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OFG Bancorp (NYSE:OFG)
Q3 2020 Earnings Call
Oct 23, 2020, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. Thank you for joining OFG Bancorp's Conference Call. My name is Maria, and I'll be your operator today. Our speakers are Jose Rafael Fernandez, President, Chief Executive Officer and Vice Chairman; and Maritza Arizmendi, Executive Vice President and Chief Financial Officer.

A presentation accompanying today's remarks can be found on our redesigned Investor Relations website on the homepage and in the What's New box or on the Quarterly Results page. This call may feature certain forward-looking statements about management's goals, plans and expectations. These statements are subject to risks and uncertainties outlined in the Risk Factors section of OFGs 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.

Jose Rafael Fernandez -- President, Chief Executive Officer and Vice Chairman

Good morning to all and thank you for joining us. Before I begin, I want to thank all our team members for their dedication and commitment during these very challenging times. They have done an excellent job and our results show it.

I'd like to start [Technical Issues] on the big picture. Once we got through the earthquakes in January, the economy and OFG performed well. [Technical Issues] started to see the benefits of the Scotiabank acquisition, then the COVID-19 pandemic hit and by mid-March, the Puerto Rico government had shut down the island. These tough measures, however, enabled Puerto Rico to begin to relax restrictions on economic activity by the end of the second quarter and beginning of the third, with a noticeable rebound in the economy.

At the same time, we began to see an increased flow of federal funds for stimulus and the construction related to Hurricane Maria, the earthquakes and the COVID-19 pandemic in addition to the benefits provided by the bank loan deferrals. All these added to the third quarter's economic rebound and resulted in increased liquidity on the part of businesses and consumers. Altogether, the impact has been much more beneficial on a relative basis than what's happened on the mainland.

As it relates to the local banking industry, consolidation, the natural rebound in economic activity, and the growing amount of stimulus, combined with the Federal Reserve Bank's significant rate cuts in March, created a number of banking cross-currents in the third quarter. By acting with agility and speed, OFG has been able to take advantage of them, to the benefit of our customers, communities and people.

The increase in liquidity resulted in continued growth in deposits and cash. This caused, virtually, all our net interest margin dilution compared to the second quarter. It also encouraged consumers and business customers to step up their loan repayments. Taking advantage of the situation, we continue to expand our customer base and digital migration. There was a large increase in new total sales which we translated into a noticeable increase in our own auto loan generation. Mortgage production quadrupled, fee income grew across the board and deferrals dropped to 2% of loans from 30% in the second quarter.

Our commitment and preparation enable us to manage these changes facil, rapido, hecho, as we say at OFG. Branches continue to operate safely, enhanced by our technology. Full service ATMs and ITMs, our mobile app and online bill paying tools continue to facilitate routine transactions in a contactless manner. Online and mobile appointment scheduling continue to make COVID-safe customer meetings possible at branches. In addition, the Scotiabank integration continues on track and we're starting to see improved operating leverage. In the end, we generated strong momentum in our core businesses, as we continue to help our customers, communities and people build better and stronger financial futures for themselves.

Let's turn to Page 4. We have continued to see strong digital migration trends among both our retail and business customers. More customers are becoming online and mobile users, but they're are also using an increasing number of digital features. Here are some new highlights comparing September to January of this year. P2P volume is up 40%, digital money transfers have increased 55%, online loan payments are up 87%, retail and commercial photo deposits have doubled, and we scheduled more than 34,000 COVID-safe appointments with customers through our online mobile tool, almost all of them in the second and third quarters.

Clearly, customers are using these features to avoid contact during COVID. But as they experienced the ease and convenience of banking like this, their habits will surely stick. More and more, customers in Puerto Rico, are asking themselves, why would you drive to the branch to deposit a check when you can take a photograph? Why will you even write a paycheck these days? These are positive trends that have accelerated due to the pandemic and play nicely to our retail banking strategy. We continue to look for new and innovative ways to help our customers interact with us in an agile and easy way. Earlier this week, we became the first financial institution in Puerto Rico and the U.S. Virgin Islands to launch a digital portal to make it fast and easy for our commercial clients to apply for PPP loan forgiveness.

Let's start on Page 5 to talk about our financial results. Earnings increased significantly. We reported earnings per share of $0.50, a 28% increase from the second quarter and more than four times the year-ago quarter. The effective tax rate was 19% compared to 25% in the second quarter. Total core revenues were $127 million, excluding one-time interest recoveries from acquired Scotiabank loans. Net interest income of $99 million was level with the second quarter, while fee income rose 19% to $27 million. Net interest margin was 4.3%. When you exclude interest recoveries in both quarters, net interest margin was 4.28% versus 4.5% in the second quarter. Virtually, all the difference was attributable to the increase in cash balances.

Non-interest expenses of $83 million fell more than $2 million compared to the second quarter and that number includes merger and COVID-related costs. Excluding those in both periods, the efficiency ratio improved 369 basis points compared to the second quarter as increased operating leverage from the Scotiabank acquisition began to kick in.

Customers' deposits grew more than $212 million from June 30 to $8.5 billion. Due to the increased deposits, as well as repayments of loans and securities, cash increased $383 million to $2.3 billion. As a result, total assets grew $84 million to $10 billion. We do not anticipate exceeding these total asset level, come December 31, 2020.

Loan production was strong, totaling $458 million. Excluding Paycheck Protection Program loans in the second quarter and third quarter, production increased $228 million. The allowance coverage increased to 3.64%, excluding PPP loans. Capital continued to build, shareholders' equity increased to $1.06 billion, all regulatory capital ratios remained significantly above requirements for a well-capitalized institution. The CET1 ratio was 12.55% on September 30, 2020.

Please turn to Page 6. The effects of all this is that we are building tangible book value per share. These increased $0.50 in the third quarter to $16.51. In addition, all three of the key performance ratio we track improved sequentially. Efficiency ratio improved to 65.69% on a reported basis. On an adjusted basis, it was 62.17%. Return on average assets was 1.11%, and return on average tangible common stockholders equity was 12.23% and 12.10% on an adjusted basis. Return on average tangible common equity is now exceeding our performance as compared to the year-ago second quarter before all the transactions related to the Scotiabank acquisition and increased provisioning affected the business.

Please turn to Page 7 for our operational highlights. Average loan balances declined $54 million from the second quarter, reflecting net loan repayment in mortgage, commercial and consumer; auto increased. Average core deposits, excluding brokered, grew $524 million from the second quarter. End of period core deposits are now up more than $1 billion from the end of the last year, that is on top of the $2.8 billion that came with the Scotiabank acquisition. Loan generation, excluding PPP loans, by order of magnitude was driven by $174 million in commercial lending, $156 million in auto, $94 million in residential mortgage and $24 million in consumer. Loan yield at 6.57% declined 40 basis points from the second quarter. This was mainly driven by PCD loans due to lower interest recoveries. Non-PCD loan yield declined only 16 basis points. The cost of core deposits declined 5 basis points to 56 basis points.

Please turn to Page 8 to review credit quality. Credit quality continued to be under control. The net charge-off rate declined 30 basis points from the second quarter, mainly due to declines in auto. Provision declined $4 million, largely due to a decline in COVID-related provisioning. Otherwise, provision was approximately level. The non-performing loan rate increased 52 basis points quarter-over-quarter, mainly mortgage and auto. We believe this is more about getting customers back in the payment cycle, now that most deferrals are over. But we surely are keeping a close watch on it.

As for our customer relief program, if you recall, as of June 30, we had processed relief for more than 44,000 retail customers for $1.4 billion or 32% of our retail loans. For our commercial customers, we had processed relief on $685 million in loans or about 27% of our commercial portfolio. As I mentioned earlier, our deferrals are now down to 2% of total loans. Most of that relates to about $112 million of commercial loans, mostly long-standing solid customer relationships in the hospitality industry.

Please turn to Page 9. The allowance for loan and lease losses increased $2.6 million from the second quarter and is now equal to 3.48% of total loans. Excluding SBA guaranteed PPP loans, the allowance was 16 basis points higher than in the second quarter.

Please turn to Page 10. We're in a very strong capital position. Our CET capital ratio is now up 164 basis points since last year after the Scotiabank acquisition.

Please turn to Page 11. To conclude, we believe our history, culture, team, and approach to business, as well as our most recent results demonstrate our ability to quickly respond and adapt to changing economic environments. During the second and third quarters, we have built momentum in our core businesses and developed a strong pipeline of new loans.

Looking at our liquidity, capital and balance sheet, we are well-positioned financially and strategically. We have $8.5 billion of sticky core deposits with an excess of more than $1 billion giving us significant amount of dry powder. Our agenda remains the same: finish integrating the former Scotiabank operations by year-end; achieve the full benefits of the acquisition by the end of next year; continue to invest for the future to further simplify our operations and enhance our ability to serve customers; and continue to play a significant role in the economic rebound of Puerto Rico and the U.S. Virgin Islands.

From a macro perspective, the increased liquidity from ongoing stimulus should continue to benefit the economy. This favorable environment should be further enhanced by the fiscal board finally working toward a resolution with Puerto Rico creditors and by pharmaceutical companies as they onshore more production back to Puerto Rico.

We are now incrementally more confident that the economy will improve further. Let's be clear, we still face tremendous challenges with -- from COVID-19, the elections in Puerto Rico and the USA and completing our Scotiabank conversion and integration. But, we believe the economy is starting to move in the right direction and the future is beginning to look brighter. By staying close to our customers and communities, we should be able to continue to deepen our relationships and grow the financial services we provide to them as we enter what appears to be a nascent and potentially expanding recovery.

Again, I want to thank all our team members for our excellent results and for their dedication and commitment this year. Crises bring out the best in people to help others. Our team demonstrates that every single day.

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

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Alex Twerdahl of Piper Sandler.

Alex Twerdahl -- Piper Sandler -- Analyst

Hey, good morning.

Jose Rafael Fernandez -- President, Chief Executive Officer and Vice Chairman

Good morning, Alex.

Alex Twerdahl -- Piper Sandler -- Analyst

First off, just wanted to ask you a couple of questions on the margin. Specifically, you guys are now sitting on around $2.3 billion of cash, running 13 basis points. And I look at your CD book, at almost the same amount, paying $154 million [Phonetic], just seems like a tremendous opportunity to really get aggressive on deposit costs over the next couple of quarters. Is that the case? And how quickly could we see the cost of deposits continue to come down, just based on maturities that are coming on and what new product is coming on the books at?

Jose Rafael Fernandez -- President, Chief Executive Officer and Vice Chairman

Thank you for your question, Alex. I think that's a good point. And the way we look at this is, first, we need to make sure we extract the full benefits of the acquisition from Scotiabank. And, as you know, we've been added for the whole year so far in terms of the integration and now the conversion coming in later in this quarter. So we are being very strategic in terms of how we address the cost of funds from our customers because we want to make sure that we extract also the efficiencies from the operations first. Customers come first for us and we try to focus first on how do we make our operation more efficient and, certainly, with the acquisition of Scotiabank, we had to delay it, given COVID-19. We're starting to get back on track and we should see the full effects of the operating efficiencies by the end of next year.

And -- but as you know, we keep a close look at the market and how deposits are being priced and we act accordingly. But it is not our intention to be tactical about this and we want to not only retain our customers, but we want to also expand relationship with our customers. We feel that are our retail strategy and our commercial strategy are playing wonderfully, given the new normal that we will have to operate in, in the foreseeable future and probably on the longer term. So looking long term, we think that we're in very good shape and we're not in any hurry to play a tactical game here.

Alex Twerdahl -- Piper Sandler -- Analyst

Okay, understood. And then just switching over, looking at the reserve increase this quarter, it seems like it was mostly driven by the auto portfolio. Can you talk a little bit about what drove a higher reserve level for auto this quarter specifically? Is it sort of collection trends or is there something else and some macro data that got adjusted? And what drove the increase and what factors you look forward to eventually drive that to go lower?

Jose Rafael Fernandez -- President, Chief Executive Officer and Vice Chairman

Yeah, I'll let Maritza give you some color.

Maritza Arizmendi Diaz -- Executive Vice President, Chief Financial Officer

Hey. Hi, Alex. Well, our higher reserve [Phonetic] was a variable of volume and auto loan was [Indecipherable] during this quarter increased significantly due to the higher level of production. It's one of the factor for the increase. Also there was temporary increase in the NPLs, as we see it. So we provided as the methodology requires to do so. I think that's the main two drivers for the increase during this quarter.

Alex Twerdahl -- Piper Sandler -- Analyst

Okay and then just talking a little bit about the NPLs and you sort of alluded to in your prepared remarks, Jose, but do you attribute the increase in NPLs to just returning on collection efforts that maybe have been off for a couple of months? And can you just remind us sort of what you saw after Hurricane Maria? What's the same sort of thing and how that eventually played out?

Jose Rafael Fernandez -- President, Chief Executive Officer and Vice Chairman

So, I think the script is playing out similar to Maria. And what we're seeing with the pick up in NPLs, we feel it's a little bit of two things. One is, deferrals were over and people need to get back into the payment cycle. But also the fact that we're in COVID-19, this has a different dynamic than Hurricane Maria, And that is going out there and into the streets and doing the canvassing that requires, particularly on the consumer side, it's harder. So again we use all methods and I think COVID-19 kind of threw a curve at everyone with some of the tools that we utilize to kind of get people into the payment cycle. And that's how we see it. We are keeping a close eye to it and we'll give you an update in the next next quarter's results call. But we're not, at this point, any -- seeing any deteriorating trends or anything that tells us that we are having incremental NPLs.

Alex Twerdahl -- Piper Sandler -- Analyst

Great. Thank you for taking my questions.

Jose Rafael Fernandez -- President, Chief Executive Officer and Vice Chairman

You're welcome. Thank you for your questions.

Operator

Our next question comes from the line of Joe Gladue of Alden Securities.

Joe Gladue -- Alden Securities -- Analyst

Hey. Good morning.

Jose Rafael Fernandez -- President, Chief Executive Officer and Vice Chairman

Good morning, Joe.

Joe Gladue -- Alden Securities -- Analyst

I guess, first, wanted to ask about the loan originations, very impressed with the growth there. And wondering if you could give us a little color on some of the drivers, but particularly with the mortgage portfolio. It looks like production in the third quarter was more than you did in all of 2019. And just wondering if there is some -- that's market share gains? Is the market growing that much? You're the first ones to report here in Puerto Rico. Just hoping for a little color on the drivers.

Jose Rafael Fernandez -- President, Chief Executive Officer and Vice Chairman

Yeah. So I would say, Joe, on the origination side, mortgage was a great performer in the quarter. As you recall, before the acquisition of Scotia, we were originating $20 million to $30 million, I would say, $15 million to $20 million a month. So it's like more closer to like $50 million. And this quarter we almost reached $100 million in mortgage origination and that is part of the benefit that we're getting from the Scotiabank acquisition where we have a larger platform to originate. Certainly lower interest rates and refi and we're seeing also pent-up demand to buy homes and starting to see good pricing bids for homes also. So all that has put into play the increase in originations on the mortgage side.

In terms of market share, I suspect that we have increased our market share, but we don't have enough data at this point in time to confirm. But it seems to me that with that origination level in the quarter, it looks like we've gained some market share there. On the auto side, also we saw in the quarter, and as I mentioned in my initial remarks, the third quarter really benefited from the pent-up demand that was created from the shutdown and the reopening. So auto sales -- new auto sales and used car sales also went up and we have a great relationship with the dealers that we serve and we moved fast and served them as fast and agile as we could to gain that origination levels. So I think those two are the key contributors to the origination increase.

And I would just like to add on the commercial side, while we are seeing very strong production from the small commercial side of the business, we are also seeing steady and strong production on the larger commercial type of loans and we're seeing good pipelines on both. And I -- again, you guys know me, I am reluctant to be overly optimistic about Puerto Rico and the world. But I can't deny the facts and we're seeing, certainly, the benefits of all the stimulus and it's translating into greater opportunities for us to originate loans and we're out there. We got to be out there for our customers and make sure that we serve them and provide them the ability to grow their relationships with us.

Joe Gladue -- Alden Securities -- Analyst

Okay. And just in regards to how that -- your production is affecting the margins, just where are average yields on new production versus what the averages are for the quarter?

Jose Rafael Fernandez -- President, Chief Executive Officer and Vice Chairman

So on the consumer side, I'll just give you some color on the auto and consumer, because on the mortgage, most of it, we originate and sell if it's conforming and most of it is conforming. But on the auto and consumer, average yield between the two portfolios is probably close to the 9.5% to 10% among both. And on the commercial side, with lower interest rates by the Federal Reserve Bank, we're seeing certainly lower yields there. But we are also seeing pretty much discipline on providing floors to the variable commercial loans that we are originating. On the small commercial, it's more fixed than variable and we're seeing 6% to 5.5%, 5.75%, 6% by volumes.

Joe Gladue -- Alden Securities -- Analyst

All right, thank you. That's all I had.

Jose Rafael Fernandez -- President, Chief Executive Officer and Vice Chairman

Thank you, Joe. Have a great weekend.

Joe Gladue -- Alden Securities -- Analyst

You too.

Operator

[Operator Instructions] Our next question comes from the line of Glen Manna of Keefe, Bruyette & Woods.

Glen Manna -- Keefe, Bruyette & Woods -- Analyst

Hi, good morning, Jose. Good morning, Maritza.

Jose Rafael Fernandez -- President, Chief Executive Officer and Vice Chairman

Hi, Glen.

Glen Manna -- Keefe, Bruyette & Woods -- Analyst

I just wanted to dig into the fee income a little bit, on the banking service fees. And I think, given the merger happened just before COVID, we really probably never got a really good run rate on what that would be on the combined company. But the current quarter's at 16.3% in the current quarter, does that have any lingering effects of customer activity or is that kind of the run rate that we would have expected after the merger?

Jose Rafael Fernandez -- President, Chief Executive Officer and Vice Chairman

So on the fee income, we have several factors there. As you know we have a long-standing legacy financial services business. That business did incrementally better this quarter. We also have a larger mortgage business from servicing and all, and we're starting to see the full benefits of that business as we start to stabilize and normalize on the COVID environment. And then on the banking services, what we're seeing is again a reflection of the economy and a reflection of the business activity coming back, and our customers going out and doing their own activities -- business activities and personal purchasing activities. So when you look at the results this quarter, broadly, we are starting to see the full effects of the acquisition in terms of fee income and we're very much on the lookout.

Now that we're going to do the conversion, and we're going to do the systems integration, we'll have better visibility because, remember, we're running two systems right now and life is a little bit more complicated than what you would imagine on a daily basis, given the two systems plus, given the COVID-19 pandemic scenario. So that's why I keep on going back to our team and I keep on saying that what we have done and what we have accomplished this year just fills me with pride and I can't stop repeating it because this is not normal standard operating conditions and add to that, that we're in the process of integrating two banks. So, again, really proud of our team.

Glen Manna -- Keefe, Bruyette & Woods -- Analyst

Okay. And then to that point and kind of on the expenses, if you take out the merger charges and COVID expenses in the second quarter and the third quarter, it looks like expenses decreased $1.8 million. Annualized, that would suggest about 20% of the $35 million in cost saves that you had guided to when you announced the Scotiabank deal. Is that right internally? And are those really cost saves from the deal and are we at the 20% range?

Jose Rafael Fernandez -- President, Chief Executive Officer and Vice Chairman

So I'll let Maritza give you the color, but I just want to make sure that everybody understands that we're working hard toward extracting all the benefits of the Scotiabank acquisition, but very much being cognizant of the COVID-19 environment we're operating in. So, Maritza, why don't you give Glen some color on that?

Maritza Arizmendi Diaz -- Executive Vice President, Chief Financial Officer

Yes. As Jose was mentioning, the consolidation process had started later than we planned it. And during this third quarter, we started to see the initial step that we have taken so far to take full advantage of the consolidation. However, as a simple version, it's a big deal for us to continue realizing these expected savings. So when we completed this process -- I expect [Phonetic] to be completed by the end of this year, we will have a better visibility on what could be the run rate in the long term. We are very -- look, we're looking forward for the operating leverage that the Scotiabank acquisition is -- the potential of that operating leverage, we are expecting for. So I think, at the end, last quarter would be key for us to have the full visibility of the long-term savings and we would be in a better shape to share with you any long-term run rate.

Jose Rafael Fernandez -- President, Chief Executive Officer and Vice Chairman

Having said that, Glen, the trends are positive, as you can appreciate. So we're happy with the lower expense trends. We just want to make sure that we go by and go through the fourth quarter to have a better idea of how we -- faster we extract the benefits.

Glen Manna -- Keefe, Bruyette & Woods -- Analyst

Okay. And then you had touched on it, Jose, the non-acquired book yields were down 16 basis points quarter-over-quarter, they were down 59 basis points a quarter before that. Given where LIBOR is now, how much of that back book repricing would you expect, or given that LIBOR's flat now, are we kind of all-in on some of that back book repricing?

Jose Rafael Fernandez -- President, Chief Executive Officer and Vice Chairman

Yeah, I would say, as we mentioned throughout this call today, the lower rate environment is here to stay and here to stay for longer. So I think there's still some remnants of lower yields on our loan portfolio. But I think we have pretty much all of it already baked in, given the lower rate environment we operate in. So, I would suspect that we still have a couple more quarters where we still see loan yields trending downwards, but not in a significant way.

Glen Manna -- Keefe, Bruyette & Woods -- Analyst

Okay. And then just a question on the tax rate. When we kind of go through all of the adjustments to get to an operating number, it looks like the effective tax rate was in the 18%, the operating number, probably about 22% versus the 25% where you ran. Where can we expect the tax rate to go to in '21, '22, going forward?

Maritza Arizmendi Diaz -- Executive Vice President, Chief Financial Officer

Well, that's a good question, Glen. I'm glad that you asked it. This year we did have a higher proportion of exempt income that I can anticipate won't be repeated during the next two years. So, we are looking at a range of 30% to 32% as a normalized size of ETR for the next two years.

Glen Manna -- Keefe, Bruyette & Woods -- Analyst

Okay. And then just the last question on reserving. You guys -- with PPP, ex-PPP, you're in that mid-to-high 3% range. Could you maybe talk about your economic outlook? And if there is no change in kind of the basis of the outlooks that you're using from outside services, are you well reserved here? Do you expect, at some point, we could start to see matched charge-offs or maybe even a little reserve release?

Jose Rafael Fernandez -- President, Chief Executive Officer and Vice Chairman

So, to answer one -- your first question, are we well reserved? The answer is yes. To talk about the macro, for sure, we see the beginnings of an economic rebound and we are encouraged and we see a brighter kind of feature for Puerto Rico. But, as I said, we have -- there are tremendous uncertainties and there is tremendous challenges and there are still several things that need to settle in the near future and beyond for the Puerto Rico economy to have safe sailings into the future. So when we look at our credit allowance and how we look at credit risk, the macro -- the outlook is improving, but we really have to live with the present and the present still poses tremendous challenges that we want to make sure they play out in one way or the other, so that we can bring the ship to shore safely.

But again, I feel that this is the beginning of a brighter future for the macro in Puerto Rico in the next several years as we benefit from the stimulus and the reconstruction funds that are starting to flow, and particularly longer term with the pharmaceuticals that we have in Puerto Rico, we have around 30% to 35% of our gross domestic product onshore, more medical devices and more pharmaceutical production to Puerto Rico. I think we're in -- we're at a point where it's too early to tell, but it's certainly a good position to be in. And if you add to that the credit, I think you can get the answer to it.

Glen Manna -- Keefe, Bruyette & Woods -- Analyst

Okay, thank you. Oh, and I just wanted to bring up one point on the taxes, Maritza. Thank you for that guidance. And I just wanted to confirm if there is a change in administrations on the mainland here, and we see an increase in corporate tax rate, OFG would be relatively not impacted at all by an increase in mainland corporate tax rate. Am I correct in still assuming that?

Maritza Arizmendi Diaz -- Executive Vice President, Chief Financial Officer

Yes. Yes, because at the end, the -- our U.S. income that we have is proportionately lower than anybody. So it's really small, so we won't be significantly...

Jose Rafael Fernandez -- President, Chief Executive Officer and Vice Chairman

Most of our business is Puerto Rico so.

Maritza Arizmendi Diaz -- Executive Vice President, Chief Financial Officer

Most of the business is Puerto Rico, yes.

Glen Manna -- Keefe, Bruyette & Woods -- Analyst

Thank you for confirming that and thank you for taking my questions.

Jose Rafael Fernandez -- President, Chief Executive Officer and Vice Chairman

You're welcome. Have a great weekend.

Glen Manna -- Keefe, Bruyette & Woods -- Analyst

You too.

Operator

Our next question comes from the line of Alex Twerdahl of Piper Sandler.

Alex Twerdahl -- Piper Sandler -- Analyst

Hey, thanks for taking my follow-up. So, Jose, a couple of times during this call, you kind of seemed a little bit more positive or constructive on some of the economic and banking trends that you're seeing on the island. You've sort of alluded to housing markets showing some signs of recovery and some bidding wars and things like that. But maybe you could just talk a little bit more about what you're seeing. You kind of talked about the cash flow, following Maria, actually starting to make some impact on the island. Maybe you can give us some sort of a little bit more color from on the ground there in terms of, has there been increased hiring, is it increased spending. What is it really that you're looking at when you make those comments?

Jose Rafael Fernandez -- President, Chief Executive Officer and Vice Chairman

We're seeing the flow of funds starting to put into play and we're seeing reconstruction efforts across the entire island in roads and bridges. And we're starting to see the deployment of all the benefits from the CARES Act also in play, the last couple of quarters. And we also expect additional, let's call it, CARES Act 4 or 5 or however a number you want to call it, before, after the elections or next year, and Puerto Rico will be benefiting from those also. So I'm seeing -- what we're seeing on the ground is constructive.

What we are seeing into the future is more of those stimulus funds coming in and reconstruction funds flowing in, not additional, just simply they're standing there for them to be utilized and having a change in government coming January will certainly help, because they will have a vested interest on getting the economy moving. So I think that's kind of where we come from. And -- but the statistics, in specific, in terms of the federal funds flowing into the island have remained the same. It's just a matter of them starting to put them to play.

Alex Twerdahl -- Piper Sandler -- Analyst

Great. And then in terms of the pharmaceutical thesis, which you've alluded to as well, has there been any updates to anything? I think we've all seen the bills in Congress and the executive order from Trump in August. And anything on the ground there that shows increased activity in terms of that repatriation thesis?

Jose Rafael Fernandez -- President, Chief Executive Officer and Vice Chairman

No, nothing on the ground that would confirm the actual onshoring, but very few times you see bipartisan agreement and less times you'll see bipartisan agreement on Puerto Rico. So here you do and that's encouraging. And that's certainly encouraging and I think it's a matter of also the federal government starting to realize that the end game in Puerto Rico is not about sending federal funds all the time. It's also to assist in creating economic development longer term and in a recurring way. And again, this is -- this hasn't been played out yet, but it looks like it's moving in that direction. And certainly that is a lot better than just waiting for a hurricane to receive federal funds.

Alex Twerdahl -- Piper Sandler -- Analyst

Right. Have you been seeing any additional -- I mean, we've seen the federal money put into the island. What about private equity or other money looking for opportunities in Puerto Rico as a result of some of the increased economic activity?

Jose Rafael Fernandez -- President, Chief Executive Officer and Vice Chairman

Several of private equity firms are in play in Puerto Rico, and also looking into Puerto Rico to -- looking at opportunities, because they are seeing the same thing that we're seeing.

Alex Twerdahl -- Piper Sandler -- Analyst

Interesting. And then final question from me. I know we're going to get -- it's not just the new administration or potentially a new administration in the mainland, but there's also going to be a change in governor in Puerto Rico, I believe, next year. Are there any proposals or things that are kind of circulating around a change in administration down there that we as an investment community should be aware of?

Jose Rafael Fernandez -- President, Chief Executive Officer and Vice Chairman

So, not really. Politics in Puerto Rico are really -- I will use a word that you guys use in the States, politicians and politics in Puerto Rico are all now lame ducks, because everything has to go through the fiscal board. So it's just a political event that we go through. But in reality, at the end of the day, they're going to have to realize that if they want to get reelected, they're going to have to sit down and play with the fiscal board in a more constructive way than they have done in the past, and I expect that will happen, whoever wins, because it's in their own best interest also. But there are no specific proposals here. It's all the same old talk. But, at the end of the day, the budget and the strategies are pretty much defined and instructed by the fiscal board and I think that's kind of what -- what's going to play out.

Alex Twerdahl -- Piper Sandler -- Analyst

Great. And then actually, I just had one other follow-up. And I think I sort of get to ask the question on additional capital returns and capital actions. Obviously, you're still digesting a pretty major acquisition, but sitting with 12.5% common equity Tier 1 and a lot of liquidity in the balance sheet and a huge reserve. I mean, is a share buyback something or a dividend increase something that could be potentially on the table in the next, call it, six to 12 months?

Jose Rafael Fernandez -- President, Chief Executive Officer and Vice Chairman

Well, what -- how you describe it is our reality. We do -- are sitting in a very strong solid balance sheet, and that gives us options for capital management and we look at all the options and we put them on the table, we keep a continuous dialog with regulators, being cognizant that now we're closer to a $10 billion bank and that requires us to make some investments in achieving the -- or at least and be able to manage a larger bank and that's another benefit that we get from the Scotiabank acquisition and some of the team members that have joined us. So all those things are -- as I said in the prepared remarks, we are sitting in a good financial and strategic position, and we look at capital and we will make the capital decisions that are rationale and constructive for us to grow our bank and move in the strategic path that we have defined.

Alex Twerdahl -- Piper Sandler -- Analyst

Perfect. Thank you for taking my follow-ups.

Jose Rafael Fernandez -- President, Chief Executive Officer and Vice Chairman

Yeah, well, thank you. Have a great weekend.

Alex Twerdahl -- Piper Sandler -- Analyst

You too.

Operator

[Operator Instructions] I'm showing no further questions at this time. I would like to turn the floor back over to Mr. Fernandez for any additional or closing remarks.

Jose Rafael Fernandez -- President, Chief Executive Officer and Vice Chairman

Thank you, operator. And thank you all to our stakeholders who have listened in. I wish you a great weekend. Our concern goes out to those who have suffered from this pandemic. Our hope is that it ends soon and as possible, and that everybody stays safe and healthy. So thank you and have a great day.

Operator

[Operator Closing Remarks]

Duration: 47 minutes

Call participants:

Jose Rafael Fernandez -- President, Chief Executive Officer and Vice Chairman

Maritza Arizmendi Diaz -- Executive Vice President, Chief Financial Officer

Alex Twerdahl -- Piper Sandler -- Analyst

Joe Gladue -- Alden Securities -- Analyst

Glen Manna -- Keefe, Bruyette & Woods -- Analyst

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