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 second quarter of 2009 as seen by continued lower levels of core earnings, pressure on operating earnings, changes in liquidity and declining credit quality. The financial results for the second quarter of 2009 reflected in this report differ from those that we reported on July 31, 2009, due to developments affecting the issuer of one of the trust preferred securities in our investment portfolio. After we had reported our results for the second quarter, the issuer reported the termination of an agreement with investors for a previously-announced equity investment. This development caused us to conclude that the unrealized loss on the security represented and other-than-temporary impairment. Accordingly, we increased the other-than-temporary impairment, or OTTI, charges on investment securities for the second quarter of 2009 by $5,656 from the amount in our second quarter earnings release. The increased impairment charges also increased the after tax loss by $5,656 to $49,603, or ($2.39) per share from the amount in our second quarter earnings release.
During the second quarter of 2009, we experienced an increase in non-performing assets of $2,637, or 1.3%, a lower rate of increase than we have experienced in recent quarters, as well as the lowest level of delinquencies we have had since September 2007. Our provision for loan losses increased 3.6% from the first quarter of 2009 to $32,536, while our net charge-offs were $28,752. Our allowance for loan losses increased, as a percentage to both total and non-performing loans. Our credit quality continued to significantly impact our operations in the areas of lower net interest income, a higher provision for loan losses and higher non-interest expense as a result of loan, collection and legal expense. Our focus continues to be on managing our credit, liquidity and capital positions.
During the first quarter of 2009, we invested $40,000 of the funds received from the Treasury Department's Capital Purchase Program or CPP, into our subsidiary, Integra Bank N.A., or the Bank. This additional capital positively impacted the Bank's capital ratios and provided additional liquidity to the Bank. During the second quarter of 2009, we made an additional capital contribution into the Bank of $5,000 using the CPP funds. In July 2009, we made an additional $7,900 capital contribution.
On May 4, 2009, we announced the appointment of Michael J. Alley as our Interim Chairman and Chief Executive Officer and that an outside firm had been hired to institute a search process for a permanent CEO.
On May 20, 2009, the Bank entered into a formal written agreement with the Office of the Comptroller of the Currency (the "OCC"). Pursuant to the agreement, the Bank agreed to undertake certain actions within designated timeframes and operate in compliance with the agreement's provisions during its term. The agreement is based on the results of an annual examination of the Bank by the OCC.
The agreement generally provides for the development and implementation of actions to reduce the Bank's level of criticized assets and improve earnings. The agreement requires the Bank's Board of Directors to act or cause actions to be taken with respect to six areas:
• developing and implementing a staffing plan for the loan work-out department;

• adopting, implementing and adhering to a written program to reduce criticized assets;

• conducting robust guarantor analyses for certain commercial and industrial loans and commercial real estate loans;

• enhancing the loan management information system to allow for split classifications for portions of single credits;

• establishing a process to identify and correct the root causes of untimely identification of problem credits by relationship managers; and

• revising and maintaining a comprehensive liquidity risk management program which assesses the Bank's current and projected funding needs.

The Bank is required to submit written progress reports on a quarterly basis to the OCC.
On June 26, 2009, we announced the completion of an initiative designed to improve profitability, efficiency and productivity. The initiative is expected to reduce future non-interest expense by over $8,000 and improve future non-interest income by nearly $3,000 on an annualized basis. The expense reduction included a reduction in work force which was substantially completed during the second quarter.
The net loss available for common shareholders for the second quarter of 2009 was $(49,603), or $(2.39) per share, compared to $(28,474), or $(1.37) per share, for the first quarter of 2009 and $(899) or $(0.04) per share during the second quarter of 2008. The provision for loan losses was $32,536, while net-charge-offs totaled $28,752, or 4.80% of total loans on an annualized basis. The allowance to total loans increased 26 basis points during the second quarter of 2009 to 3.50% at June 30, 2009, while the allowance to non-performing loans increased from 41.5% to 45.1%. Non-performing loans decreased to $182,413, or 7.76% of total loans, compared to $189,214, or 7.80% at March 31, 2009 and $150,899, or 6.06% of total loans at December 31, 2008. Other real estate owned increased $9,438 during the quarter, bringing total non-performing assets to $211,699 at June 30, 2009. Total non-performing assets increased $2,637, or 1.3% during the second quarter of 2009.
Net interest income was $16,774 for the second quarter of 2009, compared to $25,166 for the second quarter of 2008 and $17,483 for the first quarter of 2009. The net interest margin was 2.34%, compared to 3.43% for the second quarter of 2008 and 2.39% for the first quarter of 2009. Liability costs declined 10 basis points during the quarter, while earning asset yields declined 9 basis points. The decline in earning asset yields and liability costs was in part driven by the impact of the short end of the yield curve, actions we took to improve liquidity and the increase in non-accrual loans. The decline in net interest income was also driven by lower levels of earning assets. Non-interest income was $(10,984) for the second quarter of 2009, compared to $3,012 for the second quarter of 2008 and $5,492 for the first quarter of 2009. The second quarter of 2009 included OTTI charges of $20,314 and gains from sales of securities of $1,479. During the second quarter of 2009, we targeted and sold securities with a gain and used part of the proceeds to repay higher rate debt. The second quarter of 2009 also included a $1,407 reduction to non-interest income for a non-tax deductible mark-to-market adjustment for the 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 shares underlying the Treasury Warrant, 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". The second quarter fair value adjustment reflects the change in value of the Treasury Warrant from March 31, 2009 through the date it was reclassified to equity. 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, as well as a $4,738 reduction to non-interest income for a mark-to-market adjustment for the Treasury Warrant. Deposit service charges increased $622 during the second quarter of 2009 from the first quarter of 2009, while debit card interchange increased $116. Bank owned life insurance income declined $295, primarily due to a first quarter death benefit that was received.
Non-interest expense was $29,169 for the second quarter of 2009, compared to $24,177 for the second quarter of 2008 and $29,473 for the first quarter of 2009. The net reduction in expense during the second quarter of 2009 compared to the first quarter included declines in loan expense of $2,765, employee benefits of $1,046, other real estate owned expense of $795, low income housing partnership losses of $217, and occupancy expenses of $203. These decreases were partially offset by increases in FDIC insurance of $2,055, debt prepayment penalties of $1,511, professional fees of $327 and severance of $421. The income tax benefit for the second quarter of 2009 was $7,451, and included an increase in our income tax valuation allowance of $13,489.
Total assets decreased $209,271 during the second quarter of 2009. During the second quarter, we sold $62,789 of securities for a gain of $1,465 and repaid repurchase agreements of $20,000 prior to their maturity, incurring prepayment penalties of $1,511. These actions reduced our reliance on wholesale funding sources, reduced our risk weighted assets and improved our capital ratios. The remaining decline in total assets was driven by additional cash flows from paydowns of securities available for sale of $37,743, commercial loans of $61,582 and cash and due from banks of $41,510, partially offset by purchases of U.S. Treasury securities we classified as trading of $19,980. We used the funds generated from these sources to decrease brokered deposits by $54,955, public funds time deposits by $53,222, repurchase agreements by $31,123 and money market by $27,639, borrowings under the Term Auction Facility, or TAF, of $25,000, retail certificates of deposit of $24,291 and non-interest bearing deposits by $21,036. These decreases were partially offset by an increase in savings balances of $84,679. We have continued to carry a higher than normal amount of short-term liquid funds, which improves our liquidity position, but has a negative impact on our net interest margin and earnings.

Commercial loan average balances decreased $26,714 in the second quarter of 2009, or 5.8% on an annualized basis. This included declines in construction land and development loan balances of $84,202 and commercial and industrial of $18,075, partially offset by an increase in commercial real estate loans of $75,564. The shift out of construction and land development loans to commercial real estate loans reflects the completion of construction for several of the projects securing these loans, net of payoffs and paydowns. Low cost deposit average balances increased $89,626 during the second quarter of 2009 to $1,001,952.
At June 30, 2009, the Bank's and holding company's regulatory capital ratios were above the regulatory minimum requirements. The reclassification of the Treasury Warrant described above from liabilities to equity in April 2009 increased our consolidated capital ratios, but had no impact on the Bank. Our plan for the remainder of 2009 includes the following key priorities:
• Improving our regulatory capital and tangible capital levels;

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

• returning to profitability;

• growing core deposits faster than loans; and

• improving our efficiency, primarily through execution of our profit improvement program and ongoing expense management.

CRITICAL ACCOUNTING POLICIES
On April 9, 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, "Recognition and Presentation of Other-Than-Temporary Impairments", which amends the guidance for determining OTTI on debt securities. We adopted this FSP effective April 1, 2009, and reversed $1,250 for the non-credit portion of the cumulative OTTI charge. The adoption was recognized as a cumulative effect adjustment that increased retained earnings and decreased accumulated other comprehensive income $778, net of tax of $472, as of April 1, 2009. As a result of implementing the new standard, the amount of OTTI recognized in income for the period was $20,314. The amount of OTTI that would have been recognized in income for the period under prior guidance would have been $19,164.
There have been no other changes to our critical accounting policies since those disclosed in the Annual Report on Form 10-K for the year ended December 31, 2008.
NET INTEREST INCOME
Net interest income decreased $8,392, or 33.3%, to $16,774 for the three months ended June 30, 2009, from $25,166 for the three months ended June 30, 2008, and $14,427, or 29.6%, to $34,257 for the six months ended June 30, 2009, from $48,684 for June 30, 2008. The net interest margin for the three months ended June 30, 2009, was 2.34% compared to 3.43% for the same three months of 2008, while the margin for the six months ended June 30, 2009, was 2.37%, as compared to 3.32% for the six months ended June 30, 2008. The yield on earning assets decreased 146 basis points to 4.38% for the second quarter of 2009, compared to the same quarter in 2008, while the cost of interest-bearing liabilities decreased 61 basis points to 2.06%.
The primary components of the changes in margin and net interest income to the second quarter of 2009 as compared to the second quarter of 2008 were as follows:
• Average loan yields decreased 176 basis points to 4.23% for the quarter ended June 30, 2009, from 5.99% in the quarter ended June 30, 2008, led by a decrease in commercial loan yields, including loan fees of 208 basis points to 3.61%. Commercial loan yields fell as loans repriced in response to declines in prime and LIBOR. At June 30, 2009, approximately 39% of our variable rate loans are tied to prime, 51% to LIBOR and 10% to other floating rate indices. During the twelve months ended June 30, 2009, the national prime lending rate declined 175 basis points, while one and three month LIBOR declined 216 and 220 basis points, respectively. Approximately 69% of our loans were variable rate at June 30, 2009. Commercial loan yields also declined in large part because of the increase in non-performing loans we experienced during the past four quarters. The impact of total non-performing assets on the net interest margin has increased since early 2008, and was 42 basis points for the second quarter of 2009.

• Changes in our earning asset mix adversely impacted both the net interest margin and net interest income. Total average commercial loan balances increased $109,251, or 6.4% from the year ago quarter, while the average balance of higher yielding residential mortgage loan balances decreased $67,881, or 27.1%, as did the average balance of higher yielding securities, which decreased $86,012, or 14.3%. 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 and higher average balances of non-accrual loans. Total commercial loan average balances represented 61.2% of total earning assets in the second quarter of 2009, up from 56.4% for the second quarter of 2008. The 208 basis point decline in commercial loan yields for the second quarter of 2009 outpaced declines in more stable residential mortgage loans and securities yields of 61 and 14 basis points, respectively. We took steps to increase our liquidity and as a result, average cash and due from bank balances increased by $300,364. The increase in these cash reserves also had a negative impact on the net interest margin.

• The decline in interest rates throughout the second half of 2008 and the first six months of 2009 resulted in lower liabilities costs. The average rate paid on interest bearing liabilities was 2.06% for the second quarter of 2009, a 61 basis point decline from the second quarter of 2008. Time deposit rates declined 76 basis points and money market rates declined 70 basis points. Savings deposit rates increased 70 basis points, leading to higher average balances. The average rate paid on sources of funds other than time and transaction deposits, which include repurchase agreements, Federal Home Loan Bank or FHLB advances and other sources, decreased from 2.95% to 2.02% for the quarter ended June 30, 2009, as compared to the quarter ended June 30, 2008. Changes in funding sources included TAF borrowings, which averaged $81,044 during the second quarter of 2009 compared to none during the second quarter of 2008, the borrowing we executed in the first quarter of 2009 of $50,000 under the FDIC's Temporary Loan Guaranty Program, or TLGP, and increases in time deposits and savings average balances of $170,459 and $153,504. These increases were partially offset by declines in federal funds purchased of $80,245, FHLB advances of $77,518 and money market deposits of $54,143.

AVERAGE BALANCE SHEET AND ANALYSIS OF NET INTEREST INCOME

                                                        2009                                          2008
                                        Average        Interest        Yield/         Average        Interest        Yield/
For Three Months Ended June 30,        Balances         & Fees          Cost         Balances         & Fees          Cost
EARNING ASSETS:

Short-term investments                $       574      $     174        121.50 %    $     6,408      $      30           1.83 %
Loans held for sale                        10,493            127          4.86 %          5,835             90           6.18 %
Securities                                517,244          6,296          4.87 %        603,256          7,554           5.01 %
Regulatory Stock                           29,137            157          2.15 %         29,181            409           5.61 %
Loans                                   2,404,068         25,598          4.23 %      2,377,745         35,832           5.99 %


Total earning assets                    2,961,516      $  32,352          4.38 %      3,022,425      $  43,915           5.84 %


Allowance for loan loss                   (81,217 )                                     (29,552 )
Other non-earning assets                  633,110                                       379,071


TOTAL ASSETS                          $ 3,513,409                                   $ 3,371,944

INTEREST-BEARING LIABILITIES:

Deposits
Savings and interest-bearing
demand                                $   708,583      $   1,742          0.99 %    $   564,866      $   1,194           0.85 %
Money market accounts                     336,338          1,169          1.39 %        390,481          2,029           2.09 %
Certificates of deposit and other
time                                    1,237,139          8,848          2.87 %      1,066,680          9,628           3.63 %


Total interest-bearing deposits         2,282,060         11,759          2.07 %      2,022,027         12,851           2.56 %

Short-term borrowings                     251,287            583          0.92 %        346,565          1,955           2.23 %
Long-term borrowings                      388,201          2,683          2.73 %        359,841          3,288           3.61 %


Total interest-bearing liabilities      2,921,548      $  15,025          2.06 %      2,728,433      $  18,094           2.67 %


Non-interest bearing deposits             293,369                                       285,582
Other noninterest-bearing
liabilities and shareholders'
equity                                    298,492                                       357,929


TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY                  $ 3,513,409                                   $ 3,371,944


Interest income/earning assets                         $  32,352          4.38 %                     $  43,915           5.84 %
Interest expense/earning assets                           15,025          2.04 %                        18,094           2.41 %


Net interest income/earning assets                     $  17,327          2.34 %                     $  25,821           3.43 %

Tax exempt income presented on a tax equivalent basis based on a 35% federal tax rate.
Federal tax equivalent adjustments on securities are $444 and $600 for 2009 and 2008, respectively
Federal tax equivalent adjustments on loans are $109 and $55 for 2009 and 2008, respectively.

AVERAGE BALANCE SHEET AND ANALYSIS OF NET INTEREST INCOME

                                                        2009                                          2008
                                        Average        Interest        Yield/         Average        Interest        Yield/
For Six Months Ended June 30,          Balances         & Fees          Cost         Balances         & Fees          Cost
EARNING ASSETS:

Short-term investments                $       535      $     267        100.63 %    $     5,638      $      68           2.42 %
Loans held for sale                         9,426            230          4.88 %          6,226            193           6.20 %
Securities                                538,308         13,313          4.95 %        623,386         16,053           5.15 %
Regulatory Stock                           29,146            678          4.65 %         29,180            785           5.38 %
Loans                                   2,429,947         51,659          4.24 %      2,355,402         74,657           6.30 %


Total earning assets                    3,007,362      $  66,147          4.43 %      3,019,832      $  91,756           6.10 %


Allowance for loan loss                   (74,077 )                                     (28,791 )
Other non-earning assets                  573,656                                       381,863


TOTAL ASSETS                          $ 3,506,941                                   $ 3,372,904

INTEREST-BEARING LIABILITIES:

Deposits
Savings and interest-bearing
demand                                $   663,916      $   3,107          0.94 %    $   550,495      $   2,440           0.89 %
Money market accounts                     331,346          2,346          1.43 %        391,185          4,806           2.47 %
Certificates of deposit and other
time                                    1,255,841         18,493          2.97 %      1,097,276         21,997           4.03 %


Total interest-bearing deposits         2,251,103         23,946          2.15 %      2,038,956         29,243           2.88 %

Short-term borrowings                     306,671          1,346          0.87 %        304,376          4,121           2.68 %
Long-term borrowings                      371,382          5,393          2.89 %        387,887          8,303           4.23 %


Total interest-bearing liabilities      2,929,156      $  30,685          1.98 %      2,731,219      $  41,667           3.07 %


Non-interest bearing deposits             293,471                                       279,196
Other noninterest-bearing
liabilities and shareholders'
equity                                    284,314                                       362,489


TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY                  $ 3,506,941                                   $ 3,372,904


Interest income/earning assets                         $  66,147          4.43 %                     $  91,756           6.10 %
Interest expense/earning assets                           30,685          2.06 %                        41,667           2.78 %


Net interest income/earning assets                     $  35,462          2.37 %                     $  50,089           3.32 %

Tax exempt income presented on a tax equivalent basis based on a 35% federal tax rate.
Federal tax equivalent adjustments on securities are $987 and $1,307 for 2009 and 2008, respectively
Federal tax equivalent adjustments on loans are $218 and $98 for 2009 and 2008, respectively.
NON-INTEREST INCOME
Non-interest income declined $13,996 to $(10,984) for the quarter ended June 30, 2009, compared to $3,012 from the second quarter of 2008. Major contributors to the decrease in non-interest income from the second quarter of 2008 to the second quarter of 2009 are as follows:
• An OTTI charge of $20,314 was taken during the second quarter of 2009 on six securities, compared to a charge of $6,302 taken during the second quarter of 2008 on two securities. This is discussed in more detail in the financial statements included in this document, specifically Note 3. A gain on sale of securities of $1,479 partially offset the impairment charge.

• A $1,407 reduction to non-interest income reflects 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 shares underlying the Treasury Warrant, 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". The second quarter fair value adjustment reflects the change in value of the Treasury Warrant from March 31, 2009, through the date it was reclassified to equity.

• Losses on free standing derivatives of $369 occurred during the second quarter of 2008, compared to none during the second quarter of 2009.

• The second quarter of 2009 included trading gains of $235, compared to none during the second quarter of 2008. The gains reflected the increase in value of U.S. Treasury securities purchased during June 2009.

• Annuity income decreased $252 from the year ago quarter, reflecting a change in customer preferences.

• Bank owned life insurance income declined $181 and resulted from lower crediting rates.

Deposit service charges for the second quarter of 2009 were $5,035, a $24 or . . .