(

) Stock-Based Compensation

Under our equity incentive plans, employees and directors

may

be granted stock options, restricted stock, restricted stock units and performance awards. Effective

February 17, 2015,

our shareholders approved the

2015

Equity Incentive Plan of Insteel Industries, Inc. (the

“2015

Plan”), which authorizes up to

900,000

shares of our common stock for future grants under the plan. The

2015

Plan, which expires on

February 17, 2025,

replaces the

2005

Equity Incentive Plan of Insteel Industries, Inc., which expired on

February 15, 2015.

As of

July 1, 2017,

there were

503,000

shares of our common stock available for future grants under the

2015

Plan, which is our only active equity incentive plan.

Stock

ption

awards

Under our equity incentive plans, employees and directors

may

be granted options to purchase shares of common stock at the fair market value on the date of the grant. Options granted under these plans generally vest over

three

years and expire

ten

years from the date of the grant. Compensation expense associated with stock options is as follows:

	Three Months Ended				Nine Months Ended
	July 1,		July 2,		July 1,		July 2,
(In thousands)	2017		2016		2017		2016
Compensation expense	$	78	$	97	$	585	$	563

As of

July 1, 2017,

there was

$259,000

of unrecognized compensation cost related to unvested options which is expected to be recognized over a weighted average period of

1.40

years.

The fair value of each option award granted is estimated on the date of grant using a Monte Carlo valuation model. The estimated fair values of stock options granted during the

nine

-month periods ended

July 1, 2017

and

July 2, 2016

was

$13.66

and

$8.69

per share, respectively, based on the following weighted-average assumptions:

	Nine Months Ended
	July 1,			July 2,
	2017			2016
Risk-free interest rate		2.03	%		1.39	%
Dividend yield		0.33	%		0.53	%
Expected volatility		38.79	%		39.23	%
Expected term (in years)		5.12			5.75

The assumptions utilized in the Monte Carlo valuation model are evaluated and revised, as necessary, to reflect market conditions and actual historical experience. The risk-free interest rate for periods within the contractual life of the option was based on the U.S. Treasury yield curve in effect at the time of the grant. The dividend yield was calculated based on our annual dividend as of the option grant date. The expected volatility was derived using a term structure based on historical volatility and the volatility implied by exchange-traded options on our common stock. The expected term for options was based on the results of a Monte Carlo simulation model, using the model’s estimated fair value as an input to the Black-Scholes-Merton model, and then solving for the expected term.

The following table summarizes stock option activity:

											Contractual		Aggregate
	Options			Exercise Price Per Share							Term - Weighted		Intrinsic
	Outstanding								Weighted		Average		Value
	(in thousands)			Range					Average		(in years)		(in thousands)
Outstanding at October 1, 2016		371		$	9.16	-	$	34.49	$	20.81
Granted		36			37.06	-		37.06		37.06
Exercised		(67	)		9.16	-		23.95		19.05			$	1,212
Outstanding at July 1, 2017		340			9.16	-		37.06		22.88		7.55		3,638

Vested and anticipated to vest in the future at July 1, 2017		335								22.84		7.54		3,605

Exercisable at July 1, 2017		135								17.37		6.06		2,103

Stock option exercises include “net exercises” for which the optionee received shares of common stock equal to the intrinsic value of the options (fair market value of common stock on the date of exercise less exercise price) reduced by any applicable withholding taxes.

Restricted stock uni

Restricted stock units (“RSUs”) granted under our equity incentive plans are valued based upon the fair market value on the date of the grant and provide for a dividend equivalent payment which is included in compensation expense. The vesting period for RSUs is generally

one

year from the date of the grant for RSUs granted to directors and

three

years from the date of the grant for RSUs granted to employees. RSUs do

not

have voting rights. RSU grants and compensation expense are as follows:

	Three Months Ended				Nine Months Ended
	July 1,		July 2,		July 1,		July 2,
(In thousands)	2017		2016		2017		2016
Restricted stock unit grants:
Units		-		-		19		43
Market value	$	-	$	-	$	690	$	1,027
Compensation expense		132		148		758		958

As of

July 1, 2017,

there was

$532,000

of unrecognized compensation cost related to unvested RSUs which is expected to be recognized over a weighted average period of

1.51

years.

The following table summarizes RSU activity:

				Weighted
	Restricted			Average
	Stock Units			Grant Date
(Unit amounts in thousands)	Outstanding			Fair Value
Balance, October 1, 2016		145		$	22.35
Granted		19			37.06
Released		(31	)		20.39
Balance, July 1, 2017		133			24.88