OFG Bancorp (OFG) 2021 Q4 法說會逐字稿

Good morning. Thank you for joining OFG Bancorp's conference call. My name is Britney, I will be your operator today. Our speakers are Jose Rafael Fernandez, Chief Executive Officer and Vice Chair of the Board of Directors; and Maritza Arizmendi, Chief Financial Officer. A presentation accompanies today's remarks. It can be found on our Investor Relations website on our homepage in the What's New box or in the Quarterly Results page.

This call may feature certain forward-looking statements about management's goals, plans and expectations. These statements are subject to certain risks and uncertainties outlined in the Risk Factors section of OFG's SEC filings. Actual results may differ materially from those currently anticipated. We disclaim any obligation to update information disclosed in this call as a result of developments that occur afterwards.

(Operator Instructions) I would now like to turn the call over to Mr. Fernandez.

Good morning, and thank you for joining us. I wanted to start our call today thanking all our team members for the excellent work they've done through 2021. We are extremely proud of our achievements, particularly our focus on helping our customers achieve progress and financial well-being.

So let's start by turning to Page 3 of our conference call presentation. Fourth quarter earnings per share diluted was $0.66 compared to $0.81 in the third quarter and $0.42 in the year-ago period. Fourth quarter earnings were impacted by our strategic decision to sell $66 million of past due loans. These loans had already been partially reserved but required $10 million in additional provisions.

As for our core business, we continue to demonstrate strong momentum as we ended 2021 and now entered 2022. Core revenues totaled $141 million. That's an increase of 5% quarter-over-quarter and 6% year-over-year. Asset quality continued to improve, resulting in a $3 million net reserve release, which reduced our total provision to $7 million. Noninterest expenses increased $8 million, primarily due to increased investments in people and technology. Pre-provision net revenues totaled $56 million, similar to the third quarter but 26% greater than last year.

Looking at the December 30 balance sheet. We ended 2021 with $9.9 billion of assets, postponing the applicability of Durbin later in the summer. Compared to September 30, customer deposits declined $641 million to $8.6 billion. That reflects withdrawals at year-end by government-related and institutional commercial clients. This was partially offset by increased retail deposits.

Even with the loans we decided to sell, we saw loan growth in loans held for investments in all three of our priority areas: an increase of 5% in commercial loans ex PPP; an increase of 9% in consumer loans; and an increase of 1% in auto loans. And new loan origination remained very strong at $633 million for the quarter. We also successfully executed on our capital allocation strategies. We completed our $50 million share buyback and our capital levels remained robust.

Please turn to Page 4. We are also pleased at all the progress we made for the year as a whole. Earnings per share of $2.81 was up 113%. This was driven by $70 million higher core revenues, $92 million lower provisioning and $20 million lower noninterest expenses. And pre-provision net revenues increased 15% to $250 million.

Looking at the balance sheet. Total assets increased $74 million, customer deposits grew $225 million, loans declined $172 million. Excluding PPP forgiveness, they increased $24 million. New loan origination was a record $2.4 billion. If we exclude PPP from both years, it was also a record at $2.2 billion, up $798 million or 56% compared to 2020. The CET1 ratio increased 69 basis points, leaving us in a very strong capital position. Other capital actions in 2021 included increasing our common stock dividend to $0.12 per share from $0.07 and completing the $92 million redemption of all our remaining preferred stock.

Results for both the quarter and the year continue to reflect the 4 main drivers of our business: consistently growing recurring net income driven by loan growth, and that includes continuing to build both our Puerto Rico and our U.S. loan businesses; our larger scale; our focus on increasing digital utilization and customer service differentiation; and Puerto Rico beginning to enter a growth economic cycle. All this continues to validate our optimism regarding the future of Puerto Rico and OFG.

We continue to transform OFG with a focus on simplification and building a culture of excellence and customer service. We are developing and attracting top talent to deliver on this transformation and continue to invest in technology. As you know, some of our technology investments are table stakes and require to continuously upgrade our systems. Others require us to focus our technology on investments that drive our strategy, namely digital, data analytics, cloud migration, cybersecurity and our sales and service capabilities.

Two quick examples of this in 2021 were the deployment of our digital residential mortgage origination process and our commercial banking data-driven business model. Both are firsts for the Puerto Rico market. With OFG's unique strategic position and with Puerto Rico's growing economic outlook, we will accelerate these investments to improve the customer experience faster, improve efficiency longer term and set the stage for OFG's long-term growth. We are extremely proud of our accomplishments and look forward to continuing to grow together with our clients and the communities we serve.

Now here is Maritza to go over the financials in more detail.

Thank you, Jose. Please turn to Page 5 to review our financial highlights. Total core revenue were $141 million. That is an increase of about $6.2 million or about 5% from the third quarter. This reflects a $1.5 million increase in net interest income. NII reflected level interest income from loans and cash, increased income from investment activities and $1 million in lower cost of funds. The decline in total interest expense was mainly driven by a lower average rate.

Growth in total core revenues also reflected a $4.7 million increase in total banking and wealth management revenue that reflected the fourth quarter receipt of annual insurance commission. This totaled $4.3 million this year compared to $4 million last year. Noninterest revenue growth also reflected more or less increases in recurring banking services and mortgage banking activities.

Noninterest expenses totaled $86 million. That is an increase of $7.6 million from the prior quarter. The fourth quarter included increased compensation, technology investments and costs related to higher levels of business activity. The quarter also included $2.4 million for a legal reserve and to cover operational losses and $1 million in lower gains on sales of real estate owned compared to the prior quarter. The higher noninterest expenses resulted in an efficiency ratio of 61.4% compared to 58.6% in the third quarter.

As Jose mentioned, we will continue to invest in our people and technology to further deploy our strategy. We now expect in 2022 our efficiency ratio to remain in the low 60% range. Return metrics continued to be in our target range. Return on average assets was 1.3%. Return on average tangible common equity was 14.1%. We continue to build capital. Tangible book value per share was $19.08. That is an increase of 2.6% from the third quarter and 12.4% year-over-year.

Please turn to Page 6 to review our operational highlights. Average loan balances totaled $6.5 billion. That is a decline of $14 million from the third quarter, which reflected an increase of $54 million in non-PCD loans and a decrease of $60 million in PCD loans. The increase in PCD largely reflected new commercial, auto and consumer loans. The decrease in PCD largely reflected repayment in the acquired Scotiabank mortgage portfolio.

Loan yield held steady at 6.62% as it has for most of the year. The loan sales consisted of $60.7 million of mainly former Scotiabank residential mortgage PCD loans and 1 large former Scotiabank PCD commercial loans that were transferred to held for sale. And the $5 million balance mainly consisted of several small commercial loans where the sale was completed during the quarter.

Total new loan origination was $633 million. This is up $76 million from the third quarter. It is also up $147 million year-over-year. We continue to see high levels of auto, commercial and mortgage lending and an increased demand for consumer loans. The commercial loan portfolio ex PPP has now increased 3 consecutive quarters.

Average core deposits totaled $9.1 billion. That is a decline of $90 million from the third quarter. Most of the government-related and commercial withdrawal occurred at the end of the year. End-of-period core deposits declined $641 million from September 30. Core deposit costs continue to fall. They were 26 basis points in the fourth quarter. That is a reduction of 4 basis points from the third quarter. This reflected general rate reductions and the continued maturing of older, higher-priced CDs.

Early in the fourth quarter, we paid down $33.3 million of 2.98% Federal Home Loan Bank balances. Average cash balances totaled $2.6 billion. That is a decline of 5% or $146 million from the third quarter. This mainly reflects an increase in the average investment portfolio by $177 million. Net interest margin was 4.18%, an increase of 6 basis points from the third quarter. The increase was mostly driven by the 5 basis point decrease in cost of interest paid in [liabilities] and by the 1 basis point increase in earning asset yields.

Please turn to Page 7 to review our credit quality and capital strength. Asset quality metrics continued to trend positively. Fourth quarter net charge-offs totaled $32 million. This included $30 million related to the past due loans transferred to held for sale and sales previously mentioned. The NCO rate increased to 2%. The early and total delinquency rates were 2.34% and 3.71%, respectively. The nonperforming loan rate on the non-PCD loan portfolio was 1.98%. Total NPL rates including PCD was 1.75%. This compares to 2.08% in the third quarter and 2.28% in the year-ago quarter.

These rates are some of the lowest levels we have seen in the last 5 quarters. As a result, we had $2.7 million of net reserve releases. With the added provision related to the loan sales, that provision was $7.2 million. And our allowance coverage was 2.44% on a reported basis and 2.47% excluding PPP loans. The CET ratio increased to 13.77%.

Stockholders' equity was $1.07 billion, an increase of $15 million from the third quarter. This reflected the increase in retained earnings, partially offset by the common stock buybacks. The tangible common equity rose to 9.69%.

Now here's Jose.

Thank you, Maritza. Please turn to Page 8 for our outlook.

The macro situation continues to improve in Puerto Rico. We're seeing continued incremental business sector optimism. Consumer demand also remains strong. And Puerto Rico is at the beginning of an economic growth cycle. In addition, Puerto Rico is on the verge of exiting bankruptcy. We believe this will go a long way towards changing the mainland perception of Puerto Rico and continue to improve its standing in the business community.

Within this environment, we will continue the strategies that have been working so well for us, mainly taking advantage of the economic momentum, deploying excess liquidity for loan growth, investing in people and technology, speeding our digital transformation and enhancing the customer experience. We at OFG are more than ready, thanks to our resilient team members for their continued dedication and commitment.

With this, we end our formal presentation. Thank you all for listening. Operator, let's start the Q&A.

(Operator Instructions) And we will take our first question from Alex Twerdahl with Piper Sandler.

First off, I have a bunch of questions here. But I want to start with the loan growth that you guys saw this quarter. And I was hoping, Jose, you could give us some commentary. We saw some nice commercial loan growth this quarter. It looked like a strong quarter for originations and obviously excluding PPP.

But is this just sort of the tip of the iceberg on commercial loan growth? Can you maybe comment on the pipeline, comment on the paydown activity you're seeing and give us some -- help us think about what our expectations should be for the next couple of quarters, starting with the commercial loan growth?

Yes, yes. So what we're seeing this quarter is again a confirmation of what we have been seeing in the last 3 or 4 quarters prior, inching up on originations, inching up on loan balances, particularly on the commercial side and the auto lending side as well as now lately on the consumer portfolio. So yes, what I'm feeling right now is at the beginning of the year -- last year, I mentioned that I was very optimistic, my last 17 years as a CEO is the most optimistic. I think throughout 2021, we saw a confirmation that that optimism is turning into growth for the Puerto Rico economy.

So I feel we're in the early innings of an economic growth cycle in Puerto Rico now. It's pretty much -- the confirmation data is pretty much behind us from last year. So I feel that loan growth is here to stay for the next couple of years as the economy continues to grow. So what we're seeing here when we look at loan growth is production.

We feel that the production and, let's call it, loan origination for 2022, the way I look at it is we're going to see higher consumer loan origination. We're going to see a relatively similar auto loan origination and most likely similar commercial loan origination, which in itself is a record year we had in 2021. So when we look at that scenario on the production side, I'm excited. And we are, as a team, very excited to look into deploying our liquidity here.

Regarding the other components of the loan balances, right, we talk about origination, but we also need to talk about paydowns. On the mortgage portfolio, we will continue to have the repayments. And I think with interest rates now starting to inch up, we'll probably have slower repayments on the mortgage portfolio. And that's good for us. We will continue to originate and sell, but we will also be a little bit more focused on nonconforming and retaining a little bit of nonconforming. That might be helpful. But we see the portfolio on mortgages, residential mortgage trending lower.

On the commercial, we see a good opportunity for us to build that, particularly on the small- and mid-sized commercial business clients. We're seeing good opportunities there. And I think line utilization is also going to start trending positively next year. We haven't seen that yet, but we're starting to trend positively.

And then pipelines for 2022, we feel that on the commercial side, the pipelines are strong. And our expectation is that there's going to be opportunities for us to continue to build on those pipelines. So that's kind of my take on loan and loan growth, Alex.

That's really helpful. And then just the last piece of it, the PPP, do you expect the remaining $87 million, is that gone by mid-year? And can you let us know, Maritza, if you have in front of you just the PPP fees that we saw this quarter or last quarter and what's remaining in terms of PPP fees?

So on the PPP forgiveness, our expectation is, yes, they should be forgiven by the end of the first half of the year. So that's the answer there. I don't have the data, but Maritza does have the information on the fees on PPPs.

Yes. For this quarter, the fee was $2.3 million vis-à-vis $3.4 million last quarter. We still have about $5 million in unamortized fees yet to be recognized.

I'm sorry, can you repeat it one more time? You just broke up a little bit. You said -- I think you said $3.4 million last quarter, $5 million left. What was it this quarter?

This quarter, it's $2.3 million.

$2.3 million in 4Q, okay. And then I wanted to ask, a big announcement yesterday from the bankruptcy judge, kind of signifying the end of bankruptcy. Certainly, you kind of addressed it a little bit in your prepared comments, sort of what the implications could be and certainly improves the sentiment around the island. I'm just -- as you think out, are there any direct implications for you guys? Does it impact things like your capital plan and -- as you kind of say that the island is no longer in bankruptcy?

So let me step back a second here on that question because I think it's important. Let's think about this. The last 10 years prior to 2021, Puerto Rico's economy contracted at the average rate of 2%, so that's 20% for 10 years. So we had a 20% contraction. We went to bankruptcy. We had all the issues that everybody knows.

So when we look at now, 2021 and beyond -- and I mentioned the growth cycle, particularly because of all the stimulus that's coming in and now the rebuilding and the funds from the Maria and the earthquakes coming in, Puerto Rico has -- it's in a great position right now. So now Puerto Rico basically has moved from a depressionary, deflationary 10-year cycle into the early stages of a growth cycle.

So how does the exiting of bankruptcy play into all this? Well, certainly very positively. Because first of all, we got rid of a bunch of debts that we had to pay in the last -- that we were supposed to pay in the last 10 years. But more importantly, there are guardrails put in place for the government to invest in the infrastructure and use those federal stimulus and federal funds for reconstruction, to build the infrastructure in Puerto Rico, invest in education, invest in the strengthening of the power authority and the privatization that is going on. So all those things are at the early stage. And to me, getting out of bankruptcy is going to allow eventually Puerto Rico, if we do things right, to access the markets and be able to expand that growth cycle that is beginning right now.

Great. And then just 2 more questions for me. One, with respect to your capital actions and your capital plans, I know sometimes you announce it kind of an update to the dividend or the buyback at the end of January. Last year, you returned over 100% of earnings when you add up the buyback, the preferred retirement and the 2 dividend increases. Is there any reason why with 13.8% common equity Tier 1, we should not expect another year of pretty large capital return in 2022?

There's no reason for it. I mean there's no reason for you not to think about those things. I think you're correct. But let me tell you what our priorities are regarding capital. First and foremost, our capital, we want to deploy it in good loan growth -- in good loans and be able to deploy it to help the communities and the customers that we serve. So that's number one.

Number two in the priorities is looking at the dividend and making sure that we continue to have a growing dividend and then also expect us to be active with the share repurchase. We finished the prior authorization, so more to come with that.

Great. And am I correct on the timing, sort of end of January, end of July is the two times, so we could potentially get an update next week?

Yes, you're right on the timing.

Great. And then just my final question, I noticed you guys dropped right below $10 billion at the end of the year. Does that effectively push Durbin out a full year?

So I tried to mention it in the -- in my remarks. Durbin, if we are above $10 billion by December 31, Durbin would have triggered on July 1. So it would have had a half year impact. In terms of fee income, it would have had a half year impact in 2022. Now that half year impact will not materialize because we closed the year below $10 billion.

Fantastic. So that effectively takes the $10 million or so of interchange fees that you would have lost in this back half of '22 and early 2023 and effectively pushes that impact out a year, assuming you guys continue to grow?

Actually, pushed it out -- yes, for 2022, it would have been $4.1 million or $4.2 million because it would have been half a year. And for a full year, it would have been $10 million. So we actually pushed it all the way to July of 2023 for half...

And we will take our next question from Brett Rabatin with Hovde Group.

Wanted to first talk about the -- I guess, first question, wanted to go over a little bit the loan sales in the quarter of the past due loans. If you could give us some more color on the loans you made or the loans that you sold, the decision to sell those loans. And then of the $32.5 million of net charge-offs for the quarter, it sounds like those were a preponderance of -- or related to that, how much of the $32.5 million was related to those loans that you sold?

So Brett, I understood clearly your first part of the question, but I couldn't understand the second part. Let me answer the first part and then you can ask me the question again, if that's okay with you. So why -- what came about us doing the loan sales? These are Scotiabank -- as Maritza mentioned, these are Scotiabank legacy residential mortgage loans mostly and one commercial loan. As part of the acquisition, they were mostly -- most of them were on the PCD bucket. And frankly, the residential loans had several years of nonperformance. So it was becoming too cumbersome for us to manage -- add resources to try to get those loans out of the books.

So we decided to sell and get it out of the way, so we can focus on what's important. We're also trying to be efficient. And at the end of the day, the strategic logic behind it is how can we move some of our resources that are on the workout side and put them on the front side, so we can bring in more loan business? So that's also part of the thought process that we have there.

On the commercial loan that we sold, it's again the same dynamic. It's a participation and it's not necessarily been performing for a while. And we felt that it was the right decision to get it out of the books also at the end of the year. So that's kind of the thought process behind it. Can you ask the second part of your question?

Yes, sure, Jose. The second part of the question was just, I think, in the press release, you noted that a significant portion of the net charge-offs of $32.5 million were related to the loan sales. How much specifically was related to the loan sales in terms of net charge-offs?

$30 million.

So out of the $30 million...

Out of the $32 million, $30 million were reserved to the sale.

Okay. That's -- so net charge-offs, excluding that, were actually pretty modest. And then as it relates to that, just -- I did notice that the linked-quarter early delinquencies were up a little bit. Was there anything that was kind of driving that linked quarter?

Yes, that's -- you see the auto portfolio, we had a little bit higher early delinquency there. We're looking into it. We feel that we've got our hands around it pretty well, and we'll -- we should have that trending back again to where it should be. And since you're asking me about the credit, we continue to see credit very benign compared to what we have managed in the prior 10 years, as you can imagine.

So going forward, we feel that we have that as a background, too, where certainly we will have to deal with -- on the consumer book, we'll see the charge-offs starting to come in sometime in the near future as part of the normal process of getting back to a normal state of the economy ex all the stimulus that was put in. But we don't see that going back to the levels prior to the pandemic. We see those levels better than then. So that's kind of how we're seeing it.

Okay. And then Jose Rafael, I'm curious -- or maybe this is a better question for Maritza, just thinking about the margin. I know at the end of last quarter, for a 100 basis point increase, the reported NII upside was a little over 4%. But it would seem like that could be conservative with cash still being 25% of the balance sheet. And with the Fed possibly raising 3 or 4 times this year, it would seem like your margin is going to benefit throughout the year from Fed action. Maritza, can you talk maybe about how you think about Fed hikes impact on the margin and kind of how you see the margin playing out throughout the year?

Yes. So Brett, we -- as you pointed out, we are asset-sensitive. The cash will be impacted immediately, so all those things play in our favor. We also have quite a bit of variable rate lending on the commercial portfolio. So let me just give you some color on it. But the specifics will come on the 10-K, when we publish it later -- I think it's in February -- early February.

But we will be -- net interest income on a 100 basis point shock impact on the interest rate, we'll be affected positively in the high single digits. So that's kind of how we're seeing it right now. We continue to look at all the modeling and all these scenarios. And we'll give you the specifics on the 10-K. But that's kind of how it looks like.

Okay. And then wanted to ask about the expenses. There's obviously some hires. And I guess let me first start with that. Just what were the hires in the quarter? Did you add any lenders? Maybe talk about the hires you made. And then thinking about the other bucket, is that a level that continues from 4Q? Or does that come back as we go throughout this year?

So we really -- let me just address that from a different angle. With the Great Resignation that everybody is talking about, what we are seeing on our side is on the hourly employees and the -- where we're seeing more turnover, so we had to go out there and recruit some of those to replace and make sure that we keep the house in order in terms of the customer service. We continue to attract good talent, particularly on the consumer side, on the retail side. We have a great team on the commercial side as well. And we've been building. Remember, when we acquired Scotiabank, we also acquired a bunch of commercial bankers, so we are good there.

But on the consumer side and on the retail side, I think we've done excellent hires in the past, and we continue to do so, attracting and retaining and developing our talent. So that's kind of how we're looking at our people strategy. We want to make sure that we have the right talent for the future and develop that right talent with the potential they have. So that's kind of where we're coming from. We really lowered or had lower employees this quarter than the prior quarter. But it's pretty much coming from the hourly employees where we're having a higher turnover than usual.

Okay. And then on the G&A expenses, the other line item, that $39 million kind of core number for the fourth quarter, is that a good run rate going forward? Or I assume with the technology expenses and some of the other things, maybe that number could come back a little bit?

So that's why Maritza guided you guys with an efficiency ratio in the low 60s. We did -- we feel we're in a unique position here in the market we operate. We really are confident that our vision on how to get closer to the customer and do a better job incrementally on how we service that customer and how we add value to that customer, we feel we're in a unique position in this market. And we need to continue to invest and actually increase the speed of the technology investments, so that we can affect change faster.

So from that perspective is that we're coming in, we're looking at people and we're looking at technology, not as a solution for everything but as a means to actually deploy and execute on our sales and service strategy and be able to take advantage of all the benefits that technology is providing us and the markets in general with data analytics and the cloud migration and be able to be more proactive taking care of our customers.

So the market we operate here in Puerto Rico, we need to be on top of that in order for us to continue our differentiation. And that's kind of what we're doing. We are very -- being very decisive in those investments because we think it's the right thing to do today. And it would bring us the incremental differentiation into the future.

Okay, that's great color. I appreciate that, and congrats on the quarter.

Thank you. Thank you very much.

(Operator Instructions) We will take our next question from Timur Braziler with Wells Fargo.

Maybe just starting with the deposit outlook. I know you mentioned that you had some government-related withdrawals and some institutional client activity. I guess what are you thinking about deposits in '22? Does much of that come back online? And then as far as government deposits, can you just give us a balance and then what you're expected to exit kind of with the bankruptcy resolution here in the near term?

So overall, in deposits, we feel that we're going to have those -- most of those deposits come back. And it's probably going to come back in the first half of the year. So that's kind of where we see that. On the government side, I'll let Maritza give you the number because I don't have it off the top of my head.

Well, in general, just to make sure I get the question right, it's how much government-related deposits were withdrawn and coming back or how much we have at this moment?

How much we have…

Well, how much we have at this moment? We have about $200 million at this moment. And that's the whole. We haven't had much in our history, but we still have some deposits there.

So historically, we don't consider -- yes, the government deposits are not a core part of our business.

Okay. And then maybe transitioning over to balance sheet mix and margin with the decline in deposits and the subsequent decline in cash balances, it looks like much of that happened at year-end and not really reflected in the average balances. Should we see the margin tick up pretty meaningfully here in the first quarter to reflect that mix shift? Or is there something else going on that might keep margin levels a little lower?

I think that the trend in the net interest margin changed during this quarter. We started to see a pickup there. We will continue -- our base case scenario is that it will continue to trend positively as we continue to invest in the loan balance and the change in the deposit mix. So we saw it getting in the bottom in the third quarter, so our expectation is it gradually will continue to increase during the quarter -- during the next year.

Okay, that's helpful. Maybe switching to allowance, the allowance ratio is still pretty high at these levels. I'm wondering, was there an ability to fully absorb the charge-offs from the loan sales through additional reserve releases rather than provisioning for them? And then I guess how does that translate to the current 2.40% reserve level from here? And how should we see that trend?

I'll let Maritza go into the details. But big picture, the answer is no, we couldn't because we need to follow the CECL methodology. And that means the economic scenarios, we need to look at the balance of the loans and we need to look at charge-offs and then we look at the qualitative and the volume order. So I don't think we could have done that particularly or specifically in this transaction, so -- but I'll let Maritza answer the second part of your question regarding the -- how do we see the allowance trending into the future.

Yes, thank you. And in general, as Jose, I think, just answered that the elements are coming into the model and we still have a 2.44% allowance coverage, we see, going forward, as the asset quality continue to transform [sequentially] and normalize in years to continue going down and move towards a day 1 CECL allowance coverage or maybe better.

Our forecast is that it will be probably better because of the scenarios, economic scenarios are much better than day 1 CECL implementation. So that's how we see it. We need to continue the confirmation of our expectation on the asset quality trend that so far has been there as we have seen during these couple of quarters. And the expectation is the allowance coverage should go down as we see during the next couple of quarters.

Okay, that's helpful. And then last for me, just circling back to expenses, you called out $2 million of tech spend in the quarter and then during your prepared remarks, talked about accelerating some of the tech spend. The efficiency ratio guidance that you provided and just the overall mix shift within the expense bucket, is technology going to become a larger component of the annual tech spend? And does the $2 million kind of spent this quarter stick around in the run rate and get built on? Or does it fall off at some point as some of these projects and initiatives come to completion?

So tech is going to have a larger component. To answer the question as specific as you want, is this $2 million going to translate into an ongoing number? It's hard to tell because it depends on how do we execute on some of the technology projects when they come out and how we start capitalizing those investments. But they will start trickling in. And that's why we feel that, as part of our strategy, we need to kind of give you guys a heads-up. And we're doing that. But again, it is with the objective of having a return on that investment as we execute on our strategy.

And we do have a follow-up question from Alex Twerdahl with Piper Sandler.

Just a couple of follow-up questions. One, on the efficiency guide to the low 60s, what's the assumption on interest rates there? And I guess, that's the whole question.

Yes. My answer to that question is, Alex, let the Fed speak, and we'll go from there. The Fed has spoken. They have given us guidance on where rates will be looking or how they will be looking. So that's kind of our assumption here. And then how that will affect our balance sheet, we'll update you on the 10-K with the shock analysis.

Okay. I guess, just asking it in a different way, if we do get 5% or 6%, whatever the forward curve is expecting at this point and you do get that high single-digit up NII help in revenues, is a mid-50s efficiency ratio still feasible? Or would you kind of...

Yes, I'm glad you asked the question. No, I mean, I think our targets remain to be a mid-50s efficiency ratio bank. We're talking about 2022. And so again, we're trying to take advantage of where we are positioned right now, as I mentioned, and accelerate some of these investments. But it is still longer term, meaning further than 2022, our target of a mid-50s efficiency ratio still apply. So again, that's kind of how we view this and how we're thinking about the low 60s efficiency guidance that we're sharing with you.

Okay, understood. And then on the balance sheet optimization question, you guys did some securities laddering, and I think the third quarter rates are now up 50 basis points from there with the expectation for some of those deposits, you said, coming back in, in the first quarter. And I'm sure you'll get a nice boost from the child tax credit also. It seems like you're still sitting on a huge amount of liquidity to do all sorts of things with -- I mean, is there a strategy to continue laddering some of that cash into securities?

Yes.

Any sense for how much you would be willing to purchase in any given quarter?

We have to yet decide on how -- in terms of quantity, I don't have the number, but we need to think, sit around and decide. But again, it's going to be incrementally increasing.

Okay, great. And then just circling back on the reserve question, the charge-offs, the 2% charge-off this quarter, obviously the bulk of that related to the loan sale. When you think about the CECL model, does that get incorporated in your loss history? Or would the losses in your CECL model be more like the [15] basis point core loan book that remains?

No, we exclude the -- it is excluded, the $30 million charge-off that gets reserved.

Awesome. So you're looking more like a 15 basis point net charge-off or loss rate. Maybe that's a little bit low relative to where it will shake out over the next couple of quarters but still a lot lower than where it was and much more comparable to a mainland bank while your reserve is still double, got it.

Yes.

Yes, that's why we mentioned the benign credit environment.

And we do have a follow-up from Brett Rabatin with Hovde Group.

Yes. Just 2 quick follow-ups. One, the legal reserve that you guys did this quarter, can you maybe give any color on what that was related to?

Yes. That's finishing up or cleaning up the legacy arbitration cases on the broker-dealer from the -- actually, from the Puerto Rico municipal debt bankruptcy issues. So we've had to build up some legal reserves for that. And in the quarter, we took some reserves for that. That's what it is all about.

Okay. And then OFG USA, any update on what their pipeline looks like and kind of how you think that might be a contributor to your growth this year?

Yes. So we will continue to execute the U.S. loan. We've been at it for 4 years now. As you recall, we started in 2017 after Hurricane Maria. And frankly, we have been building a nice, good portfolio. We have great relationship with some of our partners in the States, too, and we built a team around it. And it's becoming incrementally more real. So we're very happy with that portfolio.

We will continue to build on it. And as we have been doing in 2021, we did, and 2022 will be the same. So that's how we see that. And again, it's part of us also deploying some of our capital and taking advantage of diversifying our risk geographically. So again, we feel that the pipelines are, I would call it, equally strong as what we're seeing in Puerto Rico.

Okay. And then maybe one last one, just on capital and just thinking about their relative levels. And it would seem like if Puerto Rico is finally turning a corner, it seemed like the regulators would be more amenable to maybe less of a buffer for Puerto Rico relative to the U.S. Can you talk maybe about if you think that might be the case? And if so, besides buybacks, is there anything else that you're thinking about in terms of trying to further improve your relative profitability on the capital base?

I don't really think that the regulators would be -- will allow us to be very much more aggressive than what we have been. I think they are -- as we are all very close to what has happened recently in the recent past here in Puerto Rico. So I think it will take a couple more years for them to think about Puerto Rico, I would say, from a risk perspective, similar to the U.S. jurisdictions. And that's kind of my own opinion, I'm here sharing my opinion.

So we operate within -- from a capital perspective, we operate with a view of we are having good earnings growth. We are having good momentum. We have excess capital. If we don't see opportunities to deploy that capital in the markets we operate, then we need to return that capital to shareholders and then we do the numbers. And more to come throughout 2022 on the same capital management strategies.

At this time, there are no further questions. I will turn the program back over to Mr. Fernandez for closing remarks.

Thank you, operator. Thanks again to all our team members for their hard work and dedication throughout the past year. We look forward to a great 2022. Thank you all to all our stakeholders who are listening today. Goodbye.

This does conclude today's program. Thank you for your participation. You may disconnect at any time, and have a wonderful day.