Table of Contents






UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
FORM 10-Q

 
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
 
     
For the quarterly period ended March 31, 2012
 
Commission File Number 0-13823


FNB UNITED CORP.
(Exact name of Registrant as specified in its Charter)
 
North Carolina
 
56-1456589
(State of Incorporation)
 
(I.R.S. Employer Identification No.)
150 South Fayetteville Street
 
 
Asheboro, North Carolina
 
27203
(Address of principal executive offices)
 
(Zip Code)

 
(336) 626-8300
(Registrant's telephone number, including area code)
  

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 such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)
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). Yes o No x

As of May 11, 2012 (the most recent practicable date), the Registrant had outstanding approximately 21,102,082 shares of Common Stock.



Table of Contents


FNB United Corp. and Subsidiaries
Report on Form 10-Q
March 31, 2012

TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
 
Item 1
 
 
 
 
 

 
Item 2
Item 3
Item 4
PART II. OTHER INFORMATION
 
Item 1
Item 1A
Item 2
Item 3
Item 4
Item 5
Item 6
 



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PART I.    FINANCIAL INFORMATION
Item 1.    Financial Statements
FNB United Corp. and Subsidiaries
Consolidated Balance Sheets (unaudited)
(in thousands, except share and per share data)
 
March 31, 2012
 
December 31, 2011
Assets
 
 
 
 
Cash and due from banks
 
$
31,983

 
$
35,773

Interest-bearing bank balances
 
436,566

 
517,643

Investment securities:
 
 
 
 
Available-for-sale, at estimated fair value (amortized cost of $472,242 in 2012
and $430,836 in 2011)
 
473,916

 
431,306

Loans held for sale
 
3,938

 
4,529

Loans held for investment
 
1,245,759

 
1,217,535

Less: Allowance for loan losses
 
(39,795
)
 
(39,360
)
Net loans held for investment
 
1,205,964

 
1,178,175

Premises and equipment, net
 
53,313

 
53,763

Other real estate owned
 
104,193

 
110,009

Core deposit premiums
 
7,825

 
8,177

Goodwill
 
4,205

 
3,905

Bank-owned life insurance
 
37,842

 
37,515

Other assets
 
28,201

 
28,068

Assets from discontinued operations
 

 
245

Total Assets
 
$
2,387,946

 
$
2,409,108

Liabilities
 
 
 
 
Deposits:
 
 
 
 
Noninterest-bearing demand deposits
 
$
256,445

 
$
234,673

Interest-bearing deposits:
 
 
 
 
Demand, savings and money market deposits
 
874,696

 
849,828

Time deposits of $100,000 or more
 
375,117

 
394,431

Other time deposits
 
613,823

 
650,179

Total deposits
 
2,120,081

 
2,129,111

Retail repurchase agreements
 
8,338

 
8,838

Federal Home Loan Bank advances
 
58,360

 
58,370

Junior subordinated debentures
 
56,702

 
56,702

Other liabilities
 
26,491

 
25,980

Liabilities from discontinued operations
 

 
1,092

Total Liabilities
 
2,269,972

 
2,280,093

Shareholders' Equity
 
 
 
 
Common stock, no par value; authorized 2,500,000,000 shares, issued 21,102,082 shares
in 2012 and 21,102,668 shares in 2011
 
454,254

 
455,166

Accumulated deficit
 
(333,041
)
 
(322,182
)
Accumulated other comprehensive loss
 
(3,239
)
 
(3,969
)
Total Shareholders' Equity
 
117,974

 
129,015

Total Liabilities and Shareholders' Equity
 
$
2,387,946

 
$
2,409,108

See accompanying notes to consolidated financial statements.

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FNB United Corp. and Subsidiaries
Consolidated Statements of Operations (unaudited)
(in thousands, except share and per share data)
 
Three Months Ended March 31,
 
 
2012
 
2011
Interest Income
 
 
 
 
Interest and fees on loans
 
$
16,959

 
$
13,061

Interest and dividends on investment securities:
 
 
 
 
Taxable income
 
2,684

 
2,080

Non-taxable income
 

 
163

Other interest income
 
350

 
165

Total interest income
 
19,993

 
15,469

Interest Expense
 
 
 
 
Deposits
 
4,223

 
5,168

Retail repurchase agreements
 
8

 
18

Federal Home Loan Bank advances
 
279

 
698

Other borrowed funds
 
303

 
378

Total interest expense
 
4,813

 
6,262

Net Interest Income before Provision for Loan Losses
 
15,180

 
9,207

Provision for loan losses
 
3,067

 
20,183

Net Interest Income/(Loss) after Provision for Loan Losses
 
12,113

 
(10,976
)
Noninterest Income
 
 
 
 
Service charges on deposit accounts
 
1,960

 
1,445

Mortgage loan income
 
36

 
121

Cardholder and merchant services income
 
997

 
766

Trust and investment services
 
202

 
401

Bank owned life insurance
 
306

 
400

Other service charges, commissions and fees
 
254

 
252

Securities (loss)/gains, net
 
(46
)
 
13

Gain on fair value swap
 

 
92

Other income
 
117

 
207

Total noninterest income
 
3,826

 
3,697

Noninterest Expense
 
 
 
 
Personnel expense
 
9,987

 
6,494

Net occupancy expense
 
1,553

 
1,186

Furniture, equipment and data processing expense
 
1,976

 
1,607

Professional fees
 
1,264

 
1,239

Stationery, printing and supplies
 
141

 
120

Advertising and marketing
 
129

 
140

Other real estate owned expense
 
5,519

 
16,186

Credit/debit card expense
 
410

 
392

FDIC insurance
 
598

 
1,863

Loan collection expense
 
746

 
1,000

Merger-related expense
 
2,258

 

Core deposit intangible amortization
 
352

 
199

Other expense
 
1,915

 
2,438

Total noninterest expense
 
26,848

 
32,864

Loss from continuing operations, before income taxes
 
(10,909
)
 
(40,143
)
Income tax benefit - continuing operations
 
(77
)
 
(128
)
Loss from continuing operations, net of tax
 
(10,832
)
 
(40,015
)
Loss from discontinued operations, net of tax
 
(27
)
 
(3,693
)
Net loss
 
(10,859
)
 
(43,708
)
Dividends on preferred stock
 

 
(1,020
)
Net loss to common shareholders
 
$
(10,859
)
 
$
(44,728
)
 
 
 
 
 
Weighted average number of common shares outstanding - basic and diluted
 
21,102,465

 
114,247

Net loss per common share from continuing operations - basic and diluted
 
$
(0.51
)
 
$
(359.18
)
Net loss per common share from discontinued operations - basic and diluted
 

 
(32.32
)
Net loss per common share - basic and diluted
 
(0.51
)
 
(391.50
)

See accompanying notes to consolidated financial statements.

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FNB United Corp. and Subsidiaries
Consolidated Statements of Comprehensive Loss (unaudited)

(dollars in thousands)
 
Three Months Ended March 31,
 
 
2012
 
2011
Net loss
 
$
(10,859
)
 
$
(43,708
)
Other comprehensive income/(loss):
 
 
 
 
Unrealized holdings gains/(loss) arising during the period on available-for-sale securities
 
1,158

 
(261
)
 Tax effect
 
(456
)
 
103

Unrealized holdings gains/(loss) arising during the period on available-for-sale securities, net of tax
 
702

 
(158
)
Reclassification adjustment for loss/(gains) on available-for-sale securities included in net income
 
46

 
(13
)
     Tax effect
 
(18
)
 
5

Reclassification adjustment for loss/(gains) on available-for-sale securities included in net income, net of tax
 
28

 
(8
)
Other comprehensive income/(loss), net of tax:
 
730

 
(166
)
Comprehensive loss
 
$
(10,129
)
 
$
(43,874
)

See accompanying notes to consolidated financial statements.


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FNB United Corp. and Subsidiaries
Consolidated Statements of Shareholders’ Equity (unaudited)
For Three Months Ended March 31, 2012 and 2011
 
 
 
 
 
 
 
 
 
 
 
 
Retained
 
Accumulated
 
 
(dollars in thousands, except share and per share data)
 
 
 
 
 
 
 
 
 
Common
 
Earnings/
 
Other
 
 
 
Preferred Stock
 
Common Stock
 
Stock
 
(Accumulated
 
Comprehensive
 
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
Warrant
 
Deficit)
 
Loss
 
Total
Balance, December 31, 2010
 
7,551,500

 
$
56,424

 
114,246

 
$
143,634

 
$
3,891

 
$
(229,095
)
 
$
(3,691
)
 
$
(28,837
)
Comprehensive loss:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss
 

 

 

 

 

 
(43,708
)
 

 
(43,708
)
Other comprehensive loss, net of tax
 

 

 

 

 

 

 
(166
)
 
(166
)
Total comprehensive loss
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(43,874
)
Issuance of preferred stock, series A
 
5,000,000

 
5,000

 

 

 

 

 

 
5,000

Accretion of discount on preferred stock
 

 
187

 

 

 

 
(187
)
 

 

Stock options:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Compensation expense recognized
 

 

 
1

 
7

 

 

 

 
7

Balance, March 31, 2011
 
12,551,500

 
$
61,611

 
114,247

 
$
143,641

 
$
3,891

 
$
(272,990
)
 
$
(3,857
)
 
$
(67,704
)
Balance, December 31, 2011
 

 
$

 
21,102,668

 
$
455,166

 
$

 
$
(322,182
)
 
$
(3,969
)
 
$
129,015

Comprehensive loss:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss
 

 

 

 

 

 
(10,859
)
 

 
(10,859
)
Other comprehensive income, net of tax
 

 

 

 

 

 

 
730

 
730

Total comprehensive loss
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(10,129
)
Stock options:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Compensation expense recognized
 

 

 

 
1

 

 

 

 
1

Expense related to 2011 issuance of common stock
 

 

 

 
(913
)
 

 

 

 
(913
)
Return of common stock not received for fractional shares rounding purposes in the 1:100 reverse stock split
 

 

 
(586
)
 

 

 

 

 

Balance, March 31, 2012
 

 
$

 
21,102,082

 
$
454,254

 
$

 
$
(333,041
)
 
$
(3,239
)
 
$
117,974


See accompanying notes to consolidated financial statements.

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FNB United Corp. and Subsidiaries
Consolidated Statements of Cash Flows (unaudited)
 (dollars in thousands)
 
Three Months Ended March 31,
 
 
2012
 
2011
Operating Activities
 
 
 
 
Net loss
 
$
(10,859
)
 
$
(43,708
)
Net loss from discontinued operations
 
(27
)
 
(3,693
)
Net loss from continuing operations
 
(10,832
)
 
(40,015
)
Adjustments to reconcile net loss to cash provided by operating activities:
 
 
 
 
Depreciation and amortization of premises and equipment
 
981

 
812

Provision for loan losses
 
3,067

 
20,183

Deferred income taxes
 
(77
)
 
(392
)
Premium on purchased loans and deferred loan fees and costs, net
 
(2,270
)
 
(156
)
Premium amortization and discount accretion of investment securities, net
 
666

 
1,015

Net loss/(gain) on sale of investment securities
 
46

 
(13
)
Amortization of core deposit premiums
 
352

 
199

Net accretion of purchase accounting adjustments
 
(2,592
)
 

Stock compensation expense
 
1

 
7

Increase in cash surrender value of bank-owned life insurance, net
 
(327
)
 
(262
)
Mortgage servicing rights amortization and impairment
 

 
117

Adjustment to goodwill from valuation adjustment on acquired OREO
 
(300
)
 

Net loss on sales and write-downs of other real estate owned
 
3,877

 
14,296

Changes in assets and liabilities:
 
 
 
 
(Increase)/decrease in accrued interest receivable and other assets
 
(532
)
 
10,129

Increase in accrued interest payable and other liabilities
 
511

 
1,925

Net cash (used in)/provided by operating activities of continuing operations
 
(7,429
)
 
7,845

Net effect of discontinued operations
 
(873
)
 
24,501

Net cash (used in)/provided by operating activities
 
(8,302
)
 
32,346

Investing Activities
 
 
 
 
Available-for-sale securities:
 
 
 
 
Proceeds from sales
 
10,760

 

Proceeds from maturities, calls and principal repayments
 
21,021

 
12,863

Purchases
 
(73,010
)
 
(75,083
)
Net (increase)/decrease in loans held for investment
 
(35,603
)
 
48,818

Proceeds from sales of other real estate owned
 
10,874

 
1,718

Purchases of premises and equipment
 
(558
)
 
(32
)
Expenses paid in 2012 related to 2011 capital raise
 
(913
)
 

Net cash used in investing activities of continuing operations
 
(67,429
)
 
(11,716
)
Net effect of discontinued operations
 

 
(60
)
Net cash used in investing activities
 
(67,429
)
 
(11,776
)
Financing Activities
 
 
 
 
Net decrease in deposits
 
(8,626
)
 
(34,418
)
(Decrease)/increase in retail repurchase agreements
 
(500
)
 
923

Decrease in Federal Home Loan Bank advances
 
(10
)
 
(10
)
Net cash used in financing activities of continuing operations
 
(9,136
)
 
(33,505
)
Net effect of discontinued operations
 

 

Net cash used in financing activities
 
(9,136
)
 
(33,505
)
Net Decrease in Cash and Cash Equivalents
 
(84,867
)
 
(12,935
)
Cash and Cash Equivalents at Beginning of Period
 
553,416

 
160,594

Cash and Cash Equivalents at End of Period
 
$
468,549

 
$
147,659

 
 
 
 
 
Supplemental disclosure of cash flow information
 
 
 
 
Cash paid during the period for:
 
 
 
 
Interest
 
$
5,099

 
$
5,972

Noncash transactions:
 
 
 
 
Foreclosed loans transferred to other real estate owned
 
8,935

 
21,287

Transfer of loans from held for investment to held for sale
 
600

 

Unrealized securities gains/(losses), net of income taxes
 
730

 
(166
)
Conversion of subordinated debt to preferred stock
 

 
(5,000
)
Issuance of preferred stock in subordinated debt conversion
 

 
5,000

See accompanying notes to consolidated financial statements.

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FNB United Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

1. Basis of Presentation
Nature of Operations
FNB United Corp. ("FNB"), we or us (which also refers to FNB and our subsidiaries on a consolidated basis), was incorporated under the laws of the State of North Carolina in 1984. We are a bank holding company with two bank subsidiaries: CommunityOne Bank, N.A. (“CommunityOne”), a national banking association headquartered in Asheboro, North Carolina and, through Bank of Granite Corporation (“Granite Corp.”), Bank of Granite (“Granite”), a state chartered bank headquartered in Granite Falls, North Carolina.
Through our bank subsidiaries, we offer a complete line of consumer, mortgage and business banking services, including loan, deposit, cash management, investment management and trust services, to individual and business customers through operations located in Alamance, Alexander, Ashe, Burke, Caldwell, Catawba, Chatham, Gaston, Guilford, Iredell, Mecklenburg, Montgomery, Moore, Orange, Randolph, Richmond, Rowan, Scotland, Watauga and Wilkes counties in North Carolina. Management believes that the banks have a relatively stable deposit base and no material amount of deposits is obtained from a single depositor or group of depositors, including federal, state and local governments.
CommunityOne owns three subsidiaries: Dover Mortgage Company, (“Dover”); First National Investor Services, Inc.; and Premier Investment Services, Inc., (“Premier”). Dover previously engaged in the business of originating, underwriting and closing mortgage loans for sale in the secondary market. Dover ceased operations in the first quarter of 2011 and filed for Chapter 11 bankruptcy on February 15, 2012. First National Investor Services, Inc. holds deeds of trust for CommunityOne. Premier is inactive. Through Granite Corp., we also own Granite Mortgage, Inc., which ceased mortgage operations in 2009 and filed for Chapter 11 bankruptcy on February 15, 2012. FNB also owns FNB United Statutory Trust I, FNB United Statutory Trust II, and Catawba Valley Capital Trust II, which were formed to facilitate the issuance of trust preferred securities.
On October 21, 2011, as part of the recapitalization of FNB, FNB acquired Granite Corp., through the merger of a wholly owned subsidiary of FNB merging into Granite Corp (the "Merger"). The Merger was part of FNB's recapitalization strategy.
General
The accompanying consolidated financial statements, prepared without audit, include the accounts of FNB and its subsidiaries. All significant intercompany balances and transactions have been eliminated. Descriptions of the organization and business of FNB, accounting policies followed by FNB and other relevant information are contained in FNB's Annual Report on Form 10-K for the year ended December 31, 2011, as amended by its Amendment No. 1 (the "Form 10-K"), including the notes to the consolidated financial statements filed as part of that report. This quarterly report should be read in conjunction with the Form 10-K.
In the opinion of management, the accompanying condensed consolidated financial statements contain all the adjustments, all of which are normal recurring adjustments, necessary to present fairly the financial position of FNB as of March 31, 2012 and December 31, 2011, and the results of its operations and cash flows for the three months ended March 31, 2012 and 2011, respectively.
All financial information is reported on a continuing operations basis, unless otherwise noted. See Note 2 to the consolidated financial statements for a discussion regarding discontinued operations and certain assets and liabilities at March 31, 2012 and December 31, 2011.
Use of Estimates
We have made a number of estimates and assumptions relating to the reporting of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period to prepare these consolidated financial statements in conformity with GAAP. Actual results could differ from those estimates. Material estimates subject to change in the near term include, among other items, the allowances for loan losses (“ALL”), the carrying value of other real estate owned (“OREO”), the carrying value of intangible assets, the fair value of net assets acquired in the Bank of Granite Merger and the realization of deferred tax assets.
Reclassification
Certain reclassifications have been made to the prior period consolidated financial statements to place them on a comparable basis with the current period consolidated financial statements. These reclassifications have no effect on net income or shareholders' equity as previously reported.
During the first quarter of 2012, FNB implemented a purchased loan accounting system and finalized its methodology to allocate the fair value of acquired loans in pools to individual loans for purposes of several of the loan disclosure tables in Notes 5 and 6 to the consolidated financial statements. In order to present these tables for prior periods on a comparable basis to current period tables in

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these consolidated financial statements, we have reclassified certain amounts as of December 31, 2011 in the tables between loan portfolio segments and classes, between performing and impaired acquired loans, and between risk grade categories. These reclassifications have no effect on net income, the loan fair value mark, total loans or shareholders' equity as of or for the period ended December 31, 2011.
Subsequent Events
Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued. Recognized subsequent events are events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements. Non-recognized subsequent events are events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date. Management has reviewed events occurring through the date of this filing and has concluded that no subsequent events have occurred requiring accrual or disclosure in addition to that included herein. See Note 11 for additional information concerning subsequent events.
Recent Accounting Pronouncements
Disclosures about Fair Value - Accounting Standards Update ("ASU") 2011-04 was issued in May 2011 to amend the Fair Value Measurement topic of the Accounting Standards Codification ("ASC") by clarifying the application of existing fair value measurement and disclosure requirements and by changing particular principles or requirements for measuring fair value or for disclosing information about fair value measurements. The amendment was effective for FNB on January 1, 2012, and the related disclosures are presented in Note 10.
Comprehensive Income - The Comprehensive Income topic of the ASC was amended in June 2011. The amendment eliminates the option to present other comprehensive income as a part of the statement of changes in shareholders' equity and requires consecutive presentation of the statement of net income and other comprehensive income. The amendments were to become applicable to FNB on January 1, 2012 and were to be applied retrospectively. In December 2011, the topic was further amended to defer the effective date of presenting reclassification adjustments from other comprehensive income to net income on the face of the financial statements. Companies should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect prior to the amendments while FASB redeliberates future requirements. The remaining provisions of this update took effect for FNB on January 1, 2012.
Goodwill - In December 2010, the Intangibles topic of the ASC was amended to modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. Any resulting goodwill impairment should be recorded as a cumulative-effect adjustment to beginning retained earnings upon adoption. Impairments occurring subsequent to adoption should be included in earnings. The amendment was effective for FNB on January 1, 2011.
In September 2011, the Intangibles topic was again amended to permit an entity to consider qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. These amendments took effect for FNB on January 1, 2012, and did not have a material effect on the financial statements.
2. Discontinued Operations
All operations of Dover, a subsidiary of CommunityOne, were discontinued as of March 17, 2011. Dover, acquired by FNB in 2003, originated, underwrote and closed mortgage loans for sale into the secondary market. It maintained a retail origination network based in Charlotte, North Carolina, which originated loans for properties located in North Carolina. Dover also engaged in the wholesale mortgage origination business and conducted retail mortgage origination business outside of North Carolina. Operations outside of the State of North Carolina and the wholesale mortgage origination business were discontinued in February 2011, and all remaining operations were discontinued on March 17, 2011. Dover filed for Chapter 11 bankruptcy on February 15, 2012 in the United States Bankruptcy Court for the Western District of North Carolina. All of the assets and liabilities of Dover were written off at that time.
Through Granite Corp., we also own Granite Mortgage, Inc., which ceased mortgage operations in 2009 and filed for Chapter 11 bankruptcy on February 15, 2012 in the United States Bankruptcy Court for the Western District of North Carolina. All of the assets and liabilities of Granite Mortgage, Inc. were written off at that time.
The results of operations of a component of an entity that has been disposed of shall be reported in discontinued operations if both the operations and cash flows of the component have been, or will be, eliminated from ongoing operations of the entity as a result of the disposal transaction and the entity will not have any significant continuing involvement in the operations of the component after the disposal transaction. As a result, the Consolidated Balance Sheets, Statements of Operations and Statement of Cash Flows for all periods reflect retrospective application of both Dover and Granite Mortgage's classification as a discontinued operation.
Assets and liabilities of discontinued operations at the dates indicated were as follows:

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(dollars in thousands)
 
March 31,
2012
 
December 31,
2011
Assets
 
 
 
 
Loans held for sale
 
$

 
$
233

Premises and equipment, net
 

 
5

Other real estate owned
 

 

Other assets
 

 
7

Assets of discontinued operations
 
$

 
$
245

Liabilities
 
 
 
 
Other liabilities
 
$

 
$
1,092

Liabilities of discontinued operations
 
$

 
$
1,092

Net loss from discontinued operations, net of tax, at the dates indicated were as follows:
(dollars in thousands)
 
Three Months Ended March 31,
 
 
2012
 
2011
Interest Income
 
 
 
 
Interest and fees on loans
 
$

 
$
43

Total interest income
 

 
43

Interest Expense
 
 
 
 
Other borrowed funds
 

 

Total interest expense
 

 

Net Interest Income before Provision for Loan Losses
 

 
43

Provision for loan losses
 

 

Net Interest Income after Provision for Loan Losses
 

 
43

Noninterest Income
 
 
 
 
Mortgage loan loss
 

 
(52
)
Other service charges, commissions and fees, net
 

 
(122
)
Other income
 

 
10

Total noninterest loss
 

 
(164
)
Noninterest Expense
 
 
 
 
Personnel expense
 
1

 
953

Net occupancy expense
 
1

 
69

Furniture, equipment and data processing expense
 

 
77

Professional fees
 
25

 
98

Stationery, printing and supplies
 

 
4

Advertising and marketing
 

 
34

Other real estate owned expense
 

 
122

Provision for recourse loans
 

 
2,178

Other expense
 

 
37

Total noninterest expense
 
27

 
3,572

Loss before income taxes
 
(27
)
 
(3,693
)
Income tax (benefit)/expense
 

 

Net loss from discontinued operations, net of tax
 
$
(27
)
 
$
(3,693
)
All financial information in the consolidated financial statements and notes to the consolidated financial statements reflects continuing operations, unless otherwise noted.


8


3. Goodwill and Other Intangible Assets
We have accounted for the Merger as a business combination under the acquisition method of accounting. As a result, we have recognized in our financial statements the identifiable net assets acquired and an amount of goodwill (representing the difference between the purchase price and the identifiable net assets). During the measurement period following a business combination, the amount of identifiable net assets recognized is subject to further adjustment to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date. Generally accepted accounting principles (“GAAP”) require that the measurement period cannot exceed one year from the acquisition date.
During the period ending March 31, 2012, we recognized $0.3 million in additional goodwill from the Merger. This additional amount was due to new valuations received on OREO acquired in the Merger, which were written down to our best estimate of fair value.
Goodwill and other intangible assets deemed to have indefinite lives generated from purchase business combinations are not subject to amortization and are instead tested for impairment no less than annually. Impairment exists when the carrying value of goodwill exceeds its implied fair value. An impairment loss would be recognized in an amount equal to that excess and would be included in noninterest expense in the Consolidated Statements of Operations. None of the goodwill recognized in the Merger is expected to be deductible for income tax purposes.
Our intangible assets with definite lives are core deposit premiums ("CDP"). This intangible asset is amortized over its useful life to its estimated residual value and reviewed for impairment at least quarterly. The amortization expense represents the estimated decline in the value of the underlying deposits.
For intangible assets related to business combinations, the following table presents the changes in CDP and the related accumulated amortization for the periods indicated:
 
 
For Three Months Ended
(dollars in thousands)
 
March 31,
2012
 
December 31, 2011
 
March 31,
2011
Gross amount of core deposit premium (CDP):
 
 
 
 
 
 
Balance at the beginning of the period
 
$
13,102

 
$
8,202

 
$
8,202

Effect of Granite merger
 

 
4,900

 

Adjustment to Granite CDP
 

 

 

Balance at the end of the period
 
13,102

 
13,102

 
8,202

Accumulated amortization:
 
 
 
 
 
 
Balance at the beginning of the period
 
(4,925
)
 
(4,625
)
 
(4,028
)
Amortization for the period
 
(352
)
 
(300
)
 
(199
)
Balance at the end of the period
 
(5,277
)
 
(4,925
)
 
(4,227
)
Net CDP at the end of the period
 
$
7,825

 
$
8,177

 
$
3,975

The aggregate amortization expense related to the intangible assets is expected to be $1.4 million for 2012.
For intangible assets related to business combinations, the following is a summary of the changes in the balance of unamortized intangible assets (goodwill) during the periods indicated:
 
 
For Three Months Ended
(dollars in thousands)
 
March 31,
2012
 
December 31, 2011
 
March 31,
2011
Gross balance at the beginning of the period
 
$
3,905

 
$

 
$

Effect of Granite merger
 

 
3,905

 

Adjustment to Granite goodwill during the period
 
300

 

 

Impairment
 

 

 

Accumulated balance at the end of the period
 
$
4,205

 
$
3,905

 
$



9

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4. Investment Securities
The primary objective of FNB's management of the investment portfolio is to maintain a portfolio of high quality, highly liquid investments yielding competitive returns. FNB is required under federal regulations to maintain adequate liquidity to ensure safe and sound operations. FNB maintains investment balances based on a continuing assessment of cash flows, the level of loan production, current interest rate risk strategies and the assessment of the potential future direction of market interest rate changes. Investment securities differ in terms of default, interest rate, liquidity and expected rate of return risk.
The following table summarizes the amortized cost and estimated fair value of available-for-sale investment securities and presents the related gross unrealized gains and losses:
(dollars in thousands)
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
March 31, 2012
 
 
 
 
 
 
 
 
Obligations of:
 
 
 
 
 
 
 
 
U.S. Treasury and government agencies
 
$
6,876

 
$
114

 
$

 
$
6,990

U.S. government sponsored agencies
 
23,981

 
22

 
23

 
23,980

States and political subdivisions
 
6,027

 
61

 

 
6,088

Residential mortgage-backed securities-GSE
 
393,011

 
3,793

 
593

 
396,211

Residential mortgage-backed securities-Private
 
33,719

 
212

 
1,803

 
32,128

Commercial mortgage-backed securities-Private
 
5,395

 

 
37

 
5,358

Corporate notes
 
3,233

 

 
72

 
3,161

Total
 
$
472,242

 
$
4,202

 
$
2,528

 
$
473,916

 
 
 
 
 
 
 
 
 
December 31, 2011
 
 
 
 
 
 
 
 
Obligations of:
 
 
 
 
 
 
 
 
U.S. Treasury and government agencies
 
$
7,081

 
$
107

 
$

 
$
7,188

U.S. government sponsored agencies
 
32,479

 
36

 
151

 
32,364

States and political subdivisions
 
6,075

 
16

 
1

 
6,090

Residential mortgage-backed securities-GSE
 
348,884

 
2,611

 
1,222

 
350,273

Residential mortgage-backed securities-Private
 
33,111

 
73

 
967

 
32,217

Corporate notes
 
3,206

 

 
32

 
3,174

Total
 
$
430,836

 
$
2,843

 
$
2,373

 
$
431,306

CommunityOne and Granite, as members of the Federal Home Loan Bank of Atlanta (“FHLB”), are required to own capital stock in the FHLB of Atlanta based generally upon the balances of total assets and FHLB advances. FHLB capital stock is pledged to secure FHLB advances. This investment is carried at cost since no ready market exists for FHLB stock and there is no quoted market value. However, redemption of this stock has historically been at par value. The combined Banks owned a total of $10.7 million of FHLB stock at March 31, 2012 and at December 31, 2011. Due to the redemption provisions of FHLB stock, FNB estimated that fair value approximated cost and that this investment was not impaired at March 31, 2012. FHLB stock is included in other assets at its original cost basis.
CommunityOne, as a member bank of the Federal Reserve Bank of Richmond (“FRBR”), is required to own capital stock of the FRBR based upon a percentage of the bank's common stock and surplus. This investment is carried at cost since no ready market exists for FRBR stock and there is no quoted market value. At both March 31, 2012 and December 31, 2011, CommunityOne owned a total of $1.2 million, of FRBR stock. Due to the nature of this investment in an entity of the U.S. government, FNB estimated that fair value approximated the cost and that this investment was not impaired at March 31, 2012. FRBR stock is included in other assets at its original cost basis.
At March 31, 2012, $90.3 million of the investment securities portfolio was pledged to secure public deposits, $11.9 million was pledged to retail repurchase agreements, $4.1 million was pledged to the FRBR and $2.1 million was pledged to others, leaving $365.6 million available as lendable collateral.
The following tables show investments' estimated fair value and gross unrealized losses, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, at March 31, 2012 and December 31, 2011. All unrealized losses on investment securities are considered by management to be temporarily impaired given the credit ratings on

10

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these investment securities or the short duration of the unrealized loss or both.
 
Less than 12 Months
 
12 Months or More
 
Total
(dollars in thousands)
Estimated Fair Value
Gross Unrealized Losses
 
Estimated Fair Value
Gross Unrealized Losses
 
Estimated Fair Value
Gross Unrealized Losses
March 31, 2012
 
 
 
 
 
 
 
 
Obligations of:
 
 
 
 
 
 
 
 
U.S. government sponsored agencies
$
20,366

$
23

 
$

$

 
$
20,366

$
23

Residential mortgage-backed securities-GSE
60,851

421

 
27,201

172

 
88,052

593

Residential mortgage-backed securities-Private
24,118

1,803

 


 
24,118

1,803

Commercial mortgage-backed securities-Private
5,358

37

 


 
5,358

37

Corporate notes
3,161

72

 


 
3,161

72

Total
$
113,854

$
2,356

 
$
27,201

$
172

 
$
141,055

$
2,528

 
 
 
 
 
 
 
 
 
 
Less than 12 Months
 
12 Months or More
 
Total
(dollars in thousands)
Estimated Fair Value
Gross Unrealized Losses
 
Estimated Fair Value
Gross Unrealized Losses
 
Estimated Fair Value
Gross Unrealized Losses
December 31, 2011
 
 
 
 
 
 
 
 
Obligations of:
 
 
 
 
 
 
 
 
U.S. government sponsored agencies
$
21,248

$
151

 
$

$

 
$
21,248

$
151

States and political subdivisions
1,907

1

 


 
1,907

1

Residential mortgage-backed securities-GSE
89,730

1,042

 
16,552

180

 
106,282

1,222

Residential mortgage-backed securities-Private
21,519

967

 


 
21,519

967

Corporate notes
3,173

32

 


 
3,173

32

Total
$
137,577

$
2,193

 
$
16,552

$
180

 
$
154,129

$
2,373

At March 31, 2012, 28 available-for-sale securities were in an unrealized loss position less than 12 months compared to 32 at December 31, 2011. At March 31, 2012, there were 10 available-for-sale securities that were in an unrealized loss position for longer than 12 months, compared to eight at December 31, 2011.
If an entity intends to sell a debt security or cannot assert it is more likely than not that it will not have to sell the security before recovery, other than temporary impairment ("OTTI") must be taken. If the entity does not intend to sell the debt security before recovery, but the entity does not expect to recover the entire amortized cost basis, then OTTI must be taken, but the amount of impairment is to be bifurcated between impairment due to credit (which is recorded through earnings) and noncredit impairment (which becomes a component of other comprehensive income (“OCI”) for both available-for-sale and held-to-maturity securities). For held-to-maturity securities, the amount in OCI will be amortized prospectively over the security's remaining life. FNB did not have any OTTI during the three months ended March 31, 2012 and March 31, 2011.
As of March 31, 2012, FNB had four private residential mortgage-backed securities that were designated as below investment grade. These securities were acquired in the Merger and have a current fair market value of $8.1 million. It is our intention to continue to hold these securities.
FNB analyzed its securities portfolio at March 31, 2012, paying particular attention to its private label mortgage-backed securities. After considering ratings, fair value, cash flows and other factors, FNB does not believe securities to be other-than-temporary impaired.
The aggregate amortized cost and fair value of securities at March 31, 2012, by remaining contractual maturity, are shown in the following table. Actual expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations.


11

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Available-for-Sale
(dollars in thousands)
 
Amortized Cost
 
Estimated Fair Value
Due in one year or less
 
$
20,389

 
$
20,367

Due after one one year through five years
 
8,119

 
8,187

Due after five years through 10 years
 
4,733

 
4,675

Due after 10 years
 
6,876

 
6,990

Total
 
40,117

 
40,219

Mortgage-backed securities
 
432,125

 
433,697

Total
 
$
472,242

 
$
473,916

5. Loans
Loans held for investment are stated at the principal amounts outstanding adjusted for purchase premiums/discounts, deferred net loan fees and costs, and unearned income. Classes are generally disaggregations of a portfolio segment. FNB's portfolio segments are: Commercial and agricultural, Real estate - construction, Real estate - mortgage: 1-4 family residential, Real estate - commercial and other and Consumer loans. The classes within the Commercial and agricultural portfolio are: owner occupied and non-owner occupied. The classes within the Real estate - construction portfolio are: Retail properties, Multi-family, Industrial and Warehouse, and Other commercial real estate. The classes within the Real estate - residential portfolio are: first-lien and second-lien loans and home equity lines of credit. The Consumer loan portfolio is not further segregated into classes.
Loan fees and the incremental direct costs associated with making loans are deferred and subsequently recognized over the life of the loan as an adjustment of interest income. The premium or discount on purchased loans is amortized over the expected life of the loans and is included in interest and fees on loans.
The following summary sets forth the major portfolio segments of loans. During the first quarter 2012, we purchased $61.9 million of performing residential mortgage loans. The premium paid on these loans of $2.3 million will be amortized as an adjustment to yield over the estimated life of this pool. Acquired loans for purposes of the tables included in Note 5 and Note 6 relate only to loans acquired in the Merger.
 
 
 
 
 
 
 
 
Total Loans
(dollars in thousands)
 
Acquired Loans
 
March 31,
 
December 31,
 
 
Impaired
 
Performing
 
Total
 
2012
 
2011
Loans held for sale
 
$

 
$

 
$

 
$
3,938

 
$
4,529

Loans held for investment:
 
 
 
 
 
 
 
 
 
 
Commercial and agricultural
 
$
5,092

 
$
27,534

 
$
32,626

 
$
85,475

 
$
95,089

Real estate - construction
 
459

 
6,036

 
6,495

 
79,122

 
92,806

Real estate - mortgage:
 
 
 
 
 
 
 
 
 
 
1-4 family residential
 
8,478

 
74,616

 
83,094

 
529,300

 
453,725

Commercial
 
42,290

 
185,029

 
227,319

 
508,067

 
531,383

Consumer
 
81

 
1,536

 
1,617

 
43,795

 
44,532

Gross loans held for investment
 
56,400

 
294,751

 
351,151

 
1,245,759

 
1,217,535

Less: Allowance for loan losses
 

 

 

 
(39,795
)
 
(39,360
)
Loans held for investment, net of allowance
 
$
56,400

 
$
294,751

 
$
351,151

 
$
1,205,964

 
$
1,178,175

At March 31, 2012 and December 31, 2011, loans held for sale consisted of nonperforming loans transferred from loans held for investment under sales contracts, which are valued at the contractual sales price.
Loans included in the preceding loan composition table are net of participations sold. Loans as presented are reduced by net deferred loan fees of $2.8 million and $0.6 million at March 31, 2012 and December 31, 2011, respectively.
Mortgage loans serviced for others are not included in the consolidated balance sheet. The unpaid principal balance of mortgage loans serviced for others amounted to $0.8 million at March 31, 2012 and $0.7 million at December 31, 2011.
To borrow from the FHLB, members must pledge collateral to secure advances and letters of credit. Acceptable collateral includes, among other types of collateral, a variety of residential, multifamily, home equity lines and second mortgages, and commercial

12

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loans. Gross loans of $323.4 million and $339.4 million were pledged to collateralize FHLB advances and letters of credit at March 31, 2012 and December 31, 2011, respectively, of which there was $80.4 million and $80.5 million of credit availability for borrowing, respectively. At March 31, 2012, $48.2 million of loans and $4.1 million of securities were pledged to collateralize potential borrowings from the Federal Reserve Discount Window, of which $4.8 million was available as borrowing capacity.
Interest income on loans is generally calculated by using the interest method based on the daily outstanding balance. The recognition of interest income is discontinued when, in management's opinion, the collection of all or a portion of interest becomes doubtful. Loans are returned to accrual status when the factors indicating doubtful collectability cease to exist and the loan has performed in accordance with its terms for a demonstrated period of time. The past due status of loans is based on the contractual payment terms. Had nonaccruing loans been on accruing status, interest income would have been higher by $1.5 million and $4.1 million for the three months ended March 31, 2012 and March 31, 2011, respectively. At March 31, 2012 and December 31, 2011, FNB had certain impaired loans of $104 million and $103 million, respectively, which were on nonaccruing interest status.
Nonperforming assets include nonaccrual loans, accruing loans in excess of 90 days delinquent, OREO and other foreclosed assets. The following is a summary of nonperforming assets for the periods ended as presented.
(dollars in thousands)
 
March 31, 2012
 
December 31, 2011
Loans on nonaccrual status:
 
 
 
 
Held for sale
 
$
3,938

 
$
4,529

Held for investment
 
100,206

 
98,444

Loans more than 90 days delinquent, still on accrual
 
1,197

 
3,000

Real estate owned/repossessed assets
 
104,379

 
110,386

Total nonperforming assets
 
$
209,720

 
$
216,359

An impaired loan is one for which FNB will not be repaid all principal and interest due per the terms of the original contract or within reasonably modified contracted terms.  If the loan has been modified to provide relief to the borrower, the loan is deemed to be impaired if all principal and interest will not be repaid according to the original contract. All loans meeting the definition of Doubtful should be considered impaired. (Loan risk grade categories are defined in Note 6.)
When a loan in any class has been determined to be impaired, the amount of the impairment is measured using the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, the observable market price of the loan, or the fair value of the collateral if the loan is collateral dependent. When the present value of expected future cash flows is used, the effective interest rate is the original contractual interest rate of the loan adjusted for any premium or discount. When the contractual interest rate is variable, the effective interest rate of the loan changes over time. A specific reserve is established as a component of the ALL when a loan has been determined to be impaired. Subsequent to the initial measurement of impairment, if there is a significant change to the impaired loan's expected future cash flows, or if actual cash flows are significantly different from the cash flows previously estimated, FNB recalculates the impairment and appropriately adjusts the specific reserve. Similarly, if FNB measures impairment based on the observable market price of an impaired loan or the fair value of the collateral of an impaired collateral-dependent loan, FNB will adjust the specific reserve if there is a significant change in either of those bases.
When a loan within any class is impaired and principal and interest is in doubt when contractually due, interest income is not recognized. Cash receipts received on nonaccruing impaired loans within any class are generally applied entirely against principal until the loan has been collected in full, after which time any additional cash receipts are recognized as interest income. Cash receipts received on accruing impaired loans within any class are applied in the same manner as accruing loans that are not considered impaired.
The following table summarizes information relative to impaired loans for the quarters ended on the dates indicated.

13

Table of Contents


 
 
March 31, 2012
 
December 31, 2011
(dollars in thousands)
 
Balance
Associated Reserves
 
Balance
Associated Reserves
Impaired loans, held for sale
 
$
3,938

$

 
$
4,529

$

Impaired loans, not individually reviewed for impairment
 
5,479


 
5,127


Impaired loans, individually reviewed, with no impairment
 
49,937


 
53,885


Impaired loans, individually reviewed, with impairment
 
47,471

11,671

 
42,356

11,090

Total impaired loans *
 
$
106,825

$
11,671

 
$
105,897

$
11,090

 
 
 
 
 
 
 
Average impaired loans calculated using a simple average
 
$
106,370

 
 
$
112,600

 
* Included at March 31, 2012 and December 31, 2011 were $3.8 million and $2.9 million, respectively, in restructured and performing loans.
Impaired loans also include loans for which FNB may elect to grant a concession, providing terms more favorable than those prevalent in the market (e.g., rate, amortization term), and formally restructure due to the weakening credit status of a borrower. Restructuring is designed to facilitate a repayment plan that minimizes the potential losses that the Bank otherwise may have to incur. If these impaired loans are on nonaccruing status as of the date of restructuring, the loans are included in nonperforming loans. Nonperforming restructured loans will remain as nonperforming until the borrower can demonstrate adherence to the restructured terms for a period of no less than six months and when it is otherwise determined that continued adherence is reasonably assured. Some restructured loans continue as accruing loans after restructuring if the borrower is not past due at the time of restructuring, adequate collateral valuations support the restructured loans, and the cash flows of the underlying business appear adequate to support the restructured debt service. Not included in nonperforming loans are loans that have been restructured that were performing as of the restructure date. At March 31, 2012, there was $27.3 million in restructured loans, of which $3.8 million in loans were accruing and in a performing status. At December 31, 2011, there was $28.3 million in restructured loans, of which loans amounting to $2.9 million were accruing and in a performing status.
All loan classes are considered past due when the contractual amounts due with respect to principal and interest are not received within 30 days of the contractual due date. When FNB cannot reasonably expect full and timely repayment of its loan, the loan is placed on nonaccrual.
All loan classes on which principal or interest is in default for 90 days or more are put on nonaccrual status, unless there is sufficient documentation to conclude that the loan is well secured and in the process of collection. A debt is "well-secured" if collateralized by liens on or pledges of real or personal property, including securities that have a realizable value sufficient to discharge the debt in full; or by the guarantee of a financially responsible party. A debt is "in process of collection" if collection is proceeding in due course either through legal action, including judgment enforcement procedures, or, in appropriate circumstances, through collection efforts not involving legal action that are reasonably expected to result in repayment of the debt or its restoration to a current status.
Loans that are less delinquent may also be placed on nonaccrual if approved due to deterioration in the financial condition of the borrower that increases the possibility of less than full repayment.
For all loan classes a nonaccrual loan may be returned to accrual status when FNB can reasonably expect continued timely payments until payment in full. All prior arrearage does not have to be eliminated, nor do all previously charged-off amounts need to have been recovered, but the loan can still be returned to accrual status if the following conditions are met: (1) all principal and interest amounts contractually due (including arrearage) are reasonably assured of repayment within a reasonable period; and (2) there is a sustained period of repayment performance (generally a minimum of six months) by the borrower, in accordance with the contractual terms involving payments of cash or cash equivalents.
At the time a loan is placed on nonaccrual, all accrued, unpaid interest is charged off, unless it is documented that repayment of all principal and presently accrued but unpaid interest is probable. Charge-offs of accrued and unpaid interest are charged against the current year's interest income and not against the current ALL.
For all classes within all loan portfolios, cash receipts received on nonaccrual loans are applied entirely against principal until the loan or lease has been collected in full, after which time any additional cash receipts are recognized as interest income.
For all loan classes, as soon as any loan becomes uncollectible, the loan will be charged down or charged off as follows:
If unsecured, the loan must be charged off in full.
If secured, the outstanding principal balance of the loan should be charged down to the net liquidation value of the collateral.
Loans should be considered uncollectible when:

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No regularly scheduled payment has been made within four months and the determination is made that any further payment is unlikely, or
The loan is unsecured, the borrower files for bankruptcy protection and there is no other (guarantor, etc.) support from an entity outside of the bankruptcy proceedings.
Based on a variety of credit, collateral and documentation issues, loans with lesser degrees of delinquency or obvious loss may also be deemed uncollectible.
Potential problem loans that are not included in nonperforming assets are classified separately within FNB's portfolio as Special Mention and carry a risk grade rating of “6.” These loans are defined as those with potential weaknesses that may affect repayment capacity but do not pose sufficient risk as to require an adverse classification. As of March 31, 2012, the balance of such loans was $106.7 million compared to a balance of $130.7 million as of December 31, 2011.
During 2011, FNB sold loans to third party buyers in order to reduce FNB's classified loan exposure. These loans are transferred to loans held for sale at the time FNB receives a signed contract for the purchase of the loans. Prior to transferring these loans to loans held for sale, the loans were marked down to the contract price less associated selling costs. All transactions are conducted at arm's length and loans are sold without recourse.
The following table presents sold loans by portfolio segment for the periods indicated below:
 
For Three Months Ended March 31, 2012
 
For Three Months Ended March 31, 2011
(dollars in thousands)
Number
 
Recorded
 
Contract
 
Number
 
Recorded
 
Contract
 
of Loans
 
Investment
 
Pricing
 
of Loans
 
Investment
 
Pricing
Loan Sales
 
 
 
 
 
 
 
 
 
 
 
Real estate - construction
1

 
$
3,800

 
$
4,050

 
4

 
$
13,342

 
$
5,813

Real estate - mortgage:
 
 
 
 
 
 
 
 
 
 
 
1-4 family residential
1

 
150

 
150

 

 

 

Commercial

 

 

 
1

 
321

 
350

Total
2

 
$
3,950

 
$
4,200

 
5

 
$
13,663

 
$
6,163

During the three-month period ending March 31, 2012, there were two loans placed under contract for sale and then sold by March 31, 2012.
Acquired Loans
Loans acquired in the Merger ("Acquired Loans") include purchased credit-impaired loans ("PCI loans") and performing revolving consumer and commercial loans.
PCI loans are segregated into pools and recorded at estimated fair value on the date of acquisition without the carryover of the related ALL. PCI loans are accounted for under ASC 310-30 when the loans have evidence of credit deterioration since origination and it is probable at the date of acquisition we will not collect all contractually required principal and interest payments. Evidence of credit quality deterioration as of the date of acquisition may include statistics such as past due status, nonaccrual status and risk grade. PCI loans generally meet FNB's definition for nonaccrual status, however, even if the borrower is not currently making payments, FNB will classify loans as accruing if FNB can reasonably estimate the amount and timing of future cash flows. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the nonaccretable difference.
Periodically, we estimate the expected cash flows for each pool of the PCI loans and evaluate whether the expected cash flows for each pool have changed from prior estimates. Decreases to the expected cash flows will generally result in a provision for loan losses. Subsequent increases in cash flows result in a reversal of the provision for loan losses to the extent of prior charges, or reclassification from nonaccretable difference to accretable yield with a positive impact on future interest income. Excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized into interest income over the remaining life of the loan when there is a reasonable expectation about the amount and timing of such cash flows.
We have elected to treat the Granite portfolio under ASC 310-30, with the exception of performing revolving consumer and commercial loans, which are being accounted for under ASC 310-20.
At March 31, 2012, no ALL was required for the acquired Granite loans, and in addition, the acquired Granite loans are presented on an accruing basis.

15

Table of Contents


 
 
At March 31, 2012
(dollars in thousands)
 
Acquired
Credit-Impaired
Loans
 
Acquired
Performing
Loans
 
Total
Acquired
Loans
 
Unpaid
Principal
Balance
Acquired Loans:
 
 
 
 
 
 
 
 
Commercial and agricultural
 
$
5,092

 
$
27,534

 
$
32,626

 
$
33,003

Real estate - Construction
 
459

 
6,036

 
6,495

 
7,202

Real estate -mortgage:
 
 
 
 
 
 
 
 
   1-4 family residential
 
8,478

 
74,616

 
83,094

 
87,261

   Commercial
 
42,290

 
185,029

 
227,319

 
242,730

Consumer
 
81

 
1,536

 
1,617

 
1,617

       Total
 
$
56,400

 
$
294,751

 
$
351,151

 
$
371,813

 
 
At December 31, 2011
(dollars in thousands)
 
Acquired
Credit-Impaired
Loans
 
Acquired
Performing
Loans
 
Total
Acquired
Loans
 
Unpaid
Principal
Balance
Acquired Loans:
 
 
 
 
 
 
 
 
Commercial and agricultural
 
$
5,472

 
$
31,671

 
$
37,143

 
$
39,531

Real estate - Construction
 
1,165

 
6,483

 
7,648

 
8,413

Real estate -mortgage:
 
 
 
 
 
 
 
 
   1-4 family residential
 
10,234

 
77,542

 
87,776

 
93,472

   Commercial
 
46,125

 
193,220

 
239,345

 
261,076

Consumer
 
99

 
1,866

 
1,965

 
1,799

       Total
 
$
63,095

 
$
310,782

 
$
373,877

 
$
404,291

The tables below include only those Acquired Loans accounted for under the expected cash flow method (PCI Loans) for the periods indicated. These tables do not include performing revolving consumer and commercial loans, which are being accounted for under the contractual cash flow method.
 
 
At March 31, 2012
 
 
Purchased Credit-Impaired Loans
 
Purchased Performing Loans
(dollars in thousands)
 
Carrying
Amount
 
Accretable
Yield
 
Carrying
Amount
 
Accretable
Yield
Balance, January 1, 2012
 
$
63,095

 
$
(13,718
)
 
$
269,295

 
$
(34,086
)
  Accretion
 
2,008

 
2,008

 
3,766

 
3,766

  Payments received
 
(5,544
)
 

 
(19,073
)
 

  Foreclosed and transferred to OREO
 
(3,159
)
 

 

 

Balance, March 31, 2012
 
$
56,400

 
$
(11,710
)
 
$
253,988

 
$
(30,320
)
 
 
At December 31, 2011
 
 
Purchased Credit-Impaired Loans
 
Purchased Performing Loans
(dollars in thousands)
 
Carrying
Amount
 
Accretable
Yield
 
Carrying
Amount
 
Accretable
Yield
Balance, September 30, 2011
 
$

 
$

 
$

 
$

  Addition from Bank of Granite Corp acquisition
 
65,690

 
(15,451
)
 
285,431

 
(37,130
)
  Accretion
 
1,733

 
1,733

 
3,044

 
3,044

  Payments received
 
(4,328
)
 

 
(19,180
)
 

Balance, December 31, 2011
 
$
63,095

 
$
(13,718
)
 
$
269,295

 
$
(34,086
)
6. Allowance for Loan Losses

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ALL, which is utilized to absorb actual losses in the loan portfolio, is maintained at a level consistent with management's best estimate of probable loan losses to be incurred as of the balance sheet date. FNB's ALL is also assessed quarterly by management. This assessment includes a methodology that separates the total loan portfolio into homogeneous loan classifications for purposes of evaluating risk. The required allowance is calculated by applying a risk adjusted reserve requirement to the dollar volume of loans within a homogenous group. FNB has grouped its loans into pools according to the loan segmentation regime employed on schedule RC-C of the FFIEC's Consolidated Report of Condition and Income. Major loan portfolio subgroups include: risk graded commercial loans, mortgage loans, home equity loans, retail loans and retail credit lines. Management also analyzes the loan portfolio on an ongoing basis to evaluate current risk levels, and risk grades are adjusted accordingly. While management uses the best information available to make evaluations, future adjustments may be necessary, if economic or other conditions differ substantially from the assumptions used.
FNB lends primarily in North Carolina. As of March 31, 2012, a substantial majority of the principal amount of the loans held for investment in its portfolio was to businesses and individuals in North Carolina. This geographic concentration subjects the loan portfolio to the general economic conditions within this area. The risks created by this concentration have been considered by management in the determination of the adequacy of the ALL. Management believes the ALL is adequate to cover estimated losses on loans at each balance sheet date.
During the three month period ended March 31, 2012, FNB charged off $4.0 million in loans and realized $1.4 million in recoveries, for $2.6 million of net charge-offs. The majority of the loans that were charged off were loans that had been in impairment status and had specific reserves assigned to them in prior periods.
An analysis of the changes in the ALL is as follows:
 
 
For Three Months Ended
(dollars in thousands)
 
March 31,
 
 
2012
 
2011
Balance, beginning of period
 
$
39,360

 
$
93,687

Provision for losses charged to continuing operations
 
3,067

 
20,183

Net charge-offs:
 
 
 
 
Charge-offs
 
(4,015
)
 
(45,909
)
Recoveries
 
1,383

 
768

Net charge-offs
 
(2,632
)
 
(45,141
)
Provision for losses charged to discontinued operations
 

 

Balance, end of period
 
$
39,795

 
$
68,729

Annualized net charge-offs during the period to average loans
 
0.87
%
 
14.48
%
Annualized net charge-offs during the period to ALL
 
26.60
%
 
266.37
%
Allowance for loan losses to loans held for investment (1)
 
3.19
%
 
5.78
%
(1) Excludes discontinued operations.
 
 
 
 
The ALL, as a percentage of loans held for investment, amounted to 3.19% at March 31, 2012, compared to 5.78% at March 31, 2011. At December 31, 2011, the ALL, as a percentage of loans held for investment, was 3.23%.
The credit quality indicator presented for all classes within the loan portfolio is a widely used and standard system representing the degree of risk of nonpayment. The risk-grade categories presented in the following table are:
Pass - Loans categorized as Pass are higher quality loans that have adequate sources of repayment and little risk of collection.
Special Mention - A Special Mention loan has potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution's credit position at some future date. Special Mention loans are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.
Substandard - A Substandard loan is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that FNB will sustain some loss if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of Substandard loans, does not have to exist in individual assets classified Substandard.
Doubtful - A loan classified as Doubtful has all the weaknesses inherent in one classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly

17

Table of Contents


questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonable specific pending factors, which may work to the advantage of strengthening of the asset, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors include proposed merger, acquisition, or liquidation procedures, capital injection, perfecting liens on additional collateral and refinancing plans.
Loans categorized as Special Mention or worse are considered Criticized. Loans categorized as Substandard or Doubtful are considered Classified. Purchased loans acquired in the Merger are recorded at estimated fair value on the date of acquisition without the carryover of related ALL. The table below includes $84.0 million and $63.6 million in purchased loans categorized as Substandard or Doubtful at March 31, 2012 and December 31, 2011, respectively.
The following table presents loan and lease balances by credit quality indicator as of March 31, 2012:
(dollars in thousands)
 
Nonclassified/Pass
 
Special Mention
 
Substandard*
 
Doubtful*
 
 
 
 
(Ratings 1-5)
 
(Rating 6)
 
(Rating 7)
 
(Rating 8)
 
Total
Commercial and agricultural
 
$
68,516

 
$
5,447

 
$
10,858

 
$
654

 
$
85,475

Real estate - construction
 
49,197

 
4,870

 
25,055

 

 
79,122

Real estate - mortgage:
 
 
 
 
 
 
 
 
 
 
1-4 family residential
 
462,184

 
20,167

 
46,736

 
213

 
529,300

Commercial
 
308,500

 
75,946

 
123,489

 
132

 
508,067

Consumer
 
42,814

 
257

 
343

 
381

 
43,795

Total
 
$
931,211

 
$
106,687

 
$
206,481

 
$
1,380

 
$
1,245,759

*Includes $84.0 million of loans purchased in the Merger categorized as Substandard and Doubtful.
The following table presents loan and lease balances by credit quality indicator as of December 31, 2011:
(dollars in thousands)
 
Nonclassified/Pass
 
Special Mention
 
Substandard*
 
Doubtful*
 
 
 
 
(Ratings 1-5)
 
(Rating 6)
 
(Rating 7)
 
(Rating 8)
 
Total
Commercial and agricultural
 
$
77,305

 
$
7,373

 
$
9,921

 
$
490

 
$
95,089

Real estate - construction
 
53,105

 
5,797

 
33,886

 
18

 
92,806

Real estate - mortgage:
 
 
 
 
 
 
 
 
 
 
1-4 family residential
 
385,022

 
25,864

 
42,630

 
209

 
453,725

Commercial
 
351,731

 
91,364

 
87,971

 
317

 
531,383

Consumer
 
43,487

 
279

 
387

 
379

 
44,532

Total
 
$
910,650

 
$
130,677