UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C.  20549





FORM
10-Q








(Mark
One)


R
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR
15(d)


OF
      THE SECURITIES EXCHANGE ACT OF 1934





For the
Quarterly Period Ended June 30, 2008





OR





£
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR
15(d)


OF
      THE SECURITIES EXCHANGE ACT OF 1934





For the
Transition Period from _____ to _____


Commission
File Number 1-33199





IMPERIAL
      CAPITAL BANCORP, INC.(Exact Name
      of Registrant as Specified in its Charter)





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(Registrant’s
      Telephone Number, Including Area
Code)





Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
      during the preceding 12 months (or for such shorter period that the
      registrant was required to file such reports), and (2) has been subject to
      such filing requirements for the past 90 days.  Yes R   No
      £.Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, a non-accelerated filer or a smaller reporting company.
      See definitions of “larger accelerated filer,” “accelerated filer” and
      “small reporting company” in Rule 12b-2 of the Exchange Act.
              Large
      Accelerated Filer £   Accelerated
      Filer R
              Non-Accelerated
      Filer £ (Do not
      check if a smaller reporting company)   Smaller reporting
      company £Indicate
      by check mark whether the Registrant is a shell company(as
      defined in Rule 12b-2 of the Exchange Act).  Yes £   No
      R.Number
      of shares of common stock of the registrant: 5,428,760 outstanding as of
      July 25, 2008.










IMPERIAL CAPITAL BANCORP, INC.


FORM
10-Q


FOR
THE THREE AND SIX MONTHS ENDED JUNE 30, 2008





TABLE
OF CONTENTS





PART I – FINANCIAL INFORMATIONItem 1.
            Financial StatementsConsolidated Balance Sheets – June 30, 2008 (Unaudited)
      and December 31, 2007
            3Consolidated Statements of Income – Three and Six Months
      Ended June 30, 2008 and 2007 (Unaudited)
            4Consolidated Statements of Cash Flows – Six Months Ended June
      30, 2008 and 2007 (Unaudited)
            5Notes to the Unaudited Consolidated Financial
      Statements
            6Item 2.
            Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
            14Item 3.
            Quantitative and Qualitative Disclosures about Market
      Risk
            30Item 4.
            Controls and Procedures
            31PART II – OTHER INFORMATIONItem 1.
            Legal Proceedings
            32Item 1A.
            Risk Factors
            32Item 2.
            Unregistered Sales of Equity Securities and Use of
      Proceeds
            33Item 3.
            Defaults Upon Senior Securities
            34Item 4.
            Submission of Matters to a Vote of Security
      Holders
            34Item 5.
            Other Information
            34Item 6.
            Exhibits
            34Signatures
            35





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 our
competitors’ loan and other products, loan demand risks, the quality or
composition of our loan or investment portfolios, increased costs from pursuing
the national expansion of our lending platform and operational challenges
inherent in implementing this expansion strategy, fluctuations in interest
rates, and changes in the relative differences between short- and long-term
interest rates, conditions in the commercial and residential real estate
markets, levels of non-performing assets and other loans of concern, and
operating results, capital and credit market conditions, the economic impact of
any terrorist actions 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 any 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 2008 and beyond to differ materially from those expressed in any
forward-looking statements by, or on behalf of, us, and could negatively affect
the Company’s operating and stock price performance.





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




-2-
 Table of Contents


PART I – FINANCIAL INFORMATION







IMPERIAL CAPITAL BANCORP, INC. AND
      SUBSIDIARIESCONSOLIDATED
      BALANCE SHEETSJune
      30,2008
            
            
            December
      31,(unaudited)
            
            
            2007(in
      thousands, except share data)AssetsCash
      and cash equivalents
            
            $
            4,922
            
            
            $
            8,944Investment
      securities available-for-sale, at fair value
            
            
            106,434
            
            
            
            117,924Investment
      securities held-to-maturity, at amortized cost
            
            
            914,433
            
            
            
            159,023Stock
      in Federal Home Loan Bank
            
            
            62,025
            
            
            
            53,497Loans,
      net (net of allowance for loan losses of $51,159 and $47,783as
      of June 30, 2008 and December 31, 2007, respectively)
            
            
            2,914,301
            
            
            
            3,125,072Interest
      receivable
            
            
            22,044
            
            
            
            20,841Other
      real estate and other assets owned, net
            
            
            20,912
            
            
            
            19,396Premises
      and equipment, net
            
            
            8,745
            
            
            
            8,550Deferred
      income taxes
            
            
            13,651
            
            
            
            12,148Other
      assets
            
            
            32,715
            
            
            
            25,824Total
      assets
            
            $
            4,100,182
            
            
            $
            3,551,219Liabilities
      and Shareholders’ EquityLiabilities:Deposit
      accounts
            
            $
            2,492,526
            
            
            $
            2,181,858Federal
      Home Loan Bank advances and other borrowings
            
            
            1,260,707
            
            
            
            1,021,235Accounts
      payable and other liabilities
            
            
            34,433
            
            
            
            33,959Junior
      subordinated debentures
            
            
            86,600
            
            
            
            86,600Total
      liabilities
            
            
            3,874,266
            
            
            
            3,323,652Commitments
      and contingenciesShareholders’
      equity:Preferred
      stock, 5,000,000 shares authorized, none issued
            
            
            —
            
            
            
            —Contributed
      capital - common stock, $.01 par value; 20,000,000 shares authorized,
      9,146,256 and 9,142,256 issued as of June 30, 2008 and December 31, 2007,
      respectively
            
            
            85,286
            
            
            
            85,009Retained
      earnings
            
            
            258,126
            
            
            
            255,947Accumulated
      other comprehensive (loss) income, net
            
            
            (1,956
            )
            
            
            267341,456
            
            
            
            341,223Less
      treasury stock, at cost 4,112,832 and 3,995,634 shares as ofJune
      30, 2008 and December 31, 2007, respectively
            
            
            (115,540
            )
            
            
            (113,656
            )Total
      shareholders' equity
            
            
            225,916
            
            
            
            227,567Total
      liabilities and shareholders' equity
            
            $
            4,100,182
            
            
            $
            3,551,219




See
accompanying notes to the unaudited consolidated financial
statements.




-3-
 Table of Contents





IMPERIAL CAPITAL BANCORP, INC. AND
      SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF INCOME(Unaudited)





For
      the Three Months Ended June 30,
            
            
            For
      the Six Months EndedJune
      30,2008
            
            
            2007
            
            
            2008
            
            
            2007(in
      thousands, except per share data)Interest
      income:Loans,
      including fees
            
            $
            49,921
            
            
            $
            58,464
            
            
            $
            104,756
            
            
            $
            117,227Cash
      and investment securities
            
            
            13,446
            
            
            
            4,519
            
            
            
            17,695
            
            
            
            9,088Total
      interest income
            
            
            63,367
            
            
            
            62,983
            
            
            
            122,451
            
            
            
            126,315Interest
      expense:Deposit
      accounts
            
            
            24,302
            
            
            
            27,485
            
            
            
            49,385
            
            
            
            54,073Federal
      Home Loan Bank advances and other borrowings
            
            
            12,494
            
            
            
            11,593
            
            
            
            24,412
            
            
            
            22,270Junior
      subordinated debentures
            
            
            1,798
            
            
            
            2,088
            
            
            
            3,803
            
            
            
            4,166Total
      interest expense
            
            
            38,594
            
            
            
            41,166
            
            
            
            77,600
            
            
            
            80,509Net
      interest income before provision for loan losses
            
            
            24,773
            
            
            
            21,817
            
            
            
            44,851
            
            
            
            45,806Provision
      for loan losses
            
            
            6,250
            
            
            
            500
            
            
            
            10,500
            
            
            
            1,250Net
      interest income after provision for loan losses
            
            
            18,523
            
            
            
            21,317
            
            
            
            34,351
            
            
            
            44,556Non-interest
      income:Late
      and collection fees
            
            
            196
            
            
            
            236
            
            
            
            415
            
            
            
            539Loss
      on sale of loans
            
            
            (531
            )
            
            
            —
            
            
            
            (479
            )
            
            
            —Other
            
            
            (814
            )
            
            
            607
            
            
            
            (817
            )
            
            
            1,020Total
      non-interest income
            
            
            (1,149
            )
            
            
            843
            
            
            
            (881
            )
            
            
            1,559Non-interest
      expense:Compensation
      and benefits
            
            
            5,695
            
            
            
            5,056
            
            
            
            12,559
            
            
            
            11,238Occupancy
      and equipment
            
            
            1,914
            
            
            
            1,998
            
            
            
            3,856
            
            
            
            3,941Other
            
            
            5,081
            
            
            
            4,849
            
            
            
            9,765
            
            
            
            9,145Total
      general and administrative
            
            
            12,690
            
            
            
            11,903
            
            
            
            26,180
            
            
            
            24,324Real
      estate and other assets owned expense, net
            
            
            259
            
            
            
            195
            
            
            
            687
            
            
            
            358Provision
      for losses on real estate and other assets owned
            
            
            478
            
            
            
            —
            
            
            
            1,105
            
            
            
            —Loss
      on sale of real estate and other assets owned, net
            
            
            63
            
            
            
            —
            
            
            
            463
            
            
            
            —Total
      real estate and other assets owned expense, net
            
            
            800
            
            
            
            195
            
            
            
            2,255
            
            
            
            358Total
      non-interest expense
            
            
            13,490
            
            
            
            12,098
            
            
            
            28,435
            
            
            
            24,682Income
      before provision for income taxes
            
            
            3,884
            
            
            
            10,062
            
            
            
            5,035
            
            
            
            21,433Provision
      for income taxes
            
            
            1,534
            
            
            
            4,024
            
            
            
            1,988
            
            
            
            8,658NET
      INCOME
            
            $
            2,350
            
            
            $
            6,038
            
            
            $
            3,047
            
            
            $
            12,775Basic
      earnings per share
            
            $
            0.43
            
            
            $
            1.10
            
            
            $
            0.56
            
            
            $
            2.32Diluted
      earnings per share
            
            $
            0.43
            
            
            $
            1.08
            
            
            $
            0.56
            
            
            $
            2.26Dividends
      declared per share of common stock
            
            $
            —
            
            
            $
            0.16
            
            
            $
            0.16
            
            
            $
            0.32





See
accompanying notes to the unaudited consolidated financial
statements.




-4-
 Table of Contents


IMPERIAL CAPITAL BANCORP, INC. AND
    SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF CASH FLOWS(Unaudited)For
      the Six Months EndedJune
      30,2008
            
            
            2007(in
      thousands)Cash
      Flows From Operating Activities:Net
      Income
            
            $
            3,047
            
            
            $
            12,775Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      and amortization of premises and equipment
            
            
            1,458
            
            
            
            1,495(Accretion)
      amortization of discounts and premiums on loans and investment
      securities
            
            
            (985
            )
            
            
            2,327Accretion
      of deferred loan origination fees, net of costs
            
            
            (820
            )
            
            
            (1,389
            )Provision
      for loan losses
            
            
            10,500
            
            
            
            1,250Provision
      for losses on other real estate owned
            
            
            1,105
            
            
            
            —Other,
      net
            
            
            (481
            )
            
            
            (1,186
            )(Increase)
      decrease in interest receivable
            
            
            (1,203
            )
            
            
            223(Increase)
      decrease in other assets
            
            
            (6,891
            )
            
            
            369Increase
      (decrease) in accounts payable and other liabilities
            
            
            474
            
            
            
            (8,157
            )Net cash provided by operating
      activities
            
            
            6,204
            
            
            
            7,707Cash
      Flows From Investing Activities:Purchases
      of investment securities available-for-sale
            
            
            (10,143
            )
            
            
            (59,029
            )Proceeds
      from maturity and calls of investment securities
      available-for-sale
            
            
            18,558
            
            
            
            43,288Purchases
      of investment securities held-to-maturity
            
            
            (784,619
            )
            
            
            —Proceeds
      from the maturity and redemption of investment securities
      held-to-maturity
            
            
            31,615
            
            
            
            17,991Increase
      in stock in Federal Home Loan Bank
            
            
            (6,930
            )
            
            
            —Purchase
      of loans
            
            
            —
            
            
            
            (47,343
            )Proceeds
      from sale of loans
            
            
            53,797
            
            
            
            —Other
      decreases (increases) in loans, net
            
            
            135,642
            
            
            
            (74,853
            )Proceeds
      from sale of other real estate owned
            
            
            5,986
            
            
            
            —Cash
      paid for capital expenditures
            
            
            (1,702
            )
            
            
            (2,483
            )Proceeds
      from sale of equipment
            
            
            71
            
            
            
            —Net cash used in investing
      activities
            
            
            (557,725
            )
            
            
            (122,429
            )Cash
      Flows From Financing Activities:Proceeds
      and excess tax benefits from exercise of employee stock
      options
            
            
            71
            
            
            
            2,462Cash
      paid to acquire treasury stock
            
            
            (1,884
            )
            
            
            (7,124
            )Cash
      paid for dividends
            
            
            (828
            )
            
            
            (1,675
            )Increase
      in deposit accounts
            
            
            310,668
            
            
            
            99,022Repayments
      from short-term borrowings
            
            
            (2,600
            )
            
            
            (3,498
            )Proceeds
      from long-term borrowings
            
            
            414,000
            
            
            
            100,000Repayments
      of long-term borrowings
            
            
            (171,928
            )
            
            
            (68,240
            )Net cash provided by financing
      activities
            
            
            547,499
            
            
            
            120,947Net (decrease) increase in cash
      and cash equivalents
            
            
            (4,022
            )
            
            
            6,225Cash and cash equivalents at
      beginning of period
            
            
            8,944
            
            
            
            30,448Cash and cash equivalents at
      end of period
            
            $
            4,922
            
            
            $
            36,673Supplemental
      Cash Flow Information:Cash
      paid during the period for interest
            
            $
            73,906
            
            
            $
            80,597Cash
      paid during the period for income taxes
            
            $
            194
            
            
            $
            7,337Non-Cash
      Investing and Financing Transactions:Loans
      transferred to other real estate owned
            
            $
            9,070
            
            
            $
            11,134Cash
      dividends declared but not yet paid
            
            $
            —
            
            
            $
            836





See
accompanying notes to the unaudited consolidated financial
statements.




-5-
 Table of Contents




IMPERIAL
CAPITAL BANCORP, INC. AND SUBSIDIARIES






NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS







NOTE
1 – BASIS OF PRESENTATION




The
unaudited consolidated financial statements of Imperial Capital Bancorp, Inc.
and subsidiaries (the “Company”) included herein reflect all normal recurring
adjustments which are, in the opinion of management, necessary to present fairly
the results of operations and financial position of the Company, as of the dates
and for the interim periods indicated.  The unaudited consolidated
financial statements include the accounts of Imperial Capital Bancorp, Inc. and
its wholly-owned subsidiaries, Imperial Capital Bank (the “Bank”) and Imperial
Capital Real Estate Investment Trust (“Imperial Capital REIT”).





All
intercompany transactions and balances have been eliminated.  Certain
information and disclosures normally included in financial statements prepared
in accordance with accounting principles generally accepted in the United States
have been condensed or omitted pursuant to the rules and regulations of the U.S.
Securities and Exchange Commission.  Certain amounts in prior periods
have been reclassified to conform to the presentation in the current
periods.  The results of operations for the three and six months ended
June 30, 2008 are not necessarily indicative of the results of operations for
the remainder of the year.





These
unaudited consolidated financial statements should be read in conjunction with
the consolidated financial statements and notes thereto included in our annual
report on Form 10-K for the year ended December 31, 2007.







NOTE
2 – ACCOUNTING FOR STOCK-BASED COMPENSATION




Effective
January 1, 2006, the Company adopted Statement of Financial Accounting Standards
(“SFAS”) No. 123 (revised 2004), “Share-Based Payment”, which requires the
recognition of the expense related to the fair value of stock-based compensation
awards within the consolidated statement of income.  Stock-based
compensation expense for the three and six months ended June 30, 2008 and 2007
includes compensation expense for stock-based compensation awards for which the
requisite service was performed during the period.  Compensation
expense for unvested stock-based compensation awards granted prior to January 1,
2006 are based on the grant date fair value estimated in accordance with the
original provisions of SFAS No. 123, “Accounting for Stock-Based
Compensation”.  Compensation expense for all stock-based compensation
awards granted subsequent to January 1, 2006 are based on the grant date fair
value estimated in accordance with the provisions of SFAS No.
123(R).




-6-
 Table of Contents





Total
stock-based compensation expense included in our consolidated statements of
income for the three and six months ended June 30, 2008 was approximately
$83,000 ($73,000, net of tax, or $0.01 per diluted share) and $167,000
($146,000, net of tax, or $0.03 per diluted share), respectively.  For
the three and six months ended June 30, 2007, these amounts were $39,000
($23,000, net of tax, or $0.00 per diluted share) and $58,000 ($35,000, net of
tax, or $0.01 per diluted share), respectively.  Unrecognized
stock-based compensation expense related to stock options was approximately
$627,000 and $363,000, respectively, at June 30, 2008 and 2007.  The
weighted-average period over which the unrecognized expense was expected to be
recognized was 1.9 years and 2.5 years at June 30, 2008 and 2007,
respectively.





The fair
value of each option grant is estimated on the date of grant using a
Black-Scholes option pricing model.  No options were granted during
the six months ended June 30, 2008.  The weighted-average assumptions
for option grants during the six months ended June 30, 2007 were:





Weighted-Average
      Assumptions for
      Option Grants2007Dividend
      Yield
            
            1.18%Expected
      Volatility
            
            23.83%Risk-Free
      Interest Rates
            
            4.72%Expected
      Lives
            
            Five
      YearsWeighted-Average
      Fair Value
            
            $14.49







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.  Stock options outstanding as of June 30, 2008 and 2007 were
550,650 and 498,900, respectively.  For the three and six months ended
June 30, 2008, 533,650 and 514,050, respectively, of these options outstanding
were excluded from the diluted EPS computation as their effect was
anti-dilutive, compared to 94,500 and 63,250, respectively, for the same periods
last year.




-7-
 Table of Contents


The
following is a reconciliation of the calculation of Basic EPS and Diluted
EPS:




Net
      Income
            
            
            Weighted-
              Average
      Shares
              Outstanding
            
            
            Per
              Share
              Amount(in
      thousands, except per share data)For
      the Three Months Ended June 30,2008Basic
      EPS
            
            $
            2,350
            
            
            
            5,429
            
            
            $
            0.43Effect
      of dilutive stock options
            
            
            —
            
            
            
            2
            
            
            
            (0.00
            )Diluted
      EPS
            
            $
            2,350
            
            
            
            5,431
            
            
            $
            0.432007Basic
      EPS
            
            $
            6,038
            
            
            
            5,489
            
            
            $
            1.10Effect
      of dilutive stock options
            
            
            —
            
            
            
            124
            
            
            
            (0.02
            )Diluted
      EPS
            
            $
            6,038
            
            
            
            5,613
            
            
            $
            1.08For
      the Six Months Ended June 30,2008Basic
      EPS
            
            $
            3,047
            
            
            
            5,427
            
            
            $
            0.56Effect
      of dilutive stock options
            
            
            —
            
            
            
            12
            
            
            
            (0.00
            )Diluted
      EPS
            
            $
            3,047
            
            
            
            5,439
            
            
            $
            0.562007Basic
      EPS
            
            $
            12,775
            
            
            
            5,509
            
            
            $
            2.32Effect
      of dilutive stock options
            
            
            —
            
            
            
            139
            
            
            
            (0.06
            )Diluted
      EPS
            
            $
            12,775
            
            
            
            5,648
            
            
            $
            2.26







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
      30,2008
            
            
            2007
            
            
            2008
            
            
            2007(in
      thousands)Net
      Income
            
            $
            2,350
            
            
            $
            6,038
            
            
            $
            3,047
            
            
            $
            12,775Other
      comprehensive loss:Change
      in net unrealized gains (loss) on investment securities
      available-for-sale, net of tax benefit of $1,515 and $557 for the three
      months ended June 30, 2008 and 2007, respectively, and $1,482 and $313 for
      the six months ended June 30, 2008 and 2007, respectively.
            
            
            (2,272
            )
            
            
            (835
            )
            
            
            (2,223
            )
            
            
            (469
            )Comprehensive
      Income
            
            $
            78
            
            
            $
            5,203
            
            
            $
            824
            
            
            $
            12,306




-8-
 Table of Contents


NOTE
5 – IMPAIRED LOANS RECEIVABLE




As of
June 30, 2008 and December 31, 2007, the recorded investment in impaired loans
was $125.6 million and $47.0 million, respectively.  The average
recorded investment in impaired loans was $111.7 million and $88.0 million,
respectively, for the three and six months ended June 30, 2008, and $41.9
million and $39.9 million, respectively, for the same periods last year.
Interest income recognized on impaired loans totaled $169,000 and
$361,000 respectively, for the three and six months ended June 30, 2008, as
compared to $213,000 and $406,000, respectively, for the same periods last
year.







NOTE
6 – FAIR VALUE




The
Company adopted the provisions of SFAS No. 157 as of January 1, 2008, for
financial instruments.  Although the adoption of SFAS No. 157 did not
materially impact its financial condition or results of operations, the Company
is now required to provide additional disclosures as part of its financial
statements.  In accordance with FASB Staff Position No. 157-2,
"Effective Date of FASB Statement No. 157," the Company will delay application
of SFAS No. 157 for non-financial assets and non-financial liabilities, until
January 1, 2009.




SFAS No.
157 establishes a three-tier fair value hierarchy, which prioritizes the inputs
used in measuring fair value.  These tiers include: Level 1, defined
as observable inputs such as quoted prices in active markets; Level 2, defined
as inputs other than quoted prices in active markets that are either directly or
indirectly observable; and Level 3, defined as unobservable inputs in which
little or no market data exists, therefore requiring an entity to develop its
own assumptions.




Investment
securities available-for sale are reported at fair value utilizing Level 1
inputs with respect to valuing equity securities with quoted prices on an active
market, Level 2 inputs for investment and debt securities, and Level 3 inputs
related to the valuation of the Company’s residual interest in securitized
loans.  The valuation for investment and debt securities utilizing
Level 2 inputs were primarily determined by an independent pricing service using
matrix pricing, which is a mathematical technique widely used in the industry to
value securities without relying exclusively on quoted market prices for the
specific securities, but rather by relying on the securities’ relationship to
other benchmark quoted securities.




-9-
 Table of Contents


The
Company’s assets measured at fair value on a recurring basis subject to the
disclosure requirements of SFAS No. 157 at June 30, 2008, were as
follows:


Assets
      and Liabilities Measured at Fair Value on a Recurring Basis at June 30,
      2008Quoted Prices in
                Active
      Markets
                for
      Identical
                Assets
      (Level 1)
              
              Significant
                Other
                Observable
                Inputs (Level 2)
              
              Significant
                Unobservable
                Inputs (Level 3)
              
              Balance
      at
                June
      30,2008(dollars
      in thousands)AssetsInvestment
      securities — available-for-sale
              
              $
              117
              
              
              $
              105,531
              
              
              $
              786
              
              
              $
              106,434




Changes
      in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring
      BasisBalance
      at
                December
      31,2007
              
              Total Realizedand Unrealized
                Gains
      Includedin
      Income
              TotalRealized and
                UnrealizedGains
              
              Purchases,
                Sales, Other
                Settlements and
                Issuances,
      net
              
              Net Transfers
                In and/or Outof
      Level 3
              
              Balance
      at
                June
      30, 2008Net Revaluation
                of
      RetainedInterests(dollars
      in thousands)AssetsInvestment
      securities — available-for-sale
              
              $
              1,318
              
              $                                                          
      —
              
              $
              —
              
              
              $
              (532
              )
              
              $
              —
              
              
              $
              786


The
Company’s assets measured at fair value on a non-recurring basis subject to the
disclosure requirements of SFAS No. 157 at June 30, 2008, were as
follows:


Assets
      and Liabilities Measured at Fair Value on a Non-Recurring Basis atJune
      30, 2008Quoted Prices in
                Active
      Markets
                for
      Identical
                Assets
      (Level 1)
              
              Significant
                Other
                Observable
                Inputs (Level 2)
              
              Significant
                Unobservable
                Inputs (Level 3)
              
              Balance
      at
                June
      30,2008(dollars
      in thousands)AssetsImpaired
      Loans
              
              $
              —
              
              
              $
              —
              
              
              $
              113,232
              
              
              $
              113,232






Impaired
loans, which are measured for impairment using the fair value of the collateral,
for collateral dependent loans, had a carrying amount $125.6 million, with a
valuation allowance of $12.3 million.




-10-
 Table of Contents




Certain
non-financial assets and non-financial liabilities measured at fair value on a
recurring basis include reporting units measured at fair value in the first step
of a goodwill impairment test.  Certain non-financial assets measured
at fair value on a non-recurring basis include non-financial assets and
non-financial liabilities measured at fair value in the second step of a
goodwill impairment test, as well as intangible assets and other non-financial
long-lived assets measured at fair value for impairment
assessment.  As stated above, SFAS No. 157 will be applicable to these
fair value measurements beginning January 1, 2009.







NOTE
7 – NEW ACCOUNTING PRONOUNCEMENTS




In June
2006, the Financial Accounting Standards Board (“FASB”) issued FASB
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an
interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 establishes a
single model to address accounting for uncertainty in tax
positions.  FIN 48 clarifies the accounting for uncertainty in income
taxes by prescribing a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken, or
expected to be taken, in a tax return. The interpretation also provides guidance
on derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition requirements. FIN 48 was effective for the
Company on January 1, 2007.  The adoption of FIN 48 did not have a
material impact on the Company’s financial condition or results of
operations.





In
September 2006, the FASB issued SFAS No. 157, “Fair Value
Measurements.”  SFAS No. 157 defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles,
and expands disclosures about fair value measurements. SFAS No. 157 was
effective for the Company on January 1, 2008.  The adoption of SFAS
No. 157 did not have a material impact on the Company’s financial condition or
results of operations.





In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities."  SFAS No. 159 provides
companies with an option to report selected financial assets and liabilities at
fair value.  The objective of SFAS No. 159 is to reduce both complexity in
accounting for financial instruments and the volatility in earnings caused by
measuring related assets and liabilities differently. SFAS No. 159 also
establishes presentation and disclosure requirements designed to facilitate
comparisons between companies that choose different measurement attributes for
similar types of assets and liabilities. SFAS No. 159 was effective for us on
January 1, 2008. The adoption of SFAS No. 159 did not have a material impact on
the Company’s financial condition or results of operations.





In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB Statement No.
51.”  SFAS No. 160 amends Accounting Research Bulletin (ARB) No. 51,
“Consolidated Financial Statements,” to establish accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. SFAS No. 160 clarifies that a noncontrolling
interest in a subsidiary, which is sometimes referred to as minority interest,
is an ownership interest in the consolidated entity that should be reported as a
component of equity in the consolidated financial statements. Among other
requirements, SFAS No. 160 requires consolidated net income to be reported at
amounts that include the amounts attributable to both the parent and the
noncontrolling interest. It also requires disclosure, on the face of the
consolidated income statement, of the amounts of consolidated net income
attributable to the parent and to the noncontrolling interest. SFAS No. 160 is
effective for the Company on January 1, 2009 and is not expected to have a
significant impact on the Company’s financial condition or results of
operations.





-11-
 Table of Contents




In March
2008, the FASB issued SFAS No. 161, "Disclosures About Derivative Instruments
and Hedging Activities, an Amendment of FASB Statement No.133."  SFAS
No. 161 amends SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," to amend and expand the disclosure requirements of SFAS No. 133 to
provide greater transparency about (i) how and why an entity uses derivative
instruments, (ii) how derivative instruments and related hedge items are
accounted for under SFAS No. 133 and its related interpretations, and (iii) how
derivative instruments and related hedged items affect an entity's financial
position, results of operations and cash flows.  To meet those
objectives, SFAS No. 161 requires qualitative disclosures about objectives and
strategies for using derivatives, quantitative disclosures about fair value
amounts of gains and losses on derivative instruments and disclosures about
credit-risk-related contingent features in derivative agreements. SFAS No. 161
is effective for the Company on January 1, 2009 and is not expected to have a
significant impact on the Company's financial condition or results of
operations.







NOTE
8 – BUSINESS SEGMENT INFORMATION




SFAS No.
131, “Disclosures About Segments of an Enterprise and Related Information”
(“SFAS No. 131”), 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 are 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 accounting principles generally accepted in the United States. There is no
significant difference between the measurement of the reportable segments
profits and losses disclosed below and the measurement of profits and losses in
the Company’s consolidated statements of income. Accounting allocations are made
in the same manner for all operating segments.




-12-
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LendingOperations
            
            
            All Other
            
            
            Consolidated(in
      thousands)For
      the three months ended June 30,2008Revenues
      from external customers
            
            $
            62,192
            
            
            $
            26
            
            
            $
            62,218Total
      interest income
            
            
            63,314
            
            
            
            53
            
            
            
            63,367Total
      interest expense
            
            
            36,796
            
            
            
            1,798
            
            
            
            38,594Net
      income (loss)
            
            
            4,022
            
            
            
            (1,672
            )
            
            
            2,3502007Revenues
      from external customers
            
            $
            63,260
            
            
            $
            566
            
            
            $
            63,826Total
      interest income
            
            
            62,539
            
            
            
            444
            
            
            
            62,983Total
      interest expense
            
            
            39,078
            
            
            
            2,088
            
            
            
            41,166Net
      income (loss)
            
            
            7,480
            
            
            
            (1,442
            )
            
            
            6,038For
      the six months ended June 30,2008Revenues
      from external customers
            
            $
            122,003
            
            
            $
            (433
            )
            
            $
            121,570Total
      interest income
            
            
            122,340
            
            
            
            111
            
            
            
            122,451Total
      interest expense
            
            
            73,797
            
            
            
            3,803
            
            
            
            77,600Net
      income (loss)
            
            
            6,753
            
            
            
            (3,706
            )
            
            
            3,0472007Revenues
      from external customers
            
            $
            126,958
            
            
            $
            916
            
            
            $
            127,874Total
      interest income
            
            
            125,606
            
            
            
            709
            
            
            
            126,315Total
      interest expense
            
            
            76,343
            
            
            
            4,166
            
            
            
            80,509Net
      income (loss)
            
            
            16,047
            
            
            
            (3,272
            )
            
            
            12,775




-13-
 Table of Contents




Item2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations





The
following discussion and analysis is intended to identify the major factors that
affected our financial condition and results of operations as of and for the
three and six months ended June 30, 2008.





Application
of Critical Accounting Policies and Accounting Estimates





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





We
consider accounting estimates to be critical to reported financial results if
(i) the accounting estimate requires management to make assumptions about
matters that are highly uncertain and (ii) different estimates that management
reasonably could have used for the accounting estimate in the current period, or
changes in the accounting estimate that are reasonably likely to occur from
period to period, could have a material impact on our financial
statements.  Accounting polices related to the allowance for loan
losses are considered to be critical, as these policies involve considerable
subjective judgment and estimation by management.  We also consider
our accounting polices related to other real estate and other assets owned to be
critical due to the potential significance of these activities and the estimates
involved.





For
additional information regarding critical accounting policies, refer to
Note 1 – “Organization and Summary of Significant Accounting Policies” in
the Notes to Consolidated Financial Statements and the sections captioned
“Application of Critical Accounting Policies and Accounting Estimates” and
“Allowance for Loan Losses and Non-performing 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, 2007.  There have
been no significant changes in the Company's application of accounting policies
since December 31, 2007.





RESULTS
OF OPERATIONS





Three
Months Ended June 30, 2008 Compared to Three Months Ended June 30,
2007







Executive
Summary




Consolidated
net income and diluted EPS were $2.4 million and $0.43, respectively, for the
three months ended June 30, 2008, compared to $6.0 million and $1.08 for the
same period last year.  The decline in net income during the current
period was primarily caused by a $5.8 million increase in provision for loan
losses recorded and a $2.0 million decrease in non-interest income, partially
offset by a $3.0 million increase in net interest income before provision for
loan losses.





-14-
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Net
interest income before provision for loan losses increased 13.5% to $24.8
million for the quarter ended June 30, 2008, compared to $21.8 million for the
same period last year.  The increase was primarily due to an increase
in interest earned on our investment securities held-to-maturity, as well as a
decline in our average cost of funds, as deposits have repriced to current
market interest rates.  The increase in net interest income was
partially offset by a decline in the yield earned on our loan portfolio, as
higher yielding loans have paid-off and were replaced by loan production that
was originated at lower spreads over our cost of funds due to competitive
pricing pressures, as well as our adjustable rate loan portfolio repricing to
lower current market interest rates.  During the quarters ended June
30, 2008 and 2007, the average balance of our investment securities
held-to-maturity was $567.4 million and $181.6 million,
respectively.  At June 30, 2008, our investment securities
held-to-maturity totaled $914.4 million as compared to $159.0 million at
December 31, 2007.  These increases were primarily related to the
purchase of approximately $784.6 million of AAA rated corporate sponsored
collateralized mortgage obligations (CMOs) during the current year, which are
secured by Alt A first lien residential mortgage loans, predominantly all of
which carry fixed interest rates.  For further discussion regarding
these CMO acquisitions refer to management’s discussion of net interest income
and margin for the three months ended June 30, 2008 and 2007.





The
provision for loan losses was $6.3 million and $500,000, respectively, for the
quarters ended June 30, 2008 and 2007.  The increase in the provision
for loan losses recorded during the current quarter was primarily due to the
increase in our non-performing loans.  Non-performing loans as of June
30, 2008 were $116.8 million, compared to $91.5 million and $38.0 million at
March 31, 2008 and December 31, 2007, respectively.  The increase in
non-performing loans during the year was primarily related to non-performing
construction and land development loans, which increased from $8.8 million at
December 31, 2007 to $78.7 million at June 30, 2008.  Our construction
and land loan portfolio at June 30, 2008 totaled $460.0 million, of which $296.2
million were residential and condominium conversion construction loans and land
development loans, representing 10.0% of our total loan portfolio.





The
return on average assets was 0.25% for the three months ended June 30, 2008,
compared to 0.70% for the same period last year.  The return on
average shareholders’ equity was 4.16% for the three months ended June 30, 2008,
compared to 10.71% for the same period last year.





Loan
originations were $87.1 million for the quarter ended June 30, 2008, compared to
$337.7 million for the same period last year.  During the current
quarter, we originated $31.7 million of commercial real estate loans, $46.1
million of small balance multi-family real estate loans, and $9.2 million of
entertainment finance loans.  Loan originations for the same period
last year consisted of $191.6 million of commercial real estate loans, $117.1
million of small balance multi-family real estate loans, and $29.0 million of
entertainment finance loans.  Loan originations during the current
period were impacted by a decline in customer demand as a result of
uncertainty regarding current real estate market conditions.  In
addition, our wholesale loan operations acquired $29.7 million of commercial and
multi-family real estate loans during the quarter ended June 30,
2007.  We did not purchase any loans during the current
period.





-15-
 Table of Contents




Net
Interest Income and Margin





The
following table presents for the three months ended June 30, 2008 and 2007, 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 30,2008
            
            
            2007Average
      Balance
            
            
            Income/Expense
            
            
            Yield/Rate
            
            
            Average
      Balance
            
            
            Income/Expense
            
            
            Yield/Rate(dollars
      in thousands)AssetsCash
      and investment securities
            
            $
            740,508
            
            
            $
            13,446
            
            
            
            7.30
            %
            
            $
            365,701
            
            
            $
            4,519
            
            
            
            4.96
            %Loans
      receivable
            
            
            3,076,065
            
            
            
            49,921
            
            
            
            6.53
            %
            
            
            3,080,233
            
            
            
            58,464
            
            
            
            7.61
            %Total
      interest earning assets
            
            
            3,816,573
            
            
            $
            63,367
            
            
            
            6.68
            %
            
            
            3,445,934
            
            
            $
            62,983
            
            
            
            7.33
            %Non-interest
      earning assets
            
            
            78,925
            
            
            
            
            
            
            
            
            
            
            
            80,514Allowance
      for loan losses
            
            
            (48,830
            )
            
            
            
            
            
            
            
            
            
            
            (46,218
            )Total
      assets
            
            $
            3,846,668
            
            
            
            
            
            
            
            
            
            
            $
            3,480,230Liabilities
      and Shareholders’ EquityInterest
      bearing deposit accounts:Interest
      bearing demand
            
            $
            33,347
            
            
            $
            255
            
            
            
            3.08
            %
            
            $
            25,246
            
            
            $
            246
            
            
            
            3.91
            %Money
      market and passbook
            
            
            273,732
            
            
            
            2,431
            
            
            
            3.57
            %
            
            
            230,458
            
            
            
            2,871
            
            
            
            5.00
            %Time
      certificates
            
            
            1,982,484
            
            
            
            21,616
            
            
            
            4.39
            %
            
            
            1,843,336
            
            
            
            24,368
            
            
            
            5.30
            %Total interest bearing deposit
      accounts
            
            
            2,289,563
            
            
            
            24,302
            
            
            
            4.27
            %
            
            
            2,099,040
            
            
            
            27,485
            
            
            
            5.25
            %FHLB
      advances and other borrowings
            
            
            1,198,617
            
            
            
            12,494
            
            
            
            4.19
            %
            
            
            1,023,291
            
            
            
            11,593
            
            
            
            4.54
            %Junior
      subordinated debentures
            
            
            86,600
            
            
            
            1,798
            
            
            
            8.35
            %
            
            
            86,600
            
            
            
            2,088
            
            
            
            9.67
            %Total
      interest bearing liabilities
            
            
            3,574,780
            
            
            $
            38,594
            
            
            
            4.34
            %
            
            
            3,208,931
            
            
            $
            41,166
            
            
            
            5.15
            %Non-interest
      bearing demand accounts
            
            
            9,254
            
            
            
            
            
            
            
            
            
            
            
            10,377Other
      non-interest bearing liabilities
            
            
            35,380
            
            
            
            
            
            
            
            
            
            
            
            34,727Shareholders’
      equity
            
            
            227,254
            
            
            
            
            
            
            
            
            
            
            
            226,195Total liabilities andshareholders’
      equity
            
            $
            3,846,668
            
            
            
            
            
            
            
            
            
            
            $
            3,480,230Net
      interest spread (1)
            
            
            
            
            
            
            
            
            
            
            2.34
            %
            
            
            
            
            
            
            
            
            
            
            2.18
            %Net
      interest income before provisionfor
      loan losses
            
            
            
            
            
            $
            24,773
            
            
            
            
            
            
            
            
            
            
            $
            21,817Net
      interest margin (2)
            
            
            
            
            
            
            
            
            
            
            2.61
            %
            
            
            
            
            
            
            
            
            
            
            2.54
            %


____________


(1)
            Average
      yield on interest earning assets minus average rate paid on interest
      bearing liabilities.


(2)
            Net
      interest income divided by total average interest earning
      assets.




-16-
 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, 2008 and 2007Increase
      (Decrease) Due to:Rate
            
            
            Volume
            
            
            Total(in
      thousands)Interest
      and fees earned from:Cash
      and investment securities
            
            $
            2,814
            
            
            $
            6,113
            
            
            $
            8,927Loans
            
            
            (8,462
            )
            
            
            (81
            )
            
            
            (8,543
            )Total
      increase (decrease) in interest income
            
            
            (5,648
            )
            
            
            6,032
            
            
            
            384Interest
      paid on:Deposit
      accounts
            
            
            (5,488
            )
            
            
            2,305
            
            
            
            (3,183
            )FHLB
      advances and other borrowings
            
            
            (948
            )
            
            
            1,849
            
            
            
            901Junior
      subordinated debentures
            
            
            (290
            )
            
            
            —
            
            
            
            (290
            )Total
      (decrease) increase in interest expense
            
            
            (6,726
            )
            
            
            4,154
            
            
            
            (2,572
            )Increase
      in net interest income
            
            $
            1,078
            
            
            $
            1,878
            
            
            $
            2,956





Total
interest income increased $384,000 to $63.4 million for the current
quarter as compared to $63.0 million for the same period last year. The
increase in interest income was primarily attributable to a $374.8 million
increase in the average balance on cash and investments, as well as an increase
of 234 basis points in the average yield earned on cash and
investments.  These increases were partially offset by a 108 basis
point decline in the average yield earned on total loans
receivable.





The
average balance of cash and investment securities increased to $740.5 million
during the quarter compared to $365.7 million during the same period last
year.  This increase was primarily due to an increase in the average
balance of our investment securities held-to-maturity, which totaled $567.4
million as of June 30, 2008, as compared to $181.6 million as of June 30,
2007.  These increases were primarily related to the purchase of
approximately $784.6 million of AAA rated corporate sponsored CMOs during the
current year, which are secured by Alt A first lien residential mortgage loans,
predominantly all of which carry fixed interest rates.  These CMOs
were acquired at an average cost of 88% of their current par value (actual cost
ranged from 68% to 96% of current par value, depending on estimated average
lives, credit enhancement through subordination levels, and underlying
collateral performance).  These investments were priced to earn a
weighted average effective yield of 8.9%, and they carry an average credit
enhancement of 8.6% through subordination provided by junior CMO tranches that
bear the initial losses on the underlying loans.  The average expected
life of these CMOs is approximately 5 years.  The average yield earned
on our cash and investment securities was 7.30% during the three months ended
June 30, 2008, as compared to 4.96% during the same period last
year.  These increases were primarily related to the CMO purchases
during the current year.  The average yield earned during the current
quarter on our investment securities held-to-maturity was 7.72%, as compared to
4.20% during the same period last year.





-17-
 Table of Contents




The
average aggregate balance of our loan portfolio was $3.1 billion for each of the
quarters ended June 30, 2008 and 2007.  Commercial real estate loans
had an average aggregate balance of $600.5 million during the quarter ended June
30, 2008, compared to $563.8 million during the same period last
year.  Construction and land loans had an average aggregate balance of
$436.9 million during the quarter ended June 30, 2008, compared to $423.8
million during the same period last year.  Multi-family real estate
loans had an average aggregate balance of $1.9 billion during the quarter ended
June 30, 2008, compared to $2.0 billion during the same period last
year.   Single-family residential loans had an average aggregate
balance of $11.9 million during the quarter ended June 30, 2008, compared to
$28.1 million during the same period last year.  The average aggregate
balance of entertainment finance loans was $66.1 million and $78.9 million
during the quarters ended June 30, 2008 and 2007, respectively.





The
average yield earned on total loans decreased to 6.53% during the quarter ended
June 30, 2008 as compared to 7.61% during the same period last
year.  The decrease in yield was primarily due to higher yielding
loans paying off and being replaced by loan production that was originated at
lower spreads over our cost of funds due to competitive pricing pressures, as
well as our adjustable rate loan portfolio repricing to lower current market
interest rates.  To a lesser extent, the average loan yield was also
impacted by the increase in non-performing loans, as well as the reversal of all
previously accrued but uncollected interest against our current period operating
results.  A significant portion of our loan portfolio is comprised of
adjustable rate loans indexed to either six month LIBOR or the Prime Rate, most
with interest rate floors and caps below and above which the loan’s contractual
interest rate may not adjust.  Approximately 52.0% of our loan
portfolio was adjustable at June 30, 2008, and approximately 41.2% of the loan
portfolio was comprised of hybrid loans, which after an initial fixed rate
period of three or five years, will convert to an adjustable interest rate for
the remaining term of the loan.  As of June 30, 2008, our hybrid loans
had a weighted average of 2.3 years remaining until conversion to an adjustable
rate loan.  Our adjustable rate loans generally reprice on a quarterly
or semi-annual basis with increases generally limited to maximum adjustments of
2% per year up to 5% for the life of the loan.  At June 30, 2008,
approximately $2.5 billion, or 83.7%, of our adjustable and hybrid loan
portfolio contained interest rate floors, below which the loans’ contractual
interest rate may not adjust.  The inability of our loans to adjust
downward can contribute to increased income in periods of declining interest
rates, and also assists us in our efforts to limit the risks to earnings
resulting from changes in interest rates, subject to the risk that borrowers may
refinance these loans during periods of declining interest rates.  At
June 30, 2008, the weighted average floor interest rate of these loans was
6.92%.  At that date, approximately $725.6 million, or 24.3%, of these
loans were at the floor interest rate.  At June 30, 2008, 45.8% of the
adjustable rate loans outstanding had a lifetime interest rate cap. The
weighted-average lifetime interest rate cap on our adjustable rate loan
portfolio was 12.03% at that date.  At June 30, 2008, none of these
loans were at their cap rate.




-18-
 Table of Contents




Total
interest expense decreased by $2.6 million to $38.6 million during the current
quarter, compared to $41.2 million for the same period last year.  The
decrease in interest expense was primarily attributable to a decline in average
rates paid of 98 basis points and 35 basis points on interest bearing deposits
and FHLB advances and other borrowings, respectively, as deposits repriced to
lower current market interest rates and FHLB advances matured and were replaced
with new advances at lower current market interest rates.  These
decreases were partially offset by increases in the average balances of deposits
and FHLB advances and other borrowings of $190.5 million and $175.3 million,
respectively.





Our
average cost of funds decreased to 4.34% during the three months ended June 30,
2008, compared to 5.15% for the same period last year.  As discussed
above, the decrease in the average funding costs was primarily due to deposits
repricing and FHLB advances maturing and being replaced with new advances at
lower current market interest rates.  The average rate paid on deposit
accounts was 4.27% during the three months ended June 30, 2008 as compared to
5.25% for the same period last year.  The average balance of deposit
accounts increased by $190.5 million to $2.3 billion for the three months ended
June 30, 2008 as compared to $2.1 billion for the same period last
year.  The average rate paid on FHLB advances and other borrowings was
4.19% during the three months ended June 30, 2008 compared to 4.54% for the same
period last year.  FHLB advances and other borrowings averaged $1.2
billion during the current quarter, compared to $1.0 billion for the same period
last year.





Net
interest margin increased to 2.61% for the three months ended June 30, 2008 as
compared to 2.54% for the same period last year.  This increase was
caused by a 16 basis point increase in our net interest spread, partially offset
by a $370.6 million increase in our average interest earning
assets.





Provision
for Loan Losses





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





•
            the
      risk characteristics of various classifications of
  loans;


•
            general
      portfolio trends relative to asset and portfolio
  size;


•
            asset
      categories;


•
            collateral
      values;


•
            potential
      credit and geographic
concentrations;


•
            delinquency
      trends within the loan portfolio;


•
            changes
      in the volume and severity of past due loans, classified loans and other
      loans of concern;


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


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





-19-
 Table of Contents




Accordingly,
the calculation of the adequacy of the allowance for loan losses is not based
solely on the level of non-performing assets.  The quantitative
factors, included above, are utilized by our management to identify two
different risk groups (1) individual loans (loans with specifically identifiable
risks); and (2) homogeneous loans (groups of loans with similar
characteristics). The allocation for individual loans is based on either a
specific reserve analysis, which is performed on impaired loans and our other
loans of concern, or on risk rating grades assigned to each loan as a result of
our loan management and review processes. Other loans of concern consist of
loans with respect to which known information concerning possible credit
problems with the borrowers or the cash flows of the collateral securing the
respective loans has caused management to be concerned about the ability of the
borrowers to comply with present loan repayment terms, which may result in the
future inclusion of such loans in the nonaccrual category.





Loans
evaluated by our specific reserve analysis are based on estimated cash flows
discounted at the loan’s original effective interest rate or, for collateral
dependent loans, based on the underlying collateral value.  Individual
loans assessed by our risk rating process are assigned a risk-rating grade, as
well as a loss ratio.  Risk ratings and loss ratios are determined
based on historical loss experience, augmented by the experience of management
with similar assets and our independent loan review process.  The loan
review process begins at the loan’s origination where we obtain information
about the borrower and the real estate collateral, such as personal financial
statements, FICO scores, property rent rolls, property operating statements,
appraisals, market assessments, and other pertinent data.  Throughout
the loan life, we obtain updated information such as rent rolls, property cash
flow statements, personal financial statements, and for certain loans, updated
property inspection reports.  This information, at the individual
borrower and loan level, provides input into our risk profile of our borrowers,
and serves as the primary basis for each loan’s risk grade. We also assign loss
ratios to groups of loans.  These loss ratios are assigned to the
various homogenous categories of the portfolio.





Loss
ratios and specific reserves for all categories of loans are evaluated on a
quarterly basis.  Loss ratios associated with historical loss
experience are determined based on a rolling migration analysis of each loan
category within our portfolio.  This migration analysis estimates loss
factors based on the performance of each loan category over a five year time
period.  These loss factors are then adjusted for other identifiable
risks specifically related to each loan category or risk grade.  We
utilize market and other economic data, which we accumulate on a quarterly
basis, to evaluate and identify the economic and real estate related trends
within each regional market that we operate.  In addition to the
information gathered from this data, we also typically consider other risk
factors, such as specific risks within a loan category, peer analysis reports,
and any other relevant trends or data, in determining any necessary adjustments
to our historical loss factors.  To the extent that known risks or
trends exist, the loss ratios are adjusted accordingly, and incorporated into
our assessment of the adequacy of our allowance for loan losses.





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





-20-
 Table of Contents




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





The
consolidated provision for loan losses was $6.3 million and $500,000 for the
quarters ended June 30, 2008 and 2007, respectively.  The provision
for loan losses was recorded based on an analysis of the factors referred to
above.  The increase in provision for loan losses during the quarter
was primarily due to the increase in our non-performing
loans.  Non-performing loans as of June 30, 2008 were $116.8 million,
compared to $91.5 million and $38.0 million at March 31, 2008 and December 31,
2007, respectively.  As a percentage of our total loan portfolio, the
amount of non-performing loans was 3.94% and 1.20% at June 30, 2008 and December
31, 2007, respectively.  The increase in non-performing loans during
the year was primarily related to non-performing construction and land
development loans, which increased from $8.8 million at December 31, 2007 to
$78.7 million at June 30, 2008.





With the
housing and secondary mortgage markets continuing to deteriorate and showing no
signs of stabilizing in the near future, we continue to aggressively monitor our
real estate loan portfolio, including our residential and condominium conversion
construction and land development loan portfolio.  Within our
residential and condominium conversion construction and land development loan
portfolio, at June 30, 2008, approximately 58.3%, 23.9% and 5.3% were located in
California, New York and Florida, respectively.  At June 30, 2008, we
had $74.9 million of non-performing loans within our residential and condominium
conversion construction and land development loan portfolio, consisting of ten
lending relationships.  Of these non-performing construction loans,
five relationships, with an aggregate balance of $57.2 million, were located in
California (Huntington Beach, Cathedral City, Indio, Corona and
Palmdale).





The
allowance for loan losses as a percentage of our total loans was 1.73% at June
30, 2008 compared to 1.51% at December 31, 2007.  We believe that
these reserves levels were adequate to support known and inherent losses in our
loan portfolio and for specific reserves as of June 30, 2008 and December 31,
2007, respectively.  The allowance for loan losses is impacted by
inherent risk in the loan portfolio, including the level of our non-performing
loans and other loans of concern, as well as specific reserves and charge-off
activity.  Other loans of concern increased from $27.4 million at
December 31, 2007 to $144.4 million at June 30, 2008, as compared to $115.7
million at March 31, 2008.  The increase during the current year was
primarily caused by the addition of $55.9 million of single-family and
condominium conversion construction and land development loans, $15.7 million of
commercial and retail construction projects, and $52.4 million of commercial and
multi-family real estate loans.





-21-
 Table of Contents




During
the quarters ended June 30, 2008 and 2007, we had net loan charge-offs of $3.4
million and $4.7 million, respectively.  The charge-offs taken during
the current period were previously specifically reserved for under our allowance
for loan loss methodology discussed above.  See also – “Financial
Condition – Credit Risk”.





Non-Interest
Income





Non-interest
income decreased to ($1.1 million) for the quarter ended June 30, 2008 as
compared to $843,000 for the same period last year.  The decline in
non-interest income primarily related to a $1.1 million loss provision recorded
during the current period for unfunded commitments, as well as a loss on sale of
loans recognized in connection with the sale of approximately $53.2 million of
multi-family loans in June 2008.  Non-interest income typically
consists of fees and other miscellaneous income earned on customer
accounts.





Non-Interest
Expense





Non-interest
expense totaled $13.5 million for the current quarter, compared to $12.1 million
for the same period last year.  The increase in non-interest expense
primarily related to a decline in the deferral of general and administrative
costs incurred related to the origination of loans.  As the volume of
our loan production decreased during the current quarter as compared to the same
period last year, the deferrable portion of these loan costs has also
declined.  Further contributing to the increase was a $605,000
increase in expenses associated with real estate owned and other foreclosed
assets.  This increase primarily related to a $478,000 provision
recorded during the quarter in connection with a decline in the estimated fair
value of these properties.  Our efficiency ratio (defined as general
and administrative expenses as a percentage of net revenue) was 53.7% for the
quarter ended June 30, 2008, as compared to 52.5% for the same period last
year.





Six
Months Ended June 30, 2008 Compared to Six Months Ended June 30,
2007







Executive
Summary




Consolidated
net income and diluted EPS were $3.0 million and $0.56, respectively, for the
six months ended June 30, 2008, compared to $12.8 million and $2.26 for the same
period last year.  The decline in net income was primarily caused by a
$9.3 million increase in provision for loan losses recorded during the current
period.





Net
interest income before provision for loan losses decreased 2.1% to $44.9 million
for the six months ended June 30, 2008, compared to $45.8 million for the same
period last year.  The decrease was primarily due to the decline in
the yield earned on our loan portfolio, as higher yielding loans have paid-off
and were replaced by loan production that was originated at lower spreads over
our cost of funds due to competitive pricing pressures, as well as our
adjustable rate loan portfolio repricing to lower current market interest
rates.  This decline was partially offset by a decrease in our average
cost of funds, as deposits have repriced to current market interest rates, as
well as an increase in interest earned on our investment securities
held-to-maturity, which, as discussed within the comparison of the three months
ended June 30, 2008 and 2007, primarily related to the purchase of approximately
$784.6 million of AAA rated corporate sponsored CMOs.  During the six
months ended June 30, 2008 and 2007, the average balance of our investment
securities held-to-maturity was $363.3 million and $185.8 million,
respectively.





-22-
 Table of Contents




The
provision for loan losses was $10.5 million and $1.3 million, respectively, for
the six months ended June 30, 2008 and 2007.  As discussed in detail
above, the increase in provision for loan losses during the current six month
period was primarily due to the increase in our non-performing
loans.





The
return on average assets was 0.17% for the six months ended June 30, 2008,
compared to 0.75% for the same period last year.  The return on
average shareholders’ equity was 2.69% for the six months ended June 30, 2008,
compared to 11.44% for the same period last year.





Loan
originations were $175.5 million for the six months ended June 30, 2008,
compared to $677.1 million for the same period last year.  During the
current six month period, we originated $74.4 million of commercial real estate
loans, $65.1 million of small balance multi-family real estate loans, and $34.9
million of entertainment finance loans.  Loan originations for the
same period last year consisted of $428.9 million of commercial real estate
loans, $191.0 million of small balance multi-family real estate loans, and $57.2
million of entertainment finance loans.  As discussed above, loan
originations during the current period were impacted by a decline in customer
demand as a result of uncertainty regarding current real estate market
conditions.  In addition, our wholesale loan operations acquired $47.3
million of commercial and multi-family real estate loans during the six months
ended June 30, 2007.  We did not have any wholesale loan purchases
during the current six month period.





Net
Interest Income and Margin





The
following table presents for the six months ended June 30, 2008 and 2007, 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.




-23-
 Table of Contents





For
      the Six Months Ended June 30,2008
            
            
            2007Average
      Balance
            
            
            Income/Expense
            
            
            Yield/Rate
            
            
            Average
      Balance
            
            
            Income/Expense
            
            
            Yield/Rate(dollars
      in thousands)AssetsCash
      and investment securities
            
            $
            539,974
            
            
            $
            17,695
            
            
            
            6.59
            %
            
            $
            369,433
            
            
            $
            9,088
            
            
            
            4.96
            %Loans
      receivable
            
            
            3,113,515
            
            
            
            104,756
            
            
            
            6.77
            %
            
            
            3,042,421
            
            
            
            117,227
            
            
            
            7.77
            %Total
      interest earning assets
            
            
            3,653,489
            
            
            $
            122,451
            
            
            
            6.74
            %
            
            
            3,411,854
            
            
            $
            126,315
            
            
            
            7.47
            %Non-interest
      earning assets
            
            
            81,173
            
            
            
            
            
            
            
            
            
            
            
            77,969Allowance
      for loan losses
            
            
            (48,133
            )
            
            
            
            
            
            
            
            
            
            
            (46,396
            )Total
      assets
            
            $
            3,686,529
            
            
            
            
            
            
            
            
            
            
            $
            3,443,427Liabilities
      and Shareholders’ EquityInterest
      bearing deposit accounts:Interest
      bearing demand
            
            $
            30,649
            
            
            $
            490
            
            
            
            3.22
            %
            
            $
            24,825
            
            
            $
            434
            
            
            
            3.53
            %Money
      market and passbook
            
            
            261,029
            
            
            
            4,890
            
            
            
            3.77
            %
            
            
            226,647
            
            
            
            5,589
            
            
            
            4.97
            %Time
      certificates
            
            
            1,892,616
            
            
            
            44,005
            
            
            
            4.68
            %
            
            
            1,832,487
            
            
            
            48,050
            
            
            
            5.29
            %Total interest bearing deposit
      accounts
            
            
            2,184,294
            
            
            
            49,385
            
            
            
            4.55
            %
            
            
            2,083,959
            
            
            
            54,073
            
            
            
            5.23
            %FHLB
      advances and other borrowings
            
            
            1,141,113
            
            
            
            24,412
            
            
            
            4.30
            %
            
            
            1,000,576
            
            
            
            22,270
            
            
            
            4.49
            %Junior
      subordinated debentures
            
            
            86,600
            
            
            
            3,803
            
            
            
            8.83
            %
            
            
            86,600
            
            
            
            4,166
            
            
            
            9.70
            %Total
      interest bearing liabilities
            
            
            3,412,007
            
            
            $
            77,600
            
            
            
            4.57
            %
            
            
            3,171,135
            
            
            $
            80,509
            
            
            
            5.12
            %Non-interest
      bearing demand accounts
            
            
            9,497
            
            
            
            
            
            
            
            
            
            
            
            11,007Other
      non-interest bearing liabilities
            
            
            36,818
            
            
            
            
            
            
            
            
            
            
            
            36,132Shareholders’
      equity
            
            
            228,207
            
            
            
            
            
            
            
            
            
            
            
            225,153Total liabilities andshareholders’
      equity
            
            $
            3,686,529
            
            
            
            
            
            
            
            
            
            
            $
            3,443,427Net
      interest spread (1)
            
            
            
            
            
            
            
            
            
            
            2.17
            %
            
            
            
            
            
            
            
            
            
            
            2.35
            %Net
      interest income before provisionfor
      loan losses
            
            
            
            
            
            $
            44,851
            
            
            
            
            
            
            
            
            
            
            $
            45,806Net
      interest margin (2)
            
            
            
            
            
            
            
            
            
            
            2.47
            %
            
            
            
            
            
            
            
            
            
            
            2.71
            %


____________


(1)
            Average
      yield on interest earning assets minus average rate paid on interest
      bearing liabilities.


(2)
            Net
      interest income divided by total average interest earning
      assets.





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.




-24-
 Table of Contents





For
      the Six Months EndedJune
      30, 2008 and 2007Increase
      (Decrease) Due to:Rate
            
            
            Volume
            
            
            Total(in
      thousands)Interest
      and fees earned from:Cash
      and investment securities
            
            $
            3,579
            
            
            $
            5,028
            
            
            $
            8,607Loans
            
            
            (15,204
            )
            
            
            2,733
            
            
            
            (12,471
            )Total
      (decrease) increase in interest income
            
            
            (11,625
            )
            
            
            7,761
            
            
            
            (3,864
            )Interest
      paid on:Deposit
      accounts
            
            
            (7,229
            )
            
            
            2,541
            
            
            
            (4,688
            )FHLB
      advances and other borrowings
            
            
            (957
            )
            
            
            3,099
            
            
            
            2,142Junior
      subordinated debentures
            
            
            (363
            )
            
            
            —
            
            
            
            (363
            )Total
      (decrease) increase in interest expense
            
            
            (8,549
            )
            
            
            5,640
            
            
            
            (2,909
            )(Decrease)
      increase in net interest income
            
            $
            (3,076
            )
            
            $
            2,121
            
            
            $
            (955
            )





Total
interest income decreased $3.9 million to $122.5 million for the six
months ended June 30, 2008 as compared to $126.3 million for the same
period last year. The decrease in interest income was primarily attributable to
a 100 basis point decrease in the average yield earned on total loans
receivable, partially offset by a $71.1 million increase in the average
balance of total loans receivable and a $170.5 million and 163 basis point
increase in the average balance and yield earned on cash and
investments.





The
average balance of cash and investment securities increased to $540.0 million
for the six months ended June 30, 2008, as compared to $369.4 million during the
same period last year.  This increase was primarily due to an increase
in the average balance of our investment securities held-to-maturity, which
totaled $363.3 million during the six months ended June 30, 2008, as compared to
$185.8 million for the same period last year.  The average yield
earned on our cash and investment securities increased to 6.59% during the six
months ended June 30, 2008, as compared to 4.96% for the same period last
year.  The average yield earned during the six months ended June 30,
2008 on our investment securities held-to-maturity was 6.94%, as compared to
4.21% for the same period last year.  These increases were primarily
related to our CMO purchases during the current year, as discussed
above.





The
average aggregate balance of our loan portfolio was $3.1 billion and $3.0
billion for the six months ended June 30, 2008 and 2007,
respectively.  Commercial real estate loans had an average aggregate
balance of $609.5 million during the six months ended June 30, 2008 compared to
$550.3 million during the same period last year.  Construction and
land loans had an average aggregate balance of $428.5 million during the six
months ended June 30, 2008 compared to $402.6 million during the same period
last year.  Multi-family real estate loans had an average aggregate
balance of $2.0 billion during each of the six months ended June 30, 2008 and
2007.  Single-family residential loans had an average aggregate
balance of $13.1 million during the six months ended June 30, 2008 compared to
$32.8 million during the same period last year.  The average aggregate
balance of entertainment finance loans was $68.3 million and $76.3 million
during the six months ended June 30, 2008 and 2007, respectively.





-25-
 Table of Contents




The
average yield earned on total loans decreased to 6.77% during the six months
ended June 30, 2008 as compared to 7.77% during the same period last
year.  The decrease in yield was primarily due to higher yielding
loans paying off and being replaced by loan production that was originated at
lower spreads over our cost of funds due to competitive pricing pressures, as
well as our adjustable rate loan portfolio repricing to lower current market
interest rates.  To a lesser extent, the average loan yield was also
impacted by the increase in non-performing loans, as well as the reversal of all
previously accrued but uncollected interest against our current period operating
results.





Total
interest expense decreased by $2.9 million to $77.6 million for the six months
ended June 30, 2008, compared to $80.5 million for the same period last
year.  The decrease in interest expense was primarily attributable to
a 68 basis points decline in the average rate paid on interest bearing deposits,
as deposits repriced to lower current market interest rates.  This
decrease was partially offset by increases in the average balances of deposits
and FHLB advances and other borrowings of $100.3 million and $140.5 million,
respectively.





Our
average cost of funds decreased to 4.57% during the six months ended June 30,
2008, compared to 5.12% for the same period last year.  As discussed
above, the decrease in the average funding costs was primarily due to deposits
repricing to lower current market interest rates.  The average rate
paid on deposit accounts was 4.55% during the six months ended June 30, 2008, as
compared to 5.23% for the same period last year.  The average balance
of deposit accounts increased by $100.3 million to $2.2 billion for the six
months ended June 30, 2008 as compared to $2.1 billion for the same period last
year.  The average rate paid on FHLB advances and other borrowings was
4.30% during the six months ended June 30, 2008 compared to 4.49% for the same
period last year.  This decline was primarily attributable to FHLB
advances maturing and being replaced with new advances at lower current market
interest rates.  FHLB advances and other borrowings averaged $1.1
billion during the six months ended June 30, 2008, compared to $1.0 billion for
the same period last year.





Net
interest margin decreased to 2.47% for the six months ended June 30, 2008 as
compared to 2.71% for the same period last year.  This decrease was
caused by an 18 basis point decline in our net interest spread and a $241.6
million increase in our average interest earning assets.





Provision
for Loan Losses





The
consolidated provision for loan losses was $10.5 million and $1.3 million for
the six months ended June 30, 2008 and 2007, respectively.  The
provision for loan losses was recorded based on an analysis of the factors
referred to above in the discussion regarding the three months ended June 30,
2008 and 2007.  During the six months ended June 30, 2008 and 2007, we
had net loan charge-offs of $7.1 million and $4.3 million, respectively. See
management’s discussion of the provision for loan losses for the three months
ended June 30, 2008 and 2007 for additional discussion regarding the provision
for loan losses incurred during the current period and the corresponding
methodology.




-26-
 Table of Contents




Non-Interest
Income





Non-interest
income decreased to ($881,000) during the six months ended June 30, 2008 as
compared to $1.6 million for the same period last year.  As discussed
above, the decline in non-interest income primarily related to a loss provision
recorded during the current period for unfunded commitments, as well as a loss
on sale of loans recognized in connection with the sale of approximately $53.2
million of multi-family loans in June 2008.





Non-Interest
Expense





Non-interest
expense totaled $28.4 million for the six months ended June 30, 2008, compared
to $24.7 million for the same period last year.  The increase in
non-interest expense primarily related to a decline in the deferral of general
and administrative costs incurred related to the origination of
loans.  As the volume of our loan production decreased during the
current six month period as compared to the same period last year, the
deferrable portion of these loan costs has also declined.  Further
contributing to the increase was a $1.9 million increase in expenses associated
with real estate owned and other foreclosed assets.  This increase
primarily related to a $1.1 million provision recorded during the year in
connection with a decline in the estimated fair value of these properties, as
well as $463,000 of losses recorded on the sale of other real estate
owned.  Our efficiency ratio was 59.5% for the six months ended June
30, 2008, as compared to 51.4% for the same period last year.





FINANCIAL
CONDITION







Total
assets increased $549.0 million to $4.1 billion at June 30, 2008 as compared to
$3.6 billion at December 31, 2007.  The increase in total assets was
primarily due to a $755.4 million increase in our investment securities
held-to-maturity, resulting from the CMOs purchased during the current year, as
discussed above, partially offset by a $207.4 million decrease in our loan
portfolio.  At June 30, 2008, gross loans totaled $3.0 billion,
including approximately $2.4 billion of real estate loans, $460.0 million of
construction and land development loans, $69.0 million of entertainment finance
loans, and $10.5 million of other loans.





Deposits
and FHLB advances and other borrowings increased by $310.7 million and $239.5
million, respectively, during the six months ended June 30,
2008.  Total deposit accounts increased to $2.5 billion at June 30,
2008, compared to $2.2 billion at December 31, 2007.  The increase in
deposits included a $245.9 million increase in time deposits, as well as a $64.8
million increase in savings and checking account balances. Management believes
that a significant portion of time deposits will remain with us upon maturity
based on our historical experience regarding retention of deposits. FHLB
advances and other borrowings increased to $1.3 billion as of June 30, 2008
compared to $1.0 billion at December 31, 2007.  The increase in FHLB
advances were primarily utilized to match fund the CMO acquisitions during the
year.





-27-
 Table of Contents





CREDIT
RISK





Non-performing
Assets, Other Loans of Concern and Allowance for Loan Losses





The
following table sets forth our non-performing assets by category and troubled
debt restructurings as of the dates indicated.





June
      30,
              2008
            
            
            December
      31,
              2007(dollars
      in thousands)Nonaccrual
      loans:Real
      estate
            
            $
            38,092
            
            
            $
            29,145Construction
      and land
            
            
            78,655
            
            
            
            8,804Entertainment
      finance
            
            
            12
            
            
            
            13Total
      nonaccrual loans
            
            
            116,759
            
            
            
            37,962Other
      real estate and other assets owned, net
            
            
            20,912
            
            
            
            19,396Total
      non-performing assets
            
            
            137,671
            
            
            
            57,358Performing
      troubled debt restructurings
            
            
            8,077
            
            
            
            7,802Total
      non-performing assets and performing troubled debt
      restructurings
            
            $
            145,748
            
            
            $
            65,160Nonaccrual
      loans to total loans
            
            
            3.94
            %
            
            
            1.20
            %Allowance
      for loan losses to nonaccrual loans
            
            
            43.82
            %
            
            
            125.87
            %Non-performing
      assets to total assets
            
            
            3.36
            %
            
            
            1.62
            %





Non-performing
assets were $137.7 million and $57.4 million, representing 3.36% and 1.62% of
total assets as of June 30, 2008 and December 31, 2007,
respectively.  At June 30, 2008, non-performing loans consisted of
$78.7 million construction and land loans, $15.5 million of commercial real
estate loans, $22.6 million of multi-family real estate loans, and $12,000 of
entertainment finance loans.  The increase in non-performing assets
during the six months ended June 30, 2008 consisted of the addition of $107.6
million of non-performing loans, partially offset by paydowns received of $10.6
million, charge-offs of $7.7 million and loan upgrades from non-performing to
performing status of $1.5 million.  As of June 30, 2008, as compared
to December 31, 2007, the net increase in non-performing loans primarily
consisted of $48.4 million of residential and condominium construction real
estate loans, representing six lending relationships, $23.0 million of
residential land development loans and $20.1 million of multi-family and
commercial real estate loans.  The allowance for loan loss coverage
ratio (defined as the allowance for loan losses divided by non-accrual loans)
was 43.8% at June 30, 2008 as compared to 125.9% at December 31,
2007.  In addition, our other real estate and other assets owned
increased to $20.9 million at June 30, 2008, as compared to $19.4 million at
December 31, 2007.  During the six months ended June 30, 2008, we
foreclosed on eleven properties representing $9.1 million, sold nine properties
representing $6.4 million and recorded an aggregate charge-off of $1.1 million
on five different properties.




-28-
 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
              Months
      Ended
              June
      30,
              2008
            
            
            For
      the Year
              Ended
              December
      31,
              2007
            
            
            For
      the Six
              Months
      Ended
              June
      30,
              2007(dollars
      in thousands)Balance
      at beginning of period
            
            $
            47,783
            
            
            $
            46,049
            
            
            $
            46,049Provision
      for loan losses
            
            
            10,500
            
            
            
            11,077
            
            
            
            1,250Charge-offs
            
            
            (7,737
            )
            
            
            (10,873
            )
            
            
            (4,848
            )Recoveries
            
            
            613
            
            
            
            1,530
            
            
            
            549Net
      charge-offs
            
            
            (7,124
            )
            
            
            (9,343
            )
            
            
            (4,299
            )Balance
      at end of period
            
            $
            51,159
            
            
            $
            47,783
            
            
            $
            43,000Allowance
      for loan losses as a percentageof
      loans, net
            
            
            1.73
            %
            
            
            1.51
            %
            
            
            1.38
            %





Liquidity





Liquidity
refers to our ability to maintain cash flows adequate to fund operations and
meet obligations and other commitments on a timely basis, including the payment
of maturing deposits and the origination or purchase of new loans.  We
maintain a cash and investment securities portfolio designed to satisfy
operating liquidity requirements while preserving capital and maximizing
yield.  As of June 30, 2008, we held $4.9 million of cash and cash
equivalents (consisting primarily of short-term investments with original
maturities of 90 days or less) and $106.4 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, overnight repurchase agreement
investments, 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 credit facilities with the Federal Home Loan Bank of San Francisco
and the Federal Reserve Bank of San Francisco.  As of June 30, 2008,
we had remaining available borrowing capacity under the Federal Home Loan Bank
of San Francisco credit facility of $288.1 million, net of the $9.8 million of
additional Federal Home Loan Bank stock that we would be required to purchase to
support those additional borrowings.  As of June 30, 2008, we had an
available borrowing capacity under the Federal Reserve Bank of San Francisco
credit facility of $166.1 million.  We also had available $98.0
million of uncommitted, unsecured lines of credit with four unaffiliated
financial institutions.




-29-
 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, 2008 of 7.79%, 9.93% and 11.49%,
respectively, which represents $107.3 million, $118.6 million and $44.9 million,
respectively, of capital in excess of the amount required to be “well
capitalized”.  These ratios were 8.44%, 9.73% and 11.29% as of
December 31, 2007, respectively.





The Bank
had Tier 1 leverage, Tier 1 risk based and total risk-based capital ratios at
June 30, 2008 of 7.68%, 9.79% and 11.05%, respectively, which represents $102.6
million, $113.7 million and $31.4 million, respectively, of capital in excess of
the amount required to be “well capitalized” for regulatory purposes. These
ratios were 8.31%, 9.60% and 10.85% as of December 31, 2007,
respectively.





At June
30, 2008, shareholders' equity totaled $225.9 million, or 5.5% of total
assets.  Our book value per share of common stock was $44.88 as of
June 30, 2008, as compared to $44.22 as of December 31, 2007, and $43.75 as of
June 30, 2007.





On March
19, 2008, we announced that our Board of Directors determined that, following
the payment of our cash dividend for that quarter, our regular quarterly cash
dividend would be suspended for the remainder of 2008.  This decision
was made in order to preserve our capital during the extraordinarily difficult
current operating environment.  The Board plans to reassess the
dividend when economic conditions and capital markets normalize.




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, 2007.




-30-
 Table of Contents




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, 2008
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.  In designing and evaluating our
disclosure controls and procedures, management recognized that disclosure
controls and procedures, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the disclosure
controls and procedures are met.  Our disclosure controls and procedures
have been designed to meet, and management believes that they meet, reasonable
assurance standards.  Additionally, in designing disclosure controls and
procedures, our management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible disclosure controls and
procedures. The design of any disclosure controls and procedures also is based
in part upon certain assumptions about the likelihood of future events, and
there can be no assurance that any design will succeed in achieving its stated
goals under all potential future conditions.  Based on their
evaluation, the Company’s Chief Executive Officer and Chief Financial Officer
concluded that, as of June 30, 2008, the Company’s disclosure controls and
procedures were effective at the reasonable assurance level 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)
to allow timely decisions regarding required disclosure, 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, 2008, no change occurred in the Company’s internal
control over financial reporting that has materially affected, or is reasonably
likely to materially affect, the Company’s internal control over financial
reporting.





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




-31-
 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 currently
pending proceedings, in the aggregate, will not have a material effect on our
financial condition or results of operations.




Item 1A. Risk Factors






Our
business is subject to general economic risks that could adversely impact our
results of operations and financial condition.




·
            Changes
      in economic conditions, particularly a further economic slowdown in
      California, could hurt our
business.




Our
business is directly affected by market conditions, trends in industry and
finance, legislative and regulatory changes, and changes in governmental
monetary and fiscal policies and inflation, all of which are beyond our
control.  In 2007, the housing and real estate sectors experienced an
economic slowdown that has continued into 2008.  Further deterioration
in economic conditions, particularly within the State of California, could
result in the following consequences, among others, any of which could hurt our
business materially:




·
            loan
      delinquencies may increase;




·
            problem
      assets and foreclosures may
increase;




·
            demand
      for our products and services may decline;
and




·
            collateral
      for our loans may decline in value, in turn reducing a customer’s
      borrowing power and reducing the value of assets and collateral securing
      our loans.




·
            Recent
      negative developments in the financial industry and credit markets may
      continue to adversely impact our financial condition and results of
      operations.




Negative
developments beginning in the latter half of 2007 in the sub-prime mortgage
market and the securitization markets for such loans, together with
substantially increased oil prices and other factors, have resulted in
uncertainty in the financial markets in general and a related general economic
downturn, which have continued in 2008.  Many lending institutions,
including us, have experienced declines in the performance of their loans,
including construction and land loans, and commercial and multi-family real
estate loans.  Moreover, competition among depository institutions for
deposits and quality loans has increased significantly. In addition, the values
of real estate collateral supporting many loans have declined and may continue
to decline. Bank and bank holding company stock prices have been negatively
affected, as has the ability of banks and bank holding companies to raise
capital or borrow in the debt markets compared to recent years. These conditions
may have a material adverse effect on our financial condition and results of
operations.  In addition, as a result of the foregoing factors, there
is a potential for new federal or state laws and regulations regarding lending
and funding practices and liquidity standards, and bank regulatory agencies are
expected to be very aggressive in responding to concerns and trends identified
in examinations.  Negative developments in the financial industry and
the impact of new legislation in response to those developments could restrict
our business operations, including our ability to originate loans, and adversely
impact our results of operations and financial condition.




-32-
 Table of Contents




·
            We
      may elect or be compelled to seek additional capital in the future, but
      that capital may not be available when it is
  needed.




We are
required by federal and state regulatory authorities to maintain adequate levels
of capital to support our operations.  In addition, we may elect to
raise additional capital to support the growth of our business or to finance
acquisitions, if any, or we elect to raise additional capital for other
reasons.  In that regard, a number of financial institutions have
recently raised considerable amounts of capital as a result of a deterioration
in their results of operations and financial condition arising from the turmoil
in the mortgage loan market, deteriorating economic conditions, declines in real
estate values and other factors.  Should we be required by regulatory
authorities or otherwise elect to raise additional capital, we may seek to do so
through the issuance of, among other things, our common stock or securities
convertible into our common stock, which could dilute your ownership interest in
the Company.




Our
ability to raise additional capital, if needed, will depend on conditions in the
capital markets, economic conditions and a number of other factors, many of
which are outside our control, and on our financial performance. Accordingly, we
cannot assure you of our ability to raise additional capital if needed or on
terms acceptable to us. If we cannot raise additional capital when needed or on
terms acceptable to us, it may have a material adverse effect on our financial
condition, results of operations and prospects.




Other
than the additional risk factors set forth above, there have been no material
changes to the risk factors set forth in Part I. Item 1A of the Company’s Annual
Report on Form 10-K for the year ended December 31, 2007.




Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds






The
following table sets forth the repurchases of our common stock for the fiscal
quarter ended June 30, 2008.




Period
            
            Total
      Number of Shares Purchased(1)
            
            
            Average
      Price Paid per Share
            
            
            Total
      Number of Shares Purchased as Part of Publicly Announced Plans or
      Programs
            
            
            Maximum
      Number of Shares that May Yet Be Purchased Under the Plans or
      Programs(2)April
      1, 2008 toApril
      30, 2008
            
            
            2,922
            
            
            $
            17.68
            
            
            
            —
            
            
            
            110,486May
      1, 2008 toMay
      31, 2008
            
            
            58,986
            
            
            
            10.57
            
            
            
            —
            
            
            
            110,486June
      1, 2008 toJune
      30, 2008
            
            
            9,100
            
            
            
            10.43
            
            
            
            —
            
            
            
            110,486Total
            
            
            71,008
            
            
            $
            10.84
            
            
            
            —
            
            
            
            110,486


____________


(1)
      Shares purchased during the quarter ended June 30, 2008, represent open
      market purchases by the Company’s rabbi trust in connection with our
      Supplemental Executive Retirement Plan and our Nonqualified Deferred
      Compensation Plan.


(2)
      There were no repurchases under the twelfth extension of our stock
      repurchase program during the three months ended June 30,
      2008.  The twelfth extension was announced on March 14, 2006,
      and authorized the repurchase of an additional 5% of the outstanding
      shares as of the authorization date.  At June 30, 2008, a total
      of 110,486 shares remained available for repurchase under this
      extension.




-33-
 Table of Contents




Item 3. Defaults Upon Senior Securities




Not
applicable.




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




None.




Item 5. Other Information




None.




Item 6. Exhibits




See
exhibit index.





-34-
 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.











IMPERIAL
      CAPITAL BANCORP, INC.Date:
      July30,
      2008
            /s/ George W. HaligowskiGeorge
      W. HaligowskiChairman
      of the Board, President andChief
      Executive Officer





Date:
      July30,
      2008
            /s/ Timothy M. DoyleTimothy
      M. DoyleExecutive
      Managing Director andChief
      Financial Officer




-35-
 Table of Contents


EXHIBIT
INDEX


Regulation
      S-K Exhibit Number
            
            Document
            
            Reference
      to Prior Filling or Exhibit Number Attached Hereto3.1
            
            Certificate
      of Incorporation
            
            ************3.2
            
            Bylaws,
      as amended
            
            ***4
            
            Instruments
      Defining the Rights of Security Holders, Including
    Indentures
            
            **********10.1
            
            2005
      Re-Designated, Amended and Restated Stock Option Plan For Nonemployee
      Directors (“NEDP”)
            
            *****10.2
            
            2005
      Re-Designated, Amended and Restated Employee Stock Incentive Plan
      (“ESIP”)
            
            ********10.3a
            
            409A
      Consolidated Nonqualified (Employer Securities Only) 2005 Deferred
      Compensation Plan
            
            ***10.3b
            
            409A
      Consolidated Nonqualified (Non-Employer Securities) 2005 Deferred
      Compensation Plan
            
            ***10.3c
            
            Consolidated
      Nonqualified (Employer Securities Only) Deferred Compensation
      Plan
            
            ***10.3d
            
            Consolidated
      Nonqualified (Non-Employer Securities) Deferred Compensation
      Plan
            
            ***10.4
            
            Supplemental
      Salary Savings Plan
            
            *10.5a
            
            Amended
      and Restated Employment Agreement with George W.
Haligowski
            
            ********10.5b
            
            Non-Competition
      and Non-Solicitation Agreement with George W. Haligowski
            
            ********10.6
              10.7
              10.8
              10.9
            
            Change
      in Control Severance Agreement with Norval L. Bruce
              Change
      in Control Severance Agreement with Timothy M. Doyle
              Change
      in Control Severance Agreement with Lyle C. Lodwick
              Change
      in Control Severance Agreement with Phillip E. Lombardi
            
            ********
              ********
              ********
              ***********10.10
            
            Recognition
      and Retention Plan
            
            **10.11
            
            Voluntary
      Retainer Stock and Deferred Compensation Plan for Outside
      Directors
            
            ****10.12
            
            Amended
      and Restated Supplemental Executive Retirement Plan
            
            ********10.13
            
            Amended
      and Restated ITLA Capital Corporation Rabbi Trust
Agreement
            
            *********10.14
            
            Amended
      and Restated Salary Continuation Plan
            
            ********10.15
            
            Form
      of Incentive Stock Option Agreement under ESIP
            
            ******10.16
              10.17
            
            Form
      of Non-Qualified Stock Option Agreement under the ESIP
              Form
      of Non-Qualified Stock Option Agreement under the NEDP
            
            ******
              *******10.18
            
            Description
      of Named Executive Officer Salary, Bonus and Perquisite
      Arrangements     for 2008
            
            *************10.19
            
            Description
      of Director Fee Arrangements
            
            *************10.20
            
            Split
      Dollar Agreement
            
            *************11
            
            Statement
      Regarding Computation of Per Share Earnings
            
            Not
      Required13
            
            Annual
      Report to Security Holders
            
            None18
            
            Letter
      Regarding Change in Accounting Principles
            
            None21
            
            Subsidiaries
      of the Registrant
            
            Not
      Required22
            
            Published
      Report Regarding Matters Submitted to Vote of Security
    Holders
            
            None23.1
            
            Consent
      of Ernst & Young LLP
            
            Not
      Required24
            
            Power
      of Attorney
            
            None31.1
            
            Rule
      13a-14(a)/15d-14(a) Certification of Chief Executive
    Officer
            
            31.131.2
            
            Rule
      13a-14(a)/15d-14(a) Certification of Chief Financial
    Officer
            
            31.232
            
            Section
      1350 Certifications of Chief Executive Officer and Chief Financial
      Officer
            
            32





*
            Filed
      as an exhibit to Imperial’s Registration Statement on Form S-1 (File No.
      33-96518) filed with the Commission on September 1, 1995, pursuant to
      Section 5 of the Securities Act of 1933.*
      *
            Filed
      as an exhibit to the Company’s Registration Statement on Form S-4 (File
      No. 333-03551) filed with the Commission on May 10, 1996, pursuant to
      Section 5 of the Securities Act of 1933.* *
      *
            Filed
      as an exhibit to the Company’s Current Report on Form 8-K filed on
      December 7, 2007.* *
      * *
            Filed
      as an exhibit to Amendment No. Two to the Company’s Registration Statement
      on Form S-4 (File No. 333-03551) filed with the Commission on June 19,
      1996.* *
      * * *
            Filed
      as an appendix to the Company’s definitive proxy materials filed on June
      27, 2005.* *
      * * * *
            Filed
      as an exhibit to the Company’s Current Report on Form 8-K filed on August
      9, 2005.* *
      * * * * *
            Filed
      as an exhibit to the Company’s Current Report on Form 8-K filed on
      November 4, 2005.* *
      * * * * * *
            Filed
      as an exhibit to the Company’s Current Report on Form 8-K filed on
      February 24, 2006.* *
      * * * * * * *
            Filed
      as an exhibit to the Company’s Form 10-Q for the quarter ended June 30,
      2006.* *
      * * * * * * * *
            The
      Company hereby agrees to furnish the SEC, upon request, copies of the
      instruments defining the rights of the holders of each issue of the
      Company's long-term debt.* *
      * * * * * * * * *
            Filed
      as an exhibit to the Company’s Form 10-K for the year ended December 31,
      2006.* *
      * * * * * * * * * *
            Filed
      as an exhibit to the Company’s Form 10-Q for the quarter ended June 30,
      2007 (File No. 01-33199).* *
      * * * * * * * * * * *
            Filed
      as an exhibit to the Company’s Form 10-K for the year ended December 31,
      2007.




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