----

----

**FORM      10-Q**

| R | QUARTERLY                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE                ACT OF                1934 |
|---|--------------------------------------------------------------------------------------------------------------------------------------|

| £ | TRANSITION                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE                ACT OF                1934 |
|--------|---------------------------------------------------------------------------------------------------------------------------------------|

|   | **ITLA                CAPITAL CORPORATION**                           |   |
|--------|-----------------------------------------------------------------------|--------|
|   | (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, or a non-accelerated filer. See definition of                “accelerated filer” in Rule 12b-2 of the Exchange Act. Large Accelerated                Filer £                Accelerated Filer R                Non-Accelerated Filer £                                                                                                               |
|  Indicate                by check mark whether the Registrant is a shell company (as                defined in Rule 12b-2 of the Exchange Act). Yes £                No                R.                                                                                                                                                                                                                                                                                                                             |
|  Number                of shares of common stock of the registrant: 5,543,451 outstanding                as of                November 1, 2006.                                                                                                                                                                                                                                                                                                                                                                            |

----

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**Table          of Contents**

**ITLA      CAPITAL CORPORATION **

**FORM      10-Q**

**FOR      THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2006**

**TABLEOF      CONTENTS**

| **PART                I - FINANCIAL INFORMATION** |                                                                                                                                                 |
|---------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------|
| Item                1.                            | Financial                Statements                                                                                                                  | 3 |
|                                              | Consolidated                Balance Sheets - September 30, 2006                (Unaudited) and December 31, 2005                                     | 3 |
|                                              | Consolidated                Statements of Income - Three and                Nine Months Ended September 30, 2006 and 2005                (Unaudited) | 4 |
|                                              | Consolidated                Statements of Cash Flows - Three and Nine                Months Ended September 30, 2006 and 2005 (Unaudited)            | 5 |
|                                              | Notes                to the Unaudited Consolidated Financial                Statements                                                               | 6 |
| Item                2.                            | Management’s                Discussion and Analysis of Financial Condition                and Results of Operations                            | 13 |
| Item                3.                            | Quantitative                and Qualitative Disclosures about Market                Risk                                                             | 26 |
| Item                4.                            | Controls                and Procedures                                                                                                               | 26 |
|                                              |                                                                                                                                                 |   |
| **PART                II - OTHER INFORMATION**    |                                                                                                                                                 |
| Item                1.                            | Legal                Proceedings                                                                                                                     | 28 |
| Item                1A.                           | Risk                Factors                                                                                                                          | 28 |
| Item                2.                            | Unregistered                Sales of Equity Securities and Use                of Proceeds                                                            | 28 |
| Item                3.                            | Defaults                Upon Senior Securities                                                                                                       | 28 |
| Item                4.                            | Submission                of Matters to a Vote of Security                Holders                                                                    | 28 |
| Item                5.                            | Other                Information                                                                                                                     | 29 |
| Item                6.                            | Exhibits                                                                                                                                             | 29 |
|                                              | Signatures                                                                                                                                           | 30 |
|                                              | Certifications                                                                                                                                       | 32 |
| Exhibit              31.1                         |                                                                                                                                                 |   |
| Exhibit              31.2                         |                                                                                                                                                 |   |
| Exhibit              32                           |                                                                                                                                                 |   |

**Forward      Looking Statements**

----

**Table          of Contents**

**PART      I - FINANCIAL INFORMATION**

| **ITLA                CAPITAL CORPORATION AND SUBSIDIARIES**                                                                                                                                                                              |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| **CONSOLIDATED                BALANCE SHEETS**                                                                                                                                                                                            |   |
|                                                                                                                                                                                                                                      |   |   |   |   |   |
|                                                                                                                                                                                                                                      |   | **September                30,** |   |   |   |
|                                                                                                                                                                                                                                      |   | **2006** |   | **December                31,** |   |
|                                                                                                                                                                                                                                      |   | **(unaudited)** |   | **2005** |   |
|                                                                                                                                                                                                                                      |   | **(in                thousands, except share data)** |   |
| **Assets**                                                                                                                                                                                                                                |   |   |   |   |   |   |   |
| Cash                and cash equivalents                                                                                                                                                                                                  |   | $ | 141,417 |   | $ | 93,747 |   |
| Investment                securities available-for-sale, at fair value                                                                                                                                                                    |   |   | 92,493 |   |   | 92,563 |   |
| Investment                securities held-to-maturity, at amortized cost                                                                                                                                                                  |   |   | 203,714 |   |   | 233,880 |   |
| Stock                in Federal Home Loan Bank                                                                                                                                                                                            |   |   | 48,312 |   |   | 43,802 |   |
| Loans,                net (net of allowance for loan losses of $47,141 and $43,817 as                of September 30, 2006 and December 31, 2005, respectively)                                                                           |   |   | 2,721,134 |   |   | 2,523,480 |   |
| Interest                receivable                                                                                                                                                                                                        |   |   | 18,430 |   |   | 16,287 |   |
| Other                real estate owned, net                                                                                                                                                                                               |   |   | 7,459 |   |   | 3,960 |   |
| Premises                and equipment, net                                                                                                                                                                                                |   |   | 7,163 |   |   | 6,718 |   |
| Deferred                income taxes                                                                                                                                                                                                      |   |   | 12,633 |   |   | 12,717 |   |
| Goodwill                                                                                                                                                                                                                                  |   |   | 3,118 |   |   | 3,118 |   |
| Other                assets                                                                                                                                                                                                               |   |   | 20,456 |   |   | 20,924 |   |
| Total                assets                                                                                                                                                                                                               |   | $ | 3,276,329 |   | $ | 3,051,196 |   |
|                                                                                                                                                                                                                                      |   |   |   |   |   |   |   |
| **Liabilities                and Shareholders’ Equity**                                                                                                                                                                             |   |   |   |   |   |   |   |
| Liabilities:                                                                                                                                                                                                                              |   |   |   |   |   |   |   |
| Deposit                accounts                                                                                                                                                                                                           |   | $ | 1,946,570 |   | $ | 1,735,428 |   |
| Federal                Home Loan Bank advances and other borrowings                                                                                                                                                                       |   |   | 992,734 |   |   | 992,557 |   |
| Accounts                payable and other liabilities                                                                                                                                                                                     |   |   | 34,816 |   |   | 32,130 |   |
| Junior                subordinated debentures                                                                                                                                                                                             |   |   | 86,600 |   |   | 86,600 |   |
| Total                liabilities                                                                                                                                                                                                          |   |   | 3,060,720 |   |   | 2,846,715 |   |
|                                                                                                                                                                                                                                      |   |   |   |   |   |   |   |
| Commitments                and contingencies                                                                                                                                                                                              |   |   |   |   |   |   |   |
|                                                                                                                                                                                                                                      |   |   |   |   |   |   |   |
| Shareholders’                equity:                                                                                                                                                                                                |   |   |   |   |   |   |   |
| Preferred                stock, 5,000,000 shares authorized, none issued                                                                                                                                                                  |   |   | — |   |   | — |   |
| Contributed                capital - common stock, $.01 par value; 20,000,000 shares authorized,                9,027,672 and 8,978,998 issued as of September 30, 2006 and December                31,                2005, respectively |   |   | 80,459 |   |   | 78,004 |   |
| Retained                earnings                                                                                                                                                                                                          |   |   | 237,650 |   |   | 220,095 |   |
| Accumulated                other comprehensive loss, net                                                                                                                                                                                  |   |   | (101 | ) |   | (364 | ) |
|                                                                                                                                                                                                                                      |   |   | 318,008 |   |   | 297,735 |   |
| Less                treasury stock, at cost 3,764,038 and 3,576,695 shares as of September                30, 2006 and December 31, 2005, respectively                                                                                    |   |   | (102,399 | ) |   | (93,254 | ) |
|                                                                                                                                                                                                                                      |   |   |   |   |   |   |   |
| Total                shareholders' equity                                                                                                                                                                                                 |   |   | 215,609 |   |   | 204,481 |   |
|                                                                                                                                                                                                                                      |   |   |   |   |   |   |   |
| Total                liabilities and shareholders' equity                                                                                                                                                                                 |   | $ | 3,276,329 |   | $ | 3,051,196 |   |

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**Table          of Contents**

| **ITLA                  CAPITAL CORPORATION AND SUBSIDIARIES**          |   |
|-------------------------------------------------------------------------|--------|
| **CONSOLIDATED                  STATEMENTS OF                  INCOME** |   |
| **(Unaudited)**                                                         |   |
|                                                                    |   |   |   |   |   |
|                                                                    |   | **For                  the Three Months Ended****September                  30,** |   | **For                  the Nine Months Ended****September                  30,** |   |
|                                                                    |   |   |   |   |   |   |   |   |   |
|                                                                    |   | **2006** |   | **2005** |   | **2006** |   | **2005** |   |
|                                                                    |   | **(in                  thousands, except per share data)** |   |
| Interest                  income:                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans,                  including fees                                  |   | $ | 53,605 |   | $ | 44,278 |   | $ | 151,824 |   | $ | 113,399 |   |
| Cash                  and investment securities                         |   |   | 5,525 |   |   | 4,552 |   |   | 14,494 |   |   | 13,863 |   |
|                                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                  interest income                                  |   |   | 59,130 |   |   | 48,830 |   |   | 166,318 |   |   | 127,262 |   |
|                                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest                  expense:                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deposit                  accounts                                       |   |   | 23,088 |   |   | 15,527 |   |   | 60,059 |   |   | 36,922 |   |
| Federal                  Home Loan Bank advances and other borrowings   |   |   | 9,648 |   |   | 7,634 |   |   | 28,987 |   |   | 17,366 |   |
| Junior                  subordinated debentures                         |   |   | 2,104 |   |   | 1,830 |   |   | 6,088 |   |   | 5,264 |   |
|                                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                  interest expense                                 |   |   | 34,840 |   |   | 24,991 |   |   | 95,134 |   |   | 59,552 |   |
|                                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                  interest income before provision for loan losses   |   |   | 24,290 |   |   | 23,839 |   |   | 71,184 |   |   | 67,710 |   |
|                                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Provision                  for loan losses                              |   |   | 1,500 |   |   | 1,500 |   |   | 3,750 |   |   | 3,750 |   |
|                                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                  interest income after provision for loan losses    |   |   | 22,790 |   |   | 22,339 |   |   | 67,434 |   |   | 63,960 |   |
|                                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non-interest                  income:                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Late                  and collection fees                               |   |   | 208 |   |   | 181 |   |   | 692 |   |   | 384 |   |
| Other                                                                   |   |   | 370 |   |   | 304 |   |   | 1,210 |   |   | 590 |   |
|                                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                  non-interest income                              |   |   | 578 |   |   | 485 |   |   | 1,902 |   |   | 974 |   |
|                                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non-interest                  expense:                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Compensation                  and benefits                              |   |   | 5,435 |   |   | 5,048 |   |   | 16,530 |   |   | 16,315 |   |
| Occupancy                  and equipment                                |   |   | 1,886 |   |   | 1,980 |   |   | 5,568 |   |   | 5,381 |   |
| Other                                                                   |   |   | 4,153 |   |   | 4,945 |   |   | 13,246 |   |   | 12,576 |   |
|                                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                  general and administrative                       |   |   | 11,474 |   |   | 11,973 |   |   | 35,344 |   |   | 34,272 |   |
|                                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Real                  estate owned expense, net                         |   |   | 287 |   |   | — |   |   | 216 |   |   | — |   |
| Gain                  on sale of other real estate owned, net           |   |   | — |   |   | — |   |   | — |   |   | (11 | ) |
|                                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                  real estate owned expense, net                   |   |   | 287 |   |   | — |   |   | 216 |   |   | (11 | ) |
|                                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                  non-interest expense                             |   |   | 11,761 |   |   | 11,973 |   |   | 35,560 |   |   | 34,261 |   |
|                                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income                  before provision for income taxes               |   |   | 11,607 |   |   | 10,851 |   |   | 33,776 |   |   | 30,673 |   |
| Provision                  for income taxes                             |   |   | 4,759 |   |   | 4,583 |   |   | 13,850 |   |   | 12,915 |   |
|                                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| NET                  INCOME                                             |   | $ | 6,848 |   | $ | 6,268 |   | $ | 19,926 |   | $ | 17,758 |   |
|                                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                  earnings per share                               |   | $ | 1.24 |   | $ | 1.09 |   | $ | 3.58 |   | $ | 3.08 |   |
|                                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Diluted                  earnings per share                             |   | $ | 1.20 |   | $ | 1.06 |   | $ | 3.49 |   | $ | 2.96 |   |
|                                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Dividends                  declared per share of common stock           |   | $ | 0.15 |   | $ | — |   | $ | 0.45 |   | $ | — |   |
|                                                                    |

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**Table          of Contents**

| **ITLA                CAPITAL CORPORATION AND SUBSIDIARIES**                                                      |   |
|-------------------------------------------------------------------------------------------------------------------|--------|
| **CONSOLIDATED                STATEMENTS OF CASH                FLOWS**                                           |   |
| **(Unaudited)**                                                                                                   |   |
|                                                                                                              |   | **For                the Nine Months Ended****September                30,** |   |
|                                                                                                              |   | **2006** |   | **2005** |   |
|                                                                                                              |   | **(in                thousands)** |   |
| Cash                Flows From Operating Activities:                                                              |   |   |   |   |   |   |   |
| Net                Income                                                                                         |   | $ | 19,926 |   | $ | 17,758 |   |
| Adjustments                to reconcile net income to net cash provided by operating                activities:   |   |   |   |   |   |   |   |
| Depreciation                and amortization of premises and equipment                                            |   |   | 2,008 |   |   | 2,025 |   |
| Amortization                of premium on purchased loans                                                         |   |   | 3,233 |   |   | 2,190 |   |
| Accretion                of deferred loan origination fees, net of costs                                          |   |   | (2,235 | ) |   | (2,209 | ) |
| Provision                for loan losses                                                                          |   |   | 3,750 |   |   | 3,750 |   |
| Other,                net                                                                                         |   |   | (1,476 | ) |   | (725 | ) |
| Increase                in interest receivable                                                                    |   |   | (2,143 | ) |   | (4,281 | ) |
| Decrease                in other assets                                                                           |   |   | 468 |   |   | 4,453 |   |
| Increase                in accounts payable and other liabilities                                                 |   |   | 1,884 |   |   | 3,194 |   |
|                                                                                                              |   |   |   |   |   |   |   |
| Net                cash provided by operating activities                                                          |   |   | 25,415 |   |   | 26,155 |   |
|                                                                                                              |   |   |   |   |   |   |   |
| Cash                Flows From Investing Activities:                                                              |   |   |   |   |   |   |   |
| Purchases                of investment securities available-for-sale                                              |   |   | (22,703 | ) |   | (32,811 | ) |
| Proceeds                from maturity and calls of investment securities                available-for-sale        |   |   | 23,246 |   |   | 6,949 |   |
| Purchases                of investment securities held-to-maturity                                                |   |   | (7,771 | ) |   | — |   |
| Proceeds                from the maturity and redemption of investment securities                held-to-maturity |   |   | 37,836 |   |   | 44,089 |   |
| Purchase                of stock in Federal Home Loan Bank                                                        |   |   | (2,724 | ) |   | (11,197 | ) |
| Purchase                of loans                                                                                  |   |   | (347,328 | ) |   | (621,630 | ) |
| Other                decreases (increases) in loans, net                                                          |   |   | 141,427 |   |   | (93,133 | ) |
| Proceeds                from sale of other real estate owned                                                      |   |   | — |   |   | 81 |   |
| Cash                paid for capital expenditures                                                                 |   |   | (2,453 | ) |   | (2,154 | ) |
|                                                                                                              |   |   |   |   |   |   |   |
| Net                cash used in investing activities                                                              |   |   | (180,470 | ) |   | (709,806 | ) |
|                                                                                                              |   |   |   |   |   |   |   |
| Cash                Flows From Financing Activities:                                                              |   |   |   |   |   |   |   |
| Proceeds                and excess tax benefits from exercise of employee stock                options            |   |   | 2,167 |   |   | 3,908 |   |
| Cash                paid to acquire treasury stock                                                                |   |   | (9,179 | ) |   | (20,150 | ) |
| Cash                paid for dividends                                                                            |   |   | (1,582 | ) |   | — |   |
| Increase                in deposit accounts                                                                       |   |   | 211,142 |   |   | 409,705 |   |
| Net                proceeds from (repayments of) short-term borrowings                                            |   |   | 21,795 |   |   | (136,000 | ) |
| Proceeds                from long-term borrowings                                                                 |   |   | 89,869 |   |   | 463,719 |   |
| Repayments                of long-term borrowings                                                                 |   |   | (111,487 | ) |   | (68,887 | ) |
|                                                                                                              |   |   |   |   |   |   |   |
| Net                cash provided by financing activities                                                          |   |   | 202,725 |   |   | 652,295 |   |
|                                                                                                              |   |   |   |   |   |   |   |
| Net                increase (decrease) in cash and cash equivalents                                               |   |   | 47,670 |   |   | (31,356 | ) |
| Cash                and cash equivalents at beginning of period                                                   |   |   | 93,747 |   |   | 87,580 |   |
|                                                                                                              |   |   |   |   |   |   |   |
| Cash                and cash equivalents at end of period                                                         |   | $ | 141,417 |   | $ | 56,224 |   |
|                                                                                                              |   |   |   |   |   |   |   |
| Supplemental                Cash Flow Information:                                                                |   |   |   |   |   |   |   |
| Cash                paid during the period for interest                                                           |   | $ | 89,769 |   | $ | 58,709 |   |
| Cash                paid during the period for income taxes                                                       |   | $ | 14,329 |   | $ | 8,490 |   |
| Non-Cash                Investing and Financing Transactions:                                                     |   |   |   |   |   |   |   |
| Loans                transferred to other real estate owned                                                       |   | $ | 3,499 |   | $ | 70 |   |
| Cash                dividends declared but not yet paid                                                           |   | $ | 789 |   | $ | — |   |
|                                                                                                              |   |   |   |   |   |   |   |

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**Table          of Contents**

**ITLA      CAPITAL CORPORATION AND SUBSIDIARIES **

**NOTES      TO THE UNAUDITED CONSOLIDATED FINANCIAL      STATEMENTS**

**NOTE      1 - BASIS OF PRESENTATION**

**NOTE      2 - ACCOUNTING FOR STOCK-BASED COMPENSATION**

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**Table          of Contents**

|                                                                                                                                                                                   |   | **For                the Three Months Ended****September                30, 2005** |   | **For                the Nine Months Ended****September                30, 2005** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------|--------|
|                                                                                                                                                                                   |   | **(in                thousands, except per share data)**                           |   |
|                                                                                                                                                                                   |   |                                                                               |   |                                                                              |   |
| Net                income, as reported                                                                                                                                                 |   | $                                                                                  | 6,268  |                                                                              | $      | 17,758 |   |
| Less:                Stock-based employee compensation expense determined under the fair                value                method, net of tax benefit of $426 and $733, respectively |   |                                                                               | 639    |                                                                              |   | 1,100 |   |
| Pro                forma net income                                                                                                                                                    |   | $                                                                                  | 5,629  |                                                                              | $      | 16,658 |   |
| Earnings                per share:                                                                                                                                                     |   |                                                                               |   |                                                                              |   |   |   |
| Basic                - as reported                                                                                                                                                     |   | $                                                                                  | 1.09   |                                                                              | $      | 3.08 |   |
| Basic                - pro forma                                                                                                                                                       |   | $                                                                                  | 0.98   |                                                                              | $      | 2.89 |   |
| Diluted                - as reported                                                                                                                                                   |   | $                                                                                  | 1.06   |                                                                              | $      | 2.96 |   |
| Diluted                - pro forma                                                                                                                                                     |   | $                                                                                  | 0.95   |                                                                              | $      | 2.78 |   |

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**Table          of Contents**

|                                      |   | **Weighted-Average                  Assumptions****for                  Option Grants** |
|-------------------------------------------|--------|-----------------------------------------------------------------------------------------|
|                                      |   | **2006**                                                                                |   | **2005** |
|                                      |   |                                                                                    |   |   |
| Dividend                  Yield           |   | 1.20%                                                                                   |   | 0.00% |
| Expected                  Volatility      |   | 22.94%                                                                                  |   | 36.34% |
| Risk-Free                  Interest Rates |   | 5.00%                                                                                   |   | 4.10% |
| Expected                  Lives           |   | Five                  Years                                                             |   | Seven                  Years |

**NOTE      3 - EARNINGS PER SHARE**

|                                                                   |   |                                                     |    |
|------------------------------------------------------------------------|--------|----------------------------------------------------------|---------|
|                                                                   |   |   **Net                Income**                |    | **Weighted-****Average                Shares****Outstanding** |   | **Per****Share****Amount** |   |
|                                                                   |   | **(in                thousands, except per share data)** |    |
| **For                the Three Months Ended September 30,**            |   |                                                     |    |   |   |   |   |   |   |   |
| **2006**                                                               |   |                                                     |    |   |   |   |   |   |   |   |
| Basic                EPS                                               |   | $                                                        | 6,848   |   |   | 5,534 |   | $ | 1.24 |   |
| Effect                of dilutive stock options                        |   |                                                     | — |   |   | 156 |   |   | (0.04 | ) |
| Diluted                EPS                                             |   | $                                                        | 6,848   |   |   | 5,690 |   | $ | 1.20 |   |
|                                                                   |   |                                                     |    |   |   |   |   |   |   |   |
| **2005**                                                               |   |                                                     |    |   |   |   |   |   |   |   |
| Basic                EPS                                               |   | $                                                        | 6,268   |   |   | 5,746 |   | $ | 1.09 |   |
| Effect                of dilutive stock options                        |   |                                                     | — |   |   | 185 |   |   | (0.03 | ) |
| Diluted                EPS                                             |   | $                                                        | 6,268   |   |   | 5,931 |   | $ | 1.06 |   |
|   **For                the Nine Months Ended September 30,** |   |                                                     |
| **2006**                                                               |   |                                                     |    |   |   |   |   |   |   |   |
| Basic                EPS                                               |   | $                                                        | 19,926  |   |   | 5,570 |   | $ | 3.58 |   |
| Effect                of dilutive stock options                        |   |                                                     | — |   |   | 147 |   |   | (0.09 | ) |
| Diluted                EPS                                             |   | $                                                        | 19,926  |   |   | 5,717 |   | $ | 3.49 |   |
|                                                                   |   |                                                     |    |   |   |   |   |   |   |   |
| **2005**                                                               |   |                                                     |    |   |   |   |   |   |   |   |
| Basic                EPS                                               |   | $                                                        | 17,758  |   |   | 5,769 |   | $ | 3.08 |   |
| Effect                of dilutive stock options                        |   |                                                     | — |   |   | 232 |   |   | (0.12 | ) |
| Diluted                EPS                                             |   | $                                                        | 17,758  |   |   | 6,001 |   | $ | 2.96 |   |

----

**Table          of Contents**

**NOTE      4 - COMPREHENSIVE INCOME**

|                                                                                                                                                                                                                                                                                                                                                                                                    |   | **Three                Months Ended** |   | **Nine                Months Ended** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|--------|--------------------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                    |   | **September                30,**      |   | **September                30,**     |   |
|                                                                                                                                                                                                                                                                                                                                                                                                    |   | **2006**                              |   | **2005**                             |   | **2006** |   | **2005** |   |
|                                                                                                                                                                                                                                                                                                                                                                                                    |   | **(in                thousands)**     |   |
|                                                                                                                                                                                                                                                                                                                                                                                                    |   |                                  |   |                                 |   |   |   |   |   |   |   |   |   |
| Net                Income                                                                                                                                                                                                                                                                                                                                                                               |   | $                                     | 6,848  |                                 | $      | 6,268 |   | $ | 19,926 |   | $ | 17,758 |   |
| Other                comprehensive income (loss):                                                                                                                                                                                                                                                                                                                                                       |   |                                  |   |                                 |   |   |   |   |   |   |   |   |   |
| Change                in unrealized gains (losses) on investment securities available-for-sale,                net of tax (expense) benefit of $(222) and $17 for the three months                ended                September 30, 2006 and 2005, respectively, and $(174) and $154 for                the                nine months ended September 30, 2006 and 2005,                respectively. |   |                                  | 333    |                                 |   | (24 | ) |   | 263 |   |   | (233 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                                    |   |                                  |   |                                 |   |   |   |   |   |   |   |   |   |
| Comprehensive                Income                                                                                                                                                                                                                                                                                                                                                                     |   | $                                     | 7,181  |                                 | $      | 6,244 |   | $ | 20,189 |   | $ | 17,525 |   |

**NOTE      5 - IMPAIRED LOANS RECEIVABLE **

**NOTE      6 - RESIDUAL INTEREST IN SECURITIZATION**

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**Table          of Contents**

|                                                                                             |   | **September                30,****2006**  |      | **December                31, 2005** |   |
|--------------------------------------------------------------------------------------------------|--------|-------------------------------------------|-----------|--------------------------------------|--------|
|                                                                                             |   | **(dollars                in thousands)** |      |
|                                                                                             |   |                                      |      |
| **Fair                value of retained interest**                                               |   | **$**                                     | **2,463** |                                 | **$**  | **3,570** |   |
| **Weighted                average remaining life (in years) - securities**                       |   |                                      | **0.54**  |                                 |   | **0.56** |   |
| **Weighted                average remaining life (in years) - residual                interest** |   |                                      | **2.70**  |                                 |   | **2.92** |   |
| **Weighted                average annual prepayment speed**                                      |   |                                      | **40.0**  | **%  **                    |   | **40.0** | **%** |
| Impact                of 10% adverse change                                                      |   | $                                         | (11       | )                                    | $      | (22 | ) |
| Impact                of 25% adverse change                                                      |   | $                                         | (21       | )                                    | $      | (34 | ) |
| **Weighted                average annual discount rate**                                         |   |                                      | **13.0**  | **%**                                |   | **13.0** | **%** |
| Impact                of 10% adverse change                                                      |   | $                                         | (79       | )                                    | $      | (117 | ) |
| Impact                of 25% adverse change                                                      |   | $                                         | (187      | )                                    | $      | (284 | ) |
| **Weighted                average lifetime credit losses**                                       |   |                                      | **20.2**  | **%**                                |   | **14.3** | **%** |
| Impact                of 10% adverse change                                                      |   | $                                         | (102      | )                                    | $      | (79 | ) |
| Impact                of 25% adverse change                                                      |   | $                                         | (265      | )                                    | $      | (211 | ) |

**NOTE      7 - NEW ACCOUNTING PRONOUNCEMENTS**

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**Table          of Contents**

**NOTE      8 - BUSINESS SEGMENT INFORMATION**

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**Table          of Contents**

|                                                        |   | **Lending**                       |    |                         |   |             |   |
|-------------------------------------------------------------|--------|-----------------------------------|---------|------------------------------|--------|------------------|--------|
|                                                        |   | **Operations**                    |    | **All                Other** |   | **Consolidated** |   |
|                                                        |   | **(in                thousands)** |    |
| **For                the three months ended September 30,** |   |                              |    |                         |   |             |   |   |   |   |
| **2006**                                                    |   |                              |    |                         |   |             |   |   |   |   |
| Revenues                from external customers             |   | $                                 | 59,341  |                         | $      | 367              |   | $ | 59,708 |   |
| Total                interest income                        |   |                              | 58,836  |                         |   | 294              |   |   | 59,130 |   |
| Total                interest expense                       |   |                              | 32,736  |                         |   | 2,104            |   |   | 34,840 |   |
| Net                income                                   |   |                              | 8,324   |                         |   | (1,476           | )      |   | 6,848 |   |
|                                                        |   |                              |    |                         |   |             |   |   |   |   |
| **2005**                                                    |   |                              |    |                         |   |             |   |   |   |   |
| Revenues                from external customers             |   | $                                 | 48,709  |                         | $      | 606              |   | $ | 49,315 |   |
| Total                interest income                        |   |                              | 48,265  |                         |   | 565              |   |   | 48,830 |   |
| Total                interest expense                       |   |                              | 23,161  |                         |   | 1,830            |   |   | 24,991 |   |
| Net                income                                   |   |                              | 7,568   |                         |   | (1,300           | )      |   | 6,268 |   |
|                                                        |   |                              |    |                         |   |             |   |   |   |   |
|                                                        |   |                              |    |                         |   |             |   |   |   |   |
| **For                the nine months ended September 30,**  |   |                              |    |                         |   |             |   |   |   |   |
| **2006**                                                    |   |                              |    |                         |   |             |   |   |   |   |
| Revenues                from external customers             |   | $                                 | 167,710 |                         | $      | 510              |   | $ | 168,220 |   |
| Total                interest income                        |   |                              | 165,730 |                         |   | 588              |   |   | 166,318 |   |
| Total                interest expense                       |   |                              | 89,046  |                         |   | 6,088            |   |   | 95,134 |   |
| Net                income                                   |   |                              | 24,626  |                         |   | (4,700           | )      |   | 19,926 |   |
|                                                        |   |                              |    |                         |   |             |   |   |   |   |
| **2005**                                                    |   |                              |    |                         |   |             |   |   |   |   |
| Revenues                from external customers             |   | $                                 | 126,583 |                         | $      | 1,653            |   | $ | 128,236 |   |
| Total                interest income                        |   |                              | 125,285 |                         |   | 1,977            |   |   | 127,262 |   |
| Total                interest expense                       |   |                              | 54,288  |                         |   | 5,264            |   |   | 59,552 |   |
| Net                income                                   |   |                              | 21,576  |                         |   | (3,818           | )      |   | 17,758 |   |

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**Table          of Contents**

**Item      2. Management’s Discussion and Analysis of Financial      Condition and Results of Operations**

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

----

**Table          of Contents**

**RESULTS      OF OPERATIONS**

**Three      Months Ended September 30, 2006 Compared to Three Months Ended September 30,      2005**

**Executive      Summary**

**Net      Interest Income and Margin**

----

**Table          of Contents**

|                                                                                    |   | **For                the Three Months Ended September 30,** |      |
|-----------------------------------------------------------------------------------------|--------|-------------------------------------------------------------|-----------|
|                                                                                    |   | **2006**                                                    |      | **2005** |   |
|                                                                                    |   | **Average                Balance**                          |      | **Income/****Expense** |   | **Yield/****Rate** |   | **Average                Balance** |   | **Income/****Expense** |   | **Yield/****Rate** |   |
|                                                                                    |   | **(dollars                in thousands)**                   |      |
| **Assets**                                                                              |   |                                                        |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash                and investment securities                                           |   | $                                                           | 471,381   |   | $ | 5,525 |   |   | 4.65 | %   | $ | 430,410 |   | $ | 4,552 |   |   | 4.20 | % |
| Loans                receivable:                                                        |   |                                                        |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Real                estate loans                                                        |   |                                                        | 2,588,275 |   |   | 51,888 |   |   | 7.95 | % |   | 2,283,278 |   |   | 39,528 |   |   | 6.87 | % |
| Other                loans                                                              |   |                                                        | 78,855    |   |   | 1,717 |   |   | 8.64 | % |   | 223,636 |   |   | 4,750 |   |   | 8.43 | % |
| Total                loans receivable                                                   |   |                                                        | 2,667,130 |   |   | 53,605 |   |   | 7.97 | % |   | 2,506,914 |   |   | 44,278 |   |   | 7.01 | % |
|                                                                                    |   |                                                        |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                interest earning assets                                            |   |                                                        | 3,138,511 |   | $ | 59,130 |   |   | 7.47 | % |   | 2,937,324 |   | $ | 48,830 |   |   | 6.60 | % |
| Non-interest                earning assets                                              |   |                                                        | 72,131    |   |   |   |   |   |   |   |   | 53,352 |   |   |   |   |   |   |   |
| Allowance                for loan losses                                                |   |                                                        | (47,200   | ) |   |   |   |   |   |   |   | (37,952 | ) |   |   |   |   |   |   |
| Total                assets                                                             |   | $                                                           | 3,163,442 |   |   |   |   |   |   |   | $ | 2,952,724 |   |   |   |   |   |   |   |
|                                                                                    |   |                                                        |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Liabilities                and Shareholders’ Equity**                           |   |                                                        |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest                bearing deposit accounts:                                       |   |                                                        |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest                bearing demand                                                  |   | $                                                           | 25,329    |   | $ | 188 |   |   | 2.94 | % | $ | 44,613 |   | $ | 286 |   |   | 2.54 | % |
| Money                market and passbook                                                |   |                                                        | 212,501   |   |   | 2,593 |   |   | 4.84 | % |   | 184,428 |   |   | 1,476 |   |   | 3.18 | % |
| Time                certificates                                                        |   |                                                        | 1,670,231 |   |   | 20,307 |   |   | 4.82 | % |   | 1,588,757 |   |   | 13,765 |   |   | 3.44 | % |
| Total                interest bearing deposit accounts                                  |   |                                                        | 1,908,061 |   |   | 23,088 |   |   | 4.80 | % |   | 1,817,798 |   |   | 15,527 |   |   | 3.39 | % |
| FHLB                advances and other borrowings                                       |   |                                                        | 908,897   |   |   | 9,648 |   |   | 4.21 | % |   | 804,757 |   |   | 7,634 |   |   | 3.76 | % |
| Junior                subordinated debentures                                           |   |                                                        | 86,600    |   |   | 2,104 |   |   | 9.64 | % |   | 86,600 |   |   | 1,830 |   |   | 8.38 | % |
|                                                                                    |   |                                                        |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                interest bearing liabilities                                       |   |                                                        | 2,903,558 |   | $ | 34,840 |   |   | 4.76 | % |   | 2,709,155 |   | $ | 24,991 |   |   | 3.66 | % |
| Non-interest                bearing demand accounts                                     |   |                                                        | 11,351    |   |   |   |   |   |   |   |   | 15,671 |   |   |   |   |   |   |   |
| Other                non-interest bearing liabilities                                   |   |                                                        | 35,715    |   |   |   |   |   |   |   |   | 27,743 |   |   |   |   |   |   |   |
| Shareholders’                equity                                               |   |                                                        | 212,818   |   |   |   |   |   |   |   |   | 200,155 |   |   |   |   |   |   |   |
| Total                liabilities and shareholders’                equity          |   | $                                                           | 3,163,442 |   |   |   |   |   |   |   | $ | 2,952,724 |   |   |   |   |   |   |   |
| Net                interest spread *(1)*                                                |   |                                                        |      |   |   |   |   |   | 2.71 | % |   |   |   |   |   |   |   | 2.94 | % |
|                                                                                    |   |                                                        |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                interest income before provision for                loan losses |   |                                                        |      |   | $ | 24,290 |   |   |   |   |   |   |   | $ | 23,839 |   |   |   |   |
| Net                interest margin *(2)*                                                |   |                                                        |      |   |   |   |   |   | 3.07 | % |   |   |   |   |   |   |   | 3.22 | % |
|                                                                                    |   |                                                        |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

*(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.*

----

**Table          of Contents**

|                                                      |   | **For                the Three Months Ended****September                30, 2006 and 2005** |   |
|-----------------------------------------------------------|--------|---------------------------------------------------------------------------------------------|--------|
|                                                      |   | **Increase                (Decrease) Due to:**                                              |   |
|                                                      |   | **Rate**                                                                                    |   | **Volume** |   | **Total** |   |
|                                                      |   | **(in                thousands)**                                                           |   |
| Interest                and fees earned from:             |   |                                                                                        |   |   |   |   |   |   |   |   |
| Cash                and investment securities             |   | $                                                                                           | 515    |   | $ | 458 |   | $ | 973 |   |
| Loans                                                     |   |                                                                                        | 6,359  |   |   | 2,968 |   |   | 9,327 |   |
|                                                      |   |                                                                                        |   |   |   |   |   |   |   |   |
| Total                increase in interest income          |   |                                                                                        | 6,874  |   |   | 3,426 |   |   | 10,300 |   |
|                                                      |   |                                                                                        |   |   |   |   |   |   |   |   |
| Interest                paid on:                          |   |                                                                                        |   |   |   |   |   |   |   |   |
| Deposit                accounts                           |   |                                                                                        | 6,755  |   |   | 806 |   |   | 7,561 |   |
| FHLB                advances and other borrowings         |   |                                                                                        | 968    |   |   | 1,046 |   |   | 2,014 |   |
| Junior                subordinated debentures             |   |                                                                                        | 274    |   |   | — |   |   | 274 |   |
|                                                      |   |                                                                                        |   |   |   |   |   |   |   |   |
| Total                increase in interest expense         |   |                                                                                        | 7,997  |   |   | 1,852 |   |   | 9,849 |   |
|                                                      |   |                                                                                        |   |   |   |   |   |   |   |   |
| Increase                (decrease) in net interest income |   | $                                                                                           | (1,123 | ) | $ | 1,574 |   | $ | 451 |   |

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**Table          of Contents**

----

**Table          of Contents**

**Provision      for Loan Losses**

| ·   | the                risk characteristics of various classifications of                loans; |
|--------------------|---------------------------------------------------------------------------------------------|

| ·   | general                portfolio trends relative to asset and portfolio size; |
|--------------------|-------------------------------------------------------------------------------|

| ·   | asset                categories; |
|--------------------|----------------------------------|

| ·   | potential                credit and geographic concentrations; |
|--------------------|----------------------------------------------------------------|

| ·   | delinquency                trends and nonaccrual loan levels; |
|--------------------|---------------------------------------------------------------|

| ·   | historical                loss experience and risks associated with changes in economic, social                and                business conditions; and |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | the                underwriting standards in effect when the loan was                made. |
|--------------------|--------------------------------------------------------------------------------------------|

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**Table          of Contents**

**Non-Interest      Income**

**Non-Interest      Expense**

**Nine      Months Ended September 30, 2006 Compared to Nine Months Ended September 30,      2005**

**Executive      Summary**

----

**Table          of Contents**

**Net      Interest Income and Margin**

----

**Table          of Contents**

|                                                                               |   | **For                the Nine Months Ended September 30,** |      |
|------------------------------------------------------------------------------------|--------|------------------------------------------------------------|-----------|
|                                                                               |   | **2006**                                                   |      | **2005** |   |
|                                                                               |   | **Average                Balance**                         |      | **Income/****Expense** |   | **Yield/****Rate** |   | **Average                Balance** |   | **Income/****Expense** |   | **Yield/****Rate** |   |
|                                                                               |   | **(dollars                in thousands)**                  |      |
| **Assets**                                                                         |   |                                                       |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash                and investment securities                                      |   | $                                                          | 436,242   |   | $ | 14,494 |   |   | 4.44 | %   | $ | 430,250 |   | $ | 13,863 |   |   | 4.31 | % |
| Loans                receivable:                                                   |   |                                                       |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Real                estate loans                                                   |   |                                                       | 2,539,098 |   |   | 146,867 |   |   | 7.73 | % |   | 1,908,681 |   |   | 98,412 |   |   | 6.89 | % |
| Other                loans                                                         |   |                                                       | 77,807    |   |   | 4,957 |   |   | 8.52 | % |   | 240,436 |   |   | 14,987 |   |   | 8.33 | % |
| Total                loans receivable                                              |   |                                                       | 2,616,905 |   |   | 151,824 |   |   | 7.76 | % |   | 2,149,117 |   |   | 113,399 |   |   | 7.05 | % |
|                                                                               |   |                                                       |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                interest earning assets                                       |   |                                                       | 3,053,147 |   | $ | 166,318 |   |   | 7.28 | % |   | 2,579,367 |   | $ | 127,262 |   |   | 6.60 | % |
| Non-interest                earning assets                                         |   |                                                       | 69,007    |   |   |   |   |   |   |   |   | 49,474 |   |   |   |   |   |   |   |
| Allowance                for loan losses                                           |   |                                                       | (45,955   | ) |   |   |   |   |   |   |   | (36,870 | ) |   |   |   |   |   |   |
| Total                assets                                                        |   | $                                                          | 3,076,199 |   |   |   |   |   |   |   | $ | 2,591,971 |   |   |   |   |   |   |   |
|                                                                               |   |                                                       |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Liabilities                and Shareholders’ Equity**                      |   |                                                       |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest                bearing deposit accounts:                                  |   |                                                       |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest                bearing demand                                             |   | $                                                          | 30,635    |   | $ | 646 |   |   | 2.82 | % | $ | 55,609 |   | $ | 967 |   |   | 2.32 | % |
| Money                market and passbook                                           |   |                                                       | 208,097   |   |   | 6,812 |   |   | 4.38 | % |   | 174,153 |   |   | 3,685 |   |   | 2.83 | % |
| Time                certificates                                                   |   |                                                       | 1,559,929 |   |   | 52,601 |   |   | 4.51 | % |   | 1,371,507 |   |   | 32,270 |   |   | 3.15 | % |
| Total                interest bearing deposit accounts                             |   |                                                       | 1,798,661 |   |   | 60,059 |   |   | 4.46 | % |   | 1,601,269 |   |   | 36,922 |   |   | 3.08 | % |
| FHLB                advances and other borrowings                                  |   |                                                       | 936,223   |   |   | 28,987 |   |   | 4.14 | % |   | 665,660 |   |   | 17,366 |   |   | 3.49 | % |
| Junior                subordinated debentures                                      |   |                                                       | 86,600    |   |   | 6,088 |   |   | 9.40 | % |   | 86,600 |   |   | 5,264 |   |   | 8.13 | % |
|                                                                               |   |                                                       |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                interest bearing liabilities                                  |   |                                                       | 2,821,484 |   | $ | 95,134 |   |   | 4.51 | % |   | 2,353,529 |   | $ | 59,552 |   |   | 3.38 | % |
| Non-interest                bearing demand accounts                                |   |                                                       | 13,081    |   |   |   |   |   |   |   |   | 14,884 |   |   |   |   |   |   |   |
| Other                non-interest bearing liabilities                              |   |                                                       | 33,267    |   |   |   |   |   |   |   |   | 26,598 |   |   |   |   |   |   |   |
| Shareholders’                equity                                          |   |                                                       | 208,367   |   |   |   |   |   |   |   |   | 196,960 |   |   |   |   |   |   |   |
| Total                liabilities and shareholders’                equity     |   | $                                                          | 3,076,199 |   |   |   |   |   |   |   | $ | 2,591,971 |   |   |   |   |   |   |   |
| Net                interest spread *(1)*                                           |   |                                                       |      |   |   |   |   |   | 2.77 | % |   |   |   |   |   |   |   | 3.22 | % |
|                                                                               |   |                                                       |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                interest income before provision for                loan losses |   |                                                       |      |   | $ | 71,184 |   |   |   |   |   |   |   | $ | 67,710 |   |   |   |   |
| Net                interest margin *(2)*                                           |   |                                                       |      |   |   |   |   |   | 3.12 | % |   |   |   |   |   |   |   | 3.51 | % |
|                                                                               |   |                                                       |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

*(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.*

----

**Table          of Contents**

|                                                      |   | **For                the Nine Months Ended****September                30, 2006 and 2005** |    |
|-----------------------------------------------------------|--------|--------------------------------------------------------------------------------------------|---------|
|                                                      |   | **Increase                (Decrease) Due to:**                                             |    |
|                                                      |   | **Rate**                                                                                   |    | **Volume** |   | **Total** |   |
|                                                      |   | **(in                thousands)**                                                          |    |
| Interest                and fees earned from:             |   |                                                                                       |    |   |   |   |   |   |   |   |
| Cash                and investment securities             |   | $                                                                                          | 432     |   | $ | 199 |   | $ | 631 |   |
| Loans                                                     |   |                                                                                       | 12,155  |   |   | 26,270 |   |   | 38,425 |   |
|                                                      |   |                                                                                       |    |   |   |   |   |   |   |   |
| Total                increase in interest income          |   |                                                                                       | 12,587  |   |   | 26,469 |   |   | 39,056 |   |
|                                                      |   |                                                                                       |    |   |   |   |   |   |   |   |
| Interest                paid on:                          |   |                                                                                       |    |   |   |   |   |   |   |   |
| Deposit                accounts                           |   |                                                                                       | 18,145  |   |   | 4,992 |   |   | 23,137 |   |
| FHLB                advances and other borrowings         |   |                                                                                       | 3,651   |   |   | 7,970 |   |   | 11,621 |   |
| Junior                subordinated debentures             |   |                                                                                       | 824     |   |   | — |   |   | 824 |   |
|                                                      |   |                                                                                       |    |   |   |   |   |   |   |   |
| Total                increase in interest expense         |   |                                                                                       | 22,620  |   |   | 12,962 |   |   | 35,582 |   |
|                                                      |   |                                                                                       |    |   |   |   |   |   |   |   |
| Increase                (decrease) in net interest income |   | $                                                                                          | (10,033 | ) | $ | 13,507 |   | $ | 3,474 |   |

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**Table          of Contents**

**Provision      for Loan Losses**

**Non-Interest      Income**

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**Table          of Contents**

**Non-Interest      Expense**

**FINANCIAL      CONDITION**

**CREDIT      RISK**

**Nonperforming      Assets, Other Loans of Concern and Allowance for Loan      Losses**

|                                                                                                 |   | **September                30,****2006**  |   | **December                31,****2005** |   |
|------------------------------------------------------------------------------------------------------|--------|-------------------------------------------|--------|-----------------------------------------|--------|
|                                                                                                 |   | **(dollars                in thousands)** |   |
| Nonaccrual                loans:                                                                     |   |                                      |   |                                    |   |   |   |
| Real                estate                                                                           |   | $                                         | 6,127  |                                    | $      | 6,117 |   |
| Franchise                                                                                            |   |                                      | 4,700  |                                    |   | 7,366 |   |
| Entertainment                finance                                                                 |   |                                      | 10,136 |                                    |   | 10,780 |   |
| Total                nonaccrual loans                                                                |   |                                      | 20,963 |                                    |   | 24,263 |   |
| Other                real estate owned, net                                                          |   |                                      | 7,459  |                                    |   | 3,960 |   |
| Total                nonperforming assets                                                            |   |                                      | 28,422 |                                    |   | 28,223 |   |
| Performing                troubled debt restructurings                                               |   |                                      | 8,039  |                                    |   | 10,758 |   |
| Total                nonperforming assets and performing troubled debt                restructurings |   | $                                         | 36,461 |                                    | $      | 38,981 |   |
|                                                                                                 |   |                                      |   |                                    |   |   |   |
| Nonaccrual                loans to total loans                                                       |   |                                      | 0.77   | %                                       |   | 0.95 | % |
| Allowance                for loan losses to nonaccrual loans                                         |   |                                      | 224.88 | %                                       |   | 180.59 | % |
| Nonperforming                assets to total assets                                                  |   |                                      | 0.87   | %                                       |   | 0.92 | % |

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**Table          of Contents**

|                                                                                  |   | **For                the Nine****Months                Ended****September                30,****2006** |   | **For                the Year****Ended****December                31,****2005** |   | **For                the Nine Months Ended****September                30,****2005** |   |
|---------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------|--------|
|                                                                                  |   | **(dollars                in thousands)**                                                              |   |
|                                                                                  |   |                                                                                                   |   |                                                                            |   |                                                                                 |   |   |   |   |
| Balance                at beginning of period                                         |   | $                                                                                                      | 43,817 |                                                                            | $      | 35,483                                                                               |   | $ | 35,483 |   |
| Provision                for loan losses                                              |   |                                                                                                   | 3,750  |                                                                            |   | 10,250                                                                               |   |   | 3,750 |   |
| Charge-offs                                                                           |   |                                                                                                   | (1,634 | )                                                                               |   | (2,430                                                                               | )      |   | (959 | ) |
| Recoveries                                                                            |   |                                                                                                   | 1,208  |                                                                            |   | 514                                                                                  |   |   | 387 |   |
| Net                charge-offs                                                        |   |                                                                                                   | (426   | )                                                                               |   | (1,916                                                                               | )      |   | (572 | ) |
|                                                                                  |   |                                                                                                   |   |                                                                            |   |                                                                                 |   |   |   |   |
| Balance                at end of period                                               |   | $                                                                                                      | 47,141 |                                                                            | $      | 43,817                                                                               |   | $ | 38,661 |   |
|                                                                                  |   |                                                                                                   |   |                                                                            |   |                                                                                 |   |   |   |   |
| Allowance                for loan losses as a percentage of                loans, net |   |                                                                                                   | 1.70   | %                                                                               |   | 1.71                                                                                 | %      |   | 1.52 | % |

**Liquidity**

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**Table          of Contents**

**Capital      Resources**

**Item      3. Quantitative and Qualitative Disclosures      About**
**      Market Risk**

**Item      4. Controls and Procedures**

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**Table          of Contents**

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**Table          of Contents**

**PART      II - OTHER INFORMATION**

**Item      1.** **Legal      Proceedings**

**Item      1A.** **Risk      Factors**

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

|     **Period**                                    |   |    **Total                Number of Shares Purchased** |   |    **Average                Price Paid per Share** |   | **Total                Number of Shares Purchased as Part of Publicly Announced Plans or                Programs** |   | **Maximum                Number of Shares that May Yet Be Purchased Under the Plans or                Programs****(1)** |   |
|-----------------------------------------------------------------------|--------|-----------------------------------------------------------------------|--------|-------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------|--------|
|  July                1, 2006 to July                31, 2006     |   |                                                                  | 10,200 |                                                              | $      | 49.95                                                                                                              |   |                                                                                                                    | 10,200 |   |   | 360,986 |   |
| August                1, 2006 to August                31, 2006       |   |                                                                  | 5,700  |                                                              |   | 51.31                                                                                                              |   |                                                                                                                    | 5,700  |   |   | 355,286 |   |
| September                1, 2006 to September                30, 2006 |   |                                                                  | 18,275 |                                                              |   | 51.88                                                                                                              |   |                                                                                                                    | 18,275 |   |   | 337,011 |   |
|  Total                                                           |   |                                                                  | 34,175 |                                                              | $      | 51.21                                                                                                              |   |                                                                                                                    | 34,175 |   |   | 337,011 |   |

**Item      3****.** **Defaults      Upon Senior Securities**

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**Table          of Contents**

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

| Votes  |   | For       |   | Withheld |
|--------|--------|-----------|--------|----------|
|   |   | 5,033,096 |   | 69,450   |
| Votes  |   | For       |   | Withheld |
|--------|--------|-----------|--------|----------|
|   |   | 4,374,589 |   | 727,957  |
| Votes  |   | For       |   | Withheld |
|--------|--------|-----------|--------|----------|
|   |   | 5,032,954 |   | 69,592   |
| Votes  |   | For       |   | Against |   | Withheld |
|--------|--------|-----------|--------|---------|--------|----------|
|   |   | 4,904,496 |   | 205,827 |   | 1,900    |

**Item      5** **.** **Other      Information**

**Item      6** **.** **Exhibits**

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**Table          of Contents**

**SIGNATURES**

|                                  | **ITLA                CAPITAL CORPORATION**         |   |
|---------------------------------------|-----------------------------------------------------|--------|
|                                  |                                                |   |
| Date:                November 9, 2006 | /s/                George W. Haligowski             |   |
|                                  | George                W. Haligowski                 |   |
|                                  | Chairman                of the Board, President and |   |
|                                  | Chief                Executive Officer              |   |

| Date:                November 9, 2006 | /s/                Timothy M. Doyle            |   |
|---------------------------------------|------------------------------------------------|--------|
|                                  | Timothy                M. Doyle                |   |
|                                  | Executive                Managing Director and |   |
|                                  | Chief                Financial Officer         |   |

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**Table          of Contents**

**EXHIBIT      INDEX**

| **Regulation                S-K Exhibit Number** |   | **Document**                                                                                                                                   |   | **Reference                to Prior Filling or Exhibit Number Attached                Hereto** |
|--------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------|
|                                             |   |                                                                                                                                           |   |                                                                                           |
| 3.1                                              |   | Certificate                of Incorporation                                                                                                    |   | **                                                                                             |
| 3.2                                              |   | Bylaws,                as amended                                                                                                              |   | ***                                                                                            |
| 4                                                |   | Instruments                Defining the Rights of Security Holders, Including                Indentures                                        |   | *********                                                                                      |
| 10.1                                             |   | 2005                Re-Designated, Amended and Restated Stock Option Plan For Nonemployee                Directors (“NEDP”)        |   | *****                                                                                          |
| 10.2                                             |   | Amended                and Restated 2005 Re-Designated, Amended and Restated Employee Stock                Incentive Plan (“ESIP”) |   | ********                                                                                       |
| 10.3a                                            |   | Nonqualified                (Non-Employer Securities) Deferred Compensation Plan                                                               |   | ********                                                                                       |
| 10.3b                                            |   | Nonqualified                (Employer Securities Only) Deferred Compensation Plan                                                              |   | ********                                                                                       |
| 10.4                                             |   | Supplemental                Salary Savings Plan                                                                                                |   | *                                                                                              |
| 10.5                                             |   | Data                Processing Agreement                                                                                                       |   | *                                                                                              |
| 10.6a                                            |   | Amended                and Restated Employment Agreement with George W.                Haligowski                                              |   | ********                                                                                       |
| 10.6b                                            |   | Non-Competition                and Non-Solicitation Agreement with George W. Haligowski                                                        |   | ********                                                                                       |
| 10.7                                             |   | Change                in Control Severance Agreement with Norval L. Bruce                                                                      |   | ********                                                                                       |
| 10.8                                             |   | Change                in Control Severance Agreement with Timothy M. Doyle                                                                     |   | ********                                                                                       |
| 10.9                                             |   | Change                in Control Severance Agreement with Lyle C. Lodwick                                                                      |   | ********                                                                                       |
| 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                                            |   | Form                of Non-Qualified Stock Option Agreement under the ESIP                                                                     |   | ******                                                                                         |
| 10.17                                            |   | Form                of Non-Qualified Stock Option Agreement under the NEDP                                                                     |   | *******                                                                                        |
| 10.18                                            |   | Description                of Named Executive Officer Salary, Bonus and Perquisite Arrangements                for 2006                        |   | **********                                                                                     |
| 10.19                                            |   | Description                of Director Fee Arrangements                                                                                        |   | **********                                                                                     |
| 11                                               |   | Statement                Regarding Computation of Per Share Earnings                                                                           |   | Not                Required                                                                    |
| 15                                               |   | Letter                Regarding Unaudited Interim Financial Information                                                                        |   | None                                                                                           |
| 18                                               |   | Letter                Regarding Change in Accounting Principles                                                                                |   | None                                                                                           |
| 19                                               |   | Report                Furnished to Security Holders                                                                                            |   | None                                                                                           |
| 22                                               |   | Published                Report Regarding Matters Submitted to Vote of Security                Holders                                         |   | None                                                                                           |
| 23.1                                             |   | Consent                of Experts                                                                                                              |   | Not                Required                                                                    |
| 24                                               |   | Power                of Attorney                                                                                                               |   | None                                                                                           |
| 31.1                                             |   | Rule                13a-14(a)/15d-14(a) Certification of Chief Executive                Officer                                                |   | 31.1                                                                                           |
| 31.2                                             |   | Rule                13a-14(a)/15d-14(a) Certification of Chief Financial                Officer                                                |   | 31.2                                                                                           |
| 32                                               |   | Section                1350 Certifications of Chief Executive Officer and Chief Financial                Officer                               |   | 32                                                                                             |

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