NOTE 9 - STOCK OPTIONS AND RESTRICTED SHARES

During 2008, the board of directors of the Bank approved the CapStar Bank 2008 Stock Incentive Plan. Following the formation of CapStar Financial Holdings, Inc. in 2016, and in connection with the Share Exchange, the outstanding awards of restricted stock and stock options under the CapStar Bank 2008 Stock Incentive Plan were exchanged for similar awards of restricted stock and stock options issued by CapStar Financial Holdings, Inc. under the CapStar Financial Holdings, Inc. Stock Incentive Plan (the “Plan”), which the board of directors adopted in 2016. The Stock Incentive Plan provides for the grant of stock-based incentives, including stock options, restricted stock units, performance awards and restricted stock, to employees, directors and service providers that are subject to forfeiture until vesting conditions have been satisfied by the award recipient under the terms of the award. The Plan is intended to help align the interests of employees and our shareholders and reward our employees for improved Company performance. The Plan reserved 1,569,475 shares of stock for issuance of stock incentives. In April 2018 the board of directors reserved an additional 400,000 shares of stock for issuance of stock incentives. Stock incentives include both restricted share and stock option grants. Total shares issuable under the plan were 506,435 at September 30, 2018.

The Company has recognized stock-based compensation expense, within salaries and employee benefits for employees, and within other non-interest expense for directors, in the consolidated statements of income as follows (dollars in thousands):

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2018			2017			2018			2017
Stock-based compensation expense before income taxes	$	310		$	288		$	940		$	771
Less: deferred tax benefit		(81	)		(110	)		(246	)		(295	)
Reduction of net income	$	229		$	178		$	694		$	476

Restricted Shares

Compensation expense is recognized over the vesting period of the awards based on the fair value of the stock at the issue date. The fair value of each restricted stock grant is based on valuations performed by independent consultants. The recipients have the right to vote and receive dividends but cannot sell, transfer, assign, pledge, hypothecate, or otherwise encumber the restricted stock until the shares have vested. Restricted shares fully vest on the third anniversary of the grant date. A summary of the changes in the Company’s nonvested restricted shares for the nine months ended September 30, 2018 follows:

				Weighted
				Average
	Restricted			Grant Date
Nonvested Shares	Shares			Fair Value
Nonvested at beginning of period		187,253		$	14.21
Granted		53,869			19.11
Vested		(99,603	)		12.61
Forfeited		(8,065	)		15.95
Nonvested at end of period		133,454		$	17.28

As of September 30, 2018, there was $1.6 million of unrecognized compensation cost related to nonvested shares granted under the Plan. The cost is expected to be recognized over a weighted-average period of 2.0 years. The total fair value of shares vested during the nine months ended September 30, 2018 and 2017 was $1.9 million and $1.1 million.

Stock Options

Option awards are generally granted with an exercise price equal to the fair value of the Company’s common stock at the date of grant. Option awards generally have a four year vesting period and a ten year contractual term.

The fair value of each option grant is estimated on the date of grant using the Black Scholes option pricing model. There were no options granted in 2018 or 2017.

A summary of the activity in stock options for the nine months ended September 30, 2018 follows:

						Weighted
				Weighted		Average
				Average		Remaining
				Exercise		Contractual
	Shares			Price		Term (years)
Outstanding at beginning of period		804,800		$	10.59
Granted		—			—
Exercised		(508,834	)		10.11
Forfeited or expired		—			—
Outstanding at end of period		295,966		$	11.43		4.0
Fully vested and expected to vest		294,134		$	11.42		3.7
Exercisable at end of period		268,466		$	11.34		3.7

Information related to stock options during each year follows:

	2018		2017
Intrinsic value of options exercised	$	4,282,055	$	684,275
Cash received from option exercises		5,144,090		821,500
Tax benefit realized from option exercises		1,119,329		263,446
Weighted average fair value of options granted		—		—

As of September 30, 2018, there was $0.1 million of unrecognized compensation cost related to nonvested stock options granted under the Plan. The cost is expected to be recognized over a weighted-average period of 1.0 year.