Financial Institutions, Inc. (FISI) Q4 2021 Earnings Report, Transcript and Summary

Good morning. Welcome to today's Financial Institutions, Inc. Fourth Quarter Earnings Call. My name is Candy, and I will be your moderator for today's call. [Operator Instructions] I would now like to pass the conference call over to our host, Shelly J. Doran, Director of Investment (sic) [ Investor ] Relations.

Thank you for joining us for today's call. Providing prepared comments will be President and CEO, Marty Birmingham; and CFO, Jack Plants; Chief Community Banking Officer, Justin Bigham; and Director of Financial Planning and Analysis, Mike Grover, will join us for Q&A. Today's prepared comments and Q&A will include forward-looking statements. Actual results may differ materially from forward-looking statements due to a variety of risks, uncertainties and other factors. We refer you to yesterday's earnings release and historical SEC filings available on our Investor Relations website, for a safe harbor description and a detailed discussion of the risk factors relating to forward-looking statements. We'll also discuss certain non-GAAP financial measures intended to supplement or not substitute for comparable GAAP measures. Reconciliations of those measures to GAAP financial measures provided in the earnings release filed as an exhibit to form 8-K. Please note that this call includes information that may only be acted as of today's date, February 1, 2022. I'll now turn the call over to President and CEO, Marty Birmingham.

Thank you, Shelly. Good morning, and welcome to our fourth quarter earnings call. It was another strong quarter with record net interest income and our second highest pretax pre-provision income. We reported net income of $19.6 million or $1.21 per diluted share, higher than both the linked and prior year quarters. Pretax pre-provision income was $22.6 million, a $1.5 million increase from the third quarter of 2021 and a $1.7 million increase from the fourth quarter of 2020. Results were positively impacted by several factors, including loan growth, fee accretion from forgiven PPP loans, the prudent deployment of excess liquidity into bonds and growth in revenue from our fee-based businesses and derivatives program, combined with the positive impact of the release of credit reserves and benefits from tax credit investments. I'll now provide a few comments about our loan portfolio and credit. Total loans grew $26 million or 0.7% from September 30. Commercial business decreased 7%. Commercial mortgage increased 4.8%. Residential real estate loans declined by 1.2% and consumer indirect was up 1.9%. Excluding the impact of PPP loans, the commercial business portfolio increased 2.4% and total loans increased 2.5%. PPP loan forgiveness has been faster than we anticipated with outstanding's decreasing from $248 million at year-end 2020 to $55 million at 12/31/21. While growth in C&I lending has been challenged for quite some time, by supply chain constraints, the increasing cost of labor and supplies and M&A activity, we are seeing more requests for increases in the lines of credit as customer liquidity levels are waning from peak 2021 levels. In Business Banking, our small business lending unit, we are seeing increased origination activity. This activity combined with a new experienced team of business banking lenders positions us well to experience increased market share in the space. We continue to see high deal flow for commercial real estate in our markets and have a strong pipeline going into 2022. We continue to work with known quality sponsors, and they are presenting high-quality, viable projects. While developers continue to face cost increases for materials and extended delivery dates, they're seeing some relief as lumber prices have returned to pre-pandemic levels. Residential real estate loans continue to normalize in the fourth quarter as compared to the highs experienced in 2020, and we experienced some personnel turnover contributing to a decline in new loan originations. We recently brought in a new leader and have identified opportunities to build operational efficiency in the first half of 2022, positioning us to further develop the business unit this year. Our consumer indirect auto portfolio continue to grow, and we are benefiting from high auto valuations, good access to quality credits through our dealer network of 500 franchise new auto dealerships and our strong credit discipline. The current portfolio represents 26% of total loans, down from 30% at year-end 2018. This asset class has provided us the opportunity to deploy excess liquidity in a loan product with short duration, strong credit performance and relatively higher yield characteristics. Provision for credit losses on loans was a benefit of $1.1 million in the quarter. Continued improvement in the national unemployment forecast, positive trends and qualitative factors and a reduction in specific reserves resulted in the fourth consecutive quarterly release of credit loss reserves. Many of you will recall that in the fourth quarter of 2020, we identified specific customers and industries believed to be the most at risk due to the pandemic and intentionally move these loans totaling $127 million to criticized assets. As of December 31, 2021, our at-risk COVID loan pool was down to $75 million. The primary driver of the $52 million reduction in the at-risk COVID loans, $19 million of which occurred in the third quarter and $33 million in the fourth quarter was credits that returned to full paying status and were upgraded to pass-rated. Year-end specific reserves on the at-risk COVID loans were $5.3 million, a $1.4 million decrease from the end of the third quarter. We continue to see improvement in performance indicators of several of these credits and remain optimistic they will return to pass-rated credits as the positive trends continue with the passage of time and as we review these credits in the normal annual review cycle this spring. Net charge-offs in the quarter were $4.7 million. The increase from linked in prior year quarters is primarily the result of one commercial mortgage loan with a $3.8 million partial charge-off and downgrade to nonperforming status. As a result of all these factors, the allowance for credit losses decreased by $5.8 million in the quarter to $39.7 million. The allowance for credit losses on loans to total loans was 1.08% at quarter end, down 16 basis points from September 30. Excluding PPP loans, the ratio increases to 1.09%, a decrease of 19 basis points from the linked quarter. While we did experience growth in total loans in 2021, portfolio credit performance has demonstrated stabilization since the onset of the pandemic as evidenced by 2021 net charge-offs of 16 basis points and NPAs of $12.2 million, a testament to our continued focus on premier credit quality. It's now my pleasure to turn the call over to Jack for additional details on results and 2022 guidance.

Thank you, Marty. Good morning, everyone. I'll begin today by providing commentary on key areas of performance in the fourth quarter with comparisons to the third quarter of 2021. Net interest income was $40.9 million, $2.6 million higher than the linked quarter as a result of our deployment of excess liquidity into investment securities, growth in loans, higher revenue in connection with PPP loan forgiveness and a lower overall cost of funds. Approximately $64 million and $56 million of PPP loans were forgiven in the fourth and third quarters of 2021, respectively, with a related fee accretion of $2.6 million in the fourth quarter as compared to $1 million in the third quarter. Nearly all of 2020 vintage loans have been forgiven or repaid and approximately 53% of the 2021 vintage was forgiven in the fourth quarter. NIM on a fully taxable equivalent or FTE basis, for the fourth quarter of 2021 was 315 basis points, up 8 basis points from the linked quarter and up 2 basis points from the fourth quarter of 2020. Excluding the impact of PPP interest and fees and excess liquidity from each quarter, NIM decreased 2 basis points from the prior quarter, primarily due to a 3 basis point decrease in earning asset yields and a 1 basis point decline in the cost of interest-bearing liabilities. The impact of income from excess liquidity negatively impacted NIM by 14 basis points in the fourth quarter of 2021 compared to a negative 9 basis point impact in the third quarter of 2021. Full year NIM was 305 basis points, excluding the impact of PPP loans, in line with guidance we provided since July of 2021. We continue to manage through the excess liquidity on our balance sheet. However, PPP forgiveness added to the liquidity profile once again this quarter, approximately $60 million when comparing average balances for the linked quarters. The seasonality of public deposits, which are higher at the onset of the fourth quarter, drove an increase in average public deposits of approximately $200 million as compared to the third quarter. These sources of liquidity resulted in incremental investment securities in the quarter, with an average balance of approximately $185 million higher than the linked quarter. Our investment securities purchases have been focused on mortgage-backed securities with low to moderate duration that provide ongoing cash flow, which we have prudently utilized with a low-risk liquidity management tool generates incremental yield over Federal Reserve balances. Cash flow from the portfolio will allow for reinvestment into loans or additional investment securities when rates begin to rise. Our quarterly net interest margin did benefit from a lower cost of funds, down 2 basis points from the third quarter to 22 basis points. Noninterest income of $11.7 million was relatively flat as compared to the third quarter, down $409,000. Revenue categories with the largest changes quarter-over-quarter were insurance income, which was down $521,000 as a result of the seasonal timing of commercial policy renewals. Income from limited partnerships, which was down $400,000 based on the activity and performance of underlying investments and income from derivative instruments, which was up $658,000 based on the number and value of transactions and the impact of changes in fair market value. Noninterest expense was $29.9 million, an increase of $728,000 from the linked quarter. This increase was primarily driven by a $313,000 increase in salaries and employee benefits, which was largely the result of nonrecurring severance expense related to the redesign of the bank's retail branch structure. In computer and data processing which was $373,000 higher as a result of investments in technology, which include digital banking initiatives and our new comprehensive customer relationship management solution. Income tax expense was $4.2 million in the quarter, representing an effective tax rate of 17.7%. Effective tax rates in 2021 have been higher than the previous year due to the higher level of pretax earnings in 2021 in comparison to 2020. We remain comfortable with our capital position; given that much of the asset growth we've experienced in the past year was the result of the lower risk assets, primarily excess liquidity. Our regulatory capital ratios remain comfortably above well-capitalized minimums, and our TCE ratio increased 34 basis points in the quarter from 7.25% to 7.59%. I'd now like to spend the next few minutes providing our outlook for 2022 in key areas. We expect mid to high single-digit growth in our total loan portfolio, with commercial loan categories driving this growth. Guidance assumes that forgiveness or repayment of the remaining $55 million of PPP loans during the first 3 quarters. We plan for low single-digit growth in nonpublic deposits. We are focused on attracting new consumer and commercial deposit accounts and expect the positive impact of these new accounts to be partially offset by an expected decline in the average balance per account as an outcome of the most recent interest rate forecast. We are projecting reciprocal and public deposits to be relatively flat. Overall, we expect full year NIM of 305 to 310 basis points, excluding the impact of PPP fee accretion. Although economists are predicting an increase in the Fed Funds rate during 2022, we are guiding on NIM using a spot rate forecast. We expect to continue carrying higher balances in investment securities due to carryover from our 2021 excess liquidity position, which will put pressure on NIM in early 2022. There will continue to be noise in NIM relative to PPP forgiveness, although muted relative to 2021. We are guiding on NIM, excluding the impact of PPP activity as we did last year. As a reminder, our NIM fluctuates from quarter-to-quarter due to the seasonality of public deposits and its impact on both our earning asset and funding mix. In quarters where our average public deposit balances are higher due to seasonal inflows, the second and fourth quarters, our earning asset yields are lower given the short-term duration of the deposits and the limited opportunities to invest the funds. While our NIM guidance was developed utilizing a flat rate forecast, our balance sheet is well positioned for a rising rate environment, with 34% of our loan portfolio, excluding PPP is indexed to variable interest rates. We are projecting low single-digit growth in noninterest income, excluding gains on investment securities and noninterest income categories that are difficult to predict, such as limited partnership income. We also expect a decline in mortgage banking revenue as a result of lower anticipated refinance activity and tightening of gain on sale spreads due to the interest rate environment. We are targeting an increase in the mid-single digit range for noninterest expense, which is expected to range from $31 million to $32 million per quarter. Our spend in 2022 includes investments in strategic initiatives, including further enhancements to our new customer relationship management solution, digital banking and Banking as a Service. We expect these investments to begin producing incremental revenue in 2022. However, full benefits are likely to be realized over the coming years. By way of reference, we have a demonstrated record of making short-term investments that support longer-term efficiency benefits. For example, our ESP initiatives executed in the third quarter of 2020 resulted in a short-term increase in our efficiency ratio, yet we realized an earn back on the investments inside of 1 year, and the long-term benefits contributed to our efficiency ratio performance in 2021. We expect an efficiency ratio within a range of 59% to 60% for the year, which is negatively impacted by upfront costs associated with our aforementioned investments and strategic initiatives. We expect the 2022 effective tax rate to fall within a range of 19% to 20%, including the impact of the amortization of tax credit investments placed in service in recent years. We will continue to evaluate tax credit opportunities, and our effective tax rate would be positively impacted by taking advantage of further investment opportunities. We expect net charge-offs to be within our annual historical range of approximately 35 to 40 basis points. Our overall focus includes executing on strategic initiatives that will improve profitability and operating leverage over time. We believe that achieving results in line with the guidance provided will drive these outcomes. That concludes my prepared remarks. I'll now return the call back to Marty.

Thank you very much, Jack. Our management team remains focused on the strong execution of strategic initiatives while remaining resilient and nimble. We learned a lot over the past 2 years, and those lessons learned are being incorporated into our strategic and risk frameworks that guide the evolution and in some cases, transformation of the company to drive long-term shareholder value and position us for a bright future. While the fundamental strategic outcomes of sustained deposit growth, credit disciplined loan growth, diversification of revenue, expense discipline and sustainable business practices remain critical and correlated to high performance, our strategy continues to evolve. During 2021 planning cycle, we added a 6 strategic outcome, exceptional digital experiences enabled by complementary Fintech and digital partnerships. Overall, our digital transformation efforts are taking hold, and we continue to enhance the digital experience for our consumers. Recently, we have leaned into 2 current macro trends, payments and digital currencies. Payments are rapidly rising in importance as the primary touch point between customers and their banks, forming the heart of active primary banking relationships. In response, we along with other banks in the Alloy Labs Consortium, announced the launch of CHUCK, our open payments network that allows customers to send money from their 5 Star Bank account and gives the recipient the option of choosing where they want the money to go. CHUCK takes the friction out of digital payments for our customers by promoting customer choice and flexibility. CHUCK is part of a broader payment strategy that leverages the power of collaboration to reach economies of scale in both innovation, investment and operating costs. Our robust payment strategy will have several additional offerings coming to market over the next 12 months that will benefit our consumer and commercial customers while expanding our capabilities and reach. While Bitcoin has been in the news in recent weeks due to its downturn, it is nonetheless of great interest to certain consumers. Bitcoin and block chain technology are playing a significant role in the decentralization of finance. Smaller banks may fall behind if they do not embrace change and innovate to meet changing consumer behaviors. This ultimately could push consumers to unregulated providers of financial services. That's why our partnership with NYDIG is an opportunity to bring together our respective strength to benefit consumers while maintaining a safe and sound financial system. In addition to our efforts with payments in Bitcoin, the bank is collaborating with partners on several initiatives that will increase deposit gathering and loan origination, create efficiencies and help drive our recently launched Banking as a Service line of business. We are pursuing AI decisioning for consumer lending and further digitizing our small business lending, among others. Our organization continues to operationalize initiatives intended to increase efficiencies, optimize processes and improve customer experiences. And these include our enterprise standardization program, robotics and analytics. These initiatives are ingrained in our approaches and are fundamental to lowering operating costs, while enhancing associate and customer experiences. Another outcome of our 2021 strategy update was the refresh of our human capital strategy in response to the new normal way of working, the great resignation and the great re-imagination. Long-term growth and success are linked to our ability to attract, develop and retain associates in the context of a diverse and inclusive workplace where everyone can thrive. Simply put, ensuring we have the right people who are access to the right people and skills to deliver strategies today and in the future, supported by an organizational framework that nurtures a strong and healthy culture. One of the components of the human capital strategy is the rollout of 5 Star fulfilled. We recognize that working styles are not one size fits all, and our new flexible philosophy embraces the benefits of both remote and in-office work. Both styles of work are purposeful and meaningful, and we are working with all associates to find the right balance that fits the individual and the 5 Star team. The 5 Star new way of working is scheduled to go live on April 4. And finally, building on our strong track record of driving credit disciplined loan growth; we are open to leveraging available talent to expand our commercial platform through the recruitment of commercial professionals and establishment of loan production offices in viable markets outside of our existing footprint. 2021 was a terrific year for our company, in addition to identifying and making strategic investments for our future and delivering strong financial and operating results. We provided continuous essential support and services to our customers throughout the pandemic, helping them navigate a period of great uncertainty. We successfully completed 2 bolt-on acquisitions to our SDN insurance subsidiary, expanding our insurance offerings and presence in the important Rochester and Figure Lakes market and expanding our employee benefits and human resources consulting business. In a time when many large banks are closing branches in urban markets, we opened 2 new branches in the City of Buffalo in areas undergoing significant redevelopment and revitalization. We also relocated our existing City of Elmira branch to a new development included in the New York State Downtown revitalization initiative, partnering with other businesses to help revitalize the serving area. Through the many ups and downs of 2021, we never lost sight of our critical mission to support our customers and communities across our operating footprint. I encourage you to read the 5 Star Bank 2021 Community Report available on 5 Star Bank website and our investor relations website to better understand the many ways our organization and associates provide support. Just one of the areas highlighted in the 2021 report is affordable housing. We recognize the critical need for affordable and special needs housing across our geographic footprint. And a few years ago, we hired lenders with deep experience in this area. They have led our initiative to provide debt and equity financing for numerous affordable housing projects across our operating footprint. I want to sincerely thank my fellow teammates for their ongoing dedication and commitment to our customers, our communities and each other and for their many contributions to our achievements. Operator, this concludes my prepared comments, and we are ready to open the call for questions.

[Operator Instructions]. Our first question comes from Alex Twerdahl of Piper Sandler. Your line is now open.

First question for me, you said it some severance costs in the release, but I didn't see the exact breakout. Can you just break that out first, Jack?

Yes. I think it was about $225,000 during the fourth quarter, and it was related to some of the redesign we had on the retail side and then some changeover in other areas of the bank.

Okay. And then just kind of going through the new expense guide, I think you said $31 million to $32 million, which is a little bit of a click up from where we are kind of run rating in the fourth quarter. Can you just break out for us how much of that is due to some of these initiatives you talked around the tech side? How much is wage inflation, if there's anything else in there? And then in terms of the timing of that guide, is that kind of a good number for each quarter of the year? Or is there going to be some ramp up as the year goes on?

Sure. So as far as the run rate appears on a quarterly basis, that's a good number to use. It's pretty stable from a quarter-to-quarter view for 2022. We did not budget for any wage inflation outside of -- there are some incremental staffing adds that are at current market levels and then the normal merit increases that get rolled out at the end of the third quarter. And then as far as it pertains to the initiatives that are underway, there's about $3.1 million of incremental increase of expense attributable to those initiatives that totals $4.6 million to the annual noninterest expense in 2022. And that's really through the form of our upgraded CRM platform, our BaaS strategy and then overall digital banking expansion.

So you can say that, that you said that's $4.6 million of the guide in 2022?

That's correct.

Okay. And then…

Alex, I just would add that, as we consider those investments, a couple of things. The efficiency that we're driving through enterprise standardization allows us, puts us in a position to make take on the incremental expenses. And Jack has been leading a very robust conversation internally grounded in business cases that lays out a very clear expectation in terms of the cost, the benefits and the return -- the timing of returns. Yes, several of these initiatives have earned back periods that are inside of 12 months, and the benefits of others, particularly the CRM platform have a payback period that's about 2 years.

Okay. I mean, so does that set up expenses in '23 to be roughly flattish? Or is this just kind of -- I mean, how do we think about it beyond 2022?

Yes, I'm not going to comment on 2023 expenses, but the expectation from these initiatives is that they begin to generate positive operating leverage as they mature has that initial earn-back period.

Okay. And then in your prepared remarks, Marty, I think you talked about line utilization rates, potentially trending higher, can you just where those are today and kind of what the normalized level is?

Yes. So I think for the vast majority of 2020 and all of 2021, we really experienced modest commercial utilizations of our lines of credit and our C&I business, particularly. And we're starting to see those balances kind of reduced in terms of the customers that we're talking to and working with relative to their own liquidity and they're starting to hit their lines in a more normal fashion.

Okay. And so I mean, if you kind of take it one step further and just kind of give us a sense from what that could do to the C&I portfolio if lines normalize over the course of the year? And what kind of dollar value could be associated with that or percentage growth could be associated with just that piece?

So I would just share anecdotally that our C&I business relative to budget in 2021 was performing with a negative variance. And then at year-end, the gap was closed. So there's momentum there that we've acknowledged in my prepared remarks.

Yes. Alex, from a budget standpoint, we're looking at high single-digit growth in the C&I portfolio for in 2022.

Okay. And then just a final question from me, just on the reserve and the $5.3 million or so that's related to COVID.Is that specifically associated with that $120 million or so of criticized and classified? Or is there a piece in there that's kind of general reserve that could be released even or before those criticized and classified are returned to full paying status?

Yes. There's -- so as we look at potential for releases there, there's -- there are a couple of COVID deferral loans that I think equate to about $3.5 million of that specific that are performing well, and we really need them to -- We need to observe the passage of time for consistency in their payment behavior before we can release those reserves, but they're on positive outlook at this stage of the game.

Yes. I would emphasize, Alex, as part of our COVID process and our commercial bridge is that we provide the COVID Bridges. We intentionally downgraded those where we provided bridges to criticize risk-weighting status. So anecdotally, and we're seeing as well as hearing very positive trends in these customers. And that's why I said as we go through the annual review cycle this spring to the natural course, our expectation is that those credits will return to past status.

Our next question goes to Bryce Rowe from Hovde. Your line is now open.

I wanted to maybe start on the margin, if you don't mind, Jack, you noted the percent of loans that are kind of indexed to a variable rate. Can you just speak to kind of the timing of when those loans might reset? Is it more immediate? Or is it just kind of a function of when you're seeing some level of maturity here coming up in '22?

Yes. I mean for that -- those are loans that are tied to prime and LIBOR. So assuming that primary -- has had an immediate impact.

Okay. And so no floors that would kind of impact any kind of positive that you might see from Fed rate hikes?

Yes. As much as we tried to get floors implemented years ago, we were unsuccessful in that regard. So we now have the benefit of them re-pricing instantaneously.

Okay. And then in terms of the kind of the analysis -- the asset sensitivity analysis that you provide within the Qs and the Ks. What kind of deposit data is assumed in those sensitivities?

Yes. When we look back to the last side hiking cycle in 2018, and our deposit behavior during that time frame, it was 8% to 10% betas on our non-maturity deposits, so fairly low in the grand scheme of things.

Okay. And then maybe one last one here on the NIM. In terms of cash flow coming off the bond portfolio, what is that estimated at here in the coming year?

Yes. We were at some analysis at year-end, and it looks like we have about $200 million in expected cash flow for 2022.

Okay. And then maybe one for Marty. You made mention of loan production offices there in your prepared remarks or the possibility of opening up loan production offices in new markets. Can you talk a little bit more about that comment and how you would kind of position that or think about that if you were to execute on that strategy?

Sure. Kevin Quinn, who leads our commercial line of business and is one of our named executive officers, has extensive experience, having worked in that supporting a bank with that type of activity. Kevin, early on before M&T expanded their footprint, help to open up markets for them in the '90s and spent 15 years running commercial teams in a broad geographic swath of -- from Chicago over to Boston, having worked out and is a native of Buffalo, New York. So we've got the leadership and the expertise that can help us do it. Frankly, we've been driving loan activity in Syracuse, which technically is out of our geographic footprint. And so to establish an LPO there would be new and as we're going to take advantage of Kevin's expertise and think about the opportunity to work with lenders who are in play. Consolidation continues to play out and lenders are looking for opportunities to work with an organization like ours, where they can have an impact and help us drive the success of the institution forward. So I think also what we're experiencing through our work in digital activities is that having a branch network located next to in and around the market where commercial business is being driven is not necessarily the imperative that it once was. So we can drive utilization of our balance sheet through lending activities, but as well, work with customers to open up deposit accounts, leveraging current technology.

And geographically, I mean, is there any constraint around how you're thinking about lender ads or with the -- I guess, the landscape now, does it open it up to really most geographies?

I would say it's much broader in most geographies. And really, the fundamental of gate that we'll walk through is getting to know these lenders. Ideally, being introduced to these lenders by people we know, so we can get to know them and they can get to know us, and we can then drive forward together in a credit disciplined manner.

Our next question goes to Marla Backer from Sidoti. Marla, Your line is open.

I think Damon Delmonte is on line with -- looks like it's open.

Damon, please go ahead, your line is now open.

Just wanted to follow up on the margin and the outlook there. So you're calling for a full year margin of 3.05% to 3.10% for 2022, and that does not assume any rate hikes. Is that correct?

That's correct. And it also excludes the impact of PPP fee accretion.

Okay. So I'm trying to get to like a starting point here. So this quarter, you had 315 was your reported NIM. And if you kind of take the impact from PPP, was that around 20 basis points this quarter?

Yes, that was actually 17 basis points.

17 basis points. Okay. So kind of starting back around like a 298-ish.

Yes, 298 was our margin, excluding the impact of PPP.

And then from there, that's where the $305 million to $310 million for the full year comes out. Got it. Okay. That's helpful. And then with respect to the reserve level, obviously, it came down to like 109 ex-PPP. You're forecasting 35 to 40 basis points of net charge-offs, and you still have the COVID specific reserve in place. What do you -- as you look out over the course of the year, what do you feel is a normalized reserve level based on your portfolio?

So our current coverage ratio of 108 basis points is really aligns with our pre-pandemic CECL Day 1 adoption level. And if we expect that there's going to be some stabilization in those COVID deferral loans and the potential for a release of the reserves associated with them, we could be comfortable seeing this coverage ratio drop a little bit lower in 2022, assuming that those credits stabilize, but we are expecting to have a normalized level of provisioning to cover just regular loan growth and then normalized NCOs at that 35 to 40 basis point level.

And then, I guess, just lastly, could you just talk a little bit more about the new relationship with the -- for the Bitcoin that came out last week and kind of what are some of the longer-term opportunities there and how the banking can ultimately benefit from that?

So a couple of comments, Damon. First of all, I think it's a great example of how we're trying to lean in, be a tech forward financial institution in terms of the intersection of technology and community banking. And in this case, NYDIG is a New York DFS regulated institution so are we. And we were able to simply connect our digital platform with NYDIG to be responsive to customer interest and demand for the ability to buy and sell and hold midpoint. And so we would make -- it didn't cost us much to get into that, and we would make money at the margin in terms of the transactions that occur in terms of buying and selling it. But from our perspective, it is a seamless digital experience for our customers, and it's a safe and sound experience in terms of it being technically cold storage, you can buy, you can sell, and you can hold it. You can't use it to spend it. They would have to sell it and convert it, et cetera. So for me, it's exciting that we're able to demonstrate the nimbleness and agility that we're talking about internally, and I think that's required externally to take advantage of these opportunities.

Yes, this is Jack. I think the other important of it is, it allows us to continue to evolve our relationship with NYDIG as they expand their product set and services based on Bitcoin across both the consumer wealth and commercial platforms.

[Operator Instructions]. We currently have no more questions registered at this time, so I will pass the conference over to the management team for closing remarks. Our questions come back through from Mala. Mala, unfortunately, we keep losing connection with your line. Can you try and reregister your question? No, unfortunately she has disconnected. So this does conclude today's conference call. I will hand over to management for closing remarks.

Okay. Thanks so much for your support in helping us facilitate the call. Thanks for those that have called in. It was a little longer this morning because we wanted to try to provide comprehensive updates on the company, our strategy and our outlook for 2022, and we look forward to building on the conversation in the following quarters. Thank you.

This concludes today's conference call. You may disconnect your line.