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Franklin Financial Network (FSB) Q2 2019 Earnings Call Transcript

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Franklin Financial Network (NYSE: FSB)
Q2 2019 Earnings Call
Jul 25, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good morning, and welcome to the Franklin Financial Network, Inc. 2019 second quarter earnings conference call. Hosting the call today from the Franklin Financial Network is Mr. Myers, interim CEO of Franklin Financial Network Inc.

Please note, the Franklin Financial Network earnings release and this morning's presentation are available on the Investor Relations page of the bank's website at www.franklinsynergybank.com. Today's call is being recorded and will be available for replay on Franklin Synergy Bank's website. Before we begin, Franklin Financial Network does not provide earnings guidance or forecasts. During this presentation, we may make comments that may constitute forward-looking statements.

All forward-looking statements are subject to risks and uncertainties and other facts that may cause the actual results, performance or achievements of Franklin Financial Network to differ materially from any results expressed or implied by such forward-looking statements, many of such factors beyond Franklin Financial Network's ability to control or predict, and listeners are cautioned not to -- are cautioned to put undue reliance on such forward-looking statements. A more detailed description of these and other risks is contained in the Franklin Financial Network's most recent annual report on Form 10-K. Franklin Financial Network disclaims any obligation to update or revise any forward-looking statements 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.

With that, I am now going to turn the call over to Mr. Myers Jones, Franklin Financial Network's interim CEO. Sir, you may begin.

Myers Jones -- Interim Chief Executive Officer

Good morning, everyone, and thank you for joining this morning's call to review our second-quarter 2019 results. We appreciate your continued interest in our company. I'm here this morning with Chris Black, our chief financial officer. I'd like to give a brief overview of the quarter and then Chris will review the detailed financial results.

I am proud to report that our entire team of employees from each area of our company has continued to execute our business plan, and we are creating a stronger and more profitable franchise. We are seeing the results of our planned and previously discussed balance sheet rotation and optimization. Our bankers are focusing on profitable growth through core customer relationships. During the second quarter, loans grew organically at a rate of more than 10% annualized.

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Core deposit growth was more than 16% from the same time last year. Strong growth in the core franchise allowed us to rotate away from securities and wholesale funding. We achieved that growth while also remaining disciplined on expenses. The result is a net interest margin expansion by four basis points and continued growth in pre-tax pre-provision profit.

We also maintained strong capital ratios and grew tangible book value per share at nearly 13% from this time last year, while at the same time returning capital to our shareholders by paying a common stock dividend and by beginning a share repurchase program. On the credit side, we had a preannounced -- we, as preannounced, we had one nonrecurring credit event take place in the second quarter and we filed a Form 8-K last week providing details about the situation. We expect no further negative impact as we have fully accounted for the amount of our exposure through either a specific reserve or charging off the balance of this relationship. We see no deterioration in the rest of our portfolio.

In fact, we recently had a third party perform a top to bottom portfolio review of our corporate and healthcare loans, including our SNCs, resulting in no material risk rate changes. This is effectively a clean bill of health at this given point in time. Aside from the single event, our credit metrics and asset quality remains strong. Regarding our ongoing search for a permanent CEO, to date, we have gone through a very deliberate process whereby we have identified a search firm.

We expect to announce the results of that process in due course as we continue to make positive progress toward achieving the long-term objectives set forth by our Board of Directors. Now I'll turn over to Chris to discuss the final -- the financial results in more detail.

Chris Black -- Chief Financial Officer

Thank you, Myers, and good morning, everyone. I'll be referring to the quarterly earnings presentation as available on our Investor Relations page. On Page 2, we list a number of specific financial highlights and results that summarize the quarter. We had core organic loan growth of $73 million or just over 10% on an annualized basis within our guidance of low double digits.

Growth came from all areas of the franchise and the composition of our portfolio is consistent with the first quarter. We further reduced our securities portfolio, which now represents 20% of assets, down from 32% a year ago. That is a reduction of more than $520 million during the last 12 months. Core deposits, which consists of our retail and reciprocal deposits, grew at a rate of 16% from the same time last year and are basically flat from the first quarter.

During the same time, we reduced our brokered deposit portfolio by 14.5% as we continue to focus on strengthening our balance sheet through the reduction of noncore funding sources. Taking that all together, strong organic loan growth funded with core deposits, a reduction in our securities portfolio and a reduction in our wholesale funding, our net interest margin expanded by four basis points to 2.84% and the monthly trends through the quarter remained strong. Our cost of deposits remained essentially flat from last quarter at 2.07% and our yield on loans held for investment remained flat from last quarter at 5.61%. Our balance sheet optimization strategies have allowed us to protect margin in this low interest rate environment.

I also would like to mention that, as we discussed last quarter, our intention is to opportunistically reduce the SNCs in our loan portfolio that we consider to be non-relationship-based. This can occur in a number of ways: repayment, M&A activities, run off or sales. We want to be wise and judicious in balancing risk and return for our shareholders as we execute this strategy. To that end, during the first few weeks of the third quarter, conditions improved in the SNC loan market, allowing us to sell $30 million of non-relationship SNCs with minimal financial impact.

This is a positive step in our intentional and responsible plan to gradually reduce the balance of the SNC portfolio over time. Given this development, along with some other anticipated payoffs from our healthcare lending and construction portfolios, we anticipate overall loan growth in the third quarter to be negative, likely in the low to mid-single digits. As we continue to optimize our balance sheet, we maintain our expectation for low double-digit core customer loan growth during the intermediate term, consistent with prior periods. Our bankers are focused on and incentivized to generate quality core banking relationships.

This fundamental banking strategy will drive our profitable growth into the future. Our core efficiency ratio for the quarter was 60%, basically flat from the fourth -- first quarter, and our core noninterest expenses were essentially flat relative to the fourth quarter of 2018. Additionally, we are very pleased to announce that we began returning capital to shareholders through our previously announced share repurchase program. During the quarter, approximately $0.5 million was used to repurchase shares.

We will continue to evaluate our best options for the deployment of capital through organic growth, repurchases and strategic M&A. And assuming favorable market conditions going forward, we are likely to continue to execute our share repurchase program in the third quarter. Our Board of Directors has also authorized the continued payment of our quarterly dividend of $0.04 per share. On the right side of Page 2, you will notice some of our key metric -- key performance metrics for the quarter.

We had a sizable nonrecurring credit expense that Myers referenced in his opening remarks. GAAP reported diluted EPS of $0.34 for the second quarter includes a $7 million loan loss provision expense. The charge completely covers the relationship in question and marks our exposure to 0 through either a specific reserve or a charge-off. When normalizing taxes and our loan loss provision to exclude the nonrecurring credit expense, we view our EPS trend in the $0.68 to $0.69 range for the second quarter.

Turning to Page 3. In the chart on the top left of the page, you can see the trend in net income growth. Net income for the quarter was negatively impacted by the aforementioned loan loss provision of approximately $7 million. Our net interest income has grown at a 38% annualized rate since 2013 and is up slightly from the second quarter of 2018, driven by a 10 basis point expansion in our net interest margin.

This was largely a result of our core loan and deposit growth, coupled with the shrinking of our noncore funding and securities portfolios, which resulted in overall balance sheet shrinkage of approximately $166 million quarter-over-quarter. Noninterest expenses decreased to $19.4 million when compared to the first quarter. Our core efficiency ratio remained steady at 60%. We are working hard to control expenses while demonstrating strong core franchise growth.

Page 4 illustrates the trends over time of our core earnings and tangible book value per share metrics. Our diluted EPS of $0.34 for the second quarter was negatively impacted by the previously discussed loan loss provision. Despite this highly elevated expense, our tangible book value per share grew 13% year-over-year to $25.61, further demonstrating the balance sheet strengthening we've been able to accomplish while at the same time further reducing the amount of our capital base that is vulnerable to bond market volatility. Turning to Page 5.

You can see our 10.4% annualized loan growth spread across our loan portfolio. Our team is focused on core customer loan growth, loan diversification and credit discipline. You can also see on the right-hand side of the page that our concentration ratios continued to remain manageable and within our targeted internal guidelines, driven primarily by our increased scale, granular credit administration processes, incremental loan diversification and robust capital generation. I want to emphasize that our loan growth in the quarter was organic and based on lending to our core clients.

In the appendix, we have included information on our Shared National Credit and healthcare portfolios. We are not at all satisfied with the credit event in the quarter related to the SNC and will remain vigilant and transparent about the situation. As I mentioned earlier in the call, we are highly focused on the size and composition of our SNC portfolio and expect to see the size of the SNC portfolio continue to decline as we seek to eliminate noncore, non-relationship banking activities. On Page 6, you'll see the growth and mix of our deposit funding from a year ago.

We maintained our core deposits basically flat for the quarter. As discussed previously, our ability to reciprocate deposits from local government is a game-changing development for our franchise, allowing us to redeploy lower-yielding securities into higher-yielding, longer-term assets. At the same time, we reduced our reliance on noncore broker deposits by over $19 million in the quarter. These strategic actions allowed us to reduce the size of our securities portfolio by $524 million since the second quarter of 2018.

The proceeds from shrinking the securities and SNC portfolio were used to fund organic loan growth, improving our overall strength, profitability and interest rate sensitivity positioning. As our management team continues to collaboratively work together, one of the most critical areas of our focus is on enhancing and growing our core deposit portfolio. We've already taken a number of important steps in this regard, including reengineering our incentive compensation structure to emphasize deposit generation, realigning elements of our corporate structure and setting into motion a number of deposit-gathering initiatives, including an overhaul of our sales philosophy with our senior bankers and recently hired a director of deposit, proactively engaging and driving our sales force in these critical core deposit gathering activities. We are committed to driving this core deposit growth as it represents a key tenet of our overall strategy to further improve our balance sheet composition, liquidity position and profitability of our business.

Shown on Page 7, you can see that we continue to maintain a well-capitalized liquid balance sheet, which is well-positioned to support our anticipated loan growth in coming periods. We maintained very strong regulatory capital ratios, which are supported by our strong internal capital generation. Turning to Page 8. Our asset quality ratios remained very strong.

We are committed to continuing to build a strong, disciplined and dynamic core franchise. Although we had that elevated expense, we are convinced that it was an isolated incident and our credit metrics remain quite strong. Excluding this elevated credit expense, our net charge-offs will be approximately two basis points for the quarter, consistent with prior quarters. Our reserve has been built to 95 basis points of loans held for investment, and we believe it is adequate for the portfolio we continue to build.

Importantly, as Myers stated earlier, the potential negative financial impact to the SNC has been mitigated going forward as the remaining relationship balance is fully reserved. Our ratio of nonperforming assets to total assets has trended down to just 12 basis points and our allowance for loan losses covers our nonperforming assets at a ratio of 5.8:1. It is also important to note that we have no bank-owned real estate or repossessed assets on the balance sheet. As a real estate-focused bank, this is a strong indicator of the quality of the portfolio that we have built.

I'll now turn it back to Myers for some closing remarks.

Myers Jones -- Interim Chief Executive Officer

Thanks, Chris. I'm incredibly excited about what this franchise accomplished in the quarter. Our strategy is taking hold, core customer growth is strong and margin expansion is leading to improved returns. None of us are satisfied with the credit event that we have been working through in the first half of the year.

We have taken that issue off the table while making the loan exposure to 0, and we remain confident that it was an isolated event. The bank maintained leading positions in some of the best banking markets around. We are No. 1 in Williamson County, No.

2 in Rutherford County and have a growing presence in Davidson County. Taken together, we are the sixth largest bank in the Nashville MSA, and we expect to continue to grow and gain scale. We will continue to execute our strategic initiatives and focus on organic core profitable growth. We remain committed to and focused on creating long-term shareholder value.

I'll turn the call over to the operator to see if there are any questions.

Questions & Answers:


Operator

[Operator instructions] The first question comes from Stephen Scouten with Sandler O'Neill. Please go ahead.

Stephen Scouten -- Sandler O'Neill + Partners, L.P. -- Analyst

Hey. Good morning, everyone. I'm curious as to your views on the NIM trajectory from here. I didn't see that any longer in the slide deck, kind of an expectation of where that would go. And so I'm kind of curious, one, what the impact of the SNC sale here will do to the NIM in 2Q, kind of what rate those loans had? And then what you expecting them to do with the projected rate cuts to come?

Chris Black -- Chief Financial Officer

Yes. Thanks, Stephen. Good question. I don't think we've changed kind of our intermediate NIM target, which was over 3%.

I think we're making good progress toward that. I said during the comments that the NIM trajectory expansion continued throughout the course of the three months during the second quarter. So we were a little bit higher in June than what the overall quarterly rate was. So we continue to see progress.

We continue to get, on the incremental, on the margin, some improvement in deposit pricing, which is encouraging. And as of now, we're still holding pretty steady as you see in the loan yield. So don't want to overstate it, but we continue to expect that we're going to have good progress there. Related to the SNCs, it's absolutely the right question, and that's why when we talk about we're going to balance -- be responsible and judicious.

These loans that are going out are high-quality loans, but it's not where we want to be. And we're focused on the core banking business that we've talked about. I would say in that $30 million that I talked about that we've done in the last few weeks in this quarter, in the current third quarter, probably L plus 2% to 2.25% on average is what I'd look at from that. So a little bit of an impact, but it's absolutely the right move going forward and we're confident of that.

Stephen Scouten -- Sandler O'Neill + Partners, L.P. -- Analyst

OK. But I mean, the LIBOR plus $200 million will be below your average loan yield. So theoretically, this should pull up your average loan yield. Is that right?

Chris Black -- Chief Financial Officer

Well, as we -- on the margin, sure. As we rotate through, I wouldn't say that the entirety of what we would see over the next 12 months going out of that SNC portfolio would be the same characterization. So I don't want to overstate it, don't want to get you guys too far in the weeds on that one. I don't think it's going to be a huge impact.

Stephen Scouten -- Sandler O'Neill + Partners, L.P. -- Analyst

OK. And when you say continued kind of outflows over the next 12 months of that total SNC book was, what, $231 million at quarter end, do you guys have a target in mind of how low you want to work that down? Or what we should expect beyond the $30 million that's been done quarter to date?

Chris Black -- Chief Financial Officer

Yes. So remember last quarter, we said roughly, we said 40% to 50% was non-relationship. I think, at this point, we'd be -- we'd say about 40%, maybe a little bit lower than that. Don't want to give the timing.

And like I said, these things happen. They happen gradually naturally. Or if we get the right opportunity in the market that we're comfortable with, we have that opportunity. So I could see it over the next 12 months trending to half that maybe.

We'll see, but that's not a promise. That's just a potentiality to give you some context.

Stephen Scouten -- Sandler O'Neill + Partners, L.P. -- Analyst

Yes. OK. Helpful. And then, I mean, obviously I think you spoke to, I guess, 3Q growth in the negative 5% to 6% range, negative single digits for Q3.

What do you think growth will be like beyond that given this continued theoretical headwind here in the SNC portfolio? Is it going to be maybe a kind of a low single-digit growth for a while? Or how are you guys thinking about what net growth looks like maybe for the next two or three quarters?

Chris Black -- Chief Financial Officer

Yes. So let's talk about the core first, right? So core customer growth. We're comfortable with that low double digits. And then it's going to be opportunistic.

I mean you can do the math. I don't think outside of likely, with what we're seeing here in the third quarter, it will weigh terribly, but if you want to be conservative, you said high single digits, that probably seems reasonable when you combine on a total portfolio basis. I would expect probably in that ballpark.

Stephen Scouten -- Sandler O'Neill + Partners, L.P. -- Analyst

OK. Great. I'll let somebody else hop on. Thanks for the time.

Operator

The next question comes from Tyler Stafford with Stephens. Please go ahead.

Tyler Stafford -- Stephens Inc. -- Analyst

Hey. Good morning, guys, and thanks for taking the questions. Maybe just to start where Stephen left off, just on the 3Q loan growth. Maybe I'm missing something here, but you guys have done, call it, an average of around $100 million per quarter of growth each quarter in the first and second quarter.

So why is the $30 million sale early in 3Q going to put growth at a negative starting point for the third quarter?

Chris Black -- Chief Financial Officer

Yes. So, Tyler, I'd say if you go back to the -- the first quarter is elevated, right? So we had talked about back in January, on the earnings call for the fourth quarter of '18 that we're -- that's where we started to guide that low double digits. And we had -- I think we had talked through some of the weather issues, the construction. We said the pay downs were a little bit slower during the first quarter.

We really had a wet spring here, and so that had elevated the growth numbers in the first quarter. And so this is probably just the effect of that normalizing a little bit. We had some expected pay downs in the healthcare lending portfolio that were also a little bit delayed. And so I think on balance, then you combine that with the SNC sales that we just talked about, it all sums up to that.

But -- so we are -- as we said, we're not going to grow for growth's sake. We're focused on our customers on -- our balance sheet exists for them. There's no other reason for -- it has no other purpose. And so there are going to be quarters where it could be above that range and below.

And then you mix in, as we -- we're rotating these SNCs that we don't want on the balance sheet out. It's going to create a little noise. Hopefully, that clears that for you.

Myers Jones -- Interim Chief Executive Officer

Tyler, this is Myers. During the summer season, we see a good many construction loans pay off, particularly on the residential side. We are reloading a similar number of projects, but you pay off funded balances and you reload commitments. So the summer side from the residential construction oftentimes is lower.

Not that you're doing less business, you're just funding a smaller amount. So I really expect that to catch up late third quarter, early fourth quarter.

Tyler Stafford -- Stephens Inc. -- Analyst

OK, that helps. And maybe just going back to the credit review, the third party credit review that you mentioned in your prepared comments. Can you just give us some more details about that review? And I guess how many loans did they look at? Any migration one way or the other that came about as a result of that review? I guess just bigger picture, how can we get comfortable that the credit issues seen in the first and second quarter, at least from how you see the world today over the near term, are indeed more of a kind of a one-off issue and that the underlying health of the book is still kind of matching up with your prior expectations?

Myers Jones -- Interim Chief Executive Officer

Tyler, this is Myers again. In 44 years of being in this business, I've never seen a sector reviewed as many times as the corporate healthcare sector of -- our portfolio has been. It's been looked at internally by our internal analysts. It's been looked at by our internal loan review people.

It's been looked at by our external loan review firm and it's also been looked at in total by other review parties. In all of those reviews, other than the one credit that we have outlined numerous times, I think, in this call, we have seen no credit downgrades. Now is there a guarantee to that? No. I can't make you a guarantee via the portfolio of loans secured by cash, but we have seen no migration and we have seen no downgrades by any of those reviews, if that helps.

Tyler Stafford -- Stephens Inc. -- Analyst

Yes, that's helpful. Do you have what the special mention in substandard loan balances were at quarter end? Is it $30 million?

Chris Black -- Chief Financial Officer

I'm sorry. Say that one more time, Tyler.

Tyler Stafford -- Stephens Inc. -- Analyst

Just the balances of the special mention in substandard loans at the end of the quarter?

Chris Black -- Chief Financial Officer

With you, let me find it for you. Yes, so $30 million at the end of 2Q, and that's down from about $35.7 million last quarter.

Tyler Stafford -- Stephens Inc. -- Analyst

That's substandard?

Chris Black -- Chief Financial Officer

Correct.

Tyler Stafford -- Stephens Inc. -- Analyst

OK. And then just on the margin, the 3% margin goal over time that you mentioned, do you -- Chris, do you think that's still possible with Fed cuts? And I guess, if so, can you just talk about how you expect both sides of the balance sheet to react? Any details on the deposit, kind of repricing opportunities lower? And then just the protection that you might have on the earning asset side?

Chris Black -- Chief Financial Officer

Yes, sure. We -- so I think we've talked about it before. It's just a philosophical shift that is under way, a cultural, sales-driven. And we have a lot of people extremely focused on this.

It's one of the most critical things that we are doing and are going to continue to do. So we're not -- we don't have the same liability-sensitive -- sensitivity that we once did. That's intentional. We're not in the business, in my view, and I think we shared across our team, we're not in the business of making forecasts and bets on what the interest rate environment is going to be and what the yield curve is going to be.

We're interested in mitigating our risk and positioning our balance sheet to perform the absolute best it can in a risk-adjusted manner. So that's the first thing. But we still -- so we're fairly neutral, which is where we think we should be. With that said, our deposit costs, right, are not something we're extremely proud of, and so we're working on that.

And that gives us levers and it gives us room to beat competition in the market while still improving our own pricing. And so when we get to that 3%, we will. I don't -- I can't tell you exactly when. We're making great progress.

Rome wasn't built in a day and neither is really kind of changing the culture of how we view the funding side, but we're making tons of progress. People are energized. I think we've got a lot of excitement across and -- in just the anticipation of what this means for our franchise. So I feel pretty good that we're going to get there, Tyler.

And on the asset side, we have a fairly decent percentage of loans that have floors built into them. And so we actively manage -- I think to follow-up to Steven's question earlier about the SNCs that rolled off. So we actually -- newly generated production in the quarter was closer to 5%, 5.75%. So that, as you said, that's accretive.

We continue to have pricing power, particularly as we've intentionally slowed down some of that loan growth. We're focused on that. We're focused on ensuring we're with the right customers that -- and they are focused on the service and the expertise that we give. And so we've always had pricing power from that.

So I think we're pretty comfortable that we're in a good -- we're in a fairly decent margin protection position.

Tyler Stafford -- Stephens Inc. -- Analyst

Thanks, Chris.

Operator

The next question comes from Daniel Cardenas with Raymond James. Please go ahead.

Daniel Cardenas -- Raymond James -- Analyst

Good morning, guys. So just kind of following up on your comments on loan floors, can you give us a percentage as to how much of your loan portfolio has floors? And how much would rates have to go down before you kind of break through those floors?

Myers Jones -- Interim Chief Executive Officer

Dan, this is Myers. Certainly, the majority, I mean, it is a very high percentage of loans as they're booked are booked with floors. So from a contractual standpoint, we expect those floors to be effective. As we all know, it's a fairly competitive market.

You may have some issues in regard to that. But far and away, the majority of the loans we're booking today are floor-supported.

Daniel Cardenas -- Raymond James -- Analyst

Right. And so we would need, what, like about a 100 basis point drop before you hit some of those floors? Or how much wiggle room is in there?

Myers Jones -- Interim Chief Executive Officer

Dan, I think if you look at it, floors would be -- the majority of those are in the low 5s from a forward perspective. So...

Daniel Cardenas -- Raymond James -- Analyst

Right. And then looking at the securities to assets, you're about 20% right now. Is that about as low as you guys would like to go? Or is there still room to reduce that percentage of securities?

Chris Black -- Chief Financial Officer

Yes. Dan, we've definitely made good progress. I think we'll continue to tweak and optimize, but I mean, we're getting in the ballpark. Particularly, as I think most of you know, we're in the low season for public funds.

We're managing that. We're comfortable with how to manage that. We've gotten really good at managing that. And so part of that is we still -- we can't reciprocate all of those clearly.

So we've got to have some fledging against that. And so I think we could tweak a little bit lower, but we're in the ballpark.

Daniel Cardenas -- Raymond James -- Analyst

Right, fair. And then what was the average price paid for the stock that you bought back this quarter?

Chris Black -- Chief Financial Officer

The average price. Off the top of my head, I'm going to say $27 a share, ballpark.

Daniel Cardenas -- Raymond James -- Analyst

And just kind of given the capital this is building, I mean, how aggressive do you think you guys can be in buyback efforts without compromising capital for growth's sake?

Chris Black -- Chief Financial Officer

Yes, sure. And that's exactly what we are, right? We have always, since I've been here, been focused on the bucket of capital deployment, organic growth being the most important one, no question. Second, M&A activities. We're obviously not there right now from a stock price perspective.

I'm confident we will be at some point in the future. And then returning capital to shareholders. And as we were -- we look at ourselves and look at our business and our credit portfolio and our opportunities, there's a point at which, I think, ourselves with our Board of Directors, talking a lot about these things and where we view ourselves and where we're going. We just said there's -- with the stock trading where it was trading, there's just no way that we're going to pass up that opportunity to buy our own stock back at that kind of value.

So we did it. Will we continue to? We're going to be responsible as we've delevered a little bit. TCE is up at 9.2%. Having capital for a rainy day is a great thing.

So I think we'll -- we could do a little bit, but we are definitely more focused on the organic opportunities we have around us. But we just couldn't pass it up at those kind of values.

Daniel Cardenas -- Raymond James -- Analyst

Right, fair enough. And then last question and I'll step back. On your CEO search, so you've identified a search firm, correct? Have you identified a preliminary list of candidates? And are you keeping your search kind of someone in the national market? Or are you going out beyond that?

Myers Jones -- Interim Chief Executive Officer

Dan, this is Myers. The firm has been identified. There have been no candidates submitted to date. There was an extensive conversation with the Board only two days ago regarding this process, but as we've said before, the Board does not think they are desperate in this search.

They're going to be very deliberative. They want the results to be what they focus on, not the speed. And I think that process is continuing and will continue. What they are anxious about is to make sure the existing management team continues to focus on the plan and we execute the plan.

And as they've looked at each month for the second quarter, month after month, I think they're confident that's being done.

Daniel Cardenas -- Raymond James -- Analyst

Great. Is the expectation is that by year-end, you should have an announcement?

Myers Jones -- Interim Chief Executive Officer

It would be a estimate only on my part, but I would certainly expect that to be the case or far along on the process.

Daniel Cardenas -- Raymond James -- Analyst

Right. Great. Thanks. I'll step back.

Operator

The next question comes from Laurie Hunsicker with Compass Point. Please go ahead.

Laurie Hunsicker -- Compass Point -- Analyst

Hi. Thanks. Meyers and Chris, good morning. Just wondered if we could start on just some quick items on the income statement.

Do you have accretion income for the June quarter?

Chris Black -- Chief Financial Officer

At this point, it's de minimis, Laurie. Just -- I think it's getting to immaterial levels. I don't have it in front of me. If we look though, if you look at the actual -- I'm sorry.

If you look at the average balance table, you've got $174,000 for the second quarter, two basis points into the loan yield.

Laurie Hunsicker -- Compass Point -- Analyst

Thank you. OK. And then -- I'll find it. Yes, that's sinking.

So -- OK. So your core margin also expanded because you had two basis points last quarter. That's helpful. Can you just talk a little about -- within the expense line, the other, other jumped up.

How should we be thinking about that? Was there anything nonrecurring in that? And I'm looking specifically at the 2.688 relative to 2.5. It's been running a lot lower. Just wondered if there was anything sort of onetime in nature in that?

Chris Black -- Chief Financial Officer

I would say there's a little bit as we've been working through transitions and different things, but nothing -- we're not -- philosophically, onetime to me has to be really a onetime. So I count securities gains, losses outside of something big, like we did in the fourth quarter, same thing through the expense. It's running a business from time to time. We're looking -- we've looked at our franchise top to bottom.

And we've got folks helping us, some folks we think are really smart, really talented with -- have helped produce tremendous results in the past. And so there's a little bit of elevated from those types of things as we have people continue to help us to really transform as we move to this next phase of our company's story. So there's some of that in there, but I think we all view that as we're investing for growth.

Laurie Hunsicker -- Compass Point -- Analyst

OK. So basically, that's a continuing run rate. If you think of -- in other words, there's nothing something unusual you did, some side of -- some sort of promotion campaign or something like that -- that's not something.

Chris Black -- Chief Financial Officer

Well, continuing -- in the sense, we continue to invest, but getting you a smooth line, I don't necessarily know that that's true. It could bounce around a little bit. But my point is when you see things like that, it's typically -- we're making investments that we think are important for the future. They may not continue throughout time, but they could bounce around a little bit.

And we are -- the main message is we're focused on the efficiency ratio. We're at 60%. I think our goal would be moving that toward 55% and then we'll see what happens. So as we continue to invest and grow and expand the margin, those things will happen naturally.

So we're more focused on where the overall efficiency ratio is to -- and make sure we're properly investing in our growth.

Laurie Hunsicker -- Compass Point -- Analyst

OK. And then how should we be thinking about tax rate?

Chris Black -- Chief Financial Officer

So the tax rate, I think we get through some of the noise that we've had in the past. If I think somewhere between 18%, 20% would probably be a logical go-forward tax rate.

Laurie Hunsicker -- Compass Point -- Analyst

OK. And that's what we could actually see next quarter as well?

Chris Black -- Chief Financial Officer

I think trending in that direction. That's -- we're modeling in that ballpark. So...

Laurie Hunsicker -- Compass Point -- Analyst

OK. Great. And then just to jump back over here to your C&I and your healthcare, so the substandard -- I just want to make sure I heard this correct. So your total substandard right now is $30 million and that compares to $38 million last quarter?

Chris Black -- Chief Financial Officer

I think $35 million...

Myers Jones -- Interim Chief Executive Officer

$35 million was on...

Chris Black -- Chief Financial Officer

Last quarter, yes.

Laurie Hunsicker -- Compass Point -- Analyst

I have $37 million from your Q. OK. But I guess, specifically, where I'm getting at is, of the $30 million, how much of that is healthcare?

Chris Black -- Chief Financial Officer

So about -- I would say 2/3 of that approximately is healthcare.

Laurie Hunsicker -- Compass Point -- Analyst

Because we had -- so healthcare last quarter, and this is just an extrapolation, round numbers was $32 million. I'm obviously dropping out the $7.5 million. Was there anything else that came out? Or if I'm thinking about that -- I just want to make sure I'm thinking about this the right way -- then your substandard healthcare is around $24 million, $24.5 million?

Chris Black -- Chief Financial Officer

I think there's been some puts and takes in there, some improvements, some others that have moved in and out. Yes.

Laurie Hunsicker -- Compass Point -- Analyst

OK. OK. So if I'm using -- so it's around $20 million. So if I'm looking at that, then your -- this -- I mean the substandard rate on your healthcare book is still 6%.

I mean I guess how should we be thinking about that in the provision? I realize this credit, this particular credit now sits at 0, but how should we be thinking about that as we're looking at loan loss provision going forward? Obviously, you've guided to sort of slower loan growth, a drop in the third quarter. But can you help us think about how you're approaching reserves? Are we still going to see a reserve build? Or how should we be thinking about loan loss provision?

Chris Black -- Chief Financial Officer

I think we're pretty comfortable as we continue to provision for loan growth. I think where we are, given CECL noise coming forward, probably maintaining in the ballpark of where we are. So if you adjust out -- if you adjust out for this specific reserve on the credit that we've talked about, we basically were flat as a ratio. We built it for the loan growth that we had in the quarter.

And for right now, we don't see anything on the horizon. We don't see anything outside of the previous risk from a macroeconomic and local market conditions and the condition of our portfolio. Like Myers said, we -- a clean bill health as well as a point in time thing. And we're never going to overstate or glorify something that doesn't need to be held in that regard.

But we have had enormous focus on the very portfolio that you're concerned about and a big focus on how we calculate our reserve and how we estimate qualitative factors in that regard. And so I think we're comfortable where we are is the message from what we see.

Myers Jones -- Interim Chief Executive Officer

Laurie, this is Myers. The reserve component of the healthcare -- corporate healthcare sector is the highest in the bank. It's $192 million. And as I stated earlier, I've never seen a portfolio reviewed this many times.

And one thing I failed to mention is when this portfolio is reviewed, it's reviewed in mass. There are few are customers. So you don't see a cutoff as far as size. You don't see a sample.

You see a top to bottom look at the portfolio.

Chris Black -- Chief Financial Officer

And so, Laurie, to that point, so overall, right, there's nothing that has been inconsistent with previous periods. So if we go all the way -- I'm looking at a monthly graph actually of NPAs as a percentage of total assets, and we're sitting right now at June 30 at 12 bps. And that is basically the realm that we've been in outside the credit event, right, which is now no longer the majority, that's no longer on nonperforming status because it's no longer on the balance sheet. So we're back to where we were.

And I think if you take a look at peers, I get the healthcare argument. We understand that. No one is more focused on it and quantifying that risk than we are. I promise you that.

But when we look at our peer group, either we -- every single month -- and our Chief Credit Officer, he looks at it I bet almost every single day that he can or is at least thinking about it, where we are versus local peers, where we are versus -- we look at our UBPR peer group, $3 billion to $10 billion across the country. And on every metric, we're there. I get this...

Laurie Hunsicker -- Compass Point -- Analyst

No. No. I understand that. I understand that.

I guess I'm just trying to put all that together as I'm thinking about loan loss provision then for next quarter, given the healthcare sales so far, I mean, is it possible that we see your loan loss provision running something like $300,000, $400,000, $500,000? I guess I'm just trying to get a -- marrying your comments around slower loan growth with what was announced though. OK. Just wanted to make sure I was thinking about that the right way. OK.

Good. And then...

Chris Black -- Chief Financial Officer

Well, no, if you're just trying to -- I understand what you're saying. You're just trying to get a modeling for next quarter. I mean like I said, we're -- as a percentage basis, we're pretty comfortable where we are. And so we're going to follow -- our provisions likely are going to follow our loan growth as long as we don't view any risk factors having changed for the better or for the worse.

We don't anticipate that -- any of those factors changing. And so if we have flat loan growth, it would be likely that our provision would be flat unless we see a need for a reserve build, which we could. So that's kind of my disclaimer on that.

Laurie Hunsicker -- Compass Point -- Analyst

OK. OK, that's helpful. OK. And then I just wanted to talk a little bit too about just specifically your SNC, your non-SNC.

It looks like -- I mean it looks like you've restated from your last slide deck, the slide deck where you have the Shared National Credits and healthcare portfolio broken down, it looks like there was just a restatement with healthcare non-SNC and then total SNC. And was that part of the review? And who was the person that did the review or the company that did the review? I mean is there any color around that?

Chris Black -- Chief Financial Officer

No, there's no color, Laurie. We really can't -- we don't disclose third parties that we use. Highly reputable, extremely well-versed, well-respected in the community banking space, right down into the middle of the fairway for them. And I think as we look through -- if the numbers -- it was just -- a little reclassification is probably from an accounting basis as we looked at that.

If you remember, this was the first time that we've put this together last quarter. So I'd say nothing more than kind of clerical administrative, so nothing to read into there at all.

Laurie Hunsicker -- Compass Point -- Analyst

OK. Do you have the geographical breakdown of where your healthcare loans are located?

Chris Black -- Chief Financial Officer

So kind of similar to what we talked about last quarter, we don't think that, that is the determining factor in...

Laurie Hunsicker -- Compass Point -- Analyst

No, I'm aware of that. I just wonder if you do have that, if that's available, if you can share that with us?

Chris Black -- Chief Financial Officer

No, to this point, we haven't -- we've chosen to not share that because we don't really view it as a material factor. We'll continue to talk about it. We're open. We take a lot of feedback from our analysts, from our investors and all of our stakeholders.

We value that. But at this point, we just don't think that it -- we don't think it is the determining factor or really a part of considering what the risk factors are.

Laurie Hunsicker -- Compass Point -- Analyst

I see. OK. And can you just help us think about the $330 million of healthcare, the $230 million or so of SNC, how we should see those portfolios? If we fast forward a year from now, what does that look like in terms of balance?

Chris Black -- Chief Financial Officer

Right. So kind of similar to what we were talking about with Tyler and Stephen earlier, maybe in the 40% ballpark, we would call a non-relationship and could see that, all things equal, if the crystal ball worked, M&A runoff, pay downs, maybe opportunistic opportunities, maybe that noncore is cut in half.

Laurie Hunsicker -- Compass Point -- Analyst

So the noncore is around $90 million or so. You were just talking about the SNC, correct?

Chris Black -- Chief Financial Officer

Correct.

Laurie Hunsicker -- Compass Point -- Analyst

OK. So that comes out. But I mean, how should we be thinking about where you're adding and what you consider core SNC? Or are you not? In other words, you look at that portfolio and you say a year from now we'd like that portfolio sitting at $130 million. Or how do you think about that?

Chris Black -- Chief Financial Officer

So again, we follow all the customers and opportunities. And the way that we're looking at that more core or relationship-driven that we're seeking to expand relationships, primarily on the deposit side, through those portfolios. So that's how we look at it. As we get opportunities that we can expand that and not just be a member in a group, that's how we view it.

So those plans and those initiatives are under way. Crystal ball on that one doesn't yield great visibility at this point, but we're very focused on that. Those are the criteria of how that portfolio will grow.

Myers Jones -- Interim Chief Executive Officer

Laurie, this is Myers. My take is that, that healthcare sector will basically be flat. I don't see a lot of movement up or down. I think it will be flat.

And obviously then, it would contribute less as a percentage of the overall portfolio as the total loan portfolio continues to grow.

Laurie Hunsicker -- Compass Point -- Analyst

Right. OK. And just one last question, just simply around the -- you mentioned M&A over buybacks. I mean it looks like you repurchased 19,000 or so shares this quarter, which is a very small amount relative to your, whatever, almost one million share authorization.

Can you talk a little bit about how you think about M&A over buybacks and what your approach to M&A is?

Chris Black -- Chief Financial Officer

Yes. So M&A, I mean, I think we have some pretty clearly defined objective guardrails from a financial perspective. And we're not going to go, in terms of earn-back, the type of EPS accretion, all predicated upon cultural and corporate synergies, right, and the ability to execute through that. So do we see deals right now with where our currency is trading? No, we don't.

But as many people, I think, in our community -- banking community understand that banks are sold, they're not bought, and relationships are built over time. And so when we talk about that, we have the expectation, Laurie, that as we perform, we execute and we kind of continue to increase our credibility with investors, that we'll regain our currency. And once we do that, we want to be in position to be able to execute any kind of M&A that makes sense from a strategic and financial standpoint, always with the eye of driving shareholder value.

Laurie Hunsicker -- Compass Point -- Analyst

And so how -- where are your thresholds? And I realize you're not quite there yet. But where are your thresholds in terms of how you approach tangible book dilution and earn-back? That's my last question.

Chris Black -- Chief Financial Officer

So I think in terms of timing, I think the guardrail that most people, again, in the industry use, the three-year tangible book value dilution is a good guardrail. Is it a line in the sand? I think it all depends on the merits of the deal and what the long-term strategic value of -- is of that deal, so boxing yourself in for the sake of that. But I think if you go over that, because it is a norm, because we communicate very frequently with our investors and are always listening and looking to collaborate with them, we're not going to go over that unless it was just something we viewed is so incredibly attractive. So that's a very high bar to get over.

But I'll just say -- I say that because things change, life changes, views change. And often, it is sometimes...

Laurie Hunsicker -- Compass Point -- Analyst

So what -- all right. And then just to fine-tune this last point, to what -- how much tangible book dilution would you take in a deal? Or do you not look at it that way?

Chris Black -- Chief Financial Officer

No, I don't think it's as important, Laurie, because that's -- it's all a relative, right? It's relative on the size of the other party and what that deal is. So it's more what are the prospects for earning it back? What are the assumptions that you have to deliver upon from executing? Are the cost save assumptions achievable? Are the cultural synergies such that we can execute this because that's what matters, not numbers that we put on a piece of paper? So I think the period of time that it takes to earn it back is a very logical guidepost, a little bit less might be the percentage, but obviously they play together and you have to look at both of them. But it would be ranked below, I think, for us, below just that pure earn-back period metric.

Laurie Hunsicker -- Compass Point -- Analyst

OK. I'll leave it there. Thank you.

Operator

The next question comes from Stephen Scouten with Sandler O'Neill. Please go ahead.

Stephen Scouten -- Sandler O'Neill + Partners, L.P. -- Analyst

Sorry for the follow-up, guys. Appreciate it. Just curious, and I may have missed it, I heard you talking about kind of that other expense line item. But I was curious, Chris, maybe if you could comment on the other increases in expenses? It looks like they're up 5% overall, specifically more in the salaries line.

Is that a build we should continue to see? Or is that more from the -- this deposit officer and other recent hires? Or can you kind of give some color to that increase and what we should expect moving forward?

Chris Black -- Chief Financial Officer

Yes. I think that's probably the upper end in terms of a growth rate, upper end of what we're looking for. But like I said, we're in a bit of a transitory period in a number of respects. And you do have to invest for that growth.

And we do not -- we do not want to starve our franchise of the proper investments, but we're extremely focused on it. So I mean, if you're looking at just percentages, yes, I think that's the upper end of what we're targeting, always with leverage come down. But we're in a transformational period and that's just kind of a fact that we have to deal with to invest in the future.

Stephen Scouten -- Sandler O'Neill + Partners, L.P. -- Analyst

Yes. No, that makes sense. And maybe if I ask the question a better way. Do you think you can see actual operating leverage in the next several quarters? Or in that transitory state, is it kind of, hey, we're making some investments, we're reshaping the loan book and this is kind of be where we are from an efficiency ratio standpoint for some time?

Chris Black -- Chief Financial Officer

I think we can see it. I'm cautious to promise too much, but I think we're starting to see incremental operating leverage.

Myers Jones -- Interim Chief Executive Officer

That's our expectation.

Chris Black -- Chief Financial Officer

That's right.

Stephen Scouten -- Sandler O'Neill + Partners, L.P. -- Analyst

Perfect. Very helpful. Thanks, guys.

Operator

That's all the time we have for questions. This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Myers Jones for any closing remarks.

Myers Jones -- Interim Chief Executive Officer

I'd just like to thank everyone for their participation, and I wish you a very good National Wine and Cheese Day.

Operator

[Operator signoff]

Duration: 64 minutes

Call participants:

Myers Jones -- Interim Chief Executive Officer

Chris Black -- Chief Financial Officer

Stephen Scouten -- Sandler O'Neill + Partners, L.P. -- Analyst

Tyler Stafford -- Stephens Inc. -- Analyst

Daniel Cardenas -- Raymond James -- Analyst

Laurie Hunsicker -- Compass Point -- Analyst

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