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

As of December 31, 2017, Pinnacle Financial has two equity incentive plans under which it is able to grant awards, the 2014 Equity Incentive Plan (2014 Plan) and the BNC Bancorp 2013 Amended and Restated Omnibus Stock Incentive Plan (BNC Plan) it assumed in connection with the BNC Merger. Pinnacle Financial also assumed the stock option plan of CapitalMark (the CapitalMark Option Plan) it assumed in connection with the CapitalMark Merger but Pinnacle Financial is not able to grant awards thereunder. In addition, awards previously granted remain outstanding under equity plans previously adopted by Pinnacle Financial's board of directors and shareholders. No new awards may be granted under plans other than the 2014 Plan, or in the case of associates that were former associates of BNC or its subsidiaries, the BNC Plan.

Total shares available for issuance under the 2014 Plan were approximately 672,000 shares as of December 31, 2017, inclusive of shares returned to plan reserves during the year ended December 31, 2017. The 2014 Plan also permits Pinnacle Financial to issue additional awards to the extent that currently outstanding awards are subsequently forfeited, settled in cash, transferred to Pinnacle Financial in satisfaction of withholding tax obligations on vested awards 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. There were approximately 29,000 shares available for issuance under the BNC Plan as of December 31, 2017. No options were assumed upon the acquisition of Magna, Avenue or BNC as all preexisting Magna, Avenue and BNC stock options were converted to cash upon acquisition.

Common Stock Options and Stock Appreciation Rights

As of December 31, 2017, of the 274,586 stock options outstanding, approximately 113,061 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 161,525 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 vested in equal increments over five years from the date of grant, are fully vested as of December 31, 2017 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.

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, 2017 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, 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
Granted	—		—
Stock options exercised ⁽³⁾	(275,904	)	20.09
Forfeited	—		—
Outstanding at December 31, 2017	274,586		$	21.40	3.06	$	12,329
Options exercisable at December 31, 2017	274,586		$	21.40	3.06	$	12,329


(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 $66.30 per common share at December 31, 2017 for the 274,586 options that were in-the-money at December 31, 2017.


(2)	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.


(3)	Includes 750 stock options which were exercised in a stock swap transaction which settled in 277 shares of Pinnacle Financial common stock.

During each of the years in the three-year period ended December 31, 2017, the aggregate intrinsic value of stock options and stock appreciation rights exercised under Pinnacle Financial's equity incentive plans was $12.3 million, $21.7 million and $7.6 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, 2017.

Restricted Shares

Additionally, the 2014 Plan and the BNC Plan provide 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, 2017 under the 2014 Plan or the BNC Plan. During the three-year period ended December 31, 2017, Pinnacle Financial awarded 261,942, 177,664 and 231,504 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, 2017, 2016, and 2015 follows:



	Number		Grant Date Weighted-Average Cost
Unvested at December 31, 2014	849,198		$	24.26
Shares awarded	231,504		45.71
Conversion of previously granted 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 previously granted 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
Shares awarded	261,942		67.14
Conversion of previously granted restricted share units to restricted share awards	43,680		69.40
Shares assumed in connection with acquisition of BNC	136,890		67.25
Restrictions lapsed and shares released to associates/directors	(292,896	)	37.59
Shares forfeited	(34,020	)	54.71
Unvested at December 31, 2017	936,135		$	50.08

Pinnacle Financial grants restricted share awards to associates (including members of 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, 2017. 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 ⁽⁹⁾	Shares Unvested
Time Based Awards
2015	Associates ⁽²⁾	5	190,528	53,574	19,405	19,136	98,413
2015	Leadership team ⁽³⁾	5	16,605	2,530	788	—	13,287
2016	Associates ⁽²⁾	5	143,273	19,490	7,316	15,126	101,341
2017	Associates ⁽²⁾	3 - 5	248,265	388	198	14,085	233,594
2017	Associates ^{(2) (4)}	3 - 5	136,890	40,317	—	—	96,573
Performance Based Awards
2015	Leadership team ⁽⁵⁾	5	43,711	—	—	—	43,711
2015	Leadership team ⁽⁶⁾	3	11,302	2,679	1,086	—	7,537
2016	Leadership team ⁽⁵⁾	3	43,694	—	—	—	43,694
2016	Leadership team ⁽⁷⁾	3	15,468	—	—	—	15,468
2017	Leadership team ⁽⁵⁾	3	43,680	—	—	—	43,680
Outside Director Awards ⁽⁸⁾
2015	Outside directors	1	13,069	11,298	1,771	—	—
2016	Outside directors	1	18,923	15,471	2,266	1,186	—
2017	Outside directors	1	13,677	2,376	796	—	10,505

(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 vested portion of the award. For time-based vesting 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 vesting 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)	Restricted share awards issued to associates that were former associates of BNC in connection with the acquisition of BNC.

(5)

Reflects settlement of restricted share units issued in prior years in restricted share awards. The forfeiture restrictions on these restricted share awards lapse in separate equal installments should Pinnacle Financial achieve certain soundness targets over each year of the subsequent vesting period. Half of the awards include a four-year vesting period while the remainder include a three-year vesting period.

(6)

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.


(7)	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.


(8)	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.


(9)	These shares represent forfeitures resulting from recipients whose employment or board membership terminated during the year ended December 31, 2017. Any dividends paid on shares for which the forfeiture restrictions do not lapse will be recouped by Pinnacle Financial at the time of termination or will not be distributed from escrow, as applicable.

Compensation expense associated with the performance-based vesting 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 vesting 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

The following table details the restricted share unit awards outstanding at December 31, 2017:



	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⁾
2017	72,537-109,339	24,916	2017	2	3	N/A
			2018	2	2	N/A
			2019	2	1	N/A

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	21,840
			2016	2	N/A	21,840


(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)	Performance-based vesting restricted stock unit awards granted in 2017, 2016 and 2015 if earned will be settled in shares of Pinnacle Financial Common Stock.


(3)	Restrictions on half of the shares issued as restricted share awards in settlement of units will lapse commensurate with the filing of the Form 10-K for the year ended December 31, 2018 and 2019, respectively, and are reflected as restricted stock awards in the year in which the shares are issued in settlement of the units.

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, 2017, follows (in thousands except per share data):



	2017		2016		2015

Restricted stock expense	$	19,538	$	10,971	$	6,033
Income tax benefit	7,665		4,306		2,368
Restricted stock expense, net of income tax benefit	$	11,873	$	6,665	$	3,665

As of the December 31, 2017, the total compensation cost related to unvested restricted share awards and restricted share units not yet recognized was $30.9 million. This expense is expected to be recognized over a weighted-average period of 2.98 years.