First Horizon Corporation (FHN) Q2 2023 Earnings Call Transcript

First Horizon Corporation (NYSE: FHN) Q2 2023 earnings call dated Jul. 19, 2023

Corporate Participants:

Natalie Flanders — Head of Investor Relations:

Bryan Jordan — Chairman, President and Chief Executive Officer

Hope Dmuchowski — Chief financial Officer

Susan Springfield — Senior Executive Vice President & Chief Credit Officer

Analysts:

Jon Arfstrom — RBC Capital Markets — Analyst

Casey Haire — Jefferies LLC — Analyst

Michael Rose — Raymond James & Associates, Inc. — Analyst

Brady Gailey — Keefe, Bruyette, & Woods, Inc. — Analyst

Brody Preston — UBS — Analyst

Timur Braziler — Wells Fargo Securities, LLC — Analyst

Anthony Elian — J.P. Morgan — Analyst

Christopher Marinac — Janney Montgomery Scott LLC — Analyst

Presentation:

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 of today’s call. [Operator Instructions]

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 — Chairman, President & Chief Executive Officer

Thank you, Natalie. Good morning, everyone. Thank you for joining our call this morning. We are pleased to announce our second quarter results. It’d 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 6, 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 am 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 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 results of this effort, and I’m grateful for the confidence our clients have demonstrated in us this quarter. As we move forward, I am 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 — Chief financial Officer

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 to $98 million after-tax impact 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 which remain in place following the termination. Other notable items include a $50 million contribution to the First Horizon Foundation as well as a $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 the 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 out, 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 acquisition, 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 that the pace of that mix shift is 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 this 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, primarily in our multi-family space.

We cover our 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 the 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 expenses declines include $2 million of lower fraud losses from 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 remain 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’s expectations for interest rates. Our current outlook is for 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 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 — Chairman, President & Chief Executive Officer

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 who are excited about the opportunities that we have to deliver value-added buys 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.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question is from Jon Arfstrom from RBC Markets. Your line is now open. Please go ahead.

Jon Arfstrom — RBC Capital Markets — Analyst

Good morning, everyone.

Bryan Jordan — Chairman, President & Chief Executive Officer

Good morning, Jon.

Jon Arfstrom — RBC Capital Markets — 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? Or is that essentially over at this point?

Hope Dmuchowski — Chief financial Officer

Good morning, Jon. Thank you for the first question. Good to hear from you again.

Jon Arfstrom — RBC Capital Markets — Analyst

Yeah. Good morning.

Hope Dmuchowski — Chief financial Officer

We — 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 promo rate, which is much lower. 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 in 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. And 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 that we were all doing during that time as a result of the failures in the industry. And so we believe the 29% that we’re at now is — has been stable for the second half of the quarter and remain stable as those are really operating accounts and there’s not much more that can migrate into interest bearing.

Jon Arfstrom — RBC Capital Markets — 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 ease at all with some of the bigger deposit balances?

Hope Dmuchowski — Chief financial Officer

Yeah. I would say in June, we, definitely, towards the end of the quarter saw not the 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 — Chairman, President & Chief Executive Officer

Jon, I’d add the following, which is, I think, where you’ll see more pressure in the coming quarters, not that it’s going to be easy anywhere, but more on the commercial lending side. As you look at commercial lending transactions, the entire industry is looking to deepen and broaden relationships. You’re seeing that in participation and club deals. You’re seeing that in syndicated transactions. And I think you’ll see more of the pressure emerging on the commercial side in all likelihood in the back half of this year.

Jon Arfstrom — RBC Capital Markets — Analyst

Okay. So you’re saying tied to — more tied to credit?

Bryan Jordan — Chairman, President & Chief Executive Officer

Yeah. Yeah. More than just a credit transaction, it’s a relationship.

Jon Arfstrom — RBC Capital Markets — Analyst

Okay. I’ll step back in the queue. Thank you. Appreciate it.

Bryan Jordan — Chairman, President & Chief Executive Officer

Thank you.

Operator

We have our next question from Casey Haire from Jefferies. Please go ahead.

Casey Haire — Jefferies LLC — Analyst

Great. Thanks. Good morning, guys. So just maybe following up on some of Jon’s questioning. On the — 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 promotion, but just wondering how much CDs can make up the deposit franchise.

Hope Dmuchowski — Chief financial Officer

Casey, we’re getting a little bit of feedback, but I think you asked, is there a ceiling on CDs as to what we’re targeting in our portfolio? And I would say, I think we’re still significantly underweighted in CDs versus our peers when I look back at Q1 and where we grew in Q2. So I think we still have a lot more room that we could grow CDs if we aggressively were to price there. I would tell you, in the quarter, CDs were not — are leading. We really [Indecipherable] a lot of money market funds was where we saw a lot of the new-to-client money come in.

Casey Haire — Jefferies LLC — Analyst

Okay. Great. And then just following up, any updated thoughts on where cum deposit beta — apologies if I missed this, where cum deposit beta settles?

Hope Dmuchowski — Chief financial Officer

In Investor Day, we said 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, I do believe that we accelerated our deposit betas this quarter as a result of our deposit gathering campaigns. And so 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 — Jefferies LLC — Analyst

Okay. Great. And just…

Hope Dmuchowski — Chief financial Officer

And we gave this [Indecipherable] at Investor Day, and I think we’re still in that range.

Casey Haire — Jefferies LLC — Analyst

Okay. Excellent. And just lastly, on the expense front, up 5% year over year, tracking a little bit below your 6% to 8% guide for the year. Just wondering if that’s conservative? Or is there going to be more expense pressure — heavier expense pressure in the back half?

Hope Dmuchowski — Chief financial Officer

I think that’s realistic. I think one of the big things you 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. And we also have some hiring that we need to do coming out of just being a little bit low, thinking that we are going to close on a merger shortly, and there is some hiring that we need to do back. Significant portions with just some pockets that we need to backfill.

Casey Haire — Jefferies LLC — Analyst

Great. Thank you.

Hope Dmuchowski — Chief financial Officer

And the third one is as we mentioned at Investor Day, we are — I was going to say the third one is we are starting to invest in our technology, and that takes a quarter or two to come up. So I expect we start to see some of that really hit our run rate in 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.

Casey Haire — Jefferies LLC — Analyst

Thank you.

Bryan Jordan — Chairman, President & Chief Executive Officer

Thanks, Casey.

Operator

Our next question comes from Michael Rose from Raymond James. Please go ahead when you’re ready.

Michael Rose — Raymond James & Associates, Inc. — Analyst

Hey. Good morning, everyone. Thanks for taking my questions. Just wanted to touch on this quarter’s loan growth. I think if I’m doing the math right, the guide was reiterated, but this quarter was obviously much stronger than I think many of us were anticipating. Does that imply kind of a shrinkage in the back half of the year or is the guidance conservative? Just trying to kind of square the guidance. And then maybe if you could touch on the warehouse. It looks like one of your larger competitors got out of the space. Just wanted to see what the potential benefit to you all would be. Thanks.

Bryan Jordan — Chairman, President & Chief Executive Officer

Yeah. 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 has been some changes in the competitive landscape there, and we have seen some opportunities both on the pricing and the line utilization side to pick up some very nice relationships there.

And broadly speaking, we saw utilization in commercial real estate as we saw fund-up of some existing projects that were done many, many quarters ago. So we think that will start to level out. We think, clearly, 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 it flattens out some in the back half of this year.

Michael Rose — Raymond James & Associates, Inc. — 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? And is this kind of an inflection point quarter? Are we going to get to some sort of inflection point as Fed hits terminal rates here in the next couple of months? I’m just wondering to get some updates there. Thanks.

Bryan Jordan — Chairman, President & Chief Executive Officer

Yeah. It’s — look, it’s been a series of very tough quarters in that business, and average daily revenue has suffered as a result. We’re still very confident in our ability to serve in a — our customers in a very unique way. We’re very uniquely positioned with a broad customer base, a huge distribution model. And we’re very confident that when we do reach terminal rates and we start to see some transition and steepening of the yield curve, we’re likely to see that business recover nicely. We’ve always described it as somewhat countercyclical, and we expect that we’ll continue to do that. In the meantime, our teams are working very, very hard to deliver value through other channels, portfolio advisory, asset management, research, things of that nature. And we’re going to control cost, and we’ll be positioned for the turn when it comes.

Michael Rose — Raymond James & Associates, Inc. — Analyst

All right. Great. Thanks for taking my question.

Bryan Jordan — Chairman, President & Chief Executive Officer

Sure. Thank you, Michael.

Operator

We have our next question from Brady Gailey from KBW. Please go ahead when you’re ready.

Brady Gailey — Keefe, Bruyette, & Woods, Inc. — Analyst

Thank you. Thanks. Good morning, guys.

Bryan Jordan — Chairman, President & Chief Executive Officer

Good morning, Brady.

Hope Dmuchowski — Chief financial Officer

Good morning.

Brady Gailey — Keefe, Bruyette, & Woods, Inc. — Analyst

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. What is the new kind of pricing of deposits for this quarter?

Hope Dmuchowski — Chief financial Officer

Since money markets kind of been the one that we’ve had the most success with, I’ll do 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. And I would say that that’s pretty directionally similar for our other products as well.

Brady Gailey — Keefe, Bruyette, & Woods, Inc. — Analyst

Okay. And 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 would like to see that ratio at? Are you actively trying to get that ratio lower?

Bryan Jordan — Chairman, President & Chief Executive Officer

This — 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 get — let it get wildly out of round. But right now, we’re very comfortable with how it’s positioned.

Brady Gailey — Keefe, Bruyette, & Woods, Inc. — 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 [Phonetic] of tangible?

Bryan Jordan — Chairman, President & Chief Executive Officer

Yeah. I don’t have any new information. We still have authorization to buy back stock. We believe that, right now, capital provides a really nice degree of optionality. We think it’s important to see how this economic environment plays out, and we like to be in a position 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.

Brady Gailey — Keefe, Bruyette, & Woods, Inc. — Analyst

Okay. Great. Thanks, guys.

Bryan Jordan — Chairman, President & Chief Executive Officer

Thank you.

Operator

Our next question comes from Brody Preston from UBS. Please go ahead.

Brody Preston — UBS — Analyst

Hey. Good morning, everyone.

Bryan Jordan — Chairman, President & Chief Executive Officer

Good morning.

Brody Preston — UBS — 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 — Chairman, President & Chief Executive Officer

Yeah. 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 — UBS — Analyst

Okay. Great. And then, Hope, just within the net interest income guide, I guess, how much of the — I think you were just a little bit below the low end of the 2Q guide, but you maintained, and I know you changed the forward curve outlook that you’re using as it evolved. So I just wanted to kind of ask how much did the removal of the — I think you had a couple of cuts — a handful of cuts in the back half of the year kind of baked into the previous guidance. How much did the removal of those cuts add to the net interest income guidance?

Hope Dmuchowski — Chief financial Officer

We did miss our guidance just slightly, and that’s all on deposit growth. When we set up at Investor Day on June 6 and everyone thought we were going to have deposit runoff, and we said, no, we’re seeing deposit momentum. We didn’t expect June to be a better month than May at that point. So 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 rate we’re paying for deposits is paying off wholesale funding. So it is 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 — UBS — 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 is that’s repricing over the next 12 months? And do you know what the current yield on those loans that are repricing is?

Hope Dmuchowski — Chief financial Officer

Brody, I don’t know the yield on those. I can try to get them and have Investor Relations get that 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 — UBS — Analyst

Okay. Great. And what are current origination yields? I’m sorry, if you mentioned that and I missed it.

Hope Dmuchowski — Chief financial Officer

We’ve seen our spreads significantly widen out to about 150 to 30 spreads — 300 — 150 to 300 is what we’re seeing new originations at.

Brody Preston — UBS — Analyst

Got it. Okay. And then last one for me. Just within the AFS portfolio, do you happen to know what the effective duration is of that portfolio? And then I guess within that duration calculation, do you know what conditional pre-payment rate you guys are using to come up with that duration?

Hope Dmuchowski — Chief financial Officer

Yeah. Our effective duration is 5.2, and then we assume a 5% pre-payment rate.

Brody Preston — UBS — Analyst

Awesome. Thank you very much for taking my questions. I appreciate it.

Bryan Jordan — Chairman, President & Chief Executive Officer

Thank you.

Operator

Our next question is from Jared Shaw from Wells Fargo. Please go ahead.

Timur Braziler — Wells Fargo Securities, LLC — Analyst

Hi. Good morning. This was actually Timur Braziler filling in for Jared. Just 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 of that? Is that going to go into the bond book? Any color we can get on that?

Hope Dmuchowski — Chief financial Officer

We plan to pay down our borrowings on that. We had laddered out our borrowings and the deposits came in a little bit quicker. So it wasn’t intentional to have that much cash at the Fed. But as we — FHLB matures, our debt, we will pay it off with that excess fund.

Timur Braziler — Wells Fargo Securities, LLC — Analyst

Okay. And then the — it sounds like you’re going to continue building liquidity throughout the rest of the year. Is that going to be the strategy there as well? Or could we see some additional layering into the bond book?

Hope Dmuchowski — Chief financial Officer

At this time, we have no intention of putting any additional securities on the books. Our intention is to improve our liquidity position, as you said, and as Bryan said earlier, 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 still — we have moderating loan growth in the back half of the year, but still loan growth.

Bryan Jordan — Chairman, President & Chief Executive Officer

In fact, our expectation is that the securities portfolios, because we’re making very limited reinvestment, they will continue to trend down.

Timur Braziler — Wells Fargo Securities, LLC — Analyst

Okay. That’s helpful. 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 that how that plays into the broader strategy as a stand-alone company? Once again, is kind of the near-term strategy to further penetrate the IBERIA markets kind of with a more broad 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 on how you’re thinking about geographic strategy here.

Bryan Jordan — Chairman, President & Chief Executive Officer

Yeah. 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. And so it was fairly broad based and diverse. We think that as we look at the next several quarters, realizing the benefits of the promise of the IBERIA Bank-First Horizon merger of equals, we think we have a great opportunity to continue to grow out our presence in these very attractive, higher-growth markets that we’re in all across the south.

And one of the areas of emphasis for us will be — in the coming quarters will be how we continue to build out that retail presence and retail focus, and what would been the legacy IBERIA Bank market. So we see there being a huge opportunity for us to capitalize on a unique business model and value proposition for our customers, at the same time, drive attractive deposit growth and the ability to serve our customers more broadly in these higher-growth markets.

Timur Braziler — Wells Fargo Securities, LLC — Analyst

Great. Thank you.

Bryan Jordan — Chairman, President & Chief Executive Officer

Thank you.

Operator

Our next question comes from Steven Alexopoulos from J.P. Morgan. Please go ahead when you’re ready.

Anthony Elian — J.P. Morgan — Analyst

Hi, everyone. 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? And are there any notable changes from the retention statistics you provided at Investor Day?

Bryan Jordan — Chairman, President & Chief Executive Officer

No, no notable changes. Our banker and client retention have continued to be very, very good. And we’re encouraged with the excitement, enthusiasm we see in both groups, our associates, our bankers as well as our clients. So our retention has been good. And I would — I haven’t seen the final numbers, but my estimate would be that it’s probably improved from what you saw in the first quarter.

Anthony Elian — J.P. Morgan — 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 — Chairman, President & Chief Executive Officer

Well, a couple of thoughts. Clearly, we had maybe one of the more unique situations in mid-April with the termination as you — mid-May with the termination of the merger. And we wanted to do a couple of things. One, that was a period where there was an awful lot in play, and we all know that the deposit base in the U.S. has been volatile in contracting. So one, we wanted to be very well positioned to not only to protect the home field but to be aggressive and front footed in terms of demonstrating our commitment to the markets that we serve. It was a great opportunity to get our bankers on the phone, talking to customers, having a positive conversation about First Horizon, how we’re positioned, what we’re looking to do over the foreseeable future and how we continue to be committed to serving them and their needs.

And then thirdly, Hope mentioned wholesale funds and sort of the alternative of wholesale funds. Even at the same cost, you certainly get a relationship benefit when you deal with a client versus a federal home loan bank borrowing. So we looked at it and said it was an appropriate period to say we’re going to reset, we’re going to draw a line under the termination of the merger. We’re going to get very front footed. We’re going to demonstrate our commitments to customers, our marketplace and our commitment to delivering on the value of the First Horizon model.

Anthony Elian — J.P. Morgan — Analyst

Okay. And my last question, of the $5.8 billion deposits you added in the second quarter from the campaign, how much would you say is sticky? And how does this break down into the $3.5 billion from new clients and the $2.3 billion deposits from existing clients? Thank you.

Hope Dmuchowski — Chief financial Officer

New-to-bank clients, we saw 80% of that in consumer and 20% of that in commercial. And on the deepening relationships, it was 51% consumer, 49% commercial. We see every one of these as an opportunity to introduce new clients to the First Horizon franchise. And so now that we have a deposit relationship with them, we’re calling on them and trying to deepen relationships in other spaces. So we’re hoping that the majority of these will be sticky. We’re not seeing them as transitional deposits. We’re 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 — Chairman, President & Chief Executive Officer

That’s the real opportunity in our view, which is we recognize that you attract customers in — new customers in any deposit campaign principally with rate, but it is an opportunity to demonstrate our commitment to service and deepening. And if you look at the deposit growth we had with our existing customer base, roughly $2.3 billion, $2.4 billion. If my recollection is right, something like 60% of that was with our primary customer base, 58%, something like that.

So we — what we want to do is take the opportunity. We have a locked-in period here, and we’ll take the opportunity to deepen the relationship, broaden the relationship with these customers. The new customers, the 32,000. If I remember the numbers right, it was about 23,000, 24,000 were retail and about 6,000-plus were — 6,500 were commercial. So that’s a great opportunity for us to broaden relationship and we have said about doing that, and I expect that we’ll have very good results with it.

Anthony Elian — J.P. Morgan — Analyst

Great. Thank you.

Bryan Jordan — Chairman, President & Chief Executive Officer

Thank you.

Operator

[Operator Instructions] Our next question is from Christopher Marinac from Janney Montgomery Scott. Please go ahead.

Bryan Jordan — Chairman, President & Chief Executive Officer

Chris, you there?

Christopher Marinac — Janney Montgomery Scott LLC — Analyst

Hey, Bryan, can you hear me?

Operator

Hi, Christopher, can you…

Bryan Jordan — Chairman, President & Chief Executive Officer

Yeah.

Operator

Yeah. We can hear you. Go ahead.

Bryan Jordan — Chairman, President & Chief Executive Officer

Yeah. We can hear you now. Hi, how are you?

Christopher Marinac — Janney Montgomery Scott LLC — Analyst

Great. I’m good. Thanks. I had a credit question for you or for Susan. Just about the migration of just downgrades on whether special mention or substandard, however you look at it and how you think that may play out in the quarters ahead.

Susan Springfield — Senior Executive Vice President & Chief Credit Officer

Thanks, Chris. We had a little bit of additional downwards into nonpass, but it was very moderate. And it’s something that we typically do see. As you know, in second quarter, we’re getting year-end financials in from clients. We’re still very, very pleased with the overall asset quality for the portfolio. So in terms of total classified loan percentage, we’re at 1.7% at the end of the quarter and nonaccruals at 0.7%. As Hope pointed out, we actually had a decrease in our non-accrual loan balances.

So obviously, we’re watching it carefully with what’s going on in the economy, rising interest rates. But as we talk to our bankers and clients, there’s — we feel like that, in many cases, borrowers are getting used to this environment. They’re adjusting, businesses are being able to pass along increases in prices. So again, we believe we’re well positioned, but we’re watching it carefully and doing the appropriate servicing and monitoring that we need to do and continuing to be diligent in initial underwriting as well.

Bryan Jordan — Chairman, President & Chief Executive Officer

It’s kind of interesting when you talk to our bankers and the customers, Chris. This expected recession that’s always six months off and just continues to roll. It still feels like customers, borrowers are in a pretty good place. And as Susan said that they’ve adjusted very well to higher rates and the changing dynamics around inflation. And we’re, as you said, paying an awful 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 — Janney Montgomery Scott LLC — 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 — Senior Executive Vice President & Chief Credit Officer

I think, obviously, we have to reevaluate it every quarter, Chris, in terms of looking at what growth we’ve had in balances and unfunded 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 either there’s growth or there’s deterioration in the economy.

Christopher Marinac — Janney Montgomery Scott LLC — Analyst

Great. Thanks again for taking our questions.

Bryan Jordan — Chairman, President & Chief Executive Officer

Thank you.

Operator

We have no further questions registered. I will hand back to the management team for final remarks.

Bryan Jordan — Chairman, President & Chief Executive Officer

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 give you additional information. Thanks. I hope you all have a great day.

Operator

[Operator Closing Remarks]