10-K 1 cob-20151231x10k.htm 10-K 10-K




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

 
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
 
For the annual period ended December 31, 2015
 
Commission File Number 0-13823


COMMUNITYONE BANCORP
(Exact name of Registrant as specified in its Charter)
North Carolina
 
56-1456589
(State of Incorporation)
 
(I.R.S. Employer Identification No.)
1017 E. Morehead Street
 
 
Charlotte, North Carolina
 
28204
(Address of principal executive offices)
 
(Zip Code)
 
(336) 626-8300
(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(g) of the Securities Exchange Act of 1934: 
Title of each class
Common Stock, $0.00 par value
 ______________________________________________________________
Indicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act.    Yes  ¨    No  ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.    Yes  ¨    No  ý
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  ý    No  ¨
Indicate by check mark whether the registrant (1) has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§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  ý    No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference to Part III of this Form 10-K or any amendment to this Form 10-K.  ¨
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
The aggregate market value of the Registrant’s common stock held by non-affiliates of the Registrant, as of June 30, 2015, was approximately $257.1 million. As of February 29, 2016 (the most recent practicable date), the Registrant had outstanding approximately 24,292,051 shares of Common Stock.



CommunityOne Bancorp and Subsidiaries
Report on Form 10-K
December 31, 2015

TABLE OF CONTENTS


Index
 
Page
 
 
 
PART I
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 1B.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
PART II
 
 
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
Item 7.
 
 
 
Item 7A.
 
 
 
Item 8.
 
 
 
Item 9.
 
 
 
Item 9A.
 
 
 
Item 9B.
 
 
 
PART III
 
 
 
 
 
Item 10.
 
 
 
Item 11.
 
 
 
Item 12.
 
 
 
Item 13.
 
 
 
Item 14.
 
 
 
PART IV
 
 
 
 
 
Item 15.
 
 
 
 

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PART I
Item 1.
BUSINESS
General
CommunityOne Bancorp, (“COB”) or (the “Company,” also referred to as “us” or “we” and our subsidiaries on a consolidated basis), is a bank holding company headquartered in Charlotte, North Carolina and incorporated in 1984 under the laws of the State of North Carolina. Through our ownership of CommunityOne Bank, N.A. (the “Bank”), a national banking association founded in 1907 and headquartered in Asheboro, North Carolina, we offer a complete line of consumer, mortgage and business banking services, including loan, deposit, treasury management, as well as wealth management and trust services, to individuals and small and middle market businesses through financial centers located throughout central, southern and western North Carolina. Our strategy is to grow the Company organically by focusing on meeting the financial needs of customers in our market area by providing a suite of quality financial products and services through local and experienced bankers and lenders located in branches and loan production offices in our customers’ local market. We also offer the convenience of online and mobile banking capabilities. We define our market as communities located in North Carolina, as well as adjoining markets in South Carolina and Virginia.
On November 22, 2015, we entered into an Agreement and Plan of Merger (“Merger Agreement”) with Capital Bank Financial Corp., a Delaware corporation (“Capital”), under which, upon the terms and subject to the conditions set forth in the Merger Agreement, COB will merge with and into Capital (the “Merger”), with Capital as the surviving corporation in the Merger. Immediately following the Merger, the Bank will merge with and into Capital’s wholly owned bank subsidiary, with Capital’s bank subsidiary surviving the bank merger. The Merger is subject to, among other things, regulatory and shareholder approval and other customary closing conditions and is currently expected to close in the second quarter of 2016.
In July 2013, we changed our name from FNB United Corp. to CommunityOne Bancorp, and our stock symbol from FNBN to COB.
On October 21, 2011, we acquired Bank of Granite Corporation (“Granite”) and its subsidiary bank, Bank of Granite, through the merger of a wholly owned subsidiary of ours into Granite (the “Granite Merger”). Bank of Granite was merged into the Bank and Granite was dissolved on June 8, 2013. The Granite Merger was part of a recapitalization of the Company, which included, among other things, a private placement of $310 million in capital with investments from, among other investors, affiliates of each of The Carlyle Group (“Carlyle”), and Oak Hill Capital Partners (“Oak Hill Capital” and collectively, the “Anchor Investors”), and certain of our directors and officers.
Our key objectives for the Company during 2015 were to: (1) grow loans; (2) grow core deposits; (3) enhance fee income growth; (4) maintain expense discipline, and (5) explore merger and acquisition (“M&A”) opportunities that make sense strategically and financially.
Competition
We compete with other local, regional and national financial service providers, including other bank and financial holding companies, commercial banks, savings institutions, credit unions, finance companies and brokerage and insurance firms. Specifically, we face significant competition in both originating loans and attracting deposits from other commercial banks, savings associations, credit unions, and other financial services companies located both within and outside our market area. We consider ourselves to be one of the significant financial institutions in the Piedmont area of North Carolina, in terms of total assets and deposits. Nonetheless, the banking markets in North Carolina have a high number of financial institutions, some of which are significantly larger institutions than us, with greater financial resources. These financial institutions are our competitors.
Further competition is provided by banks located in adjoining counties and states, as well as other types of financial and nonfinancial institutions, such as insurance companies, finance companies, pension funds, brokerage firms and money funds. Some of our competitors are not subject to the same level of regulation and oversight that is required of banks, and thus are able to operate under lower cost structures. We also believe the financial services industry is likely to become more competitive as technological advances enable companies to provide financial services in a more efficient and convenient basis. We believe that the principal method to compete in the commercial banking industry is emphasizing relationship and personalized banking and local decision-making, as well as expanding our online and mobile capabilities, pricing services competitively and improving our cost efficiencies.
Employees
As of December 31, 2015, we had 544 full-time equivalent employees, 539 of which are located in the State of North Carolina and 5 of which are located in the State of South Carolina. We are not a party to a collective bargaining agreement and consider our relationships with our employees to be good.

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Subsidiaries
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. The Bank holds the stock of C1 Trustee, Inc., which holds deeds of trust for the Bank.
Access to United States Securities and Exchange Commission Filings
We make available at no cost all of our reports filed electronically with the United States Securities and Exchange Commission (“SEC”), including our Annual Report on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, as well as amendments to those reports, through our website at www.community1.com. These filings are also accessible on the SEC’s website at www.sec.gov. You may read and copy any material we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.
We also will provide without charge a copy of our Annual Report on Form 10-K to any shareholder by mail. Requests should be sent to CommunityOne Bancorp, Attention: Secretary, 1017 E. Morehead Street, Suite 200, Charlotte, NC 28204.
Additionally, our corporate governance policies, including the charters of the Audit Committee, Risk Management Committee, Strategic Planning Committee, and the Compensation and Nominating Committee of our Board of Directors, as well as our Code of Business Ethics, may be found through the “Investor Relations” link on our website.

Regulation and Supervision
We are extensively regulated under federal and state law. The following describes certain aspects of that regulation and does not purport to be a complete description of all regulations that affect us or all aspects of those regulations.
To the extent statutory or regulatory provisions are described, the description is qualified in its entirety by reference to the particular statute or regulation. Any change in applicable law or regulation or in the way those laws or regulations are interpreted by regulatory agencies or courts may have a material impact on our business, operations and earnings. Proposals to change the laws and regulations governing the banking industry are frequently introduced in Congress, in state legislatures and before the various regulatory agencies. The likelihood and timing of any changes and the impact those changes might have on us is impossible to determine with any certainty.
CommunityOne Bancorp
We are a bank holding company, subject to regulation under the Bank Holding Company Act (“BHCA”) and the examination and reporting requirements of the Federal Reserve Board. Under the BHCA, a bank holding company such as COB, may not directly or indirectly acquire ownership or control of more than 5% of the voting shares or substantially all the assets of any additional bank, or merge or consolidate with another bank holding company, without the Federal Reserve Board's prior approval. COB may engage in the business of banking, managing or controlling banks or furnishing services to or performing services for its subsidiary banks, and in any activity that is considered to be so closely related to banking or managing or controlling banks, and as to be a proper incident thereto. As noted above, COB owns the Bank. We also own FNB United Statutory Trust I, FNB United Statutory Trust II, and Catawba Valley Capital Trust II, each of which were formed to facilitate the issuance of trust preferred securities.
The BHCA provides that the Federal Reserve Board may not approve any acquisition or other transaction, such as our Merger with Capital Bank, that would result in a monopoly or would be in furtherance of any combination or conspiracy to monopolize or attempt to monopolize the business of banking in any section of the United States, or the effect of which may be substantial to lessen competition or to tend to create a monopoly in any section of the country, or that in any other manner would be in restraint of trade, unless the anticompetitive effects of the proposed transaction are clearly outweighed by the public interest in meeting the convenience and needs of the community to be served. The Federal Reserve Board also is required to consider the financial and managerial resources and future prospects of the bank holding companies and banks involved in any transaction and the convenience and needs of the communities to be served. Consideration of financial resources generally focuses on capital adequacy and debt levels and consideration of convenience and needs includes the parties’ performance under the Community Reinvestment Act (“CRA”) and compliance with consumer protection laws. The Federal Reserve Board also must take into account the institution’s effectiveness in combating money laundering, and to consider the extent to which the transaction would result in greater or more concentrated risks to the stability of the United States banking or financial system.
As a bank holding company, COB is expected under Federal Reserve Board regulations to serve as a source of financial and managerial strength to its subsidiary banks. A bank holding company also is expected to commit resources, including capital and other funds, to support its subsidiary bank in circumstances where it might not do so absent such a policy.

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CommunityOne Bank, N.A.
As a national banking association, the deposits of which are insured by the Federal Deposit Insurance Corporation (“FDIC”), the Bank is subject to regulation and examination primarily by the Office of the Comptroller of the Currency (“OCC”). The Bank also is regulated by the FDIC and the Federal Reserve Board. The federal regulators impose various requirements and restrictions on the institutions they regulate, including requirements to maintain reserves against deposits, restrictions on the types and amounts of loans that may be granted and the interest that may be charged on loans, limitations on the types of investments that may be made and the types of services that may be offered, and requirements governing capital adequacy, liquidity, earnings, dividends, risk management practices and branching.
There are certain restrictions imposed on the ability of the Bank to lend to and engage in other transactions with, COB and the Bank’s other affiliates. Under these provisions, individual transactions between the Bank and COB or any nonbank affiliate generally are limited to 10% of the Bank’s capital and surplus, and all transactions between the Bank and either COB or any nonbank affiliate are limited to 20% of the Bank’s capital and surplus. Loans and extensions of credit from the Bank to any affiliate generally are required to be secured by eligible collateral in specified amounts. In addition, any transaction between the Bank and any affiliate are required to be on arm’s length terms and conditions. The Dodd-Frank Act Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) expanded these affiliate transaction rules to broaden the definition of affiliate and to apply to securities lending, repurchase agreements and derivatives activities that we may have with an affiliate, as well as to strengthen collateral requirements and limit Federal Reserve exemptive authority. Also, the definition of “extension of credit” for transactions with executive officers, directors and principal shareholders was expanded to include credit exposure arising from a derivative transaction, a repurchase or reverse repurchase agreement and a securities lending or borrowing transaction. These provisions have not had a material impact on COB or the Bank.
FDIC Insurance
The deposits of the Bank are insured by the FDIC up to the limits under applicable law, which currently are set at $250,000 for accounts under the same name and title. The Bank is subject to deposit insurance premium assessments. The FDIC imposes a risk-based deposit premium assessment system. Under this system, the assessment rates for an insured depository institution vary according to the level of risk incurred in its activities. To arrive at an assessment rate for a banking institution, the FDIC places it in one of four risk categories determined by reference to its capital levels and supervisory ratings. In the case of those institutions in the lowest risk category, the FDIC further determines its assessment rate based on certain specified financial ratios or, if applicable, long-term debt ratings. The assessment rate schedule can change from time to time, at the discretion of the FDIC, subject to certain limits. Under the current system, premiums are assessed quarterly. The FDIC has published guidelines on the adjustment of assessment rates for certain institutions. In addition, insured depository institutions have been required to pay a pro rata portion of the interest due on the obligations issued by the Financing Corporation to fund the closing and disposal of failed thrift institutions by the Resolution Trust Corporation.
The assessment base on which an insured depository institution’s deposit insurance premiums paid to the FDIC is now calculated based on its average consolidated total assets less its average equity. In addition, under current law, the minimum designated reserve ratio of the deposit insurance fund is required to increase from a minimum of 1.15% to 1.35% of the estimated amount of total insured deposits by September 30, 2020. The FDIC is required to offset the effect of the increased minimum reserve ratio for banks with assets of less than $10 billion.
Insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by a bank’s federal regulatory agency.
Deposits and certain claims for administrative expenses and employee compensation against insured depository institutions are afforded a priority over other general unsecured claims against the institution, including federal funds and letters of credit, in the liquidation or other resolution of that institution by any receiver appointed by federal authorities. These priority creditors include the FDIC.
Dividend Restrictions
COB is a legal entity separate and distinct from its banking and other subsidiaries and has in the past relied on dividends from the Bank as its primary source of liquidity. There are limitations on the payment of dividends by the Bank to COB, as well as by COB to its shareholders. Federal law would require the Bank to obtain prior approval of the OCC to pay dividends, including under circumstances where the total of all dividends declared by the Bank in any calendar year will exceed the sum of its net income for that year and its retained net income for the preceding two calendar years, less any transfers required by the OCC or to be made to retire any preferred stock. Federal law also prohibits the Bank from paying dividends that in the aggregate would be greater than its undivided profits after deducting statutory bad debts in excess of its ALL. The Bank, however, may obtain shareholder and OCC approval to reduce its capital to allow payment of dividends after cumulative losses in an amount greater than its undivided profits.

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In addition, the Federal Reserve Board has indicated that banking organizations should generally pay dividends to shareholders only if (i) the organization’s net income available to common shareholders over the past year has been sufficient to fully fund the dividends and (ii) the prospective rate of earnings retention appears consistent with the organization’s capital needs, asset quality and overall financial condition. COB has not declared any dividends with respect to its common stock in 2015 and does not expect to declare any dividends during 2016.
Capital
We are required under federal law to maintain certain capital levels at each of COB and the Bank. The federal banking agencies have issued substantially similar risk-based and leverage capital requirements to banking organizations they supervise. Under these requirements, COB and the Bank are required to maintain certain capital standards based on ratios of capital to assets and capital to risk weighted assets. 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. Risks such as concentration of credit risks and the risk arising from non-traditional activities, as well as the institution’s exposure to a decline in the economic value of its capital due to changes in interest rates, and an institution's ability to manage those risks are important factors that are to be taken into account by the federal banking agencies in assessing an institution’s overall capital adequacy.
Under revised capital rules applicable to community banks with assets less than $10 billion and their holding companies pursuant to the requirements of the Dodd-Frank Act and standards adopted by the Basel Committee on Banking Supervision (referred to as “Basel III”), which were effective for us January 1, 2015, banks and their holding companies must hold the following minimum capital ratios:
A common equity Tier 1 (“CET 1”) risk-based capital ratio of at least 4.5%;
A Tier 1 capital ratio (CET 1 plus Additional Tier 1 capital) of at least 6%;
A total (Tier 1 plus Tier 2 capital) risk-based capital ratio of at least 8%; and
A leverage capital ratio (Tier 1 capital to average consolidated assets) of at least 4%.
Common equity Tier 1 (CET 1) capital consists solely of common stock and related surplus, retained earnings, accumulated other comprehensive income and limited amounts of minority interests that are in the form of common stock. Additional Tier 1 capital includes non-cumulative perpetual preferred stock, and for bank holding companies with less than $15 billion in total consolidated assets, instruments such as COB’s trust preferred securities. Tier 2 capital continues to consist of instruments disqualified from Tier 1 capital, including eligible subordinated debt, other preferred stock and a limited amount of loan loss reserves. The revised capital rules provide for a number of deductions from and adjustments to CET 1, including for example, the requirement that mortgage servicing rights, deferred tax assets arising from temporary difference, that could not be realized through net operating loss carrybacks, and significant investment in non-consolidated financial entities be deducted from CET 1 to the extent that any one such category exceeds 10% of CET 1, or all such items in the aggregate, exceed 15% of CET 1. In addition, the effects of accumulated other comprehensive income or loss (“AOCI”) items included in shareholders’ equity (for example, unrealized gains and losses on marked to market securities held in available-for-sale portfolio) under generally accepted accounting principles may not be reversed for purposes of determining regulatory capital ratios, unless the Company made a one-time permanent election to continue to exclude those items. The Company and Bank made the one-time election as required in its March 30, 2015 Consolidated Reports of Condition and Income.
In addition, the revised capital rules require 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 and its holding company to be able to pay dividends, engage in share buybacks or make discretionary bonus payments to executive management without restriction. This capital conservation buffer is being phased in over a four year period starting on January 1, 2016. When fully implemented, a banking organization would need to maintain a common equity Tier 1 capital ratio greater than 7.0%, a Tier 1 capital ratio greater than 8.5% and a total risk-based capital ratio greater than 10.5%, otherwise, it will be subject to restrictions on capital distributions and discretionary bonus payments to its executive management.
COB and the Bank have complied with the capital requirements in effect on December 31, 2015, and we believe that both COB and the Bank will comply with the fully phased in capital ratios applicable to them without having a material effect on either COB or the Bank.
Safety and Soundness Considerations
There are a number of additional obligations and restrictions imposed by law and policy on bank holding companies, such as COB, and the Bank, that are designed to reduce potential loss exposure to depositors and to the FDIC insurance fund in the event that the depository institutions become in danger of default or in default. Under current federal law, for example, the federal banking agencies, including the OCC and the FDIC, possess broad powers 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 “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized,” as defined by the law. Under regulations issued by the federal banking agencies pursuant to the federal banking agencies’ final rule to implement Basel III and the

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minimum leverage and risk-based capital requirements of the Dodd-Frank Act, effective January 1, 2015, a “well capitalized” institution must have a total risk based capital of at least 10.0%, a Tier 1 capital ratio of at least 8.0%, a CET 1 capital ratio of at least 6.5% and a leverage ratio of at least 5%. An “adequately capitalized” institution must have a total risk-based capital of at least 8.0%, a Tier 1 capital ratio of at least 6.0%, a CET 1 capital ratio of at least 4.5% and a leverage ratio of at least 4.0%. An “undercapitalized” institution has a total risk-based capital ratio of less than 8.0%, a Tier 1 risk-based capital ratio of less than 6.0%, a CET 1 capital ratio of less than 4.5%, or a leverage ratio of less than 4.0%; a “significantly undercapitalized” institution has a total risk-based capital ratio of less than 6.0%, a Tier 1 risk-based capital ratio of less than 4.0%, a CET 1capital ratio of at less than 3.0% or a leverage ratio of less than 3.0%; and a “critically undercapitalized” institution has a ratio of tangible equity to total assets that is equal to or less than 2.0%. The Bank currently is designated as “well capitalized.” This classification is primarily for the purpose of applying the prompt corrective action provisions of federal law and is not intended to be and should not be interpreted as a representation of overall financial condition or prospects of the institution.
The federal banking agencies’ prompt corrective action powers are broad. For example, an institution that is categorized as “undercapitalized,” “significantly undercapitalized,” or “critically undercapitalized” is required to submit an acceptable capital restoration plan to its appropriate federal banking agency and the parent bank holding company must guarantee that the institution meet its capital restoration plan, subject to certain limitations. An “undercapitalized” institution is also generally prohibited from increasing its average total assets, making acquisitions, establishing any branches or engaging in any new line of business, except under an accepted capital restoration plan or with FDIC approval. In addition, the appropriate federal banking agency may treat an “undercapitalized” institution in the same manner as it treats a “significantly undercapitalized” institution if it determines that those actions are necessary.
The federal banking agencies also have adopted guidelines prescribing safety and soundness standards relating to internal controls, risk management, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth and compensation, fees and benefits. These guidelines in general require appropriate systems and practices to identify and manage specified risks and exposures. The guidelines prohibit excessive compensation as an unsafe and unsound practice and characterize compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer or employee, director or principal shareholder. In addition, the agencies have adopted regulations that authorize but do not require an agency to order an institution that has been given notice by the agency that it is not in compliance with any of the safety and soundness standards to submit a compliance plan. If after being so notified, an institution fails to submit an acceptable compliance plan, the agency must issue an order directing action to correct the deficiency and may issue an order directing other actions of the types to which an “undercapitalized” institution is subject under the prompt corrective action provisions described above.
The enforcement powers available to the federal banking agencies are substantial and include, among other things, the ability to assess civil money penalties, to issue cease and desist or removal orders, and to initiate injunctive actions against banks and bank holding companies and any “institution affiliated party” as defined in the law. In general, these enforcement actions may be initiated for violations of laws and regulations, as well as engagement in unsafe and unsound practices. Other actions or inactions may provide the basis for enforcement actions, including filing misleading or untimely reports with regulatory authorities.
Community Reinvestment and Consumer Protection Laws
In connection with its lending activities, the Bank is subject to a number of federal laws designed to protect borrowers and promote lending to various sectors of the economy and population. These include, among other laws, the Equal Credit Opportunity Act, the Truth in Lending Act, the Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act (“RESPA”), the Fair Credit Reporting Act, the Truth in Savings Act and the CRA. Administration of many of these consumer protection rules are the responsibility of the Consumer Financial Protection Bureau (“CFPB”). The CFPB also has authority to define and prevent unfair, deceptive and abusive practices in the consumer financial area, and expanded data collecting powers for purposes of determining bank compliance with the fair lending laws. In each of these cases, because we have less than $10 billion in total assets, we are supervised in these areas by the OCC.
The regulations relating to mortgage lending and servicing pursuant to the Truth in Lending Act (“TILA”), the Equal Credit Opportunity Act and RESPA were substantially revised by the CFPB, effective January 10, 2014, to require, among other things, enhanced disclosures to consumers relating to appraisals, home ownership counseling, payments, forced placed insurance, and error resolution, certain minimum standards for the origination of residential mortgages, including a determination of the borrower’s ability to repay, enhanced training to mortgage loan officers, enhanced mitigation procedures for delinquent borrowers, and provisions that will allow borrowers to raise certain defenses to foreclosure if they receive any loan other than a “qualified mortgage,” as that term has been defined by the CFPB. Effective October 1, 2015, CFPB regulations required integrated disclosures to be provided to mortgage borrowers under RESPA and TILA. The Bank is in compliance with these regulations.
Rules developed by the federal banking agencies pursuant to federal law also require institutions to disclose their privacy policies to consumers and in some circumstances to allow consumers to prevent the disclosure of certain personal information to affiliated

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entities and unaffiliated third parties. These regulations also impact how consumer information is conveyed to outside vendors. The Bank is in compliance with these regulations.
The CRA requires the appropriate federal banking agency, in connection with its examination of a bank, to assess the bank’s record in meeting the credit needs of the communities served by the institution, including low and moderate income neighborhoods. Furthermore, such assessment is required to be undertaken of any bank that has applied, among other things, to merge or consolidate with or acquire the assets or assume the liabilities of an insured depository institution, or to open or relocate a branch office. In the case of a bank holding company, the Federal Reserve Board is required to assess the record of each subsidiary bank of any bank holding company that applies to acquire a bank or bank holding company in connection with the application. Under the CRA, institutions are assigned a rating of “outstanding,” “satisfactory,” “needs to improve,” or “unsatisfactory.” The Bank received a “satisfactory” rating at its most recent CRA evaluation.
Anti-Money Laundering Rules
We are subject to the requirements of the Bank Secrecy Act (“BSA”), its implementing regulations and other anti-money laundering (“AML”) laws and regulations, including the USA Patriot Act of 2001. Among other things, these laws and regulations require the Bank to take steps to prevent the use of the Bank to facilitate the flow of illegal or illicit money, to report large currency transactions and to file suspicious activity reports. The Bank also is required to develop and implement a comprehensive AML compliance program. Banks must also have in place appropriate “know your customer” policies and procedures. Violations of these requirements can result in substantial civil and criminal sanctions. In addition, a provision of the USA Patriot Act of 2001 requires the federal banking agencies to consider the effectiveness of a financial institution’s AML activities when reviewing bank mergers and bank holding company acquisitions.
Incentive Compensation
Guidelines adopted by the federal banking agencies prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the service performed by an executive officer, employee, director or principal stockholder. The Federal Reserve Board has issued comprehensive guidance on incentive compensation policies intended to ensure that incentive compensation policies of banking organizations do not undermine the safety and soundness of such organization by encouraging excessive risk-taking. This guidance, which covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon three key principles that a banking organization’s incentive compensation should (i) provide incentives that do not encourage excessive risk-taking; (ii) be compatible with effective internal controls and risk management; and (iii) be supported by strong corporate governance, including by the organization’s board of directors. Enforcement action may be taken against a banking organization with incentive compensation arrangements posing a risk to the organization’s safety and soundness or if the organization is not taking prompt and effective measures to correct such deficiencies.
The Dodd-Frank Act
The Dodd-Frank Act significantly changed the bank regulatory structure and has affected the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies including COB. Some of the changes made by the Dodd-Frank Act have been described above. In addition to those summaries, among other things, the Dodd-Frank Act created a Financial Stability Oversight Council to identify systemic risks in the financial system and gave federal regulators new authority to take control of and liquidate larger financial firms.
Significant rules and regulations have been and continue to be issued by the various federal agencies pursuant to the requirements of the Dodd-Frank Act. Those rules that have or will affect our operations include:
Rules enacted by the SEC pursuant to the Dodd-Frank Act, giving shareholders a non-binding vote on executive compensation and so called “golden parachute” payments, as well as the authority to allow shareholders to nominate their own candidates using a company’s proxy materials;
Rules enacted by the federal banking agencies prohibiting excessive compensation paid to financial institution executives;
Provisions authorizing national banks and state banks to establish branches in other states to the same extent as a bank chartered by that state would be permitted to branch, thus allowing banks to enter new markets more freely;
Rules enacted by the Federal Reserve Board and enforced by the CFPB limiting interchange fees applicable to debit card transactions charged by banks with $10 billion or more in assets, which while not applicable to us, may have the practical effect of reducing the fees that we may be able to charge;
Rules issued by the CFPB to establish certain minimum standards for the origination of residential mortgages, including a determination of the borrower’s ability to repay;
Provisions that allow borrowers to raise certain defenses to foreclosure if they receive any loan other than a “qualified mortgage,” as that term has been defined by the CFPB;
Provisions that have consolidated consumer complaints into the CFPB;

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Provisions that give the CFPB expanded data collection powers for fair lending purposes for both small business and mortgage loans, as well as expanded authority to prevent unfair, deceptive and abusive practices; and
Provisions restricting the ability of COB and the Bank to engage in short-term proprietary trading of securities, derivatives, commodity futures and options on these instruments for their own account, owning, sponsoring or having certain relationships with “covered funds,” including hedge funds and private equity funds, or investing in certain instruments that are covered by these prohibitions, subject to certain exceptions (the so-called “Volcker Rule”).
Not all of the regulations under the Dodd-Frank Act have yet been finalized and thus we cannot predict the ultimate impact of these regulations on COB or its business, financial condition or results of operations. However, the regulations have increased and are expected to continue to increase our operating and compliance costs.
Future Legislation
Federal and state legislatures and regulatory agencies propose and adopt changes to their laws and regulations or change the manner in which existing laws or regulations are applied. We cannot predict the substance or impact of pending or future legislation or regulation or the application of those laws or regulations, although enactment of any significant proposal could affect how we operate and could significantly increase our costs, impede the efficiency of internal business processes or limit our ability to pursue business opportunities in an efficient manner, any of which could materially and adversely affect our business, financial condition and results of operations.


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Item 1A.
RISK FACTORS
An investment in our common stock is subject to risks inherent in our business. The following discussion highlights the risks that management believes are material for our Company, but do not necessarily include all the risks that we may face. You should carefully consider the risk factors and uncertainties described below and elsewhere in this Annual Report on Form 10-K (“Report”) in evaluating an investment in COB’s common stock.
Risks Related to our Business and Business Strategy
We may not be able to meet our targets for organic loan, deposit and services growth.
Our business strategy includes organically growing loans and deposits through a variety of channels, including through our branches and loan production offices (“LPOs”), which we have staffed with mortgage loan officers, private bankers and commercial loan officers. We also offer loans through a non-branch based retail mortgage loan channel and a Small Business Administration (“SBA”) unit. We met our organic growth goals in 2015 but continuing to meet our growth goals for loans and deposits depends on our ability to successfully market and generate new loan and deposit volume from these channels, as well as successfully market complementary products and services, particularly treasury management services and online and mobile banking capabilities, at acceptable risk levels and upon acceptable terms, while managing the costs associated with this growth strategy. While the loan and deposit products we are offering are not new to the Bank, treasury management services and online and mobile banking services designed to support our growth strategy involve implementation and operational risks. The strategies also depend upon hiring and retaining experienced lenders in target markets who share our relationship banking philosophy. Because of a variety of factors, including the pending Merger of COB into Capital, which impacts our ability to attract and retain additional appropriate talent, the ability to have effective marketing and calling programs, continuing to successfully implement our treasury, online and mobile banking platforms containing adequate protections to mitigate risks, as well as market conditions and competition, there is no assurance that we will be able to meet our growth goals, or if we are successful, that such growth would meet profitability, cost or asset quality targets associated with the goals. An inability to grow or to effectively manage our growth could adversely affect our results of operations, financial condition and stock price.
Our decisions regarding credit risk could be incorrect, and our allowance for loan losses may be inadequate, which may adversely affect our financial condition and results of operations.
Our largest source of revenue is interest payments on loans made to Bank customers. There are certain risks inherent in making loans. Borrowers may not repay their loans according to the terms of those loans, and the collateral securing the payment of the loans may not be sufficient to assure repayment. Interest rates may change over the life of the loan, economic conditions may change and the value of the collateral affecting the loans may deteriorate. Management makes various assumptions and judgments about the collectability of the loan portfolio, including the creditworthiness of the borrowers and the value of the real estate, which is obtained from independent appraisers, and other assets serving as collateral for the repayment of the loans. However, we may be incorrect in these assumptions, in which case we may experience significant loan losses and losses on foreclosed collateral which could have a material adverse effect on our operating results.
We maintain an Allowance for Loan Losses (“ALL”) that we consider adequate to absorb losses inherent in the loan portfolio based on our assessment of all available information. In determining the size of the allowance, we rely on an analysis of the loan portfolio based on, among other things, historical loss experience, volume and types of loans, trends in classification, volume and trends in delinquencies and nonaccruals, and general economic conditions, both local and national. During the past year, as our credit performance has improved, this analysis has allowed us to reduce our ALL by $5.2 million. If management’s assumptions in undertaking this analysis are wrong, the ALL may not be sufficient to cover actual loan losses, and adjustments may be necessary to allow for different economic conditions or adverse developments in the loan portfolio. Additionally, any new deterioration in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside management’s control, may require an increase in the ALL. Material additions to the allowance would materially decrease our net income.
Banking regulators periodically review our ALL and may require us to increase the allowance or recognize further loan charge-offs based on judgments different from those of management. Any increase in the ALL or loan charge-offs as required by regulatory authorities could have adverse effects on our operating results and financial condition.
Weaknesses in the markets for residential or commercial real estate could reduce our net income and profitability.
Loans that are secured by real estate (including commercial, construction and development and consumer residential mortgage loans) as either the primary or secondary source of repayment are a large portion of the Bank's loan portfolio. These categories constitute $1.28 billion, or approximately 83% of the Bank's total loan portfolio as of December 31, 2015. These categories are generally affected by changes in economic conditions, fluctuations in interest rates and the availability of loans to potential purchasers, changes

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in tax and other laws and acts of nature. Commercial real estate secured lending usually involves higher credit risk than that of single-family residential mortgage lending because of the larger loan balances and the fact that adverse conditions in real estate markets or the economy may impact the development and leasing of their properties and thus their cash flow. While the real estate markets in the communities we operate continue to recover from the 2009 recession, real estate in our urban markets (e.g. Charlotte) has recovered faster than real estate in our more rural markets, the impact of which is that our loan origination activity in our urban markets has increased faster than in our legacy rural markets. Any new downturn in the real estate markets in which we originate, purchase and service secured commercial, construction and development or consumer residential mortgage loans could hurt our business and future earnings both because these loans are secured by real estate and because loan demand for these type of loans would decrease.
Our mortgage business is sensitive to our success in hiring and retaining mortgage loan officers, maintaining a mix of conforming and other mortgages, as well as in changes in economic conditions, increased interest rates, and a slowdown in the housing market, any of which could impact adversely our results of operations.
Mortgage originations and sales are a significant portion of our consolidated business and maintaining or increasing our mortgage revenue is dependent upon our ability to originate loans. We expanded our mortgage origination capabilities during 2015 by hiring experienced mortgage loan officers in both our branch channel and our non-branch retail origination channel, which is targeted toward more urban markets, principally Charlotte, Raleigh and Winston-Salem. There is no assurance that we will be able to identify, hire and retain such officers, particularly given our pending Merger with Capital, and failure to do so would adversely affect our mortgage originations and consequently, our overall net income.
Furthermore, our revenue in this segment is in part reliant upon originating and selling loans that conform to the underwriting criteria of third parties, which was 42% of 2015's originations, and recording the gain on sale from such sales. Our mortgage division offers a mix of conforming and other types of mortgage loans, including jumbos and superjumbos, construction and specialized loan programs that meet the needs of our customers. While we target a percentage of loans for each loan type, there is no assurance that we will be able to maintain the mix of mortgages that meet our revenue goals. In addition, our mortgage revenue is dependent on originating both refinance and purchase money mortgages. During 2015, purchase money mortgages constituted approximately 39% of our production and that percentage is expected to continue in that range during 2016. Mortgage loan production levels are sensitive to changes in interest rates and economic conditions and changes in the housing market, as well as changes in underwriting standards, and have previously suffered from increases in interest rates or slowdowns in the housing market. Any sustained period of decreased origination activity caused by housing price pressure, underwriting standards, or increases in interest rates would adversely affect our mortgage originations, and consequently, our overall net income.
Changes in interest rates may have an adverse effect on our profitability.
Our earnings and financial condition depend to a large degree upon net interest income, which is the difference between interest earned from loans and investments and interest paid on deposits and borrowings. The narrowing of the margin between interest rates earned on loans and investments and the interest rates paid on deposits and borrowings could adversely affect our earnings and financial condition. We can neither predict with certainty nor control changes in interest rates. These changes can occur at any time and are affected by many factors, including international, national, regional and local economic conditions, competitive pressures and monetary policies of the Federal Reserve. In the unlikely event the Federal Reserve took the unprecedented step of reducing short-term interest rates below zero, the bank could experience additional narrowing of the margin between interest rates earned on loans and investments and the interest rates paid on deposits and borrowings. In addition, our customers often have the ability to prepay loans with either no penalties or penalties that are insufficient to compensate us for the lost income. If customers prepay loans at a higher rate, we may not be able to recover the lost revenues, which would affect our results of operations.
Furthermore, since 2008 interest rates have been low for an extended period of time, and any increase in rates could result in depositors redeeming time deposits or moving funds out of their existing money market or savings deposit accounts at the Bank into other interest-bearing alternatives at other financial institutions, including third party money market funds. We have ongoing policies and procedures designed to manage the risks associated with changes in market interest rates, including these prepayment and deposit run-off risks, and we model expected customer behavior based on historical experience of other interest rate cycles. Notwithstanding these policies and procedures, our customers may not react to changes in interest rates in the same manner in which they historically have reacted, resulting in a larger outflow of deposits or a higher level of loan prepayments than we expect. Such reaction could require us to increase interest rates to retain or acquire deposits, or lower loan rates to retain or attract loans. In either case, our deposit costs may increase and our loan interest income may decline, either or both of which may have an adverse effect on our financial results.
We may not be able to effectively work out nonperforming assets, which may adversely affect our results of operations and financial condition and require us to raise additional capital.
Since our recapitalization in 2011, the Bank has aggressively and materially reduced problem assets through workouts, restructurings, foreclosures and sales. The size of these problem assets is now smaller and we thus expect the pace of resolution to continue to slow. When we receive a signed contract for the sale of a loan or other real estate owned ("OREO") asset, the asset is marked down to the

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contract price less associated selling costs, which may ultimately result in a loss to the Bank. Any decrease in the value of the underlying collateral securing Bank loans, adverse change in borrowers' performance or financial condition, or a decrease in the value of OREO, whether or not due to economic and market conditions beyond our control, could adversely affect our business, results of operations and financial condition. In addition, there can be no assurance that we will not experience increases in nonperforming assets in the future, or that the workout of our current nonperforming assets will not result in further losses. A new downturn in the market areas we serve could increase our credit risk associated with our loan portfolio, as it could have a material adverse effect on both the ability of borrowers to repay loans as well as the value of the real property or other property held as collateral for such loans, or in OREO. If credit costs are incurred over what we anticipate to resolve our remaining problem assets and reduce our credit risk to what we consider acceptable levels, we may need to raise additional capital. Factors affecting whether additional capital would be required include, among others, additional provision of loan losses, and loan charge-offs, additional write-downs in the carrying value of our OREO, changing requirements of regulators, and other risks discussed in this “Risk Factors” section. There can be no assurance that we would be able to raise capital in the amounts required and in a timely manner or at all. Any additional capital raised may be significantly dilutive to our existing shareholders and may result in the issuance of securities that have rights, preferences and privileges that are senior to our common stock.
Our ability to use net operating loss carryforwards to reduce future tax payments may be limited or restricted or may not exist at all, and if we do not sustain our profitability, we may be required to put up a valuation allowance against our deferred tax assets.
We generated significant federal and state net operating losses (“NOLs”) between 2008 and 2014. We are generally able to carry NOLs forward to reduce taxable income in future years. Our ability to use our NOLs to reduce future tax payments is dependent upon our ability to sustain profitability over the time period over which these NOLs may be used under applicable tax law. At December 31, 2015 we determined, based on all available positive and negative evidence, that it is more likely than not that future taxable income will be available during available carryforward periods to absorb all of the consolidated federal net operating loss carryforward and all of the North Carolina net economic loss carryforward. However, there is no assurance that we will be able to sustain our profitability, or accelerate it to the extent necessary to be able to use all of the NOLs we have generated, or that the conditions that led to our losses will not return. Our ability to generate sustained profitability in the amounts necessary to realize our deferred tax assets against future taxable income depends upon general economic and market conditions, interest rates, and our ability to meet our strategic plans. If we are unable to generate adequate sustained profitability, we may be required to record a new valuation allowance against some or all of our deferred tax assets, which would negatively impact our financial results.
In addition, the ability to utilize our NOLs is subject to the rules of Section 382 of the Internal Revenue Code. Section 382 generally restricts the use of NOLs after an “ownership change.” An ownership change occurs if, among other things, the shareholders (or specified groups of shareholders) who own or have owned, directly or indirectly, 5% or more of a corporation’s common stock or are otherwise treated as 5% shareholders under Section 382 and Treasury regulations promulgated thereunder because of an increase of their aggregate percentage ownership of that corporation’s stock by more than 50 percentage points over the lowest percentage of the stock owned by these shareholders over a rolling three-year period. In the event of an ownership change, Section 382 imposes an annual limitation on the amount of taxable income a corporation may offset with NOL carryforwards. This annual limitation is generally equal to the product of the value of the corporation’s stock on the date of the ownership change, multiplied by the long-term tax-exempt rate published monthly by the Internal Revenue Service. Any unused annual limitation may be carried over to later years until the applicable expiration date for the respective NOL carryforwards. Consummation of our pending Merger with Capital will result in an “ownership change” at COB within the meaning of Section 382, resulting in a limitation on the resulting entity of the amount of taxable income it may offset with COB NOLs.
The loss of any member of the executive and senior management may adversely affect us.
We have assembled an executive and senior management team that has substantial background and experience in banking and financial services in the markets we serve. We rely heavily on the experience and expertise of our management to resolve problems and deploy new capital to achieve sustainable profitability and satisfactory capital levels. We have implemented a management succession planning process where we identify successors to our management team and work to train those managers for higher roles. The loss of key management personnel could negatively impact our earnings because of their skills, customer relationships and/or the potential difficulty of promptly replacing them with their chosen successors. In the Merger, it is anticipated that the five most senior officers of the Company will cease employment with the combined company at the Merger date.
Our business could suffer if we fail to attract and retain skilled people.
Our success depends, in large part, on our ability to attract and retain competent, experienced people. Our organic growth goals in particular require that we be able to attract and retain qualified and experienced mortgage loan officers, commercial lending officers and SBA lenders who share our relationship banking philosophy and have those customer relationships that will allow us to successfully expand. Many of our competitors are pursuing the same relationship banking strategy in our markets, which increases the competition to identify and hire talented employees. Our pending Merger with Capital has and will continue to result in those competitors seeking to hire our lending and other banking officers and other employees. Our failure to successfully retain

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experienced, qualified employees through the merger process may have an adverse effect on our ability to meet our financial goals and thus adversely affect our future results of operations.
As a community bank, we are vulnerable to the economic conditions within the relatively small region in which we operate.
We operate in a relatively small market area, which extends from the central and southern Piedmont and Sandhills of North Carolina to the mountains of western North Carolina, in addition to Charleston, S.C. Furthermore, we lend primarily to individuals and to small and medium-sized businesses in those or adjacent markets. Thus, we are exposed to greater risk than banks that lend to larger commercial enterprises or have a bigger market footprint. We manage our credit exposure through careful monitoring of our borrowers and loan concentrations and through rigorous application and review procedures. We also balance our geographic risk by purchasing portfolios of loans to borrowers outside of our market area. Nevertheless, we remain limited in our ability to diversify our economic risks. While economic conditions continue to improve in our market areas, any economic downturn in this fairly small geographic region likely will negatively affect our customers through increased unemployment, reduced demand and depressed real estate values, and adversely affect our results of operations.
We may experience significant competition in our market area, which may adversely affect our business.
The commercial banking industry within our market area is extremely competitive. We also compete with other providers of financial services, such as savings associations and savings banks, credit unions, insurance companies, consumer finance companies, brokerage firms, the mutual funds industry and commercial finance and leasing companies, some of which are subject to less extensive regulation than us with respect to the products and services they provide. Our larger competitors include large interstate financial holding companies that are among the largest in the nation and are headquartered in North Carolina. These companies have a significant presence in our market area, have greater resources than we do and may offer products and services that we do not offer. These institutions also may be able to offer the same products and services at more competitive rates and prices.
Online and mobile banking developments have the potential of disrupting our business model, thus adversely affecting our business.
We compete with a variety of institutions both inside and outside of our market area that also offer online and mobile banking services. These institutions include our traditional competition, as well as institutions that solely operate online. Changes in customer behavior over the past several years have resulted in the need to offer online and mobile banking options to our customers. While we continue to spend significant resources upgrading our online and mobile banking capabilities, changes in customer behaviors in this area could disrupt our branch based and relationship banking model, which could adversely affect our operations, and we may be unable to timely develop competitive new products and services in response to these changes.
We face significant operational risk.
We are exposed to many types of operational risk, including traditional operational risk, strategic risk, reputational risk, and legal and compliance risk. Operational risk includes the risk of fraud or theft by employees or persons outside COB, unauthorized transactions by employees or operational errors, including clerical or recordkeeping errors or those resulting from faulty or disabled computer or telecommunications systems, and breaches of the internal control system and compliance requirements. Negative public opinion can result from our actual or alleged conduct in a variety of areas, including lending practices, corporate governance and acquisitions and from actions taken by government regulators and community organizations in response to those activities. Negative public opinion can adversely affect our ability to attract and retain customers and can expose us to litigation and regulatory action. Operational risk also includes potential legal actions that could arise from an operational deficiency or as a result of noncompliance with applicable regulatory standards.
Because the nature of the banking business involves a high volume of transactions, certain errors may be repeated or compounded before they are found and corrected. Our reliance upon both automated and manual systems to record and process transactions may further increase the risk that technical flaws or employee tampering or manipulation of those systems will result in losses that are difficult to detect. We may also be subject to disruptions of our operating systems arising from events that are wholly or partially beyond our control (e.g., computer viruses or electrical or telecommunications outages), which may give rise to disruption of service to customers and to financial loss or liability. We are further exposed to the risk that our external vendors may be unable to fulfill their contractual obligations (or will be subject to the same risk of fraud or operational errors by their employees as is COB) and to the risk that our or our vendors' business continuity and data security systems prove to be inadequate.
We face heightened information security risks, including “hacking” and “identity theft,” from increasingly sophisticated cyber behaviors.
The computer systems and network infrastructure used by us and others are vulnerable to unforeseen problems. These problems may arise in our internal systems, the systems of our third party vendors or both. Our operations are dependent upon our ability to protect computer equipment against damage from fire, power loss, telecommunications failure or security breaches of our information systems, resulting in stolen, misplaced or lost data, including unauthorized disclosure of customer information and theft. Information

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security risks have increased in recent years in part because of the increased usage of online and mobile technologies and the increased sophistication and activities of organized crime, hackers, terrorists, governmental entities, activists and other parties to attempt to gain unauthorized access to our systems, and/or those of our customers and third party service providers through viruses, malware, and other compromises, in order to gain access to customer information and engage in financial fraud and theft. We cannot be certain that all of our systems or those of our third party service providers, are free from vulnerability to attack, despite safeguards we have instituted to protect our systems and ensure those third party systems used by us are safe. In addition, we cannot be certain that the systems of our customers that interact with our systems are free from vulnerability to attack despite heightened customer education about the threats that exist and alternatives available to protect those systems. Any damage or failure or security intrusion that may cause an interruption in our operations, makes us susceptible to unauthorized access to our customer information, hacking or identity or financial theft, and could adversely affect our business and financial results, damage our reputation, cause loss of business, additional regulatory scrutiny or exposure to litigation and possible financial liability. We have purchased insurance against such losses, but any liability could exceed the amount of insurance coverage we have.
We rely on other companies to provide key components of our business infrastructure.
Third party vendors provide key components of our business infrastructure including the software supporting our core operating system, mortgage servicing, card issuance and transaction processing, internet connections and network access. While we have selected these third party vendors carefully and subject them to a comprehensive vendor management program, which includes ongoing due diligence over these vendors' financial condition and systems security, we do not directly control their actions. Any problems caused by these third parties, including those which result from their failure to provide services for any reason, their poor performance of services, their systems’ vulnerability to cyber and other risks, or other issues could adversely affect our ability to deliver products and services to our customers and otherwise to conduct our business. Replacing any of these third party vendors could also entail significant delay and expense.
Our controls and procedures could fail or be circumvented.
Management regularly reviews and updates our internal controls, disclosure controls and procedures and corporate governance policies and procedures. Any system of controls, however well designed and implemented, is based in part on certain assumptions and can only provide reasonable, but not absolute, assurance of the effectiveness of these systems and controls. Any failure or circumvention of our internal controls and procedures and any failure to comply with regulations related to internal controls and procedures could adversely affect our business, our results of operations and financial condition, as well as our reputation.
Our efforts to reduce noninterest expenses may not be achievable or, if they are, may increase operational risk.
In order to sustain and enhance our profitability, we have, among other things, implemented a program to reduce noninterest expenses, primarily through vendor management activities, branch profitability analyses and other efficiency initiatives. These efforts to reduce noninterest expenses may not be achievable. Because of the pending Capital Merger, we are unable to negotiate favorable vendor terms and we are incurring significant new expenses in connection with the Merger. Alternatively, these noninterest expense reductions may increase our operational risk.
Uncertainty in the final resolution of purchased impaired loans may create a negative impact on our profitability.
As required by applicable accounting standards, we have accounted for purchased impaired loans acquired from Granite under ASC 310-30 which requires us to periodically re-estimate the expected cash flow of these loans.  Lower expected cash flow, whether due to changes in projected cash flow estimates, increases in loss estimates, or defaults, may result in impairment of the carrying value of these loans. Any such impairment must be taken in the period in which the change in cash flow estimate occurs, and such impairment will reduce our earnings and adversely affect results of operations.
Our reported financial results depend on management’s selection of accounting methods and certain assumptions and estimates.
Our accounting policies and methods are fundamental to the procedures by which we record and report our financial condition and results of operations. Our management must exercise judgment in selecting and applying many of these accounting policies and methods so they comply with GAAP and reflect management’s judgment of the most appropriate manner to report COB’s financial condition and results. In some cases, management must select the accounting policy or method to apply from two or more alternatives, any of which may be reasonable under the circumstances, yet may result in us reporting materially different results than would have been reported under a different alternative.
Certain accounting policies are critical to presenting COB’s financial condition and results. They require management to make difficult, subjective or complex judgments about matters that are uncertain. Materially different amounts could be reported under different conditions or using different assumptions or estimates. These critical accounting policies include: the ALL; the valuation of other real estate; the determination of fair value for financial instruments; purchased loan accounting; and the accounting for income taxes. Because of the uncertainty of estimates involved in these matters, we may be required to do one or more of the following: significantly increase the ALL or sustain credit losses that are significantly higher than the reserve provided or both; recognize

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significant impairment on its financial instruments (including purchased loans) and other intangible asset balances; or significantly increase its liabilities for taxes or pension and post-retirement benefits.
Risks Related to the Merger with Capital Bank
The Company will be subject to business uncertainties and contractual restrictions while the Merger is pending.
Uncertainty about the effect of the Merger on employees and customers may have an adverse effect on the Company. These uncertainties may impair COB’s ability to attract, retain and motivate key personnel until the Merger is completed, and could cause customers and others that deal with the Company to seek to change existing business relationships with the Company. Retention of certain employees by the Company may be challenging while the Merger is pending, as certain employees may experience uncertainty about their future roles with the combined company. If key employees depart because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with the combined entity, COB’s business could be harmed.
Combining the two companies may be more difficult, costly or time consuming than expected and the anticipated benefits and cost savings of the Merger may not be realized.
The Company has operated and, until the completion of the Merger, will continue to operate, independently from Capital in the ordinary course of business. The success of the Merger, including anticipated benefits and cost savings, will depend, in part, on Capital’s ability to successfully combine and integrate the businesses of the Company with Capital in a manner that permits growth opportunities and does not materially disrupt the existing customer relations nor result in decreased revenues due to loss of customers. As noted, it is anticipated that the five most senior officers of the Company will cease their employment with the combined company at the Merger date. It is possible that the integration process could result in the loss of other key employees, the disruption of either company’s ongoing businesses or inconsistencies in standards, controls, procedures and policies that adversely affect the combined company’s ability to maintain relationships with clients, customers, depositors and employees or to achieve the anticipated benefits and cost savings of the Merger. The loss of key employees could adversely affect the combined company’s ability to successfully conduct its business, which could have an adverse effect on the combined company’s financial results and the value of its stock. If Capital experiences difficulties with the integration process, the anticipated benefits of the Merger may not be realized fully, or at all, or may take longer to realize than expected. As with any merger of financial institutions, there also may be business disruptions that cause the Company or Capital Bank to lose customers or cause customers to remove their accounts from the Company and/or Capital and move their business to competing financial institutions. Integration efforts between the two companies will also divert management attention and resources. These integration matters could have an adverse effect on the Company during this transition period and on the combined company for an undetermined period after completion of the Merger. In addition, the actual cost savings of the Merger could be less than anticipated.

Regulatory approvals for the Merger may not be received, may take longer than expected or may impose conditions that are not presently anticipated or that could have an adverse effect on the combined company following the Merger.

Before the Merger may be completed, Capital must obtain approvals from the Federal Reserve Board, the FDIC and the North Carolina Commissioner of Banks. Other approvals, waivers or consents from regulators may also be required. In determining whether to grant these approvals, the regulators consider a variety of factors, including the regulatory standing of each party and the factors described under ‘‘Supervision and Regulation - CommunityOne Bancorp.’’ An adverse development in either party’s regulatory standing or these factors could result in an inability to obtain approval or delay their receipt. These regulators may impose conditions on the completion of the Merger or the bank merger or require changes to the terms of the Merger or the bank merger. Such conditions or changes could have the effect of delaying or preventing completion of the Merger or the bank merger or imposing additional costs on or limiting the revenues of the combined company following the Merger, any of which might have an adverse effect on the combined company following the Merger.

If the Merger is not completed, the Company and Capital will have incurred substantial expenses without realizing the expected benefits of the Merger.
The Company and Capital Bank each has incurred and will incur substantial expenses in connection with the negotiation and completion of the transactions contemplated by the Merger Agreement. If the Merger is not completed, the Company would have to recognize the expenses it has incurred without realizing the expected benefits of the Merger, which could materially impact the Company’s earnings and results of operations.
Because of the pending Merger, COB common stock trades at a market price relative to Capital Class A commons stock market price and will be impacted by market fluctuations in Capital Class A common stock.
Under the Merger Agreement, at the effective time of the Merger, each issued and outstanding share of COB common stock, except for treasury stock, will be converted into the right to receive either (i) $14.25 in cash or (ii) 0.43 shares of Capital Class A common stock,

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based on the holder’s election and subject to proration. Currently, the price of COB common stock trades at a market price relative to the Capital Class A common stock. The market value of Capital Class A common stock may fluctuate while the Merger is pending due to a variety of factors, including general market and economic conditions, changes in Capital’s businesses, operations and prospects and regulatory considerations. Many of these factors are outside of the control of the Company and Capital Bank. Furthermore, upon completion of the Merger, holders of COB common stock who receive stock consideration in the Merger will become holders of Capital Class A common stock. Capital’s businesses differ from those of COB, and accordingly, the results of operations of Capital will be affected by some factors that are different from those currently affecting the results of operations of COB, which may impact the stock price.
The Merger Agreement limits COB’s ability to pursue acquisition proposals and requires COB to pay a termination fee of $14 million under limited circumstances, including circumstances relating to acquisition proposals.
The Merger Agreement prohibits the Company from initiating, soliciting, knowingly encouraging or knowingly facilitating certain third party acquisition proposals. The Merger Agreement also provides that the Company must pay a termination fee in the amount of $14 million in the event the Merger Agreement is terminated under certain circumstances, including involving the Company’s failure to abide by certain obligations not to solicit acquisition proposals and the COB board of directors withdrawing or materially and adversely changing its recommendation that COB shareholders approve the Merger proposal. These provisions might discourage a potential competing acquirer that might have an interest in acquiring all or a significant part of the Company from considering or proposing such an acquisition.
Termination of the Merger Agreement could negatively impact the Company.
If the Merger Agreement is terminated, there may be various consequences. For example, the Company’s businesses may have been impacted adversely by the failure to pursue other beneficial opportunities due to the focus of management on the Merger, without realizing any of the anticipated benefits of completing the Merger. Additionally, if the Merger Agreement is terminated, the market price of the Company’s common stock could decline to the extent that the current market price reflects a market assumption that the Merger will be completed. If the Merger Agreement is terminated under certain circumstances, COB may be required to pay Capital a termination fee of $14 million.
Risks Related to the Regulatory Environment
Our deposit insurance premiums have decreased but may increase in the future, which could have a material adverse impact on our future earnings.
The FDIC insures the deposits of the Bank to the maximum extent provided by law. The FDIC charges the Bank premiums to maintain that insurance at specified levels. The assessments imposed by the FDIC for deposit insurance at the Bank have decreased, but they may increase in the future. The Dodd-Frank Act increased the minimum target deposit insurance ratio from 1.15% of estimated insured deposits to 1.35% of estimated insured deposits, which must be met by September 30, 2020. The FDIC has issued regulations to implement these provisions and has established a higher reserve ratio of 2% as a long-term goal beyond what is required by statute. The FDIC may increase the assessment rates or impose a special assessment in the future to keep the deposit insurance fund at the statutory target level. Any increase in FDIC insurance assessment would reduce our earnings.
The implementation of capital requirements based on Basel III may require us to hold additional capital.
Under revised capital requirements implemented by the federal banking agencies (known as Basel III capital requirements) effective for community banks and their holding companies as of January 1, 2015, the leverage and risk-based capital requirements (including the prompt corrective action framework) changed, including the definition of the regulatory capital components required to be held by community banks and their holding companies (including introducing a new capital component called common equity tier 1 or CET 1 capital), the type and minimum amount of capital that must be held under each capital component, the risk weightings of certain assets against which capital must be held, and the methodology for certain off-balance sheet items, as described under “Regulation and Supervision - Capital.” The revised rules also impose a capital conservation buffer of up to 2.5% above each of the capital ratio requirements (CET 1, tier 1, and total risk-based capital) which must be met for a bank and its holding company to be able to pay dividends, engage in share buybacks or make discretionary bonus payments to executive management without restriction. The rules phase in over time beginning in 2015 and will become fully effective in 2019. The impact of these new requirements may have the effect of reducing our returns on equity, or requiring us to modify our business strategy or raise additional capital.
In addition, in the current regulatory environment, the federal banking agencies have the power to impose additional capital requirements that are more stringent than those required under these revised rules. The application of more stringent capital requirements also could result in us experiencing lower returns on equity, require us to raise additional capital or be subject to regulatory action if we are unable to comply with these requirements.

16


We face a risk of noncompliance with the Bank Secrecy Act and other anti-money laundering statutes and regulations.
The BSA, the USA Patriot Act and other laws and regulations require financial institutions such as the Bank to, among other duties, institute and maintain an effective BSA/AML program, including implementing comprehensive "know your customer" programs, monitoring suspicious financial activity and filing suspicious activity and current transaction reports. These rules are enforced by the federal banking agencies as well as by the Financial Crimes Enforcement Network of the Treasury, the U.S. Department of Justice and the Internal Revenue Service. While the Company has enhanced its BSA/AML program over the past four years to comply with law, failure to continue to maintain an effective BSA and AML program and to comply with these laws, rules and regulations would subject the Company and the Bank to liability, including regulatory fines and additional supervisory and legal actions. Such failure also could impact the timing and ability of Capital to proceed with its acquisition of the Company. Such actions and restrictions would have a material adverse effect on our reputation and would negatively impact our business, financial condition and results of operations.
The continued implementation of the requirements of the Dodd-Frank Act may result in lower revenues and higher costs.
The Dodd-Frank Act has included, among other things, the establishment of strengthened capital and prudential standards for banks and bank holding companies; the imposition of limits on interchange fees on debit card transactions; enhanced regulation of financial markets, including derivatives and securitization markets; the elimination of certain trading activities from banks; a permanent increase of the FDIC deposit insurance to $250,000; the elimination of the prohibition on paying interest on demand deposits; the creation of a Financial Stability Oversight Council to identify emerging systemic risks and improve interagency cooperation; and the creation of the CFPB, which has promulgated new consumer protection regulations relating to consumer financial products and services, particularly in the area of mortgage lending. Certain aspects of the new law, including, without limitation, the additional cost of higher deposit insurance, higher capital requirements, and the costs of compliance with enhanced disclosure, early intervention and loss mitigation, training and reporting requirements and integrated RESPA/TILA disclosures to mortgage borrowers that have been issued by the CFPB in a relatively short time frame, have had and will continue to have a significant impact on our business, and may affect our financial condition and results of operations. As additional CFPB rulemakings become effective in the coming year, particularly those that will affect our mortgage and small business loans and businesses, we expect our compliance costs to continue to be elevated, and that they may continue to affect our financial condition and results of operation.
Government regulation significantly affects our business and changes in laws and regulations and the regulatory environment could have a material adverse effect on COB and the Bank.
We are extensively regulated under federal and state banking laws and regulations that are intended primarily for the protection of depositors, federal deposit insurance funds and the banking system as a whole and not shareholders. These regulations affect our lending and deposit practices, capital structure, investment and dividend policies, and growth. In addition, we are subject to changes in federal and state laws and regulations, and governmental economic and monetary policies. We cannot predict whether any of these changes may adversely and materially affect us. The current regulatory environment for financial institutions, particularly since the enactment of the Dodd-Frank Act, entails significant potential increases in compliance requirements and associated costs, including those related to consumer credit, with a focus on mortgage lending.
Federal and state banking regulators also possess broad powers to take supervisory actions as they deem appropriate. These actions may result in higher capital requirements, higher insurance premiums and limitations on our activities that could have a material adverse effect on our business and profitability.
Risks Related to our Stock
Our ability to pay dividends is limited, leaving appreciation in the value of our common stock as the sole opportunity for returns on investment.
The holders of COB common stock are entitled to receive dividends when and if declared by the Board of Directors out of funds legally available for the payment of dividends. The ability of COB to pay dividends to its shareholders has been dependent upon the amount of dividends the Bank may pay to COB. Statutory and regulatory limitations are imposed on the payment of dividends by the Bank to COB, as well as by COB to its shareholders. Under applicable law, the Bank must obtain the prior OCC approval to pay dividends if the total of all dividends declared by the Bank in any calendar year will exceed the sum of its net income for that year and its retained net income for the preceding two calendar years, less certain transfers. Federal law also prohibits the Bank from paying dividends that in the aggregate would be greater than its undivided profits after deducting statutory bad debts in excess of its ALL. The Bank, however, may obtain shareholder and OCC approval to reduce its capital to allow payment of dividends after cumulative losses in an amount greater than its undivided profits. The Bank has not paid dividends to the Company during 2015 and does not intend to pay dividends in 2016.

17


There is a limited market for our common stock.
Although our common stock is traded on the Nasdaq Capital Market, the volume of trading has historically been limited. Our average daily trading volume of our shares during 2015 was approximately 21,500 shares. Lightly traded stock can be more volatile than stock trading in a more active public market. While we have made efforts to increase trading in our stock, we cannot predict the extent to which an active public market for our common stock will develop or be sustained. Therefore, a holder of our common stock who wishes to sell his or her shares may not be able to do so immediately or at an acceptable price.
Subsequent resales of shares of our common stock in the public market may cause the market price of our common stock to fall.
We issued a large number of shares of our common stock to our investors in the 2011 recapitalization and in a private placement consummated on December 30, 2014. During 2015, we filed an effective registration statement for the shares issued in our 2014 private placement, as well as the shares issued to Carlyle and Oak Hill Capital and other investors in the recapitalization without any of those investors having to comply with the volume and manner of sale restrictions under Rule 144 promulgated under the Securities Act. While it is not anticipated that any of these investors will sell shares due to the pending Merger, the market value of our common stock could decline as a result of sales by the investors from time to time of a substantial amount of the shares of our common stock held by them.
Carlyle and Oak Hill Capital are substantial holders of our common stock.
Each of Carlyle and Oak Hill Capital hold approximately 24% of the outstanding shares of our common stock, and each has a representative on the Board of Directors of COB and the Bank. In addition, each of Carlyle and Oak Hill Capital has preemptive rights to maintain their percentage ownership of our common stock in the event of certain issuances of securities by COB. Although each of Carlyle and Oak Hill Capital entered into certain passivity and non-affiliation commitments with the Federal Reserve Board in connection with obtaining approval of its proposed investment in COB, in pursuing their economic interests, Carlyle and Oak Hill Capital may have interests that are different from the interests of our other shareholders. Additionally, the concentration of ownership by Carlyle and Oak Hill Capital means that they will also exert considerable, ongoing influence over matters subject to shareholder approval, including the election of directors and significant corporate transactions, such as a merger, sale of assets or other business combination or sale of our business. This concentration of ownership may have the effect of delaying, deferring, or preventing a change in control, impeding a merger, consolidation, takeover or other business combination involving us, or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of our business, even if such a transaction would benefit other shareholders.
Risks Related to Economic Conditions and other Outside Forces
We may be subject to litigation from time to time, which could involve the expenditure of substantial resources and time to defend.
From time to time, customers and others may take legal action against us. Customer defaults have also resulted in an increase in litigation. Whether or not any claims made are valid, if such claims are not resolved in a manner favorable to us, they may result in significant expense, attention from management and possibly financial liability, as well as cause damage to our reputation, all of which could have a negative effect on our business.
Market, economic and political developments may adversely affect our industry, business and results of operations.
Our results of operations are materially impacted by conditions in the economy and in the capital markets, both of which continue to be uncertain and impacted by both world and national events, such as sluggish economic growth, elevated unemployment rates and historically low interest rates. During the past six years, the financial markets have been under significant strain, resulting in financial instability, a depressed housing and manufacturing market, significant declines in asset values, employee dislocation, geopolitical issues and political uncertainly and diminished expectations for economic growth. These strains adversely affected our operations and financial results, and led to the need for our recapitalization. We have worked hard to overcome the material challenges facing our operations during the past five years, aggressively working out our criticized and classified assets, re-engaging with our communities, and returning the Bank to a satisfactory condition. While the financial market has been recovering, and conditions have improved, particularly in our urban markets, a return to a recessionary economy could result in financial stress on our borrowers that would adversely affect our financial condition and results of operations. Factors such as consumer spending, business investment, government spending and volatility and strength of the capital markets and inflation all affect the business and economic environment in which we operate and ultimately, the profitability of our business. In an economic downturn characterized by higher unemployment, and lower household income, corporate earnings, business investment and consumer spending, the demand for our products and services could be adversely affected. More generally, any financial or economic development that may raise new concern about the stability of the financial markets generally and the strength of counterparties may result in renewed lack of confidence in the financial sector, increased volatility in the financial markets and/or reduced business activity. Economic and market developments also could result in legislative and regulatory actions that could impact our business. Any of these results or actions could materially adversely affect our business, financial condition and results of operations.

18


Unpredictable catastrophic events could have a material adverse effect on us.
The occurrence of catastrophic events such as hurricanes, tropical storms, earthquakes, pandemic disease, windstorms, floods, severe winter weather (including snow, freezing rain, ice storms and blizzards), fires and other catastrophes could adversely affect our consolidated financial condition or results of operations. Unpredictable natural and other disasters could have an adverse effect on us in that such events could materially disrupt our operations or the ability or willingness of our customers to access the financial services we offer. The incidence and severity of catastrophes are inherently unpredictable. Although we carry insurance to mitigate our exposure to certain catastrophic events, these events could nevertheless reduce our earnings and cause volatility in our financial results for any fiscal quarter or year and have a material adverse effect on our financial condition or results of operations or both.



19


Item 1B.
UNRESOLVED STAFF COMMENTS
There were no unresolved comments received from the SEC regarding COB’s periodic or current reports within the 180 days prior to December 31, 2015.
Item 2.
PROPERTIES
The principal executive and administrative offices of COB are located in an office building at 1017 E. Morehead Street, Suite 200, Charlotte, NC 28204. We also maintain administrative and loan production offices in Asheboro (2), Boone, Charlotte (2), Hickory, Greensboro, Raleigh, and Winston-Salem, North Carolina and one loan production office in Charleston, South Carolina. The Bank’s primary operations center is located in Asheboro, North Carolina.

The Bank operates 45 branches in Archdale, Asheboro (two branches), Belmont, Boone, Charlotte (two branches), China Grove, Cornelius, Ellerbe, Gastonia, Graham, Granite Falls, Greensboro (two branches), Hickory (four branches), Hillsborough, Hudson, Jamestown, Kannapolis, Laurinburg, Lenoir (two branches), Matthews, Millers Creek, Mooresville, Morganton, Mt. Holly, Newton (two branches), Ramseur, Randleman, Rockingham (two branches), Salisbury (two branches), Seagrove, Siler City, Southern Pines, Stanley, Statesville and Wilkesboro, North Carolina.

In total, 38 of our branches are owned and 7 are leased facilities, with 2 of the owned branches situated on land that is leased. Of our administrative, operational and loan production office facilities, four of the facilities are owned and seven are leased.
Item 3.
LEGAL PROCEEDINGS
From time to time, we are subject to various claims, lawsuits, disputes with third parties, investigations and pending actions involving various allegations against us incident to the operation of our business.  On February 29, 2016, a case captioned Curtis R. Pendleton v. Robert L. Reid, et al., Case 5:16-cv-00037 (W.D.N.C.), was filed on behalf of a putative class of CommunityOne shareholders against CommunityOne, its directors, and Capital Bank Financial Corp. in the United States District Court for the Western District of North Carolina in connection with the Capital Merger. The complaint alleges, among other things, that the defendants violated Sections 14(a) and 20(a) of the Securities Exchange Act of 1934 by issuing a Registration/Joint Proxy Statement that, plaintiff alleges, is materially incomplete and misleading. The complaint seeks, among other things, an order enjoining the merger, as well as other equitable relief and/or money damages, interest, costs, fees (including attorneys' fees) and expenses. The Company believes that the claims are without merit. Other than the above, in management's opinion, there are no proceedings pending to which we are a party or to which our property is subject, which, if determined adversely to us, would be material in relation to our shareholder's equity or financial condition.  In addition, no material proceedings are pending or are known to be threatened or contemplated against us by governmental authorities or other parties.
Item 4.
MINE SAFETY DISCLOSURES
Not applicable.

20


PART II
Item 5.
MARKET FOR REGISTRANTS COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Prices and Dividend Policies
COB’s common stock is traded on the Nasdaq Capital Market (“Nasdaq”) under the symbol “COB.”
The range of sale prices for the years 2015 and 2014 is set forth in the table below and is based upon information obtained from Nasdaq. As of the close of business on February 29, 2016, there were approximately 4,300 registered shareholders according to the records maintained by our transfer agent.
We have not paid dividends during the calendar periods covered by the table below. We intend to reinvest cash flow generated by operations into our business. As a bank holding company, any dividends paid to us by our Bank subsidiary are subject to various statutory limitations, as described in Item 1, "Regulation and Supervision - Dividend Restrictions" of this Report.
Calendar Period
 
High
 
Low
 
Dividends
Declared
Quarter ended March 31, 2014
 
$
13.00

 
$
10.50

 
$

Quarter ended June 30, 2014
 
11.69

 
8.42

 

Quarter ended September 30, 2014
 
10.39

 
8.62

 

Quarter ended December 31, 2014
 
11.82

 
8.75

 

Quarter ended March 31, 2015
 
11.56

 
9.36

 

Quarter ended June 30, 2015
 
11.25

 
9.57

 

Quarter ended September 30, 2015
 
11.05

 
9.92

 

Quarter ended December 31, 2015
 
14.31

 
10.37

 

FIVE-YEAR STOCK PERFORMANCE TABLE
Performance Graph
The following graph and table compares the cumulative total shareholder return of COB common stock for the five-year period ended December 31, 2015 with the SNL Southeast Bank Index and the Russell 3000 Stock Index, assuming an investment of $100 at the beginning of the period and the reinvestment of dividends.

21


CommunityOne Bancorp
 
 
Period Ending
Index
 
12/31/2010
 
12/31/2011
 
12/31/2012
 
12/31/2013
 
12/31/2014
 
12/31/2015
CommunityOne Bancorp
 
$
100.00

 
$
39.38

 
$
35.69

 
$
39.23

 
$
35.23

 
$
41.45

SNL Southeast Bank
 
100.00

 
58.51

 
97.19

 
131.70

 
148.33

 
146.02

Russell 3000
 
100.00

 
101.03

 
117.61

 
157.07

 
176.79

 
177.64



22


Item 6.
SELECTED FINANCIAL DATA
The tables below set forth selected consolidated financial data as of the dates or for the periods indicated. This data should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 and the Consolidated Financial Statements and Notes in Item 8 of this Report.
(dollars in thousands, except per share data)
 
As of and for the Year Ended December 31,
 
 
2015
 
2014
 
2013
 
2012
 
2011
Income Statement Data
 
 
 
 
 
 
 
 
 
 
Net interest income
 
$
68,375

 
$
63,766

 
$
64,433

 
$
61,280

 
$
39,555

Provision for (recovery of) loan losses
 
(2,981
)
 
(5,371
)
 
523

 
14,049

 
67,362

Noninterest income
 
18,170

 
17,364

 
20,414

 
21,958

 
21,970

Noninterest expense
 
75,488

 
78,535

 
84,481

 
110,206

 
125,040

Income (Loss) from continuing operations, before income taxes
 
14,038

 
7,966

 
(157
)
 
(41,017
)
 
(130,877
)
Income tax expense (benefit) - continuing operations
 
7,124

 
(142,492
)
 
1,326

 
(1,039
)
 
641

Income (Loss) from continuing operations, net of taxes
 
6,914

 
150,458

 
(1,483
)
 
(39,978
)
 
(131,518
)
Loss from discontinued operations, net of taxes
 

 

 

 
(27
)
 
(5,796
)
Net income (loss)
 
6,914

 
150,458

 
(1,483
)
 
(40,005
)
 
(137,314
)
Preferred stock gain on retirement, net of accretion, and dividends
 

 

 

 

 
44,592

Net income (loss) to common shareholders
 
6,914

 
150,458

 
(1,483
)
 
(40,005
)
 
(92,722
)
Period End Balances
 
 
 
 
 
 
 
 
 
 
Assets
 
$
2,397,265

 
$
2,215,514

 
$
1,985,032

 
$
2,151,565

 
$
2,409,108

Loans held for sale (1)
 
5,403

 
2,796

 
1,836

 
6,974

 
4,529

Loans held for investment (2)
 
1,543,795

 
1,357,788

 
1,212,248

 
1,177,035

 
1,217,535

Allowance for loan losses (1)
 
15,195

 
20,345

 
26,785

 
29,314

 
39,360

Goodwill and other intangible assets (1)
 
9,413

 
9,886

 
11,119

 
11,700

 
12,082

Deposits
 
1,947,537

 
1,794,420

 
1,748,705

 
1,906,988

 
2,129,111

Borrowings
 
163,017

 
139,350

 
142,165

 
123,705

 
123,910

Shareholders’ equity
 
273,038

 
266,916

 
80,361

 
98,445

 
129,015

Average Balances
 
 
 
 
 
 
 
 
 
 
Assets
 
$
2,290,090

 
$
2,005,948

 
$
2,047,146

 
$
2,291,541

 
$
1,911,943

Loans held for sale (1)
 
4,036

 
1,603

 
3,693

 
5,312

 
12,849

Loans held for investment (2)
 
1,450,764

 
1,268,599

 
1,158,984

 
1,240,550

 
1,132,125

Allowance for loan losses (1)
 
18,418

 
24,770

 
27,596

 
36,738

 
66,285

Goodwill and other intangible assets (1)
 
9,532

 
10,476

 
11,412

 
12,351

 
9,250

Deposits
 
1,840,096

 
1,758,471

 
1,809,574

 
2,027,425

 
1,725,512

Borrowings
 
164,895

 
143,205

 
131,710

 
124,914

 
190,864

Shareholders’ equity (deficit)
 
271,821

 
91,151

 
85,576

 
114,684

 
(22,809
)
Per Common Share Data
 
 
 
 
 
 
 
 
 
 
Net income (loss) per share from continuing operations - basic
 
$
0.29

 
$
6.89

 
$
(0.07
)
 
$
(1.87
)
 
$
(20.71
)
Net income (loss) per share from continuing operations - diluted
 
0.29

 
6.88

 
(0.07
)
 
(1.87
)
 
(20.71
)
Net loss per common share from discontinued operations - basic and diluted
 

 

 

 

 
(1.38
)
Net income (loss) per share - basic
 
0.29

 
6.89

 
(0.07
)
 
(1.87
)
 
(22.09
)

23


Net income (loss) per share - diluted
 
$
0.29

 
$
6.88

 
$
(0.07
)
 
$
(1.87
)
 
$
(22.09
)
Core net income - diluted (3)
 
0.44

 
0.34

 
0.04

 
(1.26
)
 
(21.84
)
Book value (shareholders' equity)
 
11.24

 
11.04

 
3.68

 
4.54

 
6.11

Tangible book value (shareholders' equity) (3)
 
10.85

 
10.63

 
3.17

 
4.00

 
5.54

Performance Ratios
 
 
 
 
 
 
 
 
 
 
Return on average assets
 
0.30
%
 
7.50
%
 
(0.07
)%
 
(1.75
)%
 
(4.85
)%
Return on average tangible assets (3)
 
0.30

 
7.54

 
(0.07
)
 
(1.76
)
 
(4.87
)
Core return on average assets
 
0.47

 
0.37

 
0.04

 
(1.18
)
 
(4.64
)
Pre-tax return on average assets
 
0.61

 
0.40

 
(0.01
)
 
(1.79
)
 
(4.85
)
Return on average equity
 
2.54

 
165.06

 
(1.73
)
 
(34.88
)
 
N/M
Return on average tangible equity (3)
 
2.64

 
186.50

 
(2.00
)
 
(39.09
)
 
N/M
Net interest margin (tax equivalent)
 
3.40

 
3.43

 
3.44

 
2.95

 
2.29

Pre-credit and non-recurring (“PCNR”) noninterest expense as a percentage of average assets (3)
 
3.03

 
3.54

 
3.50

 
3.24

 
3.37

Asset Quality Ratios
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses to period end loans held for investment (1) (2)
 
0.98
%
 
1.50
%
 
2.21
 %
 
2.49
 %
 
3.23
 %
Net charge-offs to average loans held for investment (2)
 
0.15

 
0.08

 
0.26

 
1.94

 
10.75

Classified assets to Tier 1 capital and allowance for loan losses
 
32.0

 
40.6

 
84.7

 
145.2

 
140.8

Nonperforming assets to period end total assets (4)
 
1.48

 
2.06

 
3.20

 
6.63

 
8.98

Capital and Liquidity Ratios
 
 
 
 
 
 
 
 
 
 
Average equity to average assets
 
11.87
%
 
4.54
%
 
4.18
 %
 
5.00
 %
 
(1.19
)%
CET 1 Total risk-based capital
 
13.21

 
14.58

 
12.62

 
12.34

 
13.81

Tier 1 risk-based capital
 
11.22

 
13.33

 
9.48

 
9.26

 
11.71

Leverage capital
 
8.19

 
9.78

 
5.96

 
5.45

 
6.70

Period end loans held for investment to period end deposits (2)
 
79.27

 
75.67

 
69.32

 
61.72

 
57.19

(1) 
Excludes discontinued operations.
(2) 
Loans held for investment, net of unearned income, before allowance for loan losses.
(3) 
Refer to the “Non-GAAP Measures” section in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(4) 
Nonperforming loans and nonperforming assets include loans past due 90 days or more that are still accruing interest.

24


Item 7.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management’s discussion and analysis of the financial condition and results of operations of COB represents an overview of the consolidated financial conditions and results of operations of COB for each of the last three years. Certain reclassifications have been made to prior periods to place them on a basis comparable with the current period presentation. This discussion and analysis should be read in conjunction with the Consolidated Financial Statements and Notes presented in Item 8 of this Report. 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 Report contains information, including information incorporated by reference in this Report, that we believe are “forward-looking statements,” within the meaning of the safe harbor protections of the Private Securities Litigation Reform Act of 1995. These statements generally relate to COB’s financial condition, capital resources, results of operations, future plans, goals, 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,” “targets,” “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 Report, or the documents incorporated by referenced in it, including Item 1A “Risk Factors.” 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 Report are based on current expectations, estimates and projections about COB’s business, management’s beliefs and assumptions made by management based on the information available to management at the time these disclosures were prepared, including but not limited to, assumptions about general market conditions, interest rate, market and other risks. These statements are not guarantees of COB’s future performance or results 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 implied in the forward-looking statements. Future Factors include, without limitation:

Our ability to continue to grow our business internally while controlling our costs;
Having the financial and management resources in the amount, at the times and on the terms required to support our future business;
A material delay or inability to obtain regulatory and/or shareholder approval of the Merger and meet the other conditions to the Merger;
The successful completion of the Merger and subsequent integration of the two businesses without material customer disruption or decrease in revenues;
The accuracy of our assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of real estate and other assets, which could affect repayment of such borrowers' outstanding loans;
Material changes in the quality of our loan portfolio and the resulting credit related losses and expenses;
The accuracy of our assumptions relating to the establishment of our ALL;
Adverse changes in the value of real estate in our market areas;
Adverse changes in the housing markets, or an increase in interest rates, either of which may reduce demand for mortgages;
Changes in interest rates, spreads on earning assets and interest-bearing liabilities, the shape of the yield curve and interest rate sensitivity;
A prolonged period of low interest rates;
Declines in the value of our OREO;
The accuracy of our assumptions relating to our ability to use net operating loss carryforwards to reduce future tax payments;
The loss of one or more members of executive management and our ability to retain key lenders and other employees particularly pending the Merger with Capital Bank;
Less favorable general economic conditions, either nationally or regionally; resulting in, among other things, a reduced demand for our credit or other services and thus reduced origination volume;
Increased competitive pressures in the banking industry or in COB's markets affecting pricing or product and service offerings;
Our ability to respond to rapid technological developments and changes;
Disruptions in or manipulations of our operating systems;
Information security risks impacting us or our vendors, including “hacking” and “identity theft,” that could adversely affect our business and our reputation;
The loss or disruption of the services provided by one or more of our critical vendors;

25


Our ability to achieve our targeted reductions in costs and expenses, particularly in light of the pending Capital Bank Merger;
The impact of laws and regulatory requirements, including the Basel III capital rules, Bank Secrecy Act requirements, and regulations required by the Dodd-Frank Act;
Changes in trade, monetary and fiscal policies and laws, including interest rate policies of the Federal Reserve Board;
Changes in accounting principles and standards; and
Our success at managing the risks involved in the foregoing.

We encourage readers of this Report to understand forward-looking statements to be strategic objectives rather than absolute targets of future performance. Forward-looking statements speak only as of the date they are made and we do not intend to update any forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made or to reflect the occurrence of unanticipated events.

Executive Overview

Background
We are a bank holding company headquartered in Charlotte, North Carolina and incorporated in 1984 under the laws of the State of North Carolina. Through our ownership of CommunityOne Bank, N.A., (the “Bank”), a national banking association founded in 1907 and headquartered in Asheboro, North Carolina, we offer a complete line of consumer, mortgage and business banking services, including loan, deposit and treasury management, as well as wealth management and trust services, to individual and small and middle market businesses through financial centers located throughout central, southern and western North Carolina.
Our strategy is to grow the Company organically by focusing on meeting the financial needs of customers in our market area by providing a suite of quality financial products and services through local and experienced bankers and lenders located in branches and loan production offices in our customers’ local market. We also offer the convenience of online and mobile banking capabilities. We define our market as communities located in North Carolina, as well as adjoining markets in South Carolina and Virginia.
We earn revenue primarily from interest on loans and securities investments, gains on the sale of mortgage loans, and fees charged for financial services provided to our customers. Offsetting these revenues are the cost of deposits and other funding sources, credit costs through provision for loan losses and write-downs in the value of our OREO, and other operating costs such as salaries and employee benefits, occupancy, data processing expenses and income tax expense.
On November 22, 2015, we entered into an Agreement and Plan of Merger (“Merger Agreement”) with Capital Bank Financial Corp., a Delaware corporation (“Capital”), under which, upon the terms and subject to the conditions set forth in the Merger Agreement, COB will merge with and into Capital (the “Merger”), with Capital Bank as the surviving corporation in the Merger. Immediately following the Merger, the Bank will merge with and into Capital’s wholly owned bank subsidiary, with Capital’s bank subsidiary surviving the bank merger. The Merger is subject to, among other things, regulatory and shareholder approval and other customary closing conditions and is currently expected to close in the second quarter of 2016.
2015 Goals and Results
Our five key goals for 2015 were to (1) grow loans; (2) grow core deposits; (3) enhance fee income; (4) maintain expense discipline; and (5) explore merger and acquisition (“M&A”) opportunities that make sense strategically and financially. As a result of excellent execution across our Company, we were able to substantially achieve each of these goals.
Loan growth in 2015 continued to be very strong, and we grew the loan portfolio by $186.0 million, or 14%, exceeding our full year growth goal of 10-12%. The key strategies that drove this success in 2015 were the continued success in the core metro markets of Charlotte, Greensboro and Raleigh, the addition of experienced mortgage bankers in Charlotte and Raleigh, and the opening of a new loan production office in Charleston, South Carolina. Excluding our declining purchased residential mortgage loan pool portfolio, organic loan growth was even stronger at 19% in 2015. All of our lines of business grew loans, and all categories of loans grew as well. Commercial and agricultural loans, consisting primarily of Commercial and Industrial (“C&I”) loans, grew $38.9 million during 2015, or 34%, and commercial loans overall grew $130.4 million, or 21%. This strong loan growth resulted in a December 31, 2015 loans to deposits ratio of 79%, just below our 2015 goal of 80-85%, primarily as a result of strong deposit growth during 2015.
We successfully grew deposits in 2015, especially in the fourth quarter, and total deposits increased 9% or $153.1 million from the prior year. Core deposits, which exclude larger time deposits, grew $112.3 million, or 8%, during the year. Over the course of the year, we executed several successful deposit campaigns for both time deposits and money market accounts. The combination of new commercial relationship acquisition and the success of our treasury management products were key drivers of the growth of noninterest-bearing deposits, which increased $62.6 million, or 19%, in 2015.
We continued to maintain expense discipline, even as we made investments in personnel and infrastructure. During 2015, we reduced our total noninterest expense by $3.0 million or 4%. Our pre-credit and nonrecurring noninterest expense, which excludes credit and

26


non-core nonrecurring expenses, as a percentage of average assets was 3.03% in 2015, exceeding our goal of 3.10%. Excluding non-core items, noninterest expense fell $2.0 million, or 3%, as a result of expense reduction initiatives, including the closure of six branches in the first quarter. At the same time, we continued to make investments for the future, and opened a loan production office in Charleston, South Carolina and expanded our existing lending capabilities in Charlotte and Raleigh. We added origination personnel to our non-branch based retail residential mortgage channel in 2015, focused on the Charlotte and Raleigh metro markets, and originated $77.1 million in production through this channel, an increase of 732% over 2014. In 2015, we also grew our Small Business Administration (“SBA”) lending capabilities in Charlotte and originated $7.1 million in SBA loans.
Growing our fee income also was a significant focus in 2015 and excluding non-core securities gains and a bargain purchase gain from our purchase of deposits from CertusBank, N.A., we grew noninterest income by 9% in 2015, just below our 10-12% growth objective. Mortgage and SBA loan sale income growth was especially strong at 81% in 2015, as a result of investments we have made in bankers in these businesses over the past several years.
Finally, we were active in 2015 in exploring M&A opportunities. In June, we completed the purchase of the deposits of the Lenoir and Granite Falls branches of CertusBank, N.A. As previously discussed, on November 22, 2015 we entered into a Merger Agreement with Capital which is currently expected to close in the second quarter of 2016.
 
Results of Operations
Our net income for 2015 was $6.9 million, compared to 2014 net income of $150.5 million that included a non-recurring $142.5 million reversal of the valuation allowance on deferred tax assets as a credit to income tax expense. Core net income, a non-GAAP measure that excludes non-core nonrecurring income and expenses, was $10.7 million in 2015, a 43% increase from $7.5 million in 2014. Diluted net income per share was $0.29 in 2015 as compared to $6.88 in 2014. Core diluted net income per share was $0.44 in 2015 as compared to $0.34 in 2014, an increase of 29%.
Net income before income taxes was $14.0 million in 2015, a $6.1 million improvement from the prior year, primarily as a result of a $4.6 million increase in net interest income and a $3.0 million reduction in noninterest expenses, partially offset by a $2.4 million decrease in recovery of provision for loan losses.
In 2015, net interest income grew 7% to $68.4 million, from $63.8 million in 2014. Our net interest margin fell 3 basis points to 3.40% in 2015 from 3.43% in 2014, as the continued low interest rate environment reduced the yield on new loans. This decrease was partially offset by improvements in the earning asset mix as we deployed funds from low-interest rate bank balances and securities into more attractively yielding loans, whose average balances grew 15% during 2015. Our average investment securities balances decreased by 1% in 2015, while our yield on those securities fell to 2.44% in 2015 from 2.64% in 2014. Noninterest income, excluding securities gains and other non-core nonrecurring items, increased $1.5 million, or 9%, in 2015, from $16.4 million in 2014 to $17.9 million in 2015. An increase in mortgage and SBA loan sales income driven by higher origination volumes, and an increase in total service charge income from increased origination activity, drove the majority of the increase year over year.
Return on average assets was 0.30% in 2015, compared to 7.50% in 2014. Core return on average assets, a non-GAAP measure that excludes non-core nonrecurring income and expenses, was 0.47% in 2015, compared to 0.37% in 2014. Return on average shareholders' equity was 2.54% in 2015, compared to 165.06% in 2014. Return ratios were elevated in 2014 by the reversal of $142.5 million of deferred tax valuation allowance in the fourth quarter of 2014.
Net Interest Income
Our largest source of revenue is net interest income. Net interest income represents the difference between interest and fees on interest-earning assets, principally loans and investments, and interest expense on interest-bearing liabilities, principally customer deposits. Net interest income is affected by changes in interest rates and spreads and changes in the average balances and mix of interest-earning assets and interest-bearing liabilities.
Table 1 sets forth for the periods indicated information with respect to COB’s average balances of assets and liabilities, as well as the total dollar amounts of interest income (taxable equivalent basis) from earning assets and interest expense on interest-bearing liabilities, resultant rates earned or paid, net interest income, net interest spread and net yield on earning assets. Net interest spread refers to the difference between the average yield on earning assets and the average rate paid on interest-bearing liabilities. Net yield on earning assets, or net interest margin, refers to net interest income divided by average earning assets and is influenced by the level and relative mix of earning assets and interest-bearing liabilities.

27


Table 1
Average Balance Sheet and Net Interest/Dividend Income Analysis
Fully Taxable Equivalent Basis
 
 
Year Ended December 31,
 
 
2015
 
2014
 
2013
(dollars in thousands)
 
Average
Balance (3)
 
Income /
Expense
 
Average
Yield /
Rate
 
Average
Balance (3)
 
Income /
Expense
 
Average
Yield /
Rate
 
Average
Balance (3)
 
Income /
Expense
 
Average
Yield /
Rate
Interest earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans (1)(2)
 
$
1,454,800

 
$
64,930

 
4.46
%
 
$
1,270,202

 
$
59,268

 
4.67
%
 
$
1,162,677

 
$
60,339

 
5.19
%
Investment securities
 
526,523

 
12,865

 
2.44

 
533,272

 
14,068

 
2.64

 
581,271

 
14,180

 
2.44

Other earning assets
 
28,806

 
827

 
2.87

 
58,978

 
605

 
1.03

 
136,944

 
665

 
0.49

Total earning assets
 
2,010,129

 
78,622

 
3.91

 
1,862,452

 
73,941

 
3.97

 
1,880,892

 
75,184

 
4.00

Non-earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and due from banks
 
25,544

 
 
 
 
 
26,918

 
 
 
 
 
29,760

 
 
 
 
Core deposit premiums and other intangibles
 
9,532

 
 
 
 
 
10,476

 
 
 
 
 
11,412

 
 
 
 
Other assets, net
 
244,885

 
 
 
 
 
106,102

 
 
 
 
 
125,082

 
 
 
 
Total assets
 
$
2,290,090

 
 
 
 
 
$
2,005,948

 
 
 
 
 
$
2,047,146

 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing demand deposits
 
$
356,618

 
$
945

 
0.26
%
 
$
340,525

 
$
1,011

 
0.30
%
 
$
346,771

 
$
1,058

 
0.31
%
Savings deposits
 
90,941

 
93

 
0.10

 
84,921

 
87

 
0.10

 
79,651

 
81

 
0.10

Money market deposits
 
436,807

 
1,261

 
0.29

 
436,126

 
1,106

 
0.25

 
448,382

 
1,026

 
0.23

Time deposits
 
603,694

 
4,766

 
0.79

 
581,498

 
4,704

 
0.81

 
650,392

 
5,906

 
0.91

Total interest-bearing deposits
 
1,488,060

 
7,065

 
0.47

 
1,443,070

 
6,908

 
0.48

 
1,525,196

 
8,071

 
0.53

Retail repurchase agreements
 
10,033

 
22

 
0.22

 
7,713

 
16

 
0.21

 
9,852

 
21

 
0.21

Federal Home Loan Bank advances
 
92,758

 
1,963

 
2.12

 
73,493

 
2,020

 
2.75

 
62,499

 
1,376

 
2.20

Long-term debt
 
5,374

 
77

 
1.43

 
5,297

 
76

 
1.43

 
2,657

 
31

 
1.18

Other borrowed funds
 
56,730

 
1,058

 
1.86

 
56,702

 
1,070

 
1.89

 
56,702

 
1,060

 
1.87

Total interest-bearing liabilities
 
1,652,955

 
10,185

 
0.62

 
1,586,275

 
10,090

 
0.64

 
1,656,906

 
10,559

 
0.64

Noninterest-bearing liabilities and shareholders’ equity:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Noninterest-bearing demand deposits
 
352,036

 
 
 
 
 
315,401

 
 
 
 
 
284,378

 
 
 
 
Other liabilities
 
13,278

 
 
 
 
 
13,121

 
 
 
 
 
20,286

 
 
 
 
Shareholders’ equity
 
271,821

 
 
 
 
 
91,151

 
 
 
 
 
85,576

 
 
 
 
Liabilities of discontinued operations
 

 
 
 
 
 

 
 
 
 
 

 
 
 
 
Total liabilities and equity
 
$
2,290,090

 
 
 
 
 
$
2,005,948

 
 
 
 
 
$
2,047,146

 
 
 
 
Net interest income and net yield on earning assets (4)
 
 
 
$
68,437

 
3.40
%
 
 
 
$
63,851

 
3.43
%
 
 
 
$
64,625

 
3.44
%
Interest rate spread (5)
 
 
 
 
 
3.29
%
 
 
 
 
 
3.33
%
 
 
 
 
 
3.36
%
(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 available-for-sale 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.
Net interest income (on a non-tax equivalent basis) was $68.4 million in 2015, compared to $63.8 million in 2014. This increase of $4.6 million, or 7%, resulted primarily from an 8% increase in average earning assets from 2014 to 2015, partially offset by a decrease in the net interest margin to 3.40% in 2015 from 3.43% in 2014. The positive effects of the growth in loans, whose average balances rose by $184.6 million, or 15%, during 2015, were partially offset by the impact of the continued low interest rate environment on average loan yields, which declined by 0.21% during the year.

28


In 2014, the decrease in net interest income of $0.6 million, or 1% from 2013, resulted primarily from a decrease in the net interest margin to 3.43% in 2014 from 3.44% in 2013, as well as a 1% decrease in average earning assets during the same period. The positive effects of the deployment of funds from securities and low-yielding cash equivalents into higher yielding loans, whose average balances rose by $107.5 million, or 9%, during 2014, were mostly offset by the impact of the low interest rate environment on average loan yields, which declined by 0.52% during the year.
On a taxable equivalent basis, the changes in net interest income were a $4.6 million increase in 2015 and a decrease of $0.8 million for 2014. The increase in 2015 and the decline in 2014 were the result of the factors noted previously.
In 2015, the net interest spread decreased by 4 basis points from 3.33% in 2014, to 3.29% in 2015, reflecting a decrease in the total yield on earning assets, partially offset by a smaller decrease in the rate paid on interest-bearing liabilities. The total yield on earning assets decreased by 6 basis points, from 3.97% in 2014 to 3.91% in 2015, while the average rate paid on interest-bearing liabilities, or cost of funds, declined 2 basis points from 0.64% in 2014 to 0.62% in 2015.
Changes in the net interest margin and net interest spread tend to correlate with movements in interest rates. There are variations, however, in the degree and timing of rate changes for the different types of earning assets and interest-bearing liabilities.
Table 2 analyzes net interest income on a taxable equivalent basis, as measured by rate and volume variances. The table reflects the extent to which changes in the interest income and interest expense are attributable to changes in average volume (changes in average volume multiplied by prior year rate) and changes in rate (changes in rate multiplied by prior year average volume).
Table 2
Rate and Volume Variance Analysis
(dollars in thousands)
 
2015 vs 2014
 
2014 vs 2013
  
 
Volume
Variance
 
Rate
Variance
 
Total
Variance
 
Volume
Variance
 
Rate
Variance
 
Total
Variance
Interest income:
 
 
 
 
 
 
 
 
 
 
 
 
Loans
 
$
8,199

 
$
(2,537
)
 
$
5,662

 
$
12,843

 
$
(13,914
)
 
$
(1,071
)
Investment securities
 
(172
)
 
(1,031
)
 
(1,203
)
 
(15,193
)
 
15,081

 
(112
)
Other earning assets
 
(89
)
 
310

 
221

 
64

 
(124
)
 
(60
)
Total interest income
 
7,938

 
(3,258
)
 
4,680

 
(2,286
)
 
1,043

 
(1,243
)
Interest expense:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing demand deposits
 
36

 
(102
)
 
(66
)
 
(17
)
 
(30
)
 
(47
)
Savings deposits
 
6

 

 
6

 
6

 

 
6

Money market deposits
 
1

 
154

 
155

 
(37
)
 
117

 
80

Time deposits
 
176

 
(114
)
 
62

 
(590
)
 
(612
)
 
(1,202
)
Retail repurchase agreements
 
5

 
1

 
6

 
(5
)
 

 
(5
)
Federal Home Loan Bank advances
 
(466
)
 
409

 
(57
)
 
267

 
377

 
644

Long-term debt
 
1

 

 
1

 
37

 
8

 
45

Other borrowed funds
 
1

 
(13
)
 
(12
)
 

 
10

 
10

Total interest expense
 
(240
)
 
335

 
95

 
(339
)
 
(130
)
 
(469
)
Increase (decrease) in net interest income
 
$
8,178

 
$
(3,593
)
 
$
4,585

 
$
(1,947
)
 
$
1,173

 
$
(774
)
Provision for Loan Losses
The provision for (recovery of) loan losses is the charge against (addition to) earnings added to (subtracted from) the ALL each year to provide a level of allowance considered appropriate to absorb probable losses inherent in the loan portfolio. The amount of each year’s charge (addition) is affected by several considerations, including management’s evaluation of various risk factors in determining the adequacy of the allowance (see “Asset Quality” below), loan composition, actual loan loss experience and loan portfolio growth.
As a result of continued low loss experience and reductions in the amount of nonperforming loans, the Company recorded a recovery of loan losses of $3.0 million in 2015 and $5.4 million in 2014, compared to a provision for loan losses of $0.5 million in 2013. These changes in the level of the provision for loan losses are discussed and analyzed in detail as part of the discussions in the “Asset Quality” section.

29


Noninterest Income
Noninterest income was $18.2 million in 2015, a $0.8 million increase from 2014. The increase was primarily caused by an increase in mortgage loan income from $0.9 million in 2014 to $1.6 million in 2015, driven by a 72% increase in mortgage loan originations from 2014 and the origination of $7.1 million of SBA loans in 2015. Other service charges, commissions and fees grew by $0.4 million from 2014 to 2015 on increased mortgage loan fees on higher origination volumes. Other income in 2015 included a non-core bargain purchase gain on the CertusBank branch acquisition of $0.3 million. These increases were partially offset by securities gains, which were $0 in 2015 compared to $1.0 million in 2014. Core noninterest income, a non-GAAP measure that excludes nonrecurring items like securities gains and losses and bargain purchase gain, increased $1.5 million, or 9%, in 2015.
Noninterest income was $17.4 million in 2014, a decline of $3.0 million from 2013. The decrease was primarily caused by a decline in securities gains of $1.8 million, from $2.8 million in 2013 to $1.0 million in 2014. Core noninterest income fell $1.3 million in 2014. Loan sales income from the sale of mortgage loans to investors fell by $1.4 million in 2014 compared to 2013 as demand for mortgage refinancing decreased. Service charges on deposit accounts decreased $0.4 million in 2014, primarily as a result the reduced customer overdraft activity in 2014.
Table 3
Noninterest Income
(dollars in thousands)
 
Year ended December 31,
 
 
2015
 
2014
 
2013
Service charges on deposit accounts
 
$
6,331

 
$
6,351

 
$
6,714

Mortgage loan income
 
1,599

 
881

 
2,319

Cardholder and merchant services income
 
4,981

 
4,803

 
4,531

Trust and investment services
 
1,517

 
1,495

 
1,305

Bank-owned life insurance
 
1,167

 
1,153

 
1,073

Other service charges, commissions and fees
 
1,753

 
1,340

 
1,315

Securities gains, net
 

 
974

 
2,772

Other income
 
822

 
367

 
385

Total noninterest income
 
18,170

 
17,364

 
20,414

Less nonrecurring items:
 
 
 
 
 
 
    Bargain purchase gain
 
316

 

 

    Securities gains, net
 

 
974

 
2,772

        Core noninterest income (Non-GAAP)
 
$
17,854

 
$
16,390

 
$
17,642

Noninterest Expense
Noninterest expense was $75.5 million in 2015, a decline of $3.0 million, or 4%, from 2014. The decrease was attributable to 2014 executive severance expense of $2.1 million related to the severance costs for the Company's former Chief Executive Officer, $1.8 million of expenses and asset write-downs in 2014 related to the Company's decision to close six bank branches, and $0.4 million expense related to the sale by the U.S. Treasury of shares of the Company's stock. The Company also had a $0.9 million reduction in 2015 in loan collection expenses as a result of our continued reduction in nonperforming loans. These decreases were partially offset in 2015 by $2.0 million in merger-related expenses and $1.1 million in RSA acceleration expenses.
Noninterest expense was $78.5 million in 2014, a decline of $5.9 million, or 7%, from 2013, primarily on a $5.1 million reduction in OREO and loan collection costs and a $3.5 million reduction in merger-related expenses incurred in 2013. These declines were partially offset by $2.1 million of expenses related to the severance costs for the Company's former Chief Executive Officer, $1.1 million net reduction in branch closure costs from 2013 to 2014 and $0.4 million related to the sale by the Treasury of its common stock investment in the Company. Noninterest expense in 2013 also included $3.5 million in expenses related to the Granite Merger.
Core noninterest expense, which excludes merger-related expense and other non-recurring expenses, fell by 3%, or $2.0 million, to $72.4 million in 2015, compared to $74.4 million in 2014. The decrease was primarily the result of declines in occupancy, furniture, equipment and data processing expenses related to six branch closures in the first quarter of 2015, and a $0.3 million decline in professional expenses. PCNR noninterest expense, which excludes non-core noninterest expense and credit-related costs such as OREO and loan collection expenses, declined by $1.7 million, or 2% from 2014 to 2015 and by $0.7 million, or 1%, from 2013 to 2014. PCNR noninterest expense as a percent of average assets was 3.03% in 2015, improved from 3.54% in 2014.


30


Table 4
Noninterest Expense
(dollars in thousands)
 
Year ended December 31,
 
 
2015
 
2014
 
2013
Personnel expense
 
$
43,807

 
$
43,682

 
$
40,661

Net occupancy expense
 
5,680

 
6,112

 
6,391

Furniture, equipment and data processing expense
 
7,994

 
8,336

 
8,638

Professional fees
 
2,128

 
2,470

 
3,100

Stationery, printing and supplies
 
618

 
646

 
644

Advertising and marketing
 
546

 
716

 
1,135

Credit/debit card expense
 
2,048

 
2,287

 
2,143

Core deposit intangible amortization
 
1,422

 
1,408

 
1,407

FDIC insurance
 
1,749

 
2,068

 
2,643

Other real estate owned expense
 
2,311

 
1,758

 
4,138

Loan collection expense
 
669

 
1,576

 
4,333

Merger-related expense
 
1,986

 

 
3,498

Other expense
 
4,530

 
7,476

 
5,750

     Total noninterest expense
 
75,488

 
78,535

 
84,481

Less nonrecurring items:
 
 
 
 
 
 
     Merger-related expense
 
1,986

 

 
3,498

     RSA acceleration
 
1,142

 

 

     Mortgage and litigation accruals
 

 
(68
)
 
(487
)
     Executive severance
 

 
2,060

 

     US Treasury sale expenses
 

 
409

 

     Rebranding
 

 

 
616

     Branch closure and restructuring expenses
 

 
1,756

 
675

Core noninterest expense (Non-GAAP)
 
72,360

 
74,378

 
80,179

Less credit-related:
 
 
 
 
 
 
     Other real estate owned expense
 
2,311

 
1,758

 
4,138

     Loan collection expense
 
669

 
1,576

 
4,333

        PCNR noninterest expense (Non-GAAP)
 
$
69,380

 
$
71,044

 
$
71,708

Provision for Income Taxes
Income tax expense totaled $7.1 million for the year ended 2015 compared to an income tax benefit of $142.5 million for the same period in 2014. The change resulted primarily from the reversal, during 2014, of $142.5 million of valuation allowance on the Company’s deferred tax assets as a result of consistent profitability since the third quarter of 2013, improvements in the asset quality of the loan portfolio and future earnings forecasts. COB’s income tax expense as a percentage of income before income taxes was 51% for the year ended December 31, 2015, compared to an income tax benefit of 1789% for the year ended 2014.
At September 30, 2015, we determined that it was more likely than not that future taxable income would be available during applicable carryforward periods to absorb all of the remaining North Carolina net economic loss carryforwards, and accordingly, the remaining $0.7 million deferred tax asset valuation allowance was reversed as a reduction in income tax expense.
In addition, on July 28, 2015, the State of North Carolina announced that, based on the state achieving its 2015 tax year revenue target, the corporate income tax rate would be reduced to 4% during the 2016 tax year. The rate reduction trigger resulted in a $2.3 million reduction in our deferred income tax receivable. The Company recorded the impact of this legislation as a reduction in deferred income tax receivable as of September 30, 2015 and a charge to income tax expense in the third quarter of 2015.
COB had an income tax benefit totaling $142.5 million for the year ended 2014 compared to an income tax expense of $1.3 million for the same period in 2013. The change resulted primarily from the $142.5 million valuation allowance reversal on the Company’s deferred tax assets described above. COB’s income tax benefit as a percentage of income before income taxes was 1789% for the year ended December 31, 2014, compared to an income tax expense of 844% for the same period ended 2013.

31



Management regularly evaluates the likelihood that the Company will be able to realize its deferred tax assets and the need for a valuation allowance. In 2013 and prior years management determined that sufficient evidence was not available to conclude that it was more likely than not that all of its deferred tax assets could be realized, requiring a valuation allowance for certain of its deferred tax assets. At December 31, 2014 management determined, based on all available positive and negative evidence, that it was more likely than not that future taxable income would be available during the carryforward periods to absorb all of the consolidated federal net operating loss carryforward and all of the North Carolina net economic loss carryforward. As a result of this determination, $142.5 million of valuation allowance against the Company's deferred tax assets was reversed. A number of factors played a critical role in this determination, including:

Improvements in the asset quality of the loan portfolio and diminishment of credit-related losses that were the source of the Company's losses;
Implementation of strong internal controls making it unlikely that the large volume of troubled loans leading to the Company’s losses between 2008 and 2012 will reoccur;
The increased remoteness and diminished relevance of such losses;
Continued improvement of the Company’s financial metrics and six consecutive quarters of earnings;
A credible forecast of future taxable income based on management’s demonstrated forecasting accuracy;
Various cost-reduction initiatives that will have a continuing positive effect on earnings in future periods;
Availability of tax planning strategies; and
Long-dated carryforward periods.

Upon consideration of all available objectively verifiable positive and negative evidence, the Company concluded that no valuation allowance on the Company's deferred tax assets was required at December 31, 2015.
Liquidity

Liquidity for COB refers to our continuing ability to meet deposit withdrawals, fund loan and capital expenditure commitments, maintain reserve requirements, pay operating expenses and provide funds to COB for payment of dividends, debt service and other operational requirements. 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 December 31, 2015, the total amount of these four items was $379.7 million, or 16% of total assets, a decrease of $79.5 million from $459.2 million, or 21% of total assets, at December 31, 2014.  We could also access $294.1 million of additional borrowings as of December 31, 2015 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. A stable deposit base, supplemented by FHLB advances and a modest amount of brokered time deposits, has been sufficient to meet the Bank's loan demands. During 2015, liquidity was used to grow the loan portfolio by $186.0 million. We were able to grow our loans to deposits ratio from 76% at year end 2014 to 79% at year end 2015.
Contractual Obligations
Under existing contractual obligations, we will be required to make payments in future periods. Table 5 presents aggregated information about the payments due under such contractual obligations at December 31, 2015. Benefit plan payments cover estimated amounts due through 2025.

32


Table 5
Contractual Obligations
(dollars in thousands)
 
Payments Due by Period at December 31, 2015
 
 
Less than one year
 
One to less than
three years
 
Three to less than five years
 
Five years or longer
 
Total
Deposits
 
$
1,682,435

 
$
191,769

 
$
73,085

 
$
248

 
$
1,947,537

Retail repurchase agreements
 
7,219

 

 

 

 
7,219

Federal Home Loan Bank advances
 
33,500

 
10,181

 
50,000

 

 
93,681

Long-term notes payable
 

 
5,415

 

 

 
5,415

Trust preferred securities
 

 

 

 
56,702

 
56,702

Lease obligations
 
2,134

 
4,162

 
3,684

 
9,492

 
19,472

Estimated benefit plan payments:
 
 
 
 
 
 
 
 
 
 
Pension
 
910

 
1,820

 
1,850

 
4,970

 
9,550

Other
 
40

 
60

 
60

 
150

 
310

Total contractual cash obligations
 
$
1,726,238

 
$
213,407

 
$
128,679

 
$
71,562

 
$
2,139,886

Commitments, Contingencies and Off-Balance Sheet Risk
In the normal course of business, various commitments are outstanding that are not reflected in the consolidated financial statements. Significant commitments at December 31, 2015 are discussed below.
Commitments by the Bank to extend credit and undisbursed advances on customer lines of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. At December 31, 2015, total commitments to extend credit and undisbursed advances on customer lines of credit amounted to $380.9 million. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many commitments expire without being fully drawn, the total commitment amounts do not necessarily represent future cash requirements. COB evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary, upon extension of credit is based on the credit evaluation of the borrower.
The Bank issues standby letters of credit whereby each guarantees the performance of a customer to a third party if a specified triggering event or condition occurs. The guarantees generally expire within one year and may be automatically renewed depending on the terms of the guarantee. All standby letters of credit provide for recourse against the customer on whose behalf the letter of credit was issued, and this recourse may be further secured by a pledge of assets. The maximum potential amount of undiscounted future payments related to standby letters of credit was $0.7 million at December 31, 2015 and $2.7 million at December 31, 2014.
The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual notional amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The fair value of these commitments was not considered material.
COB does not have any special purpose off-balance sheet financing.
From time to time, we are subject to various claims, lawsuits, disputes with third parties, investigations and pending actions involving various allegations against us incident to the operation of our business.  On February 29, 2016, a case captioned Curtis R. Pendleton v. Robert L. Reid, et al., Case 5:16-cv-00037 (W.D.N.C.), was filed on behalf of a putative class of CommunityOne shareholders against CommunityOne, its directors, and Capital Bank Financial Corp. in the United States District Court for the Western District of North Carolina in connection with the Capital Merger. The complaint alleges, among other things, that the defendants violated Sections 14(a) and 20(a) of the Securities Exchange Act of 1934 by issuing a Registration/Joint Proxy Statement that, plaintiff alleges, is materially incomplete and misleading. The complaint seeks, among other things, an order enjoining the merger, as well as other equitable relief and/or money damages, interest, costs, fees (including attorneys' fees) and expenses. The Company believes that the claims are without merit. In management's opinion, there are no proceedings pending to which we are a party or to which our property is subject, which, if determined adversely to us, would be material in relation to our shareholder's equity or financial condition.  In addition, no material proceedings are pending or are known to be threatened or contemplated against us by governmental authorities or other parties.

33


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; however, this method addresses only the magnitude of timing differences and does not address earnings or market value. Therefore, management uses an earnings simulation model to prepare, at least quarterly, earnings projections based on a range of interest rate scenarios in order to more accurately measure interest rate risk. For additional information, see Item 7A.
Table 6 presents information about the periods in which the interest-sensitive assets and liabilities at December 31, 2015 will mature, prepay, or be subject to repricing in accordance with market rates, and the resulting interest-sensitivity gaps. This table shows the sensitivity of the balance sheet at one point in time and is not necessarily indicative of what the sensitivity will be on other dates.
Table 6
Interest Rate Sensitivity Analysis  
 
 
December 31, 2015
(dollars in thousands)
 
Rate Maturity
 
 
 
 
1-90
Days
 
91-180
Days
 
181-365
Days
 
Beyond
One Year
 
Total
Earning Assets
 
 
 
 
 
 
 
 
 
 
Investment securities
 
$
33,588

 
$
15,045

 
$
22,183

 
$
467,585

 
$
538,401

Loans held for investment
 
549,289

 
51,814

 
91,740

 
850,952

 
1,543,795

Loans held for sale
 
5,403

 

 

 

 
5,403

Interest-bearing bank balances
 
15,323

 

 

 

 
15,323

Other earning assets
 
5,971

 
9,884

 

 

 
15,855

Total interest-earning assets
 
609,574

 
76,743

 
113,923

 
1,318,537

 
2,118,777

Interest-Bearing Liabilities
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits:
 
 
 
 
 
 
 
 
 
 
Demand deposits
 
366,493

 

 

 

 
366,493

Savings deposits
 
95,081

 

 

 

 
95,081

Money market deposits
 
478,304

 

 

 

 
478,304

Time deposits of $250,000 or more
 
3,824

 
12,150

 
29,396

 
14,723

 
60,093

Other time deposits
 
78,102

 
70,742

 
161,523

 
250,870

 
561,237

Retail repurchase agreements
 
7,219

 

 

 

 
7,219

Federal Home Loan Bank advances
 
38,516

 
15

 
5,032

 
50,118

 
93,681

Long-term notes payable
 

 

 

 
5,415

 
5,415

Trust preferred securities
 
56,702

 

 

 

 
56,702

Total interest-bearing liabilities
 
1,124,241

 
82,907

 
195,951

 
321,126

 
1,724,225

Interest sensitivity gap
 
$
(514,667
)
 
$
(6,164
)
 
$
(82,028
)
 
$
997,411

 
$
394,552

Cumulative gap
 
$
(514,667
)
 
$
(520,831
)
 
$
(602,859
)
 
$
394,552

 
$
394,552

Ratio of interest-sensitive assets to interest-sensitive liabilities
 
54
%
 
93
%
 
58
%
 
411
%
 
123
%
COB’s balance sheet was asset-sensitive at December 31, 2015. An asset sensitive position means that in a declining rate environment, COB’s assets will reprice down faster than liabilities, resulting in a reduction in net interest income. Conversely, when interest rates rise, COB’s earnings position should improve. Included in interest-bearing liabilities subject to rate changes within 90 days are COB’s interest-bearing demand, savings and money market deposits. These types of deposits historically have not repriced coincidentally with or in the same proportion as general market interest rate indicators.
Market Risk
Market risk is the possible chance of loss from unfavorable changes in market prices and rates. These changes may result in a reduction of current and future period net interest income, which is the favorable spread earned from the excess of interest income on interest-earning assets, over interest expense on interest-bearing liabilities.

34


Our market risk arises primarily from interest rate risk inherent in our lending and deposit-taking activities. The structure of COB’s loan and deposit portfolios is such that a significant decline in interest rates may adversely impact net interest income while improving net market values. Conversely, an increase in interest rates may improve net interest income while adversely impacting net market values. We do not maintain a trading account nor are we subject to currency exchange risk or commodity price risk. Interest rate risk is monitored as part of our asset/liability management function, which is discussed in “Asset/Liability Management and Interest Rate Sensitivity” above. The use of interest rate swaps in conjunction with asset/liability management objectives used during 2015 is discussed in Note 18 to the accompanying consolidated financial statements.
Table 7 presents information about the contractual maturities, average interest rates and estimated values at current rates of financial instruments considered market risk sensitive at December 31, 2015.
Table 7
Market Risk Analysis of Financial Instruments
(dollars in thousands)
 
Contractual Maturities at December 31, 2015
 
 
 
 
 
 
2016
 
2017
 
2018
 
2019
 
2020
 
Beyond
Five Years
 
Total
 
Average
Interest
Rate (1)
 
Estimated
Value at
Current Rates
Financial Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Debt and equity securities: (2)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed rate
 
$
2,005

 
$
37,670

 
$

 
$

 
$
21,980

 
$
445,904

 
$
507,559

 
2.47
%
 
$
496,077

Variable rate
 

 

 

 

 

 
39,223

 
39,223

 
2.47
%
 
39,541