Horizon Bancorp Inc /In/ Q3 FY2025 Earnings Call

Good morning, everyone, and welcome to the Horizon Bancorp, Inc. conference call to discuss financial results for the third quarter of 2025. At this time, I'd like to turn the floor over to Todd Etzler, Executive Vice President, Corporate Secretary and General Counsel, for the opening introduction.

Good morning, and welcome to our third quarter conference call. 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 the supplemental presentation issued by Horizon yesterday, they may 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; and Chief Executive Officer and President, Thomas Prame. At this time, I will turn the call over to Thomas Prame. Thomas?

Thank you, Todd. Good morning, and we appreciate you joining us. Horizon's third quarter results, highlighted on Slide 3, display the successful execution of our previously announced strategic balance sheet repositioning and the continued excellent performance of our community banking franchise. The balance sheet restructuring effort has exceeded our initial expectations, and it is on pace to achieve the top-tier financial outcomes outlined in our plan. The team did an outstanding job on the equity and debt raises as well as the subsequent execution optimizing the securities and loan portfolios as well as the funding sources of our balance sheet. Additionally, our third quarter results further evidence the continued strength of the organization's exceptional core community banking franchise. Our net interest margin continued to expand with the commercial loan engine producing solid results and the core client-driven deposit franchise displaying its strength. Horizon's credit quality remained excellent and the management team remains diligent on managing core operating expenses. A few key items to note within the quarter results. The margin continued to expand for the eighth consecutive quarter with an exit run rate in September above 4%. Loan balances for the quarter reflect the planned runoff and sale of the lower-yielding indirect auto portfolio. Net of these activities, loans would have increased approximately $48 million, led by the efforts of our commercial banking teams. Our relationship-based deposit portfolios remained resilient in the quarter with predicted outflows within higher cost non-core transactional accounts as outlined in our balance sheet restructuring plan. Additionally, the combined relationship-based fee income categories of service charges, wealth, card and mortgage income performed well and an increase from the third quarter, and expenses outside of the transaction-related activities remain well managed and aligned with our internal and market expectations. This provides confidence in our ability to deliver additional positive operating leverage moving forward with a more effective balance sheet. Heading into Q4 and 2026, we are confident in delivering a superior community banking model to our shareholders, consisting of top-tier financial performance and a balance sheet producing peer-leading capital generation metrics. As we move forward in a front-footed position and with significant positive momentum, we will remain steadfast in our disciplined approach to create durable returns and sustainable long-term value for our shareholders. Turning to Slide 4. As I mentioned previously, the team did a great job on the balance sheet restructuring with the majority of the initiatives comparing favorably to our expectations in terms of financial outcomes and timing. Our execution left minimal activities for the fourth quarter, which included the redemption of the previous subordinated debt that has already been completed and the continued modest reduction of select non-relationship high-cost transactional accounts. As previously mentioned, the team has already seen a significant positive increase in performance in September, and we are confident the fourth quarter will provide a clear outlook of Horizon's top-tier financial performance and peer-leading capital generation model. John will provide additional insight into our Q4 outlook and 2026 guidance during this presentation. Overall, a very solid quarter, reflecting the disciplined execution of the balance sheet initiative, combined with the continued strength of the high-performing core banking franchise. A key element of our go-forward plan will be continued profitable loan growth and excellent credit quality that has been a cornerstone of Horizon's success. I will transition the presentation to our Executive Vice President and Chief Commercial Banking Officer, Lynn Kerber, who will share highlights for the third quarter on our loan growth and continued excellent credit performance. Lynn?

Thank you, Thomas. Net loans held for investment decreased $162 million in the quarter, consisting principally of net growth in commercial loans of $58 million and the $210 million combined impact of quarterly runoff and sale of indirect auto loans. Commercial loans continue to be our primary lending focus at this time, driven by our core franchise and focus on traditional lending products. Net commercial loan growth for the second quarter was $58 million, representing 7% for the linked quarter annualized. Net growth in the quarter also reflects syndication of $10 million in equipment finance instruments with a net gain on sale of $300,000 in the quarter, representing a 3% gain on sale. Overall, our pipeline remains steady and quarterly volumes are consistent with our averages for new origination activity, payoffs and line of credit activity. As we look forward to 2026, our focus remains on steady diversified growth, disciplined pricing and credit and growing well-rounded customer relationships to drive cross-sell activity in deposit gathering and treasury management services. Residential mortgage lending continues to be a foundation product for the bank, and volume has been predominantly sold in the secondary market to align with our balance sheet strategies and the generation of gain on sale fee income. Balances for the third quarter were essentially flat in alignment with this strategy. Turning to credit quality and the allowance. Credit quality remains satisfactory with substandard loans and nonperforming loans representing 1.31% and 0.64%, respectively, consistent with credit performance over the past year. Net charge-offs were $800,000 in the quarter, representing 7 basis points on an annualized basis, which compares to historical performance over the past year. Year-to-date charge-offs totaled $1.9 million, representing an annualized charge-off rate of 5 basis points. Finally, our allowance for credit losses decreased to $50.2 million, representing an allowance to credit loss to loans held for investment of 1.04%. The reduction of $4.2 million consisted predominantly of a release of reserves related to the indirect auto loan portfolio in the amount of $3.1 million as well as the benefit of a reduction in loss rate experience in the portfolio. Provision for credit losses was a net release of $3.6 million, which is a combination of the allowance reduction of $4.2 million, replenishment of quarterly charge-offs, modest changes in unfunded commitments and the release of the prior reserve on the Held-To-Maturity portfolio. We continue to monitor economic conditions and future provision expense will be driven by anticipated loan growth and mix, economic factors and credit quality 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 our deposit portfolio displayed on Slide 9. Horizon's core relationship balances continue to show the strength of the franchise's community banking model. Noninterest balances remain resilient with planned outflow and higher rate transactional balances aligned with the balance sheet transformation. We are very pleased with the stability of the core client base relationships and optimistic about this segment of our deposit portfolio, fueling our loan growth in subsequent quarters. Additionally, we believe our deposit portfolio continues to be well positioned to benefit the organization moving forward with its granular composition and long-standing relationships in our local markets. The team has made significant improvements in growth, enhancing our go-to-market activities for treasury management services and proven its agility by leveraging our excellent branch distribution and multiple funding options to create shareholder value. Let me now hand the presentation over to our Executive Vice President and Chief Financial Officer, John Stewart, who will walk through additional third quarter financial highlights and our outlook for the remainder of 2025 and into 2026.

Thank you, Thomas. Turning to Slide 10. Q3 marks the eighth consecutive quarter of net interest margin expansion, totaling 110 basis points from Q4 of 2023. And as I will discuss in a minute, the expansion is planned to continue. That said, these results are the direct result of the execution of a series of intentional initiatives and transactions to reposition the mix and profitability of our balance sheet, which culminated in this quarter's activities. Most notably, we have completely changed the company's risk profile, significantly curtailing both liquidity and interest rate risk through these actions, while establishing a pro forma cash flow profile that should create durable returns for our shareholders. Specific to Q3, the net interest margin increased by 29 basis points to 3.52%. While the margin this quarter was partially impacted by the repositioning of the balance sheet prior to those events, we continue to see the positive momentum in the margin, driven by the same key organic trends we have been experiencing for several quarters now, well-priced commercial loan growth leading the asset remix story, while core deposit balances continue to deliver stable funding costs. Turning to the balance sheet repositioning. There was only a partial quarter impact in the 3.52% margin. The common equity raise closed on August 22, which was the same day all the bond sales were completed. $535 million of the reinvestment settled during the last 10 days of August, with the remaining roughly $45 million in purchases settling over the first 10 days of September. The Federal Home Loan Bank advances were also repaid during the last week of August. The $100 million subordinated debt issuance closed the last week of August and the targeted high-cost transactional funds runoff of about $275 million during the quarter took place over the last few weeks of September. Therefore, while our September margin exceeded 4%, it too does not capture the full benefit of the balance sheet repositioning. As you saw on Slide 4, there are still a few items yet to make their way through the margin. First, a full month of the $275 million in deposit runoff from September; second, the balance of the $125 million in targeted deposit runoff remaining as of quarter end, which we anticipate will largely take place over the fourth quarter. And finally, the October 1 payoff of the $56.5 million of subordinated debt, which carried a cost of about 9.8%. Therefore, while we are expecting the margin to expand further in Q4 into the range of 4.15% to 4.25%, we should exit the year a bit above that in the range of 4.2% to 4.3%, where it should generally remain through 2026. This view is consistent with our prior expectations following the balance sheet efforts. Slide 11 is a new slide showing an improved return, more liquid and lower risk profile of the securities portfolio in June compared with September. As you can see in the top left quadrant, the mix of the portfolio is significantly different, carrying less credit risk and a greater mix of highly liquid assets, and it is earning more with less overall duration. Additionally, the reliance on investments in our earning asset base has been reduced and notably, the portfolio uses significantly less capital. All that said, the new portfolio was constructed to complement the interest rate risk profile we set out to achieve with the new balance sheet, which is relative neutrality to changes in rates. We intentionally purchased cash flows that are already fully extended with prepayment optionality that is significantly out of the money for the underlying borrowers. Our objective was to build a portfolio of stable cash flows at strong yields that complements the rest of the balance sheet and provides the functional liquidity it is ultimately there for. As you can see on Slide 12, reported noninterest income was materially impacted by the balance sheet actions this quarter and included the $299 million loss on the sale of securities and the $7.7 million realized loss on the sale of the indirect auto portfolio, which includes the write-off of any related unamortized dealer reserve. The auto loss was partially offset by the associated release of the $3.1 million allowance for credit loss against this portfolio, all of which was contemplated in our original planning. Excluding these items, which will not carry forward in our results, our fee-based businesses performed well during the quarter and for the first time, included about $300,000 of gains on the sale of syndicated equipment finance credits. This is a business line we expect will grow in contribution to our fee income throughout 2026. Additionally, service charges and interchange fees reflect our concerted efforts to grow the core client base and seasonally strong market activity. Looking ahead to the fourth quarter, while we do anticipate some normal seasonal headwinds to impact service charges, interchange and mortgage and therefore, expect Q4 fees to approximate $11 million, this result would still express high single-digit year-over-year growth, excluding the securities loss in the year-ago period. On Slide 13, here, too, you can see the quarterly expense results were also impacted by our balance sheet activities. Specifically, the quarter includes the $12.7 million prepayment penalty on the repayment of the higher cost $700 million in Federal Home Loan Bank advances. Additionally, the quarter included about $900,000 of expenses directly attributable to these efforts that are not expected to carry forward. Excluding these 2 items, total noninterest expense was roughly flat linked quarter and is trending favorably compared with our previously issued full-year guidance. Turning to capital on Slide 14. While each of these metrics was ultimately impacted by the balance sheet activities, in all cases, the outcome exceeded our initial projections. It resulted in better-than-expected execution, resulting in lower realized losses. Just a couple of quick comments on a few of the metrics. First, the leverage ratio is expected to recover back closer to Q2 levels in the fourth quarter as the balance sheet reduction moves its way through the average asset denominator. Second, the total risk-based ratio is expected to revert back lower in Q4, closer to Q2 levels as the September 30 Tier 2 capital balance includes both the new and previously existing subordinated debt issuances. As of October 1, we have repaid the more expensive $56.5 million prior issuance. As we have previously communicated, we are comfortable with the company's current capital position, particularly against what is a significantly derisked balance sheet. Additionally, as our outlook suggests, our peer-leading levels of profitability will accrete capital very quickly, which you will see in the coming quarters. To provide some clarity on the other side of the balance sheet transition, we have provided an outlook specifically for the fourth quarter on Slide 15. Overall, we are pleased with the progress and the outcome of the balance sheet efforts, some of which will continue here in the fourth quarter. More notably, the strength of the core community banking franchise remains intact, and we are well positioned to deliver durable top-tier performance metrics starting in the fourth quarter. There are a few items I'd like to highlight. Growth in loans held for investments is expected to remain in line with what we experienced in Q3 on a normalized basis, which is for mid-single-digit growth on an annualized basis. Most of the growth is expected to come from our organic commercial growth engine. Deposit balances will decline in Q4, primarily related to the remaining targeted reduction of high-cost non-relationship balances. Non-FTE net interest income is expected to grow in the high single-digit range from the reported Q3 figure. This will be driven by the continued expansion of the net interest margin into the range of 4.15% to 4.25%, while average earning assets will decline from Q3 to slightly below $6 billion from the impact of the planned deposit runoff and the subordinated debt redemption. This outlook does include two 25 basis point rate cuts in October and December. Total reported expenses should approximate $40 million for the quarter, but will include about $700,000 of nonrecurring expense from the write-off of the unamortized issuance cost from the previously existing sub debt position. The Q4 effective tax rate should be in the range of 18% to 20%, which is attributable to overall stronger pretax income and a significantly smaller tax-exempt municipal exposure. Given the reduced tax-exempt exposure, it should also be noted that our fully tax equivalent adjustment to income is expected to be about $1 million per quarter going forward or about half of the prior run rate. As our fourth quarter outlook illustrates, we are pleased with the performance levels Horizon will achieve going forward. Additionally, while we are currently finalizing our budget for 2026, we would like to provide a few comments on our initial view for the year. Overall, we are in alignment with the current consensus estimate for earnings per share at approximately $2 per share. Our initial look at full year non-FTE net interest income is for growth in the low double-digit range. Our FTE adjustment for 2026 should approximate $4 million, as noted earlier. The net interest margin on an FTE basis should remain relatively consistent in the range of 4.2% to 4.3%, which is in line with our prior projections following the balance sheet repositioning. Our current view on fees and expenses is generally consistent with current consensus expectations. Similar to Q4, the effective tax rate is expected to approximate 18% to 20%. Overall, 2026 should be a strong year for Horizon, steady growth with durable peer-leading returns on assets, returns on tangible common equity and internal capital generation. With that, I will turn the call back over to Thomas.

Thank you, John, and I appreciate the summary of the third quarter outlook for Q4 and initial guidepost for 2026. As you can see from our financial results, we are an organization that will quickly realize top-tier financial metrics and peer-leading capital generation performance. We expect that the well-executed balance sheet restructuring, combined with Horizon's long-standing and high-performing community banking model will deliver durable returns and sustainable long-term value for our shareholders. As we move into 2026, we will be front-footed in our optionality to create further shareholder value through a disciplined operating model, focus on profitable growth and smart stewardship of the positive capital generation platform we have created. The third quarter was an excellent performance on many fronts for the team, and we look forward to continuing to deliver on our promise to create significant shareholder value moving forward. This is the end of our prepared remarks, and I welcome the operator to open up the lines for questions for our management team.

Our first question today comes from Brendan Nosal from Hovde Group.

It's a very different company today compared to 1, 2, or 3 years ago. Recently, the focus has been primarily on the securities book and capital. Now that those issues have been resolved, can you provide an update on what you believe the new narrative for Horizon will be and the key areas of strategic emphasis moving forward?

Thanks, Brendan. I appreciate the question very much. We're very pleased with the organization as it exits Q3 and goes into Q4. And I think our financials are showing what we consider a new horizon heading into 2026. What you'll see with us is that we're going to be very consistent about the positive stewardship of capital that we're going to be delivering to our shareholders on a go-forward basis. Our new balance sheet is positioned well to generate capital at a significantly greater pace than before. We're also going to be very pleased with the optionality that this is going to present the organization, different than perhaps what you said before, we are a little bit more focused on the securities positioning. But again, we're going to be very measured in our deployment strategies and don't feel like we need to go out and quickly do something, but rather take a very measured approach on profitable deployment options going forward. That could be, for us, as we move into '26, very logical and accretive M&A that's additive to the community banking platform that we just created, expansion or lift of teams or acquisition of fee income platforms that create durable and franchise value earnings profile. And also, we're going to be very front-footed position moving to '26. But again, we'll be very respectful of capital deployment strategies and making sure that we enhance shareholder value.

Okay. Maybe just as a follow-up to that on capital specifically. I guess, first, are there any other potential outlets for capital outside of organic loan growth and M&A? And then second, now that there's a potential M&A element to the story, just kind of take us through some of the criteria, whether it's size or geography or business mix that you would be interested in?

Sure. Thank you for the follow-up question. Horizon has a strong history of successful mergers and acquisitions over many decades. This success is built on our excellent brand reputation in our core markets and being a favorable partner for transactions. In recent years, we haven't been as competitive in this area due to our earnings capabilities and some risk factors on our balance sheet. As we approach 2026, our balance sheet will be significantly improved, more efficient, and less risky, which will enable us to achieve leading financial metrics and strong capital generation. Our approach to successful acquisitions will be focused on franchises that enhance our existing profitable operations. We anticipate targets in the range of $300 million to several billion dollars, ensuring that any deals make logical and beneficial additions to our franchise. We see great opportunities in Michigan and our key markets in Indiana. Overall, Horizon will be in a stronger and more proactive position, with a more optimistic profile and an attractive balance sheet that will appeal to potential long-term partners.

Our next question comes from Terry McEvoy from Stephens.

Maybe I can start with a question for John. You mentioned that the balance sheet is fairly rate neutral with regards to changes. When I look at the current mix, it appears to be more heavily weighted towards commercial, with fewer higher beta deposits and likely less fixed rate assets, which suggests more asset sensitivity. Can you explain where I might be misunderstanding this and how you justify the rate-neutral position?

Yes, Terry, thank you for the question. I appreciate it. Looking ahead, the changes in our balance sheet mix would lead us to be slightly asset sensitive. We conduct various shock analyses and non-parallel shifts, and we don't anticipate much change whether the yield curve steepens or flattens. Approximately 25% of our loans will be floating-rate on the asset side, with only a small portion of our securities portfolio also floating. On the liabilities side, we have some callable CDs and a strong deposit positioning, so we don't expect significant impacts from rate changes in either direction.

And then maybe, Thomas, a follow-up question for you. There's the legacy bank in Michigan where generations of families and businesses have banked, that's going to be changing names. I guess my question is, how do you play more offense? And how do you balance that with some of the expense outlook that John talked about?

Thanks, I appreciate it very much. First, I agree. I think the opportunity for growth in Michigan is going to be very optimistic going forward. There are some transactions that are happening in the marketplace that are giving us some opportunities. I think we also need to remember, over the course of the last 2 years, from an offensive standpoint, specifically in commercial and treasury, we've made some really good human capital decisions there and some great teams in Grand Rapids, Lansing, Detroit in those growth markets and also Southwest Michigan. Those teams are in place and many of those individuals are now coming off their non-competes. Lynn has also done a really nice job with the treasury management franchise. We've added about 40% more salespeople. A lot of those individuals are in the Michigan market. So from an expense base, I don't think we're really looking to add a lot to our expense base in the franchise versus more take advantage of the expenses that we've already taken and really be able to open our stride on new growth.

Our next question comes from Nathan Race from Piper Sandler.

Congrats on all the progress coming out of the quarter. Just going back to the margin discussion, John, I wonder if you could just help us just in terms of with the securities portfolio repositioning, how much cash flow coming off each quarter over the next 12 months or so? And also kind of what the back book repricing tailwinds look like on the commercial real estate portfolio that's fixed.

Sure. Thanks, Nathan. I'll pass the second question to Lynn and answer your first question first. Regarding the cash flows from the securities portfolio, they're honestly very minimal. That was part of our repositioning efforts. As you can see on the slide, we purchased many discounted cash flows, which are bonds with underlying coupons in the 2s and 3s. That's what I was referring to when I mentioned that the prepayment optionality for the borrowers underneath those is negligible. Looking ahead over the next year, we anticipate only about $10 million to $15 million in cash flow from that portfolio each quarter, which isn't much.

Yes. In regards to commercial real estate repricing, I don't have the prepared dollars for you this morning. But when we've done that analysis in the past, it's a fairly minor portion of our book. As I recall, it was less than 5% per year for 2026. So a pretty small amount.

Okay. Great. And then, John, I think you mentioned about 17% of the portfolio is floating on the loan side of things. Is there managed deposit rates that you can kind of reprice kind of in lockstep with Fed rate cuts at a similar proportion, just given some of the changes in the deposit portfolio in 3Q?

Sorry, could you please repeat the question again? The number I mentioned regarding the repricing on the loan side was about 25%. Could you repeat the second question?

Yes, no, I'm just trying to understand kind of where the short-term rate-sensitive deposits stood at in terms of what you can reprice kind of lockstep with what you have repricing in terms of those floating rate loans.

Yes, we still maintain a core public funds business on the balance sheet. The higher cost transactional balances we are intentionally reducing leave us with some public funds exposure that will reprice lower, and we've observed some of that recently. We also have commercial deposits that we can adjust downwards. In our projections, we assume minimal repricing downside for consumer balances, but that should be adequate. Additionally, we have some callable brokers that will provide us with beneficial options if the market remains favorable.

Okay. Great. And then maybe one last one for Thomas. Just going back to your M&A commentary. Curious if you're just seeing any kind of increase in dialogue or opportunities to maybe consolidate some of those subscale institutions across your footprint or is still somewhat of a slower pace of conversations these days just relative to the increase in activity we're seeing across the industry these days?

Thanks for the question. I believe at the end of last year and the beginning of this year, we noticed a significant increase in dialogue. There was some uncertainty regarding whether sellers should proceed with transactions. We've observed several activities in the marketplace related to footprint activities we've participated in, which is beneficial for our brand reputation and attracts individuals considering Horizon as a potential partner. However, our previous balance sheet may not have positioned us ideally to reach our goals. We expect these activities to continue into 2026. Overall, the current market conditions appear favorable for transactions. If sellers are contemplating this, now may be a good time for those discussions at the board level, particularly regarding our operations in Michigan and Indiana. We believe we have enhanced our standing and are in a better position for execution.

Our next question comes from Damon DelMonte from KBW.

Just had a question on credit and kind of, if you, Thomas, give a little bit of color on maybe some of the trends you guys are just seeing. NPAs were up $5 million quarter-over-quarter, not a big amount. But just wondering, are there any areas of the portfolio where maybe you're starting to see some signs of stress that are requiring a little bit more attention?

Yes, I'll pass this one over to Lynn. She can walk you through some of what we saw in NPAs and how our commercial credit is looking.

On commercial portfolio, if you turn to our slide, Page 8, where we have our asset quality metrics, first of all, you can look at our substandard loans, and those have been very consistent and actually went down just a bit this quarter. So when you see the increase in nonperforming loans, it's really just a migration in that bucket. We had 2 commercial loans that moved to nonaccrual. One, we have payment arrangements on, and we expect that to be brought current. The second one, just a series of misfortunate events for that particular customer. We have an SBA 75% guarantee, real estate based. So really nothing that we're losing sleep over. Commercial non-accruals, I think we have 6 or 7 customers, roughly $11 million. So very modest number for our portfolio size.

Okay. Great. Just real quick follow-up on that question. From our transaction in the third quarter, what we consider the highest risk portfolio we have was indirect auto, that consistently was $2 out of every $3 of our charge-offs. And also as we go into a period where we may see more stress on the consumer side, exiting that portfolio, I think this really truly enhance our overall credit profile and will keep us in the ranges that we historically performed.

Got it. Okay. And then with the improvement of the profile, as we think about the provision in the coming quarters and kind of growth, I mean, is it fair to kind of assume that maybe the provision will kind of be more like the average of the first 2 quarters of this year? Or should we expect it to be a little bit lighter just given the removal of those indirect auto loans?

Yes. In terms of the provision, we experienced a release this quarter mainly due to the indirect portfolio and an overall adjustment to our loss rate. We removed approximately $200 million in indirect loans, which lowered the current allocation requirement. Consequently, the long-term loss rate for the portfolio also declined. I anticipate that it will be closer to an average of the first and second quarters, primarily influenced by growth rates, credit trends, and charge-offs.

Got it. Okay. Great. Lastly, John mentioned that you had about $0.3 million in gains from the syndicated sale of equipment finance. Could you discuss that strategy and how you see it evolving over the next couple of quarters?

Sure. This quarter was really our first quarter in piloting that. It's gone extremely well. We've established relationships with 8 to 10 purchasers and with kind of identifying and formalizing the purchase agreements and identifying their credit box. For us, it's not going to be a significant portion of our business, but it is an opportunity for us to manage our outstandings and fee income and just gives us more flexibility, again, with our balance sheet strategies. I don't think it's going to be significant. I think this year, so far, we've done $10 million. As we move forward to next year, it might be $20 million, $30 million at most, maybe more.

And our next question comes from Brian Martin from Janney.

I wanted to ask about the loan growth outlook, particularly for 2026. Can you discuss where you anticipate that growth will come from? Additionally, are there any plans to bring on more staff, or are you confident in the current team's capabilities? You've mentioned M&A, but I'm curious about your perspective on organic growth. Do you feel the need to expand your personnel to enhance the growth rate, or are you satisfied with your current staff and not planning to make changes?

Yes, it's Thomas. Thank you for the question. If you look at this year, our growth rate was strong in our core franchise. Excluding indirect auto, our commercial growth rate was consistently in the low double digits. As we look ahead to 2026, this will be the primary driver of our growth rate, and as John mentioned, we expect that rate to be in the mid-single digits. The key difference is that Horizon is not finding many options to lend. We are maintaining discipline in our credit profile and managing our margins carefully. Therefore, we don't anticipate a need to significantly increase our headcount in the marketplace. We have established ourselves in both growth markets and our core markets and are performing well. Moving forward, we will be selective, ensuring we continue to grow in a smart and profitable manner while maintaining our credit profile. We are confident about our prospects for 2026. There is no need for us to experience an abrupt spike in growth; instead, we aim to take a measured approach and continue excelling in our local communities.

Got it. That's helpful. Regarding the full quarter impact, are we on track to reach the ROA level of around 1.60 by the end of the fourth quarter, or is that more likely to be achieved in the first quarter as we aim for that run rate on the ROA target?

This is John. Thanks for the question. I think if you kind of work your way through the guidance we gave specific to Q4, I think you'll find a result that's approximating the numbers you quoted or what we had quoted in the pro formas with the announcement of the balance sheet transactions. And then it's incumbent upon us, which we think will be the case to make sure that, that's durable and sustainable and view that to be the case as we look at 2026 at this point, too.

Got you. And just one last thing, maybe you mentioned this already, but I didn't catch the capital outlets and the capital accretion. Are buybacks part of that? I know you discussed M&A and organic loan growth. Can you remind us where that fits in?

I appreciate the follow-up question. As we consider buybacks in the near term, we just raised capital. We will always view buybacks as one of the ways to create shareholder value in the near term, or I wouldn't have mentioned it as our first option.

And ladies and gentlemen, that will conclude today's question-and-answer session. I would like to turn the conference call back over to management for any closing remarks.

Thank you all for joining us today, and I really appreciate the insightful questions. We value your time and interest in Horizon. As we anticipate sharing our fourth quarter results in January, I wish you a wonderful week, and thank you once again for your time.

The conference has now concluded. We do thank you for attending today's presentation. You may now disconnect your lines.