Loans

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. Classes are generally disaggregations of a portfolio segment. FNB's portfolio segments are: Commercial and agricultural, Real estate - construction, Real estate - mortgage: 1-4 family residential, Real estate - commercial and other and Consumer loans. The classes within the Commercial and agricultural portfolio are: owner occupied and non-owner occupied. The classes within the Real estate - construction portfolio are: Retail properties, Multi-family, Industrial and Warehouse, and Other commercial real estate. The classes within the Real estate - residential portfolio are: first-lien and second-lien loans and home equity lines of credit. The Consumer loan portfolio is not further segregated into classes.

Loan fees and the incremental direct costs associated with making loans are deferred and subsequently recognized over the life of the loan as an adjustment of interest income. The premium or discount on purchased loans is amortized over the expected life of the loans and is included in interest and fees on loans.

The following summary sets forth the major portfolio segments of loans. During the first quarter 2012, we purchased $61.9 million of performing residential mortgage loans. The premium paid on these loans of $2.3 million will be amortized as an adjustment to yield over the estimated life of this pool. Acquired loans for purposes of the tables included in Note 5 and Note 6 relate only to loans acquired in the Merger.



							Total Loans
(dollars in thousands)	Acquired Loans						March 31,			December 31,
	Impaired		Performing		Total		2012			2011
Loans held for sale	$	—	$	—	$	—	$	3,938		$	4,529
Loans held for investment:
Commercial and agricultural	$	5,092	$	27,534	$	32,626	$	85,475		$	95,089
Real estate - construction	459		6,036		6,495		79,122			92,806
Real estate - mortgage:
1-4 family residential	8,478		74,616		83,094		529,300			453,725
Commercial	42,290		185,029		227,319		508,067			531,383
Consumer	81		1,536		1,617		43,795			44,532
Gross loans held for investment	56,400		294,751		351,151		1,245,759			1,217,535
Less: Allowance for loan losses	—		—		—		(39,795		)	(39,360		)
Loans held for investment, net of allowance	$	56,400	$	294,751	$	351,151	$	1,205,964		$	1,178,175

At March 31, 2012 and December 31, 2011, loans held for sale consisted of nonperforming loans transferred from loans held for investment under sales contracts, which are valued at the contractual sales price.

Loans included in the preceding loan composition table are net of participations sold. Loans as presented are reduced by net deferred loan fees of $2.8 million and $0.6 million at March 31, 2012 and December 31, 2011, respectively.

Mortgage loans serviced for others are not included in the consolidated balance sheet. The unpaid principal balance of mortgage loans serviced for others amounted to $0.8 million at March 31, 2012 and $0.7 million at December 31, 2011.

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 $323.4 million and $339.4 million were pledged to collateralize FHLB advances and letters of credit at March 31, 2012 and December 31, 2011, respectively, of which there was $80.4 million and $80.5 million of credit availability for borrowing, respectively. At March 31, 2012, $48.2 million of loans and $4.1 million of securities were pledged to collateralize potential borrowings from the Federal Reserve Discount Window, of which $4.8 million was available as borrowing capacity.

Interest income on loans is generally 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 $1.5 million and $4.1 million for the three months ended March 31, 2012 and March 31, 2011, respectively. At March 31, 2012 and December 31, 2011, FNB had certain impaired loans of $104 million and $103 million, respectively, which were on nonaccruing interest status.

Nonperforming assets include nonaccrual loans, accruing loans in excess of 90 days delinquent, OREO and other foreclosed assets. The following is a summary of nonperforming assets for the periods ended as presented.



(dollars in thousands)	March 31, 2012		December 31, 2011
Loans on nonaccrual status:
Held for sale	$	3,938	$	4,529
Held for investment	100,206		98,444
Loans more than 90 days delinquent, still on accrual	1,197		3,000
Real estate owned/repossessed assets	104,379		110,386
Total nonperforming assets	$	209,720	$	216,359

An impaired loan is one for which FNB will not be repaid all principal and interest due per the terms of the original contract or within reasonably modified contracted terms. 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. (Loan risk grade categories are defined in Note 6.)

When a loan in any class 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 within any class 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 quarters ended on the dates indicated.



	March 31, 2012				December 31, 2011
(dollars in thousands)	Balance		Associated Reserves		Balance		Associated Reserves
Impaired loans, held for sale	$	3,938	$	—	$	4,529	$	—
Impaired loans, not individually reviewed for impairment	5,479		—		5,127		—
Impaired loans, individually reviewed, with no impairment	49,937		—		53,885		—
Impaired loans, individually reviewed, with impairment	47,471		11,671		42,356		11,090
Total impaired loans *	$	106,825	$	11,671	$	105,897	$	11,090

Average impaired loans calculated using a simple average	$	106,370			$	112,600
* Included at March 31, 2012 and December 31, 2011 were $3.8 million and $2.9 million, respectively, in restructured and performing loans.

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 the Bank 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, 2012, there was $27.3 million in restructured loans, of which $3.8 million in loans were accruing and in a performing status. At December 31, 2011, there was $28.3 million in restructured loans, of which loans amounting to $2.9 million were accruing and in a performing 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 delinquent may also be placed on nonaccrual if approved due to deterioration in the financial condition of the borrower that increases the possibility of less than full repayment.

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.

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 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 files 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.

Potential problem loans that are not included in nonperforming assets are classified separately within FNB's portfolio as Special Mention and carry a risk grade rating of “6.” These loans are defined as those with potential weaknesses that may affect repayment capacity but do not pose sufficient risk as to require an adverse classification. As of March 31, 2012, the balance of such loans was $106.7 million compared to a balance of $130.7 million as of December 31, 2011.

During 2011, FNB sold loans to third party buyers in order to reduce FNB's classified loan exposure. These loans are transferred to loans held for sale at the time FNB receives 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 are conducted at arm's length and loans are sold without recourse.

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



	For Three Months Ended March 31, 2012					For Three Months Ended March 31, 2011
(dollars in thousands)	Number	Recorded		Contract		Number	Recorded		Contract
	of Loans	Investment		Pricing		of Loans	Investment		Pricing
Loan Sales
Real estate - construction	1	$	3,800	$	4,050	4	$	13,342	$	5,813
Real estate - mortgage:
1-4 family residential	1	150		150		—	—		—
Commercial	—	—		—		1	321		350
Total	2	$	3,950	$	4,200	5	$	13,663	$	6,163

During the three-month period ending March 31, 2012, there were two loans placed under contract for sale and then sold by March 31, 2012.

Acquired Loans

Loans acquired in the Merger ("Acquired Loans") include purchased credit-impaired loans ("PCI loans") and performing revolving consumer and commercial loans.

PCI loans are segregated into pools and recorded at estimated fair value on the date of acquisition without the carryover of the related ALL. PCI 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. PCI 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 FNB can reasonably estimate the amount and timing of future cash flows. 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 PCI 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 treat the Granite portfolio under ASC 310-30, with the exception of performing revolving consumer and commercial loans, which are being accounted for under ASC 310-20.

At March 31, 2012, no ALL was required for the acquired Granite loans, and in addition, the acquired Granite loans are presented on an accruing basis.



	At March 31, 2012
(dollars in thousands)	Acquired Credit-Impaired Loans		Acquired Performing Loans		Total Acquired Loans		Unpaid Principal Balance
Acquired Loans:
Commercial and agricultural	$	5,092	$	27,534	$	32,626	$	33,003
Real estate - Construction	459		6,036		6,495		7,202
Real estate -mortgage:
1-4 family residential	8,478		74,616		83,094		87,261
Commercial	42,290		185,029		227,319		242,730
Consumer	81		1,536		1,617		1,617
Total	$	56,400	$	294,751	$	351,151	$	371,813



	At December 31, 2011
(dollars in thousands)	Acquired Credit-Impaired Loans		Acquired Performing Loans		Total Acquired Loans		Unpaid Principal Balance
Acquired Loans:
Commercial and agricultural	$	5,472	$	31,671	$	37,143	$	39,531
Real estate - Construction	1,165		6,483		7,648		8,413
Real estate -mortgage:
1-4 family residential	10,234		77,542		87,776		93,472
Commercial	46,125		193,220		239,345		261,076
Consumer	99		1,866		1,965		1,799
Total	$	63,095	$	310,782	$	373,877	$	404,291

The tables below include only those Acquired Loans accounted for under the expected cash flow method (PCI Loans) for the periods indicated. These tables do not include performing revolving consumer and commercial loans, which are being accounted for under the contractual cash flow method.



	At March 31, 2012
	Purchased Credit-Impaired Loans						Purchased Performing Loans
(dollars in thousands)	Carrying Amount			Accretable Yield			Carrying Amount			Accretable Yield
Balance, January 1, 2012	$	63,095		$	(13,718	)	$	269,295		$	(34,086	)
Accretion	2,008			2,008			3,766			3,766
Payments received	(5,544		)	—			(19,073		)	—
Foreclosed and transferred to OREO	(3,159		)	—			—			—
Balance, March 31, 2012	$	56,400		$	(11,710	)	$	253,988		$	(30,320	)



	At December 31, 2011
	Purchased Credit-Impaired Loans						Purchased Performing Loans
(dollars in thousands)	Carrying Amount			Accretable Yield			Carrying Amount			Accretable Yield
Balance, September 30, 2011	$	—		$	—		$	—		$	—
Addition from Bank of Granite Corp acquisition	65,690			(15,451		)	285,431			(37,130		)
Accretion	1,733			1,733			3,044			3,044
Payments received	(4,328		)	—			(19,180		)	—
Balance, December 31, 2011	$	63,095		$	(13,718	)	$	269,295		$	(34,086	)