Stockholders' Equity and Stock Plans

Warrant

Under the United States Department of the Treasury Capital Purchase Program (the “TCPP”), Bancorp issued to the U.S. Treasury a warrant to purchase 154,242 shares of common stock at a per share exercise price of $27.23. The warrant was immediately exercisable and was subsequently auctioned to two institutional investors in November 2011. The warrant, as adjusted, represented the right to purchase 157,711 shares of common stock at $26.63 per share when it was exercised in September 2015 and the cashless exercise resulted in the issuance of 70,591 shares of common stock.

Share-Based Awards

On May 11, 2010, our shareholders approved the 2010 Director Stock Plan to pay director fees in shares of Bancorp common stock up to 150,000 shares. In 2016, 2015 and 2014, our directors were awarded a total of 4,607, 5,295 and 5,306 common shares, respectively, from the 2010 Director Stock Plan in addition to their cash compensation. As of December 31, 2016, 113,842 shares were available for future grants under this plan.

On May 8, 2007, the 2007 Equity Plan was approved by the Bank shareholders. The 2007 Equity Plan was subsequently adopted by Bancorp as part of the holding company formation. All new share-based awards from the approval date forward are granted through the 2007 Equity Plan.

The 2007 Equity Plan provides financial incentives for selected employees, advisors and non-employee directors. Terms of the plan provide for the issuance of up to 500,000 shares of common stock for these employees, advisors and non-employee directors. As of December 31, 2016, there were 155,750 shares available for future grants under the 2007 Equity Plan. The Compensation Committee of the Board of Directors has the discretion to determine which employees, advisors and non-employee directors will receive an award, the timing of awards, the vesting schedule for each award, the type of award to be granted, the number of shares of Bancorp stock to be subject to each option and restricted stock award, and any other terms and conditions. Restricted or unrestricted whole-share awards are limited to 250,000 of the total shares available under the 2007 Equity Plan.

Effective July 1, 2007, we adopted an Employee Stock Purchase Plan whereby our employees may purchase Bancorp common shares through payroll deductions of between one percent and fifteen percent of pay in each pay period. Shares are purchased quarterly at a five percent discount from the closing market price on the last day of the quarter. The plan calls for 200,000 common shares to be set aside for employee purchases, and there were 192,965 shares available for future grants under the plan as of December 31, 2016.

The inactive 1999 Stock Option Plan covered certain full-time employees and directors who had substantial responsibility for the successful operation of the Bank. Stock options granted pursuant to the 1999 Stock Option Plan were subsequently adopted by Bancorp as part of the holding company formation. Stock options under that plan now relate to shares of common stock of Bancorp. Upon approval of the 2007 Equity Plan, no new awards have been granted under the 1999 Stock Option Plan.

Options are issued at an exercise price equal to the fair value of the stock at the date of grant. Options and restricted stock awarded to officers and employees during 2006 through 2014 vest 20% on each anniversary of the grant date for five years and expire ten years from the grant date. Options granted to non-employee directors prior to 2016 vest 20% immediately and 20% on each anniversary of the grant date for four years and expire seven years from the grant date. All options granted after 2014 for employees and in 2016 for non-employee directors generally vest by one-third on each anniversary of the grant for three years and expire ten years from the grant date.

Beginning in 2015, performance-based stock awards were issued to a selected group of employees. Stock award vesting is contingent upon the achievement of pre-established long-term performance goals set by the Compensation Committee of the Board of Directors. Performance is measured over a three-year period and cliff vested. These performance-based stock awards were granted at a maximum opportunity level, and based on the achievement of the pre-established goals, the actual payouts can range from 0% to 200% of the target award. For performance-based stock awards, an estimate is made of the number of shares expected to vest based on the probability that the performance criteria will be achieved to determine the amount of compensation expense to be recognized. The estimate is re-evaluated quarterly and total compensation expense is adjusted for any change in the current period.

A summary of activity for stock options for the years ended December 31, 2016, 2015 and 2014 is presented below. The intrinsic value of options outstanding and exercisable is calculated as the number of in-the-money options times the difference between the market price of our stock as of each year end presented and the exercise prices of the in-the-money options.



	Number of Shares		Weighted Average Exercise Price		Aggregate Intrinsic Value (in thousands)		Weighted Average Grant-Date Fair Value		Weighted Average Remaining Contractual Term (in years)
Options outstanding at December 31, 2013	220,456		$	32.74	$	2,349			4.05
Granted	26,421		44.83				$	12.04
Cancelled, expired or forfeited	(2,790	)	39.01
Exercised	(49,415	)	29.39		771
Options outstanding at December 31, 2014	194,672		35.14		3,398				4.48

Exercisable (vested) at December 31, 2014	133,153		32.31		2,701				2.88

Options outstanding at December 31, 2014	194,672		35.14		3,398				4.48
Granted	28,320		50.70				12.21
Cancelled, expired or forfeited	(652	)	48.38
Exercised	(37,071	)	30.72		755
Options outstanding at December 31, 2015	185,269		38.35		2,788				5.00

Exercisable (vested) at December 31, 2015	114,581		34.12		2,209				3.21

Options outstanding at December 31, 2015	185,269		38.35		2,788				5.00
Granted	32,637		49.37				10.11
Exercised	(36,117	)	33.98		661
Options outstanding at December 31, 2016	181,789		41.20		5,190				5.77

Exercisable (vested) at December 31, 2016	103,211		36.65		3,416				4.18

The following table shows the number, weighted average exercise price, intrinsic value, and weighted average remaining contractual life of options outstanding, vested and expected to vest as of December 31, 2016.



Number of options	177,122
Weighted average exercise price	$	41.03
Aggregate intrinsic value (in thousands)	$	5,086
Weighted average remaining contractual term (in years)	5.71

The following table summarizes non-vested restricted stock awards and changes during the years ended December 31, 2016, 2015 and 2014.



	Restricted Stock Awards
	Number of Shares		Weighted Average Grant-Date Fair Value
Non-vested awards at December 31, 2013	22,521		$	37.59
Granted	8,523		45.36
Vested	(6,554	)	34.65
Forfeited	(2,067	)	39.32
Non-vested awards at December 31, 2014	22,423		41.25
Granted	15,970		50.75
Vested	(6,555	)	40.00
Forfeited	(450	)	48.45
Non-vested awards at December 31, 2015	31,388		46.24
Granted	16,910		49.65
Vested	(8,599	)	44.14
Non-vested awards at December 31, 2016	39,699		48.15

As of December 31, 2016, there was $1.6 million of total unrecognized compensation expense related to non-vested stock options and restricted stock awards. This cost is expected to be recognized over a weighted-average period of approximately 1.8 years. The total grant-date fair value of stock options vested during the years ended December 31, 2016, 2015 and 2014 was $282 thousand, $202 thousand and $187 thousand, respectively. The total grant-date fair value of restricted stock awards vested during 2016, 2015 and 2014 was $380 thousand, $262 thousand and $227 thousand, respectively.

A summary of the options outstanding and exercisable by price range as of December 31, 2016 is presented in the following table:



	Stock Options Outstanding as of December 31, 2016				Stock Options Exercisable as of December 31, 2016
Range of Exercise Prices	Stock Options Outstanding	Remaining Contractual Life (in years)	Weighted Average Exercise Price		Stock Options Exercisable	Weighted Average Exercise Price
$20.00 - $25.00	13,138	2.3	$	22.25	13,138	$	22.25
$25.01 - $30.00	10,180	1.3	28.75		10,180	28.75
$30.01 - $35.00	9,195	3.3	33.10		9,195	33.10
$35.01 - $40.00	46,588	4.1	37.70		39,038	37.48
$40.01 - $45.00	29,551	5.9	41.95		17,130	41.91
$45.01 - $50.00	45,187	8.7	48.40		5,020	45.88
$50.01 - $55.00	27,950	7.9	50.70		9,510	50.69
	181,789				103,211

The fair value of stock options on the grant date is recorded as a stock-based compensation expense in the consolidated statements of comprehensive income over the requisite service period with a corresponding increase in common stock. Stock-based compensation also includes compensation expense related to the issuance of restricted stock awards pursuant to the 2007 Equity Plan. The grant-date fair value of the restricted stock awards, which equals intrinsic value on that date, is being recorded as compensation expense over the requisite service period. Total compensation cost for these share-based payment arrangements was $994 thousand, $636 thousand and $446 thousand during 2016, 2015 and 2014, respectively, and the total recognized tax benefits related thereto were $318 thousand, $194 thousand and $128 thousand, respectively. In addition, we record excess tax benefits, if any, on the exercise of non-qualified stock options, the disqualifying disposition of incentive stock options and vesting of restricted stock awards as an addition to common stock with a corresponding decrease in current taxes payable. The tax benefit realized from disqualifying dispositions of incentive stock options recognized in the consolidated statements of comprehensive income during 2016, 2015 and 2014 was $70 thousand, $49 thousand and $76 thousand, respectively.

We determine the fair value of stock options at the grant date using the Black-Scholes pricing model that takes into account the stock price at the grant date, the exercise price, and the following assumptions (weighted-average shown).



	Years ended December 31,
	2016		2015		2014
Risk-free interest rate	1.37	%	1.67	%	2.04	%
Expected dividend yield on common stock	2.02	%	1.75	%	1.70	%
Expected life in years	6.0		6.0		6.0
Expected price volatility	25.56	%	28.06	%	30.32	%

Dividends

Presented below is a summary of cash dividends paid to common shareholders, recorded as a reduction of retained earnings. On January 20, 2017, the Board of Directors declared a cash dividend of $0.27 per share, payable on February 10, 2017 to shareholders of record at the close of business on February 3, 2017.



	Years ended December 31,
(in thousands except per share data)	2016		2015		2014
Cash dividends to common stockholders	$	6,223	$	5,390	$	4,733
Cash dividends per common share	$	1.02	$	0.90	$	0.80

The holders of the unvested restricted common stock awards are entitled to dividends on the same per-share ratio as the holders of common stock. Dividends paid on the portion of share-based awards not expected to vest are included in stock-based compensation expense. Tax benefits on dividends paid on the portion of share-based awards expected to vest are recorded as an increase to common stock with a corresponding decrease in current taxes payable.

Under the California Corporations Code, payment of dividends by Bancorp to its shareholders is restricted to the amount of retained earnings immediately prior to the distribution or the amount of assets that exceeds the total liabilities immediately after the distribution. As of December 31, 2016, Bancorp's retained earnings and the amount of assets that exceeds the total liabilities were $146.5 million and $230.6 million, respectively.

Under the California Financial Code, payment of dividends by the Bank to Bancorp is restricted to the lesser of retained earnings or the amount of undistributed net profits of the Bank from the three most recent fiscal years. Under this restriction, approximately $50.8 million of the Bank's retained earnings balance was available for payment of dividends to Bancorp as of December 31, 2016. Bancorp held $3.5 million in cash at December 31, 2016. This cash, combined with the $50.8 million dividends available to be distributed from the Bank, is expected to be adequate to cover Bancorp's estimated operational needs and cash dividends to shareholders for 2017.

Preferred Stock and Shareholder Rights Plan

On July 2, 2007, Bancorp executed a shareholder rights agreement (“Rights Agreement”) designed to discourage takeovers that involve abusive tactics or do not provide fair value to shareholders. The Rights Agreement was amended on June 17, 2016 to reduce the percentage of share ownership defining an "acquiring person" and certain related terms from 15% to 10% of the outstanding common shares. As of December 31, 2016, Bancorp was authorized to issue five million shares of preferred stock with no par value under the Rights Agreement. In the event of a proposed merger, tender offer or other attempt to gain control of Bancorp that the Board of Directors does not approve, it might be possible for the Board of Directors to authorize the issuance of shares of common or preferred stock that would impede the completion of such a transaction. An effect of the possible issuance of common or preferred stock, therefore, may be to deter a future takeover attempt. The Board of Directors has no present plans or understandings for the issuance of any common or preferred stock in connection with the Rights Agreement.