Thomas Freeman - Chief Risk Officer and Corporate Executive Vice President
Kristopher Dickson -
William Rogers - President and Chief Operating Officer
Mark Chancy - Chief Financial Officer and Corporate Executive Vice President
James Wells - Chairman of the Board, Chief Executive Officer and Chairman of Executive Committee
SunTrust Banks (STI) Q4 2010 Earnings Call January 21, 2011 8:00 AM ET
SunTrust Fourth Quarter Earnings Conference Call. [Operator Instructions] I'd like to introduce Mr. Kris Dickson. He is the Director of Investor Relations. Sir, you may begin.
Good morning, and welcome to SunTrust's Fourth Quarter Earnings Conference Call. Thanks for joining us. In addition to the press release, we've also provided a presentation that covers the topics we plan to address during our call today. Slide 2 outlines the content, which includes an overview of the quarter, financial results and a review of credit quality. The press release, presentation and detailed financial schedules are available on our website, www.suntrust.com. This information can be accessed by going to the Investor Relations section of the website.
With me today, among other members of our executive team, are Jim Wells, our Chief Executive Officer; Bill Rogers, our President and Chief Operating Officer; Mark Chancy, our Chief Financial Officer; and Tom Freeman, our Chief Risk Officer. Jim will start the call with an overview of the quarter. Mark will then discuss financial performance, and Tom will conclude with a review of asset quality. At the conclusion of the formal remarks, we'll open the session for questions.
Before I get started, I need to remind you our comments today may include forward-looking statements. These statements are subject to risk and uncertainty, and actual results could differ materially. We list the factors that might cause actual results to differ materially in our press release and SEC filings, which are available on our website.
Further, we do not intend to update any forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made, and we disclaim any responsibility to do so. During the call, we will discuss non-GAAP financial measures in 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.
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 turn the call over to Jim.
Good morning, everybody, and I'm glad to have you with us this morning, and thank you, Kris. I think you have great skills displayed in the reading of the synopsis of the forward-looking statement declaration.
I'm impressed. Also would like to thank Steve Shriner, who I hope is on the phone this morning as well. He has accepted the position of Chief Retail Credit Officer in our Corporate Risk group. And I want to thank Steve for great work over the past few years.
And before discussing the fourth quarter, I would like to take a moment to share a few accomplishments of SunTrust in 2010, as we finish the year on a much more positive note than it began. A few examples. We returned to profitability during the year and posted a full year profit before preferred dividends. Our low-cost deposits grew 10% over the course of the year and demonstrating our success in increasing client loyalty and growing market share. Revenue expanded and benefited from a 17 basis point expansion in the net interest margin, as well as from solid performance from several of our key businesses. Credit quality improved throughout the year with quarterly declines in net charge-offs, delinquencies and nonperforming loans. And our capital ratios remains strong and even expanded.
Returning to the fourth quarter, our earnings of $114 million or $0.23 per share improved compared to last year, as well as last quarter, mostly driven by a lower provision, with the result of improved credit quality and solid revenue. We're pleased with the diversity of our revenue sources and continued to improvement in credit quality. Net charge-offs, nonperforming loans, nonperforming assets and early-stage delinquencies all declined compared to the third quarter and are significantly lower than the fourth quarter of 2009.
While our financial performance is still not to the level that we or our shareholders desire, we did make additional progress in demonstrating improved results and in executing our strategies to drive longer-term growth. The operating environment unquestionably remains challenging, and obviously, it's been an active period from a regulatory and legislative standpoint.
So let's turn to Slide 4. As we've said previously, financial regulation will impact our financial results going forward. Some new proposals were issued during the quarter, and the effects of certain aspects of regulatory reform are becoming clearer. This slide highlights selected items of interest, though it's not intended to be all-inclusive. Our guidance regarding deposit service charges, Reg E issues and derivatives remains unchanged and outlined in the chart. It appears the Fed certainly followed the letter of the Dodd-Frank law, with its recent proposal on debit interchange. Like most in the industry, we are very concerned about any government efforts to impose price controls. And we additionally believe the Fed's proposal does not adequately recognize many of the costs associated with providing debit card services. We, of course, have been actively working to make our views known to the regulators as well as to Congress.
The regulation is still in the comment period, and we're hopeful that any final regulation takes into account a less narrow interpretation of costs that would include at a minimum fraud losses, fraud prevention costs and servicing costs associated with operating a debit card business. Should the proposed rules be enacted, then we obviously expect a material impact to this revenue stream beginning in the second half of 2011. I would note that the approximately 75% revenue estimate does not take into account actions that we are pursuing to help mitigate this decline.
Turning to the current deposit insurance proposal. The calculation will be based on net assets not on deposits, which will obviously raise our assessment base. That said, the calculation will also become more complex and sensitive to a variety of trailing trends and factors, such as credit concentrations, risks and earnings. If the proposal is adopted as it is today, we expect that over time, the higher assessment base will be partially mitigated as improving operating trends are reflected in the calculation.
While all of this may lead to some volatility in our quarterly expenses, we do not expect a significant increase in our 2011 expense base. With respect to capital as we disclosed last quarter, our Tier 1 common ratio is in excess of 8%, currently above the 2019 Basel III 7% requirement. Based upon our understanding of the Basel III calculation, we expect a modest benefit to our Tier 1 common ratio, which I'll cover shortly. And lastly, we currently expect about 170 basis points impact to our Tier 1 capital ratio over a three-year period, beginning in 2013 from the Collins amendment.
Let's take a minute and look at capital on Slide 5. Our regulatory capital ratios increased again this quarter as they have in previous quarters as highlighted on the slide. Estimated Tier 1 common increased to a healthy 8.08%. The tangible common equity ratio and book values per share declined modestly due to declines in unrealized gains from rising rates during the quarter.
But before I turn the call over to Mark, I'd like to take a moment to offer some context on Basel III, Slide 6. The bottom line is that our Tier 1 common ratio today already exceeds the Basel III standard that will not be effective until 2019. Our Tier 1 common ratio increases approximately 30 basis points under the Basel III calculation to 8.4% or about $1.9 billion more than the 7% standard.
As you know, the Basel III framework is one of the lenses through which the Federal Reserve will be revaluating [ph] bank's capital plans submitted as part of the comprehensive capital plan review process. SunTrust submitted its capital plan to the Federal Reserve in early January as requested. Given that the Federal Reserve's review of that plan is still in process and that it is a confidential regulatory exam, we won't be providing any specifics contained in the plan today.
I will, however, offer a few high-level thoughts on prioritization of future capital actions. As we have said, we have been and will continue to invest in our people and businesses to support the future growth opportunities and to be consistent with our responsibilities to shareholders. We plan to continue making these investments in order to grow the business. And at the same time, we also recognize the value of returning capital to shareholders. And in that regard, our priorities are repaying TARP and in due time after that, increasing the common dividend.
I'll now take a moment to comment on TARP. Our repayment strategy has been very deliberate, and it has had the best interest of our shareholders in mind. We believe our patience has been appropriate as it has enabled us to deliver meaningful improvements in our performance, which among other things has resulted in an increased stock price. I do ultimately expect that we will have to issue some equity to exit TARP as that has been the precedent today. You may have noted that Fifth Third highlighted its pro forma Tier 1 common ratio of 9% in its announcement. Several of our other large bank peers are also currently around this level. To the extent that peer review and/or a 9% number are relevant, a more modest capital raise for SunTrust than we've seen in some precedent transactions might be required. There is now a quantitative framework through which TARP repayment is going to be evaluated, and that being the Fed's comprehensive capital plan review. We're certainly supportive of this review process, and it is expected to be completed by late March.
We expect that our 8.4% Basel III Tier 1 common ratio and our reduced risk profile will serve us well in this process. That said, this is obviously a very comprehensive review that the Fed is conducting, and we don't have the results as yet. Once the review process is complete, we'll be in a better position to re-evaluate our repayment options and the appropriate timing.
Looking forward, we believe SunTrust is well positioned as we enter 2011. Our efforts to drive improved operational execution and client loyalty are yielding results and will remain a priority for us. We're taking advantage of opportunities in our markets and will continue to make investments in teammate engagement, client loyalty and growth in primary relationships, the three areas that we believe drive market share growth and ultimately, higher levels of profitability and improved financial performance for our shareholders.
And with those comments, I'll turn the call over to Mark for more detail on financial results.
Thanks, Jim, and good morning, everybody. I'll begin my comments today with a review of the summary income statement on Slide 7. For the quarter, we posted net income to common shareholders of $114 million or $0.23 per share. This represents a $0.06 increase from the $0.17 per share that we reported in the third quarter. Results were driven by a decline in the provision due to improved credit quality, as well as stable revenue relative to the strong results that we reported last quarter.
We'll discuss the quarter in more depth on subsequent slides. So for now, I'll just hit a few of the highlights. Net interest income increased 2% or $28 million relative to the third quarter and grew 7% or $89 million as compared to the fourth quarter of last year. This increase was driven by the continued favorable shift in the deposit mix and lower deposit pricing. We also saw a modest increase in loan balances in the quarter. The provision declined $103 million or 17% from the third quarter due to lower net charge-offs and a modest reduction in the allowance. Noninterest income declined sequentially by $5 million or about 1% as mortgage revenue was lower on the heels of the strong refinance activities that occurred in the third quarter. This decline was partially offset by higher trading income, as well as increases in other market-sensitive revenues.
Noninterest expenses increased $49 million or 3% from the prior quarter due primarily to investments in the business, including technology, marketing and personnel, as well as higher incentive compensation in certain business lines. As we have done in the past, we adjust for several items, including securities and mark-to-market gains, when presenting our core revenue and expense figures. The total net adjustments this quarter contributed $88 million to pretax earnings. So even excluding these items, we delivered another profitable quarter before and after TARP dividends, consistent with our guidance in December.
For the full year 2010, we reported positive net income before preferred dividends of $189 million and a net loss to common shareholders of $87 million or $0.18 per share. As Jim mentioned, both of these results improved meaningfully compared to 2009, driven by higher net interest income, a lower provision and the impact of the goodwill impairment in 2009.
Our results for the full year and for the fourth quarter are still not near the levels where we would like them to be. But we are pleased with the progress that we made over the course of 2010, and we believe that we're well positioned as we enter 2011 to realize further improvement in our financial performance.
With that, let's shift to Slide 8 for a review of loans and deposits. Average loan balances, excluding nonaccruals, were up $1.9 billion or 2% as compared to the third quarter. Growth was driven by higher commercial and consumer loans, which more than offset our continued efforts to manage down the Construction portfolio. Growth within the commercial category was split between large corporate and smaller commercial clients. Within our Corporate and Investment Banking business unit, growth came from higher balances in our asset-backed commercial paper conduit facility, while utilization rates overall remained stable and at relatively low levels. Growth in diversified commercial banking was due to a 2 percentage point pick-up in utilization rates. It is too early to declare this increase a trend as there was likely some year-end inventory building that contributed to it, but we were pleased to see higher demand in this area that we are targeting for future loan growth.
Average balance growth within the consumer direct category was largely from the consolidation of an approximate $500 million student loan securitization, which occurred at the end of the third quarter. Consumer indirect growth came primarily from auto loan purchases that occurred during both the third and fourth quarters, including an approximate $900 million portfolio acquisition that we closed in December. We have been opportunistic with these transactions as we have found them to have attractive return and credit characteristics.
Now turning to deposits. We continued to see a favorable shift in the mix towards low-cost accounts. DDA, NOW and Money Market Accounts all increased 5% sequentially. These categories grew a combined $4.3 billion over their average balance levels in the third quarter, while higher cost time deposits declined almost $2 billion. This shift helped drive further expansion on our net interest margin, which I'm going to discuss here in a minute.
Compared to the fourth quarter of last year, low-cost deposits grew 10% or $8.5 billion. Concurrently, higher cost, time and wholesale deposit sources declined 25% or about the same amount, $8.4 billion. While we acknowledge that a portion of the low-cost deposit growth is attributable to clients holding higher levels of liquidity, we also believe that the growth is the direct result of investments that we have made to enhance our clients' banking experience and to drive households and market share growth.
Now let's turn to Slide 9 for a discussion of the Securities portfolio. Our total available-for-sale portfolio stood at $26.9 billion at the end of the quarter, down $3.4 billion from the end of the third quarter. In anticipation of higher interest rates, we decreased the investment portfolio's risk profile through the sale of longer-dated securities and recognized $64 million in securities gains in the process. The sales were primarily in agency mortgage-backed and treasury securities. And going forward, we will continue to evaluate opportunities to reduce our risk to a further steepening of the yield curve through additional repositioning. Despite the significant increase in rates during the quarter, the unrealized gain in the bond portfolio was approximately $440 million, albeit down from $830 million at the end of the third quarter.
Now I'm going to move to margin on Slide 10. The net interest margin expanded for the seventh consecutive quarter and was up three basis points sequentially to 3.44%. The expansion was once again driven by lower funding costs, the direct result of our low-cost deposit growth and continued management of our rates paid by product and by market. Relative to the prior year, margin is up 17 basis points, and this improvement was primarily caused by a 38 basis point decline in rates paid on our interest-bearing liabilities. While earning asset yields were down about 17 basis points due to the low rate environment, our strong focus on loan pricing and our commercial loans swap position both help to mitigate the impact of lower rates. We expect the margin as we move into 2011 to remain relatively stable in the first quarter as compared to the fourth quarter, and the risks and opportunities to this view are listed on the slide.
Let's transition now to provision on Slide 11. Tom Freeman will cover credit quality in detail shortly so I'll be brief here. Total provision for credit losses for the quarter was $512 million, down $103 million from the third quarter as credit trends continued to improve. Net charge-offs declined by $69 million or about 10% in the quarter, with the largest improvements coming in residential mortgage and construction.
Additional credit metrics such as nonperforming loans, nonperforming assets and early-stage delinquencies all declined in the quarter. As such, the allowance was reduced by $112 million, and that reduction combined with loan growth reduced the allowance-to-loans ratio by 11 basis points.
Let's move now to noninterest income on Slide 12. On a reported basis, noninterest income was down 1% sequentially but up 39% from the prior year. And as I mentioned earlier, we've made adjustments for certain items like securities gains and mark-to-market impacts, and the full list of these adjustments can be found in the appendix. And after these adjustments, noninterest income, while down 6% sequentially, was up 30% from the prior year.
Now there were three significant swings in our sequential quarter fee income, which you see listed at the bottom of the page, including declines in mortgage production and servicing and an increase in trading. Note that these items are also reported on an adjusted basis in order to be consistent with the figures presented at the top of the page.
Adjusted mortgage production declined about $90 million as rising interest rates resulted in a decline in locked loan volume, as well as reduced production margins. Mortgage servicing declined $64 million as rate volatility during the quarter led to reduced hedge performance and an increase in prepayment activity. Adjusted trading income increased $76 million. Now this was primarily due to the $59 million fair value loss that we recognized in the third quarter on our indexed link CDs. And as we discussed last quarter, that was an unusually high loss, and it compares to a $5 million gain recognized during the fourth quarter.
Our consumer and commercial fee income categories also generally performed well. And most notably, investment banking income posted another record quarter and eclipsed the $100 million mark for the period. Syndications accounted for an atypically high proportion of the revenue this quarter, as a number of transactions were closed toward the end of the year on robust deal flow. Trust and retail investment income also increased sequentially, while deposit service charges declined due to the full quarter impact of Reg E. Overall, we were pleased that the diversity of our revenue sources enabled us to post strong year-over-year fee growth and solid sequential results amidst lower mortgage volume and reduced deposit service charges.
Let's now turn to Slide 13 for a discussion of mortgage repurchase trends. We have altered this slide compared to previous quarters in order to provide you some additional color on this topic. The top left portion shows that the income statement impact of mortgage repurchases decreased to $85 million in the fourth quarter, down $10 million from the third quarter, while charge-offs increased $9 million as expected. The mortgage repurchase reserve was reduced modestly, which is consistent with the declines experienced during the quarter in both the pending demands and new repurchase request volume, which are the topics we'll shift our attention to next. As depicted in the top right, pending demands declined by $27 million or about 8% to $293 million at the end of the quarter. And I'll come back to the non-agency figures that you see in just a minute.
The bottom left chart depicts repurchase request volume by vintage. In total, repurchase volume was down $30 million in the quarter. The 2006 and 2007 vintages continue to comprise the bulk of the requests, though 2007 requests were down $26 million sequentially. And as we've indicated previously, new demands can be volatile and are difficult to forecast, but we do expect over time that normal seasoning patterns will result in a decline in requests from the 2006 and 2007 vintages. And as that occurs, we expect lower aggregate request volumes and lower loss frequencies and severities as newer vintages exhibit more favorable credit characteristics. If we are correct in these assumptions, then we would expect a reduced income statement impact from mortgage repurchases in 2011 versus what we experienced in 2010.
Now before covering the final part of this slide, let me discuss our non-agency exposure. As we indicated last quarter, we have about $17 billion in unpaid principal balances on non-agency loans that we originated in 2005 through 2007 and subsequently sold or securitized. As you can see on the slide, we have a modest amount of pending demand on the non-agency products, and we've also been receiving a small amount of repurchase request volume of about $10 million to $15 million in recent quarters. As such, while our losses have not been material, this experience has been factored into our mortgage repurchase reserve process.
Let me finish up on this slide with a quick explanation of the bottom right box. There's been a lot of talk in the industry recently about lifetime loss estimates. The information presented here may be useful to you in deriving your own estimates for our lifetime losses, as well as our remaining exposure. You can see that we have $114 billion in remaining UPB on loans that we sold between 2005 and 2010. The $17 billion in non-agency loans is included within that figure. You also see depicted on the slide that to date, we have recognized approximately a $1 billion in losses through the income statement, which includes more than $700 million in charge-offs and the current $265 million in reserves for future losses.
With that background, let's shift gears and go to Slide 14 for a review of expenses. Noninterest expense was up 3% when compared to the third quarter and 7% versus the prior year. Adjusting for losses on debt extinguishment and write-downs in our affordable housing unit, both of which we've listed in the appendix, the growth rates are 3% and 8%, respectively. The increased expenses in both periods are due to the three drivers that you see at the bottom of the page: employee compensation, outside processing and software and marketing.
Focusing on the sequential quarter, our adjusted noninterest expense was up $46 million in total, and the increase in these three highlighted drivers was $59 million. Now broadly speaking, the increases relate to investments that we've made to drive our business, but I'll provide some additional detail here.
Employee compensation and benefits was up $29 million due to higher salaries and increased incentive compensation. Salary increases were largely the result of hiring within our technology, mortgage and client support areas. The incentive compensation increase was driven by the strong full year performance within certain business lines. Outside processing and software increased $17 million due to client acquisition and risk management technology projects, as well as higher transaction volumes. And the marketing and customer development increase of $13 million was due to overt investments to grow our business, and we have been very pleased with the results to date.
In the appendix, you will also see detail of our credit-related noninterest expenses, which also increased $9 million in the quarter, driven by $13 million in additional other real estate expenses. As we've discussed in prior quarters, we are seeking to balance investments in the business with our expense discipline. Our full year expense growth is reflective of that balance. When you exclude non-core items like the 2009 goodwill impairment, our adjusted noninterest expenses increased about 3% over 2009, whereas revenue grew approximately 5%. And looking to the first quarter of 2011, we do expect an increase in personnel expenses due to the seasonal increase in employee benefits costs. However, we expect declines in other line items to offset this impact, such that total noninterest expenses will be flat to down in the quarter.
And with that, let me turn the call over to Tom Freeman to discuss asset quality.
Thank you, Mark. I'll begin today's review of our asset quality on Slide 15. As you heard from Mark and Jim, the overall theme of our credit message this morning is that asset quality continued to improve during the fourth quarter. Net charge-offs, provision expense, nonperforming loans, nonperforming assets and early-stage delinquencies all decreased. In fact, as you can see on the right-hand side of the slide, every key credit quality metric on the slide improved for the second quarter in a row. Net charge-offs declined 10% from the third quarter to $621 million, and the corresponding annualized charge-off rate declined to 2.14%. Provision expense declined primarily as a result of lower charge-offs, driven by improving credit quality. As a result of current quarter asset quality trends and an outlook for continued improvement, the allowance for loan losses was reduced by a $112 million. This compares to a $70 million reduction in reserves in the third quarter.
The allowance-to-loan ratio ended the quarter at a healthy 2.58% of loans. Loan loss reserves declined on both an absolute and a relative basis for three reasons: First, as Mark noted earlier, high-risk portfolio balances continued to decline; second, charge-offs associated with some of these higher risk portfolios, such as construction, absorbed some of the reserves; third, emerging risk moderated.
The loan production that replaced this run-off and is generating net portfolio growth is higher-quality commercial and consumer loans and federally guaranteed student mortgage loans. Nonperforming loans and nonperforming assets declined during the quarter by $263 million and $300 million, respectively or by 6%. This is the sixth consecutive quarter of declining nonperforming loans.
Ongoing resolution of problem assets continued to drive declines in nonperforming loans. In addition, owned real estate assets are moderating as we continue to aggressively dispose of properties once we have clear title. As a result, owned real estate plus other repossessed assets has remained consistently low as a percentage of declining NPAs. A key leading indicator of asset quality, particularly for consumer loans, is 30-to-89-day delinquencies. These early-stage delinquencies declined again during the quarter to 90 basis points after excluding government-guaranteed student loans and voluntary Ginnie Mae mortgage purchases. This leading indicator of future asset quality has fallen significantly since the beginning of 2009. During this time, the economy and employment conditions have improved somewhat, but remained sluggish overall. As a result, we don't expect significant further improvement in early-stage delinquencies until economic conditions improve.
Please turn to Slide 16 for a review of asset quality by product. This slide provides net charge-off and early-stage delinquency metrics by loan type. It illustrates at a more granular level where overall asset quality has improved and that asset quality issues remained concentrated in the Residential Real Estate and Construction portfolios. More specific takeaways from this slide are that while total portfolio balances increased over $900 million, the higher risk Residential and Construction portfolios declined by nearly $1.3 billion.
Charge-offs remained stable in most portfolios, declined meaningfully in Mortgage and Construction and increased modestly in Commercial. Overall, early-stage delinquency was broadly stable to down among the portfolios.
Now let's focus on the individual portfolios beginning with Commercial. This portfolio continues to perform well. Balances grew. Net charge-offs increased somewhat, and early-stage delinquencies remained very low. We do not believe that the $29 million increase in commercial charge-offs is indicative of a trend, and it was accompanied by a 20% increase in commercial nonaccrual loans.
Charge-offs in the Commercial Real Estate portfolio were stable compared to last quarter's 1% of loans on an annualized basis. Early-stage delinquency declined significantly, and the level of nonaccrual loans increased somewhat. The current commercial real estate correction continues, and we expect some variability in the performance as this cycle plays out.
However, as I've said many times during these calls, we continue to believe this portfolio will perform comparatively well, given its composition. To date, our performance expectations have been met. On an absolute basis, the bulk of our charge-offs continue to come from Residential Mortgage, Home Equity and Construction portfolios. Combined, these three portfolio produced slightly over 70% of our fourth quarter net losses. However, these portfolios are also driving the sequential quarterly improvement in net charge-offs.
Net losses in these portfolios declined nearly $100 million compared to last quarter, with the majority of the improvement coming from residential mortgages. Quarterly variability in construction losses is to be expected as we continue to work through the remaining risk in this run-off portfolio. Charge-off trends in Consumer, Mortgage and Home Equity tend to be less variable from quarter-to-quarter and are the product of declining delinquencies and stabilizing home values.
Asset quality in the Consumer portfolios was basically stable. Charge-off ratios in the Direct and the Indirect portfolios remained roughly 60 basis points on an annualized basis and declined to less than 6% in our small credit card book. Early-stage delinquencies were flat compared to last quarter in all but the Student Loan portfolio. While delinquencies in the student loan portion of the Direct portfolio increased to 8.3%, this portfolio consists predominantly of lower-risk, government-guaranteed loans, which is evident in the charge-off ratio of less than 50 basis points.
Next, I'm going to briefly talk about the higher-risk Residential Mortgage, Home Equity and Construction portfolios, which are detailed on the next few slides. These portfolios have generally exhibited declining balances and stable-to-improving risk over the course of 2010, and their performance in the fourth quarter was no different. My comments are going to be brief because we have provided these detailed views in each quarter throughout the cycle and are fundamentally less to say at this point. I will take the opportunity, however, to point out some key changes over time.
Please turn to Slide 17 in our Residential Mortgage portfolio. Asset quality in the Residential Mortgage portfolio remained stable during the fourth quarter. As mentioned a moment ago, charge-offs declined meaningfully. On this slide, you can see that balances in nonperforming loans trended down within each of the Mortgage portfolios, most notably within the higher-risk segments. Early-stage delinquencies increased marginally, and we believe seasonally, in most Mortgage portfolio segments.
Our outlook for the Residential Mortgage portfolio remains consistent with the view we expressed last quarter. Past delinquency trends suggest reduced frequency of default over the next couple of quarters. We expect home prices to remain soft overall, trending down in some markets and stable-to-modestly up in others. We believe that lower expected default frequency and moderating loss severity will produce stable-to-declining nonperforming loan and charge-off levels over the near term.
While [ph] this perspective be on the next quarter or two, it is important to note that the material improvement in the risk profile of this portfolio over the last three years. The total portfolio has declined $1.2 billion or less than 4% over the last three years. However, the highest risk elements in the portfolio, Alt-A seconds through prime seconds on the slide, have been managed down by over $5 billion or 50% since the end of 2007. Net growth in the core portfolio of $3.6 billion during this time has been in the form of mortgages guaranteed by the federal government.
At year-end 2010, $3.8 billion or nearly 15% of the core Mortgage portfolio was backed by guarantees from Fannie Mae and the FHA. Including voluntary Ginnie Mae mortgage repurchases, federally guaranteed mortgages totaled $4.5 billion.
Moving to Slide 18 in home equity lines of credit. The Home Equity portfolio asset quality was basically stable, while higher-risk balances continued to decline. Charge-offs increased by $4 million and the net charge-off ratio rose modestly to 3.39%. Roughly half of the increase in the ratio was driven by higher net charge-offs, while the other half was attributable to lower portfolio balances. Declines in early-stage delinquency were concentrated in the higher-risk portfolios.
Balances in this portfolio have declined roughly 9% over the last two years and are flat compared to three years ago. Run-off has been concentrated in the higher-risk portfolios where no new production has occurred and little or no line availability exists.
Now if you will turn to Slide 19, I will talk about our Construction portfolio. We continue to aggressively reduce exposure to higher-risk construction loan [ph], with balances dropping another 13% during the fourth quarter. Charge-offs declined sequentially for the second quarter in a row. However, charge-offs are expected to remain elevated and uneven as we work through the remainder of the risk in this portfolio.
As you can see on the slide, residential-related construction has been the most problematic, with 80% of the nonperforming loan comprised of construction-to-perm, residential construction and land loans. Overall, nonperforming construction loans decreased for the third straight quarter. While there may be some variability, we generally expect this trend of declining nonperforming loans to continue as we aggressively pursue workouts and transition foreclosed assets to other real estate owned and ultimately disposition.
The Construction portfolio also warrants a little historic perspective. Balances of $3.8 billion are down nearly $10 billion or 72% since the end of 2007. This reduction in outstanding balances was accomplished with $1.1 billion of cumulative charge-offs over the three-year period. With 29% of the remaining portfolio in nonperforming status and appropriately reserved, we believe we are well positioned to manage the remaining risk in this portfolio.
Next I'm going to review the portfolio of restructured loans in Slide 20 of today's presentation. The vast majority of SunTrust restructured loans continue to be loans that were modified to assist individual consumers experiencing financial difficulty. 97% of our accruing loan modifications benefit customers by reducing interest rates and exempting terms on mortgage and consumer loans. The payment performance of these accruing restructured loans continues to be good, with 86% current on principal and interest savings.
Accruing TDRs totaled just over $2.6 billion at the end of the quarter, up approximately $100 million from the third quarter. Growth in accruing TDRs slowed again in the current quarter as the volume of nearly delinquent loans eligible for restructure continue to decline. The balance of nonaccruing TDR remained basically unchanged compared to the third quarter. Two-thirds of the nonaccruing balances are restructured mortgage and consumer loans. The majority of SunTrust modifications on loans to business entities are classified as nonaccrual. At the end of the fourth quarter, roughly 1/3 of nonaccruing TDRs were loans to business clients. Of those, $213 million were loans to the commercial real estate line of business clients.
Before turning the call back to Kris, I'm going to provide a brief summary of today's asset quality review on Slide 21. Overall, improvement in asset quality continued in the fourth quarter. Improvements in asset quality metrics was broad-based. Provision expense charge-offs, nonperforming loans, nonperforming assets and early-stage delinquencies all declined.
Individual portfolios showed generally stable-to-improving trends. Risk remains concentrated in the Residential Real Estate and Construction Portfolios. Balances and charge-offs in these higher-risk portfolios were stable to declining during the fourth quarter. Accruing TDRs are primarily related to mortgage and consumer loans. Solid payment performance continued, and the pace of new modifications has slowed. Our asset quality outlook for the first quarter of 2011 is for a modest decline in charge-offs and nonperforming loans as compared to the fourth quarter.
With that, I'll turn the call back over to Kris.
Thanks, Tom. Operator, we're ready to take questions.
[Operator Instructions] Chris Gamaitoni from Compass Point.
Given home prices in Florida have generally fallen looking at -- Casular [ph] metrics or CoreLogic indices, and foreclosure timelines have extended, I was just wondering how you impact or how that impacted your allowance and fair value marks on OREO, as well as how that corresponds with your commentary that severity should be mitigating? I understand the default percentage mitigating, but how does severity to go down with those circumstances?
I think what we're indicating is that the continued fall in housing prices has mitigated substantially. I mean, it's not falling by 10%, 12% a year. And in fact, it's falling in those areas of the Florida portfolio, basically in southern Florida where you're still seeing weakness in home prices. But the vast majority of the portfolio outside of Florida, northern Florida, Virginia and the rest of it, are showing more stability in housing prices and really flat-to-increasing values in those portfolios.
And then on the non-agency side, for repurchase requests, I know it's not a big deal. I was just wondering generally where are those are coming from? Are those private wholesale investors? Or are those bond investors?
This is Mark Chancy. I'll take a stab at that, and then Bill Rogers may pile on. As we mentioned before we've got about $17 billion for the non-agency loans. Those were either sold into our own securitizations, which was about 15% to 20% of the total. And then the remainder were either whole loans and/or sold to third parties who then securitized the loans. So what I would say is that it's a mixture of those three different categories. It's a relatively small dollar amount, as we mentioned, of repurchase requests and pending demands. But I would say that we have received some from the various components that I just mentioned.
Nothing to add to that other than just it's a highly diversified portfolio, which is, we think, the strength of that non-agency exposure in addition to being small.
And two quick questions. Just how much allowance do you have on the TDRs currently?
That's just not something that we have broken out in our disclosure. So I'll refrain from answering that question. We do have a very specific reserve process for the TDRs that we incorporate into our overall allowance framework. It's just not broken out separately.
And then on a more broader kind of commentary, could you just talk about the competitive landscape in the Southeast market, especially now that Wells has fully integrated Wachovia and some of the larger multinational banks have talked about increasing competition there?
This is Bill Rogers. Let me start with a general comment that competition isn't new to the Southeast. I mean, this has been a highly competitive market for a very, very long time and continues to be a highly competitive market. We think we are extremely well positioned in our markets, enjoying market shares of second and third position in most of our markets. So it has been, is and will continue to be highly competitive.
We're not showing any further questions at this time. We appreciate you all joining us. That concludes our conference call.
That concludes today's conference. You may disconnect at this time.
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