Stockholders' Equity and Stock Plans

Stock Split

On October 22, 2018, Bancorp announced a two-for-one stock split, which occurred on November 27, 2018. All share and per share data have been adjusted to reflect the stock split effective November 27, 2018.

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 300,000 shares. In addition to cash compensation, we issued 5,470 and 5,756 shares of common stock under the 2010 Director Stock Plan to directors in 2018 and 2017, respectively. As of December 31, 2018, 214,398 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. Under the plan, our employees may purchase up to 400,000 of Bancorp's 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. As of December 31, 2018, 383,870 shares were available for future purchases under the plan.

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. 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. As of December 31, 2018, there were 1,047,784 shares available for future grants to employees, advisors and non-employee directors.

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 2007 through 2014 vest 20% on each anniversary of the grant date for five years and expire ten years from the grant date. In general, option awards granted after 2014 for employees generally vest by one-third on each anniversary of the grant for three 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. Options granted to non-employee directors in 2016 vest by one-third on each anniversary of the grant for three years and expire ten years from the grant date. Options granted to non-employee directors after 2016 vest immediately and expire ten years from the grant date. Options issued as replacement awards in connection with the Bank of Napa acquisition were for existing stock option agreements that became fully vested due to change in control provisions as part of the merger agreement.

Stock options and restricted stock may be net settled in a cashless exercise by a reduction in the number of shares otherwise deliverable upon exercise or vesting in satisfaction of the exercise payment and/or applicable tax withholding requirements. During 2018, we withheld 46,794 shares totaling $1.7 million at a weighted-average price of $36.28 for cashless exercises. During 2017, we withheld 24,416 shares totaling $801 thousand at a weighted-average price of $32.82 for cashless exercises. Shares withheld under net settlement arrangements are available for future grants.

Performance-based stock awards (restricted stock) are 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 stock option activity for the years ended December 31, 2018 and 2017 is presented in the following table. 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 period 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, 2016	363,578		$	20.60	$	5,190			5.77
Granted ¹	201,328		19.89				$	16.31
Cancelled, expired or forfeited	(4,022	)	21.99
Exercised	(42,948	)	19.31		585
Options outstanding at December 31, 2017	517,936		20.42		7,075				5.34
Exercisable (vested) at December 31, 2017	384,344		17.85		6,212				4.42
Options outstanding at December 31, 2017	517,936		20.42		7,075				5.34
Granted	74,096		33.97				7.17
Cancelled, expired or forfeited	(9,140	)	28.25
Exercised	(157,192	)	13.93		3,462
Options outstanding at December 31, 2018	425,700		25.01		6,910				5.85
Exercisable (vested) at December 31, 2018	311,050		22.57		5,809				4.94

¹ Includes 140,290 replacement stock option awards issued in the Acquisition with a $13.60 weighted average exercise price and a $20.36 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, 2018 and 2017.



	Number of Shares		Weighted Average Grant-Date Fair Value
Non-vested awards at December 31, 2016	79,398		$	24.08
Granted	32,460		34.80
Vested	(20,642	)	22.89
Non-vested awards at December 31, 2017	91,216		28.16
Granted	37,040		33.58
Vested	(28,812	)	26.06
Cancelled or forfeited	(12,056	)	27.32
Non-vested awards at December 31, 2018	87,388		31.26

A summary of the options outstanding and exercisable by price range as of December 31, 2018 is presented in the following table:



	Stock Options Outstanding as of December 31, 2018				Stock Options Exercisable as of December 31, 2018
Range of Exercise Prices	Stock Options Outstanding	Remaining Contractual Life (in years)	Weighted Average Exercise Price		Stock Options Exercisable	Weighted Average Exercise Price
$0.00 - $10.00	4,604	3.1	$	8.96	4,604	$	8.96
$10.01 - $20.00	110,394	2.3	16.94		110,394	16.94
$20.01 - $30.00	179,828	6.0	23.73		151,808	23.63
$30.01 - $40.00	127,040	8.8	33.94		40,410	33.78
$40.01 - $50.00	3,834	9.5	40.70		3,834	40.70
	425,700				311,050

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,
	2018		2017
Risk-free interest rate	2.60	%	1.66	%
Expected dividend yield on common stock	1.76	%	1.70	%
Expected life in years	5.9		2.4
Expected price volatility	22.47	%	25.58	%

The fair value of stock options as of the grant date is recorded as a stock-based compensation expense in the consolidated statements of comprehensive income over the requisite service period, which is generally the vesting 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 the intrinsic value, is recorded as compensation expense over the requisite service period with a corresponding increase in common stock as the shares vest. Stock option and restricted stock awards issued in 2018 include a retirement eligibility clause whereby the requisite service period is satisfied at the retirement eligibility date. For those awards, we accelerate stock-based compensation when the award holder is eligible to retire. However, retirement eligibility does not affect the exercisability of the award, which is based on the scheduled vesting period. Total compensation expense for stock options and restricted stock awards was $1.7 million and $1.3 million during 2018 and 2017, respectively, and the total recognized deferred tax benefits related thereto were $404 thousand and $293 thousand, respectively.

As of December 31, 2018, there was $1.1 million of total unrecognized compensation expense related to non-vested stock options and restricted stock awards, which is expected to be recognized over a weighted-average period of approximately 1.9 years. The total grant-date fair value of stock options vested during the years ended December 31, 2018 and 2017 was $543 thousand and $449 thousand, respectively. The total grant-date fair value of restricted stock awards vested during 2018 and 2017 was $967 thousand and $473 thousand, respectively.

We 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. In 2018 and 2017, we recognized $484 thousand and $214 thousand, respectively, in excess tax benefits recorded as a reduction to income tax expense related to these types of transactions. 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.

Dividends

Presented below is a summary of cash dividends paid in 2017 and 2018 to common shareholders, recorded as a reduction from retained earnings. On January 25, 2019, the Board of Directors declared a $0.19 per share cash dividend, paid February 15, 2019 to the shareholders of record at the close of business on February 8, 2019.



	Years ended December 31,
(in thousands except per share data)	2018		2017
Cash dividends to common stockholders	$	8,860	$	6,896
Cash dividends per common share	$	0.64	$	0.56

The holders of unvested restricted stock awards are entitled to dividends on the same per-share ratio as holders of common stock. Tax benefits for 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.

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, 2018, Bancorp's retained earnings and amount of total assets that exceeds total liabilities were $179.9 million and $316.4 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 $24.9 million of the Bank's retained earnings balance was available for payment of dividends to Bancorp as of December 31, 2018. Bancorp held $19.1 million in cash at December 31, 2018. This cash, combined with the $24.9 million dividends available to be distributed from the Bank, is considered adequate to cover Bancorp's estimated operational needs, cash dividends to shareholders in 2019, and the Share Repurchase Program discussed below.

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. Currently, each right entitles the registered holder to purchase from Bancorp one two-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, 2018, 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.

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

We early adopted ASU No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, in the first quarter of 2018 and reclassified $638 thousand from AOCI to retained earnings. This amount represents the stranded income tax effects related to the unrealized loss on available-for-sale securities in AOCI on the date of the enactment of the Tax Cuts and Jobs Act of 2017. For more information on ASU No. 2018-02, refer to Note 1, Summary of Significant Accounting Policies.

Share Repurchase Program

On April 23, 2018, Bancorp announced that its Board of Directors approved a Share Repurchase Program under which Bancorp may repurchase up to $25.0 million of its outstanding common stock through May 1, 2019.

Under the Share Repurchase Program, Bancorp may purchase shares of its common stock through various means such as open market transactions, including block purchases, and privately negotiated transactions. The number of shares repurchased and the timing, manner, price and amount of any repurchases will be determined at Bancorp's discretion. Factors include, but are not limited to, stock price, trading volume and general market conditions, along with Bancorp’s general business conditions. The program may be suspended or discontinued at any time and does not obligate Bancorp to acquire any specific number of shares of its common stock.

As part of the Share Repurchase Program, Bancorp entered into a trading plan adopted in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended. The 10b5-1 trading plan permits common stock to be repurchased at times that might otherwise be prohibited under insider trading laws or self-imposed trading restrictions. The 10b5-1 trading plan is administered by an independent broker and is subject to price, market volume and timing restrictions.

During 2018, Bancorp repurchased 171,217 shares for a total amount of $7.0 million.