Equity Method Investment

9 Months Ended

Sep. 30, 2015

Note 3. Equity method investment

On February 1, 2015, Pinnacle Bank acquired a 30% interest in Bankers Healthcare Group, LLC (BHG) for $75 million. Pinnacle Bank accounts for this investment pursuant to the equity method for unconsolidated subsidiaries and recognizes its interest in BHG's profits and losses in noninterest income with corresponding adjustments to the BHG investment account. Currently, the equity method of accounting requires that this investment is reported as a net investment on the financial statements, but that embedded goodwill and intangibles should be identified, tested for impairment and amortized over their useful life within the equity method investment line of the balance sheet. Amortization expense associated with BHG's customer list and data processing capabilities is recorded in income from equity method investments. Pinnacle has not yet completed the purchase accounting for this equity method investment. On the acquisition date, Pinnacle Bank estimated its investment included embedded goodwill of $40.8 million and $14.4 million of technology, trade name and customer relationship intangibles. However, the FASB has issued an exposure draft, "Proposed Accounting Standards Update 2015-280 - Investments - Equity Method and Joint Ventures (Topic 323)", that may result in equity method investments moving from the currently prescribed method of accounting to an impairment based model. Pinnacle Bank recorded earnings of $12.7 million, net of approximately $1.6 million in intangible amortization expense for the first nine months of 2015. During the third quarter of 2015, Pinnacle Bank received a $6.4 million dividend from BHG, which under the equity method of accounting reduced the carrying amount of our investment in BHG. Earnings from BHG are included in Pinnacle Bank and Pinnacle Financial's consolidated tax return.

A summary of BHG's financial position and results of operations as of and for the nine months ended September 30, 2015 were as follows (in thousands):

Banker's Healthcare Group

	September 30, 2015

Assets	$	211,451

Liabilities		130,689
Equity interests		80,762
Total liabilities and equity	$	211,451

	For the nine months ended
	September 30, 2015

Revenues		$	102,574
Net income, pre-tax		$	53,002

In connection with the BHG acquisition, Pinnacle Bank borrowed $40 million pursuant to a loan agreement which requires Pinnacle Financial and Pinnacle Bank to maintain certain financial covenants including minimum capital ratios, liquidity requirements and other non-financial covenants. The loan had a 5-year maturity and bore interest at approximately 2.95% per annum. This loan was paid in full during the third quarter of 2015.

While Pinnacle Bank's investment in BHG is expected to have a modest impact on Pinnacle Financial's balance sheet volumes throughout the remainder of 2015, this investment primarily serves to increase and diversify Pinnacle Financial's fee income. Additionally, Pinnacle Financial utilizes BHG's marketing platform to distribute certain of its financial services through BHG's national distribution channel.