Regulatory and Other Matters

Regulatory Actions

Consent Orders

On July 22, 2010, 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:


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


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


•	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.


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


•	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.


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


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


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


•	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.


•	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.


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

CommunityOne has submitted all plans requested by the OCC and is adhering to the policies, procedures and processes it has put in place under the CommunityOne order to reduce classified assets, improve asset quality and to enhance bank operations that continue to warrant improvement, and continues to take affirmative steps to comply with the provisions of the CommunityOne Order. However, CommunityOne is not in compliance with the capital requirements contained in the CommunityOne Order. Any material failure of CommunityOne to comply with the CommunityOne Order could result in further enforcement action by the OCC.

On August 17, 2009, 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.

The Granite Order was terminated by the FDIC, effective February 17, 2013. Nevertheless, Granite has continuing obligations to adhere to regulatory requirements relating to, among other things, maintenance of capital in excess of regulatory minimums, continued reduction of classified assets, improvement of asset quality and enhancement of bank operations that continue to warrant improvement. Granite's capital exceeds the regulatory capital levels that were set forth in the Granite Order, which are in excess of the statutory minimums to be well-capitalized.

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. As required by the Written Agreement, FNB submitted to the FRBR a written plan to maintain sufficient capital at FNB on a consolidated basis, and annual statements of its planned sources and uses of cash for operating expenses and other purposes.

FNB has also reported 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 required Granite, prior to termination by the FDIC effective February 27, 2013, 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, 2012 were as follows:



					Minimum Regulatory Requirement
									Pursuant to Order
	CommunityOne Bank		Bank of Granite		Adequately Capitalized		Well- Capitalized		CommunityOne Bank		Bank of Granite
Total risk-based capital ratio	11.40	%	16.30	%	8.00	%	10.00	%	12.00	%	12.00	%
Tier 1 risk-based capital ratio	10.13	%	15.04	%	4.00	%	6.00	%	9.00	%	8.00	%
Leverage capital ratio	6.17	%	8.12	%	4.00	%	5.00	%	9.00	%	8.00	%

As of December 31, 2012, Granite was in compliance with the capital requirements of the Granite Order, but CommunityOne was not in compliance with the capital requirements of the CommunityOne Order. CommunityOne has been designated as “adequately capitalized” by the OCC because it continues to be subject to an Order.