14. Shareholders’ Equity

In 1998, the Board approved the Company’s first common stock repurchase program. This program has been extended and expanded several times since then, and most recently, on November 6, 2018, the Board of Directors approved an extension of the $20 million stock repurchase program to December 31, 2019.

Repurchases under the program may be made from time to time on the open market or through private transactions. The repurchase program also requires that no repurchases may be made if the Bank would not remain “well-capitalized” after the repurchase. There were no stock repurchases made in 2018 or 2017 under the Common Stock Repurchase Plan. However, in the third quarter of 2018 the Company did repurchase $31.2 million of shares, at $700 per share, in a single transaction from the estate of a large shareholder.

Dividends from the Bank constitute the principal source of cash to the Company. The Company is a legal entity separate and distinct from the Bank. Under regulations controlling California state chartered banks, the Bank is, to some extent, limited in the amount of dividends that can be paid to the Company without prior approval of the California DBO. These regulations require approval if total dividends declared by a state chartered bank in any calendar year exceed the bank’s net profits for that year combined with its retained net profits for the preceding two calendar years.

During 2018, the Company issued a combined total 13,520 shares of common stock to the Bank’s non-qualified defined contribution retirement plans. There were also 2,400 shares issued to individuals during 2018. All of the shares were issued at prices ranging from $635.00 to $690.00 per share based upon valuations completed during the quarter of issuance by a nationally recognized bank consulting and advisory firm and in reliance upon the exemption in Section 4(a)(2) of the Securities Act of 1933, as amended, and the regulations promulgated thereunder. The proceeds were contributed to the Bank as equity capital.

During 2017, the Company issued 4,975 shares of common stock. All of these shares were contributed to the Bank’s non-qualified defined contribution retirement plans. The shares issued had prices ranging from $590 per share to $595 per share. These share prices were based upon valuations completed by a nationally recognized bank consulting and advisory firm and in reliance upon the exemption in Section 4(a)(2) of the Securities Act of 1933, as amended, and the regulations promulgated thereunder. The proceeds from these issuances were contributed to the Bank as equity capital.

The Company and the Bank are subject to various federal regulatory capital requirements under the Basel III Capital Rules. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company’s and the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company and the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company and the Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

The implementation of Basel III requirements will increase the required capital levels that the Company and the Bank must maintain. The final rules include new minimum risk-based capital and leverage ratios, which would be phased in over time. The new minimum capital level requirements applicable to the Company and the Bank under the final rules will be: (i) a common equity Tier 1 capital ratio of 4.5% of risk-weighted assets (“RWA”); (ii) a Tier 1 capital ratio of 6% of RWA; (iii) a total capital ratio of 8% of RWA; and (iv) a Tier 1 leverage ratio of 4% of total assets. The final rules also establish a “capital conservation buffer” of 2.5% above each of the new regulatory minimum capital ratios, which would result in the following minimum ratios: (i) a common equity Tier 1 capital ratio of 7.0% of RWA; (ii) a Tier 1 capital ratio of 8.5% of RWA; and (iii) a total capital ratio of 10.5% of RWA. An institution will be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. The final rules also permit the Company’s subordinated debentures issued in 2003 to continue to be counted as Tier 1 capital.

The final rules became effective as applied to the Company and the Bank on January 1, 2015, with a phase in period through January 1, 2019. The Company believes that it is currently in compliance with all of these capital requirements and that they did not result in any restrictions on the Company’s business activity.

In addition, the most recent notification from the FDIC categorized the Bank as “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following tables. There are no conditions or events since that notification that management believes have changed the Bank’s category.

(in thousands)	Actual					Current Regulatory Capital Requirements					Well Capitalized Under Prompt Corrective Action
December 31, 2018	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total Bank Capital to Risk Weighted Assets	$	346,763		11.39	%	$	243,455		8.0	%	$	304,319		10.0	%
Total Consolidated Capital to Risk Weighted Assets	$	346,845		11.40	%	$	243,459		8.0	%		N/A		N/A
Total Bank Common Equity Tier 1 Capital Ratio	$	308,507		10.14	%	$	136,944		4.5	%	$	197,807		6.5	%
Total Consolidated Common Equity Tier 1 Capital Ratio	$	298,588		9.81	%	$	136,945		4.5	%		N/A		N/A
Tier 1 Bank Capital to Risk Weighted Assets	$	308,507		10.14	%	$	182,591		6.0	%	$	243,455		8.0	%
Tier 1 Consolidated Capital to Risk Weighted Assets	$	308,588		10.14	%	$	182,594		6.0	%		N/A		N/A
Tier 1 Bank Capital to Average Assets	$	308,507		9.15	%	$	134,822		3.0	%	$	168,527		5.0	%
Tier 1 Consolidated Capital to Average Assets	$	308,588		9.08	%	$	135,949		3.0	%		N/A		N/A

(in thousands)	Actual					Current Regulatory Capital Requirements					Well Capitalized Under Prompt Corrective Action
December 31, 2017	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total Bank Capital to Risk Weighted Assets	$	330,041		12.66	%	$	208,552		8.0	%	$	260,691		10.0	%
Total Consolidated Capital to Risk Weighted Assets	$	342,210		13.07	%	$	209,532		8.0	%		N/A		N/A
Total Bank Common Equity Tier 1 Capital Ratio	$	297,232		11.40	%	$	117,311		4.5	%	$	169,449		6.5	%
Total Consolidated Common Equity Tier 1 Capital Ratio	$	299,401		11.43	%	$	117,862		4.5	%		N/A		N/A
Tier 1 Bank Capital to Risk Weighted Assets	$	297,232		11.40	%	$	156,414		6.0	%	$	208,552		8.0	%
Tier 1 Consolidated Capital to Risk Weighted Assets	$	309,250		11.81	%	$	157,150		6.0	%		N/A		N/A
Tier 1 Bank Capital to Average Assets	$	297,232		9.65	%	$	123,178		4.0	%	$	153,972		5.0	%
Tier 1 Consolidated Capital to Average Assets	$	309,250		9.99	%	$	123,790		4.0	%		N/A		N/A

As directed by the Economic Growth, Regulatory Relief and Consumer Protection Act, federal bank agencies have issued a joint proposed rule whereby most qualifying community banking organizations with less than $10 billion in total consolidated assets, that meet risk-based qualifying criteria, and have a community bank leverage ratio (“CBLR”) of greater than 9 percent would be able to opt into a new community banking leverage ratio framework. Such a community banking organization would not be subject to other risk-based and leverage capital requirements (including the Basel III and Basel IV requirements) and would be considered to have met the well capitalized ratio requirements. The CBLR is determined by dividing a financial institution’s tangible equity capital by its average.