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 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:



(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 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.

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.

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:



(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.

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	$	176,048	$	178,265	$	5,373

The following table presents individually reviewed impaired loans, segregated by portfolio segment, and the corresponding reserve for impaired loan losses as of December 31, 2012:



			Unpaid
(dollars in thousands)	Recorded		Principal		Related
	Investment		Balance		Allowance
With no related allowance recorded:
Commercial and agricultural	$	1,755	$	2,608	$	—
Real estate - construction	11,875		18,553		—
Real estate - mortgage:
1-4 family residential	16,437		20,764		—
Commercial	32,215		38,585		—
Consumer	—		—		—
Total	$	62,282	$	80,510	$	—
With an allowance recorded:
Commercial and agricultural	$	579	$	602	$	282
Real estate - construction	1,658		1,843		82
Real estate - mortgage:
1-4 family residential	1,681		1,745		607
Commercial	11,394		14,714		766
Consumer	—		—		—
Total	$	15,312	$	18,904	$	1,737
Total individually evaluated impaired loans
Commercial and agricultural	$	2,334	$	3,210	$	282
Real estate - construction	13,533		20,396		82
Real estate - mortgage:
1-4 family residential	18,118		22,509		607
Commercial	43,609		53,299		766
Consumer	—		—		—
Total	$	77,594	$	99,414	$	1,737
PI loans with subsequent credit deterioration:
Commercial and agricultural	$	11,533	$	11,728	$	524
Real estate - construction	2,285		2,236		200
Real estate - mortgage:
1-4 family residential	34,961		35,802		711
Commercial	141,974		145,704		3,388
Consumer	1,362		1,147		550
Total	$	192,115	$	196,617	$	5,373

The following summary includes impaired loans individually reviewed as well as impaired loans held for sale. Average recorded investment and interest income recognized on impaired loans, segregated by portfolio segment, is shown in the following table as of March 31, 2013 and March 31, 2012:



	For Three Months Ended				For Three Months Ended
	March 31, 2013				March 31, 2012
	Average		Interest		Average		Interest
(dollars in thousands)	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
With no related allowance recorded:
Commercial and agricultural	$	886	$	—	$	3,132	$	7
Real estate - construction	9,233		—		13,414		4
Real estate - mortgage:
1-4 family residential	13,472		26		18,199		6
Commercial	34,010		87		29,810		30
Consumer	—		—		399		—
Total	$	57,601	$	113	$	64,954	$	47
With an allowance recorded:
Commercial and agricultural	$	917	$	5	$	1,668	$	—
Real estate - construction	2,111		—		12,050		2
Real estate - mortgage:
1-4 family residential	4,666		8		12,965		18
Commercial	8,663		4		14,522		8
Consumer	—		—		211		—
Total	$	16,357	$	17	$	41,416	$	28
Total:
Commercial and agricultural	$	1,803	$	5	$	4,800	$	7
Real estate - construction	11,344		—		25,464		6
Real estate - mortgage:
1-4 family residential	18,138		34		31,164		24
Commercial	42,673		91		44,332		38
Consumer	—		—		610		—
Total	$	73,958	$	130	$	106,370	$	75

Impaired loans also include loans for which FNB may elect to grant a concession, providing terms more favorable than those prevalent in the market (e.g., rate, amortization term), and formally restructure due to the weakening credit status of a borrower. Restructuring is designed to facilitate a repayment plan that minimizes the potential losses that FNB otherwise may have to incur. If these impaired loans are on nonaccruing status as of the date of restructuring, the loans are included in nonperforming loans. 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 and when it is otherwise determined that continued adherence is reasonably assured. Some restructured loans continue as accruing loans after restructuring if the borrower is not past due at the time of restructuring, adequate collateral valuations support the restructured loans, and the cash flows of the underlying business appear 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 March 31, 2013, there was $18.2 million in restructured loans, of which $3.6 million in loans were accruing and in a performing status. At December 31, 2012, there was $20.8 million in restructured loans, of which $4.5 million in loans were accruing and in a performing status.

Sale of Problem Loans

During 2012, FNB sold loans to third party buyers in order to reduce its problem loan exposure. These loans were transferred to loans held for sale at the time FNB received a signed contract for the purchase of the loans. Prior to transferring these loans to loans held for sale, the loans were marked down to the contract price less associated selling costs. All transactions were conducted at arm's length and loans were sold without recourse.

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



	For Three Months Ended					For Three Months Ended
	March 31, 2013					March 31, 2012
(dollars in thousands)	Number	Recorded		Contract		Number	Recorded		Contract
	of Loans	Investment		Pricing		of Loans	Investment		Pricing
Commercial and agricultural	—	$	—	$	—	—	$	—	$	—
Real estate - construction	—	—		—		1	3,800		4,050
Real estate - mortgage:
1-4 family residential						1	150		150
Commercial	—	—		—		—	—		—
Consumer	—	—		—		—	—		—
Total	—	$	—	$	—	2	$	3,950	$	4,200

Granite Purchased Loans

Granite Purchased Loans include PI Loans and PC Loans. PC Loans include performing revolving consumer and commercial loans on October 21, 2011, the acquisition date.

PI Loans are segregated into pools and recorded at estimated fair value on the date of acquisition without the carryover of the related ALL. PI Loans are accounted for under ASC 310-30 when the loans have evidence of credit deterioration since origination and it is probable at the date of acquisition we will not collect all contractually required principal and interest payments. Evidence of credit quality deterioration as of the date of acquisition may include statistics such as past due status, nonaccrual status and risk grade. PI Loans generally meet FNB's definition for nonaccrual status; however, even if the borrower is not currently making payments, FNB will classify loans as accruing if we can reasonably estimate the amount and timing of future cash flows. All Granite Purchased PI Loans are presented on an accruing basis. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the nonaccretable difference.

Periodically, we estimate the expected cash flows for each pool of the PI Loans and evaluate whether the expected cash flows for each pool have changed from prior estimates. Decreases to the expected cash flows will generally result in a provision for loan losses. Subsequent increases in cash flows result in a reversal of the provision for loan losses to the extent of prior charges, or reclassification from nonaccretable difference to accretable yield with a positive impact on future interest income. Excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized into interest income over the remaining life of the loan when there is a reasonable expectation about the amount and timing of such cash flows.

We have elected to account for the Granite Purchased PI Loans under ASC 310-30 and the Granite Purchased PC Loans under ASC 310-20.

At March 31, 2013, and December 31, 2012, our financial statements reflected a PI Loan ALL of $5.4 million and $5.4 million, respectively, and an ALL for PC Loans of $0.8 million and $0.5 million, respectively.

The following table presents the balance of all Granite Purchased Loans:



	At March 31, 2013
(dollars in thousands)	Purchased Impaired		Purchased Contractual		Total Purchased Loans		Unpaid Principal Balance
Commercial and agricultural	$	12,909	$	5,701	$	18,610	$	18,107
Real estate - construction	2,328		—		2,328		2,281
Real estate - mortgage:
1-4 family residential	36,907		25,879		62,786		64,906
Commercial	152,437		—		152,437		157,312
Consumer	1,303		—		1,303		1,008
Total	$	205,884	$	31,580	$	237,464	$	243,614



	At December 31, 2012
(dollars in thousands)	Purchased Impaired		Purchased Contractual		Total Purchased Loans		Unpaid Principal Balance
Commercial and agricultural	$	14,666	$	7,311	$	21,977	$	21,692
Real estate - construction	2,682		—		2,682		2,677
Real estate - mortgage:
1-4 family residential	39,215		27,484		66,699		69,200
Commercial	170,467		49		170,516		176,347
Consumer	1,362		—		1,362		1,144
Total	$	228,392	$	34,844	$	263,236	$	271,060

The table below includes only those Granite Purchased Loans accounted for under the expected cash flow method (PI Loans) for the periods indicated. These tables do not include PC Loans, including Granite Purchased PC Loans or purchased performing residential mortgage loans.



	For Three Months Ended						For Three Months Ended
	March 31, 2013						March 31, 2012
	Purchased Impaired						Purchased Impaired
(dollars in thousands)	Carrying Amount			Future Accretion			Carrying Amount			Future Accretion
Balance, beginning of period	$	228,392		$	30,299		$	330,836		$	47,804
Accretion	4,203			(4,203		)	5,772			(5,772		)
Payments received	(25,928		)	—			(23,110		)	—
Foreclosed and transferred to OREO	(783		)	—			(3,109		)	—
Subtotal before allowance	205,884			26,096			310,389			42,032
Allowance for credit losses	(5,373		)	—			—			—
Net carrying amount, end of period	$	200,511		$	26,096		$	310,389		$	42,032

Allowance for Loan Losses

An analysis of the changes in the ALL is as follows:



	For Three Months Ended
(dollars in thousands)	March 31, 2013			March 31, 2012
Balance, beginning of period	$	29,314		$	39,360
Provision for losses charged to continuing operations	110			3,067
Net charge-offs:
Charge-offs	(3,010		)	(4,015		)
Recoveries	3,227			1,383
Net recoveries (charge-offs)	217			(2,632		)
Balance, end of period	$	29,641		$	39,795
Annualized net charge-offs (recoveries) during the period to average loans	(0.07		)%	0.87		%
Annualized net charge-offs (recoveries) during the period to ALL	(2.93		)%	26.60		%
Allowance for loan losses to loans held for investment (1)	2.66		%	3.19		%

(1) Excludes discontinued operations.

The following table presents ALL activity by portfolio segment for the three months ended March 31, 2013:



							Real Estate - Mortgage
(dollars in thousands)	Commercial and Agricultural			Real Estate - Construction			1-4 Family Residential			Commercial			Consumer			Total

ALL:
Beginning balance at January 1, 2013	$	3,238		$	4,987		$	8,701		$	9,627		$	2,761		$	29,314
Charge-offs	(319		)	(344		)	(632		)	(891		)	(824		)	(3,010		)
Recoveries	278			796			185			932			1,036			3,227
Provision	176			155			549			(377		)	(393		)	110
Ending balance at March 31, 2013	$	3,373		$	5,594		$	8,803		$	9,291		$	2,580		$	29,641

The following table presents ALL activity by portfolio segment for the three months ended March 31, 2012:



							Real Estate - Mortgage
(dollars in thousands)	Commercial and Agricultural			Real Estate - Construction			1-4 Family Residential			Commercial			Consumer			Total
ALL:

Beginning balance at January 1, 2012	$	5,776		$	11,995		$	8,885		$	11,063		$	1,641		$	39,360
Charge-offs	(694		)	(1,775		)	(705		)	(38		)	(803		)	(4,015		)
Recoveries	254			601			133			74			321			1,383
Provision	669			91			3,790			(2,300		)	817			3,067
Ending balance at March 31, 2012	$	6,005		$	10,912		$	12,103		$	8,799		$	1,976		$	39,795

The following table details the recorded investment in loans related to each segment in the allowance for loan losses by portfolio segment and disaggregated on the basis of impairment evaluation methodology at March 31, 2013:



					Real Estate - Mortgage
(dollars in thousands)	Commercial and Agricultural		Real Estate - Construction		1-4 Family Residential		Commercial		Consumer		Total
ALL:
Individually evaluated for impairment	$	227	$	501	$	1,317	$	1,084	$	—	$	3,129
Collectively evaluated for impairment	2,601		4,896		6,756		4,856		2,030		21,139
PI loans evaluated for credit impairment	545		197		730		3,351		550		5,373
PI loans with no credit deterioration	—		—		—		—		—		—
Total ALL	$	3,373	$	5,594	$	8,803	$	9,291	$	2,580	$	29,641
Loans held for investment
Individually evaluated for impairment	$	1,792	$	11,033	$	18,909	$	41,348	$	—	$	73,082
Collectively evaluated for impairment	62,790		44,292		464,992		221,209		41,516		834,799
PI loans with subsequent credit deterioration	9,930		1,986		33,174		129,655		1,303		176,048
PI loans with no credit deterioration	2,978		342		3,733		22,783		—		29,836
Total loans	$	77,490	$	57,653	$	520,808	$	414,995	$	42,819	$	1,113,765



					Real Estate - Mortgage
(dollars in thousands)	Commercial and Agricultural		Real Estate - Construction		1-4 Family Residential		Commercial		Consumer		Total
ALL:
Individually evaluated for impairment	$	282	$	82	$	607	$	766	$	—	$	1,737
Collectively evaluated for impairment	2,432		4,705		7,383		5,473		2,211		22,204
PI loans evaluated for credit impairment	524		200		711		3,388		550		5,373
PI loans with no credit deterioration	—		—		—		—		—		—
Total ALL	$	3,238	$	4,987	$	8,701	$	9,627	$	2,761	$	29,314
Loans held for investment
Individually evaluated for impairment	$	2,334	$	13,533	$	18,118	$	43,609	$	—	$	77,594
Collectively evaluated for impairment	62,704		42,199		496,205		227,760		42,181		871,049
PI loans with subsequent credit deterioration	11,533		2,285		34,961		141,974		1,362		192,115
PI loans with no credit deterioration	3,133		397		4,254		28,493		—		36,277
Total loans	$	79,704	$	58,414	$	553,538	$	441,836	$	43,543	$	1,177,035

Troubled Debt Restructuring

The following table presents a breakdown of troubled debt restructurings that were restructured during the three months ended March 31, 2013 and March 31, 2012, segregated by portfolio segment:



	For Three Months Ended March 31, 2013					For Three Months Ended March 31, 2012
		Pre-Modification		Post-Modification				Pre-Modification		Post-Modification
		Outstanding		Outstanding				Outstanding		Outstanding
(dollars in thousands)	Number	Recorded		Recorded		Number		Recorded		Recorded
	of Loans	Investment		Investment		of Loans		Investment		Investment
Commercial and agricultural	—	$	—	$	—	—		$	—	$	—
Real estate - construction	—	—		—		2		192		192
Real estate - mortgage:
1-4 family residential	4	1,777		1,773		8		210		210
Commercial	1	1,151		807		—		—		—
Consumer	—	—		—		1		24		24
Total	5	$	2,928	$	2,580	$	11	$	426	$	426

During the three months ended March 31, 2013, FNB modified 5 loans that were considered to be troubled debt restructurings. FNB extended the terms and modified the interest rate for each of these loans. During the three months ended March 31, 2012, FNB modified eleven loans that were considered to be troubled debt restructurings. FNB extended the terms for nine of these loans, the interest rate was lowered for one of these loans, and the remaining loan was modified for multiple reasons.

There were no loans restructured in the twelve months prior to March 31, 2013 that went into default during the three months ended March 31, 2013. There were also no loans restructured in the twelve months prior to March 31, 2012 that went into default during the three months ended March 31, 2012.

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.

Unfunded Commitments

The reserve for unfunded commitments, which is included in other liabilities, is calculated by determining the type of commitment and the remaining unfunded commitment for each loan. Based on the type of commitment, an expected usage percentage to the remaining unfunded balance is applied. The expected usage percentage is multiplied by the historical losses and qualitative and environmental factors for each loans pool as defined in the regular ALL calculation to determine the appropriate level of reserve. The following describes our method for determining the unfunded commitment:


•	Straight Lines of Credit - Unfunded balance of line of credit


•	Revolving Lines of Credit - Average Utilization (for the last 12 months) less Current Utilization


•	Letters of Credit - a 10% utilization is applied

The reserve for unfunded commitments was $0.6 million as of March 31, 2013 and $0.6 million at December 31, 2012.