Popular Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
April 23, 2024

There are 12 speakers on the call.

Operator

Hello all, and welcome to Popular Inc. 1st Quarter Earnings Call. My name is Lydia, and I'll be your operator today. I'll now hand you over to your host, Paul Cardillo, Investor Relations Officer to begin. Please go ahead.

Speaker 1

Good morning and thank you for joining us. With us on the call today is our CEO, Ignacio Alvarez our COO, Javier Ferrer our CFO, Jorge Garcia and our CRO, Lidio Soriano. They will review our results for the Q1 and then answer your questions. Other members of our management team will also be available during the Q and A session. Before we begin, I would like to remind you that on today's call, we may make forward looking statements regarding Popular, such as projections of revenue, earnings, expenses, taxes and capital structure, as well as statements regarding Popular's plans and objectives.

Speaker 1

These statements are based on management's current expectations and are subject to risks and uncertainties. Factors that could cause actual results to differ materially from these forward looking statements are set forth within today's earnings release and our SEC filings. You may find today's press release and our SEC filings on our webpage at popular.com. I will now turn the call over to our CEO, Ignacio Alvarez.

Speaker 2

Good morning, and thank you for joining the call. We are pleased to report a solid Q1. Net income totaled $103,000,000 which includes the impact of an additional accrual for the FDIC special assessment and a tax expense related to prior intercompany distributions. Excluding these items, net income would have been $135,000,000 compared to adjusted net income of $140,000,000 in the previous quarter. The results in the Q1 were driven by higher net interest income and a lower provision for credit losses, offset in part by lower non interest income and a slightly higher operating expenses.

Speaker 2

Our ending loan balances increased by $54,000,000 during the quarter with large commercial payoffs impacting both banks. Our average loan balances, however, increased by $612,000,000 driven by a substantial amount of loan activity toward the end of Q4. EPPR generated loan growth of $124,000,000 driven by growth in mortgage and auto, offset in part by decreases in personal and commercial loans. Popular Bank saw a $70,000,000 decrease in loan balances, driven by commercial loan payoffs that offset growth in construction loans. Deposit balances increased by approximately $191,000,000 driven primarily by a higher level of retail demand deposits in PPPR, which increased by 232,000,000 offset somewhat by lower Puerto Rico public deposits.

Speaker 2

Our net interest margin increased by 8 basis points to 3.16%, mainly driven by higher average loan balances and the repricing of loans and securities in a higher interest rate environment. This was partially offset by higher deposit costs. Non interest income remained solid at 164,000,000 dollars Excluding the additional FDIC assessment and the expenses associated with the prior period tax expense, operating expenses increased by 3,000,000 dollars Credit quality trends remain generally favorable with slightly lower NPLs and delinquencies. We have continued to see credit normalization in the Puerto Rico unsecured consumer segments, which began in the second half of last year and we continue to be attentive to the evolving credit landscape. Tangible book value per share increased by $0.32 as our quarterly net income was offset in part by dividends and an increase in unrealized losses in our investment portfolio.

Speaker 2

Please turn to Slide 4. Last year, we crossed a significant milestone in Puerto Rico and now serve more than 2,000,000 unique customers. We believe that there continues to be opportunity to deliver more value and services to our clients and deepen those relationships. For the past 2 years, we have been engaged in a company wide transformation and we are confident that these efforts will help us capitalize upon that opportunity. Consumer spending remained healthy.

Speaker 2

Combined credit and debit card sales increased by 2% compared to the Q1 of 2023. Our auto loan and lease balances increased by $80,000,000 compared to the 4th quarter as demand for new cars continue to be strong in Puerto Rico. Mortgage loan balances at BPPR increased by $92,000,000 in the Q1, driven primarily by home purchase activity and our strategy to retain FHA loans in portfolio. The Puerto Rico economy performed well during the quarter. Business activity is solid as reflected in the positive trends in total employment and other economic data.

Speaker 2

The tourism and hospitality sector continues to be a source of strength for the local economy. Passenger traffic at the San Juan International Airport increased by 12% in the Q1 compared to the Q1 of 2023. Additionally, in March, the hotel occupancy rate increased to 84% from 79% in March of 2023. The average daily rate and RevPAR increased by 10% 17%, respectively compared to the same month a year ago. There are a significant amount of committed federal funds that have yet to be dispersed.

Speaker 2

The pace of disbursement of these funds has accelerated and we anticipate that they will support economic activity for several years. We are encouraged by the performance of the Puerto Rico economy. We remain optimistic about the future of our primary market and are well positioned to support our clients during the coming years. In short, we are pleased with the results for the quarter, particularly in Puerto Rico, where continued loan growth and the strength of our deposit base helped contribute to our increase in net interest income and support our optimistic outlook for the balance of the year. On that note, I'll now turn the call over to Jorge for more details on our financial results.

Speaker 3

Thank you, Ignacio, and thank you all for joining the call today. As Ignacio stated in his remarks, we reported net income of $103,000,000 in the Q1. Excluding the effect of the FDIC assessment and the tax expenses related to prior period intercompany distributions, adjusted net income was $135,000,000 $5,000,000 lower than the prior quarter's adjusted results. Although the quarter has some noise because of these two items, we are pleased with the core results, particularly the NII growth and the expansion of the NIM. Net interest income increased by $17,000,000 in the quarter.

Speaker 3

Our net interest margin increased by 8 basis points on a GAAP basis and 12 basis points on a tax equivalent basis, driven by higher average loan balances and the repricing of loans and securities. We should continue to see NIM expansion throughout the rest of 2024. Consistent with our previous guidance, we expect our 2024 NII to increase by approximately 9% to 13% from 2023 levels. Loan growth this quarter was lower than recent trends, driven by the early repayment of 2 large loans totaling around $200,000,000 and decreased loan demand in the U. S.

Speaker 3

Mainland. The underlying economic activity in Puerto Rico remains strong and as such, continue to expect loan growth of 3% to 6% in 2024. Non interest income was $164,000,000 a decrease of $5,000,000 from Q4, driven by lower contingent commissions in our insurance business, which are usually recognized in the 2nd Q4 of each year. We continue to expect non interest income to be approximately $160,000,000 to $165,000,000 per quarter in 2024. We were also pleased to see stable credit metrics and the early benefits of changes we implemented to address the credit losses that arose late last year in our consumer loan portfolio.

Speaker 3

The provision for credit losses was $73,000,000 compared to $79,000,000 in the 4th quarter. Total operating expenses were $483,000,000 including the additional expense of $14,000,000 related to the FDIC special assessment and $6,000,000 in expenses related to the late payment of taxes from prior period intercompany distributions. Excluding these two items, operating expenses were $462,000,000 an increase of $3,000,000 from Q4's adjusted operating expenses. Other significant expense variances in the quarter were higher personnel costs by $21,000,000 mainly due to annual incentive awards and payroll taxes, which are traditionally higher during the Q1 of the year and higher credit card processing expenses by $6,000,000 mainly due to lower volume driven rebates in the Q1. These expenses were offset in part by a decrease in professional fees by $10,000,000 mainly related to regulatory consulting fees and other advisory expenses.

Speaker 3

Business promotion expenses were also lower as these are typically higher in the 4th quarter. Notwithstanding the impact of the incremental FDIC expense and expenses related to the tax liabilities from their prior period distributions, we continue to expect annual expenses in a range of $1,89,000,000 to $1,950,000,000 for 2024. Our effective tax rate for the quarter was 35%, due mainly to having recorded $17,000,000 in income tax expense related to prior period intercompany dividends from our U. S. Subsidiary to the Puerto Rico Bank Holding Company.

Speaker 3

These dividends are subject to a 10% federal tax withholding and ordinary income tax in Puerto Rico that we failed to pay for several years. Therefore, these results reflect the cumulative effect of correcting this oversight. Excluding the impact of the FDIC special assessment and their prior period tax matter, the effective tax rate would have been 25%. This adjusted effective tax rate in Q1 also reflects approximately $7,000,000 in income tax expenses arising from a $50,000,000 distribution from the U. S.

Speaker 3

Sub completing during this quarter. We do not anticipate the tax treatment of U. S. Sourced dividends to the bank holding company to impact liquidity or future capital actions. On a GAAP basis, we now expect the effective tax rate for the year to be in a range of 21% to 23%.

Speaker 3

This includes the impact of the $17,000,000 in income tax expense related to the prior period distributions. Please turn to Slide 6. Net interest margin increased by 8 basis points. On a taxable equivalent basis, NIM was 3.38%, an increase of 12 basis points. The increase was driven by higher loan yields and average balances across most lending categories as well as higher yields in our investment portfolio.

Speaker 3

This was partially offset by higher interest expense on deposits due to increased average balance of public deposits at BPPR and high cost online deposits at Popular Bank. Excluding Puerto Rico deposits, consolidated customer deposit balances increased by roughly $240,000,000 primarily in retail accounts. At the end of the Q1, Puerto Rico public deposits were $18,000,000,000 down slightly compared to Q4 and at the upper end of our guidance range. For the rest of 2024, we expect public deposits to be in the range of $15,000,000,000 to $18,000,000,000 As usual, normal seasonality should result in public deposit balances trending higher and peaking in Q2, mostly related to tax receipts. Our interest rate sensitivity remains relatively neutral.

Speaker 3

A higher for longer rate environment should not have a significant impact on our NII forecast for 2024. Except to the extent that such an environment increases pressure on deposit pricing, particularly in our U. S. Operations due to changes in client or competitor behavior. Please turn to Slide 7.

Speaker 3

Deposit betas in the current tightening cycle are above the prior cycle. We have seen a total cumulative deposit beta of 35% to date, driven by public deposits in Puerto Rico and online deposits in the U. S. The rate of increase in deposit costs for the corporation continued to slow down in the quarter. In BBBR, total deposit costs increased by 2 basis points compared to an increase of 11 basis points in Q4, led by higher average balances of public deposits.

Speaker 3

The cost of public deposits decreased by 1 basis point. At Popular Bank, deposit costs increased by 23 basis points compared to an increase of 33 basis points in Q4, driven by deposits gathered primarily through our online channel. Please turn to Slide 8. We continue to target a sustainable 14% return on tangible common equity by the end of 2025. Regulatory capital levels remain strong.

Speaker 3

Our CET1 ratio of 16.4% increased by 6 basis points from Q4. Tangible book value per share at quarter end was $60.06 an increase of $0.32 per share from Q4. Our long term outlook on capital return has not changed. Over time, we expect our regulatory capital ratios to gravitate towards the levels of our Mainland peers plus a buffer driven by our geographic concentration in Puerto Rico. We continue working towards announcing new capital actions in the second half of twenty twenty four.

Speaker 3

The size and nature of any future capital actions will depend on the outlook of the interest rate environment, including the impact on our TCE ratio. With that, I turn the call over to Lidio.

Speaker 4

Thank you, Jorge, and good morning. Credit quality metrics were stable from the Q4 as trends remain consistent with recent performance. The corporations, mortgage and commercial portfolios continue to reflect credit metrics significantly below pre pandemic levels, while credit quality metrics continue to normalize for Puerto Rico's unsecured personal loans, credit cards and auto and lease finance loans. We continue to closely monitor changes in the macroeconomic environment and on borrower performance. Given higher rates higher interest rates and inflationary pressure, I have made changes to underwriting criteria to decrease exposure to higher risk segments.

Speaker 4

We believe that the improvements over recent years in risk management practices and the risk profile of the corporation loans portfolios positions Popular to continue to operate successfully under the current environment. Turning to Slide number 9. Non performing assets and non performing loans decreased slightly driven by the Puerto Rico region. NPLs in Puerto Rico decreased by 30,000,000 dollars reflecting improvements in most loan categories. NPLs in the U.

Speaker 4

S. Increased by 27,000,000 dollars related to higher mortgage NPLs by $70,000,000 impacted by a single loan and higher commercial NPLs by $10,000,000 Inflows of NPLs increased by $8,000,000 driven by the previously mentioned increase in NPLs in the U. S. Mortgage and commercial portfolio. In Puerto Rico, total inflows decreased by $19,000,000 driven by an $18,000,000 relationship that enter NPL in the Q4 of 2023.

Speaker 4

The ratio of NPL to total loans held in portfolio remained flat at 1%. Turning to Slide 10. Net charge off amounted to 62,000,000 dollars or annualized 71 basis points of Ravelation loans held in portfolio compared to 57,000,000 dollars or 66 basis points in the prior quarter. The increase in net charge off was driven by a $5,000,000 charge off related to a previously reserved loan. Excluding this, net charge off were flat.

Speaker 4

In Puerto Rico net charge off increased by 5,000,000 dollars mainly driven by higher commercial and consumer net charge off. Net charge off in the U. S. Were flat quarter over quarter. We continue to expect net charge offs for the full year to be between 65 basis points to 85 basis points due to the ongoing credit normalization and general economic environment.

Speaker 4

Please turn to Slide number 11. The allowance for credit losses increased by $10,000,000 to $740,000,000 In Puerto Rico, the ACL increased by $4,000,000 driven by the consumer portfolio due to changes in credit quality. In the U. S, the ACL increased by $6,000,000 driven by higher commercial loan reserve due to rate in migration. The corporation ratio of ACL to loans held in portfolio remained flat at 2.1%, while the ratio of ACL to NPLs stood at 209% compared to 204% in the previous quarter.

Speaker 4

The provision for credit losses was 72,000,000 dollars compared to $75,000,000 in the prior quarter. In Puerto Rico, the provision was $61,000,000 compared to 67,000,000 while in the U. S. Separation was $11,000,000 versus $8,000,000 To summarize, credit quality remains stable during the Q1 consistent with recent performance. We are attentive to the evolving environment, but remain encouraged by the performance of our loan book.

Speaker 4

With that, I would like to turn the call over to Ignacio for his concluding remarks.

Speaker 2

Thank you, Lidio and Jorge for your updates. Popular started off 2024 with a solid Q1, building on the positive momentum seen in 2023. Our results were driven by strong net interest income and expanding net interest margin, stable credit quality and continued customer growth. The strength of our franchise is once again reflected in the increased experience during the quarter in retail demand deposits in Puerto Rico. Last week, we launched our new institutional marketing campaign in Puerto Rico titled Seimotarimo or We Follow Your Rhythm.

Speaker 2

This campaign includes a custom composed audio brand and focuses on our unmatched omnichannel offering, highlighting our wide range of financial services through digital and traditional channels as well as our convenience and accessibility. We have also made great progress in our transformation efforts and some of those initiatives are already producing encouraging results. We will continue these efforts to ensure our organization's success for many years to come. This entails meeting the rapidly changing needs of our customers, providing our colleagues a workplace where they can thrive, promoting progress in the communities we serve and generating sustainable value for our shareholders. I am optimistic about our prospects for the remainder of 2024.

Speaker 2

Economic trends in Puerto Rico continue to be positive and we are well positioned to participate in the economic activity that is expected to be generated in the coming years. I want to thank our colleagues for their continued education and commitment to serve our customers and contribute to popular success. We're now ready to answer your questions.

Operator

Thank Our first question today comes from Gerard Cassidy of RBC Capital Markets. Your line is open. Please go ahead.

Speaker 5

Thank you. Hi, Ignacio and Jorge.

Speaker 3

Good morning. Good morning, Gerard.

Speaker 5

Can you guys give us an update on the timeline on deciding about a share repurchase program? Obviously, you're very well capitalized. The outlook this year is rather strong, better than many of your peers in terms of your economic growth and net income growth. And so if you could just update us what you're thinking in terms of possibly announcing a share buyback program in the next 6 to 12 months?

Speaker 2

I think we've got to reiterate what we said. We're working hard. We anticipate that we will be making an announcement about our clients and that will be in the second half of the year. I really wouldn't want to pinpoint it too much in terms of specific months or whatnot, but we are rest assured we know people want to hear from us and we're working hard to make some kind of announcement.

Speaker 5

And I guess as a follow-up just to that question, because your capital levels, I know you haven't given us a specific CET1 ratio that you want to manage to. But assuming you're comfortable to say that your current levels are more than sufficient, would you be willing or would you consider a program that would actually give back more capital to shareholders in dividends and buybacks that would exceed a current period of earnings so that the combined ratio, if you will, would exceed 100%?

Speaker 3

Gerard, this is Jorge. I think at this stage, as we said in the prepared remarks, the level of any new capital actions that we announced will depend on a lot of factors. I think Nexa said, we know this is important to our shareholders. We have that in mind. And I guess, I'd say, let's get started with an announcement sometime in the second half, and then we'll see where we go from there.

Speaker 3

But it's important that we set the stage. We would expect capital actions to be gradual over time. This is not going to be a step function or we see a huge decrease or something like that. It will be over time.

Speaker 5

Got it. And then just as a final question, when you guys look at the next 2 to 3 years, what's the optimal mix of money market and investment securities as a percentage of assets relative to loans? Do you are you comfortable keeping it in the 45% to 50% range? Or would it over time maybe gradually come down further?

Speaker 2

Yes. I'll let Jorge add to that, but I think it's going to depend on the level of public funds, right? So to the extent that the public funds go down, we would expect the investment securities go down. If you ask me, I always prefer more loans to investment securities. But I think it's going to depend on the it's going to be mostly dependent on the level of public funds.

Speaker 2

If they go down, you can expect a percentage of investment securities to go down also.

Speaker 5

Great. Thank you.

Operator

Our next question today comes from Timur Braziler of Wells Fargo. Please go ahead. Your line is open.

Speaker 6

Hi, good morning.

Speaker 3

Good morning. Good morning, Timur.

Speaker 6

Looking at just the NII performance in the Q1 and then your unchanged guidance for the year, or annualizing Q1 performance gets you to the upper end of the guidance. You get a seasonally strong quarter for deposits in 2Q loan growth is going to pick up kind of versus where Q1 came in. Is it safe to say that you're kind of targeting closer

Speaker 1

to the upper end of

Speaker 6

the guidance? I guess what would need to take place for you to come in closer to the lower end of your guidance at this point?

Speaker 3

I'll reiterate, we reaffirmed the guidance 9% to 13%. We give a range for a reason, Timur. In terms of the risk to the guidance, I think we talked about it a little bit on the prepared remarks. I think the deposit competitive deposit activity, particularly in our U. S.

Speaker 3

Operations, if a higher for longer environment or another bank failure creates a lot of pressure for liquidity and competition. Those are the kinds of things that would have would impact that guidance.

Speaker 6

Okay. And then I guess just speaking to deposits more specifically with public funds being at $18,000,000,000 in 1Q, 2Q being seasonally high, are those expected to go higher? And I guess in that same line questioning, maybe the competition for those deposits is a little bit more on the island. Are you anticipating having to pay up to get your fair share of kind of that seasonal deposit growth in the Q2?

Speaker 2

No. The public deposits generally have a formula that we abide by. So it's just really going to depend on, at least noted before, it's a formula based on short term rates. So that's not going to depend on the competitive pressures. The banks in Puerto Rico in terms of the non public deposits, we continue to have very healthy loan to deposit ratios, perhaps too healthy.

Speaker 2

So I don't see that competitive environment changing in the short run.

Speaker 7

Okay.

Speaker 6

And then just last for me, looking at the unsecured consumer credit and maybe some of these other consumer categories. We're hearing in the U. S. From some of the consumer companies that just the glut of activity during the pandemic now is seasoning. You're seeing kind of a commensurate increase in delinquency rates with the expectations for that to actually peak and then move lower throughout the course of the year.

Speaker 6

Should we expect a similar dynamic in Puerto Rico or maybe as

Speaker 3

you get through some of

Speaker 6

the excess capacity that was took on during COVID as that rolls off, can we actually see some of these consumer delinquency rates decline as some of the underwriting criteria kind of kicks in?

Speaker 4

I think a couple of things. As we mentioned in the remarks during the Q1, we saw a stability of our actually decreasing some of the delinquencies on the consumer portfolios, which would tend us to believe that maybe we're close to reaching APIC. In addition to that, as you mentioned, we made significant changes in the Q4 to some of our underwriting criteria and those that's been short dated or short duration portfolios will tend to have an impact in the short term. So yes, we expect that we'll see a peak soon.

Speaker 6

Great. Thank you.

Operator

Next question comes from Brett Rabatin from Hovde Group. Please go ahead. Your line is open.

Speaker 7

Hey, good morning, everybody. I had a question around the multifamily U. S. Portfolio of $1,400,000,000 which is I guess 4% of the total portfolio. So it's not huge, but I didn't understand the comment on Slide 22 that says no exposure to rent control buildings.

Speaker 7

But then the next bullet says rent stabilized units represent less than 40% of the total units in the portfolio. Can you explain the rent control piece of the multifamily portfolio? And then obviously multifamily is something folks are thinking about. The classifieds are still low for you guys, but they did increase linked quarter. Just wanted to get a better understanding of the book.

Speaker 4

I think within multifamily in New York, there are different levels. Obviously, there are market free apartments. There are rent stabilized apartments, which allow for certain increases in rent provided by on a yearly basis as agreed by the state government and then their rent control in which the rents basically are fixed for a period of time. So we're saying that we have no exposure to rent control apartments, we have exposure to rent stabilized apartments.

Speaker 7

Okay. And then would you just generally what do you expect from that portfolio from here as you look at it in terms of where migration might occur, classified, criticized in that book?

Speaker 4

I don't think we provide that level of detail or the level of guidance in any of our portfolio. What I will say that as we put in Page I think you referenced Page 22, there are the biggest risk when you look at multifamily is the level of rent control, risk stabilization and then the risk of repricing of the portfolio going forward. As we mentioned in that slide, we only have about 38,000,000 dollars of multifamily loans repricing in 2024 that have more than 50% stabilized units in their apartment. So we feel comfortable. I think it is reflected in the ratings of our portfolio.

Speaker 7

Okay. Thanks, Lydia. And then, wanted to ask back on capital. When I look at slide, I think it's the investment portfolio, it's slide 19. When I go back to the 10 ks and look at the fair value marks on the securities portfolio, if you look at the duration on Slide 19, it's 2 years.

Speaker 7

But then if you look at the 10 ks, there's a pretty good slug that's I call it a barbell strategy. Can you guys talk about any willingness to maybe restructure the longer piece of the securities portfolio that at year end was about $1,000,000,000 up to $1,300,000,000 in total AOCI?

Speaker 3

Brad, one thing I think in the 10 ks, the MBS portfolio is structured based on original maturities. Doesn't have a prepayment factor, which you would see in the maturity profile that you have on Slide 19. So I think that's a difference between the way we report for SEC requirements versus this slide. So in terms of the maturity curve, I would look at Slide 19. When you see particularly on the treasuries, you see a ladder strategy where we're seeing quarterly maturities of somewhere around $900,000,000 when you add prepayment maturities on MBSs of around $150,000,000 a quarter, you really are repricing about $1,000,000,000 a quarter.

Speaker 3

We expect about 33% of our unrealized loss at the end of this quarter to have been accreted back to tangible book value by the end of 2025 assuming no changes in the rate scenario, of course. So we believe that given our profile and the amount of the unrealized loss that's just going to naturally accrete back to tangible book value, A trade where we realize a loss doesn't make sense. Essentially, any trade with a similar duration has no economic value to our shareholders and we're trading capital, a big chunk of capital for EPS. And at this stage, we don't believe that that's a good trade.

Speaker 7

Okay. That's really helpful. And if I could sneak in one last one on the unchanged NII guidance and relative to the loan growth guidance. Is it fair to assume the balance sheet is very flat for the year?

Speaker 3

I mean, what would drive growth in the balance sheet would be growth in deposits. We would probably given the amount of liquidity and security. So I would say that when you look at the NII guidance, it is really driven by the repricing of those investment portfolios that are maturing every quarter. You have the repricing of loans in a higher rate environment. I mean just to run-in place, we have to generate a lot of new loans every quarter.

Speaker 3

So there is a lift from that. If public deposits come down given our range where we're at the top end of the range, that will reduce the balance sheet. So I I don't we don't give guidance in terms of glasses and we think the balance sheet is going to be, but there are a lot of levers there that could impact that projection.

Speaker 7

Okay. That's great. Thanks for the color.

Operator

Our next question comes from Ben Gurlinger of Citi. Your line is open. Please go ahead.

Speaker 8

Just curious in terms of the charge off guidance, I mean the 65 basis points to 85 basis points is pretty wide range. I guess at the beginning of the year there was quite a bit of the range of outcomes is pretty wide. And it seems like not only things are slowing down, they're showing clear plateauing effect. Is it fair to think that the 85% is a bit draconian at this level?

Speaker 4

I mean, we are providing the guidance that and we updated the guidance to 65 to 85 basis points. I think you're right in a sense that as we move along the year, there can be more confidence in terms of the guidance. But as of today, we're sticking with 65 to 85

Speaker 3

basis points.

Speaker 8

Got you. And then from an expense perspective, I know you gave the range for this year. When you think about next year or even 2026, are there any efficiency opportunities that you might see, not necessarily in 2024, but just thinking high level, I'm just trying to look I know you don't want to give guidance for 25 or 26 at this point, but just think from an operational perspective, is there any way or any opportunities to kind of just tighten up the expense base? I think you're doing a great job now. I'm just kind of curious on how you get even better from here.

Speaker 3

I mean, I think as you said, we don't want to give guidance for 25, fair enough, 26. But we're doing a lot of efforts in the transformation that help us to go towards that 2025 ROTCE guidance. Most of that effort, we believe, is top line driven, so we'll be creating operational efficiency. And while we always are focused on managing costs and trying to make sure we slowed down the acceleration of expenses, I would not expect a driver that would decrease our expense significantly. I would see more of an opportunity to create more efficiency, operational efficiency from higher revenues and slowing down the growth of expenses.

Speaker 8

Got you. That's helpful color. Appreciate it.

Operator

The next question comes from Jared Shaw of Barclays. Your line is open.

Speaker 7

Hi, good morning.

Speaker 9

Maybe looking at the loan growth in light of the weaker end of period balances this quarter from some of those payoffs, what gives you confidence in the pipeline here? Do you feel just that we should see some C and I and CRE growth accelerate to keep that range stable here?

Speaker 2

Well, and this is Ignacio. In terms of Puerto Rico, I mean, we're still optimistic about the economic conditions, which after all, that's what's going to end up in loan growth. So the economy seems going strong. I mean, we're seeing a lot of interest in clients and different deals. We're seeing investors asking around.

Speaker 2

So we don't give a number on pipeline, but in general, the environment is strong. So I would expect the commercial loan growth will pick up. I will expect construction will pick up. There are a number of construction projects that we've signed up, but haven't really dispersed any funds. Auto remains strong and I would consider that will remain strong.

Speaker 2

So I think in Puerto Rico, you're going to see commercial go up and I think auto will remain strong. We're building up our mortgage loan our strategy of holding mortgages in the portfolio that should be relatively steady. In the U. S, I think we're expecting the construction loans to go up in the New York area and our popular association banking subsidiary, we're also expecting growth there. And as you know, in Florida after there was horrible accident at the condominium, they passed a number of laws and regulations that require that condominiums do certain appraisals of assessment of their the structural integrity of the units.

Speaker 2

And I think there's a deadline coming up in February 25. So we expect to see a lot of activity there. And hopefully, we'll be able to pick up some more regular commercial growth. But we're and generally in Puerto Rico, it's the economic environment that gives us the confidence to maintain the guidance on loan growth.

Speaker 9

Okay, great. That's good color. Thanks. And then looking at deposits, it really feels like you found a stable level here on DDAs as a percentage of total deposits. Should we expect that DDAs keep track growth in the overall deposits from here?

Speaker 9

Or could there still be some incremental diminishment?

Speaker 2

That depends a lot on the interest rate environment. We did get benefit of this as a tax season, so there's tax refunds and that goes into people's usually goes into people's DDA accounts. We'll have to see the consumers the higher end consumer and the commercial clients are still looking for alternatives to regular demand deposits. So we can expect that trend to continue as interest rates remain high. But we do feel that our regular retail demand deposits are reflecting really the strength of our branch network.

Speaker 2

And they may have had more of a significant pickup this quarter, although a lot of the refunds occur in April also. So we'll get some benefit from that in April. So that may have been a short term thing, but in general, we feel pretty strong about our retail deposit franchise.

Speaker 9

Great. Thank you.

Operator

The next question in the queue is Alex Twerdahl of Piper Sandler. Please go ahead.

Speaker 10

Good morning, all.

Speaker 7

Good morning, Alex.

Speaker 10

Wanted to go back to a comment you made, Jorge, about just the amount of churn in the loan new generation you need just to stay where you are. And then the yield lift that is kind of inherent with that, we see some nice yield lift this quarter. Like at 7.5% overall loan yields, like can you give us a sense for like what kind of loan yield lift still remains in the portfolio assuming we see churn at similar rates to what we've seen in the past couple of quarters?

Speaker 3

Alex, I think I'd be lying if I tell you I had that level of granularity. Let's say let's look at the different components. The investment portfolio, we feel very comfortable that you're going to get a 300 basis point plus lift in that. I think with the loans, it depends on when those loans were made, it depends what type of loans they are. I would expect particularly around our commercial clients that any renewals in this environment should reflect a higher yields, but we do see perhaps some maybe compression in some of those margins.

Speaker 3

I guess at this stage, I will stick to the NII guidance, Alex.

Speaker 10

Okay. Nacho, earlier you talked about some of the loan portfolio categories you expect to grow, the commercial, the construction, the auto. Are there any categories that you'd expect to be a headwind in terms of overall balances that maybe would decline in the next year?

Speaker 2

Well, we've tightened up some of our credit policies around some of the unsecured consumer portfolios. So I don't expect you'd see a lot of growth in personal loans and credit cards. So those are really the only areas that I would pinpoint that I think we're not I don't feel and it's for a reason, it's because we tightened up. So we can expect that those are probably and personal loans especially are subject to amortization. So if we don't originate at the rate we were, it's going to go down.

Speaker 2

And those are the only 2 categories I would highlight. Mortgage depends on the interest rate. So it's not a great environment for originating mortgage loans because the high interest rates are basically limited to home purchase and obviously refinancing now. However, we're holding more in portfolio, so that sort of makes up. So I think mortgage may be more steady.

Speaker 2

I don't think I don't know if it will go down, but it will be steady. But I do think that personal loans and credit cards that we're not expecting.

Speaker 10

Okay. Thanks for that color. And then you alluded to a $17,200,000 mortgage in the press release in BPNA that migrated to NPL. Was that a residential mortgage or is that multifamily?

Speaker 2

It's a residential mortgage. I think Lidio will give you more color on that. He wants me to give you more color on that. Yes, this was a loan we made in a very expensive home in New York and it's not something we normally do. It was a special situation for our clients that had other relationships with us.

Speaker 2

And so it's really in my opinion, it's something that it's a one off. So but it is a residential mortgage, but it has a solid loan to value ratio. So we're not anticipating losing any money on that loan.

Speaker 10

I mean, would it be like a high profile divorce or something like that, that would result in something like that?

Speaker 2

No. I don't think again, it's not I'm pretty certain it's not a divorce. I don't know all the facts, but it's just someone who went into NPLs and they it's again, it is a single loan to a single borrower in a residential property in New York, a very luxury property, something we normally did. We did it as an accommodation for business reasons. And it's a one off.

Speaker 10

Okay. Would that have when I look at the yields on the mortgage portfolio look like they dropped this quarter, is that would that be sort of interest like reversal of accrued interest related to that loan?

Speaker 3

I mean, there'll be certainly some impact with us because we would reverse 3 months' worth of interest related to that loan. But the mortgage portfolio does get impacted in Puerto Rico by tax equivalent adjustments, Alex. And then I think in the Q4, we may have had a positive benefit in the Q4 related to those adjustments. So it's more that the Q4 was maybe a higher yield because of tax equivalent adjustment.

Speaker 10

Okay, great. And then I just wanted to Sorry, Nacho?

Speaker 2

No, I was just saying, remember that the FHA loans in Puerto Rico are taxes up here, the interest on the FHA loan.

Speaker 6

Got it. Okay. And

Speaker 10

then I just wanted to ask another one on the multifamily just because you did provide some pretty good color and it has become a bigger issue for the investing community. Can you do you happen to have like loan to values of some of the loans either portfolio overall and particularly the loans that are coming due this year or maturing this year as well as debt service coverage ratios?

Speaker 4

Could you repeat the question? I'm sorry.

Speaker 2

I can repeat it. Whether we have more color in terms of loan to value ratio and debt service ratios on the multifamily that's coming due this year.

Speaker 4

I mean, I will say generally, I will say that we underwrite 70 loan to value debt service coverage in excess of $1,030,000,000 We will consider providing more detail in our future filings, but today, we don't have that information.

Speaker 10

Okay. I appreciate taking all my questions.

Speaker 3

Thank

Operator

you. Our next question comes from Kelly Motta of KBW. Please go ahead.

Speaker 11

Hey, everyone. Good morning. Most of my questions have been asked and answered. Thanks. At this point, but I guess, the 14% ROTCE target by 4Q 'twenty five, you've about it a lot in the past, and I think, you put it for the first time in writing in the proxy this year.

Speaker 11

Just wondering, I know we've spoken about how you anticipate getting there, talking about mostly top line and maybe a capital component. But asking a different way, what do you think are the biggest risks or headwinds that could cause you to fall short of that number. Just wondering how we should be thinking about that?

Speaker 2

Well, Hardi, do you want to take it?

Speaker 3

Sure. As I mentioned earlier, there is a lot of efforts related to the transformation that will drive operational efficiency for us to be able to get to those results. I think at the end of this quarter, we had something like 35, 40 ongoing transformation projects throughout the organization that all eventually contribute to that success to get to those numbers. I think delays in the projects, I mean, extending where we don't see the lift or the benefits at the time that we think we're going to be able to see could have an impact on that guidance. Certainly, interest rate environment and things like that that generally impact bank earnings will have a spillover effect of that.

Speaker 11

Got it. That's helpful. Then in your prepared remarks, you mentioned with capital planning, one thing you're looking at with regards to whether to come in again with some capital return is your TCE ratio. And that got as low as a 4 handle in 2022. I know we're not guiding specifically to CET1 yet or REDI but just wondering if there's any sort of line in the sand that we should be thinking about in terms of where you might be comfortable with the TCE ratio in terms of like a bottoming level just to be mindful when we're modeling capital?

Speaker 3

Kelly, when we look at CCE, I mean, obviously, we are there are levels that we're comfortable at, but not just a bright line, black and white. We do like to look at the rate scenario, what is the projected rate environment, what is our sensitivity in our investment portfolio. So all those things contribute to our confidence and the level that we're confident that. We believe that we will be able to come to you in the second half of this year with more information take into consideration all these aspects.

Speaker 11

Understood. Thanks so much. I'll step back.

Operator

And we've had a follow-up registered from Gerard Cassidy from RBC Capital Markets. Your line is open again.

Speaker 5

Thank you. Gentlemen, can you share with us the latest update on the prepper bankruptcy proceedings? Obviously, you're a lot closer to it than the folks here in the mainland. But any insights on how it's winding down and possibly a final settlement sometime this year?

Speaker 2

Yes. I mean, they had a series of hearings and obviously they had hoped originally to have it done in the I think in the Q1. I think we're probably looking now maybe 2nd or maybe early part of Q3. There's a lot of it will be done this year, one way or the other, I think. It's been delayed.

Speaker 2

There's been objections from many sides, some arguing that the proposed rate hikes that will pay for the continued charge are too high. Some of the bondholders are claiming that the payout is too low. So you've got people arguing all sides of the equation. But I think I'm pretty confident, maybe not Q2, but Q3 probably. This gets done this year, I think.

Speaker 2

Other than that, it's hard to predict because these legal proceedings are complex and the judge is trying to figure it out. There'll be an appeal. Obviously, whatever happens, there'll be an appeal. Under the PROMESA statute, appeals are supposed to be handled expeditiously. I mean, there's always a chance that at the end of the day, in the final wire, they'll reach an agreement with some of the objecting bondholders.

Speaker 2

I don't think for 100%, obviously, but there's always that possibility. But I think this is it would be hard to speculate exactly when, but I would go out in the limb and say it will get done this year.

Speaker 5

Very good. And then just as a quick follow-up, can you remind us what drives the government's deposits? You mentioned that they're elevated right now, talking about the securities earlier in the call. But what should we keep an eye on for the government to draw down those deposits? I know there's some seasonality due to tax payments, but if there was a kind of a downward shift in them, what should we keep an eye on to see if that happens?

Speaker 2

I think the most thing is what you mentioned, the increase is tax seasonality. I think now that we're paying debt on the public, paying interest on the public debt, we have a July 1 payment that will come up. So there'll be a debt payment made on July 1. Other than that, it's really just the way the government runs. Now one of the things that could impact the government that the fiscal board has mentioned is that in the post pandemic period, there's been a number of special packages for all states and municipalities.

Speaker 2

Some of that money has been used by Puerto Rico for like the education department and other things like that. That money runs out eventually, that was limited. So part of that will have to be come from the treasury of the Puerto Rico government. So I think going forward as some of this post pandemic stimulus relief comes down, you probably see Puerto Rico spending more. We continue to have more infrastructure projects.

Speaker 2

Part of those projects require Puerto Rico to pay part of the cost. So some of that will come down. Other than that, it's hard for us to judge. I mean, over time, we do expect that the liquidity will go down for the reasons I said. I mean, some of the money that they've been using for education and for health and other things will have to be replaced by Puerto Rico money from the budget.

Speaker 2

And I think part of the money that they have, they need to spend for the infrastructure project to put our share. And then there's also some COVID money that had a term limit, so that if we don't use it, it has to be returned to the treasury. So I mean those are the best handles. We don't have great visibility to actually to the government, but those are the normal things that we see. Already we saw the government they the March numbers already flaked a significant amount of the refund because the government was refunding is refunding given the liquidity, it's refunding the taxpayers much faster than they used to in the old days.

Speaker 2

So some of that has gone out. But those are the factors that we that's frankly we see.

Speaker 5

Very good. Appreciate the color. Thank you.

Operator

Thank you. We have no further questions in the queue. So I'll turn the call back over to Ignacio Alvarez for any closing remarks.

Speaker 2

Yes. Once again, thank everyone for joining your call and for your questions. We look forward to updating you on our Q2 results in July and have a great day and have a great week. Thank you everyone. Bye.

Operator

This concludes today's call. Thank you for joining. You may now disconnect your line.

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