Note 6 – Investment Securities

The primary objective of FNB's management of the investment portfolio is to maintain a portfolio of high quality, highly liquid investments yielding competitive returns. FNB is required under federal regulations to maintain adequate liquidity to ensure safe and sound operations. FNB maintains investment balances based on a continuing assessment of cash flows, the level of loan production, current interest rate risk strategies and the assessment of the potential future direction of market interest rate changes. Investment securities differ in terms of default, interest rate, liquidity and expected rate of return risk.

On May 3, 2010, FNB reclassified the entire held-to-maturity investment securities portfolio to available-for-sale investment securities to provide additional liquidity to CommunityOne. At the time of reclassification, the held-to-maturity investment securities were carried at amortized cost of $83.2 million with an unrealized net gain of $3.5 million. FNB recorded $2.8 million to Other Comprehensive Income and a federal income tax benefit of $0.7 million to reduce its deferred tax valuation allowance established on previously recorded deferred tax assets.

The following table summarizes the amortized cost and estimated fair value of available-for-sale investment securities and the related gross unrealized gains and losses are presented below:


(dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
December 31, 2011

Obligations of:
U.S. Treasury and government agencies	$	7,081	$	107	$	—	$	7,188
U.S. government sponsored agencies		32,479		36		151		32,364
States and political subdivisions		6,075		16		1		6,090
Residential mortgage-backed securities-GSE		348,884		2,611		1,222		350,273
Residential mortgage-backed securities-Private		33,111		73		967		32,217
Corporate notes		3,206		—		32		3,174

Total	$	430,836	$	2,843	$	2,373	$	431,306


December 31, 2010

Obligations of:
U.S. Treasury and government agencies	$	20	$	1	$	—	$	21
U.S. government sponsored agencies		23,490		158		132		23,516
States and political subdivisions		23,867		885		294		24,458
Residential mortgage-backed securities-GSE		258,816		427		1,907		257,336

Total	$	306,193	$	1,471	$	2,333	$	305,331

The amortized cost and estimated fair value of investment securities at December 31, 2011, by contractual maturity, are shown in the accompanying table. Actual maturities may differ from contractual maturities because issuers may have the right to prepay obligations with or without prepayment penalties.


	Available-for-Sale
(dollars in thousands)	Amortized Cost		Estimated Fair Value
Due in one year or less	$	21,399	$	21,248
Due after one one year through five years		8,172		8,189
Due after five years through 10 years		4,706		4,688
Due after 10 years		14,564		14,691

Total		48,841		48,816
Mortgage-backed securities		381,995		382,490

Total	$	430,836	$	431,306

At December 31, 2011, $101.2 million of the investment securities portfolio was pledged to secure public deposits, including retail repurchase agreements, $4.1 million was pledged to the FRBR and $2.1 million was pledged to others, leaving $323.9 million available as lendable collateral.

At December 31, 2010, $168.1 million of the investment securities portfolio was pledged to secure public deposits, including retail repurchase agreements, $27.6 million was pledged to the FRBR and $7.5 million was pledged to others, leaving $102.2 million available as lendable collateral.

Gross gains and losses recognized (by specific identification) on the sale of securities are summarized as follows:


(dollars in thousands)	Years Ended December 31,
	2011			2010			2009
Gains on sales of investment securities available-for-sale	$	7,400		$	10,722		$	1,136
Losses on sales of investment securities available-for-sale		(102	)		(75	)		(147	)

Total securities gains	$	7,298		$	10,647		$	989

CommunityOne and Granite, as members of the Federal Home Loan Bank of Atlanta ("FHLB"), are required to own capital stock in the FHLB of Atlanta based generally upon the balances of total assets and FHLB advances. FHLB capital stock is pledged to secure FHLB advances. This investment is carried at cost since no ready market exists for FHLB stock and there is no quoted market value. However, redemption of this stock has historically been at par value. At December 31, 2011, the combined Banks owned a total of $10.7 million of FHLB stock and as of December 31, 2010, CommunityOne owned $11.5 million of FHLB stock. Due to the redemption provisions of FHLB stock, FNB estimated that fair value approximated cost and that this investment was not impaired at December 31, 2011. FHLB stock is included in other assets at its original cost basis.

CommunityOne, as a member bank of the FRBR, is required to own capital stock of the FRBR based upon a percentage of the bank's common stock and surplus. This investment is carried at cost since no ready market exists for FRBR stock and there is no quoted market value. At December 31, 2011 and 2010, CommunityOne owned a total of $1.2 million and $3.8 million, respectively of FRBR stock. Due to the nature of this investment in an entity of the U.S. Government, FNB estimated that fair value approximated the cost and that this investment was not impaired at December 31, 2011. FRBR stock is included in other assets at its original cost basis.

Other investments are recorded at cost and are composed of the following:


(dollars in thousands)	December 31,
	2011		2010
Federal Home Loan Bank stock	$	10,733	$	11,496
Federal Reserve Bank stock		1,169		3,761
Other investments		2		6

Total other investments	$	11,904	$	15,263

The following table presents a summary of available-for-sale investment securities that had an unrealized loss at December 31:


	Less than 12 Months				12 Months or More				Total
(dollars in thousands)	Estimated Fair Value		Gross Unrealized Losses		Estimated Fair Value		Gross Unrealized Losses		Estimated Fair Value		Gross Unrealized Losses
December 31, 2011

Obligations of:
U.S. government sponsored agencies	$	21,248	$	151	$	—	$	—	$	21,248	$	151
States and political subdivisions		1,907		1		—		—		1,907		1
Residential mortgage-backed securities-GSE		89,730		1,042		16,552		180		106,282		1,222
Residential mortgage-backed securities-Private		21,519		967		—		—		21,519		967
Corporate notes		3,173		32		—		—		3,173		32

Total	$	137,577	$	2,193	$	16,552	$	180	$	154,129	$	2,373


December 31, 2010

Obligations of:
U.S. government sponsored agencies	$	11,855	$	132	$	—	$	—	$	11,855	$	132
States and political subdivisions		8,873		294		—		—		8,873		294
Residential mortgage-backed securities-GSE		151,154		1,907		—		—		151,154		1,907

Total	$	171,882	$	2,333	$	—	$	—	$	171,882	$	2,333

At December 31, 2011, there were seven investment securities that had continuous unrealized losses for more than twelve months. At December 31, 2010, there were no investment securities that had continuous unrealized losses for more than twelve months. The unrealized losses relate to fixed-rate debt securities that have incurred fair value reductions due to higher market interest rates and for certain securities, increased credit risk since the respective purchase date. The unrealized losses are not likely to reverse unless and until market interest rates and credit risk decline to the levels that existed when the securities were purchased. Since none of the unrealized losses relate to the marketability of the securities or the issuer's ability to honor redemption obligations, and FNB has determined that it is not more likely than not that FNB will be required to sell the security before recovery of its amortized cost basis, none of the securities are deemed to be other than temporarily impaired.

Unrealized losses for all investment securities are reviewed to determine whether the losses are other than temporary. Investment securities are evaluated on at least a quarterly basis and more frequently when economic or market conditions warrant such an evaluation to determine whether a decline in their value below amortized cost is other-than-temporary. In conducting this assessment, FNB evaluates a number of factors including, but not limited to:

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How much fair value has declined below amortized cost;

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How long the decline in fair value has existed;

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The financial condition of the issuer;

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Contractual or estimated cash flows of the security;

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Underlying supporting collateral;

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Past events, current conditions, forecasts;

•

Significant rating agency changes on the issuer; and

•

FNB's intent and ability to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value.

FNB analyzed its securities portfolio at December 31, 2011, paying particular attention to its private label mortgage-backed securities. After considering ratings, fair value, cash flows and other factors, FNB does not believe securities to be other-than-temporary impaired.