Ladies and gentlemen, thank you for standing by. Welcome to the First Financial Holdings, first quarter earnings conference call. During the presentation all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (Operator Instructions)
I would now like to turn the conference over to D. B. Wright, Vice President and corporate secretary; please go ahead.
Dorothy B. Wright
Thank you, Rhonda. Good afternoon and thank you for participating in our first quarter 2009 earnings conference call. Before we begin, I have several brief administrative items to address. You should have received our first quarter 2009 Earnings Release along with supplemental information earlier today. For those who did not, both are available on our website at www.firstfinancialholdings.com.
In addition to this teleconference call, we have a listen-only live webcast available. This webcast will be available for the next 90 days. Both the live and archived webcast maybe accessed via a link on our website and again that address is www.firstfinancialholdings.com.
Our President and Chief Executive Officer, A. Thomas Hood, will make opening remarks on our call today. Wayne Hall, Executive Vice President and Chief Financial Officer will follow and both will take questions at the end.
Our presentation today discusses the company’s business outlook and will include forward-looking statements. Those statements include descriptions of management’s plans, objectives or goals for future operations, products or services, forecasts of financial or other performance measures and statements about the company’s general outlook for economic and business conditions.
We also may make forward-looking statements during the question-and-answer period following management’s presentation. These forward-looking statements are subject to a number of risks and uncertainties and actual results may differ materially from those discussed today.
Information on the risk factors that could cause actual results to differ is available from the Earnings Release that was distributed today and also from the Form 10-K for the year ended September 30, 2008. Forward-looking statements are effective only as of the date that they are made and the company assumes no obligation to update this information.
I will now turn the call over to Tom.
Thanks DB and thanks to everyone on the call. We’re very, very appreciative. We know there’s a flurry of releases occurring today and so we’re very, very grateful to have had your interest in First Financial and we hope this is going to be a very productive call today, emphasizing the operations of the company and focusing on those results. Your interest in First Financial is greatly appreciated.
We do hope that you have had an opportunity to go to the website earlier today to review the press release itself and other information and we’ll provide you with some key details as we discuss results and operations for the quarter. After commenting on the highlights from the quarter, I’ll comment on some continuing strategic initiatives and report on other results.
Obviously, our results reflect the impact of the current recession, the impact it’s having on our earnings and asset quality and company operations. Certainly higher levels of unemployment, declining real estate values, higher home inventories, along with other economic factors are really having a negative impact on all of the markets that we serve throughout South Carolina.
It is a snapshot for the first quarter; we had a net loss of $6.5 million, compared to our linked quarter with income of $6.3 million. Our earnings per share loss was $0.58, compared to a linked quarter of $0.54 positive earnings. Our return on equity was a negative 13% for the quarter, compared to a 9/30/08 linked quarter of positive 13.59 return-on-equity.
The loss for the quarter was significantly impacted by an increase in the provision for loan losses and impairment charges on three CDO securities. Earnings compared to our September ‘08 quarter were favorably impacted and we’re certainly pleased about this result, by a higher net interest income and an interest margin of 3.48%. We also experienced strong loan growth during the quarter. For the quarter, loans increased over $30 million. We also had higher mortgage banking income, something that we expect to continue into the future.
The negatives on the December quarter are pretty clear. We had a much higher loan loss provision in response to a higher level of charge-offs and a higher level of problem loans. We increased our loan loss reserve to $41.5 million or 174 basis points of total loans. The quarter was also negatively impacted by a $2.1 million charge for the other than temporary impairment; I’ve already mentioned on the three CDO securities.
During the quarter we experienced lower fees on deposit services charges. Our observation is that customers are simply being more cautious in their spending practices. Insurance revenues were also lower in the December quarter and that’s typically the case, the December quarter is generally a slower quarter for insurance revenues.
We had higher operating expenses, something we are addressing vigorously currently. As you compare the December ‘08 quarter with the December ‘07 quarter, quarterly earnings were positively impacted again by a higher net interest income, higher spread and higher insurance revenues in that comparative quarter and lower salary and benefit costs, again comparing the December ‘08 quarter to the December ‘07 quarter.
Earnings for the December ‘08 quarter, again compared to the December ‘07 quarter were negatively impacted again by this much higher loan loss provision and the $2.1 million charge; again, for the temporary impairment of the three securities and again, slower or lower fees on deposit service charges.
First, I’d like to comment on credit quality. That’s obviously the issue of the day. We continue to see increased levels of delinquencies, net charge-offs and non-accrual loans. At the end of December or December quarter, we experienced an increase in delinquencies in most categories. We’ve got some additional information on that, that I’ll be talking about.
Many of these delinquent loans were reclassified to special mention or substandard risk categories, as a result of their deterioration. Our allowance for loan losses model allocates higher reserve requirement, for those risk categories, thereby requiring us to provide a higher provision for loan losses. In addition, because of the continued difficult economic environment and especially the high levels of unemployment, we’ve adjusted all of our qualitative factors in our model to account for that continued uncertainty in unemployment and credit markets.
Net charge-offs for the quarter were 49 basis points compared to 39 basis points in the linked quarter, the September quarter. All of these factors led to higher reserve requirements and therefore higher loan loss provisions for the quarter. Total reserve for loan losses at 12/31/08 was $41.5 million. It’s a 73% increase over the linked quarter, resulting again in 174 basis points of reserves to outstanding loans.
We have been providing data to the marketplace on a quarterly basis on loan charge-offs. Excluding charge-offs on manufactured housing loan portfolio, we’ve typically done that in the past, because we traditionally expect higher charge-offs on manufactured housing loans. However, in this quarter, that really turned around quite remarkably.
As we pointed out in the past, traditionally manufactured housing loans have had higher charge-offs and delinquencies and obviously we compensate for that by having much higher yields on those loans. With that said manufactured housing really reversed the trend of our other portfolios by actually decreasing in net charge-offs for the quarter and I would attribute that principally to a very seasoned group of collectors that we have, that specialize in collections on manufactured housing.
Manufactured housing charge-off rate was 80 basis points for the quarter compared to 122 basis points for the September ‘08 quarter; the average yield on this portfolio, again much higher at 9.35% during the quarter. The net charge-offs, excluding manufactured housing were 46 basis points annualized for the first quarter of fiscal 2009, compared to 30 basis points in the September ‘08 quarter. Reserve coverage to problem loans is at 118% versus 116% at the September ‘08 quarter, the linked quarter and 164% at December 31 of ‘07.
The quarter ended with higher non-accrual loans and higher level of real estate owned than the linked quarter. Approximately 40% of the non-accrual loans are single family or home equity loans. Just to give you a bit of a flavor in terms of the changes in delinquencies for 30 days or more categories; in the real estate area, the one to four at 12/31/08, our delinquencies were $18.5 million, that’s compared to the linked quarter when they were $13.9 million. That’s at December 31, a ratio of 2.07% on delinquencies on real estate one-to-four.
Home equity was $8.4 million at 12/31/08 and $4.9 million in the linked quarter and that is a 2.52% ratio on delinquencies on home equity. Manufactured housing was $5.5 million at 12/31/08. Again, 30 days or more delinquent category and on 9/30 it was $5.2 million, actually just a small increase. Manufactured housing delinquencies were at 2.41%.
In the marine lending area, we have a total of $1.6 million in delinquencies at the end of this first quarter compared to $12.6 million in delinquencies or rather I’m sorry $1.0 million in delinquencies for a ratio of 2.04%.
Commercial real estate had a total of $21.8 million in delinquencies in the current quarter, compared to $12.6 million in the ’08 quarter; that’s a 6.16% delinquency for commercial real estate. One of the larger loans in the delinquencies of commercial real estate has already been brought current, which would reduce that ratio significantly. On land loans, at 12/31/08, we had $4.1 million compared to 9/30/08 at $2.8 million and for land loans that’s a delinquency ratio of 1.63.
In real estate construction one-to-four, which has been a troubling portion of virtually every loan portfolio, we had a total amount of delinquencies of $9 million for the current quarter compared to the quarter or the linked quarter of 9/30/08 when we had $5.8 million in delinquencies. That ratio is a 13.18%. I am pleased to indicate that we have been moving that entire category down in terms of its financial impact. We now are down to around $57.9 million in that category, versus 62.5 in the 9/30 quarter.
One of the key factors obviously in consumer and residential loans is the unemployment situation, which is worsening in South Carolina. In the marine seasonal area, again unemployment is probably one of the primary reasons for delinquency. In the real estate construction area, obviously our real estate markets have slowed substantially. The reason for delinquency there is just simply lack of sales; commercial real estate, obviously impacted by the recessionary economic environment.
Total consumer delinquency rates have increased to 2.37% from 1.75% in the September 30, ‘08 quarter. Increases have occurred in most categories. Again, manufactured housing was quite a good month in terms of performance, considering the economy. It increased to 2.41% from 2.34%, while home equity loans increased from 1.58% to 2.52%. Our breakdown on home equity loans indicates that we’re still on a first mortgage position or second lien to a first lien position in 64% of those loans and again, we have never focused this product on customers that were not in our markets.
Overall, drawn lines to the full line remain approximately 55% of the total line and we believe our underwriting on this product, we commented on that in the past, continues to be very sound. The average line amount is under $77,000; the average home value is approximately $303,000.
In a difficult economy, we would expect to experience increases in both charge-offs and delinquencies in our manufactured housing portfolio again; however, we’ve seen only a slight increase in delinquencies and an actual decrease in net charge-offs for this quarter. Again, excluding manufactured housing delinquencies, our total delinquencies were $12.1 million or 235 basis points at December 31, compared to $7.5 million or 149 basis points for the September 30, ‘08 quarter.
Again, we do not consider any of our residential loans as sub-prime loans. Certainly, all of those loans are in our portfolio. We expect foreclosures to increase. We did experience a slight increase in foreclosures during fiscal 2008. We completed 18 foreclosures for approximately $5.8 million and I think we’ve reported in previous commentary the losses on those, which tend to be I think very moderate.
For this year, we’ve only had three foreclosures, all of fiscal 2009, for a total of $1.3 million. We have always worked to try to minimize foreclosures in our marketplace. We are working on a number of potential foreclosures presently. We’ve always considered any number of alternatives to resolve the significant delinquent loans. Obviously, avoiding foreclosure really has become a national initiative, so we are clearly focused on achieving good results for borrowers that are really straining with home values and their finances.
While delinquencies continue to be higher, foreclosures again are very, very manageable to-date and I do want to mention too; we play a significant, pivot able role in real estate throughout any marketplace that we’re in. We have partnered with family services here in Charleston, along with the united way and other non-profits, in providing to the people in Charleston; first, a series of foreclosure clinics that have been extremely successful, getting people back on track and hopefully saving those families from that foreclosure.
We intend to take that broadly throughout the state of South Carolina. We’re moving to the grand strand. These are typically conducted on weekends and our staff and the staffs of the non-profits are very, very helpful in getting these done, but once we’re into the grand strand, we intend to move on to Florence and possibly other markets in South Carolina.
As to the net interest margin, of course we’re very, very pleased with our net interest margin progress, trying to sustain a strong net interest margin. On a linked quarter basis, the net interest margin remained at 348, considering the interest rate environment in which we’re operating, we couldn’t be more pleased. We have continued to enjoy a reduction in our funding costs over the last year, both in deposit pricing and wholesale funding. With that said, we continue to face a very competitive pricing market, but we see some softening in CD rates and other rates in the market.
As we commented in the past, we continue to focus on increases in core deposits. That’s made more difficult I think, by everyone’s focus on core deposits, but we’re making what we believe are sound decisions on both, the pricing of deposits and the pricing of loans.
Reporting on other operations, our mortgage banking operations really rebounded this quarter. Total revenues for the first quarter were $1.8 million, which compares to $818,000 in the linked quarter, the September quarter and $1.8 million in the December quarter last year. Following my comments, Wayne will address that in more detail. We have some really terrific operations in process, in mortgage banking operations, so it’s an exciting time because of the very low interest rates on mortgages and the opportunity for originating mortgages and to refinance.
The vast majority of our residential borrowers are continuing to choose to finance their purchases with fixed rate mortgages, rather than variable rate mortgages. We continue our practice of selling most of our fixed rate mortgages into the secondary market. We expect the refinanced demand to continue, but do not expect any significant increase in real estate sales for the foreseeable future.
As for service charges and fees on deposit accounts, we commented a little earlier about that. The economic downturn has obviously impacted those revenues. They are generated through the service charges on deposit accounts. Fees on deposit accounts were $5.7 million for the quarter, down from $6.1 million for both the linked quarter and the same quarter last year.
Approximately 1/3 of the decline is associated with card-based fees, directly linked to less usage by our customers. It’s our belief that lower usage is again tied to lower spending caused by the recession. The other declines are associated with lower NSF and overdraft fees in the deposit area.
As to our insurance operations, I think we’ve already commented. Generally, the December quarter is a slower quarter. The economy is always impacted; our insurance operations also. We continue to be impacted by soft market in the commercial area and the general insurance market continues to be obviously a very competitive market.
Revenues from our insurance operations were $5.2 million, compared to $4.3 million in the same quarter last year. The Somers-Pardue had a very favorable impact on revenues. That acquisition which was completed last April, added $1.2 million to this quarter’s revenues. We do expect to see somewhat of a premium price correction, certainly hopeful for that in 2009 which should translate into increased commissions for our insurance group.
Now, I’ll ask Wayne to comment on the other highlights of the operations for the quarter and also focus on the balance sheet changes. Then I’ll add some commentary on market expansion following any questions that you might have.
Thanks, Tom. What we’ll do first is discuss the financial impact of the balance sheet dynamics over the linked quarter on our net interest income. As Tom mentioned, we are pleased that we’ve been able to maintain our margin. For the current quarter, our margin was 348, that with the linked quarter and 25 basis points higher from the same quarter last year. We have experienced lower deposit pricing; along with the Fed rate cuts will allow us to grow our margin in the future.
Average loans increased by approximately $54 million in the current quarter, while our average deposits increased approximately $56 million from the linked quarter. In addition to our average cost of borrowings declining 55 basis points, that played a major role in lowering our total costs of funds by 17 basis points. Yield on total earning assets declined by 16 basis points, driven mainly by 22 basis points drop in yield on loans, offset by a 25 basis point pickup in our investment portfolio.
Our product managers continue to work very hard with campaigns to keep and maintain CD and checking account customers. We experienced growth in many loan categories. Compared to a linked quarter on an annualized basis, manufactured housing loans increased 8.2%; home equity loans rose 24.4%; commercial business loans increased almost 27% and commercial real estate loans were up 9.8%; construction loans on one-to-four family homes declined 18.6%. Overall, loans grew at an annualized rate of 5.0% from September 30, 2008.
Presently, we anticipate loan growth to moderate during fiscal 2009. The market value of the available for sale investment portfolio at 12/31 was below book value by approximately $56 million. There are three CDO investments we determined to be other than temporary impaired and we booked $2.1 million charge against earnings for these investments. These three investments along with the one investment we wrote down last quarter, brings the total to four investments that we have written down for a total of $2.6 million. We believe the decline in remaining 11 CDOs are temporary.
Our private label MBS’s and CMO Portfolios are all AA or above and do not include any loans originated after 2005. These are ongoing purchases, recent and ongoing purchases of mortgage backed securities will cover the cost of the $65 million of TARP money that we received in December 5.
Now I’d like to spend a few minutes on asset quality. As Tom mentioned earlier, we continue to experience a higher level of net charge-offs. Net charge-offs for the December ‘08 quarter were $2.9 million or 49 basis points compared to $2.3 million or 39 basis points from the linked quarter.
A breakdown of the $2.9 million net charge-offs is $75,000 for one-to-four real estate; $674,000 for commercial business; and $577,000 for consumer; $654,000 was from our boat loan portfolio; $448,000 for manufactured housing; home equity was $170,000; land was $256,000 and construction was $99,000.
Over the last six quarters, net charge-offs have ranged between 30 and 49 basis points. We are committed to strong underwriting standards and we believe the higher the normal charge-offs are due to the economic conditions rather than underwriting.
We continue to place increased emphasis on monitoring of problem assets in addition to aggressive collection and disposition of these assets. The absolute level of the allowance for loan losses has increased over 70% with $17.5 million and the allowance as percentage of loans ended the quarter at 174 basis points, up from 102 basis points at 9/30/08.
Non accrual loans increased to $35.1 million, up from $20.6 million at 9/30/08. This increase in non accruals is concentrated in commercial business with the increase of $4.3 million; single family homes with $2.7 million increase; home equity with $2.9 million and construction with $2.4 million.
With current economic conditions, we continue to expect a higher level of charge-offs and higher levels of past due loans. We are working very closely with builders to understand our potential for sales as well as working with them to help facilitate sales. Our total exposure to speculated residential construction loans at December 31, 2008 is $57.9 million, down from $62.5 million at September 30.
We recently engaged an external firm to assist us in evaluating our loan portfolio. The objective of this engagement was to perform credit quality assessments using a sample of the commercial loan portfolio including recommending risk rates for all loans sampled. The results of this engagement were used in assessing the appropriate level of allowance for loan losses.
Let’s focus a little bit on non interest income and non interest expense. Although our non interest income declined this quarter, we continue to emphasize diversifying revenues and reducing reliance on net interest income. Total non interest income for the quarter was $11.3 million, down from the $15.1 million from the linked quarter and $2.4 million decrease from the same quarter last year. $2.1million of this decrease was due to the charges for the OTTI adjustment.
Our mortgage banking operation rebounded during our first quarter contributing $1.8 million compared to $118,000 for the linked quarter. We have three major facets of our mortgage banking operation; our servicing fee income, the value of our mortgage servicing rights and the value of the loans that we have in our pipeline.
We had a $559,000 improvement in pass through gains and this increase can be attributed to the increased sales and forward sales as loan closing and applications were up. In addition, there was a $355,000 improvement in the net change of the value of the mortgage servicing rights aided by the mortgage servicing right hedging programs.
We also experienced late charges during the first quarter. Recent bid purchases of mortgage backed securities have driven down yields and created a refinancing boom which will improve pass through gains in both our second and third quarters.
Insurance revenues decrease $1.1 million from the linked quarter and increased $958,000 from the same quarter last year. The acquisition added $1.2 million to revenues in the current quarter compared to $1.4 million for the linked quarter. Additional shortfall in insurance revenues is most related to seasonal trends, as well as continuing softening particularly in the commercial sector.
Service charges and fees on deposit accounts are down as Tom mentioned earlier from the linked quarter and prior year quarters. The biggest impact is from lower NSF fees and overdraft fees as they were down approximately $325,000 from the linked quarter and lower car based fees. We believe as Tom mentioned that declines are related to the current economic environment as consumers are watching their spending habits more closely.
Let’s now focus a little bit on operating expenses which were reported at $26.6 million, an increase of $2.7 million from the linked quarter. Salary, employee benefits were the main contributor to this increase, up approximately $2.5 million for the quarter. This is mainly due to normal merit increases which take place in our first quarter and adjustment to our management incentive accrual last quarter as we did not meet our fiscal year 2008 goals for full pay out. Market increased $191,000, related to a new marketing campaign while the remainder of all other expenses showed only minor changes.
I’ll now turn the floor back over to Tom.
Thanks, Wayne. We made these observations in the past. We have a great distribution system; we continue to work on that and improve that. As we noted in the past, also had some great results from our in-store expansion, the diversification continued this year. We opened an additional Wal-Mart sales center during this quarter.
In addition, construction continues on a relocation of our mall drive financial center to a much better location nearby and that should be completed in March of ‘09. There aren’t any other significant projects for expansion of the distribution system planned in 2009.
We have reported many times on our in-store operations and they continue to be the Vanguard for increasing core deposit account relationships, continuing to produce around 60% of all of our new retail demand deposit accounts. We recently introduced a new demand account and are having some success in that new account relationship.
The technology initiatives that we mentioned in the past, we’ve completed merchant capture systems and are very successful with our commercial customers. As we look forward, our outlook, we expect that our interest spreads to be relatively steady or increasing.
We expect credit quality will continue to be under increased pressure, as the current difficult economic environment is really not forecast to start improving until late 2009 or well into 2010. We’re working closely with our home builders and other borrowers to help facilitate home sales, to avoid foreclosure and to lessen the impact on their relationships due to the economic situation that they’re faced with.
As to loan growth, it’s difficult to predict, although we were very, very pleased with the growth that we experienced this quarter. The present interest rate environment for mortgage loans should be very positive for our mortgage banking operations. Commercial lending is more uncertain and businesses are hesitant to expand in this very uncertain economic environment. We remain focused on a number of retention strategies in our existing loan portfolios.
We believe there are great opportunities in marketplaces that we’re either in presently or nearby markets, opportunities to gain market share from other financial institutions. Our markets in South Carolina continue to have more stable unemployment rates than the remainder of the state. Generally, unemployment rates in the Charleston market and the Florence market and the grand strand tend to be lower than the rest of the state.
We are also encouraged that many people have commented, including folks that maintain lots of information about end migration, that South Carolina remains a state that many, many people are coming to. Certainly, growth in population in South Carolina will add to the economic upturn when that occurs.
We’re also examining opportunities to continue refining the branch system. As I mentioned, we’re obviously always looking at the opportunity of consolidating, improving our distribution system. We had a far-ranging conversation just today with our senior management group on making sure that we can capture all of the efficiencies that we can in other operating costs.
I think, and certainly you’re aware of that, but I should also consider the extent of our management team. We’ve been together for quite some period of time. We’ve really managed I think several previous credit turn-downs in the economy in both the 1980s, 1990s; devastating hurricane in ‘89 which resulted in quite an extraordinary comeback for the company. This is a team I think that has great experience and are very, very determined to make sure that our shareholders are going to benefit from our operations.
I guess we can turn it over for any questions that you might have.
(Operator Instructions) Your first question comes from Cary Morris - Scott & Stringfellow.
Cary Morris - Scott & Stringfellow
Tom could you all talk about your charge-off expectations going forward. I may have missed it if you had talked about it before, but just charge-offs in general or what you’re expectations are or what you’re planning for in this very difficult market? I appreciate it.
Sure. Well, we really didn’t have a real significant increase in charge-offs and quite frankly, we are trying to work to avoid actual charge-offs; obviously, everyone else is too; but as delinquencies lengthen, as some of these categories continue to worsen in terms of the delinquencies in those categories, our expectation is that we may have higher levels of actual charge-offs in the future.
Obviously, despite this very large addition to our loan loss provision, we have every expectation that we’re going to follow this; I think very defined model that we’re utilizing and if additional changes in our provision are required, we’re going to promptly do that and we’ve had a large group of very experienced folks, working on and trying to move some of these problem assets off the balance sheet. So we’re very hopeful that we’ll see some progress in that regard in the near term.
(Operator Instructions) Your next question comes from Matt Hodgson - SunTrust Robinson Humphrey.
Matt Hodgson - SunTrust Robinson Humphrey
If you wouldn’t mind, could you go over the delinquency numbers again that you listed in your prepared remarks; kind of by category?
Yes sure, you want the dollar amounts that we gave? These are 30 days or more delinquent; real estate one-to-four was $18.5 million, home equities were $8.4 million, manufactured housing was $5.5 million, marine was $1.6 million, commercial real estate was $21.8 million, land was $4.1 million and real estate construction one-to-four was $9.0 million.
Matt Hodgson - SunTrust Robinson Humphrey
Okay great and also I was curious. I think you mentioned a third party loan review firm that you all engaged in the quarter and I was curious how much of their input led to the big reserve build or the change in non-accruals.
I’d say most of it. Our model takes a lot of factors into place. We use a three-year loss rate on all portfolios. We also use risk ratings to help us determine and higher risk ratings get a set loan loss reserve factor. The review that we had done changed some of those risk ratings that impacted that ratio, so that piece of it did go into helping us, but the fact that we had a number of loans deteriorating, moving in automatically and moving into categories that our model automatically allocated a higher reserve level, also had a big impact.
Matt Hodgson - SunTrust Robinson Humphrey
If you were looking at the sort of distribution of input into that process, our model would likely be 85% or 90% and maybe the review caused us to re-examine some risk ratings of particular loans; so maybe it’s 10% or 15%.
(Operator Instructions) And at this time I’m showing no further questions. I’ll turn it back to you.
Well, thank you again very, very much for participating in the call this afternoon. There is a recording you can go back to.
Dorothy B. Wright
Our website and access the archived copy if you’d like and listen again.
Yes, we know there’s a lot of information that’s discussed in the call and so please feel free to go back and listen to that again if you missed any numbers or if we can provide any additional information, I’m sure we would try to do that for any questions that come in after the call too.
Dorothy B. Wright
Thank you very much for joining us today.
Yes, thanks very much. Thank you.
Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.
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