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. FNB's ALL is also assessed quarterly by management. 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. 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.

FNB lends primarily in North Carolina. As of March 31, 2012, 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, 2012, FNB charged off $4.0 million in loans and realized $1.4 million in recoveries, for $2.6 million of net charge-offs. The majority of the loans that were charged off were loans that had been in impairment status and had specific reserves assigned to them in prior periods.

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



	For Three Months Ended
(dollars in thousands)	March 31,
	2012			2011
Balance, beginning of period	$	39,360		$	93,687
Provision for losses charged to continuing operations	3,067			20,183
Net charge-offs:
Charge-offs	(4,015		)	(45,909		)
Recoveries	1,383			768
Net charge-offs	(2,632		)	(45,141		)
Provision for losses charged to discontinued operations	—			—
Balance, end of period	$	39,795		$	68,729
Annualized net charge-offs during the period to average loans	0.87		%	14.48		%
Annualized net charge-offs during the period to ALL	26.60		%	266.37		%
Allowance for loan losses to loans held for investment (1)	3.19		%	5.78		%
(1) Excludes discontinued operations.

The ALL, as a percentage of loans held for investment, amounted to 3.19% at March 31, 2012, compared to 5.78% at March 31, 2011. At December 31, 2011, the ALL, as a percentage of loans held for investment, was 3.23%.

The credit quality indicator presented for all classes within the loan portfolio is a widely used and standard system representing the degree of risk of nonpayment. The risk-grade categories presented in the following table 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 $84.0 million and $63.6 million in purchased loans categorized as Substandard or Doubtful at March 31, 2012 and December 31, 2011, respectively.

The following table presents loan and lease balances by credit quality indicator as of March 31, 2012:



(dollars in thousands)	Nonclassified/Pass		Special Mention		Substandard*		Doubtful*
	(Ratings 1-5)		(Rating 6)		(Rating 7)		(Rating 8)		Total
Commercial and agricultural	$	68,516	$	5,447	$	10,858	$	654	$	85,475
Real estate - construction	49,197		4,870		25,055		—		79,122
Real estate - mortgage:
1-4 family residential	462,184		20,167		46,736		213		529,300
Commercial	308,500		75,946		123,489		132		508,067
Consumer	42,814		257		343		381		43,795
Total	$	931,211	$	106,687	$	206,481	$	1,380	$	1,245,759

*Includes $84.0 million of loans purchased in the Merger categorized as Substandard and Doubtful.

The following table presents loan and lease balances by credit quality indicator as of December 31, 2011:



(dollars in thousands)	Nonclassified/Pass		Special Mention		Substandard*		Doubtful*
	(Ratings 1-5)		(Rating 6)		(Rating 7)		(Rating 8)		Total
Commercial and agricultural	$	77,305	$	7,373	$	9,921	$	490	$	95,089
Real estate - construction	53,105		5,797		33,886		18		92,806
Real estate - mortgage:
1-4 family residential	385,022		25,864		42,630		209		453,725
Commercial	351,731		91,364		87,971		317		531,383
Consumer	43,487		279		387		379		44,532
Total	$	910,650	$	130,677	$	174,795	$	1,413	$	1,217,535

*Includes $63.6 million of loans purchased in the Merger categorized as Substandard and Doubtful.

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
As of March 31, 2012
Individually evaluated for impairment	$	1,837		$	3,887		$	4,455		$	1,188		$	304		$	11,671
Collectively evaluated for impairment	4,168			7,025			7,648			7,611			1,672			28,124
Acquired performing loans	—			—			—			—			—			—
Acquired credit-impaired loans	—			—			—			—			—			—
Total ALL evaluated for impairment	$	6,005		$	10,912		$	12,103		$	8,799		$	1,976		$	39,795
Loans Held for Investment:
Individually evaluated for impairment	$	4,047		$	21,427		$	27,646		$	43,939		$	349		$	97,408
Collectively evaluated for impairment	48,802			51,200			418,560			236,809			41,829			797,200
Acquired performing loans	27,534			6,036			74,616			185,029			1,536			294,751
Acquired credit-impaired loans	5,092			459			8,478			42,290			81			56,400
Total loans evaluated for impairment	$	85,475		$	79,122		$	529,300		$	508,067		$	43,795		$	1,245,759

The following table presents ALL activity by portfolio segment for the three months ended March 31, 2011:



							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, 2011	$	11,144		$	46,792		$	7,742		$	26,851		$	1,158		$	93,687
Charge-offs	(4,275		)	(22,662		)	(2,036		)	(16,178		)	(758		)	(45,909		)
Recoveries	66			190			93			49			370			768
Provision	1,784			8,627			3,952			4,946			874			20,183
Ending balance at March 31, 2011	$	8,719		$	32,947		$	9,751		$	15,668		$	1,644		$	68,729
As of December 31, 2011
Individually evaluated for impairment	$	1,506		$	4,899		$	2,140		$	2,415		$	130		$	11,090
Collectively evaluated for impairment	4,270			7,096			6,745			8,648			1,511			28,270
Acquired performing loans	—			—			—			—			—			—
Acquired credit-impaired loans	—			—			—			—			—			—
Total ALL evaluated for impairment	$	5,776		$	11,995		$	8,885		$	11,063		$	1,641		$	39,360
Loans Held for Investment
Individually evaluated for impairment	$	3,890		$	30,460		$	24,886		$	36,835		$	170		$	96,241
Collectively evaluated for impairment	54,056			54,698			341,063			255,203			42,397			747,417
Acquired performing loans	31,671			6,483			77,542			193,220			1,866			310,782
Acquired credit-impaired loans	5,472			1,165			10,234			46,125			99			63,095
Total loans evaluated for impairment	$	95,089		$	92,806		$	453,725		$	531,383		$	44,532		$	1,217,535

The following table presents loans held for investment on nonaccrual status by loan class for the dates indicated below:



(dollars in thousands)	March 31,		December 31,
	2012		2011
Loans Held for Investment:
Commercial and agricultural	$	4,173	$	4,636
Real estate - construction	22,695		30,844
Real estate - mortgage:
1-4 family residential	28,903		26,048
Commercial	43,988		36,666
Consumer	447		250
Total	$	100,206	$	98,444

The following table presents loans held for sale on nonaccrual status by loan class for the dates indicated below:



(dollars in thousands)	March 31,		December 31,
	2012		2011
Loans Held for Sale:
Real estate - construction	$	688	$	1,807
Real estate - mortgage:
1-4 family residential	1,113		517
Commercial	2,137		2,205
Consumer	—		—
Total	$	3,938	$	4,529

The following table presents an aging analysis of accruing and nonaccruing loans as of March 31, 2012:



	Past Due																90 or More
(dollars in thousands)					90 or						Acquired Loans				Total		Days Past Due
	30-59 Days		60-89 Days		More Days		Total		Current		Impaired		Current		Loans		and Accruing
Commercial and agricultural	$	1,438	$	332	$	3,258	$	5,028	$	47,821	$	5,092	$	27,534	$	85,475	$	86
Real estate - construction	934		907		14,916		16,757		55,870		459		6,036		79,122		—
Real estate - mortgage:
1-4 family residential	5,002		1,290		14,598		20,890		425,316		8,478		74,616		529,300		411
Commercial	12,531		3,380		20,605		36,516		244,232		42,290		185,029		508,067		700
Consumer	542		—		345		887		41,291		81		1,536		43,795		—
Total	$	20,447	$	5,909	$	53,722	$	80,078	$	814,530	$	56,400	$	294,751	$	1,245,759	$	1,197

The following table presents an aging analysis of accruing and nonaccruing loans as of December 31, 2011:



	Past Due																90 or More
(dollars in thousands)					90 or						Acquired Loans				Total		Days Past Due
	30-59 Days		60-89 Days		More Days		Total		Current		Impaired		Current		Loans		and Accruing
Commercial and agricultural	$	335	$	425	$	2,755	$	3,515	$	54,431	$	5,472	$	31,671	$	95,089	$	305
Real estate - construction	1,850		2,206		21,438		25,494		59,664		1,165		6,483		92,806		1,400
Real estate - mortgage:
1-4 family residential	4,544		2,253		14,125		20,922		345,027		10,234		77,542		453,725		292
Commercial	2,926		6,645		16,330		25,901		266,137		46,125		193,220		531,383		1,003
Consumer	740		278		63		1,081		41,486		99		1,866		44,532		—
Total	$	10,395	$	11,807	$	54,711	$	76,913	$	766,745	$	63,095	$	310,782	$	1,217,535	$	3,000

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 or principal and interest when due according to the contractual terms of the loan agreement.

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



			Unpaid
(dollars in thousands)	Recorded		Principal		Related
	Investment		Balance		Allowance
With no related allowance recorded:
Commercial and agricultural	$	2,156	$	2,482	$	—
Real estate - construction	8,779		10,942		—
Real estate - mortgage:
1-4 family residential	11,608		14,140		—
Commercial	27,349		34,046		—
Consumer	45		48		—
Total	$	49,937	$	61,658	$	—
With an allowance recorded:
Commercial and agricultural	$	1,891	$	1,930	$	1,837
Real estate - construction	12,648		15,659		3,887
Real estate - mortgage:
1-4 family residential	16,038		16,360		4,455
Commercial	16,590		16,924		1,188
Consumer	304		305		304
Total	$	47,471	$	51,178	$	11,671
Total:
Commercial and agricultural	$	4,047	$	4,412	$	1,837
Real estate - construction	21,427		26,601		3,887
Real estate - mortgage:
1-4 family residential	27,646		30,500		4,455
Commercial	43,939		50,970		1,188
Consumer	349		353		304
Total	$	97,408	$	112,836	$	11,671

The following table presents individually reviewed impaired loans, segregated by portfolio segment, and the corresponding reserve for impaired loan losses as of December 31, 2011:



			Unpaid
(dollars in thousands)	Recorded		Principal		Related
	Investment		Balance		Allowance
With no related allowance recorded:
Commercial and agricultural	$	2,354	$	4,346	$	—
Real estate - construction	16,351		25,714		—
Real estate - mortgage:
1-4 family residential	13,003		19,657		—
Commercial	22,176		26,964		—
Consumer	—		102		—
Total	$	53,884	$	76,783	$	—
With an allowance recorded:
Commercial and agricultural	$	1,536	$	2,047	$	1,506
Real estate - construction	14,109		14,718		4,899
Real estate - mortgage:
1-4 family residential	11,883		12,328		2,140
Commercial	14,659		14,943		2,415
Consumer	170		172		130
Total	$	42,357	$	44,208	$	11,090
Total:
Commercial and agricultural	$	3,890	$	6,393	$	1,506
Real estate - construction	30,460		40,432		4,899
Real estate - mortgage:
1-4 family residential	24,886		31,985		2,140
Commercial	36,835		41,907		2,415
Consumer	170		274		130
Total	$	96,241	$	120,991	$	11,090

The following summary includes impaired loans individually reviewed as well as impaired loans held for sale and impaired loans not individually reviewed for impairment. Average recorded investment and interest income recognized on impaired loans, segregated by portfolio segment, is shown in the following table as of March 31, 2012 and March 31, 2011:



	For Three Months Ended				For Three Months Ended
	March 31, 2012				March 31, 2011
	Average		Interest		Average		Interest
(dollars in thousands)	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
With no related allowance recorded:
Commercial and agricultural	$	3,132	$	7	$	3,970	$	—
Real estate - construction	13,414		4		63,404		—
Real estate - mortgage:
1-4 family residential	18,199		6		24,788		—
Commercial	29,810		30		110,199		—
Consumer	399		—		240		—
Total	$	64,954	$	47	$	202,601	$	—
With an allowance recorded:
Commercial and agricultural	$	1,668	$	—	$	7,686	$	—
Real estate - construction	12,050		2		59,518		—
Real estate - mortgage:
1-4 family residential	12,965		18		15,554		—
Commercial	14,522		8		33,876		—
Consumer	211		—		201		—
Total	$	41,416	$	28	$	116,835	$	—
Total:
Commercial and agricultural	$	4,800	$	7	$	11,656	$	—
Real estate - construction	25,464		6		122,922		—
Real estate - mortgage:
1-4 family residential	31,164		24		40,342		—
Commercial	44,332		38		144,075		—
Consumer	610		—		441		—
Total	$	106,370	$	75	$	319,436	$	—

For the three months ended March 31, 2012, the following table presents a breakdown of troubled debt restructurings segregated by portfolio segment:



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

During the three months ended March 31, 2012, FNB modified 11 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 through 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.

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 expected usage percentages for each commitment type are as follows:


•	Construction draws - 100%


•	Equity lines of credit - 50%


•	Letters of Credit - 10%

The reserve for unfunded commitments was $0.8 million as of March 31, 2012 and $0.6 million at December 31, 2011.