SunTrust Banks, Inc. (STI) Q3 2018 Earnings Conference Call Transcript

SunTrust Banks, Inc. (NYSE: STI)Q3 2018 Earnings Conference CallOct. 19, 2018, 8:00 a.m. ET

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the SunTrust Third Quarter Earnings Call. As a reminder, today's conference is being recorded. I would now like to turn the conference over to your host, Ankur Vyas. Please go ahead, sir.

Ankur Vyas -- Vice President of Investor Relations

Thank you. Good morning, everyone, and welcome to SunTrust's Third Quarter 2018 Earnings Conference Call. Thank you for joining us. In addition to today's press release, we've also provided a presentation that covers the topics we plan to address during our call. The press release, presentation, and detailed financial schedules can be accessed at Investors.SunTrust.com. With me today, among other members of our executive management team, are Bill Rogers, our Chairman and Chief Executive Officer, and Allison Dukes, our Chief Financial Officer. Before we get started, I need to remind you that our comments today may include forward-looking statements. These statements are subject to risks and uncertainty and actual results could differ materially. We list the factors that might cause actual results to differ materially in our SEC filings, which are available on our website. During the call, we will discuss non-GAAP financial measures when talking about the company's performance. You can find the reconciliation of these measures to GAAP financial measures in our press release and on our website, investors.SunTrust.com.

Finally, SunTrust is not responsible for and does not edit nor guarantee the accuracy of our earnings teleconference transcripts provided by third parties. The only authorized live and archived webcast are located on our website. With that, let me now turn the call over to Bill.

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Bill Rogers -- Chairman and Chief Executive Officer

Thanks, Ankur. Good morning everyone. I'll begin with an overview of the third quarter, which we highlight on Slide 3. Earnings per share for the quarter was $1.56, which represents a 47% year-over-year increase. Our strong credit quality, improved efficiency, and solid loan growth were key drivers of the year-over-year improvement with continued benefit from a favorable operating environment given both lower tax rates, including certain discreet benefits in the third quarter and higher interest rates.

The culture of continuous improvement we've instilled across the company is reflected within the results. Our increased discipline on both expenses and returns continues to drive improvements in our profitability. I'll highlight some overall revenue trends. On the lending side, we had good growth in the third quarter with average loan balances up $1.8 billion, or 1%, driven by growth across most categories. This is a reflection of the momentum we have with both wholesale and consumer clients, in addition to new lending capabilities we've added over the past few quarters.

These levels of loan growth have outpaced our deposit growth, which in turn has driven increased usage of wholesale funding. While this is a positive for net interest income, our net interest margin declined 1 basis point this quarter, as we previewed a month ago.

On the fee side, capital markets related income declined sequentially, largely due to the timing of certain deals which were pushed into the fourth quarter. That said, our performance in equity and M&A were strong, as was our progress in delivering capital market solutions to non-CIB clients, all of which continue to reflect our increased strategic relevance to clients.

Our quarter ended strong and investment banking pipelines look very healthy, but I'm much more focused on our long-term growth versus any one quarter. So overall, our revenue trends were somewhat mixed in the third quarter. I feel positive about the momentum we have going into the next quarter. More importantly, I feel even better about how we continue to work together as one team to deliver our full capabilities to our clients. This is simply how we win at SunTrust.

Separately, credit quality continued to be a strength for us, not only because of the favorable operating environment, but also because of our disciplined risk culture. Our consistently low charge-off ratio and improved outlook for credit losses across the portfolio drove a 4 basis point decline in our ALLL ratio.

Our efficiency ratio remains stable compared to the second quarter, despite the decline in fee income, due in part to our ongoing focus on disciplined expense management and also due to certain benefits realized in the third quarter. Again, our long-term performance is much more important than our quarterly results, and we remain highly focused on creating capacity to support our onboard investments and revenue growth and technology to better serve our clients, while also improving our efficiency. We have delivered consistently on these strategic imperatives.

Lastly, we commenced our 2018 capital plan in the third quarter, executing 25% of our authorized $2 billion share repurchase program, helping reduce our share count by 4% compared to the prior year.

Overall, our earnings performance year-to-date has been strong, and bigger picture, I am confident that 2018 will be the seventh consecutive year of higher earnings per share, improved efficiency and increased capital returns. This consistent track record continues to validate our improved execution, the strength and diversity of our franchise and our increased relevance with clients, which is in large part due to our ongoing investments in talent and technology.

Now, let me turn it over to Allison to cover some more details.

Allison Dukes -- Chief Financial Officer

Thank you, Bill and good morning, everyone. Moving to Slide 4, our net interest margin declined by 1 basis point this quarter, consistent with the updated guidance we provided recently. Our loan growth has outpaced deposit growth, which has driven a need for higher levels of wholesale funding. We also saw continued mix-shift within our deposits toward higher cost deposits, including our targeted focus on CDs and certain corporate deposits. More importantly, these increased funding costs were driven by the strong loan growth we delivered, resulting in a solid $24 million sequential increase in net interest income.

Looking to the fourth quarter, we expect our net interest margin to increase by 0 to 2 basis points relative to the third quarter, largely as a result of the September rate hike.

Moving to Slide 5, non-interest income decreased by $47 million sequentially, driven primarily by lower capital markets revenues, which, as Bill mentioned, were impacted by the timing of certain transactions that were pushed into the fourth quarter. There were also a few discreet items which negatively impacted fee income trends. Specifically, the second quarter included $12 million of gains related to a FinTech equity investment, and the third quarter included a $7 million charge in card fees related to a change in our processing for recognizing rewards expenses, which will effectively result in four months of reward expenses being recorded in the third quarter.

Looking into the fourth quarter, non-interest income should build off the third quarter level. Capital markets pipelines are strong and certain fee income categories, including mortgage servicing and CRE-related income are seasonally higher in the fourth quarter.

As you can see on Slide 6, the solid expense discipline we've been delivering continued into the third quarter. Expenses were stable sequentially and year-over-year, as increases in outside processing and software for both periods were offset by declines across most expense categories given our ongoing efficiency initiative, revenue trends, and certain benefits earned in the current quarter. On the latter point, one of the larger benefits was a net occupancy expense, where we had a large tenant in one of our owned office buildings terminate their lease early, which drove some benefits in the second quarter and a larger benefit in the third quarter.

Outside processing and software expense increased sequentially and year-over-year. The primary driver is increased software amortization expense for new and upgraded technology assets. The most notable investments include a new default management platform, which automates key aspects of our work-out program and replaces legacy systems, and our data lake, which is foundational to our ability to leverage data to improve the client experience and enhance revenue streams.

We also had $67 million, or $0.14 per share, of discreet tax benefits this quarter related to the finalization of tax reform and the merger of SunTrust Mortgage into SunTrust Bank, the latter of which I will cover on the consumer slide.

On a separate note, I want to make you aware of a charge we will recognize in the fourth quarter. In connection with our continued efforts to de-risk the balance sheet, we are terminating a pension plan that we acquired as a part of the National Commerce Financial Acquisition in 2004. The termination will result in an approximately $60 to 65 million one-time, pre-cash charge related to unrealized losses previously recorded in AOCI. This is in accordance with accounting requirements for which differences between expected and actual performance are recorded in AOCI and then subsequently recognized in and P&L over time or upon termination of settlement of the pension plan.

As you can see on Slide 7, the tangible efficiency ratio was 58.9% for the quarter and 59.9% year-to-date. Given the progress we have made, we are on track to achieve our sub-60% target. Equally important, we remain focused on continuing to create capacity to invest in technology and talent given the compelling opportunities we have to invest in growth, which we believe will create the most long-term value for our clients and for our shareholders.

Our performance in 2018 validates our ability to do this. Specifically, outside processing and software costs, which is where a portion of our technology spend resides, are up 9%, and yet, our efficiency ratio still has improved by 150 basis points. Our proven, consistent track record should give you the confidence that we will continue to deliver efficiency improvement. The exact pace of our improvement will be dependent upon the investment opportunities we pursue and the economic environment in any given quarter or any given year.

Moving now to Slide 8. Our net charge-off ratio increased from 20 basis points to 24 basis points, sequentially. The low level of net charge-offs reflects the relative strength we're seeing across our C&I, CRE, and residential portfolios. Performance we are extremely pleased with, though we remain cognizant that there could be some variability going forward.

The ALLL ratio declined by 4 basis points sequentially as a result of the continued asset quality improvement. Provision expense increased by $29 million from a very low level in the second quarter as a result of a lower ALLL decline and slightly higher net charge-offs.

Given the trends we're seeing in our portfolio, we would expect to operate within a 25 to 30 basis point range of net charge-offs as we look into the fourth quarter. We do expect the ALLL ratio to generally stabilize from here, which would result in a provision expense that modestly exceeds net charge-offs, given loan growth.

Now, moving to the balance sheet on Slide 9. The improved lending trends we saw in the second quarter continued this quarter, with average loans up 1% and period-in loans up 2% sequentially. The growth was broad-based across C&I, CRE, consumer lending, and mortgage.

Looking ahead, we have strong momentum across both commercial and consumer lending and our pipelines support this. On the deposit side, average balances were stable sequentially and year-over-year. As anticipated, we continue to see a migration from lower cost deposits to CDs, largely due to our targeted strategy, which allows us to retain our existing depositors and capture new market share, while also managing our asset sensitivity profile. We still believe this is an effective strategy and would expect a migration from lower cost deposits into CDs to continue as interest rates rise.

Separately, within our wholesale business, we increased rates on our corporate liquidity products, given this is a more attractive source of funding than wholesale debt and we saw solid growth in response.

Interest-bearing deposit costs increased 11 basis points sequentially, slightly higher than the prior quarter increase of 10 basis points, given the continued increases in benchmark rates and migration toward higher cost deposits and the pickup in lending activity. We expect deposit betas to continue to trend upwards, but the trajectory will be influenced by the absolute level of rates in addition to the levels of loan growth we are delivering. We remain focused on maximizing the value proposition for our clients outside of rate pace and thus improving our deposit growth trajectory in a responsible fashion. However, if deposit growth is slower, our access to alternative funding is strong.

Moving to Slide 10, which provides an update on our capital position. Our estimated Basel III common equity Tier 1 ratio was 9.6% and the Tier 1 ratio was 10.7%. Both are down slightly relative to the prior quarter due to growth and risk-weighted assets and the commencement of our 2018 capital plan, which provides for a 52% increase in share repurchases and a 25% increase in the dividend.

We're beginning to make progress toward our medium-term capital ratio objectives. Our capital plan submission does give us the flexibility to accelerate our share repurchase cadence, which is a strategy we are considering for the fourth quarter, given our views on current valuation relative to our future potential.

Now, moving to the segment overviews, I'll begin with the consumer segment on Slide 11, where we continue to have solid momentum. Our positive lending trends continued in the third quarter, in large part due to the investments we have made in LightStream, our point-of-sale lending partnership, and credit card, all of which collectively improve our growth, returns, and diversity. Our momentum in LightStream continues given the work we have done this year to enhance our analytics, new product offerings, and growth and partnerships, and referrals. Some of this collective growth has been offset by the continued declines in home equity and slower growth from certain lower return portfolios, like auto.

While we're seeing strong growth in net interest income within consumer, mortgage-related income has been pressured, particularly when looking at year-over-year trends. Relatedly, we completed the merger of SunTrust Mortgage into SunTrust Bank in the third quarter. This merger will simplify our organization structure and allows for efficiencies. But more importantly, it will allow us to more fully serve the needs of our consumer clients, irrespective of whether they begin their SunTrust relationship with a mortgage or another lending or deposit product.

In the third quarter, we recognized roughly $21 million of the tax benefits from this merger. There are also approximately $13 million of related conversion costs, most of which will be recorded in the fourth quarter.

Partially offsetting the mortgage decline is wealth management, which is demonstrating positive underlying trends. AUM is up 3% sequentially and 7% year-over-year, a reflection that our value proposition for our targeted client segments is resonating in the marketplace, driving growth in new clients and greater wallet share with existing clients. Wealth management related non-interest income is up a solid 4% year-over-year.

In addition to the solid revenue growth in consumer, the actions we have taken to improve efficiency are driving improvements in overall profitability. When excluding a $55 million legal accrual reversal in the third quarter of 2017, our tangible efficiency ratio has improved by 230 basis points year-to-date in the consumer segment. Relatedly, our branch count is down by 5% in the past year, which is largely enabled by our increasing digital adoption rates and as a part of our broader strategy to leverage technology to enhance our efficiency.

Our increased digital adoption rates are also reflected in the national recognition we are receiving for these digital capabilities. Javelin recently awarded SunTrust four Leader awards for our online and mobile banking capabilities. SunTrust was one of only four banks to receive a Leader award in four or more distinct categories. Separately, our mortgage servicing business was named Top 5 by JD Power and our auto finance business was named Top 3 Overall by Auto Finance Performance. The latter two awards are a testament to the outstanding service our teammates are providing our clients.

Bigger picture, we're just over a year into our journey of creating a more integrated consumer business and we're very pleased with the initial results. We've made good strides in appropriately wiring the ecosystem so we're anticipating and delivering the right solution and advice at the right time. This not only enhances the client experience, it also generates operational efficiencies. We still have more work to do, but we have a great team in place, we have a clear strategy, and we are in some of the highest growth markets in the country.

Moving to wholesale banking on Slide 12, where our consistent strategy continues to drive good results. On the lending side, we saw solid growth across CIB, commercial, and CRE. More broadly, the growth in our wholesale lending portfolio is a reflection of our clients increased optimism on the economy, which has resulted in higher utilization rates and increased M&A activity. This growth also reflects the investments we have made to meet a broader set of client needs, especially within CRE and aging services, in addition to our geographic expansion of commercial banking.

Within capital markets, we had another good quarter, but revenue was down compared to the prior quarter and prior year, both of which were especially strong quarters. The primary driver of the decline was the timing of certain transactions, which were pushed into the fourth quarter. More broadly, we are also seeing continued pressures on capital market's fees and structures, given the impact non-bank lenders are having on the space. Maintaining underwriting discipline is a key tenant of our strategy, and we will therefore continue to pass on transactions where the structures do not comply with our standards.

That said, the underlying strategic momentum within capital markets is strong. Specifically, M&A and equity-related income is up 7% year-to-date, which is helping to offset some of the aforementioned declines in debt capital markets. Both M&A and equity have been key areas of strategic investment for us and we are encouraged by the continued momentum we are having in meeting more of the strategic needs of our clients. And year-to-date, capital markets fees from commercial banking, CRE, and PWM clients are up 37%. We're still in the early stages of executing this strategy, but we are highly encouraged by the momentum and we believe we are uniquely positioned to succeed in this space, given our full set of capabilities and one-team approach. The partnership between our commercial bankers, investment bankers, product and industry specialists, and corporate finance teams is a great reflection of our culture.

And finally, we're benefiting from continued low charge-off levels, which are a reflection of the overall strength of the economy, in addition to our consistent discipline around credit, structure, and diversity.

Big picture, while market conditions can and do create quarterly variability, pipelines are healthy and we remain optimistic about the growth opportunities we have in wholesale, as we bring our differentiated business model to new and existing clients.

Now, I'll turn the call back over to Bill.

Bill Rogers -- Chairman and Chief Executive Officer

Thanks, Allison. To conclude, I'll point to Slide 13, which highlights how our performance this quarter aligns with our investment thesis. Overall, this was a good quarter and one where our performance is the direct result of strategies we put in place and the investments that we've made. There were some puts and takes on the revenue side, largely tied to market conditions, but the diversity of our business mix and loan portfolio enabled us to maintain relatively stable revenue trends. Importantly, my near- to medium-term optimism about our client business remains high.

I've spent a lot of time with our teams and annual wholesale client planning process recently and I've never been more encouraged with our go-to-market strategy, one-team approach, and most importantly, our talent. While the competitive environment is intense, and in some cases, irrational, when we lead with purpose, advice, expertise, and our one-team approach, we have an opportunity to win without simply using price or structure. Across the entire company, we remain highly focused on making the right investments today which position us to meet more client needs and drive incremental growth in the future.

Allison highlighted a number of digital awards our consumer team received this quarter, which reflect years of investment and focus on improving our digital client-facing capabilities. Between our mobile and online capabilities for consumer clients, summit view, and enterprise client portal for private work clients, LightStream and our new Smart Guide digital mortgage application, I feel very good about our collective set of digital capabilities for consumers and the progress we've made in enhancing these platforms over the last few years. And we'll continue to make the requisite amount of technology investments to meet evolving client needs and to strengthen our underlying foundation in technology infrastructure.

That said, improvements in efficiency and investments in technology can coexist, as they've already done in 2018 and in previous years. Pace, cadence, and execution are also important. Simply investing more will not guarantee success.

There is a possibility we'll achieve our sub-60 adjusted tangible efficiency ratio objective in 2018. It'll be close, and if we don't, we'll achieve it in 2019 and we'll continue to have efficiency opportunities beyond that. The pace of improvement will vary year-to-year as we take advantage of opportunities to grow our client base, improve the client experience and harvest efficiency savings.

In addition to efficiency progress, we're beginning to make steps toward achieving our steady state capital objectives. We began our 2018 capital plan in the third quarter and still have $1.5 billion in shares to purchase over the coming three quarters. Our capital ratios declined by 15 basis points this quarter, putting us on a path toward achieving our 8 to 9% CT1 target. This trajectory, when combined with positive mix-shift in our lending portfolio and future efficiency improvement will continue to enhance the overall ROE profile of the company. This performance is positive and it could not be achieved without our purpose of lighting the way to financial well-being. Our company has again been tested with two devastating hurricanes impacting our footprint in the past month. And it never ceases to amaze me how much our teammates will do for our clients and for other teammates in the most challenging of circumstances. It is in these times that we are acutely aware of our obligation and commitment to enable financial confidence for our clients.

We had two mobile ATMs which we deployed in our disaster recovery truck in some of the most heavily impacted areas within the panhandle two days after Hurricane Michael made landfall. And we were one of the first banks to reopen in Wilmington after Hurricane Florence came through. Our teammates put their own needs aside and I'm incredibly grateful for their commitment to serving our clients. They do this because they believe in our work. They believe in our company. And most importantly, they believe in our purpose. So team, thank you.

In summary, we had a good quarter and our performance year-to-date has been very strong. As I said in the beginning, we have good momentum building into the final quarter of the year and setting the stage for 2019. Thus, I remain highly optimistic in our ability to continue to deliver value for our clients, communities, teammates, and our owners.

So with that Ankur, I'll turn it back over to you for Q&A.

Questions and Answers:

Ankur Vyas -- Vice President of Investor Relations

Thanks, Bill. We're now ready to begin the Q&A portion of the call. As we do that, I'd like to ask participants to please limit yourselves to one primary question and one follow-up, so that we can accommodate as many of you as possible today.

Operator

Thank you, ladies and gentlemen. If you wish to ask a question, please press * then 1 on your touchtone phone. You will hear a tone indicating you have been placed in queue, and you may remove yourself from queue at any time by pressing the # key.

Our first question comes from the line of John McDonald with Bernstein. Please go ahead.

John McDonald -- Bernstein -- Analyst

Hi, good morning. Bill, you showed good loan growth. It looks like 5%, or so, link quarter annualized and came in a little bit better than maybe Allison had signaled at the Barclay's conference and didn't slow from the second quarter. Wondering if you could discuss what you're seeing in terms of current drivers and how you feel about pipelines and loan growth momentum heading into fourth quarter.

Bill Rogers -- Chairman and Chief Executive Officer

Sure, John, thanks. I think we're benefiting from a number of things. One is the markets we serve and the businesses in which we specialize. Most importantly the loan growth was really broad-based and C&I, what I liked, it was more advice driven, more proactive versus reactive. I think it reflected some of the investments we've made in talent training, technology. As I mentioned in my earlier comments, our really rigorous intensity around client planning and accountability on the consumer side, I think we were capitalizing on investments we've made to meet evolving consumer preferences and we're just, quite frankly, delivering a really, really great experience. Also, the investments we've made with new partnerships and then on the mortgage side, we've had some good seasonality increase there. So it was broad-based. To your next question, I think the pipelines are really, really strong across all of those categories. So I think the momentum is good heading into the fourth quarter and heading into next year.

John McDonald -- Bernstein -- Analyst

Okay. And just as a follow-up, one of the key drivers this quarter seemed to be commercial real estate, where other banks are being cautious and some even smaller banks are starting to show a little bit of signs of stress. Recognizing that you're somewhat under indexed in CRE, can you just talk a little bit about how you're feeling of that segment and where you're seeing growth opportunities and that -- making sure that those are good loans you're making at this point in the cycle.

Bill Rogers -- Chairman and Chief Executive Officer

Yeah, I mean, you mentioned we're a little under-indexed in CRE, but most of that growth has been related to strategies we put in place, now, a little over a year ago related to two primary components. One is with our acquisition of Pillar, we have more opportunity to bridge some agency lending, so we have a really good partnership there to be able to provide lending and anticipation of fully underwritten agency deals. And then the second is we made a decision to do some medium to longer term financing on deals that we liked -- rather than just doing the construction loan is doing a little more medium term financing. So it's not that we're sort of leaning against the wind. It's that we've got strategies in place that are just resulting in positive momentum.

John McDonald -- Bernstein -- Analyst

Got it, thanks.

Operator

Thank you. Our next question comes from the line of Matt O'Connor with Deutsche Bank. Please go ahead, sir.

Matt O'Connor -- Deutsche Bank -- Analyst

Hi, good morning. I was hoping to follow-up on the NIM guidance. Obviously, NIM came in a little bit worse than you had expected this quarter. You did signal that a month ago. So I guess, just trying to get your confidence in the fourth quarter NIM-guide in terms of being a little conservative and hopefully not getting caught off-guard at all there.

Allison Dukes -- Chief Financial Officer

Sure, thanks, Matt. Yes, relative to the revised guidance we provided in September, NIM did end up down 1 basis points for the quarter. And really, that was, as I noted, just a function of two things. One, we didn't get the run-up in 1-month LIBOR over the course of the third quarter that we might have expected. Two, and more positively, it was really driven by the strong loan growth we saw in the second quarter, which did create an increased reliance on some higher cost funding, those higher beta corporate deposits, as well as some wholesale funding.

As we think about fourth quarter and our guidance of 0 to 2 for this quarter, we really, simply expect the full benefit of the September rate hike to actually materialize in the fourth quarter. And so our guidance of 0 to 2 incorporates that. And there's some expectation there, as well, that betas do continue to increase modestly over the course of the quarter, as well.

Matt O'Connor -- Deutsche Bank -- Analyst

Okay. And then just separately following up on the comment about considering accelerating the share buybacks, maybe you can give more color on that in terms of what the magnitude might be and when you can get back in the market and buyback stocks. Thank you.

Allison Dukes -- Chief Financial Officer

Sure. So as we noted, our share buybacks for the year, we were approved for a $2 billion total share buyback. We executed on $500 million of that in the third quarter. What I will tell you in the fourth quarter is that $500 million will definitely be the floor for what we execute in this quarter. We feel really good about the prospects there.

Matt O'Connor -- Deutsche Bank -- Analyst

Thank you.

Operator

Thank you. Our next question comes from the line of Betsy Graseck with Morgan Stanley. Please go ahead.

Betsy Graseck -- Morgan Stanley -- Analyst

Hi, good morning. I wanted to dig in a little bit on the C&I loan growth, which was quite good, especially relative to competitors and understand how you're able to execute that in a market where the bid for bank loans is very high. Obviously, there's some competition from the CLO side. So maybe you could give us a sense as to how you either interplay with that asset class, or are you underwriting things that's just not that attractive to them? And maybe you could also help me understand on the IB side why there was a little bit weaker loan syndication. Again, what we're hearing in the backdrop is that there's a huge bid for C&I loans, so I wanted to get your thoughts and color on that.

Bill Rogers -- Chairman and Chief Executive Officer

Sure, let me start with the non-bank side, which clearly we've seen some competition. But in fairness most of that is sitting on the leveraged lending side from a loan growth standpoint, that's a much smaller part of our portfolio so that impact on loan growth is lessened as it relates to specific non-bank competition. We see it on the CRE side, as well. But there, again, we've got strategies in place that I think reflect the quality of our relationships and investments we've made that run counter to some of the non-bank competition.

And then as it relates to the other balance of C&I growth, it's really just based on investments we've made and specialization that we have, this really strong working relationship we have with our commercial team and our investment banking team such that we're really providing great advice. I think I mentioned in my comments that earlier -- I mean, when I look at the loan activity, it just seems much more higher quality. It's much proactive versus reactive. It's much more advice-driven and, as I said, fairly broad-based. And then we also talked about the consumer side and the investments we've made there and the client experience that we're providing and the relevance of being where our clients want to make decisions, I think, are things that continue to be strong as it relates to C&I.

Then you asked a little bit about the investment banking side. And yeah, the syndication side was a little lower this quarter. I think a lot of the changes in the fourth quarter, or slip into the fourth quarter, a lot of that is in that category. So overall, for the year, I think we'll still have a year in syndicated finance. Again, same thing. We're at the front-end of more of those deals. We're on the left side of more of those deals, so the quality of that fee generation to me is, sort of, exponentially higher than it was several years ago.

Allison Dukes -- Chief Financial Officer

And Betsy, Bill said it, but I would say nothing has changed on our underwriting standards on the C&I side. We remain very disciplined there. What you see, really, is just evidence of these strategies both from an industry focus, but also as we continue to execute against our strategy in commercial and really delivering advice and expertise down market.

Betsy Graseck -- Morgan Stanley -- Analyst

Okay, thanks, appreciate it.

Operator

Thank you. Our next question comes from the line of Ken Usdin with Jefferies. Please go ahead.

Amanda Larsen -- Jefferies -- Analyst

Hi, this is Amanda Larsen on for Ken. Allison, you mentioned that fees should bounce in 4Q in a few categories. Should we expect to see an offsetting increase in quarter-over-quarter expenses to support that revenue bounce?

Allison Dukes -- Chief Financial Officer

Yes, I think if you're saying, "What should we expect for expenses in the fourth quarter given fees were lighter in the third quarter?" Yes. As fees increase in the fourth quarter, you would expect some element of expense growth to go hand-in-hand with that.

Amanda Larsen -- Jefferies -- Analyst

Okay, great. And then thinking about headcount and branch reductions from here, those figures are both down 6% year-over-year and 5% year-over-year, respectively. Do you expect the pace of these declines to abate from here given already great progress in achieving these efficiencies? Thank you.

Allison Dukes -- Chief Financial Officer

Sure. As it relates to branch reduction, we've actually shrunk our branch count by about 25% already. As I think about where we could go from here, I'd say we expect to continue to shrink our branch network somewhere in the range of 4%, or so, a year. That's really influenced by consumer behavior patterns and that will influence in any given year how quickly we go in optimizing the density of our network. And you would expect, at least as it relates to branches, some headcount changes there. But we don't focus a whole lot on headcount. We think more about our efficiency and how we continue to deliver continuous improvement on the efficiency ratio. From there, headcount's merely an input.

Amanda Larsen -- Jefferies -- Analyst

Thank you.

Operator

Thank you. Our next question comes from the line of Geoffrey Elliot with Autonomous Research. Please go ahead.

Geoffrey Elliot -- Autonomous Research -- Analyst

Hello, good morning. Thanks for taking the question. On the deposit side, there was a pretty significant drop-off in period end, non-interest bearing deposits. Can you maybe give us a bit of background on what was happening there?

Allison Dukes -- Chief Financial Officer

Sure, this is Allison. I would caution you in looking at period-end balances with deposits. I think average balances are going to be a better indication of our deposit activity. Specifically what was going on in period end non-interest bearing deposits is at the end of the second quarter we had a short but large escrow deposit come in a few days before the end of the quarter that went out just a few days after the beginning of the quarter and that was expected. And so if you look at average balances, quarter-to-quarter, sequential quarter declines were 90 basis points on non-interest bearing deposits, which is really going to be, I think, a better indication of our performance.

If you think about operating accounts, especially now and DDA, there is always going to be month-end and period-end noise.

Geoffrey Elliot -- Autonomous Research -- Analyst

Thanks, understood. And then you've spoken a bit today and also at the conference in September about expecting to see some money move out of those non-interest bearing balances over time because of higher rates and the increased opportunity cost of leaving cash at earning zero. Can you help frame that for us? Is there a portion of that deposit base that you, kind of, feel is sticky and will stay there, regardless of the rate environment and a portion that you think is potentially going to move around as rates keep on moving up?

Allison Dukes -- Chief Financial Officer

Sure, it's hard to size exactly. But generally speaking, yes. As rates continue to move up, you would expect that non-interest bearing deposit levels do decline modestly over time. As we know, they're up quite a bit given the protracted low rate environment. So you would expect some sort of normalized decline as those balances do look for better rate. I would say one of our strategies is really to focus on our rates with our corporate liquidity products, which is a very attractive source of funding for us. We can actively manage that to help our clients meet their objectives and it's a better cost of funding for us relative to wholesale funding.

Geoffrey Elliot -- Autonomous Research -- Analyst

Got it. And just quickly there, you were talking about the earnings credit rate, or you're talking about the interest rate on that corporate liquidity offering?

Allison Dukes -- Chief Financial Officer

I'm sorry, say again. I couldn't hear you.

Geoffrey Elliot -- Autonomous Research -- Analyst

Are you talking about an earnings credit rate there, or are you talking about the interest rate you're pinning on accounts, there?

Allison Dukes -- Chief Financial Officer

I'm talking about interest rates and not product.

Geoffrey Elliot -- Autonomous Research -- Analyst

Got it. Thanks very much.

Operator

Thank you. Our next question comes from the line of Mike Mayo with Wells Fargo Securities. Please go ahead.

Mike Mayo -- Wells Fargo Securities -- Analyst

Hi. Bill, this question might fall in the category of "no good deed goes unpunished." Before you came, SunTrust had 25 years of negative operating leverage. Since 2011, it's been positive. The efficiency ratio's gone from 72% to 60%. But what's left with efficiency and why aren't your targets more ambitious? Now, I just note you're mostly at your targets, as you said. You have a better franchise. Peers are moving up investment classes in the low 50s. So a concern is, are you relaxing your intensity a little bit in terms of the tone at the top of the firm because the rate of the improvement's not as much? So how are you thinking about that?

Bill Rogers -- Chairman and Chief Executive Officer

Well, Mike, I'm looking across the table at my leadership team when you said, "Relaxing the intensity," and they had a lot of smiles on their faces because they're not feeling any relaxation on the intensity. And the "no good deed goes unpunished," I appreciate the introduction. Yeah, we've got the exact same focus on continuous improvement, creating positive operating leverage, and creating improvement in the tangible efficiency ratio. That slope is going to just change by definition. The actual rate-the actual efficiency ratio for any one bank is also dependent upon a couple of things. One is their business mix. And secondly, the intensity and the opportunity. And we're trying to balance all of that. I can assure you that '18 is going to be better than '17 and '19 is going to be better than '18. We're going to continue to be on that kind of pace.

We are making sure, Mike, that we're also creating the right level of investment for the future of the company. I think this year is a pretty good example where you can see it probably more overtly than you have in the past where you saw 150 basis point of efficiency improvement and then you saw outside processing and software costs go up 9%, just to sort of pick a line which demonstrates the fact that you can invest and become more efficient at the same time, which is the commitment that we have.

So some of it is going to be creating capacity, but all is going to be focused on making sure we're creating the long-term best shareholder value we can at SunTrust.

Mike Mayo -- Wells Fargo Securities -- Analyst

As far as a new efficiency target, if we were going to get one, would that be, say, in January? And also, you mentioned reduction in branches, 4% per year. Any other general areas where you might be able to reap additional efficiencies?

Bill Rogers -- Chairman and Chief Executive Officer

Yeah, just to go with the latter part first, the opportunities to achieve efficiency are everywhere. It's optimizing, staffing, it's right-sizing. It's realizing and harvesting -- we have a lot of investments that are on a variety of different J-curves from new markets to new private wealth teams to technology to CRM to all the things we've talked about. All of those things have harvest components to them.

So we've made the investments and they have components in the past. In our private wealth side, we've made a lot of investments on the robotic side, the AI side. We'll get $20 million worth of improvement in that kind of an investment and that kind of J-curve while improving client service, new origination platforms in mortgage and wholesale. There are lots of things. As a matter of fact, I would probably discourage you from looking at the branch count as being sort of the only thing, or the tall tent pole on efficiency. It's a lot of different things. As it relates to specific targets, the target for right now is we're going to balance that against the investments that we've got, the opportunities we have. And at every point, Mike, we'll continue to talk about it and, hopefully, continue to provide more clarity. But more importantly, provide more evidence to the fact that we're on this pace.

Mike Mayo -- Wells Fargo Securities -- Analyst

All right, thank you.

Bill Rogers -- Chairman and Chief Executive Officer

Thanks, Mike.

Operator

Thank you. Our next question comes from the line of Gerard Cassidy with RBC. Please go ahead. Mr. Cassidy, your line is open.

Ankur Vyas -- Vice President of Investor Relations

Tawny, maybe we could move to the next question.

Operator

Next question comes from the line of Erika Najarian with Bank of America. Please go ahead.

Erika Najarian -- Bank of America -- Analyst

Yes, hi. Good morning. My first question is on the strategy on the funding side. As loan growth could potentially continue to outpace deposit growth. I'm wondering what your decision tree is in terms of filling in with wholesale funding versus having a more aggressive campaign on the deposit side?

Allison Dukes -- Chief Financial Officer

Sure, thanks Erika. So, yes, loan growth could continue to outpace deposit growth, although I would tell you we remain extremely focused on generating strong deposit growth and notably as you look at our CD growth which has really been our targeted strategy for growth on the deposit side, about 40% of that growth this year is new money. So you have $2 billion of new money balances this year. So we start there in really thinking about how do we continue to refine our deposit growth strategy, how do we use CDs to -- which we like because it actually gives us the opportunity to manage our asset sensitivity, but to deepen our growth with our existing client base and to attract new household deposits.

After that, we look at our corporate funding and I mentioned our corporate liquidity products which give us an opportunity to meet our wholesale client's needs and actively use rate quarter-to-quarter, depending on the level of loan growth, to help us create attractive sources of funding. And then we look to wholesale funding. We have access to a variety of sources of funding there, both secured and unsecured from the federal home loan bank to the market, and we like our sources of funding on that side, as well.

So we feel like we have broad access and a number of diversified sources of funding, but we're going to start with really meeting our client's needs through both our consumer and wholesale funding strategies.

Erika Najarian -- Bank of America -- Analyst

Thank you, and as a follow-up to that, if banks that are SunTrust size get relief on the LCR, what kind of flexibility do you have on the balance sheet to be able to self-fund future loan growth incrementally?

Allison Dukes -- Chief Financial Officer

Yeah, it'd be hard to size that incrementally. I wouldn't say it's a tremendous difference.

Erika Najarian -- Bank of America -- Analyst

Okay, great. Thank you.

Operator

Thank you, our next question comes from the line of Gerard Cassidy. Please go ahead, with RBC.

Gerard Cassidy -- RBC --Analyst

Thank you. I apologize about that. Can you share with us, you just talked about the expectation that you're going to see the non-interest bearing deposit accounts draw down as rates go higher, as will everybody in the industry. When you go back to the last tightening cycle from '04 to '06, which was about 400 basis points, SunTrust non-interest bearing deposits to total deposits declined about from 26% to 18%. Do you see a structural difference today where that decline may not be as material this time around for you if rates go up another couple hundred basis points over the next 18 months?

Allison Dukes -- Chief Financial Officer

I think that is a question certainly for us and a broader question for the industry that we're all evaluating. The one structural difference I would certainly point to is the fact that our relationships are much broader now with our clients than just rates. We offer our deposit clients so much more than rate paid. We offer them online and mobile banking, Zelle, a number of ways to interact with us through multiple channels, the benefit of the advice and solutions that they get both through our online channels, but also in person. And so I do think structurally, that will have some differences on how non-interest bearing deposits play out over this rate cycle relative to others.

Bill Rogers -- Chairman and Chief Executive Officer

Yeah, another thing I would add to that is just the commitment we've made to be a more diversified franchise. That holds true on the asset side, but also on the liability side. So we're much more diversified by client type, by geography, and then as Allison said, much more deeply penetrated. So I think this cycle, I don't know that the last cycle will be an exact predictor for this one.

Gerard Cassidy -- RBC --Analyst

Very good. And then just changing tacks here, on technology you guys, obviously, have done a very good job in implementing your digital strategy, driving down your efficiency ratio, or helping drive down the efficiency ratio. Can you share with us what kind of penetration you're seeing in your consumer base for the number of customers that are using the digital channel, how many customers are using your mobile offerings, and then finally, just the total technology spend? What you guys are thinking about in that area?

Bill Rogers -- Chairman and Chief Executive Officer

Yeah, we've had strong mobile adoption. We're hovering right around 50%. And most importantly, it really clicks up every quarter. So every quarter, we continue to see an improvement in mobile adoption, which our clients are voting with their usage of our products and capabilities in addition to how they rate what they do, both from our clients and from some of the external rating categories.

So I think we're pleased with the level of mobile adoption. If you go down any category from sign-ons to mobile deposits to online sign-ons, all of those are increasing at an increasing rate, which we view as positive. We're careful about saying a number as it relates to total technology spend because everybody thinks about that differently and they look at capitalization rates and amortization rates and all those things differently. Just to say though that our overall investment in technology continues to grow and we, sort of, demonstrated some evidence of that. And all that is part of the efficiency initiatives to create capacity to continue to make relevant investments in technology that we think have long-term benefits.

Gerard Cassidy -- RBC --Analyst

Great, thank you.

Operator.

Thank you. Our next question comes from the line of Steve Moss with B. Riley FBR. Please go ahead.

Steve Moss -- B. Riley FBR -- Analyst

Good morning. I just wanted to ask about the credit cycle, here. Wondering if you are seeing any lending practices that cause concern or cause you to think that we are late in the credit cycle, here?

Allison Dukes -- Chief Financial Officer

Sure, this is Allison. I'd say lending practices that cause concern, first, as we've mentioned, non-bank competition, there we do see very aggressive lending there that relates to both structure, term, and pricing. I don't know that it causes us concern in our own portfolio. Or let me say it more definitively. It doesn't cause us concern in our own portfolio because we deliberately pass on those and we haven't changed our own underwriting standards.

As we look at our own portfolios and scour them, which we're doing constantly and you would expect us to do to look for any flashing yellow lights of any concern, again, this quarter, consistent with the last few quarters, we really just don't see anything of particular concern. We watch it very closely. We're stressing at underwriting all of our portfolios for an increasing rate environment, so we do that on both the consumer side and the corporate side as we think about the pressure of a rising rate environment and any stress that could have put on our clients. So we underwrite it at that level. We've kept a close eye on retail. That has not been an area of concern, although there was some noise there and we continue to keep a close eye on it as that is an area that is subject to disintermediation.

And then I'd say on the leveraged lending side, there's obviously, been a lot written around those portfolios and that has been a consistent portion of our balance sheet, overall. It's really well diversified across sectors. And that's an area we keep a close eye on, although we haven't seen any signs of stress, yet.

Bill Rogers -- Chairman and Chief Executive Officer

Yeah, another thing I'd add, I'm not sure it's necessarily a reflection of end-of-cycle as much as it's a reflection of how much liquidity exists in the system. So there is a lot of money that's available, if you pick a category the non-bank lenders. If we look at our own pipelines and near and medium-term opportunities, we still see a lot of opportunities. So we still see a good amount of runway. Again, I think it's primarily a reflection of just how much money is available to chase that yield.

Steve Moss -- B. Riley FBR -- Analyst

Okay, that's helpful. And then just on loan repricing here. I hear you on LIBOR increasing at a slower pace, but the increase in C&I loan yields was, perhaps, a little lighter than I was thinking. I was wondering if you're seeing more of a move to fixed rate lending, or if you're starting to hedge?

Allison Dukes -- Chief Financial Officer

No, I wouldn't say we're seeing more of a move to fixed rate lending. And in terms of hedging our own book, we really use our swap book to manage our interest rate sensitivity, overall. And I'd say our views there are pretty consistent with where they have been. But if you're asking, sort of, broadly, are we seeing any sort of shift in the market right now? My answer to that would be no.

Steve Moss -- B. Riley FBR -- Analyst

Okay, thank you very much.

Operator

Thank you. Our next question comes from the line of Marty Mosby with Vining Sparks. Please go ahead.

Marty Mosby -- Vining Sparks -- Analyst

Thanks. Hey, good morning. I wanted to ask you, going to this another efficiency initiative, I'm sure, you're terminating that pension plan. And that $60 million, if I get this right, it was already in your AOCI, so it doesn't really affect your equity or your tangible book value, but I guess it will be recognized, I guess, will that be the fourth quarter? And what are the expenses related to that each year? So you're going to pick up an efficiency gain once that's done. So I just was trying to couch that a little bit.

Allison Dukes -- Chief Financial Officer

Sure, thanks, Marty. So, yes, you're correct. The unrealized loss associated with that pension plan is sitting in AOCI today. So effectively, what the accounting requirements cause us to do is flush that loss as a charge through the P&L in the fourth quarter. And as I said, that'll be $60 to $65 million in this quarter. As it relates to ongoing efficiency improvements there, it is de minimis. It was a relatively small plan, so I wouldn't point to anything that's going to flow through on an annual basis from here.

Marty Mosby -- Vining Sparks -- Analyst

Okay, and then the issuance of long-term debt, it looks like there was about $1.5 billion and it really didn't move the needle on the -- because I was trying to look at the period end and average, and it looked like average went up. So it was reflected in the average, but the yield still remained around 2.92%. So is that prefunding some of the loan growth that you expect to see? Because when you put longer-term funding on, that helps the LCR. So that gives you the ability or capacity to put loans against it. So I just didn't know if that was part of what was in the margin this quarter, as well as prefunding some of the loan growth next year.

Allison Dukes -- Chief Financial Officer

No, it really wasn't. I can point you to our loan-to-deposit ratio and the movement there quarter-over-quarter. That was just really as a part of our normalized funding plan for the quarter, and it certainly wasn't any prefunding. It was just there to provide the funding necessary inside of the quarter.

Marty Mosby -- Vining Sparks -- Analyst

And would there be any incremental drag from that because it was issued in this particular quarter? So at least there was part of the impact on the margin came from putting that extra amount of funding in at that higher rate.

Allison Dukes -- Chief Financial Officer

Not really. I mean, there wasn't enough time for it to actually have that much of an impact on the quarter. And as you think about our guidance for this quarter of 0 to 2, the wholesale funding that was done previously and that we would anticipate going forward is in that 0 to 2 guidance.

Marty Mosby -- Vining Sparks -- Analyst

Got you, thanks.

Ankur Vyas -- Vice President of Investor Relations

Tawny, we have time for one more question.

Operator

Okay, and our final question will come from Saul Martinez with UBS. Please go ahead.

Saul Martinez -- UBS -- Analyst

Hi, good morning, everybody. Thanks for taking my question. I guess I have sort of a broader question. The investment narrative for SunTrust is that you're a leading player in a lot of growth markets. You're forward-thinking on technology. You have a management team that's executed very effectively. But loan and revenue growth haven't necessarily been outsized more recently. And, look, I get market conditions influenced that. There are idiosyncrasies in any given quarter. And you probably shouldn't grow, frankly, in some market environments. But if I take a step back and look beyond the quarter-to-quarter, even the year-to-year trajectory, where should we see some of these positive elements, or some of the dynamics start to show up in your growth numbers and to deliver outside growth? Where should we see that? In what loan categories, what fee categories? How do we think about how it actually drives better than peer group revenue growth?

Bill Rogers -- Chairman and Chief Executive Officer

Yeah, thanks, Saul. As you know, we don't typically guide or manage to loan growth. That's an outcome of the investments and the strategies that we have under way. Some of the exceptions to that are things like LightStream, where we're leaning in heavily and see opportunities for growth. Just pick a couple of categories, if you look back at investment banking and you look back at, sort of, a 10+% cater for now well over 10 years, I think that's sort of the reflective things of prowess and the opportunities that exist within our markets, but more importantly within the investments we've made and the specialties that we have. So I think that will be one of the categories that we'll see. We'll also see categories in private wealth, which reflect the transfers and the opportunities and the wealth building that's taken place in our markets.

I mentioned the consumer lending component. We're going to see we're going to cycle now with mortgage, that we've got refi cycling out and we'll see a more normalized version of mortgage, which I think will reflect the markets that we live in, the affordability, and the capacity for new home construction and formation in our markets. Commercial real estate, in terms of the investment that we've made in agency product, the investments and the opportunities in our portfolio, the number of national and regional firms that are consolidating in the regions we have, and then sort of, core, basic commercial banking, which we see good growth in. And I think that, probably, is a strong reflection of the markets that we operate in and the ability to generate advice-based, fee-based business from that.

So I think there are a good number of things and many of those have momentum and, I think, reflect markets and investments that we've made.

Saul Martinez -- UBS -- Analyst

Okay, great. That's really helpful. Thanks so much.

Ankur Vyas -- Vice President of Investor Relations

Thanks Saul, and this concludes our call. Thanks, everyone, for joining us today. If you have any further questions, please feel free to contact the IR department.

Operator

Ladies and gentlemen, that does conclude our conference for today. You may now disconnect.

Duration: 61 minutes

Call participants:

Ankur Vyas -- Vice President of Investor Relations

Bill Rogers -- Chairman and Chief Executive Officer

Allison Dukes -- Chief Financial Officer

John McDonald -- Bernstein -- Analyst

Matt O'Connor -- Deutsche Bank -- Analyst

Betsy Graseck -- Morgan Stanley -- Analyst

Amanda Larsen -- Jefferies -- Analyst

Geoffrey Elliot -- Autonomous Research -- Analyst

Mike Mayo -- Wells Fargo Securities -- Analyst

Erika Najarian -- Bank of America -- Analyst

Gerard Cassidy -- RBC --Analyst

Steve Moss -- B. Riley FBR -- Analyst

Marty Mosby -- Vining Sparks -- Analyst

Saul Martinez -- UBS -- Analyst

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