##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION  FORM 10-Q (Mark One)  þ
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended September 30, 2004 OR  o
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from  to 
Commission File Number 0-26960 ITLA CAPITAL CORPORATION 
  Delaware
    
    95-4596322(State or Other Jurisdiction of Incorporation or Organization)
    
    (IRS Employer Identification No.)888 Prospect St., Suite 110, La Jolla, California
    
    92037(Address of Principal Executive Offices)
    
    (Zip Code)
 (858) 551-0511 
  Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes þ No o. Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes þ No o. Number of shares of common stock of the registrant: 5,838,300 outstanding as of November 3, 2004.




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ITLA CAPITAL CORPORATION
FORM 10-Q
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2004 TABLE OF CONTENTS PART I  FINANCIAL INFORMATIONItem 1.
    
    Financial Statements
    
    
    3Consolidated Balance Sheets  September 30, 2004 (Unaudited) and December 31, 2003
    
    
    3Consolidated Statements of Income  Three and Nine Months Ended September 30, 2004 and 2003 (Unaudited)
    
    
    4Consolidated Statements of Cash Flows  Nine Months Ended September 30, 2004 and 2003 (Unaudited)
    
    
    5Notes to the Unaudited Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    27Item 4.
    
    Controls and Procedures
    
    
    27PART II  OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    29Item 2.
    
    Changes in Securities, Use of Proceeds and Issuer Repurchases of Equity Securities
    
    
    29Item 3.
    
    Defaults Upon Senior Securities
    
    
    29Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    29Item 5.
    
    Other Information
    
    
    30Item 6.
    
    Exhibits
    
    
    30Signatures
    
    
    31Certifications
    
    
    33Exhibit 31.1Exhibit 31.2Exhibit 32
  Forward Looking Statements Safe Harbor statement under the Private Securities Litigation Reform Act
of 1995: This Form 10-Q contains forward-looking statements that are subject
to risks and uncertainties, including, but not limited to, changes in economic
conditions in our market areas, changes in policies by regulatory agencies, the
impact of competitive loan products, loan demand risks, the quality or
composition of our loan or investment portfolios, fluctuations in interest
rates and changes in the relative differences between short and long-term
interest rates, levels of nonperforming assets and operating results, the
impact of terrorist actions on our loan portfolio and loan repayments, and
other risks detailed from time to time in our filings with the Securities and
Exchange Commission. We caution readers not to place undue reliance on
forward-looking statements. We do not undertake and specifically disclaim any
obligation to revise any forward-looking statements to reflect the occurrence
of anticipated or unanticipated events or circumstances after the date of such
statements. These risks could cause our actual results for 2004 and beyond to
differ materially from those expressed in any forward-looking statements by, or
on behalf of, us. As used throughout this report, the terms we, our, ITLA Capital or the
Company refer to ITLA Capital Corporation and its consolidated subsidiaries. 2




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PART I  FINANCIAL INFORMATION ITLA CAPITAL CORPORATION AND SUBSIDIARIES 
 CONSOLIDATED BALANCE SHEETS
 September 30,2004
    
    December 31,(unaudited)
    
    2003(in thousands except share amounts)AssetsCash and cash equivalents
    
    $
    66,461
    
    
    $
    178,318Investment securities available for sale, at fair value
    
    
    64,421
    
    
    
    53,093Investment securities held to maturity, at amortized cost
    
    
    198,028
    
    
    
    Stock in Federal Home Loan Bank
    
    
    23,008
    
    
    
    17,966Loans, net (net of allowance for loan losses of $33,655 and $31,573
as of September 30, 2004 and December 31, 2003, respectively)
    
    
    1,583,657
    
    
    
    1,436,849Real estate loans held in trust, net (net of allowance for loan
losses of $1,028 and $1,828 as of September 30, 2004 and December
31, 2003, respectively)
    
    
    40,508
    
    
    
    68,575Interest receivable
    
    
    8,994
    
    
    
    8,958Other real estate owned, net
    
    
    
    
    
    
    7,048Premises and equipment, net
    
    
    6,250
    
    
    
    5,766Deferred income taxes
    
    
    11,999
    
    
    
    11,609Goodwill
    
    
    3,118
    
    
    
    3,118Other assets
    
    
    23,392
    
    
    
    26,915Total assets
    
    $
    2,029,836
    
    
    $
    1,818,215Liabilities and Shareholders EquityLiabilities:Deposit accounts
    
    $
    1,236,059
    
    
    $
    1,147,017Federal Home Loan Bank advances
    
    
    489,535
    
    
    
    362,135Collateralized mortgage obligations
    
    
    
    
    
    
    15,868Accounts payable and other liabilities
    
    
    23,935
    
    
    
    19,696Junior subordinated debentures
    
    
    86,600
    
    
    
    86,600Total liabilities
    
    
    1,836,129
    
    
    
    1,631,316Commitments and contingenciesShareholders equity:Preferred stock, 5,000,000 shares authorized, none issued
    
    
    
    
    
    
    Contributed
capital - common stock, $.01 par value; 20,000,000
shares authorized, 8,562,196 and 8,447,294 issued as of
September 30, 2004 and December 31, 2003, respectively
    
    
    64,161
    
    
    
    61,704Retained earnings
    
    
    190,319
    
    
    
    165,407Accumulated other comprehensive income, net
    
    
    233
    
    
    
    155254,713
    
    
    
    227,266Less treasury stock, at cost 2,966,817 and 2,475,689 shares as
of September 30, 2004 and December 31, 2003, respectively
    
    
    (61,006
    )
    
    
    (40,367
    )Total shareholders equity
    
    
    193,707
    
    
    
    186,899Total liabilities and shareholders equity
    
    $
    2,029,836
    
    
    $
    1,818,215
 See accompanying notes to the unaudited consolidated financial statements. 3




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ITLA CAPITAL CORPORATION AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF INCOME
 (Unaudited)
 For the Three Months Ended
    
    For the Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003(in thousands except per share amounts)Interest income:Loans, including fees
    
    $
    27,983
    
    
    $
    24,802
    
    
    $
    83,321
    
    
    $
    78,877Real estate loans held in trust
    
    
    543
    
    
    
    1,407
    
    
    
    2,065
    
    
    
    5,036Cash and investment securities
    
    
    2,152
    
    
    
    866
    
    
    
    5,563
    
    
    
    4,597Total interest income
    
    
    30,678
    
    
    
    27,075
    
    
    
    90,949
    
    
    
    88,510Interest expense:Deposit accounts
    
    
    6,632
    
    
    
    5,544
    
    
    
    19,631
    
    
    
    18,681Federal Home Loan Bank advances
    
    
    2,343
    
    
    
    1,367
    
    
    
    4,248
    
    
    
    3,855Collateralized mortgage obligations
    
    
    
    
    
    
    204
    
    
    
    71
    
    
    
    885Junior subordinated debentures
    
    
    1,569
    
    
    
    
    
    
    
    4,559
    
    
    
    Total interest expense
    
    
    10,544
    
    
    
    7,115
    
    
    
    28,509
    
    
    
    23,421Net interest income before provision for loan
losses
    
    
    20,134
    
    
    
    19,960
    
    
    
    62,440
    
    
    
    65,089Provision for loan losses
    
    
    1,100
    
    
    
    750
    
    
    
    3,450
    
    
    
    7,100Net interest income after provision for loan losses
    
    
    19,034
    
    
    
    19,210
    
    
    
    58,990
    
    
    
    57,989Non-interest income:Premium on sale of loans, net
    
    
    
    
    
    
    
    
    
    
    9,284
    
    
    
    8,983Late and collection fees
    
    
    74
    
    
    
    61
    
    
    
    259
    
    
    
    192Other
    
    
    (239
    )
    
    
    716
    
    
    
    4,731
    
    
    
    5,379Total non-interest income
    
    
    (165
    )
    
    
    777
    
    
    
    14,274
    
    
    
    14,554Non-interest expense:Compensation and benefits
    
    
    4,938
    
    
    
    4,610
    
    
    
    16,540
    
    
    
    14,735Occupancy and equipment
    
    
    1,471
    
    
    
    1,236
    
    
    
    4,321
    
    
    
    3,502Other
    
    
    3,472
    
    
    
    3,112
    
    
    
    10,860
    
    
    
    9,755Total general and administrative
    
    
    9,881
    
    
    
    8,958
    
    
    
    31,721
    
    
    
    27,992Real estate owned expense, net
    
    
    32
    
    
    
    220
    
    
    
    113
    
    
    
    373Provision for losses on other real estate owned
    
    
    
    
    
    
    
    
    
    
    1,000
    
    
    
    370(Gain) loss on sale of other real estate owned, net
    
    
    (61
    )
    
    
    389
    
    
    
    (415
    )
    
    
    60Total real estate owned expense, net
    
    
    (29
    )
    
    
    609
    
    
    
    698
    
    
    
    803Total non-interest expense
    
    
    9,852
    
    
    
    9,567
    
    
    
    32,419
    
    
    
    28,795Income before provision for income taxes and
minority interest in income of subsidiary
    
    
    9,017
    
    
    
    10,420
    
    
    
    40,845
    
    
    
    43,748Minority interest in income of subsidiary
    
    
    
    
    
    
    1,540
    
    
    
    
    
    
    
    4,506Income before provision for income taxes
    
    
    9,017
    
    
    
    8,880
    
    
    
    40,845
    
    
    
    39,242Provision for income taxes
    
    
    3,519
    
    
    
    3,473
    
    
    
    15,933
    
    
    
    15,324NET INCOME
    
    $
    5,498
    
    
    $
    5,407
    
    
    $
    24,912
    
    
    $
    23,918BASIC EARNINGS PER SHARE
    
    $
    0.91
    
    
    $
    0.90
    
    
    $
    4.04
    
    
    $
    3.97DILUTED EARNINGS PER SHARE
    
    $
    0.86
    
    
    $
    0.83
    
    
    $
    3.80
    
    
    $
    3.69
 See accompanying notes to the unaudited consolidated financial statements. 4




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ITLA CAPITAL CORPORATION AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 For the Nine Months EndedSeptember 30,2004
    
    2003(in thousands)Cash Flows From Operating Activities:Net Income
    
    $
    24,912
    
    
    $
    23,918Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization of premises and equipment
    
    
    1,510
    
    
    
    1,119Amortization of premium on purchased loans
    
    
    1,637
    
    
    
    1,549Accretion of deferred loan origination fees, net of costs
    
    
    (1,443
    )
    
    
    (1,992
    )Provision for loan losses
    
    
    3,450
    
    
    
    7,100Provision for losses on other real estate owned
    
    
    1,000
    
    
    
    370Premium on sale of RAL loans, net
    
    
    (9,284
    )
    
    
    (8,983
    )Other, net
    
    
    (799
    )
    
    
    367(Increase) decrease in interest receivable
    
    
    (36
    )
    
    
    827Decrease (increase) in other assets
    
    
    3,314
    
    
    
    (8,283
    )Increase in accounts payable and other liabilities
    
    
    4,239
    
    
    
    17,981Net cash provided by operating activities
    
    
    28,500
    
    
    
    33,973Cash Flows From Investing Activities:Purchases of investment securities available for sale
    
    
    (34,577
    )
    
    
    (34,363
    )Proceeds from the maturity and calls of investment securities available for sale
    
    
    23,054
    
    
    
    42,365Purchases of investment securities held to maturity
    
    
    (200,731
    )
    
    
    Proceeds from the maturity and redemption of investment securities held to maturity
    
    
    2,732
    
    
    
    (Purchase) sale of stock in Federal Home Loan Bank
    
    
    (4,457
    )
    
    
    1,047Purchase of loans
    
    
    
    
    
    
    (54,040
    )Origination of RAL loans
    
    
    (12,949,433
    )
    
    
    (11,387,171
    )Proceeds from the participation in RAL loans
    
    
    12,958,717
    
    
    
    11,396,154(Increase) decrease in loans, net
    
    
    (152,072
    )
    
    
    23,706Repayment of real estate loans held in trust
    
    
    27,832
    
    
    
    35,543Proceeds from sale of other real estate owned
    
    
    8,318
    
    
    
    6,471Other investing activities, net
    
    
    (1,994
    )
    
    
    (1,793
    )Net cash (used in) provided by investing activities
    
    
    (322,611
    )
    
    
    27,919Cash Flows From Financing Activities:Proceeds from exercise of employee stock options
    
    
    2,319
    
    
    
    599Cash paid to acquire treasury stock
    
    
    (20,639
    )
    
    
    (1,720
    )Principal payments on collateralized mortgage obligations
    
    
    (15,868
    )
    
    
    (36,584
    )Increase (decrease) in deposit accounts
    
    
    89,042
    
    
    
    (78,493
    )Net (repayments of) proceeds from short-term borrowings from Federal Home Loan Bank
    
    
    (31,000
    )
    
    
    3,000Proceeds from long-term borrowings from Federal Home Loan Bank
    
    
    214,000
    
    
    
    16,000Repayments from long-term borrowings from Federal Home Loan Bank
    
    
    (55,600
    )
    
    
    (39,950
    )Net cash provided by (used in) financing activities
    
    
    182,254
    
    
    
    (137,148
    )Net decrease in cash and cash equivalents
    
    
    (111,857
    )
    
    
    (72,256
    )Cash and cash equivalents at beginning of period
    
    
    178,318
    
    
    
    160,848Cash and cash equivalents at end of period
    
    $
    66,461
    
    
    $
    85,592Supplemental Cash Flow Information:Cash paid during the period for interest
    
    $
    28,769
    
    
    $
    28,116Cash paid during the period for income taxes
    
    $
    8,835
    
    
    $
    16,260Non-Cash Investing Transactions:Loans transferred to other real estate owned
    
    $
    1,855
    
    
    $
    9,075
 See accompanying notes to the unaudited consolidated financial statements. 5




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ITLA CAPITAL CORPORATION AND SUBSIDIARIES 
 NOTES TO THE UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1  BASIS OF PRESENTATION The unaudited consolidated financial statements of ITLA Capital
Corporation (the Company) included herein reflect all normal recurring
adjustments which are, in the opinion of management, necessary to present
fairly the results of operations and financial position of the Company, as of
and for the interim periods indicated. The unaudited consolidated financial
statements include the accounts of ITLA Capital Corporation and its
wholly-owned subsidiaries, Imperial Capital Bank (the Bank) and Imperial
Capital Real Estate Investment Trust (Imperial Capital REIT). On December 31, 2003, the Company adopted FASB Interpretation No. 46 (FIN
46), Consolidation of Variable Interest Entities, which addresses
consolidation by business enterprises of variable interest entities having
certain characteristics. In connection with the Companys adoption of FIN 46,
ITLA Capital Statutory Trust I (Trust I), ITLA Capital Statutory Trust II
(Trust II), ITLA Capital Statutory Trust III (Trust III), ITLA Capital
Statutory Trust IV (Trust IV), and ITLA Capital Statutory Trust V (Trust
V), collectively referred to as the Trusts, were no longer consolidated as
of December 31, 2003. The result of the deconsolidation was to recognize the
Companys investment in the Trusts in other assets, and to recognize the
subordinated debentures issued by the Company to the Trusts as liabilities.
Accordingly, effective January 1, 2004, the Company recognized interest expense
on the subordinated debentures in the consolidated statements of income. Prior
to FIN 46, the Company consolidated the Trusts and reported the trust preferred
securities issued by the Trusts in the mezzanine section of the Companys
consolidated balance sheets and recognized the proportionate share of income
attributable to the preferred shareholders as minority interest in income of
subsidiary in the consolidated statements of income. The trust preferred
securities currently qualify as Tier 1 capital for the Company under Federal
Reserve Board guidelines. As a result of the issuance of FIN 46, the Federal
Reserve Board proposed a rule on May 6, 2004 related to the qualification of
the trust preferred securities as Tier 1 capital. Under the proposed rule, the
Companys trust preferred securities would still qualify as Tier 1 capital. As
of September 30, 2004, the Company would meet all requirements to maintain its
well capitalized designation under applicable regulatory guidelines regardless
of the inclusion of the trust preferred securities in Tier 1 capital. Financial
information prior to the adoption of FIN 46 has not been restated. All intercompany transactions and balances have been eliminated. Certain
information and disclosures normally included in financial statements prepared
in accordance with accounting principles generally accepted in the United
States have been condensed or omitted pursuant to the rules and regulations of
the U.S. Securities and Exchange Commission. Certain amounts in prior periods
have been reclassified to conform to the presentation in the current period.
The results of operations for the three and nine months ended September 30,
2004 are not necessarily indicative of the results of operations for the
remainder of the year. 6




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These unaudited consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in our annual report on Form 10-K for the year ended December 31,
2003. NOTE 2  ACCOUNTING FOR STOCK-BASED COMPENSATION The Company has stock-based compensation plans. These plans are accounted
for under APB Opinion No. 25, Accounting for Stock Issued to Employees, and
accordingly, no compensation costs have been recognized in the accompanying
unaudited consolidated statements of income. The Company applies Statement of
Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation, for disclosure purposes only. SFAS No. 123 disclosures include
pro forma net income and earning per share as if compensation expense had been
recognized using the fair value of the options at the date of grant. If
compensation had been determined based on SFAS No. 123, the Companys pro forma
net income and pro forma per share data would be as follows: For the Three Months
    
    For the Nine MonthsEnded September 30,
    
    Ended September 30,2004
    
    2003
    
    2004
    
    2003(in thousands, except per share data)Net income, as reported
    
    $
    5,498
    
    
    $
    5,407
    
    
    $
    24,912
    
    
    $
    23,918Less: Stock-based employee
compensation expense
determined under the fair
value method, net of tax
    
    
    350
    
    
    
    356
    
    
    
    1,025
    
    
    
    996Pro forma net income
    
    $
    5,148
    
    
    $
    5,051
    
    
    $
    23,887
    
    
    $
    22,922Earnings per share:Basic  as reported
    
    $
    0.91
    
    
    $
    0.90
    
    
    $
    4.04
    
    
    $
    3.97Basic  pro forma
    
    
    0.85
    
    
    
    0.84
    
    
    
    3.87
    
    
    
    3.81Diluted  as reported
    
    
    0.86
    
    
    
    0.83
    
    
    
    3.80
    
    
    
    3.69Diluted  pro forma
    
    
    0.80
    
    
    
    0.77
    
    
    
    3.65
    
    
    
    3.53
 The fair value of each option grant was estimated on the date of grant
using an option pricing model with the following weighted-average assumptions
for option grants: Weighted-Average Assumptions forOption Grants2004
    
    2003Dividend Yield
    
    
    0.00
    %
    
    
    0.00
    %Expected Volatility
    
    
    36.51
    %
    
    
    35.35
    %Risk-Free Interest Rates
    
    
    4.16
    %
    
    
    4.26
    %Expected Lives
    
    Seven Years
    
    Seven YearsWeighted-Average Fair Value
    
    $
    18.31
    
    
    $
    15.80
 7




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NOTE 3  EARNINGS PER SHARE Basic Earnings Per Share (Basic EPS) is computed by dividing net income
by the weighted-average number of common shares outstanding for the period.
Diluted Earnings Per Share (Diluted EPS) reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock which shared in the Companys earnings. The following is a reconciliation of the calculation of Basic EPS and
Diluted EPS: Weighted-
    
    PerAverage Shares
    
    ShareNet Income
    
    Outstanding
    
    Amount(in thousands, except per share data)For the Three Months Ended September 30,2004Basic EPS
    
    $
    5,498
    
    
    
    6,054
    
    
    $
    0.91Effect of dilutive stock options
    
    
    
    
    
    
    351
    
    
    
    (0.05
    )Diluted EPS
    
    $
    5,498
    
    
    
    6,405
    
    
    $
    0.862003Basic EPS
    
    $
    5,407
    
    
    
    6,031
    
    
    $
    0.90Effect of dilutive stock options
    
    
    
    
    
    
    517
    
    
    
    (0.07
    )Diluted EPS
    
    $
    5,407
    
    
    
    6,548
    
    
    $
    0.83For the Nine Months Ended September 30,2004Basic EPS
    
    $
    24,912
    
    
    
    6,166
    
    
    $
    4.04Effect of dilutive stock options
    
    
    
    
    
    
    385
    
    
    
    (0.24
    )Diluted EPS
    
    $
    24,912
    
    
    
    6,551
    
    
    $
    3.802003Basic EPS
    
    $
    23,918
    
    
    
    6,019
    
    
    $
    3.97Effect of dilutive stock options
    
    
    
    
    
    
    471
    
    
    
    (0.28
    )Diluted EPS
    
    $
    23,918
    
    
    
    6,490
    
    
    $
    3.69
 8




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NOTE 4  COMPREHENSIVE INCOME Comprehensive income, which encompasses net income and the net change in
unrealized gains (losses) on investment securities available for sale, is
presented below: Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003(in thousands)Net Income
    
    $
    5,498
    
    
    $
    5,407
    
    
    $
    24,912
    
    
    $
    23,918Other comprehensive income (loss):Change in unrealized gain
(loss) on investment
securities available for sale,
net of tax benefit (expense)
of $(195) and $70 for the
three months ended September
30, 2004 and 2003, and net of
tax benefit (expense) of $(48)
and $198 for the nine months
ended September 30, 2004 and
2003, respectively
    
    
    320
    
    
    
    (110
    )
    
    
    78
    
    
    
    (309
    )Comprehensive income
    
    $
    5,818
    
    
    $
    5,297
    
    
    $
    24,990
    
    
    $
    23,609
 NOTE 5  IMPAIRED LOANS RECEIVABLE As of September 30, 2004 and December 31, 2003, the recorded investment in
impaired loans (including impaired real estate loans held in trust) was $23.2
million and $13.1 million, respectively. The average recorded investment in
impaired loans was $19.0 million and $22.7 million, respectively, for the three
and nine months ended September 30, 2004 and $10.6 million and $13.3 million,
respectively, for the same periods last year. Interest income recognized on
impaired loans totaled $76,000 and $313,000 for the three and nine months ended
September 30, 2004 as compared to $120,000 and $377,000 for the same periods
last year. NOTE 6  RESIDUAL INTEREST IN SECURITIZATION During the first quarter of 2002, the Company formed a limited liability
company to issue $86.3 million of asset-backed notes in a securitization of
substantially all of the Companys residential loan portfolio. The Company
recognized a gain of $3.7 million on the securitization of these loans, which
was included in other non-interest income within the consolidated statement of
income. Concurrent with recognizing such gain on sale, the Company recorded a
residual interest, which represented the present value of future cash flows
(spread and fees) that are estimated to be received over the life of the loans.
The residual interest is recorded on the consolidated balance sheet in
Investment securities available for sale, at fair value. The value of the
residual interest is subject to substantial credit, prepayment, and interest
rate risk on the sold residential loans. In accordance with the provisions of
SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities,
the residual interest is classified as available-for-sale and, as such,
recorded at fair value with the resultant changes in fair value recorded as
accumulated unrealized gain or loss in a separate component of shareholders
equity entitled accumulated other comprehensive income or loss, until
realized. Fair value is estimated on a monthly basis based on a discounted
cash flow analysis. These cash flows are estimated over the lives of the
receivables using prepayment, default, and interest rate 9




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##### Table of Contents



assumptions that management believes market participants would use for
similar financial instruments. For each of the nine months ended September 30, 2004 and 2003, the Company
recognized an other than temporary impairment of $750,000 in connection with
its residual interest. Impairments that are deemed to be other than temporary
are charged to income as other expense. In evaluating impairments as other
than temporary the Company considers credit risk, as well as the magnitude and
trend of default rates and prepayment speeds of the underlying residential
loans. At September 30, 2004 and December 31, 2003, key economic assumptions and
the sensitivity of the current fair value of the residual interest based on
projected cash flows to immediate adverse changes in those assumptions are as
follows: September 30,
    
    December 31,2004
    
    2003Dollars in thousandsFair value of retained interest
    
    $
    5,368
    
    
    $
    5,368Weighted average life (in years)  securities
    
    
    1.13
    
    
    
    1.00Weighted average life (in years)  residual interest
    
    
    3.74
    
    
    
    4.47Weighted average annual prepayment speed
    
    
    35.0
    %
    
    
    35.0
    %Impact of 10% adverse change
    
    $
    (156
    )
    
    $
    (67
    )Impact of 25% adverse change
    
    $
    (411
    )
    
    $
    (120
    )Weighted average annual discount rate
    
    
    15.0
    %
    
    
    15.0
    %Impact of 10% adverse change
    
    $
    (266
    )
    
    $
    (313
    )Impact of 25% adverse change
    
    $
    (637
    )
    
    $
    (753
    )Weighted average lifetime credit losses
    
    
    3.3
    %
    
    
    3.3
    %Impact of 10% adverse change
    
    $
    (174
    )
    
    $
    (147
    )Impact of 25% adverse change
    
    $
    (435
    )
    
    $
    (367
    )
 These sensitivities are hypothetical and should be used with caution. As
the figures indicate, changes in the fair value of the residual interest are
based on a variation in assumptions and generally cannot be extrapolated
because the relationship of the change in assumption to the change in fair
value may not be linear. Also, in the above table, the effect of a variation
in a particular assumption on the fair value of the residual interest is
calculated without changing any other assumption; in reality, changes in one
factor may result in changes in another (for example, increases in market
interest rates may result in lower prepayments but increased credit losses),
which might magnify or counteract the sensitivities, and depending on the
severity of such changes, the results of operations may be materially affected. NOTE 7  NEW ACCOUNTING PRONOUNCEMENTS On March 31, 2004, the Financial Accounting Standards Board (FASB)
issued the Exposure Draft, Share-Based Payment, which is a proposed amendment
to SFAS No. 123, Accounting For Stock-Based Compensation. In this draft, the
FASB formally proposed to require companies to recognize the fair value of
stock options and other stock-based compensation to 10




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##### Table of Contents



employees for future reporting periods in the income statement based on
their fair values. On October 13, 2004, the FASB concluded that the amended
SFAS 123 would be effective for public companies for interim or annual period
beginning after June 15, 2005. The Company is in the process of evaluating the
impact that expensing stock options and other stock-based compensation will
have on the results of operations and financial position. American Institute of Certified Public Accountants (AICPA) Statement of
Position (SOP) No. 03-3, Accounting for Certain Loans or Debt Securities
Acquired in a Transfer. SOP 03-3 addresses accounting for differences between
the contractual cash flows of certain loans and debt securities and the cash
flows expected to be collected when loans or debt securities are acquired in a
transfer and those cash flow differences are attributable, at least in part, to
credit quality. As such, SOP 03-3 applies to loans and debt securities
acquired individually, in pools or as part of a business combination and does
not apply to originated loans. The application of SOP 03-3 limits the interest
income, including accretion of purchase price discounts that may be recognized
for certain loans and debt securities. Additionally, SOP 03-3 does not allow
the excess of contractual cash flows over cash flows expected to be collected
to be recognized as an adjustment of yield, loss accrual or valuation
allowance, such as the allowance for possible loan losses. SOP 03-3 requires
that increases in expected cash flows subsequent to the initial investment be
recognized prospectively through adjustment of the yield on the loan or debt
security over its remaining life. Decreases in expected cash flows should be
recognized as impairment. In the case of loans acquired in a business
combination where the loans show signs of credit deterioration, SOP 03-3
represents a significant change from current purchase accounting practice
whereby the acquirees allowance for loan losses is typically added to the
acquirers allowance for loan losses. SOP 03-3 is effective for loans and debt
securities acquired by the Company beginning January 1, 2005. The adoption of
this new standard is not expected to have a material impact on the Companys
financial statements. NOTE 8  BUSINESS SEGMENT INFORMATION SFAS No. 131, Disclosures About Segments of an Enterprise and Related
Information, requires disclosure of segment information in a manner consistent
with the management approach. The management approach is based on the way
the chief operating decision-maker organizes segments within a company for
making operating decisions and assessing performance. The main factors used to identify operating segments were the specific
product and business lines of the various operating segments of the Company.
Operating segments are organized separately by product and service offered. We
have identified one operating segment that meets the criteria of being a
reportable segment in accordance with the provisions of SFAS No. 131. This
reportable segment is the origination and purchase of loans, which by its legal
form, is identified as operations of the Bank and Imperial Capital REIT. This
segment derives the majority of its revenue by originating and purchasing
loans. Other operating segments of the Company that did not meet the criteria
of being a reportable segment in accordance with SFAS No. 131 have been
aggregated and reported as All Other. Substantially all of the transactions
from the Companys operating segments occur in the United States. 11




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##### Table of Contents



Transactions between the reportable segment of the Company and its other
operating segments are made at terms which approximate arms-length
transactions and in accordance with GAAP. There is no significant difference
between the measurement of the reportable segments assets and profits and
losses disclosed below and the measurement of assets and profits and losses in
our consolidated balance sheets and statements of income. Accounting
allocations are made in the same manner for all operating segments. LendingOperations
    
    All Other
    
    Eliminations
    
    Consolidated(in thousands)For the three months ended September 30,2004Revenues from external customers
    
    $
    30,704
    
    
    $
    362
    
    
    $
    
    
    
    $
    31,066Total interest income
    
    
    30,935
    
    
    
    362
    
    
    
    (619
    )
    
    
    30,678Total interest expense
    
    
    9,594
    
    
    
    1,569
    
    
    
    (619
    )
    
    
    10,544Net income
    
    $
    7,189
    
    
    $
    (1,691
    )
    
    $
    
    
    
    $
    5,4982003Revenues from external customers
    
    $
    27,631
    
    
    $
    221
    
    
    $
    
    
    
    $
    27,852Total interest income
    
    
    26,916
    
    
    
    1,892
    
    
    
    (1,733
    )
    
    
    27,075Total interest expense
    
    
    7,308
    
    
    
    1,540
    
    
    
    (1,733
    )
    
    
    7,115Net income
    
    $
    6,896
    
    
    $
    (1,489
    )
    
    $
    
    
    
    $
    5,407For the nine months ended September 30,2004Revenues from external customers
    
    $
    105,270
    
    
    $
    1,003
    
    
    $
    
    
    
    $
    106,273Total interest income
    
    
    91,086
    
    
    
    1,003
    
    
    
    (1,140
    )
    
    
    90,949Total interest expense
    
    
    24,916
    
    
    
    4,733
    
    
    
    (1,140
    )
    
    
    28,509Net income
    
    $
    29,859
    
    
    $
    (4,947
    )
    
    $
    
    
    
    $
    24,9122003Revenues from external customers
    
    $
    102,659
    
    
    $
    796
    
    
    $
    
    
    
    $
    103,455Total interest income
    
    
    88,316
    
    
    
    5,302
    
    
    
    (5,108
    )
    
    
    88,510Total interest expense
    
    
    23,906
    
    
    
    4,623
    
    
    
    (5,108
    )
    
    
    23,421Net income
    
    $
    29,190
    
    
    $
    (5,272
    )
    
    $
    
    
    
    $
    23,918
 12




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results
of Operations The following discussion and analysis is intended to identify the major
factors that affected the financial condition and results of operations for the
three and nine months ended September 30, 2004. Application of Critical Accounting Policies and Accounting Estimates The accounting and reporting policies followed by the Company conform, in
all material respects, to accounting principles generally accepted in the
United States (GAAP) and to general practices within the financial services
industry. The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. While the Company
bases estimates on historical experience, current information and other factors
deemed to be relevant, actual results could differ from those estimates. The Company considers accounting estimates to be critical to reported
financial results if (i) the accounting estimate requires management to make
assumptions about matters that are highly uncertain and (ii) different
estimates that management reasonably could have used for the accounting
estimate in the current period, or changes in the accounting estimate that are
reasonably likely to occur from period to period, could have a material impact
on the Companys financial statements. Accounting polices related to the
allowance for loan losses are considered to be critical, as these policies
involve considerable subjective judgment and estimation by management. The
Company also considers accounting policies related to stock-based compensation
to be critical due to the continuously evolving standards, changes to which
could materially impact the way the Company accounts for stock options.
Additionally, the Company considers its accounting policies in regards to its
tax refund lending program and other real estate owned to be critical
accounting policies. For additional information regarding critical accounting policies, refer
to Note 1  Organization and Summary of Significant Accounting Policies in the
Notes to Consolidated Financial Statements and the sections captioned
Application of Critical Accounting Policies and Accounting Estimates and
Allowance for Possible Loan Losses and Nonperforming Assets in Managements
Discussion and Analysis of Financial Condition and Results of Operations
included in the Companys Form 10-K for the year ended December 31, 2003.
There have been no significant changes in the Companys application of
accounting policies since December 31, 2003. 13




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##### Table of Contents



RESULTS OF OPERATIONS Three Months Ended September 30, 2004 Compared to Three Months Ended September
30, 2003 Executive Summary Consolidated net income was $5.5 million and $5.4 million for the three
months ended September 30, 2004 and 2003, respectively. Diluted EPS was $0.86
for the three months ended September 30, 2004 compared to $0.83 for the same
period last year. Net interest income before provision for loan losses increased from the
prior year period primarily as a result of an increase in the average balance
of loans outstanding, reflecting an increase in loan production, and an
increase in the average balance of investment securities held-to-maturity. The
increase was partially offset by an increase in interest expense, caused by the
adoption of FIN 46, which required the inclusion of the interest payments on
the junior subordinated debentures related to the Companys trust preferred
securities, and the increase in the average balance of deposits and FHLB
advances, and to a lesser extent, the decrease in net interest income earned by
the REIT. The return on average assets was 1.15% for the three months ended
September 30, 2004 compared to 1.42% for the same period last year. The return
on average shareholders equity was 10.86% for the three months ended September
30, 2004, compared 12.02% for the same period last year. The Banks loan originations for the three months ended September 30, 2004
were $231.5 million, which consisted of $139.6 million of commercial real
estate loans, $59.8 million of Imperial Capital Express (ICE) small balance
multi-family loans, $27.3 million of film finance loans and $4.8 million of
franchise loans. The Banks loan originations for the same period last year
were $228.8 million, which consisted of $143.7 million of commercial real
estate loans, $40.0 million of ICE small balance multi-family loans, $27.6
million of film finance loans and $17.5 million of franchise loans. During the
same period last year, the Bank also purchased loans of $50.8 million. 14




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##### Table of Contents



Net Interest Income and Margin The following table presents, for the three months ended September 30,
2004 and 2003, our condensed average balance sheet information, together with
interest income and yields earned on average interest-earning assets and
interest expense and rates paid on average interest-bearing liabilities.
Average balances are computed using daily average balances. Nonaccrual loans
are included in loans receivable. For the Three Months Ended September 30,2004
    
    2003Average
    
    Income/
    
    Yield/
    
    Average
    
    Income/
    
    Yield/Balance
    
    Expense
    
    Rate
    
    Balance
    
    Expense
    
    Rate(dollars in thousands)AssetsCash and investments
    
    $
    252,540
    
    
    $
    2,152
    
    
    
    3.39
    %
    
    $
    110,343
    
    
    $
    866
    
    
    
    3.11
    %Loans receivable:Loans
    
    
    1,577,422
    
    
    
    27,983
    
    
    
    7.01
    %
    
    
    1,279,054
    
    
    
    24,802
    
    
    
    7.69
    %Real estate loans held in trust
    
    
    47,342
    
    
    
    543
    
    
    
    4.56
    %
    
    
    88,960
    
    
    
    1,407
    
    
    
    6.27
    %Total loans receivable
    
    
    1,624,764
    
    
    
    28,526
    
    
    
    6.98
    %
    
    
    1,368,014
    
    
    
    26,209
    
    
    
    7.60
    %Total interest-earning assets
    
    
    1,877,304
    
    
    $
    30,678
    
    
    
    6.50
    %
    
    
    1,478,357
    
    
    $
    27,075
    
    
    
    7.27
    %Non-interest-earning assets
    
    
    57,937
    
    
    
    
    
    
    
    
    
    
    
    66,405Allowance for loan losses
    
    
    (35,449
    )
    
    
    
    
    
    
    
    
    
    
    (33,456
    )Total assets
    
    $
    1,899,792
    
    
    
    
    
    
    
    
    
    
    $
    1,511,306Liabilities and
Shareholders EquityDeposit accounts:Savings and passbook accounts
    
    $
    127,470
    
    
    $
    641
    
    
    
    2.00
    %
    
    $
    158,412
    
    
    $
    630
    
    
    
    1.58
    %Demand accounts
    
    
    101,415
    
    
    
    402
    
    
    
    1.58
    %
    
    
    11,005
    
    
    
    29
    
    
    
    1.04
    %Time certificates
    
    
    986,844
    
    
    
    5,589
    
    
    
    2.35
    %
    
    
    753,880
    
    
    
    4,885
    
    
    
    2.57
    %Total deposit accounts
    
    
    1,175,729
    
    
    
    6,632
    
    
    
    2.24
    %
    
    
    923,297
    
    
    
    5,544
    
    
    
    2.38
    %Collateralized mortgage obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    37,453
    
    
    
    204
    
    
    
    2.16
    %FHLB advances
    
    
    387,792
    
    
    
    2,343
    
    
    
    2.40
    %
    
    
    236,539
    
    
    
    1,367
    
    
    
    2.29
    %Junior subordinated debentures
    
    
    86,600
    
    
    
    1,569
    
    
    
    7.21
    %
    
    
    
    
    
    
    
    
    
    
    Total interest-bearing liabilities
    
    
    1,650,120
    
    
    $
    10,544
    
    
    
    2.54
    %
    
    
    1,197,289
    
    
    $
    7,115
    
    
    
    2.36
    %Non-interest-bearing liabilities
    
    
    48,213
    
    
    
    
    
    
    
    
    
    
    
    51,218Guaranteed preferred beneficial
interests
in the Companys junior
subordinated
deferrable interest debentures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    84,375Shareholders equity
    
    
    201,459
    
    
    
    
    
    
    
    
    
    
    
    178,424Total liabilities
and shareholders equity
    
    $
    1,899,792
    
    
    
    
    
    
    
    
    
    
    $
    1,511,306Net interest spread
    
    
    
    
    
    
    
    
    
    
    3.96
    %
    
    
    
    
    
    
    
    
    
    
    4.91
    %Net interest income before provision
for loan losses
    
    
    
    
    
    $
    20,134
    
    
    
    
    
    
    
    
    
    
    $
    19,960Net interest margin
    
    
    
    
    
    
    
    
    
    
    4.27
    %
    
    
    
    
    
    
    
    
    
    
    5.36
    %
 15




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##### Table of Contents



The following table sets forth a summary of the changes in interest income
and interest expense resulting from changes in average interest-earning asset
and interest-bearing liability balances and changes in average interest rates.
The change in interest due to both volume and rate has been allocated to change
due to volume and rate in proportion to the relationship of absolute dollar
amounts of each. For the Three Months EndedSeptember 30, 2004 and 2003Increase (Decrease) Due to:Rate
    
    Volume
    
    Total(In thousands)Interest and fees earned from:Cash and investment securities
    
    $
    78
    
    
    $
    1,208
    
    
    $
    1,286Loans
    
    
    (2,088
    )
    
    
    5,269
    
    
    
    3,181Real estate loans held in trust
    
    
    (384
    )
    
    
    (480
    )
    
    
    (864
    )Total increase (decrease) in interest income
    
    
    (2,394
    )
    
    
    5,997
    
    
    
    3,603Interest paid on:Deposit accounts
    
    
    (326
    )
    
    
    1,414
    
    
    
    1,088Collateralized mortgage obligations
    
    
    
    
    
    
    (204
    )
    
    
    (204
    )FHLB advances
    
    
    65
    
    
    
    911
    
    
    
    976Junior subordinated debentures
    
    
    
    
    
    
    1,569
    
    
    
    1,569Total increase (decrease) in interest
expense
    
    
    (261
    )
    
    
    3,690
    
    
    
    3,429Increase (decrease) in net interest income
    
    $
    (2,133
    )
    
    $
    2,307
    
    
    $
    174
 Total interest income increased $3.6 million to $30.7 million in the third
quarter of 2004 as compared to $27.1 million for the same period last year. The
increase in interest income was primarily attributable to an increase of $398.9
million in average interest earning assets, partially offset by a decrease of
77 basis points in the average yield earned on interest earning assets due to
lower market interest rates. The average balance of loans held by the Bank was $1.6 billion and $1.3
billion for the three months ended September 30, 2004 and 2003, respectively.
Loans secured by income producing properties and construction loans had an
average balance of $1.3 billion during the quarter ended September 30, 2004
compared to $1.1 billion during the same period last year. The average balance
of franchise loans was $132.4 million and $64.1 million during the quarters
ended September 30, 2004 and 2003, respectively. The average balance of film
finance loans was $95.0 million and $87.6 million during the quarters ended
September 30, 2004 and 2003, respectively. The average balance of real estate loans held in trust decreased to $47.3
million for the three months ended September 30, 2004 as compared to $89.0
million for the same period last year. This decrease was due to loan
prepayments and principal amortization. 16




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##### Table of Contents



The average balance of cash and investments increased to $252.5 million in
the third quarter of 2004 compared to $110.3 million during the same period
last year. The increase in average cash and investments was primarily due to
the purchase of investment securities held-to-maturity, partially offset by a
decline in cash and cash equivalents. The increase in the average yield earned
on cash and investments from 3.11% during the third quarter of 2003 to 3.39%
during the third quarter of 2004 was primarily caused by the increase in
investment securities held-to-maturity, which yielded a higher return than cash
and cash equivalents. The average yield earned on total loans decreased to 6.98% in the quarter
ended September 30, 2004 as compared to 7.60% in the same period last year.
The decline in our yield was primarily caused by higher yielding loans being
repaid and replaced by new loan production at lower current market interest
rates. Our commercial real estate loan portfolio is primarily comprised of
adjustable rate mortgages indexed to six month LIBOR. Approximately 97.1% of
our real estate loans (including real estate loans held in trust) were
adjustable rate mortgages at September 30, 2004. These adjustable rate
mortgages generally reprice on a quarterly basis. At September 30, 2004,
approximately $1.4 billion or 90.2% of our real estate loans contained interest
rate floors, below which the loans contractual interest rate may not adjust.
At September 30, 2004, the weighted average floor interest rate of these loans
was 6.5%. At that date, approximately $1.0 billion or 74.0% of those loans
were at the floor interest rate. Of these loans, the fully indexed
rate of approximately $522.0 million or 37.3% were within 50
basis points of exceeding their floor rates and $196.2 million or 14.0% were greater than 50 basis points but less than 100
basis points of exceeding their floor rates. Total interest expense increased by $3.4 million to $10.5 million in the
third quarter of 2004, compared to $7.1 million for the same period last year.
The increase in interest expense was primarily attributable to an increase in
the average balance of interest-bearing liabilities and the adoption of FIN 46,
which required that beginning January 1, 2004, the Company recognize interest
expense incurred on its junior subordinated debentures issued to the Trusts in
the consolidated statements of income. The average balance of interest-bearing
liabilities increased to $1.7 billion in the third quarter of 2004 compared to
$1.2 billion during the same period last year. This increase was caused by the
inclusion of junior subordinated debentures, and the increase in the average
balance of deposits and FHLB advances. For the three months ended September
30, 2004, the junior subordinated debentures had an average balance of $86.6
million and an average rate of 7.21%. Our average cost of funds increased to 2.54% during the three month period
ended September 30, 2004, compared to 2.36% for the same period last year.
This increase in the average funding costs was due primarily to a higher
average balance of FHLB advances and junior subordinated debentures, partially
offset by lower rates being paid on our deposit accounts as a result of the
general decline in market interest rates. The average rate paid on FHLB
advances was 2.40% during the three months ended September 30, 2004 compared to
2.29% for the same period last year. FHLB advances averaged $387.8 million in
the current quarter, compared to $236.5 million for the same period last year.
The average rate paid on deposit accounts was 2.24% during the three months
ended September 30, 2004 as compared to 2.38% for the same period last year.
The average balance of deposit accounts increased $252.4 million 17




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##### Table of Contents



to $1.2 billion for the three months ended September 30, 2004 as compared
to $923.3 million for the same period last year. Net interest margin decreased to 4.27% for the three months ended
September 30, 2004 as compared to 5.36% for the same period last year primarily
due to increased interest expense resulting from higher average
interest-bearing liabilities and the adoption of FIN 46, as well as higher
yielding loans within the Banks loan portfolio being repaid and replaced by
new loan production at lower current market rates. Provision for Loan Losses Management periodically assesses the adequacy of the allowance for loan
losses by reference to many factors, which may be weighted differently at
various times depending on prevailing conditions. These factors include, among
other elements:  
    
    general portfolio trends relative to asset and portfolio size;  
    
    asset categories;  
    
    credit and geographic concentrations;  
    
    delinquency trends and nonaccrual loan levels;  
    
    historical loss experience; and  
    
    risks associated with changes in economic, social and business conditions. Accordingly, the calculation of the adequacy of the allowance for loan
losses is not based solely on the level of nonperforming assets. Management
believes that the allowance for loan losses as of September 30, 2004 was
adequate to absorb the known and inherent risks of loss in the loan portfolio
at that date. While management believes the estimates and assumptions used in
its determination of the adequacy of the allowance are reasonable, there can be
no assurance that such estimates and assumptions will not be proven incorrect
in the future, or that the actual amount of future provisions will not exceed
the amount of past provisions or that any increased provisions that may be
required will not materially adversely impact our financial condition and
results of operations. In addition, the determination of the amount of the
Banks allowance for loan losses is subject to review by the Banks regulators,
as part of the routine examination process, which may result in the
establishment of additional reserves based upon their judgment of information
available to them at the time of their examination. The consolidated provision for loan losses totaled $1.1 million for the
current quarter of 2004, compared to $750,000 for the same period last year.
The provision for loan losses was recorded based on an analysis of the factors
referred to above and for specific charge-offs experienced during the three
months ended September 30, 2004 and 2003. The allowance for loan losses was
2.09% of total loans and real estate loans held in trust at September 30, 2004
as compared to 2.17% at December 31, 2003. During the quarters ended September
30, 2004 and 2003, we had net loan charge-offs of $2.3 million and $1.1
million, respectively. See also  Financial Condition  Credit Risk. 18




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##### Table of Contents



Non-Interest Income Non-interest income for the three months ended September 30, 2004 was
$(165,000) as compared to $777,000 for the same period last year. The decline
in non-interest income earned during the current period, as compared to the
same period last year, was due to a mark-to-market adjustment recorded during the current period on an executive
deferred compensation plan and the reduction of processing and administrative fee income earned in connection with the Banks refund
anticipation loan (RAL) program and its strategic relationship with Household
International, Inc. (Household). On June 24, 2004, we announced that we received
final confirmation that Household and its affiliates would, effective this
year, terminate their RAL and private label credit card programs with the Bank.
Pursuant to the agreement, this termination comes without penalty to
Household. As a result of Households termination of the RAL program, we
expect that non-interest income will decrease significantly in future periods. Non-Interest Expense Non-interest expense totaled $9.9 million for the three months ended
September 30, 2004, compared to $9.6 million for the same period last year.
The increase was primarily caused by our continued expansion of ICE, the Banks
small balance multi-family lending platform. Consequently, our efficiency
ratio (defined as recurring general and administrative expenses as a percentage
of net revenue) increased to 49.5% in the third quarter of 2004 from 43.2% for
the same period in 2003. Nine Months Ended September 30, 2004 Compared to Nine Months Ended September
30, 2003 Executive Summary Consolidated net income totaled $24.9 million for the nine months ended
September 30, 2004 compared to $23.9 million for the same period last year.
Diluted EPS was $3.80 for the nine months ended September 30, 2004, compared to
$3.69 for the same period last year. Net interest income before provision for loan losses decreased from the
prior year period primarily as a result of an increase in interest expense,
caused by the adoption of FIN 46, which required the inclusion of the interest
payments on the junior subordinated debentures related to the Companys trust
preferred securities, the decrease in net interest income earned by the REIT,
partially offset by an increase in net interest income earned at the Bank. The return on average assets was 1.59% for the nine months ended September
30, 2004, compared to 1.80% for the same period last year. The return on
average shareholders equity was 16.65% for the nine months ended September 30,
2004, compared to 18.50% for the same period last year. Loan originations for the nine months ended September 30, 2004 were $644.7
million, which consisted of $375.7 million of commercial real estate loans,
$153.7 million of ICE small balance multi-family real estate loans, $69.2
million of film finance loans and $46.1 million of franchise loans. Loan
originations for the same period last year were $471.3 million, which 19




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##### Table of Contents



consisted of $294.4 million of commercial real estate loans, $98.3 million
of ICE small balance multi-family real estate loans, $52.0 million of film
finance loans and $26.6 million of franchise loans. During the same period
last year, the Bank also purchased loans of $54.1 million. Net Interest Income and Margin The following table presents, for the nine months ended September 30, 2004
and 2003, our condensed average balance sheet information, together with
interest income and yields earned on average interest-earning assets and
interest expense and rates paid on average interest-bearing liabilities.
Average balances are computed using daily average balances. Nonaccrual loans
are included in loans receivable. For the Nine Months Ended September 30,2004
    
    2003Average
    
    Income/
    
    Yield/
    
    Average
    
    Income/
    
    Yield/Balance
    
    Expense
    
    Rate
    
    Balance
    
    Expense
    
    Rate(dollars in thousands)AssetsCash and investments
    
    $
    438,168
    
    
    $
    5,563
    
    
    
    1.70
    %
    
    $
    340,725
    
    
    $
    4,597
    
    
    
    1.80
    %Loans receivable:Loans
    
    
    1,518,865
    
    
    
    83,321
    
    
    
    7.33
    %
    
    
    1,291,178
    
    
    
    78,877
    
    
    
    8.17
    %Real estate loans held in trust
    
    
    54,176
    
    
    
    2,065
    
    
    
    5.09
    %
    
    
    104,286
    
    
    
    5,036
    
    
    
    6.46
    %Total loans receivable
    
    
    1,573,041
    
    
    
    85,386
    
    
    
    7.25
    %
    
    
    1,395,464
    
    
    
    83,913
    
    
    
    8.04
    %Total interest-earning assets
    
    
    2,011,209
    
    
    $
    90,949
    
    
    
    6.04
    %
    
    
    1,736,189
    
    
    $
    88,510
    
    
    
    6.82
    %Non-interest-earning assets
    
    
    110,235
    
    
    
    
    
    
    
    
    
    
    
    114,328Allowance for loan losses
    
    
    (34,970
    )
    
    
    
    
    
    
    
    
    
    
    (33,499
    )Total assets
    
    $
    2,086,474
    
    
    
    
    
    
    
    
    
    
    $
    1,817,018Liabilities and
Shareholders EquityDeposit accounts:Savings and passbook accounts
    
    $
    135,228
    
    
    $
    1,776
    
    
    
    1.75
    %
    
    $
    157,136
    
    
    $
    1,887
    
    
    
    1.61
    %Demand accounts
    
    
    88,331
    
    
    
    1,017
    
    
    
    1.54
    %
    
    
    8,589
    
    
    
    67
    
    
    
    1.04
    %Time certificates
    
    
    971,355
    
    
    
    16,838
    
    
    
    2.32
    %
    
    
    822,742
    
    
    
    16,727
    
    
    
    2.72
    %Total deposit accounts
    
    
    1,194,914
    
    
    
    19,631
    
    
    
    2.19
    %
    
    
    988,467
    
    
    
    18,681
    
    
    
    2.53
    %Collateralized mortgage obligations
    
    
    4,728
    
    
    
    71
    
    
    
    2.01
    %
    
    
    51,011
    
    
    
    885
    
    
    
    2.32
    %FHLB advances
    
    
    221,935
    
    
    
    4,248
    
    
    
    2.56
    %
    
    
    190,876
    
    
    
    3,855
    
    
    
    2.70
    %Junior subordinated debentures
    
    
    86,600
    
    
    
    4,559
    
    
    
    7.03
    %
    
    
    
    
    
    
    
    
    
    
    Total interest-bearing liabilities
    
    
    1,508,177
    
    
    $
    28,509
    
    
    
    2.52
    %
    
    
    1,230,354
    
    
    $
    23,421
    
    
    
    2.55
    %Non-interest-bearing liabilities
    
    
    378,404
    
    
    
    
    
    
    
    
    
    
    
    329,504Guaranteed preferred beneficial
interests
in the Companys junior
subordinated
deferrable interest debentures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    84,307Shareholders equity
    
    
    199,893
    
    
    
    
    
    
    
    
    
    
    
    172,853Total liabilities
and shareholders equity
    
    $
    2,086,474
    
    
    
    
    
    
    
    
    
    
    $
    1,817,018Net interest spread
    
    
    
    
    
    
    
    
    
    
    3.52
    %
    
    
    
    
    
    
    
    
    
    
    4.27
    %Net interest income before provision
for loan losses
    
    
    
    
    
    $
    62,440
    
    
    
    
    
    
    
    
    
    
    $
    65,089Net interest margin
    
    
    
    
    
    
    
    
    
    
    4.15
    %
    
    
    
    
    
    
    
    
    
    
    5.01
    %
 20




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##### Table of Contents



The following table sets forth a summary of the changes in interest income
and interest expense resulting from changes in average interest-earning asset
and interest-bearing liability balances and changes in average interest rates.
The change in interest due to both volume and rate has been allocated to change
due to volume and rate in proportion to the relationship of the absolute dollar
amounts of each. For the Nine Months EndedSeptember 30, 2004 and 2003Increase (Decrease) Due to:Rate
    
    Volume
    
    Total(In thousands)Interest and fees earned from:Cash and investment securities
    
    $
    (258
    )
    
    $
    1,224
    
    
    $
    966Loans
    
    
    (8,589
    )
    
    
    13,033
    
    
    
    4,444Real estate loans held in trust
    
    
    (1,067
    )
    
    
    (1,904
    )
    
    
    (2,971
    )Total increase (decrease) in interest income
    
    
    (9,914
    )
    
    
    12,353
    
    
    
    2,439Interest paid on:Deposit accounts:
    
    
    (2,481
    )
    
    
    3,431
    
    
    
    950Collateralized mortgage obligations
    
    
    (118
    )
    
    
    (696
    )
    
    
    (814
    )FHLB advances
    
    
    (201
    )
    
    
    594
    
    
    
    393Junior subordinated debentures
    
    
    
    
    
    
    4,559
    
    
    
    4,559Total increase (decrease) in interest
expense
    
    
    (2,800
    )
    
    
    7,888
    
    
    
    5,088Increase (decrease) in net interest income
    
    $
    (7,114
    )
    
    $
    4,465
    
    
    $
    (2,649
    )
 Total interest income increased $2.4 million to $90.9 million in the nine
months ended September 30, 2004, as compared to $88.5 million for the same
period last year. The increase in interest income was primarily attributable
to the increase in average interest earning assets of $275.0 million partially
offset by a decrease of 78 basis points in the average yield earned on interest
earning assets. The average balance of loans held by the Bank was $1.5 billion and $1.3
billion for the nine months ended September 30, 2004 and 2003, respectively.
Loans secured by income producing properties and construction loans increased
to $1.3 billion for the nine month period ended September 30, 2004, from $1.1
billion during same period last year. The average balance of franchise loans
was $121.3 million and $58.7 million during the nine months ended September 30,
2004 and 2003, respectively. The average balance of film finance loans was
$96.0 million and $102.9 million, respectively, during the nine months ended
September 30, 2004 and 2003. The average balance of real estate loans held in trust decreased to $54.2
million for the nine months ended September 30, 2004 as compared to $104.3
million for the same period last year. This decrease was due to loan
prepayments and principal amortization. The average balance of our cash and investments increased to $438.2
million for the nine months ended September 30, 2004 compared to $340.7 million
during the same period last year. The increase in our average cash and
investments was attributable to the increased liquidity 21




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##### Table of Contents



maintained in connection with the RAL program and the purchase of
investment securities held-to-maturity during the third quarter. The decline
in the average yield earned on cash and investments from 1.80% during the nine
months ended September 30, 2003 to 1.70% during the same period in 2004 was
caused by lower yields earned on short-term and overnight investments as a
result of a general decline in market interest rates. A significant portion of
our excess liquidity maintained during the nine months ended September 30, 2004
was invested in overnight investments, which yielded lower returns during the
current year as compared to the same period last year. The average yield earned on loans decreased 79 basis points to 7.25% for
the nine months ended September 30, 2004 as compared to 8.04% in the same
period last year. The decrease in the yield on loans was primarily due to
higher yielding loans being repaid and replaced with new loan production at
lower current market interest rates. Total interest expense increased by $5.1 million to $28.5 million for the
nine months ended September 30, 2004, compared to $23.4 million for the same
period last year. All but $0.5 million of this increase was attributable to
the adoption of FIN 46, which required that beginning January 1, 2004, the
Company recognize interest expense incurred on its junior subordinated
debentures issued to the Trusts in the consolidated statements of income. For
the nine months ended September 30, 2004, the junior subordinated debentures
had an average balance of $86.6 million and an average cost of funds of 7.03%. Our average cost of funds decreased to 2.52% during the nine months ended
September 30, 2004, compared to 2.55% for the same period last year. This
decrease in funding costs was due primarily to a general decline in market
interest rates, resulting in lower rates being paid on our deposit accounts
compared to the same period last year, as well as the addition of new interest
bearing FHLB advances at lower current market rates. This decrease was
partially offset by the average cost of funds of the junior subordinated
debentures of 7.03%. The average rate paid on deposit accounts was 2.19%
during the nine months ended September 30, 2004 compared to 2.53% for the same
period last year. The average balance of deposit accounts increased $206.4
million to $1.2 billion for the nine months ended September 30, 2004, compared
to $988.5 million for the same period last year. The average rate paid on the
FHLB advances was 2.56% during the nine months ended September 30, 2004
compared to 2.70% for the same period last year. FHLB advances averaged $221.9
million for the nine months ended September 30, 2004, compared to $190.9
million for the same period last year. Net interest margin decreased to 4.15% for the nine months ended September
30, 2004 as compared to 5.01% for the same period last year. This decrease was
primarily due to the increased interest expense resulting from the adoption of
FIN 46 and the 78 basis point decrease in the average yield earned on
interest-earning assets as a result of higher yielding loans being repaid and
replaced with new loan production at lower current market rates. Provision for Loan Losses The consolidated provision for loan losses totaled $3.5 million for the
nine months ended September 30, 2004, compared to $7.1 million for the same
period last year. The provision for loan losses was recorded to provide for
reserves based on an analysis of the factors referred to 22




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##### Table of Contents



previously and for specific charge-offs experienced through the nine
months ended September 30, 2004 and 2003. During the nine months ended
September 30, 2004 and 2003, the Company had net loan charge-offs of $2.2
million and $6.9 million, respectively. Non-interest Income Non-interest income totaled $14.3 million for the nine months ended
September 30, 2004, compared to $14.6 million for the same period last year.
Substantially all of the non-interest income earned during the current and
prior period was due to income earned in connection with the RAL program. Non-interest Expense Non-interest expense totaled $32.4 million for the nine months ended
September 30, 2004, compared to $28.8 million for the same period last year.
General and administrative expenses totaled $31.7 million during the nine
months ended September 30, 2004, compared to $28.0 million for the same period
last year. The increase in general and administrative expenses was primarily
due to the costs incurred in connection with the expansion of our ICE lending
platform. During the current year, the Bank opened thirteen ICE loan
production offices, and to date, there are eighteen ICE loan production offices
located throughout the west coast, eastern seaboard and southwestern region of
the United States. Consequently, our efficiency ratio (defined as recurring
general and administrative expenses as percentage of net revenue) increased to
41.4% for the nine months ended September 30, 2004, from 35.2% for the same
period in 2003. FINANCIAL CONDITION Total assets increased to $2.0 billion at September 30, 2004 as compared
to $1.8 billion at December 31, 2003. At September 30, 2004, loans, net
totaled $1.6 billion, including approximately $1.4 billion of real estate
loans, $132.8 million of franchise loans and $98.4 million of film finance
loans. During the nine months ended September 30, 2004, the Banks loan
portfolio increased $148.9 million and the REITs portfolio decreased $28.9
million. The decrease in the REITs loan portfolio reflects loan prepayments
and principal amortization experienced during the nine months ended September
30, 2004. Investment securities held to maturity increased $198.0 million,
while cash and cash equivalents decreased $111.9 million primarily as a result
of a reduction in the liquidity required to be maintained in connection with
the RAL program. Total deposit accounts increased to $1.2 billion at September
30, 2004 from $1.1 billion at December 31, 2003. FHLB advances increased
$127.4 million to $489.5 million at September 30, 2004, compared to $362.1
million at December 31, 2003. This increase was primarily utilized to fund the
purchase of investment securities held to maturity. Management believes that a
significant portion of deposits will remain with us upon maturity based on our
historical experience regarding retention of deposits. 23




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##### Table of Contents



Residual Interest In the first quarter of 2002, we formed a limited liability company to
issue $86.3 million of asset-backed notes in a securitization of substantially
all of our residential loan portfolio. These notes were rated AAA by Standard
& Poors, Aaa by Moodys, and are insured by Financial Security Assurance. In
the securitization, residential loans were sold to the limited liability
company for a cash purchase price and an interest in the loans securitized in
the form of the excess spread. The cash purchase price was raised through an
offering of asset-backed notes issued by the limited liability company. Note
holders are entitled to receive the principal collected on the loans and the
stated interest rate on the notes. We are entitled to receive the excess
spread. The excess spread generally represents, over the estimated life of the
loans, the excess of the weighted average coupon on the loans sold over the sum
of the note interest rate less other expenses including a trustee fee and an
insurance fee. Valuation of the excess spread includes an estimate of annual
future credit losses related to the loans securitized. These estimated cash
flows are discounted when computing the value of the residual interest. We recognized a gain on the sale of these loans, although cash
(representing the excess spread and servicing fees) is received by us over the
lives of the loans. Concurrent with recognizing such gain on sale, we recorded
the excess spread as a residual interest, which is included in our consolidated
balance sheets as Investment securities available for sale, at fair value.
The value of the residual interest is subject to substantial credit, prepayment
and interest rate risk on the sold residential loans. In accordance with the provisions of SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities, we classified our residual interest
as an available-for-sale asset and, as such, they are recorded at fair value
with the resultant changes in fair value recorded as accumulated unrealized
gain or loss in a separate component of shareholders equity entitled
accumulated other comprehensive income or loss, until realized. We estimate
fair value on a monthly basis based on a discounted cash flow analysis. These
cash flows are estimated over the lives of the receivables using prepayment,
default, and interest rate assumptions that we believe market participants
would use for similar financial instruments. During each of the nine months ended September 30, 2004 and 2003, we
recognized an other than temporary impairment of $750,000 in connection with
our residual interest. Impairments that are deemed to be other than temporary
are charged to income, as other expense. In evaluating impairments as other
than temporary we consider credit risk, as well as the magnitude and trend of
default rates and prepayment speeds of the underlying residential loans. At September 30, 2004 and December 31, 2003, key economic assumptions and
the sensitivity of the current fair value of the residual interest based on
projected cash flows to immediate adverse changes in those assumptions is as
follows: 24




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##### Table of Contents



September 30,
    
    December 31,2004
    
    2003Dollars in thousandsFair value of retained interest
    
    $
    5,368
    
    
    $
    5,368Weighted average life (in years)  securities
    
    
    1.13
    
    
    
    1.00Weighted average life (in years)  residual interest
    
    
    3.74
    
    
    
    4.47Weighted average annual prepayment speed
    
    
    35.0
    %
    
    
    35.0
    %Impact of 10% adverse change
    
    $
    (156
    )
    
    $
    (67
    )Impact of 25% adverse change
    
    $
    (411
    )
    
    $
    (120
    )Weighted average annual discount rate
    
    
    15.0
    %
    
    
    15.0
    %Impact of 10% adverse change
    
    $
    (266
    )
    
    $
    (313
    )Impact of 25% adverse change
    
    $
    (637
    )
    
    $
    (753
    )Weighted average lifetime credit losses
    
    
    3.3
    %
    
    
    3.3
    %Impact of 10% adverse change
    
    $
    (174
    )
    
    $
    (147
    )Impact of 25% adverse change
    
    $
    (435
    )
    
    $
    (367
    )
 These sensitivities are hypothetical and should be used with caution. As
the figures indicate, changes in the fair value of our residual are based on a
variation in assumptions and generally cannot be extrapolated because the
relationship of the change in assumption to the change in fair value may not be
linear. Also, in the above table, the effect of a variation in a particular
assumption on the fair value of the residual interest is calculated without
changing any other assumption; in reality, changes in one factor may result in
changes in another (for example, increases in market interest rates may result
in lower prepayments but increased credit losses), which might magnify or
counteract the sensitivities, and depending on the severity of such changes,
the results of operations may be materially affected. CREDIT RISK Nonperforming Assets, Other Loans of Concern and Allowance for Loan Losses The following table sets forth our nonperforming assets by category and
troubled debt restructurings as of the dates indicated. September 30,
    
    December 31,2004
    
    2003(dollars in thousands)Nonaccrual loans:Real estate
    
    $
    9,032
    
    
    $
    4,686Franchise
    
    
    3,929
    
    
    
    799Film finance
    
    
    3,938
    
    
    
    3,030Total nonaccrual loans
    
    
    16,899
    
    
    
    8,515Other real estate owned, net
    
    
    
    
    
    
    7,048Total nonperforming assets
    
    
    16,899
    
    
    
    15,563Performing troubled debt restructurings
    
    
    3,182
    
    
    
    4,709$
    20,081
    
    
    $
    20,272Nonaccrual loans to total loans
and real estate loans held in trust
    
    
    1.02
    %
    
    
    0.55
    %Allowance for loan losses to nonaccrual loans
    
    
    205.24
    %
    
    
    392.26
    %Nonperforming assets to total assets
    
    
    0.83
    %
    
    
    0.86
    %
 25




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##### Table of Contents



At September 30, 2004, there were no other real estate owned properties.
Management periodically evaluates the estimated fair value of its other real
estate owned properties. During the nine months ended September 30, 2004, we
recorded a $1.0 million impairment reserve related to the value of one other
real estate owned property. As of September 30, 2004 and December 31, 2003, other loans of concern
totaled $35.5 million and $31.3 million, respectively. Other loans of concern
consist of loans with respect to which known information concerning possible
credit problems with the borrowers or the cash flows of the properties securing
the respective loans has caused management to be concerned about the ability of
the borrowers to comply with present loan repayment terms, which may result in
the future inclusion of such loans in the nonaccrual category. The increase in
other loans of concern for the nine months ended September 30, 2004 was
primarily due to $23.5 million of new other loans of concern, partially offset
by $6.2 million of loans being paid-off, $10.5 million of loans migrating to
nonaccrual status, $1.7 million of loans being upgraded and $882,000 of loans
being transferred to other real estate owned. The following table provides certain information with respect to our
allowance for loan losses, including charge-offs, recoveries and selected
ratios for the periods indicated. For the Nine
    
    For the YearMonths Ended
    
    EndedSeptember 30,
    
    December 31,2004
    
    2003(dollars in thousands)Balance at beginning of period
    
    $
    33,401
    
    
    $
    33,009Provision for loan losses
    
    
    3,450
    
    
    
    7,760Charge-offs
    
    
    (2,300
    )
    
    
    (7,447
    )Recoveries
    
    
    132
    
    
    
    79Net recoveries (charge-offs)
    
    
    (2,168
    )
    
    
    (7,368
    )Balance at end of period
    
    $
    34,683
    
    
    $
    33,401Allowance for loan losses as a percentage of
loans and loans held in trust, net
    
    
    2.09
    %
    
    
    2.17
    %
 Liquidity Liquidity refers to our ability to maintain cash flow adequate to fund
operations and meet obligations and other commitments on a timely basis,
including the payment of maturing deposits and the origination or purchase of
new loans. We maintain a cash and investment securities portfolio designed to
satisfy operating liquidity requirements while preserving capital and
maximizing yield. As of September 30, 2004, we held $66.5 million of cash and
cash equivalents (consisting primarily of short-term investments with original
maturities of 90 days or less) and $64.4 million of investment securities
classified as available for sale. Short-term fixed income investments classified as cash equivalents
consisted of interest-bearing deposits at financial institutions, government
money market funds and short-term 26




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government agency securities, while investment securities available for
sale consisted primarily of fixed income instruments, which were rated AAA,
or equivalent by nationally recognized rating agencies. In addition, our
liquidity position is supported by a credit facility with the Federal Home Loan
Bank of San Francisco. As of September 30, 2004, we had remaining available
borrowing capacity under this credit facility of $190.8 million, net of the
$10.0 million of additional Federal Home Loan Bank stock that we would be
required to purchase to support those additional borrowings, $30.0 million of
unused federal funds credit facilities under established lines of credit with
two banks, and a $25.0 million revolving credit facility with a bank. Capital Resources The Company, the Banks holding company, had Tier 1 leverage, Tier 1 risk
based and total risk-based capital ratios at September 30, 2004 of 13.38%,
15.00% and 17.48%, respectively, which represents $159.0 million, $152.3
million and $126.5 million, respectively, of capital in excess of the amount
required to be well capitalized. These ratios were 14.17%, 15.61% and 18.17%
as of December 31, 2003, respectively. The Bank had Tier 1 leverage, Tier 1 risk based and total risk-based
capital ratios at September 30, 2004 of 12.34%, 13.80% and 15.06%,
respectively, which represents $134.9 million, $128.2 million and $83.1
million, respectively, of capital in excess of the amount required to be well
capitalized for regulatory purposes. These ratios were 13.23%, 14.30% and
15.56% as of December 31, 2003, respectively. At September 30, 2004, shareholders equity totaled $193.7 million, or 9.5
percent of total assets. Our book value per share of common stock was $34.62
as of September 30, 2004, as compared to $31.30 as of December 31, 2003, and
$31.10 as of September 30, 2003. 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk Our estimated sensitivity to interest rate risk, as measured by the
estimated interest earnings sensitivity profile and the interest sensitivity
gap analysis, has not materially changed from the information disclosed in our
annual report on Form 10-K for the year ended December 31, 2003. 
 Item 4. Controls and Procedures (a) Evaluation of Disclosure Controls and Procedures: An evaluation of the
Companys disclosure controls and procedures (as defined in Rule 13a-15(e)
under the Securities Exchange Act of 1934 (the Act)) was carried out as of
September 30, 2004 under the supervision and with the participation of the
Companys Chief Executive Officer, Chief Financial Officer and several other
members of the Companys senior management. The Companys Chief Executive
Officer and Chief Financial Officer concluded that, as of September 30, 2004,
the Companys disclosure controls and procedures are effective in ensuring that
the information required to be disclosed by the Company in the reports it files
or submits under the Act is (i) accumulated and communicated to the Companys
management (including the Chief Executive Officer and Chief Financial Officer)
in a timely manner, and (ii) recorded, processed, summarized and reported
within the time periods specified in the SECs rules and forms. 27




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The Company does not expect that its disclosure controls and procedures
will prevent all error and all fraud. A control procedure, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control procedure are met. Because of the inherent
limitations in all control procedures, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any,
within the Company have been detected. These inherent limitations include the
realities that judgments in decision-making can be faulty, and that breakdowns
can occur because of simple error or mistake. Additionally, controls can be
circumvented by the individual acts of some persons, by collusion of two or
more people, or by management override of the control. The design of any
control procedure also is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions;
over time, controls may become inadequate because of changes in conditions, or
the degree of compliance with the policies or procedures may deteriorate.
Because of the inherent limitations in a cost-effective control procedure,
misstatements due to error or fraud may occur and not be detected. (b) Changes in Internal Control over Financial Reporting: During the
quarter ended September 30, 2004, no change occurred in the Companys internal
control over financial reporting that has materially affected, or is reasonably
likely to materially affect, the Companys internal control over financial
reporting. Section 404 of the Sarbanes-Oxley Act of 2002 requires that companies
evaluate and annually report on their systems of internal control over
financial reporting. In addition, our independent accountants must report on
managements evaluation. We are in the process of evaluating, documenting and
testing our system of internal control over financial reporting to provide the
basis for our report that will, for the first time, be a required part of our
annual report on Form 10-K for the year ending December 31, 2004. Due to the
ongoing evaluation and testing of our internal controls, there can be no
assurance that all control deficiencies identified, if any, will be remediated
before the end of the Companys fiscal year or that there may not be
significant deficiencies or material weaknesses that would be required to be
reported. In addition, we expect the evaluation process and any required
remediation, if applicable, to increase our accounting, legal and other costs
and divert management resources from core business operations. 28




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PART II -  OTHER INFORMATION 
 Item 1. Legal Proceedings We are party to certain legal proceedings incidental to our business.
Management believes that the outcome of such proceedings, in the aggregate,
will not have a material effect on our financial condition or results of
operations. 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The following table sets forth the repurchases of our common stock for the
fiscal quarter ended September 30, 2004. Total Number of
    
    Maximum Number ofShares Purchased as
    
    Shares that May YetPart of Publicly
    
    Be Purchased UnderTotal Number of
    
    Average Price Paid
    
    Announced Plans or
    
    the Plans orPeriod
    
    Shares Purchased
    
    per Share
    
    Programs
    
    Programs(1)July 1, 2004 to
July 31, 2004
    
    
    21,000
    
    
    $
    40.37
    
    
    
    21,000
    
    
    
    34,831August 1, 2004 to
August 31, 2004
    
    
    205,200
    
    
    
    39.22
    
    
    
    205,200
    
    
    
    125,783September 1, 2004 to
September 30, 2004
    
    
    137,883
    
    
    
    44.62
    
    
    
    137,883
    
    
    
    292,565Total
    
    
    364,083
    
    
    $
    41.33
    
    
    
    364,083
    
    
    
    292,565
  (1)  The repurchases during July, August and September 2004 were made under
the seventh, eighth and ninth extensions of our stock repurchase program,
which were announced on December 21, 2001, August 12, 2004, and September 30,
2004, respectively. Each such extension authorized the repurchase of an
additional 5% of the outstanding shares as of the authorization date. As
reflected in the table, the 34,831 shares authorized for repurchase under the
seventh extension that were remaining at July 31, 2004 were repurchased in
August 2004 (prior to the announcement of the eighth extension), and the
125,783 shares authorized for repurchase under the eighth extension that were
remaining at August 31, 2004 were repurchased in September 2004 (prior to the
announcement of the ninth extension). At September 30, 2004, 292,565 shares
remained available for repurchase under the ninth extension. 
 Item 3 . Defaults Upon Senior Securities Not applicable. 
 Item 4 . Submission of Matters to a Vote of Security Holders  (a)
    
    On July 28, 2004, the Company held its Annual Meeting of
Shareholders.  (b)
    
    Shareholders voted on the following matters:  (i)
    
    The election of Sandor X. Mayuga as director for a term to
expire in 2007: Votes
    
    For
    
    Against
    
    Withheld5,505,349
    
    
    
    0
    
    
    
    238,868
  (ii)
    
    The election of Robert R. Reed as director for a term to expire in 2007: Votes
    
    For
    
    Against
    
    Withheld5,667,544
    
    
    
    0
    
    
    
    77,773
 29




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(iii)  The ratification of the appointment of Ernst & Young LLP as independent
auditors of the Company for the fiscal year ending December 31, 2004: Votes
    
    For
    
    Against
    
    Withheld5,517,883
    
    
    
    224,794
    
    
    
    2,640
 
 Item 5 . Other Information None. 
 Item 6 . Exhibits See exhibit index 30




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized. ITLA CAPITAL CORPORATIONDate: November 9, 2004
    
    /s/ George W. HaligowskiGeorge W. HaligowskiChairman of the Board, President andChief Executive OfficerDate: November 9, 2004
    
    /s/ Timothy M. DoyleTimothy M. DoyleSenior Managing Director andChief Financial Officer
 31




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EXHIBIT INDEX Reference toPrior Fillingor ExhibitNumberRegulation S-K
    
    
    
    AttachedExhibit Number
    
    Document
    
    Hereto3.1
    
    
    Certificate of Incorporation
    
    
    **3.2
    
    
    Bylaws, as amended
    
    
    *****4
    
    
    Instruments Defining the Rights of Security Holders, Including
Indentures
    
    None10.1
    
    
    1995 Stock Option Plan For Nonemployee Directors
    
    
    *10.2
    
    
    1995 Employee Stock Incentive Plan
    
    
    ******10.3a
    
    
    Nonqualified (Non-Employer Securities) Deferred Compensation Plan
    
    
    ********10.3b
    
    
    Nonqualified (Employer Securities Only) Deferred Compensation
Plan
    
    
    ********10.4
    
    
    Supplemental Salary Savings Plan
    
    
    *10.5
    
    
    Data Processing Agreement
    
    
    *10.6
    
    
    Employment Agreement with George W. Haligowski
    
    
    *10.7
    
    
    Change of Control Agreements
    
    
    ***10.8
    
    
    Recognition and Retention Plan
    
    
    **10.9
    
    
    Voluntary Retainer Stock and Deferred Compensation Plan for
Outside Directors
    
    
    **10.10
    
    
    Supplemental Executive Retirement Plan
    
    
    ********10.11
    
    
    ITLA Capital Corporation Rabbi Trust Agreement
    
    
    ***10.12
    
    
    Salary Continuation Plan
    
    
    ****10.13
    
    
    Licensing Agreement, dated October 30, 2002, between Imperial
Capital Bank and Beneficial Franchise Company, Inc.
    
    
    *******10.14
    
    
    Amended and Restated Sale and Servicing Agreement for RALs and
RACs, dated as of January 3, 2003, between Imperial Capital
Bank, Household Tax Masters Inc., and Household Tax Masters
Acquisition Corporation
    
    
    *******11
    
    
    Statement Regarding Computation of Per Share Earnings
    
    None15
    
    
    Letter Regarding Unaudited Interim Financial Information
    
    None18
    
    
    Letter Regarding Change in Accounting Principles
    
    None19
    
    
    Report furnished to Security Holders
    
    None22
    
    
    Published Report Regarding Matters Submitted to Vote of Security Holders
    
    None23
    
    
    Consent of Experts
    
    None24
    
    
    Power of Attorney
    
    None31.1
    
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
    
    
    31.131.2
    
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
    
    
    31.232
    
    
    Section 1350 Certifications of Chief Executive Officer and Chief
Financial Officer
    
    
    32
   *
    
    Filed as an exhibit to Imperials Registration Statement on
Form S-1 (File No. 33-96518) filed with the Commission on September
1, 1995, pursuant to Section 5 of the Securities Act of 1933.* *
    
    Filed as an exhibit to the Companys Registration Statement
on Form S-4 (File No. 333-03551) filed with the Commission on May 10,
1996, pursuant to Section 5 of the Securities Act of 1933.* * *
    
    Filed as an exhibit to the Companys Form 10-K for the year
ended December 31, 1999 (File No. 0-26960).* * * *
    
    Filed as an exhibit to the Companys Registrants Form 10-K
for the year ended December 31, 2000 (File No. 0-26960).* * * * *
    
    Filed as an exhibit to the Companys Quarterly Report on
Form 10-Q for the quarter ended September 30, 2000 (File No. 0-26960).* * * * * *
    
    Filed as an appendix to the Companys definitive proxy
materials filed on September 29, 2001.* * * * * * *
    
    Filed as an exhibit to the Current Report on Form 8-K
filed by the Company on February 5, 2003 (File No. 0-26960). Portions
of this exhibit have been omitted pursuant to a request for confidential
treatment granted by the Commission.* * * * * * * *
    
    Filed as an exhibit to the Companys Quarterly Report
on Form 10-Q for the quarter ended September 30, 2003 (File No. 0-26960).
 32