Earnings Call Transcript - BY Q3 2021

Operator, Operator

Good morning and welcome to the Byline Bancorp 2021 Third Quarter Earnings Call. My name is Sam, I’ll be your conference operator today. The conference call is being recorded. At this time, I would now like to introduce Brooks Rennie, Head of Investor Relations to begin the conference call.

Brooks Rennie, Head of Investor Relations

Thank you, Sam. Good morning, everyone. And thank you for joining us today for the Byline Bancorp third quarter 2021 earnings call. In accordance with Regulation FD, this call is being recorded and is available via webcast on our Investor Relations website, along with our earnings release and the corresponding presentation slides. Management would like to remind everyone that certain statements made on today’s call involve projections or other forward-looking statements regarding future events or the future financial performance of the company. We caution that such statements are subject to certain risks, uncertainties and other factors that could cause actual results to differ materially from those discussed. The company’s risk factors are disclosed and discussed within its SEC filings. In addition, certain slides contain and we may refer to non-GAAP measures, which are intended to supplement, but not substitute for, the most directly comparable GAAP measures. Reconciliation for these numbers can be found within the appendix of the earnings release. For additional information about risks and uncertainties, please see the forward-looking statements and non-GAAP financial measures disclosed in the earnings release. I would now like to turn the conference call over to Alberto Paracchini, President of Byline Bancorp.

Alberto Paracchini, President

Brooks, thank you. And good morning to all of you joining the call to review our third quarter results. Joining me on the call, our Chairman and CEO, Roberto Herencia; our CFO Lindsay Corby; and our Chief Credit Officer, Mark Fucinato. Turning over to Slide 3 in the deck for the financial highlights for the quarter. As is our practice Lindsay will be providing you with much more detail on our results, but I want to start by going over a few areas at a high level. Byline had another outstanding quarter driven by positive trends in a number of key areas. First, we had very good loan growth. Second, our margin expanded nicely from the second quarter; and third, we had stable credit quality, which when combined with strong internal capital generation allowed us to continue growing and investing in the business as well as return capital to shareholders. Our net income in the quarter came in at $25.3 million or $0.66 per share. This was a bit lower than last quarter, but results include a $2.7 million fair value mark on our servicing asset, which cost us about $0.07 per diluted share. Fair value marks in part of the business can go up and down on a given quarter, but are not reflective of our recurring earnings, which carried over consistently from the second quarter. Our profitability and return metrics were excellent across the board. Digging a bit deeper here, pre-tax pre-provision revenue was $34.2 million, which translates into a pre-tax pre-provision ROA of 207 basis points. ROA came in at 153 basis points, which was a bit lower on a linked-quarter basis, but up 72 basis points from the year-ago period. ROTCE came in at 16.2% reflective of strong profitability and capital management as well as materially higher than the year-ago level of 9.4%. Moving on to the balance sheet. The third quarter saw continued growth in both loans and deposits. Our results were driven by momentum across our lending businesses and the value of having a diversified lending platform. Production was strong across the board in C&I, sponsor CRE, equipment leasing, as well as in our government-guaranteed lending business. Loans, excluding PPP, increased by $348 million or 35% annualized and stood at $4.4 billion as of quarter end. This is the second consecutive quarter where we have seen significant loan growth. Excluding PPP, we had $428 million in loan production during the quarter, a record level for the company and up from $315 million in the prior quarter. We also benefited from lower-than-expected payoffs, some of which we expect to see in the coming quarter. On a year-to-year basis loans ex. PPP grew by $588 million, which gets us very close to our goal of being able to fully replace PPP balances with quality conventional loans. Of note is the contribution we’re starting to see from investments we’ve made in bolstering our banking teams, improved profitability and our position in the marketplace. Our credit standards remain consistent and we’re happy to trade off growth if the risk-reward equation supports it. Demand for credit remains healthy and the market remains competitive. Price competition in certain categories, namely C&I and CRE with particular emphasis on multifamily and industrial is notable. That said, lenders in the market are generally maintaining discipline in credit structures. Customer activity was another positive this quarter with both new relationship additions and with existing customers increasing the use of their lines. We saw commercial line utilization increase to 52.4% from 50.6% last quarter, which helped us drive some additional growth in commercial balances. Our government-guaranteed lending business had record production with $195 million in closed loans, up 36% from the prior quarter. Gain on sale income increased 4% to $12.8 million compared to the prior quarter. We worked really hard at quarter end to make sure we got our customers the benefit of lower fees and higher guarantees under loans prior to the expiration of certain subsidies at quarter end. We continue to remain the market leader in this business, and as of the government’s fiscal year-end on September 30 we’re the fifth largest 7(a) lender in the United States. Moving over to the liability side. With respect to deposits, we continue to see strong inflows of commercial deposits from the buildup of liquidity among existing commercial clients and from the addition of new relationships in the third quarter. Deposits grew by $66 million or 5.2% annualized and stood at $5.2 billion as of quarter end, with the growth coming primarily from money market accounts. Our deposit mix remains exceptional with DDAs representing 41% of total balances. Deposit costs were flat on a quarter-over-quarter basis and continue to be at a cycle low. This quarter was also the first full quarter we started digitally opening consumer deposit accounts. Results are modest at this point, but we’re encouraged by the traction we’re gaining with growing deposits digitally and seeing continued improved conversion rates as well as the early returns on some of our technology investments. Moving on to profitability, our margin expanded by 15 basis points, excluding accretion income, and was reflective of higher yields on loans and securities. It also expanded if you exclude the six basis point drag of PPP, which was very nice to see and positions us well for potentially higher rates at some point next year. Lastly, our efficiency ratio remained in the 52% range despite seeing the effects of higher compensation costs, some of which were variable and tied to production levels and the rest reflective of the current environment. From an asset quality standpoint, our results were very good. NPLs and NPAs declined again on a quarter-over-quarter basis in both dollar and percentage terms and are reflective of what has been a benign credit environment combined with ample liquidity in the market. Charge-offs declined quarter-over-quarter coming in at 13 basis points and our allowance represented 131 basis points of loans or 140 basis points excluding PPP. Our capital position remains strong with the CET1 ratio of 11.3% and a total capital ratio of 14.8% as of quarter end. Given our strong level of profitability and capital, we were well positioned to return capital to shareholders during the quarter. We repurchased approximately 460,000 shares of our common stock. We believe our balance sheet strength positions us well to support organic growth, continue investing in our franchise and pursue M&A opportunities while returning capital to shareholders. With that, I would like to turn the call over to Lindsay, who’ll provide you more detail on our results.

Lindsay Corby, Chief Financial Officer

Thanks, Alberto, good morning, everyone. I’ll start with some additional information on our loan portfolio on Slide 4. Total loans and leases were $4.7 billion at September 30, an increase of $163 million or 14.4% annualized from the end of the prior quarter. As Alberto discussed earlier, the new loan production and increased line utilization more than offset the forgiveness we had on the PPP loans and runoff in the acquired portfolio. In addition, we saw payoffs moderate for the first quarter, down $78 million to $140 million. We saw well-balanced growth across our commercial, commercial real estate and equipment leasing, which helped us offset the continued planned runoff of our residential mortgage loan portfolio. When PPP loans and the residential mortgage loan portfolio are excluded, our originated loan portfolio increased 35% over the past year, which reflects the growth in our core commercial client base. We continued to be encouraged by the demand we’re seeing in our equipment finance business, which is up 78% over the past year. With respect to PPP loans, we have included a page in the appendix on Page 14 that provides details on the balances, forgiveness, and fees from the respective round. Turning to Slide 5, we’ll look at our government-guaranteed lending business. At September 30, on-balance sheet SBA 7(a) exposure was $468 million, approximately $6 million lower than the end of the prior quarter with $81 million being guaranteed by the SBA. The USDA on-balance sheet exposure was $76 million, up $8 million from the end of the prior quarter of which $37 million is guaranteed. As the economy recovered from the pandemic, we continue to see improving trends in this portfolio with most borrowers returning to regular payment status following the expiration of deferral periods and subsidies. As a result, we’ve slightly decreased our allowances as a percentage of the unguaranteed loan balances to 8.1% from just under 9% at the end of the prior quarter. However, we remain vigilant as the economy and small business borrowers continue to demonstrate more resiliency. Moving over to deposits on Slide 6. Our total deposits increased $66 million from the end of the prior quarter to $5.2 billion. The growth came in our lower-cost deposit categories as we continue to see inflows of commercial transaction deposits that are replacing higher-cost time deposits. As expected, our total cost of deposits remained flat at eight basis points. Our deposit activity during the quarter continued to result in a positive shift in our mix of deposits. Non-interest-bearing deposits increased to 41.1% of total deposits while commercial deposits represent about half of our total deposits and 77% of non-interest-bearing deposits. Moving on to net interest income and margin on Slide 7. Our net interest income was $59.8 million for the quarter, nearly 3% higher from the prior quarter. This was primarily due to higher average balances of loans, slightly higher forgiveness on PPP loans, as well as lower funding costs. On a GAAP basis, our net interest margin was 3.91% in the third quarter, up 17 basis points from the last quarter. Accretion income on acquired loans contributed 11 basis points to the margin for the third quarter, up from nine basis points in the last quarter. PPP loan interest income and net fee income combined to contribute $5.4 million to net interest income for the third quarter, compared to $4.5 million last quarter. The Q3 margin also benefited from a 16 basis point improvement in the average yield on earning assets as the mix of earning assets continued to shift as a result of the robust loan production during the quarter. Looking forward, our GAAP margin will be impacted by the $7.5 million of remaining net processing fees from PPP loans though the exact timing and the amounts are dependent upon the SBA's timing and process for forgiveness. We believe our core net interest margin, excluding PPP and accretion, may see compression as a result of lower yields as loans continue to reprice. We anticipate that the margin should stabilize and begin to increase as rates begin to rise. Our balance sheet remains asset sensitive, and we’re well positioned to take advantage of higher interest rates in the future with approximately 61% of the loan portfolio invested in variable rate loans. Turning to non-interest income on Slide 8. In the third quarter, our non-interest income decreased $2.5 million from the prior quarter. The decrease was primarily attributed to a $2.7 million loan servicing asset revaluation charge, which was a downward valuation adjustment for the third quarter compared to a minor upward valuation adjustment in the prior quarter. This was due to a change in the fair value of the servicing asset as a result of lower secondary market pricing, early payoffs and servicing asset write-offs. This was partially offset by an increase in net gains on sales of loans due to higher volume of loan sales. We sold $104.2 million of loans in the third quarter, up from $100.6 million in the prior quarter. The net average premium continued to be strong at 12.9% during the quarter, although we did begin to see a slight decrease by the end of the quarter. Looking forward, the SBA enhancements for government-guaranteed lending ended September 30 and the guaranteed portion has returned back to 75% from 90% and the fee waiver program was discontinued for most new SBA loan originations. Our pipeline and investor appetite for government-guaranteed loans do in fact remain strong. But as we begin to sell more loans without the guaranteed fee waiver, we anticipate premiums to decrease in the beginning of 2022 and return to historical averages. Moving to non-interest expense trends on Slide 9. Our non-interest expense was $44.2 million in the third quarter, up from $43 million in the prior quarter. The increase was primarily attributed to two factors. First, our salaries and benefits expense increased by $1.4 million, primarily due to new hires during the quarter and increased commission expense. Second, we saw an increase in other non-interest expense mainly due to higher marketing spend during the quarter. On an adjusted basis, our efficiency ratio was up from the prior quarter, but improved from a year ago to 52.35%. We continue to focus on our expense run rate and we will continue to review for efficiency. As we continue to invest in our talented team, including the additional bankers and employees that Alberto will touch upon in his closing remarks, we believe the quarterly expense run rate will increase slightly and begin trending between $43 million and $46 million per quarter. Turning to Slide 10, we’ll take a look at asset quality. We continue to see positive trends during the quarter. Our non-performing assets declined five basis points to 56 basis points of total assets. OREO decreased by $1.4 million and excluding government-guaranteed loans our non-performing loans declined five basis points to 61 basis points of total loans and leases. Net charge-offs also declined to 13 basis points from 17 basis points of average loans and leases in the prior quarter. Our provision expense was $352,000 for the third quarter, an increase of $2.3 million compared to a $2 million release of provision in the prior quarter. The provision during the quarter was mainly driven by new loan growth and lease origination offset by a release of $1.7 million as a result of improved qualitative factors resulting from continued economic improvement. We continue to have a high level of total loss absorbency as measured by our allowance plus acquisition accounting adjustments, which represents 154 basis points of total loans and leases excluding PPP loans at September 30. Turning to Slide 11 outlining our capital position and our focus on returning capital. Through the first nine months of the year, we have returned approximately 49% of our earnings to stockholders through the common stock dividend and our share repurchase program. As Alberto mentioned, during the quarter, we continued to opportunistically repurchase our shares. Year-to-date, we have repurchased 1.3 million shares and with the expanded program we have approximately 1.2 million shares remaining authorized to be repurchased. We believe these actions to deploy our capital reflect our solid capital position as we continue to generate excess capital while allowing us the flexibility to grow both organically and strategically. Alberto, back to you.

Alberto Paracchini, President

Thank you, Lindsay. Looking ahead to our priorities on Slide 12. We remain laser focused on executing our strategy. Achieving quality organic loan growth across our lending businesses remains a top priority, and we’ll continue to add talent to support this objective. We have a great market opportunity and company culture, and have built a platform with ample room for growth. At the same time, we’ll continue to manage our expense base with an eye to take cost out of the operation in order to continue investing in our digital capabilities. Lastly, we want to continue to capitalize on market opportunities that can further add value to the franchise. As we previously reported to you in the past, we’ve been actively adding talent to the organization over the last several years, both in revenue and non-revenue generating areas of the company. This quarter was no exception as we added new leaders for both our wealth management business and for business banking, in addition to continuing to add bankers in our commercial banking business. Business banking is an example of us critically looking at our business, figuring out who the customer we’re trying to serve really is, and then organizing ourselves the best way possible to serve the customer in that particular segment. This approach to a business, coupled with a scalable platform with requisite size and capital strength, positions us well to effectively compete in the marketplace. On the M&A front, the market continues to be active, and we continue to evaluate opportunities that fit our criteria and can add value to our franchise. I’d like to wrap up today with a few comments on the market environment and our outlook for the remainder of 2021. While the third quarter was dominated by concerns of the surging Delta variant and supply chain challenges, we do remain optimistic about growth in the latter part of this year and into next year. Given the level of activity and liquidity looking for yield in the market today, we expect fee payments to pick up from the levels we saw this quarter. Notwithstanding, our pipelines remain strong, which positions us well for continued growth in the portfolio, and to continue remixing our earning assets from securities to loans. In closing, we’re finishing off the year in a strong position heading into 2022, and we’re optimistic about our ability to continue growing our franchise and creating additional value for our shareholders. I’d also like to say thank you to all of our employees for their continued hard work and dedication to serving all our stakeholders. With that, Operator, let’s open the call up for questions.

Operator, Operator

Thank you. Your first question comes from the line of Ben Gerlinger from Hovde Group. Your line is now open. Please proceed.

Ben Gerlinger, Analyst, Hovde Group

Hey, good morning guys.

Alberto Paracchini, President

Morning, Ben.

Lindsay Corby, Chief Financial Officer

Good morning, Ben.

Ben Gerlinger, Analyst, Hovde Group

I was wondering, if we could just take a higher level view of the banking landscape for the call. The last two quarters or so you’ve seen a bifurcation of banks. Some are willing to go lower on loan yields in order to increase loan growth, whereas some are willing to pull back in order to somewhat defend the margin. Byline seems to be able to do both. It seems like you guys have strong growth while also seeing pretty stable encouraging margins in terms of lending capabilities. So, I was wondering, going forward, do you think that a focus on more niche lending is an area to keep future margin stable, or do you think there are different opportunities that should provide upside going forward?

Alberto Paracchini, President

Good question, Ben. I think our view on that is we believe strongly in having a diversified lending business. So this quarter we benefited from really having all of those lending businesses have a very good quarter. It’s not going to be the case every single quarter, but it provides two things. It provides stability overall to originations, and second, it provides flexibility and diversification in terms of yield as well. Some of those businesses are growing. Some of those businesses generate higher yields. Other businesses have lower yields depending on obviously the type of business and the type of borrower we’re looking to serve. And I think the idea of having diversity that supports stability in the margin as well as diversity in origination sources is something that has paid off pretty well for us over the years. The last thing I would say is don’t forget that we also had a relatively large security position. Our security portfolio had been elevated. If we can continue to remix those earning assets from securities into loans, it adds tailwinds to our margin.

Operator, Operator

Your next question comes from Nathan Race of Piper Sandler. Your line is now open.

Nathan Race, Analyst, Piper Sandler

Yes. Hi everyone. Good morning.

Lindsay Corby, Chief Financial Officer

Good morning, Nathan.

Nathan Race, Analyst, Piper Sandler

Just going back to the loan growth discussion, obviously really strong, broad-based growth in the quarter. Curious how we can think about the drivers for that growth. I know Alberto mentioned that line utilization was a factor in terms of that increase in the quarter. But what’s also curious is to get some color around how much of this growth is coming from shared gains as well.

Alberto Paracchini, President

Nate, a couple of things. Obviously a strong quarter in terms of loan growth, no question about that. We had the benefit of a few tailwinds, as I mentioned in the comments. Prepayments came in lower than we expected. I suspect we’ll see some paydowns here in the fourth quarter that didn’t happen in the third quarter, which certainly helped us a bit. The residential mortgage portfolio runoff we’ve been discussing over the last several quarters also moderated in its effect as that portfolio is smaller than before. Another point is we have been adding bankers over the last several years, and we’re really starting to see the benefits in the form of contributions that those banking teams are making to our platform and our bank. The last thing I would say is this is something that we’ve been building and focused on so our pipelines have been building up. I think what we’re seeing is the size of the bank today and the different origination sources that we have, namely for example our leasing business which was not contributing a lot in years past, is starting to contribute at the margin a lot more. So going back to the benefit of diversification, this quarter we had the good fortune that all of these lines of businesses really had a good quarter in aggregate, and it’s not going to be that way every single quarter, but it speaks to the diversification of our lending platform.

Nathan Race, Analyst, Piper Sandler

Got it. That’s great color. So just trying to put all those pieces together in terms of thinking about the outlook, is our expectation for kind of high single-digit growth reasonable to assume going forward?

Alberto Paracchini, President

We’re still sticking to that number, Nate.

Nathan Race, Analyst, Piper Sandler

Okay, great. And then just maybe changing gears and thinking about the trajectory of the reserve going forward, would be curious to get your updated thoughts on the outlook for charge-offs going forward. Obviously the SBA unit is continuing to be the main contributor to charge-offs. So what are your expectations for charge-offs from the SBA unit going forward, particularly as some of the subsidies continue to roll off? And within that context, any thoughts on the absolute reserve level and the need to provide for that kind of high single-digit growth relative to some still unallocated excess reserves that were built up over the last couple years.

Alberto Paracchini, President

Good question. Let me unpack that in several ways. First, on charge-offs, as Lindsay mentioned, we remain vigilant. The credit environment has been benign and stimulus in many forms has supported borrowers. As that stimulus wears off completely, we want to make sure we have a good understanding of how borrowers come off this extraordinary period. We’ll continue to remain cautious and vigilant. In terms of reserves, we have built reserves to a level of adequacy that we believe is appropriate at this time, but we’ll continue to monitor closely and make adjustments as necessary. One additional point is there is a lot of liquidity in the marketplace looking for yield which presents opportunities; if there are credits we are concerned about or situations where we have an opportunity to exit certain things, we will consider that. So while charges have been very good over the last several quarters, we will continue to look closely at opportunities to anticipate potential issues and to take advantage of the environment. Lastly, from a capital perspective, if we continue to see good loan growth, we will provision to support that growth.

Operator, Operator

Our next question comes from the line of Terry McEvoy of Stephens. Your line is now open.

Terry McEvoy, Analyst, Stephens

Hi, good morning.

Alberto Paracchini, President

Good morning, Terry.

Lindsay Corby, Chief Financial Officer

Good morning, Terry.

Terry McEvoy, Analyst, Stephens

I guess, I hate to ask another loan growth question, but I’ll start there. Did you see much growth at all in your legacy middle market and commercial real estate portfolios this last quarter, or did a majority of the growth come from new teams and the specialized lending verticals that you run and that you’ve talked about already on the call?

Alberto Paracchini, President

Two things: we saw good growth in both our legacy C&I business — we’re seeing customer activity pick up and utilization increased — and we’re also seeing customers resuming activity including expansion and new equipment purchases, which is encouraging for our core customer base. On the real estate side the activity is more narrow: we’re seeing good activity particularly in industrial as well as multifamily; other asset classes remain quiet. For example, retail is muted and we’re not a big hotel lender — hotels are having challenges — and we’re not a big office lender either; that market is in a wait-and-see mode given the pandemic effects.

Terry McEvoy, Analyst, Stephens

Appreciate that. Thank you. And then Lindsay, could you maybe just remind us what more normal levels of net premiums or gain-on-sale spreads within SBA are, and is there a risk that premiums go a bit below given supply-demand issues and how strong they’ve been over the last four to six quarters?

Lindsay Corby, Chief Financial Officer

Sure. Terry, the best way to look at historical premiums is to go back and look at our previous performance prior to COVID, which was a more normalized state. This quarter it did dip down slightly, and we think we’ll see somewhere in the range of a 100 to 200 basis point decrease going forward. Keep in mind we share 50/50 with the government anything above 10%, so if premiums dip down from a gain-on-sales standpoint we only share above 10%, which moderates the impact.

Terry McEvoy, Analyst, Stephens

Okay. Appreciate that. And then I’ll squeeze one more in. What’s next for Byline’s digital banking group? You mentioned earlier on the call a new product was rolled out with some success — what are they working on and any comments as it relates to tech spending and on the expense side as you think about your budget for next year, how much that could grow? Thank you.

Alberto Paracchini, President

No problem, Terry. On the digital banking side, it’s nice to see we introduced the ability to open accounts digitally. That was rolled out in the middle of the summer after testing, and it’s encouraging to see traction on the consumer side. The next evolution is to enable that capability for business accounts — small business accounts — to open end-to-end in a fully digital process. The team is working on that and we expect it to come online toward the end of the first quarter or beginning of the second quarter next year. Aside from that, digital remains a big focus area and we’ll continue to invest. We are also looking to take costs out of operations in areas less important to customers and redeploy those savings into digital capabilities.

Terry McEvoy, Analyst, Stephens

Thank you both. Have a nice weekend.

Alberto Paracchini, President

Great. Thank you.

Lindsay Corby, Chief Financial Officer

Thanks, Terry.

Operator, Operator

Your next question comes from Tim Switzer of KBW. Your line is now open. Please go ahead.

Tim Switzer, Analyst, KBW

Hey, good morning. I'm on for Mike Perito.

Lindsay Corby, Chief Financial Officer

Good morning, Tim.

Alberto Paracchini, President

Good morning, Tim.

Tim Switzer, Analyst, KBW

I wanted to ask a question on your expense outlook moving to the $43 to $46 million range. I guess that's probably largely driven by new hires, but are you baking in any additional hires on top of the ones you've already made? Is that assuming you continue adding bankers and new business leaders? And then also where could expanded expense land if loan volume is higher or gain-on-sale doesn't moderate quite as much as you're expecting?

Lindsay Corby, Chief Financial Officer

Sure. In terms of expenses, the guidance of $43 to $46 million incorporates the additions Alberto discussed, and those people were brought on toward the end of the quarter so we don't have a full quarter of run rate there. Going forward, as we continue to add new teams and bankers we will update our guidance. We do see inflationary pressures in the market and that's another reason we guided slightly higher. So that provides color around the increase.

Tim Switzer, Analyst, KBW

Okay. So it doesn't necessarily include additional hires beyond the ones you already made?

Lindsay Corby, Chief Financial Officer

No, it includes the hires that we put in place as of today.

Alberto Paracchini, President

Tim, let me add to that. We've always been opportunistic when it comes to adding talent. If the right opportunity arises and we find the right person that's good for the business and long-term, we're going to do it and invest. So it's hard to predict, but we are comfortable if expenses are a bit higher in a quarter as a result of hiring incremental talent.

Tim Switzer, Analyst, KBW

Okay, great. And one more: you've talked about an active M&A market. Can you remind us exactly what you'd be looking for in a potential target and what criteria you guys are using?

Alberto Paracchini, President

Strategically, we're looking for good strategic fit, typically incremental markets where we don't have a presence and a complementary deposit franchise. Deposits are always a focus. We also look for targets with lending businesses we like, the ability to take costs out of operations, and to drive higher profitability through consolidation. Geographically we're focused on our general market area, which includes the greater Chicago metro area out to Milwaukee. Size-wise, we're typically targeting institutions in the roughly $300 million to $2.5 billion range. Financial metrics depend on franchise quality, but we're disciplined and historically have targeted earnbacks inside of three years depending on quality.

Tim Switzer, Analyst, KBW

That's perfect. Thank you.

Operator, Operator

Our next question comes from the line of Brian Martin of Janney Montgomery. Your line is now open. Please proceed.

Brian Martin, Analyst, Janney Montgomery

Okay. Good morning.

Lindsay Corby, Chief Financial Officer

Good morning, Brian.

Brian Martin, Analyst, Janney Montgomery

I was just wondering if you could comment on a couple things, Lindsay — specifically your thoughts on the margin. Can you clarify your comments about the margin ex. accretion, ex. PPP — where did that level land this quarter as a baseline to think about going forward?

Lindsay Corby, Chief Financial Officer

When you back those items out it did compress slightly, Brian, but the margin was still strong. The modest compression was driven primarily by the earning asset mix shift as we moved from securities into loans, which has been a positive long-term lift. Near-term headwinds are loan repricing and the unknowns around payoffs. Those are the two main factors driving the modest compression in the near term.

Brian Martin, Analyst, Janney Montgomery

Got you. And what level was that core margin when you take out accretion and PPP as you think about next quarter and the quarter thereafter?

Lindsay Corby, Chief Financial Officer

Brian, we don't give that exact number because with PPP you have to make assumptions on the funding side. We provide the pieces on Page 14 so you can calculate it based on your assumptions.

Brian Martin, Analyst, Janney Montgomery

Okay. And on SBA production, how are you feeling about production going into the fourth quarter and into next year with some of the subsidies gone? How should we think about that component?

Lindsay Corby, Chief Financial Officer

Pipeline remains strong and healthy as Alberto highlighted. Production is what drives gains on sales. From a margin standpoint, the shift from 90% guarantee back to 75% will result in more earning assets being sold where we retain 25% instead of 10%, which impacts the setup. But investor appetite remains good.

Brian Martin, Analyst, Janney Montgomery

Got it. On deposits, your DDA levels are impressive. As you think about the size of the balance sheet going forward, do you expect deposit growth to slow and to rely more on remixing securities into loans, or are you still seeing those deposit flows?

Lindsay Corby, Chief Financial Officer

You saw a slight increase this quarter and we’re seeing the inflows on the commercial side. There is a lot of liquidity out there; how long it stays is the big question, but your assessment is fair. Our goal is to continue to remix earning assets and deploy liquidity into loans.

Brian Martin, Analyst, Janney Montgomery

One last one: do you expect the remaining PPP forgiveness to be largely completed this year with some tail into next year, or do you see more extending into 2022?

Lindsay Corby, Chief Financial Officer

We had a great quarter in PPP forgiveness in Q3 and saw a good amount come through. Things quieted down a bit since, and it depends on SBA timing. I don't think it will all come this year; perhaps half this year and the other half trickling into 2022. There’s only $7.5 million of net processing fees remaining.

Brian Martin, Analyst, Janney Montgomery

Got it. Okay. Thanks and great quarter, guys.

Lindsay Corby, Chief Financial Officer

Thank you, Brian. Appreciate it.

Operator, Operator

We next have a follow-up question from Nathan Race from Piper Sandler. Your line is now open. Please go ahead.

Nathan Race, Analyst, Piper Sandler

Thanks for taking my follow-up. Just on capital management over the next few quarters: you guys have returned about 50% of net income to shareholders in each of the last two quarters. Can we expect that level to continue near term, and how does that fit within the context of acquisition opportunities you’re seeing?

Alberto Paracchini, President

Nate, the way I would think about it is that our actions afford us great flexibility going forward. Whether to continue increasing the dividend over time, deploying via buybacks, first and foremost supporting growth in the business, or to have flexibility for M&A. If we continue to generate excess capital we will have the flexibility to deploy it strategically or return it to shareholders. The exact mix will depend on the opportunities we see and the capital position at the time.

Nathan Race, Analyst, Piper Sandler

Got it. I appreciate all the color. Thanks and congrats on the great quarter.

Lindsay Corby, Chief Financial Officer

Thanks, Nate.

Brooks Rennie, Head of Investor Relations

Yes. Thank you. Thank you for your question today. I will now turn the call back over to Mr. Paracchini for any closing remarks.

Alberto Paracchini, President

Great. Thank you, Sam. And that concludes our call this morning. On behalf of all of us here, thank you for your time today and your interest in Byline. We look forward to speaking to you again next quarter and next year. Thank you very much.

Operator, Operator

This concludes today’s call. Thank you for joining. You may now disconnect your lines.