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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q (Mark One)R
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934For the Quarterly Period Ended March 31, 2005OR£
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934For the Transition Period from ___to ___Commission File Number 0-26960
  ITLA CAPITAL CORPORATION   Delaware
    
    95-4596322(State or Other Jurisdiction of Incorporation or Organization)
    
    (IRS Employer Identification No.)888 Prospect St., Suite 110, La Jolla, California
    
    92037(Address of Principal Executive Offices)
    
    (Zip Code)
 (858) 551-0511   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 R No £. Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes R No £. Number of shares of common stock of the registrant: 5,754,310 outstanding as of May 3, 2005.




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ITLA CAPITAL CORPORATION
FORM 10-Q
FOR THE THREE MONTHS ENDED MARCH 31, 2005 TABLE OF CONTENTS  
 PART I  FINANCIAL INFORMATIONItem 1.
    
    Financial Statements
    
    
    3Consolidated Balance Sheets  March 31, 2005 (Unaudited) and December 31, 2004
    
    
    3Consolidated Statements of Income  Three Months Ended March 31, 2005 and 2004 (Unaudited)
    
    
    4Consolidated Statements of Cash Flows  Three Months Ended March 31, 2005 and 2004 (Unaudited)
    
    
    5Notes to the Unaudited Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    24Item 4.
    
    Controls and Procedures
    
    
    24PART
II  OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    26Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    26Item 3.
    
    Defaults Upon Senior Securities
    
    
    26Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    26Item 5.
    
    Other Information
    
    
    26Item 6.
    
    Exhibits
    
    
    26Signatures
    
    
    27Certifications
    
    
    29EX-31.1EX-31.2EX-32


Forward Looking Statements

Safe Harbor statement under the Private Securities Litigation Reform Act of 1995: This Form
10-Q 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 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 nonperforming assets and
operating results, the economic impact of 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 2005 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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PART I  FINANCIAL INFORMATION 
 ITLA CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS March 31,2005
    
    
    December 31,(unaudited)
    
    
    2004(in thousands except share amounts)AssetsCash and cash equivalents
    
    $
    11,132
    
    
    $
    87,580Investment securities available for sale, at fair value
    
    
    78,809
    
    
    
    66,845Investment securities held to maturity, at amortized cost
    
    
    283,933
    
    
    
    296,028Stock in Federal Home Loan Bank
    
    
    26,962
    
    
    
    23,200Loans, net (net of allowance for loan losses of $35,917 and $35,483
as of March 31, 2005 and December 31, 2004, respectively)
    
    
    1,986,392
    
    
    
    1,793,815Interest receivable
    
    
    12,388
    
    
    
    10,695Other real estate owned, net
    
    
    
    
    
    
    Premises and equipment, net
    
    
    6,810
    
    
    
    6,645Deferred income taxes
    
    
    10,708
    
    
    
    10,468Goodwill
    
    
    3,118
    
    
    
    3,118Other assets
    
    
    16,721
    
    
    
    19,677Total assets
    
    $
    2,436,973
    
    
    $
    2,318,071Liabilities and Shareholders EquityLiabilities:Deposit accounts
    
    $
    1,465,816
    
    
    $
    1,432,032Federal Home Loan Bank advances and other borrowings
    
    
    665,456
    
    
    
    584,224Accounts payable and other liabilities
    
    
    25,080
    
    
    
    20,491Junior subordinated debentures
    
    
    86,600
    
    
    
    86,600Total liabilities
    
    
    2,242,952
    
    
    
    2,123,347Commitments
and contingencies
Shareholders equity:Shareholders equity:Preferred stock, 5,000,000 shares authorized, none issued
    
    
    
    
    
    
    Contributed capital  common stock, $.01 par value; 20,000,000
shares
authorized, 8,822,542 and 8,703,894 issued as of March
31, 2005 and 
December 31, 2004, respectively
    
    
    72,874
    
    
    
    69,327Retained earnings
    
    
    201,683
    
    
    
    196,032Accumulated other comprehensive (loss) income, net
    
    
    (293
    )
    
    
    78274,264
    
    
    
    265,437Less treasury stock, at cost 3,331,088 and 3,154,290 shares as of
March 31, 2005 and December 31, 2004, respectively
    
    
    (80,243
    )
    
    
    (70,713
    )Total shareholders equity
    
    
    194,021
    
    
    
    194,724Total liabilities and shareholders equity
    
    $
    2,436,973
    
    
    $
    2,318,071
 See accompanying notes to the unaudited consolidated financial statements. 3




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ITLA CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited) For the Three Months EndedMarch 31,(in thousands except per share amounts)2005
    
    
    2004Interest income:Loans, including fees
    
    $
    31,911
    
    
    $
    29,640Cash and investment securities
    
    
    4,841
    
    
    
    2,443Total interest income
    
    
    36,752
    
    
    
    32,083Interest expense:Deposit accounts
    
    
    9,498
    
    
    
    6,514Federal Home Loan Bank advances and other borrowings
    
    
    3,832
    
    
    
    1,081Collateralized mortgage obligations
    
    
    
    
    
    
    62Junior subordinated debentures
    
    
    1,680
    
    
    
    1,489Total interest expense
    
    
    15,010
    
    
    
    9,146Net interest income before provision for loan losses
    
    
    21,742
    
    
    
    22,937Provision for loan losses
    
    
    750
    
    
    
    1,400Net interest income after provision for loan losses
    
    
    20,992
    
    
    
    21,537Non-interest income:Premium on sale of loans, net
    
    
    
    
    
    
    9,024Late and collection fees
    
    
    73
    
    
    
    101Other
    
    
    (93
    )
    
    
    4,269Total non-interest income
    
    
    (20
    )
    
    
    13,394Non-interest expense:Compensation and benefits
    
    
    5,891
    
    
    
    6,156Occupancy and equipment
    
    
    1,651
    
    
    
    1,328Other
    
    
    3,688
    
    
    
    3,868Total general and administrative
    
    
    11,230
    
    
    
    11,352Real estate owned expense, net
    
    
    
    
    
    
    96Provision for losses on other real estate owned
    
    
    
    
    
    
    1,000Gain on sale of other real estate owned, net
    
    
    (11
    )
    
    
    (39
    )Total real estate owned expense, net
    
    
    (11
    )
    
    
    1,057Total non-interest expense
    
    
    11,219
    
    
    
    12,409Income before provision for income taxes
    
    
    9,753
    
    
    
    22,522Provision for income taxes
    
    
    4,102
    
    
    
    8,738NET INCOME
    
    $
    5,651
    
    
    $
    13,784BASIC EARNINGS PER SHARE
    
    $
    0.97
    
    
    $
    2.21DILUTED EARNINGS PER SHARE
    
    $
    0.93
    
    
    $
    2.07
 See accompanying notes to the unaudited consolidated financial statements. 4




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ITLA CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) For the Three Months EndedMarch 31,2005
    
    
    2004(in thousands)Cash Flows From Operating Activities:Net Income
    
    $
    5,651
    
    
    $
    13,784Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization of premises and equipment
    
    
    548
    
    
    
    477Amortization of premium on purchased loans
    
    
    440
    
    
    
    692Accretion of deferred loan origination fees, net of costs
    
    
    (745
    )
    
    
    (628
    )Provision for loan losses
    
    
    750
    
    
    
    1,400Premium on sale of RAL loans, net
    
    
    
    
    
    
    (9,024
    )Other, net
    
    
    1,834
    
    
    
    975(Increase) decrease in interest receivable
    
    
    (1,693
    )
    
    
    377Decrease (increase) in other assets
    
    
    2,956
    
    
    
    (3,298
    )Increase in accounts payable and other liabilities
    
    
    4,589
    
    
    
    106,150Net cash provided by operating activities
    
    
    14,330
    
    
    
    110,905Cash Flows From Investing Activities:Purchases of investment securities available for sale
    
    
    (12,886
    )
    
    
    Proceeds from maturity and calls of investment securities available for sale
    
    
    266
    
    
    
    3,633Proceeds from repayments of investment securities held to maturity
    
    
    12,088
    
    
    
    Purchase of stock in Federal Home Loan Bank
    
    
    (3,558
    )
    
    
    (138
    )Purchase of loans
    
    
    (192,125
    )
    
    
    Origination of RAL loans
    
    
    
    
    
    
    (12,800,573
    )Proceeds from participation in RAL loans
    
    
    
    
    
    
    12,797,195Increase in loans, net
    
    
    (967
    )
    
    
    (2,139
    )Proceeds from sale of other real estate owned
    
    
    81
    
    
    
    1,738Cash paid for capital expenditures
    
    
    (713
    )
    
    
    (538
    )Net cash used in investing activities
    
    
    (197,814
    )
    
    
    (822
    )Cash Flows From Financing Activities:Proceeds from exercise of employee stock options
    
    
    1,550
    
    
    
    1,004Cash paid to acquire treasury stock
    
    
    (9,530
    )
    
    
    (2,341
    )Principal payments on collateralized mortgage obligations
    
    
    
    
    
    
    (12,695
    )Net increase in deposit accounts
    
    
    33,784
    
    
    
    75,072Net decrease in short-term borrowings
    
    
    (54,000
    )
    
    
    (41,000
    )Proceeds from long-term borrowings
    
    
    136,332
    
    
    
    10,000Repayments
of long-term borrowings
    
    
    (1,100
    )
    
    
    (33,000
    )Net cash provided by (used in) financing activities
    
    
    107,036
    
    
    
    (2,960
    )Net (decrease) increase in cash and cash equivalents
    
    
    (76,448
    )
    
    
    107,123Cash and cash equivalents at beginning of period
    
    
    87,580
    
    
    
    178,318Cash and cash equivalents at end of period
    
    $
    11,132
    
    
    $
    285,441Supplemental Cash Flow Information:Cash paid during the period for interest
    
    $
    15,204
    
    
    $
    9,476Cash paid during the period for income taxes
    
    $
    1,332
    
    
    $
    Non-Cash Investing Transactions:Loans transferred to other real estate owned
    
    $
    70
    
    
    $
    912
 See accompanying notes to the unaudited consolidated financial statements. 5




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ITLA CAPITAL CORPORATION
AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1  BASIS OF PRESENTATION The unaudited consolidated financial statements of ITLA Capital Corporation (the Company)
included herein reflect all normal recurring adjustments which are, in the opinion of management,
necessary to present fairly the results of operations and financial position of the Company, as of
the dates and for the interim periods indicated. The unaudited consolidated financial statements
include the accounts of ITLA Capital Corporation and its wholly-owned subsidiaries, Imperial
Capital Bank (the Bank) and Imperial Capital Real Estate Investment Trust (Imperial Capital
REIT). All intercompany transactions and balances have been eliminated. Certain information and
disclosures normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States have been condensed or omitted pursuant to the
rules and regulations of the U.S. Securities and Exchange Commission. Certain amounts in prior
periods have been reclassified to conform to the presentation in the current period. The results
of operations for the three months ended March 31, 2005 are not necessarily indicative of the
results of operations for the remainder of the year. These unaudited consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in our annual report on Form 10-K for
the year ended December 31, 2004. NOTE 2  ACCOUNTING FOR 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 Statement of Financial Accounting
Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, 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: 6




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For the Three Months EndedMarch 31,2005
    
    
    2004(in thousands, except per share data)Net income, as reported
    
    $
    5,651
    
    
    $
    13,784Less: Stock-based employee
compensationexpense determined
under the fair valuemethod, net of
tax
    
    
    66
    
    
    
    337Pro forma net income
    
    $
    5,585
    
    
    $
    13,447Earnings per share:Basic  as reported
    
    $
    0.97
    
    
    $
    2.21Basic  pro forma
    
    $
    0.96
    
    
    $
    2.15Diluted  as reported
    
    $
    0.93
    
    
    $
    2.07Diluted  pro forma
    
    $
    0.91
    
    
    $
    2.02
 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 forOption Grants2005
    
    2004Dividend Yield
    
    
    0.00%
    
    
    
    0.00%Expected Volatility
    
    
    34.14%
    
    
    
    38.04%Risk-Free Interest Rates
    
    
    3.95%
    
    
    
    4.00%Expected Lives
    
    Seven Years
    
    Seven Years
 NOTE 3  EARNINGS PER SHARE Basic Earnings Per Share (Basic EPS) is computed by dividing net income by the
weighted-average number of common shares outstanding for the period. Diluted Earnings Per Share
(Diluted EPS) reflects the potential dilution that could occur if securities or other contracts
to issue common stock were exercised or converted into common stock or resulted in the issuance of
common stock which shared in the Companys earnings. 7




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The following is a reconciliation of the calculation of Basic EPS and Diluted EPS: Weighted-
    
    
    PerAverage Shares
    
    
    ShareNet Income
    
    
    Outstanding
    
    
    Amount(in thousands, except per share data)For the Three Months Ended March 31,
2005Basic EPS
    
    $
    5,651
    
    
    
    5,805
    
    
    $
    0.97Effect of dilutive stock options
    
    
    
    
    
    
    301
    
    
    
    (0.04
    )Diluted EPS
    
    $
    5,651
    
    
    
    6,106
    
    
    $
    0.932004Basic EPS
    
    $
    13,784
    
    
    
    6,240
    
    
    $
    2.21Effect of dilutive stock options
    
    
    
    
    
    
    432
    
    
    
    (0.14
    )Diluted EPS
    
    $
    13,784
    
    
    
    6,672
    
    
    $
    2.07
 NOTE 4  COMPREHENSIVE INCOME Comprehensive income, which encompasses net income and the net change in unrealized gains
(losses) on investment securities available for sale, is presented below: Three Months EndedMarch 31,2005
    
    
    2004(in thousands)Net Income
    
    $
    5,651
    
    
    $
    13,784Other comprehensive (loss) income:Change in unrealized (loss)
gain oninvestment securities
available for sale, net of tax
benefit (expense) of $244 and
($75),respectively
    
    
    (371
    )
    
    
    117Comprehensive income
    
    $
    5,280
    
    
    $
    13,901
 NOTE 5  IMPAIRED LOANS RECEIVABLE As of March 31, 2005 and December 31, 2004, the recorded investment in impaired loans was
$17.8 million and $18.6 million, respectively. The average recorded investment in impaired loans
was $18.3 million and $15.6 million for the three months ended March 31, 2005 and 2004,
respectively. Interest income recognized on impaired loans totaled $94,000 and $97,000 for the
three months ended March 31, 2005 and 2004, respectively. 8




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NOTE 6  RESIDUAL INTEREST IN SECURITIZATION During the first quarter of 2002, the Company formed a limited liability company 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 such gain on sale, the Company recorded a residual interest,
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. 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
accumulated unrealized gain or loss in a separate component of shareholders equity entitled
accumulated other comprehensive income or loss, until realized. Fair value is estimated on a
monthly basis based on 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. At March 31, 2005 and December 31, 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: March 31,
    
    
    December 31,2005
    
    
    2004Dollars in thousandsFair value of retained interest
    
    $
    5,102
    
    
    $
    5,368Weighted average life (in years)  securities
    
    
    0.52
    
    
    
    0.68Weighted average life (in years)  residual interest
    
    
    2.81
    
    
    
    3.61Weighted average annual prepayment speed
    
    
    40.0
    %
    
    
    26.5
    %Impact of 10% adverse change
    
    $
    (211
    )
    
    $
    (236
    )Impact of 25% adverse change
    
    $
    (561
    )
    
    $
    (630
    )Weighted average annual discount rate
    
    
    15.0
    %
    
    
    15.0
    %Impact of 10% adverse change
    
    $
    (182
    )
    
    $
    (243
    )Impact of 25% adverse change
    
    $
    (444
    )
    
    $
    (630
    )Weighted average lifetime credit losses
    
    
    18.2
    %
    
    
    25.0
    %Impact of 10% adverse change
    
    $
    (155
    )
    
    $
    (262
    )Impact of 25% adverse change
    
    $
    (392
    )
    
    $
    (700
    )
 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), 9




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which might magnify or counteract the sensitivities, and depending on the
severity of such changes, the results of operations may be materially affected. NOTE 7  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 No. 25, and amends SFAS No. 95, Statement of Cash Flows. 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 all share-based payments to employees, including
grants of employee stock options, to be recognized in the financial statements based on their fair
values (i.e., pro forma disclosure is no longer an alternative to financial statement recognition).
SFAS No. 123(R); was to be effective for public companies at the beginning of the first interim or
annual period beginning after June 15, 2005; however, the required implementation date for the
Company was recently delayed until January 1, 2006. The Company will transition to fair value
based accounting for stock-based compensation 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 during the period of and/or the 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. Management is currently evaluating the effect of the adoption of SFAS No. 123(R); and
cannot currently quantify the impact, if any, on the Companys results of operations or financial
position. 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 of this standard. Emerging Issues Task Force (EITF) Issue 03-1, The Meaning of Other-Than-Temporary Impairment
and Its Application to Certain Investments provides guidance for determining when an investment is
considered impaired, whether impairment is other-than-temporary, and measurement of an impairment
loss. An investment is considered impaired if the fair value of the investment is less than its
cost. Generally, an impairment is considered other-than-temporary unless: (i) the investor has the
ability and intent to hold an investment for a reasonable period of time sufficient for an
anticipated recovery of fair value up to (or beyond) the cost of the investment; and (ii) evidence
indicating that the cost of the investment is recoverable within a reasonable period of time
outweighs evidence to the contrary. If impairment is determined to be other-than-temporary, then
an impairment loss should be recognized equal to the difference between the investments cost and
its fair value. Certain disclosure requirements of EITF 03-1 were adopted in 2003 and the Company
began presenting the new disclosure requirements in its consolidated financial statements for the
year ended December 31, 2003. The recognition and measurement provisions were initially effective
for other-than-temporary impairment evaluations in reporting periods beginning after June 15, 2004;
however, in September 2004, the effective 10




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date of these provisions was delayed until the
finalization of a FASB Staff Position to provide additional implementation guidance. 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 did not have a material impact on the Companys
financial statements. NOTE 8  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 origination and purchase of loans, 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. Substantially all of the transactions from the Companys operating
segments occur in the United States. 11




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##### Table of Contents



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 our consolidated
balance sheets and statements of income. Accounting allocations are made in the same manner for all
operating segments. LendingOperations
    
    
    All Other
    
    
    Eliminations
    
    Consolidated(in thousands)For the three months ended March 31,
2005Revenues from external customers
    
    $
    36,167
    
    
    $
    565
    
    
    $
    
    
    
    $
    36,732Total interest income
    
    
    35,741
    
    
    
    1,011
    
    
    
    
    
    
    
    36,752Total interest expense
    
    
    13,330
    
    
    
    1,680
    
    
    
    
    
    
    
    15,010Net income
    
    $
    6,831
    
    
    $
    (1,180
    )
    
    $
    
    
    
    $
    5,6512004Revenues from external customers
    
    $
    45,411
    
    
    $
    66
    
    
    $
    
    
    
    $
    45,477Total interest income
    
    
    31,966
    
    
    
    314
    
    
    
    (197
    )
    
    
    32,083Total interest expense
    
    
    7,681
    
    
    
    1,662
    
    
    
    (197
    )
    
    
    9,146Net income
    
    $
    15,662
    
    
    $
    (1,878
    )
    
    $
    
    
    
    $
    13,784
 12




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis is intended to identify the major factors that
affected our financial condition and results of operations for the three months ended March 31,
2005. 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 (GAAP) and to general practices
within the financial services industry. The preparation of financial statements in conformity with
GAAP 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 due to the continuously evolving
standards, changes to which could materially impact the way we account for stock options.
Additionally, 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. For additional information regarding critical accounting policies, refer to Note 1 
Organization and Summary of Significant Accounting Policies in the Notes to Consolidated Financial
Statements and the sections captioned Application of Critical Accounting Policies and Accounting
Estimates and Allowance for Possible Loan Losses and Nonperforming Assets in Managements
Discussion and Analysis of Financial Condition and Results of Operations included in the Companys
Form 10-K for the year ended December 31, 2004. There have been no significant changes in the
Companys application of accounting policies since December 31, 2004. 13




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##### Table of Contents



RESULTS OF OPERATIONS Three Months Ended March 31, 2005 Compared to Three Months Ended March 31, 2004 Executive Summary Consolidated net income was $5.7 million and $13.8 million for the quarter ended March 31,
2005 and 2004, respectively. Diluted EPS was $0.93 for the three months ended March 31, 2005
compared to $2.07 for the same period last year. This decrease was primarily caused by a decline
in interest and fee income earned in connection with the Banks refund anticipation loan (RAL)
program, which terminated during 2004. Net interest income before provision for loan losses decreased to $21.7 million for the
quarter ended March 31, 2005 compared to $22.9 million for the same period last year. This
decrease was primarily caused by the absence of interest income earned in connection with the
Banks RAL program. This decrease was partially offset by an increase in our interest income
earned due to an increase 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 the same period
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 total interest income was partially offset by 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. In addition, net interest income was further
impacted by the increase in interest expense due to an increase in the average balance of
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 return on average assets was 1.02% for the three months ended March 31, 2005, compared to
2.11% for the same period last year. The return on average shareholders equity was 11.69% for the
three months ended March 31, 2005, compared 28.17% for the same period last year. The decrease in
both of these ratios was primarily attributable to the absence of RAL related income during the
first quarter of 2005. Loan production was $318.4 million for the quarter ended March 31, 2005, compared to $155.1
million for the same period last year. During the current quarter, the Bank originated $41.2
million of commercial real estate loans, $69.3 million of small balance multi-family real estate
loans, $15.4 million of film finance loans, $0.4 million of franchise loans, and its wholesale loan
operations completed the acquisition of a $192.1 million small balance multi-family loan portfolio.
We expect the Banks franchise loan production to decline in 2005 as it focuses on its commercial
real estate and small balance multi-family real estate loan production. Loan production for the
same period last year consisted of the origination of $80.1 million of commercial real estate
loans, $38.2 million of small balance multi-family real estate loans, $20.4 million of film finance
loans and $16.4 million of franchise loans. 14




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##### Table of Contents



Net Interest Income and Margin The following table presents for the three months ended March 31, 2005 and 2004, 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. For the Three Months Ended March 31,2005
    
    2004Average
    
    
    
    Income/
    
    Yield/
    
    Average
    
    
    Income/
    
    
    Yield/Balance
    
    
    Expense
    
    
    Rate
    
    Balance
    
    
    Expense
    
    
    Rate(dollars in thousands)AssetsCash and investment securities
    
    $
    417,975
    
    
    $
    4,841
    
    
    
    4.70
    %
    
    $
    909,613
    
    
    $
    2,443
    
    
    
    1.08
    %Loans receivable:Loans
    
    
    1,790,594
    
    
    
    31,468
    
    
    
    7.13
    %
    
    
    1,477,207
    
    
    
    28,914
    
    
    
    7.87
    %Real estate loans held at REIT
    
    
    32,873
    
    
    
    443
    
    
    
    5.47
    %
    
    
    62,168
    
    
    
    726
    
    
    
    4.70
    %Total loans receivable
    
    
    1,823,467
    
    
    
    31,911
    
    
    
    7.10
    %
    
    
    1,539,375
    
    
    
    29,640
    
    
    
    7.74
    %Total interest earning assets
    
    
    2,241,442
    
    
    $
    36,752
    
    
    
    6.65
    %
    
    
    2,448,988
    
    
    $
    32,083
    
    
    
    5.27
    %Non-interest earning assets
    
    
    48,070
    
    
    
    
    
    
    
    
    
    
    
    217,822Allowance for loan losses
    
    
    (35,885
    )
    
    
    
    
    
    
    
    
    
    
    (34,165
    )Total assets
    
    $
    2,253,627
    
    
    
    
    
    
    
    
    
    
    $
    2,632,645Liabilities
and
Shareholders EquityInterest bearing deposit accounts:Interest bearing demand
    
    $
    68,860
    
    
    $
    361
    
    
    
    2.13
    %
    
    $
    55,389
    
    
    $
    247
    
    
    
    1.79
    %Money Market and passbook
    
    
    164,218
    
    
    
    986
    
    
    
    2.44
    %
    
    
    145,462
    
    
    
    598
    
    
    
    1.65
    %Time certificates
    
    
    1,196,498
    
    
    
    8,151
    
    
    
    2.76
    %
    
    
    980,761
    
    
    
    5,669
    
    
    
    2.32
    %Total interest bearing deposit
accounts
    
    
    1,429,576
    
    
    
    9,498
    
    
    
    2.69
    %
    
    
    1,181,612
    
    
    
    6,514
    
    
    
    2.22
    %Collateralized mortgage obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,662
    
    
    
    62
    
    
    
    2.58
    %FHLB advances and other borrowings
    
    
    498,535
    
    
    
    3,832
    
    
    
    3.12
    %
    
    
    147,679
    
    
    
    1,081
    
    
    
    2.94
    %Junior subordinated debentures
    
    
    86,600
    
    
    
    1,680
    
    
    
    7.87
    %
    
    
    86,600
    
    
    
    1,489
    
    
    
    6.92
    %Total interest bearing liabilities
    
    
    2,014,711
    
    
    $
    15,010
    
    
    
    3.02
    %
    
    
    1,425,553
    
    
    $
    9,146
    
    
    
    2.58
    %Non-interest bearing demand accounts
    
    
    17,126
    
    
    
    
    
    
    
    
    
    
    
    10,317Other non-interest bearing liabilities
    
    
    25,813
    
    
    
    
    
    
    
    
    
    
    
    999,992Shareholders equity
    
    
    195,977
    
    
    
    
    
    
    
    
    
    
    
    196,783Total liabilities and
shareholders equity
    
    $
    2,253,627
    
    
    
    
    
    
    
    
    
    
    $
    2,632,645Net interest spread (1)
    
    
    
    
    
    
    
    
    
    
    3.63
    %
    
    
    
    
    
    
    
    
    
    
    2.69
    %Net interest income before provision
for loan losses
    
    
    
    
    
    $
    21,742
    
    
    
    
    
    
    
    
    
    
    $
    22,937Net interest margin (2)
    
    
    
    
    
    
    
    
    
    
    3.93
    %
    
    
    
    
    
    
    
    
    
    
    3.77
    %
  (1)
    Average yield on interest earning assets minus average rate paid on interest bearing
liabilities. (2)
    Net interest income divided by total average interest earning assets. 15




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##### Table of Contents



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 absolute
dollar amounts of each. For the Three Months
EndedMarch 31, 2005 and 2004
Increase (Decrease) Due to:Rate
    
    
    Volume
    
    
    Total(In thousands)Interest and fees earned from:Cash and investment securities
    
    $
    4,320
    
    
    $
    (1,922
    )
    
    $
    2,398Loans
    
    
    (1,571
    )
    
    
    3,842
    
    
    
    2,271Total
increase in interest income
    
    
    2,749
    
    
    
    1,920
    
    
    
    4,669Interest paid on:Deposit accounts
    
    
    1,499
    
    
    
    1,485
    
    
    
    2,984Collateralized mortgage obligations
    
    
    
    
    
    
    (62
    )
    
    
    (62
    )FHLB advances and other borrowings
    
    
    70
    
    
    
    2,681
    
    
    
    2,751Junior subordinated debentures
    
    
    191
    
    
    
    
    
    
    
    191Total increase in interest expense
    
    
    1,760
    
    
    
    4,104
    
    
    
    5,864Increase (decrease) in net interest income
    
    $
    989
    
    
    $
    (2,184
    )
    
    $
    (1,195
    )
 Total interest income increased $4.7 million to $36.8 million in the first quarter of
2005 as compared to $32.1 million for the same period last year. The increase in interest income
was primarily attributable to a 362 basis point increase in the average yield earned on cash and
investment securities and a $284.1 million increase in the average balance of total loans
receivable, partially offset by a 64 basis point decrease in the average yield earned on total
loans receivable and a $491.6 million decrease in the average balance of cash and investment
securities. The average balance of cash and investments decreased to $418.0 million in the first quarter
of 2005 compared to $909.6 million during the same period last year. The decrease in average cash
and investments was primarily due to a decrease in the average balance of low yielding short-term
and overnight investments, partially offset by an increase in the average balance of higher
yielding investment securities held-to-maturity as compared to the same period 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. As a result, the average yield earned on cash and investments increased to 4.70% during
the first quarter of 2005 as compared to 1.08% for the same period last year. The average balance of our loan portfolio was $1.8 billion and $1.5 billion for the three
months ended March 31, 2005 and 2004, respectively. Loans secured by income producing 16




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##### Table of Contents



properties
and construction loans had an average balance of $1.5 billion during the quarter ended March 31,
2005 compared to $1.2 billion during the same period last year. The average balance of franchise
loans was $137.6 million and $105.6 million during the quarters ended March 31, 2005 and 2004,
respectively. The average balance of film finance loans was $99.5 million and $97.6 million during
the quarters ended March 31, 2005 and 2004, respectively. The average yield earned on total loans decreased to 7.10% in the quarter ended March 31, 2005
as compared to 7.74% in the same period last year. The decline in our yield was primarily caused
by higher yielding loans being repaid and replaced by new loan production at lower current market
interest rates. Our loan portfolio is primarily comprised of adjustable rate mortgages indexed to
six month LIBOR. Approximately 98.2% of our loan portfolio was comprised of adjustable rate
mortgages at March 31, 2005. These adjustable rate mortgages generally reprice on a quarterly
basis. At March 31, 2005, approximately $1.8 billion or 88.6% of our loan portfolio contained
interest rate floors, below which the loans contractual interest rate may not adjust. At March 31,
2005, the weighted average floor interest rate of these loans was 6.2%. At that date,
approximately $799.7 million or 39.8% of those loans were at their floor interest rate. Total interest expense increased by $5.9 million to $15.0 million in the first quarter of
2005, compared to $9.1 million for the same period last year. The increase in interest expense was
primarily attributable to an increase of $589.2 million in the average balance of interest bearing
liabilities, which was caused by the increase in deposits and FHLB advances and other borrowings,
and a 44 basis point increase in the rate paid on interest bearing liabilities, which was primarily
caused by deposits repricing to higher current market interest rates. Our average cost of funds increased to 3.02% during the three months ended March 31, 2005,
compared to 2.58% for the same period last year. This increase in the average funding costs was
due primarily to deposits repricing to higher current market interest rates, and the increase in
FHLB advances and other borrowings. The average rate paid on deposit accounts was 2.69% during the
three months ended March 31, 2005 as compared to 2.22% for the same period last year. The average
balance of deposit accounts increased $248.0 million to $1.4 billion for the three months ended
March 31, 2005 as compared to $1.2 billion for the same period last year. The average rate paid on
FHLB advances and other borrowings was 3.12% during the three months ended March 31, 2005 compared
to 2.94% for the same period last year. FHLB advances and other borrowings averaged $498.5 million
in the current quarter, compared to $147.7 million for the same period last year. Net interest margin increased to 3.93% for the three months ended March 31, 2005 as compared
to 3.77% for the same period last year. The increase in net interest margin was primarily due to a
decrease in the average balance of lower yielding interest earning assets as a result of the termination of the
RAL program, and the related increase in yield earned on investment securities discussed above.
This increase was partially offset by an increase in the average balance of interest bearing
liabilities and an increase in average rate paid on deposit accounts. 17




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##### Table of Contents



Provision for Loan Losses Management periodically assesses the adequacy of the allowance for loan losses by reference to
certain quantitative and qualitative factors that may be weighted differently at various times
depending on prevailing conditions. These factors include, among other elements:  
    general portfolio trends relative to asset and portfolio size;  
    asset categories;  
    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. 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 March 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 18




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##### Table of Contents



additional reserves based upon their judgment of information available to them at the time of
their examination. The consolidated provision for loan losses totaled $750,000 for the current quarter of 2005,
compared to $1.4 million for the same period last year. The provision for loan losses was recorded
based on an analysis of the factors referred to above. The allowance for loan losses was 1.78% of
our total loan portfolio at March 31, 2005 as compared to 1.94% at December 31, 2004. During the
quarter ended March 31, 2005, we had net loan charge-offs of $316,000 as compared to net loan
recoveries of $84,000 during the same period last year. See also  Financial Condition  Credit
Risk. Non-Interest Income Non-interest income declined $13.4 million during the quarter ended March 31, 2005 as compared
to the same period last year. During the quarter ended March 31, 2004, non-interest income
consisted of $9.0 million of net premiums earned on the sale of RAL loans and $4.2 million of
income earned in connection with RAL processing and administrative fees. Because the origination
of loans under the RAL program resulted from the filing of individual income tax returns,
transaction activity was concentrated most heavily during the tax season. This resulted in the
Company earning most of its RAL program income in the first quarter of 2004. Non-Interest Expense Non-interest expense totaled $11.2 million for the three months ended March 31, 2005, compared
to $11.4 million for the same period last year, and reflects the investment in the
national expansion of our lending platform. The Bank has 18 loan production offices outside of the
state of California and a total of 26 loan production offices operating as of March 31, 2005. Our
efficiency ratio (defined as recurring general and administrative expenses as a percentage of net
revenue) increased to 51.7% for the quarter ended March 31, 2005, as compared to 31.2% for the same
period last year, due to the decline in net revenue as a result of the termination of the RAL
program. FINANCIAL CONDITION Total assets increased to $2.4 billion at March 31, 2005 as compared to $2.3 billion at
December 31, 2004. The increase in total assets was primarily due to a $192.6 million increase in
our loan portfolio, partially offset by a $76.4 million decrease in cash and cash equivalents. The
increase in the loan portfolio was primarily due to the acquisition of a $192.1 million small
balance multi-family loan portfolio and a decline in loan prepayment speeds experienced during the
current period. At March 31, 2005, loans, net totaled $2.0 billion, including approximately $1.8
billion of real estate loans, $137.7 million of franchise loans and $97.9 million of film finance
loans. Total deposit accounts increased to $1.5 billion at March 31, 2005 from $1.4 billion at
December 31, 2004. FHLB advances and other borrowings increased $81.2 million to $665.5 million at
March 31, 2005, compared to $584.2 million at December 31, 2004. This increase was primarily due
to additional borrowings utilized to fund the purchase of the small balance multi-family loan
portfolio during the quarter. Management believes that a significant 19




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##### Table of Contents



portion of deposits will remain with us upon maturity based on our historical experience
regarding retention of deposits. Residual Interest In 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.
These notes were rated AAA by Standard & Poors, Aaa by Moodys, and are insured by Financial
Security Assurance. In the securitization, residential loans were sold to the limited liability
company for a cash purchase price and an interest in the loans securitized in the form of the
excess spread. The cash purchase price was raised through an offering of asset-backed notes issued
by the limited liability company. Note holders are entitled to receive the principal collected on
the loans and the stated interest rate on the notes. We are entitled to receive the excess spread.
The excess spread generally represents, over the estimated life of the loans, the excess of the
weighted average coupon on the loans sold over the sum of the note interest rate less other
expenses including a trustee fee and an insurance fee. Valuation of the excess spread includes an
estimate of annual future credit losses related to the loans securitized. These estimated cash
flows are discounted when computing the value of the residual interest. We recognized a gain on the sale of these loans, although cash (representing the excess spread
and servicing fees) is received by us over the lives of the loans. Concurrent with recognizing such
gain on sale, we recorded the excess spread as a residual interest, which is included in our
consolidated balance sheets as 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, we classified our residual interest as an available-for-sale asset and, as
such, they are recorded at fair value with the resultant changes in fair value recorded as
accumulated unrealized gain or loss in a separate component of shareholders equity entitled
accumulated other comprehensive income or loss, until realized. We estimate fair value on a
monthly basis based on a discounted cash flow analysis. These cash flows are estimated over the
lives of the receivables using prepayment, default, and interest rate assumptions that we believe
market participants would use for similar financial instruments. 20




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##### Table of Contents



At March 31, 2005 and December 31, 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 is as follows: March 31,
    
    
    December 31,2005
    
    
    2004Dollars in thousandsFair value of retained interest
    
    $
    5,102
    
    
    $
    5,368Weighted average life (in years)  securities
    
    
    0.52
    
    
    
    0.68Weighted average life (in years)  residual interest
    
    
    2.81
    
    
    
    3.61Weighted average annual prepayment speed
    
    
    40.0
    %
    
    
    26.5
    %Impact of 10% adverse change
    
    $
    (211
    )
    
    $
    (236
    )Impact of 25% adverse change
    
    $
    (561
    )
    
    $
    (630
    )Weighted average annual discount rate
    
    
    15.0
    %
    
    
    15.0
    %Impact of 10% adverse change
    
    $
    (182
    )
    
    $
    (243
    )Impact of 25% adverse change
    
    $
    (444
    )
    
    $
    (630
    )Weighted average lifetime credit losses
    
    
    18.2
    %
    
    
    25.0
    %Impact of 10% adverse change
    
    $
    (155
    )
    
    $
    (262
    )Impact of 25% adverse change
    
    $
    (392
    )
    
    $
    (700
    )
 These sensitivities are hypothetical and should be used with caution. As the figures
indicate, changes in the fair value of our 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. 21




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##### Table of Contents



CREDIT RISK Nonperforming Assets, Other Loans of Concern and Allowance for Loan Losses The following table sets forth our nonperforming assets by category and troubled debt
restructurings as of the dates indicated. March 31,
    
    
    December 31,2005
    
    
    2004(dollars in thousands)Nonaccrual loans:Real estate
    
    $
    6,344
    
    
    $
    7,057Franchise
    
    
    3,825
    
    
    
    3,874Film finance
    
    
    3,633
    
    
    
    3,721Total nonaccrual loans
    
    
    13,802
    
    
    
    14,652Other real estate owned, net
    
    
    
    
    
    
    Total nonperforming assets
    
    
    13,802
    
    
    
    14,652Performing troubled debt restructurings
    
    
    9,775
    
    
    
    8,811$
    23,577
    
    
    $
    23,463Nonaccrual loans to total loans
    
    
    0.69
    %
    
    
    0.80
    %Allowance for loan losses to nonaccrual loans
    
    
    260.23
    %
    
    
    242.17
    %Nonperforming assets to total assets
    
    
    0.57
    %
    
    
    0.63
    %
 As of March 31, 2005 and December 31, 2004, other loans of concern totaled $43.6 million
and $37.1 million, respectively. Other loans of concern consist of loans with respect to which
known information concerning possible credit problems with the borrowers or the cash flows of the
collateral 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 nonaccrual category. The increase in other loans of concern for the three
months ended March 31, 2005 was primarily due to $8.3 million of new other loans of concern,
partially offset by $1.0 million of loan repayments, and $0.8 million of loans being upgraded. 22




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The following table provides certain information with respect to our allowance for loan
losses, including charge-offs, recoveries and selected ratios for the periods indicated. For the Three
    
    
    For the Year
    
    
    For the ThreeMonths Ended
    
    
    Ended
    
    
    Months EndedMarch 31,
    
    
    December 31,
    
    
    March 31,2005
    
    
    2004
    
    
    2004(dollars in thousands)Balance at beginning of period
    
    $
    35,483
    
    
    $
    33,401
    
    
    $
    33,401Provision for loan losses
    
    
    750
    
    
    
    4,725
    
    
    
    1,400Charge-offs
    
    
    (508
    )
    
    
    (3,490
    )
    
    
    Recoveries
    
    
    192
    
    
    
    847
    
    
    
    84Net (charge-offs) recoveries
    
    
    (316
    )
    
    
    (2,643
    )
    
    
    84Balance at end of period
    
    $
    35,917
    
    
    $
    35,483
    
    
    $
    34,885Allowance for loan losses as a percentage
of loans, net
    
    
    1.78
    %
    
    
    1.94
    %
    
    
    2.26
    %
 Liquidity Liquidity refers to our ability to maintain cash flows 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 liquidity requirements while preserving capital and maximizing yield.
As of March 31, 2005, we held $11.1 million of cash and cash equivalents (consisting primarily of
short-term investments with original maturities of 90 days or less) and $78.8 million of investment
securities classified as available for sale. Short-term fixed income investments classified as cash equivalents consisted of interest
bearing deposits at financial institutions, government money market funds and short-term government
agency securities, while investment securities available for sale consisted primarily of fixed
income instruments, which were rated AAA, or equivalent by nationally recognized rating agencies.
In addition, our liquidity position is supported by a credit facility with the Federal Home Loan
Bank of San Francisco. As of March 31, 2005, we had remaining available borrowing capacity under
this credit facility of $210.2 million, net of the $10.4 million of additional Federal Home Loan
Bank stock that we would be required to purchase to support those additional borrowings, $30.0
million of uncommitted, unsecured lines of credit with two unaffiliated financial institutions
renewable daily, and a $25.0 million revolving credit facility with an unaffiliated financial
institution. This $25.0 million revolving credit facility expired on April 30, 2005, however, we
intend to renew this facility shortly. Capital Resources The Company, the Banks holding company, had Tier 1 leverage, Tier 1 risk based and total
risk-based capital ratios at March 31, 2005 of 11.33%, 12.68% and 14.95%, respectively, which
represents $142.4 million, $134.3 million and $99.4 million, respectively, of capital in 23




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##### Table of Contents



excess of the amount required to be well capitalized. These ratios were 12.30%, 13.67% and
16.00% as of December 31, 2004, respectively. The Bank had Tier 1 leverage, Tier 1 risk based and total risk-based capital ratios at March
31, 2005 of 10.42%, 11.62% and 12.87%, respectively, which represents $118.9 million, $110.5
million and $56.5 million, respectively, of capital in excess of the amount required to be well
capitalized for regulatory purposes. These ratios were 11.02%, 12.21% and 13.47% as of December
31, 2004, respectively. At March 31, 2005, shareholders equity totaled $194.0 million, or 8.0 percent of total
assets. Our book value per share of common stock was $35.33 as of March 31, 2005, as compared to
$35.09 as of December 31, 2004, and $33.35 as of March 31, 2004. Item 3. Quantitative and Qualitative Disclosures About Market Risk Our estimated sensitivity to interest rate risk, as measured by the estimated interest
earnings sensitivity profile and the interest sensitivity gap analysis, has not materially changed
from the information disclosed in our annual report on Form 10-K for the year ended December 31,
2004. Item 4. Controls and Procedures (a) 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 March 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 March 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. (b) Changes in Internal Control over Financial Reporting: During the quarter ended March 31,
2005, no change occurred in the Companys internal control over financial reporting that has
materially affected, or is reasonably likely to materially affect, the Companys internal control
over financial reporting. The Company does not expect that its disclosure controls and procedures and internal controls
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 24




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##### Table of Contents



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. 25




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##### Table of Contents



PART II  OTHER INFORMATION Item 1. 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 financial condition or results of operations. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The following table sets forth the repurchases of our common stock for the fiscal quarter
ended March 31, 2005. Total Number of
    
    
    Maximum Number ofShares Purchased as
    
    
    Shares that May YetPart of Publicly
    
    
    Be Purchased UnderTotal Number of
    
    
    Average Price Paid
    
    
    Announced Plans or
    
    
    the Plans orPeriod
    
    Shares Purchased
    
    
    per Share
    
    
    Programs
    
    
    Programs(1)January 1, 2005 to
January 31, 2005
    
    
    21,470
    
    
    $
    54.13
    
    
    
    21,470
    
    
    
    83,622February 1, 2005 to
February 28, 2005
    
    
    11,426
    
    
    
    51.53
    
    
    
    11,426
    
    
    
    72,196March 1, 2005 to
March 31, 2005
    
    
    143,902
    
    
    
    54.06
    
    
    
    143,902
    
    
    
    217,072Total
    
    
    176,798
    
    
    $
    53.91
    
    
    
    176,798
    
    
    
    217,072
 (1) The repurchases during January, February and March 2005 were made under the ninth and
tenth extensions of our stock repurchase program, which were announced on September 30, 2004 and
March 9, 2005, respectively. Each such extension authorized the repurchase of an additional 5%
of the outstanding shares as of the authorization date. At March 31, 2005, 217,072 shares
remained available for repurchase under the tenth extension. Item 3. Defaults Upon Senior Securities Not applicable. Item 4. Submission of Matters to a Vote of Security Holders None. Item 5. Other Information None. Item 6. Exhibits See exhibit index. 26




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##### Table of Contents



SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ITLA CAPITAL CORPORATIONDate: May 10, 2005
    /s/ George W. HaligowskiGeorge W. HaligowskiChairman of the Board, President
and
Chief Executive Officer Date: May 10, 2005
    /s/ Timothy M. DoyleTimothy M. DoyleSenior Managing Director and
Chief Financial Officer 27




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##### Table of Contents



EXHIBIT INDEX Reference toPrior Fillingor ExhibitNumberRegulation S-K
    
    
    
    AttachedExhibit Number
    
    Document
    
    Hereto3.1
    
    Certificate of Incorporation
    
    
    **3.2
    
    Bylaws, as amended
    
    
    ****4
    
    Instruments Defining the Rights of Security Holders, Including
Indentures
    
    
    ********10.1
    
    1995 Stock Option Plan For Nonemployee Directors
    
    
    *10.2
    
    1995 Employee Stock Incentive Plan
    
    
    ******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
    
    Employment Agreement with George W. Haligowski
    
    
    ****10.7
    
    Form of Change of Control Agreements with Norval L. Bruce, Timothy
M. Doyle, Don Nickbarg, and Scott Wallace
    
    
    ***10.8
    
    Recognition and Retention Plan
    
    
    **10.9
    
    Voluntary Retainer Stock and Deferred Compensation Plan for
Outside Directors
    
    
    *****10.10
    
    Supplemental Executive Retirement Plan
    
    
    *******10.11
    
    ITLA Capital Corporation Rabbi Trust Agreement
    
    
    ***10.12
    
    Salary Continuation Plan
    
    
    ****10.13
    
    Form of Incentive Stock Option Agreement under 1995 Employee Stock
Incentive Plan
    
    
    *********10.14
    
    Form of Non-Qualified Stock Option Agreement under 1995 Stock
Option Plan for Nonemployee Directors
    
    
    *********10.15
    
    Description of Named Executive Officer Salary, Bonus and Perquisite
Arrangements for 2005
    
    
    *********10.16
    
    Description of Director Fee Arrangements
    
    
    *********11
    
    Statement Regarding Computation of Per Share Earnings
    
    Not Required15
    
    Letter Regarding Unaudited Interim Financial Information
    
    None18
    
    Letter Regarding Change in Accounting Principles
    
    None19
    
    Report furnished to Security Holders
    
    None22
    
    Published Report Regarding Matters Submitted to Vote of Security
Holders
    
    None23.1
    
    Consent of Experts
    
    None24
    
    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
September 29, 2001.*******
    
    Filed as an exhibit to the Companys Quarterly Report on Form 10-Q for the
quarter ended September 30, 2003 (File No. 0-26960).********
    
    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.*********
    
    Filed as an exhibit to the Companys Form 10-K for the year ended December
31, 2004.
 28