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

As of December 31, 2016, Pinnacle Financial has one equity incentive plan under which it is able to grant awards, the 2014 Equity Incentive Plan (2014 Plan) and has assumed the stock option plan of CapitalMark (the CapitalMark Option Plan) 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 995,000 shares as of December 31, 2016, inclusive of shares returned to plan reserves during the year ended December 31, 2016. 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 or Avenue as all preexisting Magna and Avenue stock options were converted to cash upon acquisition.

Common Stock Options and Stock Appreciation Rights

As of December 31, 2016, of the 550,490 stock options outstanding, approximately 199,000 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 approximately 352,000 options would be deemed non-qualified stock options 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 vest 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 granted under the CapitalMark Plan were fully-vested at the date of the CapitalMark merger. As of December 31, 2016, there were no stock appreciation rights outstanding.

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, 2016 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, 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 acquired 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
Granted		-			-
Stock options exercised		(698,673	)		21.63
Stock appreciation rights exercised ⁽²⁾		(2,435	)		15.60
Forfeited		(3	)		29.50
Outstanding at December 31, 2016		550,490		$	20.75	2.61	$26,728
Outstanding and expected to vest at December 31, 2016		550,490		$	20.75	2.61	$26,728

(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 $69.30 per common share at December 31, 2016 for the 550,490 options that were in-the-money at December 31, 2016.

(2)

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. The 2,435 stock appreciation rights exercised during 2016 settled in 1,137 shares of Pinnacle Financial Common Stock.

During each of the years in the three-year period ended December 31, 2016, the aggregate intrinsic value of options and stock appreciation rights exercised under Pinnacle Financial's equity incentive plans was $21.7 million, $7.6 million and $4.0 million, respectively, determined as of the date of option exercise.

There have been no options granted by Pinnacle Financial since 2008. All stock option awards granted by Pinnacle Financial were fully vested during 2013. Stock options granted under the CapitalMark Plan were fully vested at the time of acquisition. As such, there was no impact on the results of operations for stock-based compensation related to stock options for the three-year period ended December 31, 2016.

Restricted Shares

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 or stock appreciation rights outstanding as of December 31, 2016 under the 2014 Plan. During the three-year period ended December 31, 2016, Pinnacle Financial awarded 177,664, 231,504 and 126,117 shares of restricted stock to certain Pinnacle Financial associates and outside directors.

A summary of activity for unvested restricted share awards for the years ended December 31, 2016, 2015, and 2014 follows:

	Number			Grant Date Weighted-Average Cost
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
Shares awarded		177,664			48.61
Conversion of restricted share units to restricted share awards		43,694			46.37
Restrictions lapsed and shares released to associates/directors		(245,873	)		28.39
Shares forfeited		(21,260	)		39.88
Unvested at December 31, 2016		820,539		$	36.47

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 tables outline restricted stock grants that were made by grant year, grouped by similar vesting criteria, during the three year period ended December 31, 2016. 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⁽⁸⁾	Shares Unvested
Time Based Awards
2014	Associates⁽²⁾	5	113,918	31,110	12,685	11,745	58,378
2015	Associates⁽²⁾	5	190,528	25,801	9,369	14,163	141,195
2015	Leadership team⁽³⁾	5	16,605	2,530	788	-	13,287
2016	Associates⁽²⁾	5	143,273	265	125	3,679	139,204
Performance Based Awards
2014	Leadership team⁽⁴⁾	5	186,943	63,634	9,375	4,386	109,548
2015	Leadership team⁽⁴⁾	5	43,711	-	-	-	43,711
2015	Leadership team⁽⁵⁾	3	11,302	-	-	-	11,302
2016	Leadership team⁽⁴⁾	3	43,694	-	-	-	43,694
2016	Leadership team⁽⁶⁾	3	15,468	-	-	-	15,468
Outside Director Awards ⁽⁷⁾
2014	Outside directors	1	12,199	10,537	1,662	-	-
2015	Outside directors	1	13,069	11,298	1,771	-	-
2016	Outside directors	1	18,923	889	297	-	17,737

⁽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 (or have Pinnacle Financial withhold 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 acquisition of Magna. The forfeiture restrictions on these restricted share awards lapse in equal installments on the anniversary date of the grant.
⁽⁴⁾	Reflects conversion of restricted share units issued in prior years to restricted share awards. 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. Half of the awards inclde a four year vesting period while the remainder include a three year vesting period.
⁽⁵⁾	These shares 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⁾	These shares were awarded to individuals joining the leadership team upon acquisition of Avenue. 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.
⁽⁷⁾	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 attendance goals for the various board and board committee meetings to which each member was scheduled to attend.
⁽⁸⁾	These shares represent forfeitures resulting from recipients whose employment or board membership terminated during the year ended December 31, 2016. 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 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.

Restricted Share Units

Pinnacle Financial grants restricted share units to the senior executive officers and other members of the Leadership Team annually. The senior executive officers' restricted share unit awards typically include a range of shares that may be earned from the target level of performance to the maximum level of performance. The Leadership Team awards are granted at the target level of performance. Restricted share units awarded prior to 2015 will convert to a number of restricted share awards based on the achievement of certain performance metrics for each of the fiscal years to which the award relates, with the restrictions on the restricted shares issued in settlement of the restricted share units thereafter lapsing if Pinnacle Bank achieves certain soundness levels in subsequent years. Beginning with grants made in 2015, the awards will be settled in shares of freely tradeable common stock of Pinnacle Financial if the one year performance metrics and subsequent one-year service period requirements are met and subsequent soundness targets for later years are achieved. The performance metrics for each of the performance periods is established concurrently with the award of the restricted share unit grants by the Human Resources and Compensation Committee. The awards may be issued with a post-vest holding period, as shown below. 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 prescribed year. These restricted share units are being expensed based on the requisite service period of the underlying tranche 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. The expense is initially 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.

The following table details the Restricted Share Unit awards outstanding at December 31, 2016:

	Units Awarded				Applicable Performance Periods associated with each tranche (fiscal year)		Service period per tranche (in years)		Subsequent holding period per tranche (in years)		Shares settled into RSAs as of period end⁽²⁾
Grant year	Named Executive Officers (NEOs)⁽¹⁾		Leadership Team other than NEOs				Service period per tranche (in years)		Subsequent holding period per tranche (in years)		Shares settled into RSAs as of period end⁽²⁾
2016		73,474-110,223		26,683		2016		2		3		N/A
						2017		2		2		N/A
						2018		2		1		N/A

2015		58,200-101,850		28,378		2015		2		3		N/A
						2016		2		2		N/A
						2017		2		1		N/A

2014⁽³⁾		58,404-102,209		29,087		2014		5		N/A		21,856
						2014		4		N/A		21,856
						2015		4		N/A		21,847
						2015		3		N/A		21,847
						2016		3		N/A
						2016		2		N/A

1) The named executive officers are awarded a range of awards that may be earned based on attainment of goals at a target level of performance to the maximum level of performance.

2) Restricted stock unit awards granted in 2016 and 2015 if earned will be settled in shares of Pinnacle Financial Common Stock.

3) Restrictions on half of the shares previously converted to RSAs will lapse commensurate with the filing of the Form 10-K for the year ended December 31, 2017 and 2018, respectively, and are reflected as restricted stock awards in the year in which the shares convert.

A summary of stock compensation expense, net of the impact of income taxes, related to restricted share awards and restricted share units for the three-year period ended December 31, 2016, follows (in thousands except per share data):

	2016		2015		2014

Restricted stock expense	$	10,971	$	6,033	$	4,070
Income tax benefit		4,306		2,368		1,597
Restricted stock expense, net of income tax benefit	$	6,665	$	3,665	$	2,473
Impact on per share results from restricted stock expense:
Basic	$	0.15	$	0.10	$	0.07
Fully diluted	$	0.15	$	0.10	$	0.07