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Suntrust Banks Inc (STI) Q4 2018 Earnings Conference Call Transcript

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Suntrust Banks Inc (NYSE: STI)
Q4 2018 Earnings Conference Call
Jan. 18, 2019, 8:00 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 Fourth Quarter 2018 Earnings Results. As a reminder, today's conference is being recorded. I'd now like to turn the conference over to Ankur Vyas. Please go ahead.

Ankur Vyas -- Director, Investor Relations

Thank you, Stacey. Good morning, and welcome to SunTrust fourth 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, I'll turn the call over to Bill.

William Rogers -- Chairman and Chief Executive Officer

Thanks, Ankur, and good morning, everyone. I'll begin with an overview of the fourth quarter and full year, which we highlight on slide three and four, and then I'll turn it over to Allison for some additional details. I'll conclude with some more strategic perspectives on our 2018 performance, our purpose and thoughts heading into 2019.

Core earnings per share were $1.50 this quarter, which excludes $0.10 per share and previously disclosed charges associated with the settlement of a legacy pension plan. Overall, I'd characterized this quarter as a good conclusion to a strong year for SunTrust.

We delivered 3% revenue growth, driven by net interest income as a result of both margin expansion and strong broad-based loan growth. The loan growth we delivered this year is driven by the strategies and the investments in our businesses, including consumer lending , CRE and commercial banking. The success of our advice-oriented model and our increasing relevance with our corporate client base.

Market conditions made fee income growth more challenging in 2018, particularly within capital markets and mortgage. Nonetheless, the diversity of our business model enable us to deliver solid overall revenue growth. We achieved our sub-60 adjusted tangible efficiency ratio target a year earlier than we anticipated. We originally set this target back in 2012 when our efficiency ratio was 72%.

At the time, this was a highly aspirational target. We did not know when we would get there, but it was important to be ambitious. While this is a milestone, as we've said before, it is not a stopping point. And finally, we delivered 41% growth in capital returns to our owners. Our dividend per share increased by 36% and today, we have a 3.5% dividend yield.

Additionally, over the last two quarters, we purchased $1.25 billion worth of shares and have $750 million of capacity in the first half of 2019. The net result of our progress across these three fronts, coupled with a favorable operating environment, was a 40% increase in adjusted earnings per share.

Importantly, our progress this year is consistent with a longer-term trend. 2018 marked the seventh consecutive year of higher earnings per share, improved efficiency and higher capital returns. This progress, which builds upon a higher base each year, it's just one indicator of the culture of continuous improvement and high performance we've instilled across the company.

Relatedly, we're adding a new medium-term efficiency target of 56% to 58%, which formalizes comments I've made in the past that we see several 100 basis points of additional opportunity. Our pace of improvement in any given year will vary based on macroeconomic environment and the investments we may pursue. But I have confidence in our ability to make continuous improvements each year as we work toward this targeted range.

As it relates to fourth quarter results, I'll let Allison get into the details. But on a high level, we ended the year with strong revenue. In fact, revenue in the fourth quarter was a high watermark for the year. This was primarily driven by continued growth in net interest income, in addition, to a very good quarter in commercial real estate related fee income, which more than offset the impact of market conditions and on capital markets revenue.

Separately, credit quality continues 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, which was 26 basis points in the fourth quarter and 23 basis points for the full year, combined with the strength in asset quality drove a 4 basis point decline in our ALLL ratio for the fourth quarter. Leading and lagging indicators of credit quality continued to be very strong and we remain optimistic on our outlook for the US economy.

We will be diligent in monitoring for any changes and most certainly, we'll maintain our focus on diversity and a conservative credit risk posture, helping position our company and balance sheet for a more consistent through-the-cycle performance.

So with that, let me turn it over to Allison to cover some more details.

Allison Dukes -- Chief Financial Officer

Thanks, Bill, and good morning everyone. I'll start with net interest income on slide five. Our net interest income increased by $36 million or 2% sequentially, driven by strong loan growth. Our net interest margin was stable sequentially, as the benefit of the September rate hike was offset by higher wholesale funding to support the loan growth in the quarter.

Looking at the first quarter, we expect the net interest margin to be generally stable relative to the fourth quarter. Beyond that, NIM trends will depend on the rate environment, future levels of loan growth and funding costs. As a reminder, there are two fewer days in the first quarter compared to the fourth quarter, which negatively impacts net interest income by approximately $10 million per day, all else equal.

Now moving to slide six. Non-interest income increased by $36 million sequentially, driven primarily by commercial real estate-related income. Specifically, our structured real estate business had a good quarter and the other key components in this line item, SunTrust Community Capital and SunTrust agency lending are seasonally higher in the fourth quarter.

Our strength in CRE fee income more than offset the decline in capital markets-related income, which was impacted by market conditions. Investment banking income declined due to lower high yield and equity origination activity as investor sentiment declined throughout the quarter.

Within trading income, our corporate bond inventory for clients was mark-to-market lower. However, we had record capital markets revenue from our non-CIB clients, which tend to be less impacted by market conditions. Mortgage-related income was stable sequentially as lower production income was offset by higher servicing income, but generally consistent with seasonal trends.

Separately, going forward and beginning with the 10-K, we will combine our mortgage production and servicing line items into a consolidated mortgage-related income line item. Other non-interest income increased sequentially as mark-to-market losses on certain FinTech equity investments were offset by mark-to-market gains on our credit default swap hedge portfolio.

Moving to expenses on slide seven. As we disclosed last quarter, we terminated a legacy pension plan that we acquired as a part of the National Commerce Financial acquisition in 2004. This resulted in a one-time $60 million charge and helps derisk the balance sheet. This charge had a minimal impact of book value as the settlement simply shifted unrealized losses within AOCI through the P&L and in the retained earnings. Excluding this, expenses increased by $38 million, driven by certain discrete items and normal quarterly variability .

Within operating losses, we had higher legal-related expenses and elevated fraud costs. Additionally, a large tenant in one of our owned office buildings terminated their lease early, which benefited net occupancy expense in the third quarter.

Lastly, other non-interest expense increased due to the costs associated with the termination of a vendor contract, a decision we made as a part of our ongoing efficiency efforts. These discrete items were partially offset by lower regulatory assessments, as a result of the removal of the FDIC surcharge, which was a $19 million benefit in addition to a separate one-time $9 million FDIC refund.

Outside processing and software expense increased 3% sequentially and 13% compared to the fourth quarter of 2017. The primary driver is increased software amortization expense for new and upgraded technology assets. As a reminder, our core personnel expenses, which excludes the $60 million pension charge in the fourth quarter, should increase by approximately $60 million to $75 million in the first quarter due to the typical seasonal increase in benefits and FICA costs.

Our effective tax rate was 16% in 2018, as we benefited from certain discreet tax benefits as a result of the finalization of tax reform. Looking into 2019, we would expect our effective tax rate to be approximately 19% and 20% to 21%, if you model us on an FTE basis.

As you can see on slide eight, the adjusted tangible efficiency ratio was 58.6% for the quarter and 59.6% for the full year. We achieved 150 basis points of improvement this year, the highest degree of improvement we have delivered since 2014. Even more notable, when considering the 40 basis point FTE calculation headwind from 2017 to 2018, given lower tax rates.

This strong progress enabled us to reach our sub-60% target one year earlier than our stated goal. The benefits of this progress, combined with less macroeconomic tailwinds, will mean that 2019 improvement will be less than 2018 . However, we continue to expect momentum as we work toward our medium-term target of 56% to 58%.

Equally important, we remain focused on continuing to create capacity to invest in technology and talent, given the compelling opportunities we have, which we believe will create the most long-term value for our clients and our owners.

Our performance in 2018 validates our ability to do this. As an example, outside processing and software costs, which is where a portion of our technology spend resides, increased by 10%. However, our overall adjusted expense base declined by 1% as a result of our ongoing efficiency initiatives, including a significant organizational restructuring we conducted in the latter half of 2017.

Moving now to slide nine. Our net charge-off ratio was 26 basis points in the fourth quarter, consistent with our prior guidance. The low level of net charge-offs reflects the relative strength we're see seeing across all of our portfolios. Performance, we are extremely pleased with, that we remain cognizant that there could be some variability and normalization going forward.

Non-performing loans declined from 47 basis points to 35 basis points sequentially. This improvement was driven by the resolution of certain C&I credits. The ALLL ratio declined by 4 basis points sequentially as a result of continued asset quality improvement. Provision expense increased by $26 million as a result of higher loan growth in the fourth quarter.

More broadly, we continue to maintain a strong overall risk discipline. In addition to the credit quality results, this is evidenced by the effectiveness of our low-VaR approach in CIB, our ability to fully syndicate all leveraged lending transactions in the fourth quarter, our proactive hedging process in both our credit and MSR portfolios and our relatively neutral interest rate risk positioning.

Looking into 2019, we would expect our net charge-off ratio to be between 25 and 30 basis points for the full year. 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.

Moving to the balance sheet on slide 10. The improved lending trends we saw in the second and third quarters continued in the fourth quarter, with average loans up 2.5% sequentially and 4% year-over-year. The growth was diversified across C&I, CRE, consumer lending and mortgage.

Wholesale loan growth was broad-based across each of our lines of business. Within CIB, loan growth was primarily driven by M&A activity and modestly higher revolver utilization. Commercial banking growth was largely driven by seasonal increases in our auto dealer portfolio, in addition to continued positive trends in our aging services vertical and our expansion markets.

CRE growth continued as a result of investments we have made in permanent lending and bridge lending capabilities, which has been partially offset by runoff in the construction portfolio. Within consumer, the ongoing investments we have made in our digital and point-of-sale lending capabilities, which provide for superior client experience are also driving good growth and enhancing our returns. Our mortgage, auto and credit card portfolios also demonstrated solid and steady growth in the quarter.

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 increased sequentially, driven by seasonal growth in NOW accounts. As anticipated, we continue to see a migration from lower-cost deposits to CDs, largely due to higher rates and our targeted strategy, which allows us to retain our existing depositors and capture new market share.

Interest-bearing deposit costs increased 10 basis points sequentially, slightly lower than the prior quarter increase of 11 basis points. We expect deposit costs to continue to trend upwards, but the trajectory will be influenced by the rate environment, in addition to the levels of loan growth we are delivering. At the same time, we remain focused on investing in products and capabilities, which enhance the client experience outside of rate paid.

Moving to slide 11, which provides an update on our capital position. Our estimated Basel III common equity Tier 1 ratio was 9.2% and the Tier 1 ratio was 10.3%, further down relative to the prior quarter due to strong loan growth and a higher share repurchase in the fourth quarter.

We continue to make progress toward our 8% to 9% target CET1 ratio. In accordance with our 2018 capital plans, we have $750 million of remaining authorization for the first and second quarters of 2019. Our capital plan does contemplate a preferred issuance as we work toward optimizing our capital ratios. However, the timing of that issuance will depend on market conditions.

Now moving to the segment overview, we'll begin with Consumer on slide 12. We made good financial progress across most metrics in Consumer in 2018. We delivered strong operating leverage, with revenues up 4% and expenses up 1%, resulting in 200 basis points of efficiency improvement and a 55% increase in net income, which was bolstered by lower tax rates and strong credit quality.

Coming into 2018, a key area of focus and investment for us was to build on the momentum we had with our digital and point-of-sale consumer lending platform. Specifically within LightStream, we focus on enhancing our marketing and analytics efforts, adding new product offerings, including new home improvement loans and growing our partnership and referral channels.

Within point-of-sale lending, we focused on adding additional partners to diversify our portfolio. We added two additional partners, both focused on aspect of home improvement. While these two partnerships are small in the context of the overall company, it reflects our investments in purpose-based point-of-sale digital financing. These investments have put us at the forefront of when and where consumers make their lending decisions.

LightStream and third-party partnerships combined, delivered approximately $2 billion in loan growth in 2018, improving growth and returns within the Consumer segment. The loan growth we delivered continues to be high quality.

Our new production FICO within consumer lending averaged 766 in 2018, stable relative to 2017, which is a reflection of our consistent underwriting discipline and conservative risk posture. Importantly, we were able to fund the entirety of our loan growth in Consumer with deposit growth.

We were early and intentional in promoting CDs to both attract new clients and retain existing clients. This proved to be an effective strategy. We generated approximately $3 billion in CD growth within Consumer, and 42% of our production was new money.

On the fee income side, there were headwinds, particularly within the mortgage line of business, which represents nearly 20% of Consumers' fee income, and was down $80 million compared to 2017 as a result of lower volumes and compressed margins.

Some of these declines were offset by wealth management, where we are seeing positive underlying trends. One of our primary areas of focus within wealth management in 2018 was hiring new advisors and expanding into new markets.

New production AUM in 2018 was $4.2 billion, 70% higher than 2017, which helped offset the market pressures we felt in the fourth quarter of 2018. Improved revenues, coupled with our ongoing expense discipline, drove a 200 basis point improvement in efficiency, helping Consumer make significant progress toward its medium-term objective.

This was driven by a number of actions in 2017 and '18, including organizational restructuring, more automation within the middle and back office at private wealth, the merger of SunTrust Mortgage into SunTrust Bank and increasing digital adoption, which is directly correlated with our ability to rationalize our physical footprint.

We also made significant strides in improving the client experience, largely driven by our ongoing investments in technology. We created the first API to connect our front-end and back-end mortgage system. The result of which is a fully digital mortgage application, SmartGUIDE, which we introduced in March.

Since its introduction, we have already achieved 64% adoption and should see further progress from here. This not only provides for a superior client experience, it also streamlines our underwriting process and reduces loan cycle origination time.

For our private wealth clients, we introduced a new digital client portal, which provides clients with a bespoke, holistic view of all aspects of their financial lives and includes enhanced financial planning tools. These investments combined with our talented team, played a significant role in the national recognition we received in 2018. Some of which is highlighted at the bottom of slide 12.

2018 was a good year for Consumer, and we're pleased with the progress we made in enhancing the client experience, improving our efficiency and effectiveness and making investments, which position us for future success as we work to anticipate and exceed evolving client expectations.

Moving to the Wholesale segment on slide 13, where we had another strong year despite challenging market conditions in the last few months of the year. Our success is evidenced in both top line and bottom line results. We achieved record revenue and net income in 2018. Revenues grew by 2%, driven entirely by net interest income as a result of NIM expansion and 1% loan growth, and net income grew by 24%, driven by $67 million or 3% increase in pre-provision net revenues.

Big picture, it's clear that we have a competitive advantage within this business. We win because of our focus on the middle market, the quality of our people, the advice they deliver and the way we work together. It was encouraging to see lending trends improve relative to 2017, when our strong production levels were being masked by elevated pay downs and lower utilization.

On the C&I side, much of our growth was driven by M&A, increased revolver utilization and the investments we've made in expanding our aging services vertical and the geographical reach of our commercial banking business, most recently evidenced by the announcement of our new Houston commercial office in November.

On the CRE side, we saw good growth and positive remixing within the portfolio as a result of the investments we made in new lending capabilities. Historically, we did not have the product suite to participate in the full life cycle of an asset and we were heavily weighted toward the construction phase. In 2017, we added permanent and bridge financing capabilities, which helped us replace the run-off in the construction portfolio with high-quality funded assets.

Importantly, this loan growth did not come at the expense of risk or return discipline. Our model is focused on leading with advice, not structure or price. As proof, our revenues from loan syndications were down 15%, which is a reflection of both market conditions, the impact non-bank lenders had on the space and our discipline.

We have a highly skilled and disciplined syndications team, and we passed on a number of transactions where the structures did not comply with our standards. While non-interest income was down, largely as a result of market conditions, there are very positive underlying trends which validate our strategic progress.

First, we had record performance in M&A and equity originations. Two, strategic areas of our capital markets platform, which are in earlier stages of their maturation and growth. Second, as I mentioned earlier, we're seeing great momentum in delivering capital markets products and solutions to our commercial banking, CRE and private wealth clients.

Compared to 2017, capital markets revenue from these clients increased 49%, a clear reflection of our ability to work effectively across lines of business within Wholesale as one team. And third, we had a particularly good year at structured real estate, as a result of our strong client relationships and deep structuring expertise.

As well as Consumer, across Wholesale, we remain focused on investing in technology with the goal of arming our teammates with the tools they need to maximize their effectiveness and provide clients with an improved experience, especially within treasury and payments.

In 2018, we completed the transition to SunView, our new treasury and payments platform. And we are now focused on expanding SunView into a broader wholesale client portal. Big picture, we continue to see the benefits of our advice-driven model and are pleased with the progress we made in meeting more client needs, providing superior execution for our clients in varying marketing conditions, elevating our relationship and making investments, which position us for future success as we work to anticipate and exceed client expectations.

Our investment banking and lending pipelines are solid. And we feel well positioned to meet our clients' needs, both in benign and more challenging markets.

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

William Rogers -- Chairman and Chief Executive Officer

Thanks, Allison. So to conclude, I'll point to slide 14, which highlights how our performance this year builds upon our longer-term trends. As you can see for each of the last seven years, we've delivered higher earnings per share, improved efficiency and higher capital returns. While our financial performance in 2018 was strong, I want to highlight some of the underlying trends and progress we made in 2018, which drove these results, all of which supports our investment thesis.

The first pillar of our investment thesis is investing in growth and technology. We have been and we'll continue to be incredibly disciplined about making consistent strategic investments to diversify our revenue mix, improve the client experience, and position us for future success. As an example, one of our key priorities has been to deliver on our capital markets capabilities to our commercial banking, CRE and PWM clients.

As Allison mentioned, we saw the benefits of our successful execution here in 2018, capital markets revenue from non-CIB clients reached a record level in the fourth quarter of 2018 and for the full year, this client segment grew to represent 20% of our total capital markets revenue.

Our ability to capture additional market share within this non-CIB client segment, which tends to be less impacted by market conditions, helped offset some of the headwinds we faced. Within Consumer, we made significant investments in technology that puts SunTrust at the center of our clients' decision-making and financial planning.

We recognize that consumer preferences are evolving rapidly and the investments we have made in our digital and point-of-sale lending capabilities have put SunTrust at the forefront of winning where clients make a decision. The growth we produced in consumer lending this year was a key driver of our loan growth, our improved net interest margin and our balance sheet diversity.

More broadly, we made good progress in advancing our technology position in 2018. Between ongoing improvements to our mobile and online capabilities for consumer clients, the introduction of our enterprise client portal for private wealth clients, our new SmartGUIDE digital mortgage application and the final roll out of SunView, we significantly improved the client experience in 2018.

In addition, we made investments in teammates facing platforms such as our digital client conversation guide, to make it easier for teammates to anticipate and meet more client needs. Lastly, we made good progress on modernizing our infrastructure by building more of our digital properties to the cloud and making further enhancements to our security capabilities.

The second pillar of our investment thesis is improving efficiency and returns. While you can see the strong progress we made in 2018, may not be as evident as the performance-based culture we've created. Continuous improvement is embedded in all aspects of how we run our company and we'll deliver further efficiency progress each year, as we work toward our medium-term target of 56% to 58%.

As we do so, we are highly focused on making the right trade-offs between saving and investing to maximize our long-term potential. Relatedly, focusing too much on one metric will not maximize long-term value for owners, which is why we have a broader focus on returns. In 2018, our ROE improved by 20 basis points and our adjusted ROTCE improved by 470 basis points.

Clearly, some of this improvement is reflective of the benefits of tax reform, but it's also due to our internal focus on maximizing risk-adjusted returns and being disciplined about the client business we'll pursue and accept. We will maintain the same level of discipline in 2019 and beyond.

The third and final pillar of our investment thesis is our strong capital and risk position. In 2018, we stayed true to our key tenants of diversity and discipline. The loan growth we produced was high-quality and broad-based. Our discipline around areas like leveraged lending prevented us from experiencing any latent distribution risk. The low-VaR approach of our trading business protected our downside risk in the final months of the year, as did our credit risk hedging strategies.

And finally, our relatively neutral interest rate risk profile positions us well for potential change in the rate environment. On the capital side, we continued strong performance. And our continued strong performance in CCAR affords us the ability to increase capital returns by 41%, reduce our share count by 5% and maintain a healthy dividend yield.

Going forward, we remain focused on ensuring we have both, a strong offense and defense in order to demonstrate more consistent through-the-cycle performance. I assure you we have been and we'll remain incredibly vigilant by looking for early warning signs anticipating future risks and taking actions accordingly. I'm also proud of the actions we took and behaviors we demonstrated in 2018 to exemplify our purpose and culture. We are a purpose-driven company, focused on lighting the way to financial well-being.

This provides the foundation for our strategy and focus. Our purpose-driven culture is exemplified in our ability to work together as one team, agnostic to products and lines of business, with the ultimate goal of providing clients the solution that meets their need, not ours. At SunTrust, our diverse team is critical in meeting and exceeding client expectations, delivering top financial performance through multiple cycles and ensuring our purpose drives success.

Now, I'd be remiss if I didn't pause here for a minute. And thank all the great SunTrust teammates who's tireless dedication to our purpose and relentless focus on our clients were the key contributors to our financial success in 2018. So team, thank you.

While market conditions may present certain headwinds in 2019, we are focused on the factors we can control. And I'm highly optimistic about our future. We have a tremendous opportunity to bring our advice-oriented purpose-driven model to more Wholesale and Consumer clients and prospects. We'll continue to make investments, enhance our technology position. And we'll continue to deliver improvements in efficiency and we'll maintain our disciplined conservative risk posture.

So with that, Ankur, let me turn it back over to you and the Q&A.

Ankur Vyas -- Director, Investor Relations

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

Questions and Answers:

Operator

Thank you. (Operator Instructions) And our first question, we'll go to John McDonald with Bernstein. Please go ahead.

John McDonald -- Sanford C. Bernstein -- Analyst

Hi. Good morning.

William Rogers -- Chairman and Chief Executive Officer

Good morning, John.

John McDonald -- Sanford C. Bernstein -- Analyst

Guess, this is a question for Allison. Your loan growth was really strong and accelerated this quarter. So, I was kind of wondering, if you could discuss your expectations for loan growth to continue exceeding core deposit growth and how you guys think about kind of evaluate, feeling that funding gap in choosing between wholesale borrowings, debt issuance on the one hand versus going out, paying up for online deposits, even starting up a national digital strategy? Just kind of how you think through that funding gap option and also, what's your comfort zone on where you'd like to be on loan-to-deposit ratio? Thanks.

Allison Dukes -- Chief Financial Officer

Sure. Let me just start with loan growth and our outlook there. I mean, you did hear us say, we've got solid pipelines. And I think you can expect our loan growth to continue to be good throughout 2019. As Bill noted, our outlook on the economy is optimistic. Our markets look healthy, our consumers look healthy, businesses look healthy.

As I think about our funding sources, I do expect that loan growth likely will continue to modestly outpace deposit growth throughout the year. As we think about funding, I mean, we are obviously balancing growth in deposits with profitability and it's a balancing act and we are carefully looking at the marginal cost of deposit funding against the marginal cost of wholesale funding sources.

From a loan-to-deposit ratio perspective, we are at 93%, finishing up the year. I think we'd be comfortable in that 95% to 100% context. You wouldn't -- I wouldn't expect to see us go any north of that, but we feel good about the access we have to alternative funding sources, whether that's the unsecured debt markets or the FHLB.

John McDonald -- Sanford C. Bernstein -- Analyst

Okay. Great. And then just a follow-up, Allison. What are the puts and takes to your NIM outlook for the fourth quarter that you gave? And if you could just let us know how you're thinking about how helpful a rate hike is? I mean, how you behave on the NIM, when there's not a rate hike? That would be great. Thank you.

Allison Dukes -- Chief Financial Officer

Sure. And I think you're asking the outlook on our first quarter NIM guidance and the puts and takes there. First, there are certainly the benefits that we will receive from the December rate hike. Second, as we noted, there are two fewer days in the quarter. So, while that does have a negative impact to NII, it's helpful to NIM. And then third, offsetting that would be our expectation that funding costs do continue to modestly increase throughout the quarter. Take that all together and we think NIM will be generally stable in the first quarter and it really will be dependent on loan growth and just overall balance sheet trends.

Also as a reminder, and as I noted in the prepared remarks, you do see a seasonal increase in NOW accounts in the fourth quarter. That's really a function of public funds -- public deposits coming in, in the fourth quarter and you'd expect to see those flow out over the course of the first quarter. So, that's factored into the guidance as well.

Thinking about quarters beyond the first quarter and what we might expect with or without a Fed rate hike, if we assume the rate environment doesn't change materially from here, as I said, I would expect loan growth to continue to modestly outpace deposit growth. With this in mind, I would expect NIM to be generally stable to maybe slightly down in any given quarter.

If we did get the benefit of a Fed rate hike, that would be modestly helpful to NIM, but it really will be a question of the increase and betas from here. As we approach a 50% beta or so in any given quarter, that does largely offset the impact or the benefit of a Fed rate hike.

John McDonald -- Sanford C. Bernstein -- Analyst

Great. Thank you.

Operator

And we'll go to the line of Saul Martinez with UBS. Please go ahead.

Saul Martinez -- UBS -- Analyst

Hey. Good morning, everybody. Congratulations on the result. First, on the efficiency ratio guide, this is a bit more of a clarification, and sorry if I missed it. It's lots of multitasking this morning. But Allison, I think you mentioned for 2019, you do expect to see continued efficiency ratio improvements, but maybe not at the pace you had in 2018, which was, I think, about 140 basis points on the tangible efficiency ratio.

Did I get that right? And I think in the past, you guys have highlighted something close to maybe 50, 100 basis points per year. That's still sort of a reasonable glide path, acknowledging the uncertainties in the revenue environment.

Allison Dukes -- Chief Financial Officer

Yeah. Let me kind of first reflect on what drove that. Yeah, really strong absolutely drop in the efficiency ratio in 2018, 150 basis points. That was the most significant improvement we've made in any given year and there were a couple of tailwinds that were helpful there. Not the least of which was the rate environment, which was very helpful to revenue in 2018, and not one that we would expect to repeat itself in 2019. Also, we conducted a pretty broad organizational redesign in the second half of 2017. And we were able to fully realize the benefits of that in 2018. So, those are two elements that won't repeat themselves in 2019 .

That said, we have a host of ongoing efficiency improvements that are constantly under way. And so in any given year, the pace of improvement is going to vary year-to-year and it really depends on the investment opportunities we have and the economic environment that presents itself. And we're going to make trade-offs inside of a year. And I think you would expect to see us do that. You would want us to do that, not sacrifice long-term growth for a short-term efficiency gain.

All that being said, continuous improvement, as Bill said is really built into our culture. It is hardwired into everything we do now in terms of our strategic planning, our short-term and our long-term planning. It's built into our incentive compensation. Our incentive comp is tied to year-over-year efficiency ratio improvements at every level in the company. So the pace of improvement won't be 150 basis points this year, but we are committed to continuous improvement. Hence, the medium-term target of 56% to 58%.

Saul Martinez -- UBS -- Analyst

Okay. Got it. I guess, a related more specific follow-up. This quarter, obviously, you had the $60 million of pension settlement charges. I mean, you flagged a few other discrete items. Could you remind us what those were in this quarter and how much -- what they were and what the magnitude of those discrete items were in the fourth quarter?

Allison Dukes -- Chief Financial Officer

The only discrete item in the fourth quarter that was of any real magnitude was the $60 million NCF pension termination. There were some discrete tax items, a lot of puts and takes as I mentioned, nothing of real significance and they generally all offset each other.

Saul Martinez -- UBS -- Analyst

Okay. Okay. So, it's really just the $60 million. Okay. Great. Thank you.

Operator

And we'll go to Ken Usdin with Jefferies. Please go ahead.

Amanda Larsen -- Jefferies -- Analyst

Hi. This is Amanda Larsen on for Ken. Can you talk about the expectation for a medium-term efficiency, to the (ph) 56% to 58% range? Where do you expect that improvement to come from, by segment? And what are those targets within the firmwide view?

William Rogers -- Chairman and Chief Executive Officer

Yeah. The question was, sort of, what is medium term? I think we view medium term as three to four years. And then where it'll come from, is a lot of different things. I think as we've talked about before, we have strict targets for efficiency in virtually all of our businesses and it will come from all the things we've been working on, leveraging technology investments, robotic process, automation, cloud computing, getting more benefits from the loan origination systems and mortgage and wholesale, digital and an agile mindset, third-party leverage, which we achieved this year, continued migration down of our real estate footprint, maximizing all the skills that we have in our overall chassis. So, it's a lot of things. It's not one thing and it's not centered in one business. You saw, in this case, improvements in wholesale and consumer and we'd expect them both to continue to improve.

Amanda Larsen -- Jefferies -- Analyst

Okay. Great. And then, separately, can you please talk about pipelines and expectations for growth in capital markets in '19 by product group and also in CRE banking?

William Rogers -- Chairman and Chief Executive Officer

Yeah. I think, pipelines are strong. They continue to be strong. They were good coming into the third quarter. They are good coming into the fourth quarter. They are strong coming into the first quarter. It appears that, as of today, the markets are starting to respond and we're responding accordingly with opportunity.

So, I'd expect capital markets to grow. If you look at sort of the individual segment lines, M&A continue to be strong. I think that will have good growth characteristics in 2019. Obviously, that's lumpy by any one quarter. I think our syndication leveraged finance will continue to be a strong part of what we do. The derivative business has continued to be strong. Trading will bounce back. It's not a big item, but it will bounce back from where it was in the third quarter.

In our equity business, I think, as those markets start to fall probably later in the quarter and later in the year, we continue to think those will be strong parts of what we did. And then as Allison and I both mentioned, just the core underpinning of our non-CIB clients and our ability to be really relevant for those clients as they think about the future and the structures of their company, that's going to continue to be an increasing part of what we do in capital markets.

Allison Dukes -- Chief Financial Officer

And I think, you asked about CRE at the end there as well. And we expect CRE growth to continue to be good in 2019. As noted, we are no longer tied just to construction funding. With the addition of our permanent financing products and the ability to really participate in the life cycle of a project, we can now expect CRE balances to maintain through the year and we see good growth in our pipelines there.

Amanda Larsen -- Jefferies -- Analyst

All right. Thank you.

Operator

And we'll go to Mike Mayo with Wells Fargo Securities. Please go ahead.

Mike Mayo -- Wells Fargo Securities -- Analyst

Hi.

William Rogers -- Chairman and Chief Executive Officer

Hey, Mike.

Mike Mayo -- Wells Fargo Securities -- Analyst

More on the efficiency. Just want to recognize seven years of better efficiency, the efficiency ratio went from 72% to 60% under your time, Bill. And you've got your efficiency target a year earlier. So, all noted.

William Rogers -- Chairman and Chief Executive Officer

I feel like there's a 'but' coming.

Mike Mayo -- Wells Fargo Securities -- Analyst

But you only now got to your target from the 1985 merger.

William Rogers -- Chairman and Chief Executive Officer

I know.

Mike Mayo -- Wells Fargo Securities -- Analyst

You weren't there. But look, I mean, you've made a lot of progress. The three to four years for your next efficiency target, just feels far off. So, a two-part question. One is, you talked about the trade-off between revenues and expenses. It seems like you're shifting some. So, is the emphasis now on generating more revenues at lower marginal cost? As you said, your goal is, efficiency is a means to an end and the end is returns and growth. And second, what are the gaps at SunTrust to best-in-class?

William Rogers -- Chairman and Chief Executive Officer

Yeah, I think, first of all, Mike, in terms of setting the medium-term target, I think, given our business mix, I think this is aspirational and it's all assumed to be organic. So, this has no dilutive impact into -- this is all organic improvement in our efficiency and not rate dependent.

So, we've sort of said, let's take a lot of those factors out of it, in terms of, we think of a medium and the trade-off really isn't so much around revenue. I mean, clearly, we're making sure that we're investing in the revenue. The trade-off is more long term, making sure that we've got the right technology and the right forethought to make sure that we're long-term thinking about what client needs and we are constantly making that trade-off.

So, I'm probably more proud of the investments we've made in technology than I'm in the efficiency that we've achieved. So, we've been balancing those continuously. So, that medium term target, I think, toggles both of those effectively. I can assure you that the culture of continuous improvement, daily grind on all the things related to efficiency are there.

I don't know -- but I see you ask, what's the sort of a big gap or the place of SunTrust? I don't think it's one particular thing. I mean, our business model, I think, given the way we're structured, we're not going to be a low-50s efficiency ratio company, that's not our business model. So, I think it's just continuing to do the things we're doing, blocking and tackling, investing long term and taking advantage of things that we've already invested in.

Mike Mayo -- Wells Fargo Securities -- Analyst

One follow-up then. Again, efficiency is a means to an end. You mentioned returns and growth. Any thoughts about where you'd like the returns to be? They are certainly higher now.

William Rogers -- Chairman and Chief Executive Officer

Yeah. I mean, they are higher now. I mean, if we talk about sort of returns on the asset liability part of the balance sheet, we have extreme discipline around what comes on our balance sheet, what we expect from our teams to deliver in overall returns and meeting client needs. Over the last seven years, that discipline continues to increase and I think is very acute.

If we look at sort of total ROA and total ROTCE, I mean, clearly, we're at a pretty high point just relative to where we are in the credit cycle. So, we're going to be pushing as far as we can push. We're going to be focused on the returns. But over time, pick your timeline, the credit part of that will normalize.

Mike Mayo -- Wells Fargo Securities -- Analyst

All right. Thank you.

William Rogers -- Chairman and Chief Executive Officer

Thanks, Mike.

Operator

And we'll go to John Pancari with Evercore. Please go ahead.

John Pancari -- Evercore ISI -- Analyst

Morning.

William Rogers -- Chairman and Chief Executive Officer

Good morning, John.

John Pancari -- Evercore ISI -- Analyst

Wanted to see if you can just give us a little bit more color on the operating losses. You mentioned the legal and fraud-related costs. It was a pretty big increase for the quarter. So, what is actually behind the -- I know, on the legal side, you may not be able to specifically talk about it. But on the fraud related, is there something that's impacting that and can that continue? Thanks.

Allison Dukes -- Chief Financial Officer

Yes. John, there is no one particular thing there. You guys are going to see variability quarter-to-quarter. So, nothing specific to point out necessarily. I don't think -- I don't expect to see operating losses in the first quarter at this kind of $40 million level. Same time, I don't know that they'll be as low as $20 million or so, where we were running in the first half of last year.

So, there's going to be some variability quarter-to-quarter just given our business model and some of the puts and takes there. Something between $20 million, $40 million is probably a reasonable expectation. But you should expect variability.

John Pancari -- Evercore ISI -- Analyst

Okay. All right. And then also on the expense side, I heard your answer, Bill, regarding the -- your efficiency ratio outlook. But when you look at it versus where your peers are, it still implies that you're operating and you expect to operate at a higher efficiency ratio than a good number of your larger super regional peers. Are you saying that you structurally believe that that will always be the case?

William Rogers -- Chairman and Chief Executive Officer

Well, let's -- I want to go back, ours is organic. So, this is an organic growth given our business model. We look at every line of business and we look at where it can produce both, growth return and efficiency. And we try to target all those in terms of being top quartile, then add all those up relative to how our company looks. And we've got to try to balance all those together. And some will have different emphasis relative to that piece. So, I think the 56% to 58%, as we sit here, structurally, is an appropriately ambitious goal that allows us to continue to invest and continue to grow.

John Pancari -- Evercore ISI -- Analyst

Okay. All right. Thank you.

Operator

We'll go to Marty Mosby with Vining Sparks. Please go ahead.

Marty Mosby -- Vining Sparks IBG -- Analyst

Thanks. Wanted to ask you a little bit about this loan growth and then kind of take that to the liquidity coverage ratio. As we've had the regulatory threshold where you're still below, I think you're getting some relief from the liquidity coverage ratio and the way it was calculated. Wanted to make sure that as we're pushing toward 100% loan-to-deposit ratio, just wanted to have a better feel for how you manage the liquidity coverage ratio and how you think about that?

Allison Dukes -- Chief Financial Officer

Yeah. On the LCR, if we do get some relief there, at the margin, it gives us a little bit of an opportunity. It's not significant and it's not going to significantly changed the way we manage our balance sheet or the way we think about loan growth. It does give us, again, benefit at the margin, but it's not -- we still have our own internal liquidity standard and those are always going to dominate how we think about the balance sheet.

Marty Mosby -- Vining Sparks IBG -- Analyst

And then when you look at the commercial real estate, you've been as a concentration, there has been (ph) a product that you've avoided or just have not had as much as many other super regional banks, is creating a lot of the momentum that you have now. How do you think about as a percent of your loan portfolio, where that kind of gets to and how you think about that from a credit quality concentration risk?

William Rogers -- Chairman and Chief Executive Officer

Yeah. Marty, as you noted, it has been a smaller relative part of our portfolio. I don't think it's going to have abnormal growth. I mean, we're not sort of leaning into -- leaning into headwinds. Part of what we've seen today and the offset of what the run-off is in construction. 2017, we put a permanent financing product in place, that really just allows us to be with stabilized, high-quality loan-to-values that are actually lower are so better. But 60% plus of that is refinancing our existing portfolio.

So, these are clients we know, projects we understand, refinanaced, they were hardly stabilized and we're doing them at lower loan-to-value. So in many ways, we're improving the credit quality of the portfolio and then the other is an agency bridge product. And that -- the acquisition of Pillar and our knowledge about what is agency eligible, allows us to really work with existing multifamily that's going through some type of rehab or ownership change. And we do all that to underwrite agency eligible position. So, it's really in a strong position.

The other part of the growth is really, I think reflected in just what's happening in our core markets. I mean, we've got some build-to-suit office for regional and national headquarters that are moving to our business. So -- and then on the other side, construction is down pretty significantly. So, I don't think CRE is going to be an abnormal part of our growth prospects. Our strategies are working and our overall credit experienced currently and what we're putting on the books, we feel really good about it.

Allison Dukes -- Chief Financial Officer

And I'd just add -- I'd just add, our CRE strategy is relationship-based. So, participating in the full life cycle of the project allows us to grow full relationships with these clients, which actually help fuel capital markets activity, like derivatives as well as deposit growth. So, it's not just the product. It's really a relationship-driven business overall.

Marty Mosby -- Vining Sparks IBG -- Analyst

And those are relationships you've already had, which was a nice leveraging point that you can really use, that you just kind of left on the table in the past.

William Rogers -- Chairman and Chief Executive Officer

I think that's a good way to say it.

Marty Mosby -- Vining Sparks IBG -- Analyst

The last thing is on efficiency. I don't want to take a whole another take because comparing to 20-years ago on a goal, it just isn't going to -- it doesn't work because this is a totally different environment. When you talk about compliance and the things that you're required to do, I want to really look at it from a sense of, I know how hard it is to generate these efficiency gains, you got there a year early. What actually worked better? Was it just revenues or were there other things that you got into and those projects got to be a little bit more productive, a lot faster?

William Rogers -- Chairman and Chief Executive Officer

It's a combination of both, Marty. The revenue environment, both in terms of return discipline and in executional excellence probably exceeded our expectations several years ago. So, our ability to acquire, retain and expand relationships continues to perform at a higher level and has got more discipline around it.

And then on the efficiency side, I wouldn't say it was one thing. I mean, clearly, early the credit environment changed and we were able to take advantage of that. But it's dozens of things. It's opportunities that we see in terms of streamlining the chassis. Probably the opportunities and technology were better than we thought they were five years ago or we didn't know what they were five years ago, so being able to take advantage of those.

Marty Mosby -- Vining Sparks IBG -- Analyst

Thanks.

Operator

We'll go to Matt O'Connor with Deutsche Bank. Please go ahead.

Matt O'Connor -- Deutsche Bank -- Analyst

Good morning.

Allison Dukes -- Chief Financial Officer

Good Morning.

Matt O'Connor -- Deutsche Bank -- Analyst

Question on credit quality. I know the numbers are small. But if we look at the losses in the other direct book, year-over-year, I guess, to account for the seasonality, they picked up a little bit. Again, the dollars are small. But is that just seasoning?

And then the follow-up question would just be, how are you feeling about the online lending platforms given some of the concerns about being late cycle and just this has been kind of a hot area and somewhat untested in downturns? Thanks.

William Rogers -- Chairman and Chief Executive Officer

Yeah. To the first question, it's a little more seasonal, so you see that pop. So, that's not anything in seasonality. So, that's not anything. And season -- even in seasonal, I should say it that way, maybe to get them both out there. So, that's not something that we are -- have a particular concern about it at this point.

If we look at the online channels and partnership channels, we now have a chance. That book has got some good turns in it. So, I think it's time tested and what we're putting on is high quality, $770 million plus in LightStream, $750 million plus in GreenSky. Our loss experience has been low. Our 30-plus day experience has been low. Fraud losses have been almost nothing.

So, we feel good about that portfolio. We continue to stay at the high end of the risk spectrum there, and that's not going to change dramatically. And as I said before, it's had a chance to have a couple of turns. So, we've had several add-backs on the learning of that portfolio.

Matt O'Connor -- Deutsche Bank -- Analyst

Okay. Thank you.

William Rogers -- Chairman and Chief Executive Officer

Thanks.

Ankur Vyas -- Director, Investor Relations

I think we have time for one more question.

Operator

Thank you. We'll go to Gerard Cassidy with RBC. Please go ahead.

Gerard Cassidy -- RBC Capital Markets -- Analyst

Thank you. Good morning.

William Rogers -- Chairman and Chief Executive Officer

Good morning.

Allison Dukes -- Chief Financial Officer

Good morning.

Gerard Cassidy -- RBC Capital Markets -- Analyst

Allison, you mentioned, I think the LightStream originations last year were just over $2 million. What percentage do they represent of the Consumer originations in 2018, excluding mortgages from that number?

Allison Dukes -- Chief Financial Officer

Want to think about -- percentage of originations in 2018, I don't...

William Rogers -- Chairman and Chief Executive Officer

We'll think about that.

Gerard Cassidy -- RBC Capital Markets -- Analyst

Okay. We can get back to that. Maybe, Bill, kind of question on consolidation. If I wanted to just build the background for you on the question, obviously, the industry has had a great run here, four years of consecutive record profitability. If we adjust last year's numbers for the tax changes, credit quality has been spectacular.

Funding low cost, core deposits have been great until very recently, now we are seeing some issues there, digital banking making massive inroads. At what point, is there an environment that you would consider that because maybe things start to become less good that it makes sense to join forces with another large regional bank?

William Rogers -- Chairman and Chief Executive Officer

Well, we're not going to speculate on any of that. I would say, for SunTrust, we just continue to see a lot of good opportunity within our own business.

Allison Dukes -- Chief Financial Officer

And Gerard, the answer to your question on LightStream originations, as a percent of consumer, originations at mortgage was about 25% in 2018.

Gerard Cassidy -- RBC Capital Markets -- Analyst

Appreciate that. Thank you. Thank you.

Ankur Vyas -- Director, Investor Relations

All right. Thank you, everyone, for joining us today. If you have any further questions, please feel free to contact the IR department.

Operator

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

Duration: 60 minutes

Call participants:

Ankur Vyas -- Director, Investor Relations

William Rogers -- Chairman and Chief Executive Officer

Allison Dukes -- Chief Financial Officer

John McDonald -- Sanford C. Bernstein -- Analyst

Saul Martinez -- UBS -- Analyst

Amanda Larsen -- Jefferies -- Analyst

Mike Mayo -- Wells Fargo Securities -- Analyst

John Pancari -- Evercore ISI -- Analyst

Marty Mosby -- Vining Sparks IBG -- Analyst

Matt O'Connor -- Deutsche Bank -- Analyst

Gerard Cassidy -- RBC Capital Markets -- Analyst

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