Earnings Call Transcript
OFG BANCORP (OFG)
Earnings Call Transcript - OFG Q4 2021
Operator, Operator
Good morning. Thank you for joining OFG Bancorp's Conference Call. My name is Britney, and 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. The presentation that accompanies today's remarks 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 include certain forward-looking statements regarding management's goals, plans, and expectations. These statements carry certain risks and uncertainties detailed in the Risk Factors section of OFG's SEC filings. Actual results may vary significantly from those anticipated. We do not commit to updating information shared in this call as new developments arise. All lines have been muted to eliminate background noise. Following the speakers’ remarks, a question-and-answer session will take place, and instructions will be provided then. I will now turn the call over to Mr. Fernandez.
Jose Rafael Fernandez, CEO
Good morning and thank you for joining us. I wanted to start our call today by 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 provision. As for our core business, we continue to demonstrate strong momentum as we ended 2021 and now entered 2022. Core revenues totaled $141 million, which is 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. Non-interest expenses increased by $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, reflecting 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 across all three of our priority areas, an increase of 5% in commercial loans, excluding PPP, an increase of 9% in consumer loans, and an increase of 1% in auto loans. New loan origination remained very strong at $633 million for the quarter. We also successfully executed on our capital allocation strategies, completing our $50 million share buyback while maintaining robust capital levels. Please turn to Page 4. We are also pleased with all the progress 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 non-interest expenses. Pre-provision net revenues increased 15% to $250 million. Looking at the balance sheet, total assets increased $74 million, customer deposits grew by $225 million, and loans declined by $172 million. Excluding PPP forgiveness, they increased by $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 by 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 continued to reflect the four main drivers of our business: consistently growing recurring net income driven by loan growth including continuing to build both our Puerto Rico and U.S. loan businesses on a 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, 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. Some technology investments are table stakes and require continuous upgrades, while others require us to focus 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 of which are firsts for the Puerto Rico market. With OFG's unique strategic position and Puerto Rico's growing economic outlook, we will accelerate these investments to improve the customer experience faster, improve efficiency long-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.
Maritza Arizmendi, CFO
Thank you, Jose. Please turn to page 5 to review our financial highlights. Total core revenue was $141 million, which is about an increase of $6.2 million or about 5% from the third quarter. This reflects a $1.5 million increase in net income. NII reflected income from loans and cash, increased income from investment securities, 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, which reflects the fourth quarter receipt of annual insurance commission, totaling $4.3 million this year compared to $4 million last year. Non-interest revenue growth also reflected increases in recurring banking services and mortgage banking activities. Non-interest expenses totaled $86 million, an increase of $7.6 million from the prior quarter. The fourth quarter included increased compensation and technology investments along with costs related to higher levels of business activities. The quarter also included $2.4 million for our legal reserve and to cover operational losses, as well as $1 million in lower gains on sales of real estate owned compared to the prior quarter. The higher non-interest 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 in technology to further implement our strategies. We now expect in 2022 our efficiency ratio to remain in the low 50% range. Return metrics continued to be in our target range: return on average assets was 1.3%, and return on tangible common equity was 14.1%. We continued to build capital, and tangible book value per share was $19.08, which 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, a decline of $14 million from the third quarter. This reflected an increase of $54 million in non-PCD loans and an increase of $60 million in PCD loans, with the increasing PCD largely reflecting new commercial auto and consumer loans. The decreasing PCD largely reflects repayments 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 a single large former Scotiabank PCD commercial loan that was transferred to held for sale. 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, up $76 million from the third quarter and 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, excluding PPP, has now increased for three consecutive quarters. Average core deposits totaled $9.1 billion, a decline of $90 million from the third quarter, mostly due to government-related and commercial withdrawals occurring at the end of the year. End of period core deposits declined $641 million from September 30. Core deposit costs continue to fall, remaining at 26 basis points in the fourth quarter, a reduction of 4 basis points from the third quarter, reflecting general rate reductions and the continued maturation of older higher-priced CDs. Early in the fourth quarter, we paid down $33.3 million of 2.98% Federal Home Loan Bank debt. Average cash balances totaled $2.6 billion, a decline of 5% or $146 million from the third quarter, mainly reflecting 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. This increase was mostly driven by a 5 basis point decrease in cost of interest paid and by a 1 basis point increase in earning asset yield. 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. These included $30 million related to the past-due loans transferred to held for sale. The NCO rate increased to 2%. The early and total delinquency rates were 2.34% and 3.71%, respectively. The non-performing loan rate on the non-PCD loan portfolio was 1.98%. The total NPL rate, including PCD, was 1.75%, compared 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 five quarters. As a result, we had $2.7 million of net reserve releases. With the added provision related to the loan sale, that provision was $7.2 million. Our allowance coverage was 2.44% on a fully-loaded basis and 2.47% excluding PPP loans. The CET ratio increased to 13.77%. Stockholder’s equity was $1.07 billion, an increase of $15 million from the third quarter. This reflects the increase in retained earnings, partially offset by the common stock buyback. The tangible common equity rose to 9.69%. Now here is Jose.
Jose Rafael Fernandez, CEO
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 remained 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 perception of Puerto Rico on the mainland and continuing 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, Operator
And we will take our first question from Alex Twerdahl with Piper Sandler; your line is now open.
Alex Twerdahl, Analyst
Hey, good morning.
Jose Rafael Fernandez, CEO
Good morning, Alex.
Alex Twerdahl, Analyst
First off, I have a bunch of questions here. I want to start with the loan growth that you guys saw this quarter. I was hoping Jose could give us some commentary. We saw some nice commercial loan growth this quarter. It looks like a strong quarter for originations, obviously excluding PPP. But, you know, is this sort of the tip of the iceberg on commercial loan growth, or can you maybe comment on the pipelines, comment on the pay-down activity you are seeing, and give us some extra help to think about what our expectations should be for the next couple of quarters, starting with commercial loan growth?
Jose Rafael Fernandez, CEO
What we're seeing this quarter is again, a confirmation of what we have been seeing in the last three or four quarters prior, inching up on the originations, inching up on loan balances particularly on the commercial side and the auto lending side as well, and now lately in the consumer portfolio. 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 CEO, was 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 the economic growth cycle in Puerto Rico now, maybe the confirmation data is pretty much behind us from last year. Loan growth is here to stay for the next couple of years as the economy continues to grow. When we look at loan growth, we feel that production, and let's call it loan origination, for 2022, we’re going to see higher consumer loan origination, we're going to see relatively similar auto loan origination, and likely similar commercial loan origination, which in itself is a record year we had in 2021. When we look at that scenario on the production side, I’m excited. We are, as a team, very excited to look into deploying our liquidity here. Regarding the other components of the loan balances, we talked 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 starting to inch up, we'll probably see slower repayments on the mortgage portfolio. That's good for us. We will continue to originate and sell, but we will also be a little bit more focused on non-conforming and retaining a little bit of non-conforming. That might be helpful, but we see the portfolio on mortgages, residential mortgages trending lower. On the commercial side, 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. 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. That's kind of my take on loan and loan growth, Alex.
Alex Twerdahl, Analyst
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, do you have in front of you just the PPP fees that we saw this quarter, last quarter, and what's remaining in terms of PPP fees?
Jose Rafael Fernandez, CEO
On the PPP forgiveness, our expectation is that it 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 PPP.
Maritza Arizmendi, CFO
For this quarter, the fees were $2.3 million versus $3.4 million last quarter. We still have about $5 million in unamortized fees yet to be recognized.
Alex Twerdahl, Analyst
I'm sorry, can you repeat that one more time? You just broke up a little bit? I think you said $3.4 million last quarter, $5 million left. What was it this quarter?
Maritza Arizmendi, CFO
This quarter $2.3 million.
Alex Twerdahl, Analyst
$2.3 million in 4Q. Okay. Thank you very much for that. And then I wanted to ask about the 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 improve the sentiment around the island. But I'm just asking, as you think out, are there any direct implications for you guys? Does it impact things like your capital plan now that the island is no longer in bankruptcy?
Jose Rafael Fernandez, CEO
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 an average rate of 2%, so as 20% for a decade, we had a 20% contraction. We went to bankruptcy and had all the issues that everybody knows. So when we look at now 2021 and beyond, I mentioned the growth cycle particularly because of all the stimulus that is coming in and now the rebuilding and the funds from Maria and the earthquakes coming in. Puerto Rico is in a great position right now. So now Puerto Rico has transited from a depressionary and deflationary 10-year cycle into the early stages of a growth cycle. How does exiting bankruptcy play into all this? Well, certainly very positively, because first of all, we get rid of a bunch of debts that we had to pay in the last decade. But more importantly, there are guardrails in place for the government to invest in the infrastructure and use those federal stimulus funds for reconstruction to build the infrastructure in Puerto Rico, invest in education, and strengthen the power authority along with the ongoing privatization. All those things are at the early stage. To me, getting out of bankruptcy is going to allow Puerto Rico, if we do things right, to access the markets and expand that growth cycle that is beginning right now.
Alex Twerdahl, Analyst
Great. And then just two more questions for me. One, with respect to your capital actions and capital plans, I know sometimes you announce updates to the dividend or 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 two dividend increases. Is there any reason why with a 13.8% common equity tier-1, we should not expect another year of pretty large capital return in 2022?
Jose Rafael Fernandez, CEO
There's no reason for it. I mean, there's no reason for you not to think about those things. I think you are correct. But let me tell you what our priorities are regarding capital. First and foremost, we want to deploy it in good loan growth and in good loans 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 ensuring that we 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.
Alex Twerdahl, Analyst
Great. And am I correct on the timing, sort of end of January, end of July, is when you typically make those announcements, so we could potentially get an update next week?
Jose Rafael Fernandez, CEO
Yes, you're right on the timing.
Alex Twerdahl, Analyst
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?
Jose Rafael Fernandez, CEO
So I tried to mention it in my remarks. We were above $10 billion by December 31st; Durbin would have triggered on July 1st. You would have had a half-year impact in terms of fee income. We would have had half a year impact in 2022. Now, that impact will not materialize, because we closed the year below $10 billion.
Alex Twerdahl, Analyst
Fantastic. So that effectively takes the $10 million or so of interchange fees that you would have lost in the back half of '22 and early 2023 and effectively pushes that impact out a year, assuming you guys continue to grow.
Jose Rafael Fernandez, CEO
Actually, for 2022, it would have been about $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.
Alex Twerdahl, Analyst
Thanks for taking my questions.
Jose Rafael Fernandez, CEO
Thank you for your questions.
Operator, Operator
We will now take our next question from Brett Rabatin with Hovde Group; your line is open.
Brett Rabatin, Analyst
Hey, good morning, everyone.
Jose Rafael Fernandez, CEO
Hi, Brett. Welcome to our call.
Maritza Arizmendi, CFO
Good morning.
Brett Rabatin, Analyst
One of the first
Jose Rafael Fernandez, CEO
I should say, welcome back.
Brett Rabatin, Analyst
Yeah. Thanks. It's good to be back. I guess, first question, I wanted to go over a little bit about the loan sales for the quarter of the past due loans, if you could give us some more color on the loans you made, the loans that you sold, the decision to sell those loans, and then of the $32.5 million of the charge-offs for the quarter, it sounds like those were regarding those. How much of the $32.5 million went into those loans that you sold?
Jose Rafael Fernandez, CEO
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 what came about from the loan sales? These are legacy residential mortgage loans mostly from Scotiabank, and one commercial loan as part of the acquisition; most of them were on the PCD bracket. Frankly, the residential loans had several years of non-performance, so it was becoming too cumbersome for us to manage the added resources to try to get those loans off the books. So we decided to sell to get it out of the way so we can focus on what's important. We're also trying to be efficient at the end of the day. The strategic logic behind it is how can we move some of our resources that are on the work side and put them on the front side to bring in more loan business. That's also part of the thought process we had. The commercial loan that we sold had the same dynamic; it's a participation, and it hasn't been performing for a while, so we felt it was the right decision to get it off the books as well at the end of the year. Can you ask the second part of your question?
Brett Rabatin, Analyst
Yes, sure. Jose, the second part of the question was just I think in the press release you noted a significant portion of the net charge-offs of $32.5 million were related to the loan sales. How much specifically was going to the loan sales in terms of net charge-offs?
Maritza Arizmendi, CFO
$30 million.
Jose Rafael Fernandez, CEO
So out of the $32 million, $30 million were related to the sale.
Brett Rabatin, Analyst
Okay, that’s net charge-offs excluding that were actually pretty modest. And then, as it relates to that, I did notice that the linked-quarter early delinquencies were up a little bit; was there anything that was driving that linked quarter?
Jose Rafael Fernandez, CEO
You’ll see in 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 that pretty well, and we should have that trending back again to where it should be. As 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. Certainly, we will have to deal with the consumer book, and we’ll see the charges starting to come in some time in the near future as part of the normal process of getting back to a normal state of the economy, considering 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. That’s how we're seeing it.
Brett Rabatin, Analyst
Okay. And then I will say roughly, 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 NIAF side was a little over 4%. But it does seem like that could be conservative with cash still being 25% of the balance sheet. With the Fed possibly raising three or four times this year, it seemed like your margin is going to benefit throughout the year from Fed action. Maritza, can you talk maybe about how you think about Fed hike's impact on the margin and how you see the margin playing out throughout the year?
Jose Rafael Fernandez, CEO
Brett, as you've pointed out, we are asset-sensitive. We 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. Let me just give you some color on it, but the specifics will come in the 10K when we publish it later in early February. But we will be net interest income on a 100 basis points shock; the impact of interest rates will be affected positively in the high single digits. So that’s how we're seeing it right now. As we continue to look at all the modeling and scenarios, we'll give you the specifics on the 10-K, but that's how it looks like.
Brett Rabatin, Analyst
Okay. And then, wanted to ask about the expenses. There are obviously some hires. I guess, I'll 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?
Jose Rafael Fernandez, CEO
We should address the situation from a different perspective considering the widespread discussions about the great resignation. On our end, we're noticing increased turnover among our hourly employees, which has prompted us to recruit replacements to maintain our customer service standards. We continue to attract strong talent, especially in retail, and have a solid team in our commercial sector as well. Following our acquisition of Scotia Bank, we incorporated a number of commercial bankers, which strengthens that area. On the consumer side, we have made significant hires recently and are committed to attracting, retaining, and developing our talent as part of our people strategy. Our goal is to ensure we have the right talent for the future and to nurture their potential. This quarter, we've seen a reduction in our hourly employee numbers compared to the previous quarter, primarily due to the higher than usual turnover among these employees.
Brett Rabatin, Analyst
Okay. And then on the G&A expenses, the other line item, that $39 million core number for the fourth quarter, is that a good run rate going forward? I assume with the technology expenses and some of the other things, maybe that number could come back a little bit.
Jose Rafael Fernandez, CEO
That’s why Maritza guided you guys with an efficiency ratio in the low 60s. We feel we're in a unique position here in the market we operate. We are really confident that our vision on how to get closer to the customer and doing a better job incrementally on servicing that customer and adding value to that customer, we feel we are in a unique position in this market, and we need to continue to invest and actually increase the speed of technology investments so that we can affect change faster. From that perspective, we’re looking at people, and we're looking at technology, not as a solution for everything but as a means to execute 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, cloud migration, and being more proactive in taking care of our customers. In the market we operate here in Puerto Rico, we need to be on top of that in order for us to continue our differentiation. That’s what we're doing; we’re being very decisive in those investments, because we think it's the right thing to do today, and they will bring those incremental differentiations into the future.
Brett Rabatin, Analyst
Okay, that's great color. I appreciate that, and congrats on the quarter.
Jose Rafael Fernandez, CEO
Thank you very much.
Operator, Operator
We will take our next question from Timur Braziler with Wells Fargo; your line is now open.
Timur Braziler, Analyst
Good morning and thanks for the questions.
Jose Rafael Fernandez, CEO
Hi. Good morning. Welcome to the call.
Timur Braziler, Analyst
And thank you. Maybe just starting with the deposit outlook. I know you mentioned you had some government-related which are all institutional client activity. I guess what are you thinking about for 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's your expected to exit kind of the bankruptcy resolution here in the near-term?
Jose Rafael Fernandez, CEO
Overall in deposits, we feel that most of those deposits will come back and probably will 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 numbers, because I don't have it up at the top of my head.
Maritza Arizmendi, CFO
In general, just to ensure I get the question right, it's how much dormant government deposit was withdrawn coming back or how much we have at this moment?
Jose Rafael Fernandez, CEO
How much we have?
Maritza Arizmendi, CFO
We have about $200 million at this moment. We haven't had much in our history, but we should have some deposits there.
Jose Rafael Fernandez, CEO
Historically, we don't consider government deposits a core part of our business.
Timur Braziler, Analyst
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 kick up pretty meaningfully here in the first quarter to reflect that mix shift, or is there something else going on and might keep margin levels a little lower?
Maritza Arizmendi, CFO
I think during the training day, there may be some margin changes this quarter. We have started to notice a peak. Our best-case scenario is that this trend will continue to benefit us. We will keep investing in the loan balance and adjusting our deposit mix. We observed a low point in the third quarter, so we expect to gradually see an increase throughout the quarter and into next year.
Timur Braziler, Analyst
Okay. That's helpful. Thank you. 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 240s reserve level from here, how should we see that trend?
Jose Rafael Fernandez, CEO
I'll let Maritza go into details. But big picture, the answer is no, we couldn't, because we need to follow the CECL methodology. That means the economic scenarios; we need to look at the balance of what loans we have, and we need to look at charges, and then we look at the qualitative factors. I don't think we could have done that particularly or specifically in this transaction. At this opportunity, but I'll let Maritza answer the second part of your question regarding how we see the allowance trending into the future.
Maritza Arizmendi, CFO
Thank you. In general, Jose, I think the element is coming into the model again. We have a 2.44% allowance coverage. We see going forward that asset quality will continue to normalize, which means it will likely continue to go down in alignment with our expectations on asset quality trends that, so far, have been favorable, as we have seen in the middle of this fourth quarter. The expectation is for it to go down as we experience within the next couple of quarters.
Timur Braziler, Analyst
Okay. That's helpful. And then last from me, just circling back to expenses. You called out $2 million of tech spend in the quarter, and 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? Does the $2 million 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?
Jose Rafael Fernandez, CEO
Tech is going to have a larger component going forward. To answer the question specifically, will this $2 million translate into an ongoing number? It’s hard to tell because it depends on how we execute on some of the technology projects and when they come out and how we start capitalizing those investments. But part of our strategy is to give you guys a heads up that we're doing that. Again, it is with the objective of having a return on that investment and executing on our strategy.
Timur Braziler, Analyst
Great, thank you very much.
Jose Rafael Fernandez, CEO
Thank you for your questions and comments.
Operator, Operator
We will take our next question from Alex Twerdahl with Piper Sandler; your line is now open.
Alex Twerdahl, Analyst
Thanks. Just a couple of follow-up questions. One on the efficiency guide to the low 60s; what's the assumption on interest rates there? I guess that's the whole question.
Jose Rafael Fernandez, CEO
Let the Fed speak and we'll go from there. The Fed has spoken; they have given us guidance on what rates will be looking like or how they will be looking, so that's our assumption here and then how that will affect our balance sheet. We will update you in the 10-K with the shock analysis.
Alex Twerdahl, Analyst
Okay, I guess just asking in a different way: if we do get 5 or 6 hikes, whatever the forward curve is expecting at this point, and you do get that high single-digit increase in NII helping revenues, is a mid-50s efficiency ratio still feasible or what kind of impact?
Jose Rafael Fernandez, CEO
I'm glad you asked this question. I think our targets remain at a mid-50s efficiency ratio bank. We're discussing 2022, and we aim to leverage our current position and accelerate some of these investments. However, those targets of a mid-50s efficiency ratio extend beyond 2022. This is our perspective as we consider the low 60s efficiency guidance we are sharing with you.
Alex Twerdahl, Analyst
Okay. Understood. Regarding balance sheet optimization, I believe you implemented some securities laddering in the third quarter. Rates are now at 50 basis points higher; with the expectation that some of the deposits you mentioned will return in the first quarter, and I’m sure you'll also see a nice boost from the child tax credit. It seems like you still have a significant amount of liquidity to work with. Is there a plan to continue laddering some of that cash into securities?
Jose Rafael Fernandez, CEO
Yes.
Alex Twerdahl, Analyst
Any sense for how much you'd be willing to purchase in any given quarter?
Jose Rafael Fernandez, CEO
We have yet to decide on quantity. I don't have the number, but we need to think around and decide. But again, it's going to be incrementally increasing.
Alex Twerdahl, Analyst
Great. Circling back to the reserve question, the 2% charge-offs this quarter are largely due to the loan sale. When considering the CECL model, does this get factored into your loss history, or would the loss history and the CECL model reflect more like 15 basis points for the remaining loan book?
Maritza Arizmendi, CFO
No. We exclude the $30 million charge-off related to the sale.
Alex Twerdahl, Analyst
Awesome. So you're looking at more like a 15 basis point net charge-off or loss rate?
Maritza Arizmendi, CFO
Yes.
Alex Twerdahl, Analyst
Maybe that's a little bit low relative to where it will shake out over the next couple 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.
Jose Rafael Fernandez, CEO
That's why we mentioned the benign credit environment.
Alex Twerdahl, Analyst
Great, thanks for taking my follow-ups.
Jose Rafael Fernandez, CEO
Yes, thank you. Thank you for your questions.
Maritza Arizmendi, CFO
Thank you.
Operator, Operator
And we do have a follow-up question from Brett Rabatin with Hovde Group; your line is now open.
Brett Rabatin, Analyst
Yeah. Just two follow-up quick questions. One, the legal reserve that you guys did this quarter; can you maybe give any color on what that was related to?
Jose Rafael Fernandez, CEO
Finishing up or cleaning up the legacy arbitration cases on the broker-dealer from the Puerto Rico municipal debt bankruptcy issues. We had to build up some legal reserves for that. In the quarter, we took some reserve for that. That's what it’s all about.
Brett Rabatin, Analyst
And then, OFG USA, any update on what their pipeline looks like and how you think that might be a contributor to your growth this year?
Jose Rafael Fernandez, CEO
We will continue to execute the U.S. loans. We've been added for four years now. As you recall, we started in 2017 after Hurricane Maria. Frankly, we have been building a nice, good portfolio. We have great relationships with some of our partners in the States too, and we built a team around it; it's becoming incrementally more real. We’re very happy with that portfolio. We will continue to build on it. As we did in 2021, we will do the same in 2022, so that's how we see that. Again, it's about deploying some of our capital and taking advantage of diversifying our risk geographically, so we feel the pipelines are equally strong as what we're seeing in Puerto Rico.
Brett Rabatin, Analyst
Okay. And then maybe one last one, just on capital and just thinking about the relative levels. It would seem like if Puerto Rico is finally turning the corner, 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?
Jose Rafael Fernandez, CEO
I don't really believe that the regulators would allow us to be much more aggressive than we have been. They, like us, are closely monitoring what has happened recently in Puerto Rico. It will likely take a couple more years for them to view Puerto Rico from a risk perspective in a way that is similar to U.S. jurisdictions. That’s just my opinion. We are operating with a rolling capital perspective, aiming for good earnings growth, strong momentum, and excess capital. If we don't find opportunities to deploy that capital in our markets, we will need to return that capital to shareholders. We will analyze the situation and provide more information on the same capital management strategies in 2022.
Brett Rabatin, Analyst
Okay, great for showing the color.
Jose Rafael Fernandez, CEO
You're welcome.
Operator, Operator
At this time, there are no further questions. I will turn the program back over to Mr. Fernandez for closing remarks.
Jose Rafael Fernandez, CEO
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 to all our stakeholders who have listened in today. Goodbye.
Operator, Operator
This does conclude today's program. Thank you for your participation. You may disconnect at any time and have a wonderful day.