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

At Pinnacle Financial's annual shareholders' meeting on April 17, 2018, the shareholders of Pinnacle Financial adopted the 2018 Omnibus Equity Incentive Plan (the "2018 Plan"). The 2018 Plan subsumed the then existing Pinnacle Financial Partners, Inc. 2014 Equity Incentive Plan (the "2014 Plan") including the approximately 500,000 shares in the aggregate that remained available for issuance thereunder on the date the 2018 Plan was approved by shareholders and increased the maximum number of shares of common stock that may be issued to associates, directors and contractors of Pinnacle Financial and Pinnacle Bank by an additional 1.2 million shares. The 2018 Plan permits Pinnacle Financial to reissue outstanding awards that are subsequently forfeited, settled in cash, withheld by Pinnacle Financial to cover withholding taxes or that expire unexercised and are returned to the 2018 Plan. At December 31, 2018, there were approximately 1.7 million shares available for issuance under the 2018 Plan.

The BNC Bancorp 2013 Amended and Restated Omnibus Stock Incentive Plan (the "BNC Plan") was assumed by Pinnacle Financial in connection with the BNC Merger. As of December 31, 2018, the BNC Plan had approximately 9,000 shares remaining available for issuance to existing associates that were previously BNC associates in future periods. No new awards may be granted under plans other than the 2018 Plan except for shares remaining available for issuance to the former BNC associates pursuant to the BNC Plan.

Upon the acquisition of CapitalMark, Pinnacle Financial assumed approximately 858,000 stock options under the CapitalMark Option Plan. No further shares remain available for issuance under the CapitalMark Option Plan. At December 31, 2018, all of the remaining options outstanding were granted under the CapitalMark Option Plan.

Common Stock Options and Stock Appreciation Rights

As of December 31, 2018, of the 176,709 stock options outstanding, approximately 106,173 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 70,536 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 assuming certain conditions are met. 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, 2018 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, 2018 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, 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
Granted	—		—
Stock options exercised	(97,877	)	18.91
Forfeited	—		—
Outstanding at December 31, 2018	176,709		$	22.77	2.23	$	4,123
Options exercisable at December 31, 2018	176,709		$	22.77	2.23	$	4,123


(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 $46.10 per common share at December 31, 2018 for the 176,709 options that were in-the-money at December 31, 2018.


(2)	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, 2018, the aggregate intrinsic value of stock options and stock appreciation rights exercised under Pinnacle Financial's equity incentive plans was $2.7 million, $12.7 million and $21.7 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, 2018, except for windfall tax benefits recorded as a component of income tax expense.

Restricted Shares

A summary of activity for unvested restricted share awards for the years ended December 31, 2018, 2017, and 2016 follows:



	Number		Grant Date Weighted-Average Cost
Unvested at December 31, 2015	866,314		$	31.39
Shares awarded	177,664		48.61
Conversion of previously awarded 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 awarded 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
Shares awarded	180,450		62.40
Conversion of previously awarded restricted share units to restricted share awards	6,200		67.85
Restrictions lapsed and shares released to associates/directors	(400,820	)	46.33
Shares forfeited	(29,159	)	59.51
Unvested at December 31, 2018	692,806		$	55.19

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 the annual leadership team award, 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, 2018. 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
2016	Associates ⁽²⁾	5	143,273	37,574	14,249	17,942	73,508
2017	Associates ⁽²⁾	3 - 5	248,265	42,615	12,687	27,647	165,316
2017	Associates^{(2) (3)}	3 - 5	136,890	85,061	2,415	1,292	48,122
2018	Associates ⁽²⁾	3 - 5	147,601	224	89	4,927	142,361
2018	Associates ^{(2) (3)}	3 - 5	16,777	—	—	500	16,277
Performance Based Awards
2016	Leadership team ⁽⁴⁾	3	43,694	14,991	7,324	—	21,379
2016	Leadership team⁽⁵⁾	3	15,468	3,904	1,250	—	10,314
2017	Leadership team⁽⁴⁾	3	43,680	14,649	7,664	—	21,367
2018	Leadership team ⁽⁴⁾	3	6,200	4,340	1,860	—	—
Outside Director Awards ⁽⁶⁾
2016	Outside directors	1	18,923	15,471	2,266	1,186	—
2017	Outside directors	1	13,677	12,139	1,538	—	—
2018	Outside directors	1	16,072	1,148	—	—	14,924

(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 and time-based vesting awards to Pinnacle Financial's executive officers, 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)	Restricted share awards issued to associates that were former associates of BNC and to Pinnacle Financial's Chairman of the Carolina's and Virginia pursuant to legacy BNC incentive plans assumed by Pinnacle Financial.


(4)	Reflects conversion of restricted share units issued in prior years to restricted share awards. The forfeiture restrictions on these restricted share awards lapse should Pinnacle Financial achieve certain soundness targets at the end of the fifth year following the grant date. See further details of these awards under the caption "Restricted Share Units" below.


(5)	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.


(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 February 28, 2019 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 whose employment or board membership is terminated during each of the years in the three-year period ended December 31, 2018 or for which the performance criteria applicable to the award are not achieved. 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 tranche 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 (all of which are performance units) outstanding at December 31, 2018:



	Units Awarded		Applicable Performance Periods associated with each tranche (fiscal year)	Service period per tranche (in years)	Subsequent holding period per tranche (in years)	Period in which shares to be settled into RSAs⁽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)	Period in which shares to be settled into RSAs⁽²⁾
2018	96,878-145,339	25,990	2018	2	3	2023
			2019	2	2	2023
			2020	2	1	2023
2017	72,537-109,339	24,916	2017	2	3	2022
			2018	2	2	2022
			2019	2	1	2022
2016	73,474-110,223	26,683	2016	2	3	2021
			2017	2	2	2021
			2018	2	1	2021
2015	58,200-101,850	28,378	2015	2	3	2020
			2016	2	2	2020
			2017	2	1	2020


(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 the years ended December 31, 2015 through December 31, 2018, if earned, will be settled in shares of Pinnacle Financial Common Stock in the periods noted in the table, if Pinnacle Bank's ratio of non-performing assets to the assets is less than amounts established in the applicable award agreement.

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, 2018, follows (in thousands):



	2018		2017		2016

Restricted stock expense	$	17,636	$	19,538	$	10,971
Income tax benefit	4,610		7,665		4,306
Restricted stock expense, net of income tax benefit	$	13,026	$	11,873	$	6,665

As of the December 31, 2018, the total compensation cost related to unvested restricted share awards and restricted share units not yet recognized was $32.9 million. This expense is expected to be recognized over a weighted-average period of 1.77 years.