Note 8 – Allowance for Loan Losses

The ALL is established through a provision for loan losses charged to expense. Loans are charged against the ALL when management believes that the collectability of principal is unlikely. Subsequent recoveries, if any, are credited to the allowance. The ALL represents management's best estimate of probable credit losses that are inherent in the loan portfolio at the balance sheet date and is determined by management through quarterly evaluations of the loan portfolio.

CommunityOne and Granite lend primarily in North Carolina. As of December 31, 2011, 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.

Changes in the ALL for the years ended December 31 were as follows:


(dollars in thousands)	2011			2010			2009
Balance at beginning of year	$	93,687		$	49,461		$	34,720
Provision for losses charged to operations		67,362			132,755			61,509
Loans charged off		(128,424	)		(91,250	)		(49,385	)
Recoveries on loans previously charged off		6,735			2,721			2,385
Discontinued operations		—			—			232

Balance at end of year	$	39,360		$	93,687		$	49,461

The ALL, as a percentage of loans held for investment, amounted to 3.23% at December 31, 2011 compared to 7.18% at December 31, 2010. The substantial reduction in ALL was the result of the Company's aggressive reduction in problem asset levels and recorded net loan charge-offs of $121.7 million in 2011 and the purchase of loans in the Merger recorded at estimated fair value and for which no ALL was required at December 31, 2011.

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 managements 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 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 the related ALL. The table below includes $40.3 million in purchased loans that are categorized as Substandard of Doubtful.

The following table presents loan and lease balances by credit quality indicator as of December 31, 2011:


(dollars in thousands)	Nonclassified/ Pass (Ratings 1-5)		Special Mention (Rating 6)		Substandard (Rating 7)		Doubtful (Rating 8)		Total
Commercial and agricultural	$	81,080	$	5,296	$	8,370	$	457	$	95,203
Real estate - construction		54,683		4,781		33,566		14		93,044
Real estate - mortgage:
1-4 family residential		390,323		20,528		38,808		138		449,797
Commercial		394,657		70,302		70,774		224		535,957
Consumer		42,743		211		324		256		43,534

Total	$	963,486	$	101,118	$	151,842	$	1,089	$	1,217,535

The following table presents loan and lease balances by credit quality indicator as of December 31, 2010:


(dollars in thousands)	Nonclassified/ Pass (Ratings 1-5)		Special Mention (Rating 6)		Substandard (Rating 7)		Doubtful (Rating 8)		Total
Commercial and agricultural	$	71,325	$	6,375	$	10,882	$	5,165	$	93,747
Real estate - construction		76,317		46,596		111,365		42,698		276,976
Real estate - mortgage:
1-4 family residential		324,369		18,398		34,662		11,430		388,859
Commercial		283,557		59,439		84,666		67,199		494,861
Consumer		48,620		—		609		303		49,532

Total	$	804,188	$	130,808	$	242,184	$	126,795	$	1,303,975

The following table presents ALL activity by portfolio segment for the year ended December 31, 2011:


							Real Estate - Mortgage
(dollars in thousands)	Commercial and Agriculture			Real Estate - Construction			1-4 Family Residential			Commercial			Consumer			Total
Allowance for loan losses:
Beginning balance at January 1, 2011	$	11,144		$	46,792		$	7,742		$	26,851		$	1,158		$	93,687
Charge-offs		(10,832	)		(65,526	)		(11,384	)		(36,998	)		(3,684	)		(128,424	)
Recoveries		855			2,637			831			891			1,521			6,735
Provision		4,609			28,092			11,696			20,319			2,646			67,362

Ending balance at December 31, 2011	$	5,776		$	11,995		$	8,885		$	11,063		$	1,641		$	39,360


Portion of ending balance:
Individually evaluated for impairment	$	1,506		$	4,899		$	2,140		$	2,415		$	130		$	11,090
Collectively evaluated for impairment		4,270			7,096			6,745			8,648			1,511			28,270
Acquired performing loans		—			—			—			—			—			—
Acquired credit impaired loans		—			—			—			—			—			—

Total ALLL evaluated for impairment	$	5,776		$	11,995		$	8,885		$	11,063		$	1,641		$	39,360


Loans held for investment:

Ending balance at December 31, 2011	$	95,203		$	93,044		$	449,797		$	535,957		$	43,534		$	1,217,535

Portion of ending balance:
Individually evaluated for impairment	$	3,890		$	30,460		$	24,886		$	36,835		$	170		$	96,241
Collectively evaluated for impairment		54,056			54,698			341,063			255,203			42,397			747,417
Acquired performing loans		31,474			6,151			73,676			196,417			876			308,594
Acquired credit impaired loans		5,783			1,735			10,172			47,502			91			65,283

Total loans evaluated for impairment	$	95,203		$	93,044		$	449,797		$	535,957		$	43,534		$	1,217,535

The following table presents ALL activity by portfolio segment for the year ended December 31, 2010:


							Real Estate - Mortgage
(dollars in thousands)	Commercial and Agriculture			Real Estate - Construction			1-4 Family Residential			Commercial			Consumer			Total
Allowance for loan losses:
Beginning balance at January 1, 2010	$	3,543		$	23,932		$	8,311		$	12,729		$	946		$	49,461
Charge-offs		(9,832	)		(53,374	)		(9,060	)		(15,418	)		(3,566	)		(91,250	)
Recoveries		585			52			178			271			1,635			2,721
Provision		16,848			76,182			8,313			29,269			2,143			132,755

Ending balance at December 31, 2010	$	11,144		$	46,792		$	7,742		$	26,851		$	1,158		$	93,687


Portion of ending balance:
Individually evaluated for impairment	$	7,451		$	35,281		$	5,448		$	22,708		$	—		$	70,888
Collectively evaluated for impairment		3,693			11,511			2,294			4,143			1,158			22,799

Total ALLL evaluated for impairment	$	11,144		$	46,792		$	7,742		$	26,851		$	1,158		$	93,687

Loans held for investment:
Ending balance at December 31, 2010	$	93,747		$	276,976		$	388,859		$	494,861		$	49,532		$	1,303,975


Portion of ending balance:
Individually evaluated for impairment	$	14,176		$	152,465		$	41,109		$	132,537		$	188		$	340,475
Collectively evaluated for impairment		79,571			124,511			347,750			362,324			49,344			963,500

Total loans evaluated for impairment	$	93,747		$	276,976		$	388,859		$	494,861		$	49,532		$	1,303,975

The following table presents loans and leases on nonaccrual status by loan class at December 31, 2011 and 2010:


(dollars in thousands)	December 31, 2011		December 31, 2010
Loans Held for Investment:
Commercial and agricultural	$	4,636	$	13,274
Real estate - construction		30,844		144,605
Real estate - mortgage:
1-4 family residential		26,048		34,994
Commercial		36,666		131,866
Consumer		250		329

Total	$	98,444	$	325,068

The following table presents loans held for sale on nonaccrual status by loan class at December 31, 2011 and 2010:


(dollars in thousands)	December 31, 2011		December 31, 2010
Loans Held for Sale:
Real estate - construction	$	1,807	$	—
Real estate - mortgage:
1-4 family residential		517		—
Commercial		2,205		—
Consumer		—		—

Total	$	4,529	$	—

The following table presents an aging analysis of loans and leases as of December 31, 2011:


(dollars in thousands)
	Past Due										Acquired Loans						90 or More
	30-59 Days		60-89 Days		90 or More Days		Total		Current		Impaired		Current		Total Loans		Days Past Due and Accruing
Commercial and agricultural	$	335	$	425	$	2,755	$	3,515	$	54,431	$	5,783	$	31,474	$	95,203	$	305
Real estate - construction		1,850		2,206		21,438		25,494		59,664		1,735		6,151		93,044		1,400
Real estate - mortgage:
1-4 family residential		4,544		2,253		14,125		20,922		345,027		10,172		73,676		449,797		292
Commercial		2,926		6,645		16,330		25,901		266,137		47,502		196,417		535,957		1,003
Consumer		740		278		63		1,081		41,486		91		876		43,534		—

Total	$	10,395	$	11,807	$	54,711	$	76,913	$	766,745	$	65,283	$	308,594	$	1,217,535	$	3,000

The following table presents an aging analysis of loans and leases as of December 31, 2010:


(dollars in thousands)	Past Due												90 or More
	30-59 Days		60-89 Days		90 or More Days		Total		Current		Total Loans		Days Past Due and Accruing
Commercial and agricultural	$	1,610	$	3,622	$	5,186	$	10,418	$	83,329	$	93,747	$	48
Real estate - construction		21,687		10,532		98,099		130,318		146,658		276,976		212
Real estate - mortgage:
1-4 family residential		11,199		7,016		22,505		40,720		348,139		388,859		4,167
Commercial		9,798		12,430		74,271		96,499		398,362		494,861		380
Consumer		199		44		160		403		49,129		49,532		11

Total	$	44,493	$	33,644	$	200,221	$	278,358	$	1,025,617	$	1,303,975	$	4,818

The following table presents impaired loan information as of December 31, 2011:


(dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded:
Commercial and agricultural	$	2,354	$	4,346	$	—
Real estate - construction		16,351		25,714		—
Real estate - mortgage:
1-4 family residential		13,003		19,657		—
Commercial		22,176		26,964		—
Consumer		—		102		—

Total	$	53,884	$	76,783	$	—

With an allowance recorded:
Commercial and agricultural	$	1,536	$	2,047	$	1,506
Real estate - construction		14,109		14,718		4,899
Real estate - mortgage:
1-4 family residential		11,883		12,328		2,140
Commercial		14,659		14,943		2,415
Consumer		170		172		130

Total	$	42,357	$	44,208	$	11,090

Total:
Commercial and agricultural	$	3,890	$	6,393	$	1,506
Real estate - construction		30,460		40,432		4,899
Real estate - mortgage:
1-4 family residential		24,886		31,985		2,140
Commercial		36,835		41,907		2,415
Consumer		170		274		130

Total	$	96,241	$	120,991	$	11,090

The following table presents impaired loan information as of December 31, 2010:


(dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded:
Commercial and agricultural	$	3,813	$	6,108	$	—
Real estate - construction		56,638		73,579		—
Real estate - mortgage:
1-4 family residential		26,737		29,173		—
Commercial		45,042		52,565		—
Consumer		188		207		—

Total	$	132,418	$	161,632	$	—

With an allowance recorded:
Commercial and agricultural	$	10,363	$	11,054	$	7,451
Real estate - construction		95,827		112,858		35,281
Real estate - mortgage:
1-4 family residential		14,372		15,855		5,448
Commercial		87,495		96,436		22,708
Consumer		—		—		—

Total	$	208,057	$	236,203	$	70,888

Total:
Commercial and agricultural	$	14,176	$	17,162	$	7,451
Real estate - construction		152,465		186,437		35,281
Real estate - mortgage:
1-4 family residential		41,109		45,028		5,448
Commercial		132,537		149,001		22,708
Consumer		188		207		—

Total	$	340,475	$	397,835	$	70,888

Average recorded investment and interest income recognized on impaired loans, segregated by portfolio segment, is shown in the following table as of December 31:


	For Twelve Months Ended December 31, 2011				For Twelve Months Ended December 31, 2010
(dollars in thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial and agricultural	$	3,202	$	—	$	5,970	$	32
Real estate - construction		41,164		1		74,440		81
Real estate - mortgage:
1-4 family residential		17,077		1		29,720		154
Commercial		38,688		25		54,674		74
Consumer		175		—		192		3

Total	$	100,306	$	27	$	164,996	$	344

With an allowance recorded:
Commercial and agricultural	$	4,458	$	—	$	8,228	$	—
Real estate - construction		51,354		—		86,329		—
Real estate - mortgage:
1-4 family residential		15,740		7		11,563		—
Commercial		40,777		—		84,015		—
Consumer		214		—		—		—

Total	$	112,543	$	7	$	190,135	$	—

Total:
Commercial and agricultural	$	7,660	$	—	$	14,198	$	32
Real estate - construction		92,518		1		160,769		81
Real estate - mortgage:
1-4 family residential		32,817		8		41,283		154
Commercial		79,465		25		138,689		74
Consumer		389		—		192		3

Total	$	212,849	$	34	$	355,131	$	344

As a result of adopting the amendments in ASU 2011-02, FNB reassessed all restructurings that occurred on or after the beginning of the fiscal year of adoption (January 1, 2011) to determine whether they are considered TDRs under the amended guidance. FNB identified as TDRs certain loans for which ALL had previously been measured under a general allowance methodology. Upon identifying those loans as TDRs, FNB identified them as impaired under the guidance in ASC 310-10-35. The amendments in ASU 2011-02 require prospective application of the impairment measurement guidance in ASC 310-10-35 for those loans newly identified as impaired. At the end of the first interim period of adoption (September 30, 2011), the recorded investment in loans for which the allowance was previously measured under a general allowance methodology and are now impaired under ASC 310-10-35 was $1.0 million, and the ALL associated with those loans, on the basis of a current evaluation of loss was $16,200.

For the twelve months ended December 31, 2011, the following table presents a breakdown of troubled debt restructurings segregated by portfolio segment:


	For Twelve Months Ended December 31, 2011
(dollars in thousands)	Number of Loans		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment
Commercial and agricultural		8	$	806	$	806
Real estate - construction		8		5,162		5,162
Real estate - mortgage:
1-4 family residential		9		406		406
Commercial		15		9,740		9,740

Total		40	$	16,114	$	16,114

For the year 2011, one commercial and agricultural loan for $0.2 million defaulted subsequent to becoming a TDR.

During the twelve months ended December 31, 2011, FNB modified 40 loans that were considered to be troubled debt restructurings. FNB extended the terms for 25 of these loans, the interest rate was lowered for three of these loans, and of the remaining twelve loans, nine were modified to convert to interest only loans, one was modified for multiple reasons and two were considered as TDRs for other reasons.

In the determination of the ALL, management considers troubled debt restructurings and any subsequent defaults in these restructurings as impaired loans. The amount of the impairment is measured using the present value of expected future cash flows discounted at the loan's effective interest rate, the observable market price of the loan, or the fair value of the collateral if the loan is collateral dependent.