CommunityOne Bancorp 10-Q 2014 Q3 Quarterly report

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 September 30, 2014 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 October 31, 2014 (the most recent practicable date), the Registrant had outstanding approximately 21,820,687 shares of Common Stock.

CommunityOne Bancorp and Subsidiaries

Report on Form 10-Q

September 30, 2014

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
Item 1	Consolidated Financial Statements (Unaudited)
	Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013	1
	Consolidated Statements of Operations for Three Months and Nine Months Ended September 30, 2014 and 2013	2
	Consolidated Statements of Comprehensive Income (Loss) for the Three Months and Nine Months ended September 30, 2014 and 2013	3
	Consolidated Statements of Shareholders' Equity for the Nine Months Ended September 30, 2014 and 2013	4
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2014 and 2013	5
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	36
Item 3	Quantitative and Qualitative Disclosures about Market Risk	55
Item 4	Controls and Procedures	56
PART II. OTHER INFORMATION
Item 1	Legal Proceedings	57
Item 1A	Risk Factors	57
Item 2	Unregistered Sales of Equity Securities and Repurchases	57
Item 3	Defaults Upon Senior Securities	57
Item 4	Mine Safety Disclosures	57
Item 5	Other Information	57
Item 6	Exhibits	57
	Signatures	58

i

PART I.    FINANCIAL INFORMATION

Item 1.    Financial Statements

CommunityOne Bancorp and Subsidiaries

Consolidated Balance Sheets (unaudited)

(in thousands, except share and per share data)	September 30, 2014			December 31, 2013*
Assets
Cash and due from banks	$	26,411		$	31,917
Interest-bearing bank balances	33,669			35,513
Investment securities:
Available-for-sale, at estimated fair value (amortized cost of $374,457 in 2014 and $438,057 in 2013)	363,296			414,614
Held-to-maturity, at amortized cost (estimated fair value of $139,582 in 2014 and $141,125 in 2013)	144,684			151,795
Loans held for sale	2,268			1,836
Loans held for investment	1,318,117			1,212,248
Less: Allowance for loan losses	(21,525		)	(26,785		)
Net loans held for investment	1,296,592			1,185,463
Premises and equipment, net	47,416			50,889
Other real estate owned and property acquired in settlement of loans	20,289			28,395
Core deposit premiums and other intangibles	5,986			6,914
Goodwill	4,205			4,205
Bank-owned life insurance	40,797			39,940
Other assets	30,180			33,551
Total Assets	$	2,015,793		$	1,985,032
Liabilities
Deposits:
Noninterest-bearing demand deposits	$	317,981		$	290,461
Interest-bearing deposits:
Demand, savings and money market deposits	859,003			875,970
Time deposits of $100 or more	249,499			229,395
Other time deposits	332,447			352,879
Total deposits	1,758,930			1,748,705
Retail repurchase agreements	12,217			6,917
Federal Home Loan Bank advances	73,246			73,283
Long-term notes payable	5,319			5,263
Junior subordinated debentures	56,702			56,702
Other liabilities	14,889			13,801
Total Liabilities	1,921,303			1,904,671
Shareholders' Equity
Preferred stock, 10,000,000 shares authorized
Series A, $10.00 par value; 51,500 shares issued and no shares outstanding in 2014 and 2013	—			—
Series B, no par value, authorized 250,000 shares, no shares issued and outstanding in 2014 and 2013	—			—
Common stock, no par value; authorized 2,500,000,000 shares, issued 21,741,210 shares in 2014 and 21,861,418 in 2013	462,357			461,636
Accumulated deficit	(357,828		)	(363,670		)
Accumulated other comprehensive loss	(10,039		)	(17,605		)
Total Shareholders' Equity	94,490			80,361
Total Liabilities and Shareholders' Equity	$	2,015,793		$	1,985,032

See accompanying notes to consolidated financial statements.

* Derived from audited consolidated financial statements

1

CommunityOne Bancorp and Subsidiaries

Consolidated Statements of Operations (unaudited)

(in thousands, except share and per share data)	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
Interest Income
Interest and fees on loans	$	14,855		$	15,993		$	43,312		$	45,451
Interest and dividends on investment securities:
Taxable income	3,400			3,774			10,826			10,366
Other interest income	140			86			447			244
Total interest income	18,395			19,853			54,585			56,061
Interest Expense
Deposits	1,725			1,894			5,168			6,231
Retail repurchase agreements	5			6			11			15
Federal Home Loan Bank advances	521			289			1,504			1,037
Other borrowed funds	296			282			857			809
Total interest expense	2,547			2,471			7,540			8,092
Net Interest Income before Recovery of Loan Losses	15,848			17,382			47,045			47,969
Recovery of loan losses	(1,679		)	(350		)	(4,048		)	(1,297		)
Net Interest Income after Recovery of Loan Losses	17,527			17,732			51,093			49,266
Noninterest Income
Service charges on deposit accounts	1,583			1,858			4,766			4,915
Mortgage loan income	205			420			640			2,085
Cardholder and merchant services income	1,183			1,161			3,505			3,403
Trust and investment services	344			329			1,101			964
Bank-owned life insurance	273			267			803			805
Other service charges, commissions and fees	290			365			974			960
Securities gains, net	34			50			754			2,773
Other income	73			37			278			362
Total noninterest income	3,985			4,487			12,821			16,267
Noninterest Expense
Personnel expense	12,616			9,663			32,965			31,149
Net occupancy expense	1,521			1,558			4,586			5,060
Furniture, equipment and data processing expense	2,208			2,050			6,258			6,512
Professional fees	699			222			1,799			2,475
Stationery, printing and supplies	149			136			484			509
Advertising and marketing	142			150			442			994
Other real estate owned expense	(29		)	(98		)	1,186			4,116
Credit/debit card expense	520			627			1,719			1,525
FDIC insurance	412			646			1,646			1,980
Loan collection expense	198			1,120			1,406			3,784
Merger-related expense	—			—			—			3,498
Core deposit premium intangible amortization	352			352			1,056			1,056
Other expense	1,227			1,501			4,542			4,273
Total noninterest expense	20,015			17,927			58,089			66,931
Income (loss) before income taxes	1,497			4,292			5,825			(1,398		)
Income tax expense (benefit)	(276		)	286			(17		)	2,375
Net income (loss)	$	1,773		$	4,006		$	5,842		$	(3,773	)
Weighted average number of shares outstanding - basic	21,739,009			21,738,770			21,853,866			21,722,536
Weighted average number of shares outstanding - diluted	21,746,965			21,738,770			21,865,972			21,722,536
Net income (loss) per share - basic and diluted	$	0.08		$	0.18		$	0.27		$	(0.17	)

See accompanying notes to consolidated financial statements.

2

CommunityOne Bancorp and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss) (unaudited)

(dollars in thousands)	Three Months Ended September 30,
	2014			2013
Net income	$	1,773		$	4,006
Other comprehensive income (loss):
Unrealized gains (losses) arising during the period on available-for-sale securities	(521		)	1,584
Tax effect	199			(829		)
Unrealized gains (losses) arising during the period on available-for-sale securities, net of tax	(322		)	755
Reclassification adjustment for gain on available-for-sale securities included in net income	(34		)	(50		)
Tax effect	13			19
Reclassification adjustment for gain on available-for-sale securities included in net income, net of tax	(21		)	(31		)
Unrealized gain (loss) on interest rate swaps	344			—
Tax effect	(132		)	—
Unrealized gain (loss) on interest rate swaps, net of tax	212			—
Change in defined benefit plans liability	—			(249		)
Tax effect	—			95
Change in defined benefit plans liability, net of tax	—			(154		)
Other comprehensive income (loss), net of tax	(131		)	570
Comprehensive income	$	1,642		$	4,576

(dollars in thousands)	Nine Months Ended September 30,
	2014			2013
Net income (loss)	$	5,842		$	(3,773	)
Other comprehensive income (loss):
Unrealized gains (losses) arising during the period on available-for-sale securities	13,036			(19,857		)
Tax effect	(4,986		)	7,636
Unrealized gains (losses) arising during the period on available-for-sale securities, net of tax	8,050			(12,221		)
Reclassification adjustment for gain on available-for-sale securities included in net income	(754		)	(2,773		)
Tax effect	288			1,094
Reclassification adjustment for gain on available-for-sale securities included in net income, net of tax	(466		)	(1,679		)
Unrealized gain (loss) on interest rate swaps	(29		)	—
Tax effect	11			—
Unrealized gain (loss) on interest rate swaps, net of tax	(18		)	—
Change in defined benefit plans liability	—			(757		)
Tax effect	—			296
Change in defined benefit plans liability, net of tax	—			(461		)
Other comprehensive income (loss), net of tax:	7,566			(14,361		)
Comprehensive income (loss)	$	13,408		$	(18,134	)

See accompanying notes to consolidated financial statements.

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CommunityOne Bancorp and Subsidiaries

Consolidated Statements of Shareholders’ Equity (unaudited)

For Nine Months Ended September 30, 2014 and 2013

											Accumulated
(dollars in thousands, except share and per share data)											Other
	Preferred Stock			Common Stock				Accumulated			Comprehensive
	Shares	Amount		Shares		Amount		Deficit			Income (Loss)			Total
Balance, December 31, 2012	—	$	—	21,698,115		$	460,955	$	(362,187	)	$	(323	)	$	98,445
Comprehensive loss:
Net loss	—	—		—		—		(3,773		)	—			(3,773		)
Other comprehensive loss, net of tax	—	—		—		—		—			(14,361		)	(14,361		)
Stock options and restricted stock awards:
Compensation expense recognized	—	—		—		462		—			—			462
Issuance of restricted stock awards, net of cancellations	—	—		37,823		—		—			—			—
Shares issued as compensation to directors				3,708		29								29
Balance, September 30, 2013	—	$	—	21,739,646		$	461,446	$	(365,960	)	$	(14,684	)	$	80,802
Balance, December 31, 2013	—	$	—	21,861,418		$	461,636	$	(363,670	)	$	(17,605	)	$	80,361
Comprehensive income:
Net income	—	—		—		—		5,842			—			5,842
Other comprehensive income, net of tax	—	—		—		—		—			7,566			7,566
Stock options and restricted stock awards:
Compensation expense recognized	—	—		—		655		—			—			655
Issuance of restricted stock awards, net of cancellations	—	—		(126,687	)	—		—			—			—
Shares issued as compensation to directors	—	—		6,479		66		—			—			66
Balance, September 30, 2014	—	$	—	21,741,210		$	462,357	$	(357,828	)	$	(10,039	)	$	94,490

See accompanying notes to consolidated financial statements.    

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CommunityOne Bancorp and Subsidiaries

Consolidated Statements of Cash Flows (unaudited)

(dollars in thousands)	Nine Months Ended September 30,
	2014			2013
Operating Activities
Net income (loss)	$	5,842		$	(3,773	)
Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities:
Depreciation and amortization of premises and equipment	2,937			2,715
Recovery of loan losses	(4,048		)	(1,297		)
Deferred income taxes	(17		)	2,375
Deferred loan fees and costs, net	462			(279		)
Premium amortization and discount accretion of investment securities, net	1,797			3,632
Net gain on sale of investment securities	(754		)	(2,773		)
Amortization of core deposit premiums	1,056			1,056
Net accretion on acquired loans	(7,715		)	(13,364		)
Stock compensation expense	721			491
Increase in cash surrender value of bank-owned life insurance, net	(857		)	(854		)
Loans held for sale:
Origination of loans held for sale	(42,724		)	(93,390		)
Net proceeds from sale of loans held for sale	42,716			100,208
Net gain on sale of loans held for sale	(424		)	(1,684		)
Mortgage servicing rights capitalized	(433		)	(959		)
Mortgage servicing rights amortization	306			203
Net gain on sale of premises and equipment	59			604
Net loss on sales and write-downs of other real estate owned	739			3,004
Changes in assets and liabilities:
Decrease (Increase) in accrued interest receivable and other assets	740			(1,879		)
Increase in accrued interest payable and other liabilities	1,144			155
Net cash provided by (used in) operating activities	1,547			(5,809		)
Investing Activities
Available-for-sale securities:
Proceeds from sales	27,183			175,046
Proceeds from maturities, calls and principal repayments	35,668			56,650
Purchases	—			(126,041		)
Held-to-maturity securities:
Proceeds from maturities, calls and principal repayments	6,817			—
Purchases	—			(155,394		)
Net increase in loans held for investment	(101,065		)	(13,608		)
Proceeds from sales of other real estate owned	8,629			32,001
Purchases of premises and equipment	(1,692		)	(2,455		)
Proceeds from sales of premises and equipment	75			276
Net cash used in investing activities	(24,385		)	(33,525		)
Financing Activities
Net increase (decrease) in deposits	10,225			(115,916		)
Increase in retail repurchase agreements	5,300			3,747
(Decrease) Increase in Federal Home Loan Bank advances	(37		)	14,967
Net cash provided by (used in) financing activities	15,488			(97,202		)
Net Decrease in Cash and Cash Equivalents	(7,350		)	(136,536		)
Cash and Cash Equivalents at Beginning of Period	67,430			239,610
Cash and Cash Equivalents at End of Period	$	60,080		$	103,074
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest	$	6,752		$	7,793
Noncash transactions:
Foreclosed loans transferred to other real estate owned	2,894			10,403
Loans to facilitate the sale of other real estate owned	1,699			5,071
Transfer of loans from held for investment to held for sale	—			894
Unrealized securities gains (losses), net of income taxes	7,584			(13,900		)
Transfer of fixed assets to other assets	2,136			—
Employee benefit plan costs, net of income taxes	—			(461		)
Unrealized loss on interest rate swaps, net of income taxes	(18		)	—
Transfer of investment from other assets to available-for-sale securities	—			2,640

See accompanying notes to consolidated financial statements.

5

CommunityOne Bancorp and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

1. Basis of Presentation

Nature of Operations

CommunityOne Bancorp, or "COB" or the "Company" (which also refers to us and our subsidiaries on a consolidated basis), is a bank

holding company 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 headquartered in Asheboro, North Carolina, we offer a complete line of

consumer, wealth management, mortgage and business banking services, including loan, deposit, cash management, investment

management and trust services, to individual and business customers through operations located throughout central, southern and

western North Carolina.

In addition to the Bank, we own FNB United Statutory Trust I, FNB United Statutory Trust II, and Catawba Valley Capital Trust II, which were formed to facilitate the issuance of trust preferred securities. COB also owned Granite Mortgage, Inc., which ceased mortgage operations in 2009, filed for Chapter 11 bankruptcy on February 15, 2012 and was dissolved on May 5, 2014.

The Bank holds the stock of First National Investor Services, Inc., which holds deeds of trust for the Bank. The Bank had also owned Dover Mortgage, which had previously engaged in the business of originating, underwriting and closing mortgage loans for sale in the secondary market. Dover ceased operations in the first quarter of 2011, filed for Chapter 11 bankruptcy on February 15, 2012 and was dissolved on April 28, 2014.

On October 21, 2011, as part of the recapitalization of COB, COB acquired Bank of Granite Corporation and its subsidiary bank, Bank of Granite, through the merger of a wholly owned subsidiary of ours into Granite Corp. (the “Merger”). Bank of Granite was merged into the Bank on June 8, 2013.

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 other real estate owned ("OREO"), and other operating costs such as: salaries and employee benefits, occupancy, data processing expenses, merger-related 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, 2013 (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 September 30, 2014 and December 31, 2013, and the results of its operations for the three and nine months, and cash flows for the nine months ended September 30, 2014 and 2013, 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 intangible assets 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.

6

Recent Accounting Pronouncements

Troubled Debt Restructurings - In January 2014, the Financial Accounting Standards Board (“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 will be effective for the Company for interim and annual reporting periods beginning after December 15, 2014. Companies are allowed to use either a modified retrospective transition method or a prospective transition method when adopting this update. Early adoption is permitted. The Company does not expect these amendments to have a material effect on its 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 the Merger as a business combination under the acquisition method of accounting. As a result, we have recognized in our financial statements the identifiable net assets acquired and an amount of goodwill (representing the difference between the purchase price and the identifiable net assets).

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 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.

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.

7

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

September 30, 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	$	2,034	$	19	$	—	$	2,053
Residential mortgage-backed securities-GSE	313,522		591		11,666		302,447
Residential mortgage-backed securities-Private	17,653		1,015		—		18,668
Commercial mortgage-backed securities-GSE	22,475		—		831		21,644
Commercial mortgage-backed securities-Private	10,376		—		319		10,057
Corporate notes	8,397		30		—		8,427
Total available-for-sale	374,457		1,655		12,816		363,296
Held-to-Maturity:
Residential mortgage-backed securities-GSE	134,618		—		4,859		129,759
Commercial mortgage-backed securities-Private	10,066		—		243		9,823
Total held-to-maturity	144,684		—		5,102		139,582
Total investment securities	$	519,141	$	1,655	$	17,918	$	502,878
December 31, 2013
(dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Available-for-Sale:
Obligations of:
U.S. government sponsored enterprises	$	2,051	$	26	$	—	$	2,077
Residential mortgage-backed securities-GSE	364,513		974		24,340		341,147
Residential mortgage-backed securities-Private	19,770		982		—		20,752
Commercial mortgage-backed securities-GSE	22,767		—		1,328		21,439
Commercial mortgage-backed securities-Private	10,408		—		823		9,585
Business Development Company investment	1,753		984				2,737
Corporate notes	16,795		82		—		16,877
Total available-for-sale	438,057		3,048		26,491		414,614
Held-to-Maturity:
Residential mortgage-backed securities-GSE	141,724		—		9,907		131,817
Commercial mortgage-backed securities-Private	10,071		—		763		9,308
Total held-to-maturity	151,795		—		10,670		141,125
Total investment securities	$	589,852	$	3,048	$	37,161	$	555,739

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 $5.1 million of FHLB stock at September 30, 2014 and $5.9 million at December 31, 2013. Due to the redemption provisions of FHLB stock, we have estimated that fair value approximated cost and that this investment was not impaired at September 30, 2014. 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 September 30, 2014 and December 31, 2013, the Bank owned a total of $4.7 million and $4.3 million of FRBR stock, respectively. Because this investment is in an entity of the U.S. government, we have

8

estimated that fair value approximated the cost and that this investment was not impaired at September 30, 2014. FRBR stock is included in other assets at its original cost basis.

At September 30, 2014, $116.6 million of the investment securities portfolio was pledged to secure public deposits, $17.3 million was pledged to retail repurchase agreements and $176.9 million was pledged to others, leaving $197.1 million available as pledgeable collateral.

During the three and nine months ended September 30, 2014, the Bank sold securities with a book value of $23.9 million and $26.4 million and recognized gross gains of $0.5 million and $1.2 million respectively, and gross losses $0.4 million in both the three month and nine month period. During the three months and nine months ended September 30, 2013, the Bank sold securities with a book value of $3.3 million and $175.1 million, respectively, and recognized gross gains of $0.1 million and $2.9 million, respectively, and gross losses of $0 and $0.2 million, respectively. The Bank sold securities in 2014 to exit its position in a SBIC Fund investment that had converted to a publicly traded equity, to fund loan growth and to manage our interest rate sensitivity profile. The Bank sold securities in 2013 in order to manage our interest rate sensitivity profile.

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 September 30, 2014 and December 31, 2013. The change in unrealized losses during the nine months ending September 30, 2014 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
September 30, 2014
Available-for-Sale:
Residential mortgage-backed securities-GSE	$	—	$	—	$	281,209	$	11,666	$	281,209	$	11,666
Commercial mortgage-backed securities-GSE	—		—		21,645		831		21,645		831
Commercial mortgage-backed securities-Private	—		—		10,057		319		10,057		319
Total available-for-sale	—		—		312,911		12,816		312,911		12,816
Held-to-Maturity:
Residential mortgage-backed securities-GSE	—		—		129,759		4,859		129,759		4,859
Commercial mortgage-backed securities-Private	—		—		9,823		243		9,823		243
Total held-to-maturity	—		—		139,582		5,102		139,582		5,102
Total	$	—	$	—	$	452,493	$	17,918	$	452,493	$	17,918
December 31, 2013
Available-for-Sale
Residential mortgage-backed securities-GSE	$	222,475	$	16,585	$	76,501	$	7,755	$	298,976	$	24,340
Commercial mortgage-backed securities-GSE	—		—		21,439		1,328		21,439		1,328
Commercial mortgage-backed securities-Private	9,585		823		—		—		9,585		823
Total available-for-sale	232,060		17,408		97,940		9,083		330,000		26,491
Held-to-Maturity:
Residential mortgage-backed securities-GSE	131,817		9,907		—		—		131,817		9,907
Commercial mortgage-backed securities-Private	9,308		763		—		—		9,308		763
Total held-to-maturity	141,125		10,670		—		—		141,125		10,670
Total	$	373,185	$	28,078	$	97,940	$	9,083	$	471,125	$	37,161

At September 30, 2014 and December 31, 2013, there were 36 and ten available-for-sale securities that were in an unrealized loss position for 12 months or more, respectively.

9

COB analyzed its securities portfolio at September 30, 2014, 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 COB has determined that it is not more likely than not that COB 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 September 30, 2014, by remaining contractual maturity, are shown in the following table. Actual expected maturities may differ from contractual maturities because issuers may have the right to call or prepay the obligations. Mortgage backed securities are grouped based on stated maturity date, but actual maturity will vary based on the actual repayment of the underlying mortgage loans.

	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	$	2,034	$	2,053	$	—	$	—
Residential mortgage-backed securities-GSE
Due after five years through 10 years	7,267		7,378		—		—
Due after ten years	306,255		295,069		134,618		129,759
Residential mortgage-backed securities-Private
Due after ten years	17,653		18,668		—		—
Commercial mortgage-backed securities-GSE
Due after five years through 10 years	22,475		21,644		—		—
Commercial mortgage-backed securities-Private
Due after ten years	10,376		10,057		10,066		9,823
Corporate notes
Due in one year or less	8,397		8,427		—		—
Total	$	374,457	$	363,296	$	144,684	$	139,582

10

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.

The following table presents an aging analysis of accruing and nonaccruing loans as of September 30, 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	$	504	$	—	$	—	$	351	$	855	$	89,524	$	90,379
Real estate - construction	77		144		—		2,878		3,099		63,548		66,647
Real estate - mortgage:
1-4 family residential	502		517		107		8,670		9,796		634,346		644,142
Commercial	327		154		470		15,913		16,864		304,777		321,641
Consumer	82		40		—		94		216		64,427		64,643
Total	1,492		855		577		27,906		30,830		1,156,622		1,187,452
PI loans
Commercial and agricultural	—		—		2,268		—		2,268		5,990		8,258
Real estate - construction	—		—		3,934		—		3,934		5,343		9,277
Real estate - mortgage:
1-4 family residential	93		—		2,352		—		2,445		15,873		18,318
Commercial	898		1,335		11,584		—		13,817		80,013		93,830
Consumer	7		—		11		—		18		964		982
Total	998		1,335		20,149		—		22,482		108,183		130,665
Total Loans	$	2,490	$	2,190	$	20,726	$	27,906	$	53,312	$	1,264,805	$	1,318,117

11

The following table presents an aging analysis of accruing and nonaccruing loans as of December 31, 2013:

(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	$	18	$	43	$	—	$	516	$	577	$	60,946	$	61,523
Real estate - construction	168		634		—		4,677		5,479		48,711		54,190
Real estate - mortgage:
1-4 family residential	3,454		522		—		11,580		15,556		593,698		609,254
Commercial	1,765		77		—		18,380		20,222		261,524		281,746
Consumer	56		17		—		12		85		43,798		43,883
Total	5,461		1,293		—		35,165		41,919		1,008,677		1,050,596
PI loans
Commercial and agricultural	35		16		1,977		—		2,028		8,701		10,729
Real estate - construction	48		—		2,758		—		2,806		7,087		9,893
Real estate - mortgage:
1-4 family residential	135		9		2,907		—		3,051		23,802		26,853
Commercial	903		—		17,479		—		18,382		94,796		113,178
Consumer	6		—		12		—		18		981		999
Total	1,127		25		25,133		—		26,285		135,367		161,652
Total Loans	$	6,588	$	1,318	$	25,133	$	35,165	$	68,204	$	1,144,044	$	1,212,248

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

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 $30.8 million and $40.5 million in Granite Purchased Loans categorized as Substandard or Doubtful at September 30, 2014 and December 31, 2013, respectively.

12

The following table presents loans held for investment balances by risk grade as of September 30, 2014:

(dollars in thousands)	Pass		Special Mention		Substandard		Doubtful
	(Ratings 1-5)		(Rating 6)		(Rating 7)		(Rating 8)		Total
Commercial and agricultural	$	94,085	$	1,704	$	2,848	$	—	$	98,637
Real estate - construction	65,298		2,868		7,758		—		75,924
Real estate - mortgage:
1-4 family residential	637,609		8,067		16,784		—		662,460
Commercial	346,857		23,405		44,743		466		415,471
Consumer	65,116		15		105		389		65,625
Total	$	1,208,965	$	36,059	$	72,238	$	855	$	1,318,117

The following table presents loans held for investment balances by risk grade as of December 31, 2013:

(dollars in thousands)	Pass		Special Mention		Substandard		Doubtful
	(Ratings 1-5)		(Rating 6)		(Rating 7)		(Rating 8)		Total
Commercial and agricultural	$	67,277	$	1,262	$	3,713	$	—	$	72,252
Real estate - construction	50,138		3,984		9,961		—		64,083
Real estate - mortgage:
1-4 family residential	601,304		10,887		23,916		—		636,107
Commercial	307,661		29,711		57,552		—		394,924
Consumer	44,450		40		47		345		44,882
Total	$	1,070,830	$	45,884	$	95,189	$	345	$	1,212,248

Loans included in the preceding loan composition table are net of participations sold. Loans are increased by net loan premiums of $3.1 million and $3.6 million at September 30, 2014 and December 31, 2013, respectively.

At September 30, 2014 and December 31, 2013, 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 $222.8 million at September 30, 2014 and $190.2 million at December 31, 2013.

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 $132.4 million and $125.6 million of investment securities, and gross loans of $169.5 million and $24.1 million of investment securities, were pledged to collateralize FHLB advances and letters of credit at September 30, 2014 and December 31, 2013, respectively, of which there was $127.5 million and $31.8 million of credit availability for borrowing, respectively. At September 30, 2014, $5.8 million of loans and $49.3 million of securities were pledged to collateralize potential borrowings from the Federal Reserve Discount Window, of which $51.6 million was available as borrowing capacity. We could also access $200.7 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 $0.6 million and $0.7 million for the three months ended September 30, 2014 and September 30, 2013, respectively, and higher by $1.7 million and $2.3 million for the nine months ended September 30, 2014 and September 30, 2013, respectively. At September 30, 2014 and

13

December 31, 2013, COB had certain impaired loans of $27.9 million and $35.2 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.

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.

14

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:

	September 30, 2014				December 31, 2013
(dollars in thousands)	Recorded Investment		Associated Reserves		Recorded Investment		Associated Reserves
Impaired loans, not individually reviewed for impairment	$	4,741	$	—	$	4,612	$	—
Impaired loans, individually reviewed, with no impairment	29,582		—		39,865		—
Impaired loans, individually reviewed, with impairment	7,811		442		2,965		927
Total impaired loans, excluding purchased impaired *	$	42,134	$	442	$	47,442	$	927
Purchased impaired loans with subsequent deterioration	$	111,541	3,923		$	161,307	5,560
Purchased impaired loans with no subsequent deterioration	$	19,124	—		$	345	—
Total Reserves			$	4,365			$	6,487
Average impaired loans calculated using a simple average	$	44,788			$	65,527

* Included at September 30, 2014 and December 31, 2013 were $13.8 million and $12.1 million, respectively, in restructured and performing loans.

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

(dollars in thousands)
	September 30, 2014		December 31, 2013
Loans held for investment:
Commercial and agricultural	$	351	$	516
Real estate - construction	2,878		4,677
Real estate - mortgage:
1-4 family residential	8,670		11,580
Commercial	15,913		18,380
Consumer	94		12
Total nonaccrual loans	27,906		35,165
Loans more than 90 days delinquent, still on accrual	577		—
Total nonperforming loans	$	28,483	$	35,165

There were no loans held for sale on nonaccrual status as of September 30, 2014 or December 31, 2013.

15

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 September 30, 2014:

			Unpaid
(dollars in thousands)	Recorded		Principal		Related
	Investment		Balance		Allowance
Individually reviewed impaired loans with no related allowance recorded:
Commercial and agricultural	$	222	$	461	$	—
Real estate - construction	2,830		3,371		—
Real estate - mortgage:
1-4 family residential	8,028		9,915		—
Commercial	18,502		24,792		—
Consumer	—		—		—
Total	29,582		38,539		—
Individually reviewed impaired loans with an allowance recorded:
Commercial and agricultural	—		—		—
Real estate - construction	—		—		—
Real estate - mortgage:
1-4 family residential	3,402		3,853		335
Commercial	4,409		4,606		87
Consumer	—		—		—
Total	7,811		8,459		422
Total individually reviewed impaired loans
Commercial and agricultural	222		461		—
Real estate - construction	2,830		3,371		—
Real estate - mortgage:
1-4 family residential	11,430		13,768		335
Commercial	22,911		29,398		87
Consumer	—		—		—
Total	$	37,393	$	46,998	$	422
PI loans with subsequent credit deterioration:
Commercial and agricultural	$	7,774	$	6,392	$	380
Real estate - construction	9,199		10,801		613
Real estate - mortgage:
1-4 family residential	16,892		17,158		375
Commercial	76,695		77,095		2,365
Consumer	981		675		190
Total	$	111,541	$	112,121	$	3,923

16

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, 2013:

			Unpaid
(dollars in thousands)	Recorded		Principal		Related
	Investment		Balance		Allowance
Individually reviewed impaired loans with no related allowance recorded:
Commercial and agricultural	$	398	$	643	$	—
Real estate - construction	4,734		8,893		—
Real estate - mortgage:
1-4 family residential	11,154		14,431		—
Commercial	23,579		28,905		—
Consumer	—		—		—
Total	39,865		52,872		—
Individually reviewed impaired loans with an allowance recorded:
Commercial and agricultural	—		—		—
Real estate - construction	—		—		—
Real estate - mortgage:
1-4 family residential	2,965		3,032		927
Commercial	—		—		—
Consumer	—		—		—
Total	2,965		3,032		927
Total individually reviewed impaired loans
Commercial and agricultural	398		643		—
Real estate - construction	4,734		8,893		—
Real estate - mortgage:
1-4 family residential	14,119		17,463		927
Commercial	23,579		28,905		—
Consumer	—		—		—
Total	$	42,830	$	55,904	$	927
PI loans with subsequent credit deterioration:
Commercial and agricultural	$	10,729	$	10,344	$	382
Real estate - construction	9,792		11,216		1,015
Real estate - mortgage:
1-4 family residential	26,628		28,143		724
Commercial	113,178		121,813		3,251
Consumer	980		785		188
Total	$	161,307	$	172,301	$	5,560

17

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 September 30, 2014 and September 30, 2013:

	For Three Months Ended				For Three Months Ended
	September 30, 2014				September 30, 2013
	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	$	222	$	—	$	434	$	—
Real estate - construction	2,865		8		10,006		3
Real estate - mortgage:
1-4 family residential	8,253		23		10,516		—
Commercial	19,042		28		27,844		4
Consumer	—		—		—		—
Total	30,382		59		48,800		7
Individually reviewed impaired loans with an allowance recorded:
Commercial and agricultural	—		—		—		—
Real estate - construction	—		—		97		—
Real estate - mortgage:
1-4 family residential	3,413		12		2,605		—
Commercial	4,427		38		273		—
Consumer	—		—		—		—
Total	7,840		50		2,975		—
Total individually reviewed impaired loans:
Commercial and agricultural	222		—		434		—
Real estate - construction	2,865		8		10,103		3
Real estate - mortgage:
1-4 family residential	11,666		35		13,121		—
Commercial	23,469		66		28,117		4
Consumer	—		—		—		—
Total	$	38,222	$	109	$	51,775	$	7

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	For Nine Months Ended				For Nine Months Ended
	September 30, 2014				September 30, 2013
	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	$	222	$	—	$	455	$	7
Real estate - construction	2,936		29		10,300		23
Real estate - mortgage:
1-4 family residential	8,400		87		10,442		14
Commercial	19,814		237		29,288		58
Consumer	—		—		—		—
Total	31,372		353		50,485		102
Individually reviewed impaired loans with an allowance recorded:
Commercial and agricultural	$	—	$	—	$	107	$	—
Real estate - construction	—		—		220		6
Real estate - mortgage:
1-4 family residential	3,440		45		1,682		4
Commercial	4,479		153		3,933		—
Consumer	—		—		167		1
Total	7,919		198		6,109		11
Total individually reviewed impaired loans:
Commercial and agricultural	222		—		562		7
Real estate - construction	2,936		29		10,520		29
Real estate - mortgage:
1-4 family residential	11,840		132		12,124		18
Commercial	24,293		390		33,221		58
Consumer	—		—		167		1
Total	$	39,291	$	551	$	56,594	$	113

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 September 30, 2014, there was $19.9 million in restructured loans, of which $14.2 million were accruing. At December 31, 2013, there was $18.1 million in restructured loans, of which $12.1 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 September 30, 2014, and December 31, 2013, our financial statements reflected a Granite PI loan ALL of $3.9 million and $5.6 million, respectively, and an ALL for Granite PC loans of $0.6 million and $0.9 million, respectively.

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

	At September 30, 2014
(dollars in thousands)	Purchased Impaired		Purchased Contractual		Total Purchased Loans		Unpaid Principal Balance
Commercial and agricultural	$	8,258	$	3,786	$	12,044	$	10,840
Real estate - construction	9,277		—		9,277		10,886
Real estate - mortgage:
1-4 family residential	18,318		23,141		41,459		43,659
Commercial	93,830		—		93,830		100,567
Consumer	982		—		982		687
Total	$	130,665	$	26,927	$	157,592	$	166,639

	At December 31, 2013
(dollars in thousands)	Purchased Impaired		Purchased Contractual		Total Purchased Loans		Unpaid Principal Balance
Commercial and agricultural	$	10,729	$	5,948	$	16,677	$	16,452
Real estate - construction	9,893		—		9,893		11,368
Real estate - mortgage:
1-4 family residential	26,853		22,127		48,980		51,359
Commercial	113,178		373		113,551		122,197
Consumer	999		—		999		798
Total	$	161,652	$	28,448	$	190,100	$	202,174

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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
	September 30, 2014						September 30, 2013
	Purchased Impaired						Purchased Impaired
(dollars in thousands)	Carrying Amount			Future Accretion			Carrying Amount			Future Accretion
Balance, beginning of period	$	141,924		$	27,764		$	189,159		$	28,706
Accretion	2,323			(2,323		)	4,283			(4,283		)
Increase in future accretion	—			1,495			—			—
Payments received	(13,253		)	—			(16,225		)	—
Foreclosed and transferred to OREO	(329		)	—			(624		)	—
Subtotal before allowance	130,665			26,936			176,593			24,423
Allowance for loan losses	(3,923		)	—			(4,066		)	—
Net carrying amount, end of period	$	126,742		$	26,936		$	172,527		$	24,423

	For Nine Months Ended						For Nine Months Ended
	September 30, 2014						September 30, 2013
	Purchased Impaired						Purchased Impaired
(dollars in thousands)	Carrying Amount			Future Accretion			Carrying Amount			Future Accretion
Balance, beginning of period	$	161,652		$	29,987		$	228,392		$	30,299
Accretion	7,402			(7,402		)	12,677			(12,677		)
Increase in future accretion	—			4,351			—			6,801
Reclassification of loans and adjustments	(4,180		)	—			—			—
Payments received	(33,858		)	—			(62,556		)	—
Foreclosed and transferred to OREO	(351		)	—			(1,920		)	—
Subtotal before allowance	130,665			26,936			176,593			24,423
Allowance for credit losses	(3,923		)	—			(4,066		)	—
Net carrying amount, end of period	$	126,742		$	26,936		$	172,527		$	24,423

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 COB's 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

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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 September 30, 2014, 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 September 30, 2014, we charged off $2.0 million in loans and realized $1.2 million in recoveries, for $0.8 million of net charge-offs.

The ALL, as a percentage of loans held for investment, was 1.63% at September 30, 2014, compared to 2.12% at September 30, 2013. At December 31, 2013, the ALL, as a percentage of loans held for investment, was 2.21%.

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

	For Three Months Ended						For Nine Months Ended
(dollars in thousands)	September 30, 2014			September 30, 2013			September 30, 2014			September 30, 2013
Balance, beginning of period	$	23,975		$	25,085		$	26,785		$	29,314
Recovery of losses charged to continuing operations	(1,679		)	(350		)	(4,048		)	(1,297		)
Net recoveries (charge-offs):
Charge-offs	(1,970		)	(1,724		)	(5,980		)	(10,836		)
Recoveries	1,199			2,376			4,768			8,206
Net (charge-offs) recoveries	(771		)	652			(1,212		)	(2,630		)
Balance, end of period	$	21,525		$	25,387		$	21,525		$	25,387
Annualized net charge-offs (recoveries) during the period to average loans held for investment	0.24		%	(0.22		)%	0.13		%	0.31		%
Annualized net charge-offs (recoveries) during the period to ALL	14.21		%	(10.19		)%	7.53		%	13.85		%
Allowance for loan losses to loans held for investment	1.63		%	2.12		%	1.63		%	2.12		%

The following table presents ALL activity by portfolio segment for the three months ended September 30, 2014:

							Real Estate - Mortgage
(dollars in thousands)	Commercial and Agricultural			Real Estate - Construction			1-4 Family Residential			Commercial			Consumer			Total
ALL:
Beginning balance July 1, 2014	$	3,508		$	4,778		$	7,410		$	5,666		$	2,613		$	23,975
Charge-offs	(301		)	(52		)	(234		)	(511		)	(872		)	(1,970		)
Recoveries	171			131			396			123			378			1,199
Provision (recovery of provision)	(58		)	(1,089		)	(1,217		)	(150		)	835			(1,679		)
Ending balance September 30, 2014	$	3,320		$	3,768		$	6,355		$	5,128		$	2,954		$	21,525

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The following table presents ALL activity by portfolio segment for the three months ended September 30, 2013:

							Real Estate - Mortgage
(dollars in thousands)	Commercial and Agricultural			Real Estate - Construction			1-4 Family Residential			Commercial			Consumer			Total
ALL:
Beginning balance July 1, 2013	$	2,192		$	5,652		$	7,400		$	7,387		$	2,454		$	25,085
Charge-offs	(2		)	(36		)	(394		)	(592		)	(700		)	(1,724		)
Recoveries	465			1,039			285			357			230			2,376
Provision (recovery of provision)	(45		)	(1,560		)	1,493			(677		)	439			(350		)
Ending balance September 30, 2013	$	2,610		$	5,095		$	8,784		$	6,475		$	2,423		$	25,387

The following table presents ALL activity by portfolio segment for the nine months ended September 30, 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	(1,311		)	(676		)	(869		)	(1,307		)	(1,817		)	(5,980		)
Recoveries	825			1,458			894			716			875			4,768
Provision (recovery of provision)	875			(2,247		)	(2,539		)	(1,476		)	1,339			(4,048		)
Ending balance September 30, 2014	$	3,320		$	3,768		$	6,355		$	5,128		$	2,954		$	21,525

The following table presents ALL activity by portfolio segment for the nine months ended September 30, 2013:

							Real Estate - Mortgage
(dollars in thousands)	Commercial and Agricultural			Real Estate - Construction			1-4 Family Residential			Commercial			Consumer			Total
ALL:
Beginning balance January 1, 2013	$	3,238		$	4,987		$	8,701		$	9,627		$	2,761		$	29,314
Charge-offs	(1,196		)	(964		)	(3,563		)	(2,853		)	(2,260		)	(10,836		)
Recoveries	1,376			2,106			962			2,363			1,399			8,206
Provision (recovery of provision)	(808		)	(1,034		)	2,684			(2,662		)	523			(1,297		)
Ending balance September 30, 2013	$	2,610		$	5,095		$	8,784		$	6,475		$	2,423		$	25,387

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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 September 30, 2014:

					Real Estate - Mortgage
(dollars in thousands)	Commercial and Agricultural		Real Estate - Construction		1-4 Family Residential		Commercial		Consumer		Total
ALL:
Individually reviewed for impairment	$	—	$	—	$	355	$	87	$	—	$	442
Collectively reviewed for impairment	2,940		3,155		5,625		2,676		2,764		17,160
PI loans reviewed for credit impairment	380		613		375		2,365		190		3,923
PI loans with no credit deterioration	—		—		—		—		—		—
Total ALL	$	3,320	$	3,768	$	6,355	$	5,128	$	2,954	$	21,525
Loans held for investment
Individually reviewed for impairment	$	222	$	2,830	$	11,430	$	22,911	$	—	$	37,393
Collectively reviewed for impairment	90,157		63,817		632,712		298,730		64,643		1,150,059
PI loans with subsequent credit deterioration	7,774		9,199		16,892		76,695		981		111,541
PI loans with no credit deterioration	484		78		1,426		17,135		1		19,124
Total loans	$	98,637	$	75,924	$	662,460	$	415,471	$	65,625	$	1,318,117

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 December 31, 2013:

					Real Estate - Mortgage
(dollars in thousands)	Commercial and Agricultural		Real Estate - Construction		1-4 Family Residential		Commercial		Consumer		Total
ALL:
Individually reviewed for impairment	$	—	$	—	$	927	$	—	$	—	$	927
Collectively reviewed for impairment	2,549		4,218		7,218		3,944		2,369		20,298
PI loans reviewed for credit impairment	382		1,015		724		3,251		188		5,560
PI loans with no credit deterioration	—		—		—		—		—		—
Total ALL	$	2,931	$	5,233	$	8,869	$	7,195	$	2,557	$	26,785
Loans held for investment
Individually reviewed for impairment	$	398	$	4,734	$	14,119	$	23,579	$	—	$	42,830
Collectively reviewed for impairment	61,125		49,456		595,135		258,167		43,883		1,007,766
PI loans with subsequent credit deterioration	10,729		9,792		26,628		113,178		980		161,307
PI loans with no credit deterioration	—		101		225		—		19		345
Total loans	$	72,252	$	64,083	$	636,107	$	394,924	$	44,882	$	1,212,248

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Troubled Debt Restructuring

The following tables present a breakdown of troubled debt restructurings that were restructured during the three months and nine months ended September 30, 2014 and September 30, 2013, respectively, segregated by portfolio segment:

	For Three Months Ended September 30, 2014					For Three Months Ended September 30, 2013
		Pre-Modification		Post-Modification			Pre-Modification		Post-Modification
		Outstanding		Outstanding			Outstanding		Outstanding
(dollars in thousands)	Number	Recorded		Recorded		Number	Recorded		Recorded
	of Loans	Investment		Investment		of Loans	Investment		Investment
Commercial and agricultural	—	$	—	$	—	—	$	—	$	—
Real estate - construction	1	37		37		—	—		—
Real estate - mortgage:
1-4 family residential	1	260		260		—	—		—
Commercial	—	—		—		—	—		—
Consumer	—	—		—		—	—		—
Total	2	$	297	$	297	—	$	—	$	—

	For Nine Months Ended September 30, 2014					For Nine Months Ended September 30, 2013
		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	2	$	94	$	94	—	$	—	$	—
Real estate - construction	2	523		523		—	—		—
Real estate - mortgage:
1-4 family residential	8	1,012		1,088		9	2,733		2,630
Commercial	7	3,052		3,052		2	1,611		1,195
Consumer	—	—		—		—	—		—
Total	19	$	4,681	$	4,757	11	$	4,344	$	3,825

During the nine months ended September 30, 2014, we modified nineteen loans that were considered to be troubled debt restructurings. We extended the terms for two of these loans and both extended the terms and modified the interest rate for the seventeen remaining loans. During the nine months ended September 30, 2013, we modified eleven loans that were considered to be troubled debt restructurings. We extended the terms for two of these loans, modified the interest rate for one of these loans, and modified the remaining eight loans in both ways.

There were no loans restructured in the twelve months prior to September 30, 2014 that went into default during the nine months ended September 30, 2014. There were also no loans restructured in the twelve months prior to September 30, 2013 that went into default during the nine months ended September 30, 2013.

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 $0.8 million as of September 30, 2014 and $0.5 million at December 31, 2013.

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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 decreased $8.1 million during the first nine months of 2014 from $28.4 million at December 31, 2013, to $20.3 million at September 30, 2014. At September 30, 2014 and December 31, 2013, OREO and property acquired in settlement of loans represented 42% and 45% of total nonperforming assets, respectively.

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

(dollars in thousands)	September 30, 2014		December 31, 2013
Real estate acquired in settlement of loans	$	20,180	$	28,353
Property acquired in settlement of loans	109		42
Total property acquired in settlement of loans	$	20,289	$	28,395

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)	September 30, 2014			September 30, 2013
Real estate acquired in settlement of loans, beginning of period	$	21,742		$	35,662
Plus: New real estate acquired in settlement of loans	1,643			3,610
Less: Sales of real estate acquired in settlement of loans	(3,400		)	(6,411		)
Less: Write-downs and net gain (loss) on sales charged to expense	195			262
Real estate acquired in settlement of loans, end of period	$	20,180		$	33,123

	For Nine Months Ended
(dollars in thousands)	September 30, 2014			September 30, 2013
Real estate acquired in settlement of loans, beginning of period	$	28,353		$	62,796
Plus: New real estate acquired in settlement of loans	2,894			10,403
Less: Sales of real estate acquired in settlement of loans	(10,328		)	(37,072		)
Less: Write-downs and net loss on sales charged to expense	(739		)	(3,004		)
Real estate acquired in settlement of loans, end of period	$	20,180		$	33,123

At September 30, 2014, six assets with a net carrying amount of $3.7 million were under contract for sale. Estimated losses on these sales have been recognized in the Consolidated Statements of Operations in the first nine months of 2014.

6. Earnings Per Share

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

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

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(dollars in thousands, except per share data)	For Three Months Ended				For Nine Months Ended
	September 30, 2014		September 30, 2013		September 30, 2014		September 30, 2013
Net income (loss)	$	1,773	$	4,006	$	5,842	$	(3,773	)
Weighted average number of shares outstanding - basic	21,739,009		21,738,770		21,853,866		21,722,536
Weighted average number of shares outstanding - diluted	21,746,965		21,738,770		21,865,972		21,722,536
Net income (loss) per share - basic and diluted	$	0.08	$	0.18	$	0.27	$	(0.17	)

During the three and nine months ended September 30, 2014, the price of the Company's common stock (as quoted on the Nasdaq Capital Market) was above the exercise price of 50,688 vested stock options, but 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. During the three and nine months ended September 30, 2013 the price of the Company's common stock was below the exercise price of all vested stock options and the common stock warrant. In addition, as a result of the net loss for the nine months ended September 30, 2013, all stock options and the common stock warrant were considered antidilutive and thus are not included in this calculation.

For the three and nine months ended September 30, 2014, there were 22,072 antidilutive shares. For the three months and nine months ended September 30, 2013, there were 23,197 antidilutive shares. Of the antidilutive shares, the number of shares relating to stock options were 1,125 for the three and nine months ended September 30, 2013, while the number relating to the warrant was 22,072 for all periods presented.

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 September 30, 2014. 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, 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.

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	Gain (Loss) Recognized
(dollars in thousands)	For Three Months Ended						For Nine Months Ended
	September 30, 2014			September 30, 2013			September 30, 2014		September 30, 2013
Derivatives designated as hedging instruments:
Interest rate swap contracts - FHLB advances	$	—		$	—		$	—	$	—
Derivatives not designated as hedging instruments:
Mortgage loan rate lock commitments	$	(2	)	$	20		$	1	$	8
Mortgage loan forward sales	(2		)	(102		)	16		(196		)
Total	$	(4	)	$	(82	)	$	17	$	(188	)

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.

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

28

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 September 30, 2014 and December 31, 2013, 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.

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. The fair value of forward loan sale commitments is based on pricing in a secondary market.  We record interest rate lock commitments as recurring level 2.

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.

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Assets and Liabilities Recorded at Fair Value on a Recurring Basis

Assets and liabilities carried at fair value on a recurring basis at September 30, 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	$	2,053		$	—	$	2,053		$	—
Residential mortgage-backed securities-GSE	302,447			—		302,447			—
Residential mortgage-backed securities-Private	18,668			—		18,668			—
Commercial mortgage-backed securities-GSE	21,644					21,644
Commercial mortgage-backed securities-Private	10,057			—		10,057			—
Corporate notes	8,427			—		8,427			—
Total available-for-sale debt securities	363,296			—		363,296			—
Mortgage servicing rights	1,679			—		—			1,679
Interest rate swaps	(47		)	—		(47		)	—
Interest rate locks and forward loan sales commitments	55			—		55			—
Total assets at fair value	$	364,983		$	—	$	363,304		$	1,679

Assets and liabilities carried at fair value on a recurring basis at December 31, 2013 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	$	2,077	$	—	$	2,077	$	—
Residential mortgage-backed securities-GSE	341,147		—		341,147		—
Residential mortgage-backed securities-Private	20,752		—		20,752		—
Commercial mortgage-backed securities-GSE	21,439		—		21,439		—
Commercial mortgage-backed securities-Private	9,585		—		9,585		—
Business Development Company investment	2,737		2,737		—		—
Corporate notes	16,877		—		16,877		—
Total available-for-sale debt securities	414,614		2,737		411,877		—
Mortgage servicing rights	1,552		—		—		1,552
Interest rate locks and forward loan sales commitments	39		—		39		—
Total assets at fair value	$	416,205	$	2,737	$	411,916	$	1,552

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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 September 30,
	2014			2013
Balance, beginning of period	$	1,637		$	1,337
Total gains or losses (realized/unrealized):
Included in earnings, gross	163			235
Less amortization	(121		)	(90		)
Balance, end of period	$	1,679		$	1,482

	Fair Value Measurements Using Significant
	Unobservable Inputs (Level 3)
	Mortgage Servicing Rights
(dollars in thousands)	Nine Months Ended September 30,
	2014			2013
Beginning balance at January 1,	$	1,552		$	726
Total gains or losses (realized/unrealized):
Included in earnings, gross	473			959
Less amortization	(346		)	(203		)
Balance, end of period	$	1,679		$	1,482

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 September 30, 2014:

(dollars in thousands)	Total		Level 1		Level 2		Level 3
Impaired loans, net	$	7,369	$	—	$	—	$	7,369
Other real estate owned	17,021		—		—		17,021
Total assets at fair value from continuing operations	$	24,390	$	—	$	—	$	24,390

Assets measured at fair value on a non-recurring basis are included in the following table at December 31, 2013:

(dollars in thousands)	Total		Level 1		Level 2		Level 3
Impaired loans, net	$	2,038	$	—	$	—	$	2,038
Other real estate owned	18,263		—		—		18,263
Total assets at fair value from continuing operations	$	20,301	$	—	$	—	$	20,301

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Quantitative Information about Level 3 Fair Value Measurements

(dollars in thousands)	Fair Value at September 30, 2014		Valuation Techniques	Unobservable Input	Range
Impaired loans, net	$	7,369	Discounted appraisals	Collateral discounts	1.00% - 30.00%
Other real estate owned	17,021		Discounted appraisals	Collateral discounts	1.00% - 30.00%
Mortgage servicing rights	1,679		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, 2013		Valuation Techniques	Unobservable Input	Range
Impaired loans, net	$	2,038	Discounted appraisals	Collateral discounts	1.00%-30.00%
Other real estate owned	18,263		Discounted appraisals	Collateral discounts	1.00%-30.00%
Mortgage servicing rights	1,552		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

32

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 September 30, 2014
(dollars in thousands)	Carrying Value			Estimated Fair Value			Level 1		Level 2			Level 3
Financial Assets:
Cash and cash equivalents	$	60,080		$	60,080		$	60,080	$	—		$	—
Investment securities: Available-for-sale	363,296			363,296			—		363,296			—
Investment securities: Held-to-maturity	144,684			139,582			—		139,582			—
Loans held for sale	2,268			2,268			—		2,268			—
Loans held for investment, net	1,296,592			1,279,253			—		—			1,279,253
Accrued interest receivable	6,104			6,104			—		1,361			4,743
Interest rate swaps	(47		)	(47		)	—		(47		)	—
Interest rate locks and forward loan sale commitments	55			55			—		55			—
Financial Liabilities:
Deposits	1,758,930			1,757,710			—		1,757,710			—
Retail repurchase agreements	12,217			12,217			—		12,217			—
Federal Home Loan Bank advances	73,246			76,368			—		76,368			—
Long-term notes payable	5,319			5,319			—		—			5,319
Junior subordinated debentures	56,702			22,594			—		—			22,594
Accrued interest payable	3,412			3,412			—		379			3,033

	At December 31, 2013
(dollars in thousands)	Carrying Value		Estimated Fair Value		Level 1		Level 2		Level 3
Financial Assets:
Cash and cash equivalents	$	67,430	$	67,430	$	67,430	$	—	$	—
Investment securities: Available-for-sale	414,614		414,614		2,737		411,877		—
Investment securities: Held-to-maturity	151,795		141,125				141,125		—
Loans held for sale	1,836		1,836		—		1,836		—
Loans held for investment, net	1,185,463		1,129,826		—		—		1,129,826
Accrued interest receivable	6,283		6,283		—		1,583		4,700
Interest rate locks and forward loan sale commitments	39		39		—		39		—
Financial Liabilities:
Deposits	1,748,705		1,748,685		—		1,748,685		—
Retail repurchase agreements	6,917		6,917		—		6,917		—
Federal Home Loan Bank advances	73,283		75,663		—		75,663		—
Long-term notes payable	5,263		5,263		—		—		5,263
Junior subordinated debentures	56,702		22,316		—		—		22,316
Accrued interest payable	2,624		2,624		—		389		2,235

There were no transfers between valuation levels for any assets during the three months ended September 30, 2014. 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, 2014	$	(14,476	)	$	—		$	(3,129	)	$	(17,605	)
Other comprehensive income before reclassifications	8,050			(18		)	—			8,032
Amounts reclassified from accumulated other comprehensive income	(466		)	—			—			(466		)
Net current period other comprehensive income	7,584			(18		)	—			7,566
Ending balance September 30, 2014	$	(6,892	)	$	(18	)	$	(3,129	)	$	(10,039	)

(Dollars in thousands)	Unrealized Gains (Losses) on Available-For-Sale Securities			Defined Benefit Plan Items			Total
Beginning balance January 1, 2013	$	3,650		$	(3,973	)	$	(323	)
Other comprehensive loss before reclassifications	(12,221		)	—			(12,221		)
Amounts reclassified from accumulated other comprehensive income	(1,679		)	(461		)	(2,140		)
Net current period other comprehensive loss	(13,900		)	(461		)	(14,361		)
Ending balance September 30, 2013	$	(10,250	)	$	(4,434	)	$	(14,684	)

The following table presents the reclassifications out of our accumulated other comprehensive income (loss) for the three months and nine months ended September 30, 2014 and 2013:

(Dollars in thousands)	Amount Reclassified from AOCI
	For Three Months Ended September 30, 2014			For Three Months Ended September 30, 2013			For Nine Months Ended September 30, 2014			For Nine Months Ended September 30, 2013			Line Item in the Consolidated Statement of Operations
Available-for-sale securities:
Net realized gains on sale of securities	$	(34	)	$	(50	)	$	(754	)	$	(2,773	)	Securities gains, net
Income tax (benefit) expense	13			19			288			1,094			Income tax expense
Total, net of tax	(21		)	(31		)	(466		)	(1,679		)
Defined benefit plan items:
Net actuarial gains	—			(249		)	—			(762		)	Personnel expense
Income tax (benefit) expense	—			95			—			301			Income tax expense
Total, net of tax	—			(154		)	—			(461		)
Total reclassifications for the period	$	(21	)	$	(185	)	$	(466	)	$	(2,140	)

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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:

• having financial resources in the amount, at the times and on the terms required to support our future business;

• adverse changes in financial performance or condition of our borrowers, which could affect repayment of such borrowers' outstanding loans;

• 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;

• credit losses and material changes in the quality of our loan portfolio;

• new declines in the value of our OREO;

• increased competitive pressures in the banking industry or in our markets;

• less favorable general economic conditions, either nationally or regionally, resulting in, among other things, a reduced demand for credit or other services;

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

• repurchase risk in connection with our mortgage line of business;

• reducing costs and expenses;

• our ability to raise capital in amounts, on terms and at times that will support our business needs and meet our Business Plan;

• increasing price and product/service competition by competitors;

• rapid technological development and changes;

• the inaccuracy of assumptions underlying the establishment of our ALL;

• loss of additional members of executive management;

• disruptions in or manipulations of our operating systems or the systems of our vendors due to, among other things, cybersecurity risks or otherwise;

• changes in trade, monetary and fiscal policies and laws, including interest rate policies of the Federal Reserve Board and Federal, State and local taxing authorities;

• the outcome of legislation and regulation affecting the financial services industry, including COB, including the effects resulting from the implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Basel III capital rules;

• changes in accounting principles and standards;

• the effect of any mergers, acquisitions or other transactions to which we or our subsidiaries may from time to time be a party; and

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

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

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Financial highlights are presented in the accompanying table.

Selected Financial Data

(dollars in thousands, except per share data)	As of and for Three Months Ended						As of and for Nine Months Ended
	September 30, 2014			September 30, 2013			September 30, 2014			September 30, 2013
Income Statement Data
Net interest income	$	15,848		$	17,382		$	47,045		$	47,969
Recovery of loan losses	(1,679		)	(350		)	(4,048		)	(1,297		)
Noninterest income	3,985			4,487			12,821			16,267
Noninterest expense	20,015			17,927			58,089			66,931
Income (loss) before income taxes	1,497			4,292			5,825			(1,398		)
Net income (loss)	1,773			4,006			5,842			(3,773		)
Period End Balances
Assets	$	2,015,793		$	2,037,173		$	2,015,793		$	2,037,173
Loans held for sale	2,268			2,734			2,268			2,734
Loans held for investment (1)	1,318,117			1,195,142			1,318,117			1,195,142
Allowance for loan losses	21,525			25,387			21,525			25,387
Goodwill and other intangible assets	10,191			11,402			10,191			11,402
Deposits	1,758,930			1,790,608			1,758,930			1,790,608
Borrowings	147,484			147,663			147,484			147,663
Shareholders' equity	94,490			80,802			94,490			80,802
Average Balances
Assets	$	2,004,071		$	2,002,237		$	1,993,764		$	2,057,905
Loans held for sale	1,446			2,798			1,470			4,085
Loans held for investment (1)	1,288,272			1,185,559			1,244,916			1,146,248
Allowance for loan losses	24,110			25,681			25,855			28,243
Goodwill and other intangible assets	10,325			11,414			10,635			11,474
Deposits	1,753,380			1,775,529			1,749,339			1,822,906
Borrowings	144,830			131,033			142,831			126,650
Shareholders' equity	93,051			75,740			88,356			86,708
Per Common Share Data
Net income (loss) - basic and diluted	$	0.08		$	0.18		$	0.27		$	(0.17	)
Book value (shareholders' equity) (2)	4.35			3.72			4.35			3.72
Tangible book value (shareholders' equity) (2)	3.88			3.19			3.88			3.19
Performance Ratios
Return on average assets	0.35		%	0.79		%	0.39		%	(0.25		)%
Return on average tangible assets (2)	0.35			0.80			0.39			(0.25		)
Return on average equity	7.56			20.98			8.84			(5.82		)
Return on average tangible equity (2)	8.50			24.71			10.05			(6.71		)
Net interest margin (tax equivalent)	3.38			3.76			3.41			3.41
Pre-credit and non-recurring noninterest expense as a percentage of average assets (2)	3.55			3.42			3.54			3.56
Asset Quality Ratios
Allowance for loan losses to period end loans held for investment (1)	1.63		%	2.12		%	1.63		%	2.12		%

37

Nonperforming loans to period end allowance for loan losses (3)	132	%	202	%	132	%	202	%
Net annualized charge-offs (recoveries) to average loans held for investment (1)	0.24		(0.22	)	0.13		0.31
Nonperforming assets to period end total assets (3)	2.4		4.1		2.4		4.1
Capital and Liquidity Ratios
Average equity to average assets	4.64	%	3.78	%	4.43	%	4.21	%
Leverage capital	6.48		5.83		6.48		5.83
Tier 1 risk-based capital	9.57		9.18		9.57		9.18
Total risk-based capital	12.42		12.38		12.42		12.38
Period end loans to period end deposits	75		67		75		67

(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.

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Overview

CommunityOne Bancorp, or "COB" or the "Company" (which also refers to us and our subsidiaries on a consolidated basis), is a bank

holding company 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 headquartered in Asheboro, North Carolina, we offer a complete line of

consumer, wealth management, mortgage and business banking services, including loan, deposit, cash management, investment

management and trust services, to individual and business customers through operations located throughout central, southern and

western North Carolina.

In addition to the Bank, we own FNB United Statutory Trust I, FNB United Statutory Trust II, and Catawba Valley Capital Trust II,

which were formed to facilitate the issuance of trust preferred securities. COB also owned Granite Mortgage, Inc., which ceased

mortgage operations in 2009, filed for Chapter 11 bankruptcy on February 15, 2012 and was dissolved on May 5, 2014.

The Bank holds the stock of First National Investor Services, Inc., which holds deeds of trust for the Bank. The Bank had also owned

Dover Mortgage, which had previously engaged in the business of originating, underwriting and closing mortgage loans for sale in the

secondary market. Dover ceased operations in the first quarter of 2011, filed for Chapter 11 bankruptcy on February 15, 2012 and was dissolved on April 28, 2014.

On October 21, 2011, as part of the recapitalization of COB, COB acquired Bank of Granite Corporation and its subsidiary bank, Bank of Granite, through the merger of a wholly owned subsidiary of ours into Granite Corp. (the “Merger”). Bank of Granite was merged into the Bank on June 8, 2013.

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 2014 goals

The third quarter was our fifth consecutive profitable quarter and we continued to make solid progress in achieving the four goals we established for 2014:

1. Grow loans

2. Grow core deposits

3. Invest in people and products while maintaining sound expense discipline

4. Resolve our remaining credit issues

Our highest priority goal is to grow loans, and during the third quarter we continued to experience very strong loan growth, with loans growing by $48.3 million, or just under 4%, for a 15% annualized growth rate. This performance follows an equally strong second quarter annualized loan growth rate of 16%. Organic loan growth, which excludes the impact of purchased residential loan pools, totaled $56.9 million in the quarter for a 22% annualized growth rate, and the pass rated loan portfolio grew $60.5 million in the quarter for a 21% annualized growth rate. As was the case during the second quarter, we experienced loan growth in all segments of our business during the quarter, especially in our commercial banking segment, and we expect this loan growth to continue as personnel additions in the Greensboro market and new loan production offices announced in Raleigh and in Winston-Salem during the second and third quarters enhance our loan production capability. We also increased our loans to deposit ratio to 75% - which was our end-of-year goal.

On the deposit front, deposits have increased $10.2 million since the end of 2013 for a 1% annualized growth rate. During the quarter, however, deposits were down slightly, by $4.8 million, on lower non-interest-bearing demand accounts and time deposits, offset by improved demand, money market and savings deposits. During the third quarter we had $10.1 million of high cost brokered deposits that matured and were not renewed. Net of those maturities, deposits grew $5.3 million. Low cost core deposits, consisting of non-time deposits, grew $4.6 million during the quarter to 67% of total deposits. Our investments in enhanced treasury management product capabilities and online and mobile banking infrastructure continue to be on schedule with plan and, along with CD and money market deposit promotions during the fourth quarter, should support reaching our 3% deposit growth goal for the full year.

We continued our expense management efforts during the quarter, while continuing to make investments in key areas to support our strategic initiatives. Excluding the $2.1 million charge relating to the departure of our CEO at the end of the quarter, noninterest expense fell $1.3 million from the second quarter, as a result of reduced OREO and collection expenses. Pre-credit and non-recurring ("PCNR") noninterest expense was $0.5 million higher than the second quarter as a result of new hires in the commercial and

39

residential mortgage lending teams and increased benefit expenses. While average full time equivalent employees (FTE) were 568, up 10 from 558 in the second quarter due to new hires in our commercial and mortgage banking areas, they were down 7% from 608 in the third quarter of 2013. During the third quarter, improvements in our capital, earnings and asset quality drove a decline in the annual costs of our FDIC insurance expenses of $183 thousand.

Our fourth key goal is to resolve our remaining credit issues. We are currently ahead of schedule, with lower credit costs incurred year-to-date as compared to 2013. Nonperforming assets were reduced 9% in the quarter, to 2.4% of total assets, compared to a year-end goal of 2.3%. We reduced classified assets by $30.5 million year-to-date versus a full year reduction goal of $40.0 million, and the Bank's classified asset to Tier 1 capital plus ALL ratio continues to drop, down from 56% in the second quarter to 51% at quarter end, well on track to reach our goal of 45% by year end. Importantly we made this progress with very little credit cost, with only 24 basis points in annualized net charge-offs during the quarter and OREO write-downs and valuation allowances net of gains on sale of OREO, a recovery of $75 thousand.

As previously reported, at the end of the third quarter, Brian Simpson, the former CEO of the Company, left the Company and also stepped down from the boards of directors of the Company and the Bank. Bob Reid, the Company’s President since October 21, 2011, was named President and CEO as of October 1, 2014. This consolidation of the President and CEO positions was determined to be in the best interests of the Company in order to reduce operating expenses to levels consistent with the Company’s peers as we focus on improving our operating performance in the competitive markets in which we operate. Our goals and operating philosophy have not changed as a result of this change in executive management, and we remain dedicated to achieving our 2014 goals and improving the Company’s profitability in 2015.

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 - Third Quarter for the three month periods ended September 30, 2014 and 2013, and in the Average Balances and Net Interest Income Analysis - Nine Months for the nine month periods ended September 30, 2014 and 2013.

Net interest margin (taxable equivalent) declined 38 basis points from 3.76% in the third quarter of 2013 to 3.38% in the third quarter of 2014. Net interest income on a taxable equivalent basis was $15.9 million for the three month period ended September 30, 2014, a decrease of 9%, or $1.5 million, from $17.4 million for the same period in 2013. The decrease in interest income is primarily a result of a decrease in non-cash accretion on Granite PI loans of $1.2 million and the impact of $71.3 million in lower average securities balances as a result of sales and amortization.

The yield on average earning assets decreased by 37 basis points in the third quarter of 2014 to 3.92% from 4.29% in the third quarter of 2013 for the reasons just noted. The cost of interest-bearing liabilities rose three basis points from 0.61% in the third quarter of 2013 to 0.64% in the third quarter of 2014 as a result of the impact of FHLB advance cash flow hedges we executed in the first quarter of 2014. The cost of interest-bearing deposits declined 3 basis points, or 6%, from 0.51% for the third quarter of 2013 to 0.48% for the third quarter of 2014 as the average cost of time deposits fell 7 bps from the third quarter of 2013.

The following table summarizes the average balance sheets and net interest income/margin analysis for the three months ended September 30, 2014 and 2013. 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.

40

Average Balances and Net Interest Income Analysis - Third Quarter

	Three Months Ended September 30,
	2014						2013
					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)	$	1,289,718	$	14,875	4.58	%	$	1,188,357	$	16,012	5.35	%
Taxable investment securities	524,442		3,400		2.57		595,773		3,774		2.51
Other earning assets	48,319		141		1.16		55,229		115		0.83
Total earning assets	1,862,479		18,416		3.92		1,839,359		19,901		4.29
Noninterest-earning assets:
Cash and due from banks	27,425						27,401
Goodwill and other intangible assets	10,325						11,402
Other assets, net	103,842						124,075
Total assets	$	2,004,071					$	2,002,237
Interest-bearing liabilities:
Interest-bearing demand deposits	$	338,827	$	259	0.30	%	$	330,934	$	253	0.30	%
Savings deposits	85,501		22		0.10		80,412		21		0.10
Money market deposits	428,451		274		0.25		445,639		265		0.24
Time deposits	579,790		1,171		0.80		618,284		1,355		0.87
Total interest-bearing deposits	1,432,569		1,726		0.48		1,475,269		1,894		0.51
Retail repurchase agreements	8,480		5		0.23		10,871		6		0.22
Federal Home Loan Bank advances	74,341		520		2.78		59,932		289		1.91
Other borrowed funds	62,009		296		1.89		60,230		282		1.86
Total interest-bearing liabilities	1,577,399		2,547		0.64		1,606,302		2,471		0.61
Noninterest-bearing liabilities and shareholders' equity:
Noninterest-bearing demand deposits	320,811						300,260
Other liabilities	12,810						19,935
Shareholders' equity	93,051						75,740
Total liabilities and shareholders' equity	$	2,004,071					$	2,002,237
Net interest income and net yield on earning assets (4)			$	15,869	3.38	%			$	17,430	3.76	%
Interest rate spread (5)					3.28	%					3.68	%

(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.

41

Net interest income on a taxable equivalent basis was $47.1 million for the nine month period ended September 30, 2014, a decrease of $1.0 million, or 2%, from $48.1 million for the same period in 2013. The decrease in interest income is a result of a decrease in non-cash accretion on Granite PI loans of $2.0 million, partially offset by $96.1 million growth in average loans from the prior year.

Net interest margin (taxable equivalent) was unchanged at 3.41% for the first nine months of 2014 from the first nine months of 2013. This was the result of decreased interest income on loans for the reasons just noted, partially offset by a decrease in interest expense on deposits, as well as a smaller earning asset base. The yield on average earning assets decreased by 3 basis points during the first nine months of 2014 to 3.95% from 3.98% in the comparable portion of 2013. The decrease in average yield was the result of a decline in loan yields, partially offset by an increase in the yields on investment securities. The cost of interest-bearing liabilities declined during the first nine months of 2014 by 1 basis point to 0.64% compared to 0.65% in the same period of 2013, primarily as a result of a 10 bps decline in the cost of time deposits, offset by a 38 bps increase in the cost of FHLB advances as a result of interest rate hedges executed in the first quarter of 2014. The cost of interest-bearing deposits declined 6 basis points, or 11%, from 0.54% for the first nine months of 2013 to 0.48% for the comparable period of 2014.

The following table summarizes the average balance sheets and net interest income/margin analysis for the nine months ended September 30, 2014 and 2013. 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.

42

Average Balances and Net Interest Income Analysis - Nine Months

	Nine Months Ended September 30,
	2014						2013
					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)	$	1,246,385	$	43,378	4.65	%	$	1,150,333	$	45,315	5.27	%
Taxable investment securities	544,878		10,826		2.66		579,599		10,366		2.39
Tax-exempt investment securities (1)	—		—		—		—		—		—
Other earning assets	58,317		447		1.02		158,210		524		0.44
Total earning assets	1,849,580		54,651		3.95		1,888,142		56,205		3.98
Noninterest-earning assets:
Cash and due from banks	27,043						30,566
Goodwill and other intangible assets	10,635						11,474
Other assets, net	106,506						127,723
Total assets	$	1,993,764					$	2,057,905
Interest-bearing liabilities:
Interest-bearing demand deposits	$	337,393	$	770	0.31	%	$	346,730	$	784	0.30	%
Savings deposits	84,384		65		0.10		79,293		60		0.10
Money market deposits	438,279		800		0.24		450,197		759		0.23
Time deposits	578,567		3,533		0.82		669,197		4,628		0.92
Total interest-bearing deposits	1,438,623		5,168		0.48		1,545,417		6,231		0.54
Retail repurchase agreements	7,208		11		0.20		9,303		15		0.22
Federal Home Loan Bank advances	73,632		1,504		2.73		58,862		1,037		2.36
Other borrowed funds	61,991		857		1.85		58,485		809		1.85
Total interest-bearing liabilities	1,581,454		7,540		0.64		1,672,067		8,092		0.65
Noninterest-bearing liabilities and shareholders' equity:
Noninterest-bearing demand deposits	310,716						277,489
Other liabilities	13,238						21,641
Shareholders' equity	88,356						86,708
Total liabilities and shareholders' equity	$	1,993,764					$	2,057,905
Net interest income and net yield on earning assets (4)			$	47,111	3.41	%			$	48,113	3.41	%
Interest rate spread (5)					3.31	%					3.33	%

(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.

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 is affected by several considerations, including our evaluation of various risk factors in

43

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 and nine month periods ended September 30, 2014, the recovery of loan losses was $1.7 million and $4.0 million, respectively, compared to $0.4 million and $1.3 million in the same periods of 2013, as a result of the impact of declining loss rates net of recoveries in recent periods and an increase in forecasted cash flows for Granite PI loans that resulted in the reversal of previously recorded impairment on pools of loans within this portfolio. During the nine month periods ended September 30, 2014 and 2013, net charge-offs totaled $1.2 million and $2.6 million, respectively, or 0.13% and 0.31% 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 September 30, 2014, noninterest income was $4.0 million compared to $4.5 million for the same period in 2013, a decrease of $0.5 million, or 11%, primarily the result of a $0.3 million decrease in service charge income as a result of reduced levels of NSF fees, and a $0.2 million decrease in mortgage loan sales income as origination volumes declined 17%. PCNR noninterest income, which excludes securities gains and losses, was $4.0 million, a decrease of $0.5 million from the third quarter of 2013 for the reasons just noted. See "Non-GAAP Measures" for further discussion.

For the nine months ended September 30, 2014, noninterest income was $12.8 million compared to $16.3 million for the same period in 2013, a decrease of $3.5 million, or 21%, primarily the result of a $2.0 million decrease in net gains on sales of investment securities in the first nine months of 2014, compared to the same period in 2013, as well as a $1.4 million decrease in mortgage loan sales income, as a result of higher mortgage interest rates, 27% lower origination volume and lower sales of loans. PCNR noninterest income was $12.1 million, compared to $13.5 million in the first nine months of 2013 primarily as a result of the decline in mortgage loan income just noted.

	Three Months Ended				Nine Months Ended
(dollars in thousands)	September 30, 2014		September 30, 2013		September 30, 2014		September 30, 2013
Noninterest Income
Service charges on deposit accounts	$	1,583	$	1,858	$	4,766	$	4,915
Mortgage loan income	205		420		640		2,085
Cardholder and merchant services income	1,183		1,161		3,505		3,403
Trust and investment services	344		329		1,101		964
Bank-owned life insurance	273		267		803		805
Other service charges, commissions and fees	290		365		974		960
Securities gains, net	34		50		754		2,773
Other income	73		37		278		362
Total noninterest income	3,985		4,487		12,821		16,267
Less:
Securities gains, net	34		50		754		2,773
PCNR noninterest income (1)	$	3,951	$	4,437	$	12,067	$	13,494

(1) See "Non-GAAP Measures"

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, and one-time merger-related expenses incurred to acquire and integrate Granite.

Noninterest expenses were $20.0 million in the third quarter of 2014 compared to $17.9 million in the same period of 2013, an increase of $2.1 million, or 12%. The increase in noninterest expense was primarily attributable to a $3.0 million increase in personnel expense, as a result of $2.1 million of severance costs for the Company's former Chief Executive Officer and the impact of salaries, benefits and hiring costs of commercial and mortgage bankers in Charlotte, Greensboro, Winston-Salem and Raleigh. This was partially offset by decreased loan collection expense, as a result of our substantial reduction in nonperforming loans and OREO assets

44

from the prior year and stabilizing real estate prices during 2014. FDIC insurance costs were also lower by $234 thousand on improvements in capital, earnings and asset quality.

For the nine months ended September 30, 2014, noninterest expenses declined $8.8 million, or 13%, from the same period of 2013, to $58.1 million. OREO expense declined $2.9 million from the first nine months of 2013, as a result of the decline in the OREO portfolio and stabilizing real estate prices during 2014 noted above. Loan collection expenses fell $2.4 million, and merger-related expense were $3.5 million in 2013, compared to none in the first nine months of 2014. Personnel expenses increased $1.8 million from the first nine months of 2013 as a result of the severance and hiring costs described above, partially offset by branch closures and on-going staffing efficiency efforts.

As a result of the level of problem assets, actions taken to dispose of those assets, actions taken to restructure the balance sheet, and the expenses to acquire and integrate Bank of Granite, there are a significant number of credit-related and non-recurring items within our noninterest expense. Excluding the items that we identify as credit-related and non-recurring, other real estate expenses, loan collection expenses, merger-related expense, branch closure and restructuring expenses, mortgage and litigation accruals, U.S. Treasury expenses, executive severance and rebranding expenses, the PCNR NIE, was $17.8 million in the third quarter of 2014. See "Non-GAAP Measures" for further discussion. This PCNR NIE was $0.7 million higher than PCNR NIE of $17.1 million in the same quarter in 2013. For the nine months ended September 30, 2014, PCNR NIE was $2.0 million lower than the same period of 2013 as a result of the ongoing efficiency initiatives and reduction in FDIC insurance expenses.

Full-time equivalent employees averaged 568 employees for the third quarter of 2014 versus 608 employees for the third quarter of 2013, a reduction of 7%.

	Three Months Ended						Nine Months Ended
(dollars in thousands)	September 30, 2014			September 30, 2013			September 30, 2014			September 30, 2013
Noninterest Expense
Personnel expense	$	12,616		$	9,663		$	32,965		$	31,149
Net occupancy expense	1,521			1,558			4,586			5,060
Furniture, equipment and data processing expense	2,208			2,050			6,258			6,512
Professional fees	699			222			1,799			2,475
Stationery, printing and supplies	149			136			484			509
Advertising and marketing	142			150			442			994
Other real estate owned expense	(29		)	(98		)	1,186			4,116
Credit/debit card expense	520			627			1,719			1,525
FDIC insurance	412			646			1,646			1,980
Loan collection expense	198			1,120			1,406			3,784
Merger-related expense	—			—			—			3,498
Core deposit intangible amortization	352			352			1,056			1,056
Other expense	1,227			1,501			4,542			4,273
Total noninterest expense	20,015			17,927			58,089			66,931
Less:
Other real estate owned expense	(29		)	(98		)	1,186			4,116
Merger-related expense	—			—			—			3,498
Loan collection expense	198			1,120			1,406			3,784
Executive severance expense	2,060						2,060
Rebranding expenses	—			6			—			616
U.S. Treasury sale expenses	—			—			409			—
Mortgage and litigation accrual	—			(117		)	(68		)	(487		)
Branch closure and restructuring expense	—			(105		)	190			497
PCNR noninterest expense (1)	$	17,786		$	17,121		$	52,906		$	54,907

(1) See "Non-GAAP Measures"

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Provision for Income Taxes

Income tax expense (recovery) totaled $(0.3) million for the third quarter of 2014 and $0.3 million for the third quarter of 2013. For the first nine months of 2014, income tax expense (recovery) totaled $(17) thousand, compared to $2.4 million for the first nine months of 2013. Our provision for income taxes, as a percentage of income (loss) before income taxes, was (18.4)% and 6.7% for the three months ended September 30, 2014 and September 30, 2013, respectively, and (0.3)% and (169.9)% for the nine months ended September 30, 2014 and September 30, 2013, respectively. Income tax expense (recovery) in the first nine months of 2014 and 2013 is primarily the result of the reduction of deferred tax liabilities as a result of sales of investment securities during the period which had unrealized gains (and associated deferred tax liabilities) prior to sale. Because we maintain a valuation allowance for net deferred tax assets equal to the gross deferred tax asset net of any deferred tax liabilities, reductions in deferred tax liabilities from the sale of the securities during the period resulted in an increase in the required valuation reserve and a corresponding increase in income tax expense. As part of our review of the tax valuation allowance in the third quarter we determined that $0.5 million of federal tax benefits that have no expiration date could be recognized in the third quarter.  The tax benefit is partially offset by a tax expense related to our tax strategy on the securities portfolio.

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Balance Sheet Review

Total assets at September 30, 2014 were $2.02 billion, an increase of $30.8 million, or 2%, compared to total assets of $1.99 billion at December 31, 2013.

Cash and interest-bearing balances were $60.1 million at September 30, 2014, a decrease of $7.4 million, or 11%, compared to $67.4 million at December 31, 2013, primarily as a result of increases in the deposit portfolio and repayments, maturities and sales of investment portfolio securities.

Total investment portfolio securities decreased $58.4 million during the first nine months of 2014, from $566.4 million at December 31, 2013 to $508.0 million at September 30, 2014, a decrease of 10%. Year to date 2014 we have sold $26.4 million of investment portfolio securities. 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. During the first quarter of 2013, we began to purchase investment securities to be held-to-maturity. At September 30, 2014 there were $144.7 million of investment securities so designated.

Gross loans held for investment increased $105.9 million, an increase of 9%, or 12% annualized during the first nine months of 2014, from $1,212.2 million at December 31, 2013 to $1,318.1 million at September 30, 2014. The increase was primarily the result of loan originations net of reductions in problem loans, as well as the purchase of a $19.6 million residential mortgage loan pool in the second quarter of 2014. Loans held for investment grew in all lines of business during the first nine months of the year. Organic loan growth, which excludes the impact of purchased residential loan pools, totaled $105.8 million year to date for a 14% annualized growth rate. The pass rated loan portfolio grew $138.6 million year to date for a 17% annualized growth rate.

OREO and property acquired in settlement of loans decreased $8.1 million, or 29%, during the first nine months of 2014, from $28.4 million at December 31, 2013 to $20.3 million at September 30, 2014, as a result of $10.3 million of OREO sales and $0.7 million of write-downs and losses, partially offset by the addition of $2.9 million of OREO properties. At September 30, 2014, six assets with a net carrying amount of $3.7 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 nine months of 2014. Actual gains, if any, will be recorded at the time of sale.

Total deposits were $1.76 billion at September 30, 2014, an increase of $10.2 million, or 1% from $1.75 billion at December 31, 2013. Noninterest-bearing deposits increased $27.5 million, or 9%, from $290.5 million at December 31, 2013 to $318.0 million at September 30, 2014, as these deposits rebounded from seasonal lows at year end 2013. The total cost of interest-bearing deposits declined by 6 basis points from 0.54% in the first nine months of 2013 to 0.48% in the first nine months of 2014. The cost of all deposits, including noninterest-bearing deposits, fell to 0.40% for the first nine months of 2014, a decline of 6 basis points from 0.46% for the first nine months of 2013. Low cost core, which excludes all time deposits, has increased $10.6 million year to date.

Shareholders' equity (book value) at September 30, 2014 was $94.5 million as compared to $80.4 million at December 31, 2013. The book value per share was $4.35 at September 30, 2014, as compared to a book value per share of $3.70 for the year ended December 31, 2013. The change in shareholders' equity reflects net income to common shareholders for the nine months ended September 30, 2014 of $5.8 million as well as $7.6 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 nine months ended September 30, 2014, and will not pay any dividends until such time as we either receive or are not required to receive regulatory approval for the payment of dividends. We do not expect to pay dividends to shareholders for the foreseeable future.

During the first nine months of 2014, the Company issued 149,738 shares of restricted stock awards to employees.  With the US Treasury sale of its shares in May 2014 and in compliance with the U.S. Treasury’s TARP regulations, the Company cancelled 269,946 shares of restricted stock awards granted to certain senior executives.  As a result of these transactions, total shares outstanding for the nine months ended September 30, 2014 declined by 120,208.

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 September 30, 2014, there were no securities considered by COB to have OTTI.

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During the first nine months of 2014, changes in the overall level of interest rates resulted in unrealized gains of $13.0 million in our available-for-sale portfolio. As a result, an unrealized gain of $8.0 million in the first nine months of 2014, net of deferred taxes of $5.0 million, has been recorded in Other Comprehensive Income. At September 30, 2014, there was a remaining unrealized loss of $11.2 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.

Acquired Loans

Loans acquired in the Merger ("Granite Purchased Loans") include purchased impaired loans ("PI loans") and purchased contractual loans ("PC loans"). At September 30, 2014, there were $157.6 million of Granite Purchased Loans, of which $26.9 million were PC loans, and $111.5 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.

Periodically, we estimate the expected cash flows for each pool of the PI loans and evaluate whether the expected cash flows for each pool have changed from prior estimates. Decreases to the expected cash flows will generally result in a provision for loan losses. Subsequent increases in cash flows result in a reversal of the provision for loan losses to the extent of prior charges, or reclassification from 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 September 30, 2014, an ALL of $3.9 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 $491.4 million, or approximately 37%, of our total loans held for investment portfolio at September 30, 2014, down from 38% at December 31, 2013. 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 $35.2 million or 2.9% of loans held for investment at December 31, 2013, to $28.5 million, or 2.2% of loans held for investment at September 30, 2014. OREO and property acquired in settlement of loans were $20.3 million at September 30, 2014, compared to $28.4 million at December 31, 2013, a decline of $8.1 million or 29%. During the first nine months of 2014, we recorded net write-downs (net of gains on sales) of OREO of $0.7 million as compared to $3.0 million during the first nine months of 2013. We have experienced stabilizing real estate prices during 2013 and 2014, and OREO sales in excess of additions to the portfolio. Total nonperforming assets declined 23% from $63.6 million at December 31, 2013 to $48.8 million at September 30, 2014, and represented 2.4% of total assets, an improvement from 3.2% at December 31, 2013.

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

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

Estimated credit losses should meet the criteria for accrual of a loss contingency, i.e., a provision to the ALL, set forth in GAAP. Our methodology for determining the ALL is based on GAAP, the Interagency Policy Statement on the Allowance for Loan and Lease Losses and other regulatory and accounting pronouncements. The ALL is determined by the sum of three separate components:  (a) the impaired loan component, which addresses specific reserves for impaired loans; (b) the general reserve component, which addresses reserves for pools of homogeneous loans; and (c) an unallocated reserve component (if any) based on management's judgment and experience. The loan pools and impaired loans are mutually exclusive; any loan that is impaired is excluded from its homogenous pool for purposes of that pool's reserve calculation, regardless of the level of impairment. We have established a de 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 $26.8 million at December 31, 2013 decreased by 20% to $21.5 million at September 30, 2014. The ALL, as a percentage of loans held for investment, was 1.63% at September 30, 2014 compared to 2.21% at December 31, 2013. Net charge-offs were $1.2 million in the first nine months of 2014 compared to net charge-offs of $2.6 million in the first nine months of 2013. Annualized net charge-offs in the first nine months of 2014 were 0.13% of average loans, compared to annualized net charge-offs of 0.31% in the same period of 2013.

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 $21.5 million at September 30, 2014 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.

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 financial statements of the Company during the quarter it was implemented.

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.

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The following table presents COB's investment in loans considered to be impaired and related information on those impaired loans as of September 30, 2014 and December 31, 2013:

	September 30, 2014				December 31, 2013
(dollars in thousands)	Balance		Associated Reserves		Balance		Associated Reserves
Impaired loans, not individually reviewed for impairment	$	4,741	$	—	$	4,612	$	—
Impaired loans, individually reviewed, with no impairment	29,582		—		39,865		—
Impaired loans, individually reviewed, with impairment	7,811		442		2,965		927
Total impaired loans *	$	42,134	$	442	$	47,442	$	927
Purchased impaired loans with subsequent deterioration	$	111,541	$	3,923	$	161,307	$	5,560
Purchased impaired loans with no subsequent deterioration	19,124		—		345		—
Total Reserves			4,365				6,487
Average impaired loans calculated using a simple average	$	44,788			$	65,527
* Included at September 30, 2014 and December 31, 2013 were $13.8 million and $12.1 million, respectively, in restructured and performing loans.

Liquidity Management

Liquidity management refers to the ability to meet day-to-day cash flow requirements based primarily on activity in loan and deposit accounts of COB's customers. Liquidity is immediately available from four major sources: (a) cash on hand and on deposit at other banks; (b) the outstanding balance of federal funds sold; (c) the market value of unpledged investment securities; and (d) availability under lines of credit. At September 30, 2014, the total amount of these four items was $436.1 million, or 22% of total assets, a decrease of $89.0 million from $525.1 million, or 26% of total assets, at December 31, 2013. COB could also access $200.7 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.

At September 30, 2014, $116.6 million of the investment securities portfolio was pledged to secure public deposits, $17.3 million was pledged to retail repurchase agreements and $176.9 million was pledged to others, leaving $197.1 million available as lendable collateral.

Commencing the first quarter of 2012, we resumed deferring the payment of cash dividends on the Company's outstanding junior subordinated debentures. The deferral of such cash dividends in the third quarter of 2014 represented the eleventh quarterly deferral of the current deferral period.

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 September 30, 2014. 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. During 2013, increases in long-term interest rates that extended the duration of our fixed-rate mortgage-backed investment securities portfolio, purchases of $134 million of fixed-rate residential mortgage pools and the conversion of $50 million of fixed rate FHLB advances to floating rate reduced our overall level of asset sensitivity. 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.

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Capital Adequacy and Resources

Under guidelines established by the Federal Reserve Board and the OCC, capital adequacy is currently measured for regulatory purposes by certain risk-based capital ratios, supplemented by a leverage capital ratio. The guidelines define an institution's total qualifying capital as having two components: Tier 1 capital, which must be at least 50% of total qualifying capital and is mainly comprised of common equity, retained earnings and qualifying preferred stock, 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.

Under the requirements, the minimum capital standards that must be met by any bank holding company or bank include a Tier 1 capital ratio of at least 4%, a total risk-based capital ratio of at least 8% and a leverage capital ratio of at least 4% (except for those institutions with the highest regulatory ratings and not experiencing significant growth or expansion). 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 institutions ability to manage those risks are important factors that are to be taken into account by the federal banking agencies in assessing an institution's overall capital adequacy.

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, and COB and the Bank's capital ratios as of September 30, 2014 were as follows:

			Minimum Regulatory Requirement
	CommunityOne Bancorp	CommunityOne Bank	Adequately Capitalized	Well- Capitalized
Leverage capital ratio	6.48%	7.97%	4.00%	5.00%
Tier 1 risk-based capital ratio	9.57%	11.78%	4.00%	6.00%
Total risk-based capital ratio	12.42%	13.04%	8.00%	10.00%

On June 10, 2013, the OCC terminated the Bank Consent Order; however, the Bank has continuing obligations to, among other things, adhere to its Business Plan, including maintaining the capital ratios in the Plan, and will continue to have restrictions on its ability to pay dividends. With the lifting of the Consent Order, the Bank is considered “well-capitalized” under the applicable provisions of the Federal Deposit Insurance Act. On November 5, 2013, the FRBR terminated its Written Agreement with the Company which had been entered into on October 21, 2010. With the termination of the Written Agreement, the Company and the Bank are no longer subject to any formal supervisory orders. However, the Company continues to have restrictions on its ability to declare or pay dividends, distribute interest, principal or other amounts on its trust preferred securities, incurring, increasing or guaranteeing any debt, or repurchasing or redeeming any shares of stock.

The federal banking agencies have issued revised capital rules that will change the leverage and risk-based capital requirements (including the prompt corrective action framework), which will become effective for community banks as of January 1, 2015. Under these final rules, the definition of the regulatory capital components and minimum capital requirements will materially change. Among the most important of these changes is that a new common equity Tier 1 risk-based capital ratio of 4.5% has been added, and the overall Tier 1 risk-based capital ratio has been raised to 6%. Certain deductions from common equity will be expanded and others, including mortgage servicing assets and deferred tax assets subject to temporary timing differences, will be subject to threshold deductions. In addition, the agencies are requiring a capital conservation buffer of up to 2.5% above each of the capital ratio requirements (common equity tier 1, 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 rulemakings also change the risk-weighting of certain assets, including “high volatility” commercial real estate, past due assets, structured securities and equity holdings. We believe that these changes, when implemented, will not have a material effect on COB or the Bank.

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

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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, 2013, 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".

During the third quarter of 2013, we changed a component of the calculation of our allowance for loan losses. We began using a look back period consisting of the twenty most recent quarters to calculate loss factors for each risk-graded pool. Previously, we used a look back period beginning in the third quarter of 2006.

Valuation of Other Real Estate Owned

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

Carrying Value of Securities

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

Purchased Loans Accounting

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

Treatment of Deferred Tax Assets

Management's determination of the realization of deferred tax assets is based upon its judgment of various future events and uncertainties, including the timing and amount of future income earned and the implementation of various tax plans to maximize realization of the deferred tax assets. In evaluating the positive and negative evidence to support the realization of the asset under current guidance, there is insufficient positive evidence to support a conclusion that it is more likely than not this asset will be realized in the foreseeable future. Examinations of the income tax returns or changes in tax law may impact our tax liabilities and resulting provisions for income taxes.

A valuation allowance is recognized for a deferred tax asset if, based on the weight of available evidence, it is more-likely-than-not that some portion or the entire deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. In making such judgments, significant weight is given to evidence that can be objectively verified. As a result of historical credit losses, COB is in a three-year cumulative pre-tax loss position as of September 30, 2014. A cumulative loss position is considered significant negative evidence in assessing the realizability of a deferred tax asset, which is difficult to overcome. Our estimate of realizable deferred tax assets was based on the scheduled reversal of deferred tax liabilities and estimated unrealized losses in the available-for-sale investment portfolio. In total, we have a net deferred tax asset of $150.1 million which is offset by a valuation allowance of $144.5 million. We did not consider future taxable income in determining the realizability of the deferred tax assets. We expect our income tax expense (benefit) will be negligible except for tax expense or benefit related to the change in the deferred tax liability related to

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available-for-sale securities until profitability is considered sustainable. At that time, a portion of the valuation allowance would be reversed. Reversal of the valuation allowance requires a great deal of judgment and will be based on the circumstances that exist as of that future date. If future events differ significantly from our current forecasts, we may need to increase this valuation allowance.

The Merger was considered a change in control for Granite Corp. under Internal Revenue Code Section 382 and the Regulations, thereunder. Accordingly, we are required to evaluate potential limitation or deferral of its ability to carryforward pre-acquisition net operating losses and to determine the amount of net unrealized built-in losses (“NUBIL”), which may be subject to similar limitation or deferral. Under the Internal Revenue Code and Regulations, NUBIL realized within 5 years of the change in control are subject to potential limitation, which for us is October 20, 2016. Through that date, we will continue to analyze our ability to utilize such losses to offset anticipated future taxable income, however, this estimate will not be known until the five-year recognition period expires. Losses limited under these provisions are generally limited to a carryforward period of 20 years, subject to the annual limitation and expire if not used by the end of that period. The Company believes the remaining DTA of $2.9 million related to NOL carryforwards from the Merger will be realized on a go forward basis.

The State of North Carolina has reduced the income tax rates from 6.9% to 6.0% in 2014 and will reduce the rates to 5.0% in 2015.  The DTA has been reduced to account for the reduction in income tax rates to 5.0%.  The net reduction in DTA is offset by a corresponding reduction in the valuation allowance.

Summary

Management believes the accounting estimates related to the ALL, the valuation of OREO, the carrying value of securities, purchased loan accounting, and the valuation allowance for 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 “tangible shareholders' equity,” “tangible assets”, “tangible book value”, "PCNR earnings", "PCNR noninterest expense", "PCNR" and "PCNR noninterest income." and "PCNP." Our management, financial services companies, bank stock analysts, and bank regulators use these non-GAAP measures in their analysis of our performance.

• “Average tangible shareholders’ equity” is defined as average shareholders’ equity reduced by average recorded goodwill, and average other intangible assets.

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

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

• “Tangible assets” is defined as 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.

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• “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 non-recurring 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 nine months ended September 30, 2014			As of and for the year ended December 31, 2013			As of and for the nine months ended September 30, 2013
Average book value (shareholders' equity)	$	88,356		$	85,576		$	86,708
Less:
Average goodwill	(4,205		)	(4,205		)	(4,205		)
Average core deposit and other intangibles	(6,430		)	(7,207		)	(7,269		)
Average tangible book value (shareholders' equity) (non-GAAP)	$	77,721		$	74,164		$	75,234
Total average assets	$	1,993,764		$	2,047,146		$	2,057,905
Less:
Average goodwill	(4,205		)	(4,205		)	(4,205		)
Average core deposit and other intangibles	(6,430		)	(7,207		)	(7,269		)
Average tangible assets (non-GAAP)	$	1,983,129		$	2,035,734		$	2,046,431
Book value (Shareholders' equity)	$	94,490		$	80,361		$	80,802
Less:
Goodwill	(4,205		)	(4,205		)	(4,205		)
Core deposit and other intangibles	(5,986		)	(6,914		)	(7,197		)
Tangible book value (shareholders' equity) (non-GAAP)	$	84,299		$	69,242		$	69,400
Total assets	$	2,015,793		$	1,985,032		$	2,037,173
Less:
Goodwill	(4,205		)	(4,205		)	(4,205		)
Core deposit and other intangibles	(5,986		)	(6,914		)	(7,197		)
Tangible assets (non-GAAP)	$	2,005,602		$	1,973,913		$	2,025,771
Book value per common share	$	4.26		$	3.70		$	3.72
Effect of intangible assets	(0.48		)	(0.51		)	(0.53		)
Tangible book value per common share (non-GAAP)	$	3.78		$	3.19		$	3.19

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(dollars in thousands)	Three Months Ended						Nine Months Ended
	September 30, 2014			September 30, 2013			September 30, 2014			September 30, 2013
Income (loss) before income taxes	$	1,497		$	4,292		$	5,825		$	(1,398	)
Plus:
Other real estate owned expense	(29		)	(98		)	1,186			4,116
Loan collection expense	198			1,120			1,406			3,784
Merger-related expense	—			—			—			3,498
Executive severance expense	2,060			—			2,060			—
Rebranding expenses	—			6			—			616
U.S. Treasury sale expenses	—			—			409			—
Mortgage and litigation accrual	—			(117		)	(68		)	(487		)
Branch closure and restructuring expense	—			(105		)	190			497
Recovery of loan losses	(1,679		)	(350		)	(4,048		)	(1,297		)
Less: Securities gains (losses), net	34			50			754			2,773
PCNR earnings (non-GAAP)	$	2,013		$	4,698		$	6,206		$	6,556

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.

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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 September 30, 2014, 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 September 30, 2014 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 September 30, 2014 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 nine months ended September 30, 2014, 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: November 7, 2014                    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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