Note 6. Stock Options, Stock Appreciation Rights and Restricted Shares

At Pinnacle Financial's annual shareholders' meeting on April 15, 2014, the shareholders of Pinnacle Financial voted in favor of a proposal that adopted the 2014 Equity Incentive Plan (the "2014 Plan"). The 2014 Plan addressed the following matters:

(i)

Consolidation of the two existing equity incentive plans, the Pinnacle Financial Partners, Inc. 2004 Amended and Restated Equity Incentive Plan (the "2004 Plan") and the Mid-America Bancshares, Inc. 2006 Omnibus Equity Incentive Plan (the "Mid-America Plan") including approximately 396,000 shares in the aggregate that remained available for issuance under those two plans at that date; and

(ii)	Increased the maximum number of shares of common stock that may be issued to associates and directors by an additional 930,000 shares.

Total shares available for issuance under the 2014 Plan were approximately 1.3 million shares as of September 30, 2014, inclusive of shares returned to plan reserves during the nine months ended September 30, 2014. The 2014 Plan also permits Pinnacle Financial to reissue awards currently outstanding under the 2004 Plan and the Mid-America Plan that are subsequently forfeited or expired unexercised and returned to the 2014 Plan.

As of September 30, 2014, there were approximately 779,000 stock options and 3,700 stock appreciation rights outstanding to purchase common shares. A summary of the stock option and stock appreciation rights activity within the equity incentive plans during the nine months ended September 30, 2014 and information regarding expected vesting, contractual terms remaining, intrinsic values and other matters is as follows:

	Number			Weighted- Average Exercise Price		Weighted- Average Contractual Remaining Term (in years)		Aggregate Intrinsic Value (000's)
Outstanding at December 31, 2013		1,002,500		$	25.77		2.48	$	7,097	⁽¹⁾
Granted		-
Exercised		(217,499	)
Stock appreciation rights exercised⁽³⁾		(1,586	)
Forfeited		(632	)
Outstanding at September 30, 2014		782,783		$	26.70		2.00	$	7,676	⁽²⁾
Options exercisable at September 30, 2014		782,783		$	26.70		2.00	$	7,676	⁽²⁾

(1)

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the quoted closing price of Pinnacle Financial common stock of $32.53 per common share at December 31, 2013 for the approximately 931,425 options and stock appreciation rights that were in-the-money at December 31, 2013.

(2)

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the quoted closing price of Pinnacle Financial common stock of $36.10 per common share at September 30, 2014 for the approximately 782,783 options and stock appreciation rights that were in-the-money at September 30, 2014.

(3)	1,586 stock appreciation rights were converted into 609 common shares upon exercise.

During the nine months ended September 30, 2014, Pinnacle Financial recorded no stock option compensation expense compared to $13,000 during the nine months ended September 30, 2013. Compensation costs related to unvested stock options granted under Pinnacle Financial's equity incentive plan had been fully recognized and all outstanding option awards are fully vested.

Restricted Share Awards

Additionally, the 2014 Plan provides for the granting of restricted share awards and other performance or market-based awards. There were no market-based awards outstanding as of September 30, 2014 under the 2014 Plan.

A summary of activity for unvested restricted share awards for the nine months ended September 30, 2014 is as follows:

	Number			Grant Date Weighted-Average Cost
Unvested at December 31, 2013		821,695		$	19.18
Shares awarded		122,317			33.16
Conversion of restricted share units to restricted share awards		186,943			31.68
Restrictions lapsed and shares released to associates/directors		(242,136	)		18.23
Shares forfeited⁽¹⁾		(27,844	)		20.75
Unvested at September 30, 2014		860,975		$	24.10

(1)	Represents shares forfeited due to employee termination and/or retirement. No shares were forfeited due to failure to meet performance targets.

Pinnacle Financial grants restricted share awards to associates, executive management and outside directors with a combination of time and, in the case of executive management, performance vesting criteria. The following table outlines restricted stock grants that were made, grouped by similar vesting criteria, during the nine months ended September 30, 2014:

Grant Year	Group⁽¹⁾	Vesting Period in years	Shares awarded	Restrictions Lapsed and shares released to participants	Shares Forfeited by participants⁽⁵⁾	Shares Unvested
Time Based Awards⁽²⁾
2014	Associates	5	110,118	-	2,364	107,754
Performance Based Awards⁽³⁾
2014	Leadership team	5	186,943	-	3,096	183,847
Outside Director Awards⁽⁴⁾
2014	Outside directors	1	12,199	-	-	12,199

(1)

Groups include employees (referred to as associates above), the leadership team which includes our named executive officers and other key senior leadership members, and outside directors. When restricted shares are awarded, a participant receives voting rights and forfeitable dividend rights with respect to the shares, but is not able to transfer the shares until the restrictions have lapsed. Once the restrictions lapse, the participant is taxed on the value of the award and may elect to sell some shares to pay the applicable income taxes associated with the award. For time-based restricted share awards, dividends paid on shares for which the forfeiture restrictions do not lapse are subject to clawback at the time of termination. For performance-based awards, dividends are placed into escrow until the forfeiture restrictions on such shares lapse.

(2)	The forfeiture restrictions on these restricted share awards lapse in equal annual installments on the anniversary date of the grant.

(3)	The forfeiture restrictions on these restricted share awards lapse in separate equal installments should Pinnacle Financial achieve certain earnings and soundness targets over each year of the subsequent vesting period.

(4)

Restricted share awards are issued to the outside members of the board of directors in accordance with their board compensation plan. Restrictions lapse on the one year anniversary date of the award based on each individual board member meeting their attendance goals for the various board and board committee meetings to which each member was scheduled to attend.

(5)	These shares represent forfeitures resulting from recipients for whom employment terminated during the year-to-date period ended September 30, 2014. Any dividends paid on shares for which the forfeiture restrictions do not lapse will be recouped by Pinnacle Financial at the time of termination.

Compensation expense associated with the time-based restricted share awards is recognized over the time period that the restrictions associated with the awards lapse on a straight-line basis based on the total grant date fair value. Compensation expense associated with performance-based restricted share awards is recognized over the time period that the restrictions associated with the awards are anticipated to lapse based on a schedule consistent with the nature of the award. For the three and nine months ended September 30, 2014, Pinnacle Financial recognized approximately $1.3 million and $3.7 million in compensation costs attributable to restricted share awards, compared to $1.0 million and $3.0 million for the three and nine months ended September 30, 2013.

Restricted Share Units

Pinnacle Financial granted restricted share units to the senior executive officers and other members of the leadership team in the first quarter of 2014. The senior executive officers' restricted share unit award included a range from 58,404 units at the target compensation level to 102,209 units at the maximum compensation level. These restricted share units will convert to a number of restricted share awards based on the achievement of certain performance metrics. The Leadership Team restricted share unit award of 29,087 units was granted at a target level of performance. For both senior executive officers and the Leadership Team, approximately one-third of these awards are eligible for conversion to restricted share awards based on the achievement of certain predetermined goals for each of the fiscal years ended December 31, 2014, 2015 and 2016, respectively. Once converted to restricted share awards, the restrictions on these shares will lapse in 2018 and 2019 in 50% increments based on the attainment of certain soundness targets in fiscal 2017 and 2018, respectively. The performance metrics and soundness criteria for each of the impacted fiscal years were established concurrently with the restricted share unit grants in January 2014 by the Human Resources and Compensation Committee of Pinnacle Financial's board of directors (HRCC). These restricted share units are being expensed based on the requisite service period of the underlying traunche of the award. Each period, the number of shares that is expected to lapse to the recipient is reevaluated and the associated compensation expense is adjusted accordingly. For the three and nine months ended September 30, 2014, Pinnacle Financial recognized expense associated with the first traunche of this award totaling $93,000 and $248,000, respectively. The expense is being accrued at the maximum performance level for the senior executive officers and the target performance level for the Leadership Team.