Note 7. Stock Options, Stock Appreciation Rights and Restricted Shares

As described more fully in the Form 10-K, Pinnacle Financial has two equity incentive plans. Additionally, Pinnacle Financial has assumed equity plans in connection with acquisitions of Cavalry Bancorp, Inc. (Cavalry) and Mid-America Bancshares, Inc. (Mid-America) under which it has granted stock options and stock appreciation rights to its employees to purchase common stock at or above the fair market value on the date of grant and granted restricted share awards to employees and directors. At June 30, 2011, there were approximately 664,000 shares available for future issuances under all of these plans.

Common Stock Options and Stock Appreciation Rights

As of June 30, 2011, there were approximately 1,660,000 stock options and 8,200 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 six months ended June 30, 2011 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, 2010		1,795,785		$	19.49		4.82	$	3,692
Granted		-			-
Exercised (2)		(106,919	)		6.19
Forfeited		(20,611	)		27.46
Outstanding at June 30, 2011		1,668,256		$	20.25		4.28	$	3,926
Outstanding and expected to vest as of June 30, 2011		1,636,241		$	20.16		4.28	$	3,898
Options exercisable at June 30, 2011 (3)		1,502,475		$	18.07		4.09	$	3,781

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(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 $15.56 per common share for the approximately 558,000 options and stock appreciation rights that were in-the-money at June 30, 2011.

(2)

There were no stock appreciation rights exercised during the six months ended June 30, 2011.

(3)

In addition to these outstanding options, there were 267,455 warrants outstanding at June 30, 2011 that were issued in conjunction with the CPP. These warrants, if exercised, will result in the issuance of common shares.

During the three months ended June 30, 2011, approximately 22,000 option awards vested at an average exercise price of $26.69 with an intrinsic value of $10,000.

As of June 30, 2011, there was approximately $908,000 of total unrecognized compensation cost related to unvested stock options granted under our equity incentive plans. That cost is expected to be recognized over a weighted-average period of 1.08 years.

During the three and six months ended June 30, 2011, Pinnacle Financial recorded stock option compensation expense of $311,000 and $681,000, respectively, using the Black-Scholes valuation model for awards granted prior to, but not yet vested, as of January 1, 2006 and for awards granted after January 1, 2006, compared to $413,000 and $857,000 for the three and six months ended June 30, 2010. For these awards, Pinnacle Financial has recognized compensation expense using a straight-line amortization method. Stock-based compensation expense has been reduced for estimated forfeitures.

Restricted Shares

Additionally, Pinnacle Financial's 2004 Equity Incentive Plan and the Mid-America Plans provide for the granting of restricted share awards and other performance or market-based awards. There were no market-based awards outstanding as of June 30, 2011 under either of these plans. During the six months ended June 30, 2011, Pinnacle Financial awarded 213,880 shares of restricted common stock to certain Pinnacle Financial associates and outside directors.

A summary of activity for unvested restricted share awards for the six months ended June 30, 2011 is as follows:

	Number			Grant Date Weighted-Average Cost
Unvested at December 31, 2010		640,394		$	17.63
Shares awarded		213,880			14.55
Restrictions lapsed and shares released to associates/directors		(99,558	)		17.60
Shares forfeited		(73,895	)		20.08
Unvested at June 30, 2011		680,821		$	16.43

Pinnacle Financial grants restricted share awards to associates, executive management and outside directors with a combination of time and performance vesting criteria. The following table outlines restricted stock grants that were made, grouped by similar vesting criteria, during the six month period ended June 30, 2011:


Grant Year	Group(1)	Vesting Period in years		Shares awarded		Restrictions Lapsed and shares released to participants(1)		Shares Withheld for taxes by participants(1)		Shares Forfeited by participants		Shares Unvested
Time Based Awards (2)
2011	Associates		5		114,445		-		-		4,425		110,020
Performance Based Awards (3)
2011	Leadership team (4)		10		63,302		-		-		-		63,302
2011	Leadership team		3		21,097		-		-		-		21,097
Outside Director Awards (5)
2011	Outside directors		1		15,036		-		-		-		15,036

(1)

Groups include our employees (referred to as associates above), our executive managers (referred to as our Leadership Team above) and our outside directors. When the restricted shares are awarded, a participant receives voting 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, subject to the limitations of the CPP, may elect to sell shares to pay the applicable income taxes associated with the award.

(2)

These shares vest 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 pretax earnings and soundness targets over each year of the subsequent vesting period (or alternatively, the cumulative vesting period), excluding the impact of any merger related expenses.

(4)

These awards include a provision that the shares do not vest if Pinnacle Financial is not profitable for the fiscal year immediately preceding the vesting date.

(5)

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.

Compensation expense associated with the performance-based restricted share awards is recognized over the performance period that the restrictions associated with the awards are anticipated to lapse based on a graded vesting schedule such that each performance traunche is amortized separately. Compensation expense associated with the time-based restricted share awards is recognized on a straight-line basis over the time period that the restrictions associated with the awards lapse based on the total cost of the award. For the three and six months ended June 30, 2011 and 2010, Pinnacle Financial recognized approximately $762,000 and $1,570,000, respectively, in compensation costs attributable to all restricted share awards issued prior to the end of those periods, compared to $450,000 and $1,192,000, respectively, for the three and six months ended June 30, 2010.

Salary Stock Unit Awards

During the first quarter of 2011, the Human Resources and Compensation Committee of Pinnacle Financial adopted and approved the issuance of Salary Stock Units (SSU) to the named executive officers of the Company. The SSUs are designed to comply with the U.S. Treasury's Interim Final Rule on TARP Standards for Compensation and Corporate Governance issued on June 15, 2009. SSUs will accrue and be earned by the named executive officers over the course of the year during each payroll period, subject to such executive officer's continued employment with the Company. Generally, SSUs granted to named executive officers are immediately vested (and therefore not subject to forfeiture) and are payable in shares of the Company's common stock on, or as soon as administratively practical following, December 30, 2011 (Settlement Date), but in no event later than two and one-half months following the Settlement Date. For the three and six months ended June 30, 2011, Pinnacle Financial recognized approximately $194,000 and $291,000 in compensation costs attributable to the SSUs.