Summary of INTEGRA BANK CORP

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
INTRODUCTION
The discussion and analysis which follows is presented to assist in the understanding and evaluation of our financial condition and results of operations as presented in the following consolidated financial statements and related notes. The text of this review is supplemented with various financial data and statistics. All amounts presented are in thousands, except for share and per share data and ratios.
Certain statements made in this report may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. When used in this report, the words "may," "will," "should," "would," "anticipate," "estimate," "expect," "plan," "believe," "intend," and similar expressions identify forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements to be materially different from the results, performance or achievements expressed or implied by such forward-looking statements. Such factors include the risks and uncertainties described in Item 1A "Risk Factors" and other risks and uncertainties disclosed in future periodic reports. We undertake no obligation to release revisions to these forward-looking statements or to reflect events or conditions occurring after the date of this report, except as required to do so in future periodic reports.
OVERVIEW
The unfavorable economic conditions that have existed since 2007 continued to significantly impact the banking industry and our performance during the first quarter of 2009 as seen by continued lower levels of core earnings, pressure on operating earnings, changes in liquidity and declining credit quality. During the first quarter of 2009, we continued to experience significant increases in both non-performing assets and our loan loss provision, although at a slower pace than in the fourth quarter of 2008. The decline in credit quality also impacted our operations in the areas of net interest income, provision for loan losses and non-interest expense. Our focus continues to be on managing our credit, liquidity and capital positions.
On February 27, 2009, the United States Department of Treasury, or Treasury Department, invested $83,586 in us as part of the Treasury Department's Capital Purchase Program, or CPP. We issued to the Treasury Department 83,586 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series B, or Treasury Preferred Stock, having a liquidation amount per share of $1,000, and a warrant, or Warrant, to purchase up to 7,418,876 shares, or Warrant Shares, of our common stock, at an initial per share exercise price of $1.69.
The Treasury Preferred Stock pays cumulative dividends at a rate of 5% per year for the first five years and 9% per year thereafter. We may, upon prior consultation with the Federal Reserve, redeem the Treasury Preferred Stock at any time. Upon full redemption of the Treasury Preferred Stock, the Treasury Department will also liquidate the Treasury Warrant in accordance with applicable requirements.
During the first quarter of 2009, we invested $40,000 of the funds received from the Treasury Department into the Bank. This additional capital positively impacted the Bank's capital ratios and provided additional liquidity to the Bank.
The net loss available for common shareholders for the first quarter of 2009 was $(28,484), or $(1.37) per share, compared to net income of $4,973 or $0.24 per share during the first quarter of 2008 and $(81,622), or $(3.97) per share, for the fourth quarter of 2008. The provision for loan losses was $31,394, while net-charge-offs totaled $17,306, or 2.86% of total loans on an annualized basis. The net interest margin for the first quarter of 2009 was 2.39%.
The allowance to total loans increased 65 basis points during the first quarter of 2009 to 3.24% at March 31, 2009, while the allowance to non-performing loans decreased from 43% to 42%. Non-performing loans increased to $189,214, or 7.80% of total loans, compared to $150,899, or 6.06% of total loans at December 31, 2008. The increase in non-performing loans came primarily within residential construction and development loans, which comprise approximately 67% of total non-performing loans. Other real estate owned increased $452 during the quarter, bringing total non-performing assets to $209,062 at March 31, 2009. Net interest income was $17,483 for the first quarter of 2009, compared to $23,518 for the first quarter of 2008 and $21,437 for the fourth quarter of 2008. The net interest margin was 2.39%, compared to 3.23% for the first quarter of 2008 and 2.86% for the fourth quarter of 2008. A 51 basis point decline in liability costs during the quarter was outpaced by an 81 basis point decline in earning asset yields. The decline in earning asset yields was driven by the impact of the yield curve, actions taken to improve liquidity and the increase in non-accrual loans.

Table of Contents

Non interest income was $5,492 for the first quarter of 2009, compared to $10,734 for the first quarter of 2008 and $5,759 for the fourth quarter of 2008. The first quarter of 2009 included gains on the sale of five banking centers of $2,549 and other than temporary securities impairment of $1,170. The first quarter of 2009 also included a $4,738 reduction to non-interest income for a non-tax deductible mark to market adjustment for the Treasury Warrant. The Treasury Warrant was reflected as a liability at March 31, 2009 because it was not fully exercisable at the time of issuance. In April 2009 our shareholders approved an increase in the authorized shares of common stock and the issuance of the Warrant Shares at which point we began accounting for the Treasury Warrant as equity, in accordance with Emerging Issues Task Force 00-19 "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock".
Non interest expense was $29,473 for the first quarter of 2009, compared to $24,121 for the first quarter of 2008 and $99,568 for the fourth quarter of 2008, which included $74,824 of goodwill impairment. Loan and other real estate owned expenses increased to $5,448 during the first quarter of 2009, compared to $1,028 for the fourth quarter of 2008 and $452 for the first quarter of 2008. The income tax benefit for the first quarter of 2009 was $9,831, and included an increase in our income tax valuation allowance of $5,015.
During the first quarter of 2009, we increased our state income tax valuation allowance by $776 to $3,956 and recorded a federal income tax valuation allowance of $4,239. The valuation allowance estimate is highly dependent upon projections of future levels of taxable income. Should the actual amount of taxable income be less than what is projected, it may be necessary for us to increase our valuation allowance.
Total assets increased $198,433 during the first quarter of 2009, driven by an increase in cash and due from banks of $291,389. The increase in short-term liquid funds was funded by the $83,586 Treasury Department investment, an increase in time deposits of $128,304, increases in low cost deposits, which include non-interest checking, NOW and savings deposits, of $72,874, and decreases in loans and securities totaling $84,100. The increase in short-term liquid funds improved our liquidity position, but had a negative impact on our net interest margin.
In March 2009, the Bank issued a $50,000, 2.625% senior unsecured note due in 2012 as part of the FDIC's Temporary Liquidity Guarantee Program (TLGP). Commercial loan average balances increased $3,478 in the first quarter of 2009, or 0.8% on an annualized basis. This included growth in commercial real estate of $10,796, or 3.4% annualized, and a decline in commercial and industrial of $7,319, or 5.5% annualized. The growth in commercial real estate came primarily from funding outstanding commitments made prior to the fourth quarter of 2008. Low cost deposit average balances increased $53,805 during the first quarter of 2009 to $912,326.
At March 31, 2009, the Bank's ratios were above the regulatory minimum for well capitalized status. The holding company's capital ratios were within the regulatory requirements for being adequately capitalized. The reclassification of the Treasury Warrant described above from liabilities to equity in April 2009 increased our capital ratios, but had no impact on Integra Bank.
There are securities in our trust preferred securities portfolio and loans in our loan portfolio for which we have estimated losses in part based on the assumption that the plans being undertaken by the issuers or our borrowers will be implemented as expected and will have the effect of improving their financial positions. Should these plans not be executed, or have the intended consequences, our losses would increase.
Our plan for 2009 includes the following key priorities:
• pursuing opportunities to improve our regulatory capital and tangible capital levels;

• stabilizing and then improving our credit profile (as measured by non-performing assets);

• returning to profitability, then to future acceptable and sustainable profitability;

• growing core deposits faster than loans; and

• generating positive operating leverage (revenue growth that exceeds expense growth).

CRITICAL ACCOUNTING POLICIES
There have been no changes to our critical accounting policies since those disclosed in the Annual Report on Form 10-K for the year ended December 31, 2008. On April 9, 2009, the Financial Accounting Standards Board issued three Final Staff Positions (FSPs) that provide additional application guidance and enhance disclosures regarding fair value measurements and impairments of securities. We did not elect to adopt these standards early and will adopt them during the second quarter of 2009.
NET INTEREST INCOME
Net interest income decreased $6,035, or 25.7%, to $17,483 for the three months ended March 31, 2009, from $23,518 for the three months ended March 31, 2008. The net interest margin for the three months ended March 31, 2009, was 2.39% compared to 3.23% for the same three months of 2008. The yield on earning assets decreased 190 basis points to 4.47%, while the cost of interest-bearing liabilities decreased 131 basis points to 2.16%.

Table of Contents

The primary components of the changes in margin and net interest income to the first quarter of 2009 from the first quarter of 2008 were as follows:
• Average loan yields decreased 235 basis points to 4.26% for the quarter ended March 31, 2009, from 6.61% in the quarter ended March 31, 2008, led by a decrease in commercial loan yields, including loan fees, of 294 basis points to 3.60%. The decreases in yields for commercial loans occurred as loans repriced in response to declines in prime and LIBOR. At March 31, 2009, approximately 40% of our variable rate loans are tied to prime, 49% to LIBOR and 11% to other floating rate indices. During the twelve months ended March 31, 2009, the national prime lending rate declined 200 basis points, while one and three month LIBOR declined 221 and 151 basis points, respectively. Approximately 69.7% of our loans were variable rate at March 31, 2009. Commercial loan yields also declined in large part because of the increase in non-accrual loans we experienced during the past four quarters. The impact of total non-accrual loans on the net interest margin has increased since early 2008, and was 46 basis points for the first quarter of 2009, up from 11 basis points during the first quarter of 2008.

• Changes in our earning asset mix adversely impacted both the net interest margin and net interest income. Total average commercial loan balances increased $200,263, or 12.2% from the year ago quarter. The impact to our net interest margin from the higher percentage of commercial loans positively impacted our net interest margin for the first part of 2008, but has negatively impacted it since then reflecting the declines in prime and LIBOR rates. Total commercial loan average balances represented 60.3% of total earning assets in the first quarter of 2009, up from 54.4% for the first quarter of 2008. The yield on commercial loans for the first quarter of 2009 was 142 basis points lower than the yield on securities during the first quarter of 2008, a 268 basis point change from the first quarter of 2008, when commercial loan yields were 126 basis points higher than more stable securities yields.

• The decline in interest rates throughout 2008 and early 2009 resulted in lower liabilities costs. The average rate paid on interest bearing liabilities was 2.16% for the first quarter of 2009, a 131 basis point decline from the first quarter of 2008. Time deposit rates declined 134 basis points and money market rates declined 139 basis points. The average rate paid on sources of funds other than time and transaction deposits, which include repurchase agreements, Federal Home Loan Bank advances and other sources, decreased from 4.19% to 1.94% during the quarter ended March 31, 2009, as compared to the quarter ended March 31, 2008. Changes in funding sources included TAF borrowing under the Federal Reserve's Term Auction Facility (TAF), which averaged $179,521 during the first quarter of 2009 compared to none during the first quarter of 2008 and increases in time deposits and savings average balances of $146,880 and $75,655. These increases were partially offset by a decline in national market repurchase agreements of $72,082.

Table of Contents

AVERAGE BALANCE SHEET AND ANALYSIS OF NET INTEREST INCOME

                                                    2009                                       2008
                                     Average       Interest       Yield/        Average       Interest       Yield/
For Three Months Ended March 31,    Balances        & Fees         Cost        Balances        & Fees         Cost

EARNING ASSETS:

Short-term investments             $       496     $      93        76.17 %   $     4,869     $      38          3.19 %
Loans held for sale                      8,347           103         4.92 %         6,617           103          6.22 %
Securities                             559,606         7,017         5.02 %       643,517         8,499          5.28 %
Regulatory Stock                        29,154           521         7.14 %        29,179           376          5.15 %
Loans                                2,456,113        26,061         4.26 %     2,333,059        38,825          6.61 %


Total earning assets                 3,053,716     $  33,795         4.47 %     3,017,241     $  47,841          6.37 %


Allowance for loan loss                (66,858 )                                  (28,030 )
Other non-earning assets               513,543                                    384,654


TOTAL ASSETS                       $ 3,500,401                                $ 3,373,865

INTEREST-BEARING LIABILITIES:

Deposits
Savings and interest-bearing
demand                             $   618,753     $   1,365         0.90 %   $   536,124     $   1,246          0.93 %
Money market accounts                  326,299         1,177         1.46 %       391,890         2,777          2.85 %
Certificates of deposit and
other time                           1,274,752         9,645         3.07 %     1,127,872        12,369          4.41 %


Total interest-bearing deposits      2,219,804        12,187         2.23 %     2,055,886        16,392          3.21 %

Short-term borrowings                  362,670           763         0.84 %       262,187         2,166          3.27 %
Long-term borrowings                   354,376         2,710         3.06 %       415,933         5,015          4.77 %


Total interest-bearing
liabilities                          2,936,850     $  15,660         2.16 %     2,734,006     $  23,573          3.47 %


Non-interest bearing deposits          293,573                                    272,811
Other noninterest-bearing
liabilities and shareholders'
equity                                 269,978                                    367,048


TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY               $ 3,500,401                                $ 3,373,865


Interest income/earning assets                     $  33,795         4.47 %                   $  47,841          6.37 %
Interest expense/earning assets                       15,660         2.08 %                      23,573          3.14 %


Net interest income/earning
assets                                             $  18,135         2.39 %                   $  24,268          3.23 %

Tax exempt income
presented on a tax
equivalent basis based
on a 35% federal tax
rate.

Federal tax equivalent
adjustments on
securities are $543 and
$707 for 2009 and 2008,
respectively.

Federal tax equivalent
adjustments on loans
are $109 and $43 for
2009 and 2008,
respectively.

NON-INTEREST INCOME
Non-interest income decreased $5,242 to $5,492 for the quarter ended March 31, 2009, compared to $10,734 for the first quarter of 2008. Major contributors to the decrease in non-interest income from the first quarter of 2008 to the first quarter of 2009 are as follows:
• The first quarter of 2009 included a $4,738 reduction to non-interest income for a non-tax deductible mark to market adjustment for the Treasury Warrant. The Treasury Warrant was reflected as a liability because it was not fully exercisable at the time of issuance. In April 2009, our shareholders approved an increase in the authorized shares of common stock and the issuance of Warrant Shares, at which point we began accounting for the Treasury Warrant as equity, as prescribed by Emerging Issues Task Force 00-19 "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock". The value of the Treasury Warrant increased $1,407 in April 2009 prior to being transferred to equity. This resulted in $1,407 of expense in the second quarter.

• The first quarter of 2008 included trading securities gains of $321, as well as positive mark-to-market adjustments on free-standing derivatives of $506. We have not had any securities classified as trading or any free-standing derivatives in 2009.

Table of Contents

• Deposit service charges decreased $286, or 6.1%, to $4,413 as the result of a lower level of activity, likely due to the slowing economy.

• Annuity commissions decreased $324, or 55.8%, to $257. The decrease resulted from changes in customer preferences.

• Other-than-temporary securities impairment during the first quarter of 2009 was $1,170. Note 3 of the Notes to the unaudited consolidated financial statements included in this report provides additional information on the other-than-temporary impairment. There were $24 of securities gains in the first quarter of 2008.

The first quarter of 2009 also included a $2,549 gain on the sale of five banking offices located in Eastern Kentucky that partially offset the above declines. The branch sales are further discussed in Note 5 to the unaudited consolidated financial statements.
NON-INTEREST EXPENSE
Non-interest expense increased $5,352 to $29,473 for the quarter ended March 31, 2009, compared to $24,121 for the first quarter of 2008. Major contributors to the increase in non-interest expense from the first quarter of 2008 to the first quarter of 2009 are as follows:
• An increase in loan and other real estate owned expense of $4,996 consisting of increases in loan collection costs of $3,548, other real estate owned related costs of $659 and $766 of other real estate owned writedowns, compared to none in the first quarter of 2008. The primary component of the loan collection and real estate owned collection costs are the accrual of real estate taxes for properties we own or for properties securing non-performing loans.

• FDIC insurance premiums increased $872 to $950, as rates charged by the FDIC increased in the first quarter of 2009 and also because our one-time credit was fully utilized during the first quarter of 2009.

• Professional fees increased $512, or 42.0%, consisting primarily of higher legal fees of $408.

A decline in personnel expense of $319, or 2.6% partially offset these increases and consists of lower incentives of $576, partially offset by slightly higher deferred personnel costs of $167. During the first quarter of 2009, we decided to not give normal merit increases and eliminated our 401(k) match in an effort to control personnel expense. The average number of full time equivalent employees for the first quarter of 2009 was 842 compared to 859 for the first quarter of 2008.
Forgery and fraud losses declined $433, as the first quarter of 2008 included a check kiting loss of $437.
INCOME TAX EXPENSE (BENEFIT)
The income tax benefit for the first quarter of 2009 was $9,831, compared to expense of $1,524 for the same period in 2008. The effective tax rate for the first quarter of 2009 was 25.9%, compared to 23.5% for the first quarter of 2008. The tax benefit for the first quarter of 2009 is a result of the net loss, the impact of low income housing tax credits and tax free loan, municipal security and bank-owned life insurance income, partially offset by an increase in our income tax valuation allowance of $5,015.
FINANCIAL POSITION
Total assets at March 31, 2009, were $3,555,533, compared to $3,357,100 at December 31, 2008.
SECURITIES AVAILABLE FOR SALE AND TRADING SECURITIES
The securities portfolio represents our second largest earning asset after commercial loans and serves as a source of liquidity. Investment securities available for sale were $541,883 at March 31, 2009, compared to $561,739 at December 31, 2008. At March 31, 2009, all of our securities are designated as "available for sale" and are recorded at their fair market values. Because of widening market spreads and continued disruptions in many of the financial markets during the current quarter, the market value of securities available for sale on March 31, 2009 was $7,611 lower than the amortized cost, as compared to $12,914 lower at December 31, 2008.
Note 3 to the financial statements included in this report provides information about our processes for determining other-than-temporary impairment.
REGULATORY STOCK
Regulatory stock includes mandatory equity securities which do not have a readily determinable fair value and are therefore carried at cost on the balance sheet. This includes both Federal Reserve and Federal Home Loan Bank, or FHLB stock. From time-to-time, we purchase or sell shares of these dividend paying securities according to capital requirements set by the Federal Reserve or FHLB. The balance of regulatory stock was $29,137 at March 31, 2009, compared to $29,155 at December 31, 2008.

Table of Contents

LOANS HELD FOR SALE
Loans held for sale represent less than 1% of total assets and increased to $7,956 at March 31, 2009, from $5,776 at December 31, 2008. Loans held for sale consist of residential mortgage loans sold to the secondary market and are valued at the lower of cost or market in the aggregate.
LOANS
Loans, net of unearned income, at March 31, 2009, totaled $2,425,999 compared to $2,490,243 at year-end 2008, reflecting a decrease of $64,244, or 2.6%. The decrease was driven primarily by decreases in residential mortgage loans of $27,722, commercial, industrial and agricultural loans of $18,688, consumer loans of $8,901, home equity lines of credit, or HELOC loans, of $6,313, and commercial real estate loans of $3,868.
Residential mortgage loan average balances declined $18,327, or 34.5% on an annualized basis during the first quarter of 2009. We expect the balance of residential mortgage loans will continue to decline during 2009, because we sell substantially all originations to a private label provider on a servicing released basis. We evaluate our counterparty risk with this provider on a quarterly basis by evaluating their financial results and the potential impact to our relationship with them of any declines in financial performance. If we were unable to sell loans to this provider, we would seek an alternate provider and record new loans on our balance sheet until one was found, impacting both our liquidity and our interest rate risk. We have never had a strategy of originating subprime or Alt-A mortgages, option adjustable rate mortgages or any other exotic mortgage products. The impact of private mortgage insurance is not material to our determination of loss factors within the allowance for loan losses for the residential mortgage portfolio. Loans with private mortgage insurance comprise only a portion of our portfolio and the coverage amount typically does not exceed 10% of the loan balance.
HELOC loan average balances decreased $922, or 2.2% annualized from 2008. HELOC loans are generally collateralized by a second mortgage on the customer's primary residence.
The average balance of indirect consumer loans declined $3,861, or 19.4% annualized during the first quarter of 2009, as expected, since we exited this line of business in December 2006. These loans are to borrowers located primarily in the Midwest and are generally secured by recreational vehicle or marine assets. Indirect loans at March 31, 2009, were $74,669 compared to $79,126 at December 31, 2008. The average balance of direct consumer loans decreased $9,220, or 21.1% annualized during the first quarter of 2009. Commercial loan average balances for the first quarter of 2009 increased $3,478, or 0.8% annualized from the fourth quarter of 2008. The increase in average commercial loans during the first quarter of 2009 included increases in commercial real estate, including commercial construction and land development loans of $10,796 or 3.4% annualized. Commercial and industrial loan average balances decreased $7,319 or 5.5% annualized. The growth in commercial real estate loans came primarily from funding commitments made prior to the fourth quarter of 2008.
Our non-owner occupied commercial real estate, or CRE portfolio is managed by three areas, with $716,667 managed by our commercial real estate team headquartered in Cincinnati, Ohio, our CRE line of business, $265,881 managed by our Chicago region and the remainder managed in our other markets. Our largest property-type concentration is in retail projects at $280,574, or 25.7%, of the total CRE portfolio, which includes direct loans or participations in larger loans primarily for stand-alone retail buildings for large national or regional retailers such as Walgreens, Sherwin Williams and Advance Auto and for regional shopping centers with national and regional tenants. Our second largest concentration is multifamily at $211,461, or 19.4%, of the total CRE portfolio. Our third largest concentration is for land acquisition and development at $167,627, or 15.4%, of the total, which represents both commercial development and residential development. Finally, our fourth largest concentration at $132,757, or 12.2%, is to the single-family residential and construction category, 62.3% of which is in the Chicago area. No other category exceeds 8% of the CRE portfolio. Of the total non-owner occupied CRE portfolio, 59.1%, or $644,420 is classified as construction. At March 31, 2009, $834,999, or 76.6%, of the CRE portfolio is located in our core market states of Indiana, Kentucky, . . .