Equity method investment

12 Months Ended

Dec. 31, 2022

Equity Method Investments and Joint Ventures [Abstract]

Note 2. Equity Method Investment

On February 1, 2015, Pinnacle Bank acquired a 30% interest in Bankers Healthcare Group, LLC (BHG) for $75 million in cash. On March 1, 2016, Pinnacle Bank and Pinnacle Financial increased their investment in BHG by a combined 19%, for a total investment in BHG of 49%. The additional 19% interest was acquired pursuant to a purchase agreement whereby both Pinnacle Financial and Pinnacle Bank acquired 8.55% and an additional 10.45%, respectively, of the outstanding membership interests in BHG in exchange for $74.1 million in cash and 860,470 shares of Pinnacle Financial common stock valued at $39.9 million. The investment in BHG previously held by Pinnacle Financial was contributed to Pinnacle Bank effective September 30, 2022.

On March 1, 2016, Pinnacle Financial, Pinnacle Bank and the other members of BHG entered into an Amended and Restated Limited Liability Company Agreement of BHG and have subsequently entered into a Second Amended and Restated Limited Liability Company Agreement on February 2, 2021. The Second Amended and Restated Limited Liability Company Agreement, provides for, among other things, the following terms:

•co-sale rights for Pinnacle Bank in the event the other members of BHG decide to sell all or a portion of their ownership interests; and

•a right of first refusal for BHG and the other members of BHG in the event that Pinnacle Bank decides to sell all or a portion of its ownership interests, except in connection with a transfer of its ownership interests to an affiliate or in connection with the acquisition of Pinnacle Financial or Pinnacle Bank or a merger in which Pinnacle Financial or Pinnacle Bank is not the surviving entity.

Pinnacle Financial accounts for this investment pursuant to the equity method for unconsolidated subsidiaries and will recognize 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 controls less than a majority of the board seats, this investment does not require consolidation and is accounted for pursuant to the equity method of accounting. Additionally, Pinnacle Financial did not recognize any goodwill or other intangible assets associated with these transactions as of the respective purchase dates, however, it will recognize accretion income and amortization expense associated with the fair value adjustments to the net assets acquired including the fair value of certain of BHG's liabilities which are recorded as a component of income from equity method investment, pursuant to the equity method of accounting.

In accordance with Regulation S-X 3-09, the audited consolidated balance sheets of BHG as of September 30, 2022 and 2021, and the related consolidated statements of income, comprehensive income, members’ equity, and cash flows for each of the two years in the period ended September 30, 2022 are filed herewith as Exhibit 99.1 and the audited consolidated balance sheets of BHG as of September 30, 2021 and 2020, and the related consolidated statements of income, comprehensive income, members’ equity, and cash flows for each of the two years in the period ended September 30, 2021 are filed herewith as Exhibit 99.2, as a result of the fact that Pinnacle Bank’s share of BHG’s pre-tax net income for the year ended December 31, 2022 exceeded 20% of Pinnacle Financial’s consolidated pre-tax net income for the same period. BHG has a fiscal year-end of September 30th.

For each of the fiscal years in the period from December 31, 2016 through December 31, 2021, Pinnacle Financial included summarized financial information for BHG as of and for the periods presented in the footnotes to Pinnacle Financial’s consolidated financial statements in its Annual Reports on Form 10-K in accordance with Regulation S-X 4-08(g), as a result of the fact that Pinnacle Financial’s share of BHG’s pre-tax net income exceeded 10%, but not 20%, of Pinnacle Financial’s consolidated pre-tax net income for the relevant periods presented.

At December 31, 2022, Pinnacle Financial has recorded technology, trade name and customer relationship intangibles, net of related amortization, of $6.3 million compared to $6.8 million as of December 31, 2021. Amortization expense of $512,000 was included in Pinnacle Financial's results for the year ended December 31, 2022 compared to $752,000 for 2021 and $1.2 million for 2020. Accretion income of $718,000 was included in Pinnacle Financial's results for the year ended December 31, 2022, while $1.5 million of accretion income was recorded in 2021 and $2.1 million was recorded in 2020. Additionally, at December 31, 2022, Pinnacle Financial had recorded accretable discounts associated with certain liabilities of BHG of $500,000 compared to $1.2 million as of December 31, 2021.

During the year ended December 31, 2022, Pinnacle Financial and Pinnacle Bank received dividends from BHG of $63.1 million in the aggregate, compared to $70.0 million during the year ended December 31, 2021 and $53.0 million during the year ended December 31, 2020. Pinnacle Financial's and Pinnacle Bank's share of earnings from BHG are included in Pinnacle Financial's consolidated tax return. Profits from intercompany transactions are eliminated.

Pinnacle Bank has a participating interest in a $750.0 million revolving line of credit for the benefit of BHG in the amount of $150.0 million and a $150.0 million line of credit for the benefit of BHG in the amount of $30.0 million. At December 31, 2022, there was $88.3 million and $10.0 million outstanding balances on the lines related to Pinnacle Bank's interest in the lines, respectively. The lines accrue interest at SOFR plus 200 basis points and are secured by all assets of BHG. The credit agreements contain covenants requiring BHG to maintain certain financial ratios and satisfy certain other affirmative and negative covenants. At December 31, 2022, neither BHG nor the originating bank had represented to Pinnacle Bank that BHG was not in compliance, in all material respects, with these covenants.

BHG partners with third party lenders, including Pinnacle Bank, to facilitate loan originations as part of BHG’s alternative financing portfolio, whereby BHG acts as the marketing firm and refers loans to the third party lenders for funding. The third party lenders receive a fee for each loan funded and subsequently sold to BHG. These loans are ultimately sold through BHG's network of clients, which includes Pinnacle Bank. During the years ended December 31, 2022, 2021 and 2020, respectively, BHG purchased $1.0 billion, $646.6 million and $453.8 million of loans originated by Pinnacle Bank, respectively. During the years ended December 31, 2022, 2021 and 2020, Pinnacle Bank purchased $125.6 million, $276.7 million and $100.0 million, respectively, of loans from BHG at par pursuant to BHG's joint venture loan program whereby BHG and Pinnacle Bank share proportionately in the credit risk of the acquired loans based on the rate on the loan and the rate of the purchase. The yield on this portfolio to Pinnacle Bank is anticipated to be between 4.50% and 6.00% per annum. At December 31, 2022 and 2021, there were $350.6 million and $319.1 million, respectively, of BHG joint venture program loans held by Pinnacle Bank.

The following summary of BHG's financial position and results of operations as of December 31, 2022 and 2021 and for the years ended December 31, 2022, 2021 and 2020 are presented as unaudited due to BHG's fiscal year end being September 30 (in thousands):


Banker's Healthcare Group	December 31, 2022		December 31, 2021
Assets	$	4,375,643	$	2,724,542

Liabilities	$	3,821,725	$	2,355,256
Equity interests	553,918		369,286
Total liabilities and equity	$	4,375,643	$	2,724,542


	For the year ended December 31,
	2022		2021		2020
Revenues	$	1,110,230	$	735,506	$	457,928
Net income, pre-tax	$	295,186	$	241,051	$	171,964