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Operator
Good morning and welcome to WesBanco's conference call. My name is Denise and I will be your conference facilitator today. Today's call will cover WesBanco's discussion of results of operations for the quarter and year ended December 31, 2011.
Please be advised all lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer period. (Operator Instructions). This call is also being recorded. If you object to the recording, please disconnect at this time.
Forward-looking statements in this presentation relating to WesBanco's plans, strategies, objectives, expectations, intentions and adequacy of resources are made pursuant to the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995.
The information contained herein should be read in conjunction with WesBanco's 2010 annual report on Form 10-K and documents subsequently filed by WesBanco with the Securities and Exchange Commission, SEC, including WesBanco's Form 10-Q for the quarters ended March 31, June 30 and September 30, 2011 which are available on the SEC's website, www.SEC.gov or at WesBanco's website, www.WesBanco.com.
Investors are cautioned that forward-looking statements which are not historical fact involve risks and uncertainties including those detailed in WesBanco's 2010 annual report on Form 10-K filed with the SEC under the section Risk Factors in Part 1, Item 1A. Such statements are subject to important factors that could cause actual results to differ materially from those contemplated by such statements. WesBanco does not assume any duty to update any forward-looking statements.
WesBanco's fourth-quarter 2011 earnings release was issued yesterday afternoon and is available at www.WesBanco.com. This call will include about 15 to 20 minutes of prepared commentary followed by a question-and-answer period which I will facilitate. An archived webcast of this call will be available at WesBanco.com.
WesBanco's participants in today's call will be Paul Limbert, President and Chief Executive Officer; Jim Gardill, Chairman of the Board; and Robert Young, Executive Vice President and Chief Financial Officer and all will be available for questions following opening statements. Mr. Limbert, you may begin your conference.
Paul Limbert - President & CEO
Thank you, Denise. Good morning, everyone. Thank you for participating in WesBanco's quarterly earnings conference call. We are pleased to be able to provide this information to all interested parties. I would like to make some opening comments; Bob Young will provide financial highlights of the full year 2011 and the fourth quarter; and then Jim Gardill will moderate the question-and-answer period.
A press release detailing the results of the full year and the fourth quarter was issued last evening. A copy of the entire press release is available on our website. We will assume that all participants know about WesBanco and therefore we will just move to the financial highlights.
Year-to-date earnings per share increased to $1.65, a 23% increase over the prior year. Our return on average assets for the year was 81 basis points. Our return on average tangible equity for the year was 13.3%. WesBanco reported fourth-quarter earnings of $10.6 million or $0.40 per share as compared to $10.3 million or $0.39 per share for the fourth quarter of 2010.
We are pleased with the financial performance of WesBanco as compared to the prior year given the headwinds caused by a slowly improving economy and the regulatory environment. The growth in net income was achieved by improving net interest income, improving credit quality metrics, improving revenues from wealth management and customer activity fees, and a concerted effort to control costs without affecting either the quality of our operations or our revenue generating capabilities.
Non-interest income was 26% of the total revenue for the year. Our efficiency ratio improved to just under 60%. The pre-tax pre-provision return on average assets has improved to 1.76% for the year indicating continuing strong operating results.
WesBanco continues to see improvements in our core operating metrics. Revenue growth has offset the effects of a reduction in overdraft fees and WesBanco is not expecting to see any near-term loss of revenues from repricing of debit card interchange fees.
We see continued revenue growth opportunities in wealth management, securities and insurance. Operating efficiencies are being gained by our customers using our electronic banking services, allowing for a decrease in the number of full-time equivalent employees during the year.
We have used the past several years with no M&A activity to review many of our vendor contracts, provide more automation to our routine activities, and train our employees on how to perform their jobs better in assisting our customers. In other words, we went back to basic banking, reviewing many of our practices and changing our procedures to become more customer friendly and also more efficient.
At the same time, we have invested in the future by applying more marketing to regions in which our name is not as well-known and hiring more revenue-generating employees in lending and the non-banking functions. We expect these investments will result in additional revenue in future years.
We continue to see credit issues in our Ohio markets. As the recession continues some marginal credits have experienced further deterioration. While delinquencies remain at acceptable levels, we continue to see business closures and failures in the small-business sector. We are seeing a gradual decline in our non-performing assets and our criticized and classified loans, which tells us we are making progress, however slow it may be.
Our annual loan loss provision, while declining from previous years' levels, still remains unacceptably high. Charge-offs are declining, but have been stubbornly consistent at historically high levels.
As a result of the third-quarter loan sale and our loan collection efforts, non-performing assets declined during the year. Total non-performing assets of $90 million are 2.8% of total loans, down from the previous year.
We are continuing to work with our borrowers assisting them in working through this recession. Our historical community bank philosophy has been to work with and assist borrowers to make it through difficult economic times. We have shared the challenges of this recession with our customers, but believe that when economic times improve those customers will emerge stronger and help drive economic growth in our communities. We are confident that as the economy recovers our impaired loans will also decline.
Total assets increased during the year due to increasing customer deposits. Deposits grew by 5%. Please take note of our efforts to increase our non-interest demand deposits and reduce our higher cost certificates of deposit.
At year end DDA's represent a 19% increase from the prior year and, as important, they now represent 16% of total deposits. These deposits will become more valuable to the franchise as interest rates rise.
CDs declined due to the low level of interest rates. Management has used our liquidity to pay down the current maturities of Federal Home Loan Bank borrowings and purchase additional investments. While loan originations were strong and greater than the prior year, outstanding loan balances declined during the year due to the loan sale, loan payoffs and our continued collection efforts.
WesBanco had one of its strongest years for loan originations in the past couple of years. Loan originations increased for the year by 30% to almost $1 billion. Given the current and near-term interest rate projection of very low interest rates for short-term liquidity, we are focused on staying fully invested.
Growth in the loan portfolio has been limited by a lack of qualified borrowers and borrowers who have paid down their existing lines of credit and have yet not found appropriate business opportunities to borrow additional funds. In addition, competition and pricing and terms for all lending opportunities is significant.
Our success in originating loans this past year was primarily due to an increased number of loan officers, cross sales to existing customer relationships, and our ability to move loans from the application to the closing stage faster than some of our competitors.
An economic update on our market areas has not changed significantly from the third quarter. Economic conditions in many of our markets are continuing to improve; we see the West Virginia market as being very consistent with North Central region, strong with a lower unemployment rate than the national average. Our market area of West Virginia did not see the significant real estate bubble and therefore real estate market values have not fallen as far as other markets.
We are seeing increased activity levels in gas drilling in the Marcellus and Utica Shales regions with both loans and deposits beginning to realize the benefits of this important industry in our markets. The Central Ohio markets are showing signs of recovery with several new real estate projects by well established developers beginning construction. Our Western Ohio markets, while continuing to be slow, are beginning to show some signs of recovery.
We are pleased with our capital position. Our capital ratios have improved in each of the last nine quarters. Tier 1 leverage is 8.7%, well in excess of the regulator's well-capitalized levels. Our capital growth is due primarily to our strong earnings and a low dividend payout ratio of 38%. As of December 31, 2011 our tangible equity ratio has grown 6.7% due to our earnings.
We have had earnings consistently through this recession. Because of our strong capital level and the proven ability to increase equity we believe WesBanco is well-positioned for the current economic climate and future growth. Our strong earnings have allowed us to increase dividends twice during this past year. We have raised our quarterly dividend from $0.14 to $0.16 during 2011.
We continue to build WesBanco for the future. We continue to improve our operating results. We are making investments in technology and our employees. And we are restructuring and strengthening our balance sheet to be able to effectively compete as the economy turns.
We are also pleased to report that our stock price compared favorably with our peer group during 2011. The announcement of dividend increases in 2011 was received favorably by the markets. Our stock price appreciation year to date, this is as of year-end December 31, 2011, was 2.7% as compared to the NASDAQ Bank Index which had a price depreciation of 12.4%. Our dividend annual yield based upon year-end stock price was 3.4%.
I would like Bob Young, our CFO, to discuss with you in more detail the financial results of the year 2011 and the fourth quarter.
Robert Young - EVP & CFO
Thank you, Paul. Good morning, everyone. For the full year 2011, a 23% improvement in net income was primarily the result of a 2% increase in net interest income as the margin grew 6 basis points to 3.66%, a 21% reduction in the loan loss provision along with a small decrease in total expense.
In addition, fourth-quarter improvement in net income over the same period last year was primarily the result of a 5.14% increase in non-interest income with increases in electronic banking fees, securities brokerage income, non-banking income with security gains leading the way, offset somewhat by a 1% decrease in net interest income as the margin contracted by 10 basis points. Expenses were essentially flat for the quarter and so was the loan loss provision.
Moving to the details of our performance, net interest income increased $3.3 million or 2% for the year while decreasing $0.4 million or 9 -- 0.9% for the fourth quarter. For the year, in a difficult lower interest rate environment, WesBanco achieved a 6 basis point increase in the margin as cost of funds decreased at a faster pace than earning asset yields despite a change and mix towards more securities.
The increase came as a result of a 35 basis point decrease in the cost of interest bearing liabilities as a result of both pricing decreases and a shift away from higher costing CDs and borrowings to lower cost transaction accounts such as checking, money market and savings products.
Interest income from the investment portfolio increased by 2.9% for the year due to an increase in average outstanding balances partially offset by a decrease in average rates earned.
For the fourth quarter the margin decreased from 3.66% last year to 3.56% as an increase in earning assets by 2.1% was concentrated in lower yielding taxable securities which dropped from a 3.07% yield in last year's fourth quarter to 2.84% for the fourth quarter of 2011.
Reinvestment opportunities came at lower spreads and nominal yields while cash flows from the portfolio increased. Cost of interest bearing liabilities dropped from 1.48% to 1.22% for the quarter headlined by a 23 basis point decrease to 1% for interest-bearing deposits and the aforementioned increase in non-interest-bearing demand deposits.
However, a shift to a greater securities mix due to a 2% decrease in total average loans, and a drop in loan yields by 33 basis points for the quarter as a result of re-pricing and newer loans being originated in lower yields, did result in a lower net interest spread by 7 basis points to 3.39%.
Turning to non-interest income, for the year total fees were up [to] 0.5% as compared to 2010 as service charges on deposits decreased 10% from the 2010 regulatory changes governing automated overdraft programs which ultimately led to fewer customer overdraft transactions.
Most of this decrease occurred in the first half of the year for us and service charges stabilized the last six months since the implementation of those regulations occurred in mid-third quarter of 2010. Trust fees and electronic banking fee increases offset this decrease as our trust fees were up 8.5% and debit card and other electronic fees were up almost 19%.
While security gains were lower for the year, they still mostly offset a much lower level of real estate owned losses. Non-banking income was up $900,000 offsetting a similar reduction in mortgage banking gain on sale income as more of our originated production was placed in our loan portfolio than was sold in the secondary market.
For the quarter non-interest income increased 5.1% or $800,000 from the same period in 2010. Factors influencing this increase included electronic banking income, non-banking income, securities brokerage fees and securities gains while losses on REO were down.
Turning to expenses, total non-interest expense was lower by 0.6% for all of 2011 and salaries and benefits combined were only up 1.7%. This was due to lower healthcare and pension costs. Net occupancy and equipment combined were down $600,000 and tangible asset amortization decreased and FDIC insurance was down almost 29% or $1.9 million from a lower assessment schedule for all community banks.
Offsetting these decreases was a higher up marketing expense by about 23% or almost $1 million, a result of higher campaign expenses and customer incentives in order to drive higher levels of demand deposits and consumer loan applications.
For the quarter non-interest expense was flat in comparison with last year and salaries and employee benefits combined were up 3.6% due to normal mid-year salary increases and higher healthcare costs. Net occupancy increase was offset by lower equipment costs; a 39% decrease in FDIC insurance costs primarily offset the noted cost increases.
While pre-tax income was up 34.3% for the year due to a higher effective tax rate for all of 2011 of 18.3% as compared to 2010's to 10.9%, net income after tax was up 23%, which we still believe was very significant in this economic environment.
Turning to the balance sheet now, total assets were up 3.3% from last year as higher levels of investment securities were funded by a 5.3% increased in total deposits net of a 34% Federal Home Loan Bank borrowings decrease. The total $1.6 billion securities portfolio, as compared to $1.4 billion at the end of 2010, remains a source of income and liquidity for the Bank yielding 3.5% for the quarter on a tax equivalent basis and 3.7% for the whole year.
Overall the portfolio had unrealized pre-tax net security gains of approximately $45 million or 3% of the total securities balance at year end as compared to just $5 million last year end. Given the low interest rate environment we expect to see at least through 2013, we have extended duration opportunistically mostly a combination of longer-term tax exempt bonds and short CMO structures.
Total deposits were up 5.3% for the year despite a 6.4% reduction in higher costing CDs as the mix shifted towards more lower costing transaction accounts, which were 63% of total deposits at year end as compared to 59% last year.
In addition, the average balance of Federal Home Loan Bank borrowings costing 3.42% dropped $149 million on average for the year, or 41%, with total wholesale borrowings representing just 7.5% of total assets now as compared to 10% last year.
Non-interest-bearing deposit balances increased 19.5% for the year as a result of retail marketing campaigns and customer incentives as well as increased year-end balances from the Bank's business and treasury management customers, which combined were key areas of success for the Bank this year.
We continue to see growth from the important Marcellus Shale gas region in Northern West Virginia in the fourth quarter, and are also now beginning to see deposit growth from our Eastern Ohio markets in the Utica Shale region. And for the year over $125 million of initial deposits were received from customer bonus lease and royalty payments.
Turning to loans, loans were down about 1.5% over the last year but flat as compared to September 30, primarily due to the sale of $17.2 million in impaired loans in the third quarter and exit strategies developed for certain classified or criticized credits primarily in our Western Ohio markets. Several larger loan payoffs and a continued focus on reasonable underwriting requirements due to the uncertain economic environment have also somewhat muted loan outstandings.
However, we have experienced higher commercial and residential loan origination volumes in our markets in 2011 as compared to last year, resulting in a lower rate of run-off. Commercial loan production improved 44% for the year while residential mortgage volumes increased 14% benefiting from higher mortgage refinancings and a decision to keep more of that production on balance sheet.
Most of the higher commercial demand was experienced in our legacy Eastern Ohio and West Virginia markets as those markets have recovered faster than in certain Western Ohio markets, and they also benefit from greater market share and [calling officer] resources.
Commercial and industrial loan balances were up over year end by 3.3% and construction and development loans increased 13.6% all in the commercial sector as residential construction is still slow in our markets as well as across the country. Of note total loan commitments are up 22.4% at the end of the year compared to 12-31-2010. Pipeline improvements resulted in strong fourth-quarter production and we are optimistic that the fourth-quarter growth will carry over into 2012.
Relative to credit quality, total non-performing loans and classified and criticized loans continued to decrease. Total non-performing assets, which include non-accrual loans, troubled debt restructurings and REO, dropped 13.8% from last year-end's total of $104.4 million to $89.9 million representing 2.77% of total loans and REO, down from last year's 3.17%.
The overall reduction in non-performing assets was primarily due to the sale in the third-quarter of certain impaired and classified loans representing an aggregate book value of $17.2 million, which resulted in $10.3 million in net charge-offs.
While total non-accrual loans increased $8.7 million, or 17.8% from last year end, troubled debt restructurings still on accrual decreased $18.1 million or 38% resulting in an overall decrease in non-performing loans.
The increase in non-accrual loans by themselves was due to the migration of other previously classified commercial real estate and commercial and industrial loans to non-accrual status including certain loans previously reported as TDR's accruing interest partially offset by the non-accrual loans sold in the third quarter.
Also contributing to the NPA improvement is an REO balance that has decreased from $8.1 million to $3 million due to asset sales and reduced new foreclosure activity. Also total 30-day or more past due loans were down from 99 basis points last year to 77 basis points at the end of this year. Finally, total classified and criticized loans have declined significantly by 19.4% to end the year at $258 million.
Net charge-offs to average loans were 1.3% for the 12-month period compared to 1.28% for the same period last year. Fourth-quarter net charge-offs were $9.9 million or 1.22% annualized, down from the sale enhanced level of $17.4 million in the third quarter, but up from last year's fourth-quarter total of $6.6 million.
The increase in the fourth quarter compared to 2010 was attributable to higher levels of losses due to the sluggish economy impacting all segments of the loan portfolio. Overall the provision for credit losses decreased $9.3 million or 20.8% for 2011 as compared to 2010 and for the fourth quarter the provision was flat at $9.6 million in comparison with last year.
The allowance represented 1.69% of total loans at year end, relatively the same as at the end of the third quarter's 1.70%, but down from last year-end's 1.86%. The decrease in the allowance from 2010 was primarily due to the reduction in classified and criticized loans, lower overall delinquencies and the elimination of reserves attributable to loans that were either charged off or sold during the year.
As Paul noted, our strong regulatory capital position was enhanced by increased earnings this year with total risk-based capital at 14.32% versus 13.2% at the end of last year and Tier 1 leverage increasing to 8.71% as compared to 8.35%. Tangible equity was also up to 6.68%, an increase of 35 basis points for the year.
In conclusion, management is pleased with operating results for the year which exceeded our expectations. Top-line revenue growth and lower operating expenses led to improved operating leverage and net income.
We are continuing to work on improving credit quality and are optimistic that our focused workout strategies and a general improvement in the economy, which led to significant reductions in classified and criticized loans, delinquencies and non-performing loans this year, should also translate into better credit performance for the new year.
We are also excited to see a ramp up in loan demand and resulting production volumes as well as improvements in our wealth management and treasury management businesses, which historically have been important contributors to our performance.
Our liquidity and capital strength positions WesBanco to move beyond the recent recession and be able to participate in the recovery as it occurs.
This does conclude our prepared commentary and we will now open the call for questions. Jim Gardill, our Chairman of the Board, will moderate the Q&A session. We'll now turn the call back over to Denise, the facilitator, for questions.
Operator
(Operator Instructions). Catherine Mealor, KBW.
Catherine Mealor - Analyst
Paul, as you mentioned, you increased the dividend twice this past year and you're now at about a 40% payout ratio. Can you talk about your expectation for dividend increases in 2012 and what payout ratio you would be targeting this year?
Paul Limbert - President & CEO
Sure, be happy to talk about it. Catherine, it's always difficult to predict what we're going to do with dividends for the next year. It's always going to be dependent upon the earnings that we see coming into the New Year and what our Board of Directors feels comfortable with as it relates to all of our other plans for the year.
Dividends are something that is important to our directors; they continue to talk about it at our Board of Directors meetings. However, we don't really project dividend increases too early in the year; we simply wait until we have an appropriate time at a Board meeting when we lay out our plans for the year and we get our Board to talk about it.
We do have, though -- as an offset, we do have a pretty strong dividend yield right now at 3%. So I'm not sure that there is a whole lot of requirement that we increase our market yield on our dividend right now. So we'll see as we go through the year; we'll continue to talk about it at our Board meetings and at evaluation and a decision will be made at the appropriate time.
Catherine Mealor - Analyst
And at what point would you consider buybacks as another method of capital repatriation?
Jim Gardill - Chairman
Catherine, basically -- we'll let Paul to use speak to that as well. But we'll look at the capital needs projected for financial institutions and what the accords produce and continue to evaluate the capital adequacy of the Corporation. Just like the dividend, we do that quarterly. We do an analysis and review of where we are, where our earnings are, where our budget is and make those determinations at the Board level on a quarterly basis. Paul, any further?
Paul Limbert - President & CEO
Yes, I just may add, we'll go through the process of evaluating our capital plans at the Board meetings that we have during the course of the year. But we do certainly consider the regulatory requirements. We do have our eyes on the Basel III requirements.
We understand they are not necessarily to apply to banks of our size, but we do anticipate the regulators will consider the Basel III requirements as they look at capital for our size financial institutions. I think some of these requirements will trickle down to banks of WesBanco's size.
We're also going to take a look at it in relationship to our plans for 2012 and what our capital needs are for other things that may occur.
Catherine Mealor - Analyst
Thank you very much for the color. Shifting gears just for one question on the margin -- I know that you've mentioned in the past that part of the reason your CD costs are a little bit higher is due to your focus on getting some longer-term money in there. How do you think about your CD cost in 2012 and what's a reasonable estimate of where you think that rate can go?
Paul Limbert - President & CEO
Boy, you've got a good memory, Catherine. Because you're right, a couple of years ago we were anticipating that it would be wise to get a little longer term deposit money here into the Bank. We certainly were thinking along those lines until we get our Federal Reserve saying that interest rates are going to be low through 2013.
We do have some room to reduce rates on CDs and other deposit accounts in 2012. We certainly will take the opportunity, I believe, to continue to work down our CD rates as we go through the year. And that's as much for our other deposit rates at the same time. I do anticipate our deposit rates to fall during 2012.
Jim Gardill - Chairman
Catherine, you'll remember too that we were concentrating on reducing single service CD accounts which also had the impact of shifting deposits and reducing rates overall subsequent to our AmTrust Bank branch acquisition in which we did some reductions there in a number of high cost single service CDs.
Catherine Mealor - Analyst
That's great. Thank you very much for your time.
Operator
Matt Schultheis, Boenning & Scattergood.
Matt Schultheis - Analyst
Two very quick questions, one is a follow-up regard to capital levels. Have your regulators actually given any indication as to where they might expect capital levels to come in or are they still silent on what they might (multiple speakers)?
Jim Gardill - Chairman
No, we really haven't gotten any guidance from the regulatory level yet other than what we're all reading in the paper and in print.
Matt Schultheis - Analyst
Okay. And then secondly, with regard to your securities yield on a linked-quarter basis, third quarter '11 to fourth quarter '11, a significant decrease in your taxable yield. I was wondering if there was any accelerated amortization of premium on mortgage-backed securities associated with that decrease.
Robert Young - EVP & CFO
Matt, I saw your comment in your write-up and I went back and looked myself. And the answer to that is we've seen a gradual increase in premium amortization, but we control that by not allowing our investment department to buy anything above 103, so it has been a rather controlled increase.
For instance, back in July amortization net of accretion was just over $500,000 and it's not much different from that, less than a couple hundred thousand dollars different from that by the end of the year.
So it's primarily the result of us buying more securities in the fourth quarter which drove yields down. And we are seeing a tremendous inflow of cash, I noted that in my comments, cash from the portfolio continues to ramp up and so we have to reinvest that at ever lower spreads and ultimately yields.
Matt Schultheis - Analyst
Okay, thank you very much.
Operator
(Operator Instructions). Carter Bundy, Stifel Nicolaus.
Carter Bundy - Analyst
My first question on the securities yield was already asked there, so moving on to the salary line item. We saw a pretty large sequential increase -- obviously the year-over-year numbers looked pretty good. But just wanted to get some color on the sequential increase and how we should think about that run rate -- at least either on a quarterly or an annual run rate going forward?
Jim Gardill - Chairman
I'll take a look at that Carter; maybe I'll have Bob speak to that.
Robert Young - EVP & CFO
We were up from -- I think you're talking about the third quarter or the fourth quarter and we were up only 1.5% on salaries and wages. But the big increase was in employee benefits. And that's -- it was all driven by healthcare.
We had actually seen earlier in the year some decreases in our healthcare expenses. But as people work their way through deductibles and co-insurances we tend to see seasonally more use of the programs towards the end of the year. And that was indeed true in the fourth quarter.
So I note that it was healthcare-related and that is the bulk of it. The salary line item is not because we have more hires, we're running the same complement at about 1,370. We did have normal salary increases in the middle of the year that would influence that in the back half of the year.
Carter Bundy - Analyst
Okay, that's helpful. And moving on to the provision in the quarter, could you talk a little bit about what your expectations were going into the quarter? From our viewpoint it seemed a little bit elevated particularly following the third quarter -- pretty elevated provision and could you provide some color on that?
Jim Gardill - Chairman
We can. I think the economy has been rather stubborn and I think the anticipation was we'd see more improvement in credit quality in some of our markets than we actually experienced. I'll let Bob talk to the metrics a little bit, but I think that had a lot to do with the provision. When I look at the year-over-year provision we showed a nice reduction; the reduction that we experienced in the fourth quarter was not as much as we had hoped.
Robert Young - EVP & CFO
Yes, and certainly, as I mentioned in my comments, it's much better than the third quarter when we had a $17 million of charge-offs, $10 million of provision. But Jim is right, we had hoped for a lower run rate provision in the fourth quarter; we'll see how it works out here in the first quarter.
I would say that the bulk of the rationale in the fourth quarter was that we did experience some higher loss content on previously impaired loans in the classified sector and we decided to take those charge-offs in the fourth quarter as opposed to continuing to work them. So that was the primary reason, we'll see how that floats, so to speak, into the new year.
Jim Gardill - Chairman
Carter, I'll speak to that a little bit at the end as well in my comment.
Carter Bundy - Analyst
Okay. And then on -- from a loan growth perspective I guess a question for Bob and Paul. Should we -- as you think about going into '12 here it sounds like production was very, very strong this past year. Do you anticipate that pay-downs should ease and that would likely start to support gross fund growth, or net loan growth?
Jim Gardill - Chairman
We're going to continue to deal with this economic cycle and the accumulation of liquidity in the stronger companies and the pay-down on their lines and are aggressively working problem credits and getting them out of the Bank building for the future of the Company contribute to that significantly. So we have some variables in there that we really can't predict.
I think we have ramped up our lending function. We hit really what we would call record numbers in loan production, as Paul said, close to $1 billion in loan production in a $5 billion asset company, which is fairly strong. And we've increased the number of lenders, the talent that we have on the street to increase our opportunities. So we plan to continue that in 2012 and believe that that combination will result in improvement over time.
We're going to continue to aggressively address credits, though, and where we experience credits and that does -- whether we move them out or write them off at some point, it does have an impact on outstandings. So that variable will still be in the mix. Any other comments, Bob or Paul?
Robert Young - EVP & CFO
I think Jim's right, we were only down some $50 million for the year and if you take a look at 2009 to 2010 I believe the reduction in total loans was closer to $180 million. So if you take out the loan sale in the third quarter and some of the other exit strategies we were working on for classified credits, as well as Jim mentioned the charge-offs, we would have been up slightly for the year.
But I do think my comments about the pipeline here late in the year and Paul's comments about production are germane to the direction of loan production as well as outstandings in 2012. And we referred to it as the hole at the bottom of the bucket with the pay-offs and we do believe, or we are hoping, that we'll see some pull through in terms of outstandings with our aggressive growth that we are planning in 2012.
Carter Bundy - Analyst
And then final question -- that's helpful. Final question on the tax rate, on an FTE basis it was right around 25.5% for the year, it came in around 27%. Is this a reasonable quarterly run rate going forward?
Robert Young - EVP & CFO
In 2012 we would anticipate a couple percent increase in the effective tax rate, I'm looking at it on an effective basis, not on a fully tax equivalent basis. But it's germane to both.
Carter Bundy - Analyst
Great. Thank you all very much; I'll let someone else hop in.
Operator
(Operator Instructions). I'm showing no additional questions in the queue. I would like to turn the conference back over to our Chairman, Mr. Gardill, for any closing comments.
Jim Gardill - Chairman
Thank you very much, Denise. And we appreciate everyone's participation today. Just briefly, I would just like to mention that we feel that we focus our Company to continue to strengthen it for the future and that has been our focus in this past year.
When you look at that, the year-over-year growth in income of 23%, the growth in the dividend of 14%, the growth in capital with tangible book value being increased 35 basis points, and the growth in deposits of 5.3% we think are all strong positive demonstrating factors in this focus on strengthening the Company for the future.
We certainly have dealt aggressively with credit issues, that has had some impact on loans outstanding and certainly on net interest margin. We've also ramped up our loan production and it has increased substantially over the past year.
We believe we have positioned the Company to compete effectively in a slow growth, low rate environment. So we're pleased with the results for 2011 and we think we're well positioned for 2012. So thank you very much today for all of your participation on the call.
Operator
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.