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Associated Banc-Corp (NYSE:ASB)
Q1 2021 Earnings Call
Apr 22, 2021, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon, everyone, and welcome to Associated Banc-Corp's First Quarter 2021 Earnings Conference Call. My name is Devin, and I will be your operator today. [Operator Instructions] 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 and the Risk Factors section of Associated's 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 and to Page eight 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.

Philip B. Flynn -- President, Chief Executive Officer And Director, Associated Banc-Corp

Thank you. Welcome to our first quarter 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 first quarter, 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 first-quarter results. It's almost trite to say that the past 12 months have been unlike anything we've experienced before. But during the first quarter of '21, we've seen steadily increasing availability of COVID-19 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 first quarter's highlights are detailed on Slide 2. Our first-quarter earnings per share were $0.58, up 45% from the fourth quarter. We saw strong fee income trends in the first quarter. 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 continue 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 '21, which speaks to the strength of our markets in the Upper Midwest. Nonaccrual loans were down 23% quarter-over-quarter, while net charge-offs fell to just $5 million or down about 83% from the fourth quarter. We also posted a negative provision for the quarter. Together, 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 3, we've provided a summary of our quarterly pre-tax 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 4. We highlight changes in quarterly loan trends. Compared to the first quarter of '20, 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 PPP activity. However, we continued to see liquidity-driven paydown 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 PPP loans from rounds one and two to be paid off or forgiven during the first half of the year, we've seen good traction on Round three PPP activity, where we've supported nearly 5,000 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 13,000 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 C&I combined, excluding the PPP loans, of approximately 2% to 4%.

With respect to residential mortgage, we continue to expect balanced 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 would 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 have hired over 40 people from KeyBank, 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 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 seven years and reflecting more than half in -- 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 #1 for the Upper Midwest when final results are released next week. These positive customer dynamics are reflected in the strong growth of first-quarter average deposits, which were up $2.5 billion or 10% over the first quarter of '20. 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, end-of-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% 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, 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 books. 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 have 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. 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 as we continue to implement new LIBOR floors into our new and renewing loans. This will happen over time or in conjunction with other refinanced -- repricing or credit actions, including the anticipated migration to SOFR 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, we're revising our margin outlook for the full year to 2.45% to 2.55%.

Turning to Slide 8. First-quarter noninterest income came in 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 the 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 anticipate Q2 '21 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, reflecting an 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 Whitnell closed on March 1, and we still ended the quarter with over $12.5 billion 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 million. Given the above, we are updating and increasing our full-year fee income outlook by $30 million to reflect noninterest income expectations of $310 million to $330 million in 2021.

On Slide 9, 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 Whitnell and an additional branch sale to close 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 '21 expense outlook from approximately $675 million, to between $690 million and $695 million.

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 the net reserve release of $11 million in the fourth quarter, we posted a further net reserve release of an additional $28 million in the first quarter of '21. 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, a $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 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 one levels by the end of 2021.

Our quarterly credit trends are presented on Slide 11. Potential problem loans, nonaccrual 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 $1.6 billion in the second quarter of '20, 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. I'm 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 one ratio increased 31 basis points from the fourth quarter and has grown 140 basis points from the first quarter of '20 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 '21. 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% to 2.55%. We're revising our noninterest income guidance up by $30 million, reflecting our positive fee income trends. We now expect the full year to come in between $310 million and $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 assuming 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, assuming no change in the corporate tax rate. With that, we would be happy to take your questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from the line of Scott Siefers with Piper Sandler. Please do with your question.

Robert Scott Siefers -- Piper Sandler & Co. -- Research Division-MD & Senior Research Analyst

Good afternoon, guys. Thank you for taking the question. And I guess before we get started, so Phil, best of luck. I will miss on the conference calls. And best wishes in whatever you choose to do in the future.

Philip B. Flynn -- President, Chief Executive Officer And Director, Associated Banc-Corp

Thank you, Scott.

Robert Scott Siefers -- Piper Sandler & Co. -- Research Division-MD & Senior Research Analyst

So I guess -- 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 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? It certainly sounds like mortgage will stay strong at least through the second quarter, but just sort of on a go-forward basis, curious how you guys are thinking about that fee momentum.

Philip B. Flynn -- President, Chief Executive Officer And Director, Associated Banc-Corp

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 noninterest income outlook, which is why we raised that guidance by $30 million for the year.

Robert Scott Siefers -- Piper Sandler & Co. -- Research Division-MD & Senior Research Analyst

Okay. All right. Perfect. And just one on -- pardon me, 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?

Christopher J. Del Moral-Niles -- Chief Financial Officer and Executive Vice President

Yes, Scott. So those are presented on Slide three of the tables. There's $18 million at the end of the year, roughly $6 million from the first two rounds and $12 million from the new round here in Q1.

Robert Scott Siefers -- Piper Sandler & Co. -- Research Division-MD & Senior Research Analyst

All right. Perfect. Thank you, guys, very much. Appreciate it.

Operator

Our next question comes from the line of Lan Zanger with Jefferies. Please do with your question.

Casey Haire -- Jefferies -- Analyst

Hey. Good afternoon. And best of luck, Phil, on the next chapter. This is Uzi on for Casey Haire. I 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 I appreciate, I think you mentioned $200 million by the fourth quarter -- or in the fourth quarter. As you build out to get to make this a several billion-dollar item, kind of what are you thinking for 2022 for this product?

Philip B. Flynn -- President, Chief Executive Officer And Director, Associated Banc-Corp

Yes. So a 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 KeyBank, and we've also actually brought -- bought some of the intellectual property from KeyBank to be able to jump-start this business and operate within what was their, 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 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.

Casey Haire -- Jefferies -- Analyst

Okay. And 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?

Philip B. Flynn -- President, Chief Executive Officer And Director, Associated Banc-Corp

Well, nothing is necessarily holding 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 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.

Casey Haire -- Jefferies -- Analyst

Okay. Fair. Thank you.

Operator

Our next question comes from the line of Chris McGratty with KBW. Please do with your question.

Christopher Edward McGratty -- Keefe, Bruyette, & Woods, Inc. -- Research Division-MD

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 the bottom?

Christopher J. Del Moral-Niles -- Chief Financial Officer and Executive Vice President

Yes. So we do think the quarterly NII has bottomed. We do believe, and if 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 in future quarter-day counts. And we continue to believe we will manage the interest expense lower as we move through the year. And you sort of bring that all together and we see a positive bridge to Q2 and a further positive, in particular, the 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 third and certainly into the fourth, they will return to the more normal high borrowing levels, maybe not normal immediately, but they will start to normalize. And that spread will start to reemerge, which is what we typically would see during the recovery or expansion cycle.

Christopher Edward McGratty -- Keefe, Bruyette, & Woods, Inc. -- Research Division-MD

Okay. That's great color. And on the provision, just given where we, I guess, started, how negative it was and the constructive comments, I hate to parse words, but nominal provision would suggest that there's a meaningful positive provision. And I'm just trying to get a sense of the element of conservatism.

Philip B. Flynn -- President, Chief Executive Officer And Director, Associated Banc-Corp

Well, what I said was very nominal. So I -- look, credit has improved dramatically. And from CECL day one through the first two quarters, we were ramping up our reserves. You've seen us start to release now in the fourth quarter and the first quarter. We're getting remarkable outcomes in credits that we were concerned about. Stuff that we thought we had lost 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 is that?

Christopher Edward McGratty -- Keefe, Bruyette, & Woods, Inc. -- Research Division-MD

Okay. That's fair. And then can you just -- I probably have it in my notes, but the day one CECL reserve, what was that percentage? I just don't have it in front of me.

Christopher J. Del Moral-Niles -- Chief Financial Officer and Executive Vice President

Yes, it's shown on page 10 of our deck of 1.55%.

Christopher Edward McGratty -- Keefe, Bruyette, & Woods, Inc. -- Research Division-MD

Got it. Thanks, Chris.

Christopher J. Del Moral-Niles -- Chief Financial Officer and Executive Vice President

Yes.

Operator

And our next question comes from the line of Jon Arfstrom with RBC Capital Markets. Please do with your question.

Jon Glenn Arfstrom -- RBC Capital Markets -- Research Division-MD of Financial Services Equity Research & Analyst

Good afternoon. A couple of follow-ups, just on the debit and credit spend. What do the numbers look like in January and February versus March?

Philip B. Flynn -- President, Chief Executive Officer And Director, Associated Banc-Corp

Yes. 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.

Jon Glenn Arfstrom -- RBC Capital Markets -- Research Division-MD of Financial Services Equity Research & Analyst

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?

Philip B. Flynn -- President, Chief Executive Officer And Director, Associated Banc-Corp

It's line utilization. We're sitting right now, Jon, 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 our customers around the 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&I as we get into the year.

Jon Glenn Arfstrom -- RBC Capital Markets -- Research Division-MD of Financial Services Equity Research & Analyst

And I guess it ties to the next question. The period-end noninterest-bearing savings and money market growth, so much higher than your averages. And 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?

Philip B. Flynn -- President, Chief Executive Officer And Director, Associated Banc-Corp

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.

Jon Glenn Arfstrom -- RBC Capital Markets -- Research Division-MD of Financial Services Equity Research & Analyst

And then just a random one, but you talked about the J.D. Power ranking.

Philip B. Flynn -- President, Chief Executive Officer And Director, Associated Banc-Corp

Yes.

Jon Glenn Arfstrom -- RBC Capital Markets -- Research Division-MD of Financial Services Equity Research & Analyst

Where were you in the past? I mean we don't have to go back to 2009, but what...

Philip B. Flynn -- President, Chief Executive Officer And Director, Associated Banc-Corp

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 #1 in the Upper Midwest for retail customer satisfaction.

Jon Glenn Arfstrom -- RBC Capital Markets -- Research Division-MD of Financial Services Equity Research & Analyst

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.

Philip B. Flynn -- President, Chief Executive Officer And Director, Associated Banc-Corp

Thank you. And it did snow a little here yesterday, but we didn't have to plow or anything because it melted.

Operator

Our next question comes from the line of Terry McEvoy with Stephens. Please do with your question.

Terence James McEvoy -- Stephens Inc. -- Research Division-MD & Research Analyst

All right. Good afternoon. And I remember that call in 2010. It was a mess, to Jon's point, and the bank is significantly healthier today, on your last call, Phil. So I enjoyed working with you.

Philip B. Flynn -- President, Chief Executive Officer And Director, Associated Banc-Corp

Thank you, Terry.

Terence James McEvoy -- Stephens Inc. -- Research Division-MD & Research Analyst

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? The incoming CEO of the -- 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?

Philip B. Flynn -- President, Chief Executive Officer And Director, Associated Banc-Corp

Yes. Great questions. Probably a little early for me to give you much guidance on '22 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 KeyBank team presented itself fortuitously as we were thinking this through. And so we went after that aggressively. And all of that was under way 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.

Terence James McEvoy -- Stephens Inc. -- Research Division-MD & Research Analyst

That is great. That is it on my list. Thanks, everyone. Thanks, Phil.

Philip B. Flynn -- President, Chief Executive Officer And Director, Associated Banc-Corp

Thank you.

Operator

Our next question comes from the line Michael Young with Truist. Please do with your question.

Michael Masters Young -- Truist Securities, Inc. -- Research Division-VP & Analyst

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?

Philip B. Flynn -- President, Chief Executive Officer And Director, Associated Banc-Corp

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.

Michael Masters Young -- Truist Securities, Inc. -- Research Division-VP & Analyst

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 view 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 a good business to be in, whereas others have kind of exited at different times?

Philip B. Flynn -- President, Chief Executive Officer And Director, Associated Banc-Corp

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 RAROCs. 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 KeyBank 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 a 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.

Michael Masters Young -- Truist Securities, Inc. -- Research Division-VP & Analyst

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 and et cetera, for that already? Or are people kind of taking a wait-and-see approach?

Philip B. Flynn -- President, Chief Executive Officer And Director, Associated Banc-Corp

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 D.C. We would certainly expect to see something happening, and our customers expect it to happen as well.

Michael Masters Young -- Truist Securities, Inc. -- Research Division-VP & Analyst

Okay. That is all for me. Thanks. And congrats, Phil, on your time.

Philip B. Flynn -- President, Chief Executive Officer And Director, Associated Banc-Corp

Thank you. Appreciate it.

Operator

Our final question comes from the line of Scott Siefers with Piper Sandler. Please do with your question.

Robert Scott Siefers -- Piper Sandler & Co. -- Research Division-MD & Senior Research Analyst

Hey, 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 first quarter run rate. So are the auto buildout 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-a-vis the first-quarter run rate?

Philip B. Flynn -- President, Chief Executive Officer And Director, Associated Banc-Corp

Sure. So 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. And 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 and incentive activity and such. So yes, I mean, at $690 million to $695 million, it's a little less than the $700 million run rate, but that would be not unexpected given the normal seasonal pattern of our expenses.

Robert Scott Siefers -- Piper Sandler & Co. -- Research Division-MD & Senior Research Analyst

Okay. Good. All right. And then just on the margin guidance of 2.45% to 2.55%, are we talking there a reported margin, like including the impact of the PPP fees? Or are we thinking sort of off that sort of core base of, I have estimated around, 2.32% or so, excluding the PPP fees?

Philip B. Flynn -- President, Chief Executive Officer And Director, Associated Banc-Corp

So that includes...

Christopher J. Del Moral-Niles -- Chief Financial Officer and Executive Vice President

It's a fully loaded reported number.

Robert Scott Siefers -- Piper Sandler & Co. -- Research Division-MD & Senior Research Analyst

Okay. Perfect. All right. That is great. Thank you, guys, very much.

Operator

And with that, this concludes our question-and-answer session. And now I would like to turn the call back over to Mr. Flynn for closing remarks.

Philip B. Flynn -- President, Chief Executive Officer And Director, Associated Banc-Corp

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. You can call me until Wednesday. After that, call Niles and Andy Harmening. Thanks again for your interest in Associated Bank.

Operator

And 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.

Duration: 42 minutes

Call participants:

Philip B. Flynn -- President, Chief Executive Officer And Director, Associated Banc-Corp

Christopher J. Del Moral-Niles -- Chief Financial Officer and Executive Vice President

Robert Scott Siefers -- Piper Sandler & Co. -- Research Division-MD & Senior Research Analyst

Casey Haire -- Jefferies -- Analyst

Christopher Edward McGratty -- Keefe, Bruyette, & Woods, Inc. -- Research Division-MD

Jon Glenn Arfstrom -- RBC Capital Markets -- Research Division-MD of Financial Services Equity Research & Analyst

Terence James McEvoy -- Stephens Inc. -- Research Division-MD & Research Analyst

Michael Masters Young -- Truist Securities, Inc. -- Research Division-VP & Analyst

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