Stockholders' Equity and Stock Plans

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 addition to cash compensation, we issued 2,878, 4,607 and 5,295 shares of common under the 2010 Director Stock Plan to directors in 2017, 2016 and 2015, respectively. As of December 31, 2017, 110,433 shares were available for future grants under this plan.

On September 27, 2017, the Board of Directors adopted the 2017 Employee Stock Purchase Plan, effective July 1, 2017, which replaced the 2007 Employee Stock Purchase Plan. Under the plan, 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. Of the 200,000 common shares set aside for employee purchases, there were 192,453 shares available for future grants under the plan as of December 31, 2017. Shares purchased under the 2017 plan are restricted until the plan is approved by our shareholders.

On March 17, 2017, the Board of Directors approved the 2017 Equity Plan, which was affirmed by Bancorp's shareholders on May 16, 2017 and replaced the 2007 Equity Plan. As of the 2017 Equity Plan's effective date, there were 118,668 shares of common stock available for future grants to employees, advisors and non-employee directors. As of December 31, 2017, there were 108,981 shares available for future grants under the 2017 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.

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. In general, options granted after 2014 for employees and after 2015 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. Options issued as replacement awards in connection with the Bank of Napa acquisition were fully vested as part of the merger agreement with Bank of Napa.

Stock options may be net settled by a reduction in the number of shares otherwise deliverable upon exercise in satisfaction of the exercise payment and applicable tax withholding requirements. During 2017, we withheld 12,208 shares totaling $801 thousand at a weighted-average price of $65.63 for cashless stock option exercises. There were no stock options exercised under net settlement arrangements in 2016 or 2015. Shares withheld under net settlement arrangements are available for future grants.

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, 2017, 2016 and 2015 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, 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
Options outstanding at December 31, 2016	181,789		41.20		5,190				5.77
Granted ¹	100,664		39.78				32.61
Cancelled, expired or forfeited	(2,011	)	43.97
Exercised	(21,474	)	38.62		585
Options outstanding at December 31, 2017	258,968		40.84		7,075				5.34
Exercisable (vested) at December 31, 2017	192,172		35.69		6,212				4.42

¹ Includes 70,145 replacement stock option awards issued in the Acquisition with a $27.20 weighted average exercise price and a $40.71 weighted average grant-date fair value. See Note 18, Acquisition.

The following table summarizes non-vested restricted stock awards and changes during the years ended December 31, 2017, 2016 and 2015.



	Number of Shares		Weighted Average Grant-Date Fair Value
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
Granted	16,230		69.59
Vested	(10,321	)	45.78
Non-vested awards at December 31, 2017	45,608		56.31

A summary of the options outstanding and exercisable by price range as of December 31, 2017 is presented in the following table:



	Stock Options Outstanding as of December 31, 2017				Stock Options Exercisable as of December 31, 2017
Range of Exercise Prices	Stock Options Outstanding	Remaining Contractual Life (in years)	Weighted Average Exercise Price		Stock Options Exercisable	Weighted Average Exercise Price
$10.00 - $20.00	14,120	2.1	$	17.74	14,120	$	17.74
$20.01 - $30.00	51,731	1.1	26.05		51,731	26.05
$30.01 - $40.00	70,363	5.3	35.53		68,238	35.41
$40.01 - $50.00	64,511	7.1	46.14		33,224	44.73
$50.01 - $60.00	27,724	6.9	50.70		18,200	50.70
$60.01 - $70.00	30,519	9.3	68.68		6,659	65.46
	258,968				192,172

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,
	2017		2016		2015
Risk-free interest rate	1.66	%	1.37	%	1.67	%
Expected dividend yield on common stock	1.70	%	2.02	%	1.75	%
Expected life in years	2.4		6.0		6.0
Expected price volatility	25.58	%	25.56	%	28.06	%

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. 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 $1.3 million, $994 thousand and $636 thousand during 2017, 2016 and 2015, respectively, and the total recognized deferred tax benefits related thereto were $293 thousand, $318 thousand and $194 thousand, respectively.

As of December 31, 2017, there was $1.5 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 2.1 years. The total grant-date fair value of stock options vested during the years ended December 31, 2017, 2016 and 2015 was $449 thousand, $282 thousand and $202 thousand, respectively. The total grant-date fair value of restricted stock awards vested during 2017, 2016 and 2015 was $473 thousand, $380 thousand and $262 thousand, respectively.

We adopted ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting effective January 1, 2017 as discussed in Note 1, which requires us to record excess tax benefits (deficiencies) resulting from the exercise of non-qualified stock options, the disqualifying disposition of incentive stock options and vesting of restricted stock awards as income tax benefits (expense) in the consolidated statements of comprehensive income with a corresponding decrease (increase) to current taxes payable. For the year ended December 31, 2017, we recognized $214 thousand in excess tax benefits recorded as a reduction to income tax expense related to these types of transactions. Prior to the adoption of this ASU, excess tax benefits (deficiencies) were recognized as an increase (decrease) to common stock in the consolidated statements of changes in stockholders' equity. The tax benefits realized from disqualifying dispositions of incentive stock options were recognized in tax expense to the extent of the book compensation cost recorded. Total tax benefits from disqualifying dispositions of incentive stock options recognized during 2016 and 2015 were $70 thousand and $49 thousand, respectively.

Dividends

Presented below is a summary of cash dividends paid to common shareholders, recorded as a reduction of retained earnings. On January 19, 2018, the Board of Directors declared a cash dividend of $0.29 per share, payable on February 9, 2018 to shareholders of record at the close of business on February 2, 2018.



	Years ended December 31,
(in thousands except per share data)	2017		2016		2015
Cash dividends to common stockholders	$	6,896	$	6,223	$	5,390
Cash dividends per common share	$	1.12	$	1.02	$	0.90

The holders of unvested restricted stock awards and performance-based stock awards are entitled to dividends on the same per-share ratio as holders of common stock. Upon the adoption of ASU No. 2016-09, tax benefits on dividends paid on unvested restricted stock awards are recorded as tax benefits in the consolidated statements of comprehensive income with a corresponding decrease to current taxes payable. Dividends on forfeited awards are included in stock-based compensation expense. Prior to the adoption of ASU No. 2016-09, tax benefits on dividends were recognized as an increase to common stock in the consolidated statements of changes in stockholders' equity.

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, 2017, Bancorp's retained earnings and the amount of assets that exceeds the total liabilities were $155.5 million and $297.0 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 $39.9 million of the Bank's retained earnings balance was available for payment of dividends to Bancorp as of December 31, 2017. Bancorp held $3.2 million in cash at December 31, 2017. This cash, combined with the $39.9 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 2018.

Preferred Stock and Shareholder Rights Plan

On July 6, 2017, Bancorp adopted a new shareholder rights agreement (“Rights Agreement”), which replaced the existing Rights Agreement that expired on July 23, 2017. The Rights Agreement, which expires on July 23, 2022, is designed to discourage takeovers that involve abusive tactics or do not provide fair value to shareholders. The Rights Agreement defines the percentage of share ownership of an "acquiring person" as 10% of the outstanding common shares. Each right entitles the registered holder to purchase from Bancorp one one-hundredth of a share of Series A Junior Participating Preferred Stock, no par value, of Bancorp at an initial price of $90 per one one-hundredth of a preferred share, subject to adjustment upon the occurrence of certain events. As of December 31, 2017, Bancorp was authorized to issue five million shares of preferred stock with no par value, one million shares of which have been designated as Series A Junior Participating 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, the Board of Directors may 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.

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.