XNAS:FNBN Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012






UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
FORM 10-Q

 
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
 
     
For the quarterly period ended June 30, 2012
 
Commission File Number 0-13823


FNB UNITED CORP.
(Exact name of Registrant as specified in its Charter)
 
North Carolina
 
56-1456589
(State of Incorporation)
 
(I.R.S. Employer Identification No.)
150 South Fayetteville Street
 
 
Asheboro, North Carolina
 
27203
(Address of principal executive offices)
 
(Zip Code)

 
(336) 626-8300
(Registrant's telephone number, including area code)
  

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)
Large accelerated filer o
Accelerated filer o
Non-accelerated filer o
Smaller reporting company x
 
 
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

As of August 6, 2012 (the most recent practicable date), the Registrant had outstanding approximately 21,588,034 shares of Common Stock.




FNB United Corp. and Subsidiaries
Report on Form 10-Q
June 30, 2012

TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
 
Item 1
 
 
 
 
 

 
Item 2
Item 3
Item 4
PART II. OTHER INFORMATION
 
Item 1
Item 1A
Item 2
Item 3
Item 4
Item 5
Item 6
 



i


PART I.    FINANCIAL INFORMATION
Item 1.    Financial Statements
FNB United Corp. and Subsidiaries
Consolidated Balance Sheets (unaudited)
(in thousands, except share and per share data)
 
June 30, 2012
 
December 31, 2011
Assets
 
 
 
 
Cash and due from banks
 
$
32,733

 
$
35,773

Interest-bearing bank balances
 
331,146

 
517,643

Investment securities:
 
 
 
 
Available-for-sale, at estimated fair value (amortized cost of $473,438 in 2012
and $430,836 in 2011)
 
477,136

 
431,306

Loans held for sale
 
1,324

 
4,529

Loans held for investment
 
1,281,823

 
1,217,535

Less: Allowance for loan losses
 
(38,551
)
 
(39,360
)
Net loans held for investment
 
1,243,272

 
1,178,175

Premises and equipment, net
 
52,893

 
53,763

Other real estate owned
 
86,183

 
110,009

Core deposit premiums
 
7,473

 
8,177

Goodwill
 
4,205

 
3,905

Bank-owned life insurance
 
38,172

 
37,515

Other assets
 
27,224

 
28,068

Assets from discontinued operations
 

 
245

Total Assets
 
$
2,301,761

 
$
2,409,108

Liabilities
 
 
 
 
Deposits:
 
 
 
 
Noninterest-bearing demand deposits
 
$
262,087

 
$
234,673

Interest-bearing deposits:
 
 
 
 
Demand, savings and money market deposits
 
868,335

 
849,828

Time deposits of $100,000 or more
 
343,235

 
394,431

Other time deposits
 
568,113

 
650,179

Total deposits
 
2,041,770

 
2,129,111

Retail repurchase agreements
 
11,455

 
8,838

Federal Home Loan Bank advances
 
58,350

 
58,370

Junior subordinated debentures
 
56,702

 
56,702

Other liabilities
 
25,482

 
25,980

Liabilities from discontinued operations
 

 
1,092

Total Liabilities
 
2,193,759

 
2,280,093

Shareholders' Equity
 
 
 
 
Preferred stock Series A, $10.00 par value; authorized 200,000 shares, no shares issued and outstanding in 2012 and 2011
 

 

Preferred stock, $1.00 par value, authorized 15,000,000 shares, no shares issued and outstanding in 2012 and 2011
 

 

Common stock, no par value; authorized 2,500,000,000 shares, issued 21,587,880 shares
in 2012 and 21,102,668 shares in 2011
 
461,169

 
455,166

Accumulated deficit
 
(351,179
)
 
(322,182
)
Accumulated other comprehensive loss
 
(1,988
)
 
(3,969
)
Total Shareholders' Equity
 
108,002

 
129,015

Total Liabilities and Shareholders' Equity
 
$
2,301,761

 
$
2,409,108

See accompanying notes to consolidated financial statements.

1


FNB United Corp. and Subsidiaries
Consolidated Statements of Operations (unaudited)
(in thousands, except share and per share data)
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
Interest Income
 
 
 
 
 
 
 
Interest and fees on loans
$
17,235

 
$
12,221

 
$
34,194

 
$
25,282

Interest and dividends on investment securities:
 
 
 
 
 
 
 
Taxable income
2,887

 
2,717

 
5,571

 
4,798

Non-taxable income

 
134

 

 
297

Other interest income
310

 
118

 
660

 
284

Total interest income
20,432

 
15,190

 
40,425

 
30,661

Interest Expense
 
 
 
 
 
 
 
Deposits
3,701

 
4,963

 
7,924

 
10,132

Retail repurchase agreements
9

 
14

 
17

 
31

Federal Home Loan Bank advances
387

 
703

 
666

 
1,401

Other borrowed funds
286

 
318

 
589

 
696

Total interest expense
4,383

 
5,998

 
9,196

 
12,260

Net Interest Income before Provision for Loan Losses
16,049

 
9,192

 
31,229

 
18,401

Provision for loan losses
7,778

 
33,580

 
10,845

 
53,763

Net Interest Income/(Loss) after Provision for Loan Losses
8,271

 
(24,388
)
 
20,384

 
(35,362
)
Noninterest Income
 
 
 
 
 
 
 
Service charges on deposit accounts
1,960

 
1,485

 
3,920

 
2,929

Mortgage loan income
287

 
(14
)
 
323

 
107

Cardholder and merchant services income
1,046

 
841

 
2,043

 
1,607

Trust and investment services
256

 
350

 
458

 
752

Bank owned life insurance
314

 
266

 
620

 
666

Other service charges, commissions and fees
271

 
216

 
525

 
356

Securities (loss)/gains, net
2,002

 
(98
)
 
1,956

 
(84
)
Gain on fair value swap

 
77

 

 
169

Other income
396

 
162

 
513

 
365

Total noninterest income
6,532

 
3,285

 
10,358

 
6,867

Noninterest Expense
 
 
 
 
 
 
 
Personnel expense
10,541

 
6,231

 
20,528

 
12,725

Net occupancy expense
1,603

 
1,117

 
3,156

 
2,303

Furniture, equipment and data processing expense
2,020

 
1,613

 
3,996

 
3,219

Professional fees
1,109

 
1,628

 
2,373

 
2,879

Stationery, printing and supplies
153

 
99

 
294

 
218

Advertising and marketing
125

 
196

 
254

 
336

Other real estate owned expense
12,473

 
10,586

 
17,992

 
26,773

Credit/debit card expense
437

 
427

 
847

 
818

FDIC insurance
1,225

 
1,575

 
1,823

 
3,438

Loan collection expense
514

 
1,651

 
1,260

 
2,651

Merger-related expense
(840
)
 

 
1,418

 

Core deposit intangible amortization
352

 
199

 
704

 
397

Other expense
3,203

 
1,008

 
5,118

 
3,323

Total noninterest expense
32,915

 
26,330

 
59,763

 
59,080

Loss from continuing operations, before income taxes
(18,112
)
 
(47,433
)
 
(29,021
)
 
(87,575
)
Income tax expense (benefit) - continuing operations
26

 
(448
)
 
(51
)
 
(576
)
Loss from continuing operations, net of tax
(18,138
)
 
(46,985
)
 
(28,970
)
 
(86,999
)
Loss from discontinued operations, net of tax

 
(1,989
)
 
(27
)
 
(5,682
)
Net loss
(18,138
)
 
(48,974
)
 
(28,997
)
 
(92,681
)
Dividends on preferred stock

 
(1,087
)
 

 
(2,104
)
Net loss to common shareholders
(18,138
)
 
(50,061
)
 
$
(28,997
)
 
$
(94,785
)
 
 
 
 
 
 
 
 
Weighted average number of common shares outstanding - basic and diluted
21,190,848

 
114,265

 
21,146,758

 
114,256

Net loss per common share from continuing operations - basic and diluted
$
(0.86
)
 
$
(420.71
)
 
$
(1.37
)
 
$
(779.85
)
Net loss per common share from discontinued operations - basic and diluted

 
(17.40
)
 

 
(49.73
)
Net loss per common share - basic and diluted
(0.86
)
 
(438.11
)
 
(1.37
)
 
(829.58
)

See accompanying notes to consolidated financial statements.

2


FNB United Corp. and Subsidiaries
Consolidated Statements of Comprehensive Loss (unaudited)
(dollars in thousands)
Three Months Ended June 30,
 
2012
 
2011
Net loss
$
(18,138
)
 
$
(48,974
)
Other comprehensive income:

 

Unrealized holdings gains arising during the period on available-for-sale securities
4,026

 
4,785

 Tax effect
(1,563
)
 
(1,890
)
Unrealized holdings gains arising during the period on available-for-sale securities, net of tax
2,463

 
2,895

Reclassification adjustment for (gain) loss on available-for-sale securities included in net income
(2,002
)
 
98

     Tax effect
790

 
(39
)
Reclassification adjustment for (gain) loss on available-for-sale securities included in net income, net of tax
(1,212
)
 
59

Other comprehensive income, net of tax:
1,251

 
2,954

Comprehensive loss
$
(16,887
)
 
$
(46,020
)

(dollars in thousands)
 
Six Months Ended June 30,
 
 
2012
 
2011
Net loss
 
$
(28,997
)
 
$
(92,681
)
Other comprehensive income:
 
 
 
 
Unrealized holdings gains arising during the period on available-for-sale securities
 
5,184

 
4,524

 Tax effect
 
(2,020
)
 
(1,787
)
Unrealized holdings gains arising during the period on available-for-sale securities, net of tax
 
3,164

 
2,737

Reclassification adjustment for (gain) loss on available-for-sale securities included in net income
 
(1,956
)
 
84

     Tax effect
 
773

 
(33
)
Reclassification adjustment for (gain) loss on available-for-sale securities included in net income, net of tax
 
(1,183
)
 
51

Other comprehensive income, net of tax:
 
1,981

 
2,788

Comprehensive loss
 
$
(27,016
)
 
$
(89,893
)

See accompanying notes to consolidated financial statements.


3


FNB United Corp. and Subsidiaries
Consolidated Statements of Shareholders’ Equity (unaudited)
For Six Months Ended June 30, 2012 and 2011
 
 
 
 
 
 
 
 
 
 
 
 
Retained
 
Accumulated
 
 
(dollars in thousands, except share and per share data)
 
 
 
 
 
 
 
 
 
Common
 
Earnings/
 
Other
 
 
 
Preferred Stock
 
Common Stock
 
Stock
 
(Accumulated
 
Comprehensive
 
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
Warrant
 
Deficit)
 
Loss
 
Total
Balance, December 31, 2010
 
7,551,500

 
$
56,424

 
114,246

 
$
143,634

 
$
3,891

 
$
(229,095
)
 
$
(3,691
)
 
$
(28,837
)
Comprehensive loss:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss
 

 

 

 

 

 
(92,681
)
 

 
(92,681
)
Other comprehensive income, net of tax
 

 

 

 

 

 

 
2,788

 
2,788

Total comprehensive loss
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(89,893
)
Issuance of preferred stock, series A
 
5,000,000

 
5,000

 

 

 

 

 

 
5,000

Accretion of discount on preferred stock
 

 
378

 

 

 

 
(378
)
 

 

Stock options:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Compensation expense recognized
 

 

 

 
12

 

 

 

 
12

Balance, June 30, 2011
 
12,551,500

 
$
61,802

 
114,246

 
$
143,646

 
$
3,891

 
$
(322,154
)
 
$
(903
)
 
$
(113,718
)
Balance, December 31, 2011
 

 
$

 
21,102,668

 
$
455,166

 
$

 
$
(322,182
)
 
$
(3,969
)
 
$
129,015

Comprehensive loss:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss
 

 

 

 

 

 
(28,997
)
 

 
(28,997
)
Other comprehensive income, net of tax
 

 

 

 

 

 

 
1,981

 
1,981

Total comprehensive loss
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(27,016
)
Stock options:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Compensation expense recognized
 

 

 

 
1

 

 

 

 
1

Expense related to 2011 issuance of common stock
 

 

 

 
(913
)
 

 

 

 
(913
)
Return of common stock not received for fractional shares rounding purposes in the 1:100 reverse stock split
 

 

 
(586
)
 

 

 

 

 

Exercise of warrants related to stock offering
 

 

 
10

 

 

 

 

 

Stock offering, net of issuance costs of $158
 

 

 
485,788

 
6,915

 

 

 

 
6,915

Balance, June 30, 2012
 

 
$

 
21,587,880

 
$
461,169

 
$

 
$
(351,179
)
 
$
(1,988
)
 
$
108,002


See accompanying notes to consolidated financial statements.    

4


FNB United Corp. and Subsidiaries
Consolidated Statements of Cash Flows (unaudited)
 (dollars in thousands)
 
Six Months Ended June 30,
 
 
2012
 
2011
Operating Activities
 
 
 
 
Net loss
 
$
(28,997
)
 
$
(92,681
)
Net loss from discontinued operations
 
(27
)
 
(5,682
)
Net loss from continuing operations
 
(28,970
)
 
(86,999
)
Adjustments to reconcile net loss to cash provided by operating activities:
 
 
 
 
Depreciation and amortization of premises and equipment
 
1,957

 
1,602

Provision for loan losses
 
10,845

 
53,763

Deferred income taxes
 
(51
)
 
(1,228
)
Deferred loan fees and costs, net
 
(3,648
)
 
(237
)
Premium amortization and discount accretion of investment securities, net
 
4,700

 
1,815

Net loss/(gain) on sale of investment securities
 
(1,956
)
 
84

Amortization of core deposit premiums
 
704

 
397

Net accretion of purchase accounting adjustments
 
(14,397
)
 

Adjustment to goodwill
 
(300
)
 

Stock compensation expense
 
1

 
12

Increase in cash surrender value of bank-owned life insurance, net
 
(657
)
 
(543
)
Loans held for sale:
 
 
 
 
Origination of loans held for sale
 
(3,039
)
 

Net proceeds from sale of loans held for sale
 
1,749

 
107

Net loss/(gain) on sale of loans held for sale
 
(34
)
 
(107
)
Mortgage servicing rights capitalized
 

 
145

Net loss on sales and write-downs of other real estate owned
 
14,470

 
24,242

Changes in assets and liabilities:
 
 
 
 
(Increase)/decrease in accrued interest receivable and other assets
 
(605
)
 
15,046

Decrease in accrued interest payable and other liabilities
 
(498
)
 
(2,126
)
Net cash (used in)/provided by operating activities of continuing operations
 
(19,729
)
 
5,973

Net effect of discontinued operations
 
(874
)
 
33,103

Net cash (used in)/provided by operating activities
 
(20,603
)
 
39,076

Investing Activities
 
 
 
 
Available-for-sale securities:
 
 
 
 
Proceeds from sales
 
118,049

 
30,117

Proceeds from maturities, calls and principal repayments
 
83,454

 
23,687

Purchases
 
(245,492
)
 
(126,446
)
Net (increase)/decrease in loans held for investment
 
(69,984
)
 
114,460

Proceeds from sales of other real estate owned
 
23,878

 
10,399

Purchases of premises and equipment
 
(1,163
)
 
(139
)
Proceeds from sales of premises and equipment
 
34

 

Expenses paid in 2012 related to 2011 capital raise
 
(913
)
 

Net cash (used in) provided by investing activities of continuing operations
 
(92,137
)
 
52,078

Net effect of discontinued operations
 

 
70

Net cash (used in) provided by investing activities
 
(92,137
)
 
52,148

Financing Activities
 
 
 
 
Net decrease in deposits
 
(86,309
)
 
(91,436
)
Increase in retail repurchase agreements
 
2,617

 
428

Decrease in Federal Home Loan Bank advances
 
(20
)
 
(19
)
Issuance of common stock, net of expense
 
6,915

 

Net cash used in financing activities of continuing operations
 
(76,797
)
 
(91,027
)
Net effect of discontinued operations
 

 

Net cash used in financing activities
 
(76,797
)
 
(91,027
)
Net (Decrease) Increase in Cash and Cash Equivalents
 
(189,537
)
 
197

Cash and Cash Equivalents at Beginning of Period
 
553,416

 
160,594

Cash and Cash Equivalents at End of Period
 
$
363,879

 
$
160,791

 
 
 
 
 
Supplemental disclosure of cash flow information
 
 
 
 
Cash paid during the period for:
 
 
 
 
Interest
 
$
9,657

 
$
11,832

Noncash transactions:
 
 
 
 
Foreclosed loans transferred to other real estate owned
 
15,020

 
73,967

Loans to facilitate the sale of other real estate owned
 
778

 

Transfer of loans from held for investment to held for sale
 
600

 

Transfer of loans from held for sale to held for investment
 
(3,885
)
 

Unrealized securities gains/(losses), net of income taxes
 
1,981

 
2,788

Conversion of subordinated debt to preferred stock
 

 
(5,000
)
Issuance of preferred stock in subordinated debt conversion
 

 
5,000

See accompanying notes to consolidated financial statements.

5



FNB United Corp. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

1. Basis of Presentation
Nature of Operations
FNB United Corp. we or us (which also refers to FNB and our subsidiaries on a consolidated basis) ("FNB") is a bank holding company incorporated under the laws of the State of North Carolina in 1984. We own two bank subsidiaries: CommunityOne Bank, N.A. (“CommunityOne”), a national banking association headquartered in Asheboro, North Carolina and, through Bank of Granite Corporation (“Granite Corp.”), Bank of Granite (“Granite”), a state chartered bank headquartered in Granite Falls, North Carolina.
Through our bank subsidiaries, we offer a complete line of consumer, mortgage and business banking services, including loan, deposit, cash management, investment management and trust services, to individual and business customers through operations located throughout central, southern and western North Carolina, including the counties of Alamance, Alexander, Ashe, Burke, Caldwell, Catawba, Chatham, Gaston, Guilford, Iredell, Mecklenburg, Montgomery, Moore, Orange, Randolph, Richmond, Rowan, Scotland, Watauga and Wilkes. Management believes that the banks have a relatively stable deposit base and no material amount of deposits is obtained from a single depositor or group of depositors, including federal, state and local governments.
CommunityOne owns two subsidiaries: Dover Mortgage Company, (“Dover”) and First National Investor Services, Inc. Dover previously engaged in the business of originating, underwriting and closing mortgage loans for sale in the secondary market. Dover ceased operations in the first quarter of 2011 and filed for Chapter 11 bankruptcy on February 15, 2012. First National Investor Services, Inc. holds deeds of trust for CommunityOne. Through Granite Corp., we also own Granite Mortgage, Inc., which ceased mortgage operations in 2009 and filed for Chapter 11 bankruptcy on February 15, 2012. FNB also owns FNB United Statutory Trust I, FNB United Statutory Trust II, and Catawba Valley Capital Trust II, which were formed to facilitate the issuance of trust preferred securities.
On October 21, 2011, as part of the recapitalization of FNB, FNB acquired Granite Corp., through the merger of a wholly owned subsidiary of FNB merging into Granite Corp (the "Merger"). The Merger was part of FNB's recapitalization strategy.
General
The accompanying consolidated financial statements, prepared without audit, include the accounts of FNB and its subsidiaries. All significant intercompany balances and transactions have been eliminated. Descriptions of the organization and business of FNB, accounting policies followed by FNB and other relevant information are contained in FNB's Annual Report on Form 10-K for the year ended December 31, 2011, as amended by its Amendment No. 1 (the "Form 10-K"), including the notes to the consolidated financial statements filed as part of that report. This quarterly report should be read in conjunction with the Form 10-K.
In the opinion of management, the accompanying condensed consolidated financial statements contain all the adjustments, all of which are normal recurring adjustments, necessary to present fairly the financial position of FNB as of June 30, 2012 and December 31, 2011, and the results of its operations and cash flows for the three and six months ended June 30, 2012 and 2011, respectively.
All financial information is reported on a continuing operations basis, unless otherwise noted. See Note 2 to the consolidated financial statements for a discussion regarding discontinued operations and certain assets and liabilities at June 30, 2012 and December 31, 2011.
Use of Estimates
We have made a number of estimates and assumptions relating to the reporting of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period to prepare these consolidated financial statements in conformity with accounting principles generally accepted in the United States ("GAAP"). Actual results could differ from those estimates. Material estimates subject to change in the near term include, among other items, the allowances for loan losses (“ALL”), the carrying value of other real estate owned (“OREO”), the carrying value of intangible assets, the fair value of net assets acquired in the Merger and the realization of deferred tax assets.
Reclassification
Certain reclassifications have been made to the prior period consolidated financial statements to place them on a comparable basis with the current period consolidated financial statements. These reclassifications have no effect on net income or shareholders' equity as previously reported.
During the first quarter of 2012, FNB implemented a purchased loan accounting system and finalized its methodology to allocate the fair value of purchased impaired loans in pools to individual loans for purposes of several of the loan disclosure tables in Notes 5 and

6


6 to the consolidated financial statements. In order to present these tables for prior periods on a comparable basis to current period tables in these consolidated financial statements, we have reclassified certain amounts as of December 31, 2011 in the tables between loan portfolio segments and classes, between purchased contractual and purchased impaired loans, and between risk grade categories. These reclassifications have no effect on net income, the loan fair value mark, total loans or shareholders' equity as of or for the period ended December 31, 2011.
Subsequent Events
Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued. Recognized subsequent events are events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements. Non-recognized subsequent events are events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date. Management has reviewed events occurring through the date of this filing and has concluded that no subsequent events have occurred requiring accrual or disclosure in addition to that included herein.
Recent Accounting Pronouncements
Disclosures about Fair Value - Accounting Standards Update ("ASU") 2011-04 was issued in May 2011 to amend the Fair Value Measurement topic of the Accounting Standards Codification ("ASC") by clarifying the application of existing fair value measurement and disclosure requirements and by changing particular principles or requirements for measuring fair value or for disclosing information about fair value measurements. The amendment was effective for FNB on January 1, 2012, and the related disclosures are presented in Note 10.
Comprehensive Income - The Comprehensive Income topic of the ASC was amended in June 2011. The amendment eliminates the option to present other comprehensive income as a part of the statement of changes in shareholders' equity and requires consecutive presentation of the statement of net income and other comprehensive income. The amendments were to become applicable to FNB on January 1, 2012 and were to be applied retrospectively. In December 2011, the topic was further amended to defer the effective date of presenting reclassification adjustments from other comprehensive income to net income on the face of the financial statements. Companies should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect prior to the amendments while FASB redeliberates future requirements. The remaining provisions of this update took effect for FNB on January 1, 2012.
2. Discontinued Operations
All operations of Dover, a subsidiary of CommunityOne, were discontinued as of March 17, 2011. Dover, acquired by FNB in 2003, originated, underwrote and closed mortgage loans for sale into the secondary market. It maintained a retail origination network based in Charlotte, North Carolina, which originated loans for properties located in North Carolina. Dover also engaged in the wholesale mortgage origination business and conducted retail mortgage origination business outside of North Carolina. Operations outside of the State of North Carolina and the wholesale mortgage origination business were discontinued in February 2011, and all remaining operations were discontinued on March 17, 2011. Dover filed for Chapter 11 bankruptcy on February 15, 2012 in the United States Bankruptcy Court for the Western District of North Carolina. All of the assets and liabilities of Dover were written off at that time.
The results of operations of a component of an entity that has been disposed of shall be reported in discontinued operations if both the operations and cash flows of the component have been, or will be, eliminated from ongoing operations of the entity as a result of the disposal transaction and the entity will not have any significant continuing involvement in the operations of the component after the disposal transaction. As a result, the Consolidated Balance Sheets, Statements of Operations and Statement of Cash Flows for all periods reflect retrospective application of Dover's classification as a discontinued operation.
Assets and liabilities of discontinued operations at the dates indicated were as follows:
(dollars in thousands)
 
June 30,
2012
 
December 31,
2011
Assets
 
 
 
 
Loans held for sale
 
$

 
$
233

Premises and equipment, net
 

 
5

Other real estate owned
 

 

Other assets
 

 
7

Assets of discontinued operations
 
$

 
$
245

Liabilities
 
 
 
 
Other liabilities
 
$

 
$
1,092

Liabilities of discontinued operations
 
$

 
$
1,092


7


Net loss from discontinued operations, net of tax, at the dates indicated were as follows:
(dollars in thousands)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2012
 
2011
 
2012
 
2011
Interest Income
 
 
 
 
 
 
 
 
Interest and fees on loans
 
$

 
$
13

 
$


$
56

Total interest income
 

 
13

 

 
56

Interest Expense
 
 
 
 
 
 
 
 
Other borrowed funds
 

 

 

 

Total interest expense
 

 

 

 

Net Interest Income before Provision for Loan Losses
 

 
13

 

 
56

Provision for loan losses
 

 

 

 

Net Interest Income after Provision for Loan Losses
 

 
13

 

 
56

Noninterest Income
 
 
 
 
 
 
 
 
Mortgage loan loss
 

 
(113
)
 

 
(165
)
Other service charges, commissions and fees, net
 

 
(2
)
 

 
(11
)
Other income
 

 

 

 
10

Total noninterest loss
 

 
(115
)
 

 
(166
)
Noninterest Expense
 
 
 
 
 
 
 
 
Personnel expense
 

 
490

 
1

 
1,443

Net occupancy expense
 

 
142

 
1

 
211

Furniture, equipment and data processing expense
 

 
94

 

 
171

Professional fees
 

 
80

 
25

 
177

Stationery, printing and supplies
 

 
3

 

 
8

Advertising and marketing
 

 
(6
)
 

 
28

Other real estate owned expense
 

 
45

 

 
166

Provision for recourse loans
 

 
1,146

 

 
3,324

Other expense
 

 
106

 

 
257

Total noninterest expense
 

 
2,100

 
27

 
5,785

Loss before income taxes
 

 
(2,202
)
 
(27
)
 
(5,895
)
Income tax (benefit)/expense
 

 
(213
)
 

 
(213
)
Net loss from discontinued operations, net of tax
 
$

 
$
(1,989
)
 
$
(27
)
 
$
(5,682
)
All financial information in the consolidated financial statements and notes to the consolidated financial statements reflects continuing operations, unless otherwise noted.
3. Goodwill and Other Intangible Assets
We have accounted for the Merger as a business combination under the acquisition method of accounting. As a result, we have recognized in our financial statements the identifiable net assets acquired and an amount of goodwill (representing the difference between the purchase price and the identifiable net assets). During the measurement period following a business combination, the amount of identifiable net assets recognized is subject to further adjustment to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date. GAAP requires that the measurement period cannot exceed one year from the acquisition date.
Goodwill and other intangible assets deemed to have indefinite lives generated from purchase business combinations are not subject to amortization and are instead tested for impairment no less than annually. Impairment exists when the carrying value of goodwill exceeds its implied fair value. An impairment loss would be recognized in an amount equal to that excess and would be included in noninterest expense in the Consolidated Statements of Operations. None of the goodwill recognized in the Merger is expected to be deductible for income tax purposes.
During the six months ending June 30, 2012, we recognized $0.3 million in additional goodwill from the Merger. This additional amount was due to new valuations received on OREO acquired in the Merger, which were written down to our best estimate of fair value.

8


Our intangible assets with definite lives are core deposit premiums ("CDP"). This intangible asset is amortized over its useful life to its estimated residual value and reviewed for impairment at least quarterly. The amortization expense represents the estimated decline in the value of the underlying deposits.
4. 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 an 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 risks.
The following table summarizes the amortized cost and estimated fair value of available-for-sale investment securities and presents the related gross unrealized gains and losses:
June 30, 2012
 
 
 
 
 
 
 
 
(dollars in thousands)
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
Obligations of:
 
 
 
 
 
 
 
 
U.S. Treasury and government agencies
 
$
6,864

 
$
232

 
$

 
$
7,096

U.S. government sponsored enterprises
 
3,586

 
30

 

 
3,616

States and political subdivisions
 
5,988

 
78

 

 
6,066

Residential mortgage-backed securities-GSE
 
381,857

 
3,904

 
259

 
385,502

Residential mortgage-backed securities-Private
 
32,797

 
652

 
769

 
32,680

Commercial mortgage-backed securities-Private
 
5,354

 

 
15

 
5,339

Corporate notes
 
36,992

 

 
155

 
36,837

Total
 
$
473,438

 
$
4,896

 
$
1,198

 
$
477,136

 
 
 
 
 
 
 
 
 
December 31, 2011
 
 
 
 
 
 
 
 
(dollars in thousands)
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
Obligations of:
 
 
 
 
 
 
 
 
U.S. Treasury and government agencies
 
$
7,081

 
$
107

 
$

 
$
7,188

U.S. government sponsored enterprises
 
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

CommunityOne and Granite, as members of the Federal Home Loan Bank of Atlanta (“FHLB”), are required to own capital stock in the FHLB 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. The combined banks owned a total of $7.3 million of FHLB stock at June 30, 2012 and at December 31, 2011. Due to the redemption provisions of FHLB stock, FNB estimated that fair value approximated cost and that this investment was not impaired at June 30, 2012. FHLB stock is included in other assets at its original cost basis.
CommunityOne, as a member bank of the Federal Reserve Bank of Richmond (“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 both June 30, 2012 and December 31, 2011, CommunityOne owned a total of $3.7 million, 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 June 30, 2012. FRBR stock is included in other assets at its original cost basis.
At June 30, 2012, $82.0 million of the investment securities portfolio was pledged to secure public deposits, $12.3 million was

9


pledged to retail repurchase agreements, $4.1 million was pledged to the FRBR and $0.7 million was pledged to others, leaving $378.2 million available as lendable collateral.
During the three and six months ended June 30, 2012, the banks sold securities with a book value of $112.7 million and recognized a gain of $2.0 million. The banks sold these securities in order to modify our interest rate sensitivity profile.
The following tables show investments' estimated fair value and gross unrealized losses, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, at June 30, 2012 and December 31, 2011. All unrealized losses on investment securities are considered by management to be temporary given the credit ratings on these investment securities or the short duration of the unrealized loss or both.
 
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
June 30, 2012
 
 
 
 
 
 
 
 
Residential mortgage-backed securities-GSE
$
43,983

$
167

 
$
12,594

$
92

 
$
56,577

$
259

Residential mortgage-backed securities-Private
13,061

769

 


 
13,061

769

Commercial mortgage-backed securities-Private
5,339

15

 


 
5,339

15

Corporate notes
36,837

155

 


 
36,837

155

Total
$
99,220

$
1,106

 
$
12,594

$
92

 
$
111,814

$
1,198

 
 
 
 
 
 
 
 
 
 
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 enterprises
$
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

At June 30, 2012, 10 available-for-sale securities were in an unrealized loss position less than 12 months compared to 32 at December 31, 2011. At June 30, 2012, there were 3 available-for-sale securities that were in an unrealized loss position for longer than 12 months, compared to seven at December 31, 2011.
If an entity intends to sell a debt security or cannot assert it is more likely than not that it will not have to sell the security before recovery, other than temporary impairment ("OTTI") must be taken. If the entity does not intend to sell the debt security before recovery, but the entity does not expect to recover the entire amortized cost basis, then OTTI must be taken, but the amount of impairment is to be bifurcated between impairment due to credit (which is recorded through earnings) and noncredit impairment (which becomes a component of other comprehensive income (“OCI”) for both available-for-sale and held-to-maturity securities). For held-to-maturity securities, the amount in OCI will be amortized prospectively over the security's remaining life. FNB did not have any OTTI during the three and six months ended June 30, 2012 and June 30, 2011.
As of June 30, 2012, FNB had four private residential mortgage-backed securities that were rated as below investment grade by one or more rating agencies. These securities were acquired in the Merger and have a current fair value of $8.1 million. It is our intention to continue to hold these securities.
FNB analyzed its securities portfolio at June 30, 2012, 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.
The aggregate amortized cost and fair value of securities at June 30, 2012, by remaining contractual maturity, are shown in the following table. Actual expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations.


10


 
 
Available-for-Sale
(dollars in thousands)
 
Amortized Cost
 
Estimated Fair Value
Due in one year or less
 
$
8,436

 
$
8,407

Due after one one year through five years
 
33,381

 
33,459

Due after five years through 10 years
 
4,749

 
4,653

Due after 10 years
 
6,864

 
7,096

Total
 
53,430

 
53,615

Mortgage-backed securities
 
420,008

 
423,521

Total
 
$
473,438

 
$
477,136


5. 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 disaggregations of a portfolio segment.  FNB's portfolio segments are:  Commercial and agricultural, Real estate, and Consumer loans.  The Commercial and agricultural loan portfolio is not further segregated into classes.  The classes within the Real estate portfolio segment include Real estate - construction and real estate mortgage, broken into 1-4 family residential mortgage and commercial real estate mortgage loans. The Consumer loan portfolio is not further segregated into classes.

Loan fees and the incremental direct costs associated with originating loans are deferred and subsequently recognized over the life of the loan as an adjustment to interest income.
In addition to originating loans we also purchase loans. At acquisition purchased loans are designated as either purchased contractual loans or purchased impaired loans. Purchase contractual loans ("PC Loans") are acquired loans where management feels it is probable that it will receive all principal as of the date of acquisition.  These loans are accounted for under the contractual cash flow method, under ASC 310-20. Any discount or premium paid on purchased contractual loans is recorded in interest income on the effective yield method over the expected life of the loan.
Purchased impaired loans ("PI Loans") are acquired loans where, in management's estimation, it is probable that all principal on the acquired loans will not be received as of acquisition date.  PI loans are placed in homogeneous risk based pools where accounting for projected cash flows is performed, as allowed under ASC 310-30.  Once a pool is established the individual loans within each pool do not change.  As management obtains new information related to changes in expected principal loss and expected cash flows, by pool, we record either an increase in yield when new expected cash flows increase, or an allowance for loan losses when new expected cash flows decline.  
Loans acquired in the Merger ("Granite Purchased Loans") included PI Loans and PC Loans. Loans designated as PC Loans included performing revolving consumer and commercial loans on acquisition date.
During February 2012, we purchased $61.9 million of performing residential mortgage loans, including a premium of $2.3 million, and during April 2012 we purchased an additional $75.5 million of performing residential mortgage loans, including a premium of $1.4 million. These loan purchases are accounted for as PC loans.
The following is a summary of Granite Purchased Loans and total loans for the periods as presented.



11


(dollars in thousands)
 
June 30, 2012
 
December 31, 2011
 
 
Granite Purchased Loans
 
Total Loans
 
 
Granite Purchased Loans
 
Total Loans
Loans held for sale
 
$

 
$
1,324

 
$

$

 
$
4,529

Loans held for investment:
 
 
 
 
 
 
 
 
 
Commercial and agricultural
 
$
26,560

 
$
78,367

 
 
$
36,933

 
$
95,089

Real estate - construction
 
5,671

 
75,576

 
 
7,641

 
92,806

Real estate - mortgage:
 
 
 
 
 
 
 
 
 
1-4 family residential
 
76,523

 
589,972

 
 
87,484

 
453,725

Commercial
 
213,750

 
493,721

 
 
239,621

 
531,383

Consumer
 
1,244

 
44,187

 
 
1,809

 
44,532

Gross loans held for investment
 
323,748

 
1,281,823

 
 
373,488

 
1,217,535

Less: Allowance for loan losses
 
(3,336
)
 
(38,551
)
 
 

 
(39,360
)
   Loans held for investment, net of allowance
 
$
320,412

 
$
1,243,272

 
 
$
373,488

 
$
1,178,175

At June 30, 2012 loans held for sale consisted of originated residential mortgage loans held for sale at the lower of cost or fair market value. At December 31, 2011, loans held for sale consisted of nonperforming loans transferred from loans held for investment under sales contracts recorded at the contractual sales price.
Loans included in the preceding loan composition table are net of participations sold. Loans are increased by net deferred loan premiums or expenses of $2.6 million at June 30, 2012. Loans are decreased by net deferred loan discounts or fees of $1.8 million at December 31, 2011.
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 $2.5 million at June 30, 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 $309.9 million and $339.4 million were pledged to collateralize FHLB advances and letters of credit at June 30, 2012 and December 31, 2011, respectively, of which there was $58.0 million and $69.5 million of credit availability for borrowing, respectively. Lendable collateral values are subject to change as a result of periodic reviews by the FHLB. At June 30, 2012, $46.0 million of loans and $4.1 million of securities were pledged to collateralize potential borrowings from the Federal Reserve Discount Window, of which $29.0 million was available as borrowing capacity.
Interest income on loans is 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 $3.5 million for the three months ended June 30, 2012 and June 30, 2011, respectively, and higher by $2.9 million and $7.6 million for the six months ended June 30, 2012 and June 30, 2011, respectively. At June 30, 2012 and December 31, 2011, FNB had certain impaired loans of $95.1 million and $103.0 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)
 
June 30, 2012
 
December 31, 2011
Loans on nonaccrual status:
 
 
 
 
Held for sale
 
$

 
$
4,529

Held for investment
 
95,110

 
98,444

Loans more than 90 days delinquent, still on accrual
 
427

 
3,000

Real estate owned/repossessed assets
 
86,400

 
110,386

Total nonperforming assets
 
$
181,937

 
$
216,359


12


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.
 
 
June 30, 2012
 
December 31, 2011
(dollars in thousands)
 
Balance
Associated Reserves
 
Balance
Associated Reserves
Impaired loans, held for sale
 
$

$

 
$
4,529

$

Impaired loans, not individually reviewed for impairment
 
6,750


 
5,127


Impaired loans, individually reviewed, with no impairment
 
55,160


 
53,884


Impaired loans, individually reviewed, with impairment
 
40,778

8,724

 
42,357

11,090

Total impaired loans, excluding purchased impaired *
 
$
102,688

$
8,724

 
$
105,897

$
11,090

 
 
 
 
 
 
 
Purchased impaired loans with subsequent deterioration
 
$
36,659

3,336

 
$


Purchased impaired loans with no subsequent deterioration
 
$
250,433


 
$
330,836


Total Reserves
 
 
$
12,060

 
 
$
11,090

 
 
 
 
 
 
 
Average impaired loans calculated using a simple average
 
$
107,263

 
 
$
112,600

 
* Included at June 30, 2012 and December 31, 2011 were $3.9 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 June 30, 2012, there was $27.3 million in restructured loans, of which $3.9 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.

13


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 than 90 days delinquent may also be placed on nonaccrual if deterioration in the financial condition of the borrower has increased the probability of less than full repayment.
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 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.
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 June 30, 2012, the balance of such loans was $91.7 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 its classified loan exposure. These loans were transferred to loans held for sale at the time FNB received 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 were conducted at arm's length and loans were sold without recourse.
The following table presents sold loans by portfolio segment for the periods indicated below:
 
For Three Months Ended June 30, 2012
 
For Three Months Ended June 30, 2011
(dollars in thousands)
Number
 
Recorded
 
Contract
 
Number
 
Recorded
 
Contract
 
of Loans
 
Investment
 
Pricing
 
of Loans
 
Investment
 
Pricing
Commercial and agricultural

 
$

 
$

 

 
$

 
$

Real estate - construction

 

 

 

 

 

Real estate - mortgage:
 
 
 
 
 
 
 
 
 
 
 
1-4 family residential
6

 
1,715

 
1,746

 

 

 

Commercial

 

 

 

 

 

Consumer

 

 

 

 

 

Total
6

 
$
1,715

 
$
1,746

 

 
$

 
$


14


 
For Six Months Ended June 30, 2012
 
For Six Months Ended June 30, 2011
(dollars in thousands)
Number
 
Recorded
 
Contract
 
Number
 
Recorded
 
Contract
 
of Loans
 
Investment
 
Pricing
 
of Loans
 
Investment
 
Pricing
Commercial and agricultural

 
$

 
$

 

 
$

 
$

Real estate - construction

 

 

 
4

 
13,342

 
5,813

Real estate - mortgage:
 
 
 
 
 
 
 
 
 
 
 
1-4 family residential
7

 
1,865

 
1,896

 

 



Commercial
1

 
3,800

 
4,050

 
1


321


350

Consumer

 

 

 





Total
8

 
$
5,665

 
$
5,946

 
5

 
$
13,663

 
$
6,163

During the three-month period ending June 30, 2012, there were six non-performing loans placed under contract for sale and then sold by June 30, 2012.
Granite Purchased Loans
Granite Purchased Loans include PI Loans and PC Loans. PC Loans included performing revolving consumer and commercial loans on the acquisition date.
PI Loans are segregated into pools and recorded at estimated fair value on the date of acquisition without the carryover of the related ALL. PI 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. PI 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 we 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 PI 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 account for the Granite Purchased PI Loans under ASC 310-30 and the Granite Purchased PC Loans under ASC 310-20.
At June 30, 2012, we established a PI Loan ALL of $3.3 million and an ALL for originated and PC Loans of $0.4 million relating to Granite Purchased loans. All Granite Purchased PI Loans are presented on an accruing basis.
The following table presents the balance of all Granite Purchased Loans:
 
 
At June 30, 2012
(dollars in thousands)
 
Purchased Impaired
 
Purchased Contractual
 
Total Purchased Loans
 
Unpaid
Principal
Balance
Commercial and agricultural
 
$
20,277

 
$
6,283

 
$
26,560

 
$
26,793

Real estate - construction
 
5,671

 

 
5,671

 
6,101

Real estate - mortgage:
 
 
 
 
 
 
 
 
   1-4 family residential
 
46,150

 
30,373

 
76,523

 
79,980

   Commercial
 
213,750

 

 
213,750

 
224,208

Consumer