Q1 2021 Associated Banc-Corp Earnings Call
Good afternoon, everyone and welcome to <expletive>ociated Banc Corp's first quarter 'twenty 'twenty One earnings conference call. My name is Devon, and I will be your operator today.
At this time all participants are in a listen only mode.
We will be conducting a question and answer session at the end of this conference.
Copies of the slides that will be referenced during today's call are available on the company's website.
That's true <expletive>ociated Banc dotcom.
As a reminder, this conference call is being recorded.
As outlined on slide one during the course of the discussion today management may make statements that constitute projections expectations beliefs or similar forward looking statements.
[noise] <expletive>ociated actual results could differ materially from those results anticipated or projected in any.
Such forward looking statements.
Additional detailed information concerning the important factors that could cause <expletive>ociated actual results to differ materially from the information discussed today is readily available on the SEC's website and the risk factors section of <expletive>ociated its most recent form 10-K and subsequent SEC filings.
These factors are incorporated herein by reference.
For a reconciliation of the non-GAAP financial measures to the GAAP financial measures mentioned in this conference call. Please refer to pages 18, and 19 of the slide presentation.
So page eight of the press release financial tables.
Following today's presentation instructions will be given.
So the question and answer session.
At this time I would like to turn the conference over to Philip Flynn, President and CEO for opening remarks. Please go ahead Sir.
Yes.
Thank you welcome to our first quarter 2021 on earnings call. Joining me today are Chris Niles, Our Chief Financial Officer, and Patty her on our Chief Credit Officer.
Before discussing our results for the first quarter I should note that this will be my last time, leading our quarterly earnings call for <expletive>ociated net.
Next week I'll be p<expletive>ing the baton to Andy Harmening, who will be stepping in as president and Chief Executive Officer on April 28.
Andy is a highly regarded banking leader with more than 25 years of experience and a track record of driving profitable growth and operational excellence, improving customers' experience and spearheading innovative digital products.
I'm proud of the progress the <expletive>ociated team has made as we pursued our vision of becoming one of the Midwest Premier financial institutions, and I'm highly confident that Andy will take <expletive>ociated to our next phase of success and continue our profitable growth trajectory I look forward to working with Andy as he takes over and serving in an advisory capacity.
To support the company.
Let me now turn to our first quarter results.
It's almost tried to say that the past 12 months have been unlike anything we've experienced before.
During the first quarter of 'twenty, one we've seen steadily increasing availability of COVID-19 vaccinations throughout our markets.
Businesses have started to reopen.
Encouraged by these trends our frontline teams are back in front of clients and working directly with our customers.
We've also continued to invest in and deploy technologies to meet our customers' banking needs when and where they need us with the economy showing signs of improvement credit dynamics have continued to improve across all of our portfolios our customers remain liquid.
Continue to pay down their credit lines and are positioning themselves for the expected economic recovery later this year.
As we celebrate our 160 <unk> year as a company, we see many signs of a strengthening economy in our markets.
The first quarter's highlights are detailed on slide two on.
Our first quarter earnings per share were 58 cents up 45 per cent from the fourth quarter we.
We saw strong fee income trends in the first quarter mortgage banking income capital markets on wealth management All group taken together this strength in fee income offset the impacts of LIBOR compression and mortgage refinancing activity, which weighed on our net interest margin.
We also continued to see record levels of checking account deposit inflows driven by additional government stimulus. While this added liquidity also compressed margins, we continued to grow our lowest cost deposits, which accounted for 65 per cent of total deposits at the end of the quarter.
This liquidity positions us to meet what we expect will be rising loan demand later this year.
Shifting to credit we've been very pleased with the rapidly improving credit environment in early 'twenty, one which speaks to the strength of our markets in the upper Midwest.
Non accrual loans were down 23 per cent quarter over quarter, while net charge offs fell to just $5 million or down about 83%.
From the fourth quarter, we also posted.
The negative provision for the quarter.
The other charge offs and the negative provision drove a net reserve release of $28 million.
We finished the quarter with strong capital and repurchased $18 million of common stock during Q1, our tangible book value per share increased to $16.95 as of the end of the month and all our capital ratios improved year over year.
On slide three we've provided a summary of our quarterly pretax pre provision income, which has remained relatively flat quarter over quarter adjusting for the branch and other sales activity quarter over quarter changes even flatter.
Turning to slide four we highlight changes in quarterly loan trends.
Compared to the first quarter of 'twenty average first quarter loans increased $1 $2 billion or 5%.
On a sequential quarter end of period basis, we saw solid growth in our specialty lending and construction portfolios along with renewed P. P. P activity.
However, we continued to see liquidity driven pay down activity impact our general commercial portfolio driven by lower line utilization.
Similarly, while mortgage warehouse and our own mortgage banking group benefited from the ongoing refi wave the same activity drove our residential mortgage and HELOC balances lower during the quarter. We continued to enjoy strong mortgage originations, but as we've discussed previously we've been reluctant to add low rate mortgages to our balance sheet.
Looking forward, we remain optimistic around loan growth going into the latter part of this year, specifically on commercial real estate lending, we expect construction lending to continue at a strong pace and to drive increasing average CRE balances by 4% to 6% during 2021.
In addition, while we expect most of our outstanding P. P. P loans from round, one and two to be paid off our forgiven during the first half of the year. We've seen good traction on round three P. P. P activity, where we've supported nearly 5000 customers as of today.
We expect round three originations to peak in Q2 at about $320 million in total we expect to have supported over 13000, small and medium sized businesses with more than $1.3 billion in loans.
We remain optimistic about commercial loan demand in the back half of the year and still expect full year commercial loan growth that is CRE and CNI combined excluding the PPP loans of approximately 2% to four per cent.
With respect to residential mortgage we continue to expect balance contraction from the ongoing refinancing activity. However, we expect any revenue contraction will be offset by incremental mortgage banking fee income as we saw on Q1.
We'd also like to update you on our new auto lending initiative, we're expanding our consumer lending platform to add indirect auto lending to our product set to date, we've hired over 40 people from Keybanc, including all the senior leadership and expect to end the year with a total of 55 to 60 full time equivalent employees.
As we build out this business, we expect to begin originating indirect auto paper by the fall.
With production of 200 million or more in 2021.
Adding to and diversifying our total consumer portfolio, we expect the portfolio's net yields to exceed those on our residential mortgage book as we achieve scale. We expect the indirect auto financials will be more or less run rate neutral by year end with income derived from Q4 loan values offsetting the ongoing costs.
We expect this business to be accretive in 2022 and of course beyond we aspire to grow our indirect auto outstandings into a multibillion dollar loan portfolio over time.
Moving to slide five we continue to see all time record deposit levels for <expletive>ociated customers, reflecting our ability to retain our core customers in a low rate and largely remote banking environment on.
Our retention rates have been improving now for seven years and reflect a more than half of attrition over that time period.
Our customer interaction and call Center survey data continues to suggest our customers have been well served despite the challenges posed by the pandemic.
I'm, particularly excited to tell you that we are currently in first place and leading the upper Midwest region in the J D power retail banking study and we expect to be recognized by J D power as number one for the upper Midwest. When final results are released next week.
These positive customer dynamics are reflected in the strong growth our first quarter average deposits, which were up two and a half billion or 10% over the first quarter of 'twenty.
This growth reflects strong trends in our lowest cost deposit categories, which grew by approximately $3 5 billion from the same period a year ago, while we continued to reduce higher cost network and time deposits by over $1 3 billion.
From a quarter over quarter standpoint, and a period noninterest bearing checking and savings were up $834 million and $383 million, respectively from the fourth quarter, driving our low cost deposits to their highest levels ever.
At the end of the first quarter low cost deposits accounted for approximately 65 per cent of our balances marked by steady growth in checking and savings category specifically.
Turning to slide six we had previously indicated the dollar net interest income would be reduced by day count LIBOR and refinancing pressures during Q1 and in fact first quarter net interest income was $176 million down $12 million from the fourth quarter.
As you can see from the chart on the right. The most significant drop in our realized yields was in our residential mortgage portfolio, which came down by 21 basis points, reflecting the impact of prepayments and refi activity on the book the declining <expletive>et yields were partially offset by continuing improvement on the interest expense side.
Where the additional influx of low cost customer deposits combined with lower levels of borrowing continued to drive our interest expense lower.
While the 10 basis point quarterly drop in margin was more than we had expected as we look forward. We continue to expect our net interest margin to gradually expand over the course of the second through fourth quarters.
Slide seven shows a breakdown of the specific factors that impacted net interest income in Q1.
As we indicated on the prior slide key factors for the quarter were mortgage refinance driven impacts such as premium and origination cost amortization, which depressed net interest income by approximately $9 million for the quarter. However, these costs were offset by an increase in net mortgage banking income over the course of the quarter and we.
Expect mortgage yields to rebound as the current refinance wave slows in Q2.
On the commercial side, our LIBOR based loans were impacted by day count the LIBOR rate compression in February and March and slower PPP forgiveness relative to Q4.
All of these impacts played a significant role in Q1, we expect them to moderate as we move through the year further we expect spreads to widen on our LIBOR based commercial loans as we continue to implement new LIBOR floors into our new and renewing loans. This will happen over time or in conjunction with other refinance repricing or credit action.
<unk>, including the anticipated migration to sofa or other indices later this year.
We also still have over $140 million in consumer Cds with weighted average rates above 2% set to mature by the end of the third quarter.
Given the first quarter's margin current rates and ongoing refi activity were revising our margin outlook for the full year to $2 45 to $2 55.
Turning to slide eight first quarter noninterest income came on at $95 million up over 11% from the fourth quarter, reflecting the positive side of the mortgage refinance wave expanding fee based revenues and strong capital markets activity.
As can be seen on the right side of this slide mortgage banking income was up $9 million quarter over quarter as we recovered much of the MSR valuation, we wrote down last year in the declining rate environment. We.
We anticipate Q2 'twenty one will reflect continued strength in mortgage banking income, but we expect this activity to moderate as we move later into the year.
Capital markets fees came in at $8 million, an increase of 38% quarter over quarter book.
Reflecting on active syndications and risk management market.
Wealth management fees also increased slightly for the first quarter buoyed by strong equity markets. We note that the sale of what now closed on March 1st and we still ended the quarter with over $12 5 billion of <expletive>ets under management of more than 20% year over year growth rate.
As a further positive we've seen increasing card activity and purchase levels throughout our customer base, including record credit and debit card spend in the month of March.
We also recorded gains on the sale of what now to Rockefeller. The further disposition of branches during the quarter and other investments, which totaled nearly 6 million given.
Given the above we are updating and increasing our full year fee income outlook by $30 million to reflect noninterest income expectations at $310 million to $330 million in 2021.
On slide nine we highlight our expenses.
The first quarter came in at 175 million, a slight increase from the fourth quarter.
Personnel expenses rose by $6 million for the quarter, driven by increased compensation and incentives.
Higher mortgage commission expense and the addition of the team we've brought in to support our new indirect auto lending initiative as a partial offset other core expenses continued to trend lower driven by a reduction of expense following the sale of what now and an additional branch sales that closed during the quarter.
After combining the added expenses tied to compensation and incentives mortgage commissions and the indirect auto initiative. We're revising our initial full year 'twenty one expense outlook from approximately 675 to between 690 and $695 million.
The allowance update as shown on slide 10.
We utilized the Moody's March 2021 baseline forecast for our C. So forward looking <expletive>umptions.
The Moody's baseline forecast <expletive>umes additional stimulus a continuing low rate environment and widely available and effective COVID-19 vaccines.
Following a net reserve release of $11 million on the fourth quarter, we posted a further net reserve release of an additional $28 million in the first quarter of 'twenty one.
This net release was driven by gross reductions in our allowance for all of our core business units with a $15 million gross reduction in our allowance related to our general commercial and business lending portfolio of $9 million reduction in our CRE allowance and a $4 million reduction in retail lending.
As of March 31.
Our total allowance was $404 million down from $431 million on the prior quarter.
Similarly, our ratio of reserves to loans declined to 167% from 176% during the quarter.
We expect the allowance to loans to drop back down to approximately seasonal day, one levels by the end of 2021.
Our quarterly credit trends are presented on slide 11.
Potential problem loans, non accrual loans and net charge offs all declined during the quarter our.
Our key Covid commercial exposures also continued to decline, notably oil and gas retail and restaurant exposure is all declined during the quarter.
After peaking at $1 $6 billion in the second quarter of 'twenty, our quarterly active loan deferrals have continued to decline and fell to a total of just $37 million across all our core business units in the first quarter total deferrals now make up just 15 basis points of total loans at quarter end, we've continued to see positive trends.
Here very pleased with where we've ended most customers who received deferrals have not needed additional <expletive>istance and have been able to resume making normal payments.
Assuming the positive credit dynamics continue we would expect a very nominal net provision for the year.
As shown on slide 12, our regulatory capital levels remained strong our cash.
Common equity tier one ratio increased 31 basis points from the fourth quarter and has grown 140 basis points from the first quarter of 'twenty as we conserved capital in light of economic uncertainty will.
We will continue to target TCE levels at or above seven five per cent and CET, one at or above 95 per cent.
And so on slide 13, we recap our updated guidance for 'twenty one.
Revising our net interest margin guidance down to reflect the ongoing prepayment dynamics to reflect a full year margin of approximately 2.45 to five 5%.
We're revising our noninterest income guidance up by $30 million, reflecting a positive fee income trends. We now expect the full year to come in between $310 million on $330 million. We expect this additional strength in our fee businesses to outpace the downward pressure on the margin.
We're revising our expense guidance upward to approximately $690 million to $695 million driven by additional incentive and compensation expense additional mortgage commissions and additional personnel expense to support our new indirect auto initiative.
Given the credit trends, we continue to see and <expletive>uming the economy continues to perform positively as we generally expect we now believe the 21 full year provision will be very nominal.
Finally, given higher levels of profitability, we expect our annual tax rate to normalize in the 19% to 21% range, <expletive>uming no change in the corporate tax rate.
With that be happy to take your questions.
At this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad.
<unk> total indicate your line is in the question queue you.
You May press Star two if you let your move your question from the queue for participants using speaker equipment. It may be not sure to pick up your handset before pressing the star keys, one moving pieces, we poll for questions.
Our first question comes from the line of Scott Cyprus with Piper Sandler. Please proceed with your question.
Afternoon, guys. Thank you for taking the question and I guess before we get started so Phil best of Best of luck, Joe Michigan on.
The conference calls and best wishes and and.
In whatever you choose to do in the future.
Thank you Scott Yeah.
Yeah, you bet.
First question, just the sort of thing.
New on some of the factors in the she.
She improvement.
Just doing the math it looks like a lot of the improvement we kind of already captured it in the reported first quarter numbers. Just curious how you guys are thinking about the.
Remainder of the year is there any sort of core improvement to the way you're thinking things will trend you know it certainly sounds like mortgage will stay strong at least through the second quarter, but I'm just sort of on a go forward basis curious how you guys are thinking about that fee momentum.
Yeah. So.
Mortgage banking is going to remain strong for a while as you said our.
Our capital markets business should continue to perform very well, we think that consumer spending is going to drive debit.
Debit and credit we already saw record levels and I would imagine we're going to start breaking records month after month.
Going forward.
We of course.
Do think that we're gonna have significant loan demand in the back half and that will add some fee income as well.
No.
We feel.
We feel very good about our noninterest income outlook.
Which is why we raised that guidance by 30 million Bucks for the year.
Okay, Alright, perfect. Thank you and just one on pardon me PPP do you guys have the.
Remaining PPP the PPP fees from.
Both last year's rounds as well as the most recent round on how those would be sort of bifurcate it.
Yes, Scott. So those are presented on slide three of the tables, there 18 million at the end of the year roughly six from the first two rounds and 12 from the new round here in Q Q1.
Alright, perfect Alright. Thank you guys very much appreciate it.
Our next question comes from the line of Lawn Zynga with Jefferies. Please proceed with your question.
Hey, good afternoon in basketball Phil on the next chapter of this was on who you on on for Casey Haire.
Just wanted to touch.
To touch on auto.
What what are what kind of credit box or are you looking at for this product maybe can you tell us a little bit about the FICO and potential loss rates.
I. Appreciate you know I think you mentioned 200 million by the fourth quarter or in the fourth quarter.
You know as you build out to together to make this a several billion dollar item kind of what what are you thinking for 2022.
Hum.
For this product.
Yeah. So little early to give you that much specific detail yet I can tell you that you know given our own credit appetite that you are probably familiar with cash.
Is that we're going to be operating in.
In the higher <unk>.
Quality area.
In the prime and near Prime.
ZIP code.
We've hired as I mentioned.
The team from Keybanc and we've also actually brought bought some of the intellectual property from keybanc to be able to jumpstart this business.
And operate within what was there.
We think relatively conservative and successful credit box so more details to come as we get this going we still have work to do.
On systems to be able to stand up the business, but we'll give you updates.
As the year goes on.
As far as what where we're going to be next year, probably a little too early to give you that information, but we'll certainly.
Share that as the year goes on.
Okay.
Separately just on capital.
You're still well above your CET one ratio I guess, what's holding you back from maybe doing a little bit bigger buybacks going forward.
Well nothing has necessarily hold us back we have a significant authorization still remaining from the board.
And as you know we have a new CEO starting next week.
So how we implement.
On future buybacks will will be reviewed and as always we will be.
Thoughtful about how we deploy that capital.
Doing it in an opportunistic way.
And <unk>.
Beyond that we also never tell anyone on exactly when we're going to do it.
[laughter].
Okay fair. Thank you.
Our next question comes from the line of Chris Mcgratty with Keyw. Please proceed with your question.
Yeah.
Hey, Thanks for the question.
Maybe Chris for you.
On the kind of interested in more on the outlook for NII.
And maybe I missed it but.
Even given the down draft in margin.
Excluding the P. P. P should how should we think about the trajectory of net interest income from from current levels.
Do you think it's bottomed.
We do think the quarterly NII has bottomed, we do believe if I draw your attention to page seven the net interest walk forward dynamics.
We believe the mortgage refinance driven dynamics will abate and turned from the strong negative they were this quarter too.
With the sort of decrease in premium amortization and origination cost simulation move to a better level, we believe the commercial and business lending volumes will drive that to a more positive place. Obviously, we will have a few more days in future quarter day count.
And we continue to believe we will manage the interest expense lower as we move through the year and you sort of bring that altogether and we see a positive bridge to Q2 and a further positive in particular bridge into Q3, when we expect we'll see more of the loan growth, particularly on the commercial side I would note that our commercial and.
Business core.
Customers are at decade, low line utilization levels.
So what you have is a mix going on where our traditional core.
Yield and spread customer base is at a low point and.
And we think as we move certainly into the third and certainly into the fourth they will return to more normal borrowing level, maybe not normal immediately but they'll start to normalize and that spread will start to reemerge, which is what we do.
Typically would see during a recovery or expansion cycle.
Okay, that's great color. Thank you.
And on the provision just just given where we started how negative it wasn't the constructive comments.
You know I hate to parse words, but nominal provision.
Would you suggest.
The value of home part positive.
Provision and I'm, just trying to get a sense of.
Element of conservatism.
Yeah.
Well, what I said was very nominal.
[laughter].
Good luck on <unk>.
Credit has improved dramatically.
Dramatically and you know from seasonal day, one through the first two quarters, we were ramping up.
Our reserves you have seen it start to release now on the fourth quarter and the first quarter.
We're getting remarkable.
Outcomes in credits that we were concerned about.
That we thought we had lost content in has been fully repaid we've seen that now twice just in the last month sizable credit so.
You know that the provision is going to be.
Barry flow.
How's that.
That's fair and then can you just I probably have it on my notes, but the the day one seasonal reserve.
What was that percentage I, just don't have in front of me.
Yeah, it's shown on page 10 of our debt is $1 55.
Got it thanks, Chris.
Yes.
Yeah.
And our next question comes from the line of John Awesome with RBC capital markets. Please proceed with your question.
Hey, good afternoon.
Good day genre.
A couple of follow ups.
Just on the debit and credit spend.
What are the numbers look like in January and February versus March.
Yeah, we were up in March over February I believe.
20% on transaction volume and 20% on dollar volume so a dramatic step up in March.
And then I think you may have touched on it.
I missed it but on slide four.
The general commercial decline.
What was the.
The driver there.
Yeah.
It's line utilization.
We're sitting right now John at about 32%, which is the lowest it's ever been we would normally run in the mid Forty's.
So I.
I mean it.
If nothing else since things tend to revert back to where to the mean.
There's a significant amount of.
Untapped Outstandings, there that I believe youre going to start to see come on pretty hard as we get into the later part of the year.
With the business activity that we're seeing in the conversations we're having with our customers around the upper Midwest.
Inventories are going to have to start to build on receivables are going to start to be generated in that stuff's going to have to be financed so.
We do believe that line utilization alone is going to drive.
Significant pick up in C&I as we get into the year.
Okay.
But I guess it ties to the next question.
Yes.
The period.
Non interest bearing and savings in money market growth.
So much higher than your average is.
You know every bank has experienced that.
Do you expect us to come back down when the line utilization starts to pick up or do you expect that stuff to stick around for awhile.
Well a lot of its sitting in retail accounts of course with all the stimulus money that went out so I expect consumers will start to spend money on that those dollars will come down.
Our commercial borrowers are aren't sitting on all of that money, it's mostly out on the retail side.
And then just a random one but.
It talks about the J D power ranking.
Yeah.
Where are you on the past.
I mean, we don't have to go back.
To 2009, but you know what we were when we were kind of average you know I mean, we were we did fine, but we werent a standout on that measure in.
We've made huge efforts over the years.
Two to really become a customer facing and customer centric organization.
And I have to tell you that you know on my last earnings call. It's gratifying to be able to say that yeah. We're gonna be number one on the upper Midwest for a retail customer satisfaction.
I remember the first call I think it was January 22 of them.
And it's kind of a mess.
Some of the promos Phil for sure so well thanks for everything so good luck.
Thank you and it did snow a little here yesterday, but we didn't have to plough or anything because it helped it.
Uh huh.
No.
Our next question comes from the line of Terry Mcevoy with Stephens. Please share with your question.
Hi, good afternoon, and I remember that call in 2010, and it was a mess to John's point in the bank significantly healthier today.
On your last call Phil So enjoyed working with you.
Thank you Terry.
I guess, just circling back on the indirect auto and I apologize my phone line broke up a little bit when you were talking about that business could you just run through I guess did you evaluate any other lending verticals or was this the team presented itself and you had an interest.
Incoming CEO of these his bank.
Has a strong history in that business did that come into play.
And then just the last part the expenses and I. Appreciate the update will there be incremental expenses next year that we should contemplate as we model out 2022.
Yeah, great questions, probably a little early for me to give you much guidance on 'twenty two expenses, but I can tell you that.
And as we talked about.
We have built a conservative.
Credit book here for many years, which also is a relatively low yielding credit book I mean, those things obviously go hand in hand, we've been looking for another <expletive>et cl<expletive> to enter that we were comfortable with that has higher yields attached to it and so we settled in on the indirect auto lending business.
Cause you know after.
Home lending in its various forms.
And the credit card business. It's the next <expletive>et cl<expletive> for consumers that makes a difference just based on the size of the market.
And the size of those purchases for the average household so we'd actually settled on <unk>.
Pursuing this business.
Keybanc team presented itself.
Fortuitously as we were thinking this through and so we went after that aggressively and all of that was underway actually before the board.
Hired Andy so.
It's it's fortuitous, but coincidental that he's coming from a bank debt does have a large presence in the indirect auto space.
That's great that was it on my list. Thanks, everyone. Thanks, Phil.
Thank you.
Our next question comes on line of Michael Young with Truth. Please share with your question.
Hey, Thanks for taking the question sorry for another follow up on the indirect auto but you know first of all would that be a regional book and really kind of cross sell within the core customer base. Initially and then walked out further on how how do you kind of look at that.
Actually our intention.
Is to be active in originating.
This indirect auto paper from the northeast all the way through to our footprint. So that's the initial footprint that we're looking at.
And that lines up basically with the team that we've hired from key.
Right. Okay, and then maybe just a philosophical question there we've seen a lot of banks exit that business or get out back when losses were a little higher a couple of years back and there was some some worry or concern. There. So is there anything that you all viewed differently. When you were kind of reviewing it whether it be a scale issue.
Cecil impacts or anything like that that.
Kind of lead you to believe this is a good business to be on whereas others, just kind of exited at different times.
Yeah, Yeah, as I was describing to Terry a moment ago, we do feel the need to seek some <expletive>et cl<expletive>es with higher yield.
And something that could make a difference.
We think that conservatively and properly run this.
This is a perfectly fine business that will generate appropriate ray rocks, but critical to making that decision was finding an experienced team.
With a proven track record of success to run it for us and that's what we were able to find.
With the Keybanc team, if you think about.
The history of this bank expanding outside of its footprint into other areas. For example, our loan production offices that are focused on commercial real estate and places like.
Dallas and.
Michigan, and Ohio and other places.
Hmm.
We are always very careful to make sure that the most important aspect was buying the right leadership team to run those operations with experience in those markets.
And it's a different <expletive>et cl<expletive> than commercial real estate, but at the same philosophy applies here and we have found a great senior leadership team.
And we have found they have the ability to bring along significant amount of the rest of their team with us.
So we're not trying to as novices.
Get into this business on we're bringing in experienced people on to help us do that.
It's also true that many of us here, whether it's myself or <unk> or others.
In previous organizations have been involved in the business. So although I wouldnt certainly call any of us experts compared to the people that we brought on.
We have significant familiarity with it.
Okay, and maybe one last one if I could sneak it in just on.
Kind of a potential infrastructure Bill you talked about the positivity and kind of outlook in commercial and you know I guess ramping production. If you have a lot of just anecdotal conversations where people are getting prepared or ramping up supplies and et cetera for that already or are people kind of taking a wait and see.
<unk>.
No our our borrowers who are in that space. For example, we have a.
We have a.
A decent sized portfolio of heavy civil contractors.
Debt, we've run out of out of Minneapolis, They are of course, eager and willing and anxious to get going.
And we're there to support them. So yeah, I mean, our customers are gearing up I mean this is still it.
It's still conversation right now in D. C. We would certainly expect to see something happening on our customers expect that to happen as well.
Okay. That's all for me, thanks, and congrats though on your time <expletive>ociated.
I appreciate it.
Our final question comes from the line of Scott Cyphers with Piper Sandler. Please proceed with your question.
Hey, guys just a couple of follow ups.
First.
Sorry.
Looking at the guidance I think it implies costs are going to actually come down from the first quarter run rate so our.
The auto.
Build out costs already embedded in there or like where are the I guess where are the savings coming from that would allow you to have down costs through the remainder of the year vis vis the first quarter run rate.
Sure. So you know we've already hired more than half of that team. During the course of the first quarter. So some of those costs are already in there in our guidance of course takes into account all of the costs for the rest of the year.
Know that our first quarter expenses, usually are a little bit higher.
Just from compensation activity in incentive activity and such so.
Yeah, I mean at six at 690, 695, it's a little less than $700 million run rate, but debt that would be.
Not unexpected given the normal seasonal pattern of our expenses.
Okay, Alright, and then just on the margin guidance of $2 45 to $2 55.
Are we talking there a reported margin like and including the impact on the P. P. P fees or are we thinking sort about that.
So our core base of estimated around $2 32, or so excluding the P. P P fees.
So we haven't fully loaded reported.
Okay.
Perfect.
Alright, that's great. Thank you guys very much.
Thanks Scott.
And with that this concludes our question and answer session and I would like to turn the call back over to Mr. Flynn for closing remarks.
Great well thank you.
And in closing I do want to thank the.
The analysts and investors who are on the call for the trust you've placed in me over these years I know Andy looks forward to talking with you all later.
As he gets on board.
And I certainly.
I would expect that he'll continue to carry on our tradition of <unk>.
Investor transparency and accessibility. So if you have any questions in the meantime give us a call on me until Wednesday, after that call miles and Andy Harmening. Thanks again for your interest in <expletive>ociated Banc.
With that this concludes today's teleconference. You may now disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.
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