Regulatory Matters

9 Months Ended

Sep. 30, 2011

Regulatory Matters [Abstract]

Regulatory Matters

3. Regulatory Matters

Regulatory Actions

Consent Order

Due to the Bank's condition, on July 22, 2010, pursuant to a Stipulation and Consent to the Issuance of a Consent Order, the Bank consented and agreed to the issuance of a Consent Order ("Order") by the Office of the Comptroller of the Currency ("OCC"). In the Order, the Bank and the OCC agreed as to areas of the Bank's operations that warrant improvement and a plan for making those improvements. The Order includes a capital directive, which requires the Bank 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, in connection with which the Bank could be subject to limitations on the maximum interest rates it can pay on deposit accounts. The Order also contains restrictions on future extensions of credit and requires the development of various programs and procedures to improve the Bank's asset quality as well as routine reporting on the Bank's progress toward compliance with the Order to the Board of Directors and the OCC. Specifically, the Order imposed the following requirements on the Bank:

• to appoint a Compliance Committee to monitor and coordinate the Bank'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 within 90 days 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 within 60 days a written capital plan for the Bank covering at least a three-year period.

• to develop, implement and ensure the Bank'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 allowance for loan losses, providing for review of the allowance by the Board of Directors at least quarterly.

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

• to implement and maintain a comprehensive liquidity risk management program, assessing on an ongoing basis the Bank'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.

The Order permits the OCC to extend the time periods under the Order upon written request. Any material failure to comply with the Order could result in further enforcement actions by the OCC. In addition, if the OCC does not accept the capital plan or the Bank fails to achieve and maintain the minimum capital levels, the OCC may require the Bank to sell, merge or liquidate the Bank.

The Bank submitted all required materials and plans requested to the OCC within the given time periods. The Bank submitted written strategic and capital plans to the OCC covering the requisite three-year period and has submitted a revised capital plan reflecting the terms and status of the recapitalization transaction described under Note 21, Capital Raise, Merger Agreement and Related Matters. FNB United and the Bank received the necessary approvals to complete the contemplated recapitalization transaction and FNB United completed the transaction on October 21, 2011. See Note 22, Subsequent Events.

Written Agreement

On October 21, 2010, FNB United entered into a written agreement with the Federal Reserve Bank of Richmond ("FRBR"). Pursuant to the agreement, FNB United's Board of Directors is to take appropriate steps to utilize fully FNB United's financial and managerial resources to serve as a source of strength to the Bank, including causing the Bank to comply with the Order it entered into with the OCC on July 22, 2010.

In the agreement, FNB United agreed that it would not declare or pay any dividends without prior written approval of the FRBR and the Federal Reserve Board's Director of the Division of Banking Supervision and Regulation ("Federal Reserve"). It further agreed that it would not take dividends or any other form of payment representing a reduction in capital from the Bank without the FRBR's prior written approval. The agreement also provides that neither FNB United 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 Federal Reserve.

The agreement further provides that neither FNB United nor any of its subsidiaries shall incur, increase or guarantee any debt without FRBR approval. In addition, FNB United 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 agreement, FNB United submitted to the FRBR a written plan to maintain sufficient capital at FNB United on a consolidated basis. Within 30 days of the agreement, FNB United submitted to the FRBR a statement of its planned sources and uses of cash for operating expenses and other purposes for 2011. FNB United is to submit such a cash flow projection for each subsequent calendar year by December of the preceding year.

The agreement permits the FRBR to grant written extensions of time for FNB United to comply with its provisions.

FNB United is to report to the FRBR quarterly regarding its progress in complying with the 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 Matters

The Order, as set forth above, requires the Bank to achieve and maintain Tier 1 capital of not less than 9% and total risk-based capital of not less than 12% for the life of the Order. The Bank did not achieve the required capital levels by the deadline imposed under the Order. The Bank is not "well capitalized" for capital adequacy purposes under the terms of the Order and may not be designated so in the future, even if the Bank exceeds the levels of capital required under the Order.

The minimum capital requirements to be characterized as "well capitalized" and "adequately capitalized," as defined by regulatory guidelines, the capital requirements pursuant to the Order, and the Company's actual capital ratios on a consolidated and Bank-only basis were as follows as of September 30, 2011:

							Minimum Regulatory Requirement
	Consolidated			Bank			Adequately Capitalized			Well- Capitalized			Pursuant to Order
Total risk-based capital ratio		(13.48	) %		(8.06	) %		8.00	%		10.00	%		12.00	%
Tier 1 risk-based capital ratio		(13.48	) %		(8.06	) %		4.00	%		6.00	%		9.00	%
Leverage capital ratio		(8.54	) %		(5.09	) %		4.00	%		5.00	%		9.00	%

Effective October 21, 2011, FNB United consummated the $310 million recapitalization as set forth in Note 21, Capital Raise, Merger Agreement and Related Matters and Note 22, Subsequent Events and subsequently contributed $232.5 million in cash capital to the Bank. As a result, the Bank is in compliance with the capital ratios required in the Order and has been designated as "adequately capitalized" as of October 21, 2011.

On June 10, 2011, FNB United received a written notice from The Nasdaq Stock Market of the Nasdaq staff's determination that FNB United had not provided a definitive plan evidencing its ability to achieve near-term compliance with all of the continued listing requirements of The Nasdaq Capital Market and, in particular, Rule 5550(a)(2), the bid price rule, and Rule 5550(b), the shareholders' equity rule. Accordingly, unless FNB United requested an appeal of this staff determination, trading of FNB United's common stock would have been suspended at the opening of business on June 21, 2011, and a Form 25-NSE would have been filed with the Securities and Exchange Commission, removing FNB United's common stock from listing and registration on The Nasdaq Stock Market. FNB United did appeal the Nasdaq staff's determination. Following a hearing, FNB United received written notice from The Nasdaq Stock Market of the appeals panel's determination to grant FNB United's request to remain listed on Nasdaq, subject to certain conditions. These conditions include the closings of FNB United's proposed recapitalization and acquisition of Granite occurring on or before October 31, 2011, FNB United'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 United 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. FNB United has satisfied the first two conditions and as of the close of business of October 31, 2011 had effected a reverse stock split to achieve compliance with the bid price rule by November 18, 2011.

Current federal law requires federal bank regulators to have a system of prompt corrective action to resolve the problems of undercapitalized institutions. Under this system, the federal banking regulators have established five capital categories (well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized), are required to take certain mandatory supervisory actions, and are authorized to take other discretionary actions, with respect to institutions in the three undercapitalized categories. The severity of the action will depend upon the capital category in which the institution is placed. Generally, subject to a narrow exception, the banking regulator must appoint a receiver or conservator for an institution that is critically undercapitalized.

The federal banking agencies have specified by regulation the relevant capital level for each category as follows: (1) "Well Capitalized," consisting of institutions with a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater and a leverage ratio of 5.0% or greater and which are not operating under an order, written agreement, capital directive or prompt corrective action directive; (2) "Adequately Capitalized," consisting of institutions with a total risk-based capital ratio of 8.0% or greater, a Tier 1 risk-based capital of 4.0% or greater and a leverage ratio of 4.0% or greater and which do not meet the definition of a "Well Capitalized" institution; (3) "Undercapitalized," consisting of institutions with a total risk-based capital ratio of less than 8.0%, a Tier 1 risk-based capital ratio of less than 4.0%, or a leverage ratio of less than 4.0%; (4) "Significantly Undercapitalized," consisting of institutions with a total risk-based capital ratio of less than 6.0%, a Tier 1 risk-based capital ratio of less than 3.0%, or a leverage ratio of less than 3.0%; and (5) "Critically Undercapitalized," consisting of institutions with a ratio of tangible equity to total assets that is equal to or less than 2.0%.

An institution that is categorized as undercapitalized, significantly undercapitalized, or critically undercapitalized is required to submit an acceptable capital restoration plan to its appropriate federal banking agency. A bank holding company must guarantee that a subsidiary depository institution meets its capital restoration plan, subject to certain limitations. The controlling holding company's obligation to fund a capital restoration plan is limited to the lesser of 5.0% of an undercapitalized subsidiary's assets or the amount required to meet regulatory capital requirements. An undercapitalized institution is also generally prohibited from increasing its average total assets, making acquisitions, establishing any branches or engaging in any new line of business, except under an accepted capital restoration plan or with FDIC approval. In addition, the appropriate federal banking agency may treat an undercapitalized institution in the same manner as it treats a significantly undercapitalized institution if it determines that those actions are necessary.

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.