Note 9. Stock Options, Stock Appreciation Rights and Restricted Shares

As described more fully in the Annual Report on Form 10-K, as of September 30, 2015, Pinnacle Financial has one equity incentive plan, the 2014 Equity Incentive Plan (the 2014 Plan) and has assumed the stock option plan (the CapitalMark Option Plan) of CapitalMark in connection with the CapitalMark Merger.

Total shares available for issuance under the 2014 Plan were approximately 1.1 million as of September 30, 2015, inclusive of shares returned to plan reserves during the nine months ended September 30, 2015. The 2014 Plan also permits Pinnacle Financial to issue additional awards to the extent that currently outstanding awards are subsequently forfeited, settled in cash or expired unexercised and returned to the 2014 Plan. Upon the acquisition of CapitalMark, Pinnacle Financial assumed approximately 858,000 of stock options under the CapitalMark Plan. No further shares remain available for issuance under the CapitalMark Option Plan. No options were assumed upon the acquisition of Magna as all preexisting Magna stock options were converted to cash upon the acquisition.

Common Stock Options and Stock Appreciation Rights

As of September 30, 2015, there were 1,347,824 stock options and 2,481 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, 2015 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, 2014		698,488		$	26.89		1.90	$	9,071	⁽¹⁾
Options acquired upon acquisition of CapitalMark		858,143
Granted		-
Exercised		(205,091	)
Stock appreciation rights exercised⁽³⁾		(1,230	)
Forfeited		(5	)
Outstanding at September 30, 2015		1,350,305		$	21.24		2.90	$	36,610	⁽²⁾
Options and stock appreciation rights exercisable at September 30, 2015		1,350,305		$	21.24		2.90	$	36,610	⁽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 $39.54 per common share at December 31, 2014 for the 698,488 options and stock appreciation rights that were in-the-money at December 31, 2014.

(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 $49.41 per common share at September 30, 2015 for the 1,350,305 options and stock appreciation rights that were in-the-money at September 30, 2015.

(3)	1,230 SARS were converted into 537 common shares upon exercise.

Compensation costs related to unvested stock options and stock appreciation rights granted under Pinnacle Financial's equity incentive plan had been fully recognized in prior periods 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, 2015 under this plan.

A summary of activity for unvested restricted share awards for the nine months ended September 30, 2015 is as follows:

	Number			Grant Date Weighted-Average Cost
Unvested at December 31, 2014		849,198		$	24.26
Shares awarded		222,335			45.41
Conversion of restricted share units to restricted share awards		43,711			34.50
Restrictions lapsed and shares released to associates/directors		(234,607	)		23.04
Shares forfeited⁽¹⁾		(14,850	)		28.63
Unvested at September 30, 2015		865,787		$	30.47

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

Pinnacle Financial has granted 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, 2015:

Grant Year	Group⁽¹⁾	Vesting Period in years	Shares awarded	Restrictions Lapsed and shares released to participants	Shares Forfeited by participants⁽⁷⁾	Shares Unvested
Time Based Awards
2015	Associates⁽²⁾	5	181,359	13	3,396	177,950
2015	Leadership team⁽³⁾	5	16,605	-	-	16,605
Performance Based Awards
2015	Leadership team⁽⁴⁾	5	43,711	-	-	43,711
2015	Leadership team⁽⁵⁾	3	11,302	-	-	11,302
Outside Director Awards⁽⁶⁾
2015	Outside directors	1	13,069	905	-	12,164

(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 the 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 will be recouped by the Company 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)	These shares were awarded to individuals joining the leadership team upon acquisition of Magna. The forfeiture restrictions on these restricted share awards lapse in equal installments on the anniversary date of the grant.

(4)	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.

(5)

These share were awarded to individuals joining the leadership team upon acquisition of CapitalMark. The forfeiture restrictions on these restricted share awards lapse in separate equal installments should Pinnacle Financial achieve certain earnings targets over each year of the vesting period and should the recipient thereafter remain employed by Pinnacle Financial for a subsequent vesting period.

(6)

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.

(7)	These shares represent forfeitures resulting from recipients for when employment terminated during the year-to-date period ended September 30, 2015. Any dividends paid on shares for which the forfeiture restrictions do not lapse will be recouped by the Company 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, 2015, Pinnacle Financial recognized approximately $1.6 million and $4.3 million, respectively, in compensation costs attributable to restricted share awards, compared to $1.1 million and $3.7 million for the three and nine months ended September 30, 2015.

Effective as of the closing of the CapitalMark merger, the Human Resources and Compensation Committee of the board of directors of Pinnacle Financial (HRCC) awarded approximately 52,000 restricted share awards to former CapitalMark associates. Approximately 41,000 are time-based awards and vest in pro rata increments over the next 5 years. The remaining awards were granted to CapitalMark's former officers who are members of Pinnacle Bank's senior leadership. A portion will vest each year over a three year period if certain performance criteria are satisfied.

Effective as of the closing of the Magna merger, the HRCC awarded approximately 40,000 restricted share awards to former Magna associates. Approximately 23,000 are time-based awards and vest in pro rata increments over the next 5 years. The remaining awards were granted to Magna's former officers who are members of Pinnacle Bank's senior leadership. A portion will vest each year over a five year period if performance criteria are satisfied.

2015 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 2015. The senior executive officers' restricted share unit award included a range from 58,200 units at the target compensation level to 101,850 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 28,378 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 performance goals for each of the fiscal years ended December 31, 2015, 2016 and 2017, respectively. The performance metrics for each of the impacted fiscal years were established concurrently with the issuance of the restricted share unit grants in January 2015 by the HRCC. The awards include a one-year performance period and an additional one-year service period following the performance period for a combined two-year service period per traunche. At the end of each respective two-year service period, the restricted share units are then subject to a post-vest holding period to extend the term of each traunche of the award to five years from the date of grant. During the post-vest holding period, the shares will not be released to the recipient and cannot be transferred, subject to limited exceptions, but will continue to accrue dividends until the awards are released, which is expected to be commensurate with the filing of Pinnacle Financial's Annual Report on Form 10-K for the year ended December 31, 2019 provided Pinnacle Bank achieves a certain soundness threshold as of December 31, 2019. 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, 2015, Pinnacle Financial recognized expense associated with the first traunche of this award totaling $143,000 and $389,000 respectively. The expense is being accrued using an anticipated performance level for the senior executive officers between the target and maximum performance levels and at the target performance level for the Leadership Team.

2014 Restricted Share Units

Pinnacle Financial granted restricted share units to the senior executive officers and 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. 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, one-third of these restricted share units were settled with the issuance of 43,711 restricted shares upon the filing of Pinnacle Financial's 2014 Annual Report on Form 10-K. The remaining restricted share units are eligible for conversion to restricted share awards in pro-rata increments based on the Company's achievement of certain predetermined goals for each of the fiscal years ended December 31, 2015 and 2016, respectively. Upon conversion 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 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, 2015, Pinnacle Financial expensed $193,000 and $582,000, respectively, attributable to these awards compared to $92,000 and $215,000 for the same periods in the prior year.