ITLA Capital Corporation Form 10-Q For the Period Ended 03/31/2006
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q


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

For the Quarterly Period Ended March 31, 2006

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

For the Transition Period from _____ to _____
 
Commission File Number 0-26960

 
ITLA CAPITAL CORPORATION
  
 
(Exact Name of Registrant as Specified in its Charter)
  

Delaware
  
95-4596322
(State or Other Jurisdiction of Incorporation or Organization)
  
(IRS Employer Identification No.)
     
888 Prospect St., Suite 110, La Jolla, California
  
92037
(Address of Principal Executive Offices)
  
(Zip Code)

(858) 551-0511
(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes R No £.
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” in Rule 12b-2 of the Exchange Act. Large Accelerated Filer £ Accelerated Filer R Non-Accelerated Filer £
 
Indicate by check mark whether the Registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act). Yes £ No R.
 
Number of shares of common stock of the registrant: 5,549,477 outstanding as of May 3, 2006.
 

 
 


ITLA CAPITAL CORPORATION
FORM 10-Q
FOR THE THREE MONTHS ENDED MARCH 31, 2006

TABLE OF CONTENTS

 
Item 1.
3
 
3
 
4
 
5
 
6
Item 2.
12
Item 3.
21
Item 4.
21
     
 
Item 1.
22
Item 1A.
22
Item 2.
22
Item 3.
22
Item 4.
22
Item 5.
22
Item 6.
22
 
23
 
Certifications
 
Exhibit 31.1    
Exhibit 31.2    
Exhibit 32    

 
Forward Looking Statements
 
“Safe Harbor” statement under the Private Securities Litigation Reform Act of 1995: This Form 10-Q contains forward-looking statements that are subject to risks and uncertainties, including, but not limited to, changes in economic conditions in our market areas, changes in policies by regulatory agencies, the impact of competitive loan products, loan demand risks, the quality or composition of our loan or investment portfolios, increased costs from pursuing the national expansion of our small balance multi-family lending platform and operational challenges inherent in implementing this expansion strategy, fluctuations in interest rates and changes in the relative differences between short and long-term interest rates, levels of non-performing assets and other loans of concern, and operating results, the economic impact of any terrorist actions on our loan originations and loan repayments and other risks detailed from time to time in our filings with the Securities and Exchange Commission. We caution readers not to place undue reliance on forward-looking statements. We do not undertake and specifically disclaim any obligation to revise any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. These risks could cause our actual results for 2006 and beyond to differ materially from those expressed in any forward-looking statements by, or on behalf of, us.

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

- 2 -
 
PART I - FINANCIAL INFORMATION
 

ITLA CAPITAL CORPORATION AND SUBSIDIARIES
  
CONSOLIDATED BALANCE SHEETS
  
           
   
March 31,
      
   
2006
  
December 31,
  
   
(unaudited)
  
2005
  
   
(in thousands, except share data)
  
Assets
          
Cash and cash equivalents
  
$
109,429
  
$
93,747
  
Investment securities available-for-sale, at fair value
    
93,877
    
92,563
  
Investment securities held-to-maturity, at amortized cost
    
222,984
    
233,880
  
Stock in Federal Home Loan Bank
    
45,306
    
43,802
  
Loans, net (net of allowance for loan losses of $45,452 and $43,817 as of March 31, 2006 and December 31, 2005, respectively)
    
2,615,335
    
2,523,480
  
Interest receivable
    
17,010
    
16,287
  
Other real estate owned, net
    
6,240
    
3,960
  
Premises and equipment, net
    
7,254
    
6,718
  
Deferred income taxes
    
12,750
    
12,717
  
Goodwill
    
3,118
    
3,118
  
Other assets
    
21,424
    
20,924
  
Total assets
  
$
3,154,727
  
$
3,051,196
  
               
Liabilities and Shareholders’ Equity
              
Liabilities:
              
Deposit accounts
  
$
1,809,527
  
$
1,735,428
 
Federal Home Loan Bank advances and other borrowings
    
1,024,550
    
992,557
 
Accounts payable and other liabilities
    
30,053
    
32,130
 
Junior subordinated debentures
    
86,600
    
86,600
  
Total liabilities
    
2,950,730
    
2,846,715
 
               
Commitments and contingencies
              
               
Shareholders’ equity:
              
Preferred stock, 5,000,000 shares authorized, none issued
   
—
    
—
  
Contributed capital - common stock, $.01 par value; 20,000,000 shares authorized, 8,982,998 and 8,978,998 issued as of March 31, 2006 and December 31, 2005, respectively
    
78,222
    
78,004
  
Retained earnings
    
225,595
    
220,095
 
Accumulated other comprehensive loss, net
    
(358
)
  
(364
)
     
303,459
    
297,735
  
Less treasury stock, at cost 3,709,476 and 3,576,695 shares as of March 31, 2006 and December 31, 2005, respectively
    
(99,462
)
  
(93,254
)
               
Total shareholders' equity
    
203,997
    
204,481
 
               
Total liabilities and shareholders' equity
  
$
3,154,727
  
$
3,051,196
  
 

 
See accompanying notes to the unaudited consolidated financial statements.

- 3 -


ITLA CAPITAL CORPORATION AND SUBSIDIARIES
  
CONSOLIDATED STATEMENTS OF INCOME
  
(Unaudited)
  
       
   
For the Three Months Ended March 31,
  
           
   
2006
  
2005
  
   
(in thousands, except per share data)
  
Interest income:
              
Loans, including fees
  
$
47,137
  
$
31,911
  
Cash and investment securities
    
4,291
    
4,841
  
               
Total interest income
    
51,428
    
36,752
  
               
Interest expense:
              
Deposit accounts
    
17,198
    
9,498
  
Federal Home Loan Bank advances and other borrowings
    
9,362
    
3,832
  
Junior subordinated debentures
    
1,958
    
1,680
  
               
Total interest expense
    
28,518
    
15,010
  
               
Net interest income before provision for loan losses
    
22,910
    
21,742
  
               
Provision for loan losses
    
750
    
750
  
               
Net interest income after provision for loan losses
    
22,160
    
20,992
  
               
Non-interest income:
              
Late and collection fees
    
223
    
73
  
Other
    
494
    
(93
)
               
Total non-interest income
    
717
    
(20
)
               
Non-interest expense:
              
Compensation and benefits
    
6,020
    
5,891
  
Occupancy and equipment
    
1,806
    
1,651
  
Other
    
4,211
    
3,688
  
               
Total general and administrative
    
12,037
    
11,230
  
               
Real estate owned expense, net
    
106
    
—
  
Gain on sale of other real estate owned, net
    
—
    
(11
)
               
Total real estate owned expense, net
    
106
    
(11
)
               
Total non-interest expense
    
12,143
    
11,219
  
               
Income before provision for income taxes
    
10,734
    
9,753
  
Provision for income taxes
    
4,402
    
4,102
  
               
NET INCOME
  
$
6,332
  
$
5,651
  
               
Basic earnings per share
  
$
1.13
  
$
0.97
  
               
Diluted earnings per share
  
$
1.10
  
$
0.93
  
               
Dividends declared per share of common stock
  
$
0.15
  
$
—
  

See accompanying notes to the unaudited consolidated financial statements.

- 4 -


ITLA CAPITAL CORPORATION AND SUBSIDIARIES
  
CONSOLIDATED STATEMENTS OF CASH FLOWS
  
(Unaudited)
  
   
For the Three Months Ended
March 31,
  
   
2006
  
2005
  
   
(in thousands)
 
Cash Flows From Operating Activities:
              
Net Income
  
$
6,332
  
$
5,651
  
Adjustments to reconcile net income to net cash provided by operating activities:
              
Depreciation and amortization of premises and equipment
    
657
    
548
  
Amortization of premium on purchased loans
    
975
    
440
  
Accretion of deferred loan origination fees, net of costs
    
(851
)
  
(745
)
Provision for loan losses
    
750
    
750
  
Other, net
    
(448
)
  
1,834
  
Increase in interest receivable
    
(723
)
  
(1,693
)
(Increase) decrease in other assets
    
(500
)
  
2,956
  
(Decrease) increase in accounts payable and other liabilities
    
(2,909
)
  
4,589
  
               
Net cash provided by operating activities
    
3,283
    
14,330
  
               
Cash Flows From Investing Activities:
              
Purchases of investment securities available-for-sale
    
(11,095
)
  
(12,886
)
Proceeds from maturity and calls of investment securities available-for-sale
    
9,783
    
266
  
Proceeds from the maturity and redemption of investment securities held-to-maturity
    
10,870
    
12,088
  
Purchase of stock in Federal Home Loan Bank
    
(991
)
  
(3,558
)
Purchase of loans
    
(103,558
)
  
(192,125
)
Decrease (increase) in loans, net
    
8,549
    
(967
)
Proceeds from sale of other real estate owned
    
—
    
81
  
Cash paid for capital expenditures
    
(1,193
)
  
(713
)
               
Net cash used in investing activities
    
(87,635
)
  
(197,814
)
               
Cash Flows From Financing Activities:
              
Proceeds and excess tax benefits from exercise of employee stock options
    
150
    
1,550
  
Cash paid to acquire treasury stock
    
(6,208
)
  
(9,530
)
Increase in deposit accounts
    
74,099
    
33,784
  
Net repayments of short-term borrowings
    
(37,226
)
  
(54,000
)
Proceeds from long-term borrowings
    
89,869
    
136,332
  
Repayments of long-term borrowings
    
(20,650
)
  
(1,100
)
               
Net cash provided by financing activities
    
100,034
    
107,036
  
               
Net increase (decrease) in cash and cash equivalents
    
15,682
    
(76,448
)
Cash and cash equivalents at beginning of period
    
93,747
    
87,580
  
               
Cash and cash equivalents at end of period
  
$
109,429
  
$
11,132
  
               
Supplemental Cash Flow Information:
              
Cash paid during the period for interest
  
$
32,041
  
$
15,204
  
Cash paid during the period for income taxes
  
$
2,156
  
$
1,332
  
Non-Cash Investing and Financing Transactions:
              
Loans transferred to other real estate owned
 
$
2,280
  
$
70
  
Cash dividends declared but not yet paid
  
$
832
  
$
—
  
               

See accompanying notes to the unaudited consolidated financial statements.

- 5 -

 
ITLA CAPITAL CORPORATION AND SUBSIDIARIES
 
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 

NOTE 1 - BASIS OF PRESENTATION
 
The unaudited consolidated financial statements of ITLA Capital Corporation (the “Company”) included herein reflect all normal recurring adjustments which are, in the opinion of management, necessary to present fairly the results of operations and financial position of the Company, as of the dates and for the interim periods indicated. The unaudited consolidated financial statements include the accounts of ITLA Capital Corporation and its wholly-owned subsidiaries, Imperial Capital Bank (the “Bank”) and Imperial Capital Real Estate Investment Trust (“Imperial Capital REIT”).

All intercompany transactions and balances have been eliminated. Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to the rules and regulations of the U.S. Securities and Exchange Commission. Certain amounts in prior periods have been reclassified to conform to the presentation in the current period. The results of operations for the three months ended March 31, 2006 are not necessarily indicative of the results of operations for the remainder of the year.

These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our annual report on Form 10-K for the year ended December 31, 2005.

 
NOTE 2 - ACCOUNTING FOR STOCK-BASED COMPENSATION
 
Prior to January 1, 2006, the Company’s stock-based compensation plans were accounted for in accordance with Accounting Principles Board (“APB”) Opinion No. 25 - “Accounting for Stock Issued to Employees.” Under APB Opinion No. 25, no compensation expense was recognized for a stock option grant if the exercise price of the stock option at measurement date was equal to or greater than the fair market value of the common stock on the date of grant. The Company also applied Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation”, for disclosure purposes only. SFAS No. 123 disclosures included pro forma net income and earnings per share as if the fair value-based method of accounting had been used.

Effective January 1, 2006, the Company adopted SFAS No. 123 (revised 2004), “Share-Based Payment”, which requires the recognition of the expense related to the fair value of stock-based compensation awards within the consolidated statement of income. The Company elected the modified prospective transition method as permitted by SFAS No. 123(R), and accordingly, results from prior periods have not been restated. Under this transition method, stock-based compensation expense for the three months ended March 31, 2006 includes compensation expense for all unvested stock-based compensation awards granted prior to January 1, 2006, for which the requisite service has not been performed, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123. Compensation expense for all stock-based compensation awards granted subsequent to January 1, 2006 will be based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123(R). No stock-based compensation awards have been granted since the adoption of SFAS No. 123(R).

- 6 -
 
 
Total stock option expense included in our consolidated statements of income for the quarter ended March 31, 2006 was approximately $68,000 ($41,000, net of tax or $0.01 per diluted share). No stock option expense was included in the consolidated statement of income for the quarter ended March 31, 2005. All of option expense included in our consolidated statement of income for the quarter ended March 31, 2006, relates to awards granted prior to January 1, 2006.

Prior to the adoption of SFAS No. 123(R), we reported all tax benefits resulting from the exercise of stock options as operating cash flows in our consolidated statements of cash flows. In accordance with SFAS No. 123(R), for the three months ended March 31, 2006, the presentation of our statement of cash flows has changed from prior periods to report the excess tax benefits from the exercise of stock options as financing cash flows. For the three months ended March 31, 2006, $29,000 of excess tax benefits were reported as financing cash flows.

The table below illustrates the effect on net earnings and earnings per share as if we had applied the fair value recognition provisions of SFAS No. 123 to stock-based compensation during the quarter ended March 31, 2005.



   
For the Three Months Ended
March 31, 2005
  
   
(in thousands, except per share data)
  
       
Net income, as reported
  
$
5,651
  
Less: Stock-based employee compensation expense determined under the fair value method, net of tax benefit of $43
   
66
  
Pro forma net income
  
$
5,585
  
Earnings per share:
        
Basic - as reported
  
$
0.97
  
Basic - pro forma
  
$
0.96
  
Diluted - as reported
  
$
0.93
  
Diluted - pro forma
  
$
0.91
  

 
The fair value of each option grant was estimated on the date of grant using a black-scholes option pricing model with the following weighted-average assumptions for option grants:


   
Weighted-Average Assumptions
for Option Grants
 
  
2006 (1)
  
2005
         
Dividend Yield
  
—
  
0.00%
Expected Volatility
  
—
  
34.14%
Risk-Free Interest Rates
  
—
  
3.95%
Expected Lives
  
—
  
Seven Years
 
(1)
The Company did not grant any stock options during the three months ended March 31, 2006.

 
- 7 -
 
 
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:
 
       
   
 
 
Net Income
  
Weighted-
Average Shares
Outstanding
  
Per
Share
Amount
  
   
(in thousands, except per share data)
  
For the Three Months Ended March 31,
              
2006
              
Basic EPS
  
$
6,332
    
5,625
  
$
1.13
  
Effect of dilutive stock options
    
—
    
139
    
(0.03
)
Diluted EPS
  
$
6,332
    
5,764
  
$
1.10
  
                     
2005
                    
Basic EPS
  
$
5,651
    
5,805
  
$
0.97
  
Effect of dilutive stock options
    
—
    
301
    
(0.04
)
Diluted EPS
  
$
5,651
    
6,106
  
$
0.93
  


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
  
   
March 31,
  
   
2006
  
2005
  
   
(in thousands)
  
           
Net Income
  
$
6,332
  
$
5,651
  
Other comprehensive income (loss):
              
Change in unrealized gains (losses) on investment securities available-for-sale, net of tax (expense) benefit of $(4) and $244 for the three months ended March 31, 2006 and 2005, respectively.
    
6
    
(371
)
               
Total Comprehensive Income
  
$
6,338
  
$
5,280
  

 
NOTE 5 - IMPAIRED LOANS RECEIVABLE
 
As of March 31, 2006 and December 31, 2005, the recorded investment in impaired loans was $31.3 million and $36.3 million, respectively. The average recorded investment in impaired loans was $32.8 million and $18.3 million, respectively, for the three months ended March 31, 2006 and 2005. Interest income recognized on impaired loans totaled $111,000 and $94,000, respectively, for the three months ended March 31, 2006 and 2005.


- 8 -
 
NOTE 6 - RESIDUAL INTEREST IN SECURITIZATION
 
The Company has recorded a residual asset in connection with a 2002 securitization of residential real estate loans, which represented the present value of future cash flows (spread and fees) that were 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. Fair value is estimated based on a discounted cash flow analysis. These cash flows are estimated over the lives of the receivables using prepayment, default, and interest rate assumptions that management believes market participants would use for similar financial instruments.

At March 31, 2006 and December 31, 2005, key economic assumptions and the sensitivity of the current fair value of the residual interest based on projected cash flows to immediate adverse changes in those assumptions are as follows:

   
March 31,
2006
  
December 31,
2005
  
   
(dollars in thousands)
  
       
Fair value of retained interest
  
$
3,037
  
$
3,570
  
Weighted average life (in years) - securities
    
0.54
    
0.56
  
Weighted average life (in years) - residual interest
    
2.76
    
2.92
  
Weighted average annual prepayment speed
    
40.0
%
  
40.0
%
Impact of 10% adverse change
  
$
(10
)
$
(22
)
Impact of 25% adverse change
  
$
(30
)
$
(34
)
Weighted average annual discount rate
    
15.0
%
  
13.0
%
Impact of 10% adverse change
  
$
(111
)
$
(117
)
Impact of 25% adverse change
  
$
(269
)
$
(284
)
Weighted average lifetime credit losses
    
20.3
%
  
14.3
%
Impact of 10% adverse change
  
$
(121
)
$
(79
)
Impact of 25% adverse change
  
$
(308
)
$
(211
)

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.

 

- 9 -

NOTE 7 - NEW ACCOUNTING PRONOUNCEMENTS
 
In February 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments” — an amendment of SFAS Nos. 133 and 140 (“SFAS No. 155”). SFAS No. 155 permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 133, establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives, and amends SFAS No. 140 to eliminate the prohibition on a qualifying special purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. The Company adopted SFAS No. 155 effective January 1, 2006. The adoption of SFAS No. 155 did not have a material impact on our financial condition or results of operations.

In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets” (“SFAS No. 156”). This statement amends SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”, with respect to the accounting for separately recognized servicing assets and servicing liabilities. SFAS No. 156 requires companies to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract. The statement permits a company to choose either the amortized cost method or fair value measurement method for each class of separately recognized servicing assets. This statement is effective for fiscal years beginning after September 15, 2006. Management does not expect the adoption of SFAS No. 156 to have a material impact on our financial condition or results of operations.
 
NOTE 8 - BUSINESS SEGMENT INFORMATION
 
SFAS No. 131, “Disclosures About Segments of an Enterprise and Related Information” (“SFAS No. 131”), requires disclosure of segment information in a manner consistent with the “management approach”. The management approach is based on the way the chief operating decision-maker organizes segments within a company for making operating decisions and assessing performance.

The main factors used to identify operating segments are the specific product and business lines of the various operating segments of the Company. Operating segments are organized separately by product and service offered. We have identified one operating segment that meets the criteria of being a reportable segment in accordance with the provisions of SFAS No. 131. This reportable segment is the origination and purchase of loans, which by its legal form, is identified as operations of the Bank and Imperial Capital REIT. This segment derives the majority of its revenue by originating and purchasing loans. Other operating segments of the Company that did not meet the criteria of being a reportable segment in accordance with SFAS No. 131 have been aggregated and reported as “All Other”. Substantially all of the transactions from the Company’s operating segments occur in the United States.

- 10 -
 
 
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 segments profits and losses disclosed below and the measurement of profits and losses in our consolidated statements of income. Accounting allocations are made in the same manner for all operating segments.

   
Lending
  
 
          
   
Operations
 
All Other
 
Eliminations
 
Consolidated
 
   
(in thousands)
  
For the three months ended March 31,
                  
2006
                 
Revenues from external customers
  
$
51,928
  
$
217
  
$
—
  
$
52,145
  
Total interest income
   
51,262
    
166
    
—
    
51,428
  
Total interest expense
   
26,560
    
1,958
    
—
    
28,518
  
Net income
   
7,798
    
(1,466
)
  
—
    
6,332
  
                           
2005
                         
Revenues from external customers
  
$
36,167
  
$
565
  
$
—
  
$
36,732
  
Total interest income
   
35,741
    
1,011
    
—
    
36,752
  
Total interest expense
   
13,330
    
1,680
    
—
    
15,010
  
Net income
   
6,831
    
(1,180
)
  
—
    
5,651
  
 
 

 
- 11 -

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

The following discussion and analysis is intended to identify the major factors that affected our financial condition and results of operations for the three months ended March 31, 2006.

Application of Critical Accounting Policies and Accounting Estimates

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

We consider accounting estimates to be critical to reported financial results if (i) the accounting estimate requires management to make assumptions about matters that are highly uncertain and (ii) different estimates that management reasonably could have used for the accounting estimate in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, could have a material impact on our financial statements. Accounting polices related to the allowance for loan losses are considered to be critical, as these policies involve considerable subjective judgment and estimation by management. We also consider accounting policies related to stock-based compensation to be critical due to the adoption of SFAS No. 123(R), which has significantly changed the way we account for stock options. Additionally, we also consider our accounting polices related to other real estate owned to be critical due to the potential significance of these activities and the estimates involved.

For additional information regarding critical accounting policies, refer to Note 1 - “Organization and Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements and the sections captioned “Application of Critical Accounting Policies and Accounting Estimates” and “Allowance for 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, 2005. There have been no significant changes in the Company's application of accounting policies since December 31, 2005, except for the adoption of SFAS No. 123(R).

- 12 -

RESULTS OF OPERATIONS

Three Months Ended March 31, 2006 Compared to Three Months Ended March 31, 2005
 

Executive Summary
 
Consolidated net income was $6.3 million and $5.7 million for the quarters ended March 31, 2006 and 2005, respectively. Diluted EPS was $1.10 for the three months ended March 31, 2006 compared to $0.93 for the same period last year.

Net interest income before provision for loan losses increased to $22.9 million for the quarter ended March 31, 2006 compared to $21.7 million for the same period last year. The increase was primarily caused by additional interest income earned due to the growth in the average balance of our loan portfolio and variable rate loans repricing to higher current market interest rates, partially offset by additional interest expense incurred due to the growth in the average balance of interest bearing liabilities as compared to the same period last year, deposits repricing to higher current market interest rates, and the addition of new borrowings at higher current market interest rates.

The return on average assets was 0.86% for the three months ended March 31, 2006, compared to 1.02% for the same period last year. The decrease in the return on average assets ratio was primarily due to the increase in average total assets, which increased to $3.0 billion for the three months ended March 31, 2006 as compared to $2.3 billion for the same period last year, as well as continued net interest margin compression and narrowing interest rate spreads caused by current competitive pricing pressures and a higher aggregate amount of lower yielding multi-family loans. The return on average shareholders’ equity was 12.52% for the three months ended March 31, 2006, compared 11.69% for the same period last year.

Loan originations were $197.2 million for the quarter ended March 31, 2006, compared to $126.3 million for the same period last year. During the current quarter, the Bank originated $120.6 million of commercial real estate loans, $66.0 million of small balance multi-family real estate loans, and $10.6 million of entertainment finance loans. Loan originations for the same period last year consisted of $41.2 million of commercial real estate loans, $69.3 million of small balance multi-family real estate loans, $15.4 million of entertainment finance loans, and $400,000 of franchise loans. In addition, the Bank’s wholesale loan operations acquired $103.6 million and $192.1 million of commercial and multi-family real estate loans during the quarters ended March 31, 2006 and 2005, respectively.

- 13 -
 
Net Interest Income and Margin

The following table presents for the three months ended March 31, 2006 and 2005, our condensed average balance sheet information, together with interest income and yields earned on average interest earning assets and interest expense and rates paid on average interest bearing liabilities. Average balances are computed using daily average balances. Nonaccrual loans are included in loans receivable.



   
For the Three Months Ended March 31,
  
   
2006
  
2005
  
   
Average Balance
  
Income/
Expense
  
Yield/
Rate
  
Average Balance
  
Income/
Expense
  
Yield/
Rate
  
   
(dollars in thousands)
  
Assets
                          
Cash and investment securities
  
$
407,871
  
$
4,291
    
4.27
%
$
417,975
  
$
4,841
    
4.70
%
Loans receivable:
                                      
Real estate loans
    
2,463,807
    
45,453
    
7.48
%
  
1,572,057
    
26,864
    
6.93
%
Other loans
   
82,222
    
1,684
    
8.31
%
  
251,410
    
5,047
    
8.14
%
Total loans receivable
    
2,546,029
    
47,137
    
7.51
%
  
1,823,467
    
31,911
    
7.10
%
                                       
Total interest earning assets
    
2,953,900
  
$
51,428
    
7.06
%
  
2,241,442
  
$
36,752
    
6.65
%
Non-interest earning assets
    
65,495
                
48,070
              
Allowance for loan losses
    
(44,684
)
              
(35,885
)
            
Total assets
  
$
2,974,711
              
$
2,253,627
              
                                       
Liabilities and Shareholders’ Equity
                                      
Interest bearing deposit accounts:
                                      
Interest bearing demand
  
$
36,146
  
$
247
    
2.77
%
$
68,860
  
$
361
    
2.13
%
Money market and passbook
    
200,345
    
1,912
    
3.87
%
  
164,218
    
986
    
2.44
%
Time certificates
    
1,465,748
    
15,039
    
4.16
%
  
1,196,498
    
8,151
    
2.76
%
Total interest bearing deposit accounts
    
1,702,239
    
17,198
    
4.10
%
  
1,429,576
    
9,498
    
2.69
%
FHLB advances and other borrowings
    
934,677
    
9,362
    
4.06
%
  
498,535
    
3,832
    
3.12
%
Junior subordinated debentures
    
86,600
    
1,958
    
9.17
%
  
86,600
    
1,680
    
7.87
%
                                       
Total interest bearing liabilities
    
2,723,516
  
$
28,518
    
4.25
%
  
2,014,711
  
$
15,010
    
3.02
%
Non-interest bearing demand accounts
    
14,508
                
17,126
              
Other non-interest bearing liabilities
    
31,607
                
25,813
              
Shareholders’ equity
    
205,080
                
195,977
              
Total liabilities and
shareholders’ equity
  
$
2,974,711
              
$
2,253,627
              
Net interest spread (1)
                
2.81
%
              
3.63
%
                                       
Net interest income before provision
for loan losses
        
$
22,910
              
$
21,742
        
Net interest margin (2)
                
3.15
%
              
3.93
%
                                       
____________
(1) Average yield on interest earning assets minus average rate paid on interest bearing liabilities.
(2) Net interest income divided by total average interest earning assets.

The following table sets forth a summary of the changes in interest income and interest expense resulting from changes in average interest earning asset and interest bearing liability balances and changes in average interest rates. The change in interest due to both volume and rate has been allocated to change due to volume and rate in proportion to the relationship of absolute dollar amounts of each.

- 14 -


   
For the Three Months Ended
March 31, 2006 and 2005
  
   
Increase (Decrease) Due to:
  
   
Rate
  
Volume
  
Total
  
   
(in thousands)
  
Interest and fees earned from:
              
Cash and investment securities
  
$
(435
)
$
(115
)
$
(550
)
Loans
    
1,936
    
13,290
    
15,226
  
                     
Total increase in interest income
    
1,501
    
13,175
    
14,676
  
                     
Interest paid on:
                    
Deposit accounts
    
5,645
    
2,055
    
7,700
  
FHLB advances and other borrowings
    
1,417
    
4,113
    
5,530
  
Junior subordinated debentures
    
278
    
—
    
278
  
 
                    
Total increase in interest expense
    
7,340
    
6,168
    
13,508
  
                     
Increase (decrease) in net interest income
  
$
(5,839
)
$
7,007
  
$
1,168
  

Total interest income increased $14.7 million to $51.4 million during the current quarter as compared to $36.8 million for the same period last year. The increase in interest income was primarily attributable to a $722.6 million increase in the average balance of total loans receivable and a 41 basis point increase in the average yield earned on total loans receivable, partially offset by a $10.1 million decrease in the average balance of cash and investment securities, and a 43 basis point decrease in the average yield earned on cash and investment securities.

The average balance of cash and investment securities decreased to $407.9 million in the first quarter of 2006 compared to $418.0 million during the same period last year. The decrease in average cash and investment securities was primarily due to a decrease in the average balance of higher yielding investment securities held-to-maturity, partially offset by an increase in investment securities available-for-sale, and cash and cash equivalents as compared to the same period last year. The average yield earned on cash and investments decreased to 4.27% during the current quarter as compared to 4.70% for the same period last year.

The average aggregate balance of our loan portfolio was $2.5 billion and $1.8 billion for the three months ended March 31, 2006 and 2005, respectively. Commercial real estate and construction loans had an average aggregate balance of $803.6 million during the quarter ended March 31, 2006 compared to $720.4 million during the same period last year. Multi-family real estate loans had an average aggregate balance of $1.6 billion during the quarter ended March 31, 2006 compared to $818.2 million during the same period last year. Single-family residential loans had an average aggregate balance of $97.2 million during the quarter ended March 31, 2006 compared to $545,000 during the same period last year. The average aggregate balance of entertainment finance loans was $59.6 million and $99.5 million during the quarters ended March 31, 2006 and 2005, respectively. The average aggregate balance of franchise loans was $12.9 million and $137.7 million during the quarters ended March 31, 2006 and 2005, respectively.


- 15 -

The average yield earned on total loans increased to 7.51% during the quarter ended March 31, 2006 as compared to 7.10% during the same period last year. The increase in yield was primarily due to adjustable rate loans repricing to higher current interest rates. A majority of our loan portfolio is comprised of adjustable rate loans indexed to either six month LIBOR or the Prime Rate, most with interest rate floors and caps below and above which the loan’s contractual interest rate may not adjust. Approximately 58.3% of our loan portfolio was adjustable at March 31, 2006, and approximately 39.2% of the loan portfolio was comprised of hybrid loans, which after an initial fixed rate period of three or five years, will convert to an adjustable interest rate for the remaining term of the loan. Our adjustable rate loans generally reprice on a quarterly or semi-annual basis with increases generally limited to maximum adjustments of 2% per year up to 5% for the life of the loan. At March 31, 2006, approximately $2.4 billion, or 92.1%, of our adjustable loan portfolio contained interest rate floors, below which the loans’ contractual interest rate may not adjust. The inability of our loans to adjust downward can contribute to increased income in periods of declining interest rates, and also assists us in our efforts to limit the risks to earnings resulting from changes in interest rates, subject to the risk that borrowers may refinance these loans during periods of declining interest rates. At March 31, 2006, the weighted average floor interest rate of these loans was 6.08%. At that date, approximately $76.5 million, or 2.9%, of these loans were at their floors at the end of the quarter. At March 31, 2006, 63.2% of the adjustable rate loans outstanding had a lifetime interest rate cap. The weighted-average lifetime interest rate cap on our adjustable rate loan portfolio was 11.35%.

Total interest expense increased by $13.5 million to $28.5 million during the current quarter, compared to $15.0 million for the same period last year. The increase in interest expense was primarily attributable to an increase of $708.8 million in the average balance of interest bearing liabilities, which was caused by the increase in deposits and FHLB advances and other borrowings, and a 123 basis point increase in the rate paid on interest bearing liabilities, which was primarily caused by deposits repricing to higher current market interest rates, as well as the addition of new borrowings and deposits at higher current market interest rates.

Our average cost of funds increased to 4.25% during the three months ended March 31, 2006, compared to 3.02% for the same period last year. As discussed above, the increase in the average funding costs was primarily due to deposits repricing to higher current market interest rates, and the addition of FHLB advances and other borrowings at higher current market interest rates. The average rate paid on deposit accounts was 4.10% during the three months ended March 31, 2006 as compared to 2.69% for the same period last year. The average balance of deposit accounts increased $272.7 million to $1.7 billion for the three months ended March 31, 2006 as compared to $1.4 billion for the same period last year. The average rate paid on FHLB advances and other borrowings was 4.06% during the three months ended March 31, 2006 compared to 3.12% for the same period last year. FHLB advances and other borrowings averaged $934.7 million during the current quarter, compared to $498.5 million for the same period last year.

Net interest margin decreased to 3.15% for the three months ended March 31, 2006 as compared to 3.93% for the same period last year. This decrease was caused by an 82 basis point decline in our net interest spread and a $712.5 million increase in our average interest earning assets.

- 16 -

Provision for Loan Losses

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

·
the risk characteristics of various classifications of loans;
·
general portfolio trends relative to asset and portfolio size;
·
asset categories;
·
potential credit and geographic concentrations;
·
delinquency trends and nonaccrual loan levels;
·
historical loss experience and risks associated with changes in economic, social and business conditions; and
·
the underwriting standards in effect when the loan was made.
 
Accordingly, the evaluation of the adequacy of the allowance for loan losses is not based solely on the level of nonperforming assets. The quantitative factors, included above, are utilized by our management to identify two different risk groups (1) individual loans (loans with specifically identifiable risks); and (2) homogeneous loans (groups of loan with similar characteristics). We base the allocation for individual loans primarily on risk rating grades assigned to each of these loans as a result of our loan management and review processes. We then assign each risk-rating grade a loss ratio, which is determined based on the experience of management and our independent loan review process. We estimate losses on impaired loans based on estimated cash flows discounted at the loan’s original effective interest rate or based on the underlying collateral value. Based on management’s experience, we also assign loss ratios to groups of loans. These loss ratios are assigned to the various homogenous categories of the portfolio.

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

Management believes that our allowance for loan losses as of March 31, 2006 was adequate to absorb the known and inherent risks of loss in the loan portfolio at that date. While management believes the estimates and assumptions used in its determination of the adequacy of the allowance are reasonable, there can be no assurance that such estimates and assumptions will not be proven incorrect in the future, or that the actual amount of future provisions will not exceed the amount of past provisions or that any increased provisions that may be required will not adversely impact our financial condition and results of operations. In addition, the determination of the amount of the Bank’s allowance for loan losses is subject to review by bank regulators, as part of the routine examination process, which may result in the establishment of additional reserves based upon their judgment of information available to them at the time of their examination.

- 17 -
 
The consolidated provision for loan losses totaled $750,000 for the quarters ended March 31, 2006 and 2005, respectively. The provision for loan losses was recorded based on an analysis of the factors referred to above. The allowance for loan losses as a percentage of our total loans was 1.71% at March 31, 2006 and December 31, 2005, respectively. During the quarter ended March 31, 2006, we had net loan recoveries of $885,000, compared to net loan change-offs of $316,000 during the same period last year. See also - “Financial Condition - Credit Risk”.

Non-Interest Income

Non-interest income increased to $717,000 during the quarter ended March 31, 2006 as compared to ($20,000) for the same period last year. This increase was attributable to additional fees earned on customer accounts during the current period, partially offset by a valuation adjustment recorded during the quarter ended March 31, 2005, related to the Company’s executive deferred compensation plan and an impairment recognized on the Company’s residual interest in the 2002 securitization of our residential loan portfolio. See also - “Notes to the Unaudited Consolidated Financial Statements - Note 6 - Residual Interest in Securitization”.

Non-Interest Expense

Non-interest expense totaled $12.1 million for the current quarter, compared to $11.2 million for the same period last year. The increase in non-interest expense was caused by the additional overhead expenses incurred in connection with the national expansion of our loan production platform over the same period last year. Our efficiency ratio (defined as recurring general and administrative expenses as a percentage of net revenue) improved to 50.9% for the quarter ended March 31, 2006, as compared to 51.7% for the same period last year.

FINANCIAL CONDITION
 
Total assets increased to $3.2 billion at March 31, 2006 as compared to $3.1 billion at December 31, 2005. The increase in total assets was primarily due to a $93.5 million increase in our loan portfolio and a $15.7 million increase in cash and cash equivalents, partially offset by a $10.9 million decline in investment securities held-to-maturity and a $1.6 million increase in the allowance for loan losses. The increase in the loan portfolio was primarily due to the loan production of $300.8 million and a decline in loan prepayment speeds experienced during the three months ended March 31, 2006. At March 31, 2006, gross loans totaled $2.7 billion, including approximately $2.6 billion of real estate loans, $57.1 million of entertainment finance loans, and $22.4 million of other loans. Total deposit accounts increased to $1.8 billion at March 31, 2006 from $1.7 billion at December 31, 2005. Management believes that a significant portion of deposits will remain with us upon maturity based on our historical experience regarding retention of deposits. FHLB advances and other borrowings increased to $1.0 billion at March 31, 2006, compared to $992.6 million at December 31, 2005.

- 18 -
 
CREDIT RISK

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

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

   
March 31,
2006
  
December 31,
2005
  
   
(dollars in thousands)
  
Nonaccrual loans:
          
Real estate
 
$
4,207
  
$
6,117
  
Franchise
    
7,344
    
7,366
  
Entertainment finance
    
10,379
    
10,780
  
Total nonaccrual loans
    
21,930
    
24,263
  
Other real estate owned, net
    
6,240
    
3,960
  
Total nonperforming assets
    
28,170
    
28,223
  
Performing troubled debt restructurings
    
20,541
    
10,758
  
Total nonperforming assets and performing troubled debt restructurings
  
$
48,711
  
$
38,981
  
               
Nonaccrual loans to total loans
    
0.83
%
  
0.95
%
Allowance for loan losses to nonaccrual loans
    
207.26
%
  
180.59
%
Nonperforming assets to total assets
    
0.89
%
  
0.92
%

As of March 31, 2006 and December 31, 2005, other loans of concern totaled $75.7 million and $66.4 million, respectively. Other loans of concern, which includes performing troubled debt restructurings, consist of loans with respect to which known information concerning possible credit problems with the borrowers or the cash flows of the collateral securing the respective loans has caused management to be concerned about the ability of the borrowers to comply with present loan repayment terms, which may result in the future inclusion of such loans in the nonaccrual category. The increase in other loans of concern for the three months ended March 31, 2006 was primarily due to $18.7 million of new other loans of concern, partially offset by $4.0 million of loan repayments, $2.5 million of loans being upgraded, and $2.9 million of loans being transferred to nonperforming assets. The increase in new other loans of concern primarily resulted from the inclusion of two lending relationships. One of these relationships also contributed to the increase in performing troubled debt restructurings at March 31, 2006.

- 19 -

The following table provides certain information with respect to our allowance for loan losses, including charge-offs, recoveries and selected ratios for the periods indicated.

   
For the
Three Months Ended
March 31, 2006
  
For the
Year Ended
December 31, 2005
  
For the
Three Months Ended
March 31, 2005
  
   
(dollars in thousands)
  
               
Balance at beginning of period
  
$
43,817
  
$
35,483
  
$
35,483
  
Provision for loan losses
    
750
    
10,250
    
750
  
Charge-offs
    
—
    
(2,430
)
  
(508
)
Recoveries
    
885
    
514
    
192
  
Net recoveries (charge-offs)
    
885
   
(1,916
)
  
(316
)
                     
Balance at end of period
  
$
45,452
  
$
43,817
  
$
35,917
  
                     
Allowance for loan losses as a percentage of loans, net
    
1.71
%
  
1.71
%
  
1.78
%

Liquidity

Liquidity refers to our ability to maintain cash flows adequate to fund operations and meet obligations and other commitments on a timely basis, including the payment of maturing deposits and the origination or purchase of new loans. We maintain a cash and investment securities portfolio designed to satisfy operating liquidity requirements while preserving capital and maximizing yield. As of March 31, 2006, we held $109.4 million of cash and cash equivalents (consisting primarily of short-term investments with original maturities of 90 days or less) and $93.9 million of investment securities classified as available-for-sale.

Short-term fixed income investments classified as cash equivalents consisted of interest bearing deposits at financial institutions, overnight repurchase agreement investments, government money market funds and short-term government agency securities, while investment securities available-for-sale consisted primarily of fixed income instruments, which were rated “AAA”, or equivalent by nationally recognized rating agencies. In addition, our liquidity position is supported by a credit facility with the Federal Home Loan Bank of San Francisco. As of March 31, 2006, we had remaining available borrowing capacity under this credit facility of $238.7 million, net of the $12.6 million of additional Federal Home Loan Bank stock that we would be required to purchase to support those additional borrowings. We also had available $80.0 million of uncommitted, unsecured lines of credit with three unaffiliated financial institutions, and a $25.0 million revolving credit facility with an unaffiliated financial institution.

Capital Resources

The Company, the Bank’s holding company, had Tier 1 leverage, Tier 1 risk based and total risk-based capital ratios at March 31, 2006 of 9.0%, 10.5% and 12.4%, respectively, which represents $119.7 million, $114.8 million and $61.5 million, respectively, of capital in excess of the amount required to be “well capitalized.” These ratios were 9.1%, 11.0% and 13.0% as of December 31, 2005, respectively.

The Bank had Tier 1 leverage, Tier 1 risk based and total risk-based capital ratios at March 31, 2006 of 9.2%, 10.7% and 11.9%, respectively, which represents $123.9 million, $118.9 million and $49.2 million, respectively, of capital in excess of the amount required to be “well capitalized” for regulatory purposes. These ratios were 9.1%, 11.0% and 12.2% as of December 31, 2005, respectively.

At March 31, 2006, shareholders' equity totaled $204.0 million, or 6.5% of total assets. Our book value per share of common stock was $38.68 as of March 31, 2006, as compared to $37.85 as of December 31, 2005, and $35.33 as of March 31, 2005.
 

- 20 -
 
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, 2005.
 
Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures: An evaluation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Act”)) was carried out as of March 31, 2006 under the supervision and with the participation of the Company’s Chief Executive Officer, Chief Financial Officer and several other members of the Company’s senior management. The Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2006, the Company’s disclosure controls and procedures were effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Act is (i) accumulated and communicated to the Company’s management (including the Chief Executive Officer and Chief Financial Officer) to allow timely decisions regarding required disclosure, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

(b) Changes in Internal Control over Financial Reporting: During the quarter ended March 31, 2006, no change occurred in the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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



- 21 -
 
PART II - OTHER INFORMATION
 
 
Item 1. Legal Proceedings
 
We are party to certain legal proceedings incidental to our business. Management believes that the outcome of such currently pending proceedings, in the aggregate, will not have a material effect on our financial condition or results of operations.
 
Item 1A. Risk Factors
 
There have been no material changes to the risk factors set forth in Part I. Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
The following table sets forth the repurchases of our common stock for the fiscal quarter ended March 31, 2006.
 
 
 
 
 
Period
  
 
 
 
Total Number of Shares Purchased
  
 
 
 
Average Price Paid per Share
  
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
  
Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs(1)
  
 
January 1, 2006 to
January 31, 2006
    
23,493
  
$
48.75
    
23,493
    
223,503
  
February 1, 2006 to
February 28, 2006
    
54,370
    
46.29
    
54,370
    
169,133
  
March 1, 2006 to
March 31, 2006
    
54,918
    
46.37
    
54,918
    
393,961
  
 
Total
    
132,781
  
$
46.76
    
132,781
    
393,961
  

(1) The repurchases during January, February, and March 2006 were made under the eleventh extension of our stock repurchase program, which was announced on October 18, 2005. On March 14, 2006, the twelfth extension to the stock repurchase program was announced. The extensions authorized the repurchase of an additional 5% of the outstanding shares as of their respective authorization dates. At March 31, 2006, 393,961 shares remained available for repurchase under the eleventh and twelfth extensions. 

 
Item 3 . Defaults Upon Senior Securities
 
Not applicable.
 
Item 4 . Submission of Matters to a Vote of Security Holders
 
None.
 
Item 5 . Other Information
 
None.
 
Item 6 . Exhibits
 
See exhibit index.
 
 
 

- 22 -

 
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 CORPORATION
  
     
Date: May 10, 2006
/s/ George W. Haligowski
  
 
George W. Haligowski
  
 
Chairman of the Board, President and
  
 
Chief Executive Officer
  

Date: May 10, 2006
/s/ Timothy M. Doyle
 
 
Timothy M. Doyle
  
 
Executive Managing Director and
  
 
Chief Financial Officer
  




- 23 -

EXHIBIT INDEX
Regulation S-K Exhibit Number
  
Document
  
Reference to Prior Filling or Exhibit Number Attached Hereto
         
3.1
  
Certificate of Incorporation
  
**
3.2
  
Bylaws, as amended
  
****
4
  
Instruments Defining the Rights of Security Holders, Including Indentures
  
**********
10.1
  
2005 Re-Designated, Amended and Restated Stock Option Plan For Nonemployee Directors (“NEDP”)
  
******
10.2
  
Amended and Restated 2005 Re-Designated, Amended and Restated Employee Stock Incentive Plan (“ESIP”)
  
*********
10.3a
  
Nonqualified (Non-Employer Securities) Deferred Compensation Plan
  
*********
10.3b
  
Nonqualified (Employer Securities Only) Deferred Compensation Plan
  
*********
10.4
  
Supplemental Salary Savings Plan
  
*
10.5
  
Data Processing Agreement
  
*
10.6a
  
Amended and Restated Employment Agreement with George W. Haligowski
  
*********
10.6b
  
Non-Competition and Non-Solicitation Agreement with George W. Haligowski
  
*********
10.7
  
Change in Control Severance Agreement with Norval L. Bruce
  
*********
10.8
  
Change in Control Severance Agreement with Timothy M. Doyle
  
*********
10.9
  
Change in Control Severance Agreement with Lyle C. Lodwick
  
*********
10.10
  
Change in Control Severance Agreement with Maria P. Kunac
  
*********
10.11
  
Recognition and Retention Plan
  
**
10.12
  
Voluntary Retainer Stock and Deferred Compensation Plan for Outside Directors
  
*****
10.13
  
Amended and Restated Supplemental Executive Retirement Plan
  
*********
10.14
  
ITLA Capital Corporation Rabbi Trust Agreement
  
***
10.15
  
Amended and Restated Salary Continuation Plan
  
*********
10.16
  
Form of Incentive Stock Option Agreement under ESIP
 
*******
10.17
  
Form of Non-Qualified Stock Option Agreement under the ESIP
  
*******
10.18
  
Form of Non-Qualified Stock Option Agreement under the NEDP
  
********
10.19
  
Description of Named Executive Officer Salary, Bonus and Perquisite Arrangements for 2006
  
***********
10.20
  
Description of Director Fee Arrangements
  
***********
11
  
Statement Regarding Computation of Per Share Earnings
  
Not Required
15
  
Letter Regarding Unaudited Interim Financial Information
  
None
18
  
Letter Regarding Change in Accounting Principles
  
None
19
  
Report Furnished to Security Holders
  
None
22
  
Published Report Regarding Matters Submitted to Vote of Security Holders
  
None
23.1
 
Consent of Experts
  
Not Required
24
  
Power of Attorney
  
None
31.1
  
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
  
31.1
31.2
  
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
  
31.2
32
  
Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer
  
32

*
Filed as an exhibit to Imperial’s Registration Statement on Form S-1 (File No. 33-96518) filed with the Commission on September 1, 1995, pursuant to Section 5 of the Securities Act of 1933.
* *
Filed as an exhibit to the Company’s Registration Statement on Form S-4 (File No. 333-03551) filed with the Commission on May 10, 1996, pursuant to Section 5 of the Securities Act of 1933.
* * *
Filed as an exhibit to the Company’s Form 10-K for the year ended December 31, 1999 (File No. 0-26960).
* * * *
Filed as an exhibit to the Company’s Form 10-Q for the quarter ended June 30, 2000 (File No. 0-26960).
* * * * *
Filed as an exhibit to Amendment No. Two to the Company’s Registration Statement on Form S-4 (File No. 333-03551) filed with the Commission on June 19, 1996.
* * * * * *
Filed as an appendix to the Company’s definitive proxy materials filed on June 27, 2005.
* * * * * * *
Filed as an exhibit to the Company’s Current Report on Form 8-K filed on August 9, 2005.
* * * * * * * *
Filed as an exhibit to the Company’s Current Report on Form 8-K filed on November 4, 2005.
* * * * * * * * *
Filed as an exhibit to the Company’s Current Report on Form 8-K filed on February 24, 2006.
* * * * * * * * * *
The Company hereby agrees to furnish the SEC, upon request, copies of the instruments defining the rights of the holders of each issue of the Company's long-term debt.
* * * * * * * * * * *
Filed as an exhibit to the Company’s Form 10-K for the year ended December 31, 2005.