SunTrust Banks (STI) Q3 2019 Earnings Call Transcript

SunTrust Banks (STI)
Q3 2019 Earnings Call
Oct 17, 2019, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the SunTrust third-quarter 2019 earnings results conference call. [Operator instructions] As a reminder, this conference is being recorded. At this time, I'll turn the conference call over to your host, Director of Investor Relations, Mr.

Ankur Vyas. Please go ahead, sir.

Ankur Vyas -- Director of Investor Relations

Thank you, Tony. Good morning, and welcome to SunTrust third-quarter 2019 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 uncertainties, and actual results could differ materially.

Please refer to the cautionary statements on Page 2 of our presentation regarding forward-looking information, including some of the factors that might cause actual results to differ materially. 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 or in our presentation 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 webcasts are located on our website. With that, I'll now turn the call over to Bill.

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, and then I'll turn it over to Allison for some additional details. Reported earnings per share was $1.34.

And when excluding merger-related impacts on the quarter, earnings per share was $1.40. Overall, we had a good quarter, particularly as it relates to the strength in a number of our fee income-oriented businesses and continued balance sheet growth, both of which are reflective of our successful execution against the strategic initiatives of our consumer and wholesale segments. We also continue to benefit from strong asset quality performance as a result of our consistent underwriting discipline and a favorable economic environment. However, as we guided last quarter, a lower rate environment drove further pressure on our net interest margin, offsetting much of the core growth we delivered in loans, deposits and noninterest income.

So with that as an overview, let me highlight some of the specifics for SunTrust earnings in the third quarter. Loan growth remains healthy, evidenced by the 1% sequential growth we delivered, which was generally broad based across most businesses. The investments we've made in delivering product and industry expertise to our corporate, commercial and CRE clients, in addition to our ongoing investments and digital consumer lending, continue to drive good loan growth. We're also seeing healthy growth in indirect auto, reflecting strong consumer confidence.

Bigger picture, our clients remain relatively optimistic about the economy and are committed to making ongoing investments in their personal lives and in their businesses, so the level of uncertainty has increased leading to some caution. We also saw strong deposit growth in the quarter, which was largely driven by good results from our corporate liquidity products team, in addition to solid growth in consumer deposits. Offsetting the balance sheet growth we delivered was pressure on the net interest margin, given rate dynamics, which Allison will discuss in more detail. Excluding certain discrete items, noninterest income increased by 2% sequentially and 7% year over year, reflecting increased client activity levels in mortgage, investment banking, commercial real estate and private wealth, most of which is reflective of the successful execution against our strategies and is also a good representation of the diversity of our business mix.

Overall, revenue was stable sequentially as this diversity helped to offset the 10-basis-point decline in our net interest margin. Importantly, our continued execution against expense initiatives across the company has allowed us to keep our efficiency ratio stable year to date in spite of the challenge in interest rate environment. This base performance puts us on good footing heading into the merger where our efficiency opportunities are significantly amplified. And finally, credit quality remains a strength with charge-offs and nonperforming loans remaining below their historical averages.

When excluding the impacts of interest rate environment, I continue to be pleased with the core performance of both our consumer and wholesale businesses. We've developed and continued to enhance our competitive advantage in certain differentiated businesses like SunTrust Robinson Humphrey and LightStream. We continue to make good progress in enhancing the digital experience we're providing for our clients and remain focused on leading with an advice-driven model for our clients, particularly in our wholesale and private wealth businesses. These are just a few of the reasons why we entered into our proposed merger with equals of BB&T from a position of underlying strength with our offensive mindset.

The ability to bring together two highly complementary business models with different areas of relative strength and opportunity, I think, is unique to this particular combination. At the same time, the overall revenue environment has changed, which also underscores some of the defensive merits of our merger, including the synergy opportunities and our balance sheet positioning. As we all know, championship teams have great offenses and great defenses. In this regard, I think Truist is uniquely well-positioned.

Momentum for Truist continues to build, and I conclude with further details on the progress we're making in our integration planning efforts, in addition to some of the key items we hope to accomplish in the first 100 days as Truist. Before I turn it over to Allison, I want to highlight the announcement we made last week that Linnie Haynesworth was appointed to the SunTrust board of directors, and she will also serve on the Truist board of directors. Linnie was the leader of the cyber and intelligence mission solutions divisions for Northrop Grumman, and she will bring a wealth of knowledge to our board as it relates to cybersecurity, technology and innovation, all critical skill sets in creating a strong foundation for Truist and financial security and confidence for our clients. So with that, let me turn it over to Allison.

Allison Dukes -- Chief Financial Officer

Thanks, Bill. Let's start with net interest income. As you can see on Slide 4, our net interest margin declined 10 basis points sequentially. This was slightly lower than our previous guidance, primarily driven by short-term rates and long-term rates that declined more than we anticipated in July.

As a reminder, one-month LIBOR impacts approximately 22% of our earning assets, net of debt and commercial loan swaps, and short-term benchmark rates began to decline throughout August as the probability of the September rate cut increased in late July. Second, long-term rates declined approximately 50 basis points on average, which negatively impacted yields and prepayments in our fixed rate assets, largely mortgage-backed securities and mortgage loans. Net interest income declined by $25 million sequentially or 1.6% as good loan and deposit growth only partially mitigated the impact of the decline in interest rates. On a stand-alone basis, I would expect our net interest margin to decline by 2 to 5 basis points in the fourth quarter given the impact of the September rate cut.

We do expect deposit cost to begin to turn the corner and decline as we look into the fourth quarter. But overall, margin will still decline given the aforementioned net exposure to short-term interest rates. Now moving to Slide 5. When excluding the insurance settlements in the second quarter and a $5 million residual benefit in the third quarter, noninterest income increased by $18 million sequentially, driven primarily by mortgage income, which benefited from higher refinancing activity and improved gain on sale margins in addition to strong investment banking performance, where we saw increased origination activity within debt capital market and strength in M&A.

Separately, there were several discrete gains in the third quarter from strategic fintech equity investments and net securities gains. These gains were largely offset by a $14 million negative adjustment to counter-party credit valuation reserve in connection with our interest rate derivatives portfolio for client hedging activity, primarily as a result of lower rate. Moving to expenses on Slide 6. We recognized $33 million of merger-related impacts on the second quarter.

$22 million of these were specific merger-related costs driven by legal and professional services, in addition to the writedown of certain technology development projects in progress which were decommissioned. Another $11 million of costs were incurred, primarily related to consulting expenses associated with the merger, which generally show up in other noninterest expense. Excluding the merger-related impact, expenses increased by $22 million sequentially as a result of higher compensation cost, in part, due to one extra day in the quarter and higher operating losses in the quarter. Compared to the prior year, core expenses increased by 4% driven by higher compensation expense, partially in connection with the 7% increase in core noninterest income, in addition to ongoing investments in technology.

Importantly, these investments in talent and technology were largely funded by ongoing efficiency initiatives, which you can see on Slide 7. The adjusted tangible efficiency ratio was 59.9% for the quarter. And year to date, our adjusted tangible efficiency ratio is stable relative to 2018. Despite year-over-year stability, we feel good about these results given our forecast at the beginning of the year included two rate increases, whereas we have instead experienced two rate cuts with the possibility of more.

More importantly, given the synergies and scale we will achieve by merging with BB&T, we will have significantly greater capacity to invest in technology, talent and innovation. It's one of the key benefits of this transaction, not just that we have the opportunity to achieve best-in-class efficiency, which is, of course, a great outcome for our shareholders, but more so to have incremental capacity for investments. Now moving to Slide 8. Our net charge-off ratio was 28 basis points in the third quarter, up 6 basis points relative to the second quarter.

Our nonperforming loan ratio was 38 basis points, up 4 basis points relative to the prior quarter. The drivers of the increases in charge-offs and NPLs were generally idiosyncratic and also a reflection of credit metrics being at absolute low and benign level. On a stand-alone basis, we still expect our full-year net charge-off ratio to be between 25 and 30 basis points. Over time, however, we believe that net charge-off ratios are more likely to have an upward trajectory rather than downwards, simply given how strong performance has been in recent years, combined with the fact that there are increased levels of macroeconomic, political and global uncertainty.

Moving to the balance sheet on Slide 9. We continue to deliver good loan growth, evidenced by the 1% sequential growth in average balances. Importantly, the growth was diversified across most portfolios, including consumer direct, indirect auto and CRE. Within consumer, the ongoing investments we have made in our digital and point-of-sale lending capability which provide for superior client experience are also driving good growth in enhancing our returns.

Our auto portfolio continuing to demonstrate healthy growth and solid risk-adjusted returns. Within CRE, we continue to see growth tied to the investments we have made in permanent lending and bridge lending capabilities for institutional borrowers, which has been partially offset by runoff in the construction portfolio. Across this wholesale and consumer, our underwriting discipline has not changed, and we remain highly focused on ensuring that the quality of our new production is consistent with the quality of our existing portfolio. On the deposit side, average balances were up 2% sequentially.

The increased growth is reflective of strong production from our consumer segment where we're benefiting from increased momentum associated with new checking and savings products which were introduced at the end of 2018, along with targeted marketing and pricing strategies. We also benefited from targeted growth with certain corporate clients as a result of success delivered by our corporate liquidity product specialists team. Interest-bearing deposit costs increased by 4 basis points sequentially, lower than the prior two quarter increases of 6 and 9 basis points, respectively. This quarter's increase in deposit costs reflects, to some extent, the lagged impact from prior rate hikes and our desire to balance our funding profile.

As I said earlier, we do anticipate deposit costs to begin to decline in the fourth quarter, but we will also be thoughtful about remaining competitive given our desire to maximize our ability to retain and grow clients as we embark on the merger and integration processes over the coming couple of years. Moving to Slide 10 which provides an update on our capital position. Our estimated Basel III Common Equity Tier 1 ratio was 9.3%, and the Tier 1 ratio was 10.4%, slightly higher than the prior quarter given the suspension of share repurchases. Book value and tangible book value per share increased by 3% sequentially, given growth in retained earnings and the impact of lower rates had on improving the unrealized loss position in our securities and derivatives portfolio.

We continue to expect capital ratios to trend upward given the suspension of share repurchases in anticipation of our merger with BB&T. Separately, we increased our quarterly dividend by 12% this quarter to $0.56 per common share, providing for an attractive dividend yield of 3.3%. Moving to the segment overviews, we'll begin with the consumer segment on Slide 11. The positive lending momentum we had in consumer continued in the third quarter with consumer lending production, excluding mortgage, up 7% year over year.

The investments we've made in LightStream and our point-of-sale lending partnership continue to be consistent contributors to our loan growth. Over the past year, we have focused on enhancing our analytics, improving automation, adding product offerings and growing our partnership and referral, all of which are key contributors to the 38% year-over-year growth we delivered in LightStream. We've also made good progress in enhancing our point-of-sale lending capabilities and expanding our partnership network. Relatedly, we added two additional point-of-sale financing partners this quarter: one focused on seller, and the other focused on equipment.

These partnerships further our strategy of investing in digital lending channels which meet clients where they make purchase decisions. Consistent with prior quarters, some of this collective growth has been offset by the continued declines in home equity. On the deposit side, as I mentioned earlier, we're experiencing good momentum with the new product offerings which were introduced at the end of 2018. These products, combined with effective targeted marketing campaigns, have led to a strong year-over-year increase in new deposit production.

Overall, the 7% loan growth and 2% deposit growth offset margin compression and drove a 1% increase in net interest income relative to the prior year. Consumer fee income benefited from strength in mortgage production income as a result of an increase in refinancing activity and improved gain on sale margin. Mortgage income also benefited from increased adoption of SmartGUIDE, our digital mortgage application, which has surpassed 90%. This application, which provides for a significantly better user experience and streamlined aspects of the intake and underwriting process, combined with an improving back-end process, made our mortgage team very well-positioned to help our clients in the recent refinance wave.

When looking at longer-term trends, our consumer business has made significant strides over the last couple of years. Revenue is up 8% driven by strong balance sheet growth and strength in mortgage and wealth-related fee. Assets under management are up by 10%, in part, due to better partnership across the retail premier and wealth segment. We've made significant strides in improving our front-end client experience through ongoing enhancements to mobile and online banking, digital lending through SmartGUIDE, LightStream and point-of-sale partnership.

Our enterprise client portal for private wealth clients has provided for a differentiated experience for our high net worth clients and is now being leveraged for a new portal for small business clients. Our investments in our new account center have significantly improved the digital account opening experience. And now, over 90% of our consumer products and solutions can be onboarded and serviced 100% digitally. In addition to digital progress, our branch client experience scores are the strongest they've been in years.

And finally, our adjusted tangible efficiency ratio in consumer has improved by approximately 480 basis points, driven, in part, by a 10% reduction in branch count, which is largely tied to increased digital adoption, improved productivity and strong revenue growth. All of this was accomplished in the context of consistent underwriting discipline and improved risk-adjusted return. This progress, combined with our strong presence across high-growth markets in the Southeast and Mid-Atlantic, will be amplified when we merge with BB&T, creating retail and private wealth businesses that will be among the leaders in the industry across many key dimensions: growth, efficiency, talent and technology. Moving to wholesale on Slide 12 where our consistent strategy continues to drive good results.

Loan growth disposed somewhat in the third quarter largely as a result of increased pay downs within C&I and our own internal discipline around pricing and structure. Deposit growth ticked up meaningfully as a result of success from our corporate liquidity product specialists team, in addition to several larger temporary client deposits. Investment banking income had strong performance across most categories despite market volatility with particular strength in debt capital markets and M&A. Relatively, approximately 35% of our M&A fees year to date have come from commercial banking clients, a good indicator of the continued success we are having in bringing enhanced advisory capabilities to a broader set of clients in wholesale.

This underlying strength was largely mapped by the aforementioned negative $14 million adjustment in trading income, in addition to a sequential decline in CRE-related fee, given the especially strong performance in the second quarter. When looking at broader trends, commercial real-estate-related fees year to date were up 61%, reflective of our strong client relationships and deep expertise in the structured real estate business, the improved momentum from our agency lending business, given increased partnership between our coverage bankers and product specialists, and good core performance from SunTrust Community Capital. Similar to consumer, when looking at longer-term trends, our wholesale business has made significant strides over the last three years. Revenue has grown at a 5% CAGR with several key drivers, including lead relationships have grown at a 10% CAGR, driving increased market share with our client.

Revenue from non-CIB clients has grown at a 20% CAGR over last two years and now represents roughly 20% of capital markets fees, and commercial real-estate-related fees have seen strong growth, largely driven by the investments we have made in our agency-lending capabilities through the acquisition of Pillar in 2016. We expanded our commercial banking business into Ohio and Texas, and we launched a national expansion of our aging services vertical within commercial banking. We've improved technology capabilities for clients and teammates first for loan origination and our client-facing treasury and payments portal. Each of these investments in growth was self-funded by ongoing efficiency initiatives.

Specifically, our adjusted tangible efficiency ratio in wholesale has improved by 225 basis points. And importantly, these achievements were all accomplished in the context of consistent risk discipline and our ability to win based on advise, not structure or pricing. Each of these strategies continues to drive solid, sustainable results and has created a strong foundation which we can build upon as we merge with BB&T and have the opportunity to bring our capabilities and our differentiated model to a broader set of corporate and commercial clients. With that, I'll turn the call back over to Bill.

Bill Rogers -- Chairman and Chief Executive Officer

Thanks, Allison. The overall momentum we have on a stand-alone basis continues to validate my view that SunTrust is approaching the proposed merger with BB&T from a great position of strength. Individually, we are two very strong companies. And together, we're going to be able to accomplish so much more together than either of us could have alone.

So with that as a context, let me provide a progress update on the merger on Slide 13. The combined executive management team has been meeting weekly for nearly nine months now. Over this period of time, I mean, I think our teams have developed great rapport, trust and respect for one -- each other. This has exceeded my already very, very high expectations.

As a team, we continue to work incredibly hard to lay the foundation for Truist. And as we do so, there is a great sense of excitement for the future. Kelly, thanks for your collaborative leadership. And to the whole team, thank you for your hard work, the incredible integrity and the openness during this process.

Everybody is whirling for Truist. It's just so apparent. We've all worked hard to share this excitement with all of our teammates, both at BB&T and SunTrust. We've had over 30 formal sets of communication regarding merger updates.

They've included organizational designs, technology ecosystem decisions, benefits, packages and so much more, but those are just the formal sets of communications. We've had multiple more informal town halls, listening sessions, every form of communication possible. Overall, I'm really proud of the transparency in this process. In the third quarter specifically, we accomplished several key milestones.

On July 24, Kelly and I appeared before the house of financial services committee and felt that the merits of this transaction were generally well received and understood by representatives. It was a real honor to represent all the things that SunTrust has done to benefit its clients and communities and is heartening to hear back from representatives, community groups and clients on how many feel so positively about SunTrust and also about BB&T. On July 30, both SunTrust and BB&T shareholders overwhelmingly approved the transaction in connection with our special shareholders meeting. Throughout the quarter, our leaders continue their organizational design process, which culminated in the announcement of nearly 8,000 positions today, consistent with the earlier phases of organization design.

These leaders reflect great talent in both companies. It's a tremendous balance between both BB&T and SunTrust, great levels of diversity by both traditional definitions, but also by backgrounds, experiences and perspectives. We just simply have a superior team. We've been making powerful decisions around compensation and benefits for Truist teammates.

We're looking at the combined set of salary, benefits, time off, retirement, voluntarism, career development resources, combined with the just incredible opportunities that are going to be available for Truist teammates. I just fundamentally believe Truist will be the premier financial institution to work for in the country. We also made tremendous progress in selecting, which systems we'll use for Truist in creating road maps for integration. We identified approximately 100 ecosystems as part of this process and feel confident that the selections we've made and are making are going to create a super foundation for Truist by leveraging the best of both architecting for the future and minimizing integration risk and providing additional security.

Finally and perhaps most importantly, we conducted a legal day-one readiness exercise with each of our approximately 100 merger work streams in the second half of September. The results confirmed our confidence that we're in a position to move very quickly after receiving regulatory approval. From here, we'll continue to work closely with regulators to answer their questions and finalize various process. The dialogue has been extremely constructive.

And given all that we know today, we're targeting a close at some point in the fourth quarter. Once we do close, we're in a position to hit the ground running, and we have several key milestones which we plan to accomplish in our first 100 days as Truist. First, as you can imagine, we'll present to the new Truist board all the proposed committee, governance structures for approval legal day one. Our combined board, just like our combined management team, brings a unique and diverse set of backgrounds, experiences, perspectives and skills and also excited to work with all of them.

We will also engage with all of our teammates on Truist's focus, mission and values, which is just so critical to helping build our new culture. I think as all of you know, SunTrust and BB&T are both entering into this merger as companies that have strong focus and mission foundations upon which to build. I will say from a personal perspective, this work has really been rewarding and the approach that everyone has taken to build a truly purpose-oriented company is very exciting to think about. We'll continue to refine all aspects of the Truist brand with the goal of rolling this out in 2020.

As you know, we'll still go to market as BB&T and SunTrust as divisions of Truist for some period of time as we get through the client-conversion process. And finally, we'll begin executing against the opportunities we've identified to harness expense and revenue synergies. With great energy from our teams and the help of third parties, there's been a significant amount of time dedicated to creating clear playbooks for achieving our cost saves. Some of the near-term opportunities that will be initial savings from removing duplicative positions across the company, most of which have been identified as part of our organizational design process.

Third-party spend will be a key area of focus in scenarios where we both use the same vendor partner will have the opportunity to negotiate better contracts and quickly rationalize costs in scenarios where we use different vendor partners. We'll swiftly begin an RFP process and work through a thoughtful selection process. And finally, we'll continue to refine our plans to rationalize our real estate footprint. Branch closures will not begin until after the first year, but there will be opportunity in the next six to nine months to harness savings from our non-branch corporate real estate footprint.

And while it may take a little longer for revenue synergies to come to fruition, we're going to quickly start executing against the opportunities. We have to bring a more fulsome set of products and capabilities to an expanded client base. That's sort of a traditional way of explaining revenue synergies, but I see another important layer, which is the leverage we create by recognizing each other's executional prowess and go-to-market strategies. Our teams are choosing the best of both to define Truist's go-to-market strategy, which I think will be incredibly effective.

I feel very confident in our future, and I'm proud of all the work that's been done to get us to where we are today. When we announced our name Truist, we also declared that Truist would stand for better, better experiences, better partnerships, better technology and creating a better future for our teammates, our clients and our communities. Because of the team we have in place, the capabilities that each company brings and the identified synergy opportunities we have from leveraging each company's executional excellence, I can already declare that Truist will be better with the objective of being the absolute best. So before I conclude, I want to thank all the SunTrust teammates and BB&T associates who are just working incredibly hard to make this merger a success while there's directly an integration planning, managing risk, investing in our communities or most importantly, doing that job they do every day providing outstanding confidence and service to our clients.

I want you to all know that your efforts are a significant part of making history. So with that, Ankur, let me turn the call back over to you.

Ankur Vyas -- Director of Investor Relations

Great. Tony, we are now ready to begin the Q&A portion of the call. So you can start that process.

Questions & Answers:

Operator

All right, sir. Thank you very much. [Operator instructions] [Technical difficulty]

Bill Rogers -- Chairman and Chief Executive Officer

Well, while we're waiting, this is Bill, let me assure you that Allison and I are very excited about taking your questions, but I cannot speak for why AT&T had any hesitation, but we're very excited and glad to be back on.

Operator

[Operator instructions] We'll take our first question from Betsy Graseck with Morgan Stanley. Please go ahead.

Betsy Graseck -- Morgan Stanley -- Analyst

Hi. Good morning. So just wanted say thanks for getting back on for the Q&A. I guess a couple of questions.

First off, wanted to understand your -- what you're hearing from the corporate clients that you have. And C&I book, obviously, is a big piece of your business. I know that you mentioned that you're going to be -- going with the SunTrust brand still for a while here until you migrate. Maybe give us a sense as to, a, how long you think that's going to be for corporate clients? And then also give us a sense to -- oh, I've got some feedback here.

Bill Rogers -- Chairman and Chief Executive Officer

We can hear you fine.

Betsy Graseck -- Morgan Stanley -- Analyst

How you're thinking -- yes, how you're thinking about your go-to-market strategy to the corporate clients just generally.

Bill Rogers -- Chairman and Chief Executive Officer

Yes. I think a couple of things. If I went and sort of did a consumer, commercial and large corporate and how everybody is feeling, I think as many have articulated and we feel the same way that consumer is really strong and good credit quality, good spending, good confident sentiment, and that obviously drives what happens in commercial and the corporate side. On the commercial side, I would say they're cautiously optimistic.

I build a lot of clients recently and a lot of them are coming off sort of record years and record quarters, which I think would cause them to be a little naturally cautious. Most of the challenges mentioned out, I think, are in the hiring and retaining of employees. They're sort of managing through the tariff issues that's sort of a small percent of their business. On the large corporate side, clearly, more impact on global slowdown, pick your category, ISM numbers.

But we've also seen really good strong earnings season, we've seen some positive developments, and maybe even today, and certainly, in the last few days. And I would say they're cautious but resilient. And I think the resilient thing is probably the important part. My sense is in talking to clients is they have an ability more so today than they ever just sort of react quickly.

So I think the betas attached to different news cycles and different news events are sort of high, but they can slice both ways. Our go-to-market strategy is really -- I think it's one of the hallmarks of what this Truist merger is going to look like because we're really combining the best of both worlds. If we take -- start with our commercial community banking model, we're doing all the great things that BB&T does in execution, deposit generation, small business relationship management, technology and combining that with all the specialties of aging services, not for profit, all the capital markets penetration. So the ability to go to market and take the best of what both companies have to offer, I think, is going to be the real hallmark of what is has.

As it relates to sort of the large corporate go to market, we're really consolidating what happens at BB&T and what happens at SunTrust. There are great opportunities in both places to create some capacity and some products and some capabilities that we didn't have either want and accentuate those and run those through a model that I think is running effectively and efficiently today.

Betsy Graseck -- Morgan Stanley -- Analyst

And do you go with the Truist brand sooner on the corporate side than the consumer side? Or do you sense as to the time frame for when we should expect that branding switch to happen on the corporate side?

Bill Rogers -- Chairman and Chief Executive Officer

Yes. That's a great question and that's one of the things that we'll be evaluating day one, that won't be day one, but that's one of the things that we'll be evaluating sort of what leads and what lags in terms of the brand. But in how we go-to-market, I mean, it will be more Truist feeling because it will be all those decisions have been made, all those alignments have happened. What we do specifically with the branding, we'll talk more about as we enter the first part of next year.

Betsy Graseck -- Morgan Stanley -- Analyst

OK. And so when you're talking about the go-to-market too, you're talking about the pricing and structure and aligning on coverage model. Has that already been decided? Or are those maybe could ease once you get to post-close?

Bill Rogers -- Chairman and Chief Executive Officer

Yes, all that work has been done, which has been great. I mean, that's what the teams have been really cranking away for the last nine months as to literally as a starting gun is to be able to go to the market really effective way. People know what their jobs are, they know who their bosses are, they know what their capabilities are and to hit the ground running.

Betsy Graseck -- Morgan Stanley -- Analyst

Thanks.

Operator

Thank you very much. [Operator instructions] Our next question comes from Mike Mayo with Wells Fargo Securities. Please go ahead.

Mike Mayo -- Wells Fargo Securities -- Analyst

Hi. Can you hear me?

Allison Dukes -- Chief Financial Officer

We can hear you.

Bill Rogers -- Chairman and Chief Executive Officer

Hi, Mike.

Mike Mayo -- Wells Fargo Securities -- Analyst

So we're already seeing the statistics that something like two out of three mergers do not work out. And then what you're saying is, it is working out. Where are you in this so far? So one is, can you simply define and describe the culture on day one once the merger closes and in simple terms as possible. And the other part of this is, I mean, I hear you and Kelly, you sound like everything is going great and it's the respect.

You've had no -- it sounds like newlyweds, right? And we all know that newlyweds eventually will have some issues or questions or disagreements. So can you just bring up one example of a disagreement that you had and how it's been resolved? Because we know that's inevitable and it just sounds a little too good to be true on the outside or maybe I'm just missing something.

Bill Rogers -- Chairman and Chief Executive Officer

Well, I think the last part of your question is undisputable. I think you're cynical. And that's what your job is, and I'd appreciate it and I respect that. I think culture isn't a day-one event.

So when you say what's the culture like day one, I don't actually think about the world that way. I mean, culture is something that's defined over time. It's built together, so the things that will exist day one. And I think this is really critical as our two companies are, I think, arguably deeply ingrained and purpose mission and values, and these are not marketing slogans.

They're not initiatives. They're not words on the page. This is how we look. This is how we drive our companies.

Our employees think about the why as much as they do about the how, and that came up in the survey work we've done. I mean, we're working with the outside consultants. I mean, on the cultural work, they said, "Look, we've really never seen two companies that are this embedded in terms of how they think about purpose." So if we think about what's there day one, it's got to be that. I mean, that's going to be there.

That was there, and that would continue to be a framework. We have done an incredible amount of work, as I talked about, in aligning those two and aligning the words. The teamwork on that has been spectacular, and the alignment has been spectacular, which sort of defines, I think, those cultural moments when you get together and talk about hard issues. Are you doing in a way that's looking forward and are you doing in a way that puts everything on the table.

I know you're driving for how on Kelly and I disagreed and what are all the issues and where are we squabbling, and the fact is it's just not happening. I mean we have a strong alignment. We came into this merger with a clear vision of what we wanted to accomplish. We came into this merger with the same strong sense of the why as just as important as the how.

We came into this merger recognizing what the benefits were, and I would say the parts that had worked and the parts where we not disagreed is because everything has been in the middle of the table. We just haven't had an issue where it's the BB&T way or it's the SunTrust way. We automatically put those in the middle. And if we've had discussions versus disagreements, it's about ensuring that that happens.

Kelly might say, "Bill, let's make sure that's in the middle." I might say, "Kelly, let's make sure that's in the middle." We have sort of code words between us, which is no light between us. So if we see light between us or between our teams, we get on it immediately. I've got a long list of text from Kelly. Kelly, he's got a long list from me, and we focus on closing those issues.

So -- but there also might be differences, I mean, let's be honest about that. There are differences, and let's celebrate those. I mean, that's diversity of thought. I can tell you, I'm a better leader for having spent nine months working with the BB&T leadership.

I've learned a lot, and it will make me a better leader going forward, and I would trust that they would tell you the same thing on the other side. So having a little bit of diversity and a little bit of difference of thought is a good thing. It's not a bad thing.

Mike Mayo -- Wells Fargo Securities -- Analyst

And then I guess one more time, one short follow-up. Bill, when I got married, I wanted to live in a one-bedroom condo, and my wife wanted to live in a studio loft. So we compromised, and we lived in a studio loft. That was an attempt on a joke.

But when you do have that complex because it's going to happen probably in bigger ways than you've seen already. What are your plans for resolving that? How -- just walk us through that.

Bill Rogers -- Chairman and Chief Executive Officer

Well, we have a -- first of all, we have a very collaborative model, and Kelly and I both lead from a collaborative basis. So I think that's a strong suit, and that actually showed up on the survey, the work that we did that that's a -- it's not a top-down. It's not a one person decision-making. So the first chain of events as it will go through that collaborative model, and again we've spent nine months working on that, the bug does stop, and the bug will stop with Kelly as CEO.

So if it gets to a point where there's some disagreement, somebody has to make a decision. That's Kelly's job. He embraces that job. I embrace in having it, and we're working together.

I mean, that's just sort of what I would consider to be normal business practices.

Mike Mayo -- Wells Fargo Securities -- Analyst

All right. Thank you.

Operator

Thank you. The next question in queue will come from John McDonald with Bernstein. Please go ahead.

John McDonald -- Sanford C. Bernstein -- Analyst

Hi. Good morning. Bill, I wanted to ask you about the $1.6 billion net merger cost saves. I think both companies have expressed incremental confidence in that.

I think you've done some preparatory work, maybe even some greater confidence in that. So I wanted to just ask you again, recognizing you guys are moving slowly with the integration to do it right, what's the timeline for achieving those merger saves? As you think about it, how should we reasonably think about the timeline there? And if there is upside, how will you and Kelly think about reinvesting that in marketing or technology?

Bill Rogers -- Chairman and Chief Executive Officer

Yes. I think a couple of things, John. I mean, as you could imagine, we did the $1.6 billion on February 7, so a couple of things. We remain confident in the $1.6 billion.

I think every time we peel back the onion, we remain more confident, but the elements of that are changing. It might be a certain more percent of something than we thought or certain less percent of something that we thought. So the elements of the $1.6 billion are changing as we've been developing our plans and as we dig deeper into each situation, but the positives are offsetting the negatives in terms of change. So that creates our confidence.

I think we'll talk a lot more about timing sort of after closing. I think that will be the time to really sit down and be more definitive about putting that $1.6 billion over a more specific timeline. We did that at the outset, and now we're -- we'll know a lot more. We'll have a lot more details and work together on that.

But I think the element of being confident about the $1.6 billion is what's important. We'll get through the specific timing of how that happens as we learn more and think about ecosystems and risk and all those things that we want to make sure that we mitigate. And then as it relates to how do we invest, I mean, the good news is there is an insatiable appetite to invest, so our teams are also spending time trying to prioritize the things that we want to invest from an incremental basis. Remember, the $1.6 billion already included some incremental investments, so there are things that are sort of already in the queue and under way.

And I think we've got a really good process and system to add things in the queue in terms of incremental investment, and those will be both short term and long term.

John McDonald -- Sanford C. Bernstein -- Analyst

OK. And then wanted to bring it back to the quarter for Allison. The outlook for fourth quarter, Allison, on the net interest margin, down 2 to 5, could you give us an idea of what kind of assumptions you have in there for fed cuts, yield curve and deposit betas?

Allison Dukes -- Chief Financial Officer

Sure. Thanks, John. So the guidance of down 2 to 5 assumes that when we only have a rate cut in September and the real variability underlying that range is around deposit beta. So if we were to not have a 0 beta and not effectively have any improvement in our deposit pricing, then that decline will be probably closer to 5 basis points.

25% beta would be closer to down 2 basis points. If we were to get another rate cut in October, then there's probably an additional 3 to 4 basis points of pressure on our net interest margins.

John McDonald -- Sanford C. Bernstein -- Analyst

OK. Great. And then one more, Allison, for you. Could you talk broadly about CECL like what would day one look like for SunTrust if you were to stand alone? And then maybe some comment about the nuances of how CECL accounting interacts with merger accounting.

I know it's very complicated, but any thoughts there would be really helpful.

Allison Dukes -- Chief Financial Officer

Yes. We're not going to give guidance as to what the impact of CECL would be for SunTrust on a stand-alone basis, simply because we don't expect to be on a stand-alone basis as we move into 2020 with an expectation that we can still close the merger in fourth quarter. I will tell you we've been in parallel runs for a couple of quarters. We are ready for implementation in January.

It's been going very well, but we're going to need to work through the impacts of the merger. That's there are -- there's a lot of work to be done between our teams to make sure that our economic scenario assumptions, among other things, have some consistency. And so that guidance will be given by Truist after closing, and that's really going to be the most relevant guidance, the guidance that's given for Truist as a whole. None of it will impact the strategic merits of the merger as well.

But clearly, there's a lot of work to be done by both teams to make sure we're giving you good guidance as we move into a post-closing environment.

John McDonald -- Sanford C. Bernstein -- Analyst

OK. Thanks.

Operator

Thank you. And our last question, that will come from the line of Ken Usdin with Jefferies. Please go ahead.

Ken Usdin -- Jefferies -- Analyst

Hi. Thanks. A couple of more things, just on the results. Can you just give us a sense of just how this quarter's fee strength do you feel -- how do you feel about the continuity of that going forward? Any changes in pipelines and originations, both, when I think about more -- investment banking and mortgage, more specifically as the two that have shown better strength of late?

Bill Rogers -- Chairman and Chief Executive Officer

I'll try to hit a couple of those, Ken. On the mortgage side, well, obviously, you have some seasonality. So fourth quarter tends to be lower than the third quarter, but we've also had really good refinance activity. So that's -- that will have some overlay to that seasonality on the positive side.

On the CRE side, I mean, we'll have a good fourth quarter. It won't be what it was last fourth quarter. But as we've had some of that in the earlier quarters of this year, but it will be -- 2019 will be up over 2018, and some of those things are episodic, but I think we'll be strong in the fourth quarter. We've had really good asset flows in private wealth management, as Allison talked about.

So I think we'll continue to be on a positive front in that. And then capital markets, we've got -- we have good momentum. We've got incredible diversity. I would say the pipelines are good, but they're probably shorter in terms of thinking about it, just because markets are a little bit choppier.

I would expect the second half to be better than the first half, but it's become a little bit more of a month-to-month kind of view than a quarter-to-quarter view. But the diversity of what we're doing in the pipeline, the strategies and all those things, that feel really good about.

Ken Usdin -- Jefferies -- Analyst

Got it. And a bigger-picture question about that investment banking point, though. I mean, obviously, the deal hasn't closed yet, but both sets of bankers know about the potential synergies of the product sets. At least from a SunTrust side, has that -- how has that conversation changed at all with the way people are approaching using the bank or prospectively thinking about being able to do more with the bank? Any just anecdotes or story lines about from the customer base to date?

Bill Rogers -- Chairman and Chief Executive Officer

Yes. Look, I think we got to be careful, right? So we're not talking to clients specifically about individual activities because we're still in the competitive mode. But clients, as you know, have come to us and really are recognizing the fact that we've got additional capabilities and additional benefits and they are starting to ask the questions. We sort of have to keep on the bay a little bit at this particular juncture, but I think that capacity to hit the ground running and be able to have a really receptive audience.

I've said this before. I mean, clients really want an alternative to lot of the bulge bracket firms, and we provide a great alternative. We provide great diversity to their base. We have a lot of specialties.

We have this access to our commercial base, and they see that access multiplying by probably three times in terms of the number of commercial clients in the BB&T portfolio. So I think all the strategies that we put in place are really going to just be accentuated and accelerated with this merger, and our clients are recognizing that. But today, we're competing and we're going to stay in that mode until legal day one, and then we're going to shift really, really quickly. And based on those conversations that even I've had personally, the client receptivity, I think, is going to be really strong.

Ken Usdin -- Jefferies -- Analyst

Got it.

Allison Dukes -- Chief Financial Officer

And the only thing I would add to that is clients certainly recognize that our capability on the investment banking side will remain an increase, to some extent. But I think even more than that, they recognize that our balance sheet will double in size. And so if they ever had any concern about our size and our ability to support them as they grow, I think the merger elevates that concern and gives them a lot of confidence that Truist will be the bank that can offer them the full breadth of capabilities as they continue to grow as well.

Ken Usdin -- Jefferies -- Analyst

OK. Allison, and just one last one. Just -- there was a little bit of a bounce in the C&I NPLs, but the charge-off ratio remained very low. Just -- you mentioned that credit is still very stable underneath.

Just any color or context to whether that's a seasoning or blips coming through, that would be great.

Bill Rogers -- Chairman and Chief Executive Officer

Yes. I don't see anything that's a trend in there. I mean, we're bouncing along the bottom. So I think in any one quarter now, we're going to see NPLs go up or go down by some marginal amount.

But as you can imagine, we're knee-deep and stressing everything in our portfolios and looking at all the opportunities for change, and there's nothing that I see this quarter that looks like a trend. And I think there's just a couple of hitters and sporadic things. And again, quarter to quarter, I think when you're along the bottom, you're just going to see that.

Ken Usdin -- Jefferies -- Analyst

Got it. Thanks very much.

Ankur Vyas -- Director of Investor Relations

Thank you, everyone, for joining. It looks like there are no more questions in the queue. And therefore, this concludes our call. If you have any further questions, please feel free to contact the IR team.

Operator

[Operator signoff]

Duration: 29 minutes

Call participants:

Ankur Vyas -- Director of Investor Relations

Bill Rogers -- Chairman and Chief Executive Officer

Allison Dukes -- Chief Financial Officer

Betsy Graseck -- Morgan Stanley -- Analyst

Mike Mayo -- Wells Fargo Securities -- Analyst

John McDonald -- Sanford C. Bernstein -- Analyst

Ken Usdin -- Jefferies -- Analyst

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