Q2 2023 CrossFirst Bankshares Inc Earnings Call
Participants
Benjamin Russell Clouse; CFO; CrossFirst Bankshares, Inc.
Michael J. Maddox; President, CEO & Director; CrossFirst Bankshares, Inc.
Michael John Daley; CAO; CrossFirst Bankshares, Inc.
W. Randall Rapp; President & Director; CrossFirst Bank
Andrew Brian Liesch; MD & Senior Research Analyst; Piper Sandler & Co., Research Division
Brady Matthew Gailey; MD; Keefe, Bruyette, & Woods, Inc., Research Division
Matthew Covington Olney; MD & Analyst; Stephens Inc., Research Division
Michael Edward Rose; MD of Equity Research; Raymond James & Associates, Inc., Research Division
Presentation
Operator
Good day, and welcome to the CrossFirst Bankshares, Inc. Second Quarter 2023 Earnings Conference Call. (Operator Instructions) I would now like to turn the conference over to Mike Daley, Chief Accounting Officer and Head of Investor Relations. Please go ahead.
Michael John Daley
Good morning, and welcome to CrossFirst Bankshares Second Quarter 2023 Earnings Conference Call.
Before we begin, please be aware this call will include forward-looking statements, including statements about our business plans, expansion and growth opportunities, expected acquisition of Canyon Bancorporation, Inc. and our future financial performance. These comments are based on our current expectations and assumptions and are subject to risks and uncertainties that could cause actual results to differ materially from these statements.
Our forward-looking statements are as of the date of this call, and we do not assume any obligation to update or revise them, except as required by law. Statements made on this call should be considered together with the risk factors identified in our earnings release and our other filings with the SEC. We may also refer to adjusted or non-GAAP financial measures. A reconciliation of non-GAAP financial measures to GAAP financial measures can be found in our earnings release.
These non-GAAP financial measures are not meant to be a substitute for or superior to financial measures prepared in accordance with GAAP. Our presentation will include prepared remark from Mike Maddox, President and CEO of CrossFirst Bankshares; Randy Rapp, President of CrossFirst Bank; and Ben Clouse, CFO of CrossFirst Bankshares.
At the conclusion of our prepared remarks, our operator, Betsy, will facilitate a Q&A session. At this time, I would like to turn the call over to Mike, who will begin on Slide 4 of the presentation available on our website and filed with our earnings release. Mike?
Michael J. Maddox
Thank you, Mike. I look forward to this opportunity to share an update on our second quarter results. It has been an unprecedented and challenging time for the banking industry. But despite all the recent turmoil, we continue to focus on delivering value to our clients, employees, shareholders and communities. Deposit stability and liquidity are top of mind for investors, and our financial results reflect the benefits of our relationship-driven business model, balanced business mix, high-quality client base, desirable growing markets and the relentless efforts of our extraordinary team.
During the past quarter, we delivered a consistent level of earnings, grew our capital, managed our growth and optimized our expense base, all focused toward delivering long-term value and making our company even stronger. We will continue to take a measured approach to expenses to drive efficiency improvement and gain additional operating leverage as we grow.
Our team delivered adjusted net income of $17.3 million or $0.35 per share for the quarter. Margin was compressed as cost of funds increased higher than our earning asset yields.
As the Federal Reserve continues to rein in inflation, we expect that margin will continue to be pressured. However, we remain optimistic that we will see margins stabilize, given our largely variable loan portfolio and expectations for slower asset growth the rest of this year. As expected, our loan growth moderated this quarter as the economy slows and we become even more selective on new lending opportunities.
Our deposit base remains stable despite the volatility in the industry. Our focus on relationship banking and building strong customer relationships continues to serve us well. We had a nice increase in fee-based revenue this quarter, led by our new SBA lending team, a highlight of the acquisition we completed last year. While our loan and deposit growth have historically been very strong, strategically, we continue to focus on fee income generation to diversify our revenue and enhance our profitability. We are monitoring our loan portfolio for signs of stress and are pleased with the stability of our credit quality this quarter.
We also continue to build reserves and Randy will cover more details on credit in his remarks. Our team remains focused on serving our clients, monitoring credit quality and executing our strategic initiatives. We started the year with a successful implementation of our digital banking platform, completing the system conversion for our Colorado and New Mexico acquisition and immediately following entered into a definitive agreement with Canyon Community Bancorporation and its wholly owned subsidiary, Canyon Community Bank in Tucson, Arizona. I am excited to share that we have received regulatory approval to close on the acquisition of Canyon. We are working towards closing and planning for integration and look forward to welcoming new clients and team members.
We believe the acquisition of Canyon will be complementary to our existing geographic footprint in the Arizona market. The acquisition is expected to provide liquidity, lower cost deposits and an attractive means to further expansion goals in Arizona. In June, we opened our fourth bank in the Dallas area, conveniently located in Preston Center where we see an opportunity to build relationships and grow deposits. Since we entered the Texas market in 2016, we continue to expand our presence to serve the greater metropolitan area, which also includes bank locations in Frisco and Fort Worth.
We will continue to work towards scaling and optimizing the investments we have made and remain focused on driving long-term profitability and shareholder return. Our focus continues to be on efficiency and driving operating leverage. We have made the investments in people, technology and locations necessary to drive strong, continued organic growth. We are working through a challenging time in the overall banking industry, but I am confident in our team's ability to deliver for our clients while building franchise value. Optimizing our investments is important and we made progress in the second quarter that should provide for continued earnings improvement in the quarters to come. And now I'd like to turn the call over to our President of CrossFirst Bank, Randy Rapp.
W. Randall Rapp
Thanks, Mike, and good morning, everyone. In Q2, we continued to intentionally slow loan growth and remained highly focused on deposit generation and fee income. We operated for a full quarter with our new digital banking platform and a full quarter integrated with our Colorado and New Mexico teams, which includes SBA and residential mortgage. We are actively monitoring our loan portfolio and market conditions to assess the impact of higher interest rates on our borrowers.
Turning to Q2 highlights. We slowed our loan growth activity but still reported total loan growth of $149 million, a growth rate of almost 3% for the quarter or 11% on an annualized basis. The increase was balanced across C&I, owner-occupied real estate and energy. Year-to-date, loans have increased 8% with the growth well diversified across our lending areas of focus.
During the quarter, we continued to see growth from areas we have recently made investments in talent, including restaurant finance, energy, Phoenix and the Colorado markets. Although we had strong loan activity, we are strictly adhering to our underwriting standards, incorporating the impact of higher interest rate environment and continued economic uncertainty. Approximately 70% of the loan portfolio is on floating rates that continues to reprice as market rates increase, and we have completed the transition of nearly all transactions tied to a LIBOR index.
We continue to see opportunities to price loans at widened spreads while maintaining our underwriting standards. Average C&I line utilization for the quarter was 46%, consistent with the prior quarter, and portfolio churn increased slightly and is now at the historical average level.
We expect portfolio churn to increase slightly over the next several quarters. Our loan portfolio continues to remain diversified with a 42% concentration in commercial real estate and 45% concentration in C&I and owner-occupied real estate.
Energy exposure is now $233 million or 4% of the total portfolio. This portfolio remains approximately 60% weighted to oil with the remaining exposure primarily in natural gas.
Turning to Slide 6. There remains good diversity within each of those portfolios with the highest CRE property type, industrial, accounting for 17% of total CRE exposure and the largest industry segment in C&I being manufacturing at 11% of C&I exposure.
Total office exposure is $312 million or 5% of total loans. The average office loan is $7 million, and the largest is $25 million. The average loan to value is 58%, and the majority of this portfolio is suburban office. Although we follow our strongest sponsors to other markets, the majority of the exposure is in footprint, centered in North Texas, Kansas City and Colorado.
For the quarter, deposits increased 4.5% to $6.1 billion, up $263 million from the previous quarter. Ben will cover additional deposit portfolio statistics in his remarks. Client deposit generation with an emphasis on demand deposits remains a key area of focus for our company. We are executing a multifaceted strategy that consists of targeted calling efforts in our markets and lines of business, continued investment in treasury management products and personnel, investments in new locations like Preston Center in Dallas, increasing deposit penetration in newer markets like Phoenix and Denver and enhanced incentive compensation tied directly to deposit generation while evaluating potential new deposit verticals. In short, our growth to this point has been built on the foundation of relationship banking, and that remains a strength going forward.
Moving to credit highlights. On Slide 7. For Q2, we reported an increase in nonperforming assets of $2.1 million to $13.3 million, resulting in a nonperforming asset to total asset ratio of 0.19%. The increase was due primarily to 2 C&I credits moving to nonperforming. The nonperforming portfolio is primarily C&I with very minimal energy exposure. This ratio remains down from 0.54% from the same period in 2022.
During the quarter, we sold the only remaining ORE property and now have no ORE. Classified assets to capital plus combined reserves ended Q2 at 9.6%, which is relatively flat compared to the end of Q1. For the quarter, we reported net charge-offs of $603,000, resulting in a net charge-off rate of 4 basis points on an annualized basis and 7 basis points on a trailing 12-month basis.
On Slide 7, at quarter end, we reported an allowance for credit loss to total loan ratio of 1.17%, and combined allowance for credit loss and reserve for unfunded commitments of 1.3%. For the quarter, we reported provision expense of $2.6 million, resulting in a provision to charge-off rate of 438%. Provision was slightly lower than Q1 driven primarily by lower loan growth during the quarter and improved credit metrics. With a total ACL of $68 million, our current ACL to nonperforming loan ratio is 508%. We remain highly focused on maintaining good credit metrics moving forward.
We continue to heavily scrutinize the loan portfolio to assess the impact of higher interest rates and inflation on our clients. We are confident in our underwriting standards and proven sponsors who have significant equity contributions, but could see some grade migration in certain sectors of the CRE portfolio as many projects are faced with higher interest rates, operating costs and property taxes. We expect our loan growth rate to continue to moderate in the last half of 2023 and will remain focused on deposit generation and fee income growth. I will now turn the call over to Ben to cover the financial results in more detail. Ben?
Benjamin Russell Clouse
Thanks, Randy, and good morning, everyone. GAAP net income this quarter was $16 million or $0.33 per share, which included some acquisition and severance costs. Adjusted net income was $17.3 million or $0.35 per share. Both GAAP and adjusted net income were consistent with the prior quarter as margin pressure was offset by lower provision and noninterest expenses as well as higher noninterest income.
Our adjusted return on average assets was 1% and adjusted return on average equity was 10.7%. We acknowledged the profitability compression from the lower margin and took several expense actions in the quarter to drive higher profitability in the future. Net interest income on a fully tax equivalent basis declined $3.7 million or 6% from the first quarter due to higher cost of funds outpacing the benefits of higher average earning assets, higher loan yields and 1 additional day. Average earning assets increased $222 million compared to the prior quarter. The yield on loans increased 31 basis points due to repricing as well as higher yields on new loans. The cost of funds increased 75 basis points due to continued pressure on deposits as well as the mix of deposits shifting into higher cost products as anticipated.
As I noted last quarter, we had the benefit of some additional noninterest-bearing deposits through most of the first quarter that were deployed by clients. The change in those balances was a contributor to the decline in net interest income. Fully tax equivalent net interest margin narrowed 38 basis points compared to the prior quarter to 3.27%. We expect margin to remain in a range of 3.2% to 3.35% for the full year.
Our balance sheet is only slightly sensitive through the anticipated 25 to 50 basis point rate moves expected this year and with lower anticipated loan growth, we don't expect as great of a need to add higher cost deposits going forward. We updated our presentation of loan categories this quarter to better reflect how we manage the portfolios and better align with peers.
Turning to Slide 9. Our percentage of demand deposits declined slightly this quarter and was 15% of total deposits at quarter end. The balance of noninterest-bearing deposits held up fairly well with the decline in the ratio partially attributable to the growth of our balance sheet. As I noted, we had a level of elevated demand deposits through most of the first quarter, but we continue to experience good client retention with no significant client losses this quarter.
Our total cost of funds was 3.41% for the quarter. Our total non-maturity deposit beta against rate increases through the second quarter remained about 65%, in line with our expectations.
Our deposit base remained consistent with the prior quarter in terms of diversification and composition. Our effective uninsured deposits percentage improved slightly from 35% to 32% when considering pass-through accounts. Our deposit concentration across the top 25 clients also improved to 20% this quarter from 23%.
As we have managed through this rate cycle, we have realized the majority of our deposit beta expectations in our results already. While we acknowledge competition for deposits will persist, we believe we are nearing the peak of deposit pricing, allowing us to defend our NIM as we move forward from here. Noninterest income was $5.8 million for the quarter, increasing 31% or $1.4 million from first quarter. The primary drivers were gains on SBA loan sales and growth of fee income from both the acquisition and our legacy markets.
The market was not favorable for SBA loan sales heading into 2023, but it has improved, and we are moving back to an originate and sell model with our enhanced SBA capabilities.
Moving to Slide 12. Excluding acquisition and severance expenses in both the first and second quarters, noninterest expense declined $800,000 or 2%. Going forward, we are focused on driving additional efficiencies and gaining operating leverage. At the end of the quarter, we reduced head count by about 5% and have also identified additional anticipated net savings in noninterest expense. Accordingly, we anticipate noninterest expenses to be in a range of $34 million to $35 million per quarter for the back half of 2023.
Our tax rate was 21% for the quarter, and we expect the tax rate to remain in the range of 20% to 22% for the year. At the end of the quarter, stockholders' equity totaled $651 million, with the increase being driven by earnings, partially offset by an increase in the unrealized loss on available-for-sale securities. As of quarter end, we are well capitalized under all capital ratios. We were able to advance our goal of building capital this quarter as we saw moderating asset growth, strong earnings and an anticipated decline in unfunded commitments.
We are continuing to work toward 11% total risk-based capital and 10% CET1 ratios. Our liquidity remains strong, consistent with the prior quarter with some modest improvement to 36% of assets. As we outlined on Slide 13, we have significant liquidity of approximately $2.6 billion from on- and off-balance sheet sources. In addition to our cash on the balance sheet, our 100% AFS investment portfolio includes $282 million that can be pledged to the FHLB and we have an additional $169 million of securities we could sell today at a net gain. We also have multiple sources of additional off-balance sheet liquidity, including capacity at the FHLB, Federal Reserve, Fed funds and other wholesale funding sources, totaling approximately $1.5 billion.
Slide 14 outlines the composition of our investment portfolio. We have continued to increase the liquidity in our portfolio with an ongoing moderate shift in the ratio of munis. Lastly, as Mike mentioned, we anticipate closing the acquisition of Canyon in the third quarter and are actively working on post-closing integration efforts. We expect the deal will provide additional liquidity, continued partnership opportunity with the seller and earnings accretion of $0.02 to $0.03 on a run rate basis.
The consideration for this deal is expected to be less than book value with about 1% tangible book value dilution and an anticipated earn back of about a year. It will add about $200 million in assets and will have a minimal impact on our capital ratios.
In summary, for the quarter, we shifted our cost base to fit a lower growth environment, continued to see steady credit quality and held our client deposits stable, leading to a consistent level of earnings in a tough environment.
Operator, we are now ready to begin the question-and-answer portion of the call.
Question and Answer Session
Operator
We will now begin the question-and-answer session. (Operator Instructions)
The first question today comes from Brady Gailey with KBW.
Brady Matthew Gailey
If you look in fee income, the gain on the sale of loans was up pretty nicely. I think I heard Ben say you've shifted SBA to an originate and sell model now. So that $1.2 million, is that -- was that like a really good quarter? Or is that a good run rate? Like how do you think about gain on the sale of loans going forward?
Benjamin Russell Clouse
Brady, it's Ben. That -- you're correct, about $1.2 million. That was a really good quarter with a little bit of pent-up demand and our expectation would be about half of that on a run rate basis for the next couple of quarters.
Brady Matthew Gailey
Okay. All right. And then I heard -- I know energy is not huge at CrossFirst. I think it's only like 4% of loans. And then I think I heard it's 60% oil, 40% nat gas. And we are seeing some lenders to the nat gas space that they're seeing some credit quality issues. Are you also -- I know that's a pretty small percent of your loan book, especially when you're looking just at natural gas. Are you all seeing any sort of credit weakness there? .
W. Randall Rapp
Brady, this is Randy. No, we're really not. I mean the energy portfolio is -- credit metrics are holding in very well. And one thing that I think you'll see in our portfolio is a little bit lower advance rate, a little higher hedging percentage to try and take some of that price movement off the table. So Brady, we're really not seeing migration there.
Brady Matthew Gailey
Okay. And then growth is slowing. So you guys are seeing increases in your capital ratios. I think you're only like 30 basis points away from your targeted 11% total risk base and about 50 basis points away from your targeted 10% common equity Tier 1. So as you get closer to those targets, do you start to consider a share buyback just given the stock is trading at roughly 90% of tangible book value?
Michael J. Maddox
Yes, Brady, I think that's a good question. And we have an authorized buyback plan. And as you've said, I mean, right now, we're focused on building capital and being fairly conservative. But once we get to kind of some of those levels, we will certainly consider that. And if our stock continues to trade at a discounted rate, we will take advantage of that.
Brady Matthew Gailey
Okay. All right. Great. Thanks for the color.
Operator
The next question comes from Michael Rose with Raymond James.
Michael Edward Rose
Just wanted to go back to some of the commentary around the margin to kind of square it with kind of the guidance for the year. So I appreciate the revised outlook for the margin. I understand there's a lot of moving pieces, but the range is still pretty wide, and we have 2 quarters left for the year. You did talk about betas reaching kind of terminal values here in the relatively short term, slowing loan growth, which obviously would help a little bit, but it still has a pretty wide range of outcomes, just given the range. Can you just help us walk through kind of what your base case would be? And then what would cause you to be kind of above or below? I think I can guess, but we'd just love to put a finer point on it.
Benjamin Russell Clouse
Yes. Michael, it's Ben. So our model, I would tell you is in the upper end of that range on a static balance sheet. So the biggest question mark would be, can we hold our current deposit base and mix. And then as you well know, DDA is incredibly important. And so we had some clients deploy some DDA at the very end of the first quarter. We haven't seen DDA frankly move a whole lot this whole quarter, which is great and would support us being toward the upper end of our range. I'll let Mike or Randy comment further on loan growth, of course, which is the other piece of that equation. But as we've said, we really expect that to moderate and the other impact that will have on NIM is we won't need to be as aggressive on adding deposits at the top end of the price range to fund loan growth like we had to certainly in first quarter and then a little bit of momentum into the second quarter. Mike or Randy, I don't know if you want to say anything further?
Michael J. Maddox
Michael, I'd just add on a positive note on NIM, I feel like our DDA balances have stabilized. As Ben talked about, we had 2 large customers who had exits of their businesses in the first quarter. We had a lot of DDA sitting there. We knew that was going to transition out into other investments and it did. So that changed our mix a bit in the second quarter. But I do think our DDA balances have stabilized. I think some of our loan yields will catch up as we have renewals and refinancing. So I anticipate our loan yields ought to improve through the rest of the year. So I'm hopeful that we've kind of seen a bottoming of margin and that we may be able to get it going back the same direction.
The other thing is I feel like we're getting closer to the end of the rate hiking cycle. And I think banks will be less -- there'll be less pressure on raising deposit costs. So I'm hopeful we can continue to keep our beta below where it's at today.
W. Randall Rapp
And then Michael, this is Randy. Finish it out on the loan yield side. As we're being more selective and slowing our loan growth, we really are focusing on spread. And where you saw spreads dip into the mid- to low 2s, you're now seeing those in the low to mid-3s. And so the loans we're adding to the portfolio now are at wider spreads than we've seen in the last 18 months.
Michael Edward Rose
Very helpful. I appreciate it. Just as a separate topic, I know you guys had done some trimming here in the quarter on the staffing levels. But in the slide, and as you mentioned, there's additional savings that you've identified. Just wanted to get a sense for color around what those are and what the magnitude could be both on a gross and then on a net basis, just I assume some of the savings will be redeployed in the franchise.
Benjamin Russell Clouse
Yes. So Michael, all of that's incorporated in the guidance I gave, the $34 million to $35 million range. We obviously do have some costs that are escalating going against the gross number. But those are all inclusive. We were really focused on, obviously, things that are discretionary. So what are we doing in the marketing and business development space that could naturally slow down with lower asset growth. We're being very selective on training, travel, meeting costs, those sort of things and trying to be as efficient as we possibly can. So it's really across those categories.
Going the other direction, we have a little bit higher FDIC assessment rate that we got at the beginning of the year. So that's pressure in the other direction. And then, of course, our balance sheet is bigger, so higher transaction volume, larger client base, in particular, as we fold in Central. So we have some costs there going the other way. But again, the $34 million to $35 million is all inclusive there. I think we had mentioned previously the compensation run rate adjustment was about $4 million on a run rate basis will, of course, only obtain $2 million of that savings in the second half of the year but have a little bit more opportunity as we think about 2024.
Michael J. Maddox
Yes, Mike, just to add, we've looked at every expense line item, and we are working hard to continue to improve our efficiency. That's going to happen in 2 ways. One, we're going to continue to take advantage of the operating leverage opportunity we have in our new markets. But we're also going to be very, very prudent on expenses. And we are very, very committed to getting that efficiency ratio down to a run rate in the low, low 50s by the end of the year, and we think we'll get there.
Michael Edward Rose
Very helpful. And then maybe just one final one for me. This is related to the acquisition. I assume it's going to close in the next couple of weeks, just given that you've gotten regulatory approval. But do you have a sense for what the accretable yield addition would be and if you have any sort of expectations for what the run rate would be for that once the deal closes over the next couple of quarters?
Benjamin Russell Clouse
Yes, we anticipate closing here in the early part of August. As you said, we got regulatory approval, and we're lined up to do that. Our modeled expectation, of course, we haven't done a final valuation of the loan book, is about $4 million mark on their portfolio, and I would probably initially think about that over a 5-year period. I'm not smart enough to do that math in my head, but that would be essentially what our expectation would be out of the gate, Michael.
Operator
The next question comes from Matt Olney with Stephens.
Matthew Covington Olney
I want to focus on the loan growth side. I appreciate Randy's comments on the pipelines and be more selective at this point. One of the things Randy mentioned was commentary around the portfolio churn. It sounds like that churn has moved higher, a little bit in the second quarter, now in line with historical levels. I think you also mentioned expectations for this to increase over the next few quarters. Just looking for any kind of additional color around that commentary?
W. Randall Rapp
Matt, it's Randy. We expect the churn to increase a bit in the CRE book. We're seeing the capital markets in that space a little more active, some of the refinance activity picking up, and we just know that from -- we have some visibility when clients call and say, hey, we're scheduled to pay this transaction off in 30 days, 60 days, a little more visibility into what that looks like moving forward. And we just see a little bit more of that activity than we had seen previously this year.
Matthew Covington Olney
And just staying with that, Randy, any specific loan types or any kind of themes you can pick up on as far as the improved activity in that market? .
W. Randall Rapp
The multifamily market seems to be pretty active. The agencies are -- have some good programs out there. And so some of the multifamily is churning a bit faster than it has so far this year.
Matthew Covington Olney
Okay. I appreciate that. And then I guess on impact on the margin. I appreciate the commentary you guys (inaudible) there previously. Any more color on the incremental funding costs you're seeing today as you grow the loan book with the deposit specials or any color there?
Benjamin Russell Clouse
Well, I'll start. This is Ben, and Randy or Mike, please chime in. We're really focused on money market, which is primarily what our client base utilizes. We're obviously very, very commercial. We have done some CD specials and we've raised a little bit of money in CDs, but that's never been our primary focus. We're really concentrating on money market and DDA. Maybe I'll give the incremental color run rate or beginning rate out of the gate at the end of June on our current balance sheet is about $350 million for incremental deposits. And as I said, with a lower level of balance sheet growth, we don't anticipate as great of a need to add deposits at the higher cost range as we've had in the beginning of the year. .
W. Randall Rapp
Matt, it's Randy. I would just add, obviously, the deposit environment is highly competitive and we really think about -- you've got to pull multiple levers here. And with an emphasis on client deposits, and we have, as Ben said, run some CD specials that have been successful, making sure we're competitive in money market rates. First half of the year, we saw some rotation into the ICS product. That growth and rotation has slowed. And in the quarter, we opened net 1,100 new deposit accounts. So there's multiple channels there to look at as we grow our deposit base.
Matthew Covington Olney
Okay. That's helpful. I appreciate the commentary. And then just lastly for me, on the Canyon deal, I think you mentioned that EPS impact upon closing something around $0.02 or $0.03 on an annualized basis, I assume. I thought we were looking for something previously a little bit north of that originally. Just any color on Canyon overall as far as their recent performance or recent fundamental trends.
Benjamin Russell Clouse
Yes, they have remained very consistent. Their balance sheet has not changed with any significance. That's a very conservative number on their current balance sheet. I'll let Mike and Randy talk about the market a little bit further, but we think there's very significant opportunity for expansion within the Tucson market itself, just given their historical business model.
Michael J. Maddox
Matt, I'd just say that's a pretty conservative number. We've been conservative on cost takeouts, and we've been very conservative on growth. We think we'll do better than that. But that's where we're modeling it today. And I think there's a great opportunity in Tucson. Tucson is 1 million people, and I think it's going to be a good banking market for us to compete in. And that market is seeing a lot of growth. So I think with our increased capacity and products that we'll be able to grow there faster than we're modeling.
Operator
(Operator Instructions) The next question comes from Andrew Liesch with Piper Sandler.
Andrew Brian Liesch
I just wanted to touch base on the wholesale funding that was added late in the quarter. Just curious where -- what rates those were added at. And maybe if there's any full quarter effect on that, that could affect the margin here in the third quarter?
Benjamin Russell Clouse
Andrew, it's Ben. Wholesale is primarily for us. We're doing brokered deposits wherever we can find those on the most cost-effective basis. And for the quarter, those were happening in the 5s, in the low 5s. And so that's what I was referring to as funding for us on the top end of the pricing scale. We don't anticipate those will increase in the remainder of the year and will be steady or lower.
Andrew Brian Liesch
Got it. You also mentioned that loan spreads though up to the low 3s. So I mean if I use this funding, are you saying maybe that you're getting loans yielding in the low 8s at this point? .
W. Randall Rapp
Yes, this is Randy. Yes, that's correct. We're trying to make sure that the new loan production has an 8 in front of it.
Andrew Brian Liesch
Got it. So I mean, if you saw the growth a little bit, loans in the low 8s, but then incremental funding may not be at the low 5s anymore, could see presumably some -- a lot less margin compression that we saw in the last quarter, which I think you were alluding to earlier, but am I looking at the math the right way?
Michael J. Maddox
You got it right, Andrew.
Andrew Brian Liesch
Got it. Got it. You've covered all my other questions. I will step back, thanks.
Michael J. Maddox
All right. Thank you.
Operator
This concludes our question-answer session. I would like to turn the conference back over to Mike Maddox, President and CEO, for any closing remarks.
Michael J. Maddox
Well, I just want to thank everybody for joining us this morning. We feel really good about our quarter amongst a lot of challenging backdrop in the macro environment. But really proud of our continued growth, our work on efficiency and operating leverage and our continued improvement in profitability. And also credit quality continues to be a highlight for us. So really proud of our team and the job everybody has done and really, really feel good about where we're positioned for the third and fourth quarters. So thank you, everybody, for joining us, and have a great day.
Operator
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
