National Bank Holdings Corporation (NYSE:NBHC) Q2 2022 Earnings Conference Call July 2, 2022 11:00 AM ET
Company Participants
Tim Laney – Chairman, President and Chief Executive Officer
Aldis Birkans – Chief Financial Officer
Conference Call Participants
Jeff Rulis – D.A. Davidson
Andrew Liesch – Piper Sandler
Andrew Terrell – Stephens Inc.
Kelly Motta – KBW
Brett Rabatin – Hovde Group
Operator
Good morning, everyone. And welcome to the National Bank Holdings Corporation 2022 Second Quarter Earnings Call. My name is Kyle and I will be your conference operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session following the prepared remarks. As a reminder, this conference is being recorded for replay purposes.
I would like to remind you that this conference call will contain forward-looking statements, including, but not limited to statements regarding the company’s strategy, loans, deposits, capital, net interest income, non-interest income, margins, allowance, taxes, and non-interest expense. Actual results could differ materially from those discussed today. These forward-looking statements are subject to risks, uncertainties, and other factors which are disclosed in more detail in the company’s most recent filings with the U.S. Securities and Exchange Commission.
These statements speak only as of this date of this call. And National Bank Holdings Corporation undertake no obligation to update or revise these statements. In addition, the call today will reference certain non-GAAP measures which National Bank Holdings Corporation believes provides useful information for investors. Reconciliations of these non-GAAP financial measures to the GAAP measures are provided in the news release posted on the Investor Relations section of www.nationalbankholdings.com.
It is now my pleasure to turn the call over and introduce National Bank Holdings Corporation’s Chairman, President and CEO, Mr. Tim Laney. Please go ahead, sir.
Tim Laney
Thanks Kyle. Good morning. And thank you for joining us. As we discuss National Bank Holdings second quarter 2022 financial results. I’m joined by Aldis Birkans, our Chief Financial Officer. And our focus on small and medium sized businesses operating in high performing U.S. markets continues to produce solid results. Our teams delivered another record quarter of loan fundings driving annualized loan growth of 12.3%. We remain prudent in our underwriting.
We continue to work with businesses whose balance sheets are very strong and well positioned for economic shocks. To that end, we ended the quarter with record low non-performing assets and positive asset quality trends across the board. Furthermore, if we took the cumulative losses, the cumulative losses from our recent stress tests using assumptions consistent with the severely adverse scenario used in the 2022 DFAS, we would operate with a Tier 1 leverage ratio of approximately 9%. Our focus on earning the full relationship of our clients resulted in attractive growth in transaction deposits and treasury management fees.
I’ll add that we feel very good about our new market share gains and our momentum on that front. We’re making solid progress on our regulatory approvals, having just received approval from the Federal Reserve for Rock Canyon Bank, and we remain on track for approval of the Bank of Jackson Hole acquisition. The more time we spend with these two banks and their teams, the more optimistic I am about their imminent contributions to our financial performance.
And on that note, I’ll turn the call over to Aldis Birkans. Aldis?
Aldis Birkans
All right. Thanks Tim, and good morning. Thank you for joining our earnings call this quarter. For the second quarter 2022, we reported net earnings of $20.4 million or $0.67 per diluted share. Our bankers delivered another quarter of solid loan growth. Our expenses continue to be well managed and the credit quality remain exceptionally strong. The closing and integration of our two previously announced bank acquisitions remains on track.
And on the related note, during the quarter, we had realized $1 million in M&A related costs. During the quarter, we funded $492.5 million in loan originations, which was another quarterly record. And as a result, the loan portfolio grew a solid 12.3% annualized. As we have discussed on our prior earnings calls, we benefit from operating in markets that continue to outperform the national economic metrics in many fronts, involve high inflation and rapidly rising interest rates will impact many aspects of the economy. We are pleased with our new relationship pipeline activity as we enter the second half of 2022.
We also entered this trade cycle with an asset sensitive balance sheet and the increasing interest rates benefited net interest margin nicely during the second quarter. The quarter’s fully taxable equivalent net interest margin was 3.38% or a 48 basis point increase from the prior quarter. Approximately 13 basis points of this increase was driven by accelerated income from an early payoff of an acquired loan. And the rest was driven by the balance sheet test at sensitive positioning. The total cost of deposit decreased to record low 16 basis points.
Looking ahead for the second half of 2022, we project NBH’s net interest margin to be in the 3.4% to 3.5% range. In terms of our asset quality, it remains strong with positive trends across the board. The second quarter’s net charge-offs were just three basis points annualized and both the nonperforming assets ratio and the NPL ratio decreased another four basis points this quarter. Looking ahead and fully recognizing the increased risks of the U.S. economy, our CECL credit allowance reserve increased from 1.04% of total loans at the end of the first quarter to 1.06% at the end of the second quarter. The resulting second quarter’s provision expense was $2.5 million. Total second quarter’s noninterest income was $16.8 million or a $2.3 million decrease from the first quarter.
The linked quarter decrease was entirely due to lower residential mortgage income as the rapidly rising mortgage rates materially slowed down mortgage volumes. Additionally, this quarter we selectively retained a higher portion of mortgage loans in our portfolio. Our client engagement for both consumer spending and business account activity was strong and total service charges grew 26.6% annualized on the linked quarter basis. Similarly told, bank card revenues grew 40.7% annualized on the linked quarter basis.
Looking ahead for the second half of 2022, we are projecting our total fee income to be in the $30 million to $32 million range. Non-interest expense totaled $45.6 million and included approximately $1 million of acquisition related costs. Excluding these acquisition related expenses, the core bank expense run rate was relatively flat with the first quarter and reflects our continued expense management efforts.
For the second half of 2022, we are projecting non-interest expense to be in the range of $92 million to $95 million. To be clear, these projections exclude M&A related costs. Finally, our capital ratios remain strong at 13.75% common equity Tier 1 ratio and 9.99% tangible common equity. So they already mentioned our two M&A deals remain on track. As we have been working with our future teammates throughout the summer, we are becoming increasingly optimistic about the strategic and financial benefits of these deals. And we look forward to providing more guidance on these transactions in the coming quarters.
Tim, with that, I will turn it back to you.
Tim Laney
Thanks Aldis. I like our momentum as we enter the third quarter, we’re prudently growing our company and we’re well prepared for a broad array of economic scenarios. My expectation is that we’ll continue to enhance our operating leverage while also growing diverse new revenue streams and an attractive low cost deposit base. It’s also noteworthy that our balance sheet is well positioned to avoid any major AOCI shocks. We remain focused on maintaining a fortress balance sheet while also adding capabilities that will be leveraged across our geographic and to unify platforms. We’re committed to delivering solid results today while also building for the future.
And on that note, Kyle, I’ll ask you to open up the lines for questions.
Question-and-Answer Session
Operator
Certainly. [Operator Instructions] We take our first question from Jeff Rulis with D.A. Davidson. Your line is open. Please go ahead.
Tim Laney
Good morning.
Jeff Rulis
Good morning, Tim and Aldis.
Aldis Birkans
Good morning.
Jeff Rulis
A question on the – just wanted to get a sense for the deposit behavior of some of the customers with some of the runoff. Any idea on – do you get the sense that this group was sort of the more of the rate chasing group or there were some notable by segment depositors that may have exited? Any comment on kind of the deposit balance change linked quarter?
Tim Laney
Yes, you bet. I think what you need to focus on is the division of what we would consider to be operating accounts versus time deposits. We actually had core growth in our operating accounts or what we refer to as transaction deposits. We remain very focused on whether we’re net growing new relationships, new depository relationships and feel good on that front. So I would tell you, we’ve been comfortable with letting some of the rate chasers on CDs, time-related deposits move on and frankly, feel good about the growth in our core true relationship accounts. And then I’ll throw it to Aldis for any other detail.
Aldis Birkans
Yes, Jeff, actually, on an average basis, if you look at, we grew our average deposit balance of $61 million on a linked quarter basis, $92 million in transaction deposits. So really what contributes to the earning asset funding component is we did quite well in terms of averages growing. What we saw was kind of ebbs and flows through two quarters spot balances in between. But as Tim mentioned, no loss of clients, no loss of real relationships. So again, the focus is on growing core and balances on average.
Jeff Rulis
Yes. Aldis, on the front like you said, the period end transaction deposits linked quarter, so you’re saying that’s more of a timing issue than really we can track the average number that was up, but do you think there was just some fluctuations timing-wise?
Aldis Birkans
That’s correct. As we obviously spent quite a bit of time analyzing and looking at not seeing any account losses even, it’s more of a balances and certain business client accounts.
Tim Laney
And I’ll stress again, we’ve never focused on CDs time deposit business. Our focus is on core transactional relationships and strategically feel good about where we’re continuing to move on that front. And it ties directly to the other comments we made on broader market share gains. Our focus is on earning the full relationship with clients. That means as we’re bringing on new small, medium-sized businesses or individuals, we’re expecting to certainly capture the depository relationship.
Jeff Rulis
On that core deposit or are you seeing any – I guess, what you see and what you see in market, do you see any initial moves on kind of rate adjustments? Do you think that – well, so two questions within your own book of core customers that you do want to keep, are you seeing any pressure on pricing? And then are you seeing anything in the market that’s been a rational to date?
Tim Laney
I mean the bulk of – keep in mind, the bulk of our focus is small and medium-sized businesses, we’re capturing operating accounts and we’ve seen in some cases, some discussion around earnings credit rate pressure, but it’s been nominal. On the individual side of the business or personal banking, you’re always going to have some tranche that are comparing yields on interest earning accounts.
And those are more often than not judgment calls around what we’ll do based on the nature of the relationship with the client. But fortunately, we feel like we’re operating in pretty rational markets on the deposit front. I mean there – I’ll just be blunt. There’s always going to be somebody that’s crazy out there, but we’re not going to chase crazy. And we’ll let them play that game, and we’ll stay focused on being rational.
Jeff Rulis
Great. Aldis, you’ve mentioned in the past, kind of the impact of to margin when it’s kind of more of a normalized cash and cash equivalent like on the balance sheet, the impact – the positive impact of when you get to a we saw the decline in cash. Maybe you got a little bit more to go. Could you range-bound what that impact would be when you get back to kind of a more normal level? Are you kind of approaching that on a cash basis? Thanks.
Aldis Birkans
Yes. No, I think we still have some excess liquidity sitting in that we’ll look to deploy in the loan growth. So the cash – to be very precise calculating cash still has a 21 basis point dilutive impact to the margin for the second quarter. Now we obviously as I mentioned, benefited 13 basis points in the margin from one – specific one early payoff that is visible in acquired loan line item in the margin table. So once you kind of back those out, it’s no surprise you get to very close to the margin guidance that I provided of 3.4% to 3.5% with today’s rate environment, and that does not necessarily take an account the potential actions here in later in July.
Jeff Rulis
Aldis, is that 21 basis point drag, is that taking cash to zero? Or is that taking it to a level of historical comfort?
Aldis Birkans
Yes. It’s taking to the level of historical. We’re always for liquidity purposes and intraday cash needs will hold call it, $50 million to $100 million of cash on hand just to make sure that we manage our liquidity properly. So it’s taking down to those historical levels.
Jeff Rulis
Got it. Perfect. Thanks. And maybe last one, just checking in on the timing, obviously, the Rock Canyon approval, it seems like it’s well on its way. Is it safe to say that expectations for the two deals you would think closed by the end of the third quarter? And then if you could just remind us on your PEGs conversion timing of those two as well.
Aldis Birkans
Yes. I mean, certainly, with Rock Canyon, just received the Fed’s approval, which is gives us more visibility on timing on that transaction. So we do expect that at this point to be a third quarter event for our Canyon. Again, the Bank Jackson Hole is what we understand, no, nothing far behind, but until we get that letter in hand, it’s not going to speculate when whether it’s third or fourth quarter. In terms of integrations, again, on Rock Canyon now that we can start planning a little bit more and have dates reserved with our core providers, it is a fourth quarter event.
Tim Laney
I do want to stress that whether you’re talking about Rock Canyon or Bank of Jackson Hole, there are no known issues related to the approval of either of these banks. And I’ll say again, since we’re discussing them, just we actually grow increasingly optimistic about the perspective contribution from each of these teams and the markets they’re in. And I’ll say again, have absolutely no indication that there will be any issues with approval or getting these closed and integrated on a relatively very fast pace.
Jeff Rulis
Thanks guys.
Tim Laney
Thank you, Jeff.
Operator
We take our next question from Andrew Liesch with Piper Sandler.
Tim Laney
Hey, good morning, Andrew.
Andrew Liesch
Hey, good morning, guys.
Tim Laney
Good morning.
Andrew Liesch
Question on the loan growth here. In the past, you mentioned the 10% to 12% range. It seems like tracking right near that high end. But some of the growth here this quarter was on the residential mortgage side. Curious, what’s the appetite to grow residential mortgages? Is this more of a one-off for the quarter? What sort of products were you adding just given that there has been a slowdown in that business lately?
Tim Laney
Yes. I would tell you it is not a focus. We still remain confident in driving the vast majority of our growth out of small and medium-sized businesses. What’s really interesting about this quarter is we did have and we believe, in a number of cases, these were temporary paydowns. But what you really have to look at beyond the 12.3% annualized growth is the level of fundings that were generated in the quarter to offset some meaningful paydowns or I will say in a few cases, business that moved away on price. We talked about deposit side just as we’re not going to chase business on rates on deposits, we’re also not going to retain relationships that are unprofitable.
And we did see a few relationships move away in the second quarter. But again, we’re more than capable of offsetting that with very strong fundings. Feel very, very good about third quarter fundings in the small and medium-sized business space as well. And again, we are hyper-focused on the quality of the balance sheets of these businesses we’re looking at. And I should add income statements as well. Intense focus on global cash flow coverage, intense focus on management teams of the businesses and their strategies for addressing different economic scenarios.
And certainly, just given the environment and intense focus on alternative sources of liquidity for coverage or payback of any loans were extending. So I know I kind of went beyond your question, Andrew, but our focus is clearly small and medium-sized business. I wouldn’t expect a lot – I wouldn’t expect any kind of growth trend out of what we’re holding on the balance sheet in residential.
I’ll also add tell this near and dear to my heart, we also carry no consumer it’s not as though we’re carrying floor plan or auto exposure, we don’t carry consumer credit card or for that matter, any broad consumer exposure and not that we’re suggesting that’s bad or good. It’s just not something we do.
Andrew Liesch
Got it. That’s helpful. Yes, it may be nice to have some of the mortgage growth, but more of an anomaly with the focus still being on the commercial side. So that makes a lot of sense. On the loans that left, was it just on price? Or are you seeing other people compensate on structure to take loans from you?
Tim Laney
No, I would really tell you it was largely price. Again, I feel like we’re pretty fortunate. There’s always going to be an exception to the rule. But for the most part, we’re fortunate to operate with what I would describe as rational competitors. And I think that bodes well for the markets – the primary markets we do business in.
Andrew Liesch
Got it. And just on the reserve build this quarter, appreciate building of it a little bit just with some of the macro factors in there. Is this – I mean, obviously, there’s a model that you’ve got to follow. But I mean do you think similar increase is possible in the next couple of quarters? Do you think the 106 level is where you want to flatten, just kind of us how you guys view the reserve?
Aldis Birkans
Yes. No, it’s hard to talk about what – how the Moody’s models or Moody’s outlooks will change here and how really the economy will evolve. What I can say is in the current quarter, the scenario that we are using is already assuming certain economic slowdown, if not outright recession. So the model – the way we view it is appropriately conservative that drove the reserve that we need today. But in terms – again, and just to be very clear, as I mentioned in the – it is all underlying future outlook scenario for – that drove the increase. If you look at our credit metrics, NPLs down, NPAs down, 30 to 89 past dues down, 90 plus past dues down, OREO down, classified loans down. I mean our portfolio could not have had a better quarter in terms of credit performance. It’s just the outlook is that’s driving it.
Tim Laney
I’ll share something that in all of my years of banking, I’ve not seen before, and this is just incredible. But we had – in the small business loan portfolio, we ended the quarter with zero past dues. I’m going to repeat that zero. I mean, again, there are a lot of reasons for it, including some of the government funding programs coming out of the pandemic. But I will say, when we talk about being prepared for economic shocks, we look at the balance sheets of some of these companies. In fact, the companies we bank in I don’t think they could be better prepared for a downturn. In my – all of my years, I’ve never seen zero past dues on a quarter end for a portfolio of size. So just some additional perspective.
Andrew Liesch
Thanks, guys. Quite the environment we’re in. But thanks for taking the question. I will step back.
Tim Laney
You bet. Thanks again.
Aldis Birkans
Thank you.
Operator
We take our next question from Andrew Terrell with Stephens Inc.
Tim Laney
Good morning.
Andrew Terrell
Hey, good morning. Maybe just quickly, Aldis, I wanted to go back to the net interest margin guidance for – you said 3.4% to 3.5% range for the back half of the year. Just wanted to clarify and make sure that doesn’t assume any further rate increases past what we’ve already gotten, correct?
Aldis Birkans
That is correct.
Andrew Terrell
Okay. And then just as you kind of think about that guidance, are you assuming any kind of step-up in deposit costs as we work into the back half of the year? Or is there…
Aldis Birkans
Yes. So again – so as we discussed, the markets that we are in are fairly rational. Our competitors and major competitors for sure, are very rational. It’s not to say that we haven’t seen a rate increase offers to our clients. So long way of saying is that when I project the margin, it does not assume any rate increases in deposits. Now again, if federal reserve increases here in July, whether it’s 50, 75 or 100 basis points, certainly, it will be hard to imagine that overall market does not start having more pressure on deposits. So we’ll react and make sure that we are competitive and offer fair value to our clients. But in terms of what – again, we are asset sensitive. So we expect that the loan and asset repricing at least covers that, if not, of course, exceeds the way it has to date.
Andrew Terrell
Okay. Great. Thank you. And then I think in the past, you guys have maybe given the yield on new production for the quarter. Are you able to share kind of where new production was coming on in the second quarter versus 4.17% kind of average originated loan yield in the quarter?
Aldis Birkans
Yes. So our second quarter’s new loan fundings average rate weighted average rate was 4.8%. So certainly accretive to that 4.17% or really 3.91% last – in the first quarter. To put that in perspective, first quarter was closer to 4% and late last year, while we held for most part for handle, there was a quarter or two where we dipped in high 3s. So the discipline – very happy about the discipline and our bankers have had in terms of new loan funding rates. The 4.8%, again, it’s throughout the quarter. So that does not necessarily reflect the later rate movements that took place in a quarter. So I expect that to drift up here in the third quarter or even more so.
Andrew Terrell
Okay. Got it. Thank you guys for taking my questions and congrats on a great quarter.
Aldis Birkans
Yes. Thank you very much.
Operator
We’re moving forward to Kelly Motta with KBW.
Aldis Birkans
Hi, Kelly.
Kelly Motta
Hi. Good morning. Thank you so much for the question, Tim and Aldis. Maybe on expenses, your new guidance implies a run rate that’s a bit below what you had guided for the year last quarter. Just wondering if with the inflationary pressures, if that revision lower is mostly a function of mortgage, or if there’s other things you’re doing to help control expenses since I know that’s been a keen focus of yours for the past several years?
Tim Laney
And it continues to be and will continue to be as we really look at every function in our company and realize opportunities to be more efficient. We also believe with these two impending acquisitions, we’re going to have another opportunity to really look at creating some attractive synergies, adopting some of the processes and practices that we’ve discovered in those two banks. And then, we’ll continue to look at rationalizing our banking center network. It’s just practical to be thinking that way as we continue to watch the migration of our personal banking clients to the digital world and that lent itself to opportunities to reduce expense. So I expect, as I said, in my earlier comments, I expect to see positive trends in and around the improvement of our operating leverage. And Aldis I’ll ask you what you would add.
Aldis Birkans
Yes. So the primary driver down on the guidance is the mortgage commission as we certainly adjusting our fee revenue guidance to the current market environment as well. If you look at what the round rate is today and what the implied guidance for the rest of the year is there’s a little bit of a step up and that is to be very clear. It is to unify build out initiative that we continue to invest in, but the core banking run rate and the strategic focus that we have internally and have had for multiple years now on managing expense and finding efficiencies remains there as Tim mentioned.
Tim Laney
And that’s the real key. You’re going to see the natural ebb and flow with mortgage. The real key is what we’re doing to continue to improve the core. And I really appreciate our team’s focus on that front. They’re doing a fine job.
Kelly Motta
Got it. That’s really helpful. And I appreciated all the earlier color on loan growth and the outlook. I know you usually give guidance for the year, and I didn’t hear that. Maybe I missed it. Just wondering if that’s some reticence towards the pricing competition you’re seeing, or if you’re still pretty confident that you can hold that outlook after what was a pretty strong quarter.
Aldis Birkans
Well, you heard me, right, I didn’t give an exact guidance. Just go around, having grown 12.3% second quarter, 13-plus-percent in year to date basis, we certainly are on a track to deliver the full year guidance of 10% to 12%. And as I mentioned, the pipelines that we see today are quite strong. The only call a caution that we have in our outlook is the – what we don’t know and really the inflationary pressures are real that impacts the business activity. The rate increases are real that potentially could slow down the borrowing need. And we just don’t want to over promise something that is out of our control.
Kelly Motta
Understood. That’s helpful. Maybe one last question for me, I know I’m jumping around a little. But on the deposit cost side obviously it was very well controlled. You guys have a lot of liquidity and balance sheet room in deposit betas were you guys had much lower betas than the group overall last quarter. Is there anything that would suggest you wouldn’t again outperform on the funding side here as the fed continues to crank up rates? Just wanted hear your thoughts. Thanks.
Aldis Birkans
Well, again, that asks us to comments on what others will do. So I can do that. What I can say is that our deposit beta last go around was call it 15 basis points all in through the full cycle. Certainly, we’ve had a zero beta today. We’ve seen 150 basis point rate increase on the fed funds, at least and more to come. So whether we can on next basis point of increase hold to 15 basis points, it’s hard to tell it will depend on the comparative margins.
But I do believe that it all comes down to how we approach our deposit gathering efforts, which as Tim mentioned, is very much focused on building a full relationship, obtaining the operating accounts and the rate product that is – that we offer, whether it’s a savings money market or time deposit account or it’s an ancillary type of excess liquidity that people leave with us or businesses leave with us. But the primary focus is grabbing their operating accounts, which is certainly a non-interest bearing for the most part.
Tim Laney
And I’ll just say again and again, that is our focus. We are simply focused on earning the operating accounts of our small and medium sized business clients and earning core accounts, not free accounts, core paying accounts from individuals and their families.
Kelly Motta
Got it. Thank you. This is really my last one now. Aldis, just quick modeling question for the back half of the year. Tax rate, is this a good tax rate to use for second half?
Aldis Birkans
The answer is yes. I mean, we have 17.6% in the second quarter. It does not assume again, any M&A related expenses, which certainly will take the taxable income down and therefore tax rate down more so. And just to be very clear, non-taxable income component is not going to change because of the expenses incurred on M&A. So 17.6%, I would say is probably high end of the range if once we start realizing real M&A costs. But again, we don’t project any of our numbers with M&A.
Tim Laney
Kelly, I feel like I’m hearing – yes, Kelly, I feel like I’m hearing all the analysts this morning, pepper Aldis with modeling questions. I’m going to be real curious to see what all of you come up with.
Kelly Motta
I really appreciate all the help guys and all the color as well, not just on the modeling questions, on the operational side too. So I really appreciate it. Thank you.
Aldis Birkans
You bet. Have a good day.
Operator
We take our next question from Brett Rabatin with Hovde Group.
Tim Laney
Hey Brett. Good morning.
Brett Rabatin
Hey guys. Good morning.
Tim Laney
How can we help you?
Brett Rabatin
I guess first I’ll take another crack at the margin deposit question and wanted to just think about the – obviously, you’re going to have some level of higher deposit betas and the margin expansion, like mini was more than expected maybe in 2Q, but you’ve got the positives of two solid banks coming on in the back half of the year. All this would it be fair to assume that the margin increases in the back half of the year quarterly are somewhat more muted than 2Q? Can you give us any thoughts on kind of the margin going forward, just as you see it relative to the fed hikes from here?
Tim Laney
I think that’s a very fair assessment that the increase from here and out is going to be a little bit more muted because certainly back to the deposit betas they’re not going to remain at zero right or negative really. We continue to decrease our cost here in second quarter. So fully understanding that there will be some deposit or pricing up the margin benefit from future rate increases, I think will be a little bit new muted than what we’ve seen to date.
Brett Rabatin
Okay. And what will the BA balance sheet management look like in the back half of the year with the two additional deals, obviously this quarter, you use the liquidity to kind of manage the improved margin. Does the balance sheet in combination with these two acquisitions, does that kind of mean that the balance sheet stays a little bit flattish to the back half of the year relative to the assets being added in current portfolio? Or can you give us any thoughts on sizing?
Tim Laney
Yeah. Well, again the two transactions themselves, just to recap are going to add about $1.5 billion in loans, $1.2 billion in deposits and call it $2.4 billion in total assets. I will say that those two institution balance sheets are sitting on combined approximately $500 million of cash themselves. So that certainly will – is going to provide us with a lot of flexibility, whether we talk about having to manage our betas, deposit betas and be more maybe aggressive. And what gives us freedom a little bit more aggressive in terms of not chasing as much, or certainly if we continue to on the pace and on the long originations that we’ve seen year-to-date, then provides a ton of liquidity to deploy into the loan growth, and which would be obviously the preferred route for anybody or the third option certainly will look at the time of closing and what the rate environment that is then, and, and maybe adding a little bit to the investment portfolio.
But again, the Tim’s point early on we’ve done that to-date in very conscious manner with what that does a potential risk do around our AOCI and tangible book value print. So – any, and all of that move would be with a very high focus on short duration type of asset that is risk reward is there.
Brett Rabatin
Okay. And then obviously you just mentioned AOCI. Can you give us any update on those two transactions in terms of initial dilution to tangible book given the AOCI?
Tim Laney
Yeah. So what the tangible book value, what we had put in the original decks and no reason to update or change those guidances right now, so Rock Canyon Bank, we had 4.8% tangible book value dilution, Bank of Jackson Hole 7.2%, so for combined called a 12% tangible book value day one dilution.
Brett Rabatin
Okay. alright. And then, maybe a question just on credit and it seems like there’s such a – just like you mentioned, Tim earlier, it’s such a strange environment that we’re in. And one of the things that’s interesting is, credit can’t seem to get much better than it is for most of the industry, but obviously the market and investors are worried about recession and the implications for credit quality.
Tim Laney
Yeah, exactly.
Brett Rabatin
Yeah. Tim, I mean, as you look out at the world, I mean, what asset class everyone’s worried about consumer to some degree, but as you look out, is there anything that you guys have circled that you would say, either with your portfolio or just from a lending perspective that you think like, hey this should be watched more than in other categories or there anything, is there anything that you’re kind of easing up on in terms of wanting to be bigger in?
Tim Laney
Well, I think the fact that we’re not a player in national syndication, certainly not in areas like highly leveraged transactions that we tend to stick with fundamental knitting around small and medium sized businesses that have strong track records of performance through different economic cycles bodes well for us. We’re always worried about commercial real estate, hence our low levels of commercial real estate relative to risk based capital. You could certainly, but everybody has the same observation. You could certainly pull out certain areas of commercial real estate and arguably be even more concerned.
But I think a lot of what we’re talking about here is really the importance to enhance due diligence and on ongoing monitoring. And coming back to what we believe are critical to understanding credit risk and that’s global cash flow coverage, that’s secondary and third sources of repayment. Should you have a fundamental issue on the front end? It’s management experience through again, these cycles. And so I don’t tend to think about any particular industries or sub-sectors that we’ve said absolutely no to outside of strategic decisions like exiting energy a number of years ago that frankly had nothing to do with ESG and more to do with just not being able to get our heads around as senior bank lenders, being able to take the volatility risk.
So as we see as Rick and his team, if they identify sectors or sub-sectors where we also see a level of risk volatility, that would suggest we can’t earn adequate risk adjusted returns on senior bank debt, we will not be afraid to exit them, but I can’t point to, I can’t really call out any particular sectors as we sit here today.
Brett Rabatin
Okay. fair enough. I appreciate all the color.
Tim Laney
You bet. Thanks Brett. Thanks.
Operator
Thank you. And I’m showing we have no further questions at this time. I will not turn the call back to Mr. Laney for his closing remarks.
Tim Laney
Thank you, Kyle. And I want thank everyone for their questions and your interests in National Bank Holdings have a great day.
Operator
And this concludes today’s conference. If you would like to listen to the telephone replay of this call, it will be available beginning in approximately four hours and will run through July 25th, 2022, by dialing 88820311112, and referencing pass code 8588483. The earnings release and online replay of this call will also be available on the company’s website on the Investor Relations page. Thank you very much and have a great day. You may now disconnect.
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