Third quarter 2008 net income (loss) was $(33,327), compared to third quarter 2007 net income of $9,206, and second quarter 2008 net income (loss) of $(899). Earnings (loss) per diluted share were $(1.62) and $0.45 for the third quarters of 2008 and 2007, respectively, and $(0.04) for the second quarter of 2008. The third quarter of 2008 was highlighted by the following items:
• 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.

The weakened housing market has stressed our loan portfolio, resulting in a higher provision for loan losses. We are executing adjustments to our strategic plan to take into account the current economic downturn, severe housing correction, and weakening credit conditions. We are focusing on making sure we have adequate capital, liquidity and loan loss reserves to weather the current credit cycle. To maximize capital, we have adjusted our loan targets downward, especially in the area of commercial real estate. The growth in our commercial real estate portfolio is attributable, in part, to the difficulties experienced in the permanent financing market. As a result of the worsening credit markets, many of our borrowers have not been able to refinance their completed and stabilized projects on a permanent basis as expected. Accordingly, given the current environment and the continued difficulties in the permanent market, we determined that pursuing additional growth in our commercial real estate portfolio would not be prudent at this time. During the third quarter of 2008, we discontinued pursuing new commercial real estate opportunities, regardless of property type. Our commercial real estate balances will likely continue to grow in the short-term, however, as we work through our small remaining pipeline of pending loans and as we fund committed credit facilities. We expect the rate of growth to show a significant decline over the next nine months and we expect commercial real estate balances to decline in the second half of 2009. As this credit cycle unfolds, we will continue to evaluate the size of this portfolio. Our short-term emphasis will be on maintaining credit quality, growing low cost deposits, taking care of customers and improving our operating leverage. We are looking closely at our loan portfolio to reduce levels of non-performing loans. We will also take steps to increase capital through earnings retention, as evidenced by our decision during the third quarter to temporarily reduce our dividend, balance sheet management and other opportunities that may arise and be available to us.

CRITICAL ACCOUNTING POLICIES
There has been one addition to our critical accounting policies since those disclosed in the Annual Report on Form 10-K for the year ended December 31, 2007. During the current year, we also believe the determination of other-than-temporary impairment of securities to be a critical accounting policy.
Declines in the fair value of securities below their cost that are other than temporary are reflected as realized losses. In estimating other-than-temporary losses, we consider: 1) the length of time and extent that fair value has been less than cost; 2) the financial condition and near term prospects of the issuer; and 3) our ability and intent to hold the security for a period sufficient to allow for any anticipated recovery in fair value.
For securities falling under EITF 99-20, "Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to be Held by a Transferor in Securitized Financial Assets", such as collateralized mortgage obligations (CMOs) and collateralized debt obligations (CDOs), an other-than-temporary impairment is deemed to have occurred when there is an adverse change in the expected cash flows (principal or interest) to be received and the fair value of the beneficial interest is less than its carrying amount. In determining whether an adverse change in cash flows has occurred, the present value of the remaining cash flows, as estimated at the initial transaction date (or the last date previously revised), is compared to the present value of the expected cash flows at the current reporting date. The estimated cash flows reflect those a "market participant" would use and are discounted at a rate equal to the current effective yield. If an other-than-temporary impairment is recognized as a result of this analysis, the yield is changed to the market rate. The last revised estimated cash flows are then used for future impairment analysis purposes.
NET INTEREST INCOME
Net interest income was $23,860 for the three months ended September 30, 2008, compared with $24,698 for the same period in 2007 and $72,544 and $68,594 for the nine months ended September 30, 2008 and 2007, respectively. The net interest margin for the three months ended September 30, 2008, was 3.22% compared to 3.52% for the same three months of 2007, while the margin for the nine months ended September 30, 2008 was 3.29%, as compared to 3.47% for the nine months ended September 30, 2007.
The primary components of the changes in margin and net interest income to the third quarter of 2008 from the third quarter of 2007 were as follows:
• 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.

• 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.

AVERAGE BALANCE SHEET AND ANALYSIS OF NET INTEREST INCOME

                                                        2008                                        2007
                                         Average       Interest       Yield/         Average       Interest       Yield/
For Three Months Ended September 30,    Balances        & Fees         Cost         Balances        & Fees         Cost

EARNING 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                                     376,750


TOTAL ASSETS                           $ 3,377,261                                 $ 3,232,918

INTEREST-BEARING LIABILITIES:

Deposits
Savings 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                                     284,002
Other noninterest-bearing
liabilities and shareholders' equity       346,633                                     353,671


TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY                                 $ 3,377,261                                 $ 3,232,918


Interest 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 %

Tax exempt income presented on a tax equivalent basis based on a 35% federal tax rate.
Federal tax equivalent adjustments on securities are $587 and $745 for 2008 and 2007, respectively.
Federal tax equivalent adjustments on loans are $66 and $53 for 2008 and 2007, respectively.

AVERAGE BALANCE SHEET AND ANALYSIS OF NET INTEREST INCOME

                                                       2008                                        2007
                                        Average       Interest       Yield/         Average       Interest       Yield/
For Nine Months Ended September 30,    Balances        & Fees         Cost         Balances        & Fees         Cost

EARNING 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                                     333,014


TOTAL ASSETS                          $ 3,374,367                                 $ 3,032,331

INTEREST-BEARING LIABILITIES:

Deposits
Savings 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                                     272,472
Other noninterest-bearing
liabilities and shareholders'
equity                                    357,165                                     319,641


TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY                                $ 3,374,367                                 $ 3,032,331


Interest 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 %

Tax exempt income presented on a tax equivalent basis based on a 35% federal tax rate.
Federal tax equivalent adjustments on securities are $1,894 and $2,051 for 2008 and 2007, respectively.
Federal tax equivalent adjustments on loans are $164 and $161 for 2008 and 2007, respectively.
NON-INTEREST INCOME
Non-interest income declined $203 to $10,184 for the quarter ended September 30, 2008, compared to $10,387 from the third quarter of 2007. The net decrease was primarily attributable to:
• 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%.

Non-interest income for the nine months ended September 30, 2008, was $23,930, a decrease of $5,603, or 19.0% from the nine months ended September 30, 2007. The primary components of the difference include the second quarter 2008 impairment charge of $6,302, a first quarter 2007 gain on the sale of our mortgage servicing portfolio of $555 and a resulting decline in mortgage servicing income of $206.
Non-interest income for the nine months ended September 30, 2008 included increases in several customer based fee income categories. Deposit service charges increased $608, or 4.0%, resulting from a higher level of non-sufficient funds charges, the continuing impact of higher fees and service charges from the . . .