Welcome to the Horizon Bancorp Investor Day. management may periodically reference the investor presentation that will be broadcast throughout today's event. This presentation, along with a replay of this event, will also be available on the Investor Relations section of horizonbank.com. Before turning the event over to management, please remember that today's call may contain statements that are forward-looking in nature. These statements are subject to risk, uncertainties, and other factors that could cause actual results to differ materially from those discussed, including those factors noted in the investor presentation prepared for today's event. Additional information about factors that could cause actual results to differ materially is contained in Horizon's current 10-K and later filings. Portions of today's event have been prerecorded. Therefore, Q&A relating to prerecorded portions will be available during the live portions of today's event.
The company assumes no obligation to update any forward-looking statements made or presented after the date on which the forward-looking statement is made. In addition, management may refer to non-GAAP financial measures, which are intended to help investors understand Horizon's business. Reconciliations for those measures are contained in the company's most recent quarterly financial results news release. In addition to presentations and prepared remarks by Horizon executives, Investor Day will include two Q&A sessions with management. Please use the form on the webpage below the video player to submit your questions. You may begin submitting now during the presentation and during the live Q&A sessions themselves.
If you have any difficulties using the Q&A form, please submit your questions via email to HBNC@lambert.com. Again, the address is Horizon's ticker, HBNC @ L A M B E R T dot com. Now, at this time, I'd like to turn the call over to Horizon's Chairman and CEO, Craig Dwight.
Hello, and welcome to Investor Day. today, you'll hear from our leadership team on what we believe will be a very exciting and productive 2022. I would like to start out by stating, at Horizon, we believe that we earn the right to be independent every single day. This simple philosophy has been a key driver to achieving approximately 18% annual compounded earnings growth rate over the past 18 years. Now, let me refresh your memory on Horizon's footprint. Horizon's footprint is diverse, has a stable economic base, and expands from Columbus, Indiana, south of Indianapolis, north through the Michigan state line, and includes Western, Central, Northern, and Eastern parts of the Lower Peninsula of Michigan.
We remind you that Horizon's expansion and growth has occurred on the right side of Chicago in colleges and university towns and in state or county governmental seats in Indiana and Michigan. Therefore, a majority of our footprint has an economic base that is traditionally more stable than other areas of the Midwest. Our recent branch acquisition continues our expansion theme and increases our presence in college towns. In eight of the 11 counties where the acquired branches are located, Horizon is top 3 in deposit market share. In addition, Horizon remains positioned well to take advantage of the outbound migration from Illinois, which continues to increase as consumers and businesses exit high taxes, increasing crime rates, and the high cost of living. Both Indiana and Michigan continue to show improving economies as evidenced by low unemployment rates and an increase in total workforce.
Both states are ranked in the top 7 for manufacturing workforce and creation of Internet of Things, which positions the states well for future growth as companies revisit their supply chains and develop new sources closer to home or move towards increasing their vertical integration. Going into 2022, Horizon will continue to capitalize on the market disruption taking place in Michigan, the infrastructure investments being made by private and public sectors to expand quantum computing capacity in the Chicago-South Bend to Lafayette corridor and faster commuter train lines from Chicago into Northwest Indiana. In addition, you will hear how Horizon's technology investments for the past several years have improved efficiency, enhanced the customer experience, and helped to expand our market reach.
Looking through the end of this year in 2022, we intend to continue the momentum that started to accelerate in the third quarter with some specific growth targets for next year. For commercial loans, our team has taken advantage of the Michigan market disruption by hiring additional commercial lending officers for an approximate increase of 20% in loan officer headcount. All new hires are seasoned bankers with big bank experience and intimate market knowledge. We started this recruitment effort in December 2020, and it's already starting to show progress in our growth markets. Adding to the strength of people is Horizon Bank's loan pricing competitive advantage related to the current branch acquisition, which was deposit-rich. Excluding PPP lending, we are targeting 10% commercial loan growth in 2022.
You'll hear from Dennis Kuhn today about how and why we expect to achieve that, as well as Lynn Kerber on how we intend to maintain the excellent credit risk profile we have in our commercial book. For mortgage loans, Horizon's production has historically been directly aligned with Mortgage Bankers Refinance Index, as published by the Mortgage Bankers Association, which is currently forecasting a 30%-35% reduction in mortgage volume in 2022. The good news is Horizon fully expects to beat the Mortgage Bankers Association's dour mortgage loan production forecast, with originations down just 15%-18%. Today, Jim Neff will be providing details on our business expectations for that business line. Due to the anticipated increase in interest rates next year, we do expect a decline in gain on sale of mortgage loans.
However, this will be partially mitigated by a pickup in mortgage servicing income and mortgage servicing rights valuation recapture. It should be noted that on a normal run rate, Horizon's revenues from mortgage loans is less than 10% of total revenues. For consumer lending, as a result of consumers starting to spend through their stimulus monies and the pent-up demand for upgrading cars, we are seeing an increase in consumer line of credit utilization and an increase in car loans. Given the low unemployment rates in our markets and wage inflation, we expect consumer spending to continue through 2022, which bodes well for the consumer loan growth. The consumer lending team is reporting year-to-date record production on home equity lines and an expansion of our dealer network in our new Michigan markets for in-market car loans.
Horizon has the capacity to handle this growth without an increase in staff due to our prior investments in technology. Consumer loans are positioned well for growth in the mid to high single-digit range in 2022. Knowing Noe Najera, we'll be filling you in on the excellent opportunities in that business in the quarters ahead. During these times of low interest rates, Horizon's focus is to increase net interest income dollars through leveraging our capital and low-cost deposits to investments and loans. Horizon has approximately $1 billion in additional earning assets going into the fourth quarter as compared to the third quarter, which will increase net interest income. The direction of Horizon's net interest margin is expected to decline for 2022 as the mix of assets has shifted to higher-level investments versus loans.
However, we are targeting growth in net interest income dollars based on our leverage strategy. Consumer loan yields are expected to hold steady, if not increase, and commercial loan production is expected to continue at or below current portfolio yield. Horizon fully expects our expenses to average assets to decline below 2% in 2022 as a result of branch closures, improved operating platforms to increase productivity, and leveraging capital. The third quarter's operating expenses were at 2.09% of average assets, which is a reduction from 2.18% from the second quarter. Horizon continues to focus on operational efficiency and leverage, and the results are proving to be successful.
As a result of the aforementioned, Horizon expects return on average assets to exceed 1.20% in 2022 and return on average equity to exceed 12.5%. Now turning to our Michigan branch acquisition. The total deposits assumed and loans acquired were lower than Horizon's initial announcement. However, the financial aspects of the transaction are more favorable. You'll hear from Mark Secor shortly that Horizon expects our tangible book value dilution earn-back period to be substantially accelerated as a result of lower goodwill and higher forecasted earnings. In addition, the risk profile of this transaction is considered low due to long-term tenured deposit base with an average deposit life exceeding 10 years. In addition, we acquired a well-diversified loan portfolio with 50% consumer and mortgage loans and 50% commercial loans.
The acquired commercial loans are considered primarily small business loans with an average loan amount of $137,000. Kathie DeRuiter will be sharing details on the branch integration today. Horizon's 10 branch closures on August 27 continued to perform as modeled with approximately 2.2% deposit runoff through the first two months of closure. The lower runoff is a direct result of retaining the branch personnel and reassigning them to other high-performing branch locations. The retention of the branch personnel was for the purpose of providing additional support for the branch integration. Retention of customers and maintaining seasoned bankers were hard to find in the current tight labor market. Through normal attrition, we do expect to be at a normalized headcount within the next 12 months.
Now it's time for our team to provide you with details supporting our 2022 outlook and key aspects of our business, and that gives us continued confidence and optimism going into next year. Our next presenter is Horizon's Executive Vice President and Chief Financial Officer, Mark Secor. Mark?
Thank you, Craig. We appreciate this opportunity to update our investors on a number of fronts, including the financial effects of the positive changes we made to our retail branch network in 2021. Specifically, the 10 branches consolidated on August 27 and the Michigan branch acquisition completed on September 17. I'll start with the consolidation of the nine Indiana branches and the one in Michigan. As previously disclosed, the cost savings are not anticipated to materially impact the near-term income statement due to offsetting investments we are making, particularly in digital and technology. We offered all employees from these branches new positions within the bank, as we knew we would need staff to assist with integration of the acquisition as well as fill open positions.
About two-thirds of these employees have stayed with the company, moving to branches with more attractive growth and profitability potential, as well as our communication center. This truly has been a win-win both for employees coming from the consolidated branches and for the bank, as we offer new opportunities to proven Horizon professionals in a competitive labor market. With normal attrition rates, we expect the overall company workforce to be right-sized within 12 months of the consolidation. Other cost saves from the branch consolidation will come over time as we liquidate fixed assets. We were already successful in selling four of the 10 properties before September 30th and moved the remaining six to bank-owned real estate using their appraised value, less selling costs. Minimal write-downs were taken on these properties and were included in the third quarter results.
We anticipate that as cost savings are realized over time, they will help mitigate expense growth as we continue to invest in technology, additional talent for growth and digital initiatives. Moving to our acquisition of 14 branches, we are very pleased with this strategically and financially attractive extension of Horizon's low-cost deposit franchise in Michigan, where we have been operating since 2002. With our May 2021 deal announcement, we initially expected to assume approximately $976 million in deposits and approximately $278 million in loans. At closing, we ultimately acquired $846 million in deposits and $215 million in loans. The deal was priced at just 1.75% of deposits, so the initial value of $17.1 million came down to approximately $15 million.
We believe favorable closing adjustments made the deal even more financially compelling than when we announced it in May. Starting with the total interest cost of deposits, we originally anticipated 8 basis points when the actual is just over 5 basis points. That more than offset a 3 basis point drop in the loan yield to 4.19% for the loans acquired. There also were fewer investments purchased with the liquidity from the deposits, but the investment yield we achieved was 2.06% or 56 basis points higher than our initial estimate. This additional interest income from the investments made up for the lower earning assets. We also adjusted our deposit runoff estimates. In May, we estimated a 15% initial runoff plus another 20% runoff due to surge deposits from the federal stimulus programs for consumers and businesses.
As we have seen the deposit trends for these accounts and the industry, we are now reducing our runoff estimate to an initial 10% plus another 10% for the surge deposits. Maintaining more of the deposit base over time will generate more long-term value from this transaction, and ultimately, we may find that our new and lower runoff estimates are still too conservative. Given closing balances lower than we announced, but being offset by the higher investment yield, we continue to expect the 2022 EPS accretion of 17%. This is unchanged from May. Today, we are updating our tangible book dilution expectation from the 5% we shared in May to 1.6% at day one. Rather than two years, we now estimate a tangible book value payback period of less than one year.
The key driver to the shorter payback was the core deposit intangible created at just under $1.6 million and the goodwill created of $4 million. The actual intangible assets created are approximately a fourth of what was originally estimated. The internal rate of return estimated we shared in May of approximately 21% is now expected to be about 29%. Another update is the amount of cash we now expect to push down from the holding company to the bank, which is significantly lower than we estimated in the spring, giving meaningful increase to retained earnings and capital levels in the second and third quarters, as well as actual deposits acquired at close. In May, we indicated that we would need to capitalize the bank with $60 million of cash from the holding company to maintain our target capital ratios.
Now we anticipate only needing to add approximately $20 million of cash to the bank from the holding company to maintain targeted capital levels. This provides the company more cash as future opportunities arise to create shareholder value. Even after pushing the cash down to the bank, our strong cash position at the holding company represents approximately 12 quarters of the current dividends plus fixed costs. The improving economy and the success of our efforts to compete in our new and established markets may allow us to redeploy acquired liquidity into loans faster than we have modeled, providing even further accretion upside for this well-priced acquisition and its low-cost core deposits. We are very pleased with where we stand on this transaction, not only financially, but in terms of strategic and operational fit.
For an update on the integration and our retail franchise overall, it is my pleasure to introduce you to Kathie DeRuiter, Horizon Bank's Executive Vice President and Senior Operations Officer.
Thank you, Mark, and hello, everyone. To build off the successful financial outlook that our Michigan branch acquisition brought to Horizon, today I would like to share a behind-the-scenes look at the mechanics of this transaction. Horizon successfully completed the conversion of 14 Michigan branches at close of business on Friday, September 17, 2021. This deal marks Horizon's 15th acquisition in the past 20 years, with eight of those 15 taking place over the past five years. What makes Horizon a preferred partner for mergers and acquisitions? Horizon is experienced. Our bank values and understands the importance of the trusted banker role and the impact of change on the acquired customer base. Horizon is nimble. As an in-house core processor, we require very little dependency on outside vendors or professional services to complete data conversion and integrations. Horizon's core conversion team is experienced.
Our operational team has been with the bank through all 15 acquisitions. Our team is seasoned. Professionals provide the foundation of the data conversion with an innovative edge. As technologies progress and change, Horizon has added members with specialized skills, increasing the skillsets of our talent pool and the diversification of our team. Horizon is proactive and collaborative. Given the nature of the DOJ-mandated divestiture, the seller had a very aggressive timeline. We believe one of the factors that made Horizon an attractive buyer is the fact that we have limited to no reliance on outside professional services. With our strong reputation as a proven successful acquirer, Horizon emerged as the premier partner that could meet the challenges of the complexity of this particular transaction while maintaining our community bank vision. Horizon values employees. Horizon recognizes that acquisitions aren't just about acquiring customers and accounts, but acquiring and retaining talent.
Horizon's commitment to people-first continues to play out in our acquisition strategy. To ensure a seamless service, we provide extensive training to acquired employees and surround them with significant on-site team of Horizon veterans. In this particular transaction, we allocated almost 15% of high-performing retail advisors to on-site support roles, ensuring success for both the customer and the new employees. Our team of on-site advisors also included our video bankers. Horizon installed a fleet of 14 interactive teller machines before Monday, September 20 opening as Horizon Bank, affording customers additional outlets for personalized video banking assistance and extended hours of service. Horizon understands the pain points for acquisitions for customers. We proactively address growth capabilities for critical systems that support customers, such as online banking, debit cards, live chat, and phone support.
We created new support tools, including chatbots, specifically designed to use for our converting customers, workflow tools for boarding complex treasury management customers, and expanded our data warehouse to provide easy, immediate access to transaction data from the seller up to and including 9/17's close. Horizon also operates three bank-owned communication centers with our advisors who are well-trained and fully prepared with consistent responses for what we knew would be common customer questions. We also designed a customer response system that was supported by more than 10 times the number of advisors in our normal staffing model. All allowed us to maintain acceptable wait and response times.
Because a branch deal has the added complexity of not acquiring routing numbers, we ensured that replacement checks and debit cards were in the hands of our new customers prior to conversion weekend to ensure that they would have uninterrupted access to their funds, even as they were being converted from the seller to Horizon. Horizon is customer-focused. From the moment a customer begins their journey with Horizon, we want them to feel the value proposition that our community bank has to offer. We're big enough to serve them but small enough to know them. Horizon understands English is not the first language of choice for some customers. To that end, Horizon supports live chat, phone, email, and video banking with English and Spanish staffing. In communities where there's a large population of bilingual residents, we have opened bilingual branches to better serve those customers.
Understanding what our customers may need and being able to consolidate massive amounts of information into action plans that are meaningful, productive, and appreciated is our objective. That is why Horizon has made substantial investments in our data assets, including the continual enrichment of our data warehouse, so that we may create a single point of reference for customer relationship management. Horizon invests in digital engagement. The acquisition of Salin Bank in 2019 with nearly $1 billion in assets not only provided expansion in the growing Indianapolis market but also allowed us to acquire a proven and tested video banking team. We have seen the value of this technology. We are wholeheartedly embracing this valuable tool across our network and, most recently, in our new Michigan market.
The staffing leverage we gain from utilizing a centralized business unit to serve multiple markets, while at the same time providing customers with extended hours of service, is a win-win for everyone. To that end, Horizon has continued to invest in the expansion of video banking. In 2022, we will begin the revamping of our current drive-ups, eliminating the outdated tube system, speeding up transaction turn time, and allowing us to reallocate current drive-up staff for other customer-related sales and service opportunities. Our video bankers already experienced in customer service, transaction processing, and risk assessment made them the ideal candidate for rolling out our online deposit account opening platform in 2020. In 2022, Horizon will continue to enhance our online deposit suite to include time, IRA, and health savings accounts. Live chat is another platform within our digital banking division.
It allows us to leverage the power of automation to enhance the customer's experience. Our target measurement for bot success is 85% of all interactions may be satisfied without agent escalation. We continuously monitor trending topics and perform intent analysis to ensure that our bots are able to field natural language questions and direct customers to appropriate answers or resource. Year to date, we have had over 300,000 successful chat interactions to meet our customers' inquiry needs, which is an increase of 300% in usage compared to prior year. Additional leverage from the investment in live chat will be gained in 2022 as we leverage the underlying natural language search engine on new bots designed to provide training and support for Horizon advisors that need to find a particular definition, a procedure, or form.
Horizon is committed to continuous investment in our online banking platform as we recognize that this is often the single point of interaction for many customers. Therefore, chat, online account opening have been incorporated into our online banking platform using API integration. Along with many other services, we are currently considering licensing our provider's SDK to be able to increase our speed to market with other integrations. Why choose in-house development versus the third-party CRM platform vendor? Horizon's objective is to remain nimble and be able to avoid being beholden to vendors' implementation constraints. We have made strategic talent acquisitions to support customization and data integration. Our in-house data warehouse allows Horizon to harness data from phone, email, online banking, marketing campaigns, authenticated chat, and pair that with transaction analysis from our in-house core to better understand and anticipate customer needs.
While we already use our data warehouse for targeted market, in 2022, we plan to focus on using it to expand customer segmentation and profitability models. Horizon embraces change and cooperation. Perhaps Horizon's greatest strength is our culture. As an acquiring bank, we are energized by change and culturally celebrate an environment of team spirit and cooperation. We recognize and respect the interdependencies we have on one another for achieving our goals of providing exceptional service and developing generational loyalty with our customers. We recognize that through the preference of accessing one's bank may differ by generation, each still shares a common desire for a trusted professional banker who knows and understands them. Phase two of our digital transformation is leveraging our digital banking tools inside our brick-and-mortar branches.
In 2022, our retail team will be able to open accounts using the same online account opening tool that customers applying online use. Using tools and partners like Nintex, Foxtrot, and Nautilus, we are designing workflows to automate Horizon advisors' manual tasks, such as ordering debit cards, auto-enrollment in online banking, selecting eStatements, auto-payment, and overdraft protection preferences, and establishing virtual wallets, all while reducing the costs, waste, and inefficiencies of paper disclosures that most customers now prefer to receive electronically. These automated workflows alleviate many manual tasks from operations as well by sending direct updates to our core and automatically indexing account opening and maintenance documents into our documentation retention platform. These digital convenience, without question, will be a tremendous boost to overall process efficiency.
Most importantly, these tools provide our bankers the most valuable advantage of all: targeted current information and more time with our customers to interact and listen. When customers come into our lobbies, whether they are virtual or brick-and-mortar, Horizon wants to be their trusted financial consultant, able to anticipate customers' next need. Whatever the financial need, loans, investments, IRAs, complex treasury management solutions, Horizon wants to be customers' first and only choice. To be sure, Horizon is a community bank that is proud of its 150-year heritage and deep community roots. At the same time, our board, management team, and workforce has embraced digital tools and technologies to remain a leader in customer experience and efficient operations.
Our size, speed of decision-making, and genuine understanding of the customer has consistently enabled us to stay steps ahead of our local and regional competitors on multiple fronts, including financial technology and digital banking. We may not look like we did 100 or even 10 years ago, but our community banking mission has not wavered. With that, I'd now like to turn it back to Craig for a question-and-answer session.
At this time, we will begin our first question-and-answer session. As a reminder, please use the form on the webpage below the video player to submit your questions. If you have any difficulties using the Q&A form, please submit your questions via email to hbnc@lambert.com. Again, the address is Horizon's ticker, HBNC, at L-A-M-B-E-R-T dot com. For our first question, Craig, can you share some thoughts on how the local economies in the Indiana and Michigan regions you serve are generally faring now? Any details on wage inflation, labor shortages, supply chain disruption, or other trends that might distinguish your regions from others?
Well, yes. Thank you for the question. First of all, as a reminder, the locations where Horizon Bank has our offices, they're more robust than most of the Midwest markets. For example, our unemployment rates are trending lower than the national average, which is currently 4.6%. In several markets, the unemployment rates are below 4%. Regarding wage inflation, we're seeing wage inflation throughout all of our footprint due to a shortage of labor. Recently, some banks have announced an increase to $19 an hour for their minimum wage. Horizon is still at $15 an hour, which we think is a pretty good starting wage, and we can hold that, we believe, throughout 2022. However, it is getting more challenging.
From our customers' perspective, we're seeing wage inflation across the board due to shortage of labor, and that is expected to continue throughout 2022.
For our next question, what are your thoughts on loan and deposit pricing in your markets in the coming quarters?
Yeah, I'll turn that question over to Mark Secor. Mark?
I'll take the easier part first on the deposit pricing. With the continued liquidity in the market, we are not seeing competition for deposit pricing. We don't anticipate seeing deposit pricing change and hope to continue to see a little more trickle off from the CD portfolios maturing. Loan pricing, we are starting to see a little more leveling off of the loan pricing as we're starting to see new pricing tracking better with the portfolio yields. For deals that are very competitive, with all the liquidity, we are willing to look at pricing as part of the competitive advantage.
If I could jump in there. We believe we're at the bottom of our commercial loan pricing. The yields that we're putting on the books are about 3.60% versus our current portfolio yield just a little bit above 3.60%. We think we're getting to the bottom of yield compression.
Our next question is from Terry McEvoy at Stephens. Can you give us an update on your recent branch deal in terms of client retention, new client growth, and other opportunities in these new Michigan markets?
Well, Terry, thank you for your question. We're very pleased with the retention rates in our new branch transaction. Through the first three months, our deposit roll-off or runoff is running about 5% or about a little over 1% per month. In our 15 acquisitions prior to that time, we averaged about 10%-12% total deposit runoff. We're on pace, much better than what we anticipated back in May when we announced the transaction. Anything else you want to add, Mark?
Some opportunities as Noe commented or will comment. We're seeing some additional benefit from the indirect market with picking up dealers. We have lenders in the market, so we are seeing some very positive results from that activity.
Another question from Terry is: In Horizon's markets, what are you seeing with sellers' expectations on pricing in bank M&A?
Terry, again, thanks for the question. I believe sellers' expectations are probably more driven by the buyers' currency, and the currency values for the buyers have increased considerably over the last 12 months, so we have brought ourselves closer together. That's probably why you saw so many acquisitions announced in 2021. We expect that pace to continue in 2022, especially when some of the smaller banks see margin compression with little opportunity for growth.
Next question, turning to 2022. Regarding how wage inflation could impact expenses, deposit growth, strategy around managing excess liquidity, interest rate positioning or NIM outlook, assuming short rates rise, you know, impact on areas across the bank for loan growth and fees as well?
That covers all the non-interest expense categories, so thank you, Terry, for the question. Regarding wages, I'll take that one. I'll turn over the other issues to Mark who will provide some more detail. We're expecting a 3%-4% increase in compensation next year, and part of that is to make sure we're competitive in the marketplace to retain top talent. That would be the outlook for the compensation, probably 3.5%-4%. Mark?
Yeah. We continue to see liquidity holding. The deposits continue to hold and even some growth, outside of the municipal markets. We anticipate this liquidity is going to stay. We are looking for opportunities. We anticipate seeing loan growth next year that will use some of the liquidity. We will look to see if we need to continue to put anything into the investment portfolio, because as we've stated for several quarters through this, that we're gonna be focused on net interest income and growing net interest income so that we can continue to leverage the expense that we have.
The next question is, in the markets where you undertook branch consolidations, what has the client attrition been, and is there more to come?
Well, there's always deposit runoff in any acquisition. As I mentioned earlier, our history has been 10%-12% from the previous 15 acquisitions. We're on pace today with the current acquisition of the 14 branches at about 1.5% per month. We're very pleased. It's a lot better than what we predicted in our May announcement of the acquisition. We think we're on schedule. In addition, we're picking up new accounts. Several treasury management accounts, seven figures have been added since we closed the deal. The early spikes in the deposit runoff were caused by split households.
When we do the householding through Huntington Bank in their little black box they ran the model from, there was about 3,500 households who still had accounts at Horizon and accounts at Huntington Bank. Some of those moved naturally to consolidate their relationship with one bank. The 5% we've had in the first three months I think is actually high, given there was some settlement taking place.
Yeah. I'll add that over the last month, we have seen the runoff stop. For the first couple months we saw the runoff, but for the last three to four weeks, we've seen that stabilize and even come back a little bit. That's a positive look.
Our next question is on capital. Can you give us some additional detail on your capital management plans?
Again, this comes from Terry. Thanks for the question, Terry. As you know, we like to leverage capital and to have an efficient capital base. With that said, our dividend payout ratio is between 25%-35% is the target range. Right now we're over 30%, and we have a 3% dividend. Stock buybacks probably will not take place given the current pricing. We think the pricing is fair, and it's not a long-term value creation. As far as issuing capital, we've never issued common stock. We try to leverage it through subordinated debt and other instruments before we'd issue common. So we think our capital position is strong. We're building capital at a very fast pace. So we expect to be robust going into 2022. Nils, go ahead.
Our next question is on digital strategy and trends. Given the strategy and trends you're seeing, how do you see this impacting the efficiency ratio?
I'll turn this question over to Mark and Kathy, who are the experts in that category.
Yeah. Kathy, you wanna comment on the digital?
Yeah, I can go ahead and comment on it, and if anything to add, please jump in, Mark. We continue to see increase in the use of our digital channels compared to our traditional channels. We're running at 76% on transactions through digital channels. As I had shared in my presentation, we continue to look at ways to increase the customer's experience in our digital channels. I also talk a lot about the automation and building of workflows that will allow us to leverage the resources that we do have. My objective would be to positively impact the efficiency ratio.
Our next question is from Nate Race at Piper Sandler. What gaps, if any, exist in Horizon's current digital commercial banking product suite, and how does it stack up compared to local competitors?
Yeah. First of all, Nate, Horizon Bank for four or five years now, we do a technology gap analysis every single year. We compare ourselves to best in class, other community banks, and then the super national banks, Wells Fargo, Capital One, et cetera. Kathie runs this study. Based where we see the gaps, we try to deploy our resources to fill those gaps. Kathie, can you talk about some of the resources we're planning next year?
Yeah, we are. There's a couple things that we're gonna do in the small business and commercial lending area. We have a partnership now that we provide that we did use for PPP, and then we also use for an unsecured small business loan. We're looking in 2022 to use this platform to expand our SBA offering and also secured small business. Lynn Kerber will be up later today, and in her area, we are looking for a more efficient or streamlined platform for her underwriting team. Those are 2022 initiatives.
You know, we were early adopters of Numerated, the small business package, long before a lot of our peers have picked up similar small business packages. We were also early adopters of Q2, one of the premier mobile banking websites. We've been on that site for what? 10 years now, and good partners, and they often use us as a beta site for future product rollout.
As a reminder, to submit a Q&A question, please use the form below the video player or submit questions via email to HBNC@lambert.com. Our next question is on M&A. How do you think about M&A from a geographic perspective? Would you consider something out of market that gave you a new business line, such as leasing or other products?
From a retail and commercial banking perspective, we're looking in market only. Indiana and Michigan are our top priorities. Secondary markets would be Northwest Ohio. There are discussions that are starting to pick up again later this year. Regarding what was the last part of the question?
Additional business lines.
Oh, business lines. Yeah. Thank you. Additional business lines, we are looking to pursue a leasing company. We think a leasing company would be a natural fit to expand our current product line for commercial loan officers, and would be a nice lead in. We currently buy leases and been doing so for over 20 years from brokers in Michigan and Indiana, and we think it's just a natural extension of what we already know and what we do well.
The next question is that most banks give a quarterly update to their net interest income sensitivity to an immediate 50 basis points or 100 basis points parallel shift in the yield curve. How would Horizon fare in such a simulation? That's from Dave Long.
Yeah. Thank you, Dave. We are asset sensitive. So when we run these models, and I don't recall off the top of my head the percentages, but we fare well. We would see a pick up in net interest income in those 50-basis points and 100-basis point increases. That is something that I've seen out there, and I think it is something we need to consider adding a little more disclosure on as we go forward.
The next question is back to business lines. How interested are you in adding or expanding a fee-based business line to further diversify noninterest income beyond mortgage?
Yeah, we've tried to buy registered investment advisory firms and other trust companies, and we've not brought one over the lines, but we still continue to pursue those avenues. We believe we can add additional strength and depth to our wealth investment management team in key markets in Indianapolis, in Michigan for future growth.
The next question is from Brian Martin. Can you provide an update on your recruiting pipeline? How likely do you see M&A given robust organic growth, focus and your outlook?
Yeah, we just added another commercial loan officer this week, a strong producer in Northwest Indiana, and I think we have one more pending. I think that'll be it for this year. We're gonna freeze the headcount going into 2022. We have excess capacity. Regarding M&A outlook, we're gonna be pretty cautious given our current balance sheet and liquidity we have in place. If we pick up a bank, it's gonna be in-market or it's gonna be a growth market where we think we can have a marketplace that exceeds our expectations and our current projections.
That concludes our first question and answer session. There will be a second session later in today's conference. You may continue to submit questions through the online portal in the meantime. At this time, we're pleased to introduce Dennis Kuhn, Horizon's Chief Commercial Banking Officer.
Horizon is a well-established and quality source of commercial loans for small to mid-sized borrowers and sponsors in our chosen markets of Indiana and Michigan. Commercial growth has been a focus for the past 10 years and now represents a majority of our total loans at 58% on September 30. That is up from 50% at year-end 2016, and 36% at year-end 2011. This has been achieved through both organic growth and acquisition. As many of you know, talent and relationships are critical to the healthy long-term expansion of this business with high-quality clients. Horizon has committed to continuing to grow the commercial portfolio through the opportunistic hiring of highly experienced commercial loan officers across our footprint. We've added eight new commercial lenders during 2021 with average experience in their respective markets exceeding 20 years.
We also have two offers pending. Key market expansions have included Troy and Holland, Michigan, and Lake County, Indiana. Total production has accelerated throughout 2021, far eclipsing both 2020 same period results and pre-COVID 2019 production. For the third quarter, core commercial loans, excluding PPP and acquired, were up 2.3% or over 9% annualized. We continue to gain momentum with expectations for 2022 growth in the range of 10% on our commercial portfolio, again, excluding PPP lending. The pipeline entering the fourth quarter exceeds $130 million and is building. Based on historical funding of new production in the range of 60%, this would equate to $80 million in new loans funded as we begin the last quarter of 2021.
We are seeing activity daily that is supplementing this already strong pipeline. We also saw a reversal of consistently lower revolving line of credit usage during the third quarter with a net increase of over $4 million in balances, marking the first time since the first quarter of 2020 that quarterly usage increased. We expect this to develop into a trend in the months ahead. We believe we are in a good position with expanding loan production as we enter the fourth quarter and look ahead to 2022. Horizon has a presence in most of the key growth markets across both Indiana and Michigan, which have been developed through both organic market expansions as we have opened new loan production offices in select markets and acquisition activities.
Most recently, we have significantly expanded our presence in the highly desirable Oakland County market in suburban Detroit, which has a significant concentration of large and mid-sized businesses and the highest per capita median income of any county in Michigan. After entering this county through a 2017 acquisition that included a loan production office there, we have opened a full-service office that includes a market president and five commercial lenders, three of which have been added in 2021. With $126 million in loans outstanding at September 30, this market has registered over 40% growth in the past 12 months and is accelerating with these recent hires. The newly acquired Northern Michigan offices will provide additional growth opportunity as well, with three current commercial lenders and one pending addition.
Horizon believes in establishing lifelong relationships by offering a full array of products and services to our commercial clients. We have a highly experienced team of nine treasury management sales professionals who are deployed in key markets across our footprint and service all of our offices. The cooperation exhibited by our advisors toward ensuring that our clients' needs and expectations are met or exceeded is exemplary. With the support of our operations and technology groups, we have the solutions available to meet our competition. As we look ahead to 2022, we expect to continue to build upon the momentum we have gained throughout 2021, with significant growth expectations currently in the range of 10% on our commercial loan portfolio, excluding PPP lending. Next, Lynn Kerber, Executive Vice President and Senior Commercial Credit Officer, will provide insight into our credit culture and metrics.
Thank you, Dennis. Horizon's commercial loan portfolio is well-diversified by business sector and geography throughout the states of Indiana and Michigan. On a geographic basis, commercial loans were distributed 51% in Indiana and 49% in Michigan as of September 30, 2021. Our predominant markets include Indianapolis at 21% of portfolio, Northwest Indiana at 16%, West Michigan and Southwest Michigan account for 21% of the portfolio, and Southeast and South Central Michigan make up 11%. Our recent franchise expansion in Northern Michigan added approximately $105 million in commercial loans, comprising approximately 5% of the portfolio. On a sector basis, our overall portfolio composition is 33% commercial and industrial, 20% owner-occupied real estate, and 47% non-owner occupied.
We are well-diversified with less than 10% in any one NAICS super sector, and our largest sectors range between 7% and 8% and consist of healthcare, construction, and residential multifamily. These sectors have performed well through the pandemic. During the COVID-19 pandemic, we closely monitored those sectors that had higher risk profiles, such as hotel, restaurant, and retail, with enhanced servicing and reporting during this time. Our balances in these sectors have generally flat or declining and are performing well. Horizon is predominantly a secured lender with recourse from their business owners and continues to follow prudent underwriting standards. While some sectors may inherently present a lower or higher risk profile, as an underwriter, we focus on established businesses with experienced management, strong sponsors, and demonstrated repayment ability.
We maintain individual and market loan authorities, and the advantage is that our decision-makers are within their market and have intimate knowledge of our customers. Our commercial loans are underwritten on a tailored basis, and this enables us to consider opportunities that span a wide variety of industries and borrower needs. Horizon utilizes a digital platform for small business loans less than $500,000 in credit exposure and has a targeted turn time of 24 hours for this segment. We also are a preferred SBA lender, which provides an opportunity to support our customers' credit needs. Our average loan size is $1 million or less, depending on loan type, and our bread and butter are loans between $500,000 and $5 million.
Horizon's commercial loan portfolio continues to reflect strong underwriting standards as evidenced by low delinquency of just 2 basis points and non-performing loans of 75 basis points of total commercial loans at quarter end September 30th. Net charge-offs year to date were zero and a 12-month rolling net charge-off of $43,600. These metrics reflect a continued trend of strong credit quality, which compares favorably to our peer group. To be sure, current macroeconomic conditions will impact our customers' business expansion and working capital needs. We also know that there is ongoing residual effects from the COVID-19 pandemic as our customers navigate supply chain issues, labor constraints, and the impact of inflation. That being said, we think the overall outlook is positive, and we believe that there is pent-up demand which will drive business growth.
We are positioning ourselves in two ways to help support this growth. First, Horizon is expanding our digital lending in both its small business lending segment and traditional commercial segment. In 2022, we plan to upgrade and expand our small business platform to further enhance our customer's experience and improve operational efficiency. We are also expanding our SBA program offerings through increased business development efforts, customer support, and digital capabilities. 2020 and 2021 SBA lending was, of course, dominated by the Paycheck Protection Program, and we expect to have forgiveness processing substantially complete by the end of this year. As our customers transition from navigating the pandemic to positioning themselves for growth, this is an important tool to assist them and our communities. Now it is my pleasure to introduce Horizon Bank President, Jim Neff, who will discuss Horizon's consumer opportunity in 2022 and beyond.
Thank you, Lynn. Good afternoon, everyone. I would like to detail some of our 2022 strategies on how we plan to fight off the headwinds forecasted by the Mortgage Bankers Association and others regarding mortgage production levels in 2022. First off, our M&A expansion into the Northern Michigan market opens up an additional 14 retail branch locations. We have already hired 2 experienced mortgage loan originators for this market who have hit the ground running and closed over $5 million in less than 90 days. We feel this market is large enough to support three MLOs, and we are currently in the process of recruiting an additional originator. This market provides great opportunities for second home and jumbo financing, which are strong portfolio products we offer.
As some of you may know, the northern and western portions of the state where we have critical mass and vibrant second home markets on the shores of Lake Michigan, Lake Huron, and hundreds of inland lakes. Even before the pandemic, high six-figure and seven-figure waterfront properties were purchased in this region by well-qualified second home buyers from Chicago, Detroit, and other major metropolitan areas. That trend has only accelerated since 2020. Now looking across our Indiana and Michigan footprint, the Federal Housing Finance Agency is expected to increase Fannie Mae and Freddie Mac's conforming loan limit to $625,000 as of the first of the year. This is a 14% increase over the existing limit. We feel this increase in the conforming limit presents refinance opportunities for jumbo ARMs, allowing the borrower to lock in long-term fixed rates.
We plan to target-market these jumbo borrowers with loan balances at or below the $625,000 level for refinance. We compete well with, and have been successful taking market share from large and regional banks in our markets. We strive for top five market share for our well-established markets and expect to see improvement in all of our markets annually. We have an experienced and tenured mortgage support team and are able to consistently close transactions under 30 days. Now, one of the drivers for the forecasted reduction in the mortgage originations for 2022 is the lack of housing inventory. This has created a strong demand for new construction throughout all of our markets. Horizon has long been in the construction loan business and is positioned well to take advantage of this growth segment of the market.
Our experienced MLOs have long-term relationships with local contractors and builders. We've recently made a policy adjustment expanding our geographic footprint for saleable products. Previously, we limited production to our branch footprint of Indiana and Michigan, unless the applicant had an established commercial or wealth management relationship. We have since opened originations for all saleable product to over 20 states. This will provide opportunities for growth, while at the same time limiting Horizon's risk since these loans will be sold on the secondary market and not placed in the bank's portfolio. This geographic expansion is being marketed by the MLOs to their contacts, centers of influence, and through our website. In 2021, we installed a state-of-the-art loan origination system that has created efficiencies internally and for our third-party partners. It is an end-to-end integrated solution that provides user-friendly mobile and online capabilities for our customers.
We feel the investments we have made in technology position us well to do more with less. These strategies, along with our experienced mortgage staff, will limit the expected reduction in mortgage loan originations for 2022. The Mortgage Bankers Association is forecasting an overall reduction in originations of approximately 35%. We feel we can beat their estimates and are looking at an overall reduction of 15%-18% by implementing our strategies outlined above. We started the quarter with a strong pipeline and expect to end the year with production levels north of $580 million. Now, I'd like to introduce Noe Najera, Senior Vice President of Retail Lending, to discuss our consumer loan strategies.
Thank you, Jim. Hello, everyone. I would like to provide additional insights to our 2022 consumer strategies and how we are going to achieve growth in retail consumer lending. One point, as emphasized at the top of the discussion, is that Horizon's historic focus has been on prime secured consumer lending in and around Indiana and Michigan, which has contributed to the bank's strong asset quality metrics. This emphasis remains unchanged. As previously mentioned, our expansion into the Central and Northern Michigan market has opened up our ability to immediately capitalize on new opportunities with direct and indirect lending channels. Among 310 auto dealer partners across our entire footprint, 34 are already from our new Michigan market, with another 15 pending approval to join.
Our new Michigan markets have also produced over $6 million in loan originations since the acquisition was announced, and a growing direct consumer pipeline with a heavy concentration of HELOC applications. Additionally, we have reevaluated our indirect lending program and focused on higher yielding loans without compromising Horizon's credit standards. Today, we have five credit tiers, and historically, we have purchased more loans in the top two tiers, encompassing credit score 700 and above. In analyzing performance of the portfolio, we know there are growth opportunities in the mid-grade tiers, which range between 640-699, with very manageable credit loss profiles and attractive risk-adjusted returns. This approach will allow us to achieve better, more productive relationships with existing partners and customers. This will also allow us to introduce an increased spectrum of buying to potential dealer partners.
We have a great opportunity to originate higher-yielding loans and plan to achieve this with limited credit risk, and we expect our charge-off levels to remain consistent with market trends. Today, we originate 93% used auto loans with indirect lending. We anticipate that trend to continue, with the added benefit of higher average originated loan balances. Horizon's originated volume during the past 12 months has remained on par with market trends, with prior years in large part because of the consistency in underwriting and processing standards. We anticipate these changes to have a positive impact to our yield, along with growth of our existing consumer loan portfolios. We have continued the practice of being selective in our partnerships, aligning with those dealerships with excellent reputations, high volume stores, and partners that share the same goal of best-in-class experience for our customer.
Our focus has remained on franchise dealers with strong inventories and late model used vehicles. Increased yield remains a long-term goal, and we are committed to achieve, and we'll do this with consistent buying in the high to mid-grade tiers. We believe loan growth and adjustments to our portfolio mix to be attainable. We have a respected indirect sales manager in place, leveraging her experience and relationships throughout our footprint and are confident in the message to network partners. Auto loans, primarily indirect, represent 56% of Horizon's total consumer loan portfolio, which stood at $708 million on September 30. Much of the remaining balance, 39%, was comprised of Home Equity Lines of Credit.
During the third quarter of 2021, we achieved record HELOC production and expect that in the rising rate environment, line utilization and balances will increase as an alternative to refinancing of first mortgages. With the expectation of mortgage rate increases in 2022, we will showcase our existing no-fee HELOC product, which was introduced in late 2021, with quick approval process resulting in higher line usage as compared to early 2021, when usage fell below 30%. We expect an increase in excess of 40% as customers leverage line usage during the rising rate environment. This will allow us to grow balances at a much higher rate than in previous years due to record low mortgage rates over the past two years.
With a broader lending spectrum in auto, HELOC, and other consumer products, we intend to continue taking market share in existing markets where we have established Horizon as a top prime lender, and we aim to become a top ten lender in our bank's new markets in Central and Northern Michigan, Indianapolis, Fort Wayne, and South Bend. Across our auto, HELOC, and other prime consumer products, we believe that we have the right products, people, technology, and responsive decision-making needed to achieve our performance goals for these offerings. For 2022, our goals include annual growth in total consumer lending in the mid- to high single-digit % range, while also increasing our yield during the process and providing a best-in-class experience for dealers and consumers. With that, I'd like to turn it back to Craig for our Q&A session.
At this time, we will begin our final question and answer session. As a reminder, please use the form on the webpage below the video player to submit your questions. Craig, we have a pair of questions that came as we closed the last session. The first is from Nate Race at Piper Sandler. Are there any major technology initiatives on the near-term horizon?
Well, first of all, we have some great partners, Numerated and Q2, that we mentioned earlier, and we were early adopters of, with both those partnerships. We plan to continue to expand our relationship with both Numerated and Q2 going forward. Q2 provides some of the best-in-class treasury management services. Regarding Numerated, we're looking at expanding our SBA programs and other. I'm gonna turn that part of the answer over to Lynn Kerber. Lynn?
Thank you, Craig. There are several areas in the commercial lending area that we're exploring and planning to pursue and currently doing research and due diligence on. The primary areas are small business and SBA lending, primarily from a digital interface experience with our customers and making it very convenient for them. We're also exploring and planning an upgrade in our overall commercial
Loan origination system. We do anticipate that we'll have very good pickup and automation, and certainly contribute to more efficiency over the next year and coming years.
I'd like to add just one more point here. We've just recently promoted a new gentleman to our senior vice president of technology in our communication center. The communication center is an outbound effort to attract and retain new customers. We pride ourselves in the fact that 85% of all inquiries through our call center are answered by bots, and we have an objective to getting that to 90%. We're able to do that. We have some outstanding young programmers who take a lot of pride in looking at how to enhance the customer experience. Thank you for the question.
The other question from earlier, Craig, was from Damon DelMonte at KBW, and he asked, Can you give some color on how the liquidity from the branch deal was deployed to get a blended 2% yield, MBS, munis, et cetera?
Yeah, we started deploying the liquidity and put the strategy in place right after the deal was announced. We were able to buy into the investment arena at over 2% yield on the new products coming in. By the time we closed, we had a resulting 2.06% yield on the investment's excess liquidity. Now, the mix did take a little more credit risk than we normally do in our investment portfolio through sub-debt offerings, and that's about $50 million-$70 million of sub-debt that we put in the range of 3.5%. Thanks for the question.
Our next question is from Brian Martin at Janney. Why is your mortgage outlook significantly better than MBA forecast?
Brian, I'm gonna turn that over to Jim Neff. Jim.
Thanks, Craig. The MBA forecast is looking at anywhere from a 30%-35% reduction in 2022, and we are anticipating anywhere from a 15%-18% reduction. We think we're gonna get that growth from a couple of different areas. One, our 14 new branches that we acquired in that retail location. We've hired two mortgage loan originators already in that office that were experienced in that market and have really hit the ground running. We feel there's room for a third mortgage loan originator in that office, and we're looking currently to hire there and looking to expand our sales footprint throughout the entire branch network. We're also looking at Fannie and Freddie have recently increased their conforming limit.
In my presentation comments, I made the comment that it was $625,000. Those numbers just were updated yesterday, and it's actually $647,200, which is an 18% increase over the prior number. We're gonna do some targeting marketing to be able to go out and do refinance of jumbo loans and put them in our portfolio at a long-term fixed rate and ARM products. I'm lost here on my third point here.
Let me jump in there to add to it from a financial perspective, Jim. What's gonna offset some of the lost income from mortgage gain on sale is the fact that we're gonna recapture our mortgage servicing rights during a rising rate environment. That's kind of a hedge we've had in our balance sheet for some time. The loss you might be expecting, even though Jim's talking about an 18% reduction in production, is not that serious. Thanks for the question.
Our next question is from Terry McEvoy at Stephens. "Is the company taking on more credit risk with the commercial loan growth coming from the new lenders and markets? What markets or industries should support the 10% commercial loan growth outlook?
I'll turn that over to Dennis Kuhn and Lynn Kerber. Dennis.
Thank you, Craig, and good afternoon. You know, if you look at our history, obviously, Horizon has a very strong credit culture, credit profile. Our metrics are very sound. You know, we believe throughout, you know, the pandemic, we've handled the credit side really well. From a growth standpoint, we really don't believe we're taking on more credit risk. Certainly we're looking at good activity and good growth, but you know, the new lenders that we've brought on are highly experienced lenders, typical experience over 20 years. They're coming from larger banks, sophisticated banks. They're established in their markets. They know the good borrowers. From that standpoint, we feel comfortable with the credit we're putting on. Lynn, I don't know if you have any other. Yeah.
I'll just briefly add some comments, and that is, the new markets that we've entered with the branch acquisition are very well known to us. We have lending staff that has experience in those markets and the profile of those geographies and the type of clients in those markets are very consistent with our overall portfolio and therefore we're very comfortable with that.
Most of the new lenders we've hired have come from larger banks, Huntington, First Financial of the world, Comerica, so they're used to dealing with disciplined credit cultures and processes. They've been in business, what, 20-25+ years. We're very confident we have the internal controls in place to monitor our credit quality going forward.
Our next question is from Damon DelMonte at KBW. Can you talk about opportunities being created by market disruption across your markets, especially in Michigan? Are there more opportunities to hire additional bankers?
We're probably capping off hiring additional commercial lenders because of the excess capacity we have in place today. We did hire some additional treasury management back room support staff in Michigan, which was a nice lift out and really deepened our team and the quality of our team. Michigan, we have a great team in place from Troy, Michigan to Grand Rapids, Midland, in the new branches we acquired. We feel pretty confident we've already completed the lift outs that we could do. I think going forward, we have the position and team in place to continue to grow.
Nate Race from Piper Sandler submitted a question. What is your outlook for loan portfolio acquisitions or other plans to offset anticipated declines in mortgage banking and PPP revenue?
We've done most of it currently, short-term through our investment portfolio by taking on some subordinated debt. We're generating approximately $450 million-$500 million in cash flows off that annually, which we plan to put in to the loan portfolio through normal organic growth, which we think is in place with the teams we have in place. So far for the fourth quarter, we're very optimistic that we're gonna continue that growth. The pipelines are robust. I think, Dennis, you can maybe add kind of what the pipelines to the commercial side.
Yes, you bet. Going into the fourth quarter, first of all, we came off obviously a very strong third quarter with net commercial loan growth of $45 million, over 9% annualized. Fourth quarter pipeline, as we started and we reported, was over $130 million. We're seeing that come to fruition at this point with very solid growth through the first two months. The outlook is, and the momentum we've gained, we feel very good about that.
I don't see us buying portfolios per se, but we are active in the healthcare lending program. We have a target of growing that about $80 million. They're about $40 million-$50 million today. That's a nice addition to our portfolio.
Brian Martin from Janney asked, How big is the MSR recapture potential? And what is the growth outlook for the residential portfolio in 2022?
Brian, I can't answer the question on the recapture number, but we'll have Mark Secor email you back. Thanks for the question. As far as mortgage growth, I'll turn that over to Jim.
Yeah. I think I can answer the MSR recapture potential. It's about $3 million that we still have that we can recapture in the coming year. The growth on the mortgage loan side, we're looking at mid-single digit growth for 2022. Brian, your other question, I drew a little bit blank there. We also opened up our mortgage portfolio, our lending to 20 states. Previously, we were just doing lending in our footprint. If you went outside the footprint, it needed to be a large commercial relationship or wealth management. For saleable product, now we are opening that up for 20 states to give us some additional opportunities as well.
Your investment technology brought down the geographic footprint and boundaries we had previously.
Absolutely.
We made that investment a couple of years ago, so good point.
Our next question is from Terry McEvoy at Stephens. Would you share your thoughts on Horizon's retail and office commercial real estate exposure, as well as trends in that space and trends in other parts of the loan portfolio that you're watching closely going into 2022?
I'll turn it over to our experts, Dennis and Lynn.
Sure. Well, first of all, our exposure in both of these categories, I would say, is fairly limited, generally 6% or less of our commercial loan portfolio. So it's not a significant concentration for us. Certainly there's been an eye on the office and retail sectors with the impact from COVID-19. However, with Horizon's footprint and also our underwriting standards, we've really not seen, you know, any impact on those, fortunately. Similarly with our marketplace, we are in a very diversified geography and not in any major city center that would have a significant impact on the office space. So overall, I feel that our exposure is fairly limited in that area.
As far as areas that we're looking at over, and continuing to monitor, certainly those sectors that have been impacted by COVID. Restaurants, hospitality, leisure, and entertainment. Fortunately, all of those areas have been performing very well for us, but we continue to monitor them. Dennis, any comments you'd like to make?
We've been tracking those portfolios since June 2020, and it's amazing. Very low delinquency. As you know, non-owner occupied properties did not qualify for PPP, yet they were still making their full payments. No modifications were given those portfolios, but pretty strong credit with strong recourse.
Again, the key is, you know, our lenders, the experience and the clients that we're working with. They've known through, in many cases, through multiple cycles, business cycles. These are well-established borrowers and, you know, with well-vetted projects overall.
Turning, specifically to the Indianapolis area, what are your growth opportunities there, specifically in C&I as well as CRE, given the competition in that market?
Sure. In Indianapolis, we've been in that market for nearly 10 years now, I think it's 10 years next year and have very solid footing there, not only starting from a LPO, again, with highly experienced staff, also supplementing that through some acquisition a couple years ago with Salin Bank. We have very solid performance in that market and great opportunity. Experienced people from the leadership standpoint, highly experienced CRE lender and, you know, supplemented that with other C&I focused lenders. You know, again, we've been very pleased with our growth in that market and feel that we still have significant opportunity.
The next question is on consumer lending. You have a 2022 goal for growth of total consumer lending in the mid- to high-single-digit percentage range. How much of that is auto and how much are you expecting to be HELOC?
Noe, you wanna handle this question?
Yeah, I'd be glad to. In 2022, we're expecting our consumer portfolio, direct auto, indirect, and HELOC to be in this high single digits. We're coming off a record third quarter. We're anticipating a strong fourth quarter as the numbers that we closed the month last month. We anticipate that the HELOCs will continue to drive that business. With the interest rates going up, we expect that our HELOC promotions that we've launched, we've revamped our program, will continue to take market share in all markets.
Our next question is also on consumer. What drove consumer loan growth in the third quarter, and is that sustainable? Were the increases fully attributed to indirect auto? And do you expect more of the same in a recovering economy in 2022?
The third quarter, we really refreshed our consumer loan portfolio and our program, looking for opportunities to buy indirect a little bit deeper, as I mentioned in the previous slides. We anticipate that will continue in the fourth quarter and into the new year. We'll remain strong in a recovering economy. There is some supply chain bottlenecks that we'll head into, but I think we're positioned well with our new markets in Northern Michigan. The additional dealerships that we've added will help us grow that portfolio.
Our next question is on supply chain challenges in the automotive space and how that might be impacting the consumer lending business.
Well, our indirect business is really set up for a late model. We have a niche in where we lend, and so we're positioned very well with the changes we've recently made in the third quarter heading into the first quarter and ending the year. We fully anticipate that those changes will allow us to continue to grow in the late model used vehicles, regardless of the supply chain. We have great partners who understand our program and our niche.
Yeah, yeah. Just to comment, 95% of our indirect business is used car. We only have around 5% of the new car business.
That concludes our question and answer session. We'll turn the conference back to Mr. Dwight for his closing remarks.
Thank you for your questions. As heard today, Horizon is a company on the move, and we fully believe that we earn the right to remain independent every day. We always believe that actions speak louder than words, and Horizon's actions exemplify a company focused on creating shareholder value. Why should you continue to invest in Horizon Bancorp? We are a growth company with compounded annual growth rate over the past 18 years of 18% and clear growth targets in 2022. We are a value play with our current trading multiples trading at a discount to peers. We manage our capital efficiently to maximize return on equity. We have a history of seizing upon opportunities, whether it's recruiting talent or acquiring other banks. Our dividend yield is better than peers and historically aligned with earnings growth.
Our markets are more robust than most Midwest markets and have considerable economic activity to propel us into the next year. On behalf of the entire management team, thank you for participating in today's investment conference. Have a good day.