Shareholders’ Equity

Earnings per Share

Basic net income (loss) per share, or basic earnings (loss) per share (“EPS”), is computed by dividing net income (loss) to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if COB’s potential common stock, which consists of dilutive stock options and a common stock warrant were issued. As required for entities with complex capital structures, a dual presentation of basic and diluted EPS is included on the face of the income statement. During 2015, the Company had 24,236,147 weighted average basic shares outstanding and 24,251,604 weighted average diluted shares outstanding.

Due to a net loss for the twelve month period ended December 31, 2013, all stock options and the common stock warrant were considered antidilutive and thus are not included in this calculation for those years. For the periods ended December 31, 2015, December 31, 2014 and December 31, 2013, there were 22,112, 22,127 and 22,738 antidilutive shares, respectively. Of the antidilutive shares, the number of shares relating to stock options were 40 at December 31, 2015, 55 at December 31, 2014, and 666 at December 31, 2013. Average antidilutive shares relating to the common stock warrant were 22,072 for each of the three years. During the periods for which the exercise price exceeded the average market price for the period, the stock options and common stock warrant were omitted from the calculation of diluted earnings per share for their respective periods.

During the years ended December 31, 2015, 2014 and 2013, COB had no preferred stock outstanding.

Common Stock Issuance

On December 30, 2014, we raised $25.0 million of additional capital, net of costs, through the issuance of 2,367,425 shares of common stock in a private placement offering to certain “accredited investors,” at an average price of $10.56. Of this amount, $19.4 million was contributed to the Bank.

Stock Based Compensation

For the years ended December 31, 2015, 2014 and 2013, COB had five share-based compensation plans in effect. The compensation expense charged against income for those plans was $2,429,000, $853,000, and $628,000, respectively, and the related income tax benefit was $929,000, $326,000 and $250,000, 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.

During 2015, a total of 106,247 shares of long-term restricted stock were granted to certain employees and directors, while during 2014 and 2013 a total of 223,503 shares and 158,302 shares, respectively, of such restricted stock were granted to employees and directors. All awards were made pursuant to the 2012 Incentive Plan. With the U.S. Treasury sale of its shares in May 2014 and in compliance with the U.S. Treasury’s TARP regulations, the Company cancelled 269,946 shares of restricted stock awards granted to certain senior executives.

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, 2015, no shares of common stock have been reserved for issuance under the 1993 stock compensation plan. No shares of common stock have been reserved for issuance under the 2003 stock compensation plan. At December 31, 2015, there were 11,450 shares available under the 2003 plan for the granting of additional options or stock awards.

With the completion of the Granite 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 2014, and none remain exercisable at December 31, 2015.

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, 2015, 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 either a Monte Carlo option pricing model or the Black-Scholes option pricing model, depending on the vesting terms. 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 and 2014, 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 zero, based upon the current yield in effect at the date of grant, as the Company has not declared a dividend since 2009. There were 283,857 options granted during 2015, with a volatility of 30% and a risk-free rate ranging between 1.82% and 2.32%. There were 255,227 options granted to employees during 2014, with a volatility ranging between 30% and 40% and a risk-free rate ranging between 2.14% and 2.59%. There were 54,060 stock options granted in 2013 with a volatility of 29.60% and a risk-free rate of 2.60%.

The following is a summary of stock option activity:



	For the Years Ended December 31,
	2015				2014				2013
	Shares		Weighted Average Exercise Price		Shares		Weighted Average Exercise Price		Shares		Weighted Average Exercise Price
Outstanding at beginning of year	303,272		$	14.33	52,812		$	30.75	1,125		$	1,963.29
Granted	283,857		14.84		255,227		15.20		54,060		7.86
Exercised	(296	)	8.40		—		—		—		—
Forfeited or expired	(4,519	)	17.39		(4,767	)	242.98		(2,373	)	425.40
Outstanding at end of year	582,314		14.56		303,272		14.33		52,812		30.75
Options exercisable at end of year	68,023		13.45		12,712		15.02		666		1,823.23

At December 31, 2015, 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
$1.00 - $7.99	47,419	7.29	$	7.86	23,588	7.29	$	7.86
$8.00 - $15.99	96,067	8.99	10.58		7,832	8.37	9.92
$16.00 - $16.99	438,788	9.17	16.00		36,563	8.75	16.00
$1,590.00 - $1,800.00	40	1.37	1,668.75		40	1.72	1,668.75

During 2015, the intrinsic value of options exercised was $1,000, while in 2014 and 2013, there was no intrinsic value of options exercised, and the grant-date fair value of options vested was $235,000 in 2015, 46,000 in 2014 and zero in 2013. There were 296 options exercised in 2015.

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



	For the Years Ended December 31,
	2015				2014
	Shares		Weighted Average Grant Date Fair Value		Shares		Weighted Average Grant Date Fair Value
Non-vested at beginning of year	187,133		$	8.19	268,361		$	10.14
Granted	106,247		10.95		223,503		7.60
Vested	(214,845	)	8.90		(31,516	)	10.25
Cancelled	—		—		(267,937	)	9.38
Forfeited or expired	(6,409	)	9.13		(5,278	)	9.49
Unvested at end of year	72,126		$	10.05	187,133		$	8.19

The fair value of restricted stock vested in 2015, 2014 and 2013 was $2.9 million, $323,000, and $0 respectively.

During 2015, a total of 106,247 shares of restricted stock were granted by the COB Board of Directors to the top five officers, six of the seven non-executive directors and a larger group of employees. The awards to the top officers and directors constituted restricted stock, some of which were time vesting only, with 1/3 of the stock vesting on each of the first, second and 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. During 2014, a total of 223,503 shares of restricted stock were granted by the COB Board of Directors to the top six officers, eight of the nine non-executive directors and a larger group of employees. The awards to the top officers and directors constituted restricted stock, some of which were time vesting only, with 1/3 of the stock vesting on each of the first, second and 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. During 2013, a total of 158,302 shares were granted to similar groups of top officers, directors and other employees. The awards to the top officers constituted long-term restricted stock, some of which were time vesting only, with 2/3 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. With the U.S. Treasury sale of its shares in May 2014 and in compliance with the U.S. Treasury TARP regulations, the Company cancelled 267,937 shares of restricted stock awards granted to certain senior executives. As provided in amendments to the employments agreements entered into by each of the Named Executive Officers ("NEO") with the company in connection with the Merger Agreement with Capital Bank, and for tax planning purposes with respect to Section 28G and 4999 of the Internal Revenue Code, all the unvested restricted stock held by each NEO, except 1,835 shares granted to Ms. DeSimone, vested as of December 30, 2015.

As of December 31, 2015, unrecognized compensation cost related to non-vested share-based compensation arrangements granted under COB’s stock benefit plans totaled $0.7 million, which will be fully recognized during 2016 upon the successful completion of the Merger with Capital.

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.