
              
              $
              29,634Adjustments
                  to net income:Equity
                  in undistributed net income of subsidiaries
              
              
              (29,207
              )
              
              (36,666
              )
              
              (35,790
              )Provision
                  for loan losses
              
              
              (64
              )
              
              —
              
              
              150Other,
                  net
              
              
              3,465
              
              
              3,099
              
              
              506(Increase)
                  decrease in other assets
              
              
              (335
              )
              
              2,127
              
              
              (5,494
              )Increase
                  in liabilities
              
              
              524
              
              
              3,440
              
              
              3,252Net
                  cash (used in) provided by operating activities
              
              
              (1,554
              )
              
              2,625
              
              
              (7,742
              )Cash
                  Flows From Investing Activities:Capital
                  contribution to Imperial Capital Bank
              
              
              —
              
              
              —
              
              
              —Capital
                  distribution received from Imperial Capital REIT
              
              
              11,065
              
              
              —
              
              
              —Dividends
                  received from Imperial Capital Bank
              
              
              3,000
              
              
              28,000
              
              
              2,500Dividends
                  received from Imperial Capital REIT
              
              
              3,756
              
              
              1,839
              
              
              4,236Other,
                  net
              
              
              1,376
              
              
              316
              
              
              (383
              )Net
                  cash provided by investing activities
              
              
              19,197
              
              
              30,155
              
              
              6,353Cash
                  Flows From Financing Activities:Proceeds
                  from exercise of employee stock options
              
              
              4,650
              
              
              4,159
              
              
              2,897Cash
                  paid to acquire treasury stock
              
              
              (22,625
              )
              
              (30,346
              )
              
              (2,233
              )Net
                  cash (used in) provided by financing activities
              
              
              (17,975
              )
              
              (26,187
              )
              
              664Net
                  (decrease) increase in cash and cash equivalents
              
              
              (332
              )
              
              6,593
              
              
              (725
              )Cash
                  and cash equivalents at beginning of period
              
              
              8,206
              
              
              1,613
              
              
              2,338Cash
                  and cash equivalents at end of period
              
              $
              7,874
              
              $
              8,206
              
              $
              1,613







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          of Contents**


**Item
      9. Changes In andDisagreements With Accountants on
      Accounting and**  **Financial
      Disclosure**





None.





**Item
      9A. Control and Procedures**





**Evaluation
      of Disclosure Controls and Procedures**





An
      evaluation of the Company’s disclosure controls and procedures (as defined in
      Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Act”)) was
      carried out as of December 31, 2005 under the supervision and with the
      participation of the Company’s Chief Executive Officer, Chief Financial Officer
      and several other members of the Company’s senior management. The Company’s
      Chief Executive Officer and Chief Financial Officer concluded that, as of
      December 31, 2005, the Company’s disclosure controls and procedures were
      effective in ensuring that the information required to be disclosed by the
      Company in the reports it files or submits under the Act is (i) accumulated
      and
      communicated to the Company’s management (including the Chief Executive Officer
      and Chief Financial Officer) in a timely manner, and (ii) recorded, processed,
      summarized and reported within the time periods specified in the SEC’s rules and
      forms.





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





The
      annual report of management on the effectiveness of our internal control over
      financial reporting and the attestation report thereon issued by our independent
      registered public accounting firm are set forth under “Management’s Report on
      Internal Control Over Financial Reporting” and “Report of Independent Registered
      Public Accounting Firm” under “Item 8. Financial Statements and Supplementary
      Data.”





**Changes
      in Internal Control Over Financial Reporting**





During
      the quarter ended December 31, 2005, no changes occurred in the Company’s
      internal control over financial reporting that have materially affected, or
      are
      reasonably likely to materially affect, the Company’s internal control over
      financial reporting.





**Item
      9B. Other Information**





None.





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          68
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          of Contents**


**PART
      III**





**Item
      10. Directors andExecutive Officers of the
      Registrant**





**Executive
      Officers and Directors of the Registrant**





The
      executive officers of the Registrant are identified below.





**Name**
            **Age**
            **Position**George
                W. Haligowski
            51
            Chairman
                of the Board, President and Chief Executive Officer of ITLA Capital
                and
                the BankNorval
                L. Bruce
            64
            Vice
                Chairman of the Board and Chief Credit Officer of ITLA Capital and
                the
                BankTimothy
                M. Doyle
            49
            Executive
                Managing Director and Chief Financial Officer of ITLA Capital and
                the
                BankLyle
                C. Lodwick
            51
            Executive
                Managing Director and Chief Operating Officer of ITLA Capital and
                the
                BankMaria
                P. Kunac
            53
            Senior
                Managing Director and Chief Lending Officer of ITLA Capital and the
                Bank





*George
      W. Haligowski* has
      served as ITLA Capital’s Chairman of the Board, President and Chief Executive
      Officer since inception. He has also served as the Bank’s Chairman of the Board
      and Chief Executive Officer since 1992, and was the Bank’s President from 1992
      to October 1997. In 2000 he was again appointed as President of the Bank. From
      1990 to 1992, he served as President, Chief Executive Officer and Principal
      of
      Halivest International, Ltd., an international finance and asset management
      company. He was previously employed as a Vice President by Shearson Lehman
      Hutton (1988 to 1990) and Prudential-Bache Securities (1983 to 1988), and by
      Avco Financial Services as Regional Director of its Japanese branch operations
      (1976 to 1981), as Training Coordinator for Avco Thrift and Loan (1976) and
      as a
      Branch Manager (1974 to 1976). Mr.
      Haligowski’s post secondary education consists of the following programs: He
      graduated from the Securities Industry Institute held at the University of
      Pennsylvania Wharton School.  He also became an alumnus of the Harvard
      Business School by completing the Owners Presidents Management Program. He
      completed the Advanced Management Program at the University of Southern
      California. He received his Masters of Banking diploma from L.S.U. Graduate
      School of Banking. Mr. Haligowski also serves on several boards, including
      Operation Hope, Chairman Emeritus of the Young Presidents Organization of San
      Diego, and is Chairman of the University of California San Diego Scripps
      Institute of Oceanography's Advisory Board the Director's Cabinet.




*Norval
      L. Bruce* has
      served as the Vice Chairman and Chief Credit Officer for ITLA Capital and the
      Bank since June of 1999. He was previously President and Chief Operating Officer
      of the Bank from October 1997 to June 1999, and previously was the Executive
      Vice President and Chief Credit Officer of the Bank from 1990 to October 1997.
      Mr. Bruce was appointed a director of the Bank and ITLA Capital in January
      1997
      and September 1997, respectively. From 1988 to 1989, he served as Executive
      Vice
      President and Chief Credit Officer of Security Pacific Bank, Nevada. He was
      previously employed by Security Pacific Bank from 1965 to 1988 in a variety
      of
      positions including management positions in which he was responsible for both
      loan origination and credit quality. Mr.
      Bruce
      has an Associates of Arts degree from Clark College of Vancouver Washington,
      and
      attended the University of Washington where he studied economics and
      engineering. He is a graduate of the Southwestern Graduate School of Banking
      at
      Southern Methodist University and he has completed the Executive Program in
      Management from the John E. Anderson Graduate School of Management at
      UCLA.


*Timothy
      M. Doyle* has
      served as Executive Managing Director and Chief Financial Officer of ITLA
      Capital and the Bank since August 2005. He was previously Senior Managing
      Director and Chief Financial Officer of ITLA Capital and the Bank from May
      2000
      to August 2005, and prior to that he was Managing Director and Chief
      Administrative Officer of ITLA Capital and the Bank from May 1996 to May 2000.
      Before joining the Bank, he was the Controller and Director of Operations at
      Northeastern Plastics from 1995 to 1996; Assistant Controller of Alpha Wire
      Corporation from 1992 to 1994; and Vice President and Chief Financial Officer
      of
      Halivest International, Ltd. from 1989 to 1991. From 1982 to 1988, he was the
      Corporate Controller of the Shepaug Corporation. Mr.
      Doyle
      graduated with a Bachelor of Science degree in Accounting from Western New
      England College, and has completed the International Business Management Senior
      Executive Program of the London Business School.


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          69
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          of Contents**


*Lyle
        C. Lodwick* has
        served as Executive Managing Director and Chief Operating Officer of ITLA
        Capital and the Bank since August 2005. Prior to joining ITLA Capital, Mr.
        Lodwick served as Executive Vice President and Chief Operating Officer of
        Sunwest Bank and, prior to that, he served as Executive Vice President and
        Chief
        Credit Officer at Pacific Crest Capital, Inc. During his tenure at Pacific
        Crest
        Capital, Inc. from 1992 to 2004, he held several senior level positions with
        the
        company. From 1982 to 1985, he was Assistant Regional Credit Manager, Western
        Region, with Commercial Credit Corporation. Mr.
        Lodwick has a BA from Whittier College and an MBA from the University of
        LaVerne.
  *Maria
        P. Kunac* has
        served as Senior Managing Director and Chief Lending Officer of ITLA Capital
        and
        the Bank since November 2004. Prior to joining ITLA Capital, Ms. Kunac served
        as
        the Executive Vice President for First National Bank. During her tenure at
        First
        National Bank from 1996 to 2004, she also managed the Real Estate Loan Division,
        and served as the Deputy Chief Credit Officer and Special Assets Manager.
        From
        1993 to 1995, she was Executive Vice President and Chief Lending Officer
        of
        First Fidelity Thrift & Loan, and was Senior Vice President for Great
        American Bank from 1979 to 1992.


The
      directors of ITLA Capital, excluding Mr. Haligowski and Mr. Bruce, are
      identified below.





*Preston
      Martin,* age
      82,
      is the former Vice Chairman of the Federal Reserve Board of Governors. Mr.
      Martin previously served as a Senior Advisory Director to the Board. Mr. Martin
      is currently Chairman of the Board of Martin Associates, a San Francisco based
      financial services company. Mr. Martin was Chairman and Chief Executive Officer
      of Seraro Corporation, a Sears Roebuck enterprise, PMI Mortgage Insurance
      Corporation and PMI Mortgage Corporation. Mr. Martin was also Professor of
      Finance and Director of Executive Programs at the University of Southern
      California. Mr.
      Martin holds a Ph.D. in Monetary Economics from Indiana University, as well
      as
      an MBA and a BS in Finance from the University of Southern
      California.


*Jeffrey
      L. Lipscomb* ,
      age 52,
      is an Investment Advisory Associate with AXA Advisors and formerly was a
      Registered Principal and Assistant Manager of the San Diego office of Equitable
      Financial Companies since 1986, handling corporate group benefits and personal
      financial planning. Mr. Lipscomb was also with Kidder Peabody from 1983 to
      1986. Mr.
      Lipscomb received a Bachelor of Arts Degree in General Psychology from the
      University of California, Santa Barbara in 1976.


*Sandor
      X. Mayuga* ,
      age 58,
      is a member of the California State Bar and has been of counsel to the law
      firm
      of Keesal, Young & Logan since April 2004. Prior to that, he was a member of
      the law firm of Tisdale & Nicholson since 1994. He conducted his own law
      practice from 1983 to 1994 and was a partner in the Financial Institutions
      Department of Finley, Kumble, Wagner, Heine, Underberg, Manly & Casey, a New
      York-based national law firm, from 1980 to 1983. Previously, he served as
      Assistant General Counsel of Hunt-Wesson Foods, Inc., a subsidiary of Norton
      Simon, Inc., and was associated with two large regional law firms in Los Angeles
      County. Since 1980, Mr. Mayuga’s practice has focused on the representation of
      financial institutions and other finance-related businesses in corporate,
      transactional and regulatory matters. Mr.
      Mayuga is a graduate of the University of Pennsylvania School of Law (Juris
      Doctoris, 1974), and the University of California, Santa Barbara (A.B.,
      Political Science, with High Honors, 1970). While at the University of
      Pennsylvania, he also studied at The Wharton School of Finance and Commerce.
      He
      also earned a Certificate in Private International Law at Academie du Droit
      Internationale de la Haye (1975).


*Hirotaka
      Oribe* ,
      age 71,
      is a licensed architect with international experience in real estate development
      and urban planning. Since 1993, Mr. Oribe has served as an advisor to Kajima
      Development Resources, Inc. From 1979 to 1993, Mr. Oribe was Executive Vice
      President, Chief Operating Officer and a Director of Kajima Development
      Corporation, a firm engaged in development and construction of single-family
      and
      multi-family housing, office buildings, retail space and land development.
      Mr.
      Oribe previously held other positions with affiliates of Kajima Corporation
      of
      Japan from 1973 to 1979 and was a practicing architect from 1962 to 1973. Mr.
      Oribe
      holds Bachelor and Masters of Engineering from Waseda University in Tokyo,
      and
      holds a Master of Architecture in Urban Design from Harvard University's
      Graduate School of Design. He is also a licensed architect with the State of
      California and the Commonwealth of Massachusetts.


*Robert
      R. Reed* ,
      age 69,
      is retired from Household International where he was employed in various
      positions from 1960 to 1992. Mr. Reed served as Vice President of Household
      Bank
      from 1980 to 1992. Mr. Reed was previously employed in management positions
      with
      Household Financial Corporation from 1962 to 1980. From 1995 to 2000, Mr. Reed
      served as a director of the Santa Ana City Cable Television Review Board.





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          of Contents**




**Audit
      Committee Membership**





The
      Audit
      Committee of ITLA Capital’s Board of Directors consists of Directors Martin
      (Chairman), Lipscomb and Reed. The Board of Directors has determined that Mr.
      Martin is an “audit committee financial expert,” as defined in the SEC’s rules,
      and that Mr. Martin is “independent,” as independence is defined for audit
      committee members in the listing standards of the NASDAQ Stock
      Market.





**Code
      of Ethics**





We
      have
      adopted a code of ethics that applies to our principal executive officer,
      principal financial officer, principal accounting officer, and persons
      performing similar functions, and to all of our other employees and our
      directors. A copy of our code of ethics is available on our website, located
      at
      www.itlacapital.com.





**Section
      16(a) Beneficial Ownership Reporting Compliance**





Section
      16(a) of the Securities Exchange Act of 1934 requires ITLA Capital’s directors
      and executive officers, and persons who own more than 10% of a registered class
      of our equity securities, to file with the SEC initial reports of ownership
      and
      reports of changes in ownership of common stock and other equity securities
      of
      ITLA Capital. Officers, directors and greater than 10% stockholders are required
      by SEC regulation to furnish ITLA Capital with copies of all Section 16(a)
      forms
      they file.





To
      our
      knowledge, based solely on a review of the copies of such reports furnished
      to
      us and written representations that no other reports were required, during
      the
      fiscal year ended December 31, 2005, all Section 16(a) filing requirements
      applicable to its officers, directors and greater than 10% beneficial owners
      were complied with, except for the inadvertent failure by Ms. Kunac, Senior
      Managing Director and Chief Lending Officer, to timely file a Form 4 to report
      one transaction.





**Item
      11. ExecutiveCompensation**





The
      following table sets forth the compensation, for the years ended December 31,
      2005, 2004 and 2003, of the Chief Executive Officer, the four other current
      executive officers and the former Chief Banking Officer (the “named
      executives”).





**Annual
                Compensation**
            
            **Long-Term**
              **Compensation********Name
                and Principal Position**
            
            **Year**
            
            ******Salary**
              **($)**
            
            ******Bonus**
              **($)**
            
            **Other
                Annual Compensation**
              **($)**
            
            ******Options**
              **(#)
                (1)**
            
            **All
                Other**
              **Compensation**
              **($)**George
                W. Haligowski
            
            
            2005
            
            $
            590,000
            
            $
            979,750
            *(2)*
            $
            498,350
            *(3)*
            
            50,000
            
            $
            332,531
            *(4)*Chairman
                of the Board, President
            
            
            2004
            
            $
            498,750
            
            $
            1,179,750
            *(2)*
            $
            125,346
            *(3)*
            
            *—*
            
            $
            296,938and
                Chief Executive Officer
            
            
            2003
            
            $
            496,202
            
            $
            1,000,813
            *(2)*
            $
            174,970
            *(3)*
            
            *—*
            
            $
            208,081Norval
                L. Bruce
            
            
            2005
            
            $
            241,500
            *(10)*
            $
            120,750
            *(10)*
            $
            —
            
            
            12,500
            
            $
            93,264
            *(5)*Vice
                Chairman of the Board and Chief
            
            
            2004
            
            $
            230,769
            *(10)*
            $
            165,750
            *(10)*
            $
            —
            
            
            *—*
            
            $
            69,294Credit
                Officer
            
            
            2003
            
            $
            230,769
            *(10)*
            $
            153,500
            *(10)*
            $
            —
            
            
            *—*
            
            $
            45,263Timothy
                M. Doyle
            
            
            2005
            
            $
            225,000
            
            $
            112,500
            
            $
            —
            
            
            25,000
            
            $
            55,269
            *(6)*Executive
                Managing Director and
            
            
            2004
            
            $
            195,000
            
            $
            157,500
            
            $
            —
            
            
            *—*
            
            $
            30,951Chief
                Financial Officer
            
            
            2003
            
            $
            193,917
            
            $
            137,750
            
            $
            —
            
            
            *—*
            
            $
            30,756Lyle
                C. Lodwick*(12)*
            
            
            2005
            
            $
            83,333
            
            $
            41,918
            
            $
            —
            
            
            47,500
            
            $
            39,593
            *(7)*Executive
                Managing Director and
            
            
            2004
            
            $
            —
            
            $
            —
            
            $
            —
            
            
            *—*
            
            $
            —Chief
                Operating Officer
            
            
            2003
            
            $
            —
            
            $
            —
            
            $
            —
            
            
            *—*
            
            $
            —Maria
                P. Kunac*(13)*
            
            
            2005
            
            $
            185,000
            
            $
            101,750
            
            $
            —
            
            
            30,000
            
            $
            27,202
            *(8)*Senior
                Managing Director and
            
            
            2004
            
            $
            30,000
            
            $
            87,000
            
            $
            —
            
            
            —
            
            $
            18,071Chief
                Lending officer
            
            
            2003
            
            $
            —
            
            $
            —
            
            $
            —
            
            
            —
            
            $
            —Don
                Nickbarg*(14)*
            
            
            2005
            
            $
            134,804
            
            $
            —
            
            $
            —
            
            
            *—*
            
            $
            37,086
            *(9)*Former
                Senior Managing Director and
            
            
            2004
            
            $
            175,528
            
            $
            110,750
            *(11)*
            $
            —
            
            
            *—*
            
            $
            28,458Chief
                Banking Officer
            
            
            2003
            
            $
            175,528
            
            $
            98,750
            *(11)*
            $
            —
            
            
            *—*
            
            $
            24,949






-
          71
          -
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          of Contents**


*(1)*
            *Options
                were granted on various dates and vested immediately, with the exception
                of Ms. Kunac’s options, which were initially granted to vest one-third on
                each of the three subsequent anniversary dates of issuance but were
                subsequently accelerated by the Compensation Committee to vest entirely
                in
                December 2005.*





*(2)*
            *None
                of the 2005 bonus was deferred at the election of the named executive
                officer under ITLA Capital’s Nonqualified Deferred Compensation plan. The
                respective amounts were $890,474 and $173,315 for 2004 and
                2003.*





*(3)*
            *For
                2005, represents (a) the aggregate incremental cost to the Company
                of
                perquisites and other personal benefits provided to Mr. Haligowski
                totaling $289,620, including $175,000 for the transfer of an interest
                in a
                timeshare in a resort and the incremental cost to the Company of
                $83,620
                for Mr. Haligowski’s use of chartered air transportation service, and (b)
                reimbursements for tax obligations incurred by Mr. Haligowski totaling
                $208,730. For 2004 and 2003, represents the aggregate incremental
                cost to
                the Company of perquisites and other personal benefits provided to
                Mr.
                Haligowski, including the incremental cost to the Company of $33,000
                and
                $83,500, respectively, for Mr. Haligowski’s use of chartered air
                transportation services. During 2005, 2004 and 2003, none of the
                other
                named executives received perquisites or other personal benefits
                in excess
                of the lesser of $50,000 or 10% of their salary and bonus reported
                for the
                year.*





*(4)*
            *Consists
                of (a) $30,000 in supplemental housing payments, (b) $11,216 in life
                insurance premiums, (c) $6,300 in employer contributions to ITLA
                Capital’s
                401(k) plan, (d) $240,015 in preferential interest on employee savings
                accounts in 2005, and (e) an allocation of 5,000 shares of restricted
                stock under the Supplemental Executive Retirement Plan (“SERP”) valued at
                $9.00 per share (see “Supplemental Executive Retirement Plan” below) for
                an aggregate value of $45,000.*





*(5)*
            *Consists
                of (a) $3,429 in life insurance premiums, (b) $5,460 in employer
                contributions to ITLA Capital’s 401(k) plan, (c) $73,575 in preferential
                interest on employee savings accounts in 2005, and (d) an allocation
                of
                1,200 shares of restricted stock under the Supplemental Executive
                Retirement Plan (“SERP”) valued at $9.00 per share (see “Supplemental
                Executive Retirement Plan” below) for an aggregate value of $10,800.*





*(6)*
            *Consists
                of (a) $9,287 in life insurance premiums, (b) $6,300 in employer
                contributions to ITLA Capital’s 401(k) plan, (c) $19,432 in preferential
                interest on employee savings accounts in 2005, and (d) an allocation
                of
                2,250 shares of restricted stock under the Supplemental Executive
                Retirement Plan (“SERP”) valued at $9.00 per share (see “Supplemental
                Executive Retirement Plan” below) for an aggregate value of
                $20,250.*





*(7)*
            *Consists
                of (a) $322 in life insurance premiums, (b) $10,021 in preferential
                interest on employee savings accounts in 2005, and (c) an allocation
                of
                3,250 shares of restricted stock under the Supplemental Executive
                Retirement Plan (“SERP”) valued at $9.00 per share (see “Supplemental
                Executive Retirement Plan” below) for an aggregate value of $29,250.*





*(8)*
            *Consists
                of (a) $883 in life insurance premiums, (b) $3,931 in employer
                contributions to ITLA Capital’s 401(k) plan, (c) $6,638 in preferential
                interest on employee savings accounts in 2005, and (d) an allocation
                of
                1,750 shares of restricted stock under the Supplemental Executive
                Retirement Plan (“SERP”) valued at $9.00 per share (see “Supplemental
                Executive Retirement Plan” below) for an aggregate value of
                $15,750.*





*(9)*
            *Consists
                of (a) $591 in life insurance premiums, (b) $6,300 in employer
                contributions to ITLA Capital’s 401(k) plan, and (c) $30,195 in
                preferential interest on employee savings accounts in
                2005.*





*(10)*
            *$116,604
                of the 2005 salary and $60,375 of the 2005 bonus was deferred at
                the
                election of the named executive officer under ITLA Capital’s Nonqualified
                Deferred Compensation plan. The respective amounts were $115,885
                and
                $102,023 in 2004 and $91,067 and none in
                2003.*





*(11)*
            *None
                of the 2005 bonus was deferred at the election of the named executive
                under ITLA Capital’s Nonqualified Deferred Compensation plan. The
                respective amounts were $10,000 in 2004 and $20,000 in
                2003.*





*(12)*
            *Mr.
                Lodwick joined ITLA Capital on August 9,
                2005.*





*(13)*
            *Ms.
                Kunac joined ITLA Capital on November 1,
                2004.*





*(14)*
            *Mr.
                Nickbarg departed ITLA Capital in August
                2005.*





-
          72
          -
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          of Contents**


**Option
        Grants for 2005**
 
 The
        following table sets forth certain information regarding stock options granted
        pursuant to the Stock Option Plan to the named executive officers in 2005.
        No
        stock appreciation rights have been granted pursuant to the Stock Option
        Plan.
 
 **Stock
        Option Grants in Last Fiscal Year**
 
 **Individual
                  Grants****Potential
                  Realizable****%
                  of Total**
              
              
              
              
              
              **Value
                  of Assumed****Number
                  of**
              
              **Options**
              
              
              
              
              
              **Annual
                  Rates of Stock****Underlying**
              
              **Granted
                  to**
              
              **Exercise**
              
              
              
              **Price
                  Appreciation for****Options**
              
              **Employees**
              
              **or
                  Base**
              
              
              
              **Option
                  Term****Granted**
              
              **in
                  Fiscal**
              
              **Price**
              
              **Expiration**
              
              **5%**
              
              **10%****Name**
              
              **(#)**
              
              **Year**
              
              **($/Share)**
              
              **Date**
              
              **($)**
              
              **($)**George
                  W. Haligowski
              
              
              50,000
              *(1)*
              
              15.5
              %
              $
              48.46
              
              
              12/19/2015
              
              $
              1,523,812
              
              $
              3,861,638Norval
                  L. Bruce
              
              
              12,500
              *(1)*
              
              3.9
              %
              $
              48.46
              
              
              12/19/2015
              
              $
              380,953
              
              $
              965,409Timothy
                  M. Doyle
              
              
              25,000
              *(1)*
              
              7.8
              %
              $
              48.46
              
              
              12/19/2015
              
              $
              761,906
              
              $
              1,930,819Lycle
                C. Lodwick
              
              
              35,000
              *(2)*
              
              10.9
              %
              $
              54.25
              
              
              8/8/2015
              
              $
              1,194,114
              
              $
              3,026,11812,500
              *(1)*
              
              3.9
              %
              $
              48.46
              
              
              12/19/2015
              
              $
              380,953
              
              $
              965,409Maria
                  P. Kunac
              
              
              10,000
              *(3)*
              
              3.1
              %
              $
              55.58
              
              
              1/31/2015
              
              $
              349,540
              
              $
              885,80212,500
              *(4)*
              
              3.9
              %
              $
              47.92
              
              
              10/27/2015
              
              $
              376,708
              
              $
              954,6527,500
              *(1)*
              
              2.3
              %
              $
              48.46
              
              
              12/19/2015
              
              $
              228,572
              
              $
              579,246Don
                  Nickbarg
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
 ____________
 
 *(1)*
              *Options
                  vested immediately on the date of grant and were granted to the
                  named
                  executives on December 19,
                  2005.*
 
 *(2)*
              *Options
                  vested immediately on the date of grant and were granted to the
                  named
                  executive on August 8, 2005.*
 
 *(3)*
              *Options
                  were initially granted to vest equally over a three-year period,
                  beginning
                  with the first anniversary of the grant date. On December 8, 2005
                  the
                  Compensation Committee of the Board of Directors approved the accelerated
                  vesting of these options. These options were granted to the named
                  executive on January 31, 2005.*
 
 *(4)*
              *Options
                  vested immediately on the date of grant and were granted to the
                  named
                  executive on October 27,
                  2005.*





**Option
      Exercises and Values at December 31, 2005**





The
      following table sets forth certain information concerning stock options
      exercised by the named executive officers in 2005 and the number and value
      of
      stock options held by the named executive officers at December 31,
      2005.





**Option
      Values at December 31, 2005**




**Shares**
                
                
                
                **Number
                    of Unexercised**
                
                **Value
                    of Unexercised****Acquired
                    on**
                
                **Value**
                
                **Option
                    at**
                
                **“In-the-Money”
                    Options****Exercise**
                
                **Realized**
                
                **Fiscal
                    Year-End (#)**
                
                **at
                    Fiscal Year-End (1)($)****Name**
                
                **(#)**
                
                **($)**
                
                **Exercisable**
                
                **Unexercisable**
                
                **Exercisable**
                
                **Unexercisable**George
                    W. Haligowski
                
                
                101,802
                
                $
                4,445,305
                
                
                162,500
                
                
                —
                
                $
                3,412,625
                
                
                —Norval
                    L. Bruce
                
                
                —
                
                
                n/a
                
                
                23,000
                
                
                —
                
                $
                276,300
                
                
                —Timothy
                    M. Doyle
                
                
                25,000
                
                $
                1,002,375
                
                
                75,000
                
                
                —
                
                $
                1,572,250
                
                
                —Lyle
                    C. Lodwick
                
                
                —
                
                
                n/a
                
                
                47,500
                
                
                —
                
                $
                4,875
                
                
                —Maria
                    P. Kunac
                
                
                —
                
                
                n/a
                
                
                30,000
                
                
                —
                
                $
                14,550
                
                
                —Don
                    Nickbarg
                
                
                40,000
                
                $
                1,381,092
                
                
                —
                
                
                —
                
                $
                —
                
                
                —




*(1)*
            *The
                difference between the aggregate option exercise price and the closing
                price of $48.85 of the underlying shares at December 31,
                2005.*





-
            73
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            of Contents**
  **Agreements
        with Mr. Haligowski**
 
 On
        February 24, 2006, we entered into an amended and restated employment agreement
        with Mr. Haligowski, which constituted an amendment and restatement of his
        employment agreement with the Company dated January 28, 2000 (the "Employment
        Agreement"). The Employment Agreement has a five-year term which commenced
        effective as of January 1, 2006 and is renewable on each subsequent January
        1st,
        as long as neither the Company, nor the Bank, has notified Mr. Haligowski
        at
        least 90 days in advance that the term will not be so extended. If a "change
        in
        control" (as defined in the Employment Agreement) occurs during the term
        of the
        Employment Agreement, then notwithstanding the delivery of any notice of
        non-renewal to Mr. Haligowski, the employment term will automatically be
        extended until five years after the date of the change in control.
 
 The
        Employment Agreement entitles Mr. Haligowski to: (1) an annual base salary
        of
        not less than $590,000; (2) participate in any performance-based awards and
        discretionary bonuses paid to executive officers; (3) receive a minimum monthly
        housing allowance of $3,500 and, at his election, a minimum monthly automobile
        allowance of $2,600 or the use of a Company vehicle pursuant to the Company's
        automobile policy; (4) receive a personal life insurance policy, with premiums
        paid by the Company, providing a death benefit of at least four times his
        annual
        base salary; (5) receive Company-paid memberships in certain organizations
        and
        clubs; (6) up to $6,500 per year, plus imputed taxes, for the maintenance
        of his
        personal estate and tax planning; and (7) participate in benefit plans and
        receive other fringe benefits provided by the Company and the Bank.
 
 The
        Employment Agreement provides that if Mr. Haligowski is "involuntarily
        terminated" prior to a change in control, then he will: (1) receive a prorated
        lump sum payment based on the amount of cash bonus and other cash incentive
        compensation paid to him for the Company's last completed fiscal year; (2)
        either (a) continue to receive monthly through the remaining term of the
        agreement one-twelfth of his base salary at the highest annual rate in effect
        during the three years before the termination date and one-twelfth of the
        average amount of cash bonus and cash incentive compensation earned by him
        during the two fiscal years preceding the termination date or (b) at his
        election, receive the amount of all payments described in (a) in a lump sum;
        (3)
        either (a) continue to receive for himself and his dependents substantially
        the
        same medical, dental and disability benefits at the same cost to him for
        five
        years after the date of termination, reduced to the extent he receives
        substantially the same coverage at substantially the same cost to him from
        another employer, or (b) at his election (or at the Company's or the Bank's
        election, if coverage under the Company's group plan is not available to
        Mr.
        Haligowski and his dependents), receive an amount in cash equal to the premium
        cost being paid by the Company or the Bank before the termination date; (4)
        be
        provided with office space and secretarial support of the same type provided
        during his employment for 18 months after the termination date; (5) receive
        title to the Company-owned or leased vehicle being used by him; (6) receive
        all
        interests maintained by the Company or the Bank in life insurance policies
        maintained on his life, including the cash surrender values; and (7) become
        vested in all of his outstanding unvested stock options and restricted stock
        awards held in the SERP. The term "involuntary termination" is defined to
        include termination of Mr. Haligowski's employment by the Company or the
        Bank
        (other than for cause or due to retirement after attaining age 65) without
        his
        consent, by Mr. Haligowski following a material reduction of or interference
        with his duties, responsibilities or benefits without his consent or by the
        Company or the Bank (or their successors) or by Mr. Haligowski at the time
        of or
        within five years after a change in control.





The
      Employment Agreement provides that if Mr. Haligowski is involuntarily terminated
      in connection with or within five years after a change in control of the
      Company, then he will receive a lump sum payment equal to 299% of his "base
      amount," as defined in Section 280G of the Code, less the present value of
      the
      benefits to be received by him under the Company's Salary Continuation Plan
      and
      the accelerated vesting present value of stock options and restricted stock,
      to
      the extent such amounts are required to be considered in the calculation of
      parachute payments under Section 280G of the Code (the "Lump Sum Change in
      Control Payment"). Instead of receiving the full amount of the Lump Sum Change
      in Control Payment, however, Mr. Haligowski may elect to receive the continued
      health, medical and disability insurance benefits, 18 months of office space
      and
      secretarial support, title to his Company-owned or leased vehicle and the
      Company's interests in the life insurance policies on his life, each as
      described in the immediately preceding paragraph, in which case the amount
      of
      the Lump Sum Change in Control Payment will be reduced by the present value
      of
      these elected benefits (the "Elective Benefits"). In no event may the Lump
      Sum
      Change in Control Payment, prior to reduction for Elective Benefits, exceed
      the
      aggregate of 100% of the total value of the payments and benefits Mr. Haligowski
      would receive under the Employment Agreement if the involuntarily termination
      occurred prior to a change in control, plus 150% of his annual base salary
      in
      effect before the change in control. This resulting aggregate amount is equal
      to
      the value of Mr. Haligowski's change in control benefits under the Original
      Employment Agreement, excluding the SERP change in control benefit referred
      to
      in the Original Employment Agreement of 3.95 times his annual base salary but
      inclusive of the life insurance benefit described in the preceding paragraph
      (the "Original Agreement Adjusted Change in Control Benefit"). The Employment
      Agreement provides that if a change in control occurs on or after January 1,
      2008, the Lump Sum Change in Control Payment prior to reduction for Elective
      Benefits may not be less than the Original Agreement Adjusted Change in Control
      Benefit less $1.0 million, notwithstanding the fact that this amount exceeds
      299% of Mr. Haligowski's base amount.





-
          74
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          of Contents**


The
        Employment Agreement provides that if any payments or benefits to be provided
        under the agreement in combination with any payments or benefits under other
        plans or arrangements constitute "excess parachute payments" under Section
        280G
        of the Code, Mr. Haligowski will be paid an additional amount (referred to
        as a
        "gross up payment") that will offset, on an after tax basis, the effect of
        any
        excise tax consequently imposed upon him under Section 4999 of the
        Code.
 
 Under
        the
        Employment Agreement, if Mr. Haligowski is terminated due to disability or
        death, then he or his estate will be entitled to the same payments and benefits
        to which he would have been entitled if he were involuntarily terminated
        prior
        to a change in control, other than the continued use of office space and
        secretarial support, plus a prorated amount of any bonus or other incentive
        compensation for the year in which the termination occurs. If Mr. Haligowski
        voluntarily terminates his employment other than for a reason that constitutes
        involuntary termination or other than in connection with or within five years
        after a change in control, he will receive his base salary and benefits earned
        through the date of termination plus any benefit continuation required by
        law.
        If Mr. Haligowski's employment is terminated for cause, the Company will
        have no
        obligations to him under the Employment Agreement, other than any benefit
        continuation required by law.
 
 We
        entered into a non-competition and non-solicitation agreement (the
        "Non-Competition Agreement") with Mr. Haligowski on February 24, 2006. Like
        the
        Employment Agreement, the Non-Competition Agreement has a five-year term
        which
        commenced effective as of January 1, 2006. Mr. Haligowski's forbearance
        obligations under the Non-Competition Agreement begin on his employment
        termination in connection with or following an acquisition of the Company
        or the
        Bank and continue for three years thereafter (the "Restricted Period"). Mr.
        Haligowski will receive aggregate payments of $3.5 million during the Restricted
        Period in consideration of his compliance with his obligations under the
        Non-Competition Agreement during the Restricted Period. The Company has the
        unilateral right to extend the term of the Non-Competition Agreement for
        an
        additional five year term by adjusting the compensation to be paid to Mr.
        Haligowski under that agreement.
 
 **Salary
        Continuation Plan**
 
 The
        Salary Continuation Plan, which was originally adopted by the Company in
        March
        2000 and in which Mr. Haligowski is currently the only participant, provides
        that if the participant's employment is terminated for any reason other than
        cause, or if the participant retires after attaining age 65, the participant
        will begin receiving an annual salary continuation benefit six months thereafter
        (or starting on the first day of the next calendar month, if termination
        is due
        to death or disability), payable monthly over 15 years. The amount of Mr.
        Haligowski's annual salary continuation benefit is 75% of his average annual
        base salary for the three full calendar years preceding the year in which
        termination occurs or in which he attains age 65.


**Change
      of Control Agreements**





The
      Company recently entered into change in control severance agreements with
      Messrs. Bruce, Doyle and Lodwick and Ms. Kunac. In the case of Messrs. Bruce
      and
      Doyle, these agreements replace their existing change in control severance
      agreements with the Company. The terms of the agreements are three years for
      the
      agreements with Messrs. Bruce and Doyle and one year for the agreements with
      Mr.
      Lodwick and Ms. Kunac, beginning effective as of February 1, 2006 and renewable
      on each subsequent February 1st, as long as neither the Company nor the officer
      gives notice to the other at least 90 days in advance that the term will not
      be
      so extended. If a "change in control" (as defined in the agreement) occurs
      during the term of the agreement, then notwithstanding the delivery of any
      non-renewal notice, the agreement term will automatically be extended until
      three years, in the case of the agreements with Messrs. Bruce and Doyle, or
      two
      years, in the case of the agreements with Mr. Lodwick and Ms. Kunac, after
      the
      date of the change in control.





The
      agreements with Messrs. Bruce and Doyle provides that if their employment is
      terminated for any reason other than cause within six months before or within
      three years after a change in control, or if the officer terminates his
      employment for any reason within one year after a change in control, he will:
      (1) receive a lump sum payment equal to 299% of his "base amount" (not to exceed
      $1.0 million in the case of Mr. Bruce and $1.25 million in the case of Mr.
      Doyle); (2) either (a) continue to receive substantially the same health, dental
      and life insurance benefits for two years after the termination date, in the
      case of Mr. Bruce, and three years after the termination date, in the case
      of
      Mr. Doyle, or (b) at his election, (or at the Company's election, if coverage
      under the Company's group plan is not available to the officer) receive an
      amount in cash equal to the premium cost being paid by the Company before the
      termination date; (3) receive title to the Company-owned or leased vehicle
      being
      used by him or, if the officer receives a monthly car allowance in lieu of
      a
      Company vehicle, an amount in cash equal to 24 times, in the case of Mr. Bruce,
      and 36 times, in the case of Mr. Doyle, the greater of the monthly allowance
      on
      the date of the change in control or on the termination date; and (4) become
      vested in all of his outstanding unvested stock options and restricted stock
      awards.





The
      agreements with Mr. Lodwick and Ms. Kunac provide that if the officer's
      employment is "involuntarily terminated" in connection with or within two years
      after a change in control, he or she will: (1) receive a lump sum payment equal
      to the sum of (a) 1.5 times his or her base salary on the date of the change
      in
      control or the date of termination, whichever is greater and (b) a prorated
      bonus amount for the year in which the termination occurs based on the officer's
      prior year annual bonus, (2) either (a) continue to receive substantially the
      same health, dental and life insurance benefits for 18 months after the
      termination date or (b) at his or her election (or at the Company's election,
      if
      coverage under the Company's group plan is not available to the officer),
      receive an amount in cash equal to the premium cost being paid by the Company
      before the termination date; (3) receive title to the Company-owned or leased
      vehicle being used by him or her or, if the officer receives a monthly car
      allowance in lieu of a Company vehicle, an amount in cash equal to 18 times
      the
      greater of the monthly allowance on the date of the change in control or on
      the
      termination date; and (4) become vested in all of his or her outstanding
      unvested stock options and restricted stock awards.


-
          75
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          of Contents**


Each
        agreement provides that to the extent the value and amounts of benefits under
        the agreement, together with any other amounts and the value of other benefits
        received by the officer in connection with a change in control would cause
        any
        amount to be non-deductible by the Company pursuant to Section 280G of the
        Code,
        then the amounts and benefits under the agreement will be reduced to the
        extent
        necessary to avoid the non-deductibility of any such amounts and benefits
        under
        Section 280G.
 
 **Supplemental
        Executive Retirement Plan (SERP)**
 
 The
        SERP
        provides that the compensation committee may make restricted stock awards
        under
        ITLA Capital’s Recognition and Retention Plan (RRP) on a tax deferred basis
        through the SERP. The SERP further provides that Mr. Haligowski shall receive
        an
        allocation annually, subject to the performance terms of the RRP, of a
        restricted stock award equal to one-third of his base salary and all other
        participants shall receive an award equal to one-fifth of base salary subject
        to
        the approval of the compensation committee, which may also allocate a greater
        or
        lesser award or no award in its discretion. For this purpose, each share
        of
        common stock has been valued at $9.00 per share, the fair market value of
        the
        common stock on the date of issuance to the SERP. A participant shall only
        have
        a vested right to amounts allocated to his or her account if the participant
        is
        employed on the last day of a three year vesting cycle or earlier at the
        discretion of the compensation committee. Upon a change in control (as defined
        in the SERP), the participant shall have an accelerated vesting of all shares
        allocated to his or her account. The participant shall only have a right
        to
        vested shares in his or her account upon normal retirement, death, disability
        or
        termination. The last day of the vesting cycle for shares allocated to the
        SERP
        accounts for the benefit of the participants for the years 2003, 2004 and
        2005
        was December 31, 2005.


**Benefits**





*Insurance
      Plans.* All
      full-time employees, after approximately three months employment with us, are
      covered under group plans providing major medical, dental, and vision benefits,
      and long-term disability, travel accident, accidental death and dismemberment
      insurance, and group term life insurance.





*Salary
      Savings Plan.* The
      ITLA
      Capital Salary Savings Plan is a cash or deferred arrangement under Section
      401(k) of the Internal Revenue Code (the “Code”) designed to provide employees
      with the opportunity to accumulate retirement funds (the “401(k) Plan”).
      Permanent employees age 21 or older are eligible to participate in the 401(k)
      Plan as of January 1 or July 1 first following their hire date. Under the 401(k)
      Plan, subject to limitations imposed under Section 401(k) and Section 415 of
      the
      Code, a participant may elect to defer compensation by directing us to
      contribute such amount to the 401(k) Plan on such employee’s behalf. We
      currently make matching contributions to the 401(k) Plan equal to 50% of the
      first 6% of the participant’s monthly contribution. The Board reviews the match
      on an annual basis, and we may also make discretionary contributions to the
      401(k) Plan. “Compensation” for purposes of the 401(k) Plan is defined as a
      participant’s compensation from us as reported annually on Form W-2, including
      contributions to the 401(k) Plan by the employee, and contributions by us in
      the
      employee’s behalf to any other pension, insurance, welfare or other employee
      benefit plan. Under the 401(k) Plan, a separate account is established for
      each
      participant. Participants are always 100% vested in their contributions and
      the
      earnings thereon. Participants become vested in employer contributions and
      the
      earnings thereon at the rate of 20% per year commencing with the first full
      year
      of service (defined as completion of 12 consecutive months of work).
      Participants become fully vested in employer contributions and the earnings
      thereon on their fifth anniversary of employment, or in the event of death,
      permanent disability or attainment of age 65 while employed by us. The 401(k)
      Plan provides for in-service hardship distributions of elective deferrals,
      as
      well as loans of a portion of vested account balances. Distributions from the
      40l(k) Plan are made upon termination of service in a lump sum or in annual
      installments over a period of years at the election of the participant with
      the
      right to take a lump sum payment at any time during such period.





*Nonqualified
      Deferred Compensation Plans.* The
      ITLA
      Capital Corporation Supplemental Salary Savings Plan (the “Supplemental Plan”)
      and Nonqualified Deferred Compensation Plan (the “Deferral Plan”) are designed
      to provide additional retirement benefits for certain officers and highly
      compensated employees. The Supplemental Plan provides participating employees
      with an opportunity to make up benefits not available under the 401(k) Plan
      due
      to any application of limitations on compensation and maximum benefits under
      the
      401(k) Plan. Benefits under the Supplemental Plan are provided at the same
      time
      and in the same form as benefits under the 401(k) Plan, and become taxable
      to
      the participant at that point. The Deferral Plan allows a participant to defer
      receipt of, and current taxation upon, designated portions of the participant’s
      direct cash compensation until a future date specified by the participant.
      Both
      of these plans are unfunded plans, meaning that all benefits payable there
      under
      are payable from our general assets, and funds available to pay benefits are
      subject to the claims of our general creditors. We have established a Rabbi
      Trust with a third party FDIC insured financial institution which holds the
      contributions to the Supplemental Plan and Deferral Plan, for the purpose of
      providing the benefits set forth under the terms of the plans. Participants
      only
      have the rights of unsecured creditors with respect to the Rabbi Trust assets.


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          of Contents**


*Stock
        Plans.* On
        July
        27, 2005, the Company’s shareholders approved the 2005 Re-Designated Amended and
        Restated Employee Stock Incentive Plan (“ESIP”) and the 2005 Re-Designated,
        Amended and Restated Stock Option Plan For Nonemployee Directors (the “Director
        Option Plan” and together with the ESIP the “Stock Option Plans”). The Stock
        Option Plans were originally adopted on October 18, 1995 and amended effective
        July 31, 2001.
 
 In
        accordance with the Stock Option Plans, officers, directors and our employees
        are eligible to receive options to purchase Common Stock. Under the ESIP,
        officers and employees are also eligible for awards of stock appreciation
        rights, restricted stock, restricted stock units, performance shares and
        performance units. The purpose of the Stock Option Plans is to enable us
        to
        attract, retain and motivate employees by providing for or increasing their
        proprietary interests in ITLA Capital, and in the case of nonemployee directors,
        to attract such directors and further align their interests with our interests.
        Every one of our employees is eligible to be considered for the grant of
        awards
        under the ESIP. The maximum number of shares of Common Stock that may be
        issued
        pursuant to awards granted under the ESIP is 1,561,000 shares, provided that
        each share issued pursuant to awards of stock appreciation rights, restricted
        stock, restricted stock units, performance shares and performance units counts
        against this limit as two shares. The maximum number of shares of Common
        Stock
        that may be issued pursuant to awards granted under the Director Option Plan
        is
        70,000 shares. The maximum number of shares of Common Stock and shares with
        respect to outstanding awards under the Stock Option Plan are subject to
        adjustment in the event of a stock dividend, stock split, recapitalization
        or
        similar event.
 
 The
        Stock
        Option Plans are administered by the Compensation Committee of the Board
        of
        Directors The Committee consists of two or more nonemployee directors of
        ITLA
        Capital, and, other than formula awards under the Director Option Plan described
        below, has full and final authority to select the employees and directors
        to
        receive awards and to grant such awards. Subject to provisions of the Stock
        Option Plans, the Committee has a wide degree of flexibility in determining
        the
        terms and conditions of awards and the number of shares to be issued pursuant
        thereto. The expenses of administering the Stock Option Plans are borne by
        us.


The
      ESIP
      authorizes the Committee to enter into any type of arrangement with an eligible
      employee that, by its terms, involves or might involve the issuance of Common
      Stock or any other security or benefit with a value derived from the value
      of
      Common Stock. Awards to employees are not restricted to any specified form
      or
      structure and may include but are not limited to stock options, stock
      appreciation rights, restricted stock, restricted stock units, performance
      shares and performance units.  Under
      the
      Director Option Plan, each
      person who was a non-employee director on the original effective date of the
      plan (October 18, 1995) automatically received as of that date, and each person
      who became or becomes a non-employee director after the original effective
      date
      of the plan automatically received or will receive, as of the date such person
      became or becomes a non-employee director, non-qualified stock options to
      acquire 5,000 shares of common stock, subject to adjustment as described above
      (referred to as the “initial award”). On the first, second, third, fourth and
      fifth anniversaries of the initial award, each non-employee director
      automatically received or will receive non-qualified stock options to acquire
      1,000 shares of common stock, subject to adjustment as described above (referred
      to as the “anniversary awards”). In addition to the anniversary awards, each
      non-employee director is eligible to receive grants of non-qualified stock
      options from time to time in the sole discretion of the committee.





Awards
      may not be granted under the Stock Option Plans after July 27, 2015, the tenth
      anniversary of the shareholder approvals of the amendments and restatements
      of
      the Stock Option Plans. As of December 31, 2005, we have granted an aggregate
      of
      1,890,500 options under the Stock Option Plans, of which 447,500 have been
      granted to Mr. Haligowski, 127,500, 100,000, 47,500, and 30,000 have been
      granted to Messrs. Bruce, Doyle, Lodwick, and Kunac, respectively, 60,500 have
      been granted to non-employee directors, and 1,077,500 have been granted to
      other
      employees, of which 858,998 have been exercised and 400,684 have been forfeited.
      The exercise price per share of the options granted range from $10.00 to $58.00
      per share.





*Recognition
      and Retention Plan* .
      We have
      adopted the Recognition and Retention Plan (“RRP”), the purpose of which is to
      promote our long-term interests and our shareholders by providing a means for
      attracting and retaining officers and employees of ITLA Capital and its
      affiliates. Under the RRP, awards of restricted shares of our common stock
      may
      be made to employees as additional long-term incentive compensation. Every
      one
      of our employees is eligible to be considered for the grant of awards under
      the
      RRP. The maximum number of shares of common stock which may be issued pursuant
      to the RRP is 300,000 shares over the ten year life of the plan. No RRP shares
      may be granted in any fiscal year in which the Bank fails to maintain an
“adequately capitalized” designation under the FDIC regulations and ITLA Capital
      fails to achieve a return on average assets of at least 50 basis points for
      the
      fiscal year. The RRP was approved by the shareholders and is administered by
      the
      Compensation Committee of the Board of Directors which has a wide degree of
      flexibility, within the provisions of the RRP, in determining the terms and
      conditions of awards and the number of shares to be issued pursuant thereto.
      The
      RRP shares granted to date have been allocated through the Supplemental
      Executive Retirement Plan as discussed above.





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          of Contents**


**Directors
        Compensation**
 
 *Directors
        Fees* .
        During
        2005, each non-employee director was paid a monthly fee of $2,250 for serving
        on
        our Board of Directors and $1,000 for each Board or Committee meeting attended
        for service on such committee. In addition, Director Reed received an honorarium
        of $5,000 for his active assistance in legislative matters during 2005, Director
        Lipscomb received an honorarium of $5,000 for his active assistance with
        compensation matters, and Director Oribe received an honorarium of $15,000
        for
        his extensive work with the Executive Committee. In 2005, Director Martin
        received an annual retainer fee of $15,000 for his service as Chairman of
        the
        Audit Committee.
 
 *Voluntary
        Retainer Stock and Deferred Compensation Plan* .
        In
        1996, we adopted the Voluntary Retainer Stock and Deferred Compensation Plan
        for
        Outside Directors (the “Outside Director Plan”). The Outside Director Plan
        provides for the deferral of compensation earned by non-employee directors
        in
        the form of Stock Units (“Stock Units”) in a Stock Unit account (“Stock Unit
        Account”). Directors may elect to have up to 100% of their fees converted into
        stock units.
 
 For
        dividends paid with respect to our common stock, each non-employee director
        has
        credited to his Stock Unit Account an additional number of Stock Units in
        an
        amount determined under the Outside Director Plan. Each non-employee director’s
        Stock Unit Account will be settled by delivering to the non-employee director
        (or his beneficiary) the number of shares of our common stock equal to the
        number of whole Stock Units then credited to the non-employee director’s Stock
        Unit Account, in either (i) a lump sum or (ii) substantially equal annual
        installments over a period not to exceed ten years.
 
 To
        date,
        no amounts have been deferred under the Outside Director Plan.
 
 *Stock
        Options* .
        Directors are also eligible to receive stock option grants as described above,
        under “Benefits-Stock Plans.” On October 31, 2005, Director Martin was granted
        an option to purchase 1,000 shares of common stock with an exercise price
        of
        $49.77 per share. The option is scheduled to vest in full on October 31,
        2006
        and expire on October 30, 2015. On November 10, 2005, Directors Martin,
        Lipscomb, Mayuga, Oribe and Reed were each granted an option to purchase
        1,000
        shares of common stock with an exercise price of $52.14. These options are
        scheduled to vest in full on November 10, 2006, and expire on November 10,
        2015.
        On December 19, 2005, Directors Martin, Lipscomb, Mayuga, Oribe and Reed
        were
        each granted an option to purchase 1,500 shares of common stock with an exercise
        price of $48.46. These options are scheduled to vest in full on December
        19,
        2006, and expire on December 19, 2015. For information regarding options
        granted
        to Directors Haligowski and Bruce, see “Option Grants for
        2005.”


**Compensation
      Committee Interlocks and Insider Participation**





During
      2005, the Compensation Committee was comprised of Directors Lipscomb and
      Oribe.





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





At
      March
      7, 2006, we had 5,583,295 shares of common stock outstanding.





The
      following table sets forth, as of March 7, 2006, certain information as to
      those
      persons who were known by management to be beneficial owners of more than five
      percent of our common stock outstanding.


**Beneficial
                  Owner**
              
              **Shares
                  Beneficially Owned**
              
              **Percent
                  of Class**Neuberger
                  Berman Inc.
                605
                  Third Avenue
                New
                  York, NY 10158
              
              
              491,646
              (1)
              
              8.81
              %Dimensional
                  Fund Advisors Inc.
                1299
                  Ocean Avenue, 11th Floor
                Santa
                  Monica, CA 90401
              
              
              479,486
              (2)
              
              8.59
              %Barclays
                  Global Advisors, NA, et. al
                45
                  Fremont Street
                San
                  Francisco, CA 94105
              
              
              468,163
              (3)
              
              8.39
              %Wellington
                  Management Company, LLP
                75
                  State Street
                Boston,
                  MA 02109
              
              
              397,130
              (4)
              
              7.11
              %George
                  W. Haligowski
                888
                  Prospect Street, Suite 110
                La
                  Jolla, CA 92037
              
              
              353,376
              (5)
              
              6.15
              %Granite
                  Capital, L.P, et. al
                126
                  East 56thStreet, 25thFloor
                New
                  York, NY 10022
              
              
              319,100
              (6)
              
              5.72
              %Thomson
                  Horstmann & Bryant, Inc.
                Park
                  80 West, Plaza One
                Saddle
                  Brook, NJ 07663
              
              
              317,705
              (7)
              
              5.69
              %Friedman,
                  Billings, Ramsey Group, Inc.
                1001
                  19th Street North
                Arlington,
                  VA 22209
              
              
              305,268
              (8)
              
              5.47
              %Eubel
                  Brady & Suttman Asset Management, Inc, et. al
                7777
                  Washington Village Drive, Suite 210
                Dayton,
                  OH 45459
              
              
              292,916
              (9)
              
              5.25
              %





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*(1)*
            *As
                reported by Neuberger Berman Inc. (“Neuberger Berman”) on a Schedule 13G
                filed on February 14, 2006 with the Securities and Exchange Commission
                under the Securities Exchange Act of 1934, as amended. Neuberger
                Berman
                reported sole voting power as to 82,559 shares, sole dispositive
                power as
                to none of the 491,646 shares, shared voting power as to 141,290
                shares,
                and shared dispositive power as to all of the 491,646 shares covered
                in
                the report.*




*(2)*
              *As
                  reported by Dimensional Fund Advisors ("Dimensional") on a Schedule
                  13G
                  amendment filed on February 6, 2006 with the Securities and Exchange
                  Commission under the Securities Exchange Act of 1934, as amended.
                  Dimensional reported sole voting and dispositive powers as to all
                  of the
                  479,486 shares, and shared voting and dispositive powers as to
                  none of the
                  479,486 shares covered by the
                  report.*





*(3)*
            *As
                reported by Barclays Global Investors, NA., Barclays Global Fund
                Advisors,
                Barclays Global Investors, Ltd., and Barclays Global Investors Japan
                Trust
                and Banking Company Limited on a Schedule 13G amendment filed on
                January
                26, 2006 with the Securities and Exchange Commission under the Securities
                Exchange Act of 1934, as amended. With respect to the 468,163 shares
                listed, Barclays Global Investors, NA., reported sole voting power
                as to
                359,857 shares, sole dispositive power as to 401,300 shares and shared
                voting and dispositive powers as to none of such shares, and Barclays
                Global Fund Advisors reported sole voting power as to 65,384 shares,
                sole
                dispositive power as to 66,863 shares and shared voting and dispositive
                powers as to none of such
                shares.*





*(4)*
            *As
                reported by Wellington Management Company, LLP ("WMC") on a Schedule
                13G
                amendment filed on February 14, 2006 with the Securities and Exchange
                Commission under the Securities Exchange Act of 1934, as amended.
                WMC
                reported sole voting and dispositive powers as to none of the 397,130
                shares, shared voting power as to 225,200 shares, and shared dispositive
                power as to all of the 397,130 shares covered by the
                report.*





*(5)*
            *Includes
                162,500 shares underlying stock options which were exercisable as
                of March
                7, 2006, 162,006 shares held in Mr. Haligowski’s SERP account in the rabbi
                trust established by the Company and 28,870 held in Mr. Haligowski’s
                deferred compensation plan account in the rabbi
                trust.*





*(6)*
            *As
                reported by Granite Capital, L.P. ("Granite"), Granite Capital II,
                L.P.
                (“Granite II”), Granum Value Fund (“Granum Value”), Granite Capital L.L.C.
                (“Granite L.L.C.”), Granum Capital Management, L.L.C. (“Granum
                Management”), Lewis M. Eisenberg and Walter F. Harrison, III on a Schedule
                13G amendment filed on February 14, 2006 with the Securities and
                Exchange
                Commission under the Securities Exchange Act of 1934, as amended.
                With
                respect to the 319,100 shares listed, Granite reported sole voting
                and
                dispositive powers as to none of such shares, and shared voting and
                dispositive powers as to 266,754 of such shares, Granite II reported
                sole
                voting and dispositive powers as to none of such shares and shared
                voting
                and dispositive powers as to 17,446 of such shares, Granum Value
                reported
                sole voting and dispositive powers as to none of such shares, and
                shared
                voting and dispositive powers as to 29,400 of such shares, Granite
                L.L.C.
                reported sole voting and dispositive powers as to none of such shares
                and
                shared voting and dispositive powers as to 289,700 of such shares,
                Granum
                Capital Management reported sole voting and dispositive powers as
                to none
                of such shares and shared voting and dispositive powers as to 29,400
                of
                such shares, and each of Messrs. Eisenberg and Harrison, as managing
                members of Granite L.L.C. and Granum Management, reported sole voting
                and
                dispositive powers as to none of such shares and shared voting and
                dispositive powers as to all 319,100 of such
                shares.*




*(7)*
            *As
                reported by Thomson Horstmann & Bryant, Inc. ("Thomson") on a Schedule
                13G amendment filed on January 9, 2006 with the Securities and Exchange
                Commission under the Securities Exchange Act of 1934, as amended.
                Thomson
                reported sole voting power as to 158,405 shares, sole dispositive
                power as
                to all of the 317,705 shares, and shared voting and dispositive power
                as
                to none of the 317,705 shares covered by the
                report.*





*(8)*
            *As
                reported by Friedman, Billings, Ramsey Group, Inc. ("FBR") on a Schedule
                13G amendment filed on February 15, 2006 with the Securities and
                Exchange
                Commission under the Securities Exchange Act of 1934, as amended.
                FBR
                reported sole voting and dispositive powers as to none of the 305,268
                shares, and shared voting and dispositive powers as to all of the
                305,268
                shares covered by the report.*





*(9)*
            *As
                reported by Eubel Brady and Suttman Asset Management, Inc. ("EBS"),
                Ronald
                L. Eubel, Mark E. Brady, Robert J. Suttman, William E. Hazel, Bernard
                J.
                Holtgreive on a Schedule 13G amendment filed on February 14, 2006
                with the
                Securities and Exchange Commission under the Securities Exchange
                Act of
                1934, as amended. EBS reported sole voting and dispositive powers
                as to
                none of the 292,916 shares, and shared voting and dispositive powers
                as to
                292,876 of the shares covered by the report. According to the Schedule
                13G
                amendment, Messrs. Eubel, Brady, Suttman, Hazel and Holtgreive may,
                as a
                result of their ownership in and positions with EBS and other affiliated
                entities, be deemed to be indirect beneficial owners of the 292,916
                shares
                held by EBS and one affiliated entity, EBS Partners,
                LP.*







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The
      following table sets forth, as of March 7, 2006, certain information as to
      the
      shares of common stock beneficially owned by the directors and named executive
      officers and by all directors and executive officers of ITLA Capital as a
      group.





**Beneficial
                Owner**
            
            **Shares****Beneficially****Owned**
              ***(1)(2)(3)***
            
            **Percent
                of**
              **Class**George
                W. Haligowski
            
            
            353,376
            
            
            6.15
            %Timothy
                M. Doyle
            
            
            106,360
            
            
            1.88Norval
                L. Bruce
            
            
            60,786
            
            
            1.08Lyle
                C. Lodwick
            
            
            50,750
            
            
            0.90Maria
                P. Kunac
            
            
            33,750
            
            
            0.60Don
                Nickbarg
            
            
            —
            
            
            —Sandor
                X. Mayuga
            
            
            10,800
            
            
            0.19Preston
                Martin
            
            
            7,666
            
            
            0.14Robert
                R. Reed
            
            
            7,000
            
            
            0.13Jeffrey
                L. Lipscomb
            
            
            5,600
            
            
            0.10Hirotaka
                Oribe
            
            
            5,200
            
            
            0.09All
                Directors and Executive Officers as a Group (11 Persons)
            
            
            641,288
            
            
            10.78


____________




*(1)*
                *Includes
                    shares held directly, as well as shares held in retirement accounts
                    or by
                    certain members of the named individual's families or corporations
                    for
                    which an individual is an officer or director or held by trust
                    of which an
                    individual is trustee or a substantial beneficiary, over which
                    shares the
                    individual may be deemed to have sole or shared voting and/or
                    dispositive
                    power.*
 
 *(2)*
                *Includes
                    shares underlying exercisable options and options exercisable
                    within 60
                    days of March 7, 2006 as follows: Chairman Haligowski - 162,500
                    shares;
                    Director Lipscomb - 5,000 shares; Director Mayuga - 5,000 shares;
                    Director
                    Oribe - 5,000 shares; Director Reed - 5,000 shares; Director
                    Martin -
                    7,000 shares; Norval L. Bruce - 23,000 shares; Timothy M. Doyle
                    - 75,000
                    shares; Lyle C. Lodwick - 47,500 shares; Maria P. Kunac - 30,000
                    shares;
                    Don Nickbarg - 0 shares; and all directors and executive officers
                    as a
                    group - 365,000 shares.*
 
 *(3)*
                *Includes
                    vested SERP account shares held in the rabbi trust established
                    by the
                    Company, as follows: Chairman Haligowski -162,006 shares; Norval
                    L. Bruce
                    - 37,586 shares; Timothy M. Doyle - 31,360 shares; Lyle C. Lodwick
                    - 3,250
                    shares; Maria P. Kunac - 3,750 shares; and all directors and
                    executive
                    officers as a group - 237,952. Also includes 28,870 shares held
                    for Mr.
                    Haligowski in his deferred compensation plan account in the rabbi
                    trust.*


The
      following table sets forth information as of December 31, 2005 with respect
      to
      compensation plans under which shares of our common stock may be
      issued:





**Equity
      Compensation Plan Information**





**Plan
                Category**
            
            **Number
                of Shares to****be
                issued upon****Exercise
                of****Outstanding****Options,
                Warrants****and
                Rights**
            
            **Weighted
                Average****Exercise
                Price of****Outstanding****Options,
                Warrants****and
                Rights**
            
            **Number
                of Shares****Remaining
                Available****for
                Future Issuance****Under
                Equity****Compensation
                Plans****(Excluding
                Shares****Reflected
                in the****First
                Column) (1)**Equity
                compensation plans approved by stockholders
            
            
            630,818
            
            $
            35.61
            
            
            266,684Equity
                compensation plans not approved by stockholders
            
            
            N/A
            
            
            N/A
            
            
            N/ATotal
            
            
            630,818
            
            $
            35.61
            
            
            266,684


____________





*(1)*
            *This
                amount includes 125,000 shares issuable under our 1996 Voluntary
                Retainer
                Stock and Deferred Compensation Plan for Outside Directors, described
                under “Item 11. Executive Compensation — Directors Compensation.” Under
                the Company’s 2005 Re-Designated, Amended and Restated Employee Stock
                Incentive Plan, up to 66,092 of the 132,184 shares remaining available
                for
                issuance under that plan as of December 31, 2005 could be issued
                to plan
                participants pursuant to awards of restricted stock, restricted stock
                units, performance shares and/or performance
                units.*


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          of Contents**





**Item
      13. Certain Relationshipsand Related
      Transactions**





During
      the year, we also utilized the services of Keesal, Young & Logan. Director
      Mayuga is a partner in that law firm. During 2005, this law firm received $2,000
      in legal fees from ITLA Capital and the Bank.





**Item
      14. Principal AccountantFees and
      Services**





During
      the fiscal years ended December 31, 2005 and 2004, Ernst & Young LLP
      provided various audit, audit related and non-audit services to the Company.
      Set
      forth below are the aggregate fees billed for these services:





(a)
                Audit
                    Fees: Aggregate fees billed for professional services rendered
                    for the
                    audits of the Company’s annual financial statements and internal controls
                    over financial reporting, and reviews of financial statements
                    included in
                    the Company’s Quarterly Reports on Form 10-Q for those fiscal years:
                    $306,000 - 2005; $277,000 -
                    2004.





(b)
                Audit
                    Related Fees: Aggregate fees billed for professional services
                    rendered
                    related to audits of employee benefit plans, consultation related
                    to the
                    implementation of the Sarbanes-Oxley Act, and consultation on
                    accounting
                    matters: $34,000 - 2005; $57,000 -
                    2004.





(c)
              Tax
                  Fees: Aggregate fees billed for professional services rendered
                  related to
                  tax compliance, tax advice and tax return preparation: $165,000-
                  2005;
                  $153,000 - 2004.





(d)
              All
                  other fees: None - 2005; None -
                  2004.





The
      audit
      committee preapproves all audit and permissible non-audit services to be
      provided by Ernst & Young LLP and the estimated fees for these services.
      None of the services provided by Ernst & Young LLP described in items (a) -
      (c) above was approved by the audit committee pursuant to a waiver of the
      pre-approved requirements of the SEC’s rules and regulations.





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          of Contents**


**PART
      IV**





**Item
      15. Exhibits andFinancial Statement Schedules**





**(a)(1)
      Financial Statements:**





Our
      consolidated financial statements, and Report of Independent Registered Public
      Accountants thereon, are included in this Form 10-K at the pages listed
      below:





**Page**Management’s
                Report on Internal Control Over Financial
                Reporting
            42Reports
                of Independent Registered Public Accounting
                Firm
            43Consolidated
                Balance Sheets as of December 31, 2005 and
                2004
            45Consolidated
                Statements of Income for the Years Ended
                December 31, 2005, 2004 and 2003
            46Consolidated
                Statements of Changes in Shareholders’ Equity
                and Comprehensive Income for the Years Ended December 31, 2005, 2004
                and
                2003
            47Consolidated
                Statements of Cash Flows for the Years Ended
                December 31, 2005, 2004 and 2003
            48Notes
                to Consolidated Financial Statements
            49





**(a)(2)
      Financial Statement Schedules:**





All
      financial statement schedules have been omitted as the required information
      is
      inapplicable or has been included in the Notes to Consolidated Financial
      Statements.





**(a)(3)
      Exhibits:**





See
      Exhibit Index.


-
          82
          -
 **Table
          of Contents**


**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 by the undersigned, thereunto duly authorized.**





**ITLA
                  CAPITAL CORPORATION**Date:
                  March 16, 2006
              By:/s/
                  George W. HaligowskiGeorge
                  W. HaligowskiChairman
                  of the Board, Presidentand
                  Chief Executive Officer*(Duly
                  Authorized
                  Representative)*


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




**Signature**
              
              **Title**
              **Date**/s/
                  George W. Haligowski
              
              Chairman
                  of the Board, President and
              March
                  16, 2006George
                  W. Haligowski
              
              Chief
                  Executive Officer*(Principal
                  Executive Officer)*/s/
                  Timothy M. Doyle
              
              Executive
                  Managing Director and
              March
                  16, 2006Timothy
                  M. Doyle
              
              Chief
                  Financial Officer*(Principal
                  Financial and Accounting Officer)*/s/
                  Norval L. Bruce
              
              Director
              March
                  16, 2006Norval
                  L. Bruce/s/
                  Jeffrey L. Lipscomb
              
              Director
              March
                  16, 2006Jeffrey
                  L. Lipscomb/s/
                  Sandor X. Mayuga
              
              Director
              March
                  16, 2006Sandor
                  X. Mayuga/s/
                  Robert R. Reed
              
              Director
              March
                  16, 2006Robert
                  R. Reed/s/
                  Hirotaka Oribe
              
              Director
              March
                  16, 2006Hirotaka
                  Oribe/s/
                  Preston Martin
              
              Director
              March
                  16, 2006Preston
                  Martin


-
          83
          -
 **Table
          of Contents**


**EXHIBIT
      INDEX**


**Regulation
                S-K Exhibit Number**
            
            **Document**
            
            **Reference
                to Prior Filling or Exhibit Number Attached
                Hereto**3.1
            
            Certificate
                of Incorporation
            
            **3.2
            
            Bylaws,
                as amended
            
            ****4
            
            Instruments
                Defining the Rights of Security Holders, Including
                Indentures
            
            **********10.1
            
            2005
                Re-Designated, Amended and Restated Stock Option Plan For Nonemployee
                Directors (“ESIP”)
            
            *********10.2
            
            2005
                Re-Designated, Amended and Restated Employee Stock Incentive Plan
                (“NEDP”)
            
            ******10.3a
            
            Nonqualified
                (Non-Employer Securities) Deferred Compensation Plan
            
            *********10.3b
            
            Nonqualified
                (Employer Securities Only) Deferred Compensation Plan
            
            *********10.4
            
            Supplemental
                Salary Savings Plan
            
            *10.5
            
            Data
                Processing Agreement
            
            *10.6
            
            Amended
                and Restated Employment Agreement with George W.
                Haligowski
            
            *********10.7
              10.8
              10.9
              10.10
            
            Change
                in Control Severance Agreement with Norval L. Bruce
              Change
                in Control Severance Agreement with Timothy M. Doyle
              Change
                in Control Severance Agreement with Lyle C. Lodwick
              Change
                in Control Severance Agreement with Maria P. Kunac
            
            *********
              *********
              *********
              *********10.11
            
            Recognition
                and Retention Plan
            
            **10.12
            
            Voluntary
                Retainer Stock and Deferred Compensation Plan for Outside
                Directors
            
            *****10.13
            
            Supplemental
                Executive Retirement Plan
            
            *********10.14
            
            ITLA
                Capital Corporation Rabbi Trust Agreement
            
            ***10.15
            
            Salary
                Continuation Plan
            
            *********10.16
            
            Form
                of Incentive Stock Option Agreement under ESIP
            
            *******10.17
              10.18
            
            Form
                of Non-Qualified Stock Option Agreement under the ESIP
              Form
                of Non-Qualified Stock Option Agreement under the NEDP
            
            *******
              ********10.19
            
            Description
                of Named Executive Officer Salary, Bonus and PerquisiteArrangements
                for 2006
            
            10.1910.20
            
            Description
                of Director Fee Arrangements
            
            10.2011
            
            Statement
                Regarding Computation of Per Share Earnings
            
            Not
                Required13
            
            Annual
                Report to Security Holders
            
            None18
            
            Letter
                Regarding Change in Accounting Principles
            
            None21
            
            Subsidiaries
                of the Registrant
            
            2122
            
            Published
                Report Regarding Matters Submitted to Vote of Security
                Holders
            
            None23.1
            
            Consent
                of Ernst & Young LLP
            
            23.124
            
            Power
                of Attorney
            
            None31.1
            
            Rule
                13a-14(a)/15d-14(a) Certification of Chief Executive
                Officer
            
            31.131.2
            
            Rule
                13a-14(a)/15d-14(a) Certification of Chief Financial
                Officer
            
            31.232
            
            Section
                1350 Certifications of Chief Executive Officer and Chief Financial
                Officer
            
            32




*
              Filed
                  as an exhibit to Imperial’s Registration Statement on Form S-1 (File No.
                  33-96518) filed with the Commission on September 1, 1995, pursuant
                  to
                  Section 5 of the Securities Act of 1933.*
                  *
              Filed
                  as an exhibit to the Company’s Registration Statement on Form S-4 (File
                  No. 333-03551) filed with the Commission on May 10, 1996, pursuant
                  to
                  Section 5 of the Securities Act of 1933.*
                  *
                  *
              Filed
                  as an exhibit to the Company’s Form 10-K for the year ended December 31,
                  1999 (File No. 0-26960).*
                  *
                  * *
              Filed
                  as an exhibit to the Company’s Form 10-Q for the quarter ended June 30,
                  2000 (File No. 0-26960).*
                  *
                  * * *
              Filed
                  as an exhibit to Amendment No. Two to the Company’s Registration Statement
                  on Form S-4 (File No. 333-03551) filed with the Commission on June
                  19,
                  1996.*
                  *
                  * * * *
              Filed
                  as an appendix to the Company’s definitive proxy materials filed on June
                  27, 2005.*
                  *
                  * * * * *
              Filed
                  as an exhibit to the Company’s Current Report on Form 8-K filed on August
                  9, 2005.*
                  *
                  * * * * * *
              Filed
                  as an exhibit to the Company’s Current Report on Form 8-K filed on
                  November 4, 2005.*
                  *
                  * * * * * * *
              Filed
                  as an exhibit to the Company’s Current Report on Form 8-K filed on
                  February 24, 2006.*
                  *
                  * * * * * * * *
              The
                  Company hereby agrees to furnish the SEC, upon request, copies
                  of the
                  instruments defining the rights of the holders of each issue of
                  the
                  Company's long-term
                  debt.