Note 2 – Regulatory and Other Matters

Regulatory Actions

Consent Orders

On July 22, 2010, pursuant to a Stipulation and Consent to the Issuance of a Consent Order, CommunityOne consented and agreed to the issuance of the CommunityOne Order, by the OCC. In the CommunityOne Order, CommunityOne and the OCC agreed as to areas of the bank's operations that warrant improvement and a plan for making those improvements. The CommunityOne Order includes a capital directive, which requires CommunityOne to achieve and maintain minimum regulatory capital levels in excess of the statutory minimums to be well-capitalized, and a directive to develop a liquidity risk management and contingency funding plan. The CommunityOne Order also requires the development of various programs and procedures to improve CommunityOne's asset quality. Specifically, the CommunityOne Order imposed the following requirements on CommunityOne:

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to appoint a Compliance Committee of the Board to monitor and coordinate CommunityOne's adherence to the Order.

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to develop and submit to the OCC for review a written strategic plan covering at least a three-year period.

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to achieve and thereafter maintain total capital at least equal to 12% of risk-weighted assets and Tier 1 capital at least equal to 9% of adjusted total assets.

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to submit to the OCC a written capital plan for CommunityOne covering at least a three-year period.

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to develop, implement and ensure CommunityOne's compliance with written programs to improve the bank's loan portfolio management and to reduce the high level of credit risk in the bank.

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to adopt and ensure implementation and adherence to an enhanced written commercial real estate concentration management program consistent with OCC guidelines.

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to obtain current and complete credit information on all loans and ensure proper collateral documentation is maintained on all loans.

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to develop and implement an independent review and analysis process to ensure that appraisals conform to appraisal standards and regulations.

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to implement and adhere to a written program for the maintenance of an adequate ALL providing for review of the allowance by the Board of Directors at least quarterly.

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to increase the CommunityOne's liquidity to a level sufficient to sustain bank's current operations and to withstand any anticipated or extraordinary demand against its funding base.

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to implement and maintain a comprehensive liquidity risk management program, assessing on an ongoing basis CommunityOne's current and projected funding needs and ensuring that sufficient funds or access to funds exists to meet those needs.

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to develop and implement a written program to strengthen internal controls over accounting and financial reporting.

On August 17, 2009, pursuant to a Stipulation and Consent to the Issuance of a Consent Order, Granite consented and agreed to the issuance of the Granite Order, by the FDIC and North Carolina Commissioner of Banks ("NCCOB"). In the Granite Order, Granite and the OCC agreed as to areas of the bank's operations that warrant improvement and a plan for making those improvements. The Granite Order includes a capital directive, which requires Granite to achieve and maintain minimum regulatory capital levels in excess of the statutory minimums to be well-capitalized, and a directive to develop a liquidity risk management and contingency funding plan. The Granite Order also requires the development of various programs and procedures to improve Granite's asset quality. Specifically, the Granite Order imposed the following requirements on Granite:

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to increase Board participation and appoint a Director's Committee of the Board to monitor and coordinate Granite's compliance with the Order.

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to hire qualified and experienced management acceptable to the FDIC and NCCOB that among other things, would restore Granite to a safe and sound condition.

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to maintain total capital at least equal to 12% of risk-weighted assets and Tier 1 capital at least equal to 8% of adjusted total assets.

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to adopt and implement a written plan addressing liquidity, contingency funding and asset liability management.

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to develop and implement a written plan to reduce classified assets, which shall include a plan to obtain complete credit information on classified loans and ensure proper collateral documentation is maintained on those loans.

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to perform a segmentation analysis with respect to concentrations of credit with the goal to reduce such concentrations.

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to charge off any assets classified as "loss" and 50% of those assets classified "doubtful."

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to not extend additional credit to or for the benefit of any borrower who had a classified loan or other extension of credit from Granite.

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to implement effective written lending and collection policies.

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to develop and submit to the FDIIC and NCCOB for review a long-term written strategic plan and a budget and to thereafter submit updated budgets and evaluation of Granite's actual performance against the budget.

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to not accept, renew or rollover any brokered deposits without a waiver from the FDIC.

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to not pay cash dividends without prior supervisory approval.

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to limit asset growth to 5% per year and in compliance with the capital maintenance provisions of the Order.

Any material failure of CommunityOne to comply with the CommunityOne Order, or Granite to comply with the Granite Order could result in further enforcement actions by the OCC, or the FDIC and the NCCOB, respectively. CommunityOne submitted all required materials and plans requested to the OCC within the given time periods. On October 21, 2011, FNB completed the Recapitalization and Merger which in part was undertaken to allow CommunityOne and Granite to comply with their respective Orders. Each Bank continues to take steps to comply with the Orders.

Written Agreement

On October 21, 2010, FNB entered into the Written Agreement, with the Federal Reserve Bank of Richmond ("FRBR"). Under the Written Agreement, FNB's Board of Directors is required to take appropriate steps to use FNB's financial and managerial resources to serve as a source of strength to CommunityOne, including causing CommunityOne to comply with the CommunityOne Order it entered into with the OCC on July 22, 2010. The Written Agreement has been interpreted to also require FNB to serve as a source of strength to Granite and to cause Granite to comply with the Granite Order it entered into with the FDIC and the NCCOB on August 17, 2009.

FNB also agreed that it would not declare or pay any dividends without prior written approval of the FRBR and the Director of the Division of Banking Supervision and Regulation of the Board of Governors of the Federal Reserve System (the "Director"). FNB further agreed that it would not take dividends or any other form of payment representing a reduction in capital from the CommunityOne Bank without the FRBR's prior written approval. The Written Agreement also provides that neither FNB nor any of its nonbank subsidiaries will make any distributions of interest, principal or other amounts on subordinated debentures or trust preferred securities without the prior written approval of the FRBR and the Director.

The Written Agreement provides that neither FNB nor any of its subsidiaries shall incur, increase or guarantee any debt without FRBR approval. In addition, FNB must obtain the prior approval of the FRBR for the repurchase or redemption of its shares of stock.

Within 60 days from the date of the Written Agreement, FNB submitted to the FRBR a written plan to maintain sufficient capital at FNB on a consolidated basis. Within 30 days of the Written Agreement, FNB also submitted to the FRBR a statement of its planned sources and uses of cash for operating expenses and other purposes for 2011 and submitted a statement of planned sources and uses of cash for operating expenses and other purposes for 2012.

FNB is required to have and report to the FRBR on a quarterly basis regarding its progress in complying with the Written Agreement. The provisions of the agreement will remain effective and enforceable until they are stayed, modified, terminated or suspended in writing by the FRBR.

Capital

The CommunityOne Order requires CommunityOne to achieve and maintain Tier 1 leverage capital ratio of not less than 9% of adjusted total assets, and total risk-based capital of not less than 12% of risk-weighted assets. In addition, the Granite Order requires Granite to achieve and maintain a Tier 1 leverage capital ratio of not less than 8% of adjusted total assets and total risk-based capital of not less than 12% of risk-weighted assets.

The minimum capital requirements to be characterized as "well-capitalized" and "adequately capitalized," as defined by the prompt corrective action provision of federal law, the capital requirements required under the Orders, and each of CommunityOne's and Granite's capital ratios as of December 31, 2011 were as follows:


							Minumum Regulatory Requirement
													Pursuant to Order
	CommunityOne Bank			Bank of Granite			Adequately Capitalized			Well- Capitalized			CommunityONE Bank			Bank of Granite
Total risk-based capital ratio		14.52	%		12.04	%		8.00	%		10.00	%		12.00	%		12.00	%
Tier 1 risk-based capital ratio		13.23	%		12.04	%		4.00	%		6.00	%		9.00	%		8.00	%
Leverage capital ratio		7.39	%		7.19	%		4.00	%		5.00	%		9.00	%		8.00	%

While the Banks were initially in compliance with the capital levels required in the Orders at the consummation of the Recapitalization and Merger, neither Bank currently is in compliance with the leverage capital requirement of its respective Order. As of December 31, 2011, CommunityOne and Granite were designated as "adequately capitalized" by the OCC and FDIC, respectively, because each bank continues to be subject to an Order.

Nasdaq

On August 2, 2010, FNB received written notice from Nasdaq indicating that FNB was not in compliance with Nasdaq's bid price rule, because the closing price per share of its common stock was below $1.00 per share for 30 consecutive business days. In accordance with the rules of The Nasdaq Stock Market, FNB was afforded a 180-day grace period to achieve compliance with the bid price rule. As of January 31, 2011, FNB had not achieved compliance and submitted an application to The Nasdaq Stock Market to transfer the listing of its common stock to The Nasdaq Capital Market from The Nasdaq Global Select Market, where it had been listed. The application was granted effective February 3, 2011, and FNB became eligible for an additional 180 calendar day period, or until August 1, 2011, to achieve compliance with the bid price rule. On June 10, 2011, FNB received a further written notice from the Nasdaq Stock Market of the Nasdaq staff's determination that FNB had not provided a definitive plan evidencing its ability to achieve near-term compliance with all the continued listing requirements of The Nasdaq Capital Market including the bid price rule and the shareholders' equity rule. Accordingly, unless FNB requested an appeal, trading of FNB's common stock would have been suspended at the opening of business on June 21, 2011, and FNB's common stock would have been removed from listing and registration on The Nasdaq Stock Market. FNB appealed the Nasdaq's staff's determination. Following a hearing, FNB received written notice from The Nasdaq Stock Market of the appeals panel's determination to grant FNB's request to remain listed on Nasdaq, subject to certain conditions. These conditions include the closings of the Recapitalization and Merger on or before October 31, 2011, FNB's filing with the SEC on or before October 31, 2011 a current report on Form 8-K containing pro forma financial statements demonstrating in excess of $2.5 million in shareholders' equity, and FNB common stock's maintaining on or before November 18, 2011 a closing bid price of $1.00 or more for a minimum of ten consecutive trading days. These conditions were met, as the Recapitalization and Merger occurred on October 21, 2011 and FNB affected the Reverse Stock Split on October 31, 2011 to achieve compliance with the bid price rule by November 18, 2011.

Management Actions

During 2011, we secured additional equity capital, added critical management expertise, significantly improved liquidity and reduced problem assets.

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We completed a capital raise of $310 million in a private placement, at a price of $16.00 per share (taking into effect the Reverse Stock Split), with investments from (1) affiliates of each of The Carlyle Group and Oak Hill Capital Partners and, together with Carlyle (the "Anchor Investors"), pursuant to investment agreements with each of the Anchor Investors, and (2) various other investors, including certain of our directors and officers ("the Additional Investors"), and, together with the Anchor Investors, the Investors, pursuant to subscription agreements, with each of such Additional Investors.

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In connection with the Recapitalization, on October 21, 2011, we also consummated the acquisition of Granite Corp., pursuant to the terms and conditions of the Agreement and Plan of Merger, dated as of April 26, 2011 (as amended, the "Merger Agreement"), by and among FNB, Merger Sub and Granite Corp. Under this agreement, Merger Sub merged with and into Granite Corp., with Granite Corp continuing as the surviving corporation and as a wholly owned subsidiary of FNB. The Merger allows us to improve efficiencies and opens new markets to us.

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As a result of the Recapitalization, we also significantly enhanced our liquidity position during 2011. At December 31, 2011, cash and cash equivalents were 23.0% and 26.0% of total assets and deposits, respectively, and cash and cash equivalents and securities were 40.0% and 46.3% of total assets and deposits, respectively.

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We moved aggressively to reduce problem asset levels. Including the Merger, net loan charge-offs increased to $121.7 million in 2011, compared to $88.5 million in 2010, and OREO expenses, including gains and losses on sale and write-downs, increased $36.9 million in 2011 to $51.4 million. During 2011 we foreclosed on $132.5 million of net loans and transferred them to OREO and disposed of $77.2 million in nonperforming loans and OREO through sales. As a result of these efforts, nonperforming assets decreased 44.8% to $216.4 million during 2011, from $392.3 million at the close of 2010. Excluding the impact of the OREO assets acquired in the Granite acquisition, nonperforming assets dropped 49.1%, or $192.8 million, at CommunityOne from December 31, 2010 levels. The level of nonperforming loans decreased 67.8% from 2010 to 2011, from $329.9 million or 25.3% of loans held for investment at December 31, 2010 to $106.2 million, or 8.7% of loans held for investments at December 31, 2011. With the improved asset quality profile, the provision for loan losses decreased 49.3% to $67.4 million in 2011, compared to $132.8 million in 2010. Accordingly, the ALL decreased to 3.23% of loans held for investment at December 31, 2011, a decrease from 7.18% in 2010.

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Immediately following the consummation of the Recapitalization and the Merger, nine members of the Board of Directors resigned and the Board of Directors appointed nine new members to fill the vacancies. H. Ray McKenney, Jr. and R. Reynolds Neely, Jr., remained on the Board of Directors following the Recapitalization and Merger. Boyd C. Wilson, Jr., formerly a director of Granite Corp.; John Bresnan, a Managing Director of Carlyle; and Scott B. Kauffman, a Principal of Oak Hill Capital, were appointed as directors. Brian E. Simpson, Robert L. Reid, Austin A. Adams, Jerry R. Licari, J. Chandler Martin and Louis A. "Jerry" Schmitt were also appointed to the Board of Directors. Additionally, the following individuals were appointed as the executive officers of FNB upon the completion of the Recapitalization and the Merger: Brian E. Simpson, Chief Executive Officer; Robert L. Reid, President; and David L. Nielsen, Chief Financial Officer. Additionally, our new senior management team includes David C. Lavoie as Chief Risk Officer, Gregory P. Murphy as Chief Workout Officer, and Angus M. McBryde III as Treasurer.

As a result of the actions above, we have addressed the issues that required us in 2010 to consider whether we could continue as a going concern. Therefore, as of December 31, 2011, we do not have substantial doubt about the Company's ability to continue as a going concern.