12.	SHAREHOLDERS' EQUITY

Dividend Restrictions

The Company's ability to pay cash dividends is dependent on dividends paid to it by the Bank and limited by California corporation law. Under California law, the holders of common stock of the Company are entitled to receive dividends when and as declared by the Board of Directors, out of funds legally available, subject to certain restrictions. The California General Corporation Law permits a California corporation such as the Company to make a distribution to its shareholders if its retained earnings equal at least the amount of the proposed distribution or if after giving effect to the distribution, the value of the corporation’s assets exceed the amount of its liabilities plus the amount of shareholders preferences, if any, and certain other conditions are met.

Dividends from the Bank to the Company are restricted under California law to the lesser of the Bank's retained earnings or the Bank's net income for the latest

three

fiscal years, less dividends previously declared during that period, or, with the approval of the DBO, to the greater of the retained earnings of the Bank, the net income of the Bank for its last fiscal year, or the net income of the Bank for its current fiscal year. As of

December 31, 2019

, the maximum amount available for dividend distribution under this restriction was approximately

$30,278,000.

In addition, the Company’s ability to pay dividends is subject to certain covenants contained in the indentures relating to the Trust Preferred Securities issued by the business trusts (see Note

for additional information related to the Trust Preferred Securities).

During the last

three

years semi-annual cash dividends were paid as follows:

$0.14

per share on

May 15, 2017

and

November 15, 2017,

$0.18

per share on

May 15, 2018

and

November 15, 2018

and

$0.23

per share on

May 15, 2019

and

November 15, 2019.

Earnings Per Share

Basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock, such as stock options, result in the issuance of common stock which shares in the earnings of the Company. The treasury stock method has been applied to determine the dilutive effect of stock options in computing diluted earnings per share.

	For the Year Ended December 31,
(In thousands, except per share data)	2019		2018		2017
Net Income:
Net income	$	15,512	$	13,992	$	8,189
Earnings Per Share:
Basic earnings per share	$	3.01	$	2.74	$	1.64
Diluted earnings per share	$	2.97	$	2.68	$	1.58
Weighted Average Number of Shares Outstanding:
Basic shares		5,155		5,108		5,005
Diluted shares		5,228		5,219		5,185

Shares of common stock issuable under stock options and warrants for which the exercise prices were greater than the average market prices were

not

included in the computation of diluted earnings per share due to their antidilutive effect. Stock options and warrants

not

included in the computation of diluted earnings per share, due to shares

not

being in the-money and having an antidilutive effect, were

71,100

and

for the years ended

December 31, 2019,

2018

and

2017

, respectively.

Stock Options

2001,

the Company established a Stock Option Plan for which

shares of common stock remain reserved for issuance to employees and directors and

shares are available for future grants as of

December 31, 2019

As of

December 31, 2019

, all remaining shares in this plan have vested and

compensation cost remains unrecognized.

A summary of the activity within the

2001

Plan follows:

						Weighted
						Average
				Weighted		Remaining
				Average		Contractual
				Exercise		Term in	Intrinsic
	Shares			Price		Years	Value

Options outstanding at January 1, 2017		81,893		$	2.95
Options exercised		(35,600	)		2.95
Options outstanding at December 31, 2017		46,293			2.95
Options exercised		(40,100	)		2.95
Options outstanding at December 31, 2018		6,193			2.95
Options exercised		(6,193	)	$	2.95
Options outstanding at December 31, 2019		-
Options exercisable at December 31, 2019		-
Expected to vest after December 31, 2019		-

May 2013,

the Company established the

2013

Stock Option Plan for which

408,855

shares of common stock are reserved and

106,500

shares are available for future grants as of

December 31, 2019

. The

2013

Plan requires that the option price

may

not

be less than the fair market value of the stock at the date the option is granted, and that the stock must be paid in full at the time the option is exercised. Payment in full for the option price must be made in cash, with Company common stock previously acquired by the optionee and held by the optionee for a period of at least

six

months, in options of the Optionee that are fully vested and exercisable or in any combination of the foregoing. The options expire on dates determined by the Board of Directors, but

not

later than

ten

years from the date of grant. During the year ended

December 31, 2019

132,000

options were granted and during the year ended

December 31, 2018

76,000

options were granted.

options were granted during the year ended

December 31, 2017.

As of

December 31, 2019

, there was

$811,000

of total unrecognized compensation cost related to non-vested, share-based compensation arrangements granted under the

2013

Plan. That cost is expected to be recognized over a weighted average period of

3.4

years.

A summary of the activity within the

2013

Plan follows:

						Weighted
						Average
				Weighted		Remaining
				Average		Contractual
				Exercise		Term in		Intrinsic
	Shares			Price		Years		Value
Options outstanding at January 1, 2017		192,800		$	7.60
Options cancelled		(7,200	)		8.14
Options exercised		(25,000	)		6.65
Options outstanding at December 31, 2017		160,600			7.72
Option granted		76,000			24.4
Options cancelled		(6,500	)		20.55
Options exercised		(33,600	)		7.19
Options outstanding at December 31, 2018		196,500			13.84
Option granted		132,000			21.45
Options cancelled		(2,400	)		8.75
Options exercised		(23,715	)		7.10
Options outstanding at December 31, 2019		302,385		$	17.73		6.0	$	2,615,630
Options exercisable at December 31, 2019		96,660		$	10.87		3.9	$	1,499,197
Expected to vest after December 31, 2019		182,293		$	20.96		7.0	$	988,884

The following information relates to the

two

plans.

Compensation cost related to stock options recognized in operating results under the plan was

$224,000,

$199,000

and

$152,000

for the years ended

December 31, 2019,

2018

and

2017

, respectively. The associated future income tax benefit recognized was

$16,000,

$14,000,

$11,000

for the years ended

December 31, 2019,

2018

and

2017

, respectively.

The total fair value of options vested was

$197,000

and

$150,000

for the years ended

December 31, 2019

and

2018

, respectively. The total intrinsic value of options at time of exercise was

$545,000

and

$1,504,000

for the years ended

December 31, 2019

and

2018

, respectively.

Cash received from option exercises for the years ended

December 31, 2019,

2018

and

2017

was

$144,000,

$330,000

and

$261,000,

respectively. The tax benefit realized for the tax deductions from option exercise totaled

$41,000,

$134,000

and

$112,000

for the years ended

December 31, 2019,

2018

and

2017

, respectively.

Regulatory Capital

The Bank is subject to certain regulatory capital requirements administered by the FDIC. Failure to meet these minimum capital requirements can initiate certain mandatory and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company's consolidated financial statements.

Under capital adequacy guidelines, the Bank must meet specific capital guidelines that involved quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. These quantitative measures are established by regulation and require that minimum amounts and ratios of total and Tier

capital to risk-weighted assets and of Tier

capital to average assets be maintained. Capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

The Bank is also subject to additional capital guidelines under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain total risk-based, Tier

risk-based and Tier

leverage ratios as set forth in the table on the following page and cannot be subject to a written agreement, order or capital directive issued by the FDIC.

July,

2013,

the federal bank regulatory agencies adopted rules implementing the Basel Committee on Banking Supervision’s capital guidelines for U.S. banks, sometimes called “Basel III,” that increased the minimum regulatory capital requirements for bank holding companies and banks and implemented strict eligibility criteria for regulatory capital instruments. The Basel III capital rules include a minimum common equity Tier

ratio of

4.5%,

a Tier

capital ratio of

6.0%,

a total risk-based capital ratio of

8.0%,

and a minimum leverage ratio of

4.0%

(calculated as Tier

capital to average consolidated assets). The minimum capital levels required to be considered “well capitalized” include a common equity Tier

ratio of

6.5%,

a Tier

risk-based capital ratio of

8.0%,

a total risk-based capital ratio of

10.0%

and a leverage ratio of

5.0%.

In addition, the Basel III capital rules require that banking organizations maintain an “a capital conservation buffer” of

2.5%

above the minimum capital requirements in order to avoid restrictions on their ability to pay dividends, repurchase stock or pay discretionary bonuses. Including the capital conservation buffer of

2.5%,

the Basel III capital rules require the following minimum ratios for a bank holding company or bank to be considered well capitalized: a common equity Tier

capital ratio of

7.0%;

a Tier

capital ratio of

8.5%,

and a total capital ratio of

10.5%.

December 31, 2019,

the Company’s and the Bank’s capital ratios exceed the thresholds necessary to be considered “well capitalized” under the Basel III framework.

Under the FRB’s Small Bank Holding Company and Savings and Loan Holding company Policy Statement (the “Policy Statement”), qualifying bank holding companies with less than

billion in consolidated assets are exempt from the consolidated capital rules. The Company qualifies for treatment under the Policy Statement and is

not

currently subject to the Basel III consolidated capital rules at the bank holding company level. The new capital rules continue to apply to the Bank.

2019,

the federal banking agencies, including the FDIC, issued a rule establishing a “community bank leverage ratio” (the ratio of a bank’s tier

capital to average total consolidated assets) that qualifying institutions with less than

$10

billion in assets

may

elect to use in lieu of the generally applicable leverage and risk-based capital requirements under Basel III. A qualifying banking organization that elects to use new ratio will be considered to have met all applicable federal regulatory capital and leverage requirements, including the minimum capital levels required to be considered “well capitalized, ” if it maintains community bank leverage ratio capital exceeding

9%.

The new rule became effective on

January 1, 2020.

Our management is evaluating the new ratio but has

not

made a decision as to whether we will adopt it.

The following table sets forth the Bank's actual capital amounts and ratios (dollar amounts in thousands):

						Minimum Amount of Capital Required
											To be Well-Capitalized
						For Capital					Under Prompt
	Actual					Adequacy Purposes (1)					Corrective Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
December 31, 2019
Common Equity Tier 1 Ratio	$	90,317		13.1	%	$	31,059		4.5	%	$	44,863		6.5	%
Tier 1 Leverage Ratio		90,317		10.4	%		34,897		4.0	%		43,622		5.0	%
Tier 1 Risk-Based Capital Ratio		90,317		13.1	%		41,412		6.0	%		55,216		8.0	%
Total Risk-Based Capital Ratio		97,810		14.2	%		55,216		8.0	%		69,020		10.0	%

December 31, 2018
Common Equity Tier 1 Ratio	$	76,545		11.8	%	$	29,071		4.5	%	$	41,991		6.5	%
Tier 1 Leverage Ratio		76,545		9.3	%		32,765		4.0	%		40,956		5.0	%
Tier 1 Risk-Based Capital Ratio		76,545		11.8	%		38,761		6.0	%		51,681		8.0	%
Total Risk-Based Capital Ratio		83,753		13.0	%		51,681		8.0	%		64,602		10.0	%

(

) – Does

not

include amounts required under the capital conservation buffer discussed above.

The current and projected capital positions of the Company and the Bank and the impact of capital plans and long- term strategies are reviewed regularly by management. The Company policy is to maintain the Bank’s ratios above the prescribed well-capitalized ratios at all times. Management believes that the Bank currently meets all its capital adequacy requirements.