STI 2018 Annual Report

30 interest margin trends will depend on the interest rate environment, future levels of loan growth, and funding costs. Noninterest income decreased $128 million, or 4%, compared to 2017, driven primarily by lower mortgage and capital markets-related income as well as lower client transaction-related fees, offset partially by increases in other noninterest income, commercial real estate related income, and wealth management-related income. See additional discussion related to revenue, noninterest income, and net interest income and margin in the "Noninterest Income" and "Net Interest Income/Margin" sections of this MD&A. Also in this MD&A, see Table 21, "Net Interest Income Asset Sensitivity," for an analysis of potential changes in net interest income due to instantaneous moves in benchmark interest rates. Noninterest expense decreased $91 million, or 2%, compared to 2017, driven primarily by the $111 million of net Form 8-K and tax reform-related items recognized during the fourth quarter of 2017, offset partially by higher outside processing and software expense and the $60 million pre-tax NCF Retirement Plan settlement charge recognized in the fourth quarter of 2018. Looking to the first quarter of 2019, we expect core personnel expenses—which excludes the fourth quarter of 2018 NCF Retirement Plan settlement charge of $60 million— to increase by approximately $60 million to $75 million from the fourth quarter of 2018 due primarily to seasonal increases in 401(k) and FICA expenses. See additional discussion related to noninterest expense in the "Noninterest Expense" section of this MD&A. For 2018, our efficiency and tangible efficiency ratios were 61.0% and 60.2%, compared to the prior year ratios of 63.1% and 62.3%, respectively. Our current year efficiency ratios were negatively impacted by the NCF Retirement Plan settlement charge recognized during the fourth quarter of 2018; when excluding the impact of this item, our adjusted tangible efficiency ratio improved to 59.6% for 2018, compared to 61.0% for 2017, which is the highest degree of improvement we have delivered since 2014. This strong efficiency progress enabled us to reach our target of below 60% one year earlier than our stated goal. We expect efficiency improvement to moderate in 2019, given our strong progress in 2018 and less anticipated macroeconomic tailwinds. Despite this, we continue to expect improvement and expense discipline as we work towards our medium-term target of between 56% and 58% for SunTrust when viewed as a stand- alone company. Upon consummation of the Merger, we expect our efficiency to improve significantly as we realize merger- related synergies. We remain focused on creating capacity to invest in technology and talent, which we believe will create the most long-term value for our clients and owners. See Table 29, "Selected Financial Data andReconcilement of Non-U.S. GAAP Measures," in this MD&A for additional information regarding, and reconciliations of, our tangible and adjusted tangible efficiency ratios. Overall asset quality remained very strong during 2018, evidenced by our 0.23% net charge-offs to total average LHFI ratio and 0.35% NPL to period-end LHFI ratio. In addition, our ALLL to period-end LHFI ratio (excluding loans measured at fair value) decreased 15 basis points compared to 2017 due primarily to improved economic and credit conditions. These low levels reflect the relative strength across our entire LHFI portfolio, though we recognize that there could be normalization moving forward. Looking to 2019, we expect to operate within a net charge-offs to total average LHFI ratio of between 25 and 30 basis points. Additionally, we expect the ALLL to period-end LHFI ratio to generally stabilize, which would result in a provision for loan losses that modestly exceeds net charge-offs, given loan growth. See additional discussion of our credit and asset quality, in the “Loans,” “Allowance for Credit Losses,” and “Nonperforming Assets” sections of this MD&A. Average LHFI grew 1% compared to 2017 as improved lending trends continued, driven by growth in consumer direct, nonguaranteed residential mortgages, CRE, consumer indirect, and guaranteed student loans. These increases were offset partially by declines in average home equity products, C&I, and commercial construction loans. Our consumer lending initiatives continue to produce solid loan growth through each of our major channels, while furthering the positive mix shift within the LHFI portfolio and improving our return profile. See additional loan discussions in the “Loans,” “Nonperforming Assets,” and "Net Interest Income/Margin" sections of this MD&A. Average consumer and commercial deposits increased $219 million in 2018, relatively stable compared to 2017 as growth in time deposits and NOWaccounts were offset largely by declines in money market accounts and noninterest-bearing deposits. Our clients continue to migrate from lower-cost deposits to CDs, largely due to higher rates and our targeted strategy that allows us to retain our existing depositors and capture newmarket share, while also managing our asset sensitivity profile. Rates paid on our interest-bearing consumer and commercial deposits increased 25 basis points compared to 2017 in response to rising benchmark interest rates, themove towards higher-cost deposits, and the pickup in lending activity. Looking forward to 2019, we expect deposit costs to continue to trend upwards, with the trajectory influenced by the interest rate environment and our loan growth. We remain focused on investing in products and capabilities that enhance the client experience, outside of rate paid. See additional discussion regarding average deposits in the "Net Interest Income/Margin" and "Deposits" sections of this MD&A. Capital Our capital ratios continue to be well above regulatory requirements. The CET1 ratio decreased to 9.21% at December 31, 2018, a 53 basis point decline compared to December 31, 2017, driven primarily by growth in risk weighted assets and higher share repurchases, offset partially by an increase in retained earnings. The Tier 1 capital and Total capital ratios declined compared to December 31, 2017, due to the impact of our redemption of all outstanding shares of Series E Preferred Stock in the first quarter of 2018 as well as the aforementioned impacts to our CET1 ratio. Our book value and tangible book value per common share both increased by 3% compared to December 31, 2017, driven by growth in retained earnings. See additional details related to our capital in Note 15, "Capital," to the Consolidated Financial Statements in this Form 10-K and in the “Capital Resources” section of thisMD&A.Also see Table 29, "Selected Financial Data and Reconcilement of Non-U.S. GAAP Measures," in this MD&A for additional information regarding, and a reconciliation of, tangible book value per common share.