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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-Q (Mark One)þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly Period Ended June 30, 2004 OR o
    
    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 
  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 þ No o. Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes þ No o. Number of shares of common stock of the registrant: 6,195,418 outstanding as of August 2, 2004.




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ITLA CAPITAL CORPORATION
FORM 10-Q
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2004 TABLE OF CONTENTS PART I  FINANCIAL INFORMATIONItem 1.
    
    Financial Statements
    
    
    3Consolidated Balance Sheets  June 30, 2004 (Unaudited) and December 31, 2003
    
    
    3Consolidated Statements of Income  Three and Six Months Ended June 30, 2004 and 2003 (Unaudited)
    
    
    4Consolidated Statements of Cash Flows  Six Months Ended June 30, 2004 and 2003 (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
    
    
    28Item 4.
    
    Controls and Procedures
    
    
    28PART II  OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    29Item 2.
    
    Changes in Securities, Use of Proceeds and Issuer Repurchases of Equity Securities
    
    
    29Item 3.
    
    Defaults Upon Senior Securities
    
    
    29Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    29Item 5.
    
    Other Information
    
    
    29Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    29Signatures
    
    
    31Certifications
    
    
    33Exhibit 31.1Exhibit 31.2Exhibit 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, 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
impact of terrorist actions on our loan portfolio 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 2004 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, ITLA Capital or the
Company refer to ITLA Capital Corporation and its consolidated subsidiaries. 2




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##### Table of Contents



PART I  FINANCIAL INFORMATION ITLA CAPITAL CORPORATION AND SUBSIDIARIES 
 CONSOLIDATED BALANCE SHEETS
 June 30,2004
    
    December 31,(unaudited)
    
    2003(in thousands except share amounts)AssetsCash and cash equivalents
    
    $
    195,307
    
    
    $
    178,318Investment securities available for sale, at fair value
    
    
    55,926
    
    
    
    53,093Stock in Federal Home Loan Bank
    
    
    17,979
    
    
    
    17,966Loans, net (net of allowance for loan losses of $34,048 and $31,573
as of June 30, 2004 and December 31, 2003, respectively)
    
    
    1,510,410
    
    
    
    1,436,849Real estate loans held in trust, net (net of allowance for loan
losses of $1,828 as of June 30, 2004 and December 31, 2003)
    
    
    49,562
    
    
    
    68,575Interest receivable
    
    
    8,311
    
    
    
    8,958Other real estate owned, net
    
    
    985
    
    
    
    7,048Premises and equipment, net
    
    
    6,264
    
    
    
    5,766Deferred income taxes
    
    
    12,202
    
    
    
    11,609Goodwill
    
    
    3,118
    
    
    
    3,118Other assets
    
    
    23,432
    
    
    
    26,915Total assets
    
    $
    1,883,496
    
    
    $
    1,818,215Liabilities and Shareholders EquityLiabilities:Deposit accounts
    
    $
    1,175,095
    
    
    $
    1,147,017Federal Home Loan Bank advances
    
    
    382,535
    
    
    
    362,135Collateralized mortgage obligations
    
    
    
    
    
    
    15,868Accounts payable and other liabilities
    
    
    37,237
    
    
    
    19,696Junior subordinated debentures
    
    
    86,600
    
    
    
    86,600Total liabilities
    
    
    1,681,467
    
    
    
    1,631,316Commitments and contingenciesShareholders equity:Preferred stock, 5,000,000 shares authorized, none issued
    
    
    
    
    
    
    Contributed capital - common stock, $.01 par value; 20,000,000
shares authorized, 8,525,779 and 8,447,294 issued as of June 30,
2004 and December 31, 2003, respectively
    
    
    63,252
    
    
    
    61,704Retained earnings
    
    
    184,821
    
    
    
    165,407Accumulated other comprehensive (loss) income, net
    
    
    (87
    )
    
    
    155247,986
    
    
    
    227,266Less treasury stock, at cost 2,602,734 and 2,475,689 shares as
of June 30, 2004 and December 31, 2003, respectively
    
    
    (45,957
    )
    
    
    (40,367
    )Total shareholders equity
    
    
    202,029
    
    
    
    186,899Total liabilities and shareholders equity
    
    $
    1,883,496
    
    
    $
    1,818,215
 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 Ended
    
    For the Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003(in thousands except per share amounts)Interest income:Loans, including fees
    
    $
    26,424
    
    
    $
    25,461
    
    
    $
    55,338
    
    
    $
    54,075Real estate loans held in trust
    
    
    796
    
    
    
    1,456
    
    
    
    1,522
    
    
    
    3,629Cash and investment securities
    
    
    968
    
    
    
    994
    
    
    
    3,411
    
    
    
    3,731Total interest income
    
    
    28,188
    
    
    
    27,911
    
    
    
    60,271
    
    
    
    61,435Interest expense:Deposit accounts
    
    
    6,485
    
    
    
    6,289
    
    
    
    12,999
    
    
    
    13,137Federal Home Loan Bank advances
    
    
    824
    
    
    
    1,293
    
    
    
    1,905
    
    
    
    2,488Collateralized mortgage obligations
    
    
    9
    
    
    
    291
    
    
    
    71
    
    
    
    681Junior subordinated debentures
    
    
    1,501
    
    
    
    
    
    
    
    2,990
    
    
    
    Total interest expense
    
    
    8,819
    
    
    
    7,873
    
    
    
    17,965
    
    
    
    16,306Net interest income before provision for loan
losses
    
    
    19,369
    
    
    
    20,038
    
    
    
    42,306
    
    
    
    45,129Provision for loan losses
    
    
    950
    
    
    
    1,850
    
    
    
    2,350
    
    
    
    6,350Net interest income after provision for loan losses
    
    
    18,419
    
    
    
    18,188
    
    
    
    39,956
    
    
    
    38,779Non-interest income:Premium on sale of loans, net
    
    
    260
    
    
    
    265
    
    
    
    9,284
    
    
    
    8,983Late and collection fees
    
    
    84
    
    
    
    64
    
    
    
    185
    
    
    
    131Other
    
    
    701
    
    
    
    912
    
    
    
    4,970
    
    
    
    4,664Total non-interest income
    
    
    1,045
    
    
    
    1,241
    
    
    
    14,439
    
    
    
    13,778Non-interest expense:Compensation and benefits
    
    
    5,446
    
    
    
    4,773
    
    
    
    11,602
    
    
    
    10,125Occupancy and equipment
    
    
    1,522
    
    
    
    1,055
    
    
    
    2,850
    
    
    
    2,131Other
    
    
    3,520
    
    
    
    3,089
    
    
    
    7,388
    
    
    
    6,781Total general and administrative
    
    
    10,488
    
    
    
    8,917
    
    
    
    21,840
    
    
    
    19,037Real estate owned expense, net
    
    
    (15
    )
    
    
    11
    
    
    
    81
    
    
    
    153Provision for losses on other real estate owned
    
    
    
    
    
    
    40
    
    
    
    1,000
    
    
    
    370Gain on sale of other real estate owned, net
    
    
    (315
    )
    
    
    
    
    
    
    (354
    )
    
    
    (329
    )Total real estate owned expense, net
    
    
    (330
    )
    
    
    51
    
    
    
    727
    
    
    
    194Total non-interest expense
    
    
    10,158
    
    
    
    8,968
    
    
    
    22,567
    
    
    
    19,231Income before provision for income taxes and
minority interest in income of subsidiary
    
    
    9,308
    
    
    
    10,461
    
    
    
    31,828
    
    
    
    33,326Minority interest in income of subsidiary
    
    
    
    
    
    
    1,446
    
    
    
    
    
    
    
    2,966Income before provision for income taxes
    
    
    9,306
    
    
    
    9,015
    
    
    
    31,828
    
    
    
    30,360Provision for income taxes
    
    
    3,676
    
    
    
    3,525
    
    
    
    12,414
    
    
    
    11,849NET INCOME
    
    $
    5,630
    
    
    $
    5,490
    
    
    $
    19,414
    
    
    $
    18,511BASIC EARNINGS PER SHARE
    
    $
    0.91
    
    
    $
    0.91
    
    
    $
    3.12
    
    
    $
    3.08DILUTED EARNINGS PER SHARE
    
    $
    0.86
    
    
    $
    0.85
    
    
    $
    2.93
    
    
    $
    2.86
 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 Six Months EndedJune 30,2004
    
    2003(in thousands)Cash Flows From Operating Activities:Net Income
    
    $
    19,414
    
    
    $
    18,511Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization of premises and equipment
    
    
    985
    
    
    
    742Amortization of premium on purchased loans
    
    
    1,101
    
    
    
    1,355Accretion of deferred loan origination fees, net of costs
    
    
    (1,143
    )
    
    
    (1,506
    )Provision for loan losses
    
    
    2,350
    
    
    
    6,350Provision for losses on other real estate owned
    
    
    1,000
    
    
    
    370Premium on sale of RAL loans, net
    
    
    (9,284
    )
    
    
    (8,983
    )Other, net
    
    
    (759
    )
    
    
    (72
    )Decrease in interest receivable
    
    
    647
    
    
    
    1,362Decrease (increase) in other assets
    
    
    3,352
    
    
    
    (8,351
    )Increase in accounts payable and other liabilities
    
    
    17,541
    
    
    
    32,043Net cash provided by operating activities
    
    
    35,204
    
    
    
    41,821Cash Flows From Investing Activities:Purchases of investment securities available for sale
    
    
    (13,985
    )
    
    
    (20,210
    )Proceeds from the maturity and calls of investment securities available for sale
    
    
    10,639
    
    
    
    33,277Sale of stock in Federal Home Loan Bank
    
    
    295
    
    
    
    4,892Purchase of loans
    
    
    
    
    
    
    (3,259
    )Origination of RAL loans
    
    
    (12,949,433
    )
    
    
    (11,781,453
    )Proceeds from the participation in RAL loans
    
    
    12,956,989
    
    
    
    11,788,840(Increase) decrease in loans, net
    
    
    (75,356
    )
    
    
    89,618Repayment of real estate loans held in trust
    
    
    18,331
    
    
    
    24,985Proceeds from sale of other real estate owned
    
    
    7,314
    
    
    
    4,695Other investing activities, net
    
    
    (1,483
    )
    
    
    (1,598
    )Net cash (used in) provided by investing activities
    
    
    (46,689
    )
    
    
    139,787Cash Flows From Financing Activities:Proceeds from exercise of employee stock options
    
    
    1,456
    
    
    
    214Cash paid to acquire treasury stock
    
    
    (5,590
    )
    
    
    Principal payments on collateralized mortgage obligations
    
    
    (15,870
    )
    
    
    (25,809
    )Increase (decrease) in deposit accounts
    
    
    28,078
    
    
    
    (92,872
    )Net proceeds (repayments of) short-term borrowings from Federal Home Loan Bank
    
    
    66,000
    
    
    
    (104,400
    )Proceeds from long-term borrowings from Federal Home Loan Bank
    
    
    10,000
    
    
    
    16,000Repayments from long-term borrowings from Federal Home Loan Bank
    
    
    (55,600
    )
    
    
    (2,450
    )Net cash provided by (used in) financing activities
    
    
    28,474
    
    
    
    (209,317
    )Net increase (decrease) in cash and cash equivalents
    
    
    16,989
    
    
    
    (27,709
    )Cash and cash equivalents at beginning of period
    
    
    178,318
    
    
    
    160,848Cash and cash equivalents at end of period
    
    $
    195,307
    
    
    $
    133,139Supplemental Cash Flow Information:Cash paid during the period for interest
    
    $
    17,857
    
    
    $
    16,975Cash paid during the period for income taxes
    
    $
    4,600
    
    
    $
    12,410Non-Cash Investing Transactions:Loans transferred to other real estate owned
    
    $
    1,897
    
    
    $
    9,028
 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
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). On December 31, 2003, the Company adopted FASB Interpretation No. 46 (FIN
46), Consolidation of Variable Interest Entities, which addresses
consolidation by business enterprises of variable interest entities having
certain characteristics. In connection with the Companys adoption of FIN 46,
ITLA Capital Statutory Trust I (Trust I), ITLA Capital Statutory Trust II
(Trust II), ITLA Capital Statutory Trust III (Trust III), ITLA Capital
Statutory Trust IV (Trust IV), and ITLA Capital Statutory Trust V (Trust
V), collectively referred to as the Trusts, were no longer consolidated as
of December 31, 2003. The result of the deconsolidation was to recognize the
Companys investment in the Trusts in other assets, and to recognize the
subordinated debentures issued by the Company to the Trusts as liabilities.
Accordingly, effective January 1, 2004, the Company recognized interest expense
on the subordinated debentures in the consolidated statements of income. Prior
to FIN 46, the Company consolidated the Trusts and reported the trust preferred
securities issued by the Trusts in the mezzanine section of the Companys
consolidated balance sheets and recognized the proportionate share of income
attributable to the preferred shareholders as minority interest in income of
subsidiary in the consolidated statements of income. The trust preferred
securities currently qualify as Tier 1 capital for ITLA Capital under Federal
Reserve Board guidelines. As a result of the issuance of FIN 46, the Federal
Reserve Board proposed a rule on May 6, 2004 related to the qualification of
the trust preferred securities as Tier 1 capital. Under the proposed rule, the
Companys trust preferred securities would still qualify as Tier 1 capital. As
of June 30, 2004, the Company would meet all requirements to maintain its well
capitalized designation under applicable regulatory guidelines regardless of
the inclusion of the trust preferred securities in Tier 1 capital. Financial
information prior to the adoption of FIN 46 has not been restated. 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 and six months ended June 30, 2004 are
not necessarily indicative of the results of operations for the remainder of
the year. 6




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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,
2003. NOTE 2  ACCOUNTING FOR STOCK-BASED COMPENSATION The Company has stock-based compensation plans. These plans are accounted
for under APB Opinion No. 25, Accounting for Stock Issued to Employees, and
accordingly, no compensation costs have been recognized in the accompanying
unaudited consolidated statements of income. 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 compensation expense had been
recognized using the fair value of the options at the date of grant. 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 Three Months
    
    For the Six Months EndedEnded June 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003(in thousands, except per share data)Net income, as reported
    
    $
    5,630
    
    
    $
    5,490
    
    
    $
    19,414
    
    
    $
    18,511Less: Stock-based employee
compensation expense
determined under the fair
value method, net of tax
    
    
    337
    
    
    
    348
    
    
    
    674
    
    
    
    631Pro forma net income
    
    $
    5,023
    
    
    $
    5,142
    
    
    $
    18,740
    
    
    $
    17,880Earnings per share:Basic  as reported
    
    $
    0.91
    
    
    $
    0.91
    
    
    $
    3.12
    
    
    $
    3.08Basic  pro forma
    
    
    0.81
    
    
    
    0.83
    
    
    
    3.00
    
    
    
    2.97Diluted  as reported
    
    
    0.86
    
    
    
    0.85
    
    
    
    2.93
    
    
    
    2.86Diluted  pro forma
    
    
    0.76
    
    
    
    0.78
    
    
    
    2.81
    
    
    
    2.77
 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 Grants2004
    
    2003Dividend Yield
    
    
    0.00
    %
    
    
    0.00
    %Expected Volatility
    
    
    38.04
    %
    
    
    34.47
    %Risk-Free Interest Rates
    
    
    4.28
    %
    
    
    4.17
    %Expected Lives
    
    Seven Years
    
    Seven YearsWeighted-Average Fair Value
    
    $
    12.37
    
    
    $
    11.36
 7




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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. 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 June 30,2004Basic EPS
    
    $
    5,630
    
    
    
    6,207
    
    
    $
    0.91Effect of dilutive stock options
    
    
    
    
    
    
    372
    
    
    
    (0.05
    )Diluted EPS
    
    $
    5,630
    
    
    
    6,579
    
    
    $
    0.862003Basic EPS
    
    $
    5,490
    
    
    
    6,016
    
    
    $
    0.91Effect of dilutive stock options
    
    
    
    
    
    
    476
    
    
    
    (0.06
    )Diluted EPS
    
    $
    5,490
    
    
    
    6,492
    
    
    $
    0.85For the Six Months Ended June 30,2004Basic EPS
    
    $
    19,414
    
    
    
    6,224
    
    
    $
    3.12Effect of dilutive stock options
    
    
    
    
    
    
    402
    
    
    
    (0.19
    )Diluted EPS
    
    $
    19,414
    
    
    
    6,626
    
    
    $
    2.932003Basic EPS
    
    $
    18,511
    
    
    
    6,013
    
    
    $
    3.08Effect of dilutive stock options
    
    
    
    
    
    
    453
    
    
    
    (0.22
    )Diluted EPS
    
    $
    18,511
    
    
    
    6,466
    
    
    $
    2.86
 8




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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 Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003(in thousands)Net Income
    
    $
    5,630
    
    
    $
    5,490
    
    
    $
    19,414
    
    
    $
    18,511Other comprehensive loss:Change in unrealized
loss on investment
securities available
for sale, net of tax
benefit of $(239) and
$(51) for the three
months ended June 30,
2004 and 2003, and
net of tax benefit of
$(161) and $(127)
for the six months
ended June 30, 2004
and 2003,
respectively.
    
    
    (359
    )
    
    
    (79
    )
    
    
    (242
    )
    
    
    (199
    )Comprehensive income
    
    $
    5,271
    
    
    $
    5,411
    
    
    $
    19,172
    
    
    $
    18,312
 NOTE 5  IMPAIRED LOANS RECEIVABLE As of June 30, 2004 and December 31, 2003, the recorded investment in
impaired loans (including impaired real estate loans held in trust) was $18.5
million and $13.1 million, respectively. The average recorded investment in
impaired loans was $18.8 million and $17.2 million, respectively, for the three
and six months ended June 30, 2004 and $12.1 million and $14.6 million,
respectively, for the same periods last year. Interest income recognized on
impaired loans totaled $140,000 and $370,000 for the three and six months ended
June 30, 2004 as compared to $116,000 and $257,000 for the same periods last
year. 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 9




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##### Table of Contents



assumptions that management believes market participants would use for
similar financial instruments. During the six months ended June 30, 2004 and 2003, the Company recognized
an other than temporary impairment of $500,000 in connection with its residual
interest. Impairments that are deemed to be other than temporary are charged
to income as other expense. 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 June 30, 2004 and December 31, 2003, 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: June 30,
    
    December 31,Dollars in thousands
    
    2004
    
    2003Fair value of retained interest
    
    $
    5,368
    
    
    $
    5,368Weighted average life (in years)  securities
    
    
    0.98
    
    
    
    1.00Weighted average life (in years)  residual
interest
    
    
    3.83
    
    
    
    4.47Weighted average annual prepayment speed
    
    
    35.0
    %
    
    
    35.0
    %Impact of 10% adverse change
    
    $
    (166
    )
    
    $
    (67
    )Impact of 25% adverse change
    
    $
    (435
    )
    
    $
    (120
    )Weighted average annual discount rate
    
    
    15.0
    %
    
    
    15.0
    %Impact of 10% adverse change
    
    $
    (272
    )
    
    $
    (313
    )Impact of 25% adverse change
    
    $
    (650
    )
    
    $
    (753
    )Weighted average lifetime credit losses
    
    
    3.3
    %
    
    
    3.3
    %Impact of 10% adverse change
    
    $
    (171
    )
    
    $
    (147
    )Impact of 25% adverse change
    
    $
    (428
    )
    
    $
    (367
    )
 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 7  NEW ACCOUNTING PRONOUNCEMENTS On March 31, 2004, the Financial Accounting Standards Board (FASB)
issued the Exposure Draft, Share-Based Payment, which is a proposed amendment
to SFAS No. 123, Accounting For Stock-Based Compensation. In this draft, the
FASB formally proposed to require companies to recognize the fair value of
stock options and other stock-based compensation to employees for future
reporting periods in the income statement based on their fair values. The 10




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##### Table of Contents



final standard is expected in late 2004 and, as currently written, would
be effective for public companies for recognition and disclosure purposes for
fiscal years beginning after December 15, 2004. The Company is in the process
of evaluating the impact that expensing stock options and other stock-based
compensation will have on the results of operations and financial position. American Institute of Certified Public Accountants (AICPA) Statement of
Position (SOP) No. 03-3, Accounting for Certain Loans or Debt Securities
Acquired in a Transfer. SOP 03-3 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 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. 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 11




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##### Table of Contents



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 June 30,2004Revenues from external customers
    
    $
    29,155
    
    
    $
    327
    
    
    $
    
    
    
    $
    29,482Total interest income
    
    
    28,185
    
    
    
    327
    
    
    
    (324
    )
    
    
    28,188Total interest expense
    
    
    7,641
    
    
    
    1,502
    
    
    
    (324
    )
    
    
    8,819Net income
    
    $
    7,008
    
    
    $
    (1,378
    )
    
    $
    
    
    
    $
    5,6302003Revenues from external customers
    
    $
    28,821
    
    
    $
    343
    
    
    $
    
    
    
    $
    29,164Total interest income
    
    
    27,774
    
    
    
    1,771
    
    
    
    (1,634
    )
    
    
    27,911Total interest expense
    
    
    8,001
    
    
    
    1,506
    
    
    
    (1,634
    )
    
    
    7,873Net income
    
    $
    7,019
    
    
    $
    (1,529
    )
    
    $
    
    
    
    $
    5,490For the six months ended June 30,2004Revenues from external customers
    
    $
    74,566
    
    
    $
    641
    
    
    $
    
    
    
    $
    75,207Total interest income
    
    
    60,151
    
    
    
    641
    
    
    
    (521
    )
    
    
    60,271Total interest expense
    
    
    15,322
    
    
    
    3,164
    
    
    
    (521
    )
    
    
    17,965Net income
    
    $
    22,670
    
    
    $
    (3,256
    )
    
    $
    
    
    
    $
    19,4142003Revenues from external customers
    
    $
    75,030
    
    
    $
    444
    
    
    $
    
    
    
    $
    75,474Total interest income
    
    
    61,400
    
    
    
    3,372
    
    
    
    (3,337
    )
    
    
    61,435Total interest expense
    
    
    16,595
    
    
    
    3,048
    
    
    
    (3,337
    )
    
    
    16,306Net income
    
    $
    22,334
    
    
    $
    (3,823
    )
    
    $
    
    
    
    $
    18,511
 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 the financial condition and results of operations for the
three and six months ended June 30, 2004. Application of Critical Accounting Policies and Accounting Estimates The accounting and reporting policies followed by the Company 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 the Company
bases estimates on historical experience, current information and other factors
deemed to be relevant, actual results could differ from those estimates. The Company considers 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 the Companys 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. The
Company also considers accounting policies related to stock-based compensation
to be critical due to the continuously evolving standards, changes to which
could materially impact the way the Company accounts for stock options.
Additionally, the Company considers its accounting policies in regards to its
tax refund lending program and other real estate owned to be critical
accounting policies. 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, 2003.
There have been no significant changes in the Companys application of
accounting policies since December 31, 2003. 13




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##### Table of Contents



RESULTS OF OPERATIONS Three Months Ended June 30, 2004 Compared to Three Months Ended June 30, 2003 Executive Summary Consolidated net income was $5.6 million and $5.5 million for the three
months ended June 30, 2004 and 2003, respectively. Diluted EPS was $0.86 for
the three months ended June 30, 2004 compared to $0.85 for the same period last
year. The increase in net income was primarily due to the increase in net
interest income after provision for loan losses, partially offset by an
increase in non-interest expense. Net interest income before provision for loan losses decreased from the
prior year period primarily as a result of the increase in interest expense,
which, pursuant to the adoption of FIN 46, required the inclusion of the
interest payments on the junior subordinated debentures related to the
Companys trust preferred securities, and the decrease in net interest income
earned by the REIT. The return on average assets was 1.30% for the three months ended June 30,
2004 compared to 1.38% for the same period last year. The return on average
shareholders equity was 11.23% for the three months ended June 30, 2004,
compared 12.68% for the same period last year. Total loan production was $258.1 million for the quarter ended June 30,
2004 compared to $144.0 million for the same period last year. Loan production
during the current quarter consisted of originations of $156.0 million of
commercial real estate loans, $55.8 million of Imperial Capital Express (ICE)
small balance multi-family loans, $21.6 million of film finance loans and $24.7
million of franchise loans. Loan production for the same period last year
consisted of originations of $93.0 million of commercial real estate loans,
$31.4 million of ICE small balance multi-family loans, $9.1 million of film
finance loans and $10.5 million of franchise loans. Substantially all refund anticipation loans (RAL) originated during the
quarter were sold to Household International, Inc. (Household), a
wholly-owned subsidiary of HSBC Holdings plc (HSBC). At June 30, 2004, and
2003 the Company held $1.7 million and $1.1 million, respectively, in RAL
participation interests. Because the origination of loans under the RAL
program results from the filing of individual income tax returns, transaction
activity is concentrated most heavily during the tax season. This results in
the Company earning most of its RAL program income in the first quarter of the
year. We expect that our financial results for the remaining quarters of 2004
will not be significantly impacted by the RAL program due to the seasonal
nature of the business. On June 24, 2004, the Company announced that it
received final confirmation that Household and its affiliates would, effective
this year, terminate their RAL and private label credit card programs with the
Bank. Pursuant to the agreement, this termination comes without penalty to
Household. 14




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##### Table of Contents



Net Interest Income and Margin The following table presents, for the three months ended June 30, 2004 and
2003, 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 June 30,2004
    
    2003Average
    
    Income/
    
    Yield/
    
    Average
    
    Income/
    
    Yield/Balance
    
    Expense
    
    Rate
    
    Balance
    
    Expense
    
    Rate(dollars in thousands)AssetsCash and investments
    
    $
    150,621
    
    
    $
    968
    
    
    
    2.58
    %
    
    $
    203,187
    
    
    $
    994
    
    
    
    1.96
    %Loans receivable:Loans
    
    
    1,507,288
    
    
    
    26,424
    
    
    
    7.05
    %
    
    
    1,266,690
    
    
    
    25,461
    
    
    
    8.06
    %Real estate loans held in trust
    
    
    53,092
    
    
    
    796
    
    
    
    6.03
    %
    
    
    107,146
    
    
    
    1,456
    
    
    
    5.45
    %Total loans receivable
    
    
    1,560,380
    
    
    
    27,220
    
    
    
    7.02
    %
    
    
    1,373,836
    
    
    
    26,917
    
    
    
    7.86
    %Total interest-earning assets
    
    
    1,711,001
    
    
    $
    28,188
    
    
    
    6.63
    %
    
    
    1,577,023
    
    
    $
    27,911
    
    
    
    7.10
    %Non-interest-earning assets
    
    
    60,211
    
    
    
    
    
    
    
    
    
    
    
    64,702Allowance for loan losses
    
    
    (35,291
    )
    
    
    
    
    
    
    
    
    
    
    (32,887
    )Total assets
    
    $
    1,735,921
    
    
    
    
    
    
    
    
    
    
    $
    1,608,838Liabilities and
Shareholders EquityDeposit accounts:Savings and passbook accounts
    
    $
    132,836
    
    
    $
    537
    
    
    
    1.63
    %
    
    $
    160,195
    
    
    $
    599
    
    
    
    1.50
    %Demand accounts
    
    
    97,729
    
    
    
    368
    
    
    
    1.51
    %
    
    
    8,081
    
    
    
    21
    
    
    
    1.04
    %Time certificates
    
    
    986,730
    
    
    
    5,580
    
    
    
    2.27
    %
    
    
    844,830
    
    
    
    5,669
    
    
    
    2.69
    %Total deposit accounts
    
    
    1,217,295
    
    
    
    6,485
    
    
    
    2.14
    %
    
    
    1,013,106
    
    
    
    6,289
    
    
    
    2.49
    %Collateralized mortgage obligations
    
    
    1,393
    
    
    
    9
    
    
    
    2.60
    %
    
    
    55,988
    
    
    
    291
    
    
    
    2.08
    %FHLB advances
    
    
    128,508
    
    
    
    824
    
    
    
    2.58
    %
    
    
    168,698
    
    
    
    1,293
    
    
    
    3.07
    %Junior subordinated debentures
    
    
    86,600
    
    
    
    1,501
    
    
    
    6.97
    %
    
    
    
    
    
    
    
    
    
    
    Total interest-bearing liabilities
    
    
    1,433,796
    
    
    $
    8,819
    
    
    
    2.47
    %
    
    
    1,237,792
    
    
    $
    7,873
    
    
    
    2.55
    %Non-interest-bearing liabilities
    
    
    100,551
    
    
    
    
    
    
    
    
    
    
    
    115,689Guaranteed preferred beneficial
interests
in the Companys junior
subordinated
deferrable interest debentures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    81,698Shareholders equity
    
    
    201,574
    
    
    
    
    
    
    
    
    
    
    
    173,659Total liabilities
and shareholders equity
    
    $
    1,735,921
    
    
    
    
    
    
    
    
    
    
    $
    1,608,838Net interest spread
    
    
    
    
    
    
    
    
    
    
    4.16
    %
    
    
    
    
    
    
    
    
    
    
    4.55
    %Net interest income before provision
for loan losses
    
    
    
    
    
    $
    19,369
    
    
    
    
    
    
    
    
    
    
    $
    20,038Net interest margin
    
    
    
    
    
    
    
    
    
    
    4.55
    %
    
    
    
    
    
    
    
    
    
    
    5.10
    %
 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 EndedJune 30, 2004 and 2003Increase (Decrease) Due to:Rate
    
    Volume
    
    Total(In thousands)Interest and fees earned from:Cash and investment securities
    
    $
    312
    
    
    $
    (338
    )
    
    $
    (26
    )Loans
    
    
    (3,136
    )
    
    
    4,099
    
    
    
    963Real estate loans held in trust
    
    
    154
    
    
    
    (814
    )
    
    
    (660
    )Total increase (decrease) in interest income
    
    
    (2,670
    )
    
    
    2,947
    
    
    
    277Interest paid on:Deposit accounts
    
    
    (737
    )
    
    
    933
    
    
    
    196Collateralized mortgage obligations
    
    
    (1,100
    )
    
    
    818
    
    
    
    (282
    )FHLB advances
    
    
    40
    
    
    
    (509
    )
    
    
    (469
    )Junior subordinated debentures
    
    
    666
    
    
    
    835
    
    
    
    1,501Total increase (decrease) in interest
expense
    
    
    (1,131
    )
    
    
    2,077
    
    
    
    946Increase (decrease) in net interest income
    
    $
    (1,539
    )
    
    $
    870
    
    
    $
    (669
    )
 Total interest income increased $277,000 to $28.2 million in the second
quarter of 2004 as compared to $27.9 million for the same period last year. The
increase in interest income was primarily attributable to an increase of $134.0
million in average interest earning assets, partially offset by a decrease of
47 basis points in the average yield earned on interest earning assets due to
lower market interest rates. The average balance of loans held by the Bank was $1.5 billion and $1.3
billion for the three months ended June 30, 2004 and 2003, respectively. Loans
secured by income producing properties and construction loans had an average
balance of $1.3 billion during the quarter ended June 30, 2004 compared to $1.1
billion during the same period last year. The average balance of franchise
loans was $125.1 million and $55.3 million during the quarters ended June 30,
2004 and 2003, respectively. The average balance of film finance loans was
$95.2 million and $107.7 million during the quarters ended June 30, 2004 and
2003, respectively. The average balance of real estate loans held in trust decreased to $53.1
million for the three months ended June 30, 2004 as compared to $107.1 million
for the same period last year. This decrease was due to loan prepayments and
principal amortization. The average balance of cash and investments decreased to $150.6 million in
the second quarter of 2004 compared to $203.2 million during the same period
last year. The decrease in 16




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##### Table of Contents



average cash and investments was attributable to a decline in liquidity
maintained in connection with the Banks RAL program during the quarter ended
June 30, 2004. The increase in the average yield earned on cash and
investments from 1.96% during the second quarter of 2003 to 2.58% during the
second quarter of 2004 was primarily caused by the decline in the average daily
cash and cash equivalents balance maintained. Cash and cash equivalents are
typically invested in short-term or overnight investments, which yield
relatively low rates of return. The average yield earned on total loans decreased to 7.02% in the quarter
ended June 30, 2004 as compared to 7.86% 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 commercial real estate loan portfolio is primarily comprised of adjustable
rate mortgages indexed to six month LIBOR. Approximately 95.9% of our real
estate loans (including real estate loans held in trust) were adjustable rate
mortgages at June 30, 2004. These adjustable rate mortgages generally reprice
on a quarterly basis. At June 30, 2004, approximately $1.3 billion or 89.6% of
our real estate loans contained interest rate floors, below which the loans
contractual interest rate may not adjust. At June 30, 2004, the weighted
average floor interest rate of these loans was 6.6%. At that date,
approximately $1.2 billion or 87.8% of those loans were at the floor interest
rate, approximately $162.0 million or 11.7% were within 50 basis points of
their floor interest rate, and approximately $0.5 million or 0.1% were greater
than 50 but less than 100 basis points from their floor interest rate. Total interest expense increased by $946,000 to $8.8 million in the second
quarter of 2004, compared to $7.9 million for the same period last year. This
increase was attributable to the adoption of FIN 46, which required that
beginning January 1, 2004, the Company recognize interest expense incurred on
its junior subordinated debentures issued to the Trusts in the consolidated
statements of income. For the three months ended June 30, 2004, the junior
subordinated debentures had an average balance of $86.6 million and an average
rate of 6.97%. Excluding the impact of the adoption of FIN 46, interest expense decreased
by $555,000 as compared to the same period last year. This decrease was
primarily caused by the lower average balance on our Collateralized Mortgage
Obligations (CMOs) and Federal Home Loan Bank (FHLB) advances, as well as
higher interest bearing FHLB advances maturing and being replaced with new
advances at lower current market rates. The decline in interest expense was
also affected by deposit accounts repricing to lower current market interest
rates, partially offset by an increase in the average balance during the
period. Our average cost of funds decreased to 2.47% during the three month period
ended June 30, 2004, compared to 2.55% for the same period last year. This
decrease in funding costs was due primarily to lower rates being paid on our
deposit accounts as a result of the general decline in market interest rates,
and FHLB advances maturing and being replaced with new advances at lower
current market rates. The average rate paid on deposit accounts was 2.14%
during the three months ended June 30, 2004 as compared to 2.49% for the same
period last year. The average rate paid on FHLB advances was 2.58% during the
three months ended June 30, 2004 compared to 3.07% for the same period last
year. The average balance of deposit accounts increased $204.2 million to $1.2
billion for the three months ended June 30, 2004 as compared to $1.0 billion
for the same period last year. The average balance of our CMOs was $1.4
million 17




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during the second quarter of 2004, compared to $56.0 million for the same
period last year reflecting the decline in the related real estate loans held
in trust due to loan prepayments and principal amortization. FHLB advances
averaged $128.5 million in the current quarter, compared to $168.7 million for
the same period last year. Net interest margin decreased to 4.55% for the three months ended June 30,
2004 as compared to 5.10% for the same period last year primarily due to
increased interest expense resulting from the adoption of FIN 46 and higher
yielding loans within the Banks loan portfolio being repaid and replaced by
new loan production at lower current market rates. Provision for Loan Losses Management periodically assesses the adequacy of the allowance for loan
losses by reference to many factors, which 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. Accordingly, the calculation of the adequacy of the allowance for loan
losses is not based solely on the level of nonperforming assets. Management
believes that the allowance for loan losses as of June 30, 2004 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 the Banks 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 consolidated provision for loan losses totaled $1.0 million for the
second quarter of 2004, compared to $1.9 million for the same period last year.
The current period provision for loan losses was recorded based on an analysis
of the factors referred to above. The provision for loan losses for the same
period last year was also recorded based on an analysis of the factors referred
to above and the declining valuation of certain non-performing loans and other
loans of concern as of June 30, 2003. The allowance for loan losses was 2.25%
of total loans and real estate loans held in trust at June 30, 2004 as compared
to 2.17% at December 31, 2003. During the quarter ended June 30, 2004, we had
net loan recoveries of $41,000 as compared to net loan charge-offs of $818,000
during the same period last year. See also  Financial
Condition  Credit
Risk. 18




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##### Table of Contents



Non-Interest Income Non-interest income decreased to $1.0 million for the three months ended
June 30, 2004, compared to $1.2 million for the same period last year.
Substantially all of the non-interest income earned during the current and
prior year period related to the RAL program. As a result of Households
termination of its RAL program with the Bank discussed above (see -Executive
Summary), the Company expects that its non-interest income will decrease
significantly in future periods. Non-Interest Expense Non-interest expense totaled $10.2 million for the three months ended June
30, 2004, compared to $9.0 million for the same period last year. The increase
was primarily caused by our continued expansion of ICE, the Banks small
balance real estate lending platform. During the year, nine ICE lending
offices were opened throughout the East Coast. Our efficiency ratio (defined
as recurring general and administrative expenses as a percentage of net
revenue) was 51.4 percent in the second quarter of 2004 as compared to 41.9
percent for the same period in 2003. Six Months Ended June 30, 2004 Compared to Six Months Ended June 30, 2003 Executive Summary Consolidated net income totaled $19.4 million for the six months ended
June 30, 2004 compared to $18.5 million for the same period last year. The
increase in net income was primarily due to increases in net interest income
after provision for loan losses and non-interest income, partially offset by an
increase in non-interest expense. Diluted EPS was $2.93 for the six months
ended June 30, 2004, compared to $2.86 for the same period last year. Net interest income before provision for loan losses decreased from the
prior year period primarily as a result of the increase in interest expense,
which, pursuant to the adoption of FIN 46, required the inclusion of the
interest payments on the junior subordinated debentures related to the
Companys trust preferred securities, and the decrease in net interest income
earned by the REIT. The return on average assets was 1.79% for the six months ended June 30,
2004, compared to 1.83% for the same period last year. The return on average
shareholders equity was 19.61% for the six months ended June 30, 2004,
compared to 21.95% for the same period last year. Total loan production was $413.2 million for the six months ended June 30,
2004, compared to $245.7 million for the same period last year. During the
current six-month period, the Bank originated $236.0 million of commercial real
estate loans, $94.0 million of ICE small balance multi-family real estate
loans, $42.0 million of film finance loan and $41.2 million of franchise loans.
Loan production for the same period last year consisted of $150.7 million of
commercial real estate loans, $58.3 million of ICE small balance multi-family
real estate loans, $24.4 million of film finance loans and $12.3 million of
franchise loans. 19




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##### Table of Contents



Net Interest Income and Margin The following table presents, for the six months ended June 30, 2004 and
2003, 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 Six Months Ended June 30,2004

    
    2003Average
    
    Income/
    
    Yield/
    
    Average
    
    Income/
    
    Yield/Balance
    
    Expense
    
    Rate
    
    Balance
    
    Expense
    
    Rate(dollars in thousands)AssetsCash and investments
    
    $
    530,326
    
    
    $
    3,411
    
    
    
    1.29
    %
    
    $
    492,306
    
    
    $
    3,731
    
    
    
    1.53
    %Loans receivable:Loans
    
    
    1,492,503
    
    
    
    55,338
    
    
    
    7.46
    %
    
    
    1,314,484
    
    
    
    54,075
    
    
    
    8.30
    %Real estate loans held in trust
    
    
    57,630
    
    
    
    1,522
    
    
    
    5.31
    %
    
    
    112,076
    
    
    
    3,629
    
    
    
    6.53
    %Total loans receivable
    
    
    1,550,133
    
    
    
    56,860
    
    
    
    7.38
    %
    
    
    1,426,560
    
    
    
    57,704
    
    
    
    8.16
    %Total interest-earning assets
    
    
    2,080,459
    
    
    $
    60,271
    
    
    
    5.83
    %
    
    
    1,918,866
    
    
    $
    61,435
    
    
    
    6.46
    %Non-interest-earning assets
    
    
    138,519
    
    
    
    
    
    
    
    
    
    
    
    132,926Allowance for loan losses
    
    
    (34,728
    )
    
    
    
    
    
    
    
    
    
    
    (33,518
    )Total assets
    
    $
    2,184,250
    
    
    
    
    
    
    
    
    
    
    $
    2,018,274Liabilities and
Shareholders EquityDeposit accounts:Savings and passbook accounts
    
    $
    139,150
    
    
    $
    1,135
    
    
    
    1.64
    %
    
    $
    156,489
    
    
    $
    1,260
    
    
    
    1.62
    %Demand accounts
    
    
    81,717
    
    
    
    615
    
    
    
    1.51
    %
    
    
    7,360
    
    
    
    38
    
    
    
    1.04
    %Time certificates
    
    
    983,745
    
    
    
    11,249
    
    
    
    2.30
    %
    
    
    857,743
    
    
    
    11,839
    
    
    
    2.78
    %Total deposit accounts
    
    
    1,204,612
    
    
    
    12,999
    
    
    
    2.17
    %
    
    
    1,021,592
    
    
    
    13,137
    
    
    
    2.59
    %Collateralized mortgage obligations
    
    
    5,777
    
    
    
    71
    
    
    
    2.47
    %
    
    
    57,933
    
    
    
    681
    
    
    
    2.37
    %FHLB advances
    
    
    138,094
    
    
    
    1,905
    
    
    
    2.77
    %
    
    
    167,667
    
    
    
    2,488
    
    
    
    2.99
    %Junior subordinated debentures
    
    
    86,600
    
    
    
    2,990
    
    
    
    6.94
    %
    
    
    
    
    
    
    
    
    
    
    Total interest-bearing liabilities
    
    
    1,435,084
    
    
    $
    17,965
    
    
    
    2.52
    %
    
    
    1,247,192
    
    
    $
    16,306
    
    
    
    2.64
    %Non-interest-bearing liabilities
    
    
    550,030
    
    
    
    
    
    
    
    
    
    
    
    519,342Guaranteed
preferred beneficial interests in the Companys junior
subordinated deferrable interest debentures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    81,663Shareholders equity
    
    
    199,136
    
    
    
    
    
    
    
    
    
    
    
    170,077Total
liabilities and shareholders equity
    
    $
    2,184,250
    
    
    
    
    
    
    
    
    
    
    $
    2,018,274Net interest spread
    
    
    
    
    
    
    
    
    
    
    3.31
    %
    
    
    
    
    
    
    
    
    
    
    3.82
    %Net interest
income before provision for loan losses
    
    
    
    
    
    $
    42,306
    
    
    
    
    
    
    
    
    
    
    $
    45,129Net interest margin
    
    
    
    
    
    
    
    
    
    
    4.09
    %
    
    
    
    
    
    
    
    
    
    
    4.74
    %
 20




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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. For the Six Months EndedJune 30, 2004 and 2003Increase (Decrease) Due to:Rate
    
    Volume
    
    Total(In thousands)Interest and fees earned from:Cash and investment securities
    
    $
    (571
    )
    
    $
    251
    
    
    $
    (320
    )Loans
    
    
    (3,600
    )
    
    
    4,863
    
    
    
    1,263Real estate loans held in trust
    
    
    (676
    )
    
    
    (1,431
    )
    
    
    (2,107
    )Total increase (decrease) in interest income
    
    
    (4,847
    )
    
    
    3,683
    
    
    
    (1,164
    )Interest paid on:Deposit accounts:
    
    
    (2,123
    )
    
    
    1,985
    
    
    
    (138
    )Collateralized mortgage obligations
    
    
    29
    
    
    
    (639
    )
    
    
    (610
    )FHLB advances
    
    
    (181
    )
    
    
    (402
    )
    
    
    (583
    )Junior subordinated debentures
    
    
    
    
    
    
    2,990
    
    
    
    2,990Total
increase (decrease) in interest expense
    
    
    (2,275
    )
    
    
    3,934
    
    
    
    1,659Increase in net interest income
    
    $
    (2,572
    )
    
    $
    (251
    )
    
    $
    (2,823
    )
 Total interest income decreased $1.2 million to $60.3 million in the six
months ended June 30, 2004, as compared to $61.4 million for the same period
last year. The decrease in interest income was primarily attributable to the
decrease of 63 basis points in the average yield earned on interest earning
assets reflecting lower market interest rates, partially offset by an increase
of $161.6 million of interest earning assets. The average balance of loans held by the Bank was $1.5 billion and $1.3
billion for the six months ended June 30, 2004 and 2003, respectively. Loans
secured by income producing properties and construction loans increased to $1.3
billion for the six month period ended June 30, 2004, from $1.1 billion during
same period last year. The average balance of franchise loans was $115.4
million and $56.0 million during the six months ended June 30, 2004 and 2003,
respectively. The average balance of film finance loans was $96.4 million and
$111.3 million, respectively during the six months ended June 30, 2004 and
2003. The average balance of real estate loans held in trust decreased to $57.6
million for the six months ended June 30, 2004 as compared to $112.1 million
for the same period last year. This decrease was due to loan prepayments and
principal amortization. The average balance of our cash and investments increased to $530.3
million for the six months ended June 30, 2004 compared to $492.3 million
during the same period last year. The increase in our average cash and
investments was attributable to the increased liquidity maintained in
connection with the RAL program. The decline in the average yield earned on 21




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cash and investments from 1.53% during the six months ended June 30, 2003
to 1.29% during the same period in 2004 was caused by lower yields earned on
short-term and overnight investments as a result of a general decline in market
interest rates during the year. A significant portion of the Companys excess
liquidity maintained during the six months ended June 30, 2004 was invested in
overnight investments, which yielded lower returns during the current year as
compared to the same period last year. The average yield earned on loans decreased 78 basis points to 7.38% for
the six months ended June 30, 2004 as compared to 8.16% in the same period last
year. The decrease in the yield on loans was primarily due to the origination
and repricing of variable rate loans at lower interest rates resulting from the
continuation of the relatively low interest rate environment. Our commercial
real estate loan portfolio is primarily comprised of adjustable rate mortgages
indexed to the six month LIBOR. Total interest expense increased by $1.7 million to $18.0 million for the
six months ended June 30, 2004, compared to $16.3 million for the same period
last year. This increase was attributable to the adoption of FIN 46, which
required that beginning January 1, 2004, the Company recognize interest expense
incurred on its junior subordinated debentures issued to the Trusts in the
consolidated statements of income. For the six months ended June 30, 2004, the
junior subordinated debentures had an average balance of $86.6 million and an
average cost of funds of 6.94%. Excluding the impact of the adoption of FIN 46, interest expense decreased
by $1.3 million as compared to the same period last year. This decrease was
primarily caused by the lower average balance on our CMOs and FHLB advances, as
well as higher interest bearing FHLB advances maturing and being replaced with
new advances at lower current market rates. The decline in interest expense
was also affected by deposit accounts repricing to lower current market
interest rates, partially offset by an increase in the average balance during
the period. Our average cost of funds decreased to 2.52% during the six months ended
June 30, 2004, compared to 2.64% for the same period last year. This decrease
in funding costs was due primarily to a general decline in market interest
rates, resulting in lower rates being paid on our deposit accounts compared to
the same period last year, as well as FHLB advances maturing and being replaced
with new advances at lower current market rates. This decrease was partially
offset by the average cost of funds of the junior subordinated debentures of
6.94%. The average rate paid on deposit accounts was 2.17% during the six
months ended June 30, 2004 compared to 2.59% for the same period last year.
The average rate paid on the FHLB advances was 2.77% during the six months
ended June 30, 2004 compared to 2.99% for the same period last year. The
average balance of deposit accounts increased $183.0 million to $1.2 billion
for the six months ended June 30, 2004, compared to $1.0 billion for the same
period last year. The average balance of our CMOs was $5.8 million during the
six months ended June 30, 2004, compared to $57.9 million for the same period
last year. FHLB advances averaged $138.1 million for the six months ended June
30, 2004, compared to $167.7 million for the same period last year. Net interest margin decreased to 4.09% for the six months ended June 30,
2004 as compared to 4.74% for the same period last year. This decrease was
primarily due to the 22




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##### Table of Contents



increased interest expense resulting from the adoption of FIN 46 and the
63 basis point decrease in the average yield earned on interest-earning assets
as a result higher yielding loans being repaid and replaced with new loan
production at lower current market rates. Provision for Loan Losses The consolidated provision for loan losses totaled $2.4 million for the
six months ended June 30, 2004, compared to $6.4 million for the same period
last year. The current period provision for loan losses was recorded to
provide for reserves based on an analysis of the factors referred to
previously. The prior period provision for loan losses was recorded based on
the same factors referred to previously, as well as the declining valuation of
certain nonperforming loans and other loans of concern, and for specific
charge-offs experienced through the six months ended June 30, 2003. During the
six months ended June 30, 2004, the Company had net loan recoveries of
$125,000, compared to net loan charge-offs of $5.8 million for the same period
last year. The charge-offs during 2003 related primarily to one commercial
real estate loan. Non-interest Income Non-interest income totaled $14.4 million for the six months ended June
30, 2004, compared to $13.8 million for the same period last year.
Substantially all of the non-interest income earned during the current and
prior period was due to income earned in connection with the RAL program. As a
result of Households termination of its RAL program with the Bank discussed
above (see -Executive Summary), the Company expects that its non-interest
income will decrease significantly in future periods. Non-interest Expense Non-interest expense totaled $22.6 million for the six months ended June
30, 2004, compared to $19.2 million for the same period last year. General and
administrative expenses totaled $21.8 million during the six months ended June
30, 2004, compared to $19.0 million for the same period last year. The
increase in general and administrative expenses was primarily due to the costs
incurred in connection with the expansion of our ICE lending platform. During
the current year, the Banks opened nine ICE lending offices located throughout
the East Coast. The Companys efficiency ratio (defined as recurring general
and administrative expenses as percentage of net revenue) was 38.49 percent for
the six months ended June 30, 2004, compared to 32.32 percent for the same
period in 2003. FINANCIAL CONDITION Total assets increased to $1.9 billion at June 30, 2004 as compared to
$1.8 billion at December 31, 2003. At June 30, 2004, loans, net totaled $1.6
billion, including approximately $1.3 billion of commercial real estate loans,
$132.0 million of franchise loans and $100.7 million of film finance loans.
During the six months ended June 30, 2004, the Banks loan portfolio increased
$73.6 million and the REITs portfolio decreased $19.0 million. The decrease
in the REITs loan portfolio reflects loan prepayments and principal
amortization experienced during the six months ended June 30, 2004.
Additionally, cash and cash equivalents increased $17.0 million primarily as a
result of increased liquidity caused by the RAL program. Total deposit
accounts increased to $1.2 billion at June 30, 2004 from $1.1 billion at
December 31, 2003. 23




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##### Table of Contents



FHLB advances increased $20.4 million to $382.5 million at June 30, 2004,
compared to $362.1 million at December 31, 2003. Management believes that a
significant portion of deposits will remain with us upon maturity based on our
historical experience regarding retention of deposits. CMOs decreased from
$15.9 million at December 31, 2003 to none at June 30, 2004 reflecting the
decline in real estate loans held in trust. Accounts payable and other
liabilities increased $17.5 million primarily as a result of outstanding checks
and other liabilities related to the RAL program. 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. During each of the six months ended June 30, 2004 and 2003, we recognized
an other than temporary impairment of $500,000 in connection with our residual
interest. Impairments that are deemed to be other than temporary are charged
to income, as other expense. 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. 24




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##### Table of Contents



At June 30, 2004 and December 31, 2003, 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: June 30, 2004
    
    December 31, 2003Dollars in thousandsFair value of retained interest
    
    $
    5,368
    
    
    $
    5,368Weighted average life (in years)  securities
    
    
    0.98
    
    
    
    1.00Weighted average life (in years)  residual
interest
    
    
    3.83
    
    
    
    4.47Weighted average annual prepayment speed
    
    
    35.0
    %
    
    
    35.0
    %Impact of 10% adverse change
    
    $
    (166
    )
    
    $
    (67
    )Impact of 25% adverse change
    
    $
    (435
    )
    
    $
    (120
    )Weighted average annual discount rate
    
    
    15.0
    %
    
    
    15.0
    %Impact of 10% adverse change
    
    $
    (272
    )
    
    $
    (313
    )Impact of 25% adverse change
    
    $
    (650
    )
    
    $
    (753
    )Weighted average lifetime credit losses
    
    
    3.3
    %
    
    
    3.3
    %Impact of 10% adverse change
    
    $
    (171
    )
    
    $
    (147
    )Impact of 25% adverse change
    
    $
    (428
    )
    
    $
    (367
    )
 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. 25




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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. June 30,
    
    December 31,2004
    
    2003(dollars in thousands)Nonaccrual loans:Real estate
    
    $
    3,959
    
    
    $
    4,686Franchise
    
    
    3,959
    
    
    
    799Film finance
    
    
    6,465
    
    
    
    3,030Total nonaccrual loans
    
    
    14,383
    
    
    
    8,515Other real estate owned, net
    
    
    985
    
    
    
    7,048Total nonperforming assets
    
    
    15,368
    
    
    
    15,563Performing troubled debt restructurings
    
    
    2,688
    
    
    
    4,709$
    18,056
    
    
    $
    20,272Nonaccrual loans to total loans
and real estate loans held in trust
    
    
    0.90
    %
    
    
    0.55
    %Allowance for loan losses to nonaccrual loans
    
    
    249.43
    %
    
    
    392.26
    %Nonperforming assets to total assets
    
    
    0.82
    %
    
    
    0.86
    %
 At June 30, 2004, other real estate owned consisted of two properties
totaling $985,000. Management periodically evaluates the estimated fair value
of its other real estate owned properties. During the six months ended June 30,
2004, we recorded a $1.0 million impairment reserve related to the value of one
other real estate owned property. As of June 30, 2004 and December 31, 2003, other loans of concern totaled
$28.9 million and $31.3 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 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 nonaccrual category. The decrease in
other loans of concern for the six months ended June 30, 2004 was primarily due
to $6.0 million of loans being paid-off, $5.3 million of loans migrating to
nonaccrual status, $1.7 million of loans being upgraded and $882,000 of loans
being transferred to other real estate owned, partially offset by $11.6 million
of new other loans of concern. 26




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##### Table of Contents



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 Six
    
    For the YearMonths Ended
    
    EndedJune 30,
    
    December 31,2004
    
    2003(dollars in thousands)Balance at beginning of period
    
    $
    33,401
    
    
    $
    33,009Provision for loan losses
    
    
    2,350
    
    
    
    7,760Charge-offs
    
    
    
    
    
    
    (7,447
    )Recoveries
    
    
    125
    
    
    
    79Net recoveries (charge-offs)
    
    
    125
    
    
    
    (7,368
    )Balance at end of period
    
    $
    35,876
    
    
    $
    33,401Allowance for loan losses as a percentage of
loans and loans held in trust, net
    
    
    2.25
    %
    
    
    2.17
    %
 Liquidity 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 liquidity requirements while preserving capital and
maximizing yield. As of June 30, 2004, we held $195.3 million of cash and cash
equivalents (consisting primarily of short-term investments with original
maturities of 90 days or less) and $55.9 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 June 30,
2004, we had remaining available borrowing capacity under this credit facility
of $205.3 million, net of the $10.8 million of additional Federal Home Loan
Bank stock that we would be required to purchase to support those additional
borrowings, $30.0 million of unused federal funds credit facilities under
established lines of credit with two banks, and a $25.0 million revolving
credit facility with a bank. 27




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##### Table of Contents



Capital Resources The Company, the Banks holding company, had Tier 1 leverage, Tier 1 risk
based and total risk-based capital ratios at June 30, 2004 of 15.31%, 15.92%
and 18.24%, respectively, which represents $178.6 million, $165.3 million and
$137.3 million, respectively, of capital in excess of the amount required to be
well capitalized for bank holding company regulatory purposes. These ratios
were 14.2%, 15.6% and 18.2% as of December 31, 2003, respectively. The Bank had Tier 1 leverage, Tier 1 risk based and total risk-based
capital ratios at June 30, 2004 of 13.95%, 14.41% and 15.68%, respectively,
which represents $149.6 million, $136.2 million and $91.8 million,
respectively, of capital in excess of the amount required to be well
capitalized for regulatory purposes. These ratios were 13.2%, 14.3% and 15.6%
as of December 31, 2003, respectively. At June 30, 2004, shareholders equity totaled $202.0 million, or 10.7
percent of total assets. Our book value per share of common stock was $34.11
as of June 30, 2004, as compared to $31.30 as of December 31, 2003, and $30.28
as of June 30, 2003. 
 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, 2003. 
 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
June 30, 2004 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 June 30, 2004, the Companys
disclosure controls and procedures are 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 June 30, 2004, 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. 28




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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. Changes in Securities, Use of Proceeds and Issuer Repurchases of
Equity Securities The following table sets forth the repurchases of our common stock for the
fiscal quarter ended June 30, 2004. Total Number ofSharesPurchased as
    
    Maximum Number ofPart of Publicly
    
    Shares that May YetTotal Number
    
    Average
    
    Announced
    
    Be Purchased Underof Shares
    
    Price Paid
    
    Plans or
    
    the Plans orPeriod
    
    Purchased
    
    per Share
    
    Programs
    
    ProgramsApril 1, 2004 to April 30, 2004
    
    
    12,100
    
    
    $
    47.78
    
    
    
    12,100
    
    
    
    121,676May 1,
2004 to May 31, 2004
    
    
    44,145
    
    
    
    40.68
    
    
    
    44,145
    
    
    
    77,531June 1,
2004 to June 30, 2004
    
    
    21,700
    
    
    
    40.33
    
    
    
    21,700
    
    
    
    55,831Total
    
    
    77,945
    
    
    $
    41.69
    
    
    
    77,945
    
    
    
    55,831
 These repurchases were made under a program announced on December 21, 2001
for the repurchase of up to 5% of the outstanding shares. 
 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 and Reports on Form 8-K  (a)
    
    See exhibit index(b)
    
    During the second quarter of 2004, we filed or furnished the
following reports on Form 8-K: Item #
    
    Item Description
    
    Filing Date5 & 7
    
    Announcement of Annual Shareholders Meeting
    
    April 21, 2004Press Release12
    
    Earnings Press Release for the quarter ended
    
    May 13, 2004March 31, 20049
    
    Materials Presented at an Industry Conference
    
    June 4, 2004
 29




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##### Table of Contents



Item #
    
    Item Description
    
    Filing Date9
    
    Amendment of Materials Presented at an Industry
    
    June 23, 2004Conference previously filed on Form 8-K on June4, 20045 & 7
    
    Press Release Announcing the termination of the
    
    June 29, 2004Refund Anticipation Loan and Private LabelCredit Card programs with HouseholdInternational, Inc.
 30




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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: August 9, 2004
    
    /s/ George W. HaligowskiGeorge W. Haligowski
Chairman of the Board, President and
Chief Executive OfficerDate: August 9, 2004
    
    /s/ Timothy M. DoyleTimothy M. Doyle
Senior Managing Director and
Chief Financial Officer
 31




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##### Table of Contents



EXHIBIT INDEX Reference to PriorFilling or ExhibitRegulation S-K
    
    
    
    Number AttachedExhibit Number
    
    Document
    
    Hereto3.1
    
    Certificate of Incorporation
    
    
    **3.2
    
    Bylaws, as amended
    
    
    *****4
    
    Instruments Defining the Rights of Security Holders, IncludingIndentures
    
    None10.1
    
    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 CompensationPlan
    
    
    ********10.4
    
    Supplemental Salary Savings Plan
    
    
    *10.5
    
    Data Processing Agreement
    
    
    *10.6
    
    Employment Agreement with George W. Haligowski
    
    
    *10.7
    
    Change of Control Agreements
    
    
    ***10.8
    
    Recognition and Retention Plan
    
    
    **10.9
    
    Voluntary Retainer Stock and Deferred Compensation Plan forOutside Directors
    
    
    **10.10
    
    Supplemental Executive Retirement Plan
    
    
    ********10.11
    
    ITLA Capital Corporation Rabbi Trust Agreement
    
    
    ***10.12
    
    Salary Continuation Plan
    
    
    ****10.13
    
    Licensing Agreement, dated October 30, 2002, between ImperialCapital Bank and Beneficial Franchise Company, Inc.
    
    
    *******10.14
    
    Amended and Restated Sale and Servicing Agreement for RALs andRACs, dated as of January 3, 2003, between Imperial CapitalBank, Household Tax Masters Inc., and Household Tax MastersAcquisition Corporation
    
    
    *******11
    
    Statement Regarding Computation of Per Share Earnings
    
    None13
    
    Quarterly Report to Security Holders
    
    None15
    
    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 SecurityHolders
    
    None23
    
    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 ChiefFinancial 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 Registrants Form 10-K
for the year ended December 31, 2000 (File No. 0-26960).* * * * *
    
    Filed as an exhibit to the Companys Quarterly Report on
Form 10-Q for the quarter ended September 30, 2000 (File No. 0-26960).* * * * * *
    
    Filed as an appendix to the Companys definitive proxy
materials filed on September 29, 2001.* * * * * * *
    
    Filed as an exhibit to the Current Report on Form 8-K
filed by the Company on February 5, 2003 (File No. 0-26960). Portions
of this exhibit have been omitted pursuant to a request for confidential
treatment granted by the Commission.* * * * * * * *
    
    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).
 32