Note 15. Stock Options, Stock Appreciation Rights and Restricted Shares

As of December 31, 2015, Pinnacle Financial has one equity incentive plan under which it is able to grant awards, 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. In addition, awards previously granted remain outstanding under equity plans previously adopted by Pinnacle Financial's Board of Directors or assumed in connection with acquisitions of Mid-America Bancshares, Inc. and Cavalry Bancorp, Inc. No new awards may be granted under these other plans or the CapitalMark Option Plan.

Total shares available for issuance under the 2014 Plan were approximately 1.1 million shares as of December 31, 2015, inclusive of shares returned to plan reserves during the year ended December 31, 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 of 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 cancelled in exchange for a cash payment upon acquisition.

Common Stock Options and Stock Appreciation Rights

As of December 31, 2015, of the 1,249,166 stock options and 2,435 stock appreciation rights outstanding, approximately 392,000 options were granted with the intention to be incentive stock options qualifying under Section 422 of the Internal Revenue Code for favorable tax treatment to the option holder while 859,000 options would be deemed non-qualified stock options or stock appreciation rights and thus not subject to favorable tax treatment to the option holder. Favorable treatment generally refers to the recipient of the award not having to report ordinary income at the date of exercise. All stock options granted under the Pinnacle Financial equity incentive plans vested in equal increments over five years from the date of grant and are exercisable over a period of ten years from the date of grant. All stock options and stock appreciation rights granted under plans assumed in connection with Pinnacle Financial's mergers with Cavalry and Mid-America were fully-vested at the date of those mergers.

A summary of stock option and stock appreciation right activity within the equity incentive plans during each of the years in the three-year period ended December 31, 2015 and information regarding expected vesting, contractual terms remaining, intrinsic values and other matters was as follows:

	Number			Weighted- Average Exercise Price		Weighted- Average Contractual Remaining Term (in years)	Aggregate Intrinsic Value ⁽¹⁾ (000's)
Outstanding at December 31, 2012		1,318,381		$	23.36
Granted		-			-
Stock options exercised		(279,534	)		14.07
Stock appreciation rights exercised ⁽²⁾		(1,732	)		15.60
Forfeited		(34,615	)		29.31
Outstanding at December 31, 2013		1,002,500		$	25.77
Granted		-			-
Stock options exercised		(301,794	)		23.21
Stock appreciation rights exercised ⁽²⁾		(1,586	)		15.60
Forfeited		(632	)		24.95
Outstanding at December 31, 2014		698,488		$	26.89
Options assumed upon acquisition of CapitalMark		858,148			17.62
Granted		-			-
Stock options exercised		(303,754	)		24.09
Stock appreciation rights exercised ⁽²⁾		(1,276	)		15.60
Forfeited		(5	)		23.88
Outstanding at December 31, 2015		1,251,601		$	21.23	2.54	$37,714
Outstanding and expected to vest at December 31, 2015		1,251,601		$	21.23	2.54	$37,714

(1)

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the quoted price of Pinnacle Financial common stock of $51.36 per common share at December 31, 2015 for the 1,251,601 options and stock appreciation rights that were in-the-money at December 31, 2015.

(2)

The 1,732 stock appreciation rights exercised during 2013 settled in 471 shares of Pinnacle Financial common stock. The 1,586 stock appreciation rights exercised during 2014 settled in 609 shares of Pinnacle Financial common stock. The 1,276 stock appreciation rights exercised during 2015 settled in 559 shares of Pinnacle Financial common stock.

During each of the years in the three-year period ended December 31, 2015, the aggregate intrinsic value of options and stock appreciation rights exercised under Pinnacle Financial's equity incentive plans was $7.6 million, $4.0 million and $3.6 million, respectively, determined as of the date of option exercise.

As of December 31, 2015, compensation costs related to unvested stock options and stock appreciation rights granted under Pinnacle Financial's equity incentive plans and the CapitalMark Option Plan had been fully recognized in prior periods and all outstanding option awards are fully vested.

Pinnacle Financial adopted ASC 718-20 Compensation using the modified prospective transition method on January 1, 2006. Accordingly, during the three-years ended December 31, 2015, Pinnacle Financial recorded stock-based compensation expense using the Black-Scholes valuation model for awards granted prior to, but not yet vested, as of January 1, 2006 and for all stock-based awards granted after January 1, 2006, based on fair value estimates using the Black-Scholes valuation model. For these awards, Pinnacle Financial has recognized compensation expense using a straight-line amortization method. As ASC 718-20 requires that stock-based compensation expense be based on awards that are ultimately expected to vest, stock-based compensation for the years ended December 31, 2015, 2014, and 2013 has been reduced for estimated forfeitures. The impact on the results of operations (compensation and employee benefits expense) and earnings per share of recording stock-based compensation in accordance with ASC 718-20 (related to stock option awards) for the three-year period ended December 31, 2015 was as follows (in thousands, except per share data):

	For the year ended December 31,
	2015		2014		2013
Non-qualified stock options
Stock-based compensation expense	$	-	$	-	$	13
Income tax benefit		-		-		5
Stock-based compensation expense after income tax benefit	$	-	$	-	$	8
Impact on per share results from stock-based compensation:
Basic	$	0.00	$	0.00	$	0.00
Fully diluted	$	0.00	$	0.00	$	0.00

There have been no options granted by Pinnacle Financial since 2008.

Restricted Shares

Additionally, the 2014 Plan (and Pinnacle Financial's prior equity incentive plans), provides for the granting of restricted share awards and other performance or market-based awards. There were no market-based awards or stock appreciation rights outstanding as of December 31, 2015 under the 2014 Plan or any of Pinnacle Financial's other equity incentive plans. During the three-year period ended December 31, 2015, Pinnacle Financial awarded 231,504, 126,117 and 164,602 shares of restricted stock to certain Pinnacle Financial associates and outside directors. Pinnacle Financial also issued 225,228 restricted share units in 2012 which converted to 193,189 restricted share awards in 2013, 186,943 restricted share units in 2013 which converted to 186,943 restricted share awards in 2014 and 131,296 restricted share units in 2014 of which the first traunche converted to 43,711 restricted share awards in 2015.

A summary of activity for unvested restricted share awards for the years ended December 31, 2015, 2014, and 2013 follows:

	Number			Grant Date Weighted-Average Cost
Unvested at December 31, 2012		739,909		$	15.45
Shares awarded		164,602			21.78
Conversion of restricted share units to restricted share awards		193,189			21.51
Restrictions lapsed and shares released to associates/directors		(221,325	)		15.97
Shares forfeited		(54,680	)		15.30
Unvested at December 31, 2013		821,695		$	19.18
Shares awarded		126,117			33.32
Conversion of restricted share units to restricted share awards		186,943			31.68
Restrictions lapsed and shares released to associates/directors		(249,684	)		18.19
Shares forfeited		(35,873	)		20.70
Unvested at December 31, 2014		849,198		$	24.26
Shares awarded		231,504			45.71
Conversion of restricted share units to restricted share awards		43,711			34.50
Restrictions lapsed and shares released to associates/directors		(240,102	)		23.00
Shares forfeited		(17,997	)		30.01
Unvested at December 31, 2015		866,314		$	31.39

Pinnacle Financial grants restricted share awards to associates, including members of executive management, and outside directors with a combination of time and performance vesting criteria. The following tables outline restricted stock grants that were made by grant year, grouped by similar vesting criteria, during the three year period ended December 31, 2015. The table below reflects the life-to-date activity for these awards:

Grant Year	Group⁽¹⁾	Vesting Period in years	Shares awarded	Restrictions Lapsed and shares released to participants	Shares Withheld for taxes by participants	Shares Forfeited by participants⁽⁷⁾	Shares Unvested
Time Based Awards
2013	Associates⁽²⁾	5	150,125	41,263	16,067	12,545	80,250
2014	Associates⁽²⁾	5	113,918	15,543	6,258	9,158	82,959
2015	Associates⁽²⁾	5	190,528	28	-	4,391	176,940
2015	Leadership team⁽³⁾	5	16,605	-	-	-	16,605
Performance Based Awards
2013	Leadership team⁽⁴⁾	5	193,189	55,693	20,525	4,219	112,752
2014	Leadership team⁽⁴⁾	5	186,943	27,129	9,375	4,386	146,053
2015	Leadership team⁽⁴⁾	5	43,711	-	-	-	43,711
2015	Leadership team⁽⁵⁾	3	11,302	-	-	-	11,302
Outside Director Awards ⁽⁶⁾
2013	Outside directors	1	14,477	12,062	2,415	-	-
2014	Outside directors	1	12,199	10,537	1,662	-	-
2015	Outside directors	1	13,069	678	227	-	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 Pinnacle Financial 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 Pinnacle Financial's 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 Pinnacle Financial's 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 December 31, 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 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 graded vesting schedule such that each traunche is amortized separately. 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 cost of the award.

A summary of compensation expense, net of the impact of income taxes, related to restricted stock awards for the three-year period ended December 31, 2015, follows (in thousands, except per share data):

	2015		2014		2013

Restricted stock expense	$	6,033	$	4,970	$	4,070
Income tax benefit		2,368		1,951		1,597
Restricted stock expense, net of income tax benefit	$	3,665	$	3,019	$	2,473
Impact on per share results from restricted stock expense:
Basic	$	0.10	$	0.09	$	0.07
Fully diluted	$	0.10	$	0.09	$	0.07

2015 Restricted Share Units

Pinnacle Financial granted restricted share units to the senior executive officers and the 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 shares of Pinnacle Financial's common stock 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 to be earned 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 Human Resources and Compensation Committee of the Board of Directors (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 of Pinnacle Financial's common stock will not be issued in settlement of the units 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 units that is expected to be earned by the recipient is reevaluated and the associated compensation expense is adjusted accordingly. For the year ended December 31, 2015, Pinnacle Financial recognized expense associated with the first traunche of this award totaling approximately $533,000. 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 other members of the Leadership Team.

2014 Restricted Share Units

Pinnacle Financial granted restricted share units to the senior executive officers and to 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. 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. An additional one-third of these restricted share units will be settled with the issuance of 43,711 restricted shares upon the filing of Pinnacle Financial's 2015 Annual Report on Form 10-K. The remaining restricted share units are eligible for conversion to restricted share awards based on the Company's achievement of certain predetermined goals for the fiscal year ended December 31, 2016. 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 as of December 31, 2017 and December 31, 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 units that the recipient is expected to earn is reevaluated and the associated compensation expense is adjusted accordingly. For the year ended December 31, 2015, Pinnacle Financial expensed approximately $776,000 attributable to these awards compared to approximately $339,000 for the same period in the prior year.