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 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 June 30, 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 June 30, 2012, FNB charged off $10.3 million in loans and realized $1.3 million in recoveries, for $9.0 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						For Six Months Ended
(dollars in thousands)	June 30,						June 30,
	2012			2011			2012			2011
Balance, beginning of period	$	39,795		$	68,729		$	39,360		$	93,687
Provision for losses charged to continuing operations	7,778			33,580			10,845			53,763
Net charge-offs:
Charge-offs	(10,285		)	(45,662		)	(14,300		)	(91,571		)
Recoveries	1,263			2,719			2,646			3,487
Net charge-offs	(9,022		)	(42,943		)	(11,654		)	(88,084		)
Provision for losses charged to discontinued operations	—			—			—			—
Balance, end of period	$	38,551		$	59,366		$	38,551		$	59,366
Annualized net charge-offs during the period to average loans	2.83		%	15.06		%	1.87		%	14.76		%
Annualized net charge-offs during the period to ALL	94.13		%	290.14		%	60.79		%	299.21		%
Allowance for loan losses to loans held for investment (1)	3.01		%	5.83		%	3.01		%	5.83		%

(1) Excludes discontinued operations.

The ALL, as a percentage of loans held for investment, was 3.01% at June 30, 2012, compared to 5.83% at June 30, 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 $81.9 million and $63.6 million in purchased loans categorized as Substandard or Doubtful at June 30, 2012 and December 31, 2011, respectively.

The following table presents loan and lease balances by credit quality indicator as of June 30, 2012:



(dollars in thousands)	Pass		Special Mention		Substandard*		Doubtful*
	(Ratings 1-5)		(Rating 6)		(Rating 7)		(Rating 8)		Total
Commercial and agricultural	$	64,091	$	4,591	$	9,685	$	—	$	78,367
Real estate - construction	44,799		3,266		27,511		—		75,576
Real estate - mortgage:
1-4 family residential	533,265		19,412		37,070		225		589,972
Commercial	312,648		64,189		116,757		127		493,721
Consumer	43,222		197		681		87		44,187
Total	$	998,025	$	91,655	$	191,704	$	439	$	1,281,823

*Includes $81.9 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)	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 June 30, 2012:



							Real Estate - Mortgage
(dollars in thousands)	Commercial and Agricultural			Real Estate - Construction			1-4 Family Residential			Commercial			Consumer			Total

ALL:
Beginning balance at April 1, 2012	$	6,005		$	10,912		$	12,103		$	8,799		$	1,976		$	39,795
Charge-offs	(937		)	(4,521		)	(2,454		)	(954		)	(1,419		)	(10,285		)
Recoveries	235			244			244			262			278			1,263
Provision	1,848			4,685			(1,109		)	1,111			1,243			7,778
Ending balance at June 30, 2012	$	7,151		$	11,320		$	8,784		$	9,218		$	2,078		$	38,551

The following table presents ALL activity by portfolio segment for the three months ended June 30, 2011:



							Real Estate - Mortgage
(dollars in thousands)	Commercial and Agricultural			Real Estate - Construction			1-4 Family Residential			Commercial			Consumer			Total
ALL:

Beginning balance at April 1, 2011	$	8,719		$	32,947		$	9,751		$	15,668		$	1,644		$	68,729
Charge-offs	(4,192		)	(21,510		)	(4,585		)	(14,002		)	(1,373		)	(45,662		)
Recoveries	467			714			469			693			376			2,719
Provision	1,533			16,268			3,395			11,260			1,124			33,580
Ending balance at June 30, 2011	$	6,527		$	28,419		$	9,030		$	13,619		$	1,771		$	59,366

The following table presents ALL activity by portfolio segment for the six months ended June 30, 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	(1,631		)	(6,296		)	(3,159		)	(992		)	(2,222		)	(14,300		)
Recoveries	489			845			377			336			599			2,646
Provision	2,517			4,776			2,681			(1,189		)	2,060			10,845
Ending balance at June 30, 2012	$	7,151		$	11,320		$	8,784		$	9,218		$	2,078		$	38,551

The following table presents ALL activity by portfolio segment for the six months ended June 30, 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	(8,467		)	(44,172		)	(6,621		)	(30,180		)	(2,131		)	(91,571		)
Recoveries	533			904			562			742			746			3,487
Provision	3,317			24,895			7,347			16,206			1,998			53,763
Ending balance at June 30, 2011	$	6,527		$	28,419		$	9,030		$	13,619		$	1,771		$	59,366

The following table details the recorded investment in loans related to each segment in the allowance for loan losses by portfolio segment and disaggregated on the basis of impairment methodology at June 30, 2012.



					Real Estate - Mortgage
(dollars in thousands)	Commercial and Agricultural		Real Estate - Construction		1-4 Family Residential		Commercial		Consumer		Total
ALL:
Individually evaluated for impairment	$	1,208	$	2,247	$	2,056	$	3,012	$	201	$	8,724
Collectively evaluated for impairment	4,105		9,002		6,093		5,488		1,803		26,491
PI loans evaluated for credit impairment	1,838		71		635		718		74		3,336
PI loans with no credit deterioration	—		—		—		—		—		—
Total ALL evaluated for impairment	$	7,151	$	11,320	$	8,784	$	9,218	$	2,078	$	38,551
Loans held for investment
Individually evaluated for impairment	$	3,028	$	24,187	$	20,778	$	47,744	$	201	$	95,938
Collectively evaluated for impairment	55,062		45,716		523,044		232,229		42,742		898,793
PI loans with subsequent credit deterioration	18,911		2,188		3,179		12,307		74		36,659
PI loans with no credit deterioration	1,366		3,485		42,971		201,441		1,170		250,433
Total loans evaluated for impairment	$	78,367	$	75,576	$	589,972	$	493,721	$	44,187	$	1,281,823



					Real Estate - Mortgage
(dollars in thousands)	Commercial and Agricultural		Real Estate - Construction		1-4 Family Residential		Commercial		Consumer		Total
ALL:
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
PI loans evaluated for credit impairment	—		—		—		—		—		—
PI loans with no credit deterioration	—		—		—		—		—		—
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	62,327		54,705		375,945		254,927		42,554		790,458
PI loans with subsequent credit deterioration	—		—		—		—		—		—
PI loans with no credit deterioration	28,872		7,641		52,894		239,621		1,808		330,836
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)	June 30,		December 31,
	2012		2011
Loans held for investment:
Commercial and agricultural	$	2,855	$	4,636
Real estate - construction	24,853		30,844
Real estate - mortgage:
1-4 family residential	22,300		26,048
Commercial	44,469		36,666
Consumer	633		250
Total	$	95,110	$	98,444

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



(dollars in thousands)	June 30,		December 31,
	2012		2011
Loans held for sale:
Real estate - construction	$	—	$	1,807
Real estate - mortgage:
1-4 family residential	—		517
Commercial	—		2,205
Consumer	—		—
Total	$	—	$	4,529

The following table presents an aging analysis of accruing and nonaccruing loans as of June 30, 2012:



	Past Due
(dollars in thousands)											PI Loans						90 or more
	30-59 Days		60-89 Days		90 or More Days		Total		Current		No credit deterior- ation		Credit deterior-ation		Total Loans		days past due and Accruing
Commercial and agricultural	$	893	$	437	$	2,681	$	4,011	$	54,079	$	1,366	$	18,911	$	78,367	$	79
Real estate - construction	1,353		4,813		12,844		19,010		50,893		3,485		2,188		75,576		—
Real estate - mortgage:
1-4 family residential	5,037		823		13,009		18,869		524,953		42,971		3,179		589,972		—
Commercial	4,727		1,332		29,674		35,733		244,240		201,441		12,307		493,721		348
Consumer	464		17		1		482		42,461		1,170		74		44,187
Total	$	12,474	$	7,422	$	58,209	$	78,105	$	916,626	$	250,433	$	36,659	$	1,281,823	$	427

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



	Past Due
(dollars in thousands)											PI Loans						90 or more
	30-59 Days		60-89 Days		90 or More Days		Total		Current		No credit deterior- ation		Credit deterior-ation		Total Loans		days past due and Accruing
Commercial and agricultural	$	335	$	425	$	2,755	$	3,515	$	62,702	$	28,872	$	—	$	95,089	$	305
Real estate - construction	1,850		2,206		21,438		25,494		59,671		7,641		—		92,806		1,400
Real estate - mortgage:
1-4 family residential	4,544		2,253		14,125		20,922		379,909		52,894		—		453,725		292
Commercial	2,926		6,645		16,330		25,901		265,861		239,621		—		531,383		1,003
Consumer	740		278		63		1,081		41,643		1,808		—		44,532		—
Total	$	10,395	$	11,807	$	54,711	$	76,913	$	809,786	$	330,836	$	—	$	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 June 30, 2012:



			Unpaid
(dollars in thousands)	Recorded		Principal		Related
	Investment		Balance		Allowance
With no related allowance recorded:
Commercial and agricultural	$	1,254	$	1,320	$	—
Real estate - construction	9,496		14,027		—
Real estate - mortgage:
1-4 family residential	12,197		14,119		—
Commercial	32,213		39,590		—
Consumer	—		—		—
Total	$	55,160	$	69,056	$	—
With an allowance recorded:
Commercial and agricultural	$	1,774	$	2,096	$	1,208
Real estate - construction	14,691		18,669		2,247
Real estate - mortgage:
1-4 family residential	8,581		9,810		2,056
Commercial	15,531		16,200		3,012
Consumer	201		201		201
Total	$	40,778	$	46,976	$	8,724
Total impaired loans
Commercial and agricultural	$	3,028	$	3,416	$	1,208
Real estate - construction	24,187		32,696		2,247
Real estate - mortgage:
1-4 family residential	20,778		23,929		2,056
Commercial	47,744		55,790		3,012
Consumer	201		201		201
Total	$	95,938	$	116,032	$	8,724

PI loans with subsequent credit deterioration:
Commercial and agricultural	$	18,911	$	18,859	$	1,838
Real estate - construction	2,188		2,244		71
Real estate - mortgage:
1-4 family residential	3,179		3,729		635
Commercial	12,307		12,661		718
Consumer	74		62		74
Total	$	36,659	$	37,555	$	3,336

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 impaired loans
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

There were no PI loans with subsequent credit deterioration at December 31, 2011.

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 June 30, 2012 and June 30, 2011:



	For Three Months Ended				For Three Months Ended
	June 30, 2012				June 30, 2011
	Average		Interest		Average		Interest
(dollars in thousands)	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
With no related allowance recorded:
Commercial and agricultural	$	2,170	$	3	$	3,086	$	—
Real estate - construction	10,918		30		61,867		—
Real estate - mortgage:
1-4 family residential	15,944		60		19,685		1
Commercial	33,630		76		58,170		1
Consumer	1,000		15		161		—
Total	$	63,662	$	184	$	142,969	$	2
With an allowance recorded:
Commercial and agricultural	$	1,790	$	—	$	5,879	$	—
Real estate - construction	16,567		7		60,059		—
Real estate - mortgage:
1-4 family residential	8,760		76		17,589		—
Commercial	15,832		151		32,829		1
Consumer	652		13		282		—
Total	$	43,601	$	247	$	116,638	$	1
Total:
Commercial and agricultural	$	3,960	$	3	$	8,965	$	—
Real estate - construction	27,485		37		121,926		—
Real estate - mortgage:
1-4 family residential	24,704		136		37,274		1
Commercial	49,462		227		90,999		2
Consumer	1,652		28		443		—
Total	$	107,263	$	431	$	259,607	$	3



	For Six Months Ended				For Six Months Ended
	June 30, 2012				June 30, 2011
	Average		Interest		Average		Interest
(dollars in thousands)	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
With no related allowance recorded:
Commercial and agricultural	$	2,651	$	10	$	3,756	$	—
Real estate - construction	12,166		34		60,795		—
Real estate - mortgage:
1-4 family residential	17,071		66		20,692		1
Commercial	31,720		106		52,421		1
Consumer	699		15		249		—
Total	$	64,307	$	231	$	137,913	$	2
With an allowance recorded:
Commercial and agricultural	$	1,729	$	—	$	6,738	$	—
Real estate - construction	14,308		9		65,267		—
Real estate - mortgage:
1-4 family residential	10,862		94		17,242		—
Commercial	15,177		159		64,386		1
Consumer	432		13		195		—
Total	$	42,508	$	275	$	153,828	$	1
Total:
Commercial and agricultural	$	4,380	$	10	$	10,494	$	—
Real estate - construction	26,474		43		126,062		—
Real estate - mortgage:
1-4 family residential	27,933		160		37,934		1
Commercial	46,897		265		116,807		2
Consumer	1,131		28		444		—
Total	$	106,815	$	506	$	291,741	$	3

For the three months ended June 30, 2012, the following table presents a breakdown of troubled debt restructurings that were restructured during the quarter segregated by portfolio segment:



	For Three Months Ended June 30, 2012
		Pre-Modification		Post-Modification
		Outstanding		Outstanding
(dollars in thousands)	Number	Recorded		Recorded
	of Loans	Investment		Investment
Commercial and agricultural	—	$	—	$	—
Real estate - construction	4	369		329
Real estate - mortgage:
1-4 family residential	—	—		—
Commercial	3	617		614
Consumer	—	—		—
Total	7	$	986	$	943

For the six months ended June 30, 2012, the following table presents a breakdown of troubled debt restructurings that were restructured during the six month period segregated by portfolio segment:



	For Six Months Ended June 30, 2012
		Pre-Modification		Post-Modification
		Outstanding		Outstanding
(dollars in thousands)	Number	Recorded		Recorded
	of Loans	Investment		Investment
Commercial and agricultural	—	$	—	$	—
Real estate - construction	9	2,526		1,603
Real estate - mortgage:
1-4 family residential	2	58		58
Commercial	8	1,356		1,353
Consumer	—	—		—
Total	19	$	3,940	$	3,014

During the three months ended June 30, 2012, FNB modified 7 loans that were considered to be troubled debt restructurings. FNB extended the terms for five of these loans, the interest rate was lowered for one of these loans, and the remaining loan was modified in both ways.

There were no loans restructured in the twelve months through June 30, 2012 that went into default during the three months or six months ended June 30, 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 $1.1 million as of June 30, 2012 and $0.6 million at December 31, 2011.