STI 2018 Annual Report

29 Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION INTRODUCTION We are a leading provider of financial services, with our headquarters located inAtlanta, Georgia. We are an organization driven by our Company purpose of Lighting theWay to Financial Well-Being — helping instill a sense of confidence in the financial circumstances of clients, communities, teammates, and owners is at the center of everything we do. Our principal subsidiary, SunTrust Bank, offers a full line of financial services for consumers, businesses, corporations, institutions, and not- for-profit entities, both through branches (located primarily in Florida, Georgia, Virginia, North Carolina, Tennessee, Maryland, South Carolina, and the District of Columbia) and through other digital and national delivery channels. In addition to deposit, credit, mortgage banking, and trust and investment services offered by the Bank, our other subsidiaries provide capital markets, securities brokerage, investment banking, and wealth management services. We operate two business segments: Consumer and Wholesale, with functional activities included in Corporate Other. See Note 22, "Business Segment Reporting," to the Consolidated Financial Statements in this Form 10-K for a description of our business segments. This MD&A is intended to assist readers in their analysis of the accompanying Consolidated Financial Statements and supplemental financial information. It should be read in conjunction with the Consolidated Financial Statements and accompanying Notes to the Consolidated Financial Statements in Part II, Item 8 of this Form 10-K, as well as with the other information contained in this document. When we refer to “SunTrust,” “the Company,” “we,” “our,” and “us” in this report, we mean SunTrust Banks, Inc. and its consolidated subsidiaries. In this MD&A, consistent with SEC guidance in Industry Guide 3 that contemplates the calculation of tax-exempt income on a tax equivalent basis, we present net interest income, net interest margin, total revenue, and efficiency ratios on an FTE basis. The FTE basis adjusts for the tax-favored status of net interest income from certain loans and investments using a federal tax rate of 21% for all periods beginning on or after January 1, 2018 and 35% for all periods prior to January 1, 2018, as well as state income taxes, where applicable, to increase tax- exempt interest income to a taxable-equivalent basis. We believe the FTE basis is the preferred industry measurement basis for net interest income, net interest margin, total revenue, and efficiency ratios, and that it enhances comparability of net interest income and total revenue arising from taxable and tax- exempt sources. Additionally, we present other non-U.S. GAAP metrics to assist investors in understanding management’s view of particular financial measures, as well as to align presentation of these financial measures with peers in the industry who may also provide a similar presentation. Reconcilements for all non- U.S. GAAP measures are provided in Table 29. EXECUTIVE OVERVIEW Recent Event On February 7, 2019, we announced that our Board approved a definitive agreement to combine with BB&T Corporation (“BB&T”) in an all-stock Merger. Under the terms of the Agreement and Plan of Merger (the “Merger Agreement”), our shareholders will have the right to receive 1.295 shares of BB&T common stock for each share of our common stock. A new corporate headquarters for the combined company will be established inCharlotte, NorthCarolina, and it will operate under a new name and brand, while the combined company's board of directors and executive management team will be evenly split between SunTrust and BB&T. The Merger is expected to expand capabilities and accelerate capacity to invest in transformational technologies for clients, combine complementary business models to create a diverse and comprehensive business mix with leading market share positions, and deliver organizational and other merger-related synergies, while also being accretive to the combined company's profitability profile. Our Merger with BB&T is expected to close late in the third quarter of 2019 or in the fourth quarter of 2019, subject to satisfaction of customary closing conditions, including receipt of regulatory approvals and approval by the shareholders of each company. For more information on our proposedMerger with BB&T, see Part I, Item 1, “Business,” and Note 25, “Subsequent Event,” to the Consolidated Financial Statements in this Form 10-K. Financial Performance We delivered a seventh consecutive year of improved performance, efficiency, and capital returns for our owners, driven by a favorable operating environment, continued strong credit quality, and solid loan growth. We enjoyed solid revenue growth across both of our business segments, led by growth in net interest income. Diluted EPS for 2018 was $5.74, up 28% relative to 2017. For 2017, EPS included $0.39 per share in net benefits associated with actions we announced in our December 4, 2017 Form 8-K as well as the impact of the 2017 Tax Act and actions we took as a result to better position the Company for improved long-term success (“Form 8-K and tax reform-related items”). Total revenue for 2018 increased 2% compared to 2017, as higher net interest income was partially offset by lower noninterest income. Net interest income increased 5% relative to 2017 due to net interest margin expansion and growth in average earning assets, partially offset by an increase in average interest-bearing liabilities and associated funding costs. Net interest margin for 2018 increased 12 basis points, to 3.26%. The increase was driven by a 40 basis point increase in average earning asset yields arising from higher benchmark interest rates, favorable mix shift in earning assets, and lower premium amortization expense, offset partially by higher funding costs. Looking to the first quarter of 2019, we expect net interest margin to be generally stable compared to the fourth quarter of 2018; thereafter, net