10-Q 1 fnbn-20130331x10q.htm 10-Q FNBN-2013.03.31-10Q




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, 2013
 
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 x
Non-accelerated filer o
Smaller reporting Company  o
 
 
(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 1, 2013 (the most recent practicable date), the Registrant had outstanding approximately 21,735,938 shares of Common Stock.




FNB United Corp. and Subsidiaries
Report on Form 10-Q
March 31, 2013

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
 



i


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, 2013
 
December 31, 2012*
Assets
 
 
 
 
Cash and due from banks
 
$
26,991

 
$
38,552

Interest-bearing bank balances
 
235,302

 
201,058

Investment securities:
 
 
 
 
Available-for-sale, at estimated fair value (amortized cost of $493,631 in 2013
and $558,818 in 2012)
 
492,355

 
564,850

Held-to-maturity (estimated fair value of $73,245 in 2013)
 
73,515

 

Loans held for sale
 
5,012

 
6,974

Loans held for investment
 
1,113,765

 
1,177,035

Less: Allowance for loan losses
 
(29,641
)
 
(29,314
)
Net loans held for investment
 
1,084,124

 
1,147,721

Premises and equipment, net
 
52,449

 
52,725

Other real estate owned and property acquired in settlement of loans
 
46,537

 
63,131

Core deposit premiums and other intangibles
 
7,445

 
7,495

Goodwill
 
4,205

 
4,205

Bank-owned life insurance
 
39,068

 
38,792

Other assets
 
26,308

 
26,062

Total Assets
 
$
2,093,311

 
$
2,151,565

Liabilities
 
 
 
 
Deposits:
 
 
 
 
Noninterest-bearing demand deposits
 
$
265,455

 
$
251,235

Interest-bearing deposits:
 
 
 
 
Demand, savings and money market deposits
 
899,115

 
892,576

Time deposits of $100,000 or more
 
258,165

 
290,166

Other time deposits
 
433,426

 
473,011

Total deposits
 
1,856,161

 
1,906,988

Retail repurchase agreements
 
7,301

 
8,675

Federal Home Loan Bank advances
 
58,317

 
58,328

Junior subordinated debentures
 
56,702

 
56,702

Other liabilities
 
25,456

 
22,427

Total Liabilities
 
2,003,937

 
2,053,120

Shareholders' Equity
 
 
 
 
Preferred stock Series A, $10.00 par value; authorized 200,000 shares, no shares issued and outstanding in 2013 and 2012
 

 

Preferred stock, $1.00 par value, authorized 15,000,000 shares, no shares issued and outstanding in 2013 and 2012
 

 

Common stock, no par value; authorized 2,500,000,000 shares, issued 21,698,115 shares
in 2013 and 2012
 
461,057

 
460,955

Accumulated deficit
 
(366,783
)
 
(362,187
)
Accumulated other comprehensive loss
 
(4,900
)
 
(323
)
Total Shareholders' Equity
 
89,374

 
98,445

Total Liabilities and Shareholders' Equity
 
$
2,093,311

 
$
2,151,565

See accompanying notes to consolidated financial statements.
* Derived from audited consolidated financial statements

1


FNB United Corp. and Subsidiaries
Consolidated Statements of Operations (unaudited)
(in thousands, except share and per share data)
Three Months Ended March 31,
 
2013
 
2012
Interest Income
 
 
 
Interest and fees on loans
$
14,785

 
$
16,959

Interest and dividends on investment securities:
 
 
 
Taxable income
3,059

 
2,669

Non-taxable income
14

 
15

Other interest income
212

 
350

Total interest income
18,070

 
19,993

Interest Expense
 
 
 
Deposits
2,247

 
4,223

Retail repurchase agreements
4

 
8

Federal Home Loan Bank advances
382

 
279

Other borrowed funds
264

 
303

Total interest expense
2,897

 
4,813

Net Interest Income before Provision for Loan Losses
15,173

 
15,180

Provision for loan losses
110

 
3,067

Net Interest Income after Provision for Loan Losses
15,063

 
12,113

Noninterest Income
 
 
 
Service charges on deposit accounts
1,376

 
1,816

Mortgage loan income
744

 
36

Cardholder and merchant services income
1,069

 
1,141

Trust and investment services
241

 
202

Bank owned life insurance
263

 
306

Other service charges, commissions and fees
258

 
254

Securities gains (losses), net
2,377

 
(46
)
Other income
205

 
117

Total noninterest income
6,533

 
3,826

Noninterest Expense
 
 
 
Personnel expense
10,679

 
10,026

Net occupancy expense
1,831

 
1,561

Furniture, equipment and data processing expense
2,368

 
2,072

Professional fees
1,493

 
1,542

Stationery, printing and supplies
186

 
141

Advertising and marketing
665

 
129

Other real estate owned expense
883

 
5,519

Credit/debit card expense
425

 
410

FDIC insurance
670

 
598

Loan collection expense
1,572

 
746

Merger-related expense
1,509

 
2,258

Core deposit intangible amortization
352

 
352

Other expense
1,706

 
1,494

Total noninterest expense
24,339

 
26,848

Loss from continuing operations, before income taxes
(2,743
)
 
(10,909
)
Income tax expense (benefit) - continuing operations
1,853

 
(77
)
Loss from continuing operations, net of tax
(4,596
)
 
(10,832
)
Loss from discontinued operations, net of tax

 
(27
)
Net loss
(4,596
)
 
(10,859
)
 
 
 
 
Weighted average number of common shares outstanding - basic and diluted
21,698,115

 
21,102,465

Net loss per common share from continuing operations - basic and diluted
$
(0.21
)
 
$
(0.51
)
Net loss per common share from discontinued operations - basic and diluted

 

Net loss per common share - basic and diluted
(0.21
)
 
(0.51
)

See accompanying notes to consolidated financial statements.

2


FNB United Corp. and Subsidiaries
Consolidated Statements of Comprehensive Loss (unaudited)
(dollars in thousands)
Three Months Ended March 31,
 
2013
 
2012
Net loss
$
(4,596
)
 
$
(10,859
)
Other comprehensive income:

 

Unrealized holdings gains (losses) arising during the period on available-for-sale securities
(4,934
)
 
1,158

 Tax effect
1,949

 
(456
)
Unrealized holdings gains (losses) arising during the period on available-for-sale securities, net of tax
(2,985
)
 
702

Reclassification adjustment for (gain) losses on available-for-sale securities included in net income
(2,377
)
 
46

     Tax effect
939

 
(18
)
Reclassification adjustment for (gain) losses on available-for-sale securities included in net income, net of tax
(1,438
)
 
28

Change in defined benefit plans liability
(254
)
 

Tax effect
100

 

Change in defined benefit plans liability, net of tax
(154
)
 

Other comprehensive income (loss), net of tax:
(4,577
)
 
730

Comprehensive loss
$
(9,173
)
 
$
(10,129
)



See accompanying notes to consolidated financial statements.


3


FNB United Corp. and Subsidiaries
Consolidated Statements of Shareholders’ Equity (unaudited)
For Three Months Ended March 31, 2013 and 2012
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated
 
 
(dollars in thousands, except share and per share data)
 
 
 
 
 
 
 
 
 
 
 
Other
 
 
 
Preferred Stock
 
Common Stock
 
Accumulated
 
Comprehensive
 
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
Deficit
 
Loss
 
Total
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
)
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
)
 

 

 

 

Stock options:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Compensation expense recognized
 

 

 

 
1

 

 

 
1

Balance, March 31, 2012
 

 
$

 
21,102,082

 
$
454,254

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

Balance, December 31, 2012
 

 
$

 
21,698,115

 
$
460,955

 
$
(362,187
)
 
$
(323
)
 
$
98,445

Comprehensive loss:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss
 

 

 

 

 
(4,596
)
 

 
(4,596
)
Other comprehensive income, net of tax
 

 

 

 

 

 
(4,577
)
 
(4,577
)
Total comprehensive loss
 
 
 
 
 
 
 
 
 
 
 
 
 
(9,173
)
Stock options:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Compensation expense recognized
 

 

 

 
102

 

 

 
102

Balance, March 31, 2013
 

 
$

 
21,698,115

 
$
461,057

 
$
(366,783
)
 
$
(4,900
)
 
$
89,374


See accompanying notes to consolidated financial statements.    

4


FNB United Corp. and Subsidiaries
Consolidated Statements of Cash Flows (unaudited)
 (dollars in thousands)
 
Three Months Ended March 31,
 
 
2013
 
2012
Operating Activities
 
 
 
 
Net loss
 
$
(4,596
)
 
$
(10,859
)
Net loss from discontinued operations
 

 
(27
)
Net loss from continuing operations
 
(4,596
)
 
(10,832
)
Adjustments to reconcile net loss to cash used in operating activities:
 
 
 
 
Depreciation and amortization of premises and equipment
 
728

 
981

Provision for loan losses
 
110

 
3,067

Deferred income taxes (benefit)
 
1,853

 
(77
)
Deferred loan fees and costs, net
 
367

 
(2,270
)
Premium amortization and discount accretion of investment securities, net
 
1,386

 
666

Net (gain) loss on sale of investment securities
 
(2,377
)
 
46

Amortization of core deposit premiums
 
352

 
352

Net accretion of purchase accounting adjustments
 
(4,419
)
 
(2,592
)
Adjustment to goodwill
 

 
(300
)
Stock compensation expense
 
102

 
1

Increase in cash surrender value of bank-owned life insurance, net
 
(276
)
 
(327
)
Loans held for sale:
 
 
 
 
Origination of loans held for sale
 
(30,954
)
 

Net proceeds from sale of loans held for sale
 
33,507

 

Net loss (gain) on sale of loans held for sale
 
(591
)
 

Mortgage servicing rights capitalized
 
(348
)
 

Mortgage servicing rights amortization and impairment
 
46

 

Net loss on sales and write-downs of other real estate owned
 
219

 
3,877

Changes in assets and liabilities:
 
 
 
 
Decrease (increase) in accrued interest receivable and other assets
 
994

 
(532
)
Increase in accrued interest payable and other liabilities
 
2,775

 
511

Net cash used in operating activities of continuing operations
 
(1,122
)
 
(7,429
)
Net effect of discontinued operations
 

 
(873
)
Net cash used in operating activities
 
(1,122
)
 
(8,302
)
Investing Activities
 
 
 
 
Available-for-sale securities:
 
 
 
 
Proceeds from sales
 
148,306

 
10,760

Proceeds from maturities, calls and principal repayments
 
20,971

 
21,021

Purchases
 
(103,093
)
 
(73,010
)
Held-to-maturity securities:
 
 
 
 
Purchases
 
(73,524
)
 

Net (increase) decrease in loans held for investment
 
65,979

 
(35,603
)
Proceeds from sales of other real estate owned
 
17,614

 
10,874

Purchases of premises and equipment
 
(505
)
 
(558
)
Proceeds from sales of premises and equipment
 
37

 

Expenses paid in 2012 related to 2011 capital raise
 

 
(913
)
Net cash (used in) provided by investing activities
 
75,785

 
(67,429
)
Financing Activities
 
 
 
 
Net decrease in deposits
 
(50,595
)
 
(8,626
)
Decrease in retail repurchase agreements
 
(1,374
)
 
(500
)
Decrease in Federal Home Loan Bank advances
 
(11
)
 
(10
)
Net cash used in financing activities of continuing operations
 
(51,980
)
 
(9,136
)
Net effect of discontinued operations
 

 

Net cash used in financing activities
 
(51,980
)
 
(9,136
)
Net (Decrease) Increase in Cash and Cash Equivalents
 
22,683

 
(84,867
)
Cash and Cash Equivalents at Beginning of Period
 
239,610

 
553,416

Cash and Cash Equivalents at End of Period
 
$
262,293

 
$
468,549

 
 
 
 
 
Supplemental disclosure of cash flow information
 

 
 
Cash paid during the period for:
 
 
 
 
Interest
 
$
2,754

 
$
5,099

Noncash transactions:
 
 
 
 
Foreclosed loans transferred to other real estate owned
 
3,969

 
8,935

Loans to facilitate the sale of other real estate owned
 
2,625

 

Transfer of loans from held for investment to held for sale
 

 
600

Unrealized securities gains/(losses), net of income taxes
 
(4,423
)
 
730

Employee benefit plan costs, net of income taxes
 
(154
)
 

See accompanying notes to consolidated financial statements.

5



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

1. Basis of Presentation
Nature of Operations
FNB United Corp., we or us (which also refers to FNB and our subsidiaries on a consolidated basis) ("FNB"), is a bank holding company incorporated in 1984 under the laws of the State of North Carolina. We own 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. On March 1, 2013, we filed an application to merge Granite into CommunityOne. Subject to regulatory approval, we expect to complete the Granite Merger in the second quarter of 2013.
Through our bank subsidiaries, we offer a complete line of consumer, wealth management, mortgage and business banking services, including loan, deposit, cash management, investment management and trust services, to individual and business customers through operations located throughout central, southern and western North Carolina, including the counties of Alamance, Alexander, Ashe, Burke, Caldwell, Catawba, Chatham, Gaston, Guilford, Iredell, Mecklenburg, Montgomery, Moore, Orange, Randolph, Richmond, Rowan, Scotland, Watauga and Wilkes.
CommunityOne owns two subsidiaries: Dover Mortgage Company (“Dover”) and First National Investor Services, Inc. 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. 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, 2012, (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, 2013 and December 31, 2012, and the results of its operations and cash flows for the three months ended March 31, 2013 and 2012, 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, 2013 and December 31, 2012.
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 accounting principles generally accepted in the United States ("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 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.


6


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.
Recent Accounting Pronouncements
Comprehensive Income - In February 2013, the FASB issued ASU No. 2013-02 Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (“ASU No. 2013-02”). This pronouncement requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income for each applicable component of net income, as well as a rollforward of the components of accumulated other comprehensive income on a prospective basis. This pronouncement is effective beginning January 1, 2013. The provisions of ASU No. 2013-02 relate only to financial statement presentation of other comprehensive income and, accordingly, its adoption did not have a material effect on FNB's financial statements. See Note 10 for further disclosure.
FASB - From time to time, the Financial Accountings Standards Board (“FASB”) issues exposure drafts for proposed statements of financial accounting standards. Such exposure drafts are subject to comment from the public, to revisions by the FASB and to final issuance by the FASB as statements of financial accounting standards.
Management considers the effect of the proposed statements on the consolidated financial statements of FNB and monitors the status of changes to and proposed effective dates of exposure drafts. Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on FNB’s financial position, results of operations or cash flows.
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.
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 Dover's classification as a discontinued operation.
There were no assets and liabilities of discontinued operations as of March 31, 2013 and December 31, 2012.
Net loss from discontinued operations, net of tax, at the dates indicated were as follows:

7


(dollars in thousands)
 
Three Months Ended March 31,
 
 
2013
 
2012
Interest Income
 
 
 
 
Total interest income
 
$

 
$

Interest Expense
 
 
 
 
Total interest expense
 

 

Net Interest Income before Provision for Loan Losses
 

 

Provision for loan losses
 

 

Net Interest Income after Provision for Loan Losses
 

 

Noninterest Income
 
 
 
 
Total noninterest income
 

 

Noninterest Expense
 
 
 
 
Personnel expense
 

 
1

Net occupancy expense
 

 
1

Professional fees
 

 
25

Total noninterest expense
 

 
27

Loss before income taxes
 

 
(27
)
Income tax (benefit)/expense
 

 

Net loss from discontinued operations, net of tax
 
$

 
$
(27
)
All financial information in the consolidated financial statements and notes to the consolidated financial statements reflects continuing operations, unless otherwise noted.

3. Goodwill and Other Intangible Assets
We 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. GAAP requires that the measurement period cannot exceed one year from the acquisition date.
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.
During the first quarter of 2012, we recognized $0.3 million in additional goodwill from the Merger. This additional amount resulted from new valuations received on OREO acquired in the Merger, which were written down to our best estimate of fair value.
Our intangible assets with definite lives are core deposit premiums ("CDP") and mortgage servicing rights ("MSR"). CDPs are amortized over their useful lives to their estimated residual value and reviewed for impairment at least quarterly. The amortization expense represents the estimated decline in the value of the underlying deposits. MSRs are amortized over the expected lives of the underlying mortgages including prepayment estimates.

4. Investment Securities
Securities designated as available-for-sale are carried at fair value. However, the unrealized difference between amortized cost and fair value of securities available-for-sale is excluded from net income unless there is an other than temporary impairment and is reported, net of deferred taxes, as a component of shareholders' equity as accumulated other comprehensive income (loss). Securities held-to-maturity are carried at amortized cost, as the banks have the ability, and management has the positive intent, to hold these securities to maturity. Premiums and discounts on securities are amortized and accreted according to the interest method.

8


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 an 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 risks.
The following table summarizes the amortized cost and estimated fair value of investment securities and presents the related gross unrealized gains and losses:
March 31, 2013
 
 
 
 
 
 
 
 
(dollars in thousands)
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
Available for Sale:
 
 
 
 
 
 
 
 
Obligations of:
 
 
 
 
 
 
 
 
U.S. government sponsored enterprises
 
$
2,069

 
$
38

 
$

 
$
2,107

Residential mortgage-backed securities-GSE
 
409,949

 
1,794

 
3,279

 
408,464

Residential mortgage-backed securities-Private
 
21,992

 
879

 
250

 
22,621

Commercial mortgage backed securities-GSE
 
23,054

 

 
658

 
22,396

Corporate notes
 
36,567

 
240

 
40

 
36,767

Total
 
$
493,631

 
$
2,951

 
$
4,227

 
$
492,355

Held to Maturity:
 
 
 
 
 
 
 
 
Residential mortgage-backed securities-GSE
 
73,515

 
1

 
271

 
73,245

     Total
 
$
567,146

 
$
2,952

 
$
4,498

 
$
565,600

 
 
 
 
 
 
 
 
 
December 31, 2012
 
 
 
 
 
 
 
 
(dollars in thousands)
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
Available for Sale:
 
 
 
 
 
 
 
 
Obligations of:
 
 
 
 
 
 
 
 
U.S. Treasury and government agencies
 
$
6,646

 
$
335

 
$

 
$
6,981

U.S. government sponsored enterprises
 
22,118

 
55

 

 
22,173

States and political subdivisions
 
5,918

 
120

 

 
6,038

Residential mortgage-backed securities-GSE
 
436,344

 
5,678

 
948

 
441,074

Residential mortgage-backed securities-Private
 
22,649

 
750

 
454

 
22,945

Commercial mortgage backed securities-GSE
 
23,150

 
209

 

 
23,359

Commercial mortgage backed securities-Private
 
5,283

 
34

 

 
5,317

Corporate notes
 
36,710

 
270

 
17

 
36,963

Total
 
$
558,818

 
$
7,451

 
$
1,419

 
$
564,850

CommunityOne and Granite, as members of the Federal Home Loan Bank of Atlanta (“FHLB”), are required to own capital stock in the FHLB 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 $5.2 million of FHLB stock at March 31, 2013 and $6.3 million at December 31, 2012. 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, 2013. 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, 2013 and December 31, 2012, CommunityOne owned a total of $3.1 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, 2013. FRBR stock is included in other assets at its original cost basis.

9


At March 31, 2013, $102.7 million of the investment securities portfolio was pledged to secure public deposits, $13.9 million was pledged to retail repurchase agreements and $2.1 million was pledged to others, leaving $446.9 million available as lendable collateral.
During the three months ended March 31, 2013 and 2012, the banks sold securities with a book value of $145.9 million and $10.8 million respectively, and recognized a gain of $2.4 million and a loss of $(46) thousand, respectively. The banks sold these securities in order to manage our interest rate sensitivity profile.
The following tables show our 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, 2013 and December 31, 2012. All unrealized losses on investment securities are considered by management to be temporary given the credit ratings on 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, 2013
 
 
 
 
 
 
 
 
Available for Sale:
 
 
 
 
 
 
 
 
Residential mortgage-backed securities-GSE
$
284,396

$
3,279

 
$

$

 
$
284,396

$
3,279

Residential mortgage-backed securities-Private
3,365

217

 
4,025

33

 
7,390

250

Commercial mortgage-backed securities-GSE
22,396

658

 


 
22,396

658

Corporate notes


 
3,234

40

 
3,234

40

Total
$
310,157

$
4,154

 
$
7,259

$
73

 
$
317,416

$
4,227

Held to Maturity:
 
 
 
 
 
 
 
 
Residential mortgage-backed securities-GSE
$
48,036

$
272

 
$

$

 
$
48,036

$
272

 
 
 
 
 
 
 
 
 
December 31, 2012
 
 
 
 
 
 
 
 
Obligations of:
 
 
 
 
 
 
 
 
Residential mortgage-backed securities-GSE
$
123,489

$
904

 
$
7,027

$
44

 
$
130,516

$
948

Residential mortgage-backed securities-Private
6,482

438

 
1,017

16

 
7,499

454

Corporate notes


 
3,249

17

 
3,249

17

Total
$
129,971

$
1,342

 
$
11,293

$
77

 
$
141,264

$
1,419

At March 31, 2013, there were four available-for-sale securities that were in an unrealized loss position for longer than 12 months, compared to four at December 31, 2012.
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. After analyzing its securities portfolio at March 31, 2013, and after considering ratings, fair value, cash flows and other factors, FNB did not have any OTTI during the three months ended March 31, 2013 and March 31, 2012.
The aggregate amortized cost and fair value of securities at March 31, 2013, 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.


10


 
 
Available-for-Sale
 
Held-to-Maturity
(dollars in thousands)
 
Amortized Cost
 
Estimated Fair Value
 
Amortized Cost
 
Estimated Fair Value
Due in one year or less
 
$
16,458

 
$
16,551

 
$

 
$

Due after one year through five years
 
18,904

 
19,089

 

 

Due after five years through 10 years
 
3,274

 
3,234

 

 

Due after 10 years
 

 

 

 

Total
 
38,636

 
38,874

 

 

Mortgage-backed securities
 
454,995

 
453,481

 
73,515

 
73,245

Total
 
$
493,631

 
$
492,355

 
$
73,515

 
$
73,245


5. Loans and Allowance for Loan Losses
General

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.  FNB reports its loan portfolio by segments and classes, which are disaggregations of portfolio segments.  FNB's portfolio segments are:  Commercial and agricultural, Real estate, and Consumer loans.  The Commercial and agricultural loan and Consumer loan portfolios are not further segregated into classes.  The classes within the Real estate portfolio segment include Real estate - construction and Real estate mortgage, broken into 1-4 family residential mortgage and Commercial real estate mortgage loans.

Loan fees and the incremental direct costs associated with originating loans are deferred and subsequently recognized over the life of the loan as an adjustment to interest income.

In addition to originating loans we also purchase loans. At acquisition purchased loans are designated as either purchased contractual loans ("PC loans") or purchased impaired loans ("PI loans"). PC loans are acquired loans where management believes it is probable that it will receive all principal as of the date of acquisition.  These loans are accounted for under the contractual cash flow method, under ASC 310-20. Any discount or premium paid on PC loans is recorded in interest income using the effective yield method over the expected life of the loans.

PI loans are acquired loans where management believes, at acquisition date, it is probable that all principal on the acquired loans will not be received.  PI loans are placed in homogeneous risk based pools where accounting for projected cash flows is performed, as allowed under ASC 310-30.  Once a pool is established the individual loans within each pool do not change.  As management obtains new information related to changes in expected principal loss and expected cash flows, by pool, we record either an increase in yield when new expected cash flows increase, an allowance for loan losses when new expected cash flows decline, or a decrease in yield when there is only a timing difference in expected cash flows.

Loans acquired in the Merger ("Granite Purchased Loans") included PI loans and PC loans. Loans designated as PC loans included performing revolving consumer and performing revolving commercial loans on acquisition date.

During the three months ended March 31, 2012, CommunityOne purchased $61.9 million of performing residential mortgage loans, including premiums of $2.3 million. These loan purchases are accounted for as PC loans.

ALL Methodology
FNB's Allowance for Loan Losses ("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. Management assesses FNB's ALL quarterly. 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. For purposes of the ALL, 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

11


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.
Historical loss rates are calculated by associating losses to the risk-graded pool to which they relate for each of the previous eight quarters. Then, using a look back period beginning in third quarter 2006, loss factors are calculated for each risk-graded pool.

In addition to FNB's ability to use its own historical loss data and migration between risk grades, it has a rigorous process for computing the qualitative factors that impact the ALL. A committee, independent of the historical loss migration team, reviews risk factors that may impact the ALL. Some factors are statistically quantifiable, such as concentration, growth, delinquency, and nonaccrual risk by loan type, while other factors are qualitative in nature, such as staff competency, competition within our markets, economic and regulatory changes impacting the loans held for investment.

FNB lends primarily in North Carolina. As of March 31, 2013, 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, 2013, FNB charged off $3.0 million in loans and realized $3.2 million in recoveries, for $0.2 million of net recoveries. The majority of the loans charged off were loans that were previously impaired and had specific reserves assigned in prior periods.

The ALL, as a percentage of loans held for investment, was 2.66% at March 31, 2013, compared to 3.19% at March 31, 2012. At December 31, 2012, the ALL, as a percentage of loans held for investment, was 2.49%.

Risk Grades

The risk-grade categories presented in the following table, which are standard categories used by the bank regulators, 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 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 $70.0 million and $60.6 million in Granite Purchased Loans categorized as Substandard or Doubtful at March 31, 2013 and December 31, 2012, respectively.

The following table presents loans held for investment balances by risk grade as of March 31, 2013:

12


(dollars in thousands)
 
Pass
 
Special Mention
 
Substandard
 
Doubtful
 
 
 
 
(Ratings 1-5)
 
(Rating 6)
 
(Rating 7)
 
(Rating 8)
 
Total
Commercial and agricultural
 
$
67,700

 
$
3,416

 
$
6,076

 
$
298

 
$
77,490

Real estate - construction
 
41,979

 
1,817

 
13,857

 

 
57,653

Real estate - mortgage:
 
 
 
 
 
 
 
 
 
 
1-4 family residential
 
471,592

 
14,785

 
34,431

 

 
520,808

Commercial
 
290,610

 
42,767

 
81,450

 
168

 
414,995

Consumer
 
42,081

 
171

 
359

 
208

 
42,819

Total
 
$
913,962

 
$
62,956

 
$
136,173

 
$
674

 
$
1,113,765

The following table presents loans held for investment balances by risk grade as of December 31, 2012:
(dollars in thousands)
 
Pass
 
Special Mention
 
Substandard
 
Doubtful
 
 
 
 
(Ratings 1-5)
 
(Rating 6)
 
(Rating 7)
 
(Rating 8)
 
Total
Commercial and agricultural
 
$
69,003

 
$
3,447

 
$
6,953

 
$
301

 
$
79,704

Real estate - construction
 
40,117

 
2,031

 
16,266

 

 
58,414

Real estate - mortgage:
 
 
 
 
 
 
 
 
 
 
1-4 family residential
 
504,819

 
15,855

 
32,625

 
239

 
553,538

Commercial
 
296,271

 
50,275

 
95,126

 
164

 
441,836

Consumer
 
42,495

 
178

 
426

 
444

 
43,543

Total
 
$
952,705

 
$
71,786

 
$
151,396

 
$
1,148

 
$
1,177,035

Loans included in the preceding loan composition table are net of participations sold. Loans are increased by net loan premiums and deferred loan discounts or fees of $2.6 million at March 31, 2013. Loans are increased by net deferred loan discounts or fees of $3.6 million at December 31, 2012.
At March 31, 2013 and December 31, 2012, loans held for sale consisted of originated residential mortgage loans held for sale at the lower of cost or fair market value.
Loans serviced for others are not included in the consolidated balance sheet. The unpaid principal balance of loans serviced for others amounted to $109.7 million at March 31, 2013 and $65.1 million at December 31, 2012.
Loans Pledged
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 loans. Gross loans of $256.1 million and $270.2 million were pledged to collateralize FHLB advances and letters of credit at March 31, 2013 and December 31, 2012, respectively, of which there was $14.2 million and $19.1 million of credit availability for borrowing, respectively. At March 31, 2013, $33.5 million of loans were pledged to collateralize potential borrowings from the Federal Reserve Discount Window, of which $26.2 million was available as borrowing capacity.
Nonaccruing and Impaired Loans
Interest income on loans is 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 $0.9 million and $1.5 million for the three months ended March 31, 2013 and March 31, 2012, respectively. At March 31, 2013 and December 31, 2012, FNB had certain impaired loans of $70.5 million and $79.2 million, respectively, which were on nonaccruing interest 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

13


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 than 90 days delinquent may also be placed on nonaccrual if deterioration in the financial condition of the borrower has increased the probability of less than full repayment.
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 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.
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:
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 has filed 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.

14


The following table presents an aging analysis of accruing and nonaccruing loans as of March 31, 2013:
(dollars in thousands)
 
Accruing
 
 
 
 
 
 
 
 
 
 
30-59 days past due
 
60-89 days past due
 
More than 90 days past due
 
Nonaccrual
 
Total past due and nonaccrual
 
Current and accruing
 
Total Loans
PC and Originated Loans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and agricultural
 
$
30

 
$
1

 
$

 
$
2,350

 
$
2,381

 
$
62,200

 
$
64,581

Real estate - construction
 
367

 

 

 
11,762

 
12,129

 
43,191

 
55,320

Real estate - mortgage:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1-4 family residential
 
2,722

 
82

 
55

 
19,111

 
21,970

 
462,224

 
484,194

Commercial
 
931

 
147

 

 
37,217

 
38,295

 
224,247

 
262,542

Consumer
 
208

 
12

 

 
63

 
283

 
40,961

 
41,244

Total
 
$
4,258

 
$
242

 
$
55

 
$
70,503

 
$
75,058

 
$
832,823

 
$
907,881

PI Loans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and agricultural
 
$
1,056

 
$
60

 
$
811

 
$

 
$
1,927

 
$
10,982

 
$
12,909

Real estate - construction
 

 
48

 
523

 

 
571

 
1,761

 
2,332

Real estate - mortgage:
 
 
 
 
 

 
 
 
 
 
 
 
 
1-4 family residential
 
896

 

 
3,530

 

 
4,426

 
32,481

 
36,907

Commercial
 
3,836

 
2,896

 
15,533

 

 
22,265

 
130,168

 
152,433

Consumer
 
3

 

 
1

 

 
4

 
1,299

 
1,303

Total
 
$
5,791

 
$
3,004

 
$
20,398

 
$

 
$
29,193

 
$
176,691

 
$
205,884

Total Loans
 
$
10,049

 
$
3,246

 
$
20,453

 
$
70,503

 
$
104,251

 
$
1,009,514

 
$
1,113,765


The following table presents an aging analysis of accruing and nonaccruing loans as of December 31, 2012:
(dollars in thousands)
 
Accruing
 
 
 
 
 
 
 
 
 
 
30-59 days past due
 
60-89 days past due
 
More than 90 days past due
 
Nonaccrual
 
Total past due and nonaccrual
 
Current and accruing
 
Total Loans
PC and Originated Loans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and agricultural
 
$
515

 
$

 
$
50

 
$
2,746

 
$
3,311

 
$
61,727

 
$
65,038

Real estate - construction
 
26

 
119

 

 
14,297

 
14,442

 
41,290

 
55,732

Real estate - mortgage:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1-4 family residential
 
6,173

 
880

 

 
18,372

 
25,425

 
488,898

 
514,323

Commercial
 
617

 

 
177

 
43,621

 
44,415

 
226,948

 
271,363

Consumer
 
24

 

 

 
206

 
230

 
41,957

 
42,187

Total
 
$
7,355

 
$
999

 
$
227

 
$
79,242

 
$
87,823

 
$
860,820

 
$
948,643

PI Loans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and agricultural
 
$
100

 
$
1

 
$
1,103

 
$

 
$
1,204

 
$
13,462

 
$
14,666

Real estate - construction
 
117

 

 
655

 

 
772

 
1,910

 
2,682

Real estate - mortgage:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1-4 family residential
 
1,308

 
495

 
4,678

 

 
6,481

 
32,734

 
39,215

Commercial
 
2,559

 
4,300

 
17,384

 

 
24,243

 
146,230

 
170,473

Consumer
 
4

 

 
13

 

 
17

 
1,339

 
1,356

Total
 
$
4,088

 
$
4,796

 
$
23,833

 
$

 
$
32,717

 
$
195,675

 
$
228,392

Total Loans
 
$
11,443

 
$
5,795

 
$
24,060

 
$
79,242

 
$
120,540

 
$
1,056,495

 
$
1,177,035

All PI loans are considered to be accruing for all periods presented, in accordance with ASC 310-30.

15



A loan is considered impaired, based on current information and events, if it is probable that FNB will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. 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.
When a loan 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 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 dates indicated:
 
 
March 31, 2013
 
December 31, 2012
(dollars in thousands)
 
Balance
Associated Reserves
 
Balance
Associated Reserves
Impaired loans, held for sale
 
$

$

 
$

$

Impaired loans, not individually reviewed for impairment
 
5,946


 
6,017


Impaired loans, individually reviewed, with no impairment
 
56,985


 
62,282


Impaired loans, individually reviewed, with impairment
 
16,097

3,129

 
15,312

1,737

Total impaired loans, excluding purchased impaired *
 
$
79,028

$
3,129

 
$
83,611

$
1,737

 
 
 
 
 
 
 
Purchased impaired loans with subsequent deterioration
 
$
176,048

5,373

 
$
192,115

5,373

Purchased impaired loans with no subsequent deterioration
 
$
29,836


 
$
36,277


Total Reserves
 
 
$
8,502

 
 
$
7,110

 
 
 
 
 
 
 
Average impaired loans calculated using a simple average
 
$
76,319

 
 
$
94,754

 
* Included at March 31, 2013 and December 31, 2012 were $3.6 million and $4.5 million, respectively, in restructured and performing loans.

The following table presents loans held for investment on nonaccrual status by loan class for the dates indicated:

16


(dollars in thousands)
 
 
 
 
 
 
March 31, 2013
 
December 31, 2012
Loans held for investment:
 
 
 
 
Commercial and agricultural
 
$
2,350

 
$
2,746

Real estate - construction
 
11,762

 
14,297

Real estate - mortgage:
 
 
 
 
1-4 family residential
 
19,111

 
18,372

Commercial
 
37,217

 
43,621

Consumer
 
63

 
206

Total nonaccrual loans
 
$
70,503

 
$
79,242

Loans more than 90 days delinquent, still on accrual
 
$

 
$
227

Total nonperforming loans
 
$
70,503

 
$
79,469

There were no loans held for sale on nonaccrual status as of March 31, 2013 or December 31, 2012.


17


The following table presents individually reviewed impaired loans and purchased impaired loans with subsequent credit deterioration, segregated by portfolio segment, and the corresponding reserve for impaired loan losses as of March 31, 2013:
 
 
 
 
Unpaid
 
 
(dollars in thousands)
 
Recorded
 
Principal
 
Related
 
 
Investment
 
Balance
 
Allowance
With no related allowance recorded:
 
 
 
 
 
 
  Commercial and agricultural
 
$
875

 
$
1,413

 
$

  Real estate - construction
 
8,953

 
14,910

 

  Real estate - mortgage:
 
 
 
 
 
 
1-4 family residential
 
14,310

 
17,861

 

Commercial
 
32,847

 
40,093

 

  Consumer
 

 

 

Total
 
$
56,985

 
$
74,277

 
$

With an allowance recorded:
 
 
 
 
 
 
  Commercial and agricultural
 
$
917

 
$
917

 
$
227

  Real estate - construction
 
2,080

 
2,159

 
501

  Real estate - mortgage:
 
 
 
 
 
 
1-4 family residential
 
4,599

 
5,360

 
1,317

Commercial
 
8,501

 
10,921

 
1,084

  Consumer
 

 

 

Total
 
$
16,097

 
$
19,357

 
$
3,129

Total individually evaluated impaired loans
 
 
 
 
 
 
  Commercial and agricultural
 
$
1,792

 
$
2,330

 
$
227

  Real estate - construction
 
11,033

 
17,069

 
501

  Real estate - mortgage:
 
 
 
 
 
 
1-4 family residential
 
18,909

 
23,221

 
1,317

Commercial
 
41,348

 
51,014

 
1,084

  Consumer
 

 

 

Total
 
$
73,082

 
$
93,634

 
$
3,129

 
 
 
 
 
 
 
PI loans with subsequent credit deterioration:
 
 
 
 
 
 
  Commercial and agricultural
 
$
9,930

 
$
9,800

 
$
545

  Real estate - construction
 
1,986

 
1,924

 
197

  Real estate - mortgage:
 
 
 
 
 
 
     1-4 family residential
 
33,174

 
33,776

 
730

     Commercial
 
129,655

 
131,753

 
3,351

  Consumer
 
1,303

 
1,012

 
550

Total