Notes to Financial Statements
As of December 31, 2012 and December 31, 2011 and for the Year Ended December 31, 2012
NOTE A - DESCRIPTION OF PLAN
The following description of the CommunityOne 401(k) Plan (the “Plan”) is provided for general information purposes only. Participants should refer to the plan document for a more complete description of the Plan’s provisions. The terms used herein are defined in the plan document. The original Plan, which was named the FNB Retirement/Savings Plus Benefit Plan (the “FNB Plan”) was established on January 1, 1981. During July 2012 the FNB Plan was merged with the Bank of Granite Employees’ Savings & Profit Sharing Plan and Trust to become the Plan. The following description of the Plan is as of December 31, 2012.
General
The Plan is a defined contribution plan covering eligible employees of CommunityOne Bank N.A.
(the “Company” and “Plan Sponsor”) who have ninety days of service and are at least 18 years old. The Plan is subject to the provisions of the Employee Retirement Income Security Act of 1974 (ERISA).
Contributions
Eligible employees may elect to defer 1% to 100% of their eligible compensation in whole percentage points during a pay period up to the maximum percentage allowable not to exceed the limits of the Internal Revenue Code (the “Code”). Participants may also contribute amounts representing distributions from other qualified defined benefit or contribution plans (rollovers). Generally, employee contributions may be withdrawn in case of normal retirement, termination, or cases of extreme hardship as defined by the Plan.
The Company contributes to the Plan an amount equal to 50% of the first 6% of a participant’s annual compensation deferred as an employee salary deferral contribution. Discretionary contributions may be given annually to all employees, whether enrolled in the Plan or not. All matching and discretionary contributions from the Company are made as cash contributions, which are allocated per the participant’s election instructions. For the year ended December 31, 2012, the Company did not make a discretionary contribution.
Participant Accounts
Each participant’s account is credited with the participant’s contribution and allocations of the Company’s matching contribution and discretionary contribution, if any, and Plan earnings, and charged with an allocation of certain administrative expenses and Plan losses. Allocations are based on participant earnings or account balances, as defined. Participants are entitled to benefits, limited to the vested balance of their account.
CommunityOne 401K PLAN
Notes to Financial Statements
As of December 31, 2012 and December 31, 2011 and for the Year Ended December 31, 2012
NOTE A - DESCRIPTION OF PLAN (continued)
Vesting
Participants vest in the employer matching contributions plus actual earnings thereon and any discretionary employer contributions plus earnings in 25% increments over four years. Participants are fully vested at all times in their contributions plus actual earnings thereon.
Investment Options
Participants direct the investment of their contributions into various investment options offered by the Plan. As of December 31, 2012 the Plan offered twenty-two investment options for participants, and as of December 31, 2011, the FNB Plan offered twenty investment options for participants. All employer matching contributions are participant directed.
Payment of Benefits
On termination of service due to death, disability, retirement, or for other reasons, a participant may elect to receive either a lump-sum amount equal to the value of the participant’s vested interest in his or her account, an annuity or installment payments. Benefits are recorded when paid.
Notes Receivable from Participants
Participants may borrow from their accounts a minimum of $1,000 and up to a maximum equal to $50,000 or 50% of the vested account balance, whichever is less. The $50,000 maximum loan amount is reduced by the highest loan balance during the past 12 months minus the loan balance on the date a new loan is made. The loans are secured by the balance in the participant account and the interest rate is 1% above the prime rate, as published in The Wall Street Journal on the first business day of the month the loan is originated. Principal and interest are paid ratably through monthly payroll deductions over a period not to exceed five years but may not extend beyond such participant’s normal retirement date.
Administrative Expenses
The Plan pays all Plan related expenses, except for a limited category of expenses which the law requires the employer to pay, which generally relate to the design, establishment or termination of the Plan. The expenses charged to the Plan are allocated to the participants. In additional, some types of expenses may be charged only to some Participants based upon their use of a Plan feature or receipt of a plan distribution.
Termination of the Plan
Although the Company has not expressed any intent to terminate the Plan, it may do so at any time. If the Plan is terminated, participants will become 100% vested in their accounts and participant account balances will be distributed in accordance with one of the methods of payment provided in
the Plan.
Forfeited Accounts
Non-vested balances shall be forfeited as of the allocation date during the plan year in which the former participant receives payment of the vested benefit. At December 31, 2012 and December 31, 2011, there were $45,480 and $54,165, respectively, of forfeitures that had not yet been used to reduce the Employer’s
CommunityOne 401K PLAN
Notes to Financial Statements
As of December 31, 2012 and December 31, 2011 and for the Year Ended December 31, 2012
contributions or reduce expenses. For the year ended December 31, 2012, administrative expenses were reduced by $34,553 from forfeited non-vested accounts.
NOTE B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and present the net assets available for benefits and changes in those net assets.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (”U.S. GAAP”) requires the Plan Administrator to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of
changes in net assets during the reporting period. Actual results could differ from those estimates.
Risks and Uncertainties
The Plan’s investments include funds that invest in various types of investment securities and in various companies within various markets. Investment securities are exposed to several risks, such as interest rate, market and credit risks. Due to the level of risk associated with certain investment securities, it is at least reasonably possible that changes in the values of investment securities will occur in the near term and that such changes could materially affect the amounts reported in the Plan’s financial statements and supplemental schedule.
CommunityOne 401K PLAN
Notes to Financial Statements
As of December 31, 2012 and December 31, 2011 and for the Year Ended December 31, 2012
NOTE B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Investment Valuation and Income Recognition
All investments as of December 31, 2012 and December 31, 2011 are stated at fair value. The fair value of mutual funds are based on the quoted market prices. Purchases and sales of securities are recorded on a trade-date basis. Dividends are recorded on the ex-dividend date. The fair value of ownership interest of the stable value fund is established by the Trustee based on the quoted redemption values of the underlying investments on the last business day of the plan year. A money market account is also utilized by the Trustee to hold money that has been removed from the participants’ funds and is waiting for distribution to the appropriate participants.
Investment contracts held by a defined contribution plan are required to be reported at fair value. However, contract value is the relevant measurement attribute for that portion of the net assets available for benefits of a defined contribution plan attributable to fully benefit-responsive investment contracts because contract value is the amount participants would receive if they were to initiate permitted transactions under the terms of the Plan. The Statements of Net Assets Available for Benefits present the fair value of the investment contracts as well as the adjustment of the fully benefit-responsive investment contracts from fair value to contract value. The Statement of Changes in Net Assets Available for Benefits is prepared on a contract value basis.
Net Appreciation in Fair Value of Investments
Net appreciation in fair value of investments includes realized gains and losses and appreciation or depreciation in the fair value of the Plan’s investments, except for its fully benefit-responsive investment contract, for which appreciation or depreciation in the contract value is included in the fair value.
Fair Values of Financial Instruments
The Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 820, “Fair Value Measurement,” provides the framework for measuring fair value. That framework provides a definition of fair value and establishes a framework for measuring fair value under current accounting pronouncements that require or permit fair value measurement and enhances disclosures about fair value measurements. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction. It also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs when measuring fair value.
The Plan groups assets at fair value in three levels, based on the markets in which the assets are traded and the reliability of the assumptions used to determine fair value. These levels are:
Level 1 – Valuation is based upon quoted prices for identical instruments traded in active markets.
Level 2 – Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market, including interest rates, prepayment speeds, credit risk, etc.
Level 3 – Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates or assumptions that market
CommunityOne 401K PLAN
Notes to Financial Statements
As of December 31, 2012 and December 31, 2011 and for the Year Ended December 31, 2012
NOTE B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.
A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The following is a description of valuation methodologies used for instruments measured at fair value, including the general classification of such instruments pursuant to the valuation hierarchy.
Common Equity Securities
These investments were valued at the closing price reported on the active market on which the individual securities were traded and were classified within level 1 of the valuation hierarchy.
Mutual Funds
These investments are public investment vehicles valued using the Net Asset Value (NAV) provided by the administrator of the fund. The NAV is based on the value of the underlying assets owned by the fund, minus its liabilities, and then divided by the number of shares outstanding. The NAV is a quoted price in an active market and classified within level 1 of the valuation hierarchy.
Common Collective Investment Funds
These investments are public investment vehicles valued using the NAV provided by the administrator of the fund. The NAV is based on the value of the underlying assets owned by the fund, minus its liabilities, and then divided by the number of shares outstanding. The NAV is classified within level 2 of the valuation hierarchy because the NAV’s unit price is quoted on a private market that is not active; however, the input price is based on the underlying investments which are traded on active markets.
Stable Value Fund
The Stable Value Fund (the “Fund) is a collective trust fund sponsored by MetLife. The beneficial interest of each participant is represented by units. Units are issued and redeemed daily at the Fund’s constant NAV of $1 per unit. Distribution to the Fund’s unit holders is declared daily from the net investment income and automatically reinvested in the Fund on a monthly basis, when paid. It is the policy of the Fund to use its best efforts to maintain a stable net asset value of $1 per unit, although there is no guarantee that the Fund will be able to maintain this value. The NAV is classified within level 2 of the valuation hierarchy.
Participants ordinarily may direct the withdrawal or transfer of all or a portion of their investment at contract value. Contract value represents contributions made to the Fund, plus earnings, less participant withdrawals and administrative expenses. The Fund imposes certain restrictions on the Plan, and the Fund itself may be subject to circumstances that impact its ability to transact at contract value, as described in the following paragraphs. Plan management believes that the occurrence of events that would cause the Fund to transact at less than contract value is not probable.
Restrictions on the Plan
- Participant-initiated transactions are those transactions allowed by the Plan, including withdrawals for benefits, loans, or transfers to noncompeting funds within a plan, but excluding withdrawals that are deemed to be caused by the actions of the plan sponsor. The following employer-initiated events may limit the ability of the Fund to transact at contract value:
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•
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A failure of the Plan or its trust to qualify for exemption from federal income taxes or any required prohibited transaction exemption under ERISA.
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•
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Material breaches of responsibility which are not cured.
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•
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Material or adverse changes to the provisions of the Plan.
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CommunityOne 401K PLAN
Notes to Financial Statements
As of December 31, 2012 and December 31, 2011 and for the Year Ended December 31, 2012
NOTE B – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Circumstances that Impact the Fund
– The Fund invests in a variety of investment contracts such as guaranteed investment contracts (“GICs”) issued by insurance companies and other financial institutions and other investment products and enters into “wrapper” contracts issued by third parties. A wrapper contract is an agreement by another party, such as a bank or insurance company to make payments to the Fund in certain circumstances. Wrapper contracts are designed to allow a stable value portfolio to maintain a constant NAV and protect a portfolio in extreme circumstances. In a typical wrapper contract, the wrapper issuer agrees to pay the difference between the contract value and the market value of the underlying assets if the market value falls below the contract value.
The wrapper contracts generally contain provisions that limit the ability of the Fund to transact at contract value upon the occurrence of certain events. These events include:
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•
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termination of the plan.
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•
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a material adverse change to the provisions of the plan.
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•
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the employer elects to withdraw from a wrapper contract in order to switch to a different investment provider,
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•
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the terms of a successor plan (in the event of the spin-off or sale of a division) do not meet the wrapper contract issuer’s underwriting criteria for issuance of a clone wrapper contract.
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In the event that wrapper contracts fail to perform as intended, the Fund’s NAV may decline if the market value of its assets decline. The Fund’s ability to receive amounts due pursuant to these wrapper contracts is dependent on the third-party issuer’s ability to meet their financial obligations. The wrapper issuer’s ability to meet its contractual obligations under the wrapper contracts may be affected by future economic and regulatory developments.
The Fund is unlikely to maintain a stable NAV if, for any reason, it cannot obtain or maintain wrapper contracts covering all of its underlying assets. This could result from the Fund’s inability to promptly find a replacement wrapper contract following termination of a wrapper contract. Wrapper contracts are not transferable and have no trading market. There is a limited number of wrapper issuers. The Fund may lose the benefit of a wrapper contract on any portion of its assets in default in excess of a certain percentage of portfolio assets.
Money Market Funds
These investments were public investment vehicles valued using $1 for the NAV. The money market funds are classified within level 2 of the valuation hierarchy.
The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Plan believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
CommunityOne 401K PLAN
Notes to Financial Statements
As of December 31, 2012 and December 31, 2011 and for the Year Ended December 31, 2012
NOTE C – FEDERAL INCOME TAXES
The Internal Revenue Service has determined and informed the Company by a letter dated March 31, 2008, that the Plan and related trust are designed in accordance with applicable sections of the Internal Revenue Code. Although the Plan has been amended since receiving the determination letter, the plan administrator believes that the Plan is designed and is currently being operated in compliance with the applicable requirements of the Internal Revenue Code. In the opinion of the plan administrator, the Plan and its underlying trust have operated within the terms of the Plan and remain qualified under the applicable provisions of the Internal Revenue Code.
United States GAAP requires plan management to evaluate tax positions taken by the Plan and recognize a tax liability (or asset) if the Plan has taken an uncertain position that more likely than not would not be sustained upon examination by the IRS. The plan administrator has analyzed the tax positions taken by the Plan, and has concluded that as of December 31, 2012, there are no uncertain positions taken or expected to be taken that would require recognition of a liability or disclosure in the financial statements. The Plan is subject to routine audits by taxing jurisdictions; however, there are currently no audits for any tax periods in progress. The plan administrator believes the Plan is no longer subject to income tax examinations for years prior to 2008.
NOTE D – FAIR VALUE OF FINANCIAL INVESTMENTS
During the year ended December 31, 2012 the Plan’s investments (including gains and losses on investments purchased and sold, as well as held during the year) appreciated in value by $1,508,425.
The Plan’s investments are held by Great-West Trust Company LLC, as Trustee (the “Trustee”). The following presents investments that represent 5% or more of the Plan’s net assets. Investments with companies that are known to be a party-in-interest to the Plan are separately identified.
CommunityOne 401K PLAN
Notes to Financial Statements
As of December 31, 2012 and December 31, 2011 and for the Year Ended December 31, 2012
NOTE D – FAIR VALUE OF FINANCIAL INVESTMENTS (continued)
See “Fair Values of Financial Instruments” in Note B for discussions of the methodologies and assumptions used to determine fair value of the Plan’s investments.
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December 31, 2012
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December 31, 2011
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Investments at fair value:
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MetLife Stable Value Fund
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$
|
7,423,273
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|
|
$ *
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|
JP Morgan Core Bond
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1,991,138
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*
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|
|
Vanguard 500 Index Fund
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1,904,570
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|
|
845,206
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JP Morgan SmartRetirement 2020
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|
1,829,204
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*
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MFS Value R3
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|
1,322,008
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*
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Prudential Jennison Mid Cap Growth
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1,296,531
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*
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Capital Preservation Fund, Instl Pricing
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*
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3,074,334
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Wasatch Large Cap Value
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*
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1,235,116
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Royce Special Equity Fund
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*
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|
1,101,250
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Columbia Acorn Fund
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*
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|
1,078,599
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American Century Strategic: Aggressive Fund
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*
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|
1,018,283
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American Growth Fund of America
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*
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813,977
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T. Rowe Price Capital Appreciation Fund
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*
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755,236
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American Century Strategic Moderate Fund
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*
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715,487
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* Less than five percent of net assets
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CommunityOne 401K PLAN
Notes to Financial Statements
As of December 31, 2012 and December 31, 2011 and for the Year Ended December 31, 2012
NOTE D – FAIR VALUE OF FINANCIAL INVESTMENTS (continued)
Below are the Plan’s financial instruments carried at fair value on a recurring basis by the fair value hierarchy levels described in Note B.
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As of December 31, 2012
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Total
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Level 1
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Level 2
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Level 3
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Mutual funds
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Equity funds
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$
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14,116,983
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$
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14,116,983
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|
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$
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—
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$
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—
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Fixed income funds
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2,908,406
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2,908,406
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—
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—
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Common collective trust
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Collective investment fund
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7,423,273
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—
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7,423,273
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—
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Total assets
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$
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24,448,662
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$
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17,025,389
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$
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7,423,273
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$
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—
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As of December 31, 2011
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Total
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Level 1
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Level 2
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Level 3
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Mutual funds
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Equity funds
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$
|
8,604,238
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$
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8,604,238
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$
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—
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|
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$
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—
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Fixed income funds
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1,787,480
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|
1,787,480
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—
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—
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Common equity securities
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25,920
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25,920
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—
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|
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—
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Common collective trust
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Collective investment fund
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|
3,074,334
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|
—
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|
3,074,334
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Money market funds
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244
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|
|
—
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|
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244
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—
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Total assets
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$
|
13,492,216
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|
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$
|
10,417,638
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$
|
3,074,578
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|
$
|
—
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CommunityOne 401K PLAN
Notes to Financial Statements
As of December 31, 2012 and December 31, 2011 and for the Year Ended December 31, 2012
NOTE D – FAIR VALUE OF FINANCIAL INVESTMENTS (continued)
The table below sets forth a summary of changes in the fair value of the Plan’s level 3 assets for the years ended December 31, 2012 and December 31, 2011:
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Level 3 Assets
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Year Ended December 31, 2012
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Balance, beginning of year
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$
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—
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Realized gains
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|
—
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|
Purchases, sales, issuances, settlements and transfers, net
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—
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Balance, end of year
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|
$
|
—
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|
|
|
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|
|
|
|
|
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Level 3 Assets
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|
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Year Ended December 31, 2011
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|
Group Annuity Plans
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Balance, beginning of year
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$
|
43,498
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|
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Realized gains
|
|
88
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|
|
Purchases, sales, issuances, settlements and transfers, net
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|
(43,586
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)
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Balance, end of year
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|
$
|
—
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|
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|
NOTE E – INVESTMENTS VALUED AT NET ASSET PER SHARE
The following table for December 31, 2012 and 2011 sets forth a summary of the Plan’s investments with a reported estimated fair value using net asset value per share:
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Fair Value at
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Fair Value at
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Unfunded
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December 31, 2012
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December 31, 2011
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Commitments
|
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Common collective trust funds:
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Collective investment fund (a)
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$
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7,423,273
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$
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3,074,334
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|
$
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—
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TOTAL
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|
$
|
7,423,273
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|
|
$
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3,074,334
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|
$
|
—
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(a) The objective of the Collective investment fund is to achieve stability of principal and high current income by investing primarily in stable value products. The fund has a daily redemption frequency and a 1 year redemption notice period.
CommunityOne 401K PLAN
Notes to Financial Statements
As of December 31, 2012 and December 31, 2011 and for the Year Ended December 31, 2012
NOTE F – RELATED-PARTY TRANSACTIONS
During 2012, the Plan held certain Plan investments in shares of the Company’s common stock; therefore, these transactions qualify as party-in-interest transactions. The Plan no longer holds such shares as of December 31, 2012.
NOTE G – RECONCILIATION OF FINANCIAL STATEMENTS TO FORM 5500
The following is a reconciliation of the net assets available for benefits per the financial statements for the year ended December 31, 2012 and December 31, 2011 to Schedule H of Form 5500:
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December 31, 2012
|
|
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December 31, 2011
|
|
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Net assets available for benefits per the financial statements
|
|
24,858,248
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|
|
14,270,232
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|
Accrued dividends not reflected on Form 5500
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|
—
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|
|
(7,508
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)
|
|
Net assets available for benefits per the Form 5500
|
|
24,858,248
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|
|
14,262,724
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Contributions are recorded on the cash basis on Schedule H of Form 5500.
The following is a reconciliation of the net increase in net assets available for benefits per the financial statements for the year ended December 31, 2012 to Schedule H of Form 5500:
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|
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|
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Net increase in net assets available for benefits per the financial statements
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|
$
|
10,588,016
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Accrued interest and dividends not reflected on Form 5500
|
|
7,508
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Benefits paid to participants not reflected in Form 5500
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|
—
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Net increase in net assets available for benefits per the Form 5500
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|
$
|
10,595,524
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|
|
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The fair value adjustment represents the difference between contract value of the common/collective trust as included in the statement of changes in net assets available for benefits for the year ended December 31, 2012, and the fair value of the common/collective trust as reported in the Form 5500.
CommunityOne 401K PLAN
Notes to Financial Statements
As of December 31, 2012 and December 31, 2011 and for the Year Ended December 31, 2012
NOTE H – PLAN SPONSOR
FNB United Corp. incurred significant net losses in 2011 and 2012, primarily from the higher provisions for loan losses due to a significant level of nonperforming assets. On July 22, 2010, CommunityOne Bank, N.A.(the “Bank”), the wholly owned bank subsidiary of FNB United Corp., consented and agreed to the issuance of a Consent Order by the Office of the Comptroller of the Currency (the “OCC”). The Consent Order resulted from the Bank’s condition and imposed various requirements on the Bank, including a capital directive, which obligated the Bank to achieve and maintain minimum regulatory capital levels in excess of the statutory minimums to be well-capitalized. On June 10, 2013, the OCC terminated the Consent Order that it had issued against the Bank. On October 21, 2010, FNB United Corp. entered into a written agreement with the Federal Reserve Bank of Richmond, obligating it to serve as a source of strength of the Bank and to cause the Bank to comply with the Consent Order. During 2011, FNB United completed a capital raise of $310 million in a private placement to address the capital shortfall. As of December 31, 2012, FNB United Corp. was designated “adequately capitalized” for total risk-based capital, Tier 1 risk-based capital and leverage capital under regulatory guidelines. Although the Plan Sponsor has not expressed any intent to terminate the Plan, it may do so at any time.