Popular Inc

NASDAQ:BPOP

Earnings Call Transcript 2024-Q1

[Operator]

Hello, and welcome to Popular, Inc.'s First Quarter Earnings Call. My name is Lydia, and I'll be your operator today. [Operator Instructions] Now hand you over to your host, Paul Cardillo, Investor Relations Officer, to begin. Please go ahead.

[Paul Cardillo, executive]

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 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 web page at popular.com. I will now turn the call over to our CEO, Ignacio Alvarez.

[Ignacio Alvarez, executive]

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 distribution. 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 noninterest income 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. EDPR 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 and a higher interest rate environment.

This was partially offset by higher deposit costs. Noninterest 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 continue to be strong in Puerto Rico. Mortgage on balances EBITDAR increased by $92 million in the first quarter driven primarily by home purchase activity and our strategy to retain FTA 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 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 dispersed. 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.

[Jorge Garcia, executive]

Thank you, Ignacio, and thank you all for joining the call today. As Ignacio stated in his remarks, 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 2 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% 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 million and decreased loan demand in the U.S. mainland. The underlying economic activity in Puerto Rico remains strong and as such, we continue to expect loan growth of 3% to 6% in 2024. Noninterest 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 noninterest income to be approximately $160 million to $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 2 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 the prior period distributions. We continue to expect annual expenses in the range of $1.89 billion to $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 U.S. 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 the 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 U.S. sub completing during this quarter. We don't anticipate the tax treatment of U.S. source dividends to the bank holding company to impact liquidity or future capital action. On a GAAP basis, we now expect the effective tax rate for the year to be in a range of 21% to 23%. This includes the impact of the $17 million in income tax expense related to the prior period distribution.

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. 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 to $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 timing 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 cost of the corporation continued to slow down in the quarter. In BPR 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 remained strong. 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 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 [indiscernible].

[Lidio Soriano, executive]

Thank you, Jorge, and good morning. Credit [indiscernible] 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 predanemic levels, but 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 was [indiscernible] popular to continue to operate successfully on the current environment.

Turning to Slide #9. Nonperforming assets and nonperforming 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 U.S. increased by $27 million related to higher mortgage NPLs by $17 million impacted by a single loan and higher commercial NPLs by $10 million. Inflows of NPLs increased by $8 million, driven by the previously mentioned increase in NPLs in the U.S. mortgage and commercial portfolios. In Puerto Rico, total inflows decreased by $19 million, driven by an $18 million relationship that enter NPL in the fourth quarter of 2023. The ratio of NPLs to total loans held in portfolio remained flat at 1%.

Turning to Slide #10. Net charge-offs amounted to $62 million, or annualized 71 basis points of publish loans held in portfolio compared to $57 million or 66 basis points in the prior quarter. The increase in net charge-off was driven by a $5 million charge-off related to a previously reserved loan. Excluding this, the charge-offs were flat. In Puerto Rico, net charge-off increased by $5 million, mainly driven by higher commercial and consumer net charge-offs. The 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 to 85 basis points due to the ongoing [indiscernible] 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 reserves due to rate and migration. The corporation ratio of AC2 loans held in portfolio remained flat at 2.1%, while the ratio of [indiscernible] stood at 209% compared to 204% 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 U.S., the provision was $11 million versus $8 million.

To summarize, Credit quality remains stable during the first quarter, consistent with recent performance. We are attempted to devolve the environment, we 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, executive]

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 say [indiscernible]. 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 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 success. We are now ready to answer your questions.

[Operator]

[Operator Instructions] Our first question today comes from Gerard Cassidy of RBC Capital Markets. Please go ahead.

[Gerard Cassidy, analyst]

Can you guys give us an update on the time line on deciding about a share repurchase program? Obviously, you're very well capitalized the outlook this year 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? .

[Unknown Executive]

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 clients that will be in the second half of the year. I really -- I wouldn't want to pinpoint it too much in terms of specific months or whatnot, but we -- 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, 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 Garcia, executive]

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 like I 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. But it's important that we at this 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.

[Gerard Cassidy, analyst]

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 over time, maybe gradually come down further? .

[Unknown Executive]

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 depending on the level of public funds. If they go down, you can expect a percentage of investment securities to go down also.

[Operator]

Our next question today comes from Timur Braziler of Wells Fargo.

[Timur Braziler, analyst]

Looking at just the NII performance in the first quarter and then your unchanged guidance for the year, the annualizing first quarter performance gets you to the upper end of the guidance. You get a seasonally strong quarter for deposits and 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?

[Brett Rabatin, analyst]

I'll reiterate, we reaffirmed the guidance, 9% to 13%. We gave a range for recent 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. operations, it's 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 that we have 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 off to get your fair share of kind of that seasonal deposit growth in the second quarter? .

[Unknown Executive]

No. No, the public deposits generally have a formula that we abide by. So it's just really going to depend on what we 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 nonpublic deposits, we continue to have very healthy loan-to-deposit ratio 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 just the lot 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 period kind of kicks in?

[Lidio Soriano, executive]

I think a couple of things. As we mentioned in the prepared 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 tend us to believe that maybe we're close to reaching [indiscernible] in addition to that. As you mentioned, we made significant changes in the fourth quarter to some of our underwriting criteria. And those this can ensure 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.

[Operator]

Our next question comes from Brett Rabatin from Hovde Group.

[Brett Rabatin, analyst]

I had a question around the multifamily U.S. portfolio of $1.4 billion, 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. 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.

[Lidio Soriano, executive]

I think with the multifamily in Europe, there are different levels. Obviously, there are market 3 apartments. They are stabilized apartments, which allow for certain increases in rent provided by on a yearly basis [indiscernible] by the state government and then there are rent control in which the rents basically effects for a period of time. So we're saying that we have no exposure to rent control apartments, we have exposure to [indiscernible] stabilized environment.

[Brett Rabatin, analyst]

Okay. Do 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.

[Lidio Soriano, executive]

I think we provide that level of detail or the level of guidance in any of our portfolio. But I will say that as we put in patients, I think you referenced [indiscernible] there are the biggest risk when you look at multifamilies, the level of rent control 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 have more than 50% stabilized units in their apartments. So we feel comfortable and it is reflected in the ratings of our portfolios.

[Brett Rabatin, analyst]

Okay. And then I 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 slug that's I'd 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. .

[Unknown Executive]

Brett, one thing I think in the 10-K, the MBS portfolio is structured based on regional maturity. 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 for SEC requirement versus this slide. So in terms of the maturity curve, I would look at Slide 19. When you see, particularly on the treasury, you see a latter strategy where we're seeing quarterly maturities of somewhere around $900 million when you add prepayment maturities on MBS of around $150 million a quarter, it 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 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 does not make sense. -- essentially any trade with a similar duration. It 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 if I could sneak in one last 1 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? I mean what would drive growth in the balance sheet would be growth in deposits as 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. So there is a lift from that. If public deposits come down given our range where we are at the top end of the range that will reduce the balance sheet. So I mean -- I mean, we don't -- we don't give guidance in terms of glasses when we think the balance sheet is going to be but there are a lot of levers there that could impact that projection.

[Operator]

Our next question comes from Ben Gerlinger of Citi.

[Benjamin Gerlinger, analyst]

Just curious in terms of the charge-off guidance, I mean, the 65 to 85 basis points is a 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 are showing clear plateauing effect. Is it fair to think that the 85 is a bit draconian at this level?

[Lidio Soriano, executive]

I mean we're 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 for as of today, we're sticking with 65 to 85 basis points.

[Benjamin 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 '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. .

[Unknown Executive]

I mean, I think as you said, we don't want to give guidance for '25 [indiscernible] '26. But we're doing a lot of efforts in the transformation that help us to go towards that 2025 ROCE 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 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.

[Operator]

The next question comes from Jared Shaw of Barclays.

[Unknown Analyst]

Maybe looking at the loan growth in light of the 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 that we should see some C&I and CRE growth accelerate to keep that range stable here?

[Ignacio Alvarez, executive]

Well, this is Ignacio. In terms of Puerto Rico, I mean, the -- 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 -- so we don't -- we have given a number on pipeline, but in general, the environment is strong. So I would expect that commercial loan growth will pick up. I would expect construction will pick up. There is a number of construction projects that we've signed up but haven't really dispersed any funds. -- to remain strong, and I would consider that will remain strong. So I think in Puerto Rico, you're going to see I think commercial will go up, and I think auto will remain strong. We're building up our mortgage loan -- our strategy of holding mortgage, [indiscernible] 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.

As you know, in Florida after there was a [indiscernible] condominium, they passed a number of laws and regulations that require that kind of condominium to certain appraisals of assessment of their structural integrity of the units. 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 -- and generally, in Puerto Rico, it's the economic environment that gives us the confidence to maintain the guidance on the loan growth.

[Benjamin Gerlinger, analyst]

Okay. Great. That's good color. 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? Or could there still be some incremental diminishment? .

[Ignacio Alvarez, executive]

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 -- 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 very high. But we do feel that our regular retail demand deposits are reflecting really the strength of our branch network. 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. .

[Brett Rabatin, analyst]

The next question in the queue is Alex Tado of Pipe Sandler. Good morning all. .

[Alexander Roberts Twerdahl, analyst]

I 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 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. .

[Unknown Executive]

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 a 300 basis point plus lift in that. I think with the loans, it depends on when those loans are 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 yield, but we do see perhaps some maybe compression in some of those margins. I guess, at this stage, I will stick to the NII guidance, Alex.

[Alexander Roberts Twerdahl, analyst]

Okay, not sure earlier, you talked about some of the loan portfolio categories you expect to grow the commercial, the construction, and 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? .

[Unknown Executive]

Well, we've -- we've tightened up our -- some of our credit policies around some of the unsecured consumer portfolio. 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 -- I don't feel -- and it's for a reason. It's because we've tightened up, so we can expect that those are probably -- and 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. So 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 of the high interest rates. So we're basically limited to home purchase, others are refinancing 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 they'll go down, but it will be steady. But I do think that personal and credit cards that were not expecting on .

[Alexander Roberts Twerdahl, analyst]

Okay. And then you alluded to a $17.2 million mortgage in the press release in BPA that migrated into NPL was that a residential mortgage? Or is that multifamily?

[Unknown Executive]

It's a residential mortgage. I think Lee will give you more color on that. He wants me to give you more color on that Yes. This was a loan we made 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. 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 you have a solid loan-to-value ratio. So we're not anticipating losing any money on that level.

[Alexander Roberts Twerdahl, analyst]

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

[Unknown Executive]

No. I don't think -- again, it's 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 the 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 normomally did. We did it as an accommodation for business reasons. And I would -- it's a one-off.

[Alexander Roberts Twerdahl, analyst]

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

[Unknown Executive]

I mean there'll be certainly some impact with that as you would -- 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, since 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.

No, I just I, remember that the [indiscernible] loans in Puerto Rico are taxes in to us here. The interest on the FHA loans.

[Alexander Roberts 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 has become a bigger issue for the investment 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.

[Lidio Soriano, executive]

Repeat the question, I'm sorry. .

[Unknown Executive]

Whether we have more color in terms of loan-to-value ratio and debt service ratios on the multifamily [indiscernible].

[Lidio Soriano, executive]

I mean, I would say, generally, I would say that we underwrite a loan to value, debt service coverage in excess of [indiscernible]. We will continue providing more detail in our future filings. But today, we don't have that information.

[Operator]

[Operator Instructions] Our next question comes from Kelly Motta of KBW.

[Kelly Motta, analyst]

Most of my questions have been asked and answered at this point. But I guess the 14% ROTCE target by 4Q '25, 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 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. .

[Jorge Garcia, executive]

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, 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 impacting bank earnings will have a spillover effect of that.

[Kelly Motta, analyst]

Got it. That's helpful. And 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 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 with the TCE ratio in terms of like a bottoming level, just to be mindful on we're modeling capital. .

[Unknown Executive]

Kelly, when we look at CCE, I mean, obviously, we are -- there are levels that we're comfortable at, but it's 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 at. 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.

[Operator]

And we've had a follow-up registered from Gerard Cassidy from RBC Capital Markets.

[Gerard Cassidy, analyst]

Gentlemen, can you share with us the latest update on the [indiscernible] 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? .

[Unknown Executive]

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 first quarter. I think we're probably looking now maybe second or maybe early part of the third quarter. There's a lot of -- it will be done this year, one way or the other, I think. It's been delayed. 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 bolder claiming that the payout is too low. So you've got people arguing all side of the equation. But I think I'm pretty confident, maybe not second quarter, but third quarter probably this gets done this year, I think. Other than that, it's hard to predict because these legal proceedings are complex and and the judge is trying to figure it out. There will be an appeal. Obviously, whatever happens, there will be an appeal under the [indiscernible] statute. Appeals are supposed to be handled expeditiously. I mean there's always a chance that that at the end of the day, in the final wire, they reached an agreement with some of the objecting bondholders. I don't think put 100%, obviously, but there's always that possibility. But I think this -- it would be hard to speculate exactly when, but I would go a [indiscernible] say it will 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 that they're elevated right now. I'm 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 the, what should we keep an eye on to see if that happens? .

[Unknown Executive]

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, they'll 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-academic period, there's been a number of special packages we're all states in the [indiscernible]. 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-economic stimulus relief comes down, you'll probably see Puerto Rico spending more. 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.

Other than that, it's hard for us to judge. I mean over time, we do expect 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. 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 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 -- the March numbers already reflect a significant amount of the refunds because the government was refunding -- given the liquidity, it's refunding tax rates much faster than they used to in the old days. So some of that has gone out. But those are the factors that frankly we see.

[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. .

[Ignacio Alvarez, executive]

Yes, once again, thank everyone for joining our 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]

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