INTEGRA BANK CORP - FORM 10-Q - November 10, 2010

Attached files

file	filename
EX-31.1 - INTEGRA BANK CORP	v201582_ex31-1.htm
EX-32 - INTEGRA BANK CORP	v201582_ex32.htm
EX-31.2 - INTEGRA BANK CORP	v201582_ex31-2.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2010.

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

(Exact name of registrant as specified in its charter)

INDIANA	35-1632155
(State or other jurisdiction of incorporation or organization)	(IRS Employee Identification No.)

PO BOX 868, EVANSVILLE, INDIANA	47705-0868
(Address of principal executive offices)	(Zip Code)

Registrant's telephone number, including area code: (812) 464-9677

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for shorter period that the registrant was required to submit and post such files).

Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o Accelerated filer o Non-accelerated filer o Smaller reporting company x

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act of 1934).

Yes o No x

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

CLASS	OUTSTANDING AT OCTOBER 29, 2010
(Common stock, $1.00 Stated Value)	21,062,464

INTEGRA BANK CORPORATION

INDEX

PART I - FINANCIAL INFORMATION

	PAGE NO.
Item 1. Unaudited Financial Statements

Consolidated balance sheets-
September 30, 2010 and December 31, 2009		3

Consolidated statements of income-
Three months and nine months ended September 30, 2010 and 2009		4

Consolidated statements of comprehensive income-
Three months and nine months ended September 30, 2010 and 2009		6

Consolidated statements of changes in shareholders’ equity-
Nine months ended September 30, 2010		7

Consolidated statements of cash flow-
Nine months ended September 30, 2010 and 2009		8

Notes to unaudited consolidated financial statements		10

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations		32

Item 3. Quantitative and Qualitative Disclosures about Market Risk		50

Item 4. Controls and Procedures		51

PART II - OTHER INFORMATION

Item 1. Legal Proceedings		52

Item1A. Risk Factors		52

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		52

Item 3. Defaults Upon Senior Securities		52

Item 4. Reserved		52

Item 5. Other Information		52

Item 6. Exhibits		53

Signatures		54

PART I - FINANCIAL INFORMATION

ITEM 1. Unaudited Financial Statements

INTEGRA BANK CORPORATION and Subsidiaries

Unaudited Consolidated Balance Sheets

(In thousands, except for share data)

	September 30,			December 31,
	2010			2009
ASSETS
Cash and due from banks	$	500,600		$	304,921
Federal funds sold and other short-term investments		50,031			49,653
Total cash and cash equivalents		550,631			354,574
Loans held for sale (at lower of cost or fair value)		4,148			93,572
Securities available for sale		544,559			361,719
Securities held for trading		148			36
Regulatory stock		24,713			29,124
Loans, net of unearned income		1,456,967			2,019,732
Less: Allowance for loan losses		(95,539	)		(88,670	)
Net loans		1,361,428			1,931,062
Premises and equipment		32,768			37,814
Premises and equipment held for sale		3,134			4,249
Other intangible assets		4,173			8,242
Other real estate owned		34,814			31,982
Other assets		66,629			69,567
TOTAL ASSETS	$	2,627,145		$	2,921,941

LIABILITIES
Deposits:
Non-interest-bearing demand	$	227,106		$	263,530
Non-interest-bearing held for sale		-			7,319
Interest-bearing		1,925,464			2,004,369
Interest-bearing held for sale		-			89,888
Total deposits		2,152,570			2,365,106
Short-term borrowings		55,841			62,114
Long-term borrowings		348,161			361,071
Other liabilities		38,667			31,304
TOTAL LIABILITIES		2,595,239			2,819,595

Commitments and contingent liabilities (Note 11)		-			-

SHAREHOLDERS' EQUITY
Preferred stock - no par, $1,000 per share liquidation preference:
Shares authorized: 1,000,000
Shares outstanding: 83,586
Liquidation preference of $88,288 at September 30, 2010		82,271			82,011
Common stock - $1.00 stated value:
Shares authorized: 129,000,000
Shares outstanding: 21,066,130 and 20,847,589 respectively		21,066			20,848
Additional paid-in capital		217,068			216,939
Retained earnings (Accumulated deficit)		(291,742	)		(210,371	)
Accumulated other comprehensive income (loss)		3,243			(7,081	)
TOTAL SHAREHOLDERS' EQUITY		31,906			102,346
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	2,627,145		$	2,921,941

The accompanying notes are an integral part of the consolidated financial statements.

INTEGRA BANK CORPORATION and Subsidiaries

Unaudited Consolidated Statements of Income

(In thousands, except for per share data)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009
INTEREST INCOME
Interest and fees on loans:
Taxable	$	17,857		$	24,374		$	60,246		$	75,410
Tax-exempt		77			192			277			597
Interest and dividends on securities:
Taxable		3,493			3,265			10,310			13,736
Tax-exempt		198			592			640			2,425
Interest on securities held for trading		-			81			-			103
Dividends on regulatory stock		135			337			542			1,015
Interest on loans held for sale		29			89			87			319
Interest on federal funds sold and other short-term investments		395			272			941			539
Total interest income		22,184			29,202			73,043			94,144

INTEREST EXPENSE
Interest on deposits		7,674			10,356			24,259			34,302
Interest on short-term borrowings		54			268			151			1,614
Interest on long-term borrowings		2,995			2,528			8,401			7,921
Total interest expense		10,723			13,152			32,811			43,837

NET INTEREST INCOME		11,461			16,050			40,232			50,307
Provision for loan losses		26,240			18,913			98,220			82,843
Net interest income after provision for loan losses		(14,779	)		(2,863	)		(57,988	)		(32,536	)

NON-INTEREST INCOME
Service charges on deposit accounts		3,685			5,335			12,229			14,783
Other service charges and fees		976			1,098			3,066			3,142
Debit card income-interchange		1,207			1,368			3,931			3,998
Trust income		440			630			1,391			1,652
Gain (Loss) on sale of other assets		(329	)		(219	)		(93	)		(294	)
Net premiums on sales of deposits		11,241			-			15,612			2,549
Net gains on sale of divested loans		9,498			676			11,840			676
Net securities gains (losses)		-			6,578			3,349			8,057
Other than temporary impairment loss:
Total impairment losses recognized on securities		(585	)		-			(864	)		(22,634	)
Loss or reclassification recognized in other comprehensive income		-			-			(69	)		(1,150	)
Net impairment loss recognized in earnings		(585	)		-			(795	)		(21,484	)
Warrant fair value adjustment		-			-			-			(6,145	)
Other		1,246			(639	)		2,906			2,401
Total non-interest income		27,379			14,827			53,436			9,335

NON-INTEREST EXPENSE
Salaries and employee benefits		8,909			10,187			27,007			33,823
Occupancy		1,929			2,348			6,047			7,307
Equipment		638			749			2,075			2,406
Professional fees		4,315			1,699			8,784			5,486
Communication and transportation		873			1,126			2,761			3,378
Processing		513			647			1,747			2,138
Software		503			654			1,641			1,901
Marketing		149			312			638			1,152
Loan and OREO expense		5,813			2,545			8,814			9,881
FDIC assessment		2,753			1,721			7,134			5,676
Low income housing project losses		642			161			1,490			1,324
Debt prepayment penalties		-			27			-			1,538
Amortization of intangible assets		286			421			1,110			1,264
State and local franchise tax		269			324			693			1,112
Other		1,204			1,448			3,834			4,625
Total non-interest expense		28,796			24,369			73,775			83,011
Income (Loss) before income taxes		(16,196	)		(12,405	)		(78,327	)		(106,212	)
Income tax expense (benefit)		(42	)		7,330			(350	)		(9,952	)
Net income (loss)		(16,154	)		(19,735	)		(77,977	)		(96,260	)
Preferred stock dividends and discount accretion		1,133			1,117			3,394			2,669
Net income (loss) available to common shareholders	$	(17,287	)	$	(20,852	)	$	(81,371	)	$	(98,929	)

Unaudited Consolidated Statements of Income are continued on next page.

INTEGRA BANK CORPORATION and Subsidiaries

Unaudited Consolidated Statements of Income (Continued)

(In thousands, except for per share data)

		Three Months Ended						Nine Months Ended
		September 30,						September 30,
		2010			2009			2010			2009
Earnings (Loss) per common share:
Basic	$	(0.84	)	$	(1.01	)	$	(3.94	)	$	(4.78	)
Diluted		(0.84	)		(1.01	)	$	(3.94	)	$	(4.78	)

Weighted average common shares outstanding:
Basic		20,686			20,707			20,672			20,713
Diluted		20,686			20,707			20,672			20,713

Dividends per common share	$	-		$	-		$	-		$	0.03

The accompanying notes are an integral part of the consolidated financial statements.

INTEGRA BANK CORPORATION and Subsidiaries

Unaudited Consolidated Statements of Comprehensive Income

(In thousands)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009
Net income (loss)	$	(16,154	)	$	(19,735	)	$	(77,977	)	$	(96,260	)

Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on securities:
Unrealized gain (loss) arising in period
(net of tax of $1,342, $2,246, $6,929 and $(1,395), respectively)		2,257			3,695			11,653			(2,295	)
Reclassification of amounts realized through impairment charges
and sales (net of tax of $218, $(2,487) $(952) and $5,076, respectively)		367			(4,091	)		(1,602	)		8,351
Net unrealized gain (loss) on securities		2,624			(396	)		10,051			6,056

Change in net pension plan liability
(net of tax of $30, $9, $162 and $28, respectively)		51			15			273			46
Unrealized gain (loss) on derivative hedging instruments arising in period
(net of tax of $(13) and $(233) for 2009)		-			(22	)		-			(384	)

Net unrealized gain (loss), recognized in other comprehensive income (loss)		2,675			(403	)		10,324			5,718

Comprehensive income (loss)	$	(13,479	)	$	(20,138	)	$	(67,653	)	$	(90,542	)

The accompanying notes are an integral part of the consolidated financial statements.

INTEGRA BANK CORPORATION and Subsidiaries

Unaudited Consolidated Statements of Changes In Shareholders’ Equity

(In thousands, except for share and per share data)

															Accumulated
			Shares of						Additional						Other
	Preferred		Common			Common			Paid-in			Retained			Comprehensive
	Stock		Stock			Stock			Capital			Earnings			Income (Loss)			Total

BALANCE AT DECEMBER 31, 2009	$	82,011		20,847,589		$	20,848		$	216,939		$	(210,371	)	$	(7,081	)	$	102,346

Net income (loss)		-		-			-			-			(77,977	)		-			(77,977	)
Net change, net of tax, in accumulated
other comprehensive income		-		-			-			-			-			10,324			10,324
Preferred stock dividend and discount accretion		260		-			-			-			(3,394	)		-			(3,134	)
Vesting of restricted shares, net		-		(1,398	)		(1	)		-			-			-			(1	)
Grant of restricted stock, net of forfeitures		-		219,939			219			(219	)		-			-			-
Stock-based compensation expense		-		-			-			348			-			-			348
BALANCE AT SEPTEMBER 30, 2010	$	82,271		21,066,130		$	21,066		$	217,068		$	(291,742	)	$	3,243		$	31,906

The accompanying notes are an integral part of the consolidated financial statements.

INTEGRA BANK CORPORATION and Subsidiaries

Unaudited Consolidated Statements of Cash Flow

(In thousands)

	Nine Months Ended
	September 30,
	2010			2009
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$	(77,977	)	$	(96,260	)
Adjustments to reconcile net income to
net cash provided by operating activities:
Amortization and depreciation		5,865			5,214
Provision for loan losses		98,220			82,843
Income tax valuation allowance		29,608			25,357
Net securities (gains) losses		(3,349	)		(8,057	)
Impairment charge on available for sale securities		795			21,484
Net held for trading (gains) losses		(112	)		1,002
(Gain) loss on sale of premises and equipment		(459	)		68
(Gain) loss on sale of other real estate owned		552			227
Net premiums on sale of deposits		(15,612	)		(2,549	)
Loss on low-income housing investments		1,490			1,324
Proceeds from sale of held for trading securities		-			7,100
Purchase of held for trading securities		-			(19,745	)
Increase (decrease) in deferred taxes		(29,608	)		(3,461	)
Net gain on sale of loans held for sale		(12,465	)		(1,277	)
Proceeds from sale of loans held for sale		62,476			148,833
Origination of loans held for sale		(51,204	)		(102,352	)
Debt prepayment fees		-			1,538
Proceeds from sale of federal reserve stock		4,411			(9	)
Change in other operating		15,711			(13,375	)
Net cash flows provided by operating activities		28,342			47,905
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of securities available for sale		50,042			98,580
Proceeds from sales of securities available for sale		124,653			296,671
Purchase of securities available for sale		(346,373	)		(180,189	)
Decrease in loans made to customers		212,611			89,658
Purchase of premises and equipment		(2,193	)		(977	)
Proceeds from sale of premises and equipment		(507	)		17
Proceeds from sale of other real estate owned		6,652			5,830
Increase (decrease) from sale of branches, net of cash acquired		(66,359	)		(22,708	)
Net cash flows provided by (used in) investing activities		(21,474	)		286,882
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits		211,764			183,260
Net increase (decrease) in short-term borrowed funds		(6,273	)		(226,995	)
Proceeds from long-term borrowings		-			50,000
Repayment of long-term borrowings		(12,907	)		(49,550	)
Proceeds from issuance of TARP preferred stock		-			89,927
Accretion of discount on TARP preferred stock		(3,394	)		(197	)
Dividends paid on TARP preferred stock		-			(1,950	)
Dividends paid on common stock		-			(622	)
Proceeds from exercise of stock options and restricted shares, net		(1	)		(316	)
Net cash flows provided by financing activities		189,189			43,557
Net increase in cash and cash equivalents		196,057			378,344
Cash and cash equivalents at beginning of period		354,574			62,773
Cash and cash equivalents at end of period	$	550,631		$	441,117

Unaudited Consolidated Statements of Cash Flow are continued on next page.

INTEGRA BANK CORPORATION and Subsidiaries

Unaudited Consolidated Statements of Cash Flow (Continued)

(In thousands)

	Nine Months Ended
	September 30,
	2010		2009
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS
Other real estate acquired in settlement of loans		16,745		19,387
Dividends accrued not paid on preferred stock		4,702		522

The accompanying notes are an integral part of the consolidated financial statements.

INTEGRA BANK CORPORATION and Subsidiaries

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except for share and per share data)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

References to the terms “we”, “us”, “our”, the “Company” and “Integra” used throughout this report refer to Integra Bank Corporation and, unless the context indicates otherwise, its subsidiaries. At September 30, 2010, our subsidiaries consisted of Integra Bank N.A. (the “Bank” or “Integra Bank”), a reinsurance company and four statutory business trusts which are not consolidated under applicable accounting guidance. All significant intercompany transactions are eliminated in consolidation.

The financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). While the financial statements are unaudited, they do reflect all adjustments which, in the opinion of management, are necessary for a fair presentation of the financial position, results of operations, and cash flows for the interim periods. All such adjustments are of a normal recurring nature. Pursuant to SEC rules, certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) have been condensed or omitted from these financial statements unless significant changes have taken place since the end of the most recent fiscal year. The accompanying financial statements and notes thereto should be read in conjunction with our financial statements and notes for the year ended December 31, 2009, included in our Annual Report on Form 10-K filed with the SEC.

Because the results from commercial banking operations are so closely related and responsive to changes in economic conditions, the results for any interim period are not necessarily indicative of the results that can be expected for the entire year.

ACCOUNTING ESTIMATES

We are required to make estimates and assumptions based on available information that affect the amounts reported in the consolidated financial statements. Significant estimates, which are particularly susceptible to short-term changes, include the valuation of the securities portfolio, the determination of the allowance for loan losses, the valuation of real estate and other properties acquired in connection with foreclosures or in satisfaction of amounts due from borrowers on loans, and the valuation of our deferred tax asset. The decline in the value of residential and commercial real estate (CRE), other impacts of the recession on the Bank and our overall financial performance have all had a meaningful influence on the application of certain of our critical accounting policies and development of these significant estimates. In applying those policies and making our best estimates during the current quarter, we recorded provisions for loan losses, write-downs on other real estate owned (OREO), other-than-temporary securities impairment and an additional valuation allowance on our deferred tax asset.

Our customers’ abilities to make scheduled loan payments depend in part on the performance of their businesses and future economic conditions. In the event our loan customers’ businesses perform worse than expected, we could incur substantial additional provisions for loan losses in future periods.

There are trust preferred securities in our securities portfolio and loans in our loan portfolio as to which we have estimated losses in part based on the assumption that the plans being executed by the issuers or our borrowers will be implemented as planned and have the effect of improving their financial positions. Should these plans not be executed, or have unintended consequences, our losses would increase.

On a quarterly basis, we determine whether a valuation allowance is necessary for our deferred tax asset. In performing this analysis, we consider all evidence currently available, both positive and negative, in determining whether, based on the weight of the evidence, the deferred tax asset will be realized. We establish a valuation allowance when it is more likely than not that a recorded tax benefit is not expected to be realized. The expense to create a valuation allowance is recorded as additional income tax expense in the period the tax valuation allowance is established. To the extent that we generate taxable income in a given quarter, the valuation allowance may be reduced to fully or partially offset the corresponding income tax expense. Any remaining deferred tax asset valuation allowance may be reversed through income tax expense once we can demonstrate a sustainable return to profitability and conclude that it is more likely than not the deferred tax asset will be utilized prior to expiration.

RECENT ACCOUNTING PRONOUNCEMENTS

Effective January 1, 2010, we adopted the new accounting guidance under Accounting Standards Codification (ASC) 860 that requires more information about transfers of financial assets, including securitization transactions, and where entities have continuing exposure to the risks related to transferred financial assets. The guidance eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets, and requires additional disclosures about continuing involvement with transferred financial assets including information about gains and losses resulting from transfers during the period. The adoption of this accounting guidance did not have a material impact on our consolidated financial position or results of operations.

ASC Topic 810 provides guidance for consolidation of variable interest entities by focusing on identifying which enterprise has the power to direct the activities of a variable interest entity that most significantly impacts the entity’s economic performance and (1) the obligation to absorb losses of the entity or (2) the right to receive benefits from the entity. This guidance also requires additional disclosures about our involvement in variable interest entities. This guidance was effective for us on January 1, 2010, and did not have a significant impact on our results of operations or financial position.

FAIR VALUE MEASUREMENT

ASC Topic 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. We use various valuation techniques to determine fair value, including market, income and cost approaches. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 describes three levels of inputs that may be used to measure fair value:

Level 1: Quoted prices (unadjusted) of identical assets or liabilities in active markets that an entity has the ability to access as of the measurement date, or observable inputs.

Level 2: Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. When that occurs, we classify the fair value hierarchy on the lowest level of input that is significant to the fair value measurement. We used the following methods and significant assumptions to estimate fair value.

Securities: We determine the fair values of trading securities and securities available for sale in our investment portfolio by obtaining quoted prices on nationally recognized securities exchanges or matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities. Matrix pricing relies on the securities’ relationship to similarly traded securities, benchmark curves, and the benchmarking of like securities. Matrix pricing utilizes observable market inputs such as benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data, and industry and economic events and is considered Level 2. In instances where broker quotes are used, these quotes are obtained from market makers or broker-dealers recognized to be market participants. This valuation method is classified as Level 2 in the fair value hierarchy.

The markets for pooled collateralized debt obligations (CDOs) continue to reflect an overall lack of activity and observable transactions in the secondary and new issue markets for these securities. Those conditions are indicative of an illiquid market and transactions that do occur are not considered orderly. This led us to value our CDOs using both Level 2 and Level 3 inputs. The single name issues continue to come from the brokers and are considered Level 2 valuations. The marks for the pooled issues classified as available for sale were derived from a financial model and are considered Level 3 valuations. The pricing for the pooled CDOs held for trading were derived from a broker and are considered Level 2 inputs.

When determining fair value, ASC 820 indicates that the observable market data should be used to determine the lowest available level. It also provides guidance on determining fair value when a transaction is not considered orderly because the volume and level of activity have significantly decreased. In evaluating the fair value of our two PreTSL pooled CDOs, we determined that the market transactions for similar securities were disorderly. Therefore we priced our PreTSL pooled CDOs using the fair value generated from the cash flow analysis used as part of our review for other-than-temporary impairment. The cash flows include the deferrals and defaults associated with each security, along with anticipated deferrals, defaults and projected recoveries. This price is considered Level 3 pricing.

The effective discount rates are highly dependent upon the credit quality of the collateral, the relative position of the tranche in the capital structure of the CDO and the prepayment assumptions.

The remaining four pooled CDOs were classified as trading. We utilized pricing from a broker that was considered to be Level 2. The broker provided us with actual prices if they had executed a trade for the same deal or if they had knowledge that another trader had traded the same deal. Otherwise they compared the structure of the pooled CDO with other CDOs exhibiting the same characteristics that had experienced recent trades.

Loans held for sale: The fair value of residential mortgage loans held for sale is determined using quoted secondary-market prices. The purchaser provides us with a commitment to purchase the loan at the origination price. Under ASC 820, this commitment is classified as a Level 2 in the fair value hierarchy. If no such quoted price exists, the fair value of these loans would be determined using quoted prices for a similar asset or assets, adjusted for the specific attributes of that loan.

Derivatives: Our derivative instruments consist of over-the-counter interest rate swaps and mortgage loan interest locks that trade in liquid markets. The fair value of our derivative instruments is primarily measured by obtaining pricing from broker-dealers recognized to be market participants. On those occasions when broker-dealer pricing is not available, pricing is obtained using the Bloomberg system. The pricing is derived from market observable inputs that can generally be verified and do not typically involve significant judgment by us. This valuation method is classified as Level 2 in the fair value hierarchy.

Impaired Loans: Impaired loans are evaluated at the time full payment under the loan terms is not expected. If a loan is impaired, a portion of the allowance for loan losses is allocated so that the loan is reported, net, at the present value of estimated cash flows using the loan’s existing rate or at the fair value of the collateral, if the loan is collateral dependent. Fair value is measured based on the value of the collateral securing these loans, is classified as Level 3 in the fair value hierarchy and is determined using several methods. Generally, the fair value of real estate is determined based on appraisals by qualified licensed appraisers. If an appraisal is not available, the fair value may be determined by using a cash flow analysis, a broker’s opinion of value, the net present value of future cash flows, or an observable market price from an active market. Fair value on non-real estate loans is determined using similar methods. In addition, business equipment may be valued by using the net book value from the business’s financial statements. Impaired loans are evaluated quarterly for additional impairment.

Other Real Estate Owned: Other real estate owned is evaluated at the time a property is acquired through foreclosure or shortly thereafter. Fair value is based on appraisals by qualified licensed appraisers and is classified as Level 3.

Premises and equipment held for sale: Premises and equipment held for sale are evaluated at the time the property is deemed as held for sale. Fair value is based on appraisals by qualified licensed appraisers and is classified as Level 3 input. On occasion, when an appraisal is not performed, fair value is based on sales offers received from potential buyers.

Deposits held for sale: The fair value of deposits held for sale is based on the actual purchase price as agreed upon between Integra Bank and the purchaser. Because this transaction occurs in an orderly transaction between market participants, the fair value qualifies as a Level 2 fair value.

Assets and liabilities measured at fair value on a recurring basis are summarized below.

	Fair Value Measurements at September 30, 2010

	Quoted Prices
	in Active
	Markets for		Significant
	Identical		Other		Significant
	Assets and		Observable		Unobservable		Balance as of
	Liabilities		Inputs		Inputs		September 30,
	(Level 1)		(Level 2)		(Level 3)		2010
Assets
Securities, available for sale
U.S. Treasuries	$	-	$	18,439	$	-	$	18,439
U.S. Government agencies		-		131		-		131
Collateralized mortgage obligations:
Agency		-		249,259		-		249,259
Private Label		-		18,104		-		18,104
Mortgage backed securities: residential		-		216,367		-		216,367
Trust Preferred		-		9,451		968		10,419
State & political subdivisions		-		23,110		-		23,110
Other securities		-		8,730		-		8,730
Total securities, available for sale	$	-	$	543,591	$	968	$	544,559

Securities, held for trading
Trust Preferred	$	-	$	148	$	-	$	148

Derivatives		-		9,074		-		9,074

Liabilities
Derivatives	$	-	$	9,088	$	-	$	9,088

	Fair Value Measurements at December 31, 2009

	Quoted Prices
	in Active
	Markets for		Significant
	Identical		Other		Significant
	Assets and		Observable		Unobservable		Balance as of
	Liabilities		Inputs		Inputs		December 31,
	(Level 1)		(Level 2)		(Level 3)		2009
Assets
Securities, available for sale
U.S. Treasuries	$	-	$	8,833	$	-	$	8,833
U.S. Government agencies		-		279		-		279
Collateralized mortgage obligations:
Agency				118,431				118,431
Private Label		-		23,229		-		23,229
Mortgage backed securities: residential				167,232				167,232
Trust Preferred		-		8,450		1,588		10,038
State & political subdivisions		-		25,040		-		25,040
Other securities		-		8,637				8,637
Total securities, available for sale	$	-	$	360,131	$	1,588	$	361,719

Securities, held for trading
Trust Preferred	$	-	$	36	$	-	$	36

Derivatives		-		5,945		-		5,945

Liabilities
Derivatives	$	-	$	6,307	$	-	$	6,307

Assets and Liabilities Measured on a Non-Recurring Basis:

Assets and liabilities measured at fair value on a non-recurring basis are summarized below.

	Fair Value Measurements at September 30, 2010

	Quoted Prices
	in Active
	Markets for		Significant
	Identical		Other		Significant
	Assets and		Observable		Unobservable		Balance as of
	Liabilities		Inputs		Inputs		September 30,
	(Level 1)		(Level 2)		(Level 3)		2010
Assets
Impaired loans	$	-	$	-	$	184,026	$	184,026
Loans held for sale		-		4,148		-		4,148
Other real estate owned		-		-		34,814		34,814
Premises and equipment held for sale		-		-		3,134		3,134

Liabilities
Deposits held for sale	$	-	$	-	$	-	$	-

	Fair Value Measurements at December 31, 2009

	Quoted Prices
	in Active
	Markets for		Significant
	Identical		Other		Significant
	Assets and		Observable		Unobservable		Balance as of
	Liabilities		Inputs		Inputs		December 31,
	(Level 1)		(Level 2)		(Level 3)		2009
Assets
Impaired loans	$	-	$	-	$	92,715	$	92,715
Loans held for sale		-		93,572		-		93,572
Other real estate owned		-		-		29,317		29,317
Premises and equipment held for sale		-		-		4,249		4,249

Liabilities
Deposits held for sale	$	-	$	97,207	$	-	$	97,207

At September 30, 2010, impaired loans with specific reserves, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $223,462, with a valuation allowance of $39,436, resulting in an additional provision for loan losses of $13,559 for the three month period and $43,356 for the nine month period ended September 30, 2010.

For those properties held in other real estate owned and carried at fair value, writedowns of $4,537 and $5,015 were charged to earnings for the three and nine months ended September 30, 2010, compared to $2,148 and $2,630 for both the three and nine months ended September 30, 2009.

The following table presents a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine month periods ending September 30, 2010.

	Fair Value Measurements Using Significant
	Unobservable Inputs (Level 3)
	Securities
	Available for sale			Total
Three months ended September 30, 2010

Beginning Balance at July 1, 2010	$	1,523		$	1,523
Transfers in and/or out of Level 3		-			-
Gains (Losses) included in other comprehensive income		30			30
Gains (Losses) included in earnings		(585	)		(585	)
Ending Balance	$	968		$	968

	Fair Value Measurements Using Significant
	Unobservable Inputs (Level 3)
	Securities
	Available for sale			Total

Nine months ended September 30, 2010

Beginning Balance at January 1, 2010	$	1,588		$	1,588
Transfers in and/or out of Level 3		-			-
Gains (Losses) included in other comprehensive income		175			175
Gains (Losses) included in earnings		(795	)		(795	)
Ending Balance	$	968		$	968

Unrealized gains and losses for securities classified as available for sale are generally not recorded in earnings. However, during the three and nine months ended September 30, 2010, impairment charges of $585 and $795 were charged to earnings for two of our trust preferred securities.

The carrying amounts and estimated fair values of financial instruments, at September 30, 2010 and December 31, 2009 are as follows:

	September 30, 2010				December 31, 2009
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value

Financial Assets:
Cash and short-term investments	$	550,631	$	550,631	$	354,574	$	354,574
Loans-net of allowance		1,177,402		1,190,249		1,838,347		1,840,053
Accrued interest receivable		8,041		8,041		9,336		9,336

Financial Liabilities:
Deposits	$	2,152,570	$	2,180,997	$	2,267,899	$	2,288,866
Short-term borrowings		55,841		55,841		62,114		62,114
Long-term borrowings		348,161		353,441		361,071		362,271
Accrued interest payable		8,114		8,114		8,200		8,200

The above fair value information was derived using the information described below for the groups of instruments listed. It should be noted the fair values disclosed in this table do not represent fair values of all of our assets and liabilities and should not be interpreted to represent our market or liquidation value.

Carrying amount is the estimated fair value for cash and short-term investments, accrued interest receivable and payable, deposits without defined maturities and short-term debt. The fair value of loans is estimated in accordance with ASC Topic 825, “Financial Instruments” by discounting expected future cash flows using market rates of like maturity. For time deposits, fair value is based on discounted cash flows using current market rates applied to the estimated life. Fair value of debt is based on current rates for similar financing. It was not practicable to determine the fair value of regulatory stock due to restrictions placed on its transferability. The fair value of off-balance-sheet items is not considered material.

STOCK OPTION PLAN AND AWARDS

In April 2007, our shareholders approved the Integra Bank Corporation 2007 Equity Incentive Plan (the “2007 Plan”) which reserved 600,000 shares of common stock for issuance as incentive awards to directors and key employees. Awards may include incentive stock options, non-qualified stock options, restricted shares, performance shares, performance units or stock appreciation rights (SARs). All options granted under the 2007 Plan, or any predecessor stock-based incentive plans (the “Prior Plans”), have a termination period of ten years from the date granted. The exercise price of options granted under the plans cannot be less than the market value of the common stock on the date of grant. Upon the adoption of the 2007 Plan, no additional awards were granted under the Prior Plans. In April 2009, our shareholders approved an amendment to the 2007 Plan that increased the number of shares available under the plan to 1,000,000 shares. At September 30, 2010, there were 416,857 shares available for the granting of additional awards under the 2007 Plan.

A summary of the status of the options or SARs granted under the 2007 Plan and Prior Plans as of September 30, 2010, and changes during the year is presented below:

	September 30, 2010
						Weighted Average
				Weighted Average		Remaining Term
	Shares			Exercise Price		(In years)

Options/SARs outstanding at December 31, 2009		1,099,536		$	20.52
Options/SARs granted		-			-
Options/SARs exercised		-			-
Options/SARs forfeited/expired		(617,893	)		20.45

Options/SARs outstanding at September 30, 2010		481,643		$	20.60		4.5

Options/SARs exercisable at September 30, 2010		471,250		$	20.66		4.5

The options and SARs outstanding at September 30, 2010, had a weighted average remaining term of 4.5 years with no aggregate intrinsic value, and the options and SARs that were exercisable at September 30, 2010, had a weighted average remaining term of 4.5 years and no aggregate intrinsic value. As of September 30, 2010, there was $24 of total unrecognized compensation cost related to the stock options and SARs. The cost is expected to be recognized over a weighted-average period of less than one year. Compensation expense for options and SARs for the three and nine months ended September 30, 2010, was $19 and $38, compared to $51 and $289 for the three and nine months ended September 30, 2009.

A summary of the status of the restricted stock granted by us as of September 30, 2010, and changes during the first, second and third quarters of 2010 is presented below:

				Weighted-Average
				Grant-Date
	Shares			Fair Value

Restricted shares outstanding, December 31, 2009		226,113		$	4.94
Shares granted		288,000		$	0.76
Shares vested		(54,632	)
Shares forfeited		(68,061	)

Restricted shares outstanding, September 30, 2010		391,420		$	1.54

We record the fair value of restricted stock grants, net of estimated forfeitures, and an offsetting deferred compensation amount within stockholders’ equity for unvested restricted stock. As of September 30, 2010, there was $459 of total unrecognized compensation cost related to the nonvested restricted stock. The cost is expected to be recognized over a weighted-average period of 1.8 years. Compensation expense for restricted stock for the three and nine months ended September 30, 2010, was $131 and $311, compared to $190 and $689 for the three and nine months ended September 30, 2009.

In April 2009, our shareholders approved an increase in authorized shares of common stock of 100,000,000 shares, bringing total authorized common shares to 129,000,000.

NOTE 2. EARNINGS PER SHARE

Basic earnings per share is computed by dividing net income (loss) for the year by the weighted average number of shares outstanding. Diluted earnings per share is computed as above, adjusted for the dilutive effects of stock options, SARs, and restricted stock.

The following provides a reconciliation of basic and diluted earnings per share:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009

Net income (loss)	$	(16,154	)	$	(19,735	)	$	(77,977	)	$	(96,260	)
Preferred dividends and discount accretion		(1,133	)		(1,117	)		(3,394	)		(2,669	)
Net income (loss) available to common shareholders	$	(17,287	)	$	(20,852	)	$	(81,371	)	$	(98,929	)

Weighted average common shares outstanding - Basic		20,685,578			20,706,560			20,671,885			20,713,301
Incremental shares related to stock compensation		-			-			-			-
Average common shares outstanding - Diluted		20,685,578			20,706,560			20,671,885			20,713,301

Earnings (Loss) per common share - Basic	$	(0.84	)	$	(1.01	)	$	(3.94	)	$	(4.78	)
Effect of incremental shares related to stock compensation		-			-			-			-
Earnings (Loss) per common share - Diluted	$	(0.84	)	$	(1.01	)	$	(3.94	)	$	(4.78	)

Options to purchase 481,643 shares and 1,246,466 shares were outstanding at September 30, 2010 and 2009, respectively, and were not included in the computation of net income per diluted share in both periods because the exercise price of these options was greater than the average market price of the common shares, and therefore antidilutive and also because of the net loss in both years.

On February 27, 2009, the Treasury Department invested $83,586 in us as part of the Capital Purchase Plan (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 Warrant was not included in the computation of net income per diluted share in both periods because the exercise price of these shares was greater than the average market price of the common shares, and therefore antidilutive and also because of the net loss.

NOTE 3. SECURITIES

At September 30, 2010, the majority of securities in our investment portfolio were classified as available for sale.

Trading securities at September 30, 2010, consisted of four trust preferred securities valued at $148, compared to $36 at December 31, 2009. During the third quarter of 2010, we recorded trading gains of $87, compared to trading loss of $1,237 during the third quarter of 2009. The net gain on trading activities included in earnings for 2010 was $111.

Amortized cost, fair value and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) of available for sale securities were as follows:

	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
September 30, 2010
U.S. Treasuries	$	17,928	$	511	$	-	$	18,439
U.S. Government agencies		126		5		-		131
Collateralized mortgage obligations:
Agency		246,142		3,383		266		249,259
Private label		18,627		6		529		18,104
Mortgage-backed securities - residential		212,592		4,071		296		216,367
Trust preferred		16,484		60		6,125		10,419
States & political subdivisions		21,359		1,751		-		23,110
Other securities		8,641		91		2		8,730
Total	$	541,899	$	9,878	$	7,218	$	544,559

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
December 31, 2009
U.S. Treasuries	$	8,856	$	-	$	23	$	8,833
U.S. Government agencies		277		5		3		279
Collateralized mortgage obligations:
Agency		117,930		1,624		1,123		118,431
Private label		25,164		-		1,935		23,229
Mortgage-backed securities - residential		167,533		537		838		167,232
Trust preferred		17,238		10		7,210		10,038
States & political subdivisions		23,529		1,589		78		25,040
Other securities		8,640		-		3		8,637
Total	$	369,167	$	3,765	$	11,213	$	361,719

The amortized cost and fair value of the securities available for sale portfolio are shown by expected maturity. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

	September 30, 2010
	Amortized		Fair
	Cost		Value
Maturity
Available-for-sale

Within one year	$	3,860	$	3,884
One to five years		160,342		161,619
Five to ten years		265,630		270,783
Beyond ten years		112,067		108,273
Total	$	541,899	$	544,559

Available for sale securities with unrealized losses at September 30, 2010, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position, are as follows:

	Less than 12 Months				12 Months or More				Total
September 30, 2010	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Collateralized mortgage obligations:
Agency	$	58,575	$	266	$	-	$	-	$	58,575	$	266
Private Label		-		-		12,882		529		12,882		529
Mortgage-backed securities - residential		50,875		296		-		-		50,875		296
Trust Preferred		-		-		6,368		6,125		6,368		6,125
State & political subdivisions		-		-		-		-		-		-
Other securities		25		1		24		1		49		2
Total	$	109,475	$	563	$	19,274	$	6,655	$	128,749	$	7,218

	Less than 12 Months				12 Months or More				Total
December 31, 2009	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
U.S. Treasuries	$	8,833	$	23	$	-	$	-	$	8,833	$	23
U.S. Government agencies		149		3		-		-		149		3
Collateralized mortgage obligations:
Agency		59,198		1,123		-		-		59,198		1,123
Private Label		-		-		23,229		1,935		23,229		1,935
Mortgage-backed securities - residential		105,719		838		-		-		105,719		838
Trust Preferred		602		123		5,436		7,087		6,038		7,210
State & political subdivisions		1,806		22		1,066		56		2,872		78
Other securities		-		-		21		3		21		3
Total	$	176,307	$	2,132	$	29,752	$	9,081	$	206,059	$	11,213

Proceeds from sales and calls of securities available for sale were $125,248 and $308,258 for the nine months ended September 30, 2010 and 2009, respectively. Gross gains of $3,351 and $8,072 and gross losses of $2 and $15 were realized on these sales and calls during 2010 and 2009, respectively.

Proceeds from sales and calls of securities available for sale were $165 and $238,869 for the three months ended September 30, 2010 and 2009, respectively. Gross gains of $6,592 and gross losses of $15 were realized on these sales and calls during 2009.

We regularly review the composition of our securities portfolio, taking into account market risks, the current and expected interest rate environment, liquidity needs, and our overall interest rate risk profile and strategic goals.

On a quarterly basis, we evaluate each security in our portfolio with an individual unrealized loss to determine if that loss represents other-than-temporary impairment. The factors we consider in evaluating the securities include whether the securities were guaranteed by the U.S. government or its agencies and the securities’ public ratings, if available, and how those two factors affect credit quality and recovery of the full principal balance, the relationship of the unrealized losses to increases in market interest rates, the length of time the securities have had temporary impairment, and our ability to hold the securities for the time necessary to recover the amortized cost. We also review the payment performance, delinquency history and credit support of the underlying collateral for certain securities in our portfolio as part of our impairment analysis and review.

When other-than-temporary impairment occurs for debt securities, the amount of the other-than-temporary impairment recognized in earnings depends on whether an entity intends to sell the security or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss. If we intend to sell or it is more likely than not we will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss, the other-than-temporary impairment shall be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. If we do not intend to sell the security, and it is not more likely than not that we would be required to sell the security before recovery of its amortized cost basis, less any current-period loss, the other-than-temporary impairment shall be separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total other-than-temporary impairment related to other factors is recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the other-than-temporary impairment recognized in earnings becomes the new amortized cost basis of the investment.

The ratings of our available for sale pooled trust preferred CDOs that have incurred other-than-temporary impairment are listed below. The ratings of our four single issue trust preferred securities and private label CMOs as of September 30, 2010 and June 30, 2010 are also listed below. The private label CMOs consist of six issues of which five were originated in 2003-2004 while one was originated in 2006.

	Gross				Gross
	Amortized		Fair		Unrealized			Ratings as of
Issuer	Cost		Value		Gains/(Losses)			September 30, 2010	June 30, 2010
Pooled Trust Preferred CDOs
PreTSL VI		728		536		(192	)	Ca** (Moodys) / D (Fitch)*	Caa1 (Moodys) / CC (Fitch)
PreTSL XIV		1,757		432		(1,325	)	Ca (Moodys) /C (Fitch)	Ca (Moodys) /C (Fitch)
Total	$	2,485	$	968	$	(1,517	)

Single Issue Trust Preferred
Bank One Cap Tr VI (JP Morgan)		1,000		1,028		28		A2(Moodys)/A+(Fitch)*	A2(Moodys)
First Citizen Bancshares		5,008		2,000		(3,008	)	Non-Rated	Non-Rated
First Union Instit Cap I (Wells Fargo)		2,991		3,023		32		Baa2(Moodys)/A-(S&P)/A(Fitch)	Baa2(Moodys)/A-(S&P)/A(Fitch)
Sky Financial Cap Trust III (Huntington)		5,000		3,400		(1,600	)	B(S&P)	B(S&P)
Total	$	13,999	$	9,451	$	(4,548	)

Private Label CMOs
CWHL 2003-58 2A1		2,588		2,467		(121	)	Aaa/*-(Moodys)/AAA(S&P)	Aaa/-(Moodys)/AAA(S&P)
CMSI 2004-4 A2		207		255		48		AAA(S&P)/AAA(Fitch)	AAA(S&P)/AAA(Fitch)
GSR 2003-10 2A1		5,216		5,222		6		Aaa/*-(Moodys)/AAA(S&P)	Aaa/-(Moodys)/AAA(S&P)
RAST 2003-A15 1A1		4,044		3,931		(113	)	AAA(S&P)/AAA(Fitch)	AAA(S&P)/AAA(Fitch)
SASC 2003-31A 3A		4,962		4,712		(250	)	A1/*-(Moodys)/AAA(S&P)	A1/-(Moodys)/AAA(S&P)
WFMBS 2006-8 A13		1,610		1,517		(93	)	B2(Moodys)/B(Fitch)	B2(Moodys)*/B(Fitch)
Total	$	18,627	$	18,104	$	(523	)

The ratings above range from highly speculative, defined as equal to or below “Ca” per Moody’s and “CC” per Fitch and S&P, to the highest credit quality defined as “Aaa” or “AAA” per the aforementioned rating agencies, respectively. Changes to the ratings that occurred during the quarter are denoted with an * and subsequent changes are denoted with a **. The *- indicates a negative watch.

Pooled Trust Preferred CDOs

We incorporated several factors into our determination of whether the CDOs in our portfolio had incurred other-than-temporary impairment, including review of current defaults and deferrals, the likelihood that a deferring issuer will reinstate, recovery assumptions on defaulted issuers, expectations for future defaults and deferrals and the coupon rate at the issuer level compared to the coupon on the tranche. We examined the trustee reports to determine current payment history and the structural support that existed within the CDOs. We also reviewed key financial characteristics of each individual issuer in the pooled CDOs. Additionally, we utilized an internal watch list and near watch list which is updated and reviewed quarterly. Changes are compared to the prior quarter to determine migration patterns and direction. Our review analyzed capital ratios, leverage ratios, non-performing loan and non-performing asset ratios.

We also utilize a third party cash flow analysis that compares the present value of expected cash flows to the previous estimate to ensure there are no adverse changes in cash flows during the quarter. This analysis considers the structure and term of the CDO and the financial condition of the underlying issuers. The review details the interest rates, principal balances of note classes and underlying issuers, the timing and amount of interest and principal payments of the underlying issuers, and the allocation of the payments to the note classes. The current estimate of expected cash flows is based on the most recent trustee reports and any other relevant market information including subsequent announcements of interest payment deferrals or defaults of underlying trust preferred securities. Assumptions used in the review include expected future default rates and prepayments.

During the third quarter 2010, our review indicated additional other-than-temporary impairment had occurred on one of our available for sale pooled trust preferred securities. The PreTSL XIV security experienced additional credit deterioration during the third quarter 2010. The cash flow analysis for PreTSL XIV assumes a zero recoveries for those accounts in default and a 10 percent recovery, lagged for two years on deferrals. The report also assumes that an additional account totaling $6,000 has a 50 percent probability of defaulting prior to the next payment date. This report shows the present value of cash flows declined quarter over quarter. The cash flow analysis shows both the credit component and the non credit component declined during the third quarter of 2010. As part of the other-than-temporary impairment review for PreTSL VI, the cash flow analysis assumed a 10% recovery, lagged for two years for all issuers except for Bank Atlantic, which incorporates a 20% recovery lagged for two years. Based on the review of the third quarter 2010 cash flows for PreTSL VI, it shows the cash flow improved quarter-over-quarter, thus no additional impairment is required. The additional credit component of other-than-temporary impairment recorded in the third quarter 2010 is $585.

We did not recognize any impairment charges during the third quarter of 2009.

Single Issue Trust Preferred

With respect to our single issuer trust preferred securities, we look at rating agency actions, payment history, the capital levels of the banks, and the financial performance as filed in regulatory reports. Based on our third quarter 2010 review, we determined that all four securities were still performing and, as such, the $4,548 unrealized loss is temporary.

Private Label CMOs

Factors utilized in the analysis of the private label CMOs in our portfolio included a review of underlying collateral performance, the length of time and extent that fair value has been less than cost, changes in market valuation and rating changes to determine if other-than-temporary impairment has occurred. As of September 30, 2010, five of the six private label CMOs in our portfolio had unrealized losses for 12 consecutive months.

The issuers within the portfolio continue to perform according to their contractual terms. The underlying collateral performance for each of the private label CMOs has been reviewed. The collateral has seen delinquencies greater than 90 days continue to move higher in the third quarter of 2010 with the exception of two securities (CWHL 2003-58 2A1 & GSR 2003-10 2A1), where the delinquencies greater than 90 days experienced declines quarter over quarter. The reported cumulative loss for all six securities remained low with 1.092% being the highest. The exposure to the high risk geographies (CA, AZ, NV, and FL) has experienced little change since our last review. The credit support for five of the private label CMOs increased during the third quarter of 2010, while the support on the sixth security didn’t change. All six securities continue to maintain a credit support level that is higher than their original credit support percentages.

We also received a third party review of our private label CMOs. This review contains a stress test for each security that models multiple scenarios projecting various levels of delinquencies, loss severity rates and different liquidation time frames. The purpose of the stress test is to account for increasingly stressful macroeconomic scenarios that take into consideration various economic stresses, including but not limited to, home prices, gross domestic product index, and employment data. Only one of the securities, WFMBS 2006-8 A13, projected a minimal loss in the extreme scenario. The findings in this report continue to support our analysis that there is adequate structural support even under stressed scenarios. The overall review of the underlying mortgage collateral for the tranches we own demonstrates it is unlikely that the contractual cash flows will be disrupted. Therefore, given the performance of these securities at September 30, 2010, and that it is not our intent to sell these securities and it is likely that we will not be required to sell the securities before their anticipated recovery, we concluded that there is no other-than-temporary impairment. The $523 in unrealized loss was temporary.

As noted in the above discussion related to CDOs, including both pooled and single issue CDOs and the private label CMOs, we determined that an additional other-than-temporary impairment charge of $585 was required for the third quarter of 2010. The remainder of the securities portfolio continues to perform as expected.

The table below presents a roll forward of the credit losses recognized in earnings for the period ended September 30, 2010:

Ending balance December 31, 2009	$	315
Additions for amounts related to credit loss for which an other-
than-temporary impairment was not previously recognized		795
Reductions for amounts related to securities for which the company intends
to sell or that it will be more likely than not that the company will be
required to sell prior to recovery of amortized cost basis		-

Ending balance September 30, 2010	$	1,110

NOTE 4. LOANS

A summary of our loans follows:

	September 30,		December 31,
	2010		2009
Commercial, industrial and
agricultural loans	$	419,309	$	602,606
Economic development loans and
other obligations of state and
political subdivisions		9,164		14,773
Lease financing		1,877		5,579
Commercial mortgages		423,875		583,123
Construction and development		266,023		382,068
Residential mortgages		151,086		232,799
Home equity lines of credit		121,719		162,934
Consumer loans		63,914		126,466
Loans, net of unearned income	$	1,456,967	$	2,110,348

NOTE 5. ALLOWANCE FOR LOAN LOSSES

Changes in the allowance for loan losses were as follows for the three and nine months ended September 30, 2010 and 2009:

SUMMARY OF ALLOWANCE FOR LOAN LOSSES

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009
Beginning Balance	$	96,221		$	82,309		$	88,670		$	64,437
Loans charged off		(27,359	)		(22,396	)		(80,806	)		(69,226	)
Recoveries		437			538			2,321			1,310
Provision for loan losses		26,240			18,913			98,220			82,843
Allowance related to divested loans sold		-			-			(12,866	)		-
Ending Balance	$	95,539		$	79,364		$	95,539		$	79,364

Percent of total loans		6.56	%		3.60	%		6.56	%		3.60	%

Annualized % of average loans:
Net charge-offs		6.43	%		3.74	%		5.52	%		3.80	%
Provision for loan losses		6.26	%		3.24	%		6.91	%		4.63	%

The allowance for loan losses was $95,539 at September 30, 2010, representing 6.56% of total loans, compared with $88,670 at December 31, 2009, or 4.20% of total loans and $79,364 at September 30, 2009, or 3.60% of total loans. The allowance for loan losses to non-performing loans ratio was 44.9%, compared to 41.3% at December 31, 2009 and 41.8% at September 30, 2009. At September 30, 2010, we believe that our allowance appropriately considers incurred losses in our loan portfolio. The allowance for divested loans sold represents the allowance that was transferred to loans held for sale for loans included in 2010 branch sales. The beginning balance of the allowance for loan losses for the three months ended September 30, 2010 of $96,221, differs from the amount shown as the ending balance of $106,745 in our second quarter 2010 financial statements. In our second quarter 2010 financial statements, we did not include the allowance related to divested loans sold in the loans held for sale balance and recorded the impact of the release of the allowance for loan losses associated with the loans sold in the second quarter of 2010 of $2,342 as a reduction of the provision for loan losses. During this quarter we reclassified the second and third quarter loan sale gains of $2,342 and $10,524 from the provision for loan losses to gain on sale of loans.

Total non-performing loans at September 30, 2010, consisting of nonaccrual loans and loans 90 days or more past due, were $212,666, a decrease of $2,214 from December 31, 2009. Non-performing loans were 14.60% of total loans, compared to 10.18% at December 31, 2009, and 8.61% at September 30, 2009. Non-performing assets were 16.60% of total loans and other real estate owned at September 30, 2010, compared to 11.52% at December 31, 2009 and 9.69% at September 30, 2009. Both non-performing loans and non-performing assets declined, but their ratios increased during the third quarter primarily as a result of the sale of performing loans in the branch and loan sale transactions.

Occasionally, we may agree to modify contractual terms of a borrower’s loan. In such cases, where modifications represent a concession to a borrower experiencing financial difficulty, the modification is considered a troubled debt restructure (TDR). Loans modified in a TDR are generally placed on nonaccrual status until we determine that the future collection of principal and interest is reasonably assured, which requires that the borrower demonstrate a period of performance in accordance to the restructured terms of six months or more. At September 30, 2010, loans fitting this description totaled $17,387 compared to $4,266 at December 31, 2009.

While we currently have the ability and intent to hold for the foreseeable future loans that are not classified as held for sale, our problem asset disposition strategy now contemplates a more rapid disposition of our non-performing assets if and when opportunities arise. We may take advantage of opportunities to sell, exchange for other assets or accept discounted payoffs where appropriate, particularly in situations in which we expect it would take several quarters for values to recover. We believe this more rapid disposition policy for troubled assets will accelerate our return to profitability and credit quality norms by providing increased liquidity for redeployment, reduce real estate taxes, legal fees, and other asset carrying costs, allow for more effective utilization of our workout team, and reduce our overall staffing costs.

The following is a comparison of non-performing assets.

	September 30,			December 31,
	2010			2009
Nonaccrual loans	$	212,345		$	210,753
90 days or more past due loans		321			4,127
Total non-performing loans	$	212,666			214,880
Trust preferred held for trading		148			36
Other real estate owned		34,814			31,982
Total non-performing assets	$	247,628		$	246,898

Ratios:
Non-performing Loans to Loans		14.60	%		10.18	%
Non-performing Assets to Loans and Other Real Estate Owned		16.60	%		11.52	%
Allowance for Loan Losses to Non-performing Loans		44.92	%		41.26	%

Changes in other real estate owned were as follows for the three and nine months ended September 30, 2010:

SUMMARY OF OTHER REAL ESTATE OWNED

	Three Months Ended			Nine Months Ended
	September 30, 2010			September 30, 2010
Beginning Balance	$	33,706		$	31,982
Additions		8,450			15,137
Sales		(2,770	)		(7,204	)
Write-downs		(4,538	)		(5,015	)
Other changes		(34	)		(86	)
Ending Balance	$	34,814		$	34,814

The third quarter of 2010 included $3,539 in writedowns on two specific real estate parcels following receipt of updated appraisals.

NOTE 6. STRATEGIC PLAN

During the third quarter, we successfully executed several additional components of the strategic plan we outlined in the fourth quarter of 2009 to reduce credit risk and improve our capital ratios. The key components of that plan, and our progress during the quarter towards executing them, are as follows:

We continued our exit from the commercial real estate (CRE) lending line of business. During the third quarter, we completed the sale of three branch clusters which included the sale of CRE and other non-branch generated loans. We also obtained early repayment of several CRE loans and pursued additional loan paydowns and payoffs through a modest discount program. As a result of these initiatives, we reduced outstanding CRE loan balances by $139,570, or 16.8%, from June 30, 2010. This follows a 9.9% decrease in the second quarter. We continue to evaluate multiple alternatives to sell or exchange our performing and nonperforming CRE loans and are working with a number of parties interested in purchasing these assets. We also increased pricing on $36,656 of commercial credits, from low LIBOR based variable rates, to minimum floor rates of at least 4%, during the quarter. We will continue existing initiatives to reduce CRE balances and increase pricing on credits we cannot exit throughout 2010.

We continued to narrow our geographic operating footprint through the sale of multiple branch clusters. During the third quarter of 2010, Integra Bank completed the sale of twelve banking centers, along with groups of non-branch originated commercial and consumer loans, in three transactions with First Security Bank, FNB Bank, Inc., and Citizens Deposit Bank and Trust. These transactions included approximately $238,157 in loans and $307,724 in deposits, while generating deposit premiums of $11,241, after consideration of a write-off of $2,959 of core deposit intangible assets associated with the deposits sold. These three transactions increased Integra Bank’s Tier 1 and Total Risk-Based Capital Ratios by approximately 216 basis points, and its Tier 1 Leverage Ratio by approximately 87 basis points. The transactions also increased the Company’s Tangible Common Equity to Tangible Assets Ratio by approximately 58 basis points. Integra Bank’s Total Risk-Based Capital Ratio was 9.34% at September 30, 2010, an increase of 101 basis points from June 30, 2010 and an increase of 134 basis points from March 31, 2010. During the second quarter of 2010, we completed branch and loan sales to United Community Bank and Cecilian Bank, selling five branches, $98,057 in deposits and $86,646 in loans, generating deposit premiums of $4,371. We have nearly achieved our planned reduced geographic operating footprint, although we continue to work with interested buyers for our four branches in the Chicago market. Excluding that market, our pro-forma operating footprint includes forty-eight branches within a one-hundred mile radius of Evansville with a genuine focus on community banking.

During the third quarter of 2010, we experienced higher levels of provision and charge-offs than anticipated, as we continued our practice of updating appraisals on non-performing assets and adjusted the carrying value of these assets, increasing our loan loss provision and OREO expense and increasing our loan loss reserves. We continue to pursue aggressive disposition strategies for all of these assets which further contributed to our significant loan loss provision and increased level of net charge-offs during the quarter. We did report the first decrease in non-performing assets since the third quarter of 2006 and executed our disposition strategies on several of our non-performing assets. We also experienced improvement in our delinquencies, which were 1.30% at September 30, 2010. Our efforts continue to be focused on reducing our level of non-performing assets, improving our capital and liquidity and increasing the operating income of our core community banking franchise.

Integra Bank’s Total Risk-Based Capital Ratio was 9.34%, an increase of 101 basis points from June 30, 2010 and an increase of 134 basis points from March 31, 2010, which maintains Integra Bank’s classification as adequately capitalized under the Prompt Corrective Action framework at September 30, 2010. The increase resulted from the branch and loan sales and loan paydowns, partially offset by the quarter’s net loss. On August 12, 2010, Integra Bank received a Capital Directive from the OCC. Under the terms of the Capital Directive, the Bank is required, within 90 days, to achieve and maintain a Total Risk-Based Capital Ratio of at least 11.5% of risk-weighted assets and a Tier 1 Leverage Ratio of at least 8% of adjusted total assets. We were also required to submit to the OCC within 30 days an acceptable Capital Plan covering at least a three-year period that describes the means and time schedule by which the Bank will achieve the required minimum capital ratios, which we provided. The OCC is completing its review of that plan and we continue to review our capital raising initiatives with them. We do not expect that Integra Bank will achieve the required capital ratios within the 90 days specified in the Capital Directive. We are keeping the OCC fully informed of our efforts to raise capital and we hope to announce more definitive information later this year.

We are pursuing multiple initiatives to raise new capital. Working with our financial advisor, Keefe, Bruyette & Woods (KBW), we are having ongoing discussions with private investors, private equity firms and others about investing in our Company. We engaged an independent consultant to evaluate our loan portfolio and to independently affirm the valuation and integrity of its administration and are taking multiple steps necessary in the capital raising process. It is important that we are able to raise the capital we need and return to profitability. For a discussion of the potential implications if we cannot raise the additional capital or return to profitability, please see the “Risk Factors” section of this document. We look forward to announcing the results of our capital raising efforts at the appropriate time.

We executed multiple cost reduction initiatives during the second and early third quarters of 2010. Those initiatives included a reduction in workforce of personnel not included in the branch sale transactions, along with normal attrition, that is expected to result in lower annualized personnel costs of approximately $4,000, as well as other expense reductions. Expense reduction of our back-office operations is one of the primary components of offsetting the net income lost as a result of the divested branches. We continue reducing our costs where possible while taking into consideration the resources necessary to execute our strategies, evaluating remaining terms on existing contracts and identifying expenses we cannot reduce currently, but expect to be able to in 2011 and 2012, such as FDIC insurance, examination fees and loan workout and OREO expenses. These efforts will remain ongoing.

The July 2010 transaction with First Security included five branches located in Bowling Green and Franklin, Kentucky, as well as a pool of indirect consumer, commercial and CRE loans. First Security assumed the deposit liabilities of the five branches and purchased certain branch-related assets, including loans. There were $104,929 in loans and $115,110 in deposits sold. The sale generated a deposit premium of $5,758, less the write-off of a core deposit intangible for those branches of $2,959, as well as a gain on the sale of the loans included in the transaction of $4,959. First Security had also agreed, in a second phase, to purchase single offices located in Paoli, Mitchell and Bedford, Indiana; however, they were unable to raise the capital necessary to complete this transaction and paid us a $175 termination fee. The agreement was terminated in August 2010. We will retain these three branches in our core community banking franchise.

The September 2010 transaction with FNB included three branches located in Cadiz and Mayfield, Kentucky, along with a pool of commercial, agricultural, consumer and CRE loans. FNB assumed deposit liabilities of $118,928 of the three branches and purchased certain branch-related assets, including loans. There were $71,855 in loans sold. The sale generated a deposit premium of $6,010, as well as a gain on the sale of the loans included in the transaction of $2,078.

The September 2010 transaction with Citizens included four branches located in Maysville and Mt. Olivet, Kentucky and Ripley and Aberdeen, Ohio, as well as a pool of commercial and CRE loans. Citizens assumed the deposit liabilities of the four branches and purchased certain branch-related assets, including loans. There were $61,374 in loans and $73,686 in deposits sold. The sale generated a deposit premium of $2,432, as well as a gain on the sale of the loans included in the transaction of $2,461.

We also had a separate loan purchase agreement with Citizens under which we sold $8,297 in commercial loans on June 24, 2010.

NOTE 7. DEPOSITS

The following table shows deposits by category at September 30, 2010, and December 31, 2009, which included those held for probable branch sales.

	September 30, 2010		December 31, 2009
Deposits:
Non-interest-bearing	$	227,106	$	270,849
Interest checking		283,115		416,635
Money market accounts		218,535		249,490
Savings		243,444		342,453
Time deposits of $100 or more		797,423		623,670
Other interest-bearing		382,947		462,009
	$	2,152,570	$	2,365,106

As of September 30, 2010, the scheduled maturities of time deposits are as follows:

Time Deposit Maturities

2010	$	216,657
2011		508,461
2012		265,608
2013		97,749
2014 and thereafter		91,895

Total	$	1,180,370

We had $393,570 in brokered deposits at September 30, 2010 and $353,050 at December 31, 2009.

NOTE 8. INCOME TAXES

The income tax benefit for the first nine months of 2010 was $350, which equates to an effective tax rate of 0%. The zero effective tax rate is a result of the increase in our income tax valuation allowance on our net deferred tax asset of $5,970, with $6,959 being recorded to income tax expense. This brings our total valuation allowance at September 30, 2010, to $129,842 and represents a continuation of the full valuation allowance established at December 31, 2009.

NOTE 9. SHORT-TERM BORROWINGS

Short-term borrowings consist of securities sold under agreements to repurchase and totaled $55,841 at September 30, 2010 and $62,114 at December 31, 2009.

We must pledge collateral in the form of mortgage-backed securities or mortgage loans to secure Federal Home Loan Bank (FHLB) advances. At September 30, 2010, we had sufficient collateral pledged to satisfy the collateral requirements.

NOTE 10. LONG-TERM BORROWINGS

Long-term borrowings consist of the following:

	September 30,		December 31,
	2010		2009
Federal Home Loan Bank (FHLB) Advances
Fixed maturity advances (weighted average rate of 2.77% and 2.53%	$	114,000	$	126,004
as of September 30, 2010 and December 31, 2009, respectively)

Securities sold under repurchase agreements with maturities		80,000		80,000
at various dates through 2013 (weighted average rate of 4.60%
and 3.29% as of September 30, 2010 and December 31, 2009, respectively)

Note payable, secured by equipment, with a fixed interest rate of 7.26%,		1,739		2,645
due at various dates through 2012

Subordinated debt, unsecured, with a floating interest rate equal to three-		10,000		10,000
month LIBOR plus 3.20%, with a maturity date of April 24, 2013

Subordinated debt, unsecured, with a floating interest rate equal to three-		4,000		4,000
month LIBOR plus 2.85%, with a maturity date of April 7, 2014

Floating Rate Capital Securities, with an interest rate equal to six-month		18,557		18,557
LIBOR plus 3.75%, with a maturity date of July 25, 2031, and callable
effective July 25, 2011, at par *

Floating Rate Capital Securities, with an interest rate equal to three-month		35,568		35,568
LIBOR plus 3.10%, with a maturity date of June 26, 2033, and callable
quarterly, at par *

Floating Rate Capital Securities, with an interest rate equal to three-month		20,619		20,619
LIBOR plus 1.57%, with a maturity date of June 30, 2037, and callable
effective June 30, 2012, at par *

Floating Rate Capital Securities, with an interest rate equal to three-month		10,310		10,310
LIBOR plus 1.70%, with a maturity date of December 15, 2036, and callable
effective December 15, 2011, at par *

Senior unsecured debt guaranteed by FDIC under the TLGP, with a fixed		50,000		50,000
rate of 2.625%, with a maturity date of March 30, 2012

Other		3,368		3,368
Total long-term borrowings	$	348,161	$	361,071

* Payment of interest has been deferred since September 2009.

Securities sold under agreements to repurchase consist of $80,000 in fixed rate national market repurchase agreements. A $25,000 variable rate agreement converted to a 4.565% fixed rate instrument on April 30, 2010. These repurchase agreements have an average rate of 4.60%, with $30,000 maturing in 2012, and $50,000 maturing in 2013. We borrowed these funds under a master repurchase agreement. The counterparty to our repurchase agreements is exposed to credit risk. We are required to pledge collateral for the repurchase agreement. The amount of collateral pledged September 30, 2010, included $48,011 in cash and $42,763 in securities.

Also included in long-term borrowings are $114,000 in FHLB advances to fund investments in mortgage-backed securities, loan programs and to satisfy certain other funding needs. Included in the long-term FHLB borrowings are $40,000 of putable advances. Each advance is payable at its maturity date, with a prepayment penalty for fixed rate advances. Total FHLB advances were collateralized by $214,556 of mortgage loans and securities under collateral agreements at September 30, 2010. Based on this collateral and our holdings of FHLB stock, we were eligible to borrow additional amounts of $90,349 at September 30, 2010.

The floating rate capital securities with a maturity date of July 25, 2031, are callable at par on July 25, 2011. Unamortized organizational costs for these securities were $402 at September 30, 2010.

The floating rate capital securities with a maturity date of June 26, 2033, are callable at par quarterly. Unamortized organizational costs for these securities were $792 at September 30, 2010.

The floating rate capital securities callable at par on December 15, 2011, and quarterly thereafter, may be called prior to that date but only upon payment of a premium based on a percentage of the outstanding principal balance. The call is effective at a premium of 0.785% at December 15, 2010.

The floating rate capital securities callable at par on June 30, 2012, and quarterly thereafter, may be called prior to that date with a payment of a call premium, which is based on a percentage of the outstanding principal balance. The call at a premium of 0.70% is effective at June 30, 2011.

The principal assets of each trust subsidiary are our subordinated debentures. The subordinated debentures bear interest at the same rate as the related trust preferred securities and mature on the same dates. Our obligations with respect to the trust preferred securities constitute a full and unconditional guarantee by us of the trusts’ obligations with respect to the securities.

Unsecured subordinated debt includes $4,000 of debt that has a floating rate of three-month LIBOR plus 2.85% and will mature on April 7, 2014. We paid issuance costs of $141 and are amortizing those costs over the life of the debt. A second issue includes $10,000 of floating rate-subordinated debt issued in April 2003 that has a floating rate of three-month LIBOR plus 3.20%, which will mature on April 24, 2013. We paid issuance costs of $331 and are amortizing those costs over the life of the debt.

Subject to certain exceptions and limitations, we may from time to time defer paying interest on our subordinated debentures, which would result in a deferral of distribution payments on the related trust preferred securities and, with certain exceptions, prevent us from declaring or paying cash distributions on our common stock or debt securities that rank junior to the subordinated debenture. In September 2009, we began deferring interest payments on all of our subordinated debentures relating to trust preferred securities. This deferral period could extend through September 2014. The unpaid amounts continue to accrue until paid.

NOTE 11. COMMITMENTS AND CONTINGENCIES

In the normal course of business, there are additional outstanding commitments and contingent liabilities that are not reflected in the accompanying consolidated financial statements. We use the same credit policies in making commitments and conditional obligations as we do for other instruments.

The commitments and contingent liabilities not reflected in the consolidated financial statements were:

	September 30,		December 31,
	2010		2009
Commitments to extend credit	$	268,877	$	421,908

Standby letters of credit		16,172		18,419

Non-reimbursable standby letters of credit and commitments		1,160		2,014

NOTE 12. INTEREST RATE CONTRACTS

We are exposed to interest rate risk relating to our ongoing business operations and utilize derivatives, such as interest rate swaps and floors to help manage that risk.

During the fourth quarter of 2004, we entered into an interest rate swap agreement with a $7,500 notional amount to convert a fixed rate security to a variable rate. This rate swap is designated as a fair value hedge. The interest rate swap requires us to pay a fixed rate of interest of 4.90% and receive a variable rate based on three-month LIBOR. The variable rate received was 1.239% at September 30, 2010. The swap expires on or prior to January 5, 2016, and had a notional amount of $4,220 at September 30, 2010.

During the second quarter of 2006, we initiated an interest rate protection program in which we earned fee income by providing our commercial loan customers the ability to swap from variable to fixed, or fixed to variable interest rates. Under these agreements, we entered into a variable or fixed rate loan agreement with our customer in addition to a swap agreement. The swap agreement effectively swapped the customer’s variable rate to a fixed rate or vice versa. We then entered into a corresponding swap agreement with a third party in order to swap our exposure on the variable to fixed rate swap with our customer. Since the swaps were structured to offset each other, changes in fair values, while recorded, have no net earnings impact. We no longer offer this program for new commercial loans.

Mortgage banking derivatives used in the ordinary course of business consist of forward sales contracts and rate lock loan commitments. The fair value of these derivative instruments is obtained using the Bloomberg system.

The table below provides data about the carrying values of our derivative instruments, which are included in “Other assets” and “Other liabilities” in our consolidated balance sheets.

	September 30, 2010								December 31, 2009
	Assets		(Liabilities)			Derivative			Assets		(Liabilities)			Derivative
	Carrying		Carrying			Net Carrying			Carrying		Carrying			Net Carrying
	Value		Value			Value			Value		Value			Value
Derivatives designated as
hedging instruments:
Interest rate contracts	$	8,687	$	(9,088	)	$	(401	)	$	5,963	$	(6,307	)	$	(344	)

Derivatives not designated
as hedging instruments:
Mortgage banking derivatives		397		(10	)		387			91		(109	)		(18	)

Gains and losses recognized in income and expense on our mortgage rate locks, which are derivative instruments not designated as hedging instruments, were a loss of $1 and a gain of $306, for the three and nine months ended September 30, 2010, respectively. During the three and nine months ended September 30, 2009, we recognized gains of $186 and $91 from the change in value of our mortgage loan commitments.

We are exposed to losses if a counterparty fails to make its payments under a contract in which we are in a receiving status. Although collateral or other security is not obtained, we minimize our credit risk by monitoring the credit standing of the counterparties. We anticipate that the counterparties will be able to fully satisfy their obligations under these agreements.

The counterparties to our derivatives are exposed to credit risk whenever the derivatives discussed above are in a liability position. As a result, we have collateralized the liabilities with securities and cash. We are required to post collateral to cover the market value of the various swaps. The amount of collateral pledged to cover the market position at September 30, 2010 was $11,823.

NOTE 13. SEGMENT INFORMATION

We operate one reporting line of business, banking. Banking services include various types of deposit accounts; safe deposit boxes; automated teller machines; consumer, mortgage and commercial loans; mortgage loan origination and sales; letters of credit; corporate cash management services; insurance products and services; and complete personal and corporate trust services. Other includes the operating results of our parent company and its reinsurance subsidiary, as well as eliminations. The reinsurance subsidiary does not meet the reporting criteria for a separate segment.

The accounting policies of the Banking segment are the same as those described in the summary of significant accounting policies. The following tables present selected segment information for the banking and other operating units.

For three months ended September 30, 2010	Banking			Other			Total
Interest income	$	22,159		$	25		$	22,184
Interest expense		9,871			852			10,723
Net interest income		12,288			(827	)		11,461
Provision for loan losses		26,240			-			26,240
Other income		27,305			74			27,379
Other expense		28,565			231			28,796
Earnings (Loss) before income taxes		(15,212	)		(984	)		(16,196	)
Income taxes (benefit)		-			(42	)		(42	)
Net income (loss)		(15,212	)		(942	)		(16,154	)
Preferred stock dividends and discount accretion		-			1,133			1,133
Net income (loss) available to common shareholders	$	(15,212	)	$	(2,075	)	$	(17,287	)

For nine months ended September 30, 2010	Banking			Other			Total
Interest income	$	72,972		$	71		$	73,043
Interest expense		30,413			2,398			32,811
Net interest income		42,559			(2,327	)		40,232
Provision for loan losses		98,220			-			98,220
Other income		53,226			210			53,436
Other expense		73,162			613			73,775
Earnings (Loss) before income taxes		(75,597	)		(2,730	)		(78,327	)
Income taxes (benefit)		(97	)		(253	)		(350	)
Net income (loss)		(75,500	)		(2,477	)		(77,977	)
Preferred stock dividends and discount accretion		-			3,394			3,394
Net income (loss) available to common shareholders	$	(75,500	)	$	(5,871	)	$	(81,371	)

Segment assets	$	2,621,019		$	6,126		$	2,627,145

For three months ended September 30, 2009	Banking			Other			Total
Interest income	$	29,172		$	30		$	29,202
Interest expense		12,304			848			13,152
Net interest income (loss)		16,868			(818	)		16,050
Provision for loan losses		18,913			-			18,913
Other income		14,770			57			14,827
Other expense		24,056			313			24,369
Earnings (Loss) before income taxes		(11,331	)		(1,074	)		(12,405	)
Income tax expense (benefit)		2,192			5,138			7,330
Net income (loss)		(13,523	)		(6,212	)		(19,735	)
Preferred stock dividends and discount accretion		-			1,117			1,117
Net income (loss) available to common shareholders	$	(13,523	)	$	(7,329	)	$	(20,852	)

For nine months ended September 30, 2009	Banking			Other			Total
Interest income	$	94,045		$	99		$	94,144
Interest expense		40,969			2,868			43,837
Net interest income (loss)		53,076			(2,769	)		50,307
Provision for loan losses		82,843			-			82,843
Other income		15,264			(5,929	)		9,335
Other expense		81,728			1,283			83,011
Earnings (Loss) before income taxes		(96,231	)		(9,981	)		(106,212	)
Income tax expense (benefit)		(14,078	)		4,126			(9,952	)
Net income (loss)		(82,153	)		(14,107	)		(96,260	)
Preferred stock dividends and discount accretion		-			2,669			2,669
Net income (loss)	$	(82,153	)	$	(16,776	)	$	(98,929	)

Segment assets	$	3,251,530		$	6,795		$	3,258,325

NOTE 14. REGULATORY CAPITAL

The banking industry is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can elicit certain mandatory actions by regulators that, if undertaken, could have a direct material effect on our financial statements. Capital adequacy in the banking industry is evaluated primarily by the use of ratios that measure capital against assets and certain off-balance sheet items. Certain ratios weight these assets based on risk characteristics according to regulatory accounting practices.

Integra Bank’s Total Risk-Based Capital Ratio at September 30, 2010, was 9.34%, an increase of 101 basis points from June 30, 2010 and an increase of 134 basis points from March 31, 2010, which maintains Integra Bank’s classification as adequately capitalized under the Prompt Corrective Action framework. The increase resulted from the branch and loan sales and loan paydowns, partially offset by the quarter’s net loss. Integra Bank’s Tier 1 Risk-Based Capital Ratio increased 100 basis points to 8.02% at September 30, 2010 and its Tier 1 Leverage Ratio decreased 22 basis points to 4.31%. We were not considered adequately capitalized at the holding company level at both September 30, 2010 and June 30, 2010, and our Tangible Common Equity to Tangible Assets Ratio declined 62 basis points to (2.08)% during the third quarter of 2010. We expect that any actions we take to improve the Bank's regulatory capital ratios will also increase the holding company regulatory capital ratios. The impact of falling below the adequately capitalized level at the holding company level does not impact us in the area of liquidity or result in any additional regulatory restrictions or limitations.

Because the Bank is not currently classified as “well-capitalized”, our liquidity is affected in various ways. Banks that are not “well-capitalized” may not obtain any new brokered funds as a funding source and are subject to rate restrictions that limit the amount that can be paid on all types of retail deposits. The maximum rates we can pay on all types of retail deposits are limited to the national average rate, plus 75 basis points. We continue to compare the rates we are currently paying against the national rate caps; all rates remain within those caps. We have made changes in product design and established a new source for retail certificates of deposit that has significantly mitigated the risk associated with potential deposit runoff associated with the rate restriction requirement. At this time there has been no material impact to our deposit balances resulting from the rate caps. Failure to comply with the Capital Directive may adversely affect Integra Bank’s ability to accept and maintain public fund deposits.

On August 12, 2010, Integra Bank received a Capital Directive from the OCC. Under the terms of the Capital Directive, the Bank is required, within 90 days, to achieve and maintain a Total Risk-Based Capital Ratio of at least 11.5% of risk-weighted assets and a Tier 1 Leverage Ratio of at least 8% of adjusted total assets. We were also required to submit to the OCC within 30 days an acceptable Capital Plan covering at least a three-year period that describes the means and time schedule by which the Bank will achieve the required minimum capital ratios. The plan was provided. The OCC is completing its review of that plan and we continue to review our capital raising initiatives with them.

The Capital Directive also specifies that the Bank may only pay a dividend to the Company when the Bank is in compliance with the Capital Directive and will remain in compliance immediately following payment of the dividend and when the OCC determines in writing that it has no supervisory objection to payment. We have suspended dividend payments on our common and preferred stock. At September 30, 2010, we have $4,702 of accrued but unpaid dividends on our preferred stock, which were included in the computation of the liquidation preference amount on the consolidated balance sheet.

We do not expect that Integra Bank will achieve the required capital ratios within the 90 days specified in the Capital Directive. We are keeping the OCC fully informed of our efforts to raise capital and we hope to announce more definitive information later this year. We are working closely with our advisor, KBW as we execute these efforts and hope to report continued increases in the bank’s Total Risk-Based Capital Ratio, as well as increases in its Tier 1 Leverage Ratio to and above the levels outlined in the Capital Directive.

The regulatory capital ratios for us and the Bank are shown below.

											Minimum
						Minimum Ratios For Capital					Capital Ratios
	Actual					Adequacy Purposes					Under Capital Directive
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of September 30, 2010
Total Capital (to Risk Weighted Assets)
Consolidated	$	68,089		4.30	%	$	126,541		8.00	%		N/A		N/A
Integra Bank		144,352		9.34	%		123,678		8.00	%		177,787		11.50	%

Tier 1 Capital (to Risk Weighted Assets)
Consolidated	$	34,044		2.15	%	$	63,270		4.00	%		N/A		N/A
Integra Bank		123,985		8.02	%		61,839		4.00	%		92,759		6.00	%

Tier 1 Capital (to Average Assets)
Consolidated	$	34,044		1.18	%	$	115,270		4.00	%		N/A		N/A
Integra Bank		123,985		4.31	%		115,028		4.00	%		244,434		8.50	%

As of December 31, 2009
Total Capital (to Risk Weighted Assets)
Consolidated	$	221,590		9.94	%	$	178,377		8.00	%		N/A		N/A
Integra Bank		224,127		10.05	%		178,377		8.00	%		222,971		10.00	%

Tier 1 Capital (to Risk Weighted Assets)
Consolidated	$	137,658		6.17	%	$	89,189		4.00	%		N/A		N/A
Integra Bank		195,416		8.76	%		89,188		4.00	%		133,783		6.00	%

Tier 1 Capital (to Average Assets)
Consolidated	$	137,658		4.43	%	$	124,397		4.00	%		N/A		N/A
Integra Bank		195,416		6.30	%		124,136		4.00	%		155,170		5.00	%

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. References to the terms “we”, “us”, “our”, and the “Company” refer to Integra Bank Corporation and its subsidiaries unless the context indicates otherwise. References to the “Bank” or “Integra Bank” are to our subsidiary, Integra Bank N.A.

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,” “hope,” 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 following risks and uncertainties: the results of examinations of us and the Bank by bank regulatory authorities, including the possibility that any such regulatory authority may, among other things, institute additional formal or informal enforcement actions against us or the Bank which could require us to increase our reserve for loan losses, write-down assets, change our regulatory capital position or affect our ability to borrow funds or maintain or increase deposits, which could adversely affect our liquidity and earnings; the requirements of the Capital Directive issued to the Bank and other agreements between us and the bank regulatory authorities and the possibility that we and the Bank will be unable to fully comply with such requirements, which could result in the imposition of additional enforcement actions, requirements or restrictions; our ability to improve the quality of our assets and maintain an adequate allowance for loan losses; the adverse impact that the Bank’s capital ratios may have on the availability of funding sources, including brokered deposits and public funds; the risks presented by continued unfavorable economic conditions in our market area, which could continue to adversely affect credit quality, collateral values, including real estate collateral and OREO properties, investment values, liquidity and loan originations, reserves for loan losses and charge offs of loans and loan portfolio delinquency rates; changes in the interest rate environment that reduce our net interest margin and negatively affect funding sources; we may be compelled to seek additional capital in the future to augment capital levels or ratios or improve liquidity, but capital or liquidity may not be available when needed or on acceptable terms; the impact of our suspension of dividends on our outstanding preferred stock and deferral of payments on our subordinated debentures relating to our outstanding trust preferred securities; our ability to regain compliance with the minimum bid requirement necessary to retain the listing of our common stock on the Nasdaq Stock Market; competitive pressures among depository institutions; effects of critical accounting policies and judgments; changes in accounting policies or procedures as may be required by the financial institution regulatory agencies or the Financial Accounting Standards Board; legislative or regulatory changes or actions, including financial reform legislation, or significant litigation that adversely affects us or our business; changes to the regulatory capital treatment of our outstanding trust preferred securities; future legislative or regulatory changes in the United States Department of Treasury’s Troubled Asset Relief Program Capital Purchase Program; our ability to attract and retain key personnel; our ability to secure confidential information through our computer systems and telecommunications network; and other factors we describe in the periodic reports and other documents we file with the SEC.

Readers of this report are cautioned not to place undue reliance on these forward-looking statements. While we believe the assumptions on which the forward-looking statements are based are reasonable, there can be no assurance that these forward-looking statements will prove to be accurate. This cautionary statement is applicable to all forward-looking statements contained in this report. We disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be set forth in our periodic reports and our other filings with the Securities and Exchange Commission.

OVERVIEW

We made substantive progress in executing our strategic recovery plan during the third quarter. Positive developments impacting the third quarter of 2010 included:

The completion of three multi-branch and loan sale transactions, which generated deposit premiums of $11,241, after consideration of a write-off of $2,959 of core deposit intangible assets, as well as a net gain on the loans sold in those transactions of $9,498. These transactions helped improve Integra Bank's Total Risk-Based Capital Ratio by 101 basis points to 9.34% from 8.33% at June 30, 2010;

·	a 6.6% decline in total non-performing assets from June 30, 2010 – the first decline reported since the third quarter of 2006; and

·	continued reduction of our concentration in commercial real estate loans, including construction and land development, which declined $139,570, or 16.8%, from the prior quarter end.

Earnings for the third quarter were negatively impacted by the deterioration of valuations of commercial real estate, particularly for unimproved land held as other real estate owned (“OREO”). Our loss for the third quarter was $17,287, or $0.84 per diluted share, compared to $10,205, or $0.49 per diluted share for the second quarter of 2010. The primary factors contributing to the loss for the third quarter of 2010 include:

·	a provision for loan losses of $26,240;

·	net charge-offs of $26,922, or 6.43% of total loans on an annualized basis;

·	loan and OREO expense of $5,813 primarily resulting from a writedown of $3,539 on two specific real estate parcels following updated appraisals; and

·	legal and investment banking fees of $2,146 arising from the branch sales completed during the quarter.

During the third quarter, we also continued to reduce credit risk and improve our capital ratios. The key components of our progress during the quarter are as follows:

During the third quarter, Integra Bank completed the sale of twelve banking centers, along with groups of non-branch originated commercial and consumer loans, in three transactions with First Security Bank, FNB Bank, Inc., and Citizens Deposit Bank and Trust. These transactions included approximately $238,157 in loans and $307,724 in deposits, while generating deposit premiums of $11,241, after consideration of a write-off of $2,959 of core deposit intangible assets arising from the transaction. We also recorded a gain of $9,498 on the sale of the loans, which included loans originated in the branches sold, as well as additional loans meant to generally balance the level of deposits and loans sold. The loans were generally sold at face value, and the gain arose primarily from the amount of the allowance for loan losses allocated to the loans sold. As all loans were performing, no specific allowance amounts were associated with any individual loans. The amount of the allowance for loan losses allocated was based on the loss factors used for the loan pools in which the loans sold were previously classified. During the second quarter of 2010, we also sold branches, deposits and loans. We previously recorded the impact of the release of the allowance for loan losses associated with the loans sold as a reduction of the provision for loan losses. After discussions with our auditors, during this quarter, we reclassified this amount of $2,342 from the provision for loan losses to gain on sale of loans.

The three third quarter 2010 transactions increased Integra Bank’s Tier 1 and Total Risk-Based regulatory capital ratios by approximately 216 basis points, and its Tier 1 Leverage Ratio by approximately 87 basis points. The third quarter transactions also increased the Company’s Tangible Common Equity to Tangible Assets Ratio by approximately 58 basis points. Integra Bank’s Total Risk-Based Capital Ratio was 9.34% at September 30, 2010, an increase of 101 basis points from June 30, 2010 and an increase of 134 basis points from March 31, 2010.

We are pursuing multiple initiatives in our plan to raise new capital. Working with our financial advisor, Keefe, Bruyette & Woods (KBW), we are having ongoing discussions with private investors, private equity firms and others about investing in our Company. We engaged an independent consultant to evaluate our loan portfolio and to independently affirm the valuation and integrity of its administration. We look forward to announcing the results of those efforts at the appropriate time.

We continued our planned exit from the CRE lending line of business. The three third quarter branch transactions included the sale of CRE and other non-branch generated loans. We also obtained early repayment of several loans and pursued additional loan paydowns and payoffs through a modest discount program. As a result of these initiatives, we reduced outstanding CRE loan balances at September 30, 2010 by $139,570, or 16.8%, from those at June 30, 2010. This follows a 9.9% decrease in the second quarter. We continue to evaluate alternatives to sell or exchange our performing and nonperforming CRE loans and are working with a number of parties interested in purchasing these assets. We anticipate announcing sales of some of these assets during the fourth quarter of 2010.

During the third quarter of 2010, we experienced higher levels of provision and charge-offs than anticipated, as we continued our practice of updating appraisals on non-performing assets and adjusted the carrying value of these assets, increasing our loan loss provision and OREO expense and increasing our loan loss reserves. We continues to pursue aggressive disposition strategies for all of these assets which further contributed to our significant loan loss provision and increased level of net charge-offs during the quarter. We did report that first decrease in non-performing assets since the third quarter of 2006 and executed our disposition strategies on several of our non-performing assets. We also experienced improvement in our delinquencies, which were 1.30% at September 30, 2010. Our efforts continue to be focused on reducing our level of non-performing assets, improving our capital and liquidity and increasing the operating income of our core community banking franchise.

We completed implementation of Regulation E and were successful in minimizing its potential impact to our fee income by communicating with customers and educating them on its potential impact. The new rules did adversely impact our non-sufficient funds and overdraft income during the third quarter of 2010 and we expect them to continue to do so. We have seen an increase in new checking account openings, as we have continued to offer service charge free checking products similar to those we offered prior to the effective date of Regulation E. We expect that those new accounts and account balances will generate financial benefits to help offset the impact of the new overdraft regulations.

The net loss available to common shareholders for the third quarter of 2010 was $17,287, or $0.84 per diluted share, compared to $10,205, or $0.49 per diluted share for the second quarter of 2010. The provision for loan losses was $26,240, up $6,960 from $19,280 during the second quarter of 2010, while net charge-offs for the third quarter totaled $26,922, or 6.43% of total loans on an annualized basis, a $14,748 increase from $12,174, or 2.49% of total loans annualized for the second quarter of 2010. The net interest margin was 2.08% for the third quarter of 2010 compared with 2.32% for the second quarter of 2010. The second quarter also included net deposit premiums of $11,241.

The allowance to total loans was 6.56% at September 30, 2010, while the allowance to non-performing loans was 45%. The increase in the allowance for loan losses to total loans is due in part to the reduction in the loan portfolio resulting from the third quarter branch sale transactions and other payoffs and paydowns of performing loans. Non-performing loans decreased $18,651 to $212,666, or 14.6% of total loans, compared to $231,317, or 12.8% of total loans, including loans held for the branch divestitures pending at June 30, 2010. The decrease in non-performing loans was primarily due to a decline in the amount of additional loans being classified as non-performing, coupled with net charge-offs of $26,922. Non-performing assets declined $17,455 or 6.6% from June 30, 2010 and were $247,628.

Net interest income was $11,461 for the third quarter of 2010, compared to $13,911 for the second quarter of 2010, while the net interest margin decreased 24 basis points to 2.08%. The decline in net interest income reflects the lower amount of earning assets and related funding that resulted from the second and third quarter branch sales. The yield on earning assets decreased 19 basis points during the third quarter of 2010, while liability costs decreased by 3 basis points. The decrease in the net interest margin was primarily due to the lower level of earning assets, lower securities yields and an increase in average cash levels of $84,615, partially offset by lower retail funding costs.

Our provision for loan losses increased from $19,280 for the second quarter of 2010 to $26,240, primarily as a result of receipt of updated appraisals on properties securing non-performing loans that resulted in higher specific reserves, increasing our loan loss provision.

Non-interest income was $27,379 for the third quarter of 2010, compared to $18,467 for the second quarter, and included $11,241 of premiums on sales of deposits realized from the third quarter branch sales, net of a core deposit intangible write-off of $2,959 and net gains on the sale of loans sold in branch sales of $9,498. Partially offsetting these increases were other-than-temporary securities impairment of $585 and a decline in deposit service charges of $874 from the second quarter. The second quarter of 2010 included $4,371 of premiums on sales of deposits realized from the second quarter branch sales, gains on loans sold in those branch sales of $2,342 and securities gains of $3,351.

Non-interest expense was $28,796 for the third quarter of 2010, compared to $22,486 for the second quarter. Loan and other real estate owned expenses increased $4,409 to $5,813 and included $4,537, of writedowns to assets within that portfolio. Non-interest expense for the third quarter also included legal and investment banking fees related to the third quarter branch sales of $2,146.

We recognized $6,959 of additional valuation allowance expense during the third quarter of 2010 to offset the tax benefit which resulted from our reported loss.

Commercial loan average balances decreased $199,576 in the third quarter of 2010, including a decline in commercial real estate and construction and land development loans of $143,449. Commercial real estate loan balances, including construction and land development, at September 30 were $689,898, $139,570 or 16.8% less than the June 30 balance of $829,468. Low cost deposit average balances decreased $134,137 during the third quarter of 2010, primarily due to the effect of the second and third quarter branch sales.

Due to the uncertainty in the financial markets, we continued to maintain a higher level of liquidity during the third quarter of 2010. Cash and due from bank average balances increased $84,615, or 15.8%, during the third quarter of 2010 to $618,551. We anticipate reducing the average balance of cash as we execute our plan to improve our regulatory capital ratios.

On August 12, 2010, Integra Bank received a Capital Directive from the OCC. Under the terms of the Capital Directive, the Bank is required, within 90 days, to achieve and maintain a Total Risk-Based Capital Ratio of at least 11.5% of risk-weighted assets and a Tier 1 Leverage Ratio of at least 8% of adjusted total assets. We were also required to submit to the OCC within 30 days an acceptable Capital Plan covering at least a three-year period that describes the means and time schedule by which the Bank will achieve the required minimum capital ratios, which we provided. The OCC is completing its review of that plan and we continue to review our capital raising initiatives with them.

Our plans for the fourth quarter of 2010 include the following:

·	raise additional capital by selling common or preferred equity in private transactions and recapitalizing other elements of our capital structure;

·	use a portion of any new capital, reduce non-performing assets through a bulk sale to distressed asset buyers and redeem higher cost wholesale indebtedness;

·	continue to reduce our concentration in commercial real estate credit exposure through the sale of performing and non-performing commercial real estate loans;

·	continue to reduce non-performing assets and our overall credit exposure;

·	continue efforts to identify a purchaser for our four Chicago branches and execute that sale in the first half of 2011;

·	execute additional expense reduction initiatives to better match our levels of infrastructure and overhead with our reduced revenue base; and

·	market our services to community banking customers in our core market area that we will serve going forward and make continual adjustments to increase profitability.

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, 2009.

NET INTEREST INCOME

Net interest income decreased $4,589, or 28.6%, to $11,461 for the three months ended September 30, 2010, from $16,050 for the three months ended September 30, 2009, and $10,075, or 20.0%, to $40,232 for the nine months ended September 30, 2010, from $50,307 for the nine months ended September 30, 2009. The net interest margin for the three months ended September 30, 2010, was 2.08% compared to 2.35% for the same three months of 2009, while the margin for the nine months ended September 30, 2010, was 2.28%, as compared to 2.36% for the nine months ended September 30, 2009. The yield on earning assets decreased 22 basis points to 4.00% for the third quarter of 2010, compared to the same quarter in 2009, while the cost of interest-bearing liabilities decreased 19 basis points to 1.67%.

The primary components of the changes in margin and net interest income to the third quarter of 2010, as compared to the third quarter of 2009 were as follows:

Average loan yields increased 7 basis points to 4.25% for the quarter ended September 30, 2010, from 4.18% in the quarter ended September 30, 2009, led by an increase in commercial loan yields of 16 basis points to 3.78%. The increase in yields for commercial loans was largely the result of an initiative to increase minimum rates on new and renewing variable rate loans. At September 30, 2010, $244,301, or 30.5% of our variable rate commercial loans had interest rate floors of at least 4.00%. At September 30, 2010, approximately 33% of our variable rate loans are tied to prime, 56% to LIBOR and 11% to other floating rate indices. Approximately 55% of all loans were variable rate at September 30, 2010. The impact of total non-accrual loans on the net interest margin has continually increased since early 2008, and was 59 basis points for the third quarter of 2010, up from 44 basis points for the third quarter of 2009. We are asset sensitive, meaning that a change in prevailing interest rates impacts our assets more quickly than our liabilities. If rates were to rise, our asset yields should increase faster and more than the cost of the liabilities funding those assets, causing our net interest margin to increase.

·	Average securities yields decreased 124 basis points to 3.18% due primarily to a shift in securities to lower yielding GNMA securities and U.S. Treasuries, which carry a zero percent risk weight, reducing the amount of our risk-weighted assets and improving our risk-based capital ratios.

·	Average earning assets decreased $571,557, or 20.5%, as average loan balances decreased $656,972, partially offset by an increase of $90,565 in average securities. The decrease in loans was caused by the 2009 and 2010 branch and loan sales and other paydowns and payoffs, as well as by charge-offs.

The decline in interest rates since 2008 resulted in lower liabilities costs. The average rate paid on interest bearing liabilities was 1.67% for the third quarter of 2010, a 19 basis point decline from the third quarter of 2009. Time deposit rates declined 63 basis points, money market rates declined 34 basis points, and savings deposit rates decreased 72 basis points. The average rate paid on short-term sources of funds other than time and transaction deposits, which include repurchase agreements, FHLB advances and other sources, decreased from 0.52% to 0.37% for the quarter ended September 30, 2010, as compared to the quarter ended September 30, 2009. Decreases in these funding sources included $83,370 in Term Auction Facility (TAF) borrowings, $48,696 in short-term FHLB borrowings, and $12,494 in customer repurchase agreements. The rate on long-term borrowings increased from 2.70% to 3.37%, primarily due to the conversion of previously floating rate repurchase agreements to higher fixed rates and the maturity of a low rate FHLB advance.

AVERAGE BALANCE SHEET AND ANALYSIS OF NET INTEREST INCOME

For Three Months Ended September 30,	2010								2009
	Average			Interest		Yield/			Average			Interest		Yield/
EARNING ASSETS:	Balances			& Fees		Cost			Balances			& Fees		Cost

Short-term investments	$	50,015		$	395		3.13	%	$	46,270		$	272		2.33	%
Loans held for sale		3,075			29		3.77	%		8,977			89		3.97	%
Securities		477,197			3,797		3.18	%		386,632			4,257		4.42	%
Regulatory Stock		26,144			135		2.06	%		29,137			337		4.63	%
Loans		1,662,169			17,975		4.25	%		2,319,141			24,669		4.18	%

Total earning assets		2,218,600		$	22,331		4.00	%		2,790,157		$	29,624		4.22	%


Allowance for loan loss		(100,301	)							(81,746	)
Other non-earning assets		770,182								641,048

TOTAL ASSETS	$	2,888,481							$	3,349,459

INTEREST-BEARING LIABILITIES:

Deposits
Savings and interest-bearing demand	$	625,194		$	626		0.40	%	$	772,901		$	1,684		0.86	%
Money market accounts		244,911			551		0.89	%		303,573			943		1.23	%
Certificates of deposit and other time		1,273,821			6,497		2.02	%		1,157,820			7,729		2.65	%
		-			-
Total interest-bearing deposits		2,143,926			7,674		1.42	%		2,234,294			10,356		1.84	%

Short-term borrowings		59,086			54		0.37	%		203,646			268		0.52	%
Long-term borrowings		348,329			2,995		3.37	%		366,917			2,528		2.70	%

Total interest-bearing liabilities		2,551,341		$	10,723		1.67	%		2,804,857		$	13,152		1.86	%

Non-interest bearing deposits		250,313								286,154
Other noninterest-bearing liabilities and
shareholders' equity		86,827								258,448

TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY	$	2,888,481							$	3,349,459

Interest income/earning assets				$	22,331		4.00	%				$	29,624		4.22	%
Interest expense/earning assets					10,723		1.92	%					13,152		1.87	%

Net interest income/earning assets				$	11,608		2.08	%				$	16,472		2.35	%

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

Federal tax equivalent adjustments on securities are $106 and $319 for 2010 and 2009, respectively.

Federal tax equivalent adjustments on loans are $41 and $103 for 2010 and 2009, respectively.

AVERAGE BALANCE SHEET AND ANALYSIS OF NET INTEREST INCOME

For Nine Months Ended September 30,	2010								2009
	Average			Interest		Yield/			Average			Interest		Yield/
EARNING ASSETS:	Balances			& Fees		Cost			Balances			& Fees		Cost
Short-term investments	$	49,775		$	941		2.53	%	$	15,948		$	539		4.52	%
Loans held for sale		2,750			87		4.21	%		9,274			319		4.59	%
Securities		411,128			11,294		3.66	%		487,195			17,570		4.81	%
Regulatory Stock		27,044			542		2.68	%		29,142			1,015		4.64	%
Loans		1,900,223			60,672		4.23	%		2,392,606			76,328		4.23	%

Total earning assets		2,390,920		$	73,536		4.11	%		2,934,165		$	95,771		4.36	%


Allowance for loan loss		(100,571	)							(76,661	)
Other non-earning assets		656,744								596,366

TOTAL ASSETS	$	2,947,093							$	3,453,870

INTEREST-BEARING LIABILITIES:

Deposits
Savings and interest-bearing demand	$	711,105		$	2,890		0.54	%	$	700,643		$	4,791		0.91	%
Money market accounts		255,773			1,884		0.99	%		321,987			3,289		1.37	%
Certificates of deposit and other time		1,206,066			19,485		2.16	%		1,222,809			26,222		2.87	%

Total interest-bearing deposits		2,172,944			24,259		1.49	%		2,245,439			34,302		2.04	%

Short-term borrowings		60,788			151		0.33	%		271,951			1,614		0.78	%
Long-term borrowings		352,187			8,401		3.15	%		369,878			7,921		2.82	%

Total interest-bearing liabilities		2,585,919		$	32,811		1.70	%		2,887,268		$	43,837		2.03	%

Non-interest bearing deposits		260,713								291,005
Other noninterest-bearing liabilities and
shareholders' equity		100,461								275,597

TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY	$	2,947,093							$	3,453,870

Interest income/earning assets				$	73,536		4.11	%				$	95,771		4.36	%
Interest expense/earning assets					32,811		1.83	%					43,837		2.00	%

Net interest income/earning assets				$	40,725		2.28	%				$	51,934		2.36	%

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

Federal tax equivalent adjustments on securities are $344 and $1,306 for 2010 and 2009, respectively

Federal tax equivalent adjustments on loans are $149 and $321 for 2010 and 2009, respectively.

NON-INTEREST INCOME

Non-interest income increased $12,552 to $27,379 for the quarter ended September 30, 2010, compared to $14,827 for the third quarter of 2009. Major contributors to the increase in non-interest income from the third quarter of 2009 to the third quarter of 2010 are as follows:

·	The third quarter of 2010 included net deposit premiums of $11,241 from the sale of twelve branches after giving effect to a write-off of $2,959 of core deposit intangible assets.

·	The loans sold with the branch divestitures in the third quarter led to a gain on sale of divested loans of $10,525 arising primarily from the amount of the allowance for loan losses allocated to those loans, offset by $1,027 of net deferred origination fees and expenses related to those loans.

·	Trading income increased $1,325 due to improvement of the market value of our held for trading securities.

·	Securities were sold in the third quarter of 2009 at gains of $6,578, while the third quarter of 2010 had an other than temporary impairment charge of $585.

·	Deposit service charges declined $1,650 for the third quarter of 2010, primarily due to the sale of the deposit accounts from twenty-two banking centers since the third quarter of 2009.

During the third quarter of 2009, we evaluated the potential sale or surrender of our bank owned life insurance policies, primarily for the purposes of reducing regulatory higher risk-weighted assets and improving our regulatory capital ratios. In October 2009, we made the decision to sell $40,048 of these policies and to surrender $23,102 of them. As a result, we recorded the expected loss on sale of $788, as well as an estimate of the surrender penalty of $241 at September 30, 2009. The penalty was recorded in tax expense and cannot be offset by a net operating loss. We also recorded tax expense totaling $5,603 on the taxable gain on sale and the taxable gain on the surrender.

Non-interest income for the nine months ended September 30, 2010, was $53,436, an increase of $44,101 from the nine months ended September 30, 2009. The primary components of the difference include a reduction in other-than-temporary securities impairment of $20,689, an increase in net premiums on sales of deposits of $13,063, an increase in gain on sale of divested loans of $11,164, the offset of the fair value adjustment on the Treasury Warrant of $6,145 in 2009, an increase in trading income of $1,113, and the mark-to-market adjustment on bank owned life insurance of $788 in 2009, partially offset by lower securities gains of $4,708 and declines in deposit service charges of $2,554.

NON-INTEREST EXPENSE

Non-interest expense increased $4,427 to $28,796 for the quarter ended September 30, 2010, compared to $24,369 for the third quarter of 2009. Major components of the change in non-interest expense from the third quarter of 2009 to the third quarter of 2010 are as follows:

·	Loan and other real estate owned expenses increased $3,268 to $5,813, as writedowns taken on other real estate owned properties increased $2,358 to $4,537 during the third quarter of 2010. Loan expenses include loan collection costs, costs incurred to maintain OREO and deferred origination costs.

·	Professional fees increased $2,616 to $4,315, primarily due to legal and investment banking fees of $2,146 arising from the branch sales completed during the third quarter of 2010.

Personnel expense declined $1,278, or 12.5%, consisting primarily of a $1,702 decline in salaries, partially offset by an increase in severance payments of $471. The decline in salaries is due to the reduction in work force stemming from the sale of twenty-two banking centers since the third quarter of 2009, as well as from our profit improvement program that occurred during the second and third quarters of 2009.

·	FDIC insurance premiums increased $1,032 to $2,753.

·	Occupancy and equipment expenses declined $419, or 17.8%, and $111, or 14.8%, respectively, in part due to the sale of twenty-two banking centers and also due to a lower level of capital expenditures.

Non-interest expense for the nine months ended September 30, 2010, was $73,775, a decrease of $9,236, or 11.1% from the nine months ended September 30, 2009. The primary components of the decrease included decreases in personnel expense of $6,816, loan and OREO expenses of $1,067, debt prepayment penalties of $1,538, and lower occupancy and equipment expenses of $1,260 and $331. Partially offsetting these decreases were increases in professional fees of $3,298, and FDIC insurance of $1,458.

INCOME TAX BENEFIT

Income tax benefit was $42 and $350 for the three months and nine months ended September 30, 2010, respectively, compared to an income tax expense of $7,330 and an income tax benefit of $9,952 for the same period in 2009.

The effective tax rate for the third quarter of 2010 was 0%, resulting from the continuation of a full valuation allowance established on deferred tax assets at December 31, 2009.

FINANCIAL POSITION

Total assets at September 30, 2010 were $2,627,145, compared to $2,921,941 at December 31, 2009.

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 $544,559 at September 30, 2010, compared to $361,719 at December 31, 2009, and are recorded at their fair market values. The fair value of securities available for sale on September 30, 2010, was $2,660 higher than the amortized cost, as compared to $7,448 lower at December 31, 2009. There was $585 of OTTI on one security recognized during the third quarter of 2010. Additional information on OTTI is provided in Note 3 of the Notes to the unaudited consolidated financial statements in this report.

Trading securities at September 30, 2010, consist of four pooled trust preferred securities valued at $148. During the third quarter of 2010, we recorded net trading gains of $87.

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 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 $24,713 at September 30, 2010, compared to $29,124 at December 31, 2009.

LOANS HELD FOR SALE

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 which were held for probable branch sales in previous quarters were included in this total on the Consolidated Balance Sheet.

LOANS

Loans totaled $1,456,967 at September 30, 2010. This compares to loans (including loans held for probable branch sales) of $2,110,348 at year-end 2009, a decrease of $653,381, or 31.0%. Decreases in CRE and construction and land development loans of $275,293, commercial, industrial and agricultural loans (C&I) of $183,297, residential mortgage loans of $81,713, consumer loans of $62,552, and home equity lines of credit (HELOC) loans of $41,215 came mainly from the branch and loan sales occurring during the second and third quarter of 2010, as well as additional initiatives to receive paydowns or payoffs of other CRE loans. The loan and branch sale transactions that occurred during the third quarter included $91,751 of CRE, $875 of construction and land development, $40,205 of C&I, $19,429 of residential mortgage, $57,739 of consumer and $28,158 of HELOC loans.

Residential mortgage loan average balances declined $26,581, or 18.6% during the third quarter of 2010. We expect the balance of residential mortgage loans will continue to decline, because we sell the majority of new originations to a private label provider on a servicing released basis. We evaluate our counterparty risk with this provider on a quarterly basis by reviewing their financial results and the potential impact to our relationship 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 sub prime 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 $20,802, or 13.0% from the second quarter 2010. HELOC loans are generally collateralized by a second mortgage on the customer’s primary residence. Approximately $28,158 of HELOC loans were included in the loan and branch sales in the third quarter of 2010. HELOC loans were $121,719 at September 30, 2010, compared to $162,934 at December 31, 2009.

The average balance of indirect consumer loans declined $28,963, or 51.5% during the third quarter of 2010, as expected, since we exited this line of business in December 2006 and sold approximately $32,954 of these loans in the divestitures during the third quarter. These loans are to borrowers located primarily in the Midwest and are generally secured by recreational vehicle or marine assets. Indirect loans at September 30, 2010, were $19,192 compared to $62,062 at December 31, 2009. The average balance of direct consumer loans decreased $22,016, or 16.3% during the third quarter of 2010.

Commercial loan average balances for the third quarter of 2010 decreased $199,576, or 13.6% from the second quarter of 2010, and included a decrease in CRE, including commercial construction and land development loans of $143,449, or 13.3%. C&I loan average balances decreased $56,127, or 14.5%. Approximately $92,626 of CRE including commercial construction and land development loans, and $40,205 of C&I loans were included in the branch and loan sales during the third quarter of 2010. We sold CRE participation loans totaling $24,235 back to the originating bank at par in late June 2010. CRE loan balances, including construction and land development loans, were $689,898 at September 30, 2010, $139,570, or 16.8% less than at June 30, 2010.

Our non-owner occupied CRE portfolio was previously managed as three distinct areas. The largest portion was managed out of our team headquartered in Greater Cincinnati, Ohio, as our CRE line of business. The next largest portion of the CRE portfolio was managed by our Chicago region. The remainder of the CRE portfolio was managed in various areas within the core bank franchise. The entire CRE portfolio is now managed under the direction of our Evansville-based management team. This has provided a more efficient collection effort as we have utilized dedicated workout officers to assist with this effort. Our largest property-type concentration is in retail projects at $178,657, or 25.6%, of the total CRE portfolio, which includes direct loans and participations in larger loans primarily for stand-alone retail buildings for large national or regional retailers. Our second largest concentration is multi-family at $129,390, or 14.9%, of the total CRE portfolio. Our third largest concentration is for land acquisition which represents either commercial or resdential development at $106,609, or 15.3%, of the total. Our fourth largest concentration at $80,114, or 11.5% is developed single family residential properties of which almost 74% is in the Chicago area. Finally, office is the fifth largest concentration with $66,768, or 9.6%. No other category exceeds 8% of the CRE portfolio. Of the total non-owner occupied CRE portfolio, $274,051, or 39.3%, is classified as construction. At September 30, 2010, $511,594, or 73.4%, of the CRE portfolio is located within our four core market states of Indiana, Kentucky, Illinois and Ohio. The three largest concentrations outside of our core market states are $37,745, or 5.4%, located in Florida, $29,316, or 4.2%, located in Georgia, and $23,255, or 3.3%, located in Tennessee. Non-owner occupied CRE non-performing loans in our core market states totaled $127,906 at September 30, 2010, with another $23,953 located in Florida, and $18,551 located in Georgia. Non-performing loans totaling $6,387 and $2,833 at September 30, 2010, were located in Tennessee and North Carolina. Those states had $23,225 and $19,690, respectively in outstanding loans at September 30, 2010. The majority of projects located outside of our core market states are with developers based in, or having previous connections to, our core market states when these loans were originated that developed or are developing properties in other states. We do not provide non-recourse financing.

The ongoing reduction in the size of our loan portfolio from loan sales, branch divestitures and the planned decline in our indirect consumer and residential mortgage loan portfolios has increased our level of concentration risk. The balance in our non-owner occupied CRE portfolio was $697,053, or 47.8%, of the total portfolio at September 30, 2010, compared to $978,927, or 46.4%, at December 31, 2009. We expect to continue to see balance reductions resulting from our previously stated portfolio reduction initiatives in our non-owner occupied CRE.

The rapid increase of our non-owner occupied CRE portfolio began in 2007 and was partially accelerated due to the disruption of the permanent financing market, and the acquisition of Prairie Financial Corporation in the spring of 2007, which further increased our concentration in non-owner occupied CRE. During the third quarter of 2008, we discontinued pursuing new CRE opportunities, regardless of property type, as additional stress of this market became apparent. We continue to exit the CRE line of business altogether. We will continue to reduce our current CRE exposure through the sale of performing and nonperforming loans, by not making any new commitments, and by incenting our customers and relationship managers to reduce their outstandings ahead of their prescribed maturities, while increasing our yields as pricing opportunities arise. This effort includes pursuing payoffs from lead banks from whom we have purchased participating interests in loans or accepting discounts on payoffs in order to expedite the exiting of a relationship. These efforts resulted in paydowns of five loans totaling $26,989 during the third quarter of 2010. We continue to strengthen our Evansville-based workout team while reducing the number of production based CRE lenders within our Chicago and Cincinnati area offices, or moving them to workout roles or specific roles designed to manage existing relationships and receive paydowns and payoffs.

Total CRE loan balances, including owner occupied CRE, in Chicago were $185,108 at September 30, 2010, compared to $233,437 at December 31, 2009. CRE balances from our team in the Greater Cincinnati, Ohio area were $519,784 at September 30, 2010, compared to $735,055 at December 31, 2009.

Loans delinquent 30-89 days were $18,945, or 1.30% of our portfolio at September 30, 2010, compared to $28,584, or 1.58% at June 30, 2010, and $20,605, or 0.98% at December 31, 2009. Delinquent loans include $11,598 of CRE loans, or 1.34% of that portfolio, $3,486 of C&I loans, or 1.42% of that portfolio, $717 of residential mortgage loans, or 0.71% of that portfolio, and $3,144 of consumer and home equity loans, or 1.30% of that portfolio. Of the delinquent CRE loans, $4,418, or 38.1%, are located in the Chicago region. Of the $18,945 in 30-89 day past dues, $6,500 was to one commercial real estate borrower with a multifamily development in Indiana which became delinquent upon maturity. We expect to renew this loan in the fourth quarter of 2010 pending negotiation of final terms. This single loan represented 45 basis points of our total delinquencies.

The Bank has established a committee to oversee OREO for property acquired from foreclosures, which is managed by an experienced property manager from our facilities management group. The purpose of the OREO committee is to manage these properties and assist in their rapid disposition. In addition, we have established an OREO link on our web site to further assist in the sale and marketing of these properties.

We have limited exposure to shared national credits. Our total outstanding amount of shared national credits, which are any loans or loan commitments of at least $20,000 that are shared by three or more supervised institutions, was $32,470 at September 30, 2010. Of this amount, $4,875, or 15.01%, was classified as non-performing.

LOAN PORTFOLIO

	September 30, 2010		December 31, 2009
Commercial, industrial and agricultural loans	$	419,309	$	602,606
Economic development loans and other obligations of state and political subdivisions		9,164		14,773
Lease financing		1,877		5,579
Commercial mortgages		423,875		583,123
Construction and development		266,023		382,068
Residential mortgages		151,086		232,799
Home equity lines of credit		121,719		162,934
Consumer loans		63,914		126,466
Loans, net of unearned income	$	1,456,967	$	2,110,348

ASSET QUALITY

The allowance for loan losses is the amount that, in our opinion, is adequate to absorb probable incurred loan losses as determined by the ongoing evaluation of the loan portfolio. Our evaluation is based upon consideration of various factors including growth of the loan portfolio, an analysis of individual credits, loss data over an extended period of time, adverse situations that could affect a borrower’s ability to repay, prior and current loss experience, the results of recent regulatory examinations, and current economic conditions.

Under our Credit Risk Policy, we charge off loans to the allowance as soon as a loan, or a portion thereof, is determined to be uncollectible, and we credit recoveries of previously charged off amounts to the allowance. At a minimum, charge-offs for retail loans are recognized in accordance with OCC 2000-20, the Uniform Retail Credit Classification and Account Management Policy. We charge a provision for loan losses against earnings at levels we believe are necessary to assure that the allowance for loan losses can absorb probable losses.

The allowance for loan losses was $95,539 at September 30, 2010, representing 6.56% of total loans. This compares with $96,221 at June 30, 2010, representing 5.30% of total loans, and $88,670 at December 31, 2009, or 4.20% of total loans, which included loans classified as held for sale for potential branch divestitures. The allowance for loan losses to non-performing loans ratio was 44.9%, compared to 41.6% at June 30, 2010, and 41.3% at December 31, 2009. We do not target specific allowance to total loans or allowance to non-performing loan percentages when determining the adequacy of the allowance, but we do consider and evaluate the factors that go into making that determination. At September 30, 2010, we believe that our allowance appropriately considers the incurred loss in our loan portfolio. The provision for loan losses was $26,240 for the three months ended September 30, 2010, and $98,220 for the nine months ended September 30, 2010, compared to $18,913 and $82,843 for the three and nine months ended September 30, 2009.

Net charge-offs of $26,922 exceeded the provision for loan losses of $26,240 by $682 during the third quarter of 2010. Annualized net charge-offs to average loans were 6.43% for the quarter, compared to 3.74% for the third quarter of 2009. Net charge-offs during the third quarter of 2010 included $24,053 of CRE loans, $1,832 of C&I loans, $569 of HELOC loans, $146 of indirect consumer loans and $88 for direct consumer loans, while the remaining $234 came from various other loan categories. Charge-offs from the Chicago region totaled $8,311, while charge-offs from the CRE line of business totaled $17,376. The majority of these charge-offs relate to the residential development and construction area. The largest charge-off this quarter was for a charge off of $6,872 secured by a single family residential project located in Florida. The second largest charge-off was a partial charge down of $3,869, which was secured by a land acquisition CRE property located in Ohio. The third largest charge-off was for $2,738, and was secured by a land acquisition CRE development in Illinois. More than 40% of our charge-offs during the third quarter of 2010 were covered by specific reserves within the allowance for loan losses at June 30, 2010.

SUMMARY OF ALLOWANCE FOR LOAN LOSSES

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009
Beginning Balance	$	96,221		$	82,309		$	88,670		$	64,437
Loans charged off		(27,359	)		(22,396	)		(80,806	)		(69,226	)
Recoveries		437			538			2,321			1,310
Provision for loan losses		26,240			18,913			98,220			82,843
Allowance related to divested loans sold		-			-			(12,866	)		-
Ending Balance	$	95,539		$	79,364		$	95,539		$	79,364

Percent of total loans		6.56	%		3.60	%		6.56	%		3.60	%

Annualized % of average loans:
Net charge-offs		6.43	%		3.74	%		5.52	%		3.80	%
Provision for loan losses		6.26	%		3.24	%		6.91	%		4.63	%

At September 30, 2010, our largest non-performing loan was a $18,551 relationship with a developer in Georgia secured by a real estate project for mixed use retail and office space. The second largest non-performing loan or relationship had a balance of $12,995, after charge-offs of $3,091, and is secured by single family residential development to a developer in the Chicago area. The third largest non-performing relationship was with a developer in the Chicago area that had an outstanding balance of $12,800 after charge-offs of $2,738 secured by a residential construction project. The fourth largest non-performing loan is secured by undeveloped raw land located in Florida and had a balance of $9,900.

The majority of the remainder of our commercial non-performing loans is secured by one or more residential properties arising from our Chicago region or CRE line of business, typically at an 80% or less loan-to-value ratio at inception. The Chicago residential real estate market continues to experience stressed condidtions. The Case-Schiller index of residential housing values shows a decline in the value of Chicago single-family residential properties of 25.9% from the peak of the index in September 2006 to the most recent index for June, as published in August. The Zillow index for the second quarter of 2010 shows a decline of 29.2% from its peak during the second quarter of 2006. On a year-over-year basis, the Zillow index shows a decline of 10.5% for all homes, with a 10.2% decline for single-family housing and a 13.1% decline for condominiums. Information we gained by reviewing new appraisals for existing loans has been consistent generally with the declines indicated by the Case-Schiller and Zillow indices. If sales levels and values in Chicago remain depressed, it is likely that we will experience further losses.

Impaired loans, including troubled debt restructures, totaled $223,462 at September 30, 2010, and had a specific reserve of $39,436 included in the loan loss reserve of $95,539. This compares to impaired loans of $203,470 at December 31, 2009, and $243,129 at June 30, 2010 with specific reserves of $32,036 and $39,844, respectively. Impaired loans consist primarily of non-performing loans and certain other loans where a specific reserve allocation is consistent with our more aggressive disposition strategy.

Occasionally, we may agree to modify contractual terms of a borrower’s loan. In such cases, where modifications represent a concession to a borrower experiencing financial difficulty, the modification is considered a troubled debt restructure (TDR). Loans modified in a TDR are generally placed on nonaccrual status until we determine the future collection of principal and interest is reasonably assured, which requires the borrower to demonstrate performance in accordance to the restructured terms for six months or more. At September 30, 2010, loans fitting this description totaled $17,387. At December 31, 2009, loans modified in a TDR, totaled $4,266.

OREO increased to $34,814 at September 30, 2010, compared to $33,706 at June 30, 2010, and was up slightly from the year-end 2009 total of $31,982. The ratio of non-performing assets to total loans and OREO increased to 16.60% at September 30, 2010, compared to 11.52% at year end 2009 because of the increase in non-performing assets, the impact on the ratio of performing branch and balancing loans included in the second and third quarter 2010 branch and loan sales, and other payoffs and paydowns of performing loans. Approximately 53%, or $131,034, of our total non-performing assets are in our Chicago region. These assets represent approximately 61% of the total assets in our Chicago region.

Total non-performing loans at September 30, 2010, consisting of non-accrual and loans 90 days or more past due, were $212,666, a decrease of $2,214 from December 31, 2009 and $18,651 from June 30, 2010. This is the lowest level of non-performing loans for a quarter since the second quarter of 2009. Non-performing loans were 14.60% of total loans, compared to 10.18% at December 31, 2009, and 12.75% at June 30, 2010. This percentage was again impacted by the third quarter sale of performing loans in the branch and loan sale transactions. Of the non-performing loans, $201,149 are in our CRE portfolio and $5,114 are C&I loans, while the balance consists of homogenous 1-4 family residential and consumer loans. Total non-performing CRE loans at September 30, 2010 included $104,847 of residential real estate related projects. Of this total, $66,964 was from the Chicago region and $35,734 from our CRE line of business. The Chicago non-owner occupied CRE portfolio had commitments of $160,895 and outstanding balances of $160,238 at September 30, 2010. The Chicago portfolio made up 49% and 53% of our total non-performing loans and non-performing assets respectively at September 30, 2010. Non-owner occupied real estate within the CRE line of business had commitments of $534,741 and outstanding balances of $486,978 at September 30, 2010. This portfolio made up 45% and 41% of our total non-performing loans and non-performing assets, respectively, at September 30, 2010. The Chicago region and the CRE line of business make up 14.7% and 37.8% of total outstanding loans.

Although much of the reduction in both non-performing loans and assets has been as a result of charge offs and write downs on our OREO, the new inflow of loans to this status slowed significantly for the third consecutive quarter, ending September at $21,326, down $21,433 from the prior quarter and is the lowest level since the first quarter of 2008.

We have improved our credit management processes in several ways in 2010, including the following:

We are continuing to obtain new appraisals on properties securing our non-performing CRE loans and using those appraisals to determine specific reserves within the allowance for loan losses. As we receive new appraisals on properties securing non-performing loans, we recognize charge-offs and adjust specific reserves as appropriate.

·	We shifted the credit analysis effort for our Chicago region and CRE line of business to our centralized Credit Service Center in Evansville.

·	We are managing the efforts of our CRE line of business within our Evansville-based workout group.

·	We have added additional loan workout specialists in Evansville to service our Chicago and CRE portfolios and transitioned our relationship managers to assist with an orderly exit strategy.

We continue to adhere to our previously announced aggressive problem asset disposition strategy implemented in the first quarter of this year, specifically within our non-owner occupied commercial real estate portfolio, resulting in reduction of carrying values and deeper reserves. Other aspects of this strategy for our underperforming portfolio include but not limited to taking advantage of opportunities to sell, exchange for other assets or accept discounted payoffs where appropriate, particularly in situations in which we expect it would take several quarters for values to recover. We believe this strategy will accelerate our goal of returning to profitability and credit quality norms by providing increased liquidity for redeployment, reduce real estate taxes, legal fees, and other asset carrying costs, allow for more effective utilization of our workout team, and reduce our overall staffing costs.

Listed below is a comparison of non-performing assets.

	September 30,			December 31,
	2010			2009
Nonaccrual loans	$	212,345		$	210,753
90 days or more past due loans		321			4,127
Total non-performing loans	$	212,666			214,880
Trust preferred held for trading		148			36
Other real estate owned		34,814			31,982
Total non-performing assets	$	247,628		$	246,898

Ratios:
Non-performing Loans to Loans		14.60	%		10.18	%
Non-performing Assets to Loans and Other Real Estate Owned		16.60	%		11.52	%
Allowance for Loan Losses to Non-performing Loans		44.92	%		41.26	%

Changes in other real estate owned were as follows for the three and nine months ended September 30, 2010:

SUMMARY OF OTHER REAL ESTATE OWNED

	Three Months Ended			Nine Months Ended
	September 30, 2010			September 30, 2010
Beginning Balance	$	33,706		$	31,982
Additions		8,450			15,137
Sales		(2,770	)		(7,204	)
Write-downs		(4,538	)		(5,015	)
Other changes		(34	)		(86	)
Ending Balance	$	34,814		$	34,814

DEPOSITS

Total deposits were $2,152,570 at September 30, 2010, compared to $2,365,106 at December 31, 2009, a decrease of $212,536. During the third quarter of 2010, we sold twelve banking offices in which the buyers assumed $307,724 of deposits in the transactions. During the second quarter of 2010, we sold five banking offices. The buyers of these offices assumed $98,057 of deposits in these transactions. The decrease in deposits from the 2010 branch sales were partially offset by the increases of $55,452 in certificates of deposit, $40,520 in brokered time deposits and $24,266 in public fund time deposits.

Average balances of deposits for the third quarter of 2010, as compared to the second quarter ended June 30, 2010, included decreases in interest checking accounts of $69,804, savings accounts of $53,826, brokered time deposits of $35,924, money market accounts of $18,169, and non-interest bearing demand deposits of $10,507. Increases in retail certificates of deposit of $50,002, and public fund time deposits of $26,229, partially offset these decreases.

We have used brokered certificate of deposits to diversify our sources of funding, extend our maturities and improve pricing at certain terms as compared to local market pricing pressure.

Because the Bank’s regulatory capital ratios are less than the levels necessary to be considered “well capitalized”, it may not obtain new brokered funds as a funding source and is subject to rate restrictions that limit the amount that can be paid on all types of retail deposits. The maximum rates the Bank can pay on all types of retail deposits are limited to the national average rate, plus 75 basis points. The Bank’s current rates all fall below the national rate cap limits. Failure to comply with the Capital Directive could also adversely affect Integra Bank’s ability to accept and maintain public fund deposits.

SHORT-TERM BORROWINGS

Short-term borrowings totaled $55,841 at September 30, 2010, a decrease of $6,273 from December 31, 2009. Short-term borrowings consist of securities sold under agreements to repurchase, which are collateralized transactions acquired in national markets, as well as from our commercial customers as a part of a cash management service.

At September 30, 2010, we had availability from the FHLB of $90,349, and availability of $85,551 under the Federal Reserve secondary credit program.

LONG-TERM BORROWINGS

Long-term borrowings have original maturities greater than one year and include long-term advances from the FHLB, securities sold under repurchase agreements, term notes from other financial institutions, the FDIC guaranteed note issued under the Temporary Liquidity Guarantee Program (TLGP), floating rate unsecured subordinated debt and trust preferred securities. Long-term borrowings decreased to $348,161 at September 30, 2010, from $361,071 at December 31, 2009.

We continuously review our liability composition. Any modifications could adversely affect our profitability and capital levels over the near term, but would be undertaken if we believe that restructuring the balance sheet will improve our interest rate risk and liquidity risk profile on a longer-term basis.

CAPITAL EXPENDITURES

In October 2009, we signed a contract to construct a new banking center in the Evansville, Indiana, metro area at a cost of $2,350. This banking center was completed and opened in the second quarter of 2010. There were no material commitments for additional capital expenditures at September 30, 2010.

OFF-BALANCE SHEET ARRANGEMENTS AND AGGREGATE CONTRACTUAL OBLIGATIONS

We have obligations and commitments to make future payments under contracts. Our long-term borrowings represent FHLB advances with various terms and rates collateralized primarily by first mortgage loans and certain specifically assigned securities, securities sold under repurchase agreements, notes payable secured by equipment, subordinated debt and trust preferred securities. We are also committed under various operating leases for premises and equipment and our obligation to the Treasury Department for the funds we received under the Capital Purchase Program.

In the normal course of our business there are various outstanding commitments and contingencies, including letters of credit and standby letters of credit that are not reflected in the consolidated financial statements. Our exposure to credit loss in the event the nonperformance by the other party to the commitment is limited to the contractual amount. Many commitments expire without being used. Therefore, the amounts stated below do not necessarily represent future cash commitments. We use the same credit policies in making commitments and conditional obligations as we do for other on-balance sheet instruments.

	September 30,		December 31,
	2010		2009
Commitments to extend credit	$	268,877	$	421,908

Standby letters of credit		16,172		18,419

Non-reimbursable standby letters of credit and commitments		1,160		2,014

There have been no other material changes in off-balance sheet arrangements and contractual obligations since December 31, 2008.

CAPITAL RESOURCES AND LIQUIDITY

We, and Integra Bank, are subject to various regulatory capital requirements administered by federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory actions and generate the possibility of additional discretionary actions by regulators that, if undertaken, could have a materially adverse effect on our financial condition. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, a bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. Capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require us and the Bank to maintain minimum Total Capital and Tier 1 Capital to Risk-Weighted Assets Ratios, and Tier 1 Capital to Average Assets Ratios (as defined).

Integra Bank’s Total Risk-Based Capital Ratio was 9.34% at September 30, 2010, an increase of 101 basis points from June 30, 2010 and an increase of 134 basis points from March 31, 2010, which maintains Integra Bank’s classification as adequately capitalized under the Prompt Corrective Action framework at September 30, 2010. The increase resulted from the branch and loan sales and loan paydowns, partially offset by the quarter’s net loss. Integra Bank’s Tier 1 Risk-Based Capital Ratio increased 100 basis points to 8.02% in the third quarter of 2010 and its Tier 1 Leverage Ratio decreased 22 basis points to 4.31%. We were not considered adequately capitalized at the holding company level at both September 30, 2010 and June 30, 2010 and our Tangible Common Equity to Tangible Assets Ratio declined 62 basis points to (2.08)% during the second quarter of 2010. The plan we are executing to improve the Bank's capital ratios is expected to also increase our holding company regulatory capital ratios. The impact of falling below the adequately capitalized level at the holding company level does not impact us in the area of liquidity or result in any additional regulatory restrictions or limitations.

Our liquidity is affected in various ways because the Bank is not currently classified as “well-capitalized”. Banks that are not “well-capitalized” may not obtain any new brokered funds as a funding source and are subject to rate restrictions that limit the amount that can be paid on all types of retail deposits. The maximum rates we can pay on all types of retail deposits are limited to the national average rate, plus 75 basis points. We continue to compare the rates we are currently paying against the national rate caps all rates remain within those caps. We have made changes in product design and established a new source for retail certificates of deposit that has significantly mitigated the risk associated with potential deposit runoff associated with the rate restriction requirement. At this time there has been no material impact to our deposit balances resulting from the rate caps. Failure to comply with the Capital Directive may also adversely affect the Bank’s ability to accept and maintain public fund deposits.

On May 6, 2010, we entered into a formal written agreement with the Federal Reserve Bank of St. Louis (the Reserve Bank). Pursuant to the agreement, we agreed to use our financial and managerial resources to serve as a source of strength to the Bank, including taking steps to ensure that the Bank complies with its agreements with the OCC. In addition, the agreement provides that we shall:

·	not declare or pay any dividends without the prior approval of the Reserve Bank and the Director of the Division of Banking Supervision and Regulation of the Board of Governors of the Federal Reserve System (Federal Reserve);

·	not take dividends or any other form of payment representing a reduction in capital from the Bank without the prior approval of the Reserve Bank;

·	not make any distributions of interest, principal, or other sums on subordinated debentures or trust preferred securities without prior approval of the Reserve Bank;

·	not incur, increase, or guarantee any debt without the prior approval of the Reserve Bank;

·	not purchase or redeem any shares of our stock without prior approval of the Reserve Bank;

·	within 60 days of the agreement, submit to the Reserve Bank an acceptable plan to maintain sufficient capital on a consolidated basis;

within 30 days after the end of any quarter in which any of our capital ratios fall below the approved capital plan’s minimum ratios, notify the Reserve Bank of such shortfall and submit an acceptable capital plan detailing corrective steps for increasing ratios to or above the approved plan’s minimums;

·	within 60 days of the Agreement, submit to the Reserve Bank a projection of cash flow for 2010, and then submit projections of cash flow for each subsequent calendar year at least one month prior to the beginning of such year;

comply with notice requirements in advance of appointing any new director or senior executive officer or changing the responsibilities of any senior executive officer and comply with certain restrictions on indemnification and severance payments and, within 30 days of the end of each quarter, submit progress reports to the Reserve Bank detailing the form and manner of all actions taken to secure compliance with the agreement and the results thereof along with a parent company-level balance sheet, income statement, and, as applicable, report of changes in stockholder’s equity.

We submitted a capital plan and projections of cash flow to the Reserve Bank within the time period specified in the agreement and were notified by the Reserve Bank that they had accepted the plan. We continue to work closely with the Federal Reserve as we execute the strategies outlined above.

On August 12, 2010, Integra Bank received a Capital Directive from the OCC. Under the terms of the Capital Directive, the Bank is required, within 90 days, to achieve and maintain a Total Risk-Based Capital Ratio of at least 11.5% of risk-weighted assets and a Tier 1 Leverage Ratio of at least 8% of adjusted total assets. We were also required to submit to the OCC within 30 days an acceptable Capital Plan covering at least a three-year period that describes the means and time schedule by which the Bank will achieve the required minimum capital ratios, which we provided. The OCC is completing its review of that plan and we continue to review our capital raising initiatives with them.

The following table presents the actual capital amounts and ratios for us, on a consolidated basis, and the Bank:

											Minimum
						Minimum Ratios For Capital					Capital Ratios
	Actual					Adequacy Purposes					Under Capital Directive
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of September 30, 2010
Total Capital (to Risk Weighted Assets)
Consolidated	$	68,089		4.30	%	$	126,541		8.00	%		N/A		N/A
Integra Bank		144,352		9.34	%		123,678		8.00	%		177,787		11.50	%

Tier 1 Capital (to Risk Weighted Assets)
Consolidated	$	34,044		2.15	%	$	63,270		4.00	%		N/A		N/A
Integra Bank		123,985		8.02	%		61,839		4.00	%		N/A		N/A

Tier 1 Capital (to Average Assets)
Consolidated	$	34,044		1.18	%	$	115,270		4.00	%		N/A		N/A
Integra Bank		123,985		4.31	%		115,028		4.00	%		230,056		8.00	%

											Minimum
						Minimum Ratios For Capital					Capital Ratios
	Actual					Adequacy Purposes					To Be Well Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of December 31, 2009
Total Capital (to Risk Weighted Assets)
Consolidated	$	221,590		9.94	%	$	178,377		8.00	%		N/A		N/A
Integra Bank		224,127		10.05	%		178,377		8.00	%		222,971		10.00	%

Tier 1 Capital (to Risk Weighted Assets)
Consolidated	$	137,658		6.17	%	$	89,189		4.00	%		N/A		N/A
Integra Bank		195,416		8.76	%		89,188		4.00	%		133,783		6.00	%

Tier 1 Capital (to Average Assets)
Consolidated	$	137,658		4.43	%	$	124,397		4.00	%		N/A		N/A
Integra Bank		195,416		6.30	%		124,136		4.00	%		155,170		5.00	%

The amount of dividends which our subsidiaries may pay to us is governed by applicable laws and regulations. Federal banking law limits the amount of dividends that national banks can pay to their holding companies without obtaining prior regulatory approval. For the Bank, prior regulatory approval is required if dividends to be declared in any year would exceed net earnings of the current year (as defined under the National Banking Act) plus retained net profits for the preceding two years, subject to the capital requirements discussed above. As of September 30, 2010, the Bank did not have any retained earnings available for distribution in the form of dividends to the holding company without prior regulatory approval.

Both the Bank and the Company were subject to restrictions under the FDIC Improvement Act of 1991 at September 30, 2010. These restrictions prohibit the Bank from accepting, renewing, or rolling over brokered deposits except with a waiver from the FDIC. This act also subjects the Bank to restrictions on the interest rates that can be paid on deposits.

Liquidity management involves monitoring sources and uses of funds in order to meet day-to-day cash flow requirements. These daily requirements reflect the ability to provide funds to meet loan requests, fund existing commitments and to accommodate possible outflows in deposits and other borrowings. Liquidity represents the ability of a company to convert assets into cash or cash equivalents without significant loss and to raise additional funds by increasing liabilities. Asset liquidity is provided by cash and assets that are readily marketable, can be pledged, or will mature in the near future.

The Bank’s primary sources of funds are customer deposits, loan payments, maturities of and cash flow from investments securities, and borrowings. We have significant amounts of public fund deposits in Indiana, Kentucky and Illinois. We are required to pledge collateral to cover the deposits held in Kentucky and Illinois as directed by the laws of each state. The State of Indiana recently changed the law governing the collateralization of public funds. The new law became effective July 1, 2010. Under the new law, the Indiana Board for Depositories, Public Deposit Insurance Fund (PDIF) will determine what financial institutions are required to pledge collateral and may prohibit certain institutions from holding Indiana public funds. The PDIF will determine which financial institutions are required to pledge collateral based on the strength of their financial ratings and is in the process of implementing the collateral requirements. The revisions to the law resulted in additional collateral requirements for the Bank. Subsequent to September 30, we entered into a pledge agreement with the PDIF by which we pledged approximately $162,000 in securities with a market value of approximately $171,000. Accordingly, 100% of the Indiana public funds held at the Bank are now either covered by FDIC deposit insurance or secured by collateral we have provided. This increased the Bank’s percentage of total securities pledged to 74% at October 31, 2010. Securities available for sale balances increased $104,173 during the third quarter of 2010, while the percentages of total securities pledged as collateral declined to 44% at September 30, 2010, as compared to 54% at June 30, 2010.

For the Bank, the primary sources of short-term asset liquidity have been cash, federal funds sold, commercial paper, interest-bearing deposits with other financial institutions, and securities available for sale. We continuously monitor our current and prospective business activity in order to design maturities of specific categories of short-term loans and investments that are in line with specific types of deposits and borrowings. The balance between these sources and the need to fund loan demand and deposit withdrawals is monitored under our Capital Markets Risk Policy. In the past when these sources were not considered to be adequate, we have utilized a non-broker national CD program, brokered deposits and repurchase agreements, secured funding through the TLGP program and utilized borrowing programs from the Federal Reserve, including TAF. We may utilize the Bank’s borrowing capacity with the FHLB or we can also sell investments and loans.

Due to our recent financial performance, we elected to maintain a higher level of liquidity and increased our cash position during the first nine months of 2010. Cash and due from banks totaled $500,600 at September 30, 2010, as compared to $304,921 at December 31, 2009 and $391,171 at September 30, 2009. We expect to reduce the balance of cash in 2011 as we execute our strategic initiatives and improve our capital ratios.

In the event that the Bank’s ability to attract and retain deposits is negatively impacted by interest rate restrictions and or capital restrictions, we believe that sufficient cash and liquid assets exist to maintain operations and meet all obligations as they come due. We complied with the national rate cap limitations during the third quarter of 2010. While the restrictions have impacted some of our deposit products, they have not resulted in a meaningful loss in deposits, and have in fact, contributed to an increase in our net interest margin. We have made changes in product design and established a new source for retail certificates of deposits to mitigate the risk associated with these regulatory restrictions on deposits.

At September 30, 2010, federal funds sold and other short-term investments were $50,031. Additionally, at September 30, 2010, we had in excess of $306,930 in unencumbered securities available for repurchase agreements or liquidation.

Following changes in the borrowing rate and maturity for loans through the Federal Reserve’s discount window, the Bank shifted collateral pledged for borrowing capacity from the Federal Reserve to the FHLB in an effort to maximize the borrowing capacity and allow for longer maturities. As of September 30, 2010, the excess borrowing capacity at the FHLB was in excess of $90,349 while the capacity at the Federal Reserve was in excess of $85,551 under the secondary credit program.

The existing Transaction Account Guarantee (TAG) program provides unlimited insurance coverage through December 31, 2010 on non-interest bearing transaction accounts and NOW accounts bearing an interest rate of .25% or less. As part of the new financial regulatory reform bill signed on July 21, 2010, the TAG program was extended until December 31, 2012. This final rule was modified and provides unlimited insurance coverage on non-interest bearing transaction accounts only. The financial regulatory reform bill also made permanent the extension of the $250 per depositor insurance coverage, which was increased from the $100 limit.

Liquidity at the holding company level has historically been provided by dividends from Integra Bank, cash balances, liquid assets, and proceeds from capital market transactions. Because of recent losses, the Bank cannot pay any dividends to us without advance approval from the OCC. Should the Bank make such a request, no assurance can be given that it would be approved.

Liquidity is required to support operational expenses, pay taxes, meet outstanding debt obligations, and other general corporate purposes. In order to enhance our liquidity, we have suspended payments of cash dividends on all of our outstanding stock, and deferred the payment of interest on our outstanding subordinated debentures relating to our trust preferred securities. The indentures allow us to defer payments of interest for up to five years without default or penalty. During the deferral period, the respective trusts will likewise suspend the declaration and payment of distributions on the trust preferred securities. Also during the deferral period, we may not, among other things and with limited exceptions, pay cash dividends on or repurchase our common stock or preferred stock nor make any payment on outstanding debt obligations that rank equally with or lower than the subordinated debentures.

We believe that the deferral of payment of dividends on our common and preferred stock and the deferral of interest payments on our trust preferred subordinated debentures are preserving approximately $1,900 per quarter, thereby enhancing our liquidity. At September 30, 2010, the cash balance held by the parent company was $1,897, which is expected to remain stable as our projected cash inflows are similar to our cash outflows.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Interest rate risk is the exposure of earnings and capital to changes in interest rates. Fluctuations in rates affect earnings by changing net interest income and other interest-sensitive income and expense levels. Interest rate changes affect the market value of capital by altering the underlying value of assets, liabilities, and off balance sheet instruments. Our interest rate risk management program is comprised of several components. They include (1) Board of Directors’ oversight, (2) senior management oversight, (3) risk limits and control, (4) risk identification and measurement, (5) risk monitoring and reporting and (6) independent review. It is the objective of interest rate risk management processes to manage the impact of interest rate volatility on earnings and capital.

Our interest rate risk is managed through the Corporate Asset and Liability Committee (Corporate ALCO) with oversight through the ALCO Committee of the Board of Directors (Board ALCO). The Board ALCO meets at least twice a quarter and is responsible for the establishment of policies, risk limits and authorization levels. The Corporate ALCO meets at least quarterly and is responsible for implementing policies and procedures, overseeing the entire interest rate risk management process and establishing internal controls.

We measure and monitor interest rate risk on a proactive basis by utilizing a simulation model. The model is externally validated periodically by an independent third party.

We use the following key methodologies to measure interest rate risk.

Earnings at Risk (EAR). We consider EAR to be our best measure for managing short-term interest rate risk (one year time frame). This measure reflects the dollar amount of net interest income (NII) that will be impacted by changes in interest rates. Since March 31, 2009, we have used a simulation model to run immediate and parallel changes in interest rates from a base scenario using a static yield curve. Prior to that, implied forward rates were used for the base scenario. Simulations are run using a dynamic balance sheet that is consistent with current strategic initiatives and expectations for growth. The standard simulation analysis assesses the impact on net interest income over a 12-month horizon by shocking the base scenario yield curve up and down 100, 200, and 300 basis points. Additional yield curve scenarios are tested from time to time to assess the risk to changes in the slope of the yield curve and changes in basis relationships. Additional simulations are run from time to time to assess the risk to earnings and liquidity from balance sheet growth occurring faster or slower than anticipated as well as the impact of faster or slower prepayments in the loan and securities portfolios. This simulation model projects net interest income under each rate scenario using consistent balance sheet projections and calculates the percentage change from the base interest rate scenario. The Board ALCO has approved policy limits for changes in one year EAR from the base interest rate scenario of minus 10 percent to a downward 100 basis point shock and minus 10 percent to an upward 200 basis point shock.

With Treasury and swap rates out to three years currently below one percent, Board ALCO has temporarily waived the policy limit to the downward 100 basis point rate shock. If interest rates moved upward 200 basis points, we would experience a positive 17.15% change in NII at September 30, 2010 compared to a positive 7.96% change at December 31, 2009. The positive impact to NII with rising rates is driven by a large volume of prime and one month LIBOR indexed loans, an absence of overnight funding and significant fixed rate CD funding. The increase from December 31 is primarily driven by strategic decisions to strengthen liquidity which included locking in additional longer term fixed rate CDs. The share of funding from fixed rate CDs increased from 39% at December 31 to 46% at September 30 and the weighted average maturity increased from 12.7 months to 15.6 months.

	Estimated Change in EAR from the Base Interest Rate Scenario
	-100 basis points			+200 basis points
September 30, 2010		-16.74	%		17.15	%
December 31, 2009		-4.80	%		7.96	%

Economic Value of Equity (EVE). We consider EVE to be our best analytical tool for measuring long-term interest rate risk. This measure reflects the dollar amount of net equity that will be impacted by changes in interest rates. We use a simulation model to evaluate the impact of immediate and parallel changes in interest rates from a base scenario based on the current yield curve. The standard simulation analysis assesses the impact on EVE by shocking the current yield curve up and down 100, 200, and 300 basis points. This simulation model projects multiple rate paths under each rate scenario and projects the estimated economic value of assets and liabilities for each scenario. The difference between the economic value of total assets and the economic value of total liabilities is referred to as the economic value of equity. The simulation model calculates the percentage change from the base interest rate scenario. The Board ALCO has approved policy limits for changes in EVE. The variance limit for EVE is measured in an environment where the base interest rate scenario is shocked downward by 100 basis points and upward by 200 basis points with a limit on the change in EVE of minus 15%.

At September 30, 2010, we would experience a negative 10.77% change in EVE if interest rates moved downward 100 basis points compared to negative 2.01% at December 31, 2009. If interest rates moved upward 200 basis points, we would experience a positive 7.29% change in EVE compared to positive 0.81% at December 31, 2009. Both of these measures are within Board approved policy limits. The variances in EVE risk from year end are largely liquidity driven and reflect a change in the balance sheet mix. This includes a decrease in loans and transaction deposits through branch divestitures along with a significant increase in cash and longer term fixed rate CDs. The shift to longer term CDs locks in funding costs for an extended period of time and yields a positive impact to risk with rising rates and a negative impact to risk with falling rates. Cash has a stable value in all rate scenarios unlike fixed rate earnings assets which generally lose value as market rates rise and gain value as market rates decline. In addition, the investment portfolio was restructured and overall consists of securities with shorter average lives and less extension risk to rising rates than at year end. While the balance sheet changes noted above have an overall positive impact on risk to rising rates in addition to strengthening liquidity, they have an adverse impact on current earnings and net interest margin.

Trends in Economic Value of Equity

	Estimated Change in EVE from the Base Interest Rate Scenario
	-100 basis points			+200 basis points
September 30, 2010		-10.77	%		7.29	%
December 31, 2009		-2.01	%		0.81	%

The assumptions in any of these simulation runs are inherently uncertain. Any simulation cannot precisely estimate net interest income or economic value of the assets and liabilities or predict the impact of higher or lower interest rates on net interest income or on the economic value of the assets and liabilities. Actual results will differ from simulated results due to the timing, magnitude and frequency of interest-rate changes, the difference between actual experience and the assumptions used, as well as changes in market conditions and management strategies.

Item 4: Controls and Procedures

As of September 30, 2010, based on an evaluation of our disclosure controls and procedures, as defined in Exchange Act Rules 13a-15(e) and 15d-15(e), our principal executive officer and principal financial officer have concluded that such disclosure controls and procedures were effective as of that date.

There have been no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2010, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

We are involved in legal proceedings in the ordinary course of our business. We do not expect that any of those legal proceedings would have a material adverse effect on our consolidated financial position, results of operations or cash flows. There have been no material changes in those proceedings from what was reported in our Form 10-K at December 31, 2009.

Item 1A. RISK FACTORS

Except as set forth below, there have been no material changes from the risk factors disclosed in Part I-Item 1A of our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2010. The risk factors entitled, "We are required to comply with the terms of agreements and understandings with our regulators and if we do not comply with them” and “If we continue to suffer significant loan losses, it may be difficult to continue in operation” are deleted in their entirety and replaced by the following risk factors. Dollar amounts are shown in thousands.

We are subject to a Capital Directive and other agreements with regulators and if we do not comply with them, we are likely to become subject to additional regulatory enforcement actions.

The OCC has issued a Capital Directive to Integra Bank, directing it to achieve and maintain a Tier 1 Risk-Based Capital Ratio of 8% and a Total Risk-Based Capital Ratio of 11.5% by November 10, 2010. We are also subject to formal written agreements with the OCC and the Federal Reserve Bank of St. Louis. Compliance with the Capital Directive and other regulatory agreements will be determined by the OCC and the Reserve Bank. We do not expect that Integra Bank will achieve the minimum capital ratios set forth in the Capital Directive within the specified time. If we do not comply with the Capital Directive and other regulatory agreements in the near future, our regulators may seek to impose additional and more restrictive enforcement actions. If our regulators pursue additional enforcement actions against us, it would likely increase our expenses, limit our activities and make it more difficult for us to remain in business.

If we continue to suffer significant loan losses and are unable to raise capital, it will be difficult to continue in operation.

We recorded provisions for loan losses of $98,220 in the first nine months of 2010, $113,368 in 2009, and $65,784 in 2008. Further significant losses will make it difficult for us to continue in operation.

Our losses have largely resulted from loan and investment impairments. Since January 1, 2008, we have recorded total provisions for loan losses of $277,372 and other than temporary impairment charges on investments of $32,891. While our losses also included a charge off of goodwill of $122,824, and charges to establish an allowance against the realization of our deferred tax asset of $129,842, these latter charges would not have been required had we not incurred the losses on loans and investments.

We do not expect to incur any additional significant losses from our investment portfolio. However, substantial risks remain in certain portions of our loan portfolio. As of September 30, 2010, approximately 58% of our loan portfolio consisted of CRE and C&I loans. These types of loans are typically larger than the loans which made up the remaining portion of our loan portfolio. The deterioration of one or a few of these loans can lead to a significant increase in non-performing loans. Additional increases in non-performing loans could result in a net loss of earnings from these loans, an increase in the provision for loan losses and an increase in loan charge-offs, all of which could have a material adverse effect on our financial condition and results of operations.

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not Applicable

Item 3. DEFAULTS UPON SENIOR SECURITIES

Not Applicable

Item 4. RESERVED

Item 5. OTHER INFORMATION

During the period covered by this report, Crowe Horwath LLP, our independent registered public accounting firm, was not engaged to perform any services that represent non-audit services. This disclosure is made pursuant to Section 10A(i)(2) of the Securities Exchange Act of 1934, as added by Section 202 of the Sarbanes-Oxley Act of 2002.

Item 6. EXHIBITS

The following documents are filed as exhibits to this report:

10.1	Capital Directive issued by the Office of the Comptroller of the Currency dated August 12, 2010 (incorporated by reference to Exhibit 99.1 to the Registrant’s Current Report on Form 8-K filed August 18, 2010)

31.1	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Chief Executive Officer

31.2	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Chief Financial Officer

32	Certification of Chief Executive Officer and Chief Financial Officer

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	INTEGRA BANK CORPORATION

	By	/s/ Michael J. Alley
		Michael J. Alley Chairman of the Board and Chief Executive Officer November 10, 2010


		/s/ Michael B. Carroll
		Michael B. Carroll Chief Financial Officer November 10, 2010

Attached files

INTEGRA BANK CORP Reports

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