Pinnacle Financial Partners - Earnings Call - Q1 2017
April 18, 2017
Transcript
Speaker 0
Good morning, everyone, and welcome to the Pinnacle Financial Partners First Quarter twenty seventeen Earnings Conference Call. Hosting the call today from Pinnacle Financial Partners is Mr. Terry Turner, Chief Executive Officer and Mr. Harold Carpenter, Chief Financial Officer. Please note Pinnacle's earnings release and this morning's presentation are available on the Investor Relations page of their website at www.pnfp.com.
Today's call is being recorded and will be available for replay on Pinnacle's website for the next ninety days. At this time, all participants have been placed in a listen only mode. The floor will open for your questions following the presentation. Before we begin, Pinnacle does not provide earnings guidance or forecast. During this presentation, we may make comments, which may constitute forward looking statements.
All forward looking statements are subject to risks, uncertainties and other facts that may cause the actual results, performance or achievements of Pinnacle Financial to differ materially from any results expressed or implied by such forward looking statements. Many of such factors are beyond Pinnacle Financial's ability to control or predict and listeners are cautioned not to put undue reliance on such forward looking statements. A more detailed description of these and other risk factors are contained in Pinnacle Financial's most recent annual report on Form 10 ks. Pinnacle Financial disclaims any obligation to update or revise any forward looking statements contained in this presentation, whether as a result of new information, future events or otherwise. In addition, these remarks may include certain non GAAP financial measures as defined by SEC Regulation G.
A presentation of the most directly comparable GAAP financial measures and a reconciliation of the non GAAP measures to the comparable GAAP measures will be available on Pinnacle Financial's website at www.pnfp.com. With that, I am now going to turn the presentation over to Mr. Terry Turner, Pinnacle's President and CEO.
Speaker 1
Thank you, operator. Good morning. We appreciate you being on the call with us this morning. We always try to begin our quarterly earnings call with this dashboard to allow you to quickly assess our performance on all the critical financial metrics. This particular slide is focused on the GAAP measures.
So for the first quarter, we continue to grow the revenue and earnings capacity of the firm. We continue to grow the balance sheet, which we believe predicts the future revenue and earnings growth and our asset quality is in great shape. Frankly,
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at
Speaker 1
least for me, given all the transition and merger integration going on in the company, I believe the non GAAP measures actually provide greater insight into the core run rates on these important metrics. So we'll move to those now. Reviewing these performance metrics, a number of which are non GAAP, I think the overarching conclusion remains that the balance sheet and earnings momentum continue to be strong and the asset quality is pristine. Again, at the top left of the slide, our top line revenue growth continues to be excellent. In the first quarter, revenues excluding security gains and losses were up 19.4% year over year.
They declined a tick on a linked quarter basis, largely due to two less days in the second quarter and the impact of purchase accounting, which Harold will review in greater detail a little later. Bottom line, our fully diluted EPS net of merger related charges was $0.83 up 16.9% year over year. Excluding merger related charges, the ROTCE was 14.89%, relatively high versus period, but down from 16.34% last quarter and from 15.64% in the same quarter last year, largely owing to the follow on offering completed in January. Of course, it's our intent to leverage that up over the foreseeable future. Let's move now to the second row of charts that generally focus on balance sheet growth, which for companies like ours is primary basis for our future revenue and earnings growth.
Loans were up $192,100,000 in the quarter. That's an annualized growth rate of 9.1%. I'll talk a little more about that in just a minute. Core deposits were up $453,300,000 in the quarter. That's an annualized growth rate of 23.1%.
And I believe the single most indicative measure of the success that we're having gathering corporate clients in our markets, it's truly hard to believe. Lastly, even the general target of roughly a 20% dividend payout ratio, We're still growing tangible book value per share excluding merger related charges quarter in and quarter out. Of course, this quarter was also impacted by the accretive follow on offering. And switching now to asset quality on the bottom row of chart, you can see that the asset quality is pristine, NPAs and classified assets are currently below our historical operating range. And net charge offs are very low in the target range that we established in conjunction with our long term profitability targets.
So all in, 1Q twenty seventeen was a fabulous quarter for us with year over year revenue growth of a little more than 19%, year over year core earnings growth of approximately 17% and key asset quality indicators all in great shape. In an effort to put the quarterly numbers in the broader context, I want to review the quarter against our fairly lofty long term strategic targets. Those of you that have followed our firm for any length of time know that coming out of recession back in 2011, we published our profit model and associated performance targets. Since then, we've not only climbed to the originally targeted level, we've actually increased the return on average assets target range twice now to its current level of 1.3% to 1.5%. In conjunction with that return on average asset target, we continue to publish the targets for key performance measures that would result in that overall profitability, specifically the margin, the fees to assets, the expenses to assets and the net charge offs.
As you can see on this slide reflecting the GAAP measurements, first quarter twenty seventeen was another great quarter with a return on average assets of 1.41% inside the new target that we published with the announcement of the B and C and acquisition. And the component measures all are performing well against target. As I've already said, due to the meaningful impact of merger related charges, I personally tend to focus more on profitability metrics adjusted for those merger related charges. On that basis, can really get a picture of our operating momentum here. The first quarter return on average assets is above the midpoint of our new target range at 1.42%.
Net interest margin was within the targeted range at 3.6%, which is the top end of the range. And expenses to assets and net charge offs are all operating inside targeted ranges. Fees to assets were slightly below the target range during the first quarter due in large part to the reduction in the number of days in the quarter versus other quarters during the year. But we would anticipate that come back in the range next quarter. So the quarter was a fabulous quarter when compared to our lofty long term strategic targets.
Also in terms of first quarter highlights, I wanted to comment on several recent accolades. Honestly, goal here is not just to pound our chest, but there's a tendency on quarterly earnings calls to just provide a lot of elevator analysis, meaning just talk about what's up and down. It's easy to focus so much on purchase accounting, equity accounting and the like that we miss the substance and power behind the numbers. So for those of you that are new to the stock, you may be less familiar with what it is that makes our numbers work like they do and whether they're sustainable. When we founded the firm in February, we built it on a philosophy that the end game is to enrich shareholders.
In our case, moving up the chart, can only be done on a sustainable basis if we created the stated client experience is better than the large regionals who currently dominate our markets. And that can only be done to the extent we can attract and retain the best bankers in our markets and excite them about their freedom and ability to serve clients well. The client experience rarely exceeds that of the associate experience. So during the first quarter, we were recognized by Great Place to Work and Fortune Magazine as the seventh best work environment among financial services firms in The U. S.
By Fortune, it's one of the top 100 companies of any variety to work for in The U. S. And by People Magazine is one of the top 50 companies in America who care. We were recognized in 2016 by Grants Research as one of only 18 banks in the country that has effectively achieved a brand of distinction, I guess you would say with clients. In other words, the vast majority of our peers and competitors lack distinction.
In our case, according to independent research, our clients view us as having achieved distinction for being trustworthy and being easy to do business with. Also in the first quarter of twenty seventeen, we're recognized by Forbes as a top quartile performer among the nation's largest 100 banks when considering a basket of traditional bank performance metrics like net interest margin, return on average assets and revenue growth. And most recently, we've earned ISS' best governance ranking further evidence of our commitment to shareholders. And finally, before I hand it over to Harold for a more detailed review of the quarter, let me give an update on building the infrastructure that's intended to propel our future growth. We've been and continue to be talking about not just growing earnings, but about growing the ongoing earnings capacity of the firm.
We always have a number of initiatives that are aimed at perpetuating or accelerating our future growth. Our over earning reputation as an outstanding integrator of banks based on the success we've enjoyed in the previous three deals. I'll talk about talk, I guess, minute about the great growth in hiring and balance sheet volumes in Chattanooga and Memphis, which are our two newest markets. First quarter twenty seventeen was a very busy quarter for us related to the proposed merger with BNC. Most of you will remember on January 22, we announced the transaction.
April 6, we received our regulatory approvals from the FDIC, Federal Reserve, the Tennessee Department of Financial Institutions and the North Carolina Office of the Commissioner of Banking. So at this point, we believe we'll have our shareholder meetings for PNFP and DNC in mid to late June. We'll actually close the merger in mid June to early July. We will actually make the brand conversion to Pinnacle in the September or October timeframe. And as you see on the slide there, we have October, November legacy Pinnacle systems conversion.
I think this is a really important and strategic update here. For those of you that listened and are aware of what our original assumptions going in, we had anticipated that we would go through a phased conversion of the Bank of North Carolina from the Jack Henry Silver Lake system to the Fiserv system that we operate on at Pinnacle. We have determined at this point to do the opposite of that. We intend to convert Pinnacle to the Jack Henry Silver Lake system. We believe that this significantly derisks the integration and conversion effort for several reasons.
One is we believe our ability to manage the change, educate the sales force, conduct the transition in our existing footprint is very strong and powerful and frankly easier than across the larger footprint at the Bank of North Carolina. And secondly, because Bank of North Carolina has been an effective acquirer and integrator of banks. There are a number of their clients who have been through a number of systems integrations in the recent past. And so we can avoid putting them through an additional integration. So again, we think this is a creative approach and one that significantly de risk the integration effort.
We will actually merge our systems and B and C systems data in February. And so the synergy case will be fully deployed in the second quarter of twenty eighteen. As I mentioned, we think the approach does substantially reduce the risk. It accelerates the timing of many of the synergies, but it will delay the realization of a small portion of the synergies by a quarter. Back of the envelope estimate for me might be $1,000,000 in delayed synergy pickup during the first quarter of twenty eighteen.
And again, I think that price is affordable and appropriate for the substantial reduction in risk. Moving on beyond the M and A activities, I think over time, the single most impactful growth strategy we've executed is aggressively hiring the best bankers, brokers and mortgage originators in our markets. It's our primary core competence. We've established reputation as being a great place to work and we're able to leverage that source, recruit, hire, onboard, retain a large number of the best and most productive revenue producers in our markets. For me, that's the best way to propel our organic growth going forward.
2016 was a record year for hiring revenue producers. That pace continued in 1Q twenty seventeen with 11 new revenue producers hired during the quarter. I also want to highlight the fact that we've successfully overlaid our recruiting and hiring methodologies at Memphis and Chattanooga. As I've mentioned, I'll talk further about that in just a few minutes, but I don't want anyone to miss the power of this. We had a 1.42% ROAA adjusted merger cost and still paid for a substantial increase in our future growth capacity.
Lastly, I'd highlight loan growth for quarter at $192,000,000 That's roughly 65% above the 2016 net loan growth. After you adjust for a loan purchase we made last year in conjunction with the lift out of the C and I group from another bank. B and C and released their results last night. And as you may have seen, they continue to aggressively grow their loan book, dollars 165,000,000 in net loan growth in Q1 would be an annualized loan growth rate of 12.1. So again, they continue to perform extremely well.
Now Harold, I'll turn it over to you to let you walk through a more detailed review of quarter. Thanks, Terry. As we anticipated, revenues in the first quarter were impacted by reduced loan discount accretion as well as there have been two fewer days in the first quarter compared to the fourth quarter of last year. We've got a lot going on in this quarter to talk about, so I'm going to move past the volatility, call it, by the calendar, which likely cost us around $2,000,000 in the first quarter. For today, I thought I'd get into net interest income in a little more detail and then finish with fees and expenses as always.
Total spread income was down $646,000 between the fourth and first quarter. The dark green line on the chart denotes revenue per share. Impacting our revenue per share in the first quarter was the capital raise, which we believe diluted our revenue per share by $0.12 As to the blue bars, we anticipated the loan discount accretion that it'd be less than the first quarter and actually ended up being around $3,000,000 less than the first when compared to the fourth. So call our core net interest income is up around $2,000,000 to $2,500,000 between the first and the fourth, excluding purchase accounting. We look forward to the second quarter purchase accounting related to Capital Market, Magna and Avenue should continue to decrease and have less influence on our margins as we're estimating our loan discount accretion in the second quarter will be 10 to 20 basis points of our margin before we consider any impact of Bank of North Carolina should that transaction close in the second quarter.
As many of you know, Bank of North Carolina reported last night based on our review of their information, our first quarter revenues were $74,400,000 compared to $71,000,000 in the fourth quarter or an increase of almost $3,500,000 which is a whale of a number. Excluding the increase in the loan discount accretion of approximately $500,000 net revenue growth of 2,900,000.0 reflects a strong quarter of revenue growth in our view. Over the last two years, we've experienced a lot of change at Pinnacle with more on the horizon. Through all of that, our associates have maintained a key focus on running our franchise very effectively and produce, we believe, outstanding results for our shareholders. Concerning loans specifically, as the chart indicates, average loans for the first quarter were $8,560,000,000 or an increase of $200,000,000 in average loan balances when compared to the fourth quarter, which equates to almost a 10% linked quarter growth rate when annualized.
As we mentioned in our press release, our EOP balances increased by $192,000,000 We believe it was a strong first quarter for us as traditionally our first quarter has not been a strong growth quarter. During last year's first quarter, our loans grew approximately two eighty five million dollars but included in that amount was $169,000,000 which was acquired from another bank in connection with the lift out of several commercial lenders in Memphis. So last year's net growth was 115, which when compared to this year's 192, has us pretty excited about our prospects for the rest of this year. Our second quarter pipelines are almost are 2x and 3x our first quarter pipelines, which we believe is a record for us. As the loan yields, our loan yields decreased from 4.6 last quarter to 4.49% this quarter, impacting our loan yield this
Speaker 3
quarter was purchase accounting accretion, which
Speaker 1
positively impacted yield by 23 basis points compared to 37 basis points in the prior quarter. Excluding purchase accounting, core loan yields actually increased from 4.23 to 4.26 I'll talk about the impact of rate increases in a few moments. Bank of North Carolina reported yesterday that its net growth in average balances was up approximately $165,000,000 or approximately 12% linked quarter annualized, which we believe is a testament to their associates and their ability to stay focused on their business while also in the middle of a transaction. Then again, that's what they told us they could and would do. As to deposits, again here in the fourth quarter, we were able to maintain our low funding costs with only a slight increase in cost.
As to deposit balance, we had a great quarter for deposit growth with average deposits up $3.00 $8,000,000 in the first quarter over the previous quarter, our linked quarter annualized growth rate of 14%. This is on top of a linked quarter growth rate in the fourth quarter of 16%. Even though our average deposit balances increased by 14% linked quarter when annualized, Our deposit costs increased by only three basis points as our cost approximated 36 basis points for the third quarter compared to 33 basis for the fourth quarter. You can see the orange line on the chart and the gap between the orange and green lines is rising as we all anticipated. Our beta factors remain relatively low, but we do anticipate increases in deposit rate as time marches on, but don't expect anything dramatic in the short term.
Bank of North Carolina also reported very strong deposit growth as their average deposits increased by $213,000,000 during the first quarter or 14% linked quarter annualized, while our cost of funds only increased by one basis point. We all consider that to be great work at Bank North Carolina. Concerning our margin and asset sensitivity, the top line shows trends in core margin versus the impact of purchase accounting. As you can see, our GAAP margins have remained fairly consistent, while core margins over the last three quarters appear to be stabilized. We projected 15 to 25 basis points of purchase accounting impact in Q1 and ended up being approximately 21 basis points.
The bottom chart is our attempt to separate our bank into two parts, the client bank and the wholesale bank. We presented this slide on several occasions over the years, but given the changes we thought we'd bring it back this time. The wholesale bank has experienced shrinkage in its margins over the past three years, primarily resulting from the combination of a persistently low interest rate environment and the issuance of $270,000,000 and subordinated debt, including $120,000,000 issuance in the fourth quarter of last year, all used to bolster our total capital allowance. However, our disciplined approach in maintaining shorter duration profile of our investment portfolio paid off in the first quarter as yields increased 18 basis points quarter over quarter. This stabilized the wholesale margin despite the headwind of our latest sub debt issuance.
Going forward, we believe our approach to balancing our investment between fixed and variable rate structures and the fact that we don't anticipate any sub debt issuances in the near term, we expect the wholesale margin to remain relatively stable. The blue margin line is the more critical line and makes up 80% or more of our balance sheet. The blue line on the chart excludes purchase accounting, which has been very volatile as well as the impact of our high yield auto portfolio, which produces yields in the low 20% range. So we believe the blue line more accurately reflects our core client base. In the first quarter, the client margin increased by eight basis points, driven largely by the December rate increase.
We monitor our variable spreads constantly and believe we're maintaining our spreads on our new and renewed credits. Some more sensitivity to that. The top chart is a summary of our balance sheet and is intended to show how much of our balance is repriced on the short end and are more heavily impacted by short term rate moves. So as Fed funds rates increase, our ability to show positive traction is dependent upon several factors primarily involve our holding line on loan spreads in relation to prime based and LIBOR based indexes and managing the beta on our deposit balances effectively. The bottom chart is our current calculation of our twelve month ramp twelve month ramp increasing rate curve at the one hundred and two hundred basis point level, which reflects increasing asset sensitivity for our firm over time.
So we believe we are in a very solid asset sensitive position and our business mix will likely create increasing asset sensitivity. We believe the March Fed funds rate increase benefited us by more than $600,000 to our monthly run rate, so we're hopeful for more of those. We continue to forecast a 25 basis point Fed funds rate increase in late third quarter and another in late fourth quarter of this year. We get a lot of questions about what happens when our balance sheet and Bank of North Carolina's balance sheet come together. We talked about this in some detail on the merger call, but we thought we'd update you today.
Top charts are earning assets and bottom charts are deposits and other funding. As for the balance sheet composition, we are more asset sensitive than Bank of North Carolina with 53% of our earning assets tied to some variable rate with Bank of North Carolina being at 33% combined, we're at 45%. You can see we reduced the percentage of our loan book on forward down to basically an inconsequential amount at 3% As the Bank of North Carolina footprint works on developing their C and I platform, we should see more variable rate product on the asset side of the combined balance sheet, but roughly half of the assets are in variable rate structures currently. On funding, Bank of North Carolina has more longer term product. Again, as the Bank of North Carolina footprint works on developing our C and I platform, we should see more non interest bearing product and more core deposits begin to flow into their balance sheet.
None of the information considers purchase accounting, which will have a meaningful impact on the combined firm's balance sheet, especially in the first two to three years. That said, we continue to like the way this balance sheet is coming together. Switching now to fees, excluding security gains and losses, noninterest income for the fourth quarter increased 70.5% over the same period prior year. Some of the increases attributable to the Avenue acquisition, occurred in July, but not that much. Excluding BHG revenues of almost $8,000,000 for the 2017 From this conversation, our fee income increased by about 9%.
Our residential mortgage group had another outstanding quarter in terms of production with approximately $161,000,000 in loan sales this quarter at a yield spread of 2.75%. Despite the decrease in gross loans sold quarter over quarter, net gains on mortgage loans sold increased. The value of the mortgage pipeline, which is mark to market each quarter increased as of the end of the first quarter compared to the end of the fourth quarter because of increased production heading into the second quarter. This increased production is due to a combination of a lower ten year treasury deal spurring refinancing activity and offset of warmer weather spurring new home purchases in our markets. We feel positive regarding our mortgage pipeline as we head into the second quarter.
Additional income related to insurance commissions increased quarter over quarter due to annual incentive payment received from carriers for positive claims experience. We're reporting BHG revenues of almost $8,000,000 this quarter, down from fourth quarter by about $300,000 We expected a meaningful uptick in BHG revenues in the first quarter compared to the first quarter of last year due to our increased ownership and thus we experienced a 52% increase this first quarter compared to last year. In the second quarter, we're not likely to experience that same level of success compared to the second quarter of last year, but do expect second quarter linked quarter income to increase as we continue to anticipate that net growth for VHG in 2017 should be in the 10% to 15% range, which equates to a 20% increase for Pinnacle given the larger ownership percentage. Interchange revenues continue to show positive traction as we approach the impact to us from the Durbin Amendment on July 1. Excluding the impact of Durbin, our current estimates are that the Durbin Amendment will negatively impact us by approximately 6,500,000.0 to $7,500,000 over the next twelve months or about 1,500,000.0 to $2,000,000 per quarter.
Our revenue from loan swap fees has declined over the last several quarters as many of our clients have opted for current lower coupon variable rate structures. We've also seen a much larger appetite and a much more aggressive pricing for long term fixed rate on balance sheet lending from many of our competitors. Now as to operating leverage, our efficiency ratio on a GAAP basis was 52%, while our core efficiency ratio, excluding merger related charges, was 51%. First, concerning personnel costs. As many of you know, we grant merit raises to our workforce in January with 2017 being no exception.
Our annual merit raises approximated 3.5% increase this year. The run rate for salaries is up approximately 4% annualized, but our headcount is up by 38 FTEs. So given the first quarter is when payroll taxes start over, you would have expected our salary cost to be up by a larger margin in the first quarter. Impacting the first quarter salary number is incentive expense, which in the fourth quarter was heavier due to catch up of incentive cost that we spoke of on the call in January. What we talked about in January was that our fourth quarter twenty sixteen purchase accounting adjustment for loans was more than we anticipated, which resulted in our ability to increase our incentive payout as we achieved elevated earnings targets for the fourth quarter.
Had the purchase accounting not been advantageous, we would have had to reduce our incentives. If you recall, in spite of a 70% earnings growth rate last year, we paid less than target on our incentives to our associates last year. At each quarter end, our incentive plan is tied to corporate results, primarily fully diluted EPS and revenues. We project our annual incentive costs for the full year and then begin accruing to that amount proportionally each quarter. Our first quarter twenty seventeen incentive expense was $2,500,000 less than the amount in the fourth quarter.
Those of you that have followed our story for many years know how our one incentive plan system works and it's based on corporate results, not based on individual sales goals. You also know we set big targets around here, so we'll be working hard to get back those reduced incentives, but we only get it back if we hit our numbers. Comparing the fourth quarter to the first quarter run rates on some other items. During the fourth quarter, we had a meaningful quarterly increase in marketing expense through our sponsorship of various organizations throughout the footprint, most specifically due to our relationship with the Memphis Grizzlies, which we entered into in August. Other expenses down in the fourth quarter of last year as well primarily due to a reduction in various areas with the largest decrease in franchise tax expense caused by increased funding for several of our tax advantaged housing loans where the state of Tennessee insents us to reduce our tax burden.
The run rate for other expense normalized in the first quarter of this year. All things considered, our goal is for personnel costs to increase steadily this year, while other expense growth will be relatively small. Now I'll turn it back over to Jerry so he can wrap up. Thanks, Harold. As part of wrapping up, I want to reiterate our long term strategy.
We currently operate in all four of Tennessee's urban markets. The model that we built and perfected in Nashville going back to the year 2000 has been successfully exported to the other three urban markets in Tennessee. We've now been successful with both de novo starts and market extending acquisitions. And so we believe our current platform should produce a $16,000,000,000 asset bank in these four markets by 2020. That's an updated number.
We see similar growth opportunities in other high growth Southeastern markets. There are a number of attractive high growth markets scattered around the Southeast that are dominated by the same cash regional banks with whom we compete in Tennessee. And so in addition to building a $16,000,000,000 asset bank in Tennessee by 2020, our three year strategic plan contemplated our exploration of opportunities in some of the most attractive Southeastern markets, including Atlanta, Charlotte, Raleigh, Charleston and Richmond. And that has led to our proposed merger with BMC. I mentioned earlier at the beginning of the presentation that I talked in greater detail about the traction that we're getting in Memphis and Chattanooga, our two newest markets.
As you look at the rightmost column on this slide, you see the 1Q twenty seventeen linked quarter percentage increase in loans, core deposits and revenue producers. And for all three line items, loans, deposits and revenue producers, you can see that the growth has been occurring from the very beginning since we did not acquire and integrate these banks until mid to late twenty fifteen. So we believe that these market extending acquisitions have demonstrated that will have one, focusing on businesses and affluent consumers two, hiring and retaining a category of proven professionals and three, competing with improved levels of service and device versus the larger regions that dominate the market is indeed exportable. We get asked a lot about what's next and our outlook going forward. I'm very excited about the position we find ourselves in today.
When we close the BNCN transaction, we'll be located in 12 of the most attractive markets in the Southeast with a proven ability to take share from large regions who have dominated these markets for some time. I think you should expect us to focus our energy in 2017 on the effective integration of BNCN. Rick Calicutt, BNCN's CEO and I have established a number of performance targets, which we believe will enable us to achieve this integration with no loss of momentum for either bank, which is a monumental achievement. And looking at Q1, we're off to a fabulous start. It's our belief that the organic growth potential for our firm in these 12 markets for the foreseeable future is outstanding.
And beyond that, we're likely to have additional de novo and acquisition opportunities to finish building out our remaining targeted markets. It's my current belief that we'll effectively integrate BNC in 2017 and be in a position to pursue additional strategic opportunities in 2018. So just trying to pull all this into a summary, I'd say we've truly established a competitive distinction among the bankers in our markets, which is evidenced by our ongoing recruiting success. We think we have a competitive distinction with our clients, which is evidenced by our balance sheet growth and market share gains as well as the national recognition from Greenwich Research for the brands we've been able to establish with businesses for ease of doing business and trustworthiness. We have consistently produced and expect to continue to produce strong organic asset growth in Tennessee's urban markets, specifically to a $16,000,000,000 asset bank by 2020.
And we believe we can produce a 1.3% to 1.5% core ROA, which is where we now perform. I think the last point, which I believe is really important here is that we've got an advantaged stock that has been rationally deployed. We're fundamentally organic growers at heart. That's what we think about. That's what we love to do.
But we do have an advantaged stock, and that puts us in a position to create even more operating leverage and even more EPS growth, which we believe we've done with Capital Markets and Magna and Avenue and BHG. So in simple terms, I think you should expect a two pronged strategy from us going forward. Number one, continuation of our current organic high growth, high profit plan in Tennessee, the Carolinas and Virginia. And number two, explore expansion to the other high growth Southeastern markets in 2018. Operator, I'll stop there and we'll be glad to take questions.
Speaker 0
Thank you, Mr. Turner. The floor is now open for your questions following the presentation. Our first question is from Catherine Mealor with KBW. Your line is now open.
Speaker 4
Thanks. Good morning, everyone.
Speaker 1
Hi, Catherine.
Speaker 4
First question, I wanted to start on the margin. Your core loan yields moved up about three bps linked quarter as you mentioned, Harold. Can you give a little bit more color on loan pricing, how your contract and new and renewed credits are trending and your outlook for how quickly you think we're going to see an increase in loan yields as we move throughout the rest of the year?
Speaker 1
Yes, Catherine. We're seeing our spreads hold on all of our index price index based pricing products. So we think we're getting a full benefit out of a 25 basis point increase. We think that we're going to we're still projecting one in September. Our customer margins were up.
I think we missed like eight basis points in the first quarter. So that's about a third of a 25 basis point move. So that seems to be reasonable to us. So we believe it's about a $1,800,000 additional net interest income tailwind for us that will help offset the discount accretion that will likely come out this quarter.
Speaker 4
Okay. And then as a follow-up, just thinking big picture on the margin. So in your strategic target slide, you show that you're at the top end of your NIM target. Now some of that is accretable yield of course, but is there an opportunity for that target to move higher with rates moving higher and then as we fold in B and C in or is that still the range in which you think you're comfortable operating?
Speaker 1
Yes. We'll look at it when we get the full effect of Bank of North Carolina, but we think it actually could. It just depends on what it looks like on the day that the accounts are merged in and what the discount accretion is going to be. Catherine, I might just add to Harold's comments. You've been around and seen these numbers a long time.
We started with a lower ROA target. We've raised it twice. When we move it, have moved some of those subsidiary targets, in other words, the margin, the fees, the assets, expenses, assets and net charge off. We've moved those more rapidly than we have the ROA target itself. So when we go through the planning cycle, the idea is here that we're going to figure out how to hit the ROA target and we'll move those other components as we need to based on what the market offers us.
So again, just to say simply what Harold said, there is perhaps an opportunity to increase the margin target.
Speaker 4
Okay. All right. Thanks for the color. Appreciate it.
Speaker 0
Our next question is from Michael Rose with Raymond James. Your line is now open.
Speaker 5
Hey, good morning, guys. How are you?
Speaker 1
Good. How are you?
Speaker 5
Good. Hey, sorry if I missed this. Been hopping around some calls this morning. Harold, can you talk about the increase in the interest bearing deposit yield? Looked like it was up about 10 bps quarter to quarter.
Was there any sort of promotional items in there? And then if you could maybe split versus were the increases more on the retail side or on the commercial side? Just any color would be helpful. Thanks.
Speaker 1
Yes. I think it's all going be on the commercial side, Michael. We the total our betas in the aggregate are really low. We do have some large client depositors that pay more attention what the Fed funds rates are, and we do have quite a few of them that are tied to Fed funds. So I think in that product category, we've got some of those deposits in that particular product category.
Speaker 5
Okay. So given the positive mix shift change this quarter, and obviously, we got the rate hike this quarter, which you mentioned, we probably shouldn't expect to see this type of magnitude of deposit yield cost increases in the next couple of quarters assuming no rate hikes, correct?
Speaker 1
Assuming no rate hikes, yes. That's correct.
Speaker 5
Okay. That's helpful. And then maybe for Terry, I just wanted to circle back on some of the comments you've made around BNCN and hiring of commercial lenders. As I look at BNCN, they tend to be more of a CRE focused bank. What are the expectations for hiring commercial lenders in the BNCN franchise?
And how does that translate or triangulate to kind of the accretion guidance that you've given? Thanks.
Speaker 1
Yes. Think let me start with the accretion guidance that we've given. In fact, we've seen no revenue synergy. So in other words, we built the synergy case on cost takeouts exclusively. So hiring additional C and I build out a C and I platform would be outside and beyond the accretion guidance that we have given.
I think in terms of expectation, you would expect us to build that out build those markets out in a format similar to what we described there for Chattanooga and Memphis. I think in the case of Chattanooga, Capital Market, of course, was a C and I dominated platform. But if you recall, Magna was a CRE dominated platform. And so what we've done is hire a number of C and I and private banking type FAs in Memphis. And again, you can see the traction that we're getting, the volume hiring that we're doing in that market and the growth that we're getting in that market on both loans and deposits, think really being driven in some large extent by the addition of the C and I platform.
And so I would expect that same thing to happen. The markets have the greatest feel for us and we'll pursue most quickly on the commercial front would be markets like Charlotte, markets like Raleigh, markets like Charleston, markets like Greenville. And so again, I think those four markets in particular have great commercial all great commercial promise. And Rick Kalica has already begun his recruiting efforts, think, was successful on one great hire and has a number in the pipeline that he is pursuing along the C and I front. So I guess long winded answer to say, we expect it to impact those big markets in North Carolina the same as it has the market extensions that we've done here, and we expect that to be over the above the accretion guidance that we've given.
Speaker 5
Okay. And maybe just one final follow-up, Terry, to that response. It seems like the competition potentially for lenders in The Carolinas might be a little bit more intense just because there are a couple of banks that are of similar size to you guys, where in the markets in Tennessee, you guys clearly stand out as kind of the premier bank in the state. Can you talk about acquisition costs of lenders? And if you're not able to attract the lenders that you think you are, what would be the backup plan as we move forward?
Speaker 1
Yes, I think, I guess, relative to a backup plan, again, I just would remind you that we don't need any of that to hit the synergy case. So again, the build out of that program is incremental, not like, hey, we can't get the synergy, we can't get the accretion targets without doing it. So maybe I'll just start there. I think on the incremental side, Michael, you know this, man, I can't predict the future. I don't know what's going to happen in every market.
I don't know what the competitive response is going to be in every market. But I will say this, that's the same question they asked when we started here in Nashville. It's the same thing they asked when we went to Knoxville. It's the same thing that was asked when we went to Memphis and Chattanooga. And so in each of those markets, we found our way to hire great bankers in the markets and have them move their book of business over here.
I think one of the things that the reason that it has worked that way in the markets that we've been in is because primarily because of difficult experience for lenders in these large regional banks. In other words, again, I don't want to rattle on too long about it, Michael, but the experience for a middle market lender in a large regional company is a difficult one, lots of bureaucracy, lots of red tape, difficult to get approvals done, long length of time, frequently disappointed clients being talked to by credit officers like you're foolish, all those sorts of things. And so that's what we don't do and that's the advantage that we have over large regional banks. My belief is that it will work in those markets for the same reason. I'll just comment quickly.
Again, can't predict the future. I don't want to overplay it. I would say I am optimistic that we'll be successful in the preliminary success that Rick has had. I think if you were to talk to Rick, Rick would say, yes, we were trying to build our C and I platform. We were having modest success, but he didn't get to hire all the people he wanted to for a number of reasons, which included the size of the house limit for lending, the robustness of the treasury management platform and many people perception, as you mentioned, that they're more of a CRE bank than a C and I bank and so would that hold up.
While all those objections have been eliminated by our combination and I think he's finding that in the hiring process and the receptiveness of people as they're about recruiting. I'll just offer one more comment. One of the analysts, one of the sell side analysts who has covered us for a long time was doing some background work in the Carolinas and was calling some of the banks that you're likely referring to there that would be generally be aggressive growers, challenger brands, if you will. And he told me, he said, Jerry, normally when I make those kinds of calls and ask people what they're looking at in the market, what they see, they generally tell me, hey, we're excited. This is going to create a lot of hiring opportunity for us because we're going to be able to step in there and take advantage of the transition.
He said, not one person told me that. In fact, they were talking about what they're doing and trying to discuss themselves against your recruiting and poaching techniques. So again, Michael, I don't know what the future holds and I can't make any promises about what will transpire. But again, I do believe that the model that we have of hiring and engaging these middle market bankers will work in the Carolinas and Virginia much like it does in Tennessee.
Speaker 5
Terry, I appreciate the color. If anybody can do it's definitely you guys. So appreciate the context. Thanks.
Speaker 1
All right.
Speaker 0
Our next question is from Tyler Stafford with Stephens Inc. Your line is now open.
Speaker 2
Hey, good morning, guys.
Speaker 1
Good morning, Tyler.
Speaker 2
Maybe first just a follow-up on Catherine's earlier question just about the long term operating targets. So when you guys announced the B and C and deal, did increase the ROA target at the time, but you left all the other operating targets the same. But BNC was operating roughly 65 bps of fee income to average assets. And then with Durbin, it seems difficult to get back to that long term fee income target of that 110,000,000 to 130,000,000 But then conversely, with all the cost savings that you're going to get with the deal, it implies a fairly significant expense ramp to get back to within those long term expense targets. So I'm just wondering if BNC and its size changes the long term operating profile of Pinnacle or if there's something there that I'm missing.
Speaker 1
No, I think it will, particularly in the two categories that you're talking about around fees and expenses, I think we've got some algebra to do in both those categories, Tyler.
Speaker 2
Okay. And maybe just a Part B to that, just a clarity question on the long term expense target. It currently right now, is it the 2.1% to 2.3% that's stated in the earnings release? Or is it the 2% to 2.2% that's in the presentation?
Speaker 1
2% to 2.2%, I think.
Speaker 2
Okay. The release says 2.1 to 2.3, but you think it's the two point zero to 2.2?
Speaker 1
I think so, yes.
Speaker 2
Okay. And then just going back to Terry's comments of the Durbin impacts, the 1,500,000 I believe you said of negative impacts from Durbin. Does that include BNC or is that just stand alone Pinnacle?
Speaker 1
That's stand alone Pinnacle. I think BNC is about $500,000 to $1,000,000
Speaker 2
Okay. And then maybe just last one for me, a bigger picture BHG question. What do you think that the longer term, I guess, impacts would be from higher rates to BHG's business? Is that you think higher rates is a hindrance there? Does it make it more profitable?
What are the impacts to BHG with rates?
Speaker 1
Yes. We've had a lot of conversations about that with them. I think it's kind of like the way we look at beta factors. Right now, we're not experiencing any kind of uptick in our deposit costs. They're not seeing any slowdown in their spread between the buy rates and the contract rates with borrowers.
So they think that will continue, at least in the short term, but there's probably at some point as rates get higher and higher that there may be some, I guess, reduction in those spreads on those buy rates. But right now, it doesn't look like there's anything slowing them down.
Speaker 2
Okay. Thanks, Harold. Nice quarter, guys. I'll hop out.
Speaker 0
Our next question is from Stephen Scouten with Sandler O'Neill. Your line is now open.
Speaker 6
Hey, guys. Good morning. How are doing?
Speaker 1
Good.
Speaker 6
Good, good. Hey, question for you on the loan growth trends. Obviously, guys had a pretty strong quarter of growth given what's normally a little seasonally slower, but obviously still below the kind of low double digit targets you've traditionally given. You also seem to mention more fixed rate loan competition, so maybe some competitive pressures that could be of some mild concern. So can you talk to what your expectations are moving forward?
And if there's any change to those expectations, maybe specifically by asset class?
Speaker 1
Repeat the last part of that, Stephen.
Speaker 6
Maybe even specifically like by asset class or by loan component type, if there's any areas where you're seeing concern or weakness or more competition that's maybe irrational, that sort of thing?
Speaker 1
Yes. I think Harold's comments on fixed rate is we see that as a, I guess, marketing or sales weapon by a number of banks. I think you would see it across a number of asset classes. You would see it used frequently for small business lending. You see ten to fifteen year fixed rates with a three handle on it from time to time.
As a small business asset class, we see it to some extent on owner occupied real estate and maybe to a lesser extent in the CRE bucket. Generally, if it's deployed there by smaller banks, I think the larger banks tend to be more rational in terms of pricing that particular asset. So I think in terms of if your question, when you talk about the strength of the various asset classes, I'm interpreting that to be strength in terms of marketing momentum as opposed to asset quality some of Correct.
Speaker 7
Yes.
Speaker 1
I think so. I think clearly there's plenty of loan demand for CRE. I think the C and I loan demand is less strong. I think, Stephen, we've had this conversation a number of times. You had the euphoria following the Trump election and you had excitement and optimism among business owners.
But the truth is until somebody tells them what the tax rate is and when it's effective and what the cost of healthcare is and some of those kinds of things, you just it doesn't translate into loan demand. And so I think the C and I loan demand is not that strong, which again for us and one of the things I try to help people get is we're a market share taker. Our growth is not so dependent on loan demand, it is more dependent on our ability to take share from large regional banks. Harold mentioned that our pipeline is extraordinarily high, our loan pipeline is extraordinarily high going into the second quarter. And if you look at the core deposit growth that we achieved in the first quarter, those two things are related.
I mean, that's just sort of main line client movement from large regional banks to us. I mean, that's really what is the largest thing driving that growth. So again, I hope I'm sort of clarifying lots of loan demand in CRE category, softer demand in the C and I category. And so our ability to grow loans is primarily dependent upon our ability to take market share.
Speaker 6
Yes. No, that's perfect. That's really helpful. And maybe thinking about the NIM a little bit here, I noticed that there were some obviously some increases in the securities investments, some of that being the equity raise being deployed a little bit into investments, but it looked like some extended duration as well. Can you talk a little more about the ideology there and if that's something that will continue given the rate environment and the trends we're expecting?
Speaker 1
Yes. That's exactly what happened is the proceeds from the offering didn't get deployed until late in the quarter. But we're not expecting any kind of big ramp up in the securities book from here on out, Steve.
Speaker 6
Okay. Perfect. Perfect. And then thinking about the loan loss reserve maybe a little bit. Obviously, no real credit issues.
Credit still looks fantastic. But obviously, that's been declining as a percentage of loans. And I'm wondering if you guys have gotten any more clarity on the preliminary work around CECL and the impact there. I know in the K, it was kind of noted that those numbers maybe weren't available yet. But just wondering if you have any clarity or insight to where that number may trend over time relative to where it's been trending in the last few quarters.
Speaker 1
Yes. I mean, whenever CECL comes into play, the bias is that reserves will go up. But right now, I can't give you any kind of idea as to how much that will be.
Speaker 6
Okay. And in the near term, would you expect this kind of 68 bps of reserves to loans to be more flattish? Or would this recent trend down, could that continue as well?
Speaker 1
Yes. I think we've got only a small amount of credit leverage left in the Pinnacle book. With Bank of North Carolina, you'll see a meaningful reduction in the actual calculated reserve. So because all of that reserve will get embedded into the loan book, so the actual ratio will go down. But just like with Pinnacle, we've got $30,000,000 in discount still left from Avenue, Magna and Capital Mart.
All that money is just in the loan accounts now.
Speaker 6
Perfect. Thanks guys. Really appreciate the color. Congrats on another great quarter.
Speaker 1
Thanks, Steve. Our
Speaker 0
next question comes from Jennifer Demba with SunTrust. Your line is now open.
Speaker 8
Thank you. Good morning. Question on loan growth. Can you kind of give us an idea of geographically where how the loan growth was dispersed in the first quarter and how the music businesses have gone since acquiring Avenue?
Speaker 1
Yes, I think, let me I guess, I'll comment on the music business first and then comment on geographic dispersion next. I think on the music business, Jennifer, know Andy Moats and team, I don't have access to all their numbers in the past, but I am told by Andy that fourth quarter was a record quarter for the music and entertainment team in terms of net loan outstanding growth. There are great there are good number of lines with continued funding that did occur in the first quarter and expect continued fundings under some commitments in the second quarter as well and a good pipeline as we go into the second quarter. So I think Andy would say in terms of loan growth, he's traveling faster faster than he traveled under the Avenue brand. Jennifer, as you know, I mean, they did get an advantage with a higher house limit and those kinds of things.
So they're able to do deals for both existing clients and new clients that they previously probably could not have done. So again, our belief is that the momentum in terms of loans and deposits in the music industry is very strong. I guess just comment on the geographic dispersion, think I would say that we had well, let me go at it. We've shown you, I think, a slide where we've given you the Memphis and Chattanooga numbers. So you can see they were meaningful contributors on both loans and deposits.
Really, you can see the growth during the 2016 year as well as in the 2017 there. So again, great growth from Chattanooga and Memphis. I would say good growth in Nashville. In Nashville, we had a number of large real estate pay downs that occurred payoffs that occurred in the first quarter, which dampened their number. Their gross loan growth was obviously much higher than the net loan growth and really a pretty good number, but had some pretty large pay downs in there that muted the growth in Nashville.
In Knoxville's case, Knoxville has some clients that have very elevated fundings in the fourth quarter that pay out in the first quarter. And so their growth was not so strong in first quarter. But again, their pipelines would indicate they'll have a record quarter in the second quarter. So it's pretty well diversified, slightly different story in each market, but again, growth momentum in each of the four markets.
Speaker 8
Okay. And a separate question. In terms of expanding to new markets in the Southeast via a de novo effort, Terry, do you have any sort of priority list outside of The Carolinas? I mean, you've already given us the target markets. I mean, is Atlanta the number one priority or not?
Can you give us some thoughts there?
Speaker 1
Yes, let me clarify the question first. I think you started with a comment about de novo growth and so are you asking about the priorities as it relates to de novo growth?
Speaker 8
Yes.
Speaker 1
Yes, I think easily if we were going on a de novo basis, Atlanta would be the most attractive market that we have left open to us.
Speaker 8
Thanks so much.
Speaker 5
Our
Speaker 0
next question is from Andy Stapp with Hillard Lyons. Your line is now open.
Speaker 9
Good morning.
Speaker 2
Hi, Andy.
Speaker 9
The earning release indicates that the March Fed hike would could boost net interest income by $1,800,000 The last quarter you indicated that the December rate hike would provide 1,000,000 point dollars of lift. Just trying to understand what caused the increase. I thought maybe higher betas and the flattening of the yield curve might have constrained the lift.
Speaker 1
Yes. That's just on I think on the short end of curve, we've just got bigger balances. And so that's causing most of that increase, Andy.
Speaker 9
Okay. And I may have missed this, but could you talk about how much cost saves should be realized in the first phase of this systems conversion versus the second?
Speaker 1
Yes, we I don't think it's going be too terribly different than what we talked about on the merger call. We anticipated about 25% of the synergy case to get realized in 2017. So we still believe that's going to be the case. And then primarily that's because we won't really get into any kind of synergies until later on in the year. And then we're looking at the rest of it being towards, call it, the second quarter of next year of the full synergy case being deployed.
Speaker 9
Okay. And just trying to make sure I understand your guidance expressed in the earnings release regarding the effective tax rate for the year. Are you expecting an effective tax rate of 33%, including the impact of the accounting change?
Speaker 1
That's exclusive of the accounting change. So the stated rate should be less than the 33%.
Speaker 9
Okay. All right. Got it. Thanks.
Speaker 0
Our next question is from Kevin Fitzsimmons with Hovde Group. Your line is now open.
Speaker 3
Hey, guys. Most of my questions have been answered. Just one quick follow on. On the systems conversion, so is that purely or mostly due to this effort to reduce the risk? I heard your point, Terry, about the NCN customers have been through a lot of these.
Or is it a decision based on the system that Jack Henry's system is just a better system at the end of the day and that's what you want to end up with?
Speaker 1
That's a great question. Think there are several factors in there. And I would say, honestly, for me, personally, the most compelling has to do with the derisking of the conversion. But I wouldn't do it if Jack Henry was a less good system. We think it's equal system at a minimum and perhaps slightly better.
And what we really like about the Jack Henry as a vendor is their ability to provide support both during the system conversion integration, we view that to be substantial and important and we view their support on an ongoing basis to be substantial as well. And so all those things roll together in there, but we are we believe despite the derisking, despite the conversion support, all those kinds of things, we do believe that we're slightly better off on the Jack Henry system as we continue to grow the bank.
Speaker 3
Great. Okay, thanks, Terry. That's all I had.
Speaker 0
Our next question comes from Peyton Green with Piper Jaffray. Your line is now open.
Speaker 10
Yes. Good morning. I just wanted to get one thing clarified, I missed it earlier. But I think, Harold, you alluded to the size of the pipeline coming into the second quarter relative to the size coming into the first quarter. And just thinking about loan growth of about 9% annualized in the 2017 organically versus 7% a year ago organically.
Would seem like you feel like the overall productive capacity of the firm is probably better today than it was six to nine months ago?
Speaker 1
Yes, for sure, Peyton. I think we've gotten some excellent hires out of several places, both here in Nashville and Memphis and Chattanooga. I think we've got some momentum in some of these expanded markets. And I think everybody is on the same page.
Speaker 10
Okay. And then just to follow-up, the relative size of the pipeline coming into the second quarter versus the first quarter?
Speaker 1
I think it's at least 2.5x.
Speaker 10
Okay. Okay. And then looking at the growth in Memphis and Chattanooga, I think what's really noteworthy was that their core deposit growth was as strong as it was. Is that something that you think will continue on into the second quarter and third quarter?
Speaker 2
I'm going hedge just a little bit because
Speaker 1
it's difficult enough to be projecting our own numbers. I don't feel like I'm in a position necessarily to project B and C ends growth. But I do know this, our first quarter growth was really extraordinary and unusual. And I think it has to do with the hiring momentum that we talked about and market share movement. I think in their case, they have built and been working on, as you know, you've seen their core deposit trends and a lot of that's been dependent upon their branch system and the selling methodologies that they deployed there.
A guy named Rick Arthur runs their branch system. He's done a fabulous job in building deposit acquisition momentum in that footprint. And so I think that explains a large part of the growth and that they've had and I believe it is likely to continue. But again, I'm better able to predict Pinnacle's growth than BNC at this point.
Speaker 10
Okay. No, I'm sorry, I meant Memphis and Chattanooga, your core deposit growth was very strong. And I was just wondering if you thought that was going to carry through over the balance of 2017. It seems like traction really picked up in Chattanooga particularly.
Speaker 1
Yes. My guess is in Chattanooga, there are one or two relationships in there that are large and represents the temporary funding. Again, I think the core growth is strong and outsized, but in both Chattanooga and Memphis in the first quarter, they would have a couple of large deposits in there that are likely to be six or nine month type deposits. But again, even with the large deposits that they picked up, the core growth is extraordinary. I'm sorry, I thought you were asking about BNC.
Speaker 10
Okay, great. Thank you very much for taking my questions.
Speaker 0
Our next question comes from Brian Martin with FIG Partners. Your line is now open.
Speaker 7
Hey, guys. Most of my stuff was answered. Just a couple maybe just housekeeping and that was on the just going back to that tax question, Harold. The $3,800,000 benefit this quarter, you kind of talked in the release about $1,000,000 remaining. Is that $1,000,000 in aggregate for the next three quarters?
Or is it kind of $1,000,000 a quarter you're talking about, just to clarify?
Speaker 1
Yes. That will be probably for the rest of the year, And that's if our share prices hold as to where they're at currently. So yes, it would not be for per quarter, it would be for the rest of the year.
Speaker 7
Agreed. Okay, that's what I thought. And then just two last things. Just on the rebound in mortgage in this quarter, I guess you talked about the lot portfolio last quarter. I guess just given the performance this quarter, I guess the expectation is this might typically first quarter is seasonally the weakest and builds from there.
Is that kind of how you guys would look at things today on that on the performance this quarter?
Speaker 1
Yes. As far as looking at mortgage going into the second quarter, they had a big pipeline coming into the second quarter. And if they can keep that pipeline going into the third quarter, then it ought to be a great quarter for them. So we're not anticipating any kind of dramatic decrease in mortgage in the second quarter, but we're not expecting the same kind of similar increase here either. So flattish to slightly up, somewhere in that range might be fair.
Speaker 7
Yes. Okay. All right. And then just lastly on the comments about the conversion and kind of the change, I guess the is the thought and Terry mentioned this maybe a little bit out of the first quarter, but I guess is the thought that the prior under your prior assumptions on the conversion that the first clean quarter inclusive of BMC and on expense front might be first quarter and now it's maybe pushed that into the second quarter. So just a little bit of a delay, but which I think Terry said might be around $1,000,000 but that's the way to think about it.
The first clean quarter with the full synergies is 2Q versus 1Q?
Speaker 1
Yes, that's exactly right, Brian. We're planning on the target environment being established in April.
Speaker 7
Okay. All right. That's all I had, guys. Thank you so much.
Speaker 1
Thank you, Brian.
Speaker 0
I'm showing no further questions. Ladies and gentlemen, thank you for participating in today's conference. You may all disconnect. Everyone have a great day.