CrossFirst Bankshares, Inc. (NASDAQ:CFB) Q2 2023 Earnings Call Transcript

CrossFirst Bankshares, Inc. (NASDAQ:CFB) Q2 2023 Earnings Call Transcript July 18, 2023

Operator: Good day, and welcome to the CrossFirst Bankshares, Inc. Second Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mike Daley, Chief Accounting Officer and Head of Investor Relations. Please go ahead.

Mike 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 remarks 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 four of the presentation available on our Web site, and filed with our earnings release.

Mike?

Mike 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 remained 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 on our strategic initiatives.

We started the year with the 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 complimentary 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.

Randy 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 six, 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. Through 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 deposit remains a key area of focus for our company. We are executing a multi-faceted strategy that consist 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 goal 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 seven. For Q2, we reported an increase in non-performing assets of $2.1 million to $13.3 million, resulting in a non-performing asset to total asset ratio of 0.19%. The increase was due primarily two C&I credits moving to non-performing. The non-performing 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 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 seven, at quarter end 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 of ACL of $68 million, our current ACL to non-performing 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 prudent 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 cost, and property taxes. We expect our loan growth rate to continue to moderate in the last half of 2023, and we will remain focused on deposit generation and fee income growth. I’ll now turn the call over to Ben to cover the financial results in more detail. Ben?

Ben 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 cost. 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 non-interest expenses as well as higher non-interest 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 earnings assets, higher loan yields, and one 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 the mix of deposits shifting into higher cost products as anticipated. As I noted last quarter, we had the benefit of some additional non-interest-bearing deposits through most of the first quarter that were deployed clients. A change in those balances was a contributed to the decline in net interest income. Fully taxed 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 basis to 50 basis points rate moves expected this year. And with lower anticipated loan growth, we don’t expect as greater the need to add higher cost deposits going forward. We updated our presentation of loan categories this quarter to better reflect how we managed the portfolios and better align with peers. Turning to slide nine, our percentage of demand deposits declined slightly this quarter and was 15% of total deposits at quarter end. The balance of non-interest-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 continued 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.

Non-interest 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, non-interest 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 headcount by about 5% and have also identified additional anticipated net savings in non-interest expense.

Accordingly, we anticipate non-interest 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 a range of 20% to 22% for the year. At the end of the quarter, stockholders equity totaled $651 million with the increase been driven by earnings, partially offset by an increase in the unrealized loss on available for sales securities. As of quarter end, we are well-capitalized under all capital ratios. We were able to advance our goal building capital this quarter as we saw moderating asset growth, strong earnings, and an anticipated decline in unfunded commitments. We are continuing to work to 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 asset. 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 of 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 will continue 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.

Q&A Session

Operator: We will now begin the question-and-answer session. [Operator Instructions] The first question today comes from Brady Gailey with KBW. Please go ahead.

Brady Gailey: Hi, thanks. Good morning, guys.

Mike Maddox: Good morning, Brady.

Brady Gailey: Ben, if you look in fee income, the gain on the sale of loans was up pretty nicely. I think I heard Ben say you shifted SBA to an originate-and-sell model now. So, that $1.2 million, was that a really good quarter or is that a good run rate? How do you think about gain on the sale of loans going forward?

Ben Clouse: Good morning, Brady, it’s Ben. 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 Gailey: Okay, all right. And then I heard — yes, 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 that we are seeing some lenders to the nat gas space, that they’re seeing some credit quality issues. Are you all — 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?

Randy Rapp: Hey, Brady, this is Randy. No, really not. I mean the energy portfolio is — current metrics are holding in very well. And one thing that I think you’ll see in our portfolio is little bit lower advance rates, 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 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?

Mike Maddox: Yes, Brady, I think that’s a good question. And we have an authorized buyback plan and as you’ve said, right now we’re focused on building capital and being fairly conservative. But once we get to 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 Gailey: Okay. All right, great, thanks for the color.

Mike Maddox: Thank you.

Operator: The next question comes from Michael Rose with Raymond James. Please go ahead.

Michael Rose: Hey, good morning, guys. Thanks for taking my questions.

Mike Maddox: Good morning.

Michael Rose: Morning. Just wanted to go back to some of the commentary around the margin, [square it] (ph) with the guidance for the year. So, 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 two quarters left for the year. You did talk about betas reaching terminal values here in the relatively short-term, slowing loan growth which obviously would help a little bit. But it still is a pretty wide range of outcomes just given the range. Can you just help us walk through what your base case would be, and then what would cause you to be above or below? I think I can guess, but would just love to put a finer point on it. Thanks.

Ben Clouse: Good morning, Michael. It’s Ben. So, our model, I would tell you, is in the upper end of that range on the 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 there on —

Mike Maddox: Yes, Michael, I would just add, on a positive note on NIM, I feel like our DDA balances have stabilized. As Ben talked about, we had two 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 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 is at today.

Randy Rapp: Yes, and Michael, this is Randy. To 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 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 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 the gross and then on a net basis, just I assume some of the savings will be redeployed in the franchise. Thanks.

Ben Clouse: 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 were 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 rates 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. We’ll, 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.

Mike Maddox: Yes, Mike, I’d — just to add. We’ve looked at every expense line item, and are working hard to continue to improve our efficiency. That’s going to happen two 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 50s by the end of the year, and we think we’ll get there.

Michael Rose: Very helpful. And then maybe just one final one for me and this is related to the acquisition. I assume it’s going to close in the next couple weeks just given that you’ve gotten regulatory approval. But do you have a sense for what the [accretable] (ph) 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 quarters? Thanks.

Ben 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 five-year period. And 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.

Michael Rose: Okay, great. Thanks for taking my questions.

Mike Maddox: Thank you, Michael.

Operator: The next question comes from Matt Olney with Stephens. Please go ahead.

Matt Olney: Thanks. Good morning.

Mike Maddox: Morning.

Matt Olney: 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 the next few quarters, just looking for any kind of additional color around that commentary. Thanks.

Randy Rapp: Hey, good morning, 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 with — 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.

Matt Olney: And just staying 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?

Randy Rapp: The multi-family market seems to be pretty active. The agencies have some good programs out there, and so some of the multi-family is churning a bit faster than it has so far this year.

Matt Olney: Okay, appreciate that. And then, I guess, just the impact on the margin. Appreciate the commentary you guys put out 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?

Ben 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 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. Our run rate or beginning rate out of the gate, at the end of June, on our current balance sheet is about 3.50 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.

Randy Rapp: Matt, it’s Randy. I would just add, obviously the deposit environment is highly competitive. And we really think about — you got to pull multiple levers here, and as — 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. In the quarter, we opened net 1,100 new deposit accounts. So, there are multiple channels there to look at as we grow our deposit base.

Matt Olney: Okay, that’s helpful. 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 to $0.03 on an annualized basis, I assume. I thought we were looking for something previously a little bit north of that originally. Any color on Canyon overall as far as their recent performance or recent fundamental trends? Thanks.

Ben 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 is very significant opportunity for expansion within the Tucson market itself just given their historical business model.

Mike 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 a 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.

Matt Olney: Okay. All right, that’s all for me. Thanks, guys.

Mike Maddox: Thanks, Matt.

Operator: [Operator Instructions] The next question comes from Andrew Liesch with Piper Sandler. Please go ahead.

Andrew Liesch: Hey, everyone. Thanks for taking the questions. I just wanted to touch base on that whole self-funding that was added late in the quarter to see if there what rates those were added at, and maybe if there’s any third quarter effect on that, that could affect the margin here in the third quarter?

Ben Clouse: Hey, good morning, 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 Liesch: Got it. You also mentioned that those spreads go up to the low 3. So, this funding maybe you are getting loans yielding in the low 8 at this point?

Randy Rapp: Yes, Andrew. 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 Liesch: Got it. It’s summed up little bit loans in the low 8s, but then incremental funding may not be at low 5s anymore. Could we see some or lot less margin contraction as we saw in the quarter? I’m getting to it earlier, but am I looking at the math the right way.

Randy Rapp: That’s the way we see it, Andrew.

Andrew Liesch: Yes, got it, got it. You’ve covered all my other questions. I will step back. Thanks.

Randy Rapp: All right, thank you.

Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Mike Maddox, President and CEO for any closing remarks.

Mike 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 very proud of 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, very proud of our team and the job everybody has done. And we really feel good about where we are 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.