Note 14. Stock Options, Stock Appreciation Rights, Restricted Shares and Salary Stock Units

Pinnacle Financial has two equity incentive plans under which it has granted stock options to its employees to purchase common stock at or above the fair market value on the date of grant and granted restricted share, restricted stock unit and salary stock unit awards to employees and directors. As a result of an amendment to the 2004 Plan approved by stockholders on April 17, 2012, total shares remaining available for issuance under the 2004 Equity Incentive Plan were increased, and at December 31, 2012, totaled approximately 764,000.

During the first quarter of 2006 and in connection with its merger with Cavalry, Pinnacle Financial assumed a third equity incentive plan, the 1999 Cavalry Bancorp, Inc. Stock Option Plan (the Cavalry Plan). All options granted under the Cavalry Plan were fully vested prior to Pinnacle Financial's merger with Cavalry and expired at various dates between January 2011 and June 2012. In connection with the merger, all options to acquire Cavalry common stock were converted to options to acquire Pinnacle Financial common stock at the 0.95 exchange ratio. The exercise price of the outstanding options under the Cavalry Plan was adjusted using the same exchange ratio. All other terms of the Cavalry options were unchanged. At December 31, 2012, all shares of Pinnacle Financial common stock which could be acquired by the participants in the Cavalry Plan had been exercised and none remained outstanding.

On November 30, 2007 and in connection with its merger with Mid-America, Pinnacle Financial assumed several equity incentive plans, including the Mid-America Bancshares, Inc. 2006 Omnibus Equity Incentive Plan (the Mid-America Plans). All options and stock appreciation rights granted under the Mid-America Plans were fully vested prior to Pinnacle Financial's merger with Mid-America and expire at various dates between June 2011 and July 2017. In connection with the merger, all options and stock appreciation rights to acquire Mid-America common stock were converted to options or stock appreciation rights, as applicable, to acquire Pinnacle Financial common stock at the 0.4655 exchange ratio. The exercise price of the outstanding options and stock appreciation rights under the Mid-America Plans were adjusted using the same exchange ratio with the exercise price also being reduced by $1.50 per share. All other terms of the Mid-America options and stock appreciation rights were unchanged. At December 31, 2012, there were 138,570 Pinnacle shares which could be acquired by the participants in the Mid-America Plans at exercise prices that ranged between $12.89 per share and $20.41 per share. At December 31, 2012, there were approximately 84,000 shares available for issue under the Mid-America Plans to associates of Pinnacle Financial that were associates of Mid-America or its affiliates at the time of the merger.

Common Stock Options and Stock Appreciation Rights

As of December 31, 2012, of the approximately 1,311,000 stock options and 7,300 stock appreciation rights outstanding, 470,000 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 840,000 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 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 and stock appreciation rights granted under the Cavalry Plan and Mid-America Plans 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, 2012 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, 2009		2,149,774		$	17.54
Granted		-			-
Stock options exercised		(316,014	)		6.45
Stock appreciation rights exercised (2)		(13	)		15.60
Forfeited		(37,962	)		21.89
Outstanding at December 31, 2010		1,795,785		$	19.49
Granted		-			-
Stock options exercised		(163,829	)		6.20
Stock appreciation rights exercised (2)		-			15.60
Forfeited		(50,918	)		23.44
Outstanding at December 31, 2011		1,581,038		$	20.81
Granted		-			-
Stock options exercised		(245,201	)		6.78
Stock appreciation rights exercised (2)		(28	)		15.60
Forfeited		(17,108	)		25.90
Outstanding at December 31, 2012		1,318,701		$	23.36	3.14	$ 2,203
Outstanding and expected to vest at December 31, 2012		1,318,701		$	23.36	3.14	$ 2,203
Options exercisable at December 31, 2012		1,286,030		$	23.40	3.10	$ 2,203

(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 $18.84 per common share at December 31, 2012 for the 331,571 options and stock appreciation rights that were in-the-money at December 31, 2012.

(2)	The 232 stock appreciation rights exercised during 2010 settled in 13 shares of Pinnacle Financial common stock. There were no stock appreciation rights exercised during 2011. The 348 stock appreciation rights exercised during 2012 settled in 28 shares of Pinnacle Financial common stock.

During the year ended December 31, 2012, approximately 97,155 option awards vested at an average exercise price of $27.58. Those awards which vested had no intrinsic value. During each of the years in the three-year period ended December 31, 2012, the aggregate intrinsic value of options and stock appreciation rights exercised under Pinnacle Financial's equity incentive plans was $2,501,000, $1,330,000 and $1,919,000, respectively, determined as of the date of option exercise.

As of December 31, 2012, there was approximately $12,470 of total unrecognized compensation cost related to unvested stock options granted under our equity incentive plans. That cost will be recognized during the first quarter of 2013.

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, 2012, 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, 2012, 2011, and 2010 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, 2012 was as follows:

	Awards granted with the intention to be classified as incentive stock options		Non-qualified stock option awards		Totals
For the year ended December 31,2012:
Stock-based compensation expense	$	-	$	394,466	$	394,466
Deferred income tax benefit		-		154,749		154,749
Stock-based compensation expense after deferred income tax benefit	$	-	$	239,717	$	239,717
Impact on per share results from stock-based compensation:
Basic	$	0.00	$	0.01	$	0.01
Fully diluted	$	0.00	$	0.01	$	0.01

For the year ended December 31,2011:
Stock-based compensation expense	$	-	$	1,196,059	$	1,196,059
Deferred income tax benefit		-		469,214		469,214
Stock-based compensation expense after deferred income tax benefit	$	-	$	726,845	$	726,845
Impact on per share results from stock-based compensation:
Basic	$	0.00	$	0.02	$	0.02
Fully diluted	$	0.00	$	0.02	$	0.02

For the year ended December 31,2010:
Stock-based compensation expense	$	46,058	$	1,631,235	$	1,677,293
Deferred income tax benefit		-		639,933		639,933
Stock-based compensation expense after deferred income tax benefit	$	46,058	$	991,302	$	1,037,360
Impact on per share results from stock-based compensation:
Basic	$	0.00	$	0.03	$	0.03
Fully diluted	$	0.00	$	0.03	$	0.03

There have been no options granted by Pinnacle Financial since 2009.

Restricted Shares

Additionally, Pinnacle Financial's 2004 Equity Incentive 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, 2012 under the 2004 Equity Incentive Plan. During the three-year period ended December 31, 2012, Pinnacle Financial awarded 315,069 shares in 2010, 361,966 shares in 2011 and 156,645 shares in 2012 of restricted common stock awards to certain Pinnacle Financial associates and outside directors.

A summary of activity for unvested restricted share awards for the years ended December 31, 2012, 2011, and 2010 follows:

	Number			Grant Date Weighted-Average Cost
Unvested at December 31, 2009		480,884		$	21.03
Shares awarded		315,069			14.35
Restrictions lapsed and shares released to associates/directors		(80,028	)		18.60
Shares forfeited		(75,431	)		22.37
Unvested at December 31, 2010		640,394		$	17.63
Shares awarded		361,966			13.38
Restrictions lapsed and shares released to associates/directors		(90,406	)		17.62
Shares forfeited		(62,251	)		20.66
Unvested at December 31, 2011		849,703		$	15.61
Shares awarded		156,645			16.48
Restrictions lapsed and shares released to associates/directors		(211,913	)		16.28
Shares forfeited		(54,526	)		18.23
Unvested at December 31, 2012		739,909		$	15.45

Pinnacle Financial grants restricted share awards to associates, 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, 2012. 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(1)		Shares Withheld for taxes by participants(1)		Shares Forfeited by participants		Shares Unvested
Time Based Awards (2)

2010	Associates		5		140,849		41,537		10,621		18,108		70,583
2011	Associates		5		144,145		21,463		6,246		12,297		104,139
2012	Associates		5		141,665		-		-		7,400		134,265
Performance Based Awards (3)
2010	Leadership team (4)		10		59,568		11,392		3,280		-		44,896
2010	Leadership team (5)		3		39,250		-		-		-		39,250
2010	Leadership team (6)		2		58,203		42,110		16,093		-		-
2011	Leadership team (4)		10		152,093		7,005		2,103		-		142,985
2011	Leadership team (5)		3		29,595		-		-		-		29,595
2011	Leadership team (5)		3		21,097		5,581		1,465		-		14,051
Outside Director Awards (7)
2010	Outside directors		1		17,199		14,882		2,317		-		-
2011	Outside directors		1		15,036		10,339		2,191		2,506		-
2012	Outside directors		1		14,980		-		-		-		14,980

(1)

Groups include our employees (referred to as associates above), our executive managers (referred to as our Leadership Team above) and our outside directors. Included in the Leadership Team awards noted above are awards to our named executive officers. When the restricted shares are awarded, a participant receives voting rights with respect to the shares, but is not able to transfer the shares other than to Pinnacle Financial in satisfaction of withholding tax obligations until the later of the date that the forfeiture restrictions have lapsed and the date we redeemed the remaining outstanding shares of Series A preferred stock. Once the forfeiture restrictions lapse, the participant is taxed on the value of the award and may elect to sell shares to pay the applicable income taxes associated with the award or have these shares remitted to Pinnacle Financial.

(2)	These shares vest in equal annual installments on the first five anniversary dates of the grant.

(3)

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 (or alternatively, the cumulative vesting period), excluding the impact of any merger related expenses. For those grants with a 10 year vesting period, the vesting period for an individual award is equal to ten years or the number of years remaining before an associate reaches the age of 65 whichever is less.

(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)

The forfeiture restrictions on these restricted share awards lapse in installments as follows: 66.6% on the second anniversary date should Pinnacle Financial achieve certain earnings and soundness targets, and 33.4% on the third anniversary date should Pinnacle Financial achieve certain earnings and soundness targets in each of these periods (or, alternatively, the cumulative three-year period).

(6)	The forfeiture restrictions on these restricted share awards lapse in one lump sum on the second anniversary date of the grant so long as Pinnacle Financial is profitable for the fiscal year immediately preceding the vesting date.

(7)

Restricted share awards are issued to the outside members of the board of directors in accordance with their board compensation plan. Restrictions lapsed on the one year anniversary date of the award based on each individual board member meeting his/her attendance goals for the various board and board committee meetings to which each member was scheduled to attend. All board members who had been granted these restricted shares met their attendance goals with the exception of two board members during 2011 which resigned their board seats and forfeited their restricted share awards of 1,253 shares each.

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, 2012, follows:

	2012		2011		2010

Restricted stock expense (1)	$	3,270,028	$	3,239,677	$	2,303,720
Income tax benefit		1,282,832		1,270,925		903,749
Restricted stock expense, net of income tax benefit	$	1,987,196	$	1,968,752	$	1,399,971
Impact on per share results from restricted stock expense:
Basic	$	0.06	$	0.06	$	0.04
Fully diluted	$	0.06	$	0.06	$	0.04

(1)

During the years ended December 31, 2011, and 2010, $149,000 in previously expensed compensation associated with certain tranches of performance-based restricted share awards was reversed when Pinnacle Financial determined that the performance targets required to vest the awards, which was previously expected to be met, were unlikely to be achieved.

Restricted Stock Units

Pinnacle Financial granted 144,350 restricted share units to the senior executive officers and the Leadership Team in the first quarter of 2012. These restricted share units will be settled with the issuance of 130,875 restricted shares upon the filing of Pinnacle Financial's 2012 Annual Report on Form 10-K. Further, following the redemption of the preferred stock issued to the U.S. Treasury as a part of the CPP, the Human Resources and Compensation Committee (HRCC) also granted 82,429 restricted stock units to our senior executive officers in the second quarter of 2012. These restricted share units will be settled with the issuance of 68,828 restricted share awards upon the filing of Pinnacle Financial's 2012 Annual Report on Form 10-K. The number of restricted shares that will be issued in settlement of the restricted share units was determined based upon the achievement of certain predetermined profitability goals for 2012 that were established on January 13, 2012 by the HRCC. The number of restricted shares issuable in settlement of these restricted share units ranged between 0% and 100% based on the level of 2012 profitability. Once converted to restricted share awards with a grant date in 2013, the forfeiture restrictions on the number of restricted shares issued in settlement of these restricted share units will lapse in 20% increments over the following five years based on the achievement of soundness thresholds to be set by the HRCC in January of each respective fiscal year.

Salary Stock Unit Awards

During 2011, the HRCC of Pinnacle Financial adopted and approved the issuance of Salary Stock Units (SSU) to Pinnacle Financial's named executive officers. The SSUs were designed to comply with the Treasury's Interim Final Rule on TARP Standards for Compensation and Corporate Governance issued on June 15, 2009. SSUs were accrued and 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 Pinnacle Financial. The SSUs granted to named executive officers in 2012 were immediately vested (and therefore not subject to forfeiture) and were payable in shares of Pinnacle Financial's common stock on, or as soon as administratively practical following, December 30, 2012 (Settlement Date), but in no event later than two and one-half months following the Settlement Date. Following the redemption of all of the remaining outstanding preferred stock issued to the Treasury as part of the CPP, the HRCC terminated issuances of SSUs to these named executive officers effective June 30, 2012. No share issuance and no expense was recorded following this termination. For the year ended December 31, 2012, Pinnacle Financial issued 57,508 SSUs and recognized approximately $1,000,000 in compensation costs attributable to the SSUs compared to 54,526 and approximately $777,000 for the year ended December 31, 2011. Effective December 31, 2012, the 57,508 SSUs issued in 2012 were settled into 44,133 shares of Pinnacle Financial common stock, net of the 13,375 shares which were withheld for taxes compared to 42,688 shares, net of 11,838 shares which were withheld for taxes which were settled effective December 31, 2011 in relation to the 54,526 SSUs granted in 2011.