Oriental Financial Group (OFG) Q3 2018 Earnings Conference Call Transcript

Oriental Financial Group (OFG 1.91%)
Q3 2018 Earnings Conference Call
Oct. 19, 2018 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning. My name is Lori, and I will be your conference operator today. Thank you for joining us for OFG Bancorp's conference call. Our speakers are Jose Rafael Fernandez, president, chief executive officer and vice chairman; Ganesh Kumar, senior executive vice president and chief operating officer; and Maritza Arizmendi, executive vice president and chief financial officer.

A presentation accompanies today's remarks. It can be found on the Investor Relations website on the homepage in the What's New box or on the Webcasts, Presentations & Other Files 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 factor section of OFG's SEC filing.

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. We also direct you to the explanation of non-GAAP measures that are included in our presentation and news release. [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. Thank you for joining us, and welcome to our third-quarter earnings call. My prepared remarks will focus on the most significant highlights of the third quarter so we can maximize the amount of time for Q&A. There are supplemental slides in the appendix.

Let's turn to Slide 3. We are extremely proud to announce another consecutive quarter of superior core performance across all parts of our business. Earnings were $0.42 per share. That's a sequential increase of 20%.

Earnings per share was also significantly ahead of the breakeven quarter a year ago that included a special hurricanes-related loan loss provision. Our third quarter confirms the success of our strategies, our technology, and most of all, the diligence and capabilities of our entire team. We are now seeing the result in the form of higher earnings per share. Capital has continued to grow.

Tangible book value per common share was $16.23. This was a sequential increase of more than 6% on an annualized basis. All key performance metrics continue to build strong momentum going forward. Return on average assets increased 19 basis points from the second quarter.

Return on equity at 10.94% in the third quarter is now in the double-digit percentage range. The efficiency ratio improved 400 basis points from the second quarter. This reflected revenue growth and the absence of the lease cancellation costs we had in the second quarter. Total net revenues increased 5% sequentially, exceeding $100 million.

Net interest income increased 6% quarter over quarter, primarily due to growth of the originated loan portfolio and net interest margin expansion. Excluding cost recoveries, net interest margin increased six basis points. Fee revenue remained strong at more than $18 million. Please turn to Slide 4 for some of our key operational highlights.

For the fourth quarter in a row, originated loan growth has outpaced the paydown of acquired loans. This resulted in net loans up 10% or $388 million year over year, with originated loans up 18% or $543 million. Loan yields increased 25 basis points sequentially. This reflects: one, higher yields on originated commercial loans; two, higher proportion of commercial and auto loans; and three, a slight increase from higher-yielding acquired loans.

Average core deposit balances rose 3% from the second quarter and 6% from a year ago. Noninterest-bearing accounts remain high at $1.1 billion. The cost of core deposits increased only two basis points sequentially, reflecting minimal to no deposit beta in our market. While lower than the second quarter, loan production continued at a high level of more than $350 million.

Auto lending was a record $140 million, up 7% from the second quarter. This reflected continued pent-up demand and the market's adjustment to one less competitor in auto lending. Commercial lending at $105 million, consumer lending at $43 million and residential mortgage lending at $28 million all performed excellently. We believe the psychology of business owners and retail customers is gradually turning positive.

They are starting to embrace market opportunities in the aftermath of last year's hurricanes. The recently established OFG USA subsidiary added $37 million. This reflects seasonally lower deal flow compared to the nearly $100 million we generated in the second quarter. Per our plan, production continued to consist of commercial and industrial-related loan participations across an array of industries and geographies.

Credit quality remained stable. The nonperforming loan rate declined 18 basis points, primarily reflecting a drop in the commercial loan rate. The net charge-off rate declined 42 basis points, primarily due to lower net charge-offs in the auto business. Provision for originated loans increased solely due to growth of the portfolio.

This increase was offset by a decline in the provision for acquired loans. We believe these strong core operating highlights reflect the continued success of our strategic differentiation. We are focused on continuing to deliver superior customer convenience and service through innovative product and technology solutions and to provide value add to our customers. Third-quarter highlights include continued growth in our customer count.

It is now up 4% year over year and 9% since early 2016. We are achieving growth and servicing more customers in part through increased adoption of lower-cost, automated and interactive teller machines, online and mobile channels. Services like these enable us to step up our ability to reach out to customers and clients fácil, rápido, hecho, as we say here at OFG. Please turn to Slide 5 for our outlook.

Last quarter, we changed the title of this slide. After years of talking about the challenge ahead, we're now looking at the opportunity ahead. Our results demonstrate that change is happening. To further that, we're continuing to develop new commercial relationships in Puerto Rico and the mainland.

To service customers better and faster, we have an aggressive effort to optimize internal processes and implement new technology. Since Maria, economic activity has been driven primarily by businesses and consumers rebuilding. We now believe businesses are gaining new confidence to invest and expand going forward. We are excited about the prospects for continued growth in the fourth quarter and next year.

Having said all that, there are still some things that have to happen in Puerto Rico. We need a lasting solution to PREPA. However, I have to say, we are encouraged with the pending legislation that would privatize, depoliticize, regulate and diversify electric power on the island. Long term, this could be a real game changer.

We must also permanently resolve Puerto Rico's fiscal problems, and we need to reduce regulation and taxes to free small business to become the engine of economic growth going forward. But all of that is not stopping us at OFG and Oriental. We are increasingly optimistic about our ability to differentiate ourselves, to provide credit and financial services, and grow business and continue to contribute to Puerto Rico's economic revival. With this, we end our formal presentation.

Operator, please open the call for Q&A. 

Questions and Answers:

Operator

[Operator instructions] Your first question comes from the line of Brett Rabatin of Piper Jaffray.

Brett Rabatin -- PIper Jaffray -- Analyst

Hi, good morning, everyone.

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

Good morning, Brett.

Brett Rabatin -- PIper Jaffray -- Analyst

I wanted to first ask just a couple of things on the balance sheet. You had great deposit growth and you got some excess cash at the end of the quarter. Maybe can you just give us a little bit of color around what your plans are for that cash? And then just thinking about the margin going forward, it seemed like it continue to have an upward bias depending on deposit flows from here, I suppose.

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

So Brett, from the balance sheet question that you asked, the cash we are using and will be deployed as opportunities arise. We are recognizing in this market that we have the ability to be opportunistic and take advantage of potential lending opportunities here and also our U.S. subsidiary. So we will be deploying that accordingly and always viewing it from an optimal capital allocation.

So that's kind of how we view the balance sheet. I think for the first time in several years, almost a decade, we have an ability to grow. And we will be, as always, prudent but also opportunistic. So I -- that's kind of a little bit of how we see this going forward.

And we don't look at this on a quarterly basis. We look at it more on a longer-term basis and how we build the franchise and how we grow relationships in the markets that we are operating.

Brett Rabatin -- PIper Jaffray -- Analyst

OK. And then I want to ask -- I know it's been kind of a hard question to answer, but just with your capital levels, can you give us maybe any insight into if you think you might be able to start doing more with the capital potentially next year?

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

Yes. So as you know, we're, Monday, going to convert the preferreds, so we're doing something, number one. Number two, we continue to have the dialogue with the regulators. I think the environment is improving, and that gives us better tools for the dialogue.

I would expect that, that would continue as -- the next couple of quarters. And as we collectively become more and more comfortable, we will start making decisions in terms of how best to allocate our capital. Now having said that, let's just be clear. We're seeing a good opportunity here to grow.

We see an opportunity to expand our franchise, and we will be optimal capital allocators. And unfortunately, in the past, the environment was not as conducive for growth, and now it is. So from a franchise perspective, I think we have a great opportunity here.

Brett Rabatin -- PIper Jaffray -- Analyst

OK. And then maybe just one last one on loan growth. Does that continue to be driven in large part by auto or just commercial growth become more of a factor in your outlook? And could we see the loan portfolio potentially grow? I don't know if you want to give any kind of approximation, but it would seem like over the next year, it might actually have more of a mid- to high single-digit pace possibly.

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

We are seeing some good loan growth on the auto portfolio. I think that's the main driver so far. We also see opportunities in the small commercial and midsized commercial here in Puerto Rico. And certainly, we would continue to look into the U.S.

subsidiary that we have launched last year. So yes, I mean, that's what's driving it. And since we have now an economy that is rebuilding, there are quite a few opportunities for our clients to take advantage of, and we want to make sure that we are there for them.

Brett Rabatin -- PIper Jaffray -- Analyst

OK. Great. Congrats on the solid results.

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

Thank you.

Operator

Your next question comes from the line of Glen Manna of Keefe, Bruyette, & Woods.

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

Hi, good morning.

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

Good morning.

Maritza Arizmendi -- Executive Vice President and Chief Financial Officer

Good morning.

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

So I just wanted to follow up on that loan growth question because it was really good loan growth in Puerto Rico. And typically, the third quarter is seasonally slow, especially on the commercial side. So maybe could you just tell us what you were seeing out of some of your commercial customers on the island?

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

So why don't you guys turn to Slide 10 since you want to talk about growth. Let's just talk a little bit first on what has been our performance in the last several years. And if you go to Slide 10, you'll see there originated loans, since 2016, it's up 22%; and our core deposits, around 12%; while we've grown customers almost 10%. So what I'm trying to say here is growth is coming from us being able to take advantage of the market opportunities, but it's also being driven because we're doing things differently and we're differentiating ourselves from the market.

And if you ask me specifically how much is each, I can't tell you. What I can tell you, though, we are -- in each of the markets that we're operating in, we are inching up on market share, and that's very encouraging for us. So we -- when I say that we are growing, it's -- part of it because we have the back win from what we're seeing here in the market and the economy, but also because of the work we've done throughout the last several years on getting ready for this. We don't have a crystal ball, but now that we are living it, we are taking advantage of the efficiencies we put in place.

We're taking advantage of the technology that we have invested in, and our customers are starting to embrace that and we are encouraged with that. So I wouldn't be able to, Glen, go specific to you and say, well, next quarter, we'll see higher commercial or higher auto or -- we are really following the strategy that we have put in place, and the results have been quite robust. So hopefully, one of these days, the market will realize that we are growing and that we deserve better valuation.

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

OK. And on the OFG USA growth this quarter, was that a function of the slower loan growth in the US? Or was that your appetite for those loans given your growth in Puerto Rico?

Ganesh Kumar -- Senior Executive Vice President and Chief Operating Officer

Glen, this is Ganesh here. Obviously, it's pretty cyclic. The market is cyclic, but the opportunities far outstrip it. We wanted to do those numbers.

We could have done it. But as I said last quarter, we've been picking and choosing the credit we feel comfortable in participating in, and it's more of a factor of that judicious approach rather than lack of supply.

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

OK. Thanks. And on the provision in this quarter, was there any embedded recapture of the hurricane-related provision? And can you tell us -- I think you had put up a $27 million hurricane provision back in 3Q '17. Could you tell us how much of that is left?

Maritza Arizmendi -- Executive Vice President and Chief Financial Officer

Hi, Glen. This is Maritza speaking. Well, provisioning for this quarter reflects, in general, the trends in our asset quality ratios. As you can see, we are getting back to pre-Maria levels.

And in certain instances, better than the Maria levels like it was in the net charge-off for the auto portfolio. So in general, the provision reflects that, and we continue to assess all risks associated with the portfolio, including any related Maria-associated risks, OK?

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

OK. And do you have the number of how much of that special provision is left or not?

Maritza Arizmendi -- Executive Vice President and Chief Financial Officer

That's something that we always discuss further in the 10-Q, so we can elaborate in that report.

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

OK. Thank you. Nice quarter. Thank you.

Maritza Arizmendi -- Executive Vice President and Chief Financial Officer

Thanks.

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

Thank you.

Operator

Your next question comes from the line of Alex Twerdahl of Sandler O'Neill.

Alex Twerdahl -- Sandler O'Neill -- Analyst

Hey, good morning.

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

Good morning, Alex.

Alex Twerdahl -- Sandler O'Neill -- Analyst

I got dropped a little bit into the call, so I apologize if you've answered any of these questions. But just to kind of follow up on that last question about the hurricane-related reserve, and I know that you talk about it a little bit more in the 10-Q. But what -- like at what point would we be sitting here and knowing that enough time has passed that, that reserve has either been allocated into loans being charged off or released back into either the general reserve or released back to shareholders?

Maritza Arizmendi -- Executive Vice President and Chief Financial Officer

Well, in general, the reserve have been used both to allocate some service that still are in the portfolio and to some charge-offs that we have experienced so far. As you remember, second quarter, we have higher charge-offs due to the expiration of the moratorium. But in general, we continue to have some allocation within the portfolio related to Maria, and we will continue to monitor until we think that risks are no longer in the portfolios or we still needed them.

Alex Twerdahl -- Sandler O'Neill -- Analyst

Would that be like a year from the end of the moratoriums?

Maritza Arizmendi -- Executive Vice President and Chief Financial Officer

We don't have any specific period. Each portfolio has its own characteristics, so we each evaluate it individually.

Alex Twerdahl -- Sandler O'Neill -- Analyst

OK. And then, obviously, the deposit growth has been a fantastic story in Puerto Rico following the hurricane, particularly in low deposit betas. But can you just touch a little bit on this quarter, what drove the high core deposit growth? Are you seeing it from insurance payouts? Are you seeing it from other sources? Kind of is it retail? Is it commercial? Like maybe just talk a little bit about what's driving that and where you see it going from here.

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

Yes. It's pretty much all of the above. We have good retail core growth. We also have some good commercial core growth on the deposit side.

We're not seeing that proportion not being as tilted as it was earlier last year -- in later -- late part of last year on the insurance companies. We're seeing that -- those balances not being that significant as they were in the years ago. But all in all, we are very satisfied with our core deposit growth across all areas.

Alex Twerdahl -- Sandler O'Neill -- Analyst

OK. And as you look out, rate pressures for -- to bring in new deposits, are there any -- is there any rate pressure starting to materialize on the island?

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

Somewhat, I would say, that the rate pressure right now is primarily coming on the more -- higher sensitive type of clients who look at treasury builds and look at short-term kind of deposits in the States, and there's a little bit of a pressure on that. But other than that, we don't see any changes in the market here in Puerto Rico in terms of deposit costs.

Alex Twerdahl -- Sandler O'Neill -- Analyst

OK. And then can you just touch a little bit on -- it looks like the auto early stage delinquencies ticked up a little bit. Is there anything to read into that there? Is there anything that could have caused that specifically this quarter?

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

Yes, you can look at our balance. Our auto portfolio is higher. So when you look at it from a dollar perspective, it is higher. But when you look at it from a percentage perspective of the size of the portfolio, it's actually lower than pre-Maria levels.

And yes, we notice that. It's part of our ongoing, never-ending process of optimizing underwriting and optimizing servicing. And we'll go at it.

Maritza Arizmendi -- Executive Vice President and Chief Financial Officer

Also, net charge-off for that portfolio for the quarter was particularly low, lower than what we saw pre-Maria levels. So we feel comfortable with the levels of asset quality in that portfolio.

Alex Twerdahl -- Sandler O'Neill -- Analyst

OK. Great. Thanks for taking my questions.

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

Yes. You're welcome.

Operator

Your next question comes from the line of Joe Gladue of Merion Capital Group.

Joe Gladue -- Merion Capital Group -- Analyst

Good morning.

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

Hi, Joe.

Joe Gladue -- Merion Capital Group -- Analyst

Let me start with the expenses. I guess the occupancy and equipment line on the income statement, down about $800,000. I assume it's just you know that's -- there was the $1.5 million charge last quarter. And I am just wondering is there some like a duplicate rental expense hat's preventing that from going down that much or?

Maritza Arizmendi -- Executive Vice President and Chief Financial Officer

Well, Joe, this is Maritza speaking. Well, in general, the non-interest for the quarter have a reduction of around $1.4 million. It's related to lease cancellation. And there are some that are really piece within defense expense categories that compensate between each other.

So I think that for the quarter, we reflect a very controlled and stable expenses. And as I mentioned, there is some variability within different type of expense categories that compensate between each other, so...

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

Yes, there is nothing much to read into it, Joe. In terms of the expenses, we -- we're -- we've always been pretty good at managing expenses, and we plan on continuing to be so. So -- but don't -- there's not much into it in terms of that special line item there. We are consolidating our offices in our own main building here in Hato Rey, so we're letting go of some lease expenses, and you'll see the benefit as we move forward in -- starting next year.

So -- because we're still -- we haven't moved. So you're seeing on that line the benefit of the charge not being taken this quarter compared to last quarter, but we still have to pay rent expense over there. So once we move, we'll show on that line the improvement.

Joe Gladue -- Merion Capital Group -- Analyst

OK. And I guess just -- I know we've touched on the loan originations a bit, but just want to get your sense of how long that you think the surge in auto demand can continue.

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

I think it's starting to stabilize. In terms of where it will stabilize, we still have to figure it out. But I think we're at levels right now that -- from our perspective, Oriental's perspective, we also have a level of appetite for that business that we also are comfortable with at this level. So there's also a -- in the equation, there is also our view that we not necessarily want to grow that portfolio endlessly.

So from the demand side of it, I think it's starting to stabilize. Again, there's one less player, not from a branding perspective but from an ownership perspective, and that certainly helps because there's one less competitor. And that is definitely helping us grow that portfolio. But I just think that the demand is starting to stabilize, and we'll see how and where it does.

Ganesh Kumar -- Senior Executive Vice President and Chief Operating Officer

But, Joe, the critical thing that -- for you to note is we do have multiple operating levers in the business at this point in time. So as the demand sort of goes down -- or the supply sort of goes down, we are able to ramp up the other areas, and we do expect overall growth. I think that the key point over here is at this point in time, auto seems to be the better use of our capital. But if that market goes down, we do have the ability to pick it up in other areas of our business.

Joe Gladue -- Merion Capital Group -- Analyst

OK. I'll just ask one more just on deposit pricing and the lack of beta. Is -- are you seeing any signs from competitors that, that may change?

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

We're not seeing that right now. I just -- I don't see the competitive environment increasing cost of funds. We certainly want to maintain the rational pricing in terms of our cost of funds, and we're encouraged by that, too.

Joe Gladue -- Merion Capital Group -- Analyst

Thank you. That's all I have.

Operator

[Operator instructions] Your next question is a follow-up from Brett Rabatin of Piper Jaffray.

Brett Rabatin -- PIper Jaffray -- Analyst

Just two follow-ups. One, just on this whole deposit thought process. We're going to be seeing a lot more funds coming to Puerto Rico over the next few years. And I guess I'm just curious, when I look at the client gain trends that you posted the past year, they've been pretty good.

Are you thinking about trying to cross-sell more to the existing customers different deposit products? Or maybe just give us a little color on what you're planning as more funding comes to the island.

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

I'll let Ganesh answer that. He's leading those efforts.

Ganesh Kumar -- Senior Executive Vice President and Chief Operating Officer

Well, I think the question here is the -- where is the deposit -- the question is where the deposit inflow is coming from. It's coming from both. We do have customer growth numbers that we showed in the presentation. So they are bringing in some new deposits, but at the same time, there is a whole lot of cross-selling going on to achieve some additional relationships with the existing clients, cross-pollinating loan side customers with deposit relationship and vice versa.

So the answer to your question is both. And if the deposit -- if the cash flows into Puerto Rico is going to increase, we would stand to gain with -- from that.

Brett Rabatin -- PIper Jaffray -- Analyst

OK. And then secondly, there was discussion about businesses having increased confidence. And so I'm just thinking about Puerto Rico and for the trend and confidence. Could you guys give any more color on that, maybe what customers are telling you?

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

Yes. So I'll give you two views on that. One is a local one. And certainly, there is opportunities here for the local businesses and particularly some industries that will help on the rebuilding and also on the expansion of some of the businesses here in Puerto Rico.

And that certainly is driven by demand. And I think it's all coming from the different federal funds that have been allocated to Puerto Rico and on HUD and opportunity zones, and those things are starting to be evaluated. The other thing that I want to just point out is, for the first time in a decade or more, we -- I've been traveling to the States. And in my conversations with institutional investors and private equity and investors in general in the States, they are, for the first time in a long time, looking at Puerto Rico not from a distressed perspective and trying to come in here and buy distressed assets.

And I think they're coming now and understanding that Puerto Rico has a very appealing value proposition in terms of them investing long term. And real long-term money is starting to flow into the island to either take advantage of the federal programs that I mentioned earlier or to make actual long-term business investments here in Puerto Rico for either rebuilding or for just core businesses. So I think the interplay here between the rebuilding of the island, the federal funds that are being allocated, the investors of private capital coming to Puerto Rico or starting to evaluate opportunities to come to Puerto Rico, I think that's a perfect storm. And I think that's also going to come in into lower unemployment and people will have more cash on their wallets and they'll spend more, and it creates good momentum.

It creates good momentum going forward. And as I always said, look, we've been so accustomed to deal with the challenging environment here in Puerto Rico that there's very -- it's very difficult to change the chip so soon. And the ones who are -- have that ability will take advantage of those opportunities. And as I said in my prepared remarks, we still have some innings to go, and the government needs to do the things that they need to do with the fiscal board.

And those -- that still has some uncertainty levels there. But certainly, we're seeing capital from a government perspective on the private side, also looking at the island and with a different mirror.

Brett Rabatin -- PIper Jaffray -- Analyst

OK. Then you brought up one topic that I -- maybe I want to ask a little further about. I have seen one or two instances where there's potentially big investments coming for enterprise on lending on the island. Is that something you're hearing more about? And maybe just this -- I don't know if you've seen any quantification of how much that could add to the island, but it seems like that might be a huge opportunity.

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

Yes. No specifics, but certainly confirm what you just said. There is evaluation by investors locally and from abroad, from the States, looking at that opportunity zones that have been created. Puerto Rico is 94% opportunity zone.

It qualifies as an opportunity zone. So I don't have specific numbers, Brett, but I certainly can see the interest.

Brett Rabatin -- PIper Jaffray -- Analyst

OK. Great. I appreciate the additional color.

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

Yes.

Operator

[Operator instructions] Your next question is a follow-up from Alex Twerdahl of Sandler O'Neill.

Alex Twerdahl -- Sandler O'Neill -- Analyst

Hey, guys. Just wanted to ask another follow-up on the new customer flows that you've seen recently. What -- I mean, has there been any change in what's driving that? Obviously we've been seeing new customer flows for a long time. And you read all these reports and you kind of see the numbers of people leaving the island.

Is any of the new customer acquisition recently people returning to the island?

Ganesh Kumar -- Senior Executive Vice President and Chief Operating Officer

Yes. You can't project our results into macroeconomic trends. We are not the leading market player over here, which is the advantage we have as the challenger brand. We are growing our market share, and that does not necessarily mean the market is growing.

But within the shrinking market of customer base, we do see a lot more cash flow and deposit levels picking up than last year.

Alex Twerdahl -- Sandler O'Neill -- Analyst

OK. But in terms of the new customers, I mean, is there any way to -- like to -- and I'm not looking for any specific numbers, but just to quantify who's coming over from a competitor, who's a new account because they just graduated from high school, they need a bank account, who's -- are people returning to the island, who is a new customer that -- or a new company that's just formed. Any sort of complexion?

Ganesh Kumar -- Senior Executive Vice President and Chief Operating Officer

Look, I think at the end of the day, there is not very many household creations and new inflows into banking customers. So just really the growth that you see in our side is purely from market share growth.

Alex Twerdahl -- Sandler O'Neill -- Analyst

OK. And then how do you think about the...

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

I was just going to say, Alex, remember that there's significantly less competitors, too. So the market is shrinking, but at the same time, the population has shrunk, but the market is also -- has less competitors. And that is also good for a bank our size and with our approach.

Alex Twerdahl -- Sandler O'Neill -- Analyst

Yes, for sure. And then how do you think about the progression of loan demand and opportunities over the next couple of years? Obviously, we're starting to see the consumer piece pick up pretty meaningfully or we have been seeing that. We're probably not going to see a lot of construction for another, I don't know, maybe a couple quarters just as some of that HUD money starts coming down. And then how do you think about the progression? Is that kind of the right way to think about it, that maybe it's really driven by consumer today and then it's going to move toward commercial in the next couple of years?

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

Yes. I think you just described it as we're seeing it, too. You're seeing the consumer first that they are rebuilding. You're seeing the small business and businesses in general kind of picking up the pieces after the hurricane.

And the next page is now evaluating their businesses and looking at -- out if there is money to invest to gain opportunities, and there's going to be some consolidation in several industries that will also play into the growth. But in general, I think it's -- we're in the latter stages of the first stage, and we're going to start moving into now the other one, which is more of an investment stage.

Alex Twerdahl -- Sandler O'Neill -- Analyst

Great. Thanks for taking my follow-ups.

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

Yes. You're welcome.

Operator

Your next question comes from the line of Ignacio Canto of X-Square Capital.

Ignacio Canto -- X-Square Capital -- Analyst

Hello, congratulations on a very strong quarter. It's going to win in this inflection point in -- for the Puerto Rican economy and how banks begin to capitalize on it. I just have two questions on that front. Do you foresee Oriental participating in the construction space, in construction lending and also infrastructure lending as the money is deployed for the recovery process and the rebuilding of the island?

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

We are really not seeing ourselves in the housing construction building business. We have not been in the past, and that's part of who we are as an institution. So from that perspective, we won't, but we certainly will -- have been and will continue to participate on the construction side of the industry, which is all the clients that are indirectly involved with that business. So for sure, we will.

Ignacio Canto -- X-Square Capital -- Analyst

And then two more questions. One, why did the investment side of the ledger decrease as not retaining those mortgages? What's the reasoning behind that? And do you foresee deploying more money into the investment portfolio, taking advantage of these higher rates in the curve?

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

Yes. We're always on the lookout there, but we also want to deploy capital in the most effective way, and even the IBE provides you a tax benefit. We do have a -- kind of an ROE target that we look into. As interest rates go up, we'll continue to evaluate.

But at this quarter and the last couple of quarters, we're seeing a better way of utilizing our capital, investing in loans and growing our loan balances given the yields that we can get there.

Ignacio Canto -- X-Square Capital -- Analyst

Got it. Well, thanks again and congratulations on a great. quarter.

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

Thank you.

Operator

[Operator instructions] There are no further questions at this time. I will now return the call to Mr. Fernandez for any closing remarks.

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

Well, thank you for joining us today, and thank you for participating in this call. We have preliminarily scheduled our fourth-quarter conference call for Friday, January 25. Until then, thank you again, have a great day and a wonderful weekend.

Duration: 41 minutes

Call Participants:

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

Brett Rabatin -- PIper Jaffray -- Analyst

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

Maritza Arizmendi -- Executive Vice President and Chief Financial Officer

Ganesh Kumar -- Senior Executive Vice President and Chief Operating Officer

Alex Twerdahl -- Sandler O'Neill -- Analyst

Joe Gladue -- Merion Capital Group -- Analyst

Ignacio Canto -- X-Square Capital -- Analyst

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