Earnings Call Transcript
FIRST HORIZON CORP (FHN)
Earnings Call Transcript - FHN Q2 2023
Operator, Operator
Good morning, and welcome to the First Horizon Second Quarter 2023 Earnings Conference Call. My name is Carla, and I will be the operator for today's call. I would now like to pass the conference over to our host, Natalie Flanders, Head of Investor Relations. Please go ahead when you're ready.
Natalie Flanders, Head of Investor Relations
Thank you, Carla. Good morning, everybody. Welcome to our second quarter 2023 earnings call. It's been a few quarters since we've had one of these. So we thank you for taking the time to join us today. Our Chairman, President, and CEO, Bryan Jordan; and Chief Financial Officer, Hope Dmuchowski will provide some prepared remarks. Afterwards, Bryan, Hope, and our Chief Credit Officer, Susan Springfield will be happy to take your questions. Our remarks today will reference our earnings presentation, which is available on our website at ir.firsthorizon.com. On this call, we will make forward-looking statements that are subject to risks and uncertainties. Therefore, we ask you to review the factors that may cause our results to differ from our expectations on Page 2 of our presentation and in our SEC filings. Additionally, please be aware that our comments will refer to adjusted results, which exclude the impact of notable items. These are non-GAAP measures, so please review the GAAP information in our earnings release and on Page 3 of our presentation. Lastly, our comments reflect our current views and we are not obligated to update them. With that, I'll turn things over to Bryan.
Bryan Jordan, CEO
Thank you, Natalie, and good morning, everyone. Thank you for joining our call this morning. We are pleased to announce our second quarter results. It would be an understatement to say that 2023, especially the second quarter, has been unusual both for our company and the industry as a whole. I'm incredibly proud of the tremendous resilience our company and associates have shown. Despite some of the unprecedented events in the banking sector, we continue to focus on serving our clients and communities, and the results of those efforts are reflected in our strong quarterly results. On Slide 5, you'll find some of the key highlights from this quarter, which Hope will provide more detail on later. On an adjusted basis, we delivered EPS of $0.39 per share and a return on tangible common equity of 14.6%, while maintaining robust capital levels. We ran a very successful deposit campaign. Our bankers made over 50,000 prospecting calls to new and existing clients, bringing in almost $6 billion in new-to-bank funds and growing our client base by 4%. Credit performance continues to be strong with non-performing loans declining $21 million from the first quarter and net charge-offs of 16 basis points coming in at the low end of our guidance range. Our capital position is very strong with CET1 increasing 72 basis points to 11.1%. Though the industry is facing headwinds from increased deposit competition, macroeconomic uncertainty, and impending regulatory change, I'm confident in our ability to earn top quartile returns through the cycle. Our commitment to prudently managing interest-rate risk, liquidity, and credit has positioned us well to navigate the current environment. Our business model is diversified by industry, geography, and product, which provides consistent returns and a greater ability to manage through a range of market conditions. We are investing in our people and infrastructure to enhance our products and services, so that we can take advantage of the opportunities we see in our attractive footprint. Our associates have gone above and beyond in serving our clients during these uncertain times. A benefit of the disruption in the second quarter was the opportunity it provided our associates for proactive outreach to our clients. As you can see the extraordinary result of this effort, and I'm grateful for the confidence our clients have demonstrated in us this quarter. As we move forward, I'm very thankful for the dedication and hard work of our associates as they continue to deliver value for our clients, communities, and shareholders. With that, let me hand the call over to Hope to run through the financial results and our outlook. Hope?
Hope Dmuchowski, CFO
Thank you, Bryan. Good morning, everyone. Turning to Slide 6. We have the highlights on our adjusted financials and key performance metrics for the quarter. As interest rates have risen over the past year, our net interest margin has expanded significantly, up 64 basis points. Despite some moderation this quarter, the margin continues to be very strong at 3.38% and our balance sheet remains asset-sensitive. Adjusted fee income and expenses were both essentially flat to the prior quarter after netting the offsetting impact of deferred compensation. Credit quality continues to remain very strong. Provision expense this quarter was $50 million, resulting in an ACL coverage ratio of 1.35%, flat to the prior quarter. Tangible book value per share of $11.50 is up $0.61. The Series G conversion added $0.50, the merger termination fee added $0.23 after netting out the $50 million foundation contribution. Adjusted earnings added $0.39, partially offset by our common dividend of $0.15. The mark-to-market on the securities portfolio and hedges drove a $0.27 reduction. On Slide 7, we outlined the notable items in the quarter, which netted an after-tax impact of $98 million or $0.17 per share. Our pre-tax notable items include the merger termination fee of $225 million. Merger-related expenses of $30 million, primarily related to the employee retention awards that remain in place following the termination. Other notable items include a $50 million contribution to the First Horizon Foundation, as well as the $15 million derivative valuation adjustment related to prior class, Visa Class-B sales. On Slide 8, you can see that over the last year, we've benefited from our asset-sensitive position with the net interest margin expanding 64 basis points year-over-year. The positive response from clients to our deposit campaign this quarter exceeded our expectations. We brought in $5.8 billion of new-to-bank funds from more than 50,000 customers, which brings our ending deposit balances up 3% year-to-date. The positive deposit momentum modestly accelerated the timing of the increase in deposit betas. However, our net interest margin of 3.38% continues to be very strong, despite some moderation in the quarter. As marginal funding costs have risen, loan spreads have also widened with new production spreads approximately 50 basis points higher than we were seeing in the fourth quarter. On Slide 9, you can see the success of our deposit campaign, demonstrating the confidence our clients have in our franchise. We grew period-end deposits by 6%, added over 32,000 new clients to the bank, and deepened relationships with almost 19,000 of our existing clients. Our competitive offer and targeted client outreach generated historically strong acquisitions, with 60% of balances coming from new-to-bank clients. This deposit campaign provided a great opportunity to connect with our clients. Our bankers made proactive outreach calls, and the clients who took advantage of the deepening offer increased their balances with us by 37% on average. Mix shift continued into the second quarter with noninterest-bearing balances declining from pandemic highs. We are beginning to see signs of the pace of that mix shift starting to slow down, and DDA balances are stabilizing in the second half of the quarter. Noninterest-bearing balances at 29% still comprise a higher proportion of total deposits today than pre-pandemic, which was 27%. Like a lot of banks, we saw clients looking to maximize coverage on their deposits, driving higher utilization of our collateralized repo suite product. In addition to the $4 billion of deposit growth, we added $782 million of repo balances which are incremental funding. On Slide 10, we show the trends in our loan portfolio, with loans up 3% on average and 4% at period-end. Growth was diversified across our markets and portfolio types. Loans to mortgage companies grew $650 million from first-quarter seasonal lows. This is a great business for us; it's our highest-yielding business line, and as others have pulled back in the space, we've been able to deepen our relationships, widen spreads, and negotiate for more deposit business. We also had growth in our CRE portfolio, which was primarily driven by fund-ups on existing loans, mainly in our multi-family space. We cover fee income trends on Slide 11. Overall, fee income has remained stable for several quarters, despite the macroeconomic headwinds impacting fixed-income and mortgage. We had $5 million of increases in deferred compensation, which is offset in expense. We saw $8 million of growth in other fees, partially driven by higher treasury management fees due to a decline in noninterest-bearing deposits and seasonal factors. On Slide 12, we review our expense trends. We have maintained expense discipline across the company as evidenced in our results, with adjusted expenses down $1 million when you exclude the $5 million increase in deferred compensation. The advertising investments made this quarter were to support our client promotions, brand awareness initiatives, and client outreach programs. Other expense declines include $2 million of lower fraud losses from the implementation of additional security solutions, as well as lower franchise and realty tax expenses related to the disposal of properties. Turning to Slide 13, I'll cover asset quality and reserves. Credit quality continues to be strong with non-performing loans down $21 million from the prior quarter and net charge-offs remaining near historic lows. We had $50 million of provision expense, resulting in a reserve build of $27 million, supporting 3% loan growth excluding loans to mortgage companies. Our allowance coverage ratio remains healthy at 1.35%, flat to the prior period. If the industry experiences a credit cycle, we expect our portfolio to outperform due to the benefit of operating in attractive markets, underwriting loans for all stages of the credit cycle and the granular diversification across industries and portfolio types. Turning to capital on Slide 15. Our capital position is very strong with CET1 ratio of 11.1%, up 72 basis points. The Series G conversion added 71 basis points. The termination fee added 19 basis points, net of the foundation contribution. We accretively deployed 30 basis points of capital into loans, including $60 million of lower-risk loans to mortgage companies. CET1 would still be 9.5%, well above the 7% well-capitalized threshold even adjusting for the unrealized losses in the securities portfolio. On Slide 16, we've reaffirmed our full-year guidance, which remains unchanged from what we shared with you at Investor Day in early June. As we're all experiencing, there's been a lot of volatility in the market expectations for interest rates. Our current outlook is for a 25 basis point rate hike in July and then rates flat through the rest of the year. The positive deposit momentum modestly accelerated the timing of the increases in deposit betas and we remain asset-sensitive. We still expect our NII guidance to be in range with what we provided at Investor Day. We continue to invest in our businesses, and our expense outlook reflects the impact of those investments, as well as the remaining retention awards moving into core expenses. We are pleased with the momentum we had this quarter and are excited to continue to deliver on the strength of our franchise. To wrap up on Slide 18. We are well-positioned to capitalize on our diversified business model, highly attractive markets, and asset-sensitive balance sheet. As we continue to prudently manage capital and risk, we are committed to delivering top-quartile returns through the cycle. I am proud of the work our team has accomplished over the last few years and especially as in the last few months. We have built a balance sheet that we believe in and have demonstrated our ability to execute even in challenging times. And with that, I'll give it back to Bryan.
Bryan Jordan, CEO
Thank you, Hope. We strongly believe our second quarter results reflect the strength of our franchise. Our associates accomplished a lot in the last 60 or so days. That dedication, combined with our attractive footprint and extraordinary client base, sets us up to build an unparalleled banking franchise in the south. We have long-tenured relationships that are broad and deep. We have an established team; we're excited about the opportunities that we have to deliver value-added advice to clients with improved products and technology. I am confident that we are well on the way to becoming a top-performing regional bank and delivering enhanced returns to our shareholders. This concludes our prepared remarks. Carla, we'll now open it up for questions.
Operator, Operator
Our first question is from Jon Arfstrom from RBC Markets. Your line is now open. Please go ahead.
Jon Arfstrom, Analyst
A question on deposit pricing expectations. Curious if you see them changing at all, you alluded to a slowing noninterest-bearing migration. Can you talk a little bit about that? And then on your deposit campaign, do you need to do more? Is that essentially over at this point?
Hope Dmuchowski, CFO
Good morning, Jon. Thank you for the first question. Good to hear from you again. On the deposit campaign, we did have a promo rate that ran through June 30. That promo rate has expired, and we have gone out with a new third quarter from a way that is much more modest. We do expect to continue to need to raise deposits in the industry, but we don't expect to have to run the aggressive campaign we did in May and June. We continue to believe that we are well-positioned to grow our deposit base, especially deepening relationships with the new clients we brought on board. As far as the DDA, we really saw in the second half of the quarter, almost no migration. Coming out of the beginning of the year, especially in March and April, we saw a significant focus by clients on moving DDA into interest-bearing as they became aware of how lucrative that is and the outreach calls we were all doing during that time as a result of the failures in the industry. Therefore, we believe the 29% that we're at now has been stable for the second half of the quarter. It remains stable as those are really operating accounts and there's not much more that can migrate into interest-bearing.
Jon Arfstrom, Analyst
Okay, very helpful. And then, can you touch on the pricing pressures on some of the larger depositors? You touched on it at Investor Day, but are you seeing that at all with some of the bigger deposit balances?
Hope Dmuchowski, CFO
Yes. I would say in June, we do definitely, towards the end of the quarter, saw significant pressure. We were seeing; I think a lot of people settled down, had changed banks, already moved their money, and we're starting to see a little bit more normalized bidding in the industry, as well as clients not looking to move money as quickly as they were following the three bank failures.
Bryan Jordan, CEO
Jon, I understand. I believe you will notice greater pressure in the upcoming quarters, particularly in the commercial lending area. The entire industry is working to strengthen and expand relationships in commercial lending transactions. This is evident in the participation in club deals and indicated transactions. I expect more pressure to arise on the commercial side, likely in the latter half of this year.
Jon Arfstrom, Analyst
Okay. So you're saying it's more tied to credit?
Bryan Jordan, CEO
Yes. Directly so.
Operator, Operator
We have our next question from Casey Haire from Jefferies. Please go ahead.
Casey Haire, Analyst
So just maybe following up on some of Jon's questioning. It sounds like the DDA is near bottom, which is great. I was wondering, is there a ceiling on CDs as a percentage of mix? I know you guys are stepping away from the promotions, but just wondering how much CDs you can make of the deposit franchise.
Hope Dmuchowski, CFO
Casey, we're experiencing a bit of feedback. I believe you asked if there is a ceiling on CDs regarding our portfolio targets. I would say that we are still significantly underweighted in CDs compared to our peers when I review Q1 and the growth we had in Q2. Therefore, I believe we still have considerable room to increase our CDs. If we push that pricing aggressively, I would mention that during the quarter, CDs were not leading; instead, we attracted a significant amount of new funds into our money market offerings.
Casey Haire, Analyst
Okay, great. And then just following up, any updated thoughts on where cumulative deposit beta settles? Apologies if I missed this, where cumulative deposit beta settles?
Hope Dmuchowski, CFO
At Investor Day, what we said was that we thought our cumulative deposit betas would be around 55%. I think that's still a good range. I think we'll look at depending on what the rate environment is. One of the things that I mentioned in my comments is that I do believe we accelerate our deposit betas this quarter as a result of our deposit-gathering campaign. Future rate hikes do not require us to reprice our book the way we would have had to in the past. I think we just accelerated that.
Casey Haire, Analyst
Okay.
Hope Dmuchowski, CFO
I think we're still in that range.
Casey Haire, Analyst
Okay, excellent. And just lastly on the expense front, up 5% year-over-year, tracking a little bit below your 6-8% guide for the year. I am just wondering if that's conservative or is there going to be more expense pressure in the back half?
Hope Dmuchowski, CFO
I think that's realistic. One of the big things we need to add back is we have $22 million of retention coming back into operating that was previously charged to the merger center, which is a big part of it. We also have some hiring that we need to do coming out of just being a little bit low, thinking that we were going to close on a merger shortly. There is some hiring that we need to do back; significant portions with just some pockets that we need to backfill.
Casey Haire, Analyst
Great, thank you.
Hope Dmuchowski, CFO
And the third one is, as we mentioned in Investor Day, we are starting to invest in our technology and that takes a quarter to two to come up. So I expect we will start to see some of that really hit our run-rate in the fourth quarter with a full run-rate impact in 2024 as we invest $75 million to $100 million in our technology platforms over the next three years.
Operator, Operator
Our next question comes from Michael Rose from Raymond James. Please go ahead when you're ready.
Michael Rose, Analyst
I wanted to discuss this quarter's loan growth. If my calculations are correct, the guidance remains the same. However, this quarter has turned out to be stronger than many expected. Does this suggest a possible decline in the second half of the year? We're trying to reconcile the guidance. Additionally, could you provide some insights on the warehouse? It seems that one of your larger competitors has exited that space. I'm curious about the potential advantages this might bring for you. Thank you.
Bryan Jordan, CEO
Yes. Michael, this is Bryan. I'll start. We think that loan growth will probably flatten out some in the back half of the year. You had some continued pull-through of pipelines in the residential mortgage. You mentioned mortgage warehouse lending. There have been some changes in the competitive landscape there and we've seen some opportunities both on the pricing and the line utilization side to pick up some very nice relationships there. Broadly speaking, we saw utilization in commercial real estate as we saw fund-ups of some existing projects that were done many, many quarters ago. So we think that we'll start to level out. We think the positive trends we saw in deposits and deposit-gathering positioned us well to support our customer needs and to grow the franchise attractively, and we'll take advantage of those opportunities. But our expectation for loan growth over the full year is that it flattens out some in the back half of this year.
Michael Rose, Analyst
Great. And then maybe just switching to the fixed-income business. I think this is the lowest quarter of revenue that I have at least in my model going back many, many years. Can you just give us an update on kind of the competitive positioning of that business? Is this kind of an inflection point quarter? We're going to get to some sort of inflection point is about its terminal rates here in the next couple of months. I just wanted to get some updates there. Thanks.
Bryan Jordan, CEO
Yes, it has been a series of very challenging quarters in that business, and our average daily revenue has been affected. However, we remain confident in our ability to serve our customers in a distinctive manner. We have a strong and diverse customer base along with a significant distribution model, and we believe that once we reach terminal rates and start to see some transition and steepening of the yield curve, we can expect a recovery in that business. We have always characterized it as somewhat countercyclical and anticipate it will continue to behave that way. In the meantime, our teams are diligently working to provide value through other channels such as portfolio management, advisory services, asset management, and research, and we will be focused on controlling costs to be ready for the turnaround when it occurs.
Operator, Operator
We have our next question from Brady Gailey from KBW. Please go ahead when you're ready.
Brady Gailey, Analyst
So the initial deposit promotion is over. I think you said it wrapped up, June 30, and then you mentioned there was a new deposit promo going but at lower rates. But what is the new kind of pricing of deposits for this quarter?
Hope Dmuchowski, CFO
Since money markets have kind of been the one that we've had the most success with, on that one, we were at $5.25 for money markets and starting July 1, we're now at $4.25. So, we decreased 100 basis points there. I would say that that's pretty directionally similar for other products as well.
Brady Gailey, Analyst
Okay. The loan-to-deposit ratio ticked down a little bit in the second quarter; it's now at kind of a mid-90% range. Is there a goal that you'd like to see that ratio at? Are you actively trying to get that ratio lower?
Bryan Jordan, CEO
Yes. Brady, we don't have a goal around that. We're mindful that we have to fund our loans with deposits and our securities portfolio. We think it's useful to look at both loans and securities portfolios because they both have to be funded in a similar fashion. We are mindful that we don't want that ratio to get too high. We're not uncomfortable with where it is, and our outlook and our ability to gather deposits doesn't give us any concern that we're going to be overly constrained by our loan-to-deposit ratio. We're not going to let it get wildly out of hand, but right now we're very comfortable with how it's positioned.
Brady Gailey, Analyst
And then finally for me, just an update on the share buyback. If you look at your common equity Tier 1, you're supposed to finish the year around 11.5%. That's a lot higher than your goal of 10% to 10.5%. Is there any update on the willingness to consider a share buyback, especially with the stock at 1.10 of tangible?
Bryan Jordan, CEO
Yes. I don't have any new information. We still have authorization to buy back stock. We believe that right now capital provides really nice degree of optionality. We think it's important to see how this economic environment plays out. We like being positioned with a strong capital base. We'll have plenty of opportunity to deploy it, and capital repatriation - whether it's dividend and/or buyback. But in the meantime, we're going to use it to support our customers and look at opportunities to grow the balance sheet where appropriate.
Operator, Operator
Our next question comes from Brody Preston from UBS. Please go ahead.
Brody Preston, Analyst
I just wanted to ask, it seems like the interest-bearing deposit growth was a little bit back-half weighted when comparing the period-end and the average. And so, I just wanted to maybe ask on the spot rate of the interest-bearing deposit costs. Do you happen to have what that is at quarter-end?
Bryan Jordan, CEO
Yes. No doubt it was back-half weighted with the termination in early May. We started the program in the back half of May. Our spot rate at the end of the quarter would run in about 3.10%, all-in cost of deposits.
Brody Preston, Analyst
Okay, great. Hope, regarding the net interest income guidance, it seems you're slightly below the lower end of the Q2 estimate. I understand you've adjusted the forward curve outlook as it changes. I wanted to ask how much the removal of a few projected rate cuts in the second half of the year influenced the net interest income guidance.
Hope Dmuchowski, CFO
Yes. We did miss our guidance just slightly and that's all on deposit growth. We set up an Investor Day on June 6, and everyone thought we were going to have deposit runoff. We said no, we're seeing deposit momentum. We didn't expect June to be a better month than May at that point. We were really, really excited to see how strong June came in which did give us higher beta and a little lower net interest margin. But I will mention the rates we're paying for deposits are positive to our overall net interest margin over the horizon as we pay down wholesale funding as it matures and can continue to use client deposits as our primary way to fund our balance sheet. When we look at the way the rate curve has moved, bringing a rate increase earlier in the year versus two decreases later in the year is very positive to our margins since we're asset-sensitive, and it does help to offset the increased deposit rates we have. So I believe we're still in range with all three of those offsetting.
Brody Preston, Analyst
Okay. And then I wanted to ask one just on the fixed-rate loan portfolio. Do you happen to know what the dollar amount of fixed-rate loans that are repricing over the next 12 months is? And do you know what the current yield on those loans that are repricing?
Hope Dmuchowski, CFO
Brody, I don't know the yield on those. I can try to get them and have Investor Relations get back to you. At the end of the day, I don't have that, but it is about $5 billion that we have repricing in the next 12 months.
Brody Preston, Analyst
Okay, great. And what are current origination yields? I'm sorry if you mentioned that and I missed it.
Hope Dmuchowski, CFO
Yes. We've seen our spreads significantly widen out to about 150 to 300 is what we are seeing the new originations are.
Operator, Operator
Our next question is from Jared Shaw from Wells Fargo. Please go ahead.
Timur Braziler, Analyst
This is actually Timur Braziler filling in for Jared. Just spoke a couple of questions here. The excess liquidity that was generated in the second quarter looks like it's sitting in cash right now. Just curious, what the use of that liquidity is going to be? Are you going to pay down some borrowings with that? Is it going to go into the bond book? Any color we can get on that?
Hope Dmuchowski, CFO
We plan to use that to pay down our borrowings. We had structured our borrowings in a way that deposits arrived faster than expected. It wasn't our intention to hold that much cash at the Fed. As we repay our debt with the FHLB, we will use those excess funds to do so.
Timur Braziler, Analyst
It seems like you will continue building liquidity for the remainder of the year. Will that be the strategy, or might we see some additional investments in the bond book?
Hope Dmuchowski, CFO
At this time, we have no intention of putting any additional securities on the books. Our intention is to improve our liquidity position, as I said. As Bryan mentioned earlier, we want to use our strong capital position and liquidity, we generate to be there for our clients and customers during this time and support our loan growth that we felt. We have moderating loan growth in the back half of the year, but still loan growth.
Bryan Jordan, CEO
We expect that the securities portfolio, due to our limited reinvestment, will continue to decline.
Timur Braziler, Analyst
Okay, that's helpful. Thank you. And then, maybe from a bigger picture standpoint, the deposit growth that you generated in the second quarter. Can you just talk about kind of the geographic diversity there and how that plays in for the broader strategy as a standalone company? Is the near-term strategy to further penetrate the IBERIA markets, kind of with the broader product offering? Is it on working to gain market share in Tennessee, namely Nashville, kind of all of the above? Maybe just give a sense of how you're thinking about geographic strategy here.
Bryan Jordan, CEO
Yes. The breakdown, if I recall the numbers, it was about 20% of the deposit growth was in the State of Tennessee and 80% was out. It's fairly broad-based and diverse. We think that as we look at the next several quarters, we're realizing the benefits of the promise of the IBERIABANK First Horizon merger of equals. We think we have a great opportunity to continue to grow our presence in these very attractive higher-growth markets. We're all across that and one of the areas of emphasis for us in the coming quarters will be how we continue to build out that retail presence and retail focus in what would be in the legacy IBERIABANK markets. We see there being a huge opportunity for us to capitalize on a unique business model and value proposition for our customers while driving positive attractive deposit growth and the ability to serve our customers more broadly in these higher-growth markets.
Operator, Operator
Our next question comes from Steven Alexopoulos from JPMorgan. Please go ahead when you're ready.
Anthony Elian, Analyst
This is Anthony Elian on for Steve. My first question at Investor Day last month you indicated that you were able to retain nearly 90% of associates through the first quarter of this year while waiting for the TD deal to move forward. What did banker retention look like in the second quarter and since Investor Day? Are there any notable changes from the retention statistics you provided at Investor Day?
Bryan Jordan, CEO
No notable changes. Our banker and client retention have continued to be very strong, and we're encouraged by the excitement and enthusiasm we see in both groups: our associates and our bankers, as well as our clients. So, our retention has been good, and while I haven't seen the final numbers, my estimate would be that it has likely improved from what you observed in the first quarter.
Anthony Elian, Analyst
Okay. And then on the deposit-gathering promotion. I guess from a high level, why did you feel like you needed to be aggressive with engaging in deposit-gathering promotions, not just from existing clients, but also from new-to-bank clients?
Bryan Jordan, CEO
We had a unique situation in mid-April with the termination of the merger. During this time, we recognized that the deposit base in the U.S. has been volatile and shrinking, so we aimed to position ourselves effectively to protect our market while also aggressively demonstrating our commitment to the areas we serve. This was a great opportunity for our bankers to connect with customers, having positive discussions about First Horizon, our positioning, our future plans, and our dedication to meeting their needs. Additionally, as Hope noted, engaging with clients provides a relationship advantage over borrowing from federal home loan banks, even at similar costs. We decided it was an appropriate moment to reset and officially recognize the merger's termination, focusing on showing our dedication to our customers and the market while delivering on the value of the First Horizon model.
Anthony Elian, Analyst
Okay. And my last question of the $5.8 billion deposit you add in the second quarter from the campaign. How much would you say is sticky, and how does that break down into the $3.5 billion from new clients and the $2.3 billion deposits from existing clients? Thank you.
Hope Dmuchowski, CFO
The new-to-bank clients, we saw 80% of that in consumer and 20% of that in commercial. On the deepening relationships, it was 51% consumer and 49% commercial. We see every one of these as an opportunity to introduce new clients to the First Horizon brand and the First Horizon franchise. Now that we have a deposit relationship, we are calling on them and trying to deepen relationships in other spaces. We hope that the majority of these will be sticky; we are not seeing them as transitional deposits. We are reaching out to these clients and trying to build relationships with every single one of them. We have 4% more clients this quarter than we had before, and we see that as an opportunity to continue to grow relationships with them and create more profitability.
Bryan Jordan, CEO
The real opportunity we see is that attracting customers in any deposit campaign is important, as it allows us to demonstrate our commitment to service and strengthening relationships. Looking at the deposit growth from our existing customer base, we saw roughly $2.3 billion to $2.4 billion, with about 60% coming from our primary customers. Our aim is to use this locked-in period to deepen and broaden these relationships. Among the new customers, around 32,000 were added, with approximately 23,000 to 24,000 being retail and over 6,000 being commercial. This presents a great chance for us to expand these relationships, and we expect positive results from our efforts.
Operator, Operator
Our next question is from Christopher Marinac from Janney Montgomery Scott. Please go ahead.
Bryan Jordan, CEO
I had a credit question for you or for Susan, just about the migration of just downgrades with special mention or substandard, how you look at it and how you think that may point out in the quarters ahead?
Susan Springfield, Chief Credit Officer
Thank you, Chris. We experienced limited additional downgrades into non-performing loans, which were quite moderate. This is something we usually observe in the second quarter when we receive year-end financials from clients. Overall, we are pleased with the asset quality of our portfolio. At the end of the quarter, total classified loans were at 1.7%, and non-accruals were at 0.7%. In fact, we saw a decrease in our non-accrual loan balances. We are monitoring the situation closely due to economic conditions and rising interest rates. However, discussions with our bankers and clients indicate that many borrowers are adapting to this environment by adjusting their businesses and passing on price increases. Given our current position, we feel well-prepared but will continue to observe the situation carefully and ensure that we maintain appropriate servicing and monitoring, while also being diligent in our initial underwriting processes.
Hope Dmuchowski, CFO
It's kind of interesting when you talk to our bankers and the customers, Chris. This expected recession that's always six months off just continues to roll; it still feels like customers and borrowers are in a pretty good place. As Susan said, they've adjusted very well to higher rates and the changing dynamics around inflation. As you said, we're paying a lot of attention to grading and understanding how our borrowers are doing, but at the end of the day, things still feel relatively good at this point.
Christopher Marinac, Analyst
Great, thank you for that. And Susan, would there be any possible reserve release if the unfunded commitments come down, is that a possibility?
Susan Springfield, Chief Credit Officer
They obviously we have to reevaluate every quarter, Chris, in terms of looking at what growth we've had in balances and unfunded commitments, and things like what's going on in the economy. At this point, I feel like the reserve is where it needs to be based on what we know today, and we'll gauge that. Obviously, if there are opportunities to release, we take a look at that, just like we look at changing economic conditions when there is either growth or deterioration in the economy.
Operator, Operator
We have no further questions registered. I'll hand back to the management team for final remarks.
Bryan Jordan, CEO
Thank you, Carla. We appreciate everybody joining us on what we know is a busy morning. Thank you for taking time. We appreciate your interest in our company. If you have any follow-up questions or if you need additional information, please reach out to any of us or Natalie Flanders today, and we will get you additional information. Thanks. I hope you all have a great day.
Operator, Operator
This concludes today's call. Thank you for joining. If you have missed any part of the call or would like to hear it again, the telephone replay will be available shortly. Have a lovely day.