##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 FORM 10-Q
 þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended June 30, 2008.
 or
 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: 0-13585
 INTEGRA BANK CORPORATION
  INDIANA
    
    35-1632155(State or other jurisdiction of incorporation or organization)
    
    (IRS Employee Identification No.)PO BOX 868, EVANSVILLE, INDIANA
    
    47705-0868(Address of principal executive offices)
    
    (Zip Code)
  þ o
 
 Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ
  CLASS
    
    OUTSTANDING AT JULY 24, 2008(Common stock, $1.00 Stated Value)
    
    20,751,589




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##### 



INTEGRA BANK CORPORATION
 INDEX
 PAGE NO.PART I  FINANCIAL INFORMATIONItem 1. Unaudited Financial StatementsConsolidated balance sheets-
June 30, 2008 and December 31, 2007
    
    
    3Consolidated statements of income-
Three months and six months ended June 30, 2008 and 2007
    
    
    4Consolidated statements of comprehensive income-
Three months and six months ended June 30, 2008 and 2007
    
    
    5Consolidated statements of changes in shareholders equity-
Six months ended June 30, 2008
    
    
    6Consolidated statements of cash flow-
Six months ended June 30, 2008 and 2007
    
    
    7Notes to unaudited consolidated financial statements
    
    
    8Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    21Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    33Item 4. Controls and Procedures
    
    
    34PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    35Item 1A. Risk Factors
    
    
    35Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    35Item 3. Defaults Upon Senior Securities
    
    
    35Item 4. Submissions of Matters to a Vote of Security Holders
    
    
    35Item 5. Other Information
    
    
    36Item 6. Exhibits
    
    
    36Signatures
    
    
    37Exhibit 31.1Exhibit 31.2Exhibit 32
   2




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 ITEM 1. Unaudited Financial Statements
 INTEGRA BANK CORPORATION and Subsidiaries
 
 Unaudited Consolidated Balance Sheets
 June 30,
    
    
    December 31,2008
    
    
    2007ASSETSCash and due from banks
    
    $
    92,114
    
    
    $
    72,360Federal funds sold and other short-term investments
    
    
    8,529
    
    
    
    3,630Total cash and cash equivalents
    
    
    100,643
    
    
    
    75,990Loans held for sale (at lower of cost or fair value)
    
    
    6,045
    
    
    
    5,928Securities available for sale
    
    
    565,459
    
    
    
    582,954Securities held for trading
    
    
    
    
    
    
    53,782Regulatory stock
    
    
    29,181
    
    
    
    29,179Loans, net of unearned income
    
    
    2,409,997
    
    
    
    2,311,378Less: Allowance for loan losses
    
    
    (31,780
    )
    
    
    (27,261
    )Net loans
    
    
    2,378,217
    
    
    
    2,284,117Premises and equipment
    
    
    49,758
    
    
    
    50,552Goodwill
    
    
    122,824
    
    
    
    123,050Other intangible assets
    
    
    10,790
    
    
    
    11,652Other assets
    
    
    138,293
    
    
    
    132,922TOTAL ASSETS
    
    $
    3,401,210
    
    
    $
    3,350,126LIABILITIESDeposits:Non-interest-bearing demand
    
    $
    304,549
    
    
    $
    265,554Interest-bearing:Savings, interest checking
and money market accounts
    
    
    950,194
    
    
    
    918,023Time deposits of $100 or more
    
    
    516,815
    
    
    
    505,491Other interest-bearing
    
    
    552,090
    
    
    
    651,069Total deposits
    
    
    2,323,648
    
    
    
    2,340,137Short-term borrowings
    
    
    370,913
    
    
    
    272,270Long-term borrowings
    
    
    359,591
    
    
    
    376,707Other liabilities
    
    
    27,594
    
    
    
    33,208TOTAL LIABILITIES
    
    
    3,081,746
    
    
    
    3,022,322Commitments and contingent liabilities (Note 9)
    
    
    
    
    
    
    SHAREHOLDERS EQUITYPreferred stock  1,000,000 shares authorizedNone outstandingCommon stock  $1.00 stated value:Shares authorized: 29,000,000Shares outstanding: 20,758,485 and 20,650,165
 respectively
    
    
    20,759
    
    
    
    20,650Additional paid-in capital
    
    
    207,802
    
    
    
    206,991Retained earnings
    
    
    99,610
    
    
    
    104,913Accumulated other comprehensive income (loss)
    
    
    (8,707
    )
    
    
    (4,750
    )TOTAL SHAREHOLDERS EQUITY
    
    
    319,464
    
    
    
    327,804TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    3,401,210
    
    
    $
    3,350,126
   3




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##### Table of Contents



INTEGRA BANK CORPORATION and Subsidiaries
 
 Unaudited Consolidated Statements of Income
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007INTEREST INCOMEInterest and fees on loans:Taxable
    
    $
    35,676
    
    
    $
    41,386
    
    
    $
    74,377
    
    
    $
    73,415Tax-exempt
    
    
    101
    
    
    
    100
    
    
    
    182
    
    
    
    201Interest and dividends on securities:Taxable
    
    
    5,840
    
    
    
    6,114
    
    
    
    12,320
    
    
    
    12,360Tax-exempt
    
    
    1,114
    
    
    
    1,381
    
    
    
    2,426
    
    
    
    2,424Dividends on regulatory stock
    
    
    409
    
    
    
    281
    
    
    
    785
    
    
    
    627Interest on loans held for sale
    
    
    90
    
    
    
    45
    
    
    
    193
    
    
    
    73Interest on federal funds sold and other short-term investments
    
    
    30
    
    
    
    60
    
    
    
    68
    
    
    
    109Total interest income
    
    
    43,260
    
    
    
    49,367
    
    
    
    90,351
    
    
    
    89,209INTEREST EXPENSEInterest on deposits
    
    
    12,851
    
    
    
    20,017
    
    
    
    29,243
    
    
    
    34,701Interest on short-term borrowings
    
    
    1,955
    
    
    
    2,264
    
    
    
    4,121
    
    
    
    4,282Interest on long-term borrowings
    
    
    3,288
    
    
    
    3,519
    
    
    
    8,303
    
    
    
    6,330Total interest expense
    
    
    18,094
    
    
    
    25,800
    
    
    
    41,667
    
    
    
    45,313NET INTEREST INCOME
    
    
    25,166
    
    
    
    23,567
    
    
    
    48,684
    
    
    
    43,896Provision for loan losses
    
    
    6,003
    
    
    
    455
    
    
    
    9,637
    
    
    
    1,190Net interest income after provision for loan losses
    
    
    19,163
    
    
    
    23,112
    
    
    
    39,047
    
    
    
    42,706NON-INTEREST INCOMEService charges on deposit accounts
    
    
    5,059
    
    
    
    5,408
    
    
    
    9,758
    
    
    
    9,626Other service charges and fees
    
    
    874
    
    
    
    839
    
    
    
    1,872
    
    
    
    1,777Commissions on annuities
    
    
    441
    
    
    
    294
    
    
    
    1,022
    
    
    
    560Debit card income-interchange
    
    
    1,376
    
    
    
    1,064
    
    
    
    2,619
    
    
    
    1,959Trust income
    
    
    554
    
    
    
    602
    
    
    
    1,113
    
    
    
    1,216Net securities gains (losses)
    
    
    (6,299
    )
    
    
    56
    
    
    
    (6,275
    )
    
    
    222Gain on sale of other assets
    
    
    (12
    )
    
    
    60
    
    
    
    (12
    )
    
    
    599Bank-owned life insurance income
    
    
    575
    
    
    
    498
    
    
    
    1,218
    
    
    
    912Other
    
    
    444
    
    
    
    1,110
    
    
    
    2,431
    
    
    
    2,275Total non-interest income
    
    
    3,012
    
    
    
    9,931
    
    
    
    13,746
    
    
    
    19,146NON-INTEREST EXPENSESalaries and employee benefits
    
    
    12,446
    
    
    
    11,693
    
    
    
    24,840
    
    
    
    22,458Occupancy
    
    
    2,541
    
    
    
    2,388
    
    
    
    5,101
    
    
    
    4,495Equipment
    
    
    955
    
    
    
    822
    
    
    
    1,883
    
    
    
    1,646Professional fees
    
    
    1,086
    
    
    
    893
    
    
    
    2,070
    
    
    
    2,030Communication and transportation
    
    
    1,602
    
    
    
    1,303
    
    
    
    3,058
    
    
    
    2,474Processing
    
    
    704
    
    
    
    624
    
    
    
    1,422
    
    
    
    1,134Software
    
    
    528
    
    
    
    499
    
    
    
    1,087
    
    
    
    966Marketing
    
    
    611
    
    
    
    570
    
    
    
    1,093
    
    
    
    1,158Low income housing project losses
    
    
    723
    
    
    
    506
    
    
    
    1,374
    
    
    
    1,123Amortization of intangible assets
    
    
    431
    
    
    
    419
    
    
    
    862
    
    
    
    652Other
    
    
    2,550
    
    
    
    2,153
    
    
    
    5,508
    
    
    
    3,901Total non-interest expense
    
    
    24,177
    
    
    
    21,870
    
    
    
    48,298
    
    
    
    42,037Income (Loss) before income taxes
    
    
    (2,002
    )
    
    
    11,173
    
    
    
    4,495
    
    
    
    19,815Income tax expense (benefit)
    
    
    (1,103
    )
    
    
    2,840
    
    
    
    421
    
    
    
    4,126NET INCOME (LOSS)
    
    $
    (899
    )
    
    $
    8,333
    
    
    $
    4,074
    
    
    $
    15,689Earnings (Loss) per share:Basic
    
    $
    (0.04
    )
    
    $
    0.41
    
    
    $
    0.20
    
    
    $
    0.83Diluted
    
    
    (0.04
    )
    
    
    0.41
    
    
    
    0.20
    
    
    
    0.82Weighted average shares outstanding:Basic
    
    
    20,554
    
    
    
    20,331
    
    
    
    20,545
    
    
    
    19,012Diluted
    
    
    20,561
    
    
    
    20,407
    
    
    
    20,569
    
    
    
    19,107Dividends per share
    
    $
    0.18
    
    
    $
    0.18
    
    
    $
    0.36
    
    
    $
    0.35
   4




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##### Table of Contents



INTEGRA BANK CORPORATION and Subsidiaries
 
 Unaudited Consolidated Statements of Comprehensive Income
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net income (loss)
    
    $
    (899
    )
    
    $
    8,333
    
    
    $
    4,074
    
    
    $
    15,689Other comprehensive income, net of tax:Unrealized gain (loss) on securities:Unrealized gain (loss) arising in period
(net of tax of $(6,715), $(2,428), $(4,776) and $(1,313), respectively)
    
    
    (11,362
    )
    
    
    (3,521
    )
    
    
    (8,082
    )
    
    
    (1,838
    )Reclassification of realized amounts
(net of tax of $2,340, $(23), $2,331 and $(90), respectively)
    
    
    3,959
    
    
    
    (33
    )
    
    
    3,944
    
    
    
    (132
    )Net unrealized gain (loss) on securities
    
    
    (7,403
    )
    
    
    (3,554
    )
    
    
    (4,138
    )
    
    
    (1,970
    )Change in net pension plan liability
(net of tax of $14 and $29 respectively for 2008)
    
    
    25
    
    
    
    
    
    
    
    50Unrealized gain on derivative hedging instruments arising in period
(net of tax of $(135), $(44), $50 and $(41), respectively)
    
    
    (243
    )
    
    
    (63
    )
    
    
    131
    
    
    
    (57
    )Net unrealized gain (loss), recognized in other comprehensive income
    
    
    (7,621
    )
    
    
    (3,617
    )
    
    
    (3,957
    )
    
    
    (2,027
    )Comprehensive income (loss)
    
    $
    (8,520
    )
    
    $
    4,716
    
    
    $
    117
    
    
    $
    13,662
   5




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##### Table of Contents



INTEGRA BANK CORPORATION and Subsidiaries
 
 Unaudited Consolidated Statements of Changes In Shareholders Equity
 AccumulatedAdditional
    
    
    
    
    
    
    OtherCommon
    
    
    Common
    
    
    Paid-in
    
    
    Retained
    
    
    ComprehensiveShares
    
    
    Stock
    
    
    Capital
    
    
    Earnings
    
    
    Income (Loss)
    
    
    TotalBALANCE AT DECEMBER 31, 2007
    
    
    20,650,165
    
    
    $
    20,650
    
    
    $
    206,991
    
    
    $
    104,913
    
    
    $
    (4,750
    )
    
    $
    327,804Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,074
    
    
    
    
    
    
    
    4,074Cash
dividend declared ($0.36 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,455
    )
    
    
    
    
    
    
    (7,455
    )Change, net of tax, in unrealized gain/loss on:Securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,138
    )
    
    
    (4,138
    )Interest rate swaps
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    131
    
    
    
    131Change in unrealized postretirement
liability, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50
    
    
    
    50Initial adoption of EITF 06-4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,922
    )
    
    
    
    
    
    
    (1,922
    )Exercise of stock options and restricted shares, net
    
    
    (3,766
    )
    
    
    (3
    )
    
    
    (51
    )
    
    
    
    
    
    
    
    
    
    
    (54
    )Grant of restricted stock, net of forfeitures
    
    
    112,086
    
    
    
    112
    
    
    
    (112
    )
    
    
    
    
    
    
    
    
    
    
    Stock-based compensation expense
    
    
    
    
    
    
    
    
    
    
    974
    
    
    
    
    
    
    
    
    
    
    
    974BALANCE AT JUNE 30, 2008
    
    
    20,758,485
    
    
    $
    20,759
    
    
    $
    207,802
    
    
    $
    99,610
    
    
    $
    (8,707
    )
    
    $
    319,464
   6




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##### Table of Contents



INTEGRA BANK CORPORATION and Subsidiaries
 
 Unaudited Consolidated Statements of Cash Flow
 Six Months EndedJune 30,2008
    
    
    2007CASH FLOWS FROM OPERATING ACTIVITIESNet income
    
    $
    4,074
    
    
    $
    15,689Adjustments to reconcile net income to
net cash provided by operating activities:Amortization and depreciation
    
    
    3,609
    
    
    
    3,272Provision for loan losses
    
    
    9,637
    
    
    
    1,190Net securities (gains) losses
    
    
    6,275
    
    
    
    (222
    )Net held for trading (gains) losses
    
    
    (321
    )
    
    
    (Gain) loss on sale of premises and equipment
    
    
    (1
    )
    
    
    (Gain) loss on sale of other real estate owned
    
    
    14
    
    
    
    (35
    )Loss on sale of other assets
    
    
    
    
    
    
    12Gain on sale of mortgage servicing rights
    
    
    
    
    
    
    (576
    )Loss on low-income housing investments
    
    
    1,374
    
    
    
    1,123Proceeds from maturity of held for trading securities
    
    
    1,684
    
    
    
    Proceeds from sale of held for trading securities
    
    
    52,419
    
    
    
    Increase (decrease) in deferred taxes
    
    
    
    
    
    
    (43
    )Net gain on sale of loans held for sale
    
    
    (469
    )
    
    
    (416
    )Proceeds from sale of loans held for sale
    
    
    66,405
    
    
    
    36,582Origination of loans held for sale
    
    
    (66,053
    )
    
    
    (39,838
    )Change in other operating
    
    
    (8,280
    )
    
    
    5,246Net cash flows provided by operating activities
    
    
    70,367
    
    
    
    21,984CASH FLOWS FROM INVESTING ACTIVITIESProceeds from maturities of securities available for sale
    
    
    76,883
    
    
    
    58,899Proceeds from sales of securities available for sale
    
    
    17,758
    
    
    
    36,653Purchase of securities available for sale
    
    
    (89,563
    )
    
    
    (6,619
    )(Increase) decrease in loans made to customers
    
    
    (106,781
    )
    
    
    1,909Purchase of premises and equipment
    
    
    (1,580
    )
    
    
    (1,467
    )Proceeds from sale of premises and equipment
    
    
    21
    
    
    
    Proceeds from sale of other real estate owned
    
    
    33
    
    
    
    505Acquisition of Prairie Financial Corp, net of cash acquired
    
    
    
    
    
    
    (30,541
    )Net cash flows provided by (used in) investing activities
    
    
    (103,229
    )
    
    
    59,339CASH FLOWS FROM FINANCING ACTIVITIESNet increase (decrease) in deposits
    
    
    (16,579
    )
    
    
    (7,920
    )Excess income tax benefit from employee stock-based awards
    
    
    
    
    
    
    9Net increase (decrease) in short-term borrowed funds
    
    
    98,643
    
    
    
    (14,545
    )Proceeds from long-term borrowings
    
    
    50,000
    
    
    
    76,619Repayment of long-term borrowings
    
    
    (67,114
    )
    
    
    (113,708
    )Repurchase of common stock
    
    
    
    
    
    
    (9,556
    )Dividends paid
    
    
    (7,435
    )
    
    
    (6,030
    )Proceeds from exercise of stock options
    
    
    
    
    
    
    212Net cash flows provided by (used in) financing activities
    
    
    57,515
    
    
    
    (74,919
    )Net increase in cash and cash equivalents
    
    
    24,653
    
    
    
    6,404Cash and cash equivalents at beginning of period
    
    
    75,990
    
    
    
    69,398Cash and cash equivalents at end of period
    
    $
    100,643
    
    
    $
    75,802SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONSOther real estate acquired in settlement of loans
    
    
    3,088
    
    
    
    3,097Dividends declared and not paid
    
    
    3,737
    
    
    
    3,713
   7




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##### Table of Contents



INTEGRA BANK CORPORATION and Subsidiaries
 
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 BASIS OF PRESENTATION
    RECENT ACCOUNTING PRONOUNCEMENTS:
      8




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##### Table of Contents



FAIR VALUE MEASUREMENT
   Level 1:
 Level 2:
 Level 3:
  Securities:
  Loans held for sale:
  9




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##### Table of Contents



Derivatives:
 Impaired Loans:
  Quoted Pricesin ActiveMarkets for
    
    
    SignificantIdentical
    
    
    Other
    
    
    SignificantAssets and
    
    
    Observable
    
    
    UobservableLiabilities
    
    
    Inputs
    
    
    Inputs
    
    
    Balance as of(Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    June 30, 2008AssetsSecurities,
available for sale
    
    $
    
    
    
    $
    528,753
    
    
    $
    36,706
    
    
    $
    565,459Derivatives
    
    
    
    
    
    
    2,385
    
    
    
    
    
    
    
    2,385LiabilitiesDerivatives
    
    $
    
    
    
    $
    1,748
    
    
    $
    
    
    
    $
    1,748
  Quoted Pricesin ActiveMarkets for
    
    
    SignificantIdentical
    
    
    Other
    
    
    SignificantAssets and
    
    
    Observable
    
    
    UobservableLiabilities
    
    
    Inputs
    
    
    Inputs
    
    
    Balance as of(Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    June 30, 2008AssetsImpaired loans
    
    $
    
    
    
    $
    
    
    
    $
    14,282
    
    
    $
    14,282Loans held for sale
    
    
    6,045
    
    
    
    
    
    
    
    
    
    
    
    6,045Liabilities
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    10




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##### Table of Contents



Fair Value Measurements Using SignificantUnobservable Inputs (Level 3)SecuritiesAvailable for sale
    
    
    TotalBeginning Balance
    
    $
    
    
    
    $
    Transfers in and/or
out of Level 3
    
    
    36,706
    
    
    
    36,706Ending Balance
    
    $
    36,706
    
    
    $
    36,706
   STOCK-BASED COMPENSATION:
     2008
    
    
    2007Number of options/SARs granted
    
    
    209,198
    
    
    
    175,964Stock price
    
    $
    13.92
    
    
    $
    20.71Risk-free interest rate
    
    
    3.32
    %
    
    
    4.76
    %Expected life, in years
    
    
    6
    
    
    
    6Expected volatility
    
    
    22.36
    %
    
    
    21.10
    %Expected dividend yield
    
    
    5.18
    %
    
    
    2.94
    %Estimated fair value per option
    
    $
    1.78
    
    
    $
    6.54
  11




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##### Table of Contents



June 30, 2008Weighted Average
    
    
    AggregateWeighted Average
    
    
    Remaining Term
    
    
    IntrinsicShares
    
    
    Exercise Price
    
    
    (In years)
    
    
    ValueOptions/SARs outstanding at December 31,
2007
    
    
    1,386,983
    
    
    $
    21.74Options/SARs granted
    
    
    209,198
    
    
    
    13.92Options/SARs exercised
    
    
    
    
    
    
    Options/SARs forfeited/expired
    
    
    (917
    )
    
    
    22.55Options/SARs outstanding at June 30, 2008
    
    
    1,595,264
    
    
    $
    20.71
    
    
    
    6.1
    
    
    $
    20Options/SARs exercisable at June 30, 2008
    
    
    1,185,000
    
    
    $
    21.47
    
    
    
    5.1
    
    
    $
    20
    Weighted-AverageGrant-DateShares
    
    
    Fair ValueRestricted shares outstanding, December 31,
2007
    
    
    113,962
    
    
    $
    22.80Shares granted
    
    
    112,648Shares vested
    
    
    (32,887
    )Shares forfeited
    
    
    (562
    )Restricted shares outstanding, June 30, 2008
    
    
    193,161
    
    
    $
    17.70
   12




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##### Table of Contents



NOTE 2. EARNINGS PER SHARE
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net income (loss)
    
    $
    (899
    )
    
    $
    8,333
    
    
    $
    4,074
    
    
    $
    15,689Weighted average shares outstanding  Basic
    
    
    20,553,528
    
    
    
    20,330,795
    
    
    
    20,545,144
    
    
    
    19,011,965Incremental shares related to stock compensation
    
    
    7,186
    
    
    
    75,966
    
    
    
    23,721
    
    
    
    95,027Average shares outstanding  Diluted
    
    
    20,560,714
    
    
    
    20,406,761
    
    
    
    20,568,865
    
    
    
    19,106,992Earnings (Loss) per share  Basic
    
    $
    (0.04
    )
    
    $
    0.41
    
    
    $
    0.20
    
    
    $
    0.83Effect of incremental shares related to stock
compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.01
    )Earnings (Loss) per share  Diluted
    
    $
    (0.04
    )
    
    $
    0.41
    
    
    $
    0.20
    
    
    $
    0.82
   13




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##### Table of Contents



NOTE 3. SECURITIES
  Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueJune 30, 2008:U.S. Government agencies
    
    $
    1,004
    
    
    $
    4
    
    
    $
    2
    
    
    $
    1,006Collateralized Mortgage Obligations:Agency
    
    
    251,423
    
    
    
    365
    
    
    
    6,117
    
    
    
    245,671Private Label
    
    
    38,704
    
    
    
    
    
    
    
    2,528
    
    
    
    36,176Mortgage-backed securities
    
    
    143,702
    
    
    
    719
    
    
    
    510
    
    
    
    143,911Trust Preferred
    
    
    42,892
    
    
    
    58
    
    
    
    6,244
    
    
    
    36,706States & political subdivisions
    
    
    94,615
    
    
    
    2,321
    
    
    
    182
    
    
    
    96,754Other securities
    
    
    5,298
    
    
    
    
    
    
    
    63
    
    
    
    5,235Total
    
    $
    577,638
    
    
    $
    3,467
    
    
    $
    15,646
    
    
    $
    565,459
 Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueDecember 31, 2007:U.S. Government agencies
    
    $
    16,074
    
    
    $
    69
    
    
    $
    1
    
    
    $
    16,142Collateralized Mortgage Obligations:Agency
    
    
    238,608
    
    
    
    486
    
    
    
    4,430
    
    
    
    234,664Private Label
    
    
    41,936
    
    
    
    90
    
    
    
    707
    
    
    
    41,319Mortgage-backed securities
    
    
    122,976
    
    
    
    661
    
    
    
    826
    
    
    
    122,811FHLMC Preferred stock
    
    
    9,973
    
    
    
    
    
    
    
    
    
    
    
    9,973Trust Preferred
    
    
    49,860
    
    
    
    110
    
    
    
    3,726
    
    
    
    46,244States & political subdivisions
    
    
    104,528
    
    
    
    2,385
    
    
    
    94
    
    
    
    106,819Other securities
    
    
    5,013
    
    
    
    
    
    
    
    31
    
    
    
    4,982Total
    
    $
    588,968
    
    
    $
    3,801
    
    
    $
    9,815
    
    
    $
    582,954
  Less than 12 Months
    
    
    12 Months or More
    
    
    TotalUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedJune 30, 2008
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    LossesU.S. Government Agencies
    
    $
    627
    
    
    $
    2
    
    
    $
    
    
    
    $
    
    
    
    $
    627
    
    
    $
    2Collateralized mortgage obligations:Agency
    
    
    141,722
    
    
    
    3,074
    
    
    
    35,111
    
    
    
    3,043
    
    
    
    176,833
    
    
    
    6,117Private label
    
    
    27,925
    
    
    
    1,310
    
    
    
    8,251
    
    
    
    1,218
    
    
    
    36,176
    
    
    
    2,528Mortgage-backed securities
    
    
    41,864
    
    
    
    417
    
    
    
    10,085
    
    
    
    93
    
    
    
    51,949
    
    
    
    510Trust Preferred
    
    
    11,786
    
    
    
    2,868
    
    
    
    5,628
    
    
    
    3,376
    
    
    
    17,414
    
    
    
    6,244State & political subdivisions
    
    
    9,433
    
    
    
    164
    
    
    
    475
    
    
    
    18
    
    
    
    9,908
    
    
    
    182Other securities
    
    
    2,647
    
    
    
    63
    
    
    
    
    
    
    
    
    
    
    
    2,647
    
    
    
    63Total
    
    $
    236,004
    
    
    $
    7,898
    
    
    $
    59,550
    
    
    $
    7,748
    
    
    $
    295,554
    
    
    $
    15,646
     14




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##### Table of Contents



NOTE 4. ALLOWANCE FOR LOAN LOSSES
   Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Beginning Balance
    
    $
    28,590
    
    
    $
    21,165
    
    
    $
    27,261
    
    
    $
    21,155Allowance associated with purchase acquisitions
    
    
    
    
    
    
    5,982
    
    
    
    
    
    
    
    5,982Loans charged off
    
    
    (3,128
    )
    
    
    (1,638
    )
    
    
    (5,882
    )
    
    
    (2,711
    )Recoveries
    
    
    315
    
    
    
    426
    
    
    
    764
    
    
    
    774Provision for loan losses
    
    
    6,003
    
    
    
    455
    
    
    
    9,637
    
    
    
    1,190Ending Balance
    
    $
    31,780
    
    
    $
    26,390
    
    
    $
    31,780
    
    
    $
    26,390Percent of total loans
    
    
    1.32
    %
    
    
    1.19
    %
    
    
    1.32
    %
    
    
    1.19
    %Annualized % of average loans:Net charge-offs
    
    
    0.48
    %
    
    
    0.22
    %
    
    
    0.44
    %
    
    
    0.20
    %Provision for loan losses
    
    
    1.02
    %
    
    
    0.08
    %
    
    
    0.82
    %
    
    
    0.12
    %
   15




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##### Table of Contents



June 30,
    
    
    December 31,2008
    
    
    2007Nonaccrual loans
    
    $
    50,162
    
    
    $
    18,54990 days or more past due loans
    
    
    312
    
    
    
    4,118Total non-performing loans
    
    
    50,474
    
    
    
    22,667Other real estate owned
    
    
    5,940
    
    
    
    2,923Total non-performing assets
    
    $
    56,414
    
    
    $
    25,590Ratios:Non-performing Loans to Loans
    
    
    2.09
    %
    
    
    0.98
    %Non-performing Assets to Loans and Other Real Estate Owned
    
    
    2.34
    %
    
    
    1.11
    %Allowance for Loan Losses to Non-performing Loans
    
    
    62.96
    %
    
    
    120.27
    %
 NOTE 5. GOODWILL
  NOTE 6. INCOME TAXES
    16




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##### Table of Contents



NOTE 7. SHORT-TERM BORROWINGS
  June 30,
    
    
    December 31,2008
    
    
    2007Federal funds purchased
    
    $
    95,000
    
    
    $
    55,100Securities sold under agreements to repurchase
    
    
    100,913
    
    
    
    97,170Short-term Federal Home Loan Bank advances
    
    
    175,000
    
    
    
    120,000Total short-term borrowed funds
    
    $
    370,913
    
    
    $
    272,270
   17




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##### Table of Contents



NOTE 8. LONG-TERM BORROWINGS
  June 30,
    
    
    December 31,2008
    
    
    2007Federal Home Loan Bank AdvancesFixed maturity advances (weighted average rate of 3.38% and 4.57%
    
    $
    136,012
    
    
    $
    86,211as of June 30, 2008 and December 31, 2007, respectively)Amortizing and other advances (weighted average rate of 4.92% and
    
    
    1,208
    
    
    
    1,6075.11% as of June 30, 2008 and December 31, 2007, respectively)Total FHLB Advances
    
    
    137,220
    
    
    
    87,818Securities sold under repurchase agreements with maturities
    
    
    100,000
    
    
    
    165,000at various dates through 2013 (weighted average fixed rate of 2.85%
and 3.94% as of June 30, 2008 and December 31, 2007, respectively)Note payable, secured by equipment, with a fixed interest rate of 7.26%,
    
    
    4,317
    
    
    
    4,835due at various dates through 2012Note payable, unsecured, with a floating interest rate equal to one-month
    
    
    19,000
    
    
    
    20,000LIBOR plus 0.875%, with a maturity date of April 1, 2012Subordinated debt, unsecured, with a floating interest rate equal to three-
    
    
    10,000
    
    
    
    10,000month LIBOR plus 3.20%, with a maturity date of April 24, 2013Subordinated debt, unsecured, with a floating interest rate equal to three-
    
    
    4,000
    
    
    
    4,000month LIBOR plus 2.85%, with a maturity date of April 7, 2014Floating Rate Capital Securities, with an interest rate equal to six-month
    
    
    18,557
    
    
    
    18,557LIBOR plus 3.75%, with a maturity date of July 25, 2031, and callable
effective July 25, 2011, at parFloating Rate Capital Securities, with an interest rate equal to three-month
    
    
    35,568
    
    
    
    35,568LIBOR plus 3.10%, with a maturity date of June 26, 2033, and callable
quarterly, at parFloating Rate Capital Securities, with an interest rate equal to three-month
    
    
    20,619
    
    
    
    20,619LIBOR plus 1.57%, with a maturity date of June 30, 2037, and callable
effective June 30, 2012, at parFloating Rate Capital Securities, with an interest rate equal to three-month
    
    
    10,310
    
    
    
    10,310LIBOR plus 1.70%, with a maturity date of December 15, 2036, and callable
effective December 15, 2011, at parTotal long-term borrowings
    
    $
    359,591
    
    
    $
    376,707
      18




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##### Table of Contents



NOTE 9. COMMITMENTS AND CONTINGENCIES
    June 30,
    
    
    December 31,2008
    
    
    2007Commitments to extend credit
    
    $
    1,008,711
    
    
    $
    855,430Standby letters of credit
    
    
    16,247
    
    
    
    19,434Non-reimbursable standby letters of credit
    
    
    1,420
    
    
    
    2,220
 NOTE 10. INTEREST RATE CONTRACTS
        19




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##### Table of Contents



NOTE 11. SEGMENT INFORMATION
   For three months ended June 30, 2008
    
    Banking
    
    
    Other
    
    
    TotalInterest income
    
    $
    43,206
    
    
    $
    54
    
    
    $
    43,260Interest expense
    
    
    16,535
    
    
    
    1,559
    
    
    
    18,094Net interest income (loss)
    
    
    26,671
    
    
    
    (1,505
    )
    
    
    25,166Provision for loan losses
    
    
    6,003
    
    
    
    
    
    
    
    6,003Other income
    
    
    2,938
    
    
    
    74
    
    
    
    3,012Other expense
    
    
    23,946
    
    
    
    231
    
    
    
    24,177Earnings (Loss) before income taxes
    
    
    (340
    )
    
    
    (1,662
    )
    
    
    (2,002
    )Income tax expense (benefit)
    
    
    (475
    )
    
    
    (628
    )
    
    
    (1,103
    )Net income (loss)
    
    $
    135
    
    
    $
    (1,034
    )
    
    $
    (899
    )
 For six months ended June 30, 2008
    
    Banking
    
    
    Other
    
    
    TotalInterest income
    
    $
    90,233
    
    
    $
    118
    
    
    $
    90,351Interest expense
    
    
    38,116
    
    
    
    3,551
    
    
    
    41,667Net interest income (loss)
    
    
    52,117
    
    
    
    (3,433
    )
    
    
    48,684Provision for loan losses
    
    
    9,637
    
    
    
    
    
    
    
    9,637Other income
    
    
    13,580
    
    
    
    166
    
    
    
    13,746Other expense
    
    
    47,770
    
    
    
    528
    
    
    
    48,298Earnings before income taxes
    
    
    8,290
    
    
    
    (3,795
    )
    
    
    4,495Income tax expense (benefit)
    
    
    1,853
    
    
    
    (1,432
    )
    
    
    421Net income
    
    $
    6,437
    
    
    $
    (2,363
    )
    
    $
    4,074Segment assets
    
    $
    3,391,215
    
    
    $
    9,995
    
    
    $
    3,401,210
 For three months ended June 30, 2007
    
    Banking
    
    
    Other
    
    
    TotalInterest income
    
    $
    49,297
    
    
    $
    70
    
    
    $
    49,367Interest expense
    
    
    23,549
    
    
    
    2,251
    
    
    
    25,800Net interest income (loss)
    
    
    25,748
    
    
    
    (2,181
    )
    
    
    23,567Provision for loan losses
    
    
    455
    
    
    
    
    
    
    
    455Other income
    
    
    9,878
    
    
    
    53
    
    
    
    9,931Other expense
    
    
    21,458
    
    
    
    412
    
    
    
    21,870Earnings before income taxes
    
    
    13,713
    
    
    
    (2,540
    )
    
    
    11,173Income tax expense (benefit)
    
    
    3,787
    
    
    
    (947
    )
    
    
    2,840Net income
    
    $
    9,926
    
    
    $
    (1,593
    )
    
    $
    8,333
 For six months ended June 30, 2007
    
    Banking
    
    
    Other
    
    
    TotalInterest income
    
    $
    89,087
    
    
    $
    122
    
    
    $
    89,209Interest expense
    
    
    41,591
    
    
    
    3,722
    
    
    
    45,313Net interest income (loss)
    
    
    47,496
    
    
    
    (3,600
    )
    
    
    43,896Provision for loan losses
    
    
    1,190
    
    
    
    
    
    
    
    1,190Other income
    
    
    18,959
    
    
    
    187
    
    
    
    19,146Other expense
    
    
    41,364
    
    
    
    673
    
    
    
    42,037Earnings before income taxes
    
    
    23,901
    
    
    
    (4,086
    )
    
    
    19,815Income tax expense (benefit)
    
    
    5,664
    
    
    
    (1,538
    )
    
    
    4,126Net income
    
    $
    18,237
    
    
    $
    (2,548
    )
    
    $
    15,689Segment assets
    
    $
    3,206,414
    
    
    $
    7,948
    
    
    $
    3,214,362
  20




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 INTRODUCTION
   OVERVIEW
        
    
    The provision for loan losses was $6,003 for the second quarter of 2008, compared to
$3,634 for the first quarter of 2008. The allowance to total loans increased 10 basis
points to 1.32% while net charge-offs increased 8 basis points to 0.48%.
    
    Other-than-temporary impairment of $6,302 was recognized on two trust preferred
collateralized debt obligations. The impairment charge reflects the impact of the rising
level of deferrals and defaults in these securities.
  21




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##### Table of Contents




    
    Non-performing loans increased $20,413, or 67.9%, to $50,474 or 2.1% of total loans,
while the allowance to non-performing loans decreased from 95% to 63%. Non-performing
loans in the Chicago region represented approximately 67% of total non-performing loans at
June 30, 2008, compared to 60% at March 31, 2008.
    
    Net interest income was $25,166 for the second quarter of 2008, compared to $23,518
for the first quarter of 2008, while the net interest margin increased 20 basis points to
3.43%. Commercial loans increased $64,298 or 15.8% annualized. This increase in loan
volume, coupled with lower funding costs and low cost deposit growth of $41,513 or 20.6%
annualized, contributed to the increase in both the margin and net interest income.
    
    Non-interest income was $3,012 for the second quarter of 2008, compared to $10,734
for the first quarter, and included $6,302 of other-than-temporary impairment (OTTI)
charges on two securities. Deposit service charges increased $360, or 7.7%.
Derivative losses were $369, compared to gains of $543 during the first quarter. The first
quarter also included non-recurring trading gains of $321.
    
    Non-interest expense for the second quarter of 2008 increased $56 to $24,177 from
the first quarter of 2008, an increase of 0.9% annualized.
   CRITICAL ACCOUNTING POLICIES
  NET INTEREST INCOME
   
    
    The decrease to the net interest margin reflected the impact of the Federal Reserves
reductions in the key interbank borrowing rate which began in the fourth quarter of 2007.
During the first six months of 2008, the federal funds rate declined by 225 basis points.
Average loan yields decreased 153 basis points to 5.99% for the quarter ended June 30,
2008, from 7.52% in the quarter ended June 30, 2007, led by a decrease in commercial loan
yields, including loan fees, of 221 basis points to 5.69%. The decreases in yields for
commercial loans occurred primarily during 2008, when yields declined 201 basis points.
Our asset sensitivity (meaning that a change in prevailing interest rates impacts our
assets more quickly than our liabilities), contributed to the margin decrease in the first
quarter, but then contributed to the increase in the second quarter when the repricing of
our liabilities caught up with the repricing of our assets. Approximately 40% of our
variable rate loans are tied to prime, 46% to LIBOR and 14% to other floating rate indices.
Money market fund rates have declined 174 basis points during 2008 to 2.00%, while time
deposit rates declined only 110 basis points to 3.45%. Average money market fund rates for
the second quarter of 2008 declined 207 basis points from the second quarter of 2007, while
time deposit rates declined 111 basis points. Because we are asset sensitive, we should
benefit, on a short-term basis, if rates increase, since our assets will reprice more
quickly than our liabilities. We should experience an additional increase in net interest
income if the yield curve steepens more than currently expected as well as if short-term
(under 90 day) rates increase more than currently forecasted.
  22




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##### Table of Contents




    
    The improvement in our earning asset mix contributed positively to both the net interest
margin and net interest income. Total average commercial loan balances increased $279,053,
or 19.6% from the second quarter of 2007. This increase is primarily due to strong double
digit growth for each of the four quarters ended June 30, 2008. The positive impact to our
earning asset mix of increasing the percentage of commercial loans to total earning assets
has lessened as rates have declined. The yield during the second quarter of 2007 for
commercial loans of 7.90% was 274 basis points higher than the yield on investment
securities of 5.16%. That difference was only 68 basis points for the second quarter of
2008. Total average commercial loans represented 56.4% of earning assets for the first
quarter of 2008, compared to 49.7% for the second quarter of 2007, evidencing the
improvement in mix.
    
    A shift in funding sources from the second quarter of 2007 to the second quarter of 2008
also benefited the net interest margin and net interest income. As rates declined, we
utilized wholesale sources of funding at lower rates, choosing not to price retail
certificates of deposits at rates that would ensure the same level of balances. Higher
costing time deposit average balances were 39.1% of total interest bearing liabilities for
the quarter ended June 30, 2008, compared to 48.7% for the quarter ended June 30, 2007.
Sources of funds other than time and transaction deposits, which include repurchase
agreements, FHLB advances and other sources, increased from 16.4% of total interest-bearing
liabilities to 25.9% for the quarter ended June 30, 2008. Average time deposit rates
declined only 111 basis points from the year ago quarter, while the rates for funding
sources other than time and transaction accounts declined 251 basis points. As a result,
our loan to deposit ratio was 103.7% at June 30, 2008, compared to 98.8% at December 31,
2007 and 91.8% at June 30, 2007.
  2008
    
    
    2007Average
    
    
    Interest
    
    
    Yield/
    
    
    Average
    
    
    Interest
    
    
    Yield/For Three Months Ended June 30,
    
    Balances
    
    
    & Fees
    
    
    Cost
    
    
    Balances
    
    
    & Fees
    
    
    CostEARNING ASSETS:Short-term investments
    
    $
    6,408
    
    
    $
    30
    
    
    
    1.83
    %
    
    $
    6,184
    
    
    $
    60
    
    
    
    3.90
    %Loans held for sale
    
    
    5,835
    
    
    
    90
    
    
    
    6.18
    %
    
    
    2,957
    
    
    
    45
    
    
    
    6.08
    %Securities
    
    
    603,256
    
    
    
    7,554
    
    
    
    5.01
    %
    
    
    638,691
    
    
    
    8,239
    
    
    
    5.16
    %Regulatory stock
    
    
    29,181
    
    
    
    409
    
    
    
    5.61
    %
    
    
    25,826
    
    
    
    281
    
    
    
    4.36
    %Loans
    
    
    2,377,745
    
    
    
    35,832
    
    
    
    5.99
    %
    
    
    2,193,288
    
    
    
    41,540
    
    
    
    7.52
    %Total earning assets
    
    
    3,022,425
    
    
    $
    43,915
    
    
    
    5.84
    %
    
    
    2,866,946
    
    
    $
    50,165
    
    
    
    7.01
    %Allowance for loan loss
    
    
    (29,552
    )
    
    
    
    
    
    
    
    
    
    
    (26,504
    )Other non-earning assets
    
    
    379,071
    
    
    
    
    
    
    
    
    
    
    
    358,539TOTAL ASSETS
    
    $
    3,371,944
    
    
    
    
    
    
    
    
    
    
    $
    3,198,981INTEREST-BEARING LIABILITIES:DepositsSavings and interest-bearing demand
    
    $
    564,866
    
    
    $
    1,194
    
    
    
    0.85
    %
    
    $
    515,443
    
    
    $
    1,230
    
    
    
    0.96
    %Money market accounts
    
    
    390,481
    
    
    
    2,029
    
    
    
    2.09
    %
    
    
    384,219
    
    
    
    3,983
    
    
    
    4.16
    %Certificates of deposit and other
  time
    
    
    1,066,680
    
    
    
    9,628
    
    
    
    3.63
    %
    
    
    1,251,950
    
    
    
    14,804
    
    
    
    4.74
    %Total
interest-bearing
deposits
    
    
    2,022,027
    
    
    
    12,851
    
    
    
    2.56
    %
    
    
    2,151,612
    
    
    
    20,017
    
    
    
    3.73
    %Short-term borrowings
    
    
    346,565
    
    
    
    1,955
    
    
    
    2.23
    %
    
    
    181,480
    
    
    
    2,264
    
    
    
    4.93
    %Long-term borrowings
    
    
    359,841
    
    
    
    3,288
    
    
    
    3.61
    %
    
    
    239,086
    
    
    
    3,519
    
    
    
    5.82
    %Total interest-bearing liabilities
    
    
    2,728,433
    
    
    $
    18,094
    
    
    
    2.67
    %
    
    
    2,572,178
    
    
    $
    25,800
    
    
    
    4.02
    %Non-interest bearing deposits
    
    
    285,582
    
    
    
    
    
    
    
    
    
    
    
    284,070Other noninterest-bearing liabilities and shareholders equity
    
    
    357,929
    
    
    
    
    
    
    
    
    
    
    
    342,733TOTAL LIABILITIES AND
  SHAREHOLDERS EQUITY
    
    $
    3,371,944
    
    
    
    
    
    
    
    
    
    
    $
    3,198,981Interest income/earning assets
    
    
    
    
    
    $
    43,915
    
    
    
    5.84
    %
    
    
    
    
    
    $
    50,165
    
    
    
    7.01
    %Interest expense/earning assets
    
    
    
    
    
    
    18,094
    
    
    
    2.41
    %
    
    
    
    
    
    
    25,800
    
    
    
    3.61
    %Net interest income/earning assets
    
    
    
    
    
    $
    25,821
    
    
    
    3.43
    %
    
    
    
    
    
    $
    24,365
    
    
    
    3.40
    %
     23




---



##### Table of Contents



2008
    
    
    2007Average
    
    
    Interest
    
    
    Yield/
    
    
    Average
    
    
    Interest
    
    
    Yield/For Six Months Ended June 30,
    
    Balances
    
    
    & Fees
    
    
    Cost
    
    
    Balances
    
    
    & Fees
    
    
    CostEARNING ASSETS:Short-term investments
    
    $
    5,638
    
    
    $
    68
    
    
    
    2.42
    %
    
    $
    4,887
    
    
    $
    109
    
    
    
    4.47
    %Loans held for sale
    
    
    6,226
    
    
    
    193
    
    
    
    6.20
    %
    
    
    2,286
    
    
    
    73
    
    
    
    6.41
    %Securities
    
    
    623,386
    
    
    
    16,053
    
    
    
    5.15
    %
    
    
    623,244
    
    
    
    16,090
    
    
    
    5.16
    %Regulatory stock
    
    
    29,180
    
    
    
    785
    
    
    
    5.38
    %
    
    
    25,097
    
    
    
    627
    
    
    
    5.00
    %Loans
    
    
    2,355,402
    
    
    
    74,657
    
    
    
    6.30
    %
    
    
    1,987,909
    
    
    
    73,724
    
    
    
    7.40
    %Total earning assets
    
    
    3,019,832
    
    
    $
    91,756
    
    
    
    6.10
    %
    
    
    2,643,423
    
    
    $
    90,623
    
    
    
    6.89
    %Allowance for loan loss
    
    
    (28,791
    )
    
    
    
    
    
    
    
    
    
    
    (23,831
    )Other non-earning assets
    
    
    381,863
    
    
    
    
    
    
    
    
    
    
    
    310,783TOTAL ASSETS
    
    $
    3,372,904
    
    
    
    
    
    
    
    
    
    
    $
    2,930,375INTEREST-BEARING LIABILITIES:DepositsSavings and interest-bearing demand
    
    $
    550,495
    
    
    $
    2,440
    
    
    
    0.89
    %
    
    $
    502,533
    
    
    $
    2,332
    
    
    
    0.94
    %Money market accounts
    
    
    391,185
    
    
    
    4,806
    
    
    
    2.47
    %
    
    
    345,798
    
    
    
    7,052
    
    
    
    4.11
    %Certificates of deposit and other
  time
    
    
    1,097,276
    
    
    
    21,997
    
    
    
    4.03
    %
    
    
    1,094,383
    
    
    
    25,317
    
    
    
    4.66
    %Total
interest-bearing
deposits
    
    
    2,038,956
    
    
    
    29,243
    
    
    
    2.88
    %
    
    
    1,942,714
    
    
    
    34,701
    
    
    
    3.60
    %Short-term borrowings
    
    
    304,376
    
    
    
    4,121
    
    
    
    2.68
    %
    
    
    173,205
    
    
    
    4,282
    
    
    
    4.92
    %Long-term borrowings
    
    
    387,887
    
    
    
    8,303
    
    
    
    4.23
    %
    
    
    245,501
    
    
    
    6,330
    
    
    
    5.13
    %Total interest-bearing liabilities
    
    
    2,731,219
    
    
    $
    41,667
    
    
    
    3.07
    %
    
    
    2,361,420
    
    
    $
    45,313
    
    
    
    3.87
    %Non-interest bearing deposits
    
    
    279,196
    
    
    
    
    
    
    
    
    
    
    
    266,612Other noninterest-bearing liabilities and shareholders equity
    
    
    362,489
    
    
    
    
    
    
    
    
    
    
    
    302,343TOTAL LIABILITIES AND
  SHAREHOLDERS EQUITY
    
    $
    3,372,904
    
    
    
    
    
    
    
    
    
    
    $
    2,930,375Interest income/earning assets
    
    
    
    
    
    $
    91,756
    
    
    
    6.10
    %
    
    
    
    
    
    $
    90,623
    
    
    
    6.89
    %Interest expense/earning assets
    
    
    
    
    
    
    41,667
    
    
    
    2.78
    %
    
    
    
    
    
    
    45,313
    
    
    
    3.45
    %Net interest income/earning assets
    
    
    
    
    
    $
    50,089
    
    
    
    3.32
    %
    
    
    
    
    
    $
    45,310
    
    
    
    3.44
    %
    NON-INTEREST INCOME
  
    
    The impairment charge of $6,302 taken during the second quarter of 2008 with respect to
two securities. This is discussed in detail in the financial statements included in this
document, specifically Note 3.
    
    Losses on free standing derivatives of $369 during the second quarter of 2008, compared
to losses of $78 during the second quarter of 2007.
    
    A decrease in deposit service charges of $349, or 6.5%, to $5,059. The decrease is the
result of a lower level of non-sufficient funds activity which we believe was affected, in
part, by the federal government stimulus checks distributed during the second quarter of
2008.
    
    Offsetting increases in debit card interchange income of $312, or 29.3%, to $1,376, and
annuity income of $147, or 50.0%, to $441. The increase in debit card interchange income
continues to be driven by an increase in the number of checking accounts and a continued
shift to debit cards as the preferred method of payment.
  24




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##### Table of Contents



NON-INTEREST EXPENSE
  
    
    An increase in personnel expense of $753, or 6.4%, which was the result of higher
expenses in the Chicago region, 2008 pay rate increases coupled with a low rate of
personnel turnover, increased health insurance expense, and increased stock-based
compensation expense. Personnel expense charged directly to the Chicago region for the
second quarter of 2008, excluding insurance benefit expense, was $999, compared to $799
during the second quarter of 2007. This is in part due to only a partial quarter of
expense for Chicago in the second quarter of 2007 versus a full quarter in 2008, plus
additional investments in personnel in the area of commercial lending. Total salaries
increased $434, or 5.0%. Health insurance expense increased $169, or 19.1%, partially due
to the addition of the Chicago region. Stock based compensation expense increased $100, or
24.0%, due primarily to amortization from an additional annual grant. The average number
of full time equivalent employees for the second quarter of 2008 was 869 compared to 865
for the second quarter of 2007.
 
    
    An increase in loan and other real estate owned expense of $363, or 539.5%. This
increase is attributed to higher levels of real estate owned and related expenses, expenses
incurred in connection with loan workout and collection activities, and loan portfolio
management expenses, such as the cost of obtaining new appraisals on real estate securing
some of our commercial real estate loans.
 
    
    An increase in sales and bankshare taxes of $284, or 116.5%. This increase is due to
higher Kentucky franchise taxes, resulting from a change in the apportionment ratio
resulting from the April 2007 acquisition of Prairie Financial Corporation, coupled with an
accrual for sales tax liability resulting from an in-process audit by the Indiana
Department of Revenue.
 
    
    An increase in legal fees of $258, or 126.8%. This increase is due to higher loan
collection costs and $235 of ongoing expenses related to continuing litigation related to a
fourth quarter 2006 charge-off.
 
    
    An increase in telephone expenses of $257, or 62.8%. This increase is attributed to a
data line upgrade that included start up costs and a short period of time where both
expense from the old and new lines was being incurred as well as the addition of two new
locations and a full six months of expense in Chicago, compared to less than three months
in 2007.
 
    
    An increase in low income housing project operating losses of $217, or 42.9%. The
increase in losses relates primarily to one investment that has experienced lower occupancy
and higher operating losses because of poor economic conditions in the area in which it is
located.
 
    
    An increase in occupancy expense of $153, or 6.4%, primarily due to higher repair and
maintenance and real estate tax expenses.
    25




---



##### Table of Contents



INCOME TAX EXPENSE (BENEFIT)
   FINANCIAL POSITION
  SECURITIES
   REGULATORY STOCK
  LOANS HELD FOR SALE
  LOANS
     26




---



##### Table of Contents



27




---



##### Table of Contents



June 30,
    
    
    December 31,2008
    
    
    2007Commercial, industrial and
agricultural loans
    
    $
    725,458
    
    
    $
    689,504Economic development loans and
other obligations of state and
political subdivisions
    
    
    13,521
    
    
    
    7,227Lease financing
    
    
    5,316
    
    
    
    5,291Total commercial
    
    
    744,295
    
    
    
    702,022Commercial real estateCommercial mortgages
    
    
    394,680
    
    
    
    298,151Construction and development
    
    
    611,274
    
    
    
    609,858Total commercial real estate
    
    
    1,005,954
    
    
    
    908,009Residential mortgages
    
    
    340,048
    
    
    
    380,429Home equity
    
    
    155,346
    
    
    
    145,403Consumer loans
    
    
    164,354
    
    
    
    175,516Total loans
    
    
    2,409,997
    
    
    
    2,311,379Less: unearned income
    
    
    
    
    
    
    1Loans, net of unearned income
    
    $
    2,409,997
    
    
    $
    2,311,378
 ASSET QUALITY
       28




---



##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Beginning Balance
    
    $
    28,590
    
    
    $
    21,165
    
    
    $
    27,261
    
    
    $
    21,155Allowance associated with purchase acquisitions
    
    
    
    
    
    
    5,982
    
    
    
    
    
    
    
    5,982Loans charged off
    
    
    (3,128
    )
    
    
    (1,638
    )
    
    
    (5,882
    )
    
    
    (2,711
    )Recoveries
    
    
    315
    
    
    
    426
    
    
    
    764
    
    
    
    774Provision for loan losses
    
    
    6,003
    
    
    
    455
    
    
    
    9,637
    
    
    
    1,190Ending Balance
    
    $
    31,780
    
    
    $
    26,390
    
    
    $
    31,780
    
    
    $
    26,390Percent of total loans
    
    
    1.32
    %
    
    
    1.19
    %
    
    
    1.32
    %
    
    
    1.19
    %Annualized % of average loans:Net charge-offs
    
    
    0.48
    %
    
    
    0.22
    %
    
    
    0.44
    %
    
    
    0.20
    %Provision for loan losses
    
    
    1.02
    %
    
    
    0.08
    %
    
    
    0.82
    %
    
    
    0.12
    %
      29




---



##### Table of Contents




    
    We do not execute non-recourse financing. In most cases outside of Chicago, we have, in
addition to the real estate collateral, guarantees from strong guarantors with the
liquidity, net worth and experience to deal with difficulties in some of their projects.
 
    
    Our commercial real estate portfolio is spread across various segments, with none
exceeding 24.9% of the total CRE portfolio.
 
    
    The bulk of our non-performing loans are secured by residential units in the Chicago
area, a market which has slowed but which continues to see market activity and for which
published data indicates that the value decline in the Chicago market is within our typical
loan to value ratio.
 
    
    The performance of our other portfolios continues to be stable, including our
residential and consumer portfolios. Despite some of the difficulties being experienced by
consumers across the country, the performance of our portfolio has remained strong. The
residential portfolio had 30-89 day delinquencies of $2,518 or 1.06% and nonperforming
loans of $4,496 or 1.9% of loans. The consumer portfolio has 30-89 day delinquencies of
$2,829 or 0.66% and nonperforming loans of $2,217 or 0.52%.
  June 30,
    
    
    December 31,2008
    
    
    2007Nonaccrual loans
    
    $
    50,162
    
    
    $
    18,54990 days or more past due loans
    
    
    312
    
    
    
    4,118Total non-performing loans
    
    
    50,474
    
    
    
    22,667Other real estate owned
    
    
    5,940
    
    
    
    2,923Total non-performing assets
    
    $
    56,414
    
    
    $
    25,590Ratios:Non-performing Loans to Loans
    
    
    2.09
    %
    
    
    0.98
    %Non-performing Assets to Loans and Other Real
Estate Owned
    
    
    2.34
    %
    
    
    1.11
    %Allowance for Loan Losses to Non-performing Loans
    
    
    62.96
    %
    
    
    120.27
    %
  30




---



##### Table of Contents



DEPOSITS
    SHORT-TERM BORROWINGS
   LONG-TERM BORROWINGS
   CAPITAL EXPENDITURES
  OFF-BALANCE SHEET ARRANGEMENTS AND AGGREGATE CONTRACTUAL OBLIGATIONS
  CAPITAL RESOURCES AND LIQUIDITY
  Regulatory Guidelines
    
    
    ActualMinimum
    
    
    Well-
    
    
    June 30,
    
    
    December 31,Requirements
    
    
    Capitalized
    
    
    2008
    
    
    2007Integra Bank Corporation:Total Capital (to Risk-Weighted Assets)
    
    
    8.00
    %
    
    
    N/A
    
    
    
    11.13
    %
    
    
    11.52
    %Tier 1 Capital (to Risk-Weighted Assets)
    
    
    4.00
    %
    
    
    N/A
    
    
    
    9.13
    %
    
    
    9.34
    %Tier 1 Capital (to Average Assets)
    
    
    4.00
    %
    
    
    N/A
    
    
    
    7.80
    %
    
    
    7.81
    %Integra Bank N.A.:Total Capital (to Risk-Weighted Assets)
    
    
    8.00
    %
    
    
    10.00
    %
    
    
    11.44
    %
    
    
    11.89
    %Tier 1 Capital (to Risk-Weighted Assets)
    
    
    4.00
    %
    
    
    6.00
    %
    
    
    10.28
    %
    
    
    10.86
    %Tier 1 Capital (to Average Assets)
    
    
    4.00
    %
    
    
    5.00
    %
    
    
    8.80
    %
    
    
    9.08
    %
  31




---



##### Table of Contents




    
    Improving our level of earnings;
 
    
    Maintaining or reducing the size of our balance sheet, particularly in the area of
commercial real estate lending. We are currently in process of reducing our growth rate
in commercial real estate lending. Reducing the size of our balance sheet could also
include the sale of non-core assets;
 
    
    Altering the current dividend payout ratio; and
 
    
    Issuing new capital in an opportunistic basis if we feel necessary and if conditions
warrant.
       32




---



##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures about Market Risk
     Earnings at Risk (EAR).
  Immediate Rate Shock
    
    June 30, 2008
    
    
    December 31, 2007+200 basis points
    
    
    0.29
    %
    
    
    -1.44
    %+100 basis points
    
    
    -0.02
    %
    
    
    -0.67
    %-100 basis points
    
    
    -2.07
    %
    
    
    0.02
    %-200 basis points
    
    
    -6.13
    %
    
    
    -2.55
    %
  Economic Value of Equity (EVE).
   33




---



##### Table of Contents



Immediate Rate Shock
    
    June 30, 2008
    
    
    December 31, 2007+200 basis points
    
    
    -3.22
    %
    
    
    -4.32
    %+100 basis points
    
    
    -1.28
    %
    
    
    -1.95
    %-100 basis points
    
    
    -0.32
    %
    
    
    0.35
    %-200 basis points
    
    
    -3.12
    %
    
    
    -0.91
    %
   
 Item 4: Controls and Procedures
    34




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##### Table of Contents



PART II   OTHER INFORMATION
 
 Item 1. LEGAL PROCEEDINGS
  
 Item 1A. RISK FACTORS
  The
Decline in Fair Value of our Stock Could Adversely Affect Our Ability to Raise Capital, Dilute
Current Shareholders Ownership or Make it More Expensive to
Raise Capital, as well as Increase the Risk of Incurring Impairment
to our Recorded Goodwill.
  
 Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 Item 3. DEFAULTS UPON SENIOR SECURITIES
  
 Item 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
    WithholdAffirmative
    
    
    AuthorityBradley M. Stevens
    
    
    15,501,162
    
    
    
    652,476William E. Vieth
    
    
    15,506,497
    
    
    
    647,142Daniel T. Wolfe
    
    
    15,488,240
    
    
    
    665,398
  2009
    
    2010Sandra Clark Berry
    
    Dr. H. Ray HoopsThomas W. Miller
    
    Robert W. SwanArthur D. Pringle, IIIRichard M. StiversMichael T. Vea
  35




---



##### Table of Contents



Affirmative
    
    Negative
    
    
    Abstain15,490,031
    
    
    601,535
    
    
    
    62,070
 
 Item 5. OTHER INFORMATION
  
 Item 6. EXHIBITS
 The following documents are filed as exhibits to this report:
 31.1
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Chief Executive Officer31.2
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Chief Financial Officer32
    
    Certification of Chief Executive Officer and Chief Financial Officer
  36




---



##### Table of Contents



SIGNATURES
  INTEGRA BANK CORPORATIONBy
    
    /s/ Michael T. Vea

Michael T. VeaChairman of the Board, Presidentand Chief Executive OfficerJuly 28, 2008/s/ Martin M. Zorn

Martin M. ZornChief Operating Officer andChief Financial OfficerJuly 28, 2008
  37




---



##### Table of Contents



EXHIBIT INDEX
 Exhibit No.
    
    Description31.1
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 of Chief Executive Officer31.2
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 of Chief Financial Officer32
    
    Certification of Chief Executive Officer and Chief Financial Officer
  38