Equity Method Investment

3 Months Ended

Mar. 31, 2016

Note 3. Equity method investment

Upon its initial investment in BHG, Pinnacle Bank accounted for this investment pursuant to the equity method for unconsolidated subsidiaries and recognized its interest in BHG's profits and losses in noninterest income with corresponding adjustments to the BHG investment account. Because BHG has been determined to be a voting interest entity of which Pinnacle Financial and Pinnacle Bank control less than a majority of the board seats following the closing of the additional investment in March 2016, this investment does not require consolidation and will continue to be accounted for pursuant to the equity method of accounting.

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The equity method of accounting requires 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 netted within income from equity method investments. At March 31, 2016, Pinnacle Financial has recorded estimated embedded goodwill of $139.1 million and $16.0 million, net of related amortization, for technology, trade name and customer relationship intangibles compared to $50.6 million and $5.1 million, respectively, as of December 31, 2015. Pinnacle has not yet completed the purchase accounting for the subsequent investment in BHG and the estimates of equity embedded goodwill and intangible assets are considered preliminary as of March 31, 2016. During the first quarter of 2016, Pinnacle Financial recorded earnings of $5.5 million, net of approximately $370,000 in intangible amortization expense compared to recorded earnings of $3.6 million, net of approximately $400,000 in intangible amortization expense for the three months ended March 31, 2015. Earnings from BHG are included in Pinnacle Financial's consolidated tax return. Profit from intercompany transactions are eliminated as a part of consolidation. As part of ongoing business transacted with BHG, Pinnacle Bank purchased loans from BHG totaling $2.2 million during the year ended December 31, 2015. No loans were purchased for the period ended March 31, 2016.

A summary of BHG's financial position as of March 31, 2016 and December 31, 2015 and results of operations for the three months ended March 31, 2016 and 2015, were as follows (in thousands):

Banker's Healthcare Group
($ in thousands)
	As of
	March 31, 2016		December 31, 2015

Assets	$	208,244		220,578

Liabilities		141,445		137,147
Membership interests		66,799		83,431
Total liabilities and membership	$	208,244		220,578


	For the three months ended
	March 31, 2016		March 31, 2015

Revenues	$	31,288		27,045
Net income, pre-tax	$	12,154		14,384