Going Concern Considerations And Management's Plans And Intentions	6 Months Ended
Jun. 30, 2011
Going Concern Considerations And Management's Plans And Intentions
Going Concern Considerations And Management's Plans And Intentions	4. Going Concern Considerations and Management's Plans and Intentions Going Concern Considerations The going concern assumption is a fundamental principle in the preparation of financial statements. It is the responsibility of management to assess the Company's ability to continue as a going concern. In making this assessment, the Company has taken into account all available information about the future, which is at least, but is not limited to, twelve months from the balance sheet date of June 30, 2011. The Company had a history of profitable operations and sufficient sources of liquidity to meet its short-term and long-term funding needs. However, the Bank's financial condition has suffered during 2009, 2010 and the first six months of 2011 in what may ultimately be the worst economic downturn since the Great Depression. The effects of the current economic environment are being felt across many industries, with financial services and real estate being particularly hard-hit, and have been particularly severe during the last 30 months. The Bank, with a loan portfolio consisting of a concentration in commercial real estate loans, including residential construction and development loans, has seen a decline in the value of the collateral securing its portfolio as well as rapid deterioration in its borrowers' cash flow and ability to repay their outstanding loans to the Bank. For the first six months of 2011 and for the year ended December 31, 2010, the Bank recorded provisions of $53.8 million and $132.8 million, respectively, to increase the allowance for loan losses to a level that, in management's best judgment, adequately reflected the increased risk inherent in the loan portfolio as of the quarter-end and year-end periods, respectively. FNB United and the Bank operate in a highly regulated industry and must plan for the liquidity needs of each entity separately. A variety of sources of liquidity are available to the Bank to meet its short-term and long-term funding needs. Although a number of these sources are limited following execution of the Order with the OCC, management has prepared forecasts of the Bank's sources of funds and projected uses of funds for a three-year period in an effort to ensure that the sources available are sufficient to meet the Bank's projected liquidity needs. FNB United is a legal entity separate and distinct from the Bank and has in the past relied on dividends from the Bank as its primary source of liquidity. The Order and the Written Agreement, as well as the Prompt Correction Action provisions of federal law, prohibit the Bank from lending or otherwise supplying funds to FNB United to meet its obligations, including paying any dividends. The Company is in the process of raising capital to meet the standards set forth in applicable law and required by the OCC. As a result of the downturn in the financial markets, the availability of many sources of capital (principally to financial services companies) has become significantly restricted or has become increasingly costly as compared to market rates prevailing prior to the downturn. On April 26, 2011, FNB United entered into investment agreements with The Carlyle Group and Oak Hill Capital Partners to recapitalize the Company, as well as a merger agreement with Bank of Granite Corporation. On June 16 and August 4, 2011, the Company entered into subscription agreements with various accredited investors for the purchase and sale of its common stock. Together, the investment agreements with Carlyle and Oak Hill Capital and the subscription agreements contemplate the issuance of $310 million of common stock of the Company at $0.16 per share. Details of the investment agreements, the subscription agreements and the merger agreement can be found in Note 21, Capital Raise, Merger Agreement and Related Matters and Note 22, Subsequent Events. Management also is actively evaluating asset reductions and other balance sheet management strategies to ensure that the Bank's projected level of regulatory capital can support its balance sheet. Completion of the recapitalization, including the sale of common stock to The Carlyle Group and Oak Hill Capital Partners and the other investors, is subject to various conditions, certain of which are outside of the Company's control and may not be satisfied. The closing conditions to the recapitalization include receipt of requisite regulatory approvals and other customary closing conditions. No assurance can be given that all conditions will be satisfied timely or at all. If the Company fails to consummate the recapitalization, it is expected it will not be able to continue as a going concern, it may file for bankruptcy and the Bank may be placed into FDIC receivership. The equity financing transaction, if completed, will result in substantial dilution to the Company's current shareholders and could adversely affect the market price of the Company's common stock. It is difficult to predict if the recapitalization efforts will be successful, either on a short-term or long-term basis. Not later than 90 days after an institution becomes critically undercapitalized, the institution's primary federal bank regulatory agency must appoint a receiver or a conservator, unless the agency, with the concurrence of the FDIC, determines that the purposes of the prompt corrective action provisions would be better served by another course of action. Any alternative determination must be documented by the agency and reassessed on a periodic basis. Notwithstanding the foregoing, a receiver must be appointed after 270 days unless the FDIC determines that the institution has positive net worth, is in compliance with a capital plan, is profitable or has a sustainable upward trend in earnings, and is reducing its ratio of nonperforming loans to total loans, and unless the head of the appropriate federal banking agency and the chairperson of the FDIC certify that the institution is viable and not expected to fail. The perception or possibility that FNB United's common stock could be delisted from the Nasdaq in the future could negatively affect its liquidity and price. Delisting would have an adverse effect on the liquidity of the common shares and, as a result, the market price for the common stock might become more volatile. Delisting could also make it more difficult for the Company to raise additional capital. The accompanying consolidated financial statements for the Company have been prepared on a going concern basis, which contemplates the realization of assets and the discharge of liabilities in the normal course of business for the foreseeable future, and does not include any adjustments to reflect the possible future effects on the recoverability or classification of assets. Management's Plans and Intentions The Company incurred significant net losses in 2009, which continued in 2010 and 2011, primarily from the higher provisions for loan losses due to the significant level of nonperforming assets and the write-off of goodwill. The Bank consented and agreed to the issuance of the Consent Order ("Order") by the OCC in July 2010 and FNB United entered into a written agreement with the FRBR in October 2010. The Company's independent registered public accounting firm issued a report with respect to the Company's audited financial statements for each of the fiscal years ended December 31, 2010 and 2009, which contained an explanatory paragraph indicating that there is substantial doubt about the Company's ability to continue as a going concern. The following strategies have been or are being implemented: Held-to-Maturity Investment Securities Reclassification – As part of the Bank's contingency funding plan, the Bank's Board of Directors approved in April 2010 the reclassification of the entire held-to-maturity investment securities portfolio to available-for-sale investment securities. The conversion of the portfolio occurred on May 3, 2010 and provides additional liquidity to the Bank. The transfer resulted in the unrealized holding gains of $2.1 million, net of tax, at the date of transfer being recognized in other comprehensive income. The corresponding deferred tax on the unrealized holding gain allowed the Bank to realize a one-time reduction in deferred tax valuation allowance of $1.4 million in the second quarter of 2010. Deferring Preferred Stock and Trust Preferred Securities Payments – The Company began deferring the payment of cash dividends on its outstanding Fixed Rate Cumulative Perpetual Preferred Stock, Series A, beginning in the second quarter 2010, as well as the payment of interest on the outstanding junior subordinated notes related to its trust preferred securities to enhance the Company's liquidity. The expense associated with trust preferred securities continues to accrue and is reflected in the Company's Consolidated Statements of Operations. The dividends on preferred stock are shown as an increase to net loss to derive net loss available to common shareholders in the Consolidated Statements of Operations. Balance Sheet Reductions – Management is implementing strategies to improve capital ratios through the reduction of assets and off-balance sheet commitments. At June 30, 2011, risk-weighted assets have been reduced by $233.2 million since December 31, 2010. Reductions occurred primarily in reductions in the commercial loan portfolio. On December 30, 2010, the Bank sold $32.9 million of mortgage loans held for investment and recognized a net gain of $383,000, including transaction costs. Management expects future reductions in risk-weighted assets to be moderate and occur primarily in the loan portfolio. To offset the majority of asset reductions, liabilities declined primarily through reductions in deposits by $91.4 million. Future liability reductions are expected to occur primarily in deposits, largely public unit deposits and high-rate NOW accounts and certificates of deposits. Earnings – On June 22, 2010, the Bank retired $33.0 million in Federal Home Loan Bank ("FHLB") advances and paid an early redemption penalty of $1.0 million to the FHLB for the retirement of these advances. The penalty is included in other noninterest expenses. On July 2, 2010, the Bank purchased $30.0 million in brokered certificates of deposit to replace these funds. The advances had a remaining average life of 1.0 years and an average interest rate of 3.93%. The brokered certificates of deposit have maturities ranging from 30 months to 42 months with interest rates ranging from 1.75% to 2.20%. As a result of this transaction, the interest expense savings during the first year is estimated at an annualized rate of 1.94% on the $30.0 million restructured. Stimulus Loan Program – The Bank implemented in 2009 a stimulus loan program to facilitate the sale of residential real estate held as collateral for some of the Bank's nonperforming and performing loans and certain Bank-owned properties. The purpose of the program was to reduce the Bank'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. The Bank offered a reduced interest rate to qualified new borrowers to encourage them to purchase properties in this program. New borrowers qualified according to the Bank's normal consumer and mortgage underwriting standards. The Bank recorded these loans at fair value at time of issue. Existing unimpaired development loans that become part of the program are considered impaired upon inclusion in the stimulus loan program. The Bank currently has $41.6 million in loans under the stimulus loan program, of which $15.2 million required a fair value adjustment of $92,700 as of June 30, 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. The Bank discontinued the stimulus loan program and booked the last stimulus loan during the first quarter of 2011. The Company will continue to report stimulus loan information, as indicated above, through the filing of the annual report on Form 10-K for the year ending December 31, 2011. Additional Capital – The Company has engaged two investment banking firms to assist the Company in identifying strategic alternatives and in raising capital. On April 26, 2011, FNB United entered into investment agreements with Carlyle and Oak Hill Capital to recapitalize the Company, as well as a merger agreement with Bank of Granite Corporation. On June 16 and August 4, 2011, the Company entered into subscription agreements with various accredited investors pursuant to which those investors agreed to purchase shares of the Company's common stock in the recapitalization. Those subscription agreements, together with the investment agreements with Carlyle and Oak Hill Capital, account for $310 million in new capital for the Company. Details of the investment agreements, the subscription agreements and the merger agreement can be found in Note 21, Capital Raise, Merger Agreement and Related Matters and Note 22, Subsequent Events. There are no assurances, however, that the Company will be able to complete the investments. The successful completion of all or any portion of the capital plan is not assured, and no assurance can be made that the capital plan will not be materially modified in the future. If the Company is not able to complete the capital plan, its regulatory capital ratios may be materially and adversely affected and its ability to withstand continued adverse economic conditions could be threatened. Further, it is likely that the Company would suffer additional regulatory actions, including a potential federal conservatorship or receivership for the Bank, or a requirement that the Bank sell or transfer its assets or take other action that would likely result in a complete loss of the value of FNB United's ownership interest in the Bank and a complete loss of the value of the shares held by the FNB United shareholders. Further information relating to the capital raise is set forth in Note 21, Capital Raise, Merger Agreement and Related Matters and Note 22, Subsequent Events.

4. Going Concern Considerations and Management's Plans and Intentions

Going Concern Considerations

The going concern assumption is a fundamental principle in the preparation of financial statements. It is the responsibility of management to assess the Company's ability to continue as a going concern. In making this assessment, the Company has taken into account all available information about the future, which is at least, but is not limited to, twelve months from the balance sheet date of June 30, 2011. The Company had a history of profitable operations and sufficient sources of liquidity to meet its short-term and long-term funding needs. However, the Bank's financial condition has suffered during 2009, 2010 and the first six months of 2011 in what may ultimately be the worst economic downturn since the Great Depression.

The effects of the current economic environment are being felt across many industries, with financial services and real estate being particularly hard-hit, and have been particularly severe during the last 30 months. The Bank, with a loan portfolio consisting of a concentration in commercial real estate loans, including residential construction and development loans, has seen a decline in the value of the collateral securing its portfolio as well as rapid deterioration in its borrowers' cash flow and ability to repay their outstanding loans to the Bank. For the first six months of 2011 and for the year ended December 31, 2010, the Bank recorded provisions of $53.8 million and $132.8 million, respectively, to increase the allowance for loan losses to a level that, in management's best judgment, adequately reflected the increased risk inherent in the loan portfolio as of the quarter-end and year-end periods, respectively.

FNB United and the Bank operate in a highly regulated industry and must plan for the liquidity needs of each entity separately. A variety of sources of liquidity are available to the Bank to meet its short-term and long-term funding needs. Although a number of these sources are limited following execution of the Order with the OCC, management has prepared forecasts of the Bank's sources of funds and projected uses of funds for a three-year period in an effort to ensure that the sources available are sufficient to meet the Bank's projected liquidity needs.

FNB United is a legal entity separate and distinct from the Bank and has in the past relied on dividends from the Bank as its primary source of liquidity. The Order and the Written Agreement, as well as the Prompt Correction Action provisions of federal law, prohibit the Bank from lending or otherwise supplying funds to FNB United to meet its obligations, including paying any dividends.

The Company is in the process of raising capital to meet the standards set forth in applicable law and required by the OCC. As a result of the downturn in the financial markets, the availability of many sources of capital (principally to financial services companies) has become significantly restricted or has become increasingly costly as compared to market rates prevailing prior to the downturn. On April 26, 2011, FNB United entered into investment agreements with The Carlyle Group and Oak Hill Capital Partners to recapitalize the Company, as well as a merger agreement with Bank of Granite Corporation. On June 16 and August 4, 2011, the Company entered into subscription agreements with various accredited investors for the purchase and sale of its common stock. Together, the investment agreements with Carlyle and Oak Hill Capital and the subscription agreements contemplate the issuance of $310 million of common stock of the Company at $0.16 per share. Details of the investment agreements, the subscription agreements and the merger agreement can be found in Note 21, Capital Raise, Merger Agreement and Related Matters and Note 22, Subsequent Events. Management also is actively evaluating asset reductions and other balance sheet management strategies to ensure that the Bank's projected level of regulatory capital can support its balance sheet.

Completion of the recapitalization, including the sale of common stock to The Carlyle Group and Oak Hill Capital Partners and the other investors, is subject to various conditions, certain of which are outside of the Company's control and may not be satisfied. The closing conditions to the recapitalization include receipt of requisite regulatory approvals and other customary closing conditions. No assurance can be given that all conditions will be satisfied timely or at all. If the Company fails to consummate the recapitalization, it is expected it will not be able to continue as a going concern, it may file for bankruptcy and the Bank may be placed into FDIC receivership. The equity financing transaction, if completed, will result in substantial dilution to the Company's current shareholders and could adversely affect the market price of the Company's common stock. It is difficult to predict if the recapitalization efforts will be successful, either on a short-term or long-term basis.

Not later than 90 days after an institution becomes critically undercapitalized, the institution's primary federal bank regulatory agency must appoint a receiver or a conservator, unless the agency, with the concurrence of the FDIC, determines that the purposes of the prompt corrective action provisions would be better served by another course of action. Any alternative determination must be documented by the agency and reassessed on a periodic basis. Notwithstanding the foregoing, a receiver must be appointed after 270 days unless the FDIC determines that the institution has positive net worth, is in compliance with a capital plan, is profitable or has a sustainable upward trend in earnings, and is reducing its ratio of nonperforming loans to total loans, and unless the head of the appropriate federal banking agency and the chairperson of the FDIC certify that the institution is viable and not expected to fail.

The perception or possibility that FNB United's common stock could be delisted from the Nasdaq in the future could negatively affect its liquidity and price. Delisting would have an adverse effect on the liquidity of the common shares and, as a result, the market price for the common stock might become more volatile. Delisting could also make it more difficult for the Company to raise additional capital.

The accompanying consolidated financial statements for the Company have been prepared on a going concern basis, which contemplates the realization of assets and the discharge of liabilities in the normal course of business for the foreseeable future, and does not include any adjustments to reflect the possible future effects on the recoverability or classification of assets.

Management's Plans and Intentions

The Company incurred significant net losses in 2009, which continued in 2010 and 2011, primarily from the higher provisions for loan losses due to the significant level of nonperforming assets and the write-off of goodwill. The Bank consented and agreed to the issuance of the Consent Order ("Order") by the OCC in July 2010 and FNB United entered into a written agreement with the FRBR in October 2010. The Company's independent registered public accounting firm issued a report with respect to the Company's audited financial statements for each of the fiscal years ended December 31, 2010 and 2009, which contained an explanatory paragraph indicating that there is substantial doubt about the Company's ability to continue as a going concern. The following strategies have been or are being implemented:

Held-to-Maturity Investment Securities Reclassification – As part of the Bank's contingency funding plan, the Bank's Board of Directors approved in April 2010 the reclassification of the entire held-to-maturity investment securities portfolio to available-for-sale investment securities. The conversion of the portfolio occurred on May 3, 2010 and provides additional liquidity to the Bank. The transfer resulted in the unrealized holding gains of $2.1 million, net of tax, at the date of transfer being recognized in other comprehensive income. The corresponding deferred tax on the unrealized holding gain allowed the Bank to realize a one-time reduction in deferred tax valuation allowance of $1.4 million in the second quarter of 2010.

Deferring Preferred Stock and Trust Preferred Securities Payments – The Company began deferring the payment of cash dividends on its outstanding Fixed Rate Cumulative Perpetual Preferred Stock, Series A, beginning in the second quarter 2010, as well as the payment of interest on the outstanding junior subordinated notes related to its trust preferred securities to enhance the Company's liquidity. The expense associated with trust preferred securities continues to accrue and is reflected in the Company's Consolidated Statements of Operations. The dividends on preferred stock are shown as an increase to net loss to derive net loss available to common shareholders in the Consolidated Statements of Operations.

Balance Sheet Reductions – Management is implementing strategies to improve capital ratios through the reduction of assets and off-balance sheet commitments. At June 30, 2011, risk-weighted assets have been reduced by $233.2 million since December 31, 2010. Reductions occurred primarily in reductions in the commercial loan portfolio. On December 30, 2010, the Bank sold $32.9 million of mortgage loans held for investment and recognized a net gain of $383,000, including transaction costs. Management expects future reductions in risk-weighted assets to be moderate and occur primarily in the loan portfolio. To offset the majority of asset reductions, liabilities declined primarily through reductions in deposits by $91.4 million. Future liability reductions are expected to occur primarily in deposits, largely public unit deposits and high-rate NOW accounts and certificates of deposits.

Earnings – On June 22, 2010, the Bank retired $33.0 million in Federal Home Loan Bank ("FHLB") advances and paid an early redemption penalty of $1.0 million to the FHLB for the retirement of these advances. The penalty is included in other noninterest expenses. On July 2, 2010, the Bank purchased $30.0 million in brokered certificates of deposit to replace these funds. The advances had a remaining average life of 1.0 years and an average interest rate of 3.93%. The brokered certificates of deposit have maturities ranging from 30 months to 42 months with interest rates ranging from 1.75% to 2.20%. As a result of this transaction, the interest expense savings during the first year is estimated at an annualized rate of 1.94% on the $30.0 million restructured.

Stimulus Loan Program – The Bank implemented in 2009 a stimulus loan program to facilitate the sale of residential real estate held as collateral for some of the Bank's nonperforming and performing loans and certain Bank-owned properties. The purpose of the program was to reduce the Bank'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. The Bank offered a reduced interest rate to qualified new borrowers to encourage them to purchase properties in this program. New borrowers qualified according to the Bank's normal consumer and mortgage underwriting standards. The Bank recorded these loans at fair value at time of issue. Existing unimpaired development loans that become part of the program are considered impaired upon inclusion in the stimulus loan program. The Bank currently has $41.6 million in loans under the stimulus loan program, of which $15.2 million required a fair value adjustment of $92,700 as of June 30, 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. The Bank discontinued the stimulus loan program and booked the last stimulus loan during the first quarter of 2011. The Company will continue to report stimulus loan information, as indicated above, through the filing of the annual report on Form 10-K for the year ending December 31, 2011.

Additional Capital – The Company has engaged two investment banking firms to assist the Company in identifying strategic alternatives and in raising capital. On April 26, 2011, FNB United entered into investment agreements with Carlyle and Oak Hill Capital to recapitalize the Company, as well as a merger agreement with Bank of Granite Corporation. On June 16 and August 4, 2011, the Company entered into subscription agreements with various accredited investors pursuant to which those investors agreed to purchase shares of the Company's common stock in the recapitalization. Those subscription agreements, together with the investment agreements with Carlyle and Oak Hill Capital, account for $310 million in new capital for the Company. Details of the investment agreements, the subscription agreements and the merger agreement can be found in Note 21, Capital Raise, Merger Agreement and Related Matters and Note 22, Subsequent Events. There are no assurances, however, that the Company will be able to complete the investments. The successful completion of all or any portion of the capital plan is not assured, and no assurance can be made that the capital plan will not be materially modified in the future. If the Company is not able to complete the capital plan, its regulatory capital ratios may be materially and adversely affected and its ability to withstand continued adverse economic conditions could be threatened. Further, it is likely that the Company would suffer additional regulatory actions, including a potential federal conservatorship or receivership for the Bank, or a requirement that the Bank sell or transfer its assets or take other action that would likely result in a complete loss of the value of FNB United's ownership interest in the Bank and a complete loss of the value of the shares held by the FNB United shareholders. Further information relating to the capital raise is set forth in Note 21, Capital Raise, Merger Agreement and Related Matters and Note 22, Subsequent Events.