Note 7 – Loans

Loans are stated at the principal amounts outstanding adjusted for purchase premiums/discounts, deferred net loan fees and costs, and unearned income.

The following summary sets forth the major categories of loans:


	Acquired Loans						Total Loans 2011			Total Loans 2010
(dollars in thousands)	Impaired		Current		Total		Total Loans 2011			Total Loans 2010
Loans held for sale	$	—	$	—	$	—	$	4,529		$	—

Loans held for investment:
Commercial and agricultural	$	5,783	$	31,474	$	37,257	$	95,203		$	93,747
Real estate - construction		1,735		6,151		7,886		93,044			276,976
Real estate - mortgage:
1-4 family residential		10,172		73,676		83,848		449,797			388,859
Commercial and other		47,502		196,417		243,919		535,957			494,861
Consumer		91		876		967		43,534			49,532

Gross loans held for investment		65,283		308,594		373,877		1,217,535			1,303,975
Less: Allowance for loan losses		—		—		—		(39,360	)		(93,687	)

Loans held for investment, net of allowance	$	65,283	$	308,594	$	373,877	$	1,178,175		$	1,210,288

Loans as presented are reduced by net deferred loan fees of $0.6 million and $0.03 million at December 31, 2011 and 2010, respectively. Accruing loans past due 90 days or more amounted to $3.0 million at December 31, 2011 and $4.8 million at December 31, 2010. Nonaccrual loans amounted to $103.0 million at December 31, 2011 and $325.1 million at December 31, 2010. Interest income that would have been recorded on nonaccrual loans for the years ended December 31, 2011, 2010 and 2009, had they performed in accordance with their original terms, amounted to approximately $11.7 million, $12.3 million and $6.9 million, respectively. Interest income on nonaccrual loans included in the results of operations amounted to approximately $6.4 million in 2011, $10.7 million in 2010 and $5.1 million in 2009. Interest income on nonaccrual loans is recorded when cash is actually received.

CommunityOne and Granite have loans outstanding to executive officers and directors and their affiliated companies during each of the past three years. Such loans were made substantially on the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other borrowers and do not involve more than the normal risks of collectability.

The following table summarizes the transactions for the past two years.


(dollars in thousands)	2011			2010
Balance at beginning of year	$	14,072		$	15,036
Advances during year		1,134			23,790
Repayments during year		(14,553	)		(24,754	)

Balance at end of year	$	653		$	14,072

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 $339.4 million and $468.4 million were pledged to collateralize FHLB advances and letters of credit at December 31, 2011 and December 31, 2010, respectively, of which $80.5 million and $0, respectively, was available as additional borrowing capacity. At December 31, 2011, there was $24.7 million in loans pledged to meet the FRBR requirement for CommunityOne and $25.2 million in loans pledged to meet the FRBR requirement for Granite.

FNB implemented in 2009 a stimulus loan program to facilitate the sale of residential real estate held as collateral for some of FNB's nonperforming and performing loans and certain company-owned properties. The purpose of the program was to reduce FNB's credit concentrations and nonperforming assets by providing attractive terms that both filled the mortgage lending void created by the ongoing recession and incented potential buyers to purchase real estate. FNB offered a reduced interest rate to qualified new borrowers to encourage them to purchase properties in this program. New borrowers qualified according to FNB's normal consumer and mortgage underwriting standards. FNB recorded these loans at fair value at time of issue. The existing unimpaired development loans that become part of the program were considered impaired upon inclusion in the stimulus loan program. FNB discontinued the program, and the last stimulus loan was booked, in the first quarter of 2011. FNB currently has $29.6 million in loans under the stimulus loan program, of which, $15.2 million required a fair value adjustment of $88,200 as of December 31, 2011. The fair value adjustment is recorded as a reduction of the outstanding loan balance on the balance sheet and accreted into interest income over the contractual life of the loan.

At December 31, 2011 and December 31, 2010, FNB had nonaccrual loans of $103.0 million and $325.1 million, respectively.

The following is a summary of nonperforming assets for the periods ended as presented.


(dollars in thousands)	December 31, 2011		December 31, 2010
Loans on nonaccrual status:
Held for sale	$	4,529	$	—
Held for investment		98,444		325,068
Loans more than 90 days delinquent, still on accrual		3,000		4,818
Real estate owned/repossessed assets		110,386		62,196
Assets of discontinued operations		—		168

Total nonperforming assets	$	216,359	$	392,250

The following table summarizes information relative to impaired loans at the dates and for the periods indicated.


	December 31, 2011				December 31, 2010
(dollars in thousands)	Balance		Associated Reserves		Balance		Associated Reserves
Impaired loans, held for sale	$	4,529	$	—	$	—	$	—
Impaired loans, not individually reviewed for impairment		5,127		—		717		—
Impaired loans, individually reviewed, with no impairment		53,885		—		132,435		—
Impaired loans, individually reviewed, with impairment		42,356		11,090		208,040		70,888

Total impaired loans *	$	105,897	$	11,090	$	341,192	$	70,888


Average impaired loans calculated using a simple average	$	212,849			$	355,131

*	Included at December 31, 2011 and December 31, 2010 were $2.9 million and $6.5 million, respectively, in restructured and performing loans.

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 are considered impaired.

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 or when it is otherwise determined that continued adherence is reasonably assured. Some restructured loans continue as accruing loans after restructuring due to the borrower not being past due, adequate collateral valuations supporting the restructured loans or the cash flows of the underlying business appears 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 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. At December 31, 2010, there was $146.5 million in restructured loans, of which loans amounting to $6.5 million were accruing and in a performing status.

Potential problem loans which are not included in nonperforming assets are classified separately within CommunityOne's and Granite's portfolios as special mention and carry a risk grade rating of "6". These loans are defined as those with potential weaknesses which may affect repayment capacity, but do not pose sufficient risk as to require an adverse classification. As of December 31, 2011, the balance of such loans was $101.1 million compared with a balance of $130.8 million as of December 31, 2010.

The simple average carrying value of impaired loans was $212.8 million in 2011, $355.1 million in 2010 and $147.2 million in 2009. Interest income recognized on impaired loans, exclusive of nonaccrual loans, amounted to approximately $0.03 million in 2011, $0.3 million in 2010 and $1.7 million in 2009.

Loans with outstanding balances of $132.5 million in 2011 and $47.8 million in 2010 were transferred from loans to other real estate acquired through foreclosure. Other real estate acquired through loan foreclosures amounted to $110.0 million at December 31, 2011 and $62.1 million at December 31, 2010.

Loans held for investment are primarily made in the region of North Carolina that includes Alamance, Alexander, Ashe, Burke, Caldwell, Catawba, Chatham, Gaston, Guilford, Iredell, Mecklenburg, Montgomery, Moore, Orange, Randolph, Richmond, Rowan, Scotland, Watauga and Wilkes counties. The real estate loan portfolio can be affected by the condition of the local real estate markets.

The following table presents sold loans by portfolio segment for the periods indicated below:


	For Twelve Months Ended December 31, 2011						For Twelve Months Ended December 31, 2010
(dollars in thousands)	Number of Loans		Recorded Investment		Contract Pricing		Number of Loans		Recorded Investment		Contract Pricing
Loan Sales
Commercial and agricultural		12	$	4,576	$	1,523		—	$	—	$	—
Real estate - construction		15		35,984		21,227		5		14,205		10,152
Real estate - mortgage:
1-4 family residential		10		4,962		4,059		257		32,928		33,505
Commercial		42		20,217		16,660		—		—		—
Consumer		1		190		—		—		—		—

Total		80	$	65,929	$	43,469		262	$	47,133	$	43,657

During the twelve-month period ending December 31, 2011, the Company placed 45 loans under contract with an outstanding balance of $13.0 million for a contract price of $12.1 million to one of the investors in the recapitalization of the Company that closed on October 21, 2011. The investor did not receive any special consideration and was subjected to the same standards and requirements as any other interested third-party loan purchaser.

The carrying amount of the PCI loans consisted of impaired and nonimpaired purchased loans. The following table presents the carrying amount of PCI loans at December 31, 2011:


(dollars in thousands)	Acquired Impaired Loans		Acquired Performing Loans		Total Acquired Loans		Unpaid Principal Balance
Acquired Loans:
Commercial and agricultural	$	5,783	$	31,474	$	37,257	$	39,711
Real estate - Construction		1,735		6,151		7,886		8,413
Real estate -mortgage:
1-4 family residential		10,172		73,676		83,848		93,527
Commercial and other		47,502		196,417		243,919		260,918
Consumer		91		876		967		1,950

Total	$	65,283	$	308,594	$	373,877	$	404,519

The following table presents the purchased performing loans at the acquisition date. The amounts include principal only and do not reflect accrued interest as of the date of the acquisition or beyond:


(dollars in thousands)	October 21, 2011
Contractually required principal payments receivable	$	331,491
Fair value adjustment for credit, interest rate, and liquidity		(3,647	)

Total fair value of purchased performing loans	$	327,844

The following table presents the PCI loans at the acquisition date.


(dollars in thousands)	October 21, 2011
Contractually required principal payments and interest payments	$	383,059
Nonaccretable difference		(31,938	)

Total present value of cash flows expected to be collected (fair value of purchased impaired loans)	$	351,121

The table below includes only those acquired loans accounted for under the expected cash flow method. The table does not include performing revolving consumer and commercial loans, which are being accounted for under contractual cash flow method.


	Purchase Credit Impaired Loans						Purchase Performing Loans
(dollars in thousands)	Carrying Amount			Accretable Yield			Carrying Amount			Accretable Yield
Balance, January 1, 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		(4,444	)		—			(19,180	)		—
Provision for credit losses		—			—			—			—

Balance, December 31, 2011	$	62,979		$	(13,718	)	$	269,295		$	(34,086	)