##### 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 September 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
(State or other jurisdiction of incorporation or organization)
    
    35-1632155
(IRS Employee Identification No.)PO BOX 868, EVANSVILLE, INDIANA
(Address of principal executive offices)
    
    47705-0868
(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
(Common stock, $1.00 Stated Value)
    
    OUTSTANDING AT NOVEMBER 6, 2008
20,748,880




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##### 



INTEGRA BANK CORPORATION
 INDEX
 PAGE NO.PART I  FINANCIAL INFORMATIONItem 1. Unaudited Financial StatementsConsolidated balance sheets-
September 30, 2008 and December 31, 2007
    
    
    3Consolidated statements of income-
Three months and nine months ended September 30, 2008 and 2007
    
    
    4Consolidated statements of comprehensive income-
Three months and nine months ended September 30, 2008 and 2007
    
    
    5Consolidated statements of changes in shareholders equity-
Nine months ended September 30, 2008
    
    
    6Consolidated statements of cash flow-
Nine months ended September 30, 2008 and 2007
    
    
    7Notes to unaudited consolidated financial statements
    
    
    9Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    23Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    36Item 4. Controls and Procedures
    
    
    37PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    38Item 1A. Risk Factors
    
    
    38Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    39Item 3. Defaults Upon Senior Securities
    
    
    39Item 4. Submissions of Matters to a Vote of Security Holders
    
    
    39Item 5. Other Information
    
    
    39Item 6. Exhibits
    
    
    39Signatures
    
    
    40Exhibit 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
  September 30,
    
    
    December 31,2008
    
    
    2007ASSETSCash and due from banks
    
    $
    66,369
    
    
    $
    72,360Federal funds sold and other short-term investments
    
    
    4,128
    
    
    
    3,630Total cash and cash equivalents
    
    
    70,497
    
    
    
    75,990Loans held for sale (at lower of cost or fair value)
    
    
    6,679
    
    
    
    5,928Securities available for sale
    
    
    525,428
    
    
    
    582,954Securities held for trading
    
    
    
    
    
    
    53,782Regulatory stock
    
    
    29,182
    
    
    
    29,179Loans, net of unearned income
    
    
    2,460,810
    
    
    
    2,311,378Less: Allowance for loan losses
    
    
    (41,766
    )
    
    
    (27,261
    )Net loans
    
    
    2,419,044
    
    
    
    2,284,117Premises and equipment
    
    
    49,534
    
    
    
    50,552Goodwill
    
    
    74,824
    
    
    
    123,050Other intangible assets
    
    
    10,359
    
    
    
    11,652Other assets
    
    
    171,295
    
    
    
    132,922TOTAL ASSETS
    
    $
    3,356,842
    
    
    $
    3,350,126LIABILITIESDeposits:Non-interest-bearing demand
    
    $
    277,086
    
    
    $
    265,554Interest-bearing:Savings, interest checking and money market accounts
    
    
    902,921
    
    
    
    918,023Time deposits of $100 or more
    
    
    639,126
    
    
    
    505,491Other interest-bearing
    
    
    566,661
    
    
    
    651,069Total deposits
    
    
    2,385,794
    
    
    
    2,340,137Short-term borrowings
    
    
    306,182
    
    
    
    272,270Long-term borrowings
    
    
    358,676
    
    
    
    376,707Other liabilities
    
    
    29,602
    
    
    
    33,208TOTAL LIABILITIES
    
    
    3,080,254
    
    
    
    3,022,322Commitments and contingent liabilities (Note 10)
    
    
    
    
    
    
    SHAREHOLDERS EQUITYPreferred stock  1,000,000 shares authorizedNone outstandingCommon stock  $1.00 stated value:Shares authorized: 29,000,000Shares outstanding: 20,748,798 and 20,650,165 respectively
    
    
    20,749
    
    
    
    20,650Additional paid-in capital
    
    
    208,228
    
    
    
    206,991Retained earnings
    
    
    66,076
    
    
    
    104,913Accumulated other comprehensive income (loss)
    
    
    (18,465
    )
    
    
    (4,750
    )TOTAL SHAREHOLDERS EQUITY
    
    
    276,588
    
    
    
    327,804TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    3,356,842
    
    
    $
    3,350,126
   3




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##### Table of Contents



INTEGRA BANK CORPORATION and Subsidiaries
 
 Unaudited Consolidated Statements of Income
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007INTEREST INCOMEInterest and fees on loans:Taxable
    
    $
    35,079
    
    
    $
    43,488
    
    
    $
    109,456
    
    
    $
    116,903Tax-exempt
    
    
    122
    
    
    
    98
    
    
    
    304
    
    
    
    299Interest and dividends on securities:Taxable
    
    
    5,514
    
    
    
    5,909
    
    
    
    17,834
    
    
    
    18,269Tax-exempt
    
    
    1,091
    
    
    
    1,385
    
    
    
    3,517
    
    
    
    3,809Dividends on regulatory stock
    
    
    385
    
    
    
    314
    
    
    
    1,170
    
    
    
    941Interest on loans held for sale
    
    
    88
    
    
    
    77
    
    
    
    281
    
    
    
    150Interest on federal funds sold and other short-term investments
    
    
    26
    
    
    
    56
    
    
    
    94
    
    
    
    165Total interest income
    
    
    42,305
    
    
    
    51,327
    
    
    
    132,656
    
    
    
    140,536INTEREST EXPENSEInterest on deposits
    
    
    12,888
    
    
    
    19,790
    
    
    
    42,131
    
    
    
    54,491Interest on short-term borrowings
    
    
    1,995
    
    
    
    2,648
    
    
    
    6,116
    
    
    
    6,930Interest on long-term borrowings
    
    
    3,562
    
    
    
    4,191
    
    
    
    11,865
    
    
    
    10,521Total interest expense
    
    
    18,445
    
    
    
    26,629
    
    
    
    60,112
    
    
    
    71,942NET INTEREST INCOME
    
    
    23,860
    
    
    
    24,698
    
    
    
    72,544
    
    
    
    68,594Provision for loan losses
    
    
    17,978
    
    
    
    723
    
    
    
    27,615
    
    
    
    1,913Net interest income after provision for loan losses
    
    
    5,882
    
    
    
    23,975
    
    
    
    44,929
    
    
    
    66,681NON-INTEREST INCOMEService charges on deposit accounts
    
    
    5,884
    
    
    
    5,408
    
    
    
    15,642
    
    
    
    15,034Other service charges and fees
    
    
    880
    
    
    
    889
    
    
    
    2,752
    
    
    
    2,666Commissions on annuities
    
    
    223
    
    
    
    397
    
    
    
    1,245
    
    
    
    957Debit card income-interchange
    
    
    1,358
    
    
    
    1,136
    
    
    
    3,977
    
    
    
    3,095Trust income
    
    
    573
    
    
    
    588
    
    
    
    1,686
    
    
    
    1,804Net securities gains (losses)
    
    
    13
    
    
    
    219
    
    
    
    (6,262
    )
    
    
    441Gain on sale of other assets
    
    
    (47
    )
    
    
    (5
    )
    
    
    (59
    )
    
    
    594Bank-owned life insurance income
    
    
    574
    
    
    
    633
    
    
    
    1,792
    
    
    
    1,545Other
    
    
    726
    
    
    
    1,122
    
    
    
    3,157
    
    
    
    3,397Total non-interest income
    
    
    10,184
    
    
    
    10,387
    
    
    
    23,930
    
    
    
    29,533NON-INTEREST EXPENSESalaries and employee benefits
    
    
    12,125
    
    
    
    11,319
    
    
    
    36,965
    
    
    
    33,777Occupancy
    
    
    2,621
    
    
    
    2,474
    
    
    
    7,722
    
    
    
    6,969Equipment
    
    
    974
    
    
    
    832
    
    
    
    2,857
    
    
    
    2,478Professional fees
    
    
    1,186
    
    
    
    1,073
    
    
    
    3,256
    
    
    
    3,103Communication and transportation
    
    
    1,427
    
    
    
    1,490
    
    
    
    4,485
    
    
    
    3,964Processing
    
    
    715
    
    
    
    690
    
    
    
    2,137
    
    
    
    1,824Software
    
    
    673
    
    
    
    488
    
    
    
    1,760
    
    
    
    1,454Marketing
    
    
    453
    
    
    
    627
    
    
    
    1,546
    
    
    
    1,785Low income housing project losses
    
    
    556
    
    
    
    635
    
    
    
    1,930
    
    
    
    1,758Amortization of intangible assets
    
    
    431
    
    
    
    454
    
    
    
    1,293
    
    
    
    1,106Goodwill impairment
    
    
    48,000
    
    
    
    
    
    
    
    48,000
    
    
    
    Other
    
    
    3,026
    
    
    
    2,160
    
    
    
    8,534
    
    
    
    6,061Total non-interest expense
    
    
    72,187
    
    
    
    22,242
    
    
    
    120,485
    
    
    
    64,279Income (Loss) before income taxes
    
    
    (56,121
    )
    
    
    12,120
    
    
    
    (51,626
    )
    
    
    31,935Income tax expense (benefit)
    
    
    (22,794
    )
    
    
    2,914
    
    
    
    (22,373
    )
    
    
    7,040NET INCOME (LOSS)
    
    $
    (33,327
    )
    
    $
    9,206
    
    
    $
    (29,253
    )
    
    $
    24,895Earnings (Loss) per share:Basic
    
    $
    (1.62
    )
    
    $
    0.45
    
    
    $
    (1.42
    )
    
    $
    1.28Diluted
    
    
    (1.62
    )
    
    
    0.45
    
    
    
    (1.42
    )
    
    
    1.27Weighted average shares outstanding:Basic
    
    
    20,567
    
    
    
    20,527
    
    
    
    20,553
    
    
    
    19,523Diluted
    
    
    20,567
    
    
    
    20,545
    
    
    
    20,553
    
    
    
    19,583Dividends per share
    
    $
    0.01
    
    
    $
    0.18
    
    
    $
    0.37
    
    
    $
    0.53
   4




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##### Table of Contents



INTEGRA BANK CORPORATION and Subsidiaries
 
 Unaudited Consolidated Statements of Comprehensive Income
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net income (Loss)
    
    $
    (33,327
    )
    
    $
    9,206
    
    
    $
    (29,253
    )
    
    $
    24,895Other comprehensive income (loss), net of tax:Unrealized gain (loss) on securities:Unrealized gain (loss) arising in period

(net of tax of $(5,774), $1,961, $(10,550) and $647, respectively)
    
    
    (9,769
    )
    
    
    2,808
    
    
    
    (17,851
    )
    
    
    970Reclassification of realized amounts

(net of tax of $(5), $(89), $2,326 and $(179), respectively)
    
    
    (8
    )
    
    
    (131
    )
    
    
    3,936
    
    
    
    (263
    )Net unrealized gain (loss) on securities
    
    
    (9,777
    )
    
    
    2,677
    
    
    
    (13,915
    )
    
    
    707Change in net pension plan liability
(net of tax of $14 and $43 respectively for 2008)
    
    
    23
    
    
    
    
    
    
    
    73
    
    
    
    Unrealized gain (loss) on derivative hedging instruments arising in
period

(net of tax of $4, $82, $54 and $42, respectively)
    
    
    (4
    )
    
    
    123
    
    
    
    127
    
    
    
    66Net unrealized gain (loss), recognized in other comprehensive income (loss)
    
    
    (9,758
    )
    
    
    2,800
    
    
    
    (13,715
    )
    
    
    773Comprehensive income (loss)
    
    $
    (43,085
    )
    
    $
    12,006
    
    
    $
    (42,968
    )
    
    $
    25,668
   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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (29,253
    )
    
    
    
    
    
    
    (29,253
    )Cash dividend declared ($0.37 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,662
    )
    
    
    
    
    
    
    (7,662
    )Change, net of tax, in unrealized gain/loss on:Securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13,915
    )
    
    
    (13,915
    )Interest rate swaps
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    127
    
    
    
    127Change in unrealized postretirement
liability, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    73
    
    
    
    73Initial adoption of EITF 06-4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,922
    )
    
    
    
    
    
    
    (1,922
    )Exercise of stock options and restricted shares, net
    
    
    (4,155
    )
    
    
    (4
    )
    
    
    (53
    )
    
    
    
    
    
    
    
    
    
    
    (57
    )Grant of restricted stock, net of forfeitures
    
    
    102,788
    
    
    
    103
    
    
    
    (103
    )
    
    
    
    
    
    
    
    
    
    
    Stock-based compensation expense
    
    
    
    
    
    
    
    
    
    
    1,393
    
    
    
    
    
    
    
    
    
    
    
    1,393BALANCE AT SEPTEMBER 30, 2008
    
    
    20,748,798
    
    
    $
    20,749
    
    
    $
    208,228
    
    
    $
    66,076
    
    
    $
    (18,465
    )
    
    $
    276,588
   6




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##### Table of Contents



INTEGRA BANK CORPORATION and Subsidiaries
 
 Unaudited Consolidated Statements of Cash Flow
  Nine Months EndedSeptember 30,2008
    
    
    2007CASH FLOWS FROM OPERATING ACTIVITIESNet income
    
    $
    (29,253
    )
    
    $
    24,895Adjustments to reconcile net income to
net cash provided by operating activities:Amortization and depreciation
    
    
    5,443
    
    
    
    5,020Provision for loan losses
    
    
    27,615
    
    
    
    1,913Net securities (gains) losses
    
    
    6,262
    
    
    
    (441
    )Net held for trading (gains) losses
    
    
    (321
    )
    
    
    (Gain) loss on sale of premises and equipment
    
    
    (2
    )
    
    
    (Gain) loss on sale of other real estate owned
    
    
    61
    
    
    
    (27
    )Loss on sale of other assets
    
    
    
    
    
    
    12Gain on sale of mortgage servicing rights
    
    
    
    
    
    
    (576
    )Loss on low-income housing investments
    
    
    1,930
    
    
    
    1,684Proceeds from maturity of held for trading securities
    
    
    1,684
    
    
    
    Proceeds from sale of held for trading securities
    
    
    52,419
    
    
    
    Increase in deferred taxes
    
    
    (22,902
    )
    
    
    (43
    )Net gain on sale of loans held for sale
    
    
    (555
    )
    
    
    (572
    )Proceeds from sale of loans held for sale
    
    
    86,147
    
    
    
    61,008Origination of loans held for sale
    
    
    (86,343
    )
    
    
    (65,383
    )Goodwill impairment
    
    
    48,000
    
    
    
    Change in other operating
    
    
    (5,693
    )
    
    
    5,111Net cash flows provided by operating activities
    
    
    84,492
    
    
    
    32,601CASH FLOWS FROM INVESTING ACTIVITIESProceeds from maturities of securities available for sale
    
    
    101,446
    
    
    
    89,682Proceeds from sales of securities available for sale
    
    
    17,758
    
    
    
    51,668Purchase of securities available for sale
    
    
    (89,663
    )
    
    
    (28,852
    )Purchase of bank owned life insurance
    
    
    
    
    
    
    (13,628
    )Increase in loans made to customers
    
    
    (167,457
    )
    
    
    (81,403
    )Purchase of premises and equipment
    
    
    (2,563
    )
    
    
    (2,411
    )Proceeds from sale of premises and equipment
    
    
    21
    
    
    
    Proceeds from sale of other real estate owned
    
    
    228
    
    
    
    832Acquisition of Prairie Financial Corp, net of cash acquired
    
    
    
    
    
    
    (34,533
    )Net cash flows provided by (used in) investing activities
    
    
    (140,230
    )
    
    
    (18,645
    )CASH FLOWS FROM FINANCING ACTIVITIESNet increase (decrease) in deposits
    
    
    45,532
    
    
    
    (39,776
    )Excess income tax benefit from employee stock-based awards
    
    
    
    
    
    
    10Net increase in short-term borrowed funds
    
    
    33,912
    
    
    
    14Proceeds from long-term borrowings
    
    
    50,000
    
    
    
    161,619Repayment of long-term borrowings
    
    
    (68,027
    )
    
    
    (114,299
    )Repurchase of common stock
    
    
    
    
    
    
    (9,556
    )Dividends paid
    
    
    (11,172
    )
    
    
    (9,743
    )Proceeds from exercise of stock options
    
    
    
    
    
    
    351Net cash flows provided by (used in) financing activities
    
    
    50,245
    
    
    
    (11,380
    )Net increase in cash and cash equivalents
    
    
    (5,493
    )
    
    
    2,576Cash and cash equivalents at beginning of period
    
    
    75,990
    
    
    
    69,398Cash and cash equivalents at end of period
    
    $
    70,497
    
    
    $
    71,974
   7




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##### Table of Contents



INTEGRA BANK CORPORATION and Subsidiaries
 Unaudited Consolidated Statements of Cash Flow (Continued)
 Nine Months EndedSeptember 30,2008
    
    
    2007SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONSOther real estate acquired in settlement of loans
    
    
    4,961
    
    
    
    3,935Dividends declared and not paid
    
    
    207
    
    
    
    3,717
   8




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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:
      9




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##### Table of Contents



FAIR VALUE MEASUREMENT
   Level 1:
 Level 2:
 Level 3:
  Securities:
   10




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##### Table of Contents



Loans held for sale:
 Derivatives:
 Impaired Loans:
  Quoted Pricesin ActiveMarkets for
    
    
    SignificantIdentical
    
    
    Other
    
    
    SignificantAssets and
    
    
    Observable
    
    
    UnobservableLiabilities
    
    
    Inputs
    
    
    Inputs
    
    
    Balance as of(Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    September 30, 2008AssetsSecurities, available for sale
    
    $
    
    
    
    $
    504,821
    
    
    $
    20,607
    
    
    $
    525,428Derivatives
    
    
    
    
    
    
    3,257
    
    
    
    
    
    
    
    3,257LiabilitiesDerivatives
    
    $
    
    
    
    $
    2,520
    
    
    $
    
    
    
    $
    2,520
  Quoted Pricesin ActiveMarkets for
    
    
    SignificantIdentical
    
    
    Other
    
    
    SignificantAssets and
    
    
    Observable
    
    
    UnobservableLiabilities
    
    
    Inputs
    
    
    Inputs
    
    
    Balance as of(Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    September 30, 2008AssetsImpaired loans
    
    $
    
    
    
    $
    
    
    
    $
    32,880
    
    
    $
    32,880Loans held for sale
    
    
    6,679
    
    
    
    
    
    
    
    
    
    
    
    6,679Liabilities
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
   11




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##### Table of Contents



Fair Value Measurements Using SignificantUnobservable Inputs (Level 3)SecuritiesAvailable for sale
    
    
    TotalBeginning Balance
    
    $
    36,706
    
    
    $
    36,706Gains (Losses) included in other comprehensive income
    
    
    (16,099
    )
    
    
    (16,099
    )Transfers in and/or out of Level 3
    
    
    
    
    
    
    Ending Balance
    
    $
    20,607
    
    
    $
    20,607
    STOCK-BASED COMPENSATION:
    12




---



##### Table of Contents



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
  September 30, 2008
    
    
    Weighted 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
    
    
    (43,305
    )
    
    
    17.87Options/SARs outstanding at September 30, 2008
    
    
    1,552,876
    
    
    $
    20.79
    
    
    
    5.8
    
    
    $
    19Options/SARs exercisable at September 30, 2008
    
    
    1,187,169
    
    
    $
    21.47
    
    
    
    4.8
    
    
    $
    19
    Weighted-AverageGrant-DateShares
    
    
    Fair ValueRestricted shares outstanding, December 31, 2007
    
    
    113,962
    
    
    $
    22.80Shares granted
    
    
    112,648Shares vested
    
    
    (34,421
    )Shares forfeited
    
    
    (11,242
    )Restricted shares outstanding, September 30, 2008
    
    
    180,947
    
    
    $
    17.70
  13




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##### Table of Contents



NOTE 2. EARNINGS PER SHARE
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net income (loss)
    
    $
    (33,327
    )
    
    $
    9,206
    
    
    $
    (29,253
    )
    
    $
    24,895Weighted average shares outstanding  Basic
    
    
    20,567,252
    
    
    
    20,527,189
    
    
    
    20,552,567
    
    
    
    19,522,590Incremental shares related to stock compensation
    
    
    
    
    
    
    17,858
    
    
    
    
    
    
    
    60,243Average shares outstanding  Diluted
    
    
    20,567,252
    
    
    
    20,545,047
    
    
    
    20,552,567
    
    
    
    19,582,833Earnings per share  Basic
    
    $
    (1.62
    )
    
    $
    0.45
    
    
    $
    (1.42
    )
    
    $
    1.28Effect of incremental shares related to stock compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.01Earnings per share  Diluted
    
    $
    (1.62
    )
    
    $
    0.45
    
    
    $
    (1.42
    )
    
    $
    1.27
   14




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##### Table of Contents



NOTE 3. SECURITIES
  Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueSeptember 30, 2008:U.S. Government agencies
    
    $
    1,104
    
    
    $
    3
    
    
    $
    3
    
    
    $
    1,104Collateralized Mortgage Obligations:Agency
    
    
    239,129
    
    
    
    507
    
    
    
    5,090
    
    
    
    234,546Private Label
    
    
    36,408
    
    
    
    
    
    
    
    2,276
    
    
    
    34,132Mortgage-backed securities
    
    
    135,744
    
    
    
    876
    
    
    
    285
    
    
    
    136,335Trust Preferred
    
    
    42,803
    
    
    
    
    
    
    
    22,196
    
    
    
    20,607States & political subdivisions
    
    
    92,744
    
    
    
    1,486
    
    
    
    764
    
    
    
    93,466Other securities
    
    
    5,298
    
    
    
    
    
    
    
    60
    
    
    
    5,238Total
    
    $
    553,230
    
    
    $
    2,872
    
    
    $
    30,674
    
    
    $
    525,428
 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
    
    
    
    
    
    
    UnrealizedFair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    LossesSeptember
30, 2008:U.S. Government Agencies
    
    $
    574
    
    
    $
    3
    
    
    $
    
    
    
    $
    
    
    
    $
    574
    
    
    $
    3Collateralized mortgage
obligations:Agency
    
    
    141,772
    
    
    
    2,421
    
    
    
    33,603
    
    
    
    2,669
    
    
    
    175,375
    
    
    
    5,090Private label
    
    
    25,979
    
    
    
    1,439
    
    
    
    8,153
    
    
    
    837
    
    
    
    34,132
    
    
    
    2,276Mortgage-backed securities
    
    
    28,491
    
    
    
    215
    
    
    
    9,554
    
    
    
    70
    
    
    
    38,045
    
    
    
    285Trust Preferred
    
    
    6,240
    
    
    
    5,861
    
    
    
    14,367
    
    
    
    16,335
    
    
    
    20,607
    
    
    
    22,196State & political subdivisions
    
    
    19,964
    
    
    
    720
    
    
    
    448
    
    
    
    44
    
    
    
    20,412
    
    
    
    764Other securities
    
    
    2,630
    
    
    
    56
    
    
    
    45
    
    
    
    4
    
    
    
    2,675
    
    
    
    60Total
    
    $
    225,650
    
    
    $
    10,715
    
    
    $
    66,170
    
    
    $
    19,959
    
    
    $
    291,820
    
    
    $
    30,674
     15




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##### Table of Contents



16




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##### Table of Contents



NOTE 4. ALLOWANCE FOR LOAN LOSSES
   Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Beginning balance
    
    $
    31,780
    
    
    $
    26,390
    
    
    $
    27,261
    
    
    $
    21,155Allowance associated with purchase acquisitions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,982Loans charged off
    
    
    (8,456
    )
    
    
    (1,074
    )
    
    
    (14,337
    )
    
    
    (3,785
    )Recoveries
    
    
    464
    
    
    
    362
    
    
    
    1,227
    
    
    
    1,136Provision for loan losses
    
    
    17,978
    
    
    
    723
    
    
    
    27,615
    
    
    
    1,913Ending balance
    
    $
    41,766
    
    
    $
    26,401
    
    
    $
    41,766
    
    
    $
    26,401Percent of total loans
    
    
    1.70
    %
    
    
    1.15
    %
    
    
    1.70
    %
    
    
    1.15
    %Annualized % of average loans:Net charge-offs
    
    
    1.31
    %
    
    
    0.13
    %
    
    
    0.74
    %
    
    
    0.17
    %Provision for loan losses
    
    
    2.94
    %
    
    
    0.13
    %
    
    
    1.55
    %
    
    
    0.12
    %
      17




---



##### Table of Contents



September 30,
    
    
    December 31,2008
    
    
    2007Nonaccrual loans
    
    $
    79,672
    
    
    $
    18,54990 days or more past due loans
    
    
    5,514
    
    
    
    4,118Total non-performing loans
    
    
    85,186
    
    
    
    22,667Other real estate owned
    
    
    7,252
    
    
    
    2,923Total non-performing assets
    
    $
    92,438
    
    
    $
    25,590Ratios:Non-performing Loans to Loans
    
    
    3.46
    %
    
    
    0.98
    %Non-performing Assets to Loans and Other Real Estate Owned
    
    
    3.75
    %
    
    
    1.11
    %Allowance for Loan Losses to Non-performing Loans
    
    
    49.03
    %
    
    
    120.27
    %
 NOTE 5. BRANCH DIVESTITURES
   NOTE 6. GOODWILL
      18




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##### Table of Contents



NOTE 7. INCOME TAXES
    NOTE 8. SHORT-TERM BORROWINGS
  September 30,
    
    
    December 31,2008
    
    
    2007Federal funds purchased
    
    $
    40,000
    
    
    $
    55,100Securities sold under agreements to repurchase
    
    
    96,182
    
    
    
    97,170Short-term Federal Home Loan Bank advances
    
    
    170,000
    
    
    
    120,000Total short-term borrowed funds
    
    $
    306,182
    
    
    $
    272,270
   19




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##### Table of Contents



NOTE 9. LONG-TERM BORROWINGS
  September 30,
    
    
    December 31,2008
    
    
    2007Federal Home Loan Bank AdvancesFixed maturity advances (weighted average rate of 3.55% and 4.57%
as of September 30, 2008 and December 31, 2007, respectively)
    
    $
    136,011
    
    
    $
    86,211Amortizing and other advances (weighted average rate of 4.81% and
5.11% as of September 30, 2008 and December 31, 2007, respectively)
    
    
    1,060
    
    
    
    1,607Total FHLB Advances
    
    
    137,071
    
    
    
    87,818Securities sold under repurchase agreements with maturities
at various dates through 2013 (weighted average fixed rate of 2.77%
and 3.94% as of September 30, 2008 and December 31, 2007, respectively)
    
    
    100,000
    
    
    
    165,000Note payable, secured by equipment, with a fixed interest rate of 7.26%,
due at various dates through 2012
    
    
    4,051
    
    
    
    4,835Note payable, unsecured, with a floating interest rate equal to one-month
LIBOR plus 0.875%, with a maturity date of April 1, 2012
    
    
    18,500
    
    
    
    20,000Subordinated debt, unsecured, with a floating interest rate equal to three-month LIBOR plus 3.20%, with a maturity date of April 24, 2013
    
    
    10,000
    
    
    
    10,000Subordinated debt, unsecured, with a floating interest rate equal to three-month LIBOR plus 2.85%, with a maturity date of April 7, 2014
    
    
    4,000
    
    
    
    4,000Floating Rate Capital Securities, with an interest rate equal to six-month
LIBOR plus 3.75%, with a maturity date of July 25, 2031, and
callable effective July 25, 2011, at par
    
    
    18,557
    
    
    
    18,557Floating Rate Capital Securities, with an interest rate equal to three-month
LIBOR plus 3.10%, with a maturity date of June 26, 2033, and
callable quarterly, at par
    
    
    35,568
    
    
    
    35,568Floating Rate Capital Securities, with an interest rate equal to three-month
LIBOR plus 1.57%, with a maturity date of June 30, 2037, and
callable effective June 30, 2012, at par
    
    
    20,619
    
    
    
    20,619Floating Rate Capital Securities, with an interest rate equal to three-month
LIBOR plus 1.70%, with a maturity date of December 15, 2036, and callable
effective December 15, 2011, at par
    
    
    10,310
    
    
    
    10,310Total long-term borrowings
    
    $
    358,676
    
    
    $
    376,707
       20




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##### Table of Contents



NOTE 10. COMMITMENTS AND CONTINGENCIES
    September 30,
    
    
    December 31,2008
    
    
    2007Commitments to extend credit
    
    $
    811,532
    
    
    $
    855,430Standby letters of credit
    
    
    18,021
    
    
    
    19,434Non-reimbursable standby letters of credit
    
    
    1,520
    
    
    
    2,220
 NOTE 11. INTEREST RATE CONTRACTS
      NOTE 12. SEGMENT INFORMATION
   21




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##### Table of Contents



For Three Months Ended September 30, 2008
    
    Banking
    
    
    Other
    
    
    TotalInterest income
    
    $
    42,253
    
    
    $
    52
    
    
    $
    42,305Interest expense
    
    
    16,865
    
    
    
    1,580
    
    
    
    18,445Net interest income (loss)
    
    
    25,388
    
    
    
    (1,528
    )
    
    
    23,860Provision for loan losses
    
    
    17,978
    
    
    
    
    
    
    
    17,978Other income
    
    
    10,120
    
    
    
    64
    
    
    
    10,184Other expense
    
    
    71,843
    
    
    
    344
    
    
    
    72,187Earnings (Loss) before income taxes
    
    
    (54,313
    )
    
    
    (1,808
    )
    
    
    (56,121
    )Income tax expense (benefit)
    
    
    (22,118
    )
    
    
    (676
    )
    
    
    (22,794
    )Net income (loss)
    
    $
    (32,195
    )
    
    $
    (1,132
    )
    
    $
    (33,327
    )
 For Nine Months Ended September 30, 2008
    
    Banking
    
    
    Other
    
    
    TotalInterest income
    
    $
    132,486
    
    
    $
    170
    
    
    $
    132,656Interest expense
    
    
    54,981
    
    
    
    5,131
    
    
    
    60,112Net interest income (loss)
    
    
    77,505
    
    
    
    (4,961
    )
    
    
    72,544Provision for loan losses
    
    
    27,615
    
    
    
    
    
    
    
    27,615Other income
    
    
    23,700
    
    
    
    230
    
    
    
    23,930Other expense
    
    
    119,613
    
    
    
    872
    
    
    
    120,485Earnings (Loss) before income taxes
    
    
    (46,023
    )
    
    
    (5,603
    )
    
    
    (51,626
    )Income tax expense (benefit)
    
    
    (20,265
    )
    
    
    (2,108
    )
    
    
    (22,373
    )Net income (loss)
    
    $
    (25,758
    )
    
    $
    (3,495
    )
    
    $
    (29,253
    )Segment assets
    
    $
    3,343,706
    
    
    $
    13,136
    
    
    $
    3,356,842
 For Three Months Ended September 30, 2007
    
    Banking
    
    
    Other
    
    
    TotalInterest income
    
    $
    51,257
    
    
    $
    70
    
    
    $
    51,327Interest expense
    
    
    24,263
    
    
    
    2,366
    
    
    
    26,629Net interest income (loss)
    
    
    26,994
    
    
    
    (2,296
    )
    
    
    24,698Provision for loan losses
    
    
    723
    
    
    
    
    
    
    
    723Other income
    
    
    10,311
    
    
    
    76
    
    
    
    10,387Other expense
    
    
    21,965
    
    
    
    277
    
    
    
    22,242Earnings (Loss) before income taxes
    
    
    14,617
    
    
    
    (2,497
    )
    
    
    12,120Income tax expense (benefit)
    
    
    3,842
    
    
    
    (928
    )
    
    
    2,914Net income (loss)
    
    $
    10,775
    
    
    $
    (1,569
    )
    
    $
    9,206
 For Nine Months Ended September 30, 2007
    
    Banking
    
    
    Other
    
    
    TotalInterest income
    
    $
    140,344
    
    
    $
    192
    
    
    $
    140,536Interest expense
    
    
    65,854
    
    
    
    6,088
    
    
    
    71,942Net interest income (loss)
    
    
    74,490
    
    
    
    (5,896
    )
    
    
    68,594Provision for loan losses
    
    
    1,913
    
    
    
    
    
    
    
    1,913Other income
    
    
    29,270
    
    
    
    263
    
    
    
    29,533Other expense
    
    
    63,329
    
    
    
    950
    
    
    
    64,279Earnings (Loss) before income taxes
    
    
    38,518
    
    
    
    (6,583
    )
    
    
    31,935Income tax expense (benefit)
    
    
    9,506
    
    
    
    (2,466
    )
    
    
    7,040Net income (loss)
    
    $
    29,012
    
    
    $
    (4,117
    )
    
    $
    24,895Segment assets
    
    $
    3,309,093
    
    
    $
    8,227
    
    
    $
    3,317,320
  22




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 INTRODUCTION
   OVERVIEW
      23




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##### Table of Contents




    
    A goodwill impairment charge of $48,000. The details around this charge are
explained in Note 6.
 
    
    The provision for loan losses was $17,978 for the third quarter of 2008, compared to
$6,003 for the second quarter of 2008. The allowance to total loans increased 38 basis
points to 1.70% while net charge-offs increased 83 basis points to 1.31%. The annualized
net charge-off ratio for the nine months ended September 30, 2008 increased to 74 basis
points. The provision for loan losses exceeded net charge-offs by $9,986 during the third
quarter, and exceeded net charge-offs by $14,505 for the nine months ended September 30,
2008.
 
    
    Non-performing loans increased $34,712, or 68.8% during the third quarter of 2008,
to $85,186 or 3.5% of total loans, while the allowance to non-performing loans decreased
from 63% to 49%. The increase came primarily from increases in the residential builder
and residential construction portfolios.
 
    
    Net interest income was $23,860 for the third quarter of 2008, compared to $25,166
for the second quarter of 2008, while the net interest margin decreased 21 basis points to
3.22%. Commercial loan growth during the third quarter of $71,783 or 16.8% annualized,
was more than offset by a 33 basis point decline in commercial loan yields. Approximately
11 basis points of the 21 basis point decline in the net interest margin was due to the
higher level of non-accrual loans. An additional 6 basis points of the decline in the
margin occurred because the spread between interest earned on variable rate commercial
loans over related funding costs declined. The increase to commercial loan average
balances contributed 7 basis points to the margin, which was offset by a variety of items,
including the impact of lower residential real estate mortgage and securities balances.
Low cost deposits declined $353 or 0.2% annualized, while the cost of interest bearing
liabilities was 2.67% for both the second and third quarters of 2008.
 
    
    Non-interest income was $10,184 for the third quarter of 2008, compared to $3,012
for the second quarter which included $6,302 of other-than-temporary impairment (OTTI)
charges on two securities. Deposit service charges increased $825, or 16.3%.
Derivative gains were $95, compared to losses of $369 during the second quarter.
 
    
    Non-interest expense for the third quarter of 2008, excluding the goodwill
impairment charge of $48,000, increased $10 to $24,187 from the second quarter of 2008, an
increase of 0.2% annualized. A decline in personnel expenses of $321 was offset by an
increase in losses on real estate owned of $375.
    24




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##### Table of Contents



CRITICAL ACCOUNTING POLICIES
   market participant
 NET INTEREST INCOME
   
    
    The decreased 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,
coupled with higher levels of non-accrual loans. During the first six months of 2008, the
federal funds rate declined by 225 basis points. There was no change to the federal funds
rate during the third quarter of 2008.
 
    
    Average loan yields decreased 197 basis points to 5.70% for the quarter ended September
30, 2008, from 7.67% in the quarter ended September 30, 2007, led by a decrease in
commercial loan yields, including loan fees, of 262 basis points to 5.36%. Our asset
sensitivity (meaning that a change in prevailing interest rates impacts our assets more
quickly than our liabilities), contributed to a 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 41% of our variable
rate loans are tied to prime, 46% to LIBOR and 13% to other floating rate indices. The
amount of interest lost during the third quarter of 2008 because of non-accrual loans,
including interest not accrued and interest receivable charged off, net of recoveries, was
approximately $1,700, compared to approximately $3,400 for all of 2008. The impact of
non-accrual loans to our net interest margin for the third quarter of 2008 was 11 basis
points, and is 15 basis points for the nine months ended September 30, 2008. Approximately
66% of this amount relates to loans from our Chicago region.
 
    
    The decline in market rates during 2008 has positively impacted our liability costs.
The cost of interest bearing liabilities declined 140 basis points from the third quarter
of 2007 to the third quarter of 2008, declining from 4.07% to 2.67%. Time deposit rates
declined 131 basis points to 3.44%, money market account rates declined 224 basis points to
2.01%, and Federal Home Loan Bank rates declined 193 basis points to 3.11%. A shift in
funding from retail certificates of deposit, which declined $119,337 during the third
quarter of 2008, compared to the third quarter of 2007, to Federal Home Loan Bank advances,
which increased $187,016 during the same timeframe has not significantly impacted funding
costs.
 
    
    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 $274,845,
or 18.3% from the third quarter of 2007. This increase is primarily due to strong growth
we have experienced in the past twelve months. The positive impact to our earning asset
mix of increasing the percentage of commercial loans to total earning assets has lessened
during 2008 as rates have declined. The yield during the third quarter of 2007 for
commercial loans of 7.98% was 270 basis points higher than the yield on investment
securities of 5.28%. That difference was only 24 basis points for the third quarter of
2008. Total average commercial loans represented 58.5% of earning assets for the third
quarter of 2008, compared to 52.1% for the third quarter of 2007, evidencing the
improvement in mix. The increase in the average balance of commercial loans during the
third quarter of 2008, as compared to the third quarter of 2007, offset about half of the
decline in yield on those assets.
  25




---



##### Table of Contents




    
    A shift in funding sources from the third quarter of 2007 to the third quarter of 2008
also benefited the net interest margin and net interest income. Higher costing time
deposit average balances were 41.1% of total interest bearing liabilities for the quarter
ended September 30, 2008, compared to 46.1% for the quarter ended September 30, 2007.
Sources of funds other than time and transaction deposits, which include repurchase
agreements, FHLB advances and other sources, increased from 19.3% of total interest-bearing
liabilities during the second quarter of 2008 to 25.0% for the quarter ended September 30,
2008. Average time deposit rates declined only 131 basis points from the year ago quarter,
while the rates for funding sources other than time and transaction accounts declined 217
basis points. As a result, our loan to deposit ratio was 103.1% at
September 30, 2008, compared to 98.8% at December 31, 2007 and 96.5% at September 30, 2007.
During the third quarter of 2008, we modified our funding strategy to focus on retail
certificates of deposit through more competitive pricing, and increased our use of brokered
deposits, which increased $67,508, or 44.4% from the year ago quarter. The increase in
brokered deposits came almost entirely during the third quarter of 2008, as the average
balance of these funds increased $67,317 or 176% annualized from the second quarter of 2008.
We used these brokered deposits to fund commercial loan growth experienced during 2008 and in
part because of our bias towards longer dated liabilities.
  2008
    
    
    2007Average
    
    
    Interest
    
    
    Yield/
    
    
    Average
    
    
    Interest
    
    
    Yield/For Three Months Ended September 30,
    
    Balances
    
    
    & Fees
    
    
    Cost
    
    
    Balances
    
    
    & Fees
    
    
    CostEARNING ASSETS:Short-term investments
    
    $
    8,726
    
    
    $
    26
    
    
    
    1.21
    %
    
    $
    4,591
    
    
    $
    56
    
    
    
    4.85
    %Loans held for sale
    
    
    5,460
    
    
    
    88
    
    
    
    6.46
    %
    
    
    4,085
    
    
    
    77
    
    
    
    7.58
    %Securities
    
    
    561,511
    
    
    
    7,192
    
    
    
    5.12
    %
    
    
    609,026
    
    
    
    8,039
    
    
    
    5.28
    %Regulatory Stock
    
    
    29,182
    
    
    
    385
    
    
    
    5.27
    %
    
    
    26,138
    
    
    
    314
    
    
    
    4.80
    %Loans
    
    
    2,434,064
    
    
    
    35,267
    
    
    
    5.70
    %
    
    
    2,238,572
    
    
    
    43,639
    
    
    
    7.67
    %Total earning assets
    
    
    3,038,943
    
    
    $
    42,958
    
    
    
    5.63
    %
    
    
    2,882,412
    
    
    $
    52,125
    
    
    
    7.19
    %Allowance for loan loss
    
    
    (33,023
    )
    
    
    
    
    
    
    
    
    
    
    (26,244
    )Other non-earning assets
    
    
    371,341
    
    
    
    
    
    
    
    
    
    
    
    376,750TOTAL ASSETS
    
    $
    3,377,261
    
    
    
    
    
    
    
    
    
    
    $
    3,232,918INTEREST-BEARING LIABILITIES:DepositsSavings and interest-bearing demand
    
    $
    566,259
    
    
    $
    1,275
    
    
    
    0.90
    %
    
    $
    510,155
    
    
    $
    1,307
    
    
    
    1.02
    %Money market accounts
    
    
    367,260
    
    
    
    1,855
    
    
    
    2.01
    %
    
    
    387,962
    
    
    
    4,156
    
    
    
    4.25
    %Certificates of deposit and other time
    
    
    1,127,672
    
    
    
    9,758
    
    
    
    3.44
    %
    
    
    1,195,543
    
    
    
    14,327
    
    
    
    4.75
    %Total interest-bearing deposits
    
    
    2,061,191
    
    
    
    12,888
    
    
    
    2.49
    %
    
    
    2,093,660
    
    
    
    19,790
    
    
    
    3.75
    %Short-term borrowings
    
    
    326,742
    
    
    
    1,995
    
    
    
    2.39
    %
    
    
    211,344
    
    
    
    2,648
    
    
    
    4.90
    %Long-term borrowings
    
    
    358,859
    
    
    
    3,562
    
    
    
    3.88
    %
    
    
    290,241
    
    
    
    4,191
    
    
    
    5.65
    %Total interest-bearing liabilities
    
    
    2,746,792
    
    
    $
    18,445
    
    
    
    2.67
    %
    
    
    2,595,245
    
    
    $
    26,629
    
    
    
    4.07
    %Non-interest bearing deposits
    
    
    283,836
    
    
    
    
    
    
    
    
    
    
    
    284,002Other noninterest-bearing liabilities and
shareholders equity
    
    
    346,633
    
    
    
    
    
    
    
    
    
    
    
    353,671TOTAL LIABILITIES AND
SHAREHOLDERS EQUITY
    
    $
    3,377,261
    
    
    
    
    
    
    
    
    
    
    $
    3,232,918Interest income/earning assets
    
    
    
    
    
    $
    42,958
    
    
    
    5.63
    %
    
    
    
    
    
    $
    52,125
    
    
    
    7.19
    %Interest expense/earning assets
    
    
    
    
    
    
    18,445
    
    
    
    2.41
    %
    
    
    
    
    
    
    26,629
    
    
    
    3.67
    %Net interest income/earning assets
    
    
    
    
    
    $
    24,513
    
    
    
    3.22
    %
    
    
    
    
    
    $
    25,496
    
    
    
    3.52
    %
     26




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##### Table of Contents



2008
    
    
    2007Average
    
    
    Interest
    
    
    Yield/
    
    
    Average
    
    
    Interest
    
    
    Yield/For Nine Months Ended September 30,
    
    Balances
    
    
    & Fees
    
    
    Cost
    
    
    Balances
    
    
    & Fees
    
    
    CostEARNING ASSETS:Short-term investments
    
    $
    6,675
    
    
    $
    94
    
    
    
    1.89
    %
    
    $
    4,788
    
    
    $
    165
    
    
    
    4.59
    %Loans held for sale
    
    
    5,969
    
    
    
    281
    
    
    
    6.28
    %
    
    
    2,892
    
    
    
    150
    
    
    
    6.96
    %Securities
    
    
    602,611
    
    
    
    23,245
    
    
    
    5.14
    %
    
    
    618,452
    
    
    
    24,129
    
    
    
    5.20
    %Regulatory Stock
    
    
    29,181
    
    
    
    1,170
    
    
    
    5.34
    %
    
    
    25,448
    
    
    
    941
    
    
    
    4.93
    %Loans
    
    
    2,381,814
    
    
    
    109,924
    
    
    
    6.09
    %
    
    
    2,072,381
    
    
    
    117,363
    
    
    
    7.49
    %Total earning assets
    
    
    3,026,250
    
    
    $
    134,714
    
    
    
    5.94
    %
    
    
    2,723,961
    
    
    $
    142,748
    
    
    
    7.00
    %Allowance for loan loss
    
    
    (30,212
    )
    
    
    
    
    
    
    
    
    
    
    (24,644
    )Other non-earning assets
    
    
    378,329
    
    
    
    
    
    
    
    
    
    
    
    333,014TOTAL ASSETS
    
    $
    3,374,367
    
    
    
    
    
    
    
    
    
    
    $
    3,032,331INTEREST-BEARING LIABILITIES:DepositsSavings and interest-bearing demand
    
    $
    555,788
    
    
    $
    3,715
    
    
    
    0.89
    %
    
    $
    505,102
    
    
    $
    3,639
    
    
    
    0.96
    %Money market accounts
    
    
    383,152
    
    
    
    6,661
    
    
    
    2.32
    %
    
    
    360,007
    
    
    
    11,208
    
    
    
    4.16
    %Certificates of deposit and other time
    
    
    1,107,482
    
    
    
    31,755
    
    
    
    3.83
    %
    
    
    1,128,473
    
    
    
    39,644
    
    
    
    4.70
    %Total interest-bearing deposits
    
    
    2,046,422
    
    
    
    42,131
    
    
    
    2.75
    %
    
    
    1,993,582
    
    
    
    54,491
    
    
    
    3.65
    %Short-term borrowings
    
    
    311,886
    
    
    
    6,116
    
    
    
    2.58
    %
    
    
    186,058
    
    
    
    6,930
    
    
    
    4.91
    %Long-term borrowings
    
    
    378,140
    
    
    
    11,865
    
    
    
    4.12
    %
    
    
    260,578
    
    
    
    10,521
    
    
    
    5.32
    %Total interest-bearing liabilities
    
    
    2,736,448
    
    
    $
    60,112
    
    
    
    2.94
    %
    
    
    2,440,218
    
    
    $
    71,942
    
    
    
    3.94
    %Non-interest bearing deposits
    
    
    280,754
    
    
    
    
    
    
    
    
    
    
    
    272,472Other noninterest-bearing liabilities and
shareholders equity
    
    
    357,165
    
    
    
    
    
    
    
    
    
    
    
    319,641TOTAL LIABILITIES AND
SHAREHOLDERS EQUITY
    
    $
    3,374,367
    
    
    
    
    
    
    
    
    
    
    $
    3,032,331Interest income/earning assets
    
    
    
    
    
    $
    134,714
    
    
    
    5.94
    %
    
    
    
    
    
    $
    142,748
    
    
    
    7.00
    %Interest expense/earning assets
    
    
    
    
    
    
    60,112
    
    
    
    2.65
    %
    
    
    
    
    
    
    71,942
    
    
    
    3.53
    %Net interest income/earning assets
    
    
    
    
    
    $
    74,602
    
    
    
    3.29
    %
    
    
    
    
    
    $
    70,806
    
    
    
    3.47
    %
    NON-INTEREST INCOME
  
    
    An increase in deposit service charges of $476 or 8.8%, to $5,884. The increase is the
result of higher levels of non-sufficient funds activity which we believe is attributed to
a higher number of accounts, a slight fee increase and higher incidents of non-sufficient
funds activity.
 
    
    An increase in debit card interchange income of $222, or 19.5%, to $1,358 driven by an
increase in the number of checking accounts and a continued shift to debit cards as the
preferred method of payment.
 
    
    A decrease in net check printing and sales revenue of $259, or 104.8% which occurred, in
part due to startup costs incurred in 2008 related to converting official checks to an
in-house system from a previously outsourced arrangement.
 
    
    Declines in securities gains of $206, or 94.1% and annuity income of $174, or 43.8%.
  27




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##### Table of Contents



NON-INTEREST EXPENSE
  
    
    A $48,000 charge for goodwill impairment which is detailed in Note 6 to the financial
statements.
 
    
    An increase in salaries and employee benefits of $806, or 7.1%, which was the result of
higher salary expenses of $593, due to 2008 pay rate increases, a low rate of personnel
turnover and a limited number of new positions added in the last year, and increased health
insurance expense of $282. The average number of full time equivalent employees for the
third quarter of 2008 was 861 compared to 844 for the third quarter of 2007.
 
    
    An increase in loan and other real estate owned expenses of $622, or 251%, to $870.
This increase is attributed to an increase of $335 of real estate owned losses and related
expenses including additional writedowns and losses on sale of properties. The remaining
increase of $287 consists of expenses we 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.
   INCOME TAX EXPENSE (BENEFIT)
    28




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##### Table of Contents



FINANCIAL POSITION
  SECURITIES
   REGULATORY STOCK
  LOANS HELD FOR SALE
  LOANS
      29




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##### Table of Contents



30




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##### Table of Contents



September 30,
    
    
    December 31,2008
    
    
    2007Commercial, industrial and
agricultural loans
    
    $
    752,700
    
    
    $
    689,504Economic development loans and
other obligations of state and
political subdivisions
    
    
    13,140
    
    
    
    7,227Lease financing
    
    
    5,361
    
    
    
    5,291Total commercial
    
    
    771,201
    
    
    
    702,022Commercial real estateCommercial mortgages
    
    
    425,905
    
    
    
    298,151Construction and development
    
    
    617,085
    
    
    
    609,858Total commercial real estate
    
    
    1,042,990
    
    
    
    908,009Residential mortgages
    
    
    323,997
    
    
    
    380,429Home equity
    
    
    163,202
    
    
    
    145,403Consumer loans
    
    
    159,420
    
    
    
    175,516Total loans
    
    
    2,460,810
    
    
    
    2,311,379Less: unearned income
    
    
    
    
    
    
    1Loans, net of unearned income
    
    $
    2,460,810
    
    
    $
    2,311,378
 ASSET QUALITY
       31




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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Beginning balance
    
    $
    31,780
    
    
    $
    26,390
    
    
    $
    27,261
    
    
    $
    21,155Allowance associated with purchase acquisitions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,982Loans charged off
    
    
    (8,456
    )
    
    
    (1,074
    )
    
    
    (14,337
    )
    
    
    (3,785
    )Recoveries
    
    
    464
    
    
    
    362
    
    
    
    1,227
    
    
    
    1,136Provision for loan losses
    
    
    17,978
    
    
    
    723
    
    
    
    27,615
    
    
    
    1,913Ending balance
    
    $
    41,766
    
    
    $
    26,401
    
    
    $
    41,766
    
    
    $
    26,401Percent of total loans
    
    
    1.70
    %
    
    
    1.15
    %
    
    
    1.70
    %
    
    
    1.15
    %Annualized % of average loans:Net charge-offs
    
    
    1.31
    %
    
    
    0.13
    %
    
    
    0.74
    %
    
    
    0.17
    %Provision for loan losses
    
    
    2.94
    %
    
    
    0.13
    %
    
    
    1.55
    %
    
    
    0.12
    %
        32




---



##### Table of Contents




    
    In the third quarter of 2008, we obtained new appraisals covering approximately 60% of
the properties securing our Chicago area non-performing loans and we used those appraisals
to help determine the need for and amount of specific reserves within the allowance for
loan losses. Since April 1, 2008 we have obtained new appraisals on approximately 70% of
the properties securing our Chicago area non-performing loans. We plan to continue to
order new or updated appraisals for any commercial real estate loans that warrant it as
this cycle continues.
 
    
    We continue to refocus our Chicago lending staff towards managing non-performing loans
in their portfolio and have hired additional personnel to assist with managing the more
troubled relationships.
 
    
    As discussed above, we are not currently pursuing additional growth in our CRE
portfolio. Accordingly, during the third
quarter of 2008, we discontinued pursuing new CRE opportunities, regardless of property type.
Our CRE balances will likely continue to grow in the short-term, however, as we work through
our remaining pipeline of pending loans and fund committed credit facilities. We expect the
rate of growth to show a significant decline over the next nine months and for CRE balances
to decline in the second half of 2009. As this credit cycle unfolds, we will continue to
evaluate the size of this portfolio.
 
    
    We have implemented other policy and process changes, including actions to reduce our
concentration risk as well as tightening our loan approval standards and processes.
  September 30,
    
    
    December 31,2008
    
    
    2007Nonaccrual loans
    
    $
    79,672
    
    
    $
    18,54990 days or more past due loans
    
    
    5,514
    
    
    
    4,118Total non-performing loans
    
    
    85,186
    
    
    
    22,667Other real estate owned
    
    
    7,252
    
    
    
    2,923Total non-performing assets
    
    $
    92,438
    
    
    $
    25,590Ratios:Non-performing Loans to Loans
    
    
    3.46
    %
    
    
    0.98
    %Non-performing Assets to Loans and Other Real Estate Owned
    
    
    3.75
    %
    
    
    1.11
    %Allowance for Loan Losses to Non-performing Loans
    
    
    49.03
    %
    
    
    120.27
    %
   33




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##### Table of Contents



DEPOSITS
    SHORT-TERM BORROWINGS
   LONG-TERM BORROWINGS
    CAPITAL EXPENDITURES
  OFF-BALANCE SHEET ARRANGEMENTS AND AGGREGATE CONTRACTUAL OBLIGATIONS
   34




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##### Table of Contents



CAPITAL RESOURCES AND LIQUIDITY
  Regulatory Guidelines
    
    
    ActualMinimum
    
    
    Well-
    
    
    September 30,
    
    
    December 31,Requirements
    
    
    Capitalized
    
    
    2008
    
    
    2007Integra Bank Corporation:Total Capital (to Risk-Weighted Assets)
    
    
    8.00
    %
    
    
    N/A
    
    
    
    11.03
    %
    
    
    11.52
    %Tier 1 Capital (to Risk-Weighted Assets)
    
    
    4.00
    %
    
    
    N/A
    
    
    
    9.05
    %
    
    
    9.34
    %Tier 1 Capital (to Average Assets)
    
    
    4.00
    %
    
    
    N/A
    
    
    
    7.70
    %
    
    
    7.81
    %Integra Bank N.A.:Total Capital (to Risk-Weighted Assets)
    
    
    8.00
    %
    
    
    10.00
    %
    
    
    11.34
    %
    
    
    11.89
    %Tier 1 Capital (to Risk-Weighted Assets)
    
    
    4.00
    %
    
    
    6.00
    %
    
    
    10.09
    %
    
    
    10.86
    %Tier 1 Capital (to Average Assets)
    
    
    4.00
    %
    
    
    5.00
    %
    
    
    8.59
    %
    
    
    9.08
    %
    
    
    Improving and retaining our level of earnings;
 
    
    Reducing CRE lending. We are currently in process of reducing our growth rate in
commercial real estate lending. We may also reduce the size of our balance sheet, which
could include the sale of non-core assets;
 
    
    Evaluating the cost and benefits of the Treasury Capital Purchase Program; and
 
    
    Issuing new capital in an opportunistic basis if we feel necessary and if conditions
warrant.
       35




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures about Market Risk
     Earnings at Risk (EAR).
  Immediate Rate Shock
    
    September 30, 2008
    
    
    December 31, 2007+200 basis points
    
    
    3.57
    %
    
    
    -1.44
    %+100 basis points
    
    
    1.51
    %
    
    
    -0.67
    %-100 basis points
    
    
    -3.16
    %
    
    
    0.02
    %-200 basis points
    
    
    -9.61
    %
    
    
    -2.55
    %
   36




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##### Table of Contents



Economic Value of Equity (EVE).
   Immediate Rate Shock
    
    September 30, 2008
    
    
    December 31, 2007+200 basis points
    
    
    -1.35
    %
    
    
    -4.32
    %+100 basis points
    
    
    -0.30
    %
    
    
    -1.95
    %-100 basis points
    
    
    -2.93
    %
    
    
    0.35
    %-200 basis points
    
    
    -8.77
    %
    
    
    -0.91
    %
   
 Item 4: Controls and Procedures
    37




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##### Table of Contents



PART II   OTHER INFORMATION
 
 Item 1. LEGAL PROCEEDINGS
  
 Item 1A. RISK FACTORS
  Current market developments may adversely affect our industry, business, results of operations and
access to capital.
  
    
    Recent actions taken to implement the Economic Emergency Stabilization Act by the
Treasury Department and other actions by the federal banking agencies may not succeed in
restoring confidence to the financial markets.
 
    
    Further declines in the housing market and the increased volatility of the stock market
may adversely affect consumer confidence and may cause adverse changes in loan payment
patterns, causing increases in delinquencies and default rates.
 
    
    The processes we use to estimate probable losses and impairment of assets, including
investment securities and goodwill, may no longer be reliable because they rely on complex
judgments, including forecasts of economic conditions, which may no longer be capable of
accurate estimation.
 
    
    Our ability to assess the creditworthiness of our customers may be impaired if the
models and approaches we use to select, manage and underwrite our customers become less
predictive of future charge-offs.
 
    
    Our ability to borrow from other financial institutions on favorable terms or at all
could be adversely affected by further disruptions in the capital markets or other events.
 
    
    We may be required to pay higher FDIC premiums because of the increased deposit coverage
and the closure of other financial institutions could deplete the insurance fund of the
FDIC.
 
    
    We expect to face increased regulation of our industry. Compliance with such regulation
may increase our costs, limit our ability to pursue business opportunities, and increase
compliance challenges.
  We may record additional goodwill impairment charges which would adversely impact our results of
operations.
     38




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##### Table of Contents



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
  
 Item 5. OTHER INFORMATION
 
 
 Item 6. EXHIBITS
  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
  39




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##### Table of Contents



SIGNATURES
  INTEGRA BANK CORPORATIONBy:
    /s/ Michael T. VeaMichael T. VeaChairman of the Board, 
President and Chief Executive Officer
November 10, 2008/s/ Martin M. ZornMartin M. ZornChief Operating Officer and
Chief Financial OfficerNovember 10, 2008  40




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##### 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
  41