STI 2018 Annual Report

35 NET INTEREST INCOME/MARGIN (FTE) Net interest income was $6.1 billion in 2018, an increase of $297 million, or 5%, compared to 2017. Net interest margin for 2018 increased 12 basis points, to 3.26%, compared to 2017. The increase was driven by a 40 basis point increase in average earning asset yields as a result of higher benchmark interest rates, favorable mix shift, and lower premium amortization expense. Specifically, average LHFI yields increased 43 basis points, driven by broad-based increases in yields across most loan categories, while yields on securities AFS increased 22 basis points. These increases were offset partially by higher funding costs. Rates paid on average interest-bearing liabilities increased 33 basis points compared to 2017, driven by increases in rates paid across all interest-bearing liability categories. The rate paid on interest-bearing deposits increased 26 basis points. 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 interest margin trends will depend on the interest rate environment, future levels of loan growth, and funding costs. Average earning assets increased $1.9 billion, or 1%, compared to 2017, driven primarily by a $1.5 billion, or 1%, increase in average LHFI and a $1.1 billion, or 4%, increase in average securities AFS, offset partially by a $433 million, or 17%, decrease in average LHFS and a $377 million, or 7%, decrease in average interest earning trading assets. See the “Loans” section in this MD&A for additional discussion regarding loan activity. Average interest-bearing liabilities increased $3.7 billion, or 3%, compared to 2017, due primarily to increases across most consumer and commercial deposit categories as well as average long-term debt, offset largely by declines in money market accounts and foreign deposits. Average interest-bearing consumer and commercial deposits increased $1.3 billion, or 1%, due primarily to growth in average time deposits and NOW accounts in response to our targeted focus onCDs. The continued movement from lower cost deposits to CDs allows us to retain our existing depositors and capture newmarket share, while also managing our asset sensitivity profile, and we expect this trend to continue as interest rates rise. Average long-term debt increased $1.4 billion, or 13%, compared to 2017, due primarily to loan growth exceeding deposit growth. See the “Borrowings” section of this MD&Afor additional information regarding our short-term borrowings and long-term debt. We utilize interest rate swaps to manage interest rate risk. These instruments are primarily receive-fixed, pay-variable swaps that synthetically convert a portion of our commercial loan portfolio from floating rates, based on LIBOR, to fixed rates. At December 31, 2018, the outstanding notional balance of active swaps that qualified as cash flow hedges on variable rate commercial loans was $10.3 billion, compared to $12.1 billion at December 31, 2017, respectively. In addition to the income recognized from active swaps, we recognize interest income or expense from terminated swaps that were previously designated as cash flow hedges on variable rate commercial loans. Interest expense from our commercial loan swaps was $72 million in 2018, compared to interest income of $89 million in 2017 due primarily to an increase in LIBOR. As we manage our interest rate risk we may continue to purchase additional and/or terminate existing interest rate swaps. Remaining swaps on commercial loans have maturities through 2023 and have an average maturity of 2.5 years at December 31, 2018. The weighted average rate on the receive- fixed rate leg of the commercial loan swap portfolio was 1.72%, and theweighted average rate on the pay-variable legwas 2.50%, at December 31, 2018. Foregone Interest Foregone interest income fromNPLs reduced net interest margin by two basis points and less than one basis point for the years ended December 31, 2018 and 2017, respectively. See additional discussion regarding our credit quality in the “Loans,” “Allowance for Credit Losses,” and “Nonperforming Assets” sections of this MD&A. In addition, Table 1 and Table 2 in this MD&A contain more detailed information regarding average balances, yields earned, rates paid, and associated impacts on net interest income.