CommunityOne Bancorp - FORM 10-Q

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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 March 31, 2015			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 April 30, 2015 (the most recent practicable date), the Registrant had outstanding approximately 24,181,684 shares of Common Stock.

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CommunityOne Bancorp and Subsidiaries

Report on Form 10-Q

March 31, 2015

TABLE OF CONTENTS



PART I. FINANCIAL INFORMATION
Item 1	Consolidated Financial Statements (Unaudited)
	Consolidated Balance Sheets as of March 31, 2015 and December 31, 2014	1
	Consolidated Statements of Operations for Three Months Ended March 31, 2015 and 2014	2
	Consolidated Statements of Comprehensive Income for the Three Months ended March 31, 2015 and 2014	3
	Consolidated Statements of Shareholders' Equity for the Three Months Ended March 31, 2015 and 2014	4
	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2015 and 2014	5
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	33
Item 3	Quantitative and Qualitative Disclosures about Market Risk	49
Item 4	Controls and Procedures	50
PART II. OTHER INFORMATION
Item 1	Legal Proceedings	51
Item 1A	Risk Factors	51
Item 2	Unregistered Sales of Equity Securities and Repurchases	51
Item 3	Defaults Upon Senior Securities	51
Item 4	Mine Safety Disclosures	51
Item 5	Other Information	51
Item 6	Exhibits	51
	Signatures	52

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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)	March 31, 2015			December 31, 2014*
Assets
Cash and due from banks	$	25,715		$	29,202
Interest-bearing bank balances	22,218			66,680
Investment securities:
Available-for-sale, at estimated fair value (amortized cost of $370,038 in 2015 and $354,924 in 2014)	367,842			350,040
Held-to-maturity, at amortized cost (estimated fair value of $140,959 in 2015 and $140,875 in 2014)	140,559			142,461
Loans held for sale	7,571			2,796
Loans held for investment	1,395,911			1,357,788
Less: Allowance for loan losses	(19,008		)	(20,345		)
Net loans held for investment	1,376,903			1,337,443
Premises and equipment, net	43,809			46,782
Other real estate owned and property acquired in settlement of loans	21,040			20,411
Core deposit premiums and other intangibles	5,500			5,681
Goodwill	4,205			4,205
Bank-owned life insurance	40,212			39,946
Deferred tax assets, net	144,223			146,433
Other assets	32,137			23,434
Total Assets	$	2,231,934		$	2,215,514
Liabilities
Deposits:
Noninterest-bearing demand deposits	$	337,417		$	323,776
Interest-bearing deposits:
Demand, savings and money market deposits	880,721			882,332
Time deposits of $250 or more	50,483			49,967
Other time deposits	538,851			538,345
Total deposits	1,807,472			1,794,420
Retail repurchase agreements	7,837			9,076
Federal Home Loan Bank advances	68,221			68,234
Long-term notes payable	5,358			5,338
Junior subordinated debentures	56,702			56,702
Other liabilities	15,392			14,828
Total Liabilities	1,960,982			1,948,598
Shareholders' Equity
Preferred stock, 10,000,000 shares authorized
Series A, $10.00 par value; 51,500 shares issued and no shares outstanding in 2015 and 2014	—			—
Series B, no par value, authorized 250,000 shares, no shares issued and outstanding in 2015 and 2014	—			—
Common stock, no par value; authorized 2,500,000,000 shares, issued 24,185,130 shares in 2015 and 24,185,923 in 2014	487,781			487,603
Accumulated deficit	(210,693		)	(213,212		)
Accumulated other comprehensive loss	(6,136		)	(7,475		)
Total Shareholders' Equity	270,952			266,916
Total Liabilities and Shareholders' Equity	$	2,231,934		$	2,215,514

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 March 31,
	2015			2014
Interest Income
Interest and fees on loans	$	15,873		$	14,081
Interest and dividends on investment securities:
Taxable income	3,224			3,695
Other interest income	171			151
Total interest income	19,268			17,927
Interest Expense
Deposits	1,731			1,702
Retail repurchase agreements	4			3
Federal Home Loan Bank advances	469			469
Other borrowed funds	290			274
Total interest expense	2,494			2,448
Net Interest Income before Recovery of Loan Losses	16,774			15,479
Recovery of provision for loan losses	(1,137		)	(684		)
Net Interest Income after Recovery of Loan Losses	17,911			16,163
Noninterest Income
Service charges on deposit accounts	1,434			1,564
Mortgage loan income	465			174
Cardholder and merchant services income	1,125			1,113
Trust and investment services	322			358
Bank-owned life insurance	250			252
Other service charges, commissions and fees	383			352
Securities gains, net	—			—
Other income	55			130
Total noninterest income	4,034			3,943
Noninterest Expense
Personnel expense	10,594			10,393
Net occupancy expense	1,469			1,553
Furniture, equipment and data processing expense	1,989			2,003
Professional fees	539			633
Stationery, printing and supplies	176			162
Advertising and marketing	186			153
Other real estate owned expense	360			261
Credit/debit card expense	543			595
FDIC insurance	453			639
Loan collection expense	300			657
Core deposit premium intangible amortization	352			352
Other expense	1,047			1,405
Total noninterest expense	18,008			18,806
Income before income taxes	3,937			1,300
Income tax expense	1,418			23
Net income	$	2,519		$	1,277

Weighted average number of shares outstanding - basic	24,183,396			21,935,566
Weighted average number of shares outstanding - diluted	24,195,108			21,935,566
Net income per share - basic and diluted	$	0.10		$	0.06

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 March 31,
	2015			2014
Net income	$	2,519		$	1,277
Other comprehensive income:
Unrealized gains arising during the period on available-for-sale securities	2,688			5,291
Tax effect	(1,028		)	(2,024		)
Unrealized gains arising during the period on available-for-sale securities, net of tax	1,660			3,267
Unrealized gain (loss) on interest rate swaps	(523		)	41
Tax effect	200			(16		)
Unrealized gain (loss) on interest rate swaps, net of tax	(323		)	25
Reclassification adjustment for loss on interest rate swaps included in net income	3			—
Tax effect	(1		)	—
Reclassification adjustment for loss on interest rate swaps included in net income, net of tax	2			—
Other comprehensive income, net of tax:	1,339			3,292
Comprehensive income	$	3,858		$	4,569

See accompanying notes to consolidated financial statements.

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CommunityOne Bancorp and Subsidiaries

Consolidated Statements of Shareholders’ Equity (unaudited)

For Three Months Ended March 31, 2015 and 2014



											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, 2013	—	$	—	21,861,418		$	461,636	$	(363,670	)	$	(17,605	)	$	80,361
Comprehensive income:
Net income	—	—		—		—		1,277			—			1,277
Other comprehensive income, net of tax	—	—		—		—		—			3,292			3,292
Total comprehensive income														4,569
Stock options and restricted stock awards:
Compensation expense recognized	—	—		—		387		—			—			387
Issuance of restricted stock awards, net of cancellations	—	—		110,417		—		—			—			—
Shares issued as compensation to directors				1,348		14								14
Balance, March 31, 2014	—	$	—	21,973,183		$	462,037	$	(362,393	)	$	(14,313	)	$	85,331
Balance, December 31, 2014	—	$	—	24,185,923		$	487,603	$	(213,212	)	$	(7,475	)	$	266,916
Comprehensive income:
Net income	—	—		—		—		2,519			—			2,519
Other comprehensive income, net of tax	—	—		—		—		—			1,339			1,339
Total comprehensive income														3,858
Stock options and restricted stock awards:
Compensation expense recognized	—	—		—		167		—			—			167
Issuance of restricted stock awards, net of cancellations	—	—		(1,737	)	—		—			—			—
Shares issued as compensation to directors	—	—		944		11		—			—			11
Balance, March 31, 2015	—	$	—	24,185,130		$	487,781	$	(210,693	)	$	(6,136	)	$	270,952

See accompanying notes to consolidated financial statements.

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CommunityOne Bancorp and Subsidiaries

Consolidated Statements of Cash Flows (unaudited)



(dollars in thousands)	Three Months Ended March 31,
	2015			2014
Operating Activities
Net income	$	2,519		$	1,277
Adjustments to reconcile net income to cash provided by (used in) operating activities:
Depreciation and amortization of premises and equipment	926			945
Recovery of loan losses	(1,137		)	(684		)
Deferred income taxes	1,379			23
Deferred loan fees and costs, net	(220		)	(279		)
Premium amortization and discount accretion of investment securities, net	583			667
Amortization of core deposit premiums	352			352
Net accretion on acquired loans	(2,099		)	(2,774		)
Stock compensation expense	178			401
Increase in cash surrender value of bank-owned life insurance, net	(266		)	(270		)
Loans held for sale:
Origination of loans held for sale	(22,389		)	(13,250		)
Net proceeds from sale of loans held for sale	17,787			13,255
Net gain on sale of loans held for sale	(173		)	(130		)
Mortgage servicing rights capitalized	(300		)	(144		)
Mortgage servicing rights amortization	130			109
Net gain on sale of premises and equipment	(88		)	(11		)
Net loss on sales and write-downs of other real estate owned	294			274
Changes in assets and liabilities:
Decrease (Increase) in accrued interest receivable and other assets	(4,477		)	1,170
Increase (Decrease) in accrued interest payable and other liabilities	(1,834		)	1,031
Net cash provided by (used in) operating activities	(8,835		)	1,962
Investing Activities
Available-for-sale securities:
Proceeds from maturities, calls and principal repayments	15,520			16,871
Purchases	(31,133		)	—
Held-to-maturity securities:
Proceeds from maturities, calls and principal repayments	1,818			2,634
Net increase in loans held for investment	(38,487		)	(3,125		)
Proceeds from sales of other real estate owned	1,490			2,075
Purchases of premises and equipment	(687		)	(369		)
Proceeds from sales of premises and equipment	565			25
Net cash provided by (used in) investing activities	(50,914		)	18,111
Financing Activities
Net increase in deposits	13,052			19,225
Increase in retail repurchase agreements	(1,239		)	(1,765		)
Decrease in Federal Home Loan Bank advances	(13		)	(12		)
Net cash provided by financing activities	11,800			17,448
Net Increase (Decrease) in Cash and Cash Equivalents	(47,949		)	37,521
Cash and Cash Equivalents at Beginning of Period	95,882			67,430
Cash and Cash Equivalents at End of Period	$	47,933		$	104,951

Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest	$	5,759		$	2,204
Income taxes, net of refunds	39			—
Noncash transactions:
Foreclosed loans transferred to other real estate owned	2,495			268
Loans to facilitate the sale of other real estate owned	—			1,699
Unrealized securities gains (losses), net of income taxes	1,660			3,267
Transfer of fixed assets to other assets	2,722			2,136
Unrealized loss on interest rate swaps, net of income taxes	(321		)	25

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 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.

In July 2013, we changed our name from FNB United Corp. to CommunityOne Bancorp, and our stock symbol from FNBN to COB.

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 operating costs such as salaries and employee benefits, occupancy, data processing expenses, loan origination and collection expenses and tax expense.

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, 2014 (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 March 31, 2015 and December 31, 2014, and the results of its operations and cash flows for the three months ended March 31, 2015 and 2014, 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 allowances for loan losses (“ALL”), estimated cash flows of purchased impaired loans, the carrying value of 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

In January 2014, the FASB issued ASU No. 2014-04 Troubled Debt Restructurings by Creditors (Subtopic 310-40): "Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure" (“ASU No. 2014-04”). This pronouncement clarifies the criteria for concluding that an in substance repossession or foreclosure has occurred, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan. The amendments also outline interim and annual disclosure requirements. The amendments became effective for the Company for interim and annual reporting periods beginning after December 15, 2014. These amendments did not have a material effect on the Company's financial statements.

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In May 2014, the FASB issued an update (ASU No. 2014-09, Revenue from Contracts with Customers) creating FASB Topic 606, Revenue from Contracts with Customers. The guidance in this update affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (for example, insurance contracts or lease contracts). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance provides steps to follow to achieve the core principle. An entity should disclose sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Qualitative and quantitative information is required about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. The amendments in this update are effective for interim and annual reporting periods beginning after December 15, 2016. 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. Goodwill and Other Intangible Assets

We accounted for our October 2011 merger (the "Merger") with Bank of Granite Corporation (“Granite”), as a business combination under the acquisition method of accounting. As a result, we have recognized in our financial statements the identifiable net assets acquired and an amount of goodwill (representing the difference between the purchase price and the identifiable net assets).

Goodwill and other intangible assets deemed to have indefinite lives generated from purchased business combinations are not subject to amortization and are instead tested for impairment no less than annually. Impairment exists when the carrying value of goodwill exceeds its implied fair value. An impairment loss would be recognized in an amount equal to that excess and would be included in noninterest expense in the Consolidated Statements of Operations. None of the goodwill recognized in the Merger is expected to be deductible for income tax purposes.

Our intangible assets with definite lives are core deposit premiums ("CDP") and mortgage servicing rights ("MSR"). CDPs are amortized over their useful lives to their estimated residual value and reviewed for impairment at least quarterly. The amortization expense represents the estimated decline in the value of the underlying deposits. MSRs are amortized over the expected lives of the underlying mortgages including prepayment estimates.

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 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.

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.

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The following table summarizes the amortized cost and estimated fair value of investment securities and presents the related gross unrealized gains and losses:



March 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	$	2,022	$	14	$	—	$	2,036
Residential mortgage-backed securities-GSE	288,622		899		3,802		285,719
Residential mortgage-backed securities-Private	15,744		690		4		16,430
Commercial mortgage-backed securities-GSE	22,279		—		71		22,208
Commercial mortgage-backed securities-Private	10,354		103		—		10,457
Corporate notes	31,017		—		25		30,992
Total available-for-sale	370,038		1,706		3,902		367,842
Held-to-Maturity:
Residential mortgage-backed securities-GSE	130,496		590		372		130,714
Commercial mortgage-backed securities-Private	10,063		182		—		10,245
Total held-to-maturity	140,559		772		372		140,959
Total investment securities	$	510,597	$	2,478	$	4,274	$	508,801

December 31, 2014
(dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Available-for-Sale:
Obligations of U.S. government sponsored enterprises	$	2,028	$	16	$	—	$	2,044
Residential mortgage-backed securities-GSE	295,300		438		5,593		290,145
Residential mortgage-backed securities-Private	16,455		820		4		17,271
Commercial mortgage-backed securities-GSE	22,377		—		419		21,958
Commercial mortgage-backed securities-Private	10,365		—		150		10,215
Corporate notes	8,399		8		—		8,407
Total available-for-sale	354,924		1,282		6,166		350,040
Held-to-Maturity:
Residential mortgage-backed securities-GSE	132,396		116		1,635		130,877
Commercial mortgage-backed securities-Private	10,065		—		67		9,998
Total held-to-maturity	142,461		116		1,702		140,875
Total investment securities	$	497,385	$	1,398	$	7,868	$	490,915

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 March 31, 2015 and $4.9 million at December 31, 2014. Due to the redemption provisions of FHLB stock, we have estimated that fair value approximated cost and that this investment was not impaired at March 31, 2015. FHLB stock is included in other assets at its original cost basis.

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 March 31, 2015 and December 31, 2014, the Bank owned a total of $9.6 million and $4.7 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 March 31, 2015. FRBR stock is included in other assets at its original cost basis.

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At March 31, 2015, $120.2 million of the investment securities portfolio was pledged to secure public deposits, $16.5 million was pledged to retail repurchase agreements and $170.9 million was pledged to others, leaving $200.8 million available as pledgeable collateral.

The Bank did not sell any investment securities during the three months ended March 31, 2015 or March 31, 2014.

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 March 31, 2015 and December 31, 2014. The change in unrealized losses during the three months ending March 31, 2015 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.



	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
March 31, 2015
Available-for-Sale:
Residential mortgage-backed securities-GSE	$	80,677	$	557	$	145,265	$	3,245	$	225,942	$	3,802
Residential mortgage-backed securities-Private	1,135		4		—		—		1,135		4
Commercial mortgage-backed securities-GSE	22,208		71		—		—		22,208		71
Corporate Notes	30,992		25						30,992		25
Total available-for-sale	135,012		657		145,265		3,245		280,277		3,902
Held-to-Maturity:
Residential mortgage-backed securities-GSE	34,426		80		39,603		292		74,029		372
Total held-to-maturity	34,426		80		39,603		292		74,029		372
Total	$	169,438	$	737	$	184,868	$	3,537	$	354,306	$	4,274

December 31, 2014
Available-for-Sale
Residential mortgage-backed securities-GSE	$	—	$	—	$	245,457	$	5,593	$	245,457	$	5,593
Residential mortgage-backed securities-Private	1,154		4		—		—		1,154		4
Commercial mortgage-backed securities-GSE	—		—		21,958		419		21,958		419
Commercial mortgage-backed securities-Private	—		—		10,215		150		10,215		150
Total available-for-sale	1,154		4		277,630		6,162		278,784		6,166
Held-to-Maturity:
Residential mortgage-backed securities-GSE	—		—		112,878		1,635		112,878		1,635
Commercial mortgage-backed securities-Private	—		—		9,998		67		9,998		67
Total held-to-maturity	—		—		122,876		1,702		122,876		1,702
Total	$	1,154	$	4	$	400,506	$	7,864	$	401,660	$	7,868

At March 31, 2015 and December 31, 2014, there were 15 and 33 available-for-sale securities that were in an unrealized loss position for 12 months or more, respectively.

We analyzed our securities portfolio at March 31, 2015, 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 March 31, 2015, 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

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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.



	Available-for-Sale				Held-to-Maturity
(dollars in thousands)	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
U.S. government sponsored agencies
Due after one year through five years	$	2,022	$	2,036	$	—	$	—
Residential mortgage-backed securities-GSE
Due after five years through 10 years	2,200		2,263		—		—
Due after ten years	286,422		283,456		130,496		130,714
Residential mortgage-backed securities-Private
Due after ten years	15,744		16,430		—		—
Commercial mortgage-backed securities-GSE
Due after five years through 10 years	22,279		22,208		—		—
Commercial mortgage-backed securities-Private
Due after ten years	10,354		10,457		10,063		10,245
Corporate notes
Due after one year through five years	31,017		30,992		—		—
Total	$	370,038	$	367,842	$	140,559	$	140,959

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 recorded 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 Merger ("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 March 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	$	357	$	—	$	—	$	515	$	872	$	107,920	$	108,792
Real estate - construction	—		211		—		1,022		1,233		72,837		74,070
Real estate - mortgage:
1-4 family residential	1,491		26		—		8,856		10,373		649,407		659,780
Commercial	—		—		—		9,410		9,410		352,209		361,619
Consumer	680		116		—		452		1,248		81,140		82,388
Total	2,528		353		—		20,255		23,136		1,263,513		1,286,649
PI loans
Commercial and agricultural	14		—		2,178		—		2,192		4,649		6,841
Real estate - construction	—		—		1,618		—		1,618		7,037		8,655
Real estate - mortgage:
1-4 family residential	481		—		1,966		—		2,447		13,882		16,329
Commercial	404		—		13,055		—		13,459		63,030		76,489
Consumer	2		—		9		—		11		937		948
Total	901		—		18,826		—		19,727		89,535		109,262
Total Loans	$	3,429	$	353	$	18,826	$	20,255	$	42,863	$	1,353,048	$	1,395,911

The following table presents an aging analysis of accruing and nonaccruing loans as of December 31, 2014:



(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	$	—	$	—	$	—	$	608	$	608	$	105,269	$	105,877
Real estate - construction	100		—		—		2,307		2,407		66,723		69,130
Real estate - mortgage:
1-4 family residential	2,719		147		—		8,637		11,503		638,364		649,867
Commercial	105		141		—		13,381		13,627		325,356		338,983
Consumer	744		225		5		355		1,329		69,760		71,089
Total	3,668		513		5		25,288		29,474		1,205,472		1,234,946
PI loans
Commercial and agricultural	—		—		2,232		—		2,232		5,303		7,535
Real estate - construction	—		—		3,737		—		3,737		5,460		9,197
Real estate - mortgage:
1-4 family residential	579		15		2,209		—		2,803		14,934		17,737
Commercial	287		119		12,964		—		13,370		73,975		87,345
Consumer	2		—		10		—		12		1,016		1,028
Total	868		134		21,152		—		22,154		100,688		122,842
Total Loans	$	4,536	$	647	$	21,157	$	25,288	$	51,628	$	1,306,160	$	1,357,788

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 following table, 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 or worse are considered Criticized. Loans categorized as Substandard or Doubtful are considered Classified. Purchased loans acquired in the Merger are recorded at estimated fair value on the date of acquisition without the carryover of related ALL. The table below includes $24.5 million and $27.0 million in Granite Purchased Loans categorized as Substandard or Doubtful at March 31, 2015 and December 31, 2014, respectively.

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



(dollars in thousands)	Pass		Special Mention		Substandard		Doubtful
	(Ratings 1-5)		(Rating 6)		(Rating 7)		(Rating 8)		Total
Commercial and agricultural	$	106,767	$	6,093	$	2,773	$	—	$	115,633
Real estate - construction	75,226		2,205		5,294		—		82,725
Real estate - mortgage:
1-4 family residential	655,673		5,199		15,237		—		676,109
Commercial	385,425		21,357		30,960		363		438,105
Consumer	82,537		10		474		318		83,339
Total	$	1,305,628	$	34,864	$	54,738	$	681	$	1,395,911

The following table presents loans held for investment balances by risk grade as of December 31, 2014:



(dollars in thousands)	Pass		Special Mention		Substandard		Doubtful
	(Ratings 1-5)		(Rating 6)		(Rating 7)		(Rating 8)		Total
Commercial and agricultural	$	104,165	$	6,318	$	2,930	$	—	$	113,413
Real estate - construction	68,995		2,411		6,921		—		78,327
Real estate - mortgage:
1-4 family residential	646,897		5,363		15,342		—		667,602
Commercial	363,267		25,715		36,984		362		426,328
Consumer	71,350		11		376		381		72,118
Total	$	1,254,674	$	39,818	$	62,553	$	743	$	1,357,788

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Loans included in the preceding loan composition table are net of participations sold. Loans are increased by net loan premiums of $3.0 million and $2.8 million at March 31, 2015 and December 31, 2014, respectively.

At March 31, 2015 and December 31, 2014, 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 $246.9 million at March 31, 2015 and $235.0 million at December 31, 2014.

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 $121.4 million and $123.1 million of investment securities, and gross loans of $127.2 million and $124.6 million of investment securities, were pledged to collateralize FHLB advances and letters of credit at March 31, 2015 and December 31, 2014, respectively, of which there was $126.2 million and $130.8 million of credit availability for borrowing, respectively. At March 31, 2015, $5.3 million of loans and $47.8 million of securities were pledged to collateralize potential borrowings from the Federal Reserve Discount Window, of which $51.7 million was available as borrowing capacity. We could also access $246.0 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 $0.8 million and $1.0 million for the three months ended March 31, 2015 and March 31, 2014, respectively. At March 31, 2015 and December 31, 2014, COB had certain impaired loans of $20.3 million and $25.3 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, 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:



	March 31, 2015				December 31, 2014
(dollars in thousands)	Recorded Investment		Associated Reserves		Recorded Investment		Associated Reserves
Impaired loans, not individually reviewed for impairment	$	4,603	$	—	$	4,967	$	—
Impaired loans, individually reviewed, with no impairment	22,134		—		26,631		—
Impaired loans, individually reviewed, with impairment	7,550		364		7,851		418
Total impaired loans, excluding purchased impaired *	$	34,287	$	364	$	39,449	$	418

Purchased impaired loans with subsequent deterioration	$	105,662	3,194		$	118,701	3,237
Purchased impaired loans with no subsequent deterioration	$	3,600	—		$	4,141	—
Total Reserves			$	3,558			$	3,655

Average impaired loans calculated using a simple average	$	36,868			$	43,446



* Included at March 31, 2015 and December 31, 2014 were $14.0 million and $14.1 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)
	March 31, 2015		December 31, 2014
Loans held for investment:
Commercial and agricultural	$	515	$	608
Real estate - construction	1,022		2,307
Real estate - mortgage:
1-4 family residential	8,856		8,637
Commercial	9,410		13,381
Consumer	452		355
Total nonaccrual loans	20,255		25,288
Loans more than 90 days delinquent, still on accrual	—		5
Total nonperforming loans	$	20,255	$	25,293

There were no loans held for sale on nonaccrual status as of March 31, 2015 or December 31, 2014.

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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 March 31, 2015:



			Unpaid
(dollars in thousands)	Recorded		Principal		Related
	Investment		Balance		Allowance
Individually reviewed impaired loans with no related allowance recorded:
Commercial and agricultural	$	444	$	493	$	—
Real estate - construction	1,262		1,582		—
Real estate - mortgage:
1-4 family residential	7,852		9,761		—
Commercial	12,576		18,092		—
Consumer	—		—		—
Total	22,134		29,928		—
Individually reviewed impaired loans with an allowance recorded:
Commercial and agricultural	—		—		—
Real estate - construction	—		—		—
Real estate - mortgage:
1-4 family residential	3,738		4,305		353
Commercial	3,812		3,984		11
Consumer	—		—		—
Total	7,550		8,289		364
Total individually reviewed impaired loans:
Commercial and agricultural	444		493		—
Real estate - construction	1,262		1,582		—
Real estate - mortgage:
1-4 family residential	11,590		14,066		353
Commercial	16,388		22,076		11
Consumer	—		—		—
Total	$	29,684	$	38,217	$	364

PI loans with subsequent credit deterioration:
Commercial and agricultural	$	6,841	$	5,521	$	239
Real estate - construction	8,112		9,234		783
Real estate - mortgage:
1-4 family residential	13,272		14,078		240
Commercial	76,489		78,403		1,744
Consumer	948		621		188
Total	$	105,662	$	107,857	$	3,194

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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, 2014:



			Unpaid
(dollars in thousands)	Recorded		Principal		Related
	Investment		Balance		Allowance
Individually reviewed impaired loans with no related allowance recorded:
Commercial and agricultural	$	—	$	—	$	—
Real estate - construction	2,344		2,898		—
Real estate - mortgage:
1-4 family residential	8,115		10,238		—
Commercial	16,172		22,060		—
Consumer	—		—		—
Total	26,631		35,196		—
Individually reviewed impaired loans with an allowance recorded:
Commercial and agricultural	498		498		58
Real estate - construction	—		—		—
Real estate - mortgage:
1-4 family residential	3,294		3,676		331
Commercial	4,059		4,228		29
Consumer	—		—		—
Total	7,851		8,402		418
Total individually reviewed impaired loans:
Commercial and agricultural	498		498		58
Real estate - construction	2,344		2,898		—
Real estate - mortgage:
1-4 family residential	11,409		13,914		331
Commercial	20,231		26,288		29
Consumer	—		—		—
Total	$	34,482	$	43,598	$	418
PI loans with subsequent credit deterioration:
Commercial and agricultural	$	7,535	$	6,149	$	257
Real estate - construction	8,619		9,855		507
Real estate - mortgage:
1-4 family residential	14,174		15,278		199
Commercial	87,345		90,830		2,085
Consumer	1,028		667		189
Total	$	118,701	$	122,779	$	3,237

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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 tables as of March 31, 2015 and March 31, 2014:



	For Three Months Ended				For Three Months Ended
	March 31, 2015				March 31, 2014
	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	$	478	$	—	$	242	$	—
Real estate - construction	1,276		11		2,688		10
Real estate - mortgage:
1-4 family residential	7,925		31		9,050		28
Commercial	13,081		73		21,503		89
Consumer	—		—		—		—
Total	22,760		115		33,483		127
Individually reviewed impaired loans with an allowance recorded:
Commercial and agricultural	—		—		—		—
Real estate - construction	—		—		650		2
Real estate - mortgage:
1-4 family residential	3,744		19		3,829		19
Commercial	3,830		52		3,552		30
Consumer	—		—		—		—
Total	7,574		71		8,031		51
Total individually reviewed impaired loans:
Commercial and agricultural	478		—		242		—
Real estate - construction	1,276		11		3,338		12
Real estate - mortgage:
1-4 family residential	11,669		50		12,879		47
Commercial	16,911		125		25,055		119
Consumer	—		—		—		—
Total	$	30,334	$	186	$	41,514	$	178

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 March 31, 2015, there was $18.2 million in restructured loans, of which $14.0 million were accruing. At December 31, 2014, there was $19.4 million in restructured loans, of which $14.1 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 March 31, 2015, and December 31, 2014, our financial statements reflected a Granite PI loan ALL of $3.2 million and $3.2 million, respectively, and an ALL for Granite PC loans of $0.4 million and $0.3 million, respectively.

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



	At March 31, 2015
(dollars in thousands)	Purchased Impaired		Purchased Contractual		Total Purchased Loans		Unpaid Principal Balance
Commercial and agricultural	$	6,841	$	1,187	$	8,028	$	6,727
Real estate - construction	8,655		—		8,655		9,815
Real estate - mortgage:
1-4 family residential	16,329		21,250		37,579		39,223
Commercial	76,489		—		76,489		78,403
Consumer	948		—		948		629
Total	$	109,262	$	22,437	$	131,699	$	134,797



	At December 31, 2014
(dollars in thousands)	Purchased Impaired		Purchased Contractual		Total Purchased Loans		Unpaid Principal Balance
Commercial and agricultural	$	7,535	$	4,288	$	11,823	$	10,508
Real estate - construction	9,197		—		9,197		10,463
Real estate - mortgage:
1-4 family residential	17,737		21,660		39,397		41,295
Commercial	87,345		—		87,345		90,830
Consumer	1,028		—		1,028		678
Total	$	122,842	$	25,948	$	148,790	$	153,774

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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. These tables do not include PC loans, including Granite PC loans or purchased residential mortgage loan pools.



	For Three Months Ended						For Three Months Ended
	March 31, 2015						March 31, 2014
	Purchased Impaired						Purchased Impaired
(dollars in thousands)	Carrying Amount			Future Accretion			Carrying Amount			Future Accretion
Balance, beginning of period	$	122,842		$	24,898		$	161,651		$	29,987
Accretion	2,048			(2,048		)	2,665			(2,665		)
Increase (Decrease) in future accretion	—			(1,925		)	—			1,005
Reclassification of loans and adjustments	—			—			(4,180		)	—
Payments received	(14,854		)	—			(11,081		)	—
Foreclosed and transferred to OREO	(774		)	—			(22		)	—
Subtotal before allowance	109,262			20,925			149,033			28,327
Allowance for loan losses	(3,194		)	—			(5,237		)	—
Net carrying amount, end of period	$	106,068		$	20,925		$	143,796		$	28,327

Allowance for Loan Losses

COB'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. This represents a change in methodology which began in the third quarter of 2013. Previously, we used a look back period beginning in the third quarter of 2006 and a weighted average of losses. The impact of this change was immaterial to the allowance calculation in the period we adopted the methodology change.

In addition to our ability to use our own historical loss data and migration between risk grades, we have 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 and economic and regulatory changes impacting the loans held for investment.

We lend primarily in North Carolina. As of March 31, 2015, a large majority of the principal amount of the loans held for investment 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 March 31, 2015, we charged off $1.0 million in loans and realized $0.8 million in recoveries, for $0.2 million of net charge-offs.

The ALL, as a percentage of loans held for investment, was 1.36% at March 31, 2015, compared to 2.13% at March 31, 2014. At December 31, 2014, the ALL, as a percentage of loans held for investment, was 1.50%.

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



	For Three Months Ended
(dollars in thousands)	March 31, 2015			March 31, 2014
Balance, beginning of period	$	20,345		$	26,785
Recovery of losses charged to continuing operations	(1,137		)	(684		)
Net charge-offs:
Charge-offs	(994		)	(1,977		)
Recoveries	794			1,915
Net charge-offs	(200		)	(62		)
Balance, end of period	$	19,008		$	26,039
Annualized net charge-offs during the period to average loans held for investment	0.06		%	0.02		%
Annualized net charge-offs during the period to ALL	4.27		%	0.97		%
Allowance for loan losses to loans held for investment	1.36		%	2.13		%

The following table presents ALL activity by portfolio segment for the three months ended March 31, 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	(49		)	(81		)	(125		)	(7		)	(732		)	(994		)
Recoveries	221			196			138			58			181			794
Provision (recovery of provision)	(689		)	(158		)	(237		)	(1,078		)	1,025			(1,137		)
Ending balance March 31, 2015	$	3,398		$	3,120		$	5,623		$	3,152		$	3,715		$	19,008

The following table presents ALL activity by portfolio segment for the three months ended March 31, 2014:



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

Beginning balance January 1, 2014	$	2,931		$	5,233		$	8,869		$	7,195		$	2,557		$	26,785
Charge-offs	(389		)	(533		)	(484		)	(66		)	(505		)	(1,977		)
Recoveries	392			964			235			66			258			1,915
Provision (recovery of provision)	507			(356		)	(697		)	(229		)	91			(684		)
Ending balance March 31, 2014	$	3,441		$	5,308		$	7,923		$	6,966		$	2,401		$	26,039

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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 March 31, 2015:



					Real Estate - Mortgage
(dollars in thousands)	Commercial and Agricultural		Real Estate - Construction		1-4 Family Residential		Commercial		Consumer		Total
ALL:
Individually reviewed for impairment	$	—	$	—	$	353	$	11	$	—	$	364
Collectively reviewed for impairment	3,159		2,337		5,030		1,397		3,527		15,450
PI loans reviewed for credit impairment	239		783		240		1,744		188		3,194
PI loans with no credit deterioration	—		—		—		—		—		—
Total ALL	$	3,398	$	3,120	$	5,623	$	3,152	$	3,715	$	19,008
Loans held for investment
Individually reviewed for impairment	$	444	$	1,262	$	11,596	$	16,387	$	—	$	29,689
Collectively reviewed for impairment	108,348		72,808		648,184		345,229		82,391		1,256,960
PI loans with subsequent credit deterioration	6,841		8,112		13,272		76,489		948		105,662
PI loans with no credit deterioration	—		543		3,057		—		—		3,600
Total loans	$	115,633	$	82,725	$	676,109	$	438,105	$	83,339	$	1,395,911



					Real Estate - Mortgage
(dollars in thousands)	Commercial and Agricultural		Real Estate - Construction		1-4 Family Residential		Commercial		Consumer		Total
ALL:
Individually reviewed for impairment	$	58	$	—	$	331	$	29	$	—	$	418
Collectively reviewed for impairment	3,600		2,656		5,317		2,065		3,052		16,690
PI loans reviewed for credit impairment	257		507		199		2,085		189		3,237
PI loans with no credit deterioration	—		—		—		—		—		—
Total ALL	$	3,915	$	3,163	$	5,847	$	4,179	$	3,241	$	20,345
Loans held for investment
Individually reviewed for impairment	$	498	$	2,344	$	11,409	$	20,231	$	—	$	34,482
Collectively reviewed for impairment	105,380		66,786		638,456		318,752		71,090		1,200,464
PI loans with subsequent credit deterioration	7,535		8,619		14,174		87,345		1,028		118,701
PI loans with no credit deterioration	—		578		3,563		—		—		4,141
Total loans	$	113,413	$	78,327	$	667,602	$	426,328	$	72,118	$	1,357,788

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Troubled Debt Restructuring

The following tables present a breakdown of troubled debt restructurings that were restructured during the three months ended March 31, 2015 and March 31, 2014, respectively, segregated by portfolio segment:



	For Three Months Ended March 31, 2015					For Three Months Ended March 31, 2014
		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	—	$	—	$	—	1	$	11	$	11
Real estate - construction	—	—		—		—	—		—
Real estate - mortgage:
1-4 family residential	—	—		—		5	735		732
Commercial	—	—		—		—	—		—
Consumer	—	—		—		—	—		—
Total	—	$	—	$	—	6	$	746	$	743

During the three months ended March 31, 2015, we did not modify any loans that were considered to be troubled debt restructurings. During the three months ended March 31, 2014, we modified six loans that were considered to be troubled debt restructurings. We extended the terms for two of these loans and modified the interest rate for the remaining four loans.

There were no loans restructured in the twelve months prior to March 31, 2015 that went into default during the three months ended March 31, 2015. There were also no loans restructured in the twelve months prior to March 31, 2014 that went into default during the three months ended March 31, 2014.

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 (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 $0.9 million as of March 31, 2015 and $0.8 million at December 31, 2014.

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 other real estate below carrying value are recognized by a charge to income.

Total OREO and property acquired in settlement of loans increased $0.6 million during the first three months of 2015 from $20.4 million at December 31, 2014, to $21.0 million at March 31, 2015. At March 31, 2015 and December 31, 2014, OREO and property acquired in settlement of loans represented 51% and 45% of total nonperforming assets, respectively.

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



(dollars in thousands)	March 31, 2015		December 31, 2014
Real estate acquired in settlement of loans	$	20,833	$	20,122
Property acquired in settlement of loans	207		289
Total property acquired in settlement of loans	$	21,040	$	20,411

The following tables summarize the changes in real estate acquired in settlement of loans at the periods indicated:



	For Three Months Ended
(dollars in thousands)	March 31, 2015			March 31, 2014
Real estate acquired in settlement of loans, beginning of period	$	20,122		$	28,353
Plus: New real estate acquired in settlement of loans	2,495			268
Less: Sales of real estate acquired in settlement of loans	(1,490		)	(3,774		)
Less: Write-downs and net gain (loss) on sales charged to expense	(294		)	(274		)
Real estate acquired in settlement of loans, end of period	$	20,833		$	24,573

At March 31, 2015, 16 assets with a net carrying amount of $3.4 million were under contract for sale. Estimated losses on these sales have been recognized in the Consolidated Statements of Operations in the first three months of 2015.

At March 31, 2015, the Company’s recorded investment in mortgage loans collateralized by residential real estate properties that are in the process of foreclosure was $1.1 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.



(dollars in thousands, except share and per share data)	For Three Months Ended
	March 31, 2015		March 31, 2014
Net income	$	2,519	$	1,277
Weighted average number of shares outstanding - basic	24,183,396		21,935,566
Weighted average number of shares outstanding - diluted	24,195,108		21,935,566
Net income per share - basic and diluted	$	0.10	$	0.06

During the three months ended March 31, 2015 and March 31, 2014, 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 is not included in the diluted share calculation.

For the three months ended March 31, 2015, there were 22,127 antidilutive shares. For the three months ended March 31, 2014, there were 22,713 antidilutive shares. Of the antidilutive shares, the number of shares relating to stock options were 55 for the three months ended March 31, 2015 and 641 for the three months ended March 31, 2014, while the number relating to the warrant was 22,072 for all periods presented.

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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 March 31, 2015. 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 currently 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
	March 31, 2015			March 31, 2014
Derivatives designated as hedging instruments:
Interest rate swap contracts - FHLB advances	$	(321	)	$	—
Derivatives not designated as hedging instruments:
Mortgage loan rate lock commitments	(7		)	2
Mortgage loan forward sales	79			1
Total	$	72		$	3

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, performing 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 non-recurring basis, such as loans held for investment, impaired loans and certain other assets and liabilities. These non-recurring 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.

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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 contractual agreements with independent third party buyers. As such, we classify loans held for sale subjected to non-recurring 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 March 31, 2015 and December 31, 2014, 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 non-recurring Level 3.

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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 non-recurring 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 March 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	$	2,036		$	—	$	2,036		$	—
Residential mortgage-backed securities-GSE	285,719			—		285,719			—
Residential mortgage-backed securities-Private	16,430			—		16,430			—
Commercial mortgage-backed securities-GSE	22,208					22,208
Commercial mortgage-backed securities-Private	10,457			—		10,457			—
Corporate notes	30,992			—		30,992			—
Total available-for-sale debt securities	367,842			—		367,842			—
Mortgage servicing rights	1,896			—		—			1,896
Interest rate swaps	(1,045		)	—		(1,045		)	—
Total assets at fair value	$	368,693		$	—	$	366,797		$	1,896

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Assets and liabilities carried at fair value on a recurring basis at December 31, 2014 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	$	2,044		$	—	$	2,044		$	—
Residential mortgage-backed securities-GSE	290,145			—		290,145			—
Residential mortgage-backed securities-Private	17,271			—		17,271			—
Commercial mortgage-backed securities-GSE	21,958			—		21,958			—
Commercial mortgage-backed securities-Private	10,215			—		10,215			—
Corporate notes	8,407			—		8,407			—
Total available-for-sale debt securities	350,040			—		350,040			—
Mortgage servicing rights	1,726			—		—			1,726
Interest rate swaps	(525		)	—		(525		)	—
Total assets at fair value	$	351,241		$	—	$	349,515		$	1,726

The following tables present 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 March 31,
	2015			2014
Balance, beginning of period	$	1,726		$	1,552
Total gains or losses (realized/unrealized):
Included in earnings, gross	300			144
Less amortization	(130		)	(109		)
Balance, end of period	$	1,896		$	1,587

Assets and Liabilities Recorded at Fair Value on a Non-recurring Basis

We may be required, from time to time, to measure certain assets at fair value on a non-recurring 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 non-recurring basis are included in the following table at March 31, 2015:



(dollars in thousands)	Total		Level 1		Level 2		Level 3
Impaired loans, net	$	7,186	$	—	$	—	$	7,186
Other real estate owned	15,729		—		—		15,729
Total assets at fair value from continuing operations	$	22,915	$	—	$	—	$	22,915

Assets measured at fair value on a non-recurring basis are included in the following table at December 31, 2014:



(dollars in thousands)	Total		Level 1		Level 2		Level 3
Impaired loans, net	$	7,433	$	—	$	—	$	7,433
Other real estate owned	15,579		—		—		15,579
Total assets at fair value from continuing operations	$	23,012	$	—	$	—	$	23,012

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Quantitative Information about Level 3 Fair Value Measurements



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

Impaired loans, net	$	7,186	Discounted appraisals	Collateral discounts	1.00% - 30.00%
Other real estate owned	15,729		Discounted appraisals	Collateral discounts	1.00% - 30.00%
Mortgage servicing rights	1,896		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, 2014		Valuation Techniques	Unobservable Input	Range

Impaired loans, net	$	7,433	Discounted appraisals	Collateral discounts	1.00%-30.00%
Other real estate owned	15,579		Discounted appraisals	Collateral discounts	1.00%-30.00%
Mortgage servicing rights	1,726		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.

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

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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.

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



	At March 31, 2015
(dollars in thousands)	Carrying Value			Estimated Fair Value			Level 1		Level 2			Level 3
Financial Assets:
Cash and cash equivalents	$	47,933		$	47,933		$	47,933	$	—		$	—
Investment securities: Available-for-sale	367,842			367,842			—		367,842			—
Investment securities: Held-to-maturity	140,559			140,959			—		140,959			—
Loans held for sale	7,571			7,571			—		7,571			—
Loans held for investment, net	1,376,903			1,374,489			—		—			1,374,489
Accrued interest receivable	5,306			5,306			—		1,480			3,826
Interest rate swaps	(1,044		)	(1,044		)	—		(1,044		)	—
Interest rate locks and forward loan sale commitments	55			55			—		55			—
Financial Liabilities:
Deposits	1,807,472			1,807,162			—		1,807,162			—
Retail repurchase agreements	7,837			7,837			—		7,837			—
Federal Home Loan Bank advances	68,221			71,119			—		71,119			—
Long-term notes payable	5,358			5,358			—		—			5,358
Junior subordinated debentures	56,702			32,030			—		—			32,030
Accrued interest payable	359			359			—		342			17



	At December 31, 2014
(dollars in thousands)	Carrying Value			Estimated Fair Value			Level 1		Level 2			Level 3
Financial Assets:
Cash and cash equivalents	$	95,882		$	95,882		$	95,882	$	—		$	—
Investment securities: Available-for-sale	350,040			350,040			—		350,040			—
Investment securities: Held-to-maturity	142,461			140,875					140,875			—
Loans held for sale	2,796			2,796			—		2,796			—
Loans held for investment, net	1,337,443			1,328,895			—		—			1,328,895
Accrued interest receivable	4,885			4,885			—		1,262			3,623
Interest rate locks and forward loan sale commitments	(525		)	(525		)	—		(525		)	—
Financial Liabilities:
Deposits	1,794,420			1,793,205			—		1,793,205			—
Retail repurchase agreements	9,076			9,076			—		9,076			—
Federal Home Loan Bank advances	68,234			71,462			—		71,462			—
Long-term notes payable	5,338			5,338			—		—			5,338
Junior subordinated debentures	56,702			32,341			—		—			32,341
Accrued interest payable	3,624			3,624			—		321			3,303

There were no transfers between valuation levels for any assets during the three months ended March 31, 2015. 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, 2015	$	(3,017	)	$	(324	)	$	(4,134	)	$	(7,475	)
Other comprehensive income before reclassifications	1,660			(323		)	—			1,337
Amounts reclassified from accumulated other comprehensive income	—			2			—			2
Net current period other comprehensive income	1,660			(321		)	—			1,339
Ending balance March 31, 2015	$	(1,357	)	$	(645	)	$	(4,134	)	$	(6,136	)



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

Beginning balance January 1, 2014	$	(14,476	)	$	—	$	(3,129	)	$	(17,605	)
Other comprehensive loss before reclassifications	3,267			25		—			3,292
Amounts reclassified from accumulated other comprehensive income	—			—		—			—
Net current period other comprehensive loss	3,267			25		—			3,292
Ending balance March 31, 2014	$	(11,209	)	$	25	$	(3,129	)	$	(14,313	)

The following table presents the reclassifications out of our accumulated other comprehensive income (loss) for the three months ended March 31, 2015 and 2014:



(Dollars in thousands)	Amount Reclassified from AOCI
	For Three Months Ended March 31, 2015			For Three Months Ended March 31, 2014		Line Item in the Consolidated Statement of Operations
Available-for-sale securities:
Net realized gains on sale of securities	$	—		$	—	Securities gains, net
Income tax (benefit) expense	—			—		Income tax expense
Total, net of tax	—			—

Interest rate swaps:
Swap ineffectiveness expense	3			—		Other expense
Income tax (benefit) expense	(1		)	—		Income tax expense
Total, net of tax	2			—
Total reclassifications for the period	$	2		$	—

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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 and through acquisition and successful integration of any acquired entities 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;


•	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 recruit and retain key lenders and other employees;


•	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;


•	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


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

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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
	March 31, 2015			March 31, 2014
Income Statement Data
Net interest income	$	16,774		$	15,479
Recovery of loan losses	(1,137		)	(684		)
Noninterest income	4,034			3,943
Noninterest expense	18,008			18,806
Income before income taxes	3,937			1,300
Net income	2,519			1,277
Period End Balances
Assets	$	2,231,934		$	2,008,481
Loans held for sale	7,571			1,961
Loans held for investment (1)	1,395,911			1,219,785
Allowance for loan losses	19,008			26,039
Goodwill and other intangible assets	9,705			10,802
Deposits	1,807,472			1,767,930
Borrowings	138,118			140,406
Shareholders' equity	270,952			85,331
Average Balances
Assets	$	2,202,247		$	1,979,036
Loans held for sale	2,780			1,298
Loans held for investment (1)	1,376,053			1,208,416
Allowance for loan losses	20,239			26,942
Goodwill and other intangible assets	9,697			10,953
Deposits	1,781,534			1,739,354
Borrowings	138,756			142,244
Shareholders' equity	268,799			83,776
Per Common Share Data
Net income - basic and diluted	$	0.10		$	0.06
Book value (shareholders' equity)	11.20			3.88
Tangible book value (shareholders' equity) (2)	10.80			3.39
Performance Ratios
Return on average assets	0.46		%	0.26		%
Pre-tax return on average assets	0.73			0.27
Return on average tangible assets (2)	0.47			0.26
Return on average equity	3.80			6.18
Return on average tangible equity (2)	3.94			7.11
Net interest margin (tax equivalent)	3.54			3.43
Pre-credit and non-recurring noninterest expense as a percentage of average assets (2)	3.15			3.59
Asset Quality Ratios
Allowance for loan losses to period end loans held for investment (1)	1.36		%	2.13		%

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Net annualized charge-offs (recoveries) to average loans held for investment (1)	0.06	%	0.02	%
Classified assets to Tier 1 capital and allowance for loan losses	38.8		78.0
Nonperforming assets to period end total assets (3)	1.9		2.9
Capital and Liquidity Ratios
Average equity to average assets	12.21	%	4.23	%
Leverage capital	8.47		6.20
Common equity tier 1 risk-based capital	11.86		N/A
Tier 1 risk-based capital	11.86		9.67
Total risk-based capital	14.40		12.80
Period end loans to period end deposits	77		69

(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., 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.

In July 2013, we changed our name from FNB United Corp. to CommunityOne Bancorp, and our stock symbol from FNBN to COB.

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 write-downs in the value of, gains and losses on disposition of and holding costs associated with our OREO, and other

operating costs such as: salaries and employee benefits, occupancy, data processing expenses, merger related expenses and tax

expense.

Progress on 2015 goals

In the first quarter we made excellent progress in achieving the five goals we established for 2015, which are to (1) grow loans; (2) grow core deposits; (3) enhance fee income; (4) maintain expense discipline; and (5) explore merger and acquisition (M&A) opportunities.

Loan growth continued to be strong in the first quarter, growing at an 11% annualized rate, on track with our 10-12% loan growth goal for the year. This was the fourth consecutive quarter of double digit annualized loan growth. Organic loans, which exclude purchased residential loan pools, grew at a 16% annualized rate in the first quarter. We experienced loan growth in all segments of our business during the quarter, especially in our commercial banking segment. Our loan-to-deposit ratio improved to 77% at March 31, 2015, on track with our 80-85% goal by year end 2015. We made some additional investments in origination personnel in the first quarter, hiring three new residential mortgage loan officers in our non-branch retail channel in Raleigh and Charlotte, and we expect these new hires will enhance our mortgage loan income in 2015.

Our deposits grew at a 3% annualized rate in the first quarter. Low cost core deposits, consisting of non-time deposits, grew at an annualized rate of 4%. Targeted deposit promotional activity has increased new customers and balances and we have been able to retain the majority of these customers, helping to drive the increase in deposits. We also continue to see our treasury management product capabilities generating additional noninterest-bearing deposit balances and customers in our markets. During the quarter, we announced the purchase of the deposits of the Lenoir and Granite Falls branches of CertusBank, N.A. When this transaction closes in the second quarter of 2015, we expect it to add approximately $65 million of additional deposits.

Our third goal is to enhance fee income, with targeted growth of 10-12%. In the first quarter fee income grew at a 2% rate over the first quarter 2014. Mortgage fee income was up 167% from the first quarter of 2014 based on a 134% increase in origination volume from refinancing activity and non-branch channel volume. Our trust and investment services income were negatively impacted by a broker dealer platform conversion that we expect will reduce costs and enhance revenues going forward. Service charges were weaker in the first quarter based on lower NSF and overdraft activity levels. We expect that new business lines, such as SBA lending, will contribute to fee income growth in the coming quarters, in addition to the investment made in mortgage personnel.

We have continued to execute well in our expense management efforts. First quarter noninterest expenses (NIE) declined $0.8 million, or 4% from the first quarter of 2014. Our PCNR NIE to average asset ratio was 3.15%, on track to achieve our goal for year end of 3.10%. We completed the announced closure of six branches in March 2015, improving our branch efficiency and increasing average deposits per branch to $41 million, up 23% since March 31, 2014.

Our final goal is to explore M&A opportunities that meet strategic and financial objectives. We announced our first purchase in March with the branch acquisition from CertusBank, N.A., and we expect to continue to evaluate opportunities over the remainder of the year.

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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 - First Quarter for the three month periods ended March 31, 2015 and 2014.

Net interest income on a taxable equivalent basis was $16.8 million for the three month period ended March 31, 2015, an increase of 8%, or $1.3 million, from $15.5 million for the same period in 2014. The increase in interest income is primarily a result of an increase in average loan balances of $169.2 million, or 14%, and an increase in interest recoveries of $0.3 million, partially offset by a decrease in average investment securities balances of $52.8 million.

Net interest margin (taxable equivalent) increased 11 basis points from 3.43% in the first quarter of 2014 to 3.54% in the first quarter of 2015. The yield on average earning assets increased by 9 basis points in the first quarter of 2015 to 4.07% from 3.98% in the first quarter of 2014, as lower yielding cash and securities were replaced by higher yielding loans. The cost of interest-bearing liabilities was unchanged at 0.63% in the first quarter of 2014 and 2015. The cost of interest-bearing deposits was also unchanged at 0.48% for the first quarter of 2014 and 2015.

The following table summarizes the average balance sheets and net interest income/margin analysis for the three months ended March 31, 2015 and 2014. 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 - First Quarter



	Three Months Ended March 31,
	2015						2014
					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)	$	1,378,833	$	15,891	4.67	%	$	1,209,714	$	14,106	4.73	%
Taxable investment securities	507,765		3,224		2.58		560,556		3,695		2.67
Other earning assets	35,899		171		1.93		60,552		151		1.01
Total earning assets	1,922,497		19,286		4.07		1,830,822		17,952		3.98

Noninterest-earning assets:
Cash and due from banks	26,463						27,314
Goodwill and other intangible assets	9,697						10,953
Other assets, net	243,590						109,947
Total assets	$	2,202,247					$	1,979,036

Interest-bearing liabilities:
Interest-bearing demand deposits	$	350,165	$	255	0.30	%	$	337,364	$	250	0.30	%
Savings deposits	88,012		22		0.10		82,129		21		0.10
Money market deposits	433,370		313		0.29		448,686		265		0.24
Time deposits	587,434		1,141		0.79		574,848		1,166		0.82
Total interest-bearing deposits	1,458,981		1,731		0.48		1,443,027		1,702		0.48
Retail repurchase agreements	8,480		5		0.24		6,995		3		0.17
Federal Home Loan Bank advances	68,229		469		2.79		73,278		469		2.60
Other borrowed funds	62,047		289		1.89		61,971		274		1.79
Total interest-bearing liabilities	1,597,737		2,494		0.63		1,585,271		2,448		0.63

Noninterest-bearing liabilities and shareholders' equity:
Noninterest-bearing demand deposits	322,553						296,327
Other liabilities	13,158						13,662
Shareholders' equity	268,799						83,776
Total liabilities and shareholders' equity	$	2,202,247					$	1,979,036

Net interest income and net yield on earning assets (4)			$	16,792	3.54	%			$	15,504	3.43	%

Interest rate spread (5)					3.44	%					3.35	%

(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 March 31, 2015, the recovery of loan losses was $1.1 million, compared to $0.7 million recovery in the same period of 2014, as a result of the impact of declining net loss rates. During the three month periods ended March 31, 2015 and 2014, net charge-offs totaled $0.2 million and $0.1 million, respectively, or 0.06% and 0.02% of average loans on an annualized basis, respectively.

Noninterest Income

Noninterest income includes mortgage banking income, fees and service charges on deposit accounts, 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 March 31, 2015, noninterest income was $4.0 million compared to $3.9 million for the same period in 2014, an increase of $0.1 million, or 2%, primarily the result of a $0.3 million increase in mortgage loan sales income, partially offset by a $0.1 million decrease in service charge income.

Mortgage loan income was very strong in the first quarter, up 167% over the first quarter of 2014. Mortgage loan income was $465 thousand in the first quarter, driven by 134% increase in mortgage loan originations from the first quarter of 2014. Production from our retail non-branch channel was $14.0 million in the first quarter. During the quarter, we originated $58.4 million of mortgage loans, including $23.7 million of loans for sale to investors, an increase of 72% from the first quarter of last year.

Trust and investment services income in the first quarter fell $36 thousand from the comparable quarter last year, principally as a result of reduced sales activity in conjunction with the conversion of existing accounts to a new broker dealer platform. We expect this new broker dealer platform will result in enhanced revenue sharing and fee income now that customer conversion activities are complete. First quarter service charges were $0.2 million lower than both the first quarter of 2014 on weaker overdraft and NSF activity in the deposit portfolio, and cardholder and merchant services income was flat to the first quarter of last year.

PCNR noninterest income, which excludes securities gains and losses, was the same as total noninterest income in both periods, as there were no securities sales during either period. See "Non-GAAP Measures" for further discussion.



	Three Months Ended
(dollars in thousands)	March 31, 2015		March 31, 2014
Noninterest Income
Service charges on deposit accounts	$	1,434	$	1,564
Mortgage loan income	465		174
Cardholder and merchant services income	1,125		1,113
Trust and investment services	322		358
Bank-owned life insurance	250		252
Other service charges, commissions and fees	383		352
Securities gains, net	—		—
Other income	55		130
Total noninterest income	4,034		3,943
Less:
Securities gains, net	—		—
PCNR noninterest income (1)	$	4,034	$	3,943

(1) See "Non-GAAP Measures"

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Noninterest Expense

Noninterest expense components are included in the next table and include salary and employee benefits, occupancy and equipment, and other expenses associated with our operations, in addition to credit related expenses related to OREO and loan collections.

Noninterest expenses were $18.0 million in the first quarter of 2015 compared to $18.8 million in the same period of 2014, a decrease of $0.8 million, or 4%. The decrease in noninterest expense was primarily attributable to a $0.4 million decrease in loan collection expense, as a result of our substantial reduction in nonperforming loans and OREO assets from the prior year and stabilizing real estate prices during 2014. FDIC insurance premiums decreased by $0.2 million as a result of our improved credit and financial profile.

Excluding the items that we identify as credit-related and non-recurring, other real estate expenses, loan collection expenses, branch closure and restructuring expenses, and mortgage and litigation accruals, the PCNR NIE, was $17.3 million in the first quarter of 2015. See "Non-GAAP Measures" for further discussion. This PCNR NIE was $0.4 million lower than PCNR NIE in the same quarter in 2014, primarily as a result of lower FDIC insurance premiums described above and other small items.

Full-time equivalent employees averaged 571 employees for the first quarter of 2015 versus 576 employees for the first quarter of 2014, a reduction of 1%. Ending FTEs at March 31, 2015 were 554 as a result of the six branch closings in late March, the impact of which will not be reflected in the expense run rate until the second quarter of 2015.



	Three Months Ended
(dollars in thousands)	March 31, 2015		March 31, 2014
Noninterest Expense
Personnel expense	$	10,594	$	10,393
Net occupancy expense	1,469		1,553
Furniture, equipment and data processing expense	1,989		2,003
Professional fees	539		633
Stationery, printing and supplies	176		162
Advertising and marketing	186		153
Other real estate owned expense	360		261
Credit/debit card expense	543		595
FDIC insurance	453		639
Loan collection expense	300		657
Core deposit intangible amortization	352		352
Other expense	1,047		1,405
Total noninterest expense	18,008		18,806
Less:
Other real estate owned expense	360		261
Loan collection expense	300		657
Mortgage and litigation accrual	—		(75		)
Branch closure and restructuring expense	—		183
PCNR noninterest expense (1)	$	17,348	$	17,780

(1) See "Non-GAAP Measures"

Provision for Income Taxes

Income tax expense totaled $1.4 million for the first quarter of 2015 and $23 thousand for the first quarter of 2014. Our provision for income taxes, as a percentage of income (loss) before income taxes, was 36.0% and 1.8% for the three months ended March 31, 2015 and March 31, 2014, respectively. Income tax expense for the first three months of 2015 is primarily the result of taxes on earnings at a combined federal and state rate of approximately 38%. At December 31, 2014 management 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 the Bank’s North Carolina net economic loss carryforward.

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Income tax expense in the first three months of 2014 is primarily the result of the change in the market value of available-for-sale securities relating to our tax strategy for securities with losses on our net deferred tax assets, and a reduction in the corresponding valuation allowance that was recorded as income tax benefit.

Balance Sheet Review

Total assets at March 31, 2015 were $2.23 billion, an increase of $16.4 million, or 1%, compared to total assets of $2.22 billion at December 31, 2014.

Cash and interest-bearing balances were $47.9 million at March 31, 2015, a decrease of $48.0 million, or 50%, compared to $95.9 million at December 31, 2014, primarily as a result of increases in the loan and investment securities portfolios.

Total investment portfolio securities increased $15.9 million during the first three months of 2015, from $492.5 million at December 31, 2014 to $508.4 million at March 31, 2015, an increase of 3%. The portfolio is comprised of U.S. federal agency securities and federal agency MBSs (GSE), private residential MBSs, commercial MBSs (GSE), private commercial MBSs, and corporate debt securities. At March 31, 2015 there were $367.8 million of investment securities designated available-for-sale and $140.6 million of securities designated held-to-maturity.

Loans held for investment increased $38.1 million, an increase of 3%, or 11% annualized during the first three months of 2015, from $1,357.8 million at December 31, 2014 to $1,395.9 million at March 31, 2015. The increase was primarily the result of loan growth in our metro markets of Charlotte, Raleigh and Greensboro. Loans held for investment grew in all lines of business during the first three months of the year. Organic loan growth, which excludes purchased residential loan pools, totaled $45.9 million in the first quarter for a 16% annualized growth rate. The pass rated loan portfolio grew $51.0 million year to date for a 16% annualized growth rate.

At March 31, 2015, 16 assets with a net carrying amount of $3.4 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 three months of 2015. Actual gains, if any, will be recorded at the time of sale.

Total deposits were $1.81 billion at March 31, 2015, an increase of $13.1 million, or 1% from $1.79 billion at December 31, 2014. Noninterest-bearing deposits increased $13.6 million, or 4%, from $323.8 million at December 31, 2014 to $337.4 million at March 31, 2015, an annualized growth rate of 17%. The total cost of interest-bearing deposits was unchanged in the first three months of 2015 from the first three months of 2014 at 0.48%. The cost of all deposits, including noninterest-bearing deposits, fell to 0.39% for the first three months of 2015, a decline of 1 basis point from 0.40% for the first three months of 2014. Low cost core deposits, which excludes all time deposits, grew $12.0 million year to date.

Shareholders' equity (book value) at March 31, 2015 was $271.0 million as compared to $266.9 million at December 31, 2014. The book value per share was $11.20 at March 31, 2015, as compared to a book value per share of $11.04 for the year ended December 31, 2014. The change in shareholders' equity reflects net income to common shareholders for the three months ended March 31, 2015 of $2.5 million as well as $1.3 million other comprehensive income, net of tax, including unrealized gain on available-for-sale securities described below. We did not declare common dividends during the three months ended March 31, 2015, 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 March 31, 2015, there were no securities considered to have OTTI.

During the first three months of 2015, changes in the overall level of interest rates resulted in a gross unrealized gain of $2.7 million in our available-for-sale portfolio. The net unrealized gain, after a $1.0 million tax effect, was $1.7 million for the first three months of 2015 and was recorded in Other Comprehensive Income. At March 31, 2015, there was a gross unrealized loss of $2.2 million on our available for sale portfolio. We do not expect to sell these securities and realize these losses.

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.

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Acquired Loans

Loans acquired in the Merger ("Granite Purchased Loans") include purchased impaired loans ("PI loans") and purchased contractual loans ("PC loans"). At March 31, 2015, there were $131.7 million of Granite Purchased Loans, of which $22.4 million were PC loans, and $105.7 million were PI loans with subsequent credit deterioration.

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. 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.

Quarterly, we estimate the expected cash flows for each pool of the PI loans and evaluate whether the expected cash flows for each pool have changed from prior estimates. Decreases to the expected cash flows will generally result in a provision for loan losses. Subsequent increases in cash flows result in a reversal of the provision for loan losses to the extent of prior charges, or reclassification from 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 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 March 31, 2015, an ALL of $3.2 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 $520.8 million, or approximately 37%, of our total loans held for investment portfolio at March 31, 2015, unchanged from December 31, 2014. 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 $25.3 million or 1.9% of loans held for investment at December 31, 2014, to $20.3 million, or 1.5% of loans held for investment at March 31, 2015. OREO and property acquired in settlement of loans were $21.0 million at March 31, 2015, compared to $20.4 million at December 31, 2014, an increase of $0.6 million or 3%. During the first three months of 2015, we recorded net write-downs (net of gains on sales) of OREO of $0.3 million, equal to the first three months of 2014. At March 31, 2015, 16 assets with a net carrying amount of $3.4 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 three months of 2015. Actual gains, if any, will be recorded at the time of sale. We have experienced stabilizing real estate prices during 2014 and 2015. Total nonperforming assets declined 10% from $45.7 million at December 31, 2014 to $41.3 million at March 31, 2015, and represented 1.9% of total assets, an improvement from 2.1% at December 31, 2014.

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

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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 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 $20.3 million at December 31, 2014 decreased by 6% to $19.0 million at March 31, 2015. The ALL, as a percentage of loans held for investment, was 1.36% at March 31, 2015 compared to 1.50% at December 31, 2014. Net charge-offs were $0.2 million in the first three months of 2015 compared to net charge-offs of $62 thousand in the first three months of 2014. Annualized net charge-offs in the first three months of 2015 were 0.06% of average loans, compared to annualized net charge-offs of 0.02% in the same period of 2014.

Actual past due loans and loan charge-offs have declined and we continue to diligently work to improve asset quality. We believe the ALL of $19.0 million at March 31, 2015 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 March 31, 2015 and December 31, 2014:



	March 31, 2015				December 31, 2014
(dollars in thousands)	Balance		Associated Reserves		Balance		Associated Reserves
Impaired loans, not individually reviewed for impairment	$	4,603	$	—	$	4,967	$	—
Impaired loans, individually reviewed, with no impairment	22,134		—		26,631		—
Impaired loans, individually reviewed, with impairment	7,550		364		7,851		418
Total impaired loans *	$	34,287	$	364	$	39,449	$	418

Purchased impaired loans with subsequent deterioration	$	105,662	$	3,194	$	118,701	$	3,237
Purchased impaired loans with no subsequent deterioration	3,600		—		4,141		—
Total Reserves			3,558				3,655
Average impaired loans calculated using a simple average	$	36,868			$	43,446
* Included at March 31, 2015 and December 31, 2014 were $14.0 million and $14.1 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

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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 March 31, 2015, the total amount of these four items was $426.8 million, or 19% of total assets, a decrease of $32.5 million from $459.2 million, or 21% of total assets, at December 31, 2014. COB could also access $246.0 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.

In March 2015 we paid all deferred interest on our trust preferred securities. The company received all of its dividends on the outstanding junior subordinated debentures.

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 March 31, 2015. During 2014, $40 million in interest rate swaps to fix the interest rate on FHLB advances offset the impact of fixed rate lending, maintaining the asset sensitivity profile. 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 changes and the long duration of its indeterminate term 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 will be phased in over a four year period starting on January 1, 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

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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.

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 March 31, 2015 were as follows:



			Minimum Regulatory Requirement
	CommunityOne Bancorp	CommunityOne Bank	Adequately Capitalized	Well- Capitalized
Leverage capital ratio	8.47%	9.69%	4.00%	5.00%
CET1 risk-based capital ratio	11.86%	13.36%	4.50%	6.50%
Total Tier 1 risk-based capital ratio	11.86%	13.36%	6.00%	8.00%
Total risk-based capital ratio	14.40%	14.61%	8.00%	10.00%

Based on these ratios, the Bank is considered “well-capitalized” under the applicable provisions of the Federal Deposit Insurance Act.

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, 2014, 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 management's best estimate of probable loan losses incurred as of the balance sheet date. Our ALL is assessed quarterly by management. This assessment includes a methodology that separates the total loan portfolio into homogeneous loan classifications for purposes of evaluating risk. The required allowance is calculated by applying a risk adjusted reserve requirement to the dollar volume of loans within a homogenous group. We have grouped our loans into pools with similar risk characteristics, including loan purpose, collateral type and borrower type. Management analyzes the loan portfolio on an ongoing basis to evaluate current risk levels, and risk grades are adjusted accordingly. While management uses the best information available to make evaluations, future adjustments may be necessary, if economic or other conditions differ substantially from the assumptions used. 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

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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.

Realization of Deferred Tax Assets

Management regularly evaluates the likelihood that the Company will be able to realize its deferred tax assets and the continuing need

for a valuation allowance. Prior to December 31, 2014, management determined that sufficient evidence was not available to conclude that it was more likely than not that all of its deferred tax assets could be realized, requiring a valuation allowance for certain of its

deferred tax assets. At December 31, 2014, management 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 the Company’s North Carolina net economic loss carryforward. As a result of this determination, $142.5 million of valuation allowance against the Company's deferred tax assets was reversed.

Management's analysis as of March 31, 2015 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 all but a small portion of the Company’s North Carolina net economic loss carryforward.

As of March 31, 2015 and December 31, 2014 net deferred income tax assets totaling $144.2 million and $146.4 million,

respectively, are recorded on the Company’s balance sheet.

The Merger resulted in an ownership change for Granite Corp. under Internal Revenue Code Section 382 and the Regulations

thereunder. Accordingly, the Company is required to apply a limitation against Granite Corp.’s pre-acquisition net operating loss

carryforwards and net unrealized built-in losses. During 2013 COB determined that it would be able to use only $2.9 million of the

Granite Corp. net operating loss.

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 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 credit and non recurring 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.


•	"PCNR Noninterest Expense" ("NIE") is defined as total noninterest expense reduced by credit-related and non-recurring

noninterest expense. This measure reduces noninterest expense by items which are elevated during periods of elevated

problem asset activity and items which are non-recurring in nature.


•	“PCNR Noninterest Income "("NII") is defined as total noninterest income reduced by items which are non-recurring in

nature.


•	"PCNR Earnings" is defined as income (loss), before income taxes, adjusted by credit-related and non-recurring items, and

increased by provision for loan losses or decreased by recovery of loan losses. This measure identifies the Company's pre-tax

earnings excluding items which are elevated during periods of elevated problem asset activity and items which are nonrecurring

in nature.

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 March 31, 2015			As of and for the year ended December 31, 2014			As of and for the three months ended March 31, 2014
Total average shareholders' equity	$	268,799		$	91,151		$	83,776
Less:
Average goodwill	(4,205		)	(4,205		)	(4,205		)
Average core deposit and other intangibles	(5,492		)	(6,271		)	(6,748		)
Average tangible shareholders' equity (non-GAAP)	$	259,102		$	80,675		$	72,823

Total average assets	$	2,202,247		$	2,005,948		$	1,979,036
Less:
Average goodwill	(4,205		)	(4,205		)	(4,205		)
Average core deposit and other intangibles	(5,492		)	(6,271		)	(6,748		)
Average tangible assets (non-GAAP)	$	2,192,550		$	1,995,472		$	1,968,083

Total shareholders' equity	$	270,952		$	266,916		$	85,331
Less:
Goodwill	(4,205		)	(4,205		)	(4,205		)
Core deposit and other intangibles	(5,500		)	(5,681		)	(6,597		)
Tangible shareholders' equity (non-GAAP)	$	261,247		$	257,030		$	74,529

Total assets	$	2,231,934		$	2,215,514		$	2,008,481
Less:
Goodwill	(4,205		)	(4,205		)	(4,205		)
Core deposit and other intangibles	(5,500		)	(5,681		)	(6,597		)
Tangible assets (non-GAAP)	$	2,222,229		$	2,205,628		$	1,997,679

Book value per common share	$	11.20		$	11.04		$	3.88
Effect of intangible assets	(0.40		)	(0.41		)	(0.49		)
Tangible book value per common share (non-GAAP)	$	10.80		$	10.63		$	3.39



(dollars in thousands)	Three Months Ended
	March 31, 2015			March 31, 2014
Income (loss) before income taxes	$	3,937		$	1,300
Plus:
Other real estate owned expense	360			261
Loan collection expense	300			657
Mortgage and litigation accrual	—			(75		)
Branch closure and restructuring expense	—			183
Recovery of loan losses	(1,137		)	(684		)
Less: Securities gains (losses), net	—			—
PCNR earnings (non-GAAP)	$	3,460		$	1,642

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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 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 March 31, 2015, 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 March 31, 2015 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 March 31, 2015 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. COB is not involved in, nor has it terminated during the three months ended March 31, 2015, 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

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: May 8, 2015 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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