Horizon Bancorp Inc
NASDAQ:HBNC
Horizon Bancorp Inc
Horizon Bancorp, Inc. (Indiana) is a bank holding company, which engages in the provision of commercial and retail banking services. The company is headquartered in Michigan City, Indiana and currently employs 843 full-time employees. The company went IPO on 2001-12-20. The firm provides a range of banking services in northern and central Indiana and southern and central Michigan through its subsidiaries, Horizon Bank (the Bank) and Horizon Risk Management, Inc. The firm operates through the commercial banking segment. The Bank is a full-service commercial bank that offers a range of commercial and retail banking and other services incident to banking along with a trust department that offers corporate and individual trust and agency services and investment management services. The Bank maintains approximately 78 full-service offices. Its wholly owned subsidiary, Horizon Risk Management, Inc., is a captive insurance company. Its loan portfolio consists of commercial loans, real estate loans, mortgage warehouse loans and consumer loans. The company deposits include noninterest-bearing demand deposits, interest-bearing demand deposits, savings deposits, money market and time deposits.
Earnings Calls
In Horizon Bancorp's fourth quarter, total loans grew by $123 million, achieving a 10% annualized growth, driven largely by commercial lending. The company anticipates continued growth, projecting a mid-single-digit increase in 2025, while absorbing a $100 million decline in lower-yielding auto loans. Margin performance also strengthened, with a net interest margin of 2.97%, expected to improve to about 3.15-3.20% by year-end. Horizon aims to keep noninterest expenses steady and targets a tax rate in the mid-teens, indicating strong operational efficiency and long-term value for shareholders.
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Good morning, everyone and welcome to the Horizon Bancorp, Inc. Conference Call to discuss Financial Results for the Fourth Quarter of 2024.
[Operator Instructions] Before turning the call over to management, please remember that today's call may contain statements that are forward-looking in nature. These statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from those discussed, including those factors noted in the slide presentation.
Additional information about factors that could cause actual results to differ materially is contained in Horizon's most recent Form 10-K and its later filings with the Securities and Exchange Commission.
In addition, management may refer to certain non-GAAP financial measures that are intended to help investors understand Horizon's business. Reconciliations for these measures are contained in the presentation.
The company assumes no obligation to update any forward-looking statements made during the call. For anyone who does not already have a copy of the press release and supplemental presentation issued by Horizon yesterday, they can be accessed at the company's website, horizonbank.com.
Representing Horizon today are Executive Vice President and Senior Operations Officer, Kathie DeRuiter; Executive Vice President, Corporate Secretary and General Counsel, Todd Etzler; Executive Vice President and Chief Commercial Banking Officer, Lynn Kerber; Executive Vice President and Chief Financial Officer, John Stewart; Executive Vice President and Chief Administration Officer, Mark Secor; and Chief Executive Officer and President, Thomas Prame.
At this time, I would like to turn the call over to Thomas Prame. Please go ahead.
Good morning, and thank you for joining us. We're pleased to share our fourth quarter results as well as the well-executed strategic initiatives outlined in our last earnings call, which has improved Horizon's ability to deliver long-term value to its shareholders.
The outcome of the team's collective effort in the quarter resulted in exceptional loan growth, a significantly improved net interest income and margin, positive credit metrics and a restructured expense base that will benefit the organization moving forward.
Page 4 displays Horizon's positive fourth quarter results, reflecting the organization's commitment to continually advance our financial performance through accretive actions focused on shareholder value.
The quarter delivered continued growth in our core revenue models, driven by a fifth consecutive quarter of expanded net interest margin. Additionally, the team produced annualized loan growth, excluding warehouse balances of 10%, reflective of our commitment to dedicating resources to expanding profitable core commercial relationships while continuing to reduce the portfolio of lower-yielding auto loans.
As we move into 2025, the team remains confident on its ability to find ample lending opportunities in our local markets, while maintaining the positive credit trends that have been the cornerstone of strength for the organization.
Horizon's deposit portfolio displayed solid trends with core deposits remaining flat and the company electing to allow higher-priced transactional CD balances to roll off the balance sheet to improve the organization's overall profitability.
The granular and tenured deposit base remains strong and benefited the organization with Fed rate cuts during the quarter. Our fourth quarter results continue to advance the financial health of the franchise through a more productive balance sheet, delivering strong net interest income and excellent credit metrics.
As communicated previously, the organization expected the fourth quarter expenses to be elevated in select areas of compensation, benefits and third-party services.
Strategic initiatives in these areas completed in the quarter allowed the organization to restructure our go-forward cost structure, which will lead to a more efficient baseline in 2025. John will provide additional insight on this topic later in the presentation.
As I noted in my opening comments, we're very pleased with our results in the fourth quarter and the financial positioning of the organization heading into 2025.
A key part of our optimism is the positive momentum of loan growth and quality credit metrics. To provide additional insight on our lending performance, I'll transition the presentation to our Executive Vice President and Chief Commercial Banking Officer, Lynn Kerber.
Thank you, Thomas. Good morning. I am pleased to share a very positive momentum and results in the fourth quarter.
Total loans held for investment, excluding mortgage warehouse, grew $123 million, representing 10% annualized growth. Growth was predominantly in our core commercial lending segments and increased activity in the retail mortgage lending segment.
Net loan growth for the year, excluding the mortgage warehouse, was $408 million, representing growth of 9% for 2024. The net results also take into consideration, the strategic reduction of indirect auto loans, which ended the year at $294 million.
Transitioning to some detail on each portfolio, we have commercial loans highlighted on Slide 6. It was a very strong quarter for commercial lending with net loan growth of $164 million, representing 22% annualized growth.
As noted in my third quarter remarks, production from quarter-to-quarter is impacted by the timing of new production, seasonal funding on construction and operating lines and payoff activity. For the full year of 2024, our growth was $403 million, representing a 15% increase.
While the timing from quarter-to-quarter may vary, we anticipate our annualized growth rate to remain generally consistent. We continue to stay focused on our core markets, primary segments of owner-occupied and non-owner-occupied commercial real estate, traditional C&I lending and small and mid-ticket equipment finance.
Commercial credit quality is performing well with December 31, 2024, key metrics at or below peer performance. Key metrics include past due loans greater than 30 days of 10 basis points, nonperforming loan ratio declining from the third quarter ratio of 24 basis points to 19 basis points and net recoveries of $95,000 for 2024.
In addition, we observed positive migration in the fourth quarter with the upgrade and payoff of several nonperforming credits.
Turning to Slide 7. Consumer loan balances decreased $42.1 million during the quarter, reflective of our continued wind down in indirect auto lending.
Excluding indirect auto lending, core consumer loans remained flat with primary activity being home equity lending. Residential mortgage lending modestly grew during the quarter. We continue to opportunistically expand our mortgage lending team with local in-market lenders that are relationship focused and work well with our commercial and retail teams.
We expect to realize increased mortgage lending activities in 2025 through continued disciplined sales process and outbound calling efforts. Overall, credit quality remains satisfactory in the consumer and mortgage portfolios with delinquencies and charge-offs within targeted ranges.
Our asset quality metrics continue to be strong as outlined on Slide 8. Substandard loans of $43.2 million represented 0.89% of loans, reflecting a decrease for the quarter of $16.5 million. We are fortunate to have a large commercial nonaccrual payoff as well as positive migration on several substandard commercial loans.
Nonperforming loans were $27 million, representing 56 basis points of total loans that excludes mortgage warehouse this quarter. The quarterly increase was predominantly in consumer revolving bonds, which are supported by credit enhancements and residential mortgage loans, offset by a reduction in commercial loans.
The results in the fourth quarter remain within our historical ranges, and we do not expect this change to materially impact our outlook for performance in these segments.
Net charge-offs for the fourth quarter were $621,000, reflecting an increase from the most recent quarters. Charge-offs year-to-date remain predominantly in the consumer indirect auto portfolio.
Finally, our allowance for credit losses decreased by approximately $900,000 in the quarter to $52 million, resulting in an ACL to loan ratio of 1.07%. Primary drivers in the ACL components are loan growth, the elimination of the mortgage warehouse allocation for available-for-sale accounting and changes in specific allocations.
Provision expense of $1.2 million is a combination of the ACL increase, replenishing the reserve for fourth quarter charge-offs of $621,000 and a change in allocations for unfunded commitments.
Future reserve amounts and related provision will be driven by loan growth, and mix, economic forecasts and credit trends. Now I'd like to turn things back to Thomas, who will provide an overview of our deposit trends.
Thank you, Lynn. Moving on to deposit portfolio displayed on Slide 9. Horizon's core deposit balances were stable within the quarter, with the organization electing to reduce exposure to higher cost and longer duration CDs, continue its disciplined approach to deposit pricing and management's focus on creating a more profitable balance sheet.
The benefits of this strategy were evident as the company was able to reduce interest-bearing funding costs while capitalizing on the Fed's interest rate declines.
We believe the deposit portfolio is well positioned to continue to benefit the organization moving forward with its granular composition and long-standing relationships in our local markets that know and trust Horizon well.
We're pleased with the resiliency of the client base and the dexterity the team has displayed, leveraging multiple funding options while balancing cost and duration within the portfolios.
Let me hand the presentation over to our Executive Vice President and Chief Financial Officer, John Stewart, who will walk through some fourth quarter highlights and key strategic initiatives the team completed during the quarter.
Thank you, Thomas. Turning to Slide 10. Our Q4 net interest margin was stronger than anticipated, up 31 basis points linked quarter to 2.97%, driven by a few key factors.
First, our leadership teams were able to strategically redeploy the cash proceeds from the October securities sale earlier than expected with stronger organic commercial loan growth and the purposeful reduction of higher cost non-relationship deposit balances.
Second, the balance sheet mix continues to organically improve with the strategic execution aimed at driving a more profitable mix of both higher-yielding assets and lower cost liabilities.
Third, the reduction of the Fed funds rate in November and December was beneficial to the margin in the quarter. And finally, there was a lift of approximately 5 basis points related to interest recoveries on specific commercial loans.
Looking ahead, many of the accretive strategies that we have executed over the last several quarters will remain in place through 2025, and the year-end balance sheet should get us off to a nice start in the new year. With this as a backdrop, we would anticipate sequential quarterly margin improvement over the course of the year.
Recall, we still anticipate paying down $200 million of FHLB advances in late March and early April.
Importantly, as there has been a great deal of volatility in the forward expectations for Fed funds rates in recent months, following the securities actions taken in Q4 and our expectation that deposit betas will slow going forward, we believe our balance sheet is now very close to neutral in the front end of the curve.
While the current guidance includes one cut in July, we do not view short-end rate changes to be a major driver of our net interest income outlook for the year. Rather, net interest income and margin performance will be a factor of our continued strategic execution on both sides of the balance sheet.
Slide 11 provides the profile of the remaining investment securities and the projected cash flows and roll-off yields for the coming year. As it stands today, despite higher rates, we do not have any intention of reinvesting cash flows in 2025. Rather, those proceeds will be reinvested in relationship-based commercial lending, which will be economically accretive and additive to the long-term franchise value of the company.
I do want to comment on the remaining available-for-sale portfolio, which approximates $230 million at the end of the year. At this point, this book has been through a couple of repositioning trades and what remains is unlikely to yield further repositioning opportunities without a significant improvement in market prices on the portfolio.
As you can see on Slide 12, reported noninterest income included the previously disclosed $39.1 million realized loss on the sale of investment securities. Excluding that loss, noninterest income declined a little over $1 million linked quarter, primarily due to the seasonality of mortgage-related income.
Looking ahead to 2025, although noninterest income growth is expected to be in the low single digits for the year, we are anticipating continued positive momentum following our strategic investments throughout 2024 in treasury management, mortgage and private wealth.
Moving to expenses on Slide 13. As we noted last quarter, Q4 was impacted by expenses related to several specific initiatives to recalibrate our run rate heading into 2025. You can see those items detailed on the slide.
Additionally, the quarter was impacted by higher-than-anticipated medical benefits expense, higher performance-based compensation accruals given the strong finish to the year, a singular OREO property write-down and certain other accruals. In total, these additional items account for roughly $2 million to $2.5 million in the quarter, which would reconcile the reported figure back to our prior outlook.
These items will either reset to a lower level or not recur in 2025. Therefore, we feel confident in the guidance provided on Slide 16 for full year expenses, which would imply a lower run rate than Q4 results and aligns with our initial expense outlook for 2025 discussed in October.
Turning to capital on Slide 14. Again, this quarter, we were pleased to be able to show overall improvement in the company's capital ratios despite the realization of the securities loss through Tier 1.
Tangible common equity to tangible assets increased as a function of net income, excluding securities loss, which was aided by the reversal of the tax valuation allowance.
On the regulatory front, ratios improved with the realized reduction in risk-weighted assets. Going forward, further improvement in the company's capital ratios is expected given our outlook for stronger profitability and a continued disciplined approach to balance sheet growth.
Slide 15 provides an update on the strategic actions undertaken during the fourth quarter. In short, it was a busy quarter for the company, marked by the successful execution of several key initiatives, all of which were aimed at strengthening the balance sheet, improving the long-term profitability of the company and simplifying our business model to generate additional franchise value.
As previously mentioned, the securities repositioning early in Q4 is already outperforming initial expectations. Strategic tax planning efforts yielded the release of the $5 million valuation allowance, which is a direct benefit to capital and tangible book value per share. We accelerated expenses related to some legacy compensation and benefits plans, which will improve the go-forward expense run rate.
And finally, we were able to reengage with the multiple interested parties in our mortgage warehouse division and have sold the business for a gain effective January 17, which will be recognized in Q1 results. As you can see, it was a positive and productive quarter on many fronts.
That said, we will continue to diligently evaluate additional opportunities to strengthen the balance sheet and add to the long-term franchise value of the company.
Finally, turning to Slide 16. We are presenting our initial outlook for the full year 2025, which should represent a significant step forward on the path to improving profitability and continued positive momentum in our core operations. There are a few items I would like to highlight within our current forecast.
Specifically, as it relates to the balance sheet, we are anticipating growth in loans held for investment to land in the mid-single-digit range for the full year. While there is likely to be some seasonality in Q1, we are committed to the favorable remixing of the portfolio into higher-return core commercial business.
Within our outlook for loan growth, we are anticipating the continued runoff of lower-yielding indirect auto loans, which should decline by about $100 million over the year.
The warehouse balances of approximately $65 million at December 31 were carried in loans held for sale. Accordingly, we would expect the held-for-sale balance to decline by that amount in Q1.
While deposit balances can be impacted by many factors, our base case assumption is for period-end balances to grow in the low single-digit range, subject to typical seasonality, weaker in Q1 and Q4 with seasonal strength in Q2 and Q3. Overall, we are anticipating the deposit mix to remain relatively consistent.
We are still anticipating that we will pay down the $200 million in maturing FHLB advances in late March and early April. As a reminder, these funds currently cost around 4%.
Under our base set of assumptions, which includes 125 basis point Fed funds cut in July, our initial view is that full-year 2025 net interest income will grow in the mid-teens. This growth would be predominantly driven by net interest margin expansion as average earning assets could be relatively unchanged when compared with full year 2024.
As discussed earlier, we are expecting the quarterly run rate of noninterest expense to decline relative to Q4. Such that total expenses for 2025 should be flat to up low single digits relative to the reported full year 2024.
Lastly, I want to briefly comment on the updated guidance for the effective tax rate for 2025 to be in the mid-teens. This revised guidance considers a couple of key items. First, a stronger outlook for pretax income based on many of the items we have discussed thus far.
Additionally, more of the consolidated income is now coming from the bank versus the investment subsidiary previously. Both items are positive developments for the company but will yield an increase to the effective tax rate.
Second, this updated outlook does reflect management's decision to discontinue new investments in solar tax credits. While this decision will reduce the net benefit to the tax liability in the near term, we intend to invest our capital in more accretive core business growth over time, which we believe will create greater long-term value for our shareholders.
With that, I'll turn the call back over to Thomas.
Thank you, John. I appreciate the insight into the fourth-quarter activities and the positive momentum as we launch into 2025 with a more productive balance sheet and a healthier core earnings engine.
As the team has discussed today, we are very optimistic about our outlook heading into 2025. We continue to expand our client base and brand in excellent growth markets in the Midwest that are economically attractive for businesses and for individuals.
Our relationship-based banking model has momentum with strong organic loan growth and a low historical credit risk profile. The core commercial portfolio is experiencing ample growth across a diverse geography and portfolio mix and continues to deliver positive benefits as lower-yielding assets remix into higher-yielding loans.
The resiliency of our core deposit base maintains its great value with an opportunity to improve our financial performance as rates decline. Horizon has a successful track record of growing deposits while maintaining a disciplined approach to pricing. And lastly, Horizon has a lean and operating culture that consistently adapts to deliver long-term shareholder value.
We are strategically managing our balance sheet to improve our earning performance, simplifying our business model, and creating a more efficient cost structure that will deliver improved returns to our shareholders.
We see a bright future for Horizon in 2025, and we are delighted with the momentum in our core operating metrics as we enter the new year. This is the end of our prepared remarks, and I welcome the operator to open up the line for questions from our management team.
[Operator Instructions] The first question today comes from Brendan Nosal with Hovde Group.
Maybe just starting off on loan growth expectations. You're targeting quite strong commercial loan growth to get to that mid-single-digit guide while absorbing the runoff in the indirect book. Can you maybe talk about how you aim to get to that growth number while maintaining discipline on pricing and maintaining your credit box?
This is Lynn Kerber. Thanks for the question. Overall, I think in the core commercial lending, we're really looking at maintaining the same cadence that we've had mid-to-high single digits. Keep in mind that we've added in our equipment finance division in 2024. And so, we're also going to see the benefit of that as we move further into 2025.
This is Thomas. Just to piggyback on some of the comments Lynn made. Also, our markets are growing and thriving. Now being located in the Northeast part and northern part of Indiana, a lot of our franchise in Michigan, those growth markets of Grand Rapids, Southwest Michigan, Lansing, Detroit. We just have the right talent in the right places that are doing well.
So, I think a bit of it is not only in the marketplace, but also the talent we have in there. And, as Lynn said, we'll keep our credit box consistent. That has been a cornerstone of our franchise for a while.
One more for me on capital. It looks like you'll be building quite a fair bit of capital across 2025. Just wondering what deployment plans are at this point. I mean it feels like it's probably tough to do more on the security side of the equation given the HTM shield in place. So just wondering if you would consider repurchasing shares or if there's some other outlet for what you'll be building organically.
Thanks, Brendan. Great question. You're spot on, on that. We've been very disciplined in our approach to capital deployment. The last 2 times, we've been able to go back to our securities portfolio and harvest some great opportunities for our shareholders to create long-term value there.
As we mentioned in the deck, we don't think there's a lot of opportunity still in the available for sale right now. As we showed in our quarterly earnings, our earnings engine is considerably different '25 going into '25, it's stronger. It's going to create more stable earnings and also build our capital base.
As we look at that, it's going to give us more flexibility and options to deploy the capital hands down, stock buyback will be one of those. And just for reference, we have about 1.1 million shares authorized for buyback at this time.
The next question comes from Terry McEvoy with Stephens.
Maybe to start with margin, a lot of balance sheet activity in the fourth quarter, and that 2.92% core NIM, John, I wonder if you could just help us understand maybe where that was at the end of the year. And then your comments on margin expansion in 2025. Can you just maybe rank order the drivers between FHLB payoff, deposit repricing lower, and then growth in the commercial portfolio? What will be the driver of that expansion?
Terry, thanks for the question. Yes. So, you're right, there's a lot of activity in Q4. If you peel back the impact in the month of December from some of the interest recoveries that we did experience, the exit run rate on margin was in the low 3s, 3.03% was the margin for December.
As I noted in my prepared remarks, we do anticipate that there will be some sequential improvement over the course of the year in 2025, such that best estimate with the balance sheet changes that we've been forecasting that are implied in the guidance, exit run rate as best we can see now kind of in the 3.15% to maybe 3.20% range.
So, you can see there's some sequential improvement there. As we noted last quarter, so kind of go back to that conversation, reiterate that this quarter, the benefit of the FHLB advances kind of mid-single digits accretive on a basis point basis in the second quarter. That's just the reduction of cash to pay off those borrowings. So very, very minimal spread there. So as that comes off, that's going to be accretive.
The balance, Terry, is really going to be a pretty even distribution of just the improvement in the earning asset base and the liability mix over time. But, as I mentioned, Lynn talked about some good commercial loan growth over the year, the indirect auto runoff, that helps. That is quite accretive, the net change for those 2 assets.
And then on the liability side, we'll see what the Fed gives us in terms of rate cuts but that will kind of determine how much liability cost we end up pulling down. So, I think it's going to be more a function of mix on the liability side.
And then just as a follow-up, the warehouse gain in the first quarter are there incremental strategic actions that you expect to maybe offset that gain? Or will it fall to the bottom line? And I guess I should ask, is there a reserve at all on that warehouse? Or is it relatively small?
As Lynn mentioned in her prepared remarks, the reserve, we did carry a reserve against that. It was released when we migrate that over to held for sale. You don't carry the reserve against the held-for-sale balances. That was released in Q4. So, there is none going forward. And I'll let Thomas address the gain.
Currently, at the gain, the gain is going to be recognized in the quarter. We do not have strategic actions to deploy the gain. If something comes through the quarter that we believe is accretive to our shareholder value long term, we would. But right now, let's just take those add to our capital base.
The next question comes from Nathan Race with Piper Sandler.
Just going back to Terry's question around the margin cadence over the course of this year. John, I just want you to clarify that. It sounds like more of the expansion that you expect this year is maybe going to be weighted towards the first half of the year, just given what you'll be doing in terms of paying down some wholesale sources?
Yes. I would expect it to actually be fairly ratable over the year. We will get a little bit extra in Q2, all else equal, just from the reduction of the $200 million cash coming down, yielding kind of IOR today, 440. We're going to pay off those borrowings.
But those costs 4% today, replacement cost is actually higher than that if we were to just go back into the market for the same term. So, you'll get some margin lift just by the effect of the $200 million reduction there on both sides of the balance sheet. But otherwise, I would anticipate it to be fairly ratable.
And then maybe a question for Lynn. Just curious what you're seeing in terms of new loan pricing today maybe on a blended basis across the portfolios. And just curious what you guys have in terms of loans that are fixed rate that are also maybe having some repricing over the course of 2025 in terms of how that suggests the trajectory of loan yields are going to unfold this year?
Sure. I will start first with the core commercial team. We generally will price off of the T-bills and prime and SOFR our primary indexes. We are continuing to see some emphasis on floating rates right now as our customers are just kind of looking at the rate environment and deciding whether to fix or not.
But generally, on fixed rates, it could range anywhere from the high 6s into the 8s, depending on the credit quality and the term. So, I would say that, that's been pretty stable and just kind of a dynamic correspondence to the rate environment as a whole. So rates move, we're going to see some reduction there.
On the leasing side, we would expect that to be higher for our small ticket leasing. Middle market tends to follow our core commercial rates. On the leasing side, small ticket through November into December, we were seeing those rates an average of 7.5% up until the high 8%.
So again, depending on the credit quality, the type of financing. So obviously, we're getting a bit of a premium on the leasing.
I think the second part of your question, this is John, the runoff yields, scheduled cash flows and maturities, normal amortization, so absent any prepayment activity in right around 6% for the year.
Slides are in the deck in the appendix on our CRE maturities. And for 2025, we have about $139 million that's under 7% right now. And so, that will reprice. And then for 2026, we have roughly $161 million that's less than 7%.
The next question comes from Damon DelMonte with KBW.
Just wanted to circle back on the commentary around expenses to make sure I follow this correctly. So, John, did you kind of when you backed out the strategic initiative expense and then some of the other items that are probably not recurring that occurred in the fourth quarter, are you implying that kind of like a third quarter level of a little bit over $39 million is a good starting point for a quarterly run rate? Did I hear that correctly?
The short answer to that question is yes, but maybe we'll just take a quick look at that Slide 13, just so we're clear in talking about the same thing.
So reported expenses $44.9 million. You see the 3 bullets that we summarized there for you which very clearly are related to some of the strategic actions in the quarter that will not carry forward. That's $2.9 million. That would get you down to about $42 million.
And then the last bullet, the additional items. Those are part of your normal run rate, your compensation expense, your medical benefits expense. They were just elevated in the quarter and relative to what we anticipate on a go-forward basis in 2025.
There were also some episodic items in there that otherwise might not have been anticipated in the original guidance. But if you back that out, as I mentioned, there's $2 million to $2.5 million worth of those in there. And so, that would get you right down to that range, $39.5 million to $40 million, Damon, that you just mentioned.
And then just to circle back on the commentary around the margin. I think you had mentioned kind of a 3.15% to 3.20% level. Was that for where you think you would exit '25 based on kind of what you see the opportunities are in front of you? Or is that more in the first half of the year?
No. My commentary there was, that's where we anticipate the fourth quarter generally landing just given some of the balance sheet movements that we're projecting with the guidance.
And then I guess just lastly, very strong credit trends, you're going to be growing loans pretty steadily here in the commercial area during '25. What are your thoughts around the loan loss reserve level? I think it was 107 this past quarter, kind of been in that range for the last 4 or 5 quarters. Do you still feel comfortable with that? Or do you feel like you might need to grow that a little bit more just given the commercial growth?
Yes. Thanks for that question. As I've remarked in prior presentations, there's really a couple of key drivers on the allowance, loan growth, loan mix, the economic forecast and then not just credit quality and charge-offs.
So, to answer your question, loan growth is going to be a primary driver. But I would also say loan mix as our balance sheet has been recalibrated in some of the categories, particularly running down the indirect car loans, those are higher loss rate and that's where we've experienced a lot of our charge-offs. And so, as that mix continues to change, we're going to see the results of that in the reserve.
Credit quality has been very stable. And so, I don't expect that to be a factor at this point. Our net charge-offs have been very consistent for the last several years. As we run down that indirect portfolio, I would expect our charge-offs would also move that direction. So I think at this point, the outlook on it is relatively stable.
The next question comes from David Long with Raymond James.
In 2024, you mentioned this, you added the equipment finance division. As you look out to 2025, are there any other lines or commercial areas where you'd like to add? And are such hires considered in your operating expense outlook for the year?
Thomas, thank you for the question. I wouldn't say we're going to strategically change the profile of our portfolio lending portfolio this year. We made some great investments last year in equipment finance, some key hires in some markets. I'd say we're pretty stable from an FTE count going through '25.
I would say '25 is going to be a year that we just benefit from the investments made in late '24. Equipment finance still, if you go back and look at it I know we've been talking for a couple of quarters here, it literally started the really kind of the end of the first quarter of last year. So we have a lot of runway in front of us there. And again, we have the right people in the right markets going into '25.
And then my second question relates to deposits. Just curious what you're seeing on the ground from deposit competition. Are you seeing rational competitors out there? Or do you see still some aggressive pricing? What is the market like in Northern Indiana and Southern Michigan?
I appreciate the question. I think it takes everyone a little bit of time to react to Fed moves. So having just having Fed moves in December, I think it's a little too early to say whether or not there's rational pricing out there.
I think you've seen from our balance sheet performance here coming ending Q4 and going into Q1, we've been able to navigate what is kind of a fluid landscape out there.
There's always individuals who have some type of need and desire to build their balance sheet from a deposit standpoint, whether you're in Northern Indiana or for Michigan. But I'd say for us, we've been able to navigate that 3 ways. One, we have a great branch distribution of 70 local branches, which I think gives us a competitive advantage that are really good at harvesting deposits.
Our commercial team is truly a relationship banking team that as they get new relationships, it's both sides of the balance sheet. And then as I said before, the investment we made over the last year with about 40% more treasury management people on the ground actively going after our commercial clients and also just regular clients out there have excess deposits, I think, helps us navigate that.
But I anticipate we'll always have a little bit of rational pricing in the marketplace, but our positioning and the talent we have in the marketplace helps navigate that.
The next question comes from Brian Martin with Janney Montgomery.
Just one, John, just on the tax rate, is that pretty ratable throughout the year? I guess is there any lumpiness in that as we think about the new rate getting reset just given the buildup in earnings throughout the year as you benefit? It seemed like that was pretty ratable. So just tax rate is pretty similar then?
Yes. Thanks for the question. Yes, so that's based on our projected numbers for the full year. You'll see it step up here in the first quarter. And then all else equal, would remain right in that mid-teens level for the full year.
And then just on the capital, you mentioned the one item being the potential share repurchases. Is there anything else, I guess, that you'd be considering on the capital side, I guess, in terms of potential M&A, is that also on the Board as far as the consideration given everything you guys have done organically, there seems to be a lot of momentum there without doing M&A, but just trying to understand the capital build here and where the uses of that are.
Yes. I would say, this is Thomas, M&A is definitely on the radar for us. It has to be the right strategic size and location and make what I'll just call logical sense from a geography standpoint, mechanic standpoint.
As you said before, I think we're more attractive as we move into '25 and '24 for potential partners who can see the upside in our stock that's going to happen.
And in terms of what would interest you, Thomas, can you give us some broad parameters on M&A? If you did consider M&A, kind of what's important in whether it be size, geography, whatever you could disclose or provide there?
Sure. I think everyone starts with cultural fit first to make sure your business models align well. Infills for us in our natural growth markets of Southwest Michigan, Eastern Michigan and also Southern Indiana would be fantastic. And again, the size would that be appropriate for us, that would be something that would be logical that wouldn't be too much of a stretch.
But again, M&A is a 2-way dialogue. There needs to be a seller and a buyer, but we're out there in the marketplace entertaining conversations, and we'll see where they go.
And then maybe just one last one on the commercial side. It sounds like there's still that $100 million in the indirect portfolio as far as kind of redeploying. Are there any other places in the loan portfolio that you guys see room for changes? Or is it really that $100 million and then it's just organic growth on the commercial side is the focus and how we think about loan growth going forward?
Yes. Our focus is really on our organic engine. As Thomas mentioned, we have a very talented team in some very strong attractive markets. We have invested in some hires over the last few years and augmented a couple of our teams over the last 1.5 years.
We do have capacity within those teams. And so, we're really focused on our core business segments. As you can see from the information in the deck, we've had a pretty consistent array of business with roughly 25% to 30% C&I and roughly 45%, 50% nonowner-occupied and the balance in owner-occupied business. That has been very consistent quarter-over-quarter, and I don't expect it will deviate from that.
And Lynn, I don't know if you commented on the pipelines, but just the pipelines. And then can you remind us where the equipment finance kind of where they ended the year and just kind of their outlook for continued growth in '25, what that might look like?
Sure. For 2024, the Equipment Finance division contributed roughly $140 million to our production. I would say 60% of that was small ticket origination and then 40% of it was middle market.
We did purchase a couple of very small portfolios at the beginning of our launch just to get some earning assets on the books and through syndication. But the vast majority of it is small ticket at this point, and that continues to be our focus.
So, based on their run rate, they did have a very strong fourth quarter, particularly December. That's pretty typical in the equipment finance business as businesses are making purchases right at year-end. But as we move forward into the next year, we're really targeting $150 million, $175 million is our goal for next year.
And basically, so kind of double the growth, reproduce the growth you had this year in terms of on the equipment finance side.
Yes. We really focus on our monthly run rate that we've experienced over the last 6 months. And so it's really a continuation of that. I don't consider it to be a major expansion. It's just going to be an organic run rate from what we've had this year.
And then just the commercial pipeline kind of you usually give a little color on just kind of where that's at today, and that's all I had.
Yes. Thank you. As I mentioned in my prepared remarks, it's chunky from quarter-to-quarter sometimes. And we experienced that in the second and fourth quarters this year. Third quarter was a little muted just based on timing.
I don't expect that run rate to significantly change, not the fourth quarter run rate, but the annualized run rate. And so, while it may vary from month-to-month, quarter-to-quarter, if you look at our annual run rate, I would say that's a good predictor for 2025.
This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.
Thank you, Betsy. I appreciate that. Again, thank you for participating in today's earnings call. We truly appreciate your time and your interest in Horizon. As you can see, the team had an extremely productive fourth quarter, and we have great momentum in our key earnings metrics heading into 2025. We thank you again for your attendance today, and we look forward to sharing our first quarter results in April.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.