Shareholders’ Equity

Earnings per Share

COB filed articles of amendment to its articles of incorporation on October 31, 2011 to effect a one-for-one hundred reverse stock split (the “Reverse Stock Split”) of its common stock. The amendment became effective following the close of trading on October 31, 2011. A purpose of the Reverse Stock Split is to increase the per share trading price of COB's common stock to satisfy the $1.00 minimum bid price requirement for continued listing on The Nasdaq Capital Market. As a result of the Reverse Stock Split, every 100 shares of COB's common stock issued and outstanding prior to the opening of trading on November 1, 2011 were consolidated into one issued and outstanding share. No fractional shares were issued as a result of the Reverse Stock Split. Instead, any fractional share resulting from the Reverse Stock Split was rounded up to the next largest whole share. All share and per share amounts have been retroactively adjusted in the financial statements and footnotes to account for the impact of the Reverse Stock Split.

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

During the years ended December 31, 2013 and December 31, 2012, COB had no preferred stock outstanding. During the year ended December 31, 2011, and in order the complete the Recapitalization, COB paid dividends and deferred interest of approximately $4.5 million on Series A preferred stock, in addition to the $0.6 million accretion of the discount on the preferred stock. At December 31, 2013 and December 31, 2012, COB had no unpaid cumulative dividends.

The following table represents the impact of preferred stock activity on the Consolidated Statement of Operations for the years ended December 31, 2013, 2012, and 2011:



(dollars in thousands)	December 31,
	2013		2012		2011
Gain on the retirement of Series A preferred stock	$	—	$	—	$	38,625
Gain on retirement of Bank preferred stock	—		—		9,375
Total gain on the retirement of preferred stock	—		—		48,000
Dividends and accretion on Series A preferred stock	—		—		(2,652		)
Dividends on Bank preferred stock	—		—		(756		)
Total dividends on preferred stock	—		—		(3,408		)
Preferred stock gain on retirement, net of accretion, and dividends	$	—	$	—	$	44,592

Diluted EPS reflects the potential dilution that could occur if COB’s potential common stock, which consists of dilutive stock options and a common stock warrant held by the U.S. Treasury, were issued. As required for entities with complex capital structures, a dual presentation of basic and diluted EPS is included on the face of the income statement.

Due to a net loss for the twelve month periods ended December 31, 2013, 2012 and 2011; all stock options and the common stock warrant were considered antidilutive and thus are not included in this calculation. Additionally, for the periods ended December 31, 2013, December 31, 2012 and December 31, 2011, there were 22,713, 23,197 and 24,818 antidilutive shares, respectively. Of the antidilutive shares, the number of shares relating to stock options were 641 at December 31, 2013, 1,125 at December 31, 2012, and 2,746 at December 31, 2011. Average antidilutive shares relating to the common stock warrant were 22,072 for each of the three years. Because the exercise price exceeded the average market price for the periods discussed and because of the net loss, the stock options and common stock warrant were omitted from the calculation of diluted earnings per share for their respective periods.

Stock Based Compensation

For the years ended December 31, 2013, 2012 and 2011, COB had five share-based compensation plans in effect. The compensation expense charged against income for those plans was $653,000, $3,000, and $23,000, respectively, and the related income tax benefit was $250,000, $1,000 and $9,000, respectively.

On June 21, 2012, COB shareholders approved the FNB 2012 Incentive Plan. The 2012 Incentive Plan, which was intended to replace the 2003 plan, provides for the grant of stock options, restricted stock and other stock-based awards, as well as cash-based performance awards. An amended and restated Incentive Plan was approved by the shareholders on June 20, 2013. As amended, a total of 1,800,000 shares have been authorized for issuance under the 2012 Incentive Plan, and the maximum number of shares of COB common stock with respect to which an employee may be granted awards under the 2012 Incentive Plan during any calendar year period is 100,000 shares. On December 28, 2012, a total of 110,059 shares of long-term restricted stock were granted pursuant to the 2012 Incentive Plan to the top six officers of COB and during 2013, a total of 158,302 shares of restricted stock were issued to the same six officers, eight of the nine non-executive directors, and a larger group of employees pursuant to the same plan. In each case such shares were valued at the closing price of COB common stock on the grant date.

COB adopted stock compensation plans in 1993 and 2003 that allow for the granting of incentive and nonqualified stock options to key employees and directors. The 2003 stock compensation plan also allows for the granting of restricted stock. Under terms of both the 1993 and 2003 plans, options are granted at prices equal to the fair market value of the common stock on the date of grant. Options become exercisable after one year in equal, cumulative installments over a five-year period. No option shall expire later than ten years from the date of grant. No further grants can be made under the 1993 stock compensation plan after March 10, 2003. Based on the stock options outstanding at December 31, 2013, no shares of common stock have been reserved for issuance under the 1993 stock compensation plan. No shares of common stock has been reserved for issuance under the 2003 stock compensation plan. At December 31, 2013, there were no shares available under the 2003 plan for the granting of additional options or stock awards.

With the completion of the Merger, each outstanding option to purchase shares of Granite Corp. common stock, whether or not exercisable, was converted into options to purchase COB common stock. After adjusting for the Reverse Stock Split and rounding up to the nearest whole share, there were 78 stock options assumed from Granite Corp. All of those options expired during 2012, and none remain exercisable at December 31, 2013.

COB assumed three stock compensation plans in its acquisition of Integrity Financial Corporation in 2006. Qualified and nonqualified stock options are outstanding under these plans for grants issued from 1997 to 2004 to key employees and directors at a price equal to fair market value on the date of grant. No additional grants will be made under these plans. Based on the stock options outstanding at December 31, 2013, no shares of common stock have been reserved for issuance under these stock compensation plans.

The fair market value of each option award is estimated on the date of grant using the Black-Scholes option pricing model. The risk-free interest rate is based on a U.S. Treasury instrument with a life that is similar to the expected life of the option grant. Expected volatility is based on the historical volatility of the COB’s common stock over approximately the previous 6 years, except for the options granted in 2013, which are based on the historical volatility of COB's common stock since July 1, 2012. The expected life of the options has historically been considered to be approximately 6 years. The expected dividend yield is based upon the current yield in effect at the date of grant. There were 54,060 options granted to employees during 2013 with a risk-free rate of 2.60%, a historical volatility of 29.60% and an expected dividend yield of 0%. The fair value of options granted during 2013 was $3.27. There were no stock options granted in 2012 or 2011, respectively.

The following is a summary of stock option activity:



	For the Years Ended December 31,
	2013				2012				2011
	Shares		Weighted Average Exercise Price		Shares		Weighted Average Exercise Price		Shares		Weighted Average Exercise Price
Outstanding at beginning of year	1,125		$	1,963.29	2,742		$	1,821.79	3,658		$	1,857.00
Granted	54,060		7.86		—		—		—		—
Assumed	—		—		—		—		78		267.53
Exercised	—		—		—		—		—		—
Forfeited or expired	(484	)	2,156.98		(1,617	)	1,723.34		(994	)	1,829.09
Outstanding at end of year	54,701		29.06		1,125		1,963.29		2,742		1,821.79
Options exercisable at end of year	641		1,817.04		1,125		1,963.29		2,711		1,825.85

At December 31, 2013, information concerning stock options outstanding and exercisable is as follows:



	Options Outstanding				Options Exercisable
Range of Exercise Prices	Shares	Weighted Average Remaining Contractual Life (Years)	Weighted Average Exercise Price		Number Exercisable	Weighted Average Remaining Contractual Life (Years)	Weighted Average Exercise Price
$1 - $10	54,060	9.29	$	7.86	—	—	$	—
$1,350 - $1,620	181	1.15	1,440.74		181	1.15	1,440.74
$1,621 - $1,890	30	3.00	1,723.00		30	3.00	1,723.00
$1,891 - $2,160	430	0.96	1,982.00		430	0.96	1,982.00

In 2013, 2012 and 2011, there was no intrinsic value of options exercised, and the grant-date fair value of options vested was $0 in each of the three years. There were no options exercised in 2013.

The following is a summary of non-vested restricted stock activity:



	For the Years Ended December 31,
	2013			2012
	Shares	Weighted Average Grant Date Fair Value		Shares		Weighted Average Grant Date Fair Value
Non-vested at beginning of year	110,059	$	11.13	4		$	260.00
Granted	158,302	10.71		110,059		11.13
Vested	—	—		(4	)	260.00
Forfeited or expired	—	—		—		—
Non-vested at end of year	268,361	$	12.68	110,059		$	11.13

The fair value of restricted stock vested in 2013, 2012 and 2011 was $0, $1,040, and $1,040 respectively.

On December 19, 2013, a total of 158,302 shares of restricted stock were granted by the COB Board of Directors to the same six officers, eight of the nine non-executive directors, and a larger group of employees. The awards to the six officers constituted long-term restricted stock, some of which were time vesting only, with 2/3rds of the stock vesting on the second anniversary of the date of grant and the final 1/3 vesting on the third anniversary of the date of grant, and a portion of which also require COB common stock to reach a certain stock price target. The awards to the directors constituted restricted stock, some of which were time vesting only, with 1/3 of the stock vesting on the first anniversary of the date of grant, the second 1/3 vesting on the second anniversary of the date of grant, and the final 1/3 vesting on the third anniversary of the date of grant, and a portion of which also require COB common stock to reach a certain stock price target. The awards to the larger group of employees vest over time, with 1/4 of the stock vesting on each of the first, second, third and fourth anniversary of the date of the grant. On December 28, 2012, a total of 110,059 shares of long-term restricted stock were granted by the COB Board of Directors to the top six officers of COB at the closing price of COB common stock on the grant date. Under the terms of the awards, 2/3rds of the restricted stock vests on the later of the lifting of the Consent Orders or the second anniversary of the date of grant and the final 1/3^rd of the stock vesting on the later of the lifting of the Consent Order or the third anniversary of the date of grant. As indicated previously, all of the Consent Orders have been lifted.

As of December 31, 2013, unrecognized compensation cost related to non-vested share-based compensation arrangements granted under COB’s stock benefit plans totaled $2.5 million, which will be fully recognized by December 2016.

COB funds the option shares and restricted stock from authorized but unissued shares. COB does not typically purchase shares to fulfill the obligations of the stock benefit plans. COB’s policy does allow option holders under certain plans to exercise options with seasoned shares.