10) Equity Plan

The Company maintained an Amended and Restated 2004 Equity Plan (the “2004 Plan”) for directors, officers, and key employees. The 2004 Plan was terminated on May 23, 2013. On May 23, 2013, the Company’s shareholders approved the 2013 Equity Incentive Plan (the “2013 Plan”). On May 25, 2017, the shareholders approved an amendment to the Heritage Commerce Corp 2013 Equity Incentive Plan to increase the number of shares available from 1,750,000 to 3,000,000 shares. The equity plans provide for the grant of incentive and nonqualified stock options and restricted stock. The equity plans provide that the option price for both incentive and nonqualified stock options will be determined by the Board of Directors at no less than the fair value at the date of grant. Options granted vest on a schedule determined by the Board of Directors at the time of grant. Generally options vest over four years. All options expire no later than ten years from the date of grant. Restricted stock is subject to time vesting. For the nine months ended September 30, 2017, the Company granted 270,000 shares of nonqualified stock options and 82,770 shares of restricted stock. There were 1,528,099 shares available for the issuance of equity awards under the 2013 Plan as of September 30, 2017.

Stock option activity under the equity plans is as follows:


				Weighted
		Weighted		Average
		Average		Remaining	Aggregate
	Number	Exercise		Contractual	Intrinsic
Total Stock Options	of Shares	Price		Life (Years)	Value
Outstanding at January 1, 2017	1,719,091	$	9.79
Granted	270,000	$	14.41
Exercised	(193,863)	$	6.98
Forfeited or expired	(151,119)	$	22.85
Outstanding at September 30, 2017	1,644,109	$	9.69	6.41	$	6,972,963
Vested or expected to vest	1,545,462			6.41	$	6,554,585
Exercisable at September 30, 2017	1,085,246			5.21	$	5,799,239

Information related to the equity plans for the periods indicated:


	Nine Months Ended
	September 30,
	2017		2016
Intrinsic value of options exercised	$	1,331,528	$	437,357
Cash received from option exercise	$	1,352,236	$	771,386
Tax benefit realized from option exercises	$	543,654	$	174,194
Weighted average fair value of options granted	$	2.66	$	2.12

As of September 30, 2017, there was $1,446,000 of total unrecognized compensation cost related to nonvested stock options granted under the equity plans. That cost is expected to be recognized over a weighted‑average period of approximately 2.75 years.

The fair value of each option grant is estimated on the date of grant using the Black Scholes option pricing model that uses the assumptions noted in the following table, including the weighted average assumptions for the option grants for the periods indicated:


	Nine Months Ended
	September 30,
	2017		2016
Expected life in months(1)	72		72
Volatility(1)	24	%	31	%
Weighted average risk-free interest rate(2)	1.94	%	1.41	%
Expected dividends(3)	2.78	%	3.48	%

(1)

The expected life of employee stock options represents the weighted average period the stock options are expected to remain outstanding based on historical experience. Volatility is based on the historical volatility of the stock price over the same period of the expected life of the option.

(2)

Based on the U.S. Treasury constant maturity interest rate with a term consistent with the expected life of the option granted.

(3)

Each grant’s dividend yield is calculated by annualizing the most recent quarterly cash dividend and dividing that amount by the market price of the Company’s common stock as of the grant date

Restricted stock activity under the equity plans is as follows:


		Weighted
		Average Grant
	Number	Date Fair
Total Restricted Stock Award	of Shares	Value
Nonvested shares at January 1, 2017	199,503	$	9.74
Granted	82,770	$	14.36
Vested	(64,954)	$	10.02
Forfeited or expired	(18,634)	$	11.87
Nonvested shares at September 30, 2017	198,685	$	11.38

As of September 30, 2017, there was $1,817,000 of total unrecognized compensation cost related to nonvested restricted stock awards granted under the equity plans. The cost is expected to be recognized over a weighted‑average period of approximately 2.43 years.