7. Allowance for Loan and Lease Losses and Unfunded Commitments and Letters of Credit

We maintain an allowance for loan and lease losses ("ALLL") to absorb losses inherent in the loan portfolio. The size of the ALLL is determined through quarterly assessments of the probable estimated losses in the loan portfolio. Our methodology for making such assessments and determining the adequacy of the ALLL includes the following key elements:

The general valuation allowance is systematically calculated quarterly using quantitative and qualitative information about specific loan classes. The minimum required level in which an entity develops a systematic methodology to determine its allowance for loan and lease losses is at the segment level. However, the Company's systematic methodology in determining its allowance for loan and lease losses is prepared at the class level, which is more detailed than the segment level. The quantitative information uses historical losses from a specific loan class and incorporates the loan's risk rating migration from origination to the point of loss. A loan's risk rating is primarily determined based upon the borrower's ability to fulfill its debt obligation from a cash flow perspective. In the event there is financial deterioration of the borrower, the borrower's other sources of income or repayment are also considered, including recent appraisal values for collateral dependent loans. The qualitative information takes into account general economic and business conditions affecting our market place, seasoning of the loan portfolio, duration of the business cycle, etc. to ensure our methodologies reflect the current economic environment and other factors as using historical loss information exclusively may not give an accurate estimate of inherent losses within the Company's loan portfolio.

The specific valuation allowance is a reserve for each loan determined to be impaired and the value of the impaired loan is less than its recorded investment. The Company measures the impairment based on the discounted expected future cash flows, observable market price, or the fair value of the collateral less selling costs if the loan is collateral dependant or if foreclosure is probable. The specific reserve for each loan is equal to the difference between the recorded investment in the loan and its determined impairment value.

The ALLL is increased by provisions for loan and lease losses ("provision") charged to expense, and is reduced by loans charged off, net of recoveries. While the Company's management believes the best information available is used to determine the ALLL, changes in market conditions could result in adjustments to the ALLL, affecting net income, if circumstances differ from the assumptions used in determining the ALLL.

We have used the same methodology for ALLL calculations during the three and six months ended June 30, 2011 and 2010. Adjustments to the percentages of the ALLL allocated to loan categories are made based on trends with respect to delinquencies and problem loans within each pool of loans. The Company reviews the ALLL quantitative and qualitative methodology on a quarterly basis and makes adjustments when appropriate. The Company continues to strive towards maintaining a conservative approach to credit quality and will continue to prudently add to our ALLL as necessary in order to maintain adequate reserves. The Company carefully monitors the loan portfolio and continues to emphasize the importance of credit quality while continuously strengthening loan monitoring systems and controls.

The following table shows a detailed analysis of the allowance for loan and lease losses for noncovered loans as of the three and six months ended June 30, 2011:


*(in thousands)*	Beginning Balance		Charge-offs			Recoveries		Provision			Ending Balance		Specific Reserve		General Allocation
Three months ended June 30, 2011
Commercial Business
Secured	$	22,307	($	834	)	$	233	$	614		$	22,320	$	330	$	21,990
Unsecured		618		0			359		(404	)		573		72		501
Real Estate 1-4 Family
Residential RE Perm		1,100		(216	)		0		(37	)		847		0		847
Real Estate Commercial & Multifamily
Commercial RE Land		555		(656	)		0		995			894		0		894
Income Property Multifamily Perm		12,297		(275	)		13		2,674			14,709		301		14,408
Owner Occupied RE Perm		10,412		(623	)		0		(3,310	)		6,479		286		6,193
Construction 1-4 Family
Land & Acquisition		3,295		(410	)		700		(733	)		2,852		148		2,704
Residential Construction		2,118		(395	)		0		(19	)		1,704		0		1,704
Construction Commercial & Multifamily
Income Property Multifamily Construction		127		(1,078	)		0		994			43		0		43
Owner Occupied RE Construction		68		0			0		(34	)		34		0		34
Consumer		2,418		(271	)		45		556			2,748		161		2,587
Unallocated		0		0			0		854			854		0		854

Total	$	55,315	($	4,758	)	$	1,350	$	2,150		$	54,057	$	1,298	$	52,759


*(in thousands)*	Beginning Balance		Charge-offs			Recoveries		Provision			Ending Balance		Specific Reserve		General Allocation
Six months ended June 30, 2011
Commercial Business
Secured	$	21,811	($	4,121	)	$	329	$	4,301		$	22,320	$	330	$	21,990
Unsecured		738		(84	)		368		(449	)		573		72		501
Real Estate 1-4 Family
Residential RE Perm		1,100		(664	)		0		411			847		0		847
Real Estate Commercial & Multifamily
Commercial RE Land		634		(656	)		0		916			894		0		894
Income Property Multifamily Perm		15,210		(640	)		55		84			14,709		301		14,408
Owner Occupied RE Perm		9,692		(623	)		31		(2,621	)		6,479		286		6,193
Construction 1-4 Family
Land & Acquisition		3,769		(1,178	)		1,768		(1,507	)		2,852		148		2,704
Residential Construction		2,292		(1,054	)		36		430			1,704		0		1,704
Construction Commercial & Multifamily
Income Property Multifamily Construction		274		(1,565	)		0		1,334			43		0		43
Owner Occupied RE Construction		70		0			0		(36	)		34		0		34
Consumer		2,120		(1,196	)		108		1,716			2,748		161		2,587
Unallocated		3,283		0			0		(2,429	)		854		0		854

Total	$	60,993	($	11,781	)	$	2,695	$	2,150		$	54,057	$	1,298	$	52,759

The three and six months changes as of June 30, 2011 and 2010 are summarized as follows:


	Three Months Ended June 30,			Six Months Ended June 30,			Three Months Ended June 30,			Six Months Ended June 30,
*(in thousands)*	2011			2011			2010			2010
Beginning balance	$	55,315		$	60,993		$	56,981		$	53,478
Provision charged to expense		2,150			2,150			13,500			28,500
Loans charged off		(4,758	)		(11,781	)		(11,073	)		(23,926	)
Recoveries		1,350			2,695			340			1,696

Ending balance	$	54,057		$	54,057		$	59,748		$	59,748

Changes in the allowance for unfunded commitments and letters of credit are summarized as follows:


	Three Months Ended June 30,					Six Months Ended June 30,
*(in thousands)*	2011			2010		2011		2010
Beginning balance	$	1,660		$	815	$	1,165	$	775
Net changes in the allowance for unfunded commitments and letters of credit		(200	)		0		295		40

Ending balance	$	1,460		$	815	$	1,460	$	815

Risk Elements

The extension of credit in the form of loans to individuals and businesses is one of our principal commerce activities. Our policies and applicable laws and regulations require risk analysis as well as ongoing portfolio and credit management. We manage our credit risk through lending limit constraints, credit review, approval policies and extensive, ongoing internal monitoring. We also manage credit risk through diversification of the loan portfolio by type of loan, type of industry, type of borrower and by limiting the aggregation of debt to a single borrower.

The monitoring process for the loan portfolio includes periodic reviews of individual loans with risk ratings assigned to each loan. Based on the analysis, loans are given a risk rating of 1-10 based on the following criteria:

ratings of 1-3 indicate minimal to low credit risk,

ratings of 4-5 indicate an average to above average credit risk with adequate repayment capacity when prolonged periods of adversity do not exist,

ratings of 6-7 indicate potential weaknesses and higher credit risk requiring greater attention by bank personnel and management to help prevent further deterioration,

rating of 8 indicates a loss is possible if loan weaknesses are not corrected,

rating of 9 indicates loss is highly probable; however, the amount of loss has not yet been determined,

and a rating of 10 indicates the loan is uncollectable, and when identified is charged-off.

Loans with a risk rating of 1-6 are considered Pass loans and loans with risk ratings of 7, 8, 9 and 10 are considered Special Mention, Substandard, Doubtful and Loss, respectively. Loans with a risk rating of Substandard or worse are reported as classified loans in our allowance for loan and lease losses analysis. We review these loans to assess the ability of our borrowers to service all interest and principal obligations and, as a result, the risk rating may be adjusted accordingly. Risk ratings are reviewed and updated whenever appropriate, with more periodic reviews as the risk and dollar value of loss on the loan increases. In the event full collection of principal and interest is not reasonably assured, the loan is appropriately downgraded and, if warranted, placed on non-accrual status even though the loan may be current as to principal and interest payments. Additionally, we assess whether an impairment of a loan warrants specific reserves or a write-down of the loan.

The following is an analysis of the credit quality of our noncovered loan portfolio as of June 30, 2011 and December 31, 2010:


	June 30, 2011				December 31, 2010
*(dollars in thousands)*	Weighted- Average Risk Rating		Recorded Investment Noncovered Loans (1)		Weighted- Average Risk Rating		Recorded Investment Noncovered Loans (1)
Commercial Business
Secured		4.94	$	799,676		4.96	$	757,372
Unsecured		4.27		41,568		4.23		41,175
Real Estate 1-4 Family
Residential RE Perm		4.94		51,259		4.96		49,436
Real Estate Commercial & Multifamily
Commercial RE Land		5.79		25,899		5.75		24,956
Income Property Multifamily Perm		5.05		483,465		5.07		406,711
Owner Occupied RE Perm		5.12		345,811		5.12		366,284
Construction 1-4 Family
Land & Acquisition		6.66		30,164		6.79		37,054
Residential Construction		6.49		22,529		6.63		31,293
Construction Commercial & Multifamily
Income Property Multifamily Construction		5.94		8,932		6.38		18,296
Owner Occupied RE Construction		4.81		13,266		4.93		11,990
Consumer		4.39		178,560		4.31		182,624

Total recorded investment of noncovered loans			$	2,001,129			$	1,927,191

(1)	Recorded investment includes unpaid principal balance, net of charge-offs, unamortized deferred loan fees or costs, unamortized premiums or discounts and accrued interest.