CommunityOne Bancorp - FORM 10-Q

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EX-32 - EXHIBIT 32 - CommunityOne Bancorp	exhibit320june3016.htm
EX-31..2 - EXHIBIT 31..2 - CommunityOne Bancorp	exhibit312june3016.htm
EX-31..1 - EXHIBIT 31..1 - CommunityOne Bancorp	exhibit311june3016.htm

Table of Contents

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, 2016			Commission File Number 0-13823

COMMUNITYONE BANCORP

(Exact name of Registrant as specified in its Charter)



North Carolina		56-1456589
(State of Incorporation)		(I.R.S. Employer Identification No.)
1017 E. Morehead Street
Charlotte, North Carolina		28204
(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 x	Non-accelerated filer o	Smaller reporting Company o
		(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 July 31, 2016 (the most recent practicable date), the Registrant had outstanding approximately 24,298,640 shares of Common Stock.

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CommunityOne Bancorp and Subsidiaries

Report on Form 10-Q

June 30, 2016

TABLE OF CONTENTS



PART I. FINANCIAL INFORMATION
Item 1	Consolidated Financial Statements (Unaudited)
	Consolidated Balance Sheets as of June 30, 2016 and December 31, 2015	1
	Consolidated Statements of Operations for Three Months and Six Months Ended June 30, 2016 and 2015	2
	Consolidated Statements of Comprehensive Income for the Three Months and Six Months ended June 30, 2016 and 2015	3
	Consolidated Statements of Shareholders' Equity for the Six Months Ended June 30, 2016 and 2015	5
	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2016 and 2015	6
	Notes to Consolidated Financial Statements	8
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	36
Item 3	Quantitative and Qualitative Disclosures about Market Risk	54
Item 4	Controls and Procedures	55
PART II. OTHER INFORMATION
Item 1	Legal Proceedings	56
Item 1A	Risk Factors	56
Item 2	Unregistered Sales of Equity Securities and Repurchases	56
Item 3	Defaults Upon Senior Securities	56
Item 4	Mine Safety Disclosures	57
Item 5	Other Information	57
Item 6	Exhibits	57
	Signatures	58

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CommunityOne Bancorp and Subsidiaries

Consolidated Balance Sheets (unaudited)



(in thousands, except share and per share data)	June 30, 2016			December 31, 2015*
Assets
Cash and due from banks	$	25,733		$	23,852
Interest-bearing bank balances	27,839			15,323
Investment securities:
Available-for-sale, at estimated fair value (amortized cost of $374,740 in 2016 and $398,815 in 2015)	377,646			390,434
Held-to-maturity, at amortized cost (estimated fair value of $142,217 in 2016 and $145,185 in 2015)	139,813			147,967
Loans held for sale	4,524			5,403
Loans held for investment	1,525,070			1,543,795
Less: Allowance for loan losses	(13,705		)	(15,195		)
Net loans held for investment	1,511,365			1,528,600
Premises and equipment, net	42,816			44,457
Other real estate owned and property acquired in settlement of loans	14,436			16,583
Core deposit premiums and other intangibles	5,160			5,208
Goodwill	4,205			4,205
Bank-owned life insurance	41,463			40,869
Deferred tax assets, net	133,496			141,716
Other assets	28,296			32,648
Total Assets	$	2,356,792		$	2,397,265
Liabilities
Deposits:
Noninterest-bearing demand deposits	$	393,799		$	386,329
Interest-bearing deposits:
Demand, savings and money market deposits	902,444			939,878
Time deposits of $250 or more	70,930			60,093
Other time deposits	549,308			561,237
Total deposits	1,916,481			1,947,537
Retail repurchase agreements	12,761			7,219
Federal Home Loan Bank advances	65,153			93,681
Long-term notes payable	5,454			5,415
Junior subordinated debentures	56,702			56,702
Other liabilities	12,802			13,673
Total Liabilities	2,069,353			2,124,227
Shareholders' Equity
Preferred stock, 10,000,000 shares authorized
Series A, $10.00 par value; 51,500 shares issued and no shares outstanding in 2016 and 2015	—			—
Series B, no par value, authorized 250,000 shares, no shares issued and outstanding in 2016 and 2015	—			—
Common stock, no par value; authorized 2,500,000,000 shares, issued 24,298,640 shares in 2016 and 24,292,646 in 2015	490,421			490,075
Accumulated deficit	(198,492		)	(206,298		)
Accumulated other comprehensive loss	(4,490		)	(10,739		)
Total Shareholders' Equity	287,439			273,038
Total Liabilities and Shareholders' Equity	$	2,356,792		$	2,397,265

See accompanying notes to consolidated financial statements.

* Derived from audited consolidated financial statements.

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CommunityOne Bancorp 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,
	2016		2015			2016			2015
Interest Income
Interest and fees on loans	$	17,636	$	16,006		$	34,608		$	31,879
Interest and dividends on investment securities	3,028		3,116			6,311			6,340
Other interest income	269		208			503			379
Total interest income	20,933		19,330			41,422			38,598
Interest Expense
Deposits	1,852		1,732			3,731			3,464
Retail repurchase agreements	3		5			7			9
Federal Home Loan Bank advances	455		488			957			957
Other borrowed funds	331		278			652			568
Total interest expense	2,641		2,503			5,347			4,998
Net Interest Income before Provision for (Recovery of Provision for) Loan Losses	18,292		16,827			36,075			33,600
Provision for (Recovery of provision for) loan losses	507		(788		)	(28		)	(1,926		)
Net Interest Income after Provision for (Recovery of Provision for) Loan Losses	17,785		17,615			36,103			35,526
Noninterest Income
Service charges on deposit accounts	1,561		1,433			3,118			2,867
Mortgage loan income	683		314			2,824			779
Cardholder and merchant services income	1,332		1,218			2,573			2,343
Trust and investment services	365		403			745			725
Bank-owned life insurance	269		268			538			518
Other service charges, commissions and fees	498		421			941			804
Other income	449		97			741			152
Total noninterest income	5,157		4,154			11,480			8,188
Noninterest Expense
Personnel expense	9,906		10,462			20,044			21,056
Net occupancy expense	1,319		1,211			2,872			2,680
Furniture, equipment and data processing expense	1,921		1,875			4,051			3,864
Professional fees	575		528			1,025			1,067
Stationery, printing and supplies	127		141			287			317
Advertising and marketing	46		134			106			320
Other real estate owned expense	52		506			536			865
Credit/debit card expense	429		498			868			1,042
FDIC insurance	398		456			859			909
Loan collection expense	144		313			293			613
Merger-related expense	215		—			986			—
Core deposit premium intangible amortization	227		352			565			704
Other expense	1,400		1,351			2,668			2,398
Total noninterest expense	16,759		17,827			35,160			35,835
Income before income taxes	6,183		3,942			12,423			7,879
Income tax expense	2,291		1,419			4,617			2,837
Net income	$	3,892	$	2,523		$	7,806		$	5,042

Weighted average number of shares outstanding - basic	24,294,424		24,202,012			24,293,214			24,192,744
Weighted average number of shares outstanding - diluted	24,316,019		24,214,578			24,314,165			24,204,832
Net income per share - basic and diluted	$	0.16	$	0.10		$	0.32		$	0.21

See accompanying notes to consolidated financial statements.

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CommunityOne Bancorp and Subsidiaries

Consolidated Statements of Comprehensive Income (unaudited)




(dollars in thousands)	Three Months Ended June 30,
	2016			2015
Net income	$	3,892		$	2,523
Other comprehensive income (loss):
Unrealized gains (losses) arising during the period on available-for-sale securities	3,774			(6,761		)
Tax effect	(1,419		)	2,586
Unrealized gains (losses) arising during the period on available-for-sale securities, net of tax	2,355			(4,175		)
Change in defined benefit plans liability	—			—
Tax effect	—			—
Change in defined benefit plans liability, net of tax	—			—
Unrealized gain (loss) on interest rate swaps	(223		)	421
Tax effect	84			(161		)
Unrealized gain (loss) on interest rate swaps, net of tax	(139		)	260
Reclassification adjustment for loss on interest rate swaps included in net income	3			3
Tax effect	(1		)	(1		)
Reclassification adjustment for loss on interest rate swaps included in net income, net of tax	2			2
Other comprehensive income (loss), net of tax	2,218			(3,913		)
Comprehensive income (loss)	$	6,110		$	(1,390	)




(dollars in thousands)	Six Months Ended June 30,
	2016			2015
Net income	$	7,806		$	5,042
Other comprehensive income:
Unrealized gains (losses) arising during the period on available-for-sale securities	11,200			(4,073		)
Tax effect	(4,211		)	1,558
Unrealized gains (losses) arising during the period on available-for-sale securities, net of tax	6,989			(2,515		)
Change in defined benefit plans liability	(86		)	—
Tax effect	32			—
Change in defined benefit plans liability, net of tax	(54		)	—
Unrealized loss on interest rate swaps	(1,106		)	(102		)
Tax effect	416			39
Unrealized loss on interest rate swaps, net of tax	(690		)	(63		)
Reclassification adjustment for loss on interest rate swaps included in net income	6			6
Tax effect	(2		)	(2		)
Reclassification adjustment for loss on interest rate swaps included in net income, net of tax	4			4
Other comprehensive income (loss), net of tax:	6,249			(2,574		)
Comprehensive income	$	14,055		$	2,468

See accompanying notes to consolidated financial statements.

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CommunityOne Bancorp and Subsidiaries

Consolidated Statements of Shareholders’ Equity (unaudited)

For Six Months Ended June 30, 2016 and 2015



												Accumulated
(dollars in thousands, except share and per share data)												Other
(dollars in thousands, except share and per share data)	Preferred Stock			Common Stock					Accumulated			Comprehensive
	Shares	Amount		Shares		Amount			Deficit			Income (Loss)			Total
Balance, December 31, 2014	—	$	—	24,185,923		$	487,603		$	(213,212	)	$	(7,475	)	$	266,916
Comprehensive income:
Net income	—	—		—		—			5,042			—			5,042
Other comprehensive loss, net of tax	—	—		—		—			—			(2,574		)	(2,574		)
Total comprehensive income															2,468
Stock options and restricted stock awards:
Compensation expense recognized	—	—		—		381			—			—			381
Issuance of restricted stock awards, net of cancellations	—	—		24,358		—			—			—			—
Shares issued as compensation to directors				1,942		21									21
Balance, June 30, 2015	—	$	—	24,212,223		$	488,005		$	(208,170	)	$	(10,049	)	$	269,786
Balance, December 31, 2015	—	$	—	24,292,646		$	490,075		$	(206,298	)	$	(10,739	)	$	273,038
Comprehensive income:
Net income	—	—		—		—			7,806			—			7,806
Other comprehensive income net of tax	—	—		—		—			—			6,249			6,249
Total comprehensive income															14,055
Stock options and restricted stock awards:
Compensation expense recognized	—	—		—		339			—			—			339
Issuance of restricted stock awards, net of cancellations	—	—		(1,200	)	—			—			—			—
Shares issued upon exercise of stock options	—	—		7,194		67			—			—			67
Cancellation of stock warrant	—	—		—		(60		)	—			—			(60		)
Balance, June 30, 2016	—	$	—	24,298,640		$	490,421		$	(198,492	)	$	(4,490	)	$	287,439

See accompanying notes to consolidated financial statements.

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CommunityOne Bancorp and Subsidiaries

Consolidated Statements of Cash Flows (unaudited)



(dollars in thousands)	Six Months Ended June 30,
	2016			2015
Operating Activities
Net income	$	7,806		$	5,042
Adjustments to reconcile net income to cash provided by (used in) operating activities:
Depreciation and amortization of premises and equipment	1,864			1,817
Recovery of loan losses	(28		)	(1,926		)
Deferred income taxes	4,617			2,798
Deferred loan fees and costs, net	(235		)	(172		)
Premium amortization and discount accretion of investment securities, net	1,498			1,358
Amortization of core deposit premiums	565			704
Net accretion on acquired loans	(2,774		)	(3,943		)
Stock compensation expense	339			402
Increase in cash surrender value of bank-owned life insurance, net	(594		)	(553		)
Loans held for sale:
Origination of loans held for sale	(32,020		)	(48,585		)
Net proceeds from sale of loans held for sale	33,321			49,049
Net gain on sale of loans held for sale	(422		)	(435		)
Mortgage servicing rights capitalized	(957		)	(556		)
Mortgage servicing rights amortization	376			270
Net gain on sale of premises and equipment	(209		)	(368		)
Net loss on sales and write-downs of other real estate owned	504			685
Changes in assets and liabilities:
Decrease (Increase) in accrued interest receivable and other assets	3,498			(5,958		)
Increase (Decrease) in accrued interest payable and other liabilities	(918		)	(3,466		)
Net cash provided by (used in) operating activities	16,231			(3,837		)
Investing Activities
Available-for-sale securities:
Proceeds from maturities, calls and principal repayments	22,791			24,022
Purchases	—			(60,525		)
Held-to-maturity securities:
Proceeds from maturities, calls and principal repayments	7,853			5,952
Purchases	—			(20,394		)
Net increase in loans held for investment	(28,800		)	(87,747		)
Proceeds from sales of other real estate owned	3,758			3,153
Purchases of premises and equipment	(289		)	(1,343		)
Proceeds from sales of premises and equipment	246			1,754
Net cash received in branch deposit acquisition	—			56,788
Net cash received from bulk sale of loans	46,642			—
Net cash provided by (used in) investing activities	52,201			(78,340		)
Financing Activities
Net increase (decrease) in deposits	(31,056		)	2,459
Increase in retail repurchase agreements	5,542			2,348
Increase (Decrease) in Federal Home Loan Bank advances	(28,528		)	12,474
Cancellation of common stock warrant	(60		)	—
Issuance of common stock, net of expense	67			—
Net cash provided by (used in) financing activities	(54,035		)	17,281
Net Increase (Decrease) in Cash and Cash Equivalents	14,397			(64,896		)
Cash and Cash Equivalents at Beginning of Period	39,175			95,882
Cash and Cash Equivalents at End of Period	$	53,572		$	30,986


Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest	$	5,361		$	8,285
Income taxes, net of refunds	343			39
Noncash transactions:
Foreclosed loans transferred to other real estate owned	2,202			3,433
Unrealized securities gains (losses), net of income taxes	6,989			(2,515		)
Transfer of fixed assets to other assets	—			1,335
Employee benefit plan costs, net of income taxes	(54		)	—
Unrealized loss on interest rate swaps, net of income taxes	(686		)	(59		)
Assets acquired in branch purchase	—			58,770
Liabilities assumed in branch purchase	—			58,770

See accompanying notes to consolidated financial statements.

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CommunityOne Bancorp and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

1. Basis of Presentation

Nature of Operations

CommunityOne Bancorp, (“COB” or the “Company,” also referred to as “us” or “we” and our subsidiaries on a consolidated basis), is

a bank holding company headquartered in Charlotte, North Carolina and incorporated in 1984 under the laws of the State of North

Carolina. Through our ownership of CommunityOne Bank, N.A., or the “Bank,” a national banking association founded in 1907 and

headquartered in Asheboro, North Carolina, we offer a complete line of consumer, mortgage and business banking services, including

loan, deposit, treasury management, online and mobile banking services, as well as wealth management and trust services, to

individual and small and middle market businesses through financial centers located throughout central, southern and western North

Carolina. Our strategy is to grow the Company organically by focusing on meeting the financial needs of customers in our market

area by providing a suite of quality financial products and services through local and experienced bankers and lenders located in

branches and loan production offices in our customers’ local market. We also offer the convenience of online and mobile banking

capabilities. In addition to organic growth, our strategy is to grow through merger and acquisition activity in our markets, should

attractive opportunities present themselves. We define our market as communities located in North Carolina, as well as adjoining

markets in South Carolina and Virginia.

On November 22, 2015, we entered into an Agreement and Plan of Merger (“Merger Agreement”) with Capital Bank Financial Corp.,

a Delaware corporation (“Capital”), under which, upon the terms and subject to the conditions set forth in the Merger

Agreement, COB will merge with and into Capital (“Merger”), with Capital as the surviving corporation in the Merger.

Immediately following the Merger, the Bank will merge with and into Capital’s wholly owned bank subsidiary, with Capital’s bank subsidiary surviving the bank merger. The Merger is subject to, among other things, regulatory approval and other customary closing conditions. Shareholders of both COB and Capital approved the Merger on April 18, 2016.

General

In the accompanying consolidated financial statements, prepared without audit, all significant intercompany balances and transactions have been eliminated. Descriptions of the organization and business of COB, accounting policies followed by COB and other relevant information are contained in our Annual Report on Form 10-K for the year ended December 31, 2015 (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 consolidated financial statements contain the adjustments, all of which are normal recurring adjustments, necessary to present fairly the financial position of COB as of June 30, 2016 and December 31, 2015, and the results of its operations and cash flows for the six months ended June 30, 2016 and 2015, respectively.

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 allowance for loan losses (“ALL”), estimated cash flows of purchased impaired loans, the carrying value of other real estate owned ("OREO"), the carrying value of investment securities 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.

Recent Accounting Pronouncements

Credit Losses - In June 2016, the Financial Accounting Standard Board (the “FASB”) issued Accounting Standards Update ("ASU") 2016-13, "Measurement of Credit Losses on Financial Instruments" as part of its project on financial instruments. The new standard introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments. It also modifies the impairment model for available-for-sale (AFS) debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. The adoption of ASU 2016-13 will be effective for the fiscal year beginning after December 15, 2019. The Company is currently evaluating the impact of adopting the new guidance on the consolidated financial statements.

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Stock Compensation - In March 2016, the FASB issued Accounting Standards Update ASU 2016-09, "Compensation—Stock compensation (Topic 718): Improvements to employee share-based payment accounting" which objective is the simplification through the identification, evaluation, and improvement of areas of generally accepted accounting principles (GAAP) for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to users of financial statements. The areas for simplification involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Some of the areas for simplification apply only to nonpublic entities. The adoption of ASU 2016-9 will be effective for the fiscal year beginning after December 15, 2016. The Company is currently evaluating the impact of adopting the new guidance on the consolidated financial statements.

Leases - In January 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)" which increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. To meet that objective, the FASB is amending the FASB Accounting Standards Codification and creating Topic 842, Leases. This ASU, along with IFRS 16, Leases, are the result of the FASB’s and the International Accounting Standards Board’s (IASB’s) efforts to meet that objective and improve financial reporting. The Boards decided to not fundamentally change lessor accounting with the amendments in this Update. However, some changes have been made to lessor accounting to conform and align that guidance with the lessee guidance and other areas within generally accepted accounting principles (GAAP), such as Topic 606, Revenue from Contracts with Customers. The main difference between previous GAAP and Topic 842 is the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP. The adoption of ASU 2016-2 will be effective for the fiscal year beginning after December 15, 2018. The Company is currently evaluating the impact of adopting the new guidance on the consolidated financial statements.

Financial Instruments - In January 2016, the FASB issued Accounting Standards Update ("ASU") 2016-01, "Financial instruments—Overall (Subtopic 825-10)," which requires all equity investments to be measured at fair value with changes in the fair value recognized through net income (other than those accounted for under equity method of accounting or those that result in consolidation of the investee). The amendments in this ASU also require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. In addition, the amendments in this ASU eliminate the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet for public business entities. The amendments in ASU 2016-1 are effective for us for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. We are currently evaluating the impact of adopting the new guidance on the consolidated financial statements.

FASB - From time to time, the FASB issues exposure drafts for proposed statements of financial accounting standards. Such exposure drafts are subject to comment from the public, to revisions by the FASB and to final issuance by the FASB as statements of financial accounting standards.

Management considers the effect of the proposed statements on the consolidated financial statements of COB and monitors the status of changes to and proposed effective dates of exposure drafts. Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on our financial position, results of operations or cash flows.

2. Acquisition by Capital Bank Financial Corp.

On November 22, 2015, we entered into the Merger Agreement with Capital, under which, upon the terms and subject to the conditions set forth in the Merger Agreement, COB will merge with and into Capital in the Merger, with Capital as the surviving corporation in the Merger. Immediately following the Merger, the Bank will merge with and into Capital’s wholly-owned bank subsidiary, with Capital’s wholly-owned bank subsidiary surviving the bank merger. Shareholders of both COB and Capital approved the Merger on April 18, 2016. The Merger is subject to, among other things, regulatory approval and other customary closing conditions which remain pending.

3. Investment Securities

Securities designated as available-for-sale are carried at fair value. However, the unrealized difference between amortized cost and fair value of securities available-for-sale is excluded from net income unless there is an other than temporary impairment and it is reported, net of deferred taxes, as a component of shareholders' equity as accumulated other comprehensive income (loss). Securities designated as held-to-maturity are carried at amortized cost, as the Company has the ability, and management has the positive intent, to hold these securities to maturity. Premiums and discounts on securities are amortized and accreted according to the interest method.

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Our primary objective in managing the investment portfolio is to maintain a portfolio of high quality, highly liquid investments yielding competitive returns. We are required under federal regulations to maintain adequate liquidity to ensure safe and sound operations. We maintain 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 investment securities and presents the related gross unrealized gains and losses:



June 30, 2016
(dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Available-for-Sale:
Residential mortgage-backed securities-GSE	$	269,169	$	2,497	$	671	$	270,995
Residential mortgage-backed securities-Private	28,567		450		33		28,984
Commercial mortgage-backed securities-GSE	21,779		388		—		22,167
Commercial mortgage-backed securities-Private	17,847		362		128		18,081
Corporate notes	37,378		43		2		37,419
Total available-for-sale	374,740		3,740		834		377,646
Held-to-Maturity:
Residential mortgage-backed securities-GSE	115,395		1,975		13		117,357
Residential mortgage-backed securities-Private	14,363		38		—		14,401
Commercial mortgage-backed securities-Private	10,055		404		—		10,459
Total held-to-maturity	139,813		2,417		13		142,217
Total investment securities	$	514,553	$	6,157	$	847	$	519,863

December 31, 2015
(dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Available-for-Sale:
Obligations of U.S. government sponsored enterprises	$	2,005	$	3	$	—	$	2,008
Residential mortgage-backed securities-GSE	286,057		339		8,289		278,107
Residential mortgage-backed securities-Private	33,235		578		236		33,577
Commercial mortgage-backed securities-GSE	21,980		—		368		21,612
Commercial mortgage-backed securities-Private	17,869		—		294		17,575
Corporate notes	37,669		—		114		37,555
Total available-for-sale	398,815		920		9,301		390,434
Held-to-Maturity:
Residential mortgage-backed securities-GSE	120,197		—		2,310		117,887
Residential mortgage-backed securities-Private	17,712		—		298		17,414
Commercial mortgage-backed securities-Private	10,058		—		174		9,884
Total held-to-maturity	147,967		—		2,782		145,185
Total investment securities	$	546,782	$	920	$	12,083	$	535,619

As a member of the Federal Home Loan Bank of Atlanta (“FHLB”), the Bank is 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 Bank owned a total of $4.9 million of FHLB stock at June 30, 2016 and $6.0 million at December 31, 2015. Due to the redemption provisions of FHLB stock, we have estimated that fair value approximated cost and that this investment was not impaired at June 30, 2016. FHLB stock is included in other assets at its original cost basis.

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As a member bank of the Federal Reserve Bank of Richmond (“FRBR”), the Bank also 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 June 30, 2016 and December 31, 2015, the Bank owned a total of $10.1 million and $9.9 million of FRBR stock, respectively. Because this investment is in an entity of the U.S. government, we have estimated that fair value approximated the cost and that this investment was not impaired at June 30, 2016. FRBR stock is included in other assets at its original cost basis.

At June 30, 2016, $158.0 million of the investment securities portfolio was pledged to secure public deposits, $15.9 million was pledged to retail repurchase agreements and $162.5 million was pledged to others, leaving $181.0 million available as pledgeable collateral.

The Bank did not sell any investment securities during the three and six months ended June 30, 2016 or the three and six months ended June 30, 2015.

The following tables show our 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, 2016 and December 31, 2015. The change in unrealized losses during the six months ending June 30, 2016 was attributed to changes in interest rates and not to changes in the credit quality of these securities. All unrealized losses on investment securities are considered by management to be temporary given the credit quality of these investment securities or the short duration of the unrealized loss, or both.

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	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, 2016
Available-for-Sale:
Residential mortgage-backed securities-GSE	$	—	$	—	$	119,845	$	671	$	119,845	$	671
Residential mortgage-backed securities-Private	2,791		28		621		5		3,412		33
Commercial mortgage-backed securities-Private	—		—		7,422		128		7,422		128
Corporate Notes	10,004		2		—		—		10,004		2
Total available-for-sale	12,795		30		127,888		804		140,683		834
Held-to-Maturity:
Residential mortgage-backed securities-GSE	—		—		12,739		13		12,739		13
Total held-to-maturity	—		—		12,739		13		12,739		13
Total	$	12,795	$	30	$	140,627	$	817	$	153,422	$	847

December 31, 2015
Available-for-Sale
Residential mortgage-backed securities-GSE	$	137,998	$	2,560	$	132,148	$	5,729	$	270,146	$	8,289
Residential mortgage-backed securities-Private	26,265		231		636		5		26,901		236
Commercial mortgage-backed securities-GSE	21,612		368		—		—		21,612		368
Commercial mortgage-backed securities-Private	17,575		294		—		—		17,575		294
Corporate notes	30,523		114		—		—		30,523		114
Total available-for-sale	233,973		3,567		132,784		5,734		366,757		9,301
Held-to-Maturity:
Residential mortgage-backed securities-GSE	83,014		1,481		34,872		829		117,886		2,310
Residential mortgage-backed securities-Private	17,414		298		—		—		17,414		298
Commercial mortgage-backed securities-Private	9,884		174		—		—		9,884		174
Total held-to-maturity	110,312		1,953		34,872		829		145,184		2,782
Total	$	344,285	$	5,520	$	167,656	$	6,563	$	511,941	$	12,083

At both June 30, 2016 and December 31, 2015, there were 18 securities that were in a continuous unrealized loss position for 12 months or more.

We analyzed our securities portfolio at June 30, 2016, and considered ratings, fair value, cash flows and other factors to determine if any of the securities were other than temporarily impaired. Since none of the unrealized losses relate to the marketability of the securities or the issuer’s ability to honor redemption obligations, and we have determined that it is not more likely than not that we will be required to sell the security before recovery of its amortized cost basis, none of the securities are deemed to be other than temporarily impaired.

The aggregate amortized cost and fair value of securities at June 30, 2016, 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 the obligations. Mortgage backed securities are grouped based on stated maturity date, but actual maturity will vary based on the actual repayment of the underlying mortgage loans.

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	Available-for-Sale				Held-to-Maturity
(dollars in thousands)	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Residential mortgage-backed securities-GSE
Due after five years through 10 years	$	1,568	$	1,617	$	—	$	—
Due after ten years	267,601		269,378		115,395		117,357
Residential mortgage-backed securities-Private
Due after ten years	28,567		28,984		14,363		14,401
Commercial mortgage-backed securities-GSE
Due after one year through five years	21,779		22,167		—		—
Commercial mortgage-backed securities-Private
Due after ten years	17,847		18,081		10,055		10,459
Corporate notes
Due in one year or less	30,335		30,354		—		—
Due after one year through five years	7,043		7,065		—		—
Total	$	374,740	$	377,646	$	139,813	$	142,217

4. Loans and Allowance for Loan Losses

General

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. We report our loan portfolio by segments and classes, which are disaggregations of portfolio segments. Our portfolio segments are: Commercial and agricultural, Real estate, and Consumer loans. The Commercial and agricultural loan and Consumer loan portfolios are not further segregated into classes. The classes within the Real estate portfolio segment include Real estate - construction and Real estate - mortgage, which is further broken into 1-4 family residential mortgage and Commercial real estate mortgage loans.

Loan fees and the incremental direct costs associated with originating a loan 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 ("PC loans") or purchased impaired loans ("PI loans"). PC loans are acquired loans where management believes 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 PC loans is amortized and included in interest income using the effective yield method over the expected life of the loans.

PI loans are acquired loans whose purchase price has been discounted, in part, due to credit deterioration occurring subsequent to origination. Accordingly, management believes it is probable that all contractual principal and interest on these acquired loans will not be received. 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, an allowance for loan losses when new expected cash flows decline, or a decrease in yield when there is only a timing difference in expected cash flows.

Loans acquired in the 2011 merger with Bank of Granite Corp. ("Granite Purchased Loans") included PI loans and PC loans. Loans designated as PC loans included performing revolving consumer and performing revolving commercial loans on the acquisition date.

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The following table presents an aging analysis of accruing and nonaccruing loans as of June 30, 2016:



(dollars in thousands)	Accruing
	30-59 days past due		60-89 days past due		More than 90 days past due		Nonaccrual		Total past due and nonaccrual		Current and accruing		Total Loans
PC and Originated Loans
Commercial and agricultural	$	80	$	49	$	—	$	480	$	609	$	140,986	$	141,595
Real estate - construction	540		—		—		72		612		106,337		106,949
Real estate - mortgage:
1-4 family residential	433		671		—		7,471		8,575		635,841		644,416
Commercial	63		—		—		5,969		6,032		431,936		437,968
Consumer	1,311		342		—		678		2,331		119,213		121,544
Total	2,427		1,062		—		14,670		18,159		1,434,313		1,452,472
PI loans
Commercial and agricultural	47		—		1,721		—		1,768		2,839		4,607
Real estate - construction	—		—		1,309		—		1,309		5,726		7,035
Real estate - mortgage:
1-4 family residential	78		40		1,133		—		1,251		11,154		12,405
Commercial	—		22		8,122		—		8,144		39,584		47,728
Consumer	2		5		3		—		10		813		823
Total	127		67		12,288		—		12,482		60,116		72,598
Total Loans	$	2,554	$	1,129	$	12,288	$	14,670	$	30,641	$	1,494,429	$	1,525,070

The following table presents an aging analysis of accruing and nonaccruing loans as of December 31, 2015:



(dollars in thousands)	Accruing
	30-59 days past due		60-89 days past due		More than 90 days past due		Nonaccrual		Total past due and nonaccrual		Current and accruing		Total Loans
PC and Originated Loans
Commercial and agricultural	$	—	$	1	$	—	$	1,053	$	1,054	$	146,257	$	147,311
Real estate - construction	761		140		—		110		1,011		98,247		99,258
Real estate - mortgage:
1-4 family residential	2,710		574		817		9,106		13,207		660,430		673,637
Commercial	661		34		—		7,209		7,904		421,220		429,124
Consumer	1,227		250		1		538		2,016		104,885		106,901
Total	5,359		999		818		18,016		25,192		1,431,039		1,456,231
PI loans
Commercial and agricultural	102		—		1,618		—		1,720		3,275		4,995
Real estate - construction	—		—		1,455		—		1,455		6,289		7,744
Real estate - mortgage:
1-4 family residential	602		15		1,127		—		1,744		12,173		13,917
Commercial	517		123		8,819		—		9,459		50,530		59,989
Consumer	8		—		6		—		14		905		919
Total	1,229		138		13,025		—		14,392		73,172		87,564
Total Loans	$	6,588	$	1,137	$	13,843	$	18,016	$	39,584	$	1,504,211	$	1,543,795

All PI loans are considered to be accruing for all periods presented, in accordance with ASC 310-30.

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Risk Grades

The risk-grade categories presented in the tables below, which are standard categories used by the bank regulators, are:

Pass - Loans categorized as Pass are higher quality loans that have adequate sources of repayment and little risk of collection.

Special Mention - A Special Mention loan has potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution's credit position at some future date. Special Mention loans are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.

Substandard - A Substandard loan is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of Substandard loans, does not have to exist in individual assets classified Substandard.

Doubtful - A loan classified as Doubtful has all the weaknesses inherent in one classified Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonable specific pending factors, which may work to the advantage of strengthening of the asset, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors include proposed merger, acquisition, or liquidation procedures, capital injection, perfecting liens on additional collateral and refinancing plans.

Loans categorized as Special Mention, Substandard and Doubtful are considered Criticized. Loans categorized as Substandard or Doubtful are considered Classified. Purchased loans acquired in the merger with Bank of Granite Corp. are recorded at estimated fair value on the date of acquisition without the carryover of related ALL. The table below includes $16.2 million and $27.0 million in Granite Purchased Loans categorized as Substandard or Doubtful at June 30, 2016 and December 31, 2015, respectively.

The following table presents loans held for investment balances by risk grade as of June 30, 2016:



(dollars in thousands)	Pass		Special Mention		Substandard		Doubtful
	(Ratings 1-5)		(Rating 6)		(Rating 7)		(Rating 8)		Total
Commercial and agricultural	$	138,177	$	5,657	$	2,368	$	—	$	146,202
Real estate - construction	108,486		1,784		3,714		—		113,984
Real estate - mortgage:
1-4 family residential	643,150		2,222		11,449		—		656,821
Commercial	453,787		10,768		21,141		—		485,696
Consumer	121,214		5		696		452		122,367
Total	$	1,464,814	$	20,436	$	39,368	$	452	$	1,525,070

The following table presents loans held for investment balances by risk grade as of December 31, 2015:



(dollars in thousands)	Pass		Special Mention		Substandard		Doubtful
	(Ratings 1-5)		(Rating 6)		(Rating 7)		(Rating 8)		Total
Commercial and agricultural	$	148,844	$	672	$	2,790	$	—	$	152,306
Real estate - construction	100,252		2,122		4,628		—		107,002
Real estate - mortgage:
1-4 family residential	669,695		3,508		14,351		—		687,554
Commercial	450,587		12,765		25,761		—		489,113
Consumer	107,008		4		553		255		107,820
Total	$	1,476,386	$	19,071	$	48,083	$	255	$	1,543,795

Loans included in the preceding loan composition table are net of participations sold. Loans are increased by net loan premiums of $4.0 million and $3.7 million at June 30, 2016 and December 31, 2015, respectively.

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At June 30, 2016 and December 31, 2015, loans held for sale consisted of originated residential mortgage loans held for sale carried at the lower of cost or fair market value.

Loans serviced for others are not included in the consolidated balance sheet. The unpaid principal balance of loans serviced for others amounted to $376.5 million at June 30, 2016 and $304.6 million at December 31, 2015.

Loans Pledged

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 $91.9 million and $119.8 million of investment securities, and gross loans of $102.9 million and $113.0 million of investment securities, were pledged to collateralize FHLB advances and letters of credit at June 30, 2016 and December 31, 2015, respectively, of which there was $82.0 million and $80.8 million of credit availability for borrowing, respectively. At June 30, 2016, $3.6 million of loans and $42.8 million of securities were pledged to collateralize potential borrowings from the Federal Reserve Discount Window, of which $42.4 million was available as borrowing capacity. We could also access $326.9 million of additional borrowings from the FHLB under credit lines by pledging additional collateral.

Nonaccruing and Impaired Loans

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 $0.5 million and $0.7 million for the six months ended June 30, 2016 and June 30, 2015, respectively. At June 30, 2016 and December 31, 2015, COB had certain impaired loans of $14.7 million and $18.0 million, respectively, which were on nonaccruing interest 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 we cannot reasonably expect full and timely repayment of a loan, the loan is placed on nonaccrual.

All loan classes on which principal or interest is in default for 90 days or more are put on nonaccrual status, unless there is sufficient information 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, which 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 and unpaid interest is charged off, unless 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 ALL.

For all loan classes, a nonaccrual loan may be returned to accrual status when we 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 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.

For all loan classes, as soon as any portion of a 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.

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Loans are 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 has filed 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.

A loan is considered impaired, based on current information and events, if it is probable that we will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. 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.

When a loan 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, we recalculate the impairment and appropriately adjust the specific reserve. Similarly, if we measure impairment based on the observable market price of an impaired loan or the fair value of the collateral of an impaired collateral-dependent loan, we will adjust the specific reserve if there is a significant change in either of those bases.

When a loan 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 dates indicated:



	June 30, 2016				December 31, 2015
(dollars in thousands)	Recorded Investment		Associated Reserves		Recorded Investment		Associated Reserves
Impaired loans, not individually reviewed for impairment	$	4,543	$	—	$	4,903	$	—
Impaired loans, individually reviewed, with no impairment	18,383		—		22,411		—
Impaired loans, individually reviewed, with impairment	3,731		328		3,817		399
Total impaired loans, excluding purchased impaired *	$	26,657	328		$	31,131	399

Purchased impaired loans with subsequent deterioration	$	69,587	2,754		$	84,329	2,754
Purchased impaired loans with no subsequent deterioration	3,011		—		3,235		—
Total Reserves			$	3,082			$	3,153

Average impaired loans calculated using a simple average	28,894				35,290



* Included at June 30, 2016 and December 31, 2015 were $12.0 million and $13.1 million, respectively, in restructured and performing loans.

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



(dollars in thousands)
	June 30, 2016		December 31, 2015
Loans held for investment:
Commercial and agricultural	$	480	$	1,053
Real estate - construction	72		110
Real estate - mortgage:
1-4 family residential	7,471		9,106
Commercial	5,969		7,209
Consumer	678		538
Total nonaccrual loans	14,670		18,016
Loans more than 90 days delinquent, still on accrual	—		817
Total nonperforming loans	$	14,670	$	18,833

There were no loans held for sale on nonaccrual status as of June 30, 2016 or December 31, 2015.

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The following table presents individually reviewed impaired loans and purchased impaired loans with subsequent credit deterioration, segregated by portfolio segment, and the corresponding allowance for loan losses as of June 30, 2016:



			Unpaid
(dollars in thousands)	Recorded		Principal		Related
	Investment		Balance		Allowance
Individually reviewed impaired loans with no related allowance recorded:
Commercial and agricultural	$	379	$	479	$	—
Real estate - construction	535		690		—
Real estate - mortgage:
1-4 family residential	5,837		7,606		—
Commercial	11,632		16,491		—
Consumer	—		—		—
Total	18,383		25,266		—
Individually reviewed impaired loans with an allowance recorded:
Commercial and agricultural	—		—		—
Real estate - construction	—		—		—
Real estate - mortgage:
1-4 family residential	3,385		4,220		285
Commercial	346		353		43
Consumer	—		—		—
Total	3,731		4,573		328
Total individually reviewed impaired loans:
Commercial and agricultural	379		479		—
Real estate - construction	535		690		—
Real estate - mortgage:
1-4 family residential	9,222		11,826		285
Commercial	11,978		16,844		43
Consumer	—		—		—
Total	$	22,114	$	29,839	$	328

PI loans with subsequent credit deterioration:
Commercial and agricultural	$	4,607	$	3,475	$	378
Real estate - construction	6,779		7,480		634
Real estate - mortgage:
1-4 family residential	9,650		9,683		325
Commercial	47,728		47,383		1,375
Consumer	823		525		42
Total	$	69,587	$	68,546	$	2,754

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The following table presents individually reviewed impaired loans, and purchased impaired loans with subsequent credit deterioration, segregated by portfolio segment, and the corresponding allowance for loan losses as of December 31, 2015:



			Unpaid
(dollars in thousands)	Recorded		Principal		Related
	Investment		Balance		Allowance
Individually reviewed impaired loans with no related allowance recorded:
Commercial and agricultural	$	399	$	479	$	—
Real estate - construction	775		939		—
Real estate - mortgage:
1-4 family residential	7,418		9,406		—
Commercial	13,820		19,116		—
Consumer	—		—		—
Total	22,412		29,940		—
Individually reviewed impaired loans with an allowance recorded:
Commercial and agricultural	—		—		—
Real estate - construction	—		—		—
Real estate - mortgage:
1-4 family residential	3,817		4,691		399
Commercial	—		—		—
Consumer	—		—		—
Total	3,817		4,691		399
Total individually reviewed impaired loans:
Commercial and agricultural	399		479		—
Real estate - construction	775		939		—
Real estate - mortgage:
1-4 family residential	11,235		14,097		399
Commercial	13,820		19,116		—
Consumer	—		—		—
Total	$	26,229	$	34,631	$	399

PI loans with subsequent credit deterioration:
Commercial and agricultural	$	4,995	$	3,908	$	311
Real estate - construction	7,323		8,121		579
Real estate - mortgage:
1-4 family residential	11,103		11,327		384
Commercial	59,989		60,582		1,356
Consumer	919		598		124
Total	$	84,329	$	84,536	$	2,754

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The following summary presents individually reviewed impaired loans. Average recorded investment and interest income recognized on impaired loans, segregated by portfolio segment, is shown in the following table as of June 30, 2016 and June 30, 2015:



	For Three Months Ended				For Three Months Ended
	June 30, 2016				June 30, 2015
	Average		Interest		Average		Interest
(dollars in thousands)	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
Individually reviewed impaired loans with no related allowance recorded:
Commercial and agricultural	$	384	$	—	$	435	$	—
Real estate - construction	541		7		1,126		8
Real estate - mortgage:
1-4 family residential	5,960		21		7,099		24
Commercial	11,779		46		15,770		57
Consumer	—		—		—		—
Total	18,664		74		24,430		89
Individually reviewed impaired loans with an allowance recorded:
Commercial and agricultural	—		—		—		—
Real estate - construction	—		—		—		—
Real estate - mortgage:
1-4 family residential	3,394		11		4,646		14
Commercial	347		4		—		—
Consumer	—		—		—		—
Total	3,741		15		4,646		14
Total individually reviewed impaired loans:
Commercial and agricultural	384		—		435		—
Real estate - construction	541		7		1,126		8
Real estate - mortgage:
1-4 family residential	9,354		32		11,745		38
Commercial	12,126		50		15,770		57
Consumer	—		—		—		—
Total	$	22,405	$	89	$	29,076	$	103

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	For Six Months Ended				For Six Months Ended
	June 30, 2016				June 30, 2015
	Average		Interest		Average		Interest
(dollars in thousands)	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
Individually reviewed impaired loans with no related allowance recorded:
Commercial and agricultural	$	390	$	—	$	457	$	—
Real estate - construction	652		21		1,201		9
Real estate - mortgage:
1-4 family residential	6,338		48		7,512		27
Commercial	12,303		139		14,425		65
Consumer	—		—		—		—
Total	19,683		208		23,595		101
Individually reviewed impaired loans with an allowance recorded:
Commercial and agricultural	—		—		—		—
Real estate - construction	—		—		—		—
Real estate - mortgage:
1-4 family residential	3,841		31		4,195		17
Commercial	298		4		1,915		26
Consumer	—		—		—		—
Total	4,139		35		6,110		43
Total individually reviewed impaired loans:
Commercial and agricultural	390		—		457		—
Real estate - construction	652		21		1,201		9
Real estate - mortgage:
1-4 family residential	10,179		79		11,707		44
Commercial	12,601		143		16,340		91
Consumer	—		—		—		—
Total	$	23,822	$	243	$	29,705	$	144

Impaired loans also include loans for which we 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 we 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, 2016, there was $16.1 million in restructured loans, of which $12.0 million were accruing. At December 31, 2015, there was $17.9 million in restructured loans, of which $13.1 million were accruing.

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Granite Purchased Loans

Granite Purchased Loans include PI loans and PC loans. PC loans consist of revolving consumer and commercial loans that were performing as of 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 our definition for nonaccrual status; however, even if the borrower is not currently making payments, we will classify loans as accruing if we can reasonably estimate the amount and timing of future cash flows. All Granite PI loans are presented on an accruing basis. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the non-accretable 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 provisions, or reclassification from non-accretable 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 accounted for the Granite PI loans under ASC 310-30 and the Granite PC loans under ASC 310-20.

At both June 30, 2016 and December 31, 2015, our financial statements reflected a Granite PI loan ALL of $2.8 million and an ALL for Granite PC loans of $0.3 million.

The following table presents the balance of all Granite Purchased Loans:



	At June 30, 2016
(dollars in thousands)	Purchased Impaired		Purchased Contractual		Total Purchased Loans		Unpaid Principal Balance
Commercial and agricultural	$	4,607	$	114	$	4,721	$	3,589
Real estate - construction	7,035		—		7,035		7,763
Real estate - mortgage:
1-4 family residential	12,405		16,755		29,160		29,609
Commercial	47,728		—		47,728		47,383
Consumer	823		—		823		525
Total	$	72,598	$	16,869	$	89,467	$	88,869



	At December 31, 2015
(dollars in thousands)	Purchased Impaired		Purchased Contractual		Total Purchased Loans		Unpaid Principal Balance
Commercial and agricultural	$	4,995	$	238	$	5,233	$	4,149
Real estate - construction	7,744		—		7,744		8,579
Real estate - mortgage:
1-4 family residential	13,917		17,915		31,832		32,558
Commercial	59,989		—		59,989		60,582
Consumer	919		—		919		598
Total	$	87,564	$	18,153	$	105,717	$	106,466

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The tables below include only those Granite Purchased Loans accounted for under the expected cash flow method (PI loans) for the periods indicated. This table does not include PC loans, including Granite PC loans or purchased residential mortgage loan pools.



	For Three Months Ended						For Three Months Ended
	June 30, 2016						June 30, 2015
	Purchased Impaired						Purchased Impaired
(dollars in thousands)	Carrying Amount			Future Accretion			Carrying Amount			Future Accretion
Balance, beginning of period	$	84,627		$	14,215		$	109,262		$	20,925
Addition from Bank of Granite Corp merger	—			—			—			—
Accretion	1,319			(1,319		)	1,841			(1,841		)
Increase (Decrease) in future accretion	—			(1		)	—			1,716
Reclassification of loans and adjustments	—			—			—			—
Payments received	(12,650		)	—			(8,522		)	—
Foreclosed and transferred to OREO	(698		)	—			(466		)	—
Subtotal before allowance	72,598			12,895			102,115			20,800
Allowance for loan losses	(2,754		)	—			(3,181		)	—
Net carrying amount, end of period	$	69,844		$	12,895		$	98,934		$	20,800



	For Six Months Ended						For Six Months Ended
	June 30, 2016						June 30, 2015
	Purchased Impaired						Purchased Impaired
(dollars in thousands)	Carrying Amount			Future Accretion			Carrying Amount			Future Accretion
Balance, beginning of period	$	87,564		$	15,623		$	122,842		$	24,898
Accretion	2,725			(2,725		)	3,889			(3,889		)
Increase (Decrease) in future accretion	—			(3		)	—			(209		)
Payments received	(16,993		)	—			(23,376		)	—
Foreclosed and transferred to OREO	(698		)	—			(1,240		)	—
Subtotal before allowance	72,598			12,895			102,115			20,800
Allowance for credit losses	(2,754		)	—			(3,181		)	—
Net carrying amount, end of period	$	69,844		$	12,895		$	98,934		$	20,800

Allowance for Loan Losses

The Company's ALL, which is utilized to absorb actual losses in the loan portfolio, is maintained at a level consistent with our best estimate of probable loan losses to be incurred as of the balance sheet date. We assess our ALL quarterly. This assessment includes a methodology that separates the total loan portfolio into homogeneous loan classifications for purposes of evaluating risk. The required allowance is calculated by applying a risk adjusted reserve requirement to the dollar volume of loans within a homogenous group. For purposes of the ALL, we have grouped our loans into pools with similar risk characteristics, including loan purpose, collateral type and borrower type. Major loan portfolio subgroups include: risk graded commercial loans, mortgage loans, home equity loans, retail loans and retail credit lines. We also analyze the loan portfolio on an ongoing basis to evaluate current risk levels, and risk grades are adjusted accordingly. While we use the best information available to make evaluations, future adjustments may be necessary, if economic or other conditions differ substantially from the assumptions used.

Historical loss rates are calculated by associating losses to the risk-graded pool to which they relate for each of the previous eight quarters. Then, using a look back period consisting of the twenty most recent quarters, loss factors are calculated for each risk-graded pool using a simple average.

In addition to our ability to use our own historical loss data and migration between risk grades, we have a rigorous process for assessing the qualitative factors that impact the ALL. A committee, independent of the historical loss migration team, reviews risk factors that may impact the ALL. Some factors are statistically quantifiable, such as concentration, growth, delinquency, and

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nonaccrual risk by loan type, while other factors are qualitative in nature, such as staff competency, competition within our markets and economic and regulatory changes impacting the loan portfolio.

We lend primarily in North Carolina. As of June 30, 2016, a large majority of the principal amount of the loans in our portfolio was to businesses and individuals in North Carolina. This geographic concentration subjects the loan portfolio to the general economic conditions within this area. The risks created by this concentration have been considered by us in the determination of the adequacy of the ALL. We believe the ALL is adequate to cover estimated losses on loans at each balance sheet date.

During the three month period ended June 30, 2016, we charged off $2.0 million in loans and realized $1.0 million in recoveries, for $1.0 million of net charge-offs. During the six month period ended June 30, 2016, we charged off $3.1 million in loans and realized $1.7 million in recoveries, for $1.5 million of net charge-offs.

The ALL, as a percentage of loans held for investment, was 0.90% at June 30, 2016, compared to 1.24% at June 30, 2015. At December 31, 2015, the ALL, as a percentage of loans held for investment, was 0.98%.

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



	For Three Months Ended						For Six Months Ended
(dollars in thousands)	June 30, 2016			June 30, 2015			June 30, 2016			June 30, 2015
Balance, beginning of period	$	14,240		$	19,008		$	15,195		$	20,345
Recovery of losses charged to continuing operations	507			(788		)	(28		)	(1,926		)
Net charge-offs:
Charge-offs	(2,041		)	(1,567		)	(3,135		)	(2,562		)
Recoveries	999			1,336			1,673			2,132
Net charge-offs	(1,042		)	(231		)	(1,462		)	(430		)
Balance, end of period	$	13,705		$	17,989		$	13,705		$	17,989
Annualized net charge-offs during the period to average loans held for investment	0.27		%	0.07		%	0.19		%	0.06		%
Annualized net charge-offs during the period to ALL	30.58		%	5.15		%	21.45		%	4.82		%
Allowance for loan losses to loans held for investment	0.90		%	1.24		%	0.90		%	1.24		%

The following table presents ALL activity by portfolio segment for the three months ended June 30, 2016:



							Real Estate - Mortgage
(dollars in thousands)	Commercial and Agricultural			Real Estate - Construction			1-4 Family Residential			Commercial			Consumer			Total
ALL:
Beginning balance April 1, 2016	$	2,044		$	1,296		$	4,375		$	2,543		$	3,982		$	14,240
Charge-offs	61			(9		)	(610		)	(195		)	(1,288		)	(2,041		)
Recoveries	(32		)	174			247			385			225			999
Provision (recovery of provision)	(1,006		)	725			54			(725		)	1,459			507
Ending balance June 30, 2016	$	1,067		$	2,186		$	4,066		$	2,008		$	4,378		$	13,705

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The following table presents ALL activity by portfolio segment for the three months ended June 30, 2015:



							Real Estate - Mortgage
(dollars in thousands)	Commercial and Agricultural			Real Estate - Construction			1-4 Family Residential			Commercial			Consumer			Total
ALL:
Beginning balance January 1, 2015	$	3,398		$	3,120		$	5,623		$	3,152		$	3,715		$	19,008
Charge-offs	(257		)	(4		)	(251		)	(261		)	(794		)	(1,567		)
Recoveries	428			179			171			328			230			1,336
Provision (recovery of provision)	(857		)	(1,088		)	(26		)	87			1,096			(788		)
Ending balance June 30, 2015	$	2,712		$	2,207		$	5,517		$	3,306		$	4,247		$	17,989

The following table presents ALL activity by portfolio segment for the six months ended June 30, 2016:



							Real Estate - Mortgage
(dollars in thousands)	Commercial and Agricultural			Real Estate - Construction			1-4 Family Residential			Commercial			Consumer			Total
ALL:
Beginning balance January 1, 2016	$	2,402		$	1,769		$	5,141		$	2,328		$	3,555		$	15,195
Charge-offs	(98		)	(9		)	(674		)	(195		)	(2,159		)	(3,135		)
Recoveries	221			310			377			425			340			1,673
Provision (recovery of provision)	(1,458		)	116			(778		)	(550		)	2,642			(28		)
Ending balance June 30, 2016	$	1,067		$	2,186		$	4,066		$	2,008		$	4,378		$	13,705

The following table presents ALL activity by portfolio segment for the six months ended June 30, 2015:



							Real Estate - Mortgage
(dollars in thousands)	Commercial and Agricultural			Real Estate - Construction			1-4 Family Residential			Commercial			Consumer			Total
ALL:
Beginning balance January 1, 2015	$	3,915		$	3,163		$	5,847		$	4,179		$	3,241		$	20,345
Charge-offs	(306		)	(85		)	(376		)	(268		)	(1,527		)	(2,562		)
Recoveries	649			375			309			386			413			2,132
Provision (recovery of provision)	(1,546		)	(1,246		)	(263		)	(991		)	2,120			(1,926		)
Ending balance June 30, 2015	$	2,712		$	2,207		$	5,517		$	3,306		$	4,247		$	17,989

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The following table details the recorded investment in loans related to each segment in the allowance for loan losses by portfolio segment and disaggregated on the basis of impairment evaluation methodology at June 30, 2016:



					Real Estate - Mortgage
(dollars in thousands)	Commercial and Agricultural		Real Estate - Construction		1-4 Family Residential		Commercial		Consumer		Total
ALL:
Individually reviewed for impairment	$	—	$	—	$	285	$	43	$	—	$	328
Collectively reviewed for impairment	756		1,607		3,397		609		4,254		10,623
PI loans reviewed for credit impairment	311		579		384		1,356		124		2,754
PI loans with no credit deterioration	—		—		—		—		—		—
Total ALL	$	1,067	$	2,186	$	4,066	$	2,008	$	4,378	$	13,705
Loans held for investment:
Individually reviewed for impairment	$	379	$	535	$	9,222	$	11,978	$	—	$	22,114
Collectively reviewed for impairment	141,216		106,414		635,194		425,990		121,544		1,430,358
PI loans with subsequent credit deterioration	4,607		6,779		9,650		47,728		823		69,587
PI loans with no credit deterioration	—		256		2,755		—		—		3,011
Total loans	$	146,202	$	113,984	$	656,821	$	485,696	$	122,367	$	1,525,070



					Real Estate - Mortgage
(dollars in thousands)	Commercial and Agricultural		Real Estate - Construction		1-4 Family Residential		Commercial		Consumer		Total
ALL:
Individually reviewed for impairment	$	—	$	—	$	399	$	—	$	—	$	399
Collectively reviewed for impairment	2,091		1,190		4,358		972		3,431		12,042
PI loans reviewed for credit impairment	311		579		384		1,356		124		2,754
PI loans with no credit deterioration	—		—		—		—		—		—
Total ALL	$	2,402	$	1,769	$	5,141	$	2,328	$	3,555	$	15,195
Loans held for investment:
Individually reviewed for impairment	$	399	$	775	$	11,235	$	13,820	$	—	$	26,229
Collectively reviewed for impairment	146,912		98,483		662,402		415,304		106,901		1,430,002
PI loans with subsequent credit deterioration	4,995		7,323		11,103		59,989		919		84,329
PI loans with no credit deterioration	—		421		2,814		—		—		3,235
Total loans	$	152,306	$	107,002	$	687,554	$	489,113	$	107,820	$	1,543,795

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Troubled Debt Restructuring

The following tables present a breakdown of troubled debt restructurings that were restructured during the three and six months ended June 30, 2016 and June 30, 2015, respectively, segregated by portfolio segment:




	For Three Months Ended June 30, 2016					For Three Months Ended June 30, 2015
		Pre-Modification		Post-Modification			Pre-Modification		Post-Modification
		Outstanding		Outstanding			Outstanding		Outstanding
(dollars in thousands)	Number	Recorded		Recorded		Number	Recorded		Recorded
	of Loans	Investment		Investment		of Loans	Investment		Investment
Commercial and agricultural	—	$	—	$	—	—	$	—	$	—
Real estate - construction	—	—		—		1	370		370
Real estate - mortgage:
1-4 family residential	1	47		47		1	446		446
Commercial	1	100		100		—	—		—
Consumer	—	—		—		—	—		—
Total	2	$	147	$	147	2	$	816	$	816



	For Six Months Ended June 30, 2016					For Six Months Ended June 30, 2015
		Pre-Modification		Post-Modification			Pre-Modification		Post-Modification
		Outstanding		Outstanding			Outstanding		Outstanding
(dollars in thousands)	Number	Recorded		Recorded		Number	Recorded		Recorded
	of Loans	Investment		Investment		of Loans	Investment		Investment
Commercial and agricultural	—	$	—	$	—	—	$	—	$	—
Real estate - construction	2	307		332		1	370		370
Real estate - mortgage:
1-4 family residential	1	47		47		1	446		446
Commercial	1	100		100		—	—		—
Consumer	—	—		—		—	—		—
Total	4	$	454	$	479	2	$	816	$	816

During the six months ended June 30, 2016, we modified four loans that were considered to be troubled debt restructurings by modifying the terms for two of these loans, and by modifying both the terms and interest rate for the other two loans. During the six months ended June 30, 2015, we modified two loans that were considered to be troubled debt restructurings. We modified the interest rate for one of these loans, and both extended the term and modified the interest rate for the other loan.

There were no loans restructured in the twelve months prior to June 30, 2016 that went into default during the six months ended June 30, 2016. There were also no loans restructured in the twelve months prior to June 30, 2015 that went into default during the six months ended June 30, 2015.

In the determination of the ALL, management considers troubled debt restructurings and any subsequent defaults in these restructurings as impaired loans. The amount of the impairment is measured using the present value of expected future cash flows discounted at the loan's effective interest rate, the observable market price of the loan, or the fair value of the collateral if the loan is collateral dependent.

Unfunded Commitments

The reserve for unfunded commitments, which is included in other liabilities, is calculated by estimating the probable amount of additional funding on the commitment and multiplying that amount by the historical loss rate (including Q&E factors). The following describes our method for determining the estimated additional funding by commitment type:


•	Straight Lines of Credit - Unfunded balance of line of credit multiplied by the expected funding rate (50% - 100% utilization)


•	Revolving Lines of Credit - Average utilization (for the last 12 months) less current utilization


•	Letters of Credit - 10% utilization

The reserve for unfunded commitments was $1.2 million as of June 30, 2016 and $0.8 million at December 31, 2015.

5. Other Real Estate Owned and Property Acquired in Settlement of Loans

OREO consists of real estate acquired through foreclosure or deed in lieu thereof, and is classified as held for sale. The property is initially carried at fair value based on recent appraisals, less estimated costs to sell. Declines in the fair value of properties included in OREO below carrying value are recognized by a charge to income.

Total OREO and property acquired in settlement of loans decreased $2.1 million during the first six months of 2016 from $16.6 million at December 31, 2015, to $14.4 million at June 30, 2016. At June 30, 2016 and December 31, 2015, OREO and property acquired in settlement of loans represented 44% and 47% of total nonperforming assets, respectively.

The following table summarizes OREO and property acquired in settlement of loans at the periods indicated:



(dollars in thousands)	June 30, 2016		December 31, 2015
Real estate acquired in settlement of loans	$	14,191	$	16,251
Property acquired in settlement of loans	245		332
Total property acquired in settlement of loans	$	14,436	$	16,583

The following table summarizes the changes in real estate acquired in settlement of loans at the periods indicated:




	For Three Months Ended
(dollars in thousands)	June 30, 2016			June 30, 2015
Real estate acquired in settlement of loans, beginning of period	$	13,845		$	20,833
Plus: New real estate acquired in settlement of loans	2,143			938
Plus: Real estate acquired in BOGC acquisition	—			—
Less: Sales of real estate acquired in settlement of loans	(1,794		)	(1,663		)
Less: Write-downs and net loss on sales charged to expense	(3		)	(391		)
Real estate acquired in settlement of loans, end of period	$	14,191		$	19,717



	For Six Months Ended
(dollars in thousands)	June 30, 2016			June 30, 2015
Real estate acquired in settlement of loans, beginning of period	$	16,251		$	20,122
Plus: New real estate acquired in settlement of loans	2,202			3,433
Less: Sales of real estate acquired in settlement of loans	(3,758		)	(3,153		)
Less: Write-downs and net loss on sales charged to expense	(504		)	(685		)
Real estate acquired in settlement of loans, end of period	$	14,191		$	19,717

At June 30, 2016, 4 assets with a net carrying amount of $2.4 million were under contract for sale. Estimated losses on these sales, if any, have been recognized in the Consolidated Statements of Operations in the first six months of 2016.

At June 30, 2016, the Company’s recorded investment in mortgage loans collateralized by residential real estate properties that are in the process of foreclosure was $1.4 million and the Company’s OREO balance included $3.4 million of residential real estate.

6. Earnings Per Share

Basic net earnings per share, or basic earnings per share (“EPS”), is computed by dividing net income to common shareholders by the weighted average number of common shares outstanding for the period.

Diluted EPS reflects the potential dilution that could occur if COB's potential common stock, which consists of dilutive stock options and a common stock warrant, were issued. As required for entities with complex capital structures, a dual presentation of basic and diluted EPS is included on the face of the income statement, and a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation is provided in this note.

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(dollars in thousands, except share and per share data)	For Three Months Ended				For Six Months Ended
	June 30, 2016		June 30, 2015		June 30, 2016		June 30, 2015
Net income	$	3,892	$	2,523	$	7,806	$	5,042
Weighted average number of shares outstanding - basic	24,294,424		24,202,012		24,293,214		24,192,744
Weighted average number of shares outstanding - diluted	24,316,019		24,214,578		24,314,165		24,204,832
Net income per share - basic and diluted	$	0.16	$	0.10	$	0.32	$	0.21

During the six months ended June 30, 2016 and June 30, 2015, the price of the Company's common stock (as quoted on the Nasdaq Capital Market) was below the price of the common stock warrant. As a result, the warrant was considered antidilutive and thus was not included in the diluted share calculation. The Company canceled the common stock warrant during the second quarter of 2016.

For the three months ended June 30, 2016, there were an average of 509,963 antidilutive shares, while for the six months ended June 30, 2016, there were an average of 516,185 antidilutive shares. For the three months ended June 30, 2015, there were an average of 322,526 antidilutive shares, while for the six months ended June 30, 2015, there were an average of 294,972 antidilutive shares. Of the antidilutive shares, the number of shares relating to stock options was 500,018 and 500,177 for the three months and six months ended June 30, 2016, respectively, and 300,454 and 272,900 for the three and six months ended June 30, 2015, respectively. The number relating to the common stock warrant was 9,945 and 16,008 for the three and six months ended June 30, 2016, respectively, and 22,072 for the three and six months ended June 30, 2015.

7. Derivatives and Financial Instruments

A derivative is a financial instrument that derives its cash flows, and therefore its value, by reference to an underlying instrument, index or referenced interest rate. These instruments include interest rate swaps, caps, floors, collars, options or other financial instruments designed to hedge exposures to interest rate risk or for speculative purposes.

Accounting guidance requires an entity to recognize all derivatives as either assets or liabilities in the balance sheet, and measure those instruments at fair value. Changes in the fair value of those derivatives are reported in current earnings or other comprehensive income depending on the purpose for which the derivative is held and whether the derivative qualifies for hedge accounting.

In connection with its asset / liability management objectives, the Company during the first quarter of 2014 entered into two interest rate swaps on $40 million of FHLB advances, each swap having a $20 million notional amount, that convert the floating rate cash flow exposure on the FHLB advances to a fixed rate cash flow. As structured, the receive-variable, pay-fixed swaps were evaluated as being cash flow hedges and have remained highly effective since inception through the quarter ending June 30, 2016. The differences in cash flows in each period between the fixed rate interest payments that the Company makes and the variable rate interest payments received is reported in earnings. These interest rate swaps mature on June 15, 2020.

Mortgage banking derivatives used in the ordinary course of business consist of mandatory forward sales contracts, best-efforts forward contracts and rate lock loan commitments. The fair value of our derivative instruments is primarily measured by obtaining pricing from broker-dealers recognized to be market participants.

We have established guidelines in originating and selling loans to Fannie Mae, and retaining or selling the mortgage servicing rights. The commitments to borrowers to originate residential mortgage loans and the forward sales commitments to investors are freestanding derivative instruments. As such, they do not qualify for hedge accounting treatment and the fair value adjustments for these instruments is recorded through the Consolidated Statements of Operations in mortgage loan income. The fair market value of mortgage banking derivatives is recorded in the consolidated balance sheet in Other Assets.



	Gain (Loss) Recognized
(dollars in thousands)	For Three Months Ended						For Six Months Ended
	June 30, 2016			June 30, 2015			June 30, 2016			June 30, 2015
Derivatives designated as hedging instruments:
Interest rate swap contracts - FHLB advances	$	(137	)	$	262		$	(686	)	$	(59	)
Derivatives not designated as hedging instruments:
Mortgage loan rate lock commitments	3			4			$	4		$	(3	)
Mortgage loan forward sales	61			(61		)	68			17
Total	$	64		$	(57	)	$	72		$	14

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8. Fair Values of Assets and Liabilities

We use fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Securities available-for-sale, derivative assets and liabilities, mortgage loans held for sale, and mortgage servicing rights are recorded at fair value on a recurring basis. Additionally, from time-to-time, we may be required to record at fair value other assets and liabilities on a nonrecurring basis, such as loans held for investment, impaired loans and certain other assets and liabilities. These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets or liabilities.

Fair Value Hierarchy

We group assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities 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.

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 of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

Disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value, is required. Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time our entire holdings of a particular financial instrument.

Because no market exists for a portion of our financial instruments, fair value estimates are based on judgments regarding future expected losses, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

The following is a description of valuation methodologies used for assets and liabilities recorded at fair value:

Investments Securities Available-for-Sale

Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security's credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 may include asset-backed securities in less liquid markets.

Liquidity is a significant factor in the determination of the fair values of available-for-sale debt securities. Market price quotes may not be readily available for some positions, or positions within a market sector where trading activity has slowed significantly or ceased. Some of these instruments are valued using a discounted cash flow model, which estimates the fair value of the securities using internal credit risk, interest rate and prepayment risk models that incorporate management's best estimate of current key assumptions such as default rates, loss severity and prepayment rates. Principal and interest cash flows are discounted using an observable discount rate for similar instruments with adjustments that management believes a market participant would consider in determining fair value for the specific security. Underlying assets are valued using external pricing services, where available, or matrix pricing based on the vintages and ratings. Situations of illiquidity generally are triggered by the market's perception of credit uncertainty regarding a single company or a specific market sector. In these instances, fair value is determined based on limited available market information and other factors, principally from reviewing the issuer's financial statements and changes in credit ratings made by one or more ratings agencies.

Loans Held for Sale

Loans held for sale are carried at the lower of cost or fair value less estimated costs to sell. Once sold, the purchasing investor has all rights of ownership, including the ability to pledge or exchange the loans. Most of the loans sold are without recourse. However, the investor does have the ability to require CommunityOne to repurchase or indemnify a specific loan should there be inadequacies discovered in the original underwriting of that loan. Gains or losses on loan sales are recognized at the time of sale, are determined by the difference between net sales proceeds and the carrying value of the loan sold, and are included in Consolidated Statements of Operations. Since loans held for sale are carried at the lower of cost or fair value, the fair value of loans held for sale is based on

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contractual agreements with independent third party buyers. As such, we classify loans held for sale subjected to nonrecurring fair value adjustments as Level 2. Based on the nature of the portfolio, lack of market volatility and the short duration for which the loans are held, fair value generally exceeds cost.

Loans Held for Investment

We do not record loans held for investment at fair value on a recurring basis. However, from time to time, a loan is considered impaired and the related impairment is charged against the allowance or a specific allowance is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as impaired, we determine the fair value of the loan to quantify impairment, should such exist. The fair value of impaired loans is estimated using one of several methods, including collateral net liquidation value, market value of similar debt, enterprise value, and discounted cash flows. Those impaired loans not requiring a specific allowance represent loans for which the fair value of the expected repayments or collateral meet or exceed the recorded investments in such loans. At June 30, 2016 and December 31, 2015, substantially all of the total impaired loans were reviewed based on the fair value of the collateral. Impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. We record impaired loans as nonrecurring Level 3.

Other Real Estate Owned

OREO is adjusted to fair value upon transfer of the loans to OREO. Subsequently, OREO is carried at the lower of carrying value or fair value less estimated costs to sell. Fair value is based upon independent market prices, appraised values of the collateral or management's estimation of the value of the collateral. Given the lack of observable market prices for identical properties, we record OREO as nonrecurring Level 3.

Interest Rate Locks and Forward Loan Sale Commitments

We enter into interest rate lock commitments and commitments to sell mortgages. The fair value of interest rate lock commitments is based on servicing rate premium, origination income net of origination costs, fall out rates and changes in loan pricing between the commitment date and the balance sheet date. We record interest rate lock commitments as recurring level 3, and based on their immaterial value, has excluded them from the fair value table.

Interest Rate Swaps

We enter into interest rate swaps to hedge the variability of interest cash flow payments on certain FHLB advances. Changes in fair value of these cash flow hedges are recorded through other comprehensive income. Any ineffectiveness of the hedge is included in current period earnings. The fair value of our interest rate swaps is based on a third party valuation because there is not a readily available quoted price in the market. We record interest rate swap commitments as recurring level 2.

Mortgage Servicing Rights

The fair value of mortgage serving rights ("MSR") is dependent upon a number of assumptions including the fee per loan, the cost to service, the expected loan prepayment rate, and the discount rate. In determining the fair value of the existing MSR management reviews the key assumptions, analyzes pricing in the market for comparable MSR, and uses a third party provider to independently calculate the fair value of its MSR. We record mortgage servicing rights as recurring Level 3.

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

Assets and liabilities carried at fair value on a recurring basis at June 30, 2016 are summarized in the following table:



(dollars in thousands)	Total			Level 1		Level 2			Level 3
Assets:
Available-for-sale debt securities:
U.S. government sponsored agencies	$	—		$	—	$	—		$	—
Residential mortgage-backed securities-GSE	270,995			—		270,995			—
Residential mortgage-backed securities-Private	28,984			—		28,984			—
Commercial mortgage-backed securities-GSE	22,167			—		22,167			—
Commercial mortgage-backed securities-Private	18,081			—		18,081			—
Corporate notes	37,419			—		37,419			—
Total available-for-sale debt securities	377,646			—		377,646			—
Mortgage servicing rights	2,812			—		—			2,812
Interest rate swaps	(1,847		)	—		(1,847		)	—
Total assets at fair value	$	378,611		$	—	$	375,799		$	2,812

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Assets and liabilities carried at fair value on a recurring basis at December 31, 2015 are summarized in the following table:



(dollars in thousands)	Total			Level 1		Level 2			Level 3
Assets:
Available-for-sale debt securities:
U.S. government sponsored agencies	$	2,008		$	—	$	2,008		$	—
Residential mortgage-backed securities-GSE	278,107			—		278,107			—
Residential mortgage-backed securities-Private	33,577			—		33,577			—
Commercial mortgage-backed securities-GSE	21,611			—		21,611			—
Commercial mortgage-backed securities-Private	17,575			—		17,575			—
Corporate notes	37,555			—		37,555			—
Total available-for-sale debt securities	390,433			—		390,433			—
Mortgage servicing rights	2,231			—		—			2,231
Interest rate swaps	(755		)	—		(755		)	—
Total assets at fair value	$	391,909		$	—	$	389,678		$	2,231

The following table presents a reconciliation of all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the periods indicated:



	Fair Value Measurements Using Significant
	Unobservable Inputs (Level 3)
	Mortgage Servicing Rights
(dollars in thousands)	Three Months Ended June 30,
	2016			2015
Balance, beginning of period	$	2,654		$	1,896
Total gains or losses (realized/unrealized):
Included in earnings, gross	364			256
Less amortization	(206		)	(140		)
Balance, end of period	$	2,812		$	2,012



	Fair Value Measurements Using Significant
	Unobservable Inputs (Level 3)
	Mortgage Servicing Rights
(dollars in thousands)	Six Months Ended June 30,
	2016			2015
Beginning balance at January 1,	$	2,231		$	1,726
Total gains or losses (realized/unrealized):
Included in earnings, gross	957			556
Less amortization	(376		)	(270		)
Balance, end of period	$	2,812		$	2,012

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Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis

We may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with U.S. generally accepted accounting principles. These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period. This is due to further deterioration in the value of the assets. There were no loans held for sale that had a fair value below cost in any periods reported.

Assets measured at fair value on a nonrecurring basis are included in the following table at June 30, 2016:



(dollars in thousands)	Total		Level 1		Level 2		Level 3
Impaired loans, net	$	2,597	$	—	$	—	$	2,597
Other real estate owned	6,756		—		—		6,756
Total assets at fair value from continuing operations	$	9,353	$	—	$	—	$	9,353

Assets measured at fair value on a nonrecurring basis are included in the following table at December 31, 2015:



(dollars in thousands)	Total		Level 1		Level 2		Level 3
Impaired loans, net	$	3,418	$	—	$	—	$	3,418
Other real estate owned	10,630		—		—		10,630
Total assets at fair value from continuing operations	$	14,048	$	—	$	—	$	14,048

Quantitative Information about Level 3 Fair Value Measurements



(dollars in thousands)	Fair Value at June 30, 2016		Valuation Techniques	Unobservable Input	Range

Impaired loans, net	$	2,597	Discounted appraisals	Collateral discounts	1.00% - 30.00%
Other real estate owned	6,756		Discounted appraisals	Collateral discounts	1.00% - 30.00%
Mortgage servicing rights	2,812		Discounted cash flows	Prepayment rate	10.00% - 25.00%
Mortgage servicing rights				Discount rate	6.00% - 10.00%



(dollars in thousands)	Fair Value at December 31, 2015		Valuation Techniques	Unobservable Input	Range

Impaired loans, net	$	3,418	Discounted appraisals	Collateral discounts	1.00%-30.00%
Other real estate owned	10,630		Discounted appraisals	Collateral discounts	1.00%-30.00%
Mortgage servicing rights	2,231		Discounted cash flows	Prepayment rate	10.00% - 25.00%
Mortgage servicing rights				Discount rate	6.00% - 10.00%

Fair Value of Financial Instruments

The following methods and assumptions were used to estimate the fair value for each class of COB's financial instruments.

Cash and cash equivalents. Fair value equals the carrying value of such assets due to their nature and is classified as Level 1.

Investment securities. The fair value of investment securities is based on quoted market prices, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. The fair value of equity investments in the restricted stock of the FRBR and FHLB approximates the carrying value. The fair value of investment securities is classified as Level 1 if a quoted market price is available, or Level 2 if a quoted market price is not available.

Loans held for sale. Substantially all residential mortgage loans held for sale are pre-sold and their carrying value approximates fair value. We classified the fair value of loans held for sale as Level 2.

Loans held for investment. The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. We classified the fair value of loans as Level 3.

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Accrued interest receivable and payable. The carrying amounts of accrued interest payable and receivable approximate fair value and are classified as Level 1, 2 or 3 based on whether the related asset or liability is classified as Level 1, 2 or 3.

Deposits. The fair value of noninterest-bearing and interest-bearing demand deposits and savings are the amounts payable on demand because these products have no stated maturity. The fair value of time deposits is estimated using the rates currently offered for deposits of similar remaining maturities and deposits are classified as Level 2.

Borrowed funds. The carrying value of retail repurchase agreements is considered to be a reasonable estimate of fair value. The fair value of FHLB advances and other borrowed funds is estimated using the rates currently offered for advances of similar remaining maturities and is classified as Level 2. For the long-term note payable, the current market rate for similar debt is substantially equal to the rate on this note, so its fair value approximates its carrying value.

Junior subordinated debentures. Included in junior subordinated debentures are variable rate trust preferred securities issued by COB. Fair values for the trust preferred securities were estimated by developing cash flow estimates for each of these debt instruments based on scheduled principal and interest payments and current interest rates. Once the cash flows were determined, a rate for comparable subordinated debt was used to discount the cash flows to the present value. We classified the fair value of junior subordinated debentures as Level 3.

Financial instruments with off-balance sheet risk. The fair value of financial instruments with off-balance sheet risk is considered to approximate carrying value, since the large majority of these future financing commitments would result in loans that have variable rates and/or relatively short terms to maturity. For other commitments, generally of a short-term nature, the carrying value is considered to be a reasonable estimate of fair value.

Interest rate swaps. The fair value of interest rate swaps are measured based on third party cash flow models discounted to the valuation date and are classified as Level 2.

Interest rate locks and forward loan sale commitments. The fair value of interest rate locks and forward loan sale commitments are measured by comparing the underlying terms of the contract with current pricing obtained from broker dealer pricing and are classified as Level 2.

The estimated fair values of financial instruments are as follows at the periods indicated:



	At June 30, 2016
(dollars in thousands)	Carrying Value			Estimated Fair Value			Level 1		Level 2			Level 3
Financial Assets:
Cash and cash equivalents	$	53,572		$	53,572		$	53,572	$	—		$	—
Investment securities: Available-for-sale	377,646			377,646			—		377,646			—
Investment securities: Held-to-maturity	139,813			142,217			—		142,217			—
Loans held for sale	4,524			4,524			—		4,524			—
Loans held for investment, net	1,511,365			1,524,449			—		—			1,524,449
Accrued interest receivable	5,201			5,201			7		1,548			3,646
Interest rate swaps	(1,847		)	(1,847		)	—		(1,847		)	—
Financial Liabilities:
Deposits	1,916,481			1,918,660			—		1,918,660			—
Retail repurchase agreements	12,761			12,761			—		12,761			—
Federal Home Loan Bank advances	65,153			67,321			—		67,321			—
Long-term notes payable	5,454			5,454			—		—			5,454
Junior subordinated debentures	56,702			31,502			—		—			31,502
Accrued interest payable	353			353			—		335			18

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	At December 31, 2015
(dollars in thousands)	Carrying Value			Estimated Fair Value			Level 1		Level 2			Level 3
Financial Assets:
Cash and cash equivalents	$	39,175		$	39,175		$	39,175	$	—		$	—
Investment securities: Available-for-sale	390,434			390,434			—		390,434			—
Investment securities: Held-to-maturity	147,967			145,184			—		145,184			—
Loans held for sale	5,403			5,403			—		5,403			—
Loans held for investment, net	1,528,600			1,513,226			—		—			1,513,226
Accrued interest receivable	5,305			5,305			—		1,630			3,675
Interest rate locks and forward loan sale commitments	(755		)	(755		)	—		(755		)	—
Financial Liabilities:
Deposits	1,947,537			1,945,691			—		1,945,691			—
Retail repurchase agreements	7,219			7,219			—		7,219			—
Federal Home Loan Bank advances	93,681			95,781			—		95,781			—
Long-term notes payable	5,415			5,415			—		—			5,415
Junior subordinated debentures	56,702			32,536			—		—			32,536
Accrued interest payable	367			367			—		349			18

There were no transfers between valuation levels for any assets during the six months ended June 30, 2016. If different valuation techniques are deemed necessary, we would consider those transfers to occur at the end of the period when the assets are valued.

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9. Accumulated Other Comprehensive Income

The following tables present the changes in our accumulated other comprehensive income (loss), net of tax, by component for the periods indicated:



(Dollars in thousands)	Unrealized Gains (Losses) on Available-For-Sale Securities			Interest Rate Swaps			Defined Benefit Plan Items			Total

Beginning balance January 1, 2016	$	(5,176	)	$	(466	)	$	(5,097	)	$	(10,739	)
Other comprehensive income (loss) before reclassifications	6,989			(690		)	(54		)	6,245
Amounts reclassified from accumulated other comprehensive income	—			4			—			4
Net current period other comprehensive income (loss)	6,989			(686		)	(54		)	6,249
Ending balance June 30, 2016	$	1,813		$	(1,152	)	$	(5,151	)	$	(4,490	)



(Dollars in thousands)	Unrealized Gains (Losses) on Available-For-Sale Securities			Interest Rate Swaps			Defined Benefit Plan Items			Total

Beginning balance January 1, 2015	$	(3,017	)	$	(324	)	$	(4,134	)	$	(7,475	)
Other comprehensive loss before reclassifications	(2,515		)	(63		)	—			(2,578		)
Amounts reclassified from accumulated other comprehensive income	—			4			—			4
Net current period other comprehensive loss	(2,515		)	(59		)	—			(2,574		)
Ending balance June 30, 2015	$	(5,532	)	$	(383	)	$	(4,134	)	$	(10,049	)

The following table presents the reclassifications out of our accumulated other comprehensive income (loss) for the three and six months ended June 30, 2016 and 2015:



(Dollars in thousands)	Amount Reclassified from AOCI
	For Three Months Ended						For Six Months Ended
	June 30, 2016			June 30, 2015			June 30, 2016			June 30, 2015			Line Item in the Consolidated Statement of Operations
Interest rate swaps:
Swap ineffectiveness expense	$	3		$	3		$	6		$	6		Other expense
Income tax benefit	(1		)	(1		)	(2		)	(2		)	Income tax expense
Total, net of tax	2			2			4			4
Total reclassifications for the period	$	2		$	2		$	4		$	4

10. Repurchase Agreement Borrowings

Securities sold under agreements to repurchase ("repurchase agreements") with customers represent funds deposited by customers, generally on an overnight basis, that are collateralized by investment securities owned by the Company. Repurchase agreements with customers are included in short-term borrowings on the consolidated condensed balance sheets.

All repurchase agreements are subject to terms and conditions of repurchase/security agreements between the Company and the client and are accounted for as secured borrowings. Our repurchase agreements reflected in short-term borrowings consist of customer accounts and securities which are pledged on an individual security basis.

At June 30, 2016 and December 31, 2015, our repurchase agreement borrowings totaled $12.8 million and $7.2 million respectively, and are classified as short-term debt on the consolidated condensed balance sheets. These borrowings were collateralized with residential mortgage backed securities with a market value of $15.9 million and $17.1 million at June 30, 2016 and December 31, 2015, respectively. Declines in the value of the collateral would require us to pledge additional securities. As of June 30, 2016 and December 31, 2015 the Company had $181.0 million and $213.6 million, respectively, of available unpledged securities.

The following table presents the carrying value of repurchase agreements by remaining contractual maturity at June 30, 2016 and December 31, 2015:



June 30, 2016
(dollars in thousands)	Remaining Contractual Maturity of the Agreements
	Overnight and Continuous		1 - 90 days		Over 90 days		Total
Residential mortgage-backed securities-GSE	$	12,761	$	—	$	—	$	12,761

December 31, 2015
(dollars in thousands)	Remaining Contractual Maturity of the Agreements
	Overnight and Continuous		1 - 90 days		Over 90 days		Total
Residential mortgage-backed securities-GSE	$	7,219	$	—	$	—	$	7,219

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following presents management's discussion and analysis of the financial condition and results of operations of COB. Certain reclassifications have been made to prior periods to place them on a basis comparable with the current period presentation. This discussion should be read in conjunction with the financial statements and related notes included elsewhere in this quarterly Report on Form 10-Q. Results of operations for the periods included in this review are not necessarily indicative of results to be obtained during any future period.

Important Note Regarding Forward-Looking Statements

This quarterly Report on Form 10-Q contains statements that we believe are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements generally relate to our financial condition, results of operations, plans, objectives, future performance or business. They usually can be identified by the use of forward-looking terminology, such as “believes,” “expects,” or “are expected to,” “plans,” “projects,” “goals,” “estimates,” “may,” “should,” “could,” “would,” “intends to,” “outlook” or “anticipates,” or variations of these and similar words, or by discussions of strategies that involve risks and uncertainties. You should not place undue reliance on these statements, as they are subject to risks and uncertainties, including but not limited to, those described in this quarterly Report on Form 10-Q. When considering these forward-looking statements, you should keep in mind these risks and uncertainties, as well as any cautionary statements we may make. Moreover, you should treat these statements as speaking only as of the date they are made and based only on information actually known to us at the time. We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

Forward-looking statements contained in this quarterly Report on Form 10-Q are based on current expectations, estimates and projections about our business, management's beliefs and assumptions made by management. These statements are not guarantees of our future performance and involve certain risks, uncertainties and assumptions (called Future Factors), which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in the forward-looking statements. Future factors include, without limitation:


•	Our ability to continue to grow our business internally while controlling our costs;


•	Having the financial and management resources in the amount, at the times and on the terms required to support our future

business;


•	A material delay or inability to obtain regulatory approval of the Merger and meet the other conditions to

the Merger;


•	The successful completion of the Merger and subsequent integration of the two businesses without material customer

disruption or decrease in revenues;


•	The accuracy of our assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of real estate and other assets, which could affect repayment of such borrowers' outstanding loans;


•	Material changes in the quality of our loan portfolio and the resulting credit related losses and expenses;


•	The accuracy of our assumptions relating to the establishment of our ALL;


•	Adverse changes in the value of real estate in our market areas;


•	Adverse changes in the housing markets, or an increase in interest rates, either of which may reduce demand for mortgages;


•	Changes in interest rates, spreads on earning assets and interest-bearing liabilities, the shape of the yield curve and interest rate sensitivity;


•	A prolonged period of low interest rates;


•	Declines in the value of our OREO;


•	The accuracy of our assumptions relating to our ability to use net operating loss carryforwards to reduce future tax payments;


•	The loss of one or more members of executive management and our ability to retain key lenders and other employees

particularly pending the Merger;


•	Less favorable general economic conditions, either nationally or regionally; resulting in, among other things, a reduced demand for our credit or other services and thus reduced origination volume;


•	Increased competitive pressures in the banking industry or in COB's markets affecting pricing or product and service offerings;


•	Our ability to respond to rapid technological developments and changes;


•	Disruptions in or manipulations of our operating systems;


•	Information security risks impacting us or our vendors, including “hacking” and “identity theft,” that could adversely affect

our business and our reputation;


•	The loss or disruption of the services provided by one or more of our critical vendors;


•	Our ability to achieve our targeted reductions in costs and expenses, particularly in light of the pending Merger;


•	The impact of laws and regulatory requirements, including the Basel III capital rules, Bank Secrecy Act requirements, and

regulations required by the Dodd-Frank Act;


•	Changes in trade, monetary and fiscal policies and laws, including interest rate policies of the Federal Reserve Board;


•	Changes in accounting principles and standards; and

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•	Our success at managing the risks involved in the foregoing.

All forward-looking statements speak only as of the date on which such statements are made, and COB undertakes no obligation to update any statement, to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events.

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Financial highlights are presented in the accompanying table.

Selected Financial Data



(dollars in thousands, except per share data)	As of and for Three Months Ended						As of and for Six Months Ended
	June 30, 2016			June 30, 2015			June 30, 2016			June 30, 2015
Income Statement Data
Net interest income	$	18,292		$	16,827		$	36,075		$	33,600
Provision for (Recovery of Provision for) loan losses	507			(788		)	(28		)	(1,926		)
Noninterest income	5,157			4,154			11,480			8,188
Noninterest expense	16,759			17,827			35,160			35,835
Income before income taxes	6,183			3,942			12,423			7,879
Net income	3,892			2,523			7,806			5,042
Period End Balances
Assets	$	2,356,792		$	2,293,387		$	2,356,792		$	2,293,387
Loans held for sale	4,524			2,767			4,524			2,767
Loans held for investment (1)	1,525,070			1,445,853			1,525,070			1,445,853
Allowance for loan losses	13,705			17,989			13,705			17,989
Goodwill and other intangible assets	9,365			9,598			9,365			9,598
Deferred tax assets, net	133,496			145,229			133,496			144,229
Deposits	1,916,481			1,855,638			1,916,481			1,855,638
Borrowings	140,070			154,211			140,070			154,211
Shareholders' equity	287,439			269,786			287,439			269,786
Average Balances
Assets	$	2,374,668		$	2,246,949		$	2,384,604		$	2,224,721
Loans held for sale	5,171			3,981			4,294			3,384
Loans held for investment (1)	1,528,216			1,406,827			1,541,292			1,391,525
Allowance for loan losses	13,566			18,970			14,301			19,601
Goodwill and other intangible assets	9,295			9,458			9,234			9,576
Deferred tax assets, net	136,142			144,144			137,932			143,359
Deposits	1,940,283			1,799,682			1,936,145			1,790,657
Borrowings	135,805			161,996			153,533			150,441
Shareholders' equity	284,608			271,229			281,343			270,021
Per Common Share Data
Net income - basic and diluted	$	0.16		$	0.10		$	0.32		$	0.21
Core net income - diluted (2)	0.17			0.10			0.35			0.21
Book value (shareholders' equity)	11.83			11.14			11.83			11.14
Tangible book value (shareholders' equity) (2)	11.44			10.75			11.44			10.75
Performance Ratios
Return on average assets	0.66		%	0.45		%	0.66		%	0.46		%
Core return on average assets (2)	0.68			0.45			0.71			0.46
Return on average tangible assets (2)	0.66			0.45			0.66			0.46
Return on average equity	5.50			3.73			5.58			3.77
Return on average tangible equity (2)	5.69			3.87			5.77			3.90
Net interest margin (tax equivalent)	3.50			3.43			3.44			3.49

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Asset Quality Ratios
Allowance for loan losses to period end loans held for investment (1)	0.90	%	1.24	%	0.90	%	1.24	%
Net annualized charge-offs to average loans held for investment (1)	0.27		0.07		0.19		0.06
Classified assets to Tier 1 capital and allowance for loan losses	34.0		36.3		34.0		36.3
Nonperforming assets to period end total assets (3)	1.2		1.7		1.2		1.7
Capital and Liquidity Ratios
Average equity to average assets	11.99	%	12.07	%	11.61	%	12.14	%
Leverage capital	8.94		8.50		8.94		8.50
Common equity tier 1 risk-based capital	11.94		11.85		11.94		11.85
Tier 1 risk-based capital	11.94		11.85		11.94		11.85
Total risk-based capital	13.63		14.28		13.63		14.28
Period end loans to period end deposits	80		78		80		78

(1) Loans held for investment, net of unearned income, before allowance for loan losses.

(2) Refer to the "Non-GAAP Measures" section and Noninterest Income and Noninterest expense discussions in Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

(3) Nonperforming loans and nonperforming assets include loans past due 90 days or more that are still accruing interest.

Overview

CommunityOne Bancorp, ("COB" or the "Company," also referred to as “us” or “we” and our subsidiaries on a consolidated basis), is a bank holding company headquartered in Charlotte, North Carolina and incorporated in 1984 under the laws of the State of North Carolina. Through our ownership of CommunityOne Bank, N.A. (the "Bank,") a national banking association founded in 1907 and headquartered in Asheboro, North Carolina, we offer a complete line of consumer, mortgage and business banking services, including loan, deposit and treasury management, as well as wealth management and trust services, to individual and small and middle market businesses through financial centers located throughout central, southern and western North Carolina. Our strategy is to grow the Company organically by focusing on meeting the financial needs of customers in our market area by providing a suite of quality financial products and services through local and experienced bankers and lenders located in branches and loan production offices in our customers’ local markets. We also offer the convenience of online and mobile banking capabilities. In addition to organic growth, our strategy is to grow through merger and acquisition activity in our markets, should attractive opportunities present themselves. We define our market as communities located in North Carolina, as well as adjoining markets in South Carolina and Virginia.

We earn revenue primarily from interest on loans and securities investments, mortgage banking income and fees charged for financial services provided to our customers. Offsetting these revenues are the cost of deposits and other funding sources, provision for loan losses and other operating costs such as: salaries and employee benefits, occupancy, data processing expenses, OREO and loan collection costs and income tax.

On November 22, 2015, we entered into an Agreement and Plan of Merger (“Merger Agreement”) with Capital Bank Financial Corp., a Delaware corporation (“Capital”), under which, upon the terms and subject to the conditions set forth in the Merger Agreement, COB will merge with and into Capital (the “Merger”), with Capital as the surviving corporation in the Merger. Immediately following the Merger, the Bank will merge with and into Capital’s wholly-owned bank subsidiary, with Capital’s wholly-owned bank subsidiary surviving the bank merger. The Merger is subject to, among other things, regulatory approval and other customary closing conditions. Shareholders of both COB and Capital approved the Merger on April 18, 2016.

Results of Operations

Net Interest Income

Our principal source of revenue is net interest income. Net interest income is the difference between interest income earned on interest-earning assets, primarily loans and investment securities, and interest expense paid on interest-bearing deposits and other interest-bearing liabilities. The net interest margin measures how effectively we manage the mix of interest-earning assets and interest-bearing liabilities and the difference between the interest income earned on interest-earning assets and the interest expense paid for funds to support those assets. Fluctuations within net interest income are driven by changes in the mix of interest-earning assets and interest-bearing liabilities, changes in the interest rates earned on interest-earning assets and interest rates paid on interest-bearing liabilities, the rate of growth of the interest-earning assets and interest-bearing liabilities base, the ratio of interest-earning assets to interest-bearing liabilities, and the management of interest rate sensitivity. An analysis of these changes is presented in the Average Balances and Net Interest Income Analysis - Second Quarter for the three month periods ended June 30, 2016 and 2015, and in the Average Balances and Net Interest Income Analysis - Six Months for the six month periods ended June 30, 2016 and 2015.

Net interest income on a taxable equivalent basis was $18.3 million for the three month period ended June 30, 2016, an increase of 9%, or $1.5 million, from $16.8 million for the same period in 2015. The increase in interest income is primarily a result of growth in average loan balances of $122.6 million, or 9%.

Net interest margin (taxable equivalent) increased 7 basis points from 3.43% in the second quarter of 2015 to 3.50% in the second quarter of 2016. The yield on average earning assets increased by 6 basis points in the second quarter of 2016 to 4.00% from 3.94% in the second quarter of 2015, as improvements in loans yields, primarily related to interest recoveries on charged-off loans, more than offset lower yields on securities, primarily as a result of the impact on mortgage securities yields of higher actual and expected prepayment rates. The cost of interest-bearing liabilities increased 1 basis point to 0.63% in the second quarter of 2016 primarily as a result of the increase in the Fed Funds and related rates in December 2015. The cost of interest-bearing deposits was unchanged at 0.48% for the second quarter of both years.

The following table summarizes the average balance sheets and net interest income/margin analysis for the three months ended June 30, 2016 and 2015. The interest yield earned on interest-earning assets and interest rate paid on interest-bearing liabilities shown in the table are derived by dividing interest income and expense by the average balances of interest-earning assets or interest-bearing liabilities, respectively.

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Average Balances and Net Interest Income Analysis - Second Quarter



	Three Months Ended June 30,
	2016						2015
					Average						Average
(dollars in thousands)	Average		Income /		Yield /		Average		Income /		Yield /
	Balance (3)		Expense		Rate		Balance (3)		Expense		Rate
Interest-earning assets:
Loans (1)(2)	$	1,533,387	$	17,648	4.63	%	$	1,410,808	$	16,022	4.56	%
Investment securities	523,362		3,028		2.33		523,213		3,116		2.39
Other earning assets	47,578		270		2.28		33,209		209		2.52
Total earning assets	2,104,327		20,946		4.00		1,967,230		19,347		3.94

Noninterest-earning assets:
Cash and due from banks	24,564						24,831
Goodwill and other intangible assets	9,295						9,458
Other assets, net	236,482						245,430
Total assets	$	2,374,668					$	2,246,949

Interest-bearing liabilities:
Interest-bearing demand deposits	$	358,110	$	209	0.23	%	$	350,449	$	245	0.28	%
Savings deposits	100,895		26		0.10		90,049		23		0.10
Money market deposits	454,449		319		0.28		422,667		283		0.27
Time deposits	627,935		1,298		0.83		587,050		1,181		0.81
Total interest-bearing deposits	1,541,389		1,852		0.48		1,450,215		1,732		0.48
Retail repurchase agreements	7,511		4		0.21		8,612		5		0.23
Federal Home Loan Bank advances	66,151		455		2.77		91,208		488		2.15
Other borrowed funds	62,143		330		2.14		62,176		278		1.79
Total interest-bearing liabilities	1,677,194		2,641		0.63		1,612,211		2,503		0.62

Noninterest-bearing liabilities and shareholders' equity:
Noninterest-bearing demand deposits	398,894						349,467
Other liabilities	13,972						14,042
Shareholders' equity	284,608						271,229
Total liabilities and shareholders' equity	$	2,374,668					$	2,246,949

Net interest income and net yield on earning assets (4)			$	18,305	3.50	%			$	16,844	3.43	%

Interest rate spread (5)					3.37	%					3.32	%

(1) The fully tax equivalent basis is computed using a federal tax rate of 35%.

(2) Average loan balances include nonaccruing loans and loans held for sale.

(3) Average balances include market adjustments to fair value for securities and loans held for sale.

(4) Net yield on earning assets is computed by dividing net interest income by average earning assets.

(5) Earning asset yield minus interest-bearing liabilities rate.

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Net interest income on a taxable equivalent basis was $36.1 million for the six month period ended June 30, 2016, an increase of 7%, or $2.5 million, from $33.6 million for the same period in 2015. The increase in interest income is primarily a result of growth in average loan balances of $150.7 million, or 11%, partially offset by a decrease in net loan yield of 11 basis points from lower origination interest rates and a higher variable rate loan mix.

Net interest margin (taxable equivalent) declined 5 basis points from 3.49% in the first six months of 2015 to 3.44% in the first six months of 2016. The yield on average earning assets decreased by 6 basis points in the first six months of 2016 to 3.95% from 4.01% in the first six months of 2015, on lower yields on loans, for the reasons just discussed, and securities, as a result of the impact on mortgage securities yields of higher actual and expected prepayment rates. The cost of interest-bearing liabilities was unchanged at 0.63% in both periods, while the cost of interest-bearing deposits was unchanged at 0.48% for the first six months of both years.

The following table summarizes the average balance sheets and net interest income/margin analysis for the six months ended June 30, 2016 and 2015. The interest yield earned on interest-earning assets and interest rate paid on interest-bearing liabilities shown in the table are derived by dividing interest income and expense by the average balances of interest-earning assets or interest-bearing liabilities, respectively.

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Average Balances and Net Interest Income Analysis - Six Months



	Six Months Ended June 30,
	2016						2015
					Average						Average
(dollars in thousands)	Average		Income /		Yield /		Average		Income /		Yield /
	Balance (3)		Expense		Rate		Balance (3)		Expense		Rate
Interest-earning assets:
Loans (1)(2)	$	1,545,586	$	34,620	4.50	%	$	1,394,909	$	31,913	4.61	%
Investment securities	529,719		6,311		2.40		515,532		6,340		2.48
Other earning assets	36,679		503		2.76		34,546		379		2.21
Total earning assets	2,111,984		41,434		3.95		1,944,987		38,632		4.01

Noninterest-earning assets:
Cash and due from banks	24,649						25,643
Goodwill and other intangible assets	9,234						9,576
Other assets, net	238,737						244,515
Total assets	$	2,384,604					$	2,224,721

Interest-bearing liabilities:
Interest-bearing demand deposits	$	361,994	$	430	0.24	%	$	350,307	$	500	0.29	%
Savings deposits	98,977		50		0.10		89,036		45		0.10
Money market deposits	465,328		712		0.31		427,989		597		0.28
Time deposits	622,983		2,539		0.82		587,241		2,322		0.80
Total interest-bearing deposits	1,549,282		3,731		0.48		1,454,573		3,464		0.48
Retail repurchase agreements	7,422		8		0.22		8,547		9		0.21
Federal Home Loan Bank advances	83,977		957		2.29		79,782		957		2.42
Other borrowed funds	62,134		651		2.11		62,112		567		1.84
Total interest-bearing liabilities	1,702,815		5,347		0.63		1,605,014		4,997		0.63

Noninterest-bearing liabilities and shareholders' equity:
Noninterest-bearing demand deposits	386,863						336,084
Other liabilities	13,583						13,602
Shareholders' equity	281,343						270,021
Total liabilities and shareholders' equity	$	2,384,604					$	2,224,721

Net interest income and net yield on earning assets (4)			$	36,087	3.44	%			$	33,635	3.49	%

Interest rate spread (5)					3.32	%					3.38	%

(1) The fully tax equivalent basis is computed using a federal tax rate of 35%.

(2) Average loan balances include nonaccruing loans and loans held for sale.

(3) Average balances include market adjustments to fair value for securities and loans held for sale.

(4) Net yield on earning assets is computed by dividing net interest income by average earning assets.

(5) Earning asset yield minus interest-bearing liabilities rate.

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Provision for Loan Losses

The provision for loan loss provides a level of allowance considered appropriate to absorb our estimate of losses inherent in the loan portfolio. The amount of this charge or recovery is affected by several considerations, including our evaluation of various risk factors in determining the adequacy of the allowance (see additional discussion under “Asset Quality”), actual loan loss experience and changes in the composition of the loan portfolio.

During the three months ended June 30, 2016, the provision for loan losses was $0.5 million, while for the six months ended June 30, 2016 the amount was a recovery of provision for loan losses of ($28) thousand, compared to $(0.8) million and $(1.9) million recovery of provision for loan losses in the same periods of 2015. The provision in the second quarter of 2016 was a result of charge-offs in the consumer portfolio and additional allowance required as part of the Q&E component of the ALL. The recoveries of provision in prior periods were the result of declining historical net loss rates, partially offset by loan portfolio growth. During the three month periods ended June 30, 2016 and 2015, net charge-offs totaled $1.0 and $0.4 million, or 0.27% and 0.07% of average loans on an annualized basis, respectively. During the six month periods ended June 30, 2016 and 2015, net charge-offs totaled $1.5 million and $0.4 million, respectively, or 0.19% and 0.06% of average loans on an annualized basis, respectively.

Noninterest Income

Noninterest income includes fees and service charges on deposit accounts, mortgage banking income, fees from cardholder and merchant services, fees and commissions related to trust and investment services, gains and losses on the sales of securities, and all other types of noninterest revenue.

For the three months ended June 30, 2016, noninterest income was $5.2 million compared to $4.2 million for the same period in 2015, an increase of $1.0 million, or 24%. SBA loan sales income, included in mortgage loan income, increased from $0.1 million in the second quarter of 2015 to $0.3 million in the second quarter of 2016, while residential mortgage loan income increased from $0.2 million to $0.5 million during the same periods. Service charges (including other service charges, commissions and fees) during the second quarter of 2016 grew $0.2 million, or 11%, from the same period of 2015 on increased customer fee activity, especially in overdraft protection products. Cardholder and merchant services income improved by 9% from the second quarter a year ago on improved customer activity levels.

For the six months ended June 30, 2016, noninterest income was $11.5 million compared to $8.2 million for the same period in 2015, an increase of $3.3 million, or 40%, primarily the result of a $2.0 million increase in mortgage loan income from a $1.8 million gain on the bulk sale of $46.9 million of loans to Fannie Mae during the first quarter of 2016. In addition, SBA loan sales income, which is included in mortgage loan income, increased from $0.1 million in the first six months of 2015 to $0.5 million in the first six months of 2016. Service charges (including other service charges, commissions and fees) during the first six months of 2016 were $0.4 million higher than the same period of 2015 as described above, while cardholder and merchant services income rose $0.4 million, or 11%, from the first six months of last year.



	Three Months Ended				Six Months Ended
(dollars in thousands)	June 30, 2016		June 30, 2015		June 30, 2016		June 30, 2015
Noninterest Income
Service charges on deposit accounts	$	1,561	$	1,433	$	3,118	$	2,867
Mortgage loan income	683		314		2,824		779
Cardholder and merchant services income	1,332		1,218		2,573		2,343
Trust and investment services	365		403		745		725
Bank-owned life insurance	269		268		538		518
Other service charges, commissions and fees	498		421		941		804
Other income	449		97		741		152
Total noninterest income	5,157		4,154		11,480		8,188
Less nonrecurring items:	—		—		—		—
Core noninterest income (1)	$	5,157	$	4,154	$	11,480	$	8,188

(1) See "Non-GAAP Measures".

Noninterest Expense

Noninterest expense components include salary and employee benefits, occupancy and equipment, and other expenses associated with our operations, in addition to credit related OREO and loan collection expenses.

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Noninterest expenses were $16.8 million in the second quarter of 2016 compared to $17.8 million in the same period of 2015, a decrease of $1.0 million, or 6%. The decrease was primarily the result of a $0.6 decrease in personnel expenses as a result of employee departures related to the Merger, partially offset by higher employee benefit costs, as well as a $0.4 million decrease in OREO expense as a result of gains on the sale of OREO properties. Excluding the nonrecurring merger-related expenses, core noninterest expenses were $16.5 million in the first three months of 2016, and fell by $1.3 million, or 7%, from the same period in 2015, primarily as a result of the items noted above. See the following table and "Non-GAAP Measures" for further analysis.

Full-time equivalent employees averaged 488 employees for the second quarter of 2016 versus 553 employees for the second quarter of 2015, a reduction of 12%, primarily as a result of merger related employee departures.



	Three Months Ended				Six Months Ended
(dollars in thousands)	June 30, 2016		June 30, 2015		June 30, 2016		June 30, 2015
Noninterest Expense
Personnel expense	$	9,906	$	10,462	$	20,044	$	21,056
Net occupancy expense	1,319		1,211		2,872		2,680
Furniture, equipment and data processing expense	1,921		1,875		4,051		3,864
Professional fees	575		528		1,025		1,067
Stationery, printing and supplies	127		141		287		317
Advertising and marketing	46		134		106		320
Other real estate owned expense	52		506		536		865
Credit/debit card expense	429		498		868		1,042
FDIC insurance	398		456		859		909
Loan collection expense	144		313		293		613
Merger-related expense	215		—		986		—
Core deposit intangible amortization	227		352		565		704
Other expense	1,400		1,351		2,668		2,398
Total noninterest expense	16,759		17,827		35,160		35,835
Less nonrecurring:
Merger-related expense	215		—		986		—
Core noninterest expense (1)	$	16,544	$	17,827	$	34,174	$	35,835

(1) See "Non-GAAP Measures".

Provision for Income Taxes

Income tax expense totaled $2.3 million for the second quarter of 2016 and $1.4 million for the second quarter of 2015. For the first six months of 2016, income tax expense totaled $4.6 million, compared to $2.8 million for the first six months of 2015. Our provision for income taxes, as a percentage of income before income taxes, was 37.1% and 36.0% for the three months ended June 30, 2016 and 2015, respectively, and 37.2% and 36.0% for the six months ended June 30, 2016 and June 30, 2015, respectively. The increase in the effective tax rate for the three and six months ended June 30, 2016 as compared to the same periods in 2015 is primarily attributable to the Company’s marginal tax rate applied to the increase in its pre-tax income.

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Balance Sheet Review

Total assets at June 30, 2016 were $2.36 billion, a decrease of $40.5 million, or 2%, compared to total assets of $2.40 billion at December 31, 2015, primarily as a result of the first quarter 2016 bulk residential mortgage loan sale to Fannie Mae previously discussed.

Cash and interest-bearing balances were $53.6 million at June 30, 2016, an increase of $14.4 million, or 37%, compared to $39.2 million at December 31, 2015, primarily as a result of the cash received from the bulk sale of loans described above.

Our total investment securities portfolio decreased $20.9 million during the first six months of 2016, from $538.4 million at December 31, 2015 to $517.5 million at June 30, 2016, a decrease of 4%. The portfolio is comprised of U.S. federal agency securities and U.S. federal agency Mortgage Backed Securities ("MBS") (GSE), private residential MBS, commercial MBS (GSE), private commercial MBS, and corporate debt securities. At June 30, 2016 there were $377.7 million of investment securities designated available-for-sale and $139.8 million of securities designated held-to-maturity.

Loans held for investment decreased $18.7 million, a decrease of 1%, during the first six months of 2016, from $1,543.8 million at December 31, 2015 to $1,525.1 million at June 30, 2016. The decrease was primarily the result of the bulk sale of $46.9 million of loans to Fannie Mae described above. New commercial loan origination has slowed significantly from 2015 rates, primarily as a result of the merger related departures of commercial loan officers and mortgage loan officers. The pass rated loan portfolio, excluding the bulk loan sale, grew $35.3 million year to date, a 5% annualized growth rate.

Total deposits were $1.92 billion at June 30, 2016, a decrease of $31.1 million, or 2% from $1.95 billion at December 31, 2015. Noninterest-bearing deposits increased $7.5 million, or 2%, from $386.3 million at December 31, 2015 to $393.8 million at June 30, 2016, an annualized growth rate of 4%. Low cost core deposits, which exclude all time deposits, declined $30.0 million year to date.

Shareholders' equity (book value) at June 30, 2016 was $287.4 million as compared to $273.0 million at December 31, 2015, an increase of $14.4 million. The book value per share was $11.83 at June 30, 2016, as compared to a book value per share of $11.24 at December 31, 2015. The change in shareholders' equity primarily reflects net income for the six months ended June 30, 2016 of $7.8 million and $6.2 million other comprehensive income, net of tax, including the unrealized gain on available-for-sale securities described below. We did not declare common dividends during the six months ended June 30, 2016, and we do not expect to pay dividends to shareholders for the foreseeable future.

Investment Securities

We evaluate all securities on a quarterly basis, and more frequently as economic conditions warrant, to determine if an other than temporary impairment (“OTTI”) exists. In evaluating the possible impairment of securities, consideration is given to the length of time and the extent to which the fair value has been less than book value, the financial conditions and near-term prospects of the issuer, and the ability and intent of COB to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. In analyzing an issuer's financial condition, we may consider whether the securities are issued by the federal government or its agencies or government sponsored agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer's financial condition. If management determines that an investment experiences an OTTI, the loss is recognized in the income statement as a realized loss. Any recoveries related to the value of these securities are recorded as an unrealized gain (as other comprehensive income (loss) in shareholders' equity) and not recognized in income until the security is ultimately sold. As of June 30, 2016, there were no securities considered to have OTTI.

During the first six months of 2016, decreases in the level of market interest rates resulted in unrealized gains of $11.2 million on our available-for-sale portfolio. The unrealized gain, net of $4.2 million tax effect, was $7.0 million for the first six months of 2016 and was recorded in Other Comprehensive Income (Loss). At June 30, 2016, there was an unrealized gain of $2.9 million on our available-for-sale portfolio.

Asset Quality

Management considers asset quality to be of primary importance. A formal loan review function, independent of loan origination, is used to identify and monitor problem loans. This function reports directly to the Risk Management Committee of the Board of Directors, and is independent of loan origination.

Acquired Loans

Loans acquired in the 2011 merger with Bank of Granite Corp. ("Granite Purchased Loans") include purchased impaired loans ("PI loans") and purchased contractual loans ("PC loans"). At June 30, 2016, there were $89.5 million of Granite Purchased Loans, of which $16.9 million were PC loans, and $72.6 million were PI loans, $69.6 million of which had subsequent credit deterioration.

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loans generally meet our definition for nonaccrual status, however, even if the borrower is not currently making payments, we 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 non-accretable difference.

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 periodically. 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 non-accretable difference to accretable yield with a positive impact on future interest income. The 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 lives of the loan, when there is a reasonable expectation about the amount and timing of such cash flows.

We have elected to treat the Granite portfolio under ASC 310-30, with the exception of performing revolving consumer and commercial loans, which are being accounted for under ASC 310-20.

At June 30, 2016, an ALL of $2.8 million was required for the PI loans, and these loans are presented on an accruing basis.

Commercial Real Estate Secured Loans

Commercial real estate secured lending (including commercial, construction and land development) where conversion of the real estate is the primary source of repayment is a significant portion of our commercial loan portfolio. These categories constitute $599.7 million, or approximately 39%, of our total loans held for investment portfolio at June 30, 2016, unchanged from December 31, 2015. These categories are generally affected by changes in economic conditions, changes in real estate market values, fluctuations in interest rates, the availability of loans to potential purchasers, changes in tax and other laws and acts of nature.

Nonperforming Assets

Nonperforming assets are comprised of nonaccrual loans, accruing loans past due 90 days or more, property acquired in settlement of loans and OREO. Nonperforming loans are loans placed in nonaccrual status 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. OREO represents real estate acquired through foreclosure or deed in lieu of foreclosure and it, and other property acquired in settlement of loans, is generally carried at fair value, less estimated costs to sell.

The level of nonperforming loans continued to decline, from $18.8 million or 1.2% of loans held for investment at December 31, 2015, to $14.7 million, or 1.0% of loans held for investment at June 30, 2016. OREO and property acquired in settlement of loans were $14.4 million at June 30, 2016, compared to $16.6 million at December 31, 2015, a decrease of $2.1 million or 13%. During the first six months of 2016, we recorded net write-downs (net of gains on sales) of OREO of $0.5 million, compared to $0.7 million in the first six months of 2015. At June 30, 2016, 18 assets with a net carrying amount of $2.4 million were under contract for sale. Estimated losses, if any, with these sales have been recognized in the Consolidated Statements of Operations in the first six months of 2016. Actual gains, if any, will be recorded at the time of sale. Total nonperforming assets declined 18% from $35.4 million at December 31, 2015 to $29.1 million at June 30, 2016, and represented 1.2% of total assets, an improvement from 1.5% at December 31, 2015.

Allowance for Loan Losses

In determining the ALL and any resulting provision to be charged against earnings, particular emphasis is placed on the results of the loan review process. Consideration is also given to a review of individual loans, historical loan loss experience, the value and adequacy of collateral, as well as the economic conditions in our market area. For loans determined to be impaired, the allowance is based on discounted cash flows using the loan's initial effective interest rate or the fair value of the collateral for certain collateral dependent loans. This evaluation is inherently subjective as it requires material estimates, including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. In addition, as an integral part of its examination process, the OCC periodically reviews the Bank's ALL and may require the Bank to recognize changes to the allowance based on its judgments about information available to it at the time of its examinations. Loans are charged off when, in the opinion of management, they are deemed to be uncollectible. Recognized losses are charged against the allowance, and subsequent recoveries are added to the allowance.

Estimated credit losses should meet the criteria for accrual of a loss contingency, i.e. a provision to the ALL, set forth in GAAP. Our methodology for determining the ALL is based on GAAP, the Interagency Policy Statement on the Allowance for Loan and Lease Losses and other regulatory and accounting pronouncements. The ALL is determined by the sum of three separate components: (a) the impaired loan component, which addresses specific reserves for impaired loans; (b) the general reserve component, which addresses reserves for pools of homogeneous loans; and (c) an unallocated reserve component (if any) based on management's judgment and experience. The loan pools and impaired loans are mutually exclusive; any loan that is impaired is excluded from its homogenous pool for purposes of that pool's reserve calculation, regardless of the level of impairment. We have established a de

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minimis threshold for loan exposures that, if found to be impaired, will have impairment determined by applying the same general reserve rate as nonimpaired loans within the same pool.

The ALL of $15.2 million at December 31, 2015 decreased to $13.7 million at June 30, 2016. The ALL as a percentage of loans held for investment was 0.90% at June 30, 2016 compared to 0.98% at December 31, 2015. Net charge-offs were $1.5 million in the first six months of 2016, compared to net charge-offs of $0.4 million in the first six months of 2015. Annualized net charge-offs in the first six months of 2016 were 0.19% of average loans, compared to annualized net charge-offs of 0.06% in the same period of 2015.

Actual past due loans and loan charge-offs remain at low levels and we continue to diligently work to improve asset quality. We believe the ALL of $13.7 million at June 30, 2016 is adequate to cover probable losses inherent in the loan portfolio; however, assessing the adequacy of the allowance is a process that requires considerable judgment. Our judgments are based on numerous assumptions about current events that we believe to be reasonable, but which may or may not be valid. Thus, there can be no assurance that loan losses in future periods will not exceed the current allowance or that future increases in the allowance will not be required. No assurance can be given that our ongoing evaluation of the loan portfolio in light of changing economic conditions and other relevant circumstances will not require significant future additions to the allowance, thus adversely affecting the operating results of COB. Additional information on the ALL is presented in Note 4 to the consolidated financial statements.

In addition to the Bank's ability to use its own historical loss data and migration between risk grades, it has a rigorous process for computing the qualitative factors that impact the ALL. A committee, independent of the historical loss migration team, reviews risk factors that may impact the ALL. Some factors are statistically quantifiable, such as concentration, growth, delinquency, and nonaccrual risk by loan type, while other factors are qualitative in nature, such as staff competency, competition within our markets, economic and regulatory changes impacting the loans held for investment.

The following table presents COB's investment in loans considered to be impaired and related information on those impaired loans as of June 30, 2016 and December 31, 2015:



	June 30, 2016				December 31, 2015
(dollars in thousands)	Balance		Associated Reserves		Balance		Associated Reserves
Impaired loans, not individually reviewed for impairment	$	4,543	$	—	$	4,903	$	—
Impaired loans, individually reviewed, with no impairment	18,383		—		22,411		—
Impaired loans, individually reviewed, with impairment	3,731		328		3,817		399
Total impaired loans *	$	26,657	328		$	31,131	399

Purchased impaired loans with subsequent deterioration	$	69,587	2,754		$	84,329	2,754
Purchased impaired loans with no subsequent deterioration	3,011		—		3,235		—
Total Reserves			$	3,082			$	3,153

Average impaired loans calculated using a simple average	28,894				35,290
* Included at June 30, 2016 and December 31, 2015 were $12.0 million and $13.1 million, respectively, in restructured and performing loans.

Liquidity Management

Liquidity management refers to the ability to meet day-to-day cash flow requirements based primarily on activity in loan and deposit accounts of COB's customers. Liquidity is immediately available from four major sources: (a) cash on hand and on deposit at other banks; (b) the outstanding balance of federal funds sold; (c) the market value of unpledged investment securities; and (d) availability under lines of credit. At June 30, 2016, the total amount of these four items was $359.5 million, or 15% of total assets, a decrease of $20.3 million from $379.7 million, or 16% of total assets, at December 31, 2015. COB could also access $326.9 million of additional borrowings under credit lines by pledging additional collateral.

Consistent with the general approach to liquidity, loans and other assets of COB are funded primarily by local core deposits. To date, a stable retail deposit base and a modest amount of brokered deposits have been adequate to meet our loan obligations, while maintaining the desired level of immediate liquidity. Additionally, an investment securities portfolio is available for both immediate and secondary liquidity purposes.

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Asset/Liability Management and Interest Rate Sensitivity

One of the primary objectives of asset/liability management is to maximize the net interest margin while minimizing the earnings risk associated with changes in interest rates. One method used to manage interest rate sensitivity is to measure, over various time periods, the interest rate sensitivity positions, or gaps. This method, however, addresses only the magnitude of timing differences and does not address earnings or market value. Therefore, management uses an earnings simulation model to prepare, on a regular basis, earnings projections based on a range of interest rate scenarios to more accurately measure interest rate risk.

COB's balance sheet continued to be asset-sensitive at June 30, 2016. An asset-sensitive position means that net interest income will generally move in the same direction as interest rates. For instance, if interest rates increase, net interest income can be expected to increase, and if interest rates decrease, net interest income can be expected to decrease. COB's asset sensitivity is primarily derived from cash and due from banks position, variable rate commercial loans that adjust as interest rates change and the long duration of its low cost core deposits. These variable rate loans are primarily funded by deposits that are not expected to reprice as quickly as the loans. Management believes COB's risk to changes in interest rates to be moderate.

Capital Adequacy and Resources

Under revised capital rules established by the federal banking agencies, including the Federal Reserve Board and the OCC, effective for community banks as of January 1, 2015, capital adequacy is measured by certain risk-based capital ratios, supplemented by a leverage capital ratio. The new capital rules assess an institution's risk-based capital through three ratios: a common equity Tier 1 capital ("CET1") ratio, an additional Tier 1 risk-based capital ratio, and a total capital ratio, which includes Tier 2 capital. CET1 is comprised of the sum of common stock instruments and related surplus net of treasury stock, retained earnings, accumulated other comprehensive income (AOCI) and certain qualifying minority interests, less certain adjustments and deductions that include AOCI (based on an irrevocable option to neutralize the AOCI). Additional Tier 1 capital is comprised of noncumulative perpetual preferred stock, tier 1minority interests, grandfathered trust preferred securities, less certain intangibles; and Tier 2 capital, which may include the ALL up to a maximum of 1.25% of risk weighted assets, qualifying subordinated debt, qualifying preferred stock and hybrid capital instruments. The requirements also define the weights assigned to assets and off-balance sheet items to determine the risk weighted asset components of the risk-based capital rules.

The revised rules require a minimum CET1 risk-based capital ratio of 4.5%, a minimum overall Tier 1 risk-based capital ratio of 6%, and a total risk-based capital ratio of 8%. In addition, the revised rules require a capital conservation buffer of up to 2.5% above each of the capital ratio requirements (CET1, tier 1, and total risk-based capital) which must be met for a bank to be able to pay dividends, engage in share buybacks or make discretionary bonus payments to executive management without restriction. This capital conservation buffer are being phased in over a four year period starting on January 1, 2016 and was 0.625% for the first quarter of 2016. The revised rules also change the risk-weighting of certain assets, including “high volatility” commercial real estate, past due assets, structured securities and equity holdings. When fully implemented, a banking organization would need to maintain a CET1 capital ratio of at least 7%, a total Tier 1 capital ratio of at least 8.5% and a total risk-based capital ratio of at least 10.5% or it would be subject to restrictions on capital distributions and discretionary bonus payments to its executive management.

The leverage capital ratio, which serves as a minimum capital standard, considers Tier 1 capital only and is expressed as a percentage of average total assets for the most recent quarter, after reduction of those assets for goodwill and other disallowed intangible assets at the measurement date. Risks such as concentration of credit risks and the risk arising from non-traditional activities, as well as the institution's exposure to a decline in the economic value of its capital due to changes in interest rates, and an institution's ability to manage those risks are important factors that are to be taken into account by the federal banking agencies in assessing an institution's overall capital adequacy.

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The prompt corrective action provisions of federal law require the federal bank agencies to take prompt corrective action to resolve problems of insured depository institutions such as the Bank. The extent of these powers depends upon whether the institution is designated as well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized or critically undercapitalized, as defined by the law. The minimum capital requirements to be characterized as “well-capitalized” and “adequately capitalized,” as defined by the applicable provisions of federal law, which were revised effective as of January 1, 2015, and COB and the Bank's capital ratios as of June 30, 2016 were as follows:



					Minimum Regulatory Requirement
	CommunityOne Bancorp		CommunityOne Bank		Adequately Capitalized		Well- Capitalized
Leverage capital ratio	8.94	%	10.00	%	4.00	%	5.00	%
CET1 risk-based capital ratio	11.94		13.11		4.50		6.50
Total Tier 1 risk-based capital ratio	11.94		13.11		6.00		8.00
Total risk-based capital ratio	13.63		13.98		8.00		10.00

Based on these ratios, the Bank is considered “well-capitalized” under the applicable provisions of the Federal Deposit Insurance Act, and the Company and the Bank exceeded the minimum capital conservation buffer.

Application of Critical Accounting Policies

Our accounting policies are in accordance with GAAP and with general practice within the banking industry and are fundamental to understanding management's discussion and analysis of results of operations and financial condition. Our significant accounting policies are discussed in detail in Note 1 of the consolidated financial statements contained in the Annual Report on Form 10-K for the year ended December 31, 2015, as amended ("Form 10-K"), and are described below.

Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, valuation of OREO, carrying value of investment securities, estimated cash flows for purchased impaired loans and treatment of deferred tax assets.

Allowance for Loan Losses

The ALL, which is utilized to absorb actual losses in the loan portfolio, is maintained at a level consistent with our best estimate of probable loan losses incurred as of the balance sheet date. We assess our ALL quarterly. This assessment includes a methodology that separates the total loan portfolio into homogeneous loan classifications for purposes of evaluating risk. The required allowance is calculated by applying a risk adjusted reserve requirement to the dollar volume of loans within a homogenous group. We have grouped our loans into pools with similar risk characteristics, including loan purpose, collateral type and borrower type. We analyze the loan portfolio on an ongoing basis to evaluate current risk levels, and risk grades are adjusted accordingly. While we use the best information available to make evaluations, future adjustments may be necessary, if economic or other conditions differ substantially from the assumptions used. See additional discussion under "Asset Quality".

Valuation of Other Real Estate Owned

Other real estate owned represents properties acquired through foreclosure or deed in lieu thereof. The property is classified as held for sale and is carried at fair value based on recent appraisals, less estimated costs to sell. Declines in the fair value of properties included in other real estate below carrying value are recognized by a charge to income. An increase in fair value is not recognized until the property is sold.

Carrying Value of Securities

Securities designated as available-for-sale are carried at fair value. However, the unrealized difference between amortized cost and fair value of securities available-for-sale is excluded from net income unless there is an other than temporary impairment and is reported, net of deferred taxes, as a component of shareholders' equity as accumulated other comprehensive income (loss). Securities held-to-maturity are carried at amortized cost, as the Bank has the ability, and management has the positive intent, to hold these securities to maturity. Premiums and discounts on securities are amortized and accreted according to the interest method.

Purchased Loans Accounting

Purchased impaired ("PI") loans are recorded at fair value at acquisition date. Therefore, amounts deemed uncollectible at acquisition date become part of the fair value determination and are excluded from the allowance for loan and lease losses. Following acquisition, we periodically reforecast expected cash flows for PI loans. Subsequent decreases in the amount expected to be collected result in a provision for loan losses with a corresponding increase in the allowance for loan losses. Subsequent increases in the amount expected to be collected result in a reversal of any previously recorded provision for loan losses and related allowance for loan losses, if any, or prospective adjustment to the accretable yield if no provision for loan losses had been recorded.

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Realization of Deferred Tax Assets

We regularly evaluate the likelihood that the Company will be able to realize its deferred tax assets and the need for a valuation allowance, if any. Prior to December 31, 2014, we determined that sufficient evidence was not available to conclude that it was more likely than not that all of our deferred tax assets could be realized, requiring a valuation allowance for certain of our deferred tax assets. At December 31, 2014, we determined, based on all available positive and negative evidence, that it is more likely than not that future taxable income will be available during the carryforward periods to absorb all of the consolidated federal net operating loss carryforward and all but a small portion of our North Carolina net economic loss carryforward. As a result of this determination, $142.5 million of valuation allowance against our deferred tax assets was reversed.

Our analysis as of June 30, 2016 continues to support the position that future taxable income will be available during the carryforward periods to absorb all of the consolidated federal net operating loss carryforward and our North Carolina net economic loss carryforward.

As of June 30, 2016 and December 31, 2015 net deferred income tax assets totaling $133.5 million and $141.7 million, respectively, are recorded on the Company’s balance sheet.

On July 23, 2013, the State of North Carolina lowered the North Carolina corporate income tax rate from 6.9% to 6% effective 2014 and to 5% effective 2015. On July 28, 2015, North Carolina announced that, based on the state achieving its 2015 tax year revenue target, the rate will be reduced to 4% during the 2016 tax year. The rate will be further reduced to 3% for post-2016 tax years provided that additional revenue growth targets are reached. The rate reduction trigger resulted in a $2.3 million reduction in deferred income tax assets, which the Company recorded as a reduction in deferred income tax assets as of September 30, 2015 and a charge to income tax expense in the third quarter of 2015.

At September 30, 2015, we determined that it was more likely than not that future taxable income will be available during applicable carryforward periods to absorb all of the remaining North Carolina net economic loss carryforwards, and accordingly, the remaining $0.7 million deferred tax asset valuation allowance were reversed as a reduction in income tax expense. We have recorded income taxes in the first six months of 2016 at the Company’s effective tax rate.

The merger with Bank of Granite Corp. resulted in an ownership change for Bank of Granite Corp. under Internal Revenue Code Section 382 and the Regulations thereunder. Accordingly, the Company has applied a limitation against Bank of Granite Corp.’s pre-acquisition net operating loss carryforwards and net unrealized built-in losses.

Summary

Management believes the accounting estimates related to the ALL, the valuation of OREO, the carrying value of securities, purchased loan accounting, and the realization of deferred tax assets are “critical accounting estimates” because: (1) the estimates are highly susceptible to change from period to period as they require management to make assumptions concerning the changes in the types and volumes of the portfolios and anticipated economic conditions, and (2) the impact of recognizing an impairment valuation allowance or loan loss could have a material effect on the COB's assets reported on the balance sheet as well as its net earnings.

Non-GAAP Measures

This quarterly Report on Form 10-Q contains financial information determined by methods other than in accordance with GAAP. We use these non-GAAP measures in our analysis of COB's performance. Some of these non-GAAP measures exclude goodwill, core deposit premiums and other intangibles from the calculations of return on average assets and return on average equity. We believe presentations of financial measures excluding the impact of goodwill, core deposit premiums and other intangible assets provide useful supplemental information that is essential to a proper understanding of the operating results of our core businesses. In addition, certain designated net interest income amounts are presented on a taxable equivalent basis. We believe that the presentation of net interest income on a taxable equivalent basis aids in the comparability of net interest income arising from taxable and tax-exempt sources. We believe that other non-GAAP measures that exclude nonrecurring income and expenses provide useful supplemental information that enhances the understanding of our operating results.

These disclosures should not be viewed as a substitute for results determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies.

The non-GAAP financial measures used in this Report are defined below.


•	“Average tangible shareholders’ equity” is average shareholders’ equity reduced by average recorded goodwill, and average

other intangible assets.


•	“Average tangible assets” are average total assets reduced by average recorded goodwill and average other intangible assets.


•	“Tangible shareholders’ equity” is shareholders’ equity reduced by recorded goodwill and other intangible assets


•	“Tangible assets” are total assets reduced by recorded goodwill and other intangible assets.


•	“Tangible book value” is defined as total equity reduced by recorded goodwill, other intangible assets and preferred stock

divided by total common shares outstanding. This measure discloses changes from period-to-period in book value per share

exclusive of changes in intangible assets and preferred stock. Goodwill, an intangible asset that is recorded in a purchase

business combination, has the effect of increasing total book value while not increasing the tangible assets of a company.

Companies utilizing purchase accounting in a business combination, as required by GAAP, must record goodwill related to

such transactions.


•	"Core noninterest expense" ("Core NIE") is defined as total noninterest expense reduced by noninterest expense items which are nonrecurring in nature.


•	“Core noninterest income "("NII") is defined as total noninterest income reduced by items which are nonrecurring in

nature.


•	"Core net income before tax" is defined as income, before income taxes, adjusted by noninterest income items and noninterest expense items which are nonrecurring in nature.


•	"Core income tax expense" is defined as income taxes, adjusted by tax related items which are nonrecurring in nature.


•	"Core net income" is defined as core net income before tax less core income tax expense.


•	"Core return on average assets" is defined as annualized core net income divided by total average assets


•	"Core net income per share" is defined as core net income divided by average diluted shares outstanding for the period.

The following tables provide a more detailed analysis of these non-GAAP measures:



(dollars in thousands, except per share data)	As of and for the Three Months ended June 30, 2016			As of and for the Three Months ended June 30, 2015			As of and for the Six Months ended June 30, 2016			As of and for the Six Months ended June 30, 2015
Total average shareholders' equity	$	284,608		$	271,229		$	281,343		$	270,021
Less:
Average goodwill	(4,205		)	(4,205		)	(4,205		)	(4,205		)
Average core deposit and other intangibles	(5,090		)	(5,253		)	(5,029		)	(5,371		)
Average tangible shareholders' equity (non-GAAP)	$	275,313		$	261,771		$	272,109		$	260,445

Total average assets	$	2,374,668		$	2,246,949		$	2,384,604		$	2,224,721
Less:
Average goodwill	(4,205		)	(4,205		)	(4,205		)	(4,205		)
Average core deposit and other intangibles	(5,090		)	(5,253		)	(5,029		)	(5,371		)
Average tangible assets (non-GAAP)	$	2,365,373		$	2,237,491		$	2,375,370		$	2,215,145

Total shareholders' equity	$	287,439		$	269,786		$	287,439		$	269,786
Less:
Goodwill	(4,205		)	(4,205		)	(4,205		)	(4,205		)
Core deposit and other intangibles	(5,160		)	(5,393		)	(5,160		)	(5,393		)
Tangible shareholders' equity (non-GAAP)	$	278,074		$	260,188		$	278,074		$	260,188

Total assets	$	2,356,792		$	2,293,387		$	2,356,792		$	2,293,387
Less:
Goodwill	(4,205		)	(4,205		)	(4,205		)	(4,205		)
Core deposit and other intangibles	(5,160		)	(5,393		)	(5,160		)	(5,393		)
Tangible assets (non-GAAP)	$	2,347,427		$	2,283,789		$	2,347,427		$	2,283,789

Book value per common share	$	11.83		$	11.14		$	11.83		$	11.14
Effect of intangible assets	(0.39		)	(0.39		)	(0.39		)	(0.39		)
Tangible book value per common share (non-GAAP)	$	11.44		$	10.75		$	11.44		$	10.75



(dollars in thousands)	Three Months Ended						Six Months Ended
	June 30, 2016			June 30, 2015			June 30, 2016			June 30, 2015
Income before income taxes	$	6,183		$	3,942		$	12,423		$	7,879
Less nonrecurring:
Merger-related expense	(215		)	—			(986		)	—
Core net income before tax (non-GAAP)	$	6,398		$	3,942		$	13,409		$	7,879

Income tax expense	$	2,291		$	1,419		$	4,617		$	2,837
Less nonrecurring tax items and adjustments:
Tax effect of nonrecurring items (1)	(71		)	—			(324		)	—
Core income tax expense (non-GAAP)	$	2,362		$	1,419		$	4,941		$	2,837
Core net income (non-GAAP)	$	4,036		$	2,523		$	8,468		$	5,042

Return on average assets	0.66		%	0.45		%	0.66		%	0.46		%
Effect of adjustments to arrive at core net income	0.02			—			0.05			—
Core return on average assets (non-GAAP)	0.68		%	0.46		%	0.71		%	0.46		%

Net income per share - diluted	$	0.16		$	0.10		$	0.32		$	0.21
Effect of adjustments to arrive at core net income	0.01			—			0.03			—
Core net income per share - diluted (non-GAAP)	$	0.17		$	0.10		$	0.35		$	0.21

(1) Tax effected at an income tax rate of 33% in 2016, based on non-deductibility of certain merger-related expense.



(dollars in thousands)	Three Months Ended				Six Months Ended
	June 30, 2016		June 30, 2015		June 30, 2016		June 30, 2015
Total noninterest income	$	5,157	$	4,154	$	11,480	$	8,188
Less nonrecurring items:
	—		—		—		—
Core noninterest income (non-GAAP)	$	5,157	$	4,154	$	11,480	$	8,188

Total noninterest expense	$	16,759	$	17,827	$	35,160	$	35,835
Less nonrecurring items:
Merger-related expense	215		—		986		—
Core noninterest expense (non-GAAP)	$	16,544	$	17,827	$	34,174	$	35,835

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Management considers interest rate risk our most significant market risk. Interest rate risk is the exposure to adverse changes in net interest income due to changes in interest rates. Consistency of our net interest income is largely dependent upon the effective management of interest rate risk.

COB's Asset/Liability Management Committee (“ALCO”), which includes senior management representatives and reports to the Board of Directors, monitors and manages interest rate risk. See "Asset/Liability Management and Interest Rate Sensitivity" in Item 2 of this Form 10-Q for further discussion.

The objective of asset/liability management is the maximization of net interest income within our risk guidelines. This objective is accomplished through management of our balance sheet composition, maturities, liquidity, and interest rate risk exposures arising from changing economic conditions, interest rates and customer preferences.

To identify and manage its interest rate risk, we employ an earnings simulation model to analyze net interest income sensitivity to changing interest rates. The model is based on contractual cash flows and repricing characteristics and incorporates market-based

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assumptions regarding the effect of changing interest rates on the prepayment rates of certain assets and liabilities. The model also includes management projections for activity levels in each of the product lines offered by the Bank. Assumptions are inherently uncertain and the measurement of net interest income or the impact of rate fluctuations on net interest income cannot be precisely predicted. Actual results may differ from simulated results due to timing, magnitude, and frequency of interest changes as well as changes in market conditions and management strategies.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

An evaluation of our disclosure controls and procedures (as defined in Sections 13(a)-15(e) and 15(d)-15(e) of the Securities Exchange Act of 1934), was carried out under the supervision and with the participation of COB's Chief Executive Officer and Chief Financial Officer and several other members of senior management as of June 30, 2016, the last day of the period covered by this Quarterly Report. COB's Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2016 in ensuring that the information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934 is (a) accumulated and communicated to management (including COB's Chief Executive Officer and Chief Financial Officer) in a timely manner, and (b) recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms.

Internal Control Changes

We assess the adequacy of our internal control over financial reporting quarterly and enhance our internal controls in response to internal control assessments and internal and external audit and regulatory recommendations. No control enhancements during the quarter ended June 30, 2016 have materially affected, or are reasonably likely to materially affect, COB’s internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

In the ordinary course of operations, COB is party to various legal proceedings. As previously disclosed in the definitive joint proxy statement/prospectus dated March 15, 2016, a case captioned Robert Garfield v. Capital Bank Financial Corp., et al., No. 2016-001194-CA-01 (the “Garfield Action”) was filed on January 16, 2016 in the Circuit Court of the Eleventh Judicial Circuit in Miami-Dade County, Florida on behalf of a putative class of Capital shareholders against Capital, its directors, and the Company. The complaint in the Garfield Action alleges, among other things, that the Capital director defendants breached their fiduciary duties by approving the merger, that the Company aided and abetted such breaches, and that Capital, its directors and the Company failed to disclose material information in connection with the merger. Also as previously disclosed, a case captioned Curtis R. Pendleton v. Robert L. Reid, et al., No. 5:16-cv-00037 (the “Pendleton Action”), was filed on February 29, 2016 in the United States District Court for the Western District of North Carolina on behalf of a putative class of Company shareholders against the Company, its directors, and Capital, and on March 14, 2016, a case captioned Floyd Scrogham v. Robert L. Reid, et al., No. 5:16-cv-00045 (the “Scrogham Action”) was filed in the United States District Court for the Western District of North Carolina on behalf of a putative class of Company shareholders against the Company, its directors, and Capital. The complaint in the Scrogham Action, like the complaint in the Pendleton Action, alleges, among other things, that certain defendants violated Sections 14(a) and 20(a) of the Securities Exchange Act of 1934 by issuing a Registration/Joint Proxy Statement that, plaintiffs allege, is materially incomplete and misleading. The Garfield, Pendleton and Scrogham Actions seek, among other things, an order enjoining the merger, as well as other equitable relief and/or money damages, interest, costs, fees (including attorneys’ fees) and expenses. On March 31, 2016, the Pendleton and Scrogham Actions were consolidated for all purposes under the caption In re CommunityOne Bancorp Consolidated Stockholder Litigation, No. 5:16-cv-00037 (the “Consolidated WDNC Action”).

On April 1, 2016, the parties to the Consolidated WDNC Action filed with the Court a memorandum of understanding in which the parties agreed on the terms of a settlement of those lawsuits. The memorandum of understanding provides that CommunityOne will make certain supplemental disclosures related to the merger, which was done on April 6, 2016. On April 4, 2016, the parties to the Garfield Action entered into a stipulation of settlement providing for the settlement of the Garfield Action (the “Garfield Stipulation”), including that Capital will make certain supplemental disclosures related to the merger, which was done on April 6, 2016. The proposed settlements are conditioned upon, among other things, the parties in the Consolidated WDNC Action entering into a stipulation of settlement, consummation of the merger and final approval of the proposed settlement by the court. There can be no assurance that the parties to the Consolidated WDNC Action will ultimately enter into a stipulation of settlement or that the court will approve the settlement even if the parties were to enter into such stipulation. If the proposed settlements are approved by the court, it will release all claims in the actions that were or could have been brought challenging any aspect of the merger and any disclosures made in connection therewith and preclude further proceedings.

The defendants agreed to the settlement of these lawsuits to avoid the uncertainty, costs, distraction and disruption inherent in litigation and without admitting that further supplemental disclosure is required under any applicable rule, statute, regulation or law. Settlement hearings will be scheduled to consider the fairness, reasonableness, and adequacy of the proposed settlements following notice to the Company and Capital shareholders. If each of the proposed settlements is finally approved by the respective courts considering such settlements, they will resolve and release all claims in the Garfield Action and the Consolidated WDNC Action that were or could have been brought challenging any aspect of the Merger or the Merger Agreement and any disclosure made in connection therewith, pursuant to terms that will be disclosed to the stockholders prior to final approval of the settlement by the respective courts. In addition, in connection with the proposed settlements, the parties contemplate that plaintiffs’ counsel will seek awards of attorneys’ fees and expenses from each respective court. COB, Capital, or their successors will pay or cause to be paid those attorneys’ fees and expenses awarded by the respective courts. There can be no assurance that the courts will approve the settlements.

Other than the foregoing, COB is not involved in, nor has it terminated during the six months ended June 30, 2016, any pending legal proceedings other than routine, nonmaterial proceedings occurring in the ordinary course of business.

Item 1A. Risk Factors

There have been no material changes to the risk factors that we have previously disclosed in Item 1A - “Risk Factors” in our Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Repurchases

Not Applicable.

Item 3. Defaults Upon Senior Securities

Not Applicable.

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Item 4. Mine Safety Disclosures

Not Applicable.

Item 5. Other Information

None.

Item 6. Exhibits

Exhibits to this report are listed in the Index to Exhibits section of this report.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



		CommunityOne Bancorp
		(Registrant)

Date: August 8, 2016	By:	/s/ DAVID L. NIELSEN
		David L. Nielsen
		Executive Vice President and
		Chief Financial Officer
		(Principal Financial and Accounting Officer)

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INDEX TO EXHIBITS



Exhibit No.	Description of Exhibit
31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101	Financial Statements submitted in XBRL format.

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