Q4 2020 Bancorp Inc Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to the Q4 2020, the Bank core earnings Conference call.

At this time all participant lines are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During this session you will need to press star one on your telephone. Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero I would now.

I turn the conference over to your speaker today Andres various loss. Thank you. Please go ahead Sir.

Thank you operator, good morning, and thank you for joining us today for the Bancorp's fourth quarter and fiscal 2020 financial results conference call on the call with me today are Damian Kozlowski, Chief Executive Officer, and Paul Frankel, Our Chief Financial Officer. This mornings call is being webcast on our website at www dot the Bancorp dotcom there'll be a replay of the call beginning at approximately 12 P M Eastern time today.

The dial in for the replay is 8558592 056 with a confirmation code of 895 to nine for seven before I turn the call over to Damian I would like to remind everyone that when used in this conference call. The words believes anticipates expects and similar expressions are intended to identify forward looking statements within the meaning of the private Securities Litigation Reform Act of 19.

95, such statements are subject to risks and uncertainties, which could cause actual results performance or achievements to differ materially from those anticipated or suggested by such statements for further discussion of these risks and uncertainties. Please see the bancorp's filings with the SEC listeners are cautioned not to place undue reliance on these forward looking statements, which speak only as of the date hereof. The Bancorp undertakes no.

To publicly release the results of any revisions to forward looking statements, which may be made to reflect events or circumstances. After the date hereof or to reflect the occurrence of unanticipated events.

Like to turn the call over to Bancorp's, Chief Executive Officer, Damian Kozlowski Damian.

Thank you Andres good morning, everyone. The Bancorp earned 41 cents a share on revenue of $75 million and expenses of $42 million for the full year 2020, TB BK generated $1 37, a share this exceeded our original guidance range of $1 25 to $1 30 for share and our revised guidance target.

For the Covid of $1 25, a share.

Revenue climbed 35% driven by year over year increase in net interest income of 47% and noninterest income of 14% cost of funds was down 61% year over year illustrating the benefits of our payments funding model for the full year 2020 revenue increased 14% over 2019 expenses declined 12% for the quarter and two.

A percent year over year cost control and efficiency continues to be a main focus of management.

Net income from continuing operations grew 132% quarter over quarter, and 34% year over year after adjusting for prior year civil monetary penalties.

In the fourth quarter, we saw continued business momentum led by gross dollar volume G. D. D. In our cards business of 18% this quarter GDP growth was lower than previous quarters likely due to the elections, we experienced a depression and spend in November prior to knowing the full outcome of the presidential election, they're small.

We restored in December it does not appear to be a long term trend. We also added assets led by 56% year over year growth in our securities and insurance lending platforms. Additionally, our commercial business has continued momentum with SBA, excluding PPP growing 3% and leasing growing 7% quarter over quarter.

We have completed our strategic business plan strategic agenda budget for 2021 main focus continues to be on product and platform expansion with a rigorous focus on building the best payments ecosystem in the financial services industry. Our plan includes a comprehensive and integrated analysis of the market and competitors and the needed investments to build towards the future and create scalable core competencies.

That our partners can use to innovate and grow we also continue to invest heavily in anti money laundering, and compliance have best in class capabilities to meet regulatory guidance and expectations.

As previously announced our board has authorized a buyback of shares to commence in the first quarter of 2021. We are currently in the market repurchasing shares for bank and purchased 10 million TV Vaca shares per quarter for the balance of 2021 totaling $40 million of shares repurchased at this time the bank believes that its shares are undervalued and buybacks.

Would be the most efficient way to return capital to investors dividends were considered as an alternative but the current bank stock valuations and T V BK business prospects buybacks redeemed economically advantaged dividends could be added to buybacks in the future as valuations rise or TBA VK approaches this long term return goals.

Lastly.

Our guidance target for 2021 is $1 70, a share or approximately $100 million and net income for earnings per share estimates do not include share repurchases.

Now turn over the call to Paul for ankle, our CFO to give you more color on the fourth quarter.

Thank you Damian return on assets and equity for the quarter were respectively, one, 6% and 17% compared to third quarter asset and equity returns of one five per cent and 17%. The increases were driven primarily by a $16 $5 million increase in net interest income the increase in net.

Net interest income reflected the lower cost of funds growth in higher yielding small business SBA and leasing and the retention of the commercial real estate portfolio. We previously had been securitizing. The vast majority of that portfolio is comprised of multifamily loans I E apartments with cumulative COVID-19 losses estimated by a nationally recognized.

For analytics firm at 1.2% these loans, which total $1 6 billion generally are on our books at a $99 price or lower and have a weighted average rate floor of four eight per cent.

S block and I back loans also amount to approximately $1 6 billion and while their yield is estimated at 2.5 per cent.

Those portfolios have not experienced credit losses due to the nature of the collateral.

Our next largest portfolio of small business loans is comprised primarily of SBA loans with a year end total of $822 million, which reflected $42 million of fourth quarter repayments of short term P. P. P loans, the remaining $166 million of P. P. P loans should be repaid by the treasury over the coming quarters.

Approximately one point for millions of fees will be recognized primarily in the first quarter 2021.

Legislation enacted in December provides for additional P. P. P loans and we intend to participate in that program and the new program borrowers will have to exceed loss revenue thresholds.

To qualify for new P. D. P loans Accordingly, we believe the amount of new P. P. P loans will be less than the $208 million generated in the first program, which yielded $5 $5 million in fees.

S. B L portfolio has an estimated yield of four 9%.

While SBA commercial mortgage loans have origination date loan to values of 50 to 60 per cent S. V. A seven day loans are generally 75% guaranteed by the U S government and.

In addition to the six months of government payments on those loans authorized by the cares Act, which mostly ended in the fourth quarter. The December legislation authorizing an additional three months or longer of payments on those loans.

The U S government will also make up to eight months additional payments for business is determined to be more impacted by COVID-19, including hotels and restaurants. Unlike the six months of cares Act payments. These additional payments will be capped at $9000 per month.

In addition to SBA loan growth, we increased leasing balances to $462 million from $431 million at the prior quarter and leases have an estimated yield in the 6% range, we emphasize diversification and our small business and leasing portfolios, which is detailed in the tables in the press.

Please which segment loan portfolios by loan type collateral and geography.

Deferrals increased to slightly over 3% of loans from 1.2% at September 30th the increases were primarily in commercial real estate loans and SBA loans SBA increases reflected deferrals for customers until the additional three or eight months of government pay.

Payments begin on February 1st. They also include increases for commercial mortgage five O for loans, but note that those loans are 50% to 60% loan to value.

Commercial real estate loans increased by approximately $20 million, consisting of a new hotel and movie Theater complex deferral.

Should be noted that those loans are fair valued and we are not concerned with the overall increases in deferrals.

For this quarter, we nonetheless expanded disclosures to detailed the diversification of loans for which borrowers have requested deferrals.

The $16 $5 million increase in net interest income reflected increase increase.

Increases in average quarterly CRE loans to $1.6 billion, while related interest income increased $11 7 million.

Interest on SBA loans increased 2.1 million, including approximately $1.5 million of recognized P. P. P fees, while combined S block and I block loans increased 55% over those periods related interest income was approximately equal reflecting the federal reserve interest rate.

<unk> reductions in 2019 and first quarter 2020.

S block loans are secured by marketable securities and <unk> block are secured by the cash value of life insurance and credit losses have not been incurred.

Interest expense was $5 $1 million lower than the cost of funds was 24 basis points for the quarter, reflecting the impact of those federal reserve interest rate reductions most of our deposit interest expenses contractual and tied to market interest rates.

The net interest margin in Q4 was $3 five 8% up from 3.37 in Q3, reflecting higher securities income Q3 reflected the impact of premium amortization.

On prepayment speeds, which was less pronounced in the in the current quarter, the continuing impact of reductions of higher yielding securities either through prepayment or maturity will likely continue as the overall trend of yield reductions. Additionally.

Additionally, the margin benefited from reductions and lower balances at the Federal Reserve bank, which earn a nominal rate and which will likely eventually returned to historically higher levels.

The provision for credit losses was approximately $550000 and resulted primarily from growth in leasing and advisor financing balances as the company experienced net recoveries during the quarter.

Because S block and I block loans are respectively, collateralized by marketable securities and the cash value of life insurance and have not incurred losses management excludes those loans from the ratio of the allowance to total loans in its internal analysis accordingly, the adjusted ratio is 1.4%.

Prepaid accounts, our largest funding source are also the primary driver of noninterest income.

<unk> and related income on prepaid cards were up 5% to $17 8 million in Q4 compared to $17 million in Q4 2019 on an annual basis those fees increased 14%.

Card payment and a C. H processing fees include rapid funds revenue and decreased 174000 to 1.8 million, reflecting the exit of non strategic higher risk a C H customers and an exit due to a change in ownership.

Noninterest expense for Q4, 2020 was $41 $8 million, which represents an increase of 4%. After adjusting Q4 2019 for an FDIC settlement of $7.5 million that increase and that increase resulted primarily from higher salary expense.

<unk>, which reflected higher incentive compensation expense, we continue to focus on expense management, especially in relation to revenue growth.

In December 2020, the FDIC issued regulations, which should result in the classification of a portion of the bank's deposits as non brokered the regulation takes effect in Q2, 2021, and we intend to pursue the steps required for the Reclassifications such Reclassifications could result in a future reduction of.

FDIC expense.

Book value per share increased to $10.10 compared to $8 52 at December 31st 2019, reflecting earnings per share and the increased value of the investment portfolio in the current rate environment for Q4, 2020 consolidated leverage ratio, which is based upon average quarterly assets exceeded <unk>.

9% and risk based ratios approximated 14 per cent.

In closing there are certain characteristics of our loan portfolios as further detailed in the tables in the press release, which I would like to highlight as previously mentioned the vast majority of our $1 6 billion of commercial loans held for sale are multifamily loans, specifically apartment buildings for which a nationally recognized.

VIX firm has estimated cumulative losses of 1.2% and their COVID-19 projections.

Those loans are already on our books at levels, reflecting that discount.

The S block and I block portfolios. Our proxy are also approximately $1.6 billion and have not incurred credit losses, notwithstanding the recent historic declines in equity markets approximately.

Approximately 62% of the $822 million small business loan portfolio, including PPP loans is U S government guaranteed the majority of the other small business loans consist of commercial mortgages with 50% to 60% origination date loan to value.

For leases, which experienced credit issues, we have recourse to the leased vehicles. While there is uncertainty related to the future. We believe these are positive characteristics of our portfolio, which demonstrate lower risk than other forms of lending I will now turn the call back to Damian.

Okay. Thank you Paul we're going to open up for questions. Operator would you open the line for questions.

As a reminder to ask a question you will need to press star one on your telephone if you wish to withdraw your question press, the pound or hash key and please standby for hopefully compile the Q&A roster.

Your first question is from William Wallace with Raymond James.

Thank you good morning, guys.

Sure.

Hum.

Have a a handful of questions maybe let's just start with the GDP trends is interesting commentary during your prepared remarks that you saw a decline.

Leading up to the election, and then a bounce back in December is this.

Is this the bounce back in December I guess, a couple of questions. What do you anticipate debt that you can recover the lost spending and kind of leading up to the election or is that just sort of lost money.

And what are your overall expectations for 2021 as to how we might see the spend grow and also what you might expect on day are the margins there.

So I have no idea on that first part of that question I would assume that.

Unless the savings rate goes up on a macro level that people will spend the money sooner or later, but I couldnt, possibly calculate whether or not over 130 million cards people will spend that money, so I'm going to lay that one aside.

On the second one we're targeting where over a much larger base now we had it's just phenomenal what happened last year, we had a third growth.

That's going to far exceed any other player in the marketplace, but we're targeting 20% or more growth GDP growth over at over in our plants and I think we're trending that way, we still have an extremely strong pipeline we've added.

As you know several new large programs that really haven't started going into high gear and there is certain segments like in.

Health care and things like commuter cards that really haven't contributed and 2020.

<unk> because of Covid situation. So I think as we and this is not even suggesting theres going to be another stimulus. So.

As the economy reopens in the summer hopefully.

I think you're I think we'll be right there on trend I think will be above.

Digit target that we have and if we get stimulus or something else will probably be above that.

Yeah.

Okay, and if you if you can get the 20% plus growth in GDP could that translate into 10% plus growth in <unk>.

The revenue line or it looks like it for not too.

That's always a little bit less than half of the GV growth, so meaning priceless hubs.

Birmingham ideals.

We had 33% growth in 2014%.

Fee growth. So you know, it's roughly half it bounces around depending on which programs are growing at which times so for.

<unk>, 45% to 50% of the GDP growth seems like right now with our mix that's likely because we have a lot of new programs coming on and there are tiered so the higher fees come in the earlier part of the program. So right now it looks more like for the 50%. If we did 20 to 25.

It would be half that right now with the mix that we have today.

Okay. Okay, great. Thanks, I appreciate that.

Color and.

To ask you about.

The rapid funds product.

Okay.

Yes.

The launch of their wallet.

Okay.

Okay.

Yeah.

Okay.

Operator.

He has disconnected.

Okay, Yeah again, if anyone likes to ask a question. Please press star one on your telephone.

Your next question comes from Frank Schiraldi with Piper Sandler.

Good morning.

Frank has everything.

Thanks.

Guys are well.

I wanted to start with the guide I just want to make sure I didn't miss.

In the in.

In the release you pointed to the $1 70 in the past you've talked about the $1 65 for 107 day for EPS for 2021.

You know it doesn't include buybacks what else is not included there so.

A second stimulus I guess, even the the one that went out.

The direct payments to individuals in January is that <unk>.

<unk> in our guidance.

No we put none of them none of this stimulus right, we're expecting a depressed environment until the mid summer when the economy opens up again, so we haven't really built that in.

We've just taken the tread line we're not.

We're not expecting.

That was a smaller stimulus as you know the real question is whether or not we're going to get the bigger one right.

Alright.

Hunter so so.

That'll have a marginal impact just to just generally though.

If you look at where we are today.

We do our modeling in a very dynamic way. So we look at offsets and positives right now there does seem to be a preponderance of possible positives and those are the two real drivers for stimulus and the opening of the economy. So we don't really know what that's going to.

We're getting pretty good GDP growth that just came out at 4%. So if you were to get a big bump in the summer.

Excess of that it probably would have a pretty good impact not only on payment spend but it would have an impact on our lending businesses positively so, but we haven't built that and we've looked at.

Where we are today at day 41 cents a share it's pretty clean it's a run rate.

And if you look at our growth of our book It does seem that on a steady state basis, even if we don't get a lot of these tail winds will be up will still be able to meet that guidance. That's why we I took off the 165 I think it's pretty.

170, I would feel very comfortable with and we'll update that as we get more information about the economy.

If we do get the positives we would update.

Update that guidance.

Okay.

And then just on the the change in designation.

Deposits or at least some of them from brokerage to non brokered.

Any sort of I'm, assuming that's not in your guidance because we don't know how much you're really going to save there I guess.

But any sort of thoughts in terms of.

What percentage of your deposits will fall off net debt or become non brokered versus brokered it.

It could be as much as 40 or 50% and Youre right. Its not included that as one of those tailwind, but I'll give that to Paul he's been working on the process.

Okay.

Yeah, So Frank yes, there definitely if we get a high enough percentage of our deposits. There definitely are some potential FDIC reductions you really have to go through on a program by program basis, and analyze each program and the.

Application has to be filed for a certain of them and then the FDIC makes the ultimate determination. So because it's the fdic's determination, we're not really going to add you know as to give an estimate of what we think but we are going to do.

Do the applications and go through the processes.

And we think there's some savings going to happen, we just can't estimate the amount.

Okay.

And then just back to a GDP growth.

I don't know if you have it or you can just any color you gave your thoughts for the full year, just wondering how it's trending to start the year year over last years.

Results at.

It's trending exactly like I said, so even over with all the enormous growth we've had it's still trending very positive with.

Very strong pipeline in the range of our target so okay.

If we obviously if we get the stimulus that is going to match up if they wait any longer it's going to match up perfectly with the last year. So we'll see what happens.

If they do that or not but we're not counting on it like I said, we think we're still going to be in a really good position to share regardless, if they do that.

Got it.

Right and then obviously last year, it's tough to.

Compared to those results where to your point you were growing.

Quarters, 40% year over year, but so just to.

So the expectation this year is for what 20% plus.

Losses in aggregate, so yes, yes.

For long term target is 20% or more.

Okay. So and then hard to these things are very seasonal and everything so one month might be less we had the slowdown in November which wasn't only us it was across the entire economy, but.

Say, it's a systemically if you look at it systemically.

Very positive just because of virtualization and the partnerships that we have the key partnerships. We we have long term contracts with but all the partnerships, we're developing and implementing now for long term trend, even though that were probably we were eight on the list of the Nielsen less last year, we might be as high as five or for this year.

Behind the three big money Center banks.

It's a much bigger base, but all the necessary conditions are in place to grow it long term at that level.

Okay and I just wanted to just ask about something visa visa set in there.

On their call they talked about debit growth being being three points lower in the December quarter linked quarter, driven by a step down and unemployment benefits that were distributed through prepaid cards.

Is that impactful to you and is that an important.

Or meaningful potential growth if those unemployment benefits come back online to the extent they were in 2020 earlier in total yes.

Yes, that's another tailwind again, because we see the same things we deal with obviously a lot of those payments go into our cards from our debit partners and so yes. That's correct I don't know exactly the percentage fees is very accurate I think I don't know the exact percentage on that but it's.

It's a few percent probably.

Okay. So that is important but I guess.

<unk> stimulus is not baked into your expectation that those unemployment benefits coming back online are not baked into your <unk>.

Expectations of long term growth is that fair.

Just don't plan for other people.

Planning our pipeline of programs and that's what we based our budget on.

We don't hope for the government intervening in the structure of the industry. You just don't know you can't.

Those are all gravy, let's put it that way.

Okay.

Fair enough.

I'll I'll re queue, let somebody else ask questions. Thanks.

Hey, Thanks, a lot for Inc.

Again, if he would like to ask a question. Please press star one on your telephone.

And your next question is from Mitchell follow up questions from Mr. William Wallace with Raymond James.

Well good morning, Yeah. Thanks, I don't know what happened I'll try again.

And I apologize if I ask a question that Frank asked you can just referred me to the transcript but.

What I was going to ask was if you could update us for and trends in the business and the rapid funds.

Uh huh.

And if youre experiencing good.

Good onboarding of new customers that I look at the <unk> line down for the year and I was hoping you could just kind of give us an update.

So yes.

It will be it will be very positive. This year. So what we did was look at the entire envelope of activities, we were doing and ACTH and also looked at because our consent order restricted merchant acquiring.

We developed a path forward on that business, so youll see 20% plus.

Plus fee growth in that area. This year, most likely that's what we're predicting.

And that's based off of rapid funds and acquiring.

So we've really if you recall we had some.

Payroll business previously that we.

Exited as well as there is there was as Paul alluded to in his comments. There was one partner that left because of an acquisition that was that was done but that was in our core business of ours, either so what we've done is restructured the business we cleaned the risk what we thought were the riskier parts out of it and that's why you saw the decline this year.

<unk>.

We're seeing we're still seeing.

Growth in the.

Indirect rapid funds with the Big partners and we're starting to build volume now with direct rapid funds, which is which is where we are integrated into the system with a processor. So we should see pretty good fee growth on that line this year.

Okay, great. Thank you.

And then I noticed there was about one and a half million dollar gain on loan sales what was that from.

We win when commercial are the loans, we previously held for securitization when their report.

Paid or refinance to another institution, we earn an exit fee.

Okay.

Yes, just one thing.

Just one thing to add to that we have a future because of these are transitional loans, we still have a.

Around $250 million of future fundings. So we while some loans may refinance youre going to have future fundings come in to replace them. So we're going to have very good income stability in that portfolio over the next two years whenever anybody does refinance will will get those fees.

And remember that our balance sheet at 99 also so if they're paid at par so realize that.

Yeah. So we should anticipate there should be.

Some recurring some recurring revenue there it might be lumpy from quarter to quarter, but over the course of the next three to five years that that's probably a recurring line item.

Yes, so for the next two years, you'll get lower amount of fees.

Right for the next two years.

Because your.

We just can't predict how many people will decide to finance it space that a lot of attributes but.

It's hard to see that there will be enough.

More than the future fundings that are committed to those projects. So.

It's really after two years, where you'll see.

As people hit the three year, Mark that's where you will you won't get the exit fee, but you remember they are booked at 99, so you'll you'll get as they roll off as they are prepayments happened you'll get that.

Okay and then.

Excuse me as you see any change in the credit metrics of any individual loans like you mentioned the hotel in the theater that went onto deferral. This quarter does the 1% Mark on the whole portfolio cover trends like that or are these loan by loan marks.

There are loans by their their loan by loan Mark So we have.

Basically 1% on each loan.

But if you look at it over the next two years versus <unk>.

Versus you know.

Potential losses.

I think it's significant that.

Debt, if we have the COVID-19 losses that are predicted and by the way. We don't think we will we've underwritten these loans.

Much more carefully than just would be represented by a blanket estimate of charge offs for all multifamily, they're not like the high end and so forth, they're really working class type.

Type of apartments, but even if you assume that one 2%.

If you look at the Mark overall at 99 for the kind of the $1 $6 billion portfolio that really offsets over the long term, although the point, you're making is true that if you had a credit event that for.

1% discount would not offset that one time credit event initially.

Okay. Thanks.

Pretty straight that clarity I appreciate it.

And then following up on the FDIC insurance can you are you able to tell us how the equation changes if you have a broker deposits go for broker to non brokered.

There is there.

There's there are a lot of factors in that Wally that it makes it probably not a prudent thing to estimate the FDIC insurance like it's based on capital levels. It's based on the percentage of nonperforming loans.

It's based on just a whole host of items. So.

I think that the lesson is that or the thing to take away is that all other things equal if we can class reclassify enough of them and we do believe we have a significant amount.

That expense line item should go should go down and that's our goal.

Okay, and I guess, maybe maybe maybe to help us think about it is that.

We anticipate that that all flows to the bottom line or does that give the opportunity to invest more in any existing businesses for new business. Its bottom line, we already have our plan.

Everything we're talking stimulus the.

I don't know if you heard the comments with Frank but the stimulus the reopening of the economy FDIC insurance.

Payments to unemployment none of that all those are really not built into the base case, we really are running at a 41 cents a share already run rate. If you. Obviously, if you combine that times for your added 60 for share so.

We've got.

Is the bias up yes, there is.

No doubt, but those tailwind, we don't know whats going to happen with the Covid. We were very careful last year when everybody else took off their guidance.

We kept our eyes on and really looked at it on a run rate basis. So we're doing the same now it's not we're not totally out of the woods.

The bias is probably up on on good events could happen, but we don't we just don't know obviously because of this situation.

Okay, Yeah got it thanks, that's that's good.

Good day know that there's some potential upside drivers not considered.

On the net interest margin. Paul you gave you gave a lot of.

Color in the prepared remarks, and I can read back through that but I'm curious I didnt catch anything about what any potential impacts from.

A P. P P fee acceleration on forgiveness to did you quantify that if not could you.

Well clearly it's going to help Blake.

If the loans are repaid PPP loans are repaid.

Quaker the and I'm talking about the new round in 2021, then we recognize those fees over a short period of time, but if you look at the original one we estimate it would take 11 months and we saw the first wave of $42 million in the fourth quarter, but that still leaves us with $166 million.

So we're not planning on any acceleration.

We have about $1 4 million that will take in the fourth quarter, which is the last of the old PPP and then of course, the new P. P. P. As I said in the comments.

We expect it to be less because the borrower has to show that they had a quarterly drop of 25% in revenue. So so that all of all else equal that should reduce.

For the $5 5 million, we got and fees on the first PPP.

What was the so far on the second round or third round whatever you want to call. It where are you whats the dollar volume of applications. So far.

Yeah, Yeah, I don't know that we really want to speak to that it's they've really got to be funded and everything they've got to go through due diligence. So when we have a number a reliable number we will publish that.

Can you just say 42 million were forgiven in the fourth quarter.

$42 million were repaid by the government out of the $208 million. The government repaid is 42 million in the fourth quarter.

And what was the fees that accelerated tender and debt.

We'd been straight lining them over 11 months. So we didn't really have any acceleration in fact, they're slightly slower we're hoping that in the first quarter, we get the rest of it back.

Okay Gotcha.

Okay last.

Last question just on capital management so.

We're in the market now buying back shares.

Your earnings stream is.

Strong and seemingly predictable what are the considerations about implementing a dividend if any.

Okay. So we think our multiple is still low.

With a 17%.

ROE and growing and at one point over a 1.5 ROA, we're still undervalued and our p/e multiple in our market to book. So we think we should be at least.

Right now.

In the low twenties.

I really believe that and we're going to continue to buy shares until we are fully valued once we are fully valued and we think that will come over.

Maybe the midterm, which 18 months maybe.

We will we are definitely going to consider.

Maintaining buybacks of some sort probably but then adding a dividend. If you think about where the market is the market returns between 40, and 50% about 85 per cent of banks in that range return mostly banks.

Lower growth banks with ROE.

More like 10% to 12% range returned dividends.

But where we have a different prospect in our we believe our stock to be undervalued. So once we hit that multiple market. Multiple we think is right at that point in time. The board will consider a dividend in addition to some structure of buybacks.

Great.

Thanks, Damian I appreciate all the color I'll step out in case, there is any other questions in the queue.

Thank you Wally.

Your next question comes from Adam Horowitz with Tier places.

Hi, Thanks for taking the question.

Actually your previous response matrices, but I wanted to ask about.

Could you describe your progress over this year and shifting income from the balance sheet to fees because some of the investors I assume like me are more focused on your p/e.

E.

So we focus very obviously, we're high fee now because of the way we fund the bank obviously.

And we're always looking at our feet growing opportunities even outside of our payments business. So we want to continue to build that stream.

Throughout our businesses and what you saw this year was an extraordinary situation on our on our balance due do an extraordinary interest rate and dislocation, where we ended up holding a substantial amount of loans that we securitize and this very outs.

Sized.

Amount of loan growth that we saw in.

Certain areas like guess blocks. So when you when you.

When you when you look at the systemically Youll find that we grew our spread revenue very aggressively.

Because of the.

Obviously the collapse in funding so that should be more steady going into the next three years.

With the fed comments that interest rates are going to remain low you'll see that the spread income will grow obviously, but not in that disproportionate way due to the shock and so the balance between fees and spread.

The spread revenue will.

It'll start to show larger.

A larger.

Fee gains I believe in the.

Fees fee area rather than.

This one time.

Dislocation that increased spread substantially.

Thank you.

Your next question comes from Christopher Hillary with Roubaix capital.

Hi, good morning.

Good morning.

I just wanted to ask when you look at your 2%.

Medium long term ROE target what are some of the things that will help you get there sooner versus what might.

Slow you down and if you could sort of thing.

Take us through a few of the areas that you have some influence on that would be terrific.

Well, it's all about but I'll just throw out the Paul So it's all about balance sheet management. So we're trying to very effectively use our size right. So we don't want to have a lot of excess cash or loans that we don't think are accretive. So you saw a GAAP up this year.

Our size of bank from four five to six and we supported that obviously through that what we just talked about on the phone was this one time substantial collapse and funding rates. So that you also you saw ROA right. So we are very.

Cognizant of our returns so we want our ROE our use of equity at our use of our balance sheet to be very focused so we don't like to do things that erode that so we have a lot of liquidity on our balance sheet. We generally carry three times of primary liquidity, but we don't want to carry more than that.

Other of our peer group so we want to add good assets that return good returns.

So here's an example, like our net S block business Theres been a lot of chasing and even going down below 2% on these variable rate loans, we don't do that we set floors. So it's all about rigorous balance sheet management, and making sure that youre not utilizing your assets and low return.

For low returns and I just wanted to note that we do have a low even with our growing ROA. We do have a portion of our bond portfolio. It's fairly low return so as that as we need liquidity, we can reset that bond portfolio, let the liquidity some of that liquidity drain off and use it for higher.

Higher.

Returning loans like in leasing and our small business franchise.

Yeah, I would I would add to that yeah, I would add to that debt are our expense.

Management and managing non interest expense on.

Our growing base growing asset base is also key and then as it relates to the last question on fee income. If you look at the fee income increases the potential fee income increases implied by the G. D V growth the rapid funds and the payments business, which we're expecting.

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To get back on a on an increasing trajectory.

Those fees and those and the expense management are the two keys.

Well, thanks very much good luck with the rest of the year.

Thank you.

Again to ask a question press star one on.

And your next question comes from Frank.

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Sure royalty with Piper Sandler.

Still net back sorry, just one quick one about consumer credit and the opportunity there and more so if that is something that could you could see.

Being a part of a meaningful part.

Uh huh.

Earnings growth by the end of the year or is that more sort of something down the road.

Well no I don't know I don't know if <unk> ended the year, but that's obviously I don't think we'll be in the low end of that Paul on the sub prime area, but we're looking right now developing a credit roadmap.

For the next three years. So we're definitely looking at that Avenue, probably with us with a financial partner.

In credit sponsorship, we probably won't.

Issuing some type of credit like products today, but we're not we're not looking to save to get in the credit card business right. So this would be the potentially the financing of consumer receivables.

It's definitely going to be part of our business will be by the end of the year, probably not that's another longer term initiatives.

And it will probably be in a format.

Somehow it's delivering it in a virtual way, we're probably not going to do direct home mortgages those type of things it'll be more.

Consumer receivables that were working with a partner.

A program manager in order to facilitate.

Gotcha, and then just a quick one on the NIM for for Paul just a follow up on the debt.

Triple P.

Amortization, so is it about so I'm coming up with about $2 million.

Quarter.

That's been running out a million and a half about a million and a half.

And that should run off next next quarter. After the first quarter correct and then we will have the new P. P. P. In the second quarter by the second quarter and there is one thing to mention.

Is that we do we are working in the PPE area with a partner.

Which might result in additional fees that wouldn't be direct loans that we originated and those fees might replace.

Up to in the $2 million range.

So there may be some additional upside on the PPP in addition to the.

Our own.

Origination so we're working with a partner who is doing a.

Abetted partner.

This is a this isn't built into our forecast either in this is.

We'll see how the program.

Works, but it could result.

We're between zero and $2 million or so in fees that would be additional PPE PPP fees that would result from this program that we initiated with a partner.

That's just zero to 2 million overall are that that's quarterly there are 2 million overall, it's not these would be loans that were funding up to $50 million and then.

And then they would be settled.

So this could have this could there could be one of those or there could be 10 of those.

And so this is a partner that we have extreme confidence in that is.

Experience that we're funding the transaction and receiving fees.

Once those transactions are originated and so.

If it's say if it was $50 million and there were 10 turns of this revolving credit line that would result in $2 5 million feet now I'm not saying, we're we just started this program I'm just make you aware of that it exists and it would potentially replace some of.

The fact that we're probably going to do less of the PPP loans for ourselves some of those fee may be replaced by that alternative program. Okay.

But that program has started started up triple piece started up okay. Yes. It's already started it's already been initiated and approved by a credit Committee.

Okay, great. Thank you.

I'm showing no further questions at this time I would now like to turn the conference back to Damian Kozlowski for closing remarks.

Thank you so much operator I appreciate everybody joining us today, we really had a.

A really great year this year coming into the unfortunate circumstance, we had with the pandemic.

And the companies I think is a very solid footing for 2021 and beyond we're going to continue to work very hard to build value for our shareholders take care of our business partners make sure they can grow and innovate and always keep an eye on.

Making sure we enrich and build the careers of our people. So thank you everyone for joining us.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.

Okay.

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Yeah.

The business.

Yeah.

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