Earnings Call: Q1 2021

Apr 22, 2021

Good afternoon, everyone, and welcome to Associated Bancorp's First Quarter 2021 Earnings Conference Call. My name is Devin, 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 at investor. Associatedbank.com. As a reminder, this conference call is being recorded. As outlined on Slide 1, during the course of the discussion today, management may make statements that constitute projections, expectations, beliefs or similar forward looking statements. Associated's 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 Associated's actual results to differ materially from the information discussed today is readily available on the SEC website in the Risk Factors section of Associated's most recent Form 10 ks 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 19 of the slide presentation and to Page 8 of the press release financial tables. Following today's presentation, instructions will be given for 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. Thank you. Welcome to our Q1 2021 earnings call. Joining me today are Chris Niles, our Chief Financial Officer and Pat Ahern, our Chief Credit Officer. Before discussing our results for the Q1, I should note that this will be my last time leading the quarterly earnings call for Associated. Next week, I'll be passing 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 Associated team has made as we pursued our vision of becoming one of the Midwest's premier financial institutions, and I'm highly confident that Andy will take associated 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 Q1 results. It's almost trite to say that the past 12 months have been unlike anything we've experienced before. But during the Q1 of 2021, we've seen steadily increasing availability of COVID-nineteen vaccinations throughout our markets. Businesses have started to reopen. And 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 160th year as a company, we see many signs of a strengthening economy in our markets. The Q1's highlights are detailed on Slide 2. Our first quarter earnings per share were $0.58 up 45% from the 4th quarter. We saw strong fee income trends in the quarter. We saw strong fee income trends in the Q1. Mortgage banking income, capital markets and wealth management all grew. 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% 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 2021, which speaks to the strength of our markets in the upper Midwest. Non accrual loans were down 23% quarter over quarter, while net charge offs fell to just $5,000,000 or down about 83% from the 4th quarter. We also posted a negative provision for the quarter. Together charge offs and the negative provision drove a net reserve release of $28,000,000 We finished the quarter with strong capital and repurchased $18,000,000 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 3, 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, the quarter over quarter change is even flatter. Turning to Slide 4, we highlight changes in quarterly loan trends. Compared to the Q1 of 2020, average Q1 loans increased $1,200,000,000 or 5%. On a sequential quarter end of period basis, we saw solid growth in our specialty lending and construction portfolios along with renewed PPP 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 continue 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 PPP loans from rounds 12 to be paid off or forgiven during the first half of the year, we've seen good traction on round 3 PPP activity, where we've supported nearly 5,000 customers as of today. We expect round 3 originations to peak in Q2 at about $320,000,000 In total, we expect to have supported over 13,000 small and medium sized businesses with more than $1,300,000,000 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 C and I combined, excluding the PPP loans of approximately 2% to 4%. 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 in 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 $200,000,000 or more in 2021, adding to and diversifying our total consumer portfolio. We expect the portfolio's net yields to exceed those in 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 volumes 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 5. We continue to see all time record deposit levels for associated customers, reflecting our ability to retain our core customers in a low rate and largely remote banking environment. Our retention rates have been improving now for 7 years and reflecting 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 1st 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 1 for the upper Midwest when final results are released next week. These positive customer dynamics are reflected in the strong growth of 1st quarter average deposits, which were up $2,500,000,000 or 10% over the Q1 of 2020. This growth reflects strong trends in our lowest cost deposit categories, which grew by approximately $3,500,000,000 from the same period a year ago, while we continue to reduce higher cost network and time deposits by over 1,300,000,000 dollars From a quarter over quarter standpoint, end of period non interest bearing checking and savings were up $834,000,000 $383,000,000 respectively from the 4th quarter, driving our low cost deposits to their highest levels ever. At the end of the Q1, low cost deposits accounted for approximately 65% of our balances, marked by steady growth in checking and savings categories specifically. Turning to Slide 6, we had previously indicated that dollar net interest income would be reduced by day count, LIBOR and refinancing pressures during Q1. And in fact, 1st quarter net interest income was $176,000,000 down $12,000,000 from the 4th 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 asset 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 4th quarters. Slide 7 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 $9,000,000 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 March and slower PPP forgiveness relative to Q4. While 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 we continue to implement new LIBOR floors into our new and renewing loans. This will happen over time in conjunction with other repricing or credit actions, including the anticipated migration to SOFR or other indices later this year. We also still have over $140,000,000 in consumer CDs with weighted average rates above 2% set to mature by the end of the Q3. Given the Q1's margin, current rates and ongoing refi activity, we're revising our margin outlook for the full year to $2.45 to $2.55 Turning to Slide 8. 1st quarter non interest income came in at $95,000,000 up over 11% from the 4th 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 $9,000,000 quarter over quarter as we recovered much of the MSR valuation we wrote down last year in the declining rate environment. We anticipate Q2 2021 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 $8,000,000 an increase of 38% quarter over quarter, reflecting an active syndications and risk management market. Wealth management fees also increased slightly for the Q1, buoyed by strong equity markets. We note that the sale of Whitnall closed on March 1, and we still ended the quarter with over $12,500,000,000 of assets under management, a 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 Whitnell to Rockefeller, the further disposition of branches during the quarter and other investments, which totaled nearly $6,000,000 Given the above, we are updating and increasing our full year fee income outlook by $30,000,000 to reflect non interest income expectations of $310,000,000 to $330,000,000 in 20.21. On Slide 9, we highlight our expenses. The Q1 came in at $175,000,000 a slight increase from the 4th quarter. Personnel expenses rose by $6,000,000 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 Whitnall and an additional branch sale 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 2021 expense outlook from approximately $675,000,000 to between $690,000,000 $695,000,000 The allowance update is shown on Slide 10. We utilized the Moody's March 2021 baseline forecast for our CECL forward looking assumptions. The Moody's baseline forecast assumes additional stimulus, a continuing low rate environment and widely available and effective COVID vaccines. Following a net reserve release of $11,000,000 in the 4th quarter, we posted a further net reserve release of an additional $28,000,000 in the Q1 of 2021. This net release was driven by gross reductions in our allowance for all of our core business units with a $15,000,000 gross reduction in our allowance related to our general commercial and business lending portfolio, a $9,000,000 reduction in our CRE allowance and a $4,000,000 reduction in retail lending. As of March 31, our total allowance was $404,000,000 down from $431,000,000 in the prior quarter. Similarly, our ratio of reserves to loans declined to 1.67% from 1.76% during the quarter. We expect the allowance to loans to drop back down to approximately CECL day 1 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 key COVID commercial exposures also continued to decline, notably oil and gas, retail and restaurant exposures all declined during the quarter. After peaking at $1,600,000,000 in the Q2 of 2020, our quarterly active loan deferrals have continued to decline and fell to a total of just $37,000,000 across all our core business units in the Q1. 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 receive deferrals have not needed additional assistance 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 remain strong. Our common equity Tier 1 ratio increased 31 basis points from the Q4 and has grown 140 basis points from the Q1 of 2020 as we conserved capital in light of economic uncertainty. We'll continue to target TCE levels at or above 7.5% and CET1 at or above 9.5%. And so on Slide 13, we recap our updated guidance for 2021. We're revising our net interest margin guidance down to reflect the ongoing prepayment dynamics to reflect a full year margin of approximately 2.45 percent to 2.55 percent. We're revising our non interest income guidance up by $30,000,000 reflecting our positive fee income trends. We now expect the full year to come in between 3 $10,000,000 $330,000,000 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 $690,000,000 to $695,000,000 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 assuming the economy continues to perform positively as we generally expect, we now believe the 2021 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, assuming no change in the corporate tax rate. With that, I'd be happy to take your questions. Our first question comes from the line of Scott Sypherds 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 luck. I'll miss you on the conference call and best wishes in whatever you choose to do in the future. Thank you, Scott. Yes, you bet. First question, just the sort of the nuance of the factors in the fee improvement. I think just doing the math, it looks like a lot of the improvement, we kind of already captured it in the reported Q1 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? It certainly sounds like mortgage will stay strong at least through the Q2, but just sort of on a go forward basis, curious how you guys are thinking about that fee momentum? Yes. So mortgage banking is going to remain strong for a while, as you said. Our Capital Markets business should continue to perform very well. We think that consumer spending is going to drive 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 going to have significant loan demand in the back half and that will add some fee income as well. So we feel very good about our non interest income outlook, which is why we raised that guidance by $30,000,000 for the year. Okay. All right. Perfect. Thank you. Just one on PPP. Do you guys have the remaining PPP fees from both last year's rounds as well as the most recent round and how those would be sort of bifurcated? Yes, Scott. So those are presented on Slide 3 of the tables. There's $18,000,000 at the end of the year, roughly $6,000,000 from the first two rounds and $12,000,000 from the new round here in Q1. All right, perfect. All right, thank you guys very much. Appreciate it. Our next question comes from the line of Ilan Zanger with Jefferies. Please proceed with your question. Hey, good afternoon and best of luck Phil on the next chapter. This is Uli Yihan on for Casey here. Just wanted to touch on auto. What kind of credit box are you looking at for this product? Maybe can you tell us a little bit about the FICO and potential loss rates? And appreciate, I think you mentioned $200,000,000 by the Q4 or in the Q4. As you build out to get to make this a several $1,000,000,000 item, kind of what are you thinking for 2022 for this product? Yes. So little early to give you that much specific detail yet. I can tell you that given our own credit appetite that you're probably familiar with or Casey is that we're going to be operating in the higher credit 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 bought some of the intellectual property from KeyBanc to be able to jump start this business and operate within what was there, we think relatively conservative and successful credit box. So more detail 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 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 CET1 ratio. I guess, what's holding you back from maybe doing a little bit bigger buybacks going forward? Well, nothing is necessarily holding us back. We have significant authorization still remaining from the Board. And as you know, we have a new CEO starting next week. So how we implement future buybacks will be reviewed. And as always, we will be thoughtful about how we deploy that capital, doing it in an opportunistic way. And beyond that, we also never tell anyone exactly when we're going to do it. Okay, fair. Thank you. Our next comes from the line of Chris McGrath with KBW. Please proceed with your question. Hey, thanks for the question. Maybe Chris for you, I'm kind of interested in more on the outlook for NII and maybe I missed it. But given the downward draft in margin, I guess, excluding the PPP, how should we think about the trajectory of net interest income from current levels? Do you think it's bottomed? Yes. We do think the quarterly NII has bottomed. We do believe, as I draw your attention to Page 7, the net interest walk forward dynamics, We believe the mortgage refinance driven dynamics will abate and turn from the strong negative they were this quarter to with the sort of decrease in premium amortization and origination cost amortization move to a better level. We believe the commercial and business lending volumes will drive that to a more positive place. Obviously, we'll have a few more days and future quarter day counts. And we continue to believe we'll manage the interest expense lower as we move through the year. You sort of bring that all together 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. And so what you have is a mix going on where our traditional core yield and spread customer base is at a low point. And we think as we move certainly into the 3rd and certainly into the 4th, they will return to more normalized borrowing levels, maybe not normal immediately, but they'll start to normalize and that spread will start to reemerge, which is what we typically would see during the recovery or expansion cycle. Okay. That's great color. Thank you. And on the provision, just given where we, I guess, started, how negative it was in the constructive comments, I hate the parts of words, but nominal provision would suggest that there's a meaningful positive provision. And I'm just trying to get a sense of element of conservatism. Well, what I said was very nominal. Look, credit has improved dramatically. And from CECL day 1 through the 1st two quarters, we were ramping up our reserves. You've seen us start to release now in the Q4 and Q1. We're getting remarkable outcomes in credits that we were concerned about. Stuff that we thought we had locked content in has been fully repaid. We've seen that now twice just in the last month, sizable credits. So the provision is going to be very low. How's that? Okay. That's fair. And then can you just I probably have it in my notes, but the day 1 CECL reserve, what was that percentage? I just don't have in front of me. Yes, it's shown on Page 10 of our deck of 155. Got it. Thanks, Chris. And our next question comes from the line of Jon Arfstrom with RBC Capital Markets. Please proceed with your question. Good afternoon. Good morning, Jon. A couple of follow ups. Just on the debit and credit spend, what did the numbers look like in January February versus March? Yes, we were up in March over February, I believe. Yes, we were up in March over February, I believe, 20% on transaction volume and And then you may have touched on it, I think I missed it. But on Slide 4, the general commercial decline, what was the driver there? Yes, 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-40s. So, I mean, 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 you're 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 and the conversations we're having with upper Midwest, inventories are going to have to start to build, receivables are going to start to be generated and that stuff is going to have to be financed. So we do believe that line utilization alone is going to drive significant pickup in C and I as we get into the year. Okay. And I guess it ties to the next question. The period end non interest bearing in savings and money market growth, so much higher than your averages. Every bank has experienced it, but do you expect that to come back down when the line utilization starts to pick up or do you expect this stuff to stick around for a while? Well, a lot of it's sitting in retail accounts, of course, with all the stimulus money that went out. So I expect consumers will start to spend money and that those dollars will come down. Our commercial borrowers aren't sitting on all that money. It's mostly out on the retail side. And then just a random one, but you talked about the J. D. Power ranking. Yes. Where were you in the past? I mean, we don't have to go back to 2,009, but what We were kind of average. I mean, we were we did fine, but we weren't a standout on that measure. And we've made huge efforts over the years to really become a customer facing and customer centric organization. And I have to tell you that on my last earnings call, it's kind of gratifying to be able to say that we're going to be number 1 in upper Midwest for retail customer satisfaction. Yes, I remember the first call, I think it was January 2010. And it's kind of a mess. So this is something to be proud of, Phil, for sure. So well, thanks for everything, Phil. Good luck. Thank you. And it did snow a little here yesterday, but we didn't have to plow or anything because it melted. Our next question comes from the line of Terry McEvoy with Stephens. Please proceed with your question. Hi, good afternoon. And I remember that call in 2010. It was a mess to John's point and 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 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? The incoming CEO of the PIS 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? Yes, great questions. Probably a little early for me to give you much guidance on 2022 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 asset class 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 because after home lending in its various forms and the credit card biz, it's the next asset class 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 had actually settled on pursuing this business. The 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 fortuitous, but coincidental that he's coming from a bank that 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 from the line of Michael Young with Truist. Please proceed with your question. Hey, thanks for taking the question. Sorry for another follow-up on the indirect auto. But first of all, will that be a regional book and really kind of cross sell within the core customer base initially and then walked out further or 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 were 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 or CECL impacts, anything like that, that kind of led you to believe this was good business to be in, whereas others just kind of exited at different times? Yes. As I was describing to Terry a moment ago, we do feel the need to seek some asset classes with higher yield and something that could make a difference. We think that conservatively and properly run, 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're 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 have focused on commercial real estate in places like Dallas and Michigan and Ohio and other places. We are always very careful to make sure that the most important aspect was find the right leadership team to run those operations with experience in those markets. And it's a different asset class than commercial real estate, but the same philosophy applies here. 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. We're bringing experienced people on to help us do that. It's also true that many of us here, whether it's myself or Dave Stein or others, in previous organizations have been involved in the business. So although I wouldn't 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 the potential infrastructure bill. You talked about the positivity and kind of outlook in commercial and I guess ramping production. Have you had a lot of just anecdotal conversations where people are getting prepared or ramping up supplies etcetera for that already or people kind of taking a wait and see approach? No. Our borrowers who are in that space, for example, we have a decent sized portfolio of heavy civil contractors that we run out of Minneapolis. They're, of course, eager and willing and anxious to get going, and we're there to support them. So yes, I mean, our customers are gearing up. I mean, this is still it's still conversation right now in DC. We would certainly expect to see something happening and our customers expect it to happen as well. Okay. That's all for me. Thanks and congrats on your time at this system. Thank you. Appreciate it. Our final question comes from the line of Scott Siefers with Piper Sandler. Please proceed with your question. Hi, guys. Just a couple of follow ups. First, so looking at the guidance, I think it implies costs are going to actually come down from the Q1 run rate. So are 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 visavis the Q1 run rate? Sure. So we've already hired more than half of that team during the course of the Q1. So some of those costs are already in there. And our guidance, of course, takes into account all of the costs for the rest of the year. Know that our Q1 expenses usually are a little bit higher, just from compensation activity and incentive activity and such. So yes, I mean at $690,000,000 to $695,000,000 it's a little less than a $700,000,000 run rate, but that would be not unexpected given the normal seasonal pattern of our expenses. Okay, good. All right. And then just on the margin guidance of $245,000,000 to $255,000,000 Are we talking there a reported margin including the impact of the PPP fees? Or are we thinking sort of off that sort of core base of estimate around $2.32 or so excluding the PPP fees? So that includes a fully loaded reported number. Yes. Okay. Perfect. All right. 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 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 would expect that he'll continue to carry on our tradition of investor transparency and accessibility. So if you have any questions in the meantime, give us a call. Call me until Wednesday. After that, call Miles and Andy Harmoni. Thanks again for your interest in Associated Bank. 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.