Popular - Q1 2024
April 23, 2024
Transcript
Operator (participant)
Hello all, and welcome to Popular, Inc.'s first quarter earnings call. My name is Lydia, and I'll be your operator today. If you'd like to ask a question after the prepared remarks, you can do so by pressing star followed by the number one on your telephone keypad. I'll now hand you over to your host, Paul Cardillo, Investor Relations Officer to begin. Please go ahead.
Paul Cardillo (Investor Relations Officer)
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 García, and our CRO, Lidio Soriano. They will review our results for the first quarter and then answer your questions. Other members of our management team will also be available during the Q&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. 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.
Ignacio Alvarez (CEO)
Good morning, and thank you for joining the call. We are pleased to report a solid first quarter. Net income totaled $103 million, 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 million, compared to adjusted net income of $140 million in the previous quarter. The results in the first quarter 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. Our ending loan balances increased by $54 million during the quarter, with large commercial payoffs impacting both banks.
Our average loan balances, however, increased by $612 million, driven by a substantial amount of loan activity toward the end of the fourth quarter. BPPR generated loan growth of $124 million, driven by growth in mortgage and auto, offset in part by decreases in personal and commercial loans. Popular Bank saw a $70 million decrease in loan balances, driven by commercial loan payoffs that offset growth in construction loans. Deposit balances increased by approximately $191 million, driven primarily by a higher level of retail demand deposits in BPPR, which increased by $232 million, offset somewhat by lower Puerto Rico public deposits. 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 million. Excluding the additional FDIC assessment and the expenses associated with the prior period tax expense, operating expenses increased by $3 million. Credit quality trends remained 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 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. Please turn to slide 4. Last year, we crossed a significant milestone in Puerto Rico and now serve more than 2 million 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. Combined credit and debit card sales increased by 2% compared to the first quarter of 2023. Our auto loan and lease balances increased by $80 million compared to the fourth quarter, as demand for new cars continued to be strong in Puerto Rico. Mortgage loan balances at BPPR increased by $92 million in the first quarter, 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. 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 first quarter compared to the first quarter 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% and 17%, respectively, compared to the same month a year ago. There are a significant amount of committed federal funds that have yet to be disbursed. 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 now turn the call over to Jorge for more details on our financial results.
Jorge García (CFO)
... Thank you, Ignacio, and thank you all for joining the call today. As Ignacio stated in his remarks, we reported net income of $103 million in the first quarter. Excluding the effect of the FDIC assessment and the tax expenses related to prior period intercompany distributions, adjusted net income was $135 million, $5 million lower than the prior quarter's adjusted results. Although the quarter had 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 million in the quarter. 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%-13% from 2023 levels. Loan growth this quarter was lower than recent trends, driven by the early repayment of two large loans totaling around $200 million and decreased loan demand in the US mainland. The underlying economic activity in Puerto Rico remains strong, and as such, we continue to expect loan growth of 3%-6% in 2024. Non-interest income was $164 million, a decrease of $5 million from Q4, driven by lower contingent commissions in our insurance business, which are usually recognized in the second and fourth quarter of each year.
We continue to expect non-interest income to be approximately $160 million-$165 million 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. The provision for credit losses was $73 million, compared to $79 million in the fourth quarter. Total operating expenses were $483 million, including the additional expense of $14 million related to the FDIC special assessment and $6 million in expenses related to the late payment of taxes from prior period intercompany distributions. Excluding these two items, operating expenses were $462 million, an increase of $3 million from Q4's adjusted operating expenses.
Other significant expense variances in the quarter were higher personnel costs by $21 million, mainly due to annual incentive awards and payroll taxes, which are traditionally higher during the first quarter of the year, and higher credit card processing expenses by $6 million, mainly due to lower volume-driven rebates in the first quarter. These expenses were offset in part by a decrease in professional fees by $10 million, mainly related to regulatory consulting fees and other advisory expenses. Business promotion expenses were also lower, as these are typically higher in the fourth 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 billion-$1.95 billion for 2024.
Our effective tax rate for the quarter was 35%, due mainly to having recorded $17 million in income tax expense related to prior period intercompany dividends from our US subsidiary to the Puerto Rico bank holding company. 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 million in income tax expenses arising from a $50 million distribution from the US sub completing during this quarter.
We do not anticipate the tax treatment of US source 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%-23%. This includes the impact of the $17 million in income tax expense related to the prior period distributions. Please turn to slide 6. The 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. 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 million, primarily in retail accounts. At the end of the first quarter, Puerto Rico public deposits were $18 billion, 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 billion-$18 billion. 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. 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.
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. BPPR 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. 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.
Our CET1 ratio of 16.4% increased by 6 basis points from Q4. Tangible book value per share at the 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 2024. 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.
Lidio Soriano (Chief Risk Officer)
Thank you, Jorge, and good morning. Credit quality metrics were stable from the fourth quarter as trends remain consistent with recent performance. The corporation's 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, and have made changes to underwriting criteria to decrease exposure to higher-risk segments. 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 million, reflecting improvements in most loan categories. NPLs in the US increased by $27 million, related to higher mortgage NPLs by $17 million, impacted by a single loan, and higher commercial NPLs by $10 million. Inflow of NPLs increased by $8 million, driven by the previously mentioned increase in NPLs in the US mortgage and commercial portfolio. In Puerto Rico, total inflows decreased by $19 million, driven by an $18 million relationship that entered NPL in the fourth quarter of 2023. The ratio of NPL to total loans held in portfolio remained flat at 1%. Turning to slide 10. Net charge-off amounted to $62 million, or annualized 71 basis point of average loans held in portfolio, compared to $57 million or 66 basis points in the prior quarter.
The increase in net charge-offs was driven by a $5 million charge-off related to a previously reserved loan. Excluding this, net charge-offs were flat. In Puerto Rico, net charge-off increased by $5 million, mainly driven by higher commercial and consumer net charge-offs. 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 65-85 basis points due to the ongoing credit normalization and general economic environment. Please turn to slide 11. The allowance for credit losses increased by $10 million to $740 million. In Puerto Rico, the ACL increased by $4 million, driven by the consumer portfolio due to changes in credit quality. In the U.S., the ACL increased by $6 million, driven by higher commercial loan reserves due to rating 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 224% in the previous quarter. The provision for credit losses was $72 million, compared to $75 million in the prior quarter. In Puerto Rico, the provision was $61 million, compared to $67 million, while in the US, the provision was $11 million versus $8 million. To summarize, credit quality remains stable during the first quarter, consistent with recent performance. We are attentive to the evolving environment, but remain encouraged by the performance of our loan book. With that, I would like to turn the call over to Ignacio for his concluding remarks.
Ignacio Alvarez (CEO)
Thank you, Lidio and Jorge, for your updates. Popular started off 2024 with a solid first quarter, 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 increase experienced during the quarter in retail demand deposits in Puerto Rico. Last week, we launched our new institutional marketing campaign in Puerto Rico, titled Seguimos a Tu Ritmo, or We Follow Your Rhythm. This campaign includes a custom-composed audio brand and focuses on our unmatched omni-channel 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. 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 dedication and commitment to serve our customers and contribute to Popular's success. We are now ready to answer your questions.
Operator (participant)
Thank you. Please press Star followed by the number one if you'd like to ask a question, and ensure your device is unmuted locally when it's your turn to speak. Our first question today comes from Gerard Cassidy of RBC Capital Markets. Your line is open. Please go ahead.
Gerard Cassidy (Analyst)
Thank you. Hi, Ignacio and Jorge.
Ignacio Alvarez (CEO)
Good morning.
Jorge García (CFO)
Good morning, Gerard.
Gerard Cassidy (Analyst)
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 6-12 months.
Ignacio Alvarez (CEO)
Well, 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 plans, and that'll be in the second half of the year. I really wouldn't want to pinpoint it too much, you know, 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.
Gerard Cassidy (Analyst)
I guess as a follow-up just to that question, are you, 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%?
Jorge García (CFO)
Gerard, this is Jorge. I mean, I think at this stage, you know, as we said in the prepared remarks, the level of any new capital actions that we announce will depend on a lot of factors. I think Ignacio said, we know this is important to our shareholders. We have that in mind, and, you know, 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. But it's important that we set the stage. You know, we would expect capital actions to be gradual over time. This is not going to be a step function where we see, you know, a huge decrease or something like that. You know, it will be over time.
Gerard Cassidy (Analyst)
Got it. Then just as a final question, when you guys look at, you know, the next two to three years, what's the optimal mix of money market and investment securities as a percentage of assets relative to loans? Are you comfortable keeping it in the 45%-50% range, or would it, over time, maybe gradually come down further?
Ignacio Alvarez (CEO)
Yeah, 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-
Gerard Cassidy (Analyst)
Right
Ignacio Alvarez (CEO)
... public funds go down, we would expect that, you know, the investment securities go down. You know, if you ask me, I always prefer, you know, more loans to investment securities. But I think, you know, it's going to depend on the—it's going to be mostly dependent on the level of public funds. If they go down, you can expect a percentage of investment securities to go down also.
Gerard Cassidy (Analyst)
Great. Thank you.
Operator (participant)
Our next question today comes from Timur Braziler of Wells Fargo. Please go ahead. Your line is open.
Timur Braziler (Analyst)
Hi, good morning.
Ignacio Alvarez (CEO)
Good morning.
Jorge García (CFO)
Good morning, Timur.
Timur Braziler (Analyst)
Looking at just the NII performance in the first quarter and then your unchanged guidance for the year, annualizing first quarter performance gets you to the upper end of the guidance. You get, you know, a seasonally strong quarter for deposits in 2Q. Loan growth is going to pick up kind of versus where first quarter came in. Is it safe to say that you're kind of targeting closer to the upper end of 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?
Jorge García (CFO)
I'll reiterate, you know, we reaffirmed the guidance, 9%-13%. You know, 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.
Lidio Soriano (Chief Risk Officer)
... I think the competitive deposit activity, particularly in our U.S. 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 impact that guidance.
Timur Braziler (Analyst)
Okay. And then I guess just speaking to deposits more specifically with public funds being at $18 billion in 1Q, 2Q being seasonally high, are those expected to go higher? And I guess in that same line of 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 kinda that seasonal deposit growth in the second quarter?
Ignacio Alvarez (CEO)
No. You know, the public deposits generally have a formula that we abide by, so it's just really going to depend on, as we noted before, it's a formula based on short-term rates. So that's not going to depend on the competitive pressures. You know, 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. So I don't see that competitive environment changing in the short run.
Timur Braziler (Analyst)
Okay. 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. Should we expect a similar dynamic in Puerto Rico, or maybe as you get through some of the excess capacity that was took on during COVID, as that rolls off, could we actually see some of these consumer delinquency rates decline as some of the underwriting criteria kind of kicks in?
Lidio Soriano (Chief Risk Officer)
I think a couple of things. I think as we mentioned in the previous remarks, during the first quarter, we saw a stability of our, actually a decrease in some of the delinquencies on the consumer portfolios, which would tempt us to believe that maybe we're close to reaching a peak. In addition to that, as you mentioned, we made significant changes in the fourth quarter to some of our underwriting criteria, and those, this being short-dated or short-duration, portfolios, we tend to have an impact in the short term. So yes, we expect that we'll see a peak soon.
Timur Braziler (Analyst)
Great. Thank you.
Operator (participant)
Our next question comes from Brett Rabatin from Hovde Group. Please go ahead. Your line is open.
Brett Rabatin (Analyst)
Hey, good morning, everybody. I had a question around the multifamily US portfolio of $1.4 billion, which is, you know, I guess, 4% of the total portfolio. So it's not, it's not huge, but I didn't understand the comment on slide 22 that says, "No exposure to rent-controlled buildings," 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 it, you know, obviously, multifamily is something folks are thinking about. The classifieds are still low for you guys, but they did increase one quarter. Just wanted to get a better understanding of the book.
Lidio Soriano (Chief Risk Officer)
I think within multifamily in New York, there are different levels. Obviously, there are market-rate apartments. There are rent-stabilized apartments, which allow for certain increases in rent provided on a yearly basis, as agreed by the state government. Then there are rent-controlled, in which the rents are basically fixed for a period of time. So we're saying that we have no exposure to rent-controlled apartments; we have exposure to rent-stabilized apartments.
Brett Rabatin (Analyst)
Okay. And then 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?
Lidio Soriano (Chief Risk Officer)
I don't think we provide that level of detail in or that level of guidance in any of our portfolio. What I will say that as we put in page, as you I think you referenced page 22. There are the biggest risk when you look at multifamily, the level of rent control, rent stabilization, and then the risk of repricing of the portfolio going forward. As we mentioned in that slide, we only have about $38 million of multifamily loans repricing in 2024, that have more than 50% stabilized units in their apartments. So we feel comfortable, and I think it's reflected in the ratings of our portfolios.
Brett Rabatin (Analyst)
Okay. Thanks, Lidio. 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-K and look at the fair value marks on the securities portfolio, if you look at the duration on slide 19, it's 2 years. But then if you look at the 10-K, there's a pretty good slot 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 billion of the $1.3 billion in total AOCI?
Jorge García (CFO)
... Brett, one thing I think in the 10-K, the MBS portfolio is structured based on original maturities. It 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, you know, for SEC requirements versus this slide. So in terms of the maturity curve, I would look at—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, you know, somewhere around $900 million. When you add prepayment maturities on MBSs of around $150 million a quarter, you really are repricing about $1 billion a quarter.
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, you know, 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 just trading capital, a big chunk of capital for EPS. And at this stage, we don't believe that that's a good trade.
Brett Rabatin (Analyst)
Okay. That's really helpful. And, 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?
Jorge García (CFO)
I mean, what would drive growth in the balance sheet would be growth in deposits, as we would probably, you know, 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, so that 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, you know, will reduce the balance sheet.
So, I mean, we don't give guidance in terms of classes and we think the balance sheet is going to be, but there are a lot of levers there that could impact that projection.
Brett Rabatin (Analyst)
Okay. That's great. Thanks for all the color.
Operator (participant)
Our next question comes from Ben Gerlinger of Citi. Your line is open. Please go ahead.
Ben Gerlinger (Analyst)
Hey, good morning.
Jorge García (CFO)
Good morning.
Ben Gerlinger (Analyst)
Just curious, in terms of the charge-off guidance, I mean, the 65-85 basis points is a pretty wide range. I get at the beginning of the year, there was quite a bit of the range of outcomes was pretty wide, and it seems like not only are things slowing down, there's a clear plateauing effect. Is it fair to think that the 85 is a bit draconian at this level?
Jorge García (CFO)
I mean, we are providing the guidance that and we updated the guidance to 65-85 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 65-85 basis points.
Ben Gerlinger (Analyst)
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 2025 or 2026 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, you're doing a great job now. I'm just kind of curious on how you get even better from here.
Jorge García (CFO)
I mean, I think as you said, we don't want to give guidance for 25, certainly not 26. But we're doing a lot of efforts in the transformation that help us to go towards that 2025 ROC guidance. Most of that effort, we believe, is top-line driven, so we'll be creating operational efficiency. And while, you know, we always are focused on managing costs and trying to make sure we slow down the acceleration of expenses, I would not expect a driver that would decrease our expense base significantly. I would see more of an opportunity to create more efficiency, operational efficiency from higher revenues and slowing down the growth of expenses.
Ben Gerlinger (Analyst)
Got you. That's helpful, color. I appreciate it.
Operator (participant)
The next question comes from Jared Shaw of Barclays. Your line is open.
Jared Shaw (Analyst)
Hey, good morning. Maybe looking at the loan growth, you know, 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, you know, just that we should see some C&I and CRE growth accelerate to keep that range stable here?
Ignacio Alvarez (CEO)
... Well, this is Ignacio. In terms of Puerto Rico, I mean, we're still, you know, optimistic about the economic conditions, which after all, that's what's going to, you know, end up in loan growth. So the economy seems going strong. I mean, we're seeing a lot of interest from clients in different deals. We're seeing investors asking around. So we don't, you know, we don't give a number on pipeline, but in general, the environment is strong. So I would expect, you know, the commercial loan growth will pick up. I would expect construction will pick up. There's a number of construction projects that we've signed up, but haven't really disbursed any funds. Auto remains strong, and I would consider that will remain strong.
So I think in Puerto Rico, you're going to see commercial go up, and I think auto will remain strong. You know, we're building up our mortgage home, our strategy of holding mortgages and portfolio. That should be relatively steady. In the US, you know, I think we're expecting the construction loans to go up in the New York area and our Popular Association Banking facility, we're also expecting growth there. And as you know, in Florida, after there was that 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. And I think there's a deadline coming up in February 25th, so we expect to see a lot of activity there.
You know, and hopefully we'll be able to pick up, you know, 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 the loan growth.
Jared Shaw (Analyst)
Okay, great. That's a good color. Thanks. So then, you know, looking at deposits, you know, it really feels like you've 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? Or could there still be some incremental diminishment?
Ignacio Alvarez (CEO)
You know, that depends a lot on the, you know, 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. You know, we'll have to see the consumers. Consumers, the higher end consumer and the commercial clients are still, you know, are still looking for, you know, alternatives to regular demand deposits. So we can expect that trend to continue as interest rates remain high. But, you know, we do feel that our regular retail demand deposits are reflecting, you know, really the strength of our branch network.
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 we're in general we feel pretty strong about our retail deposit franchise.
Jared Shaw (Analyst)
Great. Thank you.
Operator (participant)
The next question in the queue is Alex Twerdahl of Piper Sandler. Please go ahead.
Alex Twerdahl (Analyst)
Good morning, all.
Jorge García (CFO)
Good morning, Alex.
Alex Twerdahl (Analyst)
Wanted to go back to a comment you made, Jorge, about just the amount of churn in the loan portfolio and kind of just the amount of new generation need just to stay in, you know, 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, you know, at 7.5% overall loan yields, like, can you give us a sense for, you know, 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?
Jorge García (CFO)
Alex, I think I'd be lying if I told you I had that level of granularity. You know, let's look at the different components. The investment portfolio, we feel very comfortable that, you know, you're going to get a, you know, 300 basis points 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 higher yields. But we do see perhaps some, you know, maybe compression in some of those margins. I guess at this stage, I will stick to the NII guidance, Alex.
Alex Twerdahl (Analyst)
Okay. You know, 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?
Ignacio Alvarez (CEO)
Well, you know, we've tightened up on some of our credit policies around some of the unsecured consumer portfolios, so I don't expect you to 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, you know, I don't feel. And it's for a reason, you know? It's because we, we've tightened up, so we can expect that those are probably. And they, you know, and personal loans especially, are subject to, you know, amortization. So if we don't, you know, originate at the rate we were, it's going to go down. So those are the only two categories I would highlight. You know, mortgage, you know, depends on the interest rate.
So, you know, you know, it's not a great environment for originating mortgage loans because of the high interest rates. So we're, you know, basically limited to home purchase, obviously, we're financing now. However, we're holding more in portfolio, so that sort of makes up. So I think mortgage may be more steady. I don't think. I don't know if it'll go down, but it'll be steady. But I do think that, you know, the personal loans and credit cards that we're not expecting on.
Alex Twerdahl (Analyst)
Okay. Thanks for that, that color. Then, you alluded to a $17.2 million mortgage in the press release in BPNA that migrated to NPL. Was that a residential mortgage, or is that multifamily?
Ignacio Alvarez (CEO)
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. Yeah, this was a loan we made in, you know, a very expensive home in New York, and it's not something we normally do. It was a special situation for a client that, you know, that had other relationships with us. And so it's really. I, in my opinion, it's, you know, something that, you know, it's a one-off, so.
Alex Twerdahl (Analyst)
okay.
Ignacio Alvarez (CEO)
It is a residential mortgage, but it has a, you know, a solid loan-to-value ratio, so we're not anticipating losing any money on that loan.
Alex Twerdahl (Analyst)
I mean, would it be like a, like a high-profile divorce or something like that, that would result in something like that?
Ignacio Alvarez (CEO)
No. I don't think... You know, again, it's not a—I'm pretty certain it's not a divorce. I don't know all the facts, but, you know, it's just a, you know, someone who went into NPLs and that they—you know, it's—again, it's a—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, you know, it's, I would... You know, it's a one-off.
Alex Twerdahl (Analyst)
Okay. Would that have—you know, when I look at the yields on the mortgage portfolio look like they dropped this quarter, is that—would that be sort of interest or like reversal of accrued interest related to that loan?
Jorge García (CFO)
I mean, there'll be certainly some impact with us because you would, you know, we would reverse, you know, three 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 fourth quarter, we may have had a positive benefit in the fourth quarter related to those adjustments. So it's more that the fourth quarter was maybe a higher yield because of tax-equivalent adjustments.
Alex Twerdahl (Analyst)
Okay, great. And then I just want to—
Ignacio Alvarez (CEO)
Puerto Rico are done. Yeah.
Alex Twerdahl (Analyst)
Sorry, Nacho?
Ignacio Alvarez (CEO)
No, I was just saying, remember that the FHA loans in Puerto Rico are tax-exempt up here, the interest on the FHA loans.
Alex Twerdahl (Analyst)
Got it. Okay. And then I just wanted to ask another one on the multifamily, just because you did provide some pretty good color, and it is, you know, become a bigger issue, for the investing community. Can you do you happen to have, like, loan-to-values of some of the loans, you know, either the portfolio overall and particularly the loans that are coming due, you know, this year or maturing this year, as well as debt service coverage ratios?
Jorge García (CFO)
Could you repeat the question? I'm sorry.
Ignacio Alvarez (CEO)
Whether 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.
Jorge García (CFO)
I mean, I would say, generally, I would say that we underwrite to 70 loan-to-value. Debt service coverage in excess of 1.30. We will consider providing more detail in our future filings, but today, we don't have that information.
Alex Twerdahl (Analyst)
Okay. I, I appreciate you taking all my questions.
Ignacio Alvarez (CEO)
Thank you.
Jorge García (CFO)
Thank you.
Operator (participant)
As a reminder, if you'd like to ask a question today, please press star followed by one on your telephone keypad. Our next question comes from Kelly Motta of KBW. Please go ahead.
Kelly Motta (Analyst)
Hey, everyone. Good morning. Most of my questions have been asked and answered—thanks at this point. But I guess the 14% ROIC target by 4Q 2025, you've talked about it a lot in the past, and I think you put it for the first time in writing in the proxy this year. Just wondering, I know we've spoken about, you know, 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.
Ignacio Alvarez (CEO)
Well, Jorge, you want to take it?
Jorge García (CFO)
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 you know extending you know 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 on that guidance. Certainly, interest rate environment, things like that, you know that generally impact bank earnings will have a spillover effect of that.
Kelly Motta (Analyst)
Got it. That's helpful. Then in your prepared remarks, you mentioned with capital planning, one thing you're looking at, with regards to, you know, whether to come in again with some capital return is your TCE ratio. And that got as low as, you know, a four handle in 2022. I know we're not guiding specifically to CET1 yet or ready to, 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, you know, with the TCE ratio in terms of like a bottoming level, just to be mindful when we're, you know, modeling capital.
Ignacio Alvarez (CEO)
I think, Kelly, when we look at TCE, I mean, it obviously, there are levels that we're comfortable at, but it's not just a bright line, you know, 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 at. You know, 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.
Kelly Motta (Analyst)
Understood. Thanks so much. I'll step back.
Operator (participant)
We've had a follow-up registered from Gerard Cassidy from RBC Capital Markets. Your line is open again.
Gerard Cassidy (Analyst)
Thank you. Gentlemen, can you share with us the latest update on the PREPA 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?
Ignacio Alvarez (CEO)
Yeah, I mean, they've been-- they had a series of hearings, and obviously, they had hoped originally to have it done in the, I think, in the first quarter. I think we're probably looking now maybe second or second or maybe early part of the third quarter. You know, there's a lot of... It'll be done this year, one way or the other, I think. It's been delayed. You know, 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 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, I mean, maybe not second quarter, but, you know, third quarter, probably.
This, this gets done this year, I think. Other than that, it's hard to predict because, you know, these legal proceedings are complex and the judge is, you know, 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. I don't think for 100%, obviously, but, you know, there's always that possibility. But I think this is. It would be hard to speculate on that exactly when, but I would go out on a limb and say it'll get done this year.
Gerard Cassidy (Analyst)
Very good. And then just as a quick follow-up, can you remind us what drives the government's deposits? You mentioned they're elevated right now and 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?
Ignacio Alvarez (CEO)
I think the most, the thing is what you mentioned, the increase is, is tax seasonality. I think, now that we're paying debt on the public, you know, paying interest on the public debt, we have a July 1 payment that'll come up. So there'll be, 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, you know, for all states and municipalities. 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 come from the Treasury of the Puerto Rico government, you know. So I think going forward, as some of this post-pandemic stimulus relief comes down, you'll probably see Puerto Rico spending more, you know. We continue to have more infrastructure projects. Part of those projects require Puerto Rico to pay part of the cost, so some of that will come down. You know, 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, you know. 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.
I think part of the money that they have, you know, 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 handles. It's 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, you know, they. The March numbers already reflect a significant amount of the refunds because the government was refunding, is refunding. Given the liquidity, it's refunding taxpayers much faster than they used to in the old days.
So some of that has gone out, but those are, those are the factors that we that frankly, we see.
Gerard Cassidy (Analyst)
Very good. Appreciate the color. Thank you.
Operator (participant)
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.
Ignacio Alvarez (CEO)
Yes. Once again, thank everyone for joining your call and for your questions. We look forward to updating you on our second quarter results in July, and have a great day and have a great week. Thank you, everyone. Bye.
Operator (participant)
This concludes today's call. Thank you for joining. You may now disconnect your line.