Bank of Hawaii CEO Discusses Q1 2012 Results - Earnings Call Transcript

Apr.23.12 | About: Bank of (BOH)

Bank of Hawaii Corporation (NYSE:BOH)

Q1 2012 Earnings Call

April 23, 2012; 02:00 pm ET

Executives

Peter Ho - Chairman, President & Chief Executive Officer

Kent Lucien - Vice Chairman & Chief Financial Officer

Mary Sellers - Vice Chairman & Chief Risk Officer

Cindy Wyrick - Director of Investor Relations

Analysts

Joe Morford - RBC Capital Markets

Ken Zerbe - Morgan Stanley

Brett Rabatin - Sterne, Agee

Casey Haire - Jeffries

Jeff Rulis - D. A. Davidson

Craig Siegenthaler - Credit Suisse

Aaron Deer - Sandler O’Neill

Jacquelynne Chimera - KBW

Bryce Rowe - Robert W. Baird

Russell Gunther - Bank of America

Operator

Good day ladies and gentlemen and welcome to the first quarter 2012, Bank of Hawaii Corporation earnings conference call. My name is Shequana and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will facilitate a question-and-answer session towards the end of this conference. (Operator Instructions).

I would now like to turn the presentation over to your host for today’s call, Ms. Cindy Wyrick, Director of Investor Relations. Please proceed ma’am.

Cindy Wyrick

Thank you Shequana. Good morning everyone and thank you for joining us as we review our financial results for the first quarter of 2012.

Joining me this morning is our Chairman, President and CEO, Peter Ho; our Vice Chairman and Chief Financial Officer, Kent Lucien; and Vice Chairman and Chief Risk Officer, Mary Sellers.

Our comments today will refer to the financial information included in the earnings announcement this morning. Before we get you started, let me remind you that today's conference call will contain some forward-looking statements, and while we believe our assumptions are reasonable, there are a variety of reasons the actual results may differ from those projected.

And now I'd like to turn the call over to Peter Ho.

Peter Ho

All right, thanks Cindy. Good morning everyone and thanks for joining us. The financial results for the first quarter of 2012 represent a strong start for the Bank of Hawaii. During the quarter we continued to generate good loan and deposit growth, our net interest margin improved, non-interest income increased and we maintained strong expense management controls. We purchased $30 million in shares, paid our shareholders a dividend and retained strong levels in liquidity, capital and reserves.

Now I may ask Kent to review some of the factors affecting our financial performance this quarter and then as is our custom, I’ll ask Mary to comment on our credit quality measures. Kent?

Kent Lucien

Thank you, Peter. Good morning. Net income for the first quarter was $43.8 million or $0.95 per share, compared to $39.2 million or $0.85 per share in the fourth quarter of 2011 and $42.4 million or $0.88 per share in the first quarter of 2011.

Our return on assets in the first quarter was 1.29% and return on equity was 17.3%. Our net interest margin in the first quarter was 3.06% compared to 3.04% in the fourth quarter of last year and 3.24% in the first quarter of 2011.

The credit provision in the first quarter was $351,000, compared to $2.2 million in the fourth quarter and $4.7 million in the first quarter of 2011. The credit provision for the first quarter included net charge-offs of $3.4 million and a $3 million decrease to the allowance.

The credit provision for the fourth quarter included net charge-offs of $7 million and a $4.8 million decrease to the allowance. Our allowance for loan and lease losses at the end of the first quarter was $135.6 million or 2.4% of outstanding loan and leases.

Non-performing assets were $41.4 million at the end of the first quarter and represented 0.74% of loans. Included in non-performing loans are $26.4 million in the residential mortgage loans as of March 31.

Non-interest income for the first quarter was $48.1 million compared to $43.4 million in the fourth quarter, and $53.9 million in the first quarter of 2011. The increase compared to the fourth quarter was primarily due to a $3.5 million gain in the sale of our equity interest and two leverage leases, partially offset by a $1 million loss on an aircraft lease in the first quarter.

Also contributing to the increase was $1.6 million increase in mortgage banking income. The decrease compared to the first quarter of 2011 was primarily due to the $6.2 million decrease in securities gains and $3 million lower debit interchange revenue as a result of the Durbin Amendment, partially offset by the net gains from the sale of leases previously mentioned.

Non-interest expense totaled $85.2 million in the first quarter, compared to $84.4 million in the fourth quarter and $86.1 million in the first quarter of 2011. The increase compared to the fourth quarter was primarily due to higher payroll taxes, associated with incentive compensation accrued in 2011 and paid in the first quarter of 2012 and $1.2 million for our personal computer refresh program. The decrease compared to the first quarter of 2011 was primarily due to a decrease in FDIC insurance expenses and lower operational losses.

The effective income tax rate was 27.6% in the first quarter compared to 26.1% in the fourth quarter and 32.6% in the first quarter of 2011. The lower rate this quarter was primarily due to the previously mentioned lease transactions, which resulted in a $2.7 million credit to provision for income taxes.

Our investment portfolio now stands at $7.2 billion and we have unrealized gains in the portfolio of $156 million. We continue to invest on a conservative basis and increased our investments in state and municipal securities this quarter. Approximately 80% of our investment portfolio is comprised of municipal securities. The average duration of the available for sale portfolio is 2.49 years and overall portfolio duration is 3.2 years.

Loans were $5.6 billion at the end of the first quarter, up $61 million compared to the end of the fourth quarter, and up $272 million from the end of the first quarter of 2011. We portfolioed $43 million of 30-year conforming mortgages in the quarter.

Deposits were $10.6 billion at the end of the first quarter, up $29 million compared to the end of the fourth quarter, and up $709 million from the end of the first quarter of 2011. We decreased our wholesale funding with government entities by $100 million to $1.2 billion in the first quarter.

Our shareholders' equity was $996 million at the end of the first quarter and we paid out $20.7 million in dividends and continued our share repurchase program in the first quarter, repurchasing 639,000 shares of common stock for $30 million.

Last Friday our Board declared a dividend at $0.45 per share for the first quarter. Our capital position remains strong and at the end of the first quarter our tangible common equity to risk-weighted assets was 17.6%.

Now, I'll turn the call over to Mary Sellers.

Mary Sellers

Thank you, Kent. Net charge-offs for the first quarter totaled $3.4 million, down $3.7 million on a linked quarter basis and $1.3 million year-over-year. The linked period decrease was due to a $2.9 million reduction in consumer charge-offs, primarily in residential mortgage and home equity and a $1.8 million increase in total recoveries, driven off a $1.4 million partial recovery on a previously charged off commercial loan.

Non-performing assets totaled $41.4 million at quarter end, compared to $40.8 million at the end of the fourth quarter and $34.6 million at the end of the first quarter of 2011. Residential non-accrual assets accounted for $26.4 million of the total at quarter end. The level of non-performing assets will continue to be impacted in the near-term, due to the longer resolution timeframe for residential assets.

Loans past due more than 90 days and still accruing interest totaled $10.1 million, up $866,000 on a linked quarter basis, and up $4.5 million year-over-year due to increases in residential mortgage and home equity. Restructured loans not included in non-accrual loans or loans past due 90 or more days totaled $29.5 million at quarter end, down $4.2 million from the prior quarter, primarily due to residential mortgage loan pay offs.

Residential mortgage and home equity loans past due more than 30 days, but less than 90 days and still accruing interest totaled $15.3 million and $6.1 million respectively at quarter end, down $2.9 million and $1.9 million from the end of the fourth quarter and down $1 million and $2.1 million respectively year-over-year.

We continue to see improvement on a linked quarter and year-over-year basis in what we consider to be the higher risk segments in our portfolio. In total, these higher segments were down $9.5 million for the quarter, due to an $8.6 million reduction in air transportation exposure and $17.8 billion year-over-year.

For the quarter, the provision for loan on these losses was $351,000, which given net charge-offs are $3.4 million, reduced fee allowance by $3 million to $135.6 million or 2.4% of loans and leases outstanding. Absent significant deterioration in the economy and with the continued improvement or stability in credit quality, we anticipate that we may require a lower level of allowance going forward.

I’ll now turn the call back to Peter.

Peter Ho

Great, thank you Mary. The low economy continued to gradually improve during the quarter, particularly in the visitor industry. Hotel occupancy, hotel revenue, visitor arrivals and visitor spending, all reflect the improvement compared with the previous year and visitor spending remains high across all firms.

We will continue to further benefit this year with an increased air seating into the marketplace, most notably and recently from Alaska Airlines and Allegiant Airlines. The structure in the industry remains relatively week however, although we are beginning to see increased activity at least at the initial stages around condo retail resort related development.

Job growth is beginning stabilize and the stabilized unemployment rate remains around 6.4%, which is significantly better than the U.S. average as a whole. Forecast for the whole economy indicate modest growth in 2012 and a continuation of gradual improvement.

And now we’ll be happy to respond to your questions.

Question-and-Answer Session

Operator

(Operator Instructions). You have a question from the line of Joe Morford representing RBC Capital Markets. Please proceed.

Joe Morford - RBC Capital Markets

Thanks. Good morning everyone.

Peter Ho

Good morning Joe.

Mary Sellers

Good morning.

Joe Morford - RBC Capital Markets

I guess, curious first on the margin. Did lower premium amortization contribute much to the strength this quarter and just in general, what’s your near term outlook for the margin.

Kent Lucien

Yes, I did add about $1.5 million to our interest income in the quarter. That’s the delta between the fourth quarter and the first quarter. Near term, it’s always hard to call. You probably have as good a forecast on interest rates as I do, but since the end of the first quarter rates have come down and so for example the tenure is at 192 or so and we were at more like 220 or 225 into the first quarter. So directionally rates are lower. Usually that tends to reduce the margin, but we’ll see, it’s still pretty early into the quarter.

Joe Morford - RBC Capital Markets

Okay, and then I guess just similar a little bit, can you talk about the strength in mortgage banking this quarter and how sustainable that may be based on the pipeline at period end.

Kent Lucien

Yes, well with mortgage banking, as I think a lot of you know, is a business, that’s a big part of our overall loan portfolio or generating revenue in two ways; one, by booking the assets and holding them on the balance sheet and then secondly, through just taking on the transaction and booking through the fee and selling off to the secondary market.

What we would like to be, what we target is a 40-40-20 split between commercial, residential and consumer lending and so our activity this year is really or this quarter was really a response to growth that we saw throughout the rest of the portfolio. I would look to maintain that ratio throughout the year, so that’s really what’s going to be the driver of future residential loan growth, at least as it pertains to being held on the balance sheet Joe.

Joe Morford - RBC Capital Markets

Okay, that’s helpful, thanks.

Kent Lucien

Yes.

Operator

Your next question comes from the line of Ken Zerbe representing Morgan Stanley. Please proceed.

Ken Zerbe - Morgan Stanley

All right, thanks. Just a question on the tax rate. If we back up the $2.7 million tax benefit that you got and obviously the other one-time items from numbers, it’s probably like a core tax rate. It looks like it was a little bit higher than normal this quarter. First of all, are we doing the math right on that and does that imply anything going forward?

Kent Lucien

I’m going to assume you did the math right, but it sounds approximately correct. As income moves up, the effective rate is going to move up, because the offsets to our statutory rate are generally fixed credits. So for example, low income housing credit, that sort of thing, and so with higher levels of income and just a fixed credit, you’re going to get a higher effective rate, all those things constant.

Ken Zerbe - Morgan Stanley

Okay, no that makes sense. The other question I just had was on the securities and loan growth, obviously very strong this quarter. What’s your view of how sustainable either those balances might be going forward or further growth from here?

Kent Lucien

Well, I’ll speak to the loan growth. The thing that we liked the most in the quarter was the consistency across the different categories. So on an average basis we had growth at every category except our lease book, which as I think a lot of you know is a book that we’ve frankly been looking to moderate as we move forward.

We talked about residential mortgage already. I think commercial’s got a pretty reasonable chance at having a good year this year and the consumer book, and by which I mean our home equity and auto and other installment lending, I think is poised for a rebound. As you guys all know, that’s been a book that’s been somewhat declining odds over the past couple of years. We’ve seen that flat and we’re actually stating to see growth and hopefully the economy will and we’re going to see that continue on through the year.

Ken Zerbe - Morgan Stanley

All right, great. Thank you.

Operator

Your next question comes from the line of Brett Rabatin representing Sterne, Agee. Please proceed.

Brett Rabatin - Sterne, Agee

Hi, good morning.

Peter Ho

Hey Brett, good morning.

Brett Rabatin - Sterne, Agee

I wanted to ask, I know I focused on this past quarter, but just the reserve and the amount of potential provisioning going forward, credit leverage. Was curious if the economy continues to be a little stronger, do you expect that the provision would probably be pretty minimal at most going forward.

Mary Sellers

Well, we definitely expect that we would not need to provision at the levels we have in the past and would be lowering our provision levels. It’s tough for me to comment on the exact dimensions of that.

Brett Rabatin - Sterne, Agee

No, fair enough, but it would make sense that your reserve level would continue to be lower than it has been in the past few quarters.

Mary Sellers

Yes.

Brett Rabatin - Sterne, Agee

Okay, and then secondly, just wanted to ask on the consumer portfolios. I know you’ve had a renewed focus in growth in those segments. Can you talk about the competitive landscape in Hawaii? Are you seeing currently any irrational competition on either mortgages or HELOCs?

Peter Ho

The mortgage side I would say is pretty clean competitively, pricing wise and in terms of credit underwriting. The home equity side is a space where I think like a lot of markets across the country, people are looking to pickup outstandings because of the variable rate nature there. So we are seeing a good amount of teaser rate pricing, which obliviously is impacting spreads there.

The indirect market is pretty darn competitive right now and I’d say that most of our local competition is priced at a pretty tight band, but that’s one area where we are seeing national competitors really pricing down to pickup volume.

Brett Rabatin - Sterne, Agee

Okay great, thank you.

Operator

Your next question comes from the line of Casey Haire representing Jeffries. Please proceed.

Casey Haire – Jeffries

Hey, good morning guys, thanks. Just a question on, another one on the margin I guess. The muni investments as a percentage of the book you said I think was 8%. Is there an appetite to increase that exposure and what kind of yield are you guys getting on these munis?

Kent Lucien

Yes, there might be a small appetite for some additional munis, but not very much. We are I think 8%, 9%, maybe up to 10%, but not much more beyond that. The yield that we are getting in that range is from 1% or 1.4%, in that neighborhood on a tax equivalent yield. We've gotten some a little bit higher based on taking a little bit more duration risk, but it's still pretty modest.

Casey Haire - Jeffries

Okay, so the FTE yield is 1% to 1.4%?

Kent Lucien

Yes.

Casey Haire – Jeffries

Wouldn't it have to be a little bit stronger than – I mean, because you're existing portfolio is yielding two and change. I would have thought that would have to be a little bit higher than that, just presuming the business is driving the NIM higher?

Kent Lucien

Well, it's not the only factor driving the NIM higher, and so composition of the balance sheet, more loans is helping little bit lower amount and funds sold is helping the premium amortization that we talked about a few minutes ago, those are all pushing in the positive direction and the munis are playing a part here, but it's not the major part so far.

Casey Haire - Jeffries

Okay, got you. And then just one more on capital if I may. I know you guys had talked about last quarter actually saying that the tier I leverage is not as – your not going to be holding to as tied to the 7% level as you had in the past. I was just curious at what point does that become a 6.6% and kind of falling, at what point does that become a hindrance to capital turn being internally or externally with regulators?

Kent Lucien

Well, I think I’ve mentioned in the past that we're looking at all aspects of the economy, our performance, these ratios in making decisions on how much capital to return to the shareholders, and so certainly yes, the answer is yes, leverage is real event. I can't give you a particular target on that, but it's definitely a factor.

Casey Haire - Jeffries

Okay, thank you.

Kent Lucien

Yes.

Operator

Your next question comes the line of Jeff Rulis representing D. A. Davidson. Please proceed.

Jeff Rulis - D. A. Davidson

Thanks. Good morning.

Peter Ho

Morning.

Kent Lucien

Morning.

Jeff Rulis - D. A. Davidson

Just a question on the investment securities line item. Maybe you could comment, not necessarily guidance, but just the conditions that sort of govern that for you at this part of the cycle of expectations, that that's a number that stays fairly modest going forward or any thoughts there?

Kent Lucien

Yes, I mean the portfolio size is really a function of the funding, and so the funding through the cycle has been very strong, very good deposit growth and so the increase in the portfolio is really going to be a function of that, less than any loan growth. So that's really the reason that we didn't make any decisions on the investment portfolio.

Jeff Rulis - D. A. Davidson

Right, and so through the P&L in terms of gains. While you're growing that, I suppose we should assume that the gains are going to stay modest as they have?

Kent Lucien

You mean in terms of realized gains?

Jeff Rulis - D. A. Davidson

Correct.

Kent Lucien

Yes. From time to time we make a decision on a particular security that just from a ALCO perspective doesn’t fit in and we make a decision to sell it, which can result in a gain or loss, but in terms of trying to realize gains, just to realize gains, that’s not likely to be what we do.

Jeff Rulis - D. A. Davidson

Okay. And then maybe just the last one on the comp expense. You mentioned a little higher dated payroll taxes, Q1 typically higher than Q4. You expect that to be the case this year as the year unfolds. Does it expect to taper off through the course of the year?

Kent Lucien

Yes, it’s just an unusual phenomenon in the first quarter, so the first quarter of next year we’ll have the same kind of result, but for the next three quarters we won't have that and so it’s purely a first quarter type of thing.

Jeff Rulis - D. A. Davidson

Okay, thank you.

Operator

Your next question comes from the line of Craig Siegenthaler representing Credit Suisse. Please proceed.

Craig Siegenthaler - Credit Suisse

Thanks guys. Just looking at the available-for-sale securities yield, it’s popped up. I’m wondering, what were the composition the securities added in terms of duration and yield and maybe the type of securities. Is it typically, you know it is probably all MBS, right?

Peter Ho

Well, let me quote just the taxable yield that we added during the quarter, so the average that we added was 1.99%. So that would take into account everything, so munis and MBS and treasuries, the whole bit. The duration of the portfolio went up a little bit in the quarter, but that was more a function of the fact that rates increased. So the duration is going to stretch out when rates go up.

Craig Siegenthaler - Credit Suisse

Got it. And then in terms of loan yield pressure, this quarter it was down about nine basis points sequentially. How do you think that steps forward into the second or third quarter? Is there anything unusual in the nine basis points we should think about and what's your kind of view of the run rate given kind of continued low rates?

Peter Ho

I think it was a pretty normal quarter. We have seen a little degradation on the mortgage side, which as you would guess is a big portion of the overall bookings for the quarter. A lot of that’s going to depend on what the composition of the loan categories that we are onboard in future quarters, but in ’12, I mean there is nothing so usual about the quarter for us.

Craig Siegenthaler - Credit Suisse

And then I’m not sure if you hit on this already, but in your table nine where you breakout payroll taxes, $3.8 million to $2.0 million, that $1.8 million, is that roughly where we should back out when we think about the 1Q to 2Q run rate?

Kent Lucien

Yes, hold on one second, let me just get that for you. Yes, it's about $1.8 million, is the delta between Q4 and Q1 on that line item, and so that’s the kind of nonrecurring expense item.

Craig Siegenthaler - Credit Suisse

And that is a similar sequential seasonal change you generally view from first quarter to second quarter, step back down to kind of a $2 million run rate?

Kent Lucien

Yes, that's about right.

Craig Siegenthaler - Credit Suisse

Got it. All right, great guys, thanks for taking my questions.

Peter Ho

Your welcome.

Kent Lucien

Welcome.

Operator

Your next question comes from the line of Aaron Deer representing Sandler O'Neill. Please proceed.

Aaron Deer - Sandler O’Neill

Hey, good morning everyone.

Peter Ho

Hey Aaron.

Kent Lucien

Hi.

Aaron Deer - Sandler O’Neill

I think most of my questions have been answered, just a quick one for Mary. I know they had changed the regulatory guidance on how home equity lines are accounted for one behind delinquent-first and it looked liked there was a very modest up-tick in your home equity portfolio, but I just want to make sure that that's fully accounted for in the numbers that you have and that we wouldn’t expect any sort of change in that going forward?

Mary Sellers

Yes, it is.

Aaron Deer - Sandler O’Neill

Okay, and then just one other quick one on the expense. You highlighted, Kent, the computer refresh in the quarter is like $1.2 million. I just want to confirm that that was a fully expensed item, not something that was capitalized, so that we should see that drop back out in the...

Peter Ho

Yes, that's a fully expensed item.

Aaron Deer - Sandler O’Neill

All right, that’s it for me. Thanks guys.

Peter Ho

Okay Aaron.

Operator

Your next question comes from the line of Jacque Chimera representing KBW. Please proceed.

Jacquelynne Chimera - KBW

Hi. Good morning everyone.

Peter Ho

Hi.

Jacquelynne Chimera - KBW

Most of my questions have also been answered. Just a quick one, probably for Peter. You've spoken in the past about looking for efficiency gains in the current economy. Has any of that been incorporated into your expense structure or is that something we could look for future?

Peter Ho

I think it's beginning to see the expense side, Jacque. I think that most of our initiatives are somewhat midstream right now. So I would look for continued expense efficiency off in the next several quarters. Some of it's in there, but a lot of it's not, I guess is the answer.

Jacquelynne Chimera - KBW

Okay great, thank you very much.

Operator

Your next question comes from the line of Bryce Rowe, representing Robert W. Baird. Please proceed.

Bryce Rowe - Robert W. Baird

Thank you. Just wondering what the mortgage servicing right fair value change was for the quarter.

Kent Lucien

I don't recall off-hand. It was a pretty small number though and I can't recall exactly, but I think it was less than $1 million.

Bryce Rowe - Robert W. Baird

Okay Kent, do you have the amount of originations for the quarter that were -- and then subsequent sales, mortgage loan sales?

Kent Lucien

Yes, I think I quoted what we portfolioed, but lets see. Yes, I'm not going to quote a number, because I can't find it off-hand. So we'll try to follow-up with you on that.

Bryce Rowe - Robert W. Baird

Okay, thank you.

Peter Ho

Okay.

Operator

And your next question comes from the line of Russell Gunther, representing Bank of America. Please proceed.

Russell Gunther - Bank of America

Hi guys, thanks for taking my questions. A bit of a follow-up on Jacque's in terms of the expense efficiencies; was the decline in the quarter in the net occupancy line largely due to the consolidation of branches in the fourth quarter or in the first, and then is there an expectation that that would be part of the driver for increased efficiencies going forward?

Peter Ho

Yeah, that’s certainly a piece of it and Kent, you probably have the numbers tighter than I do, but my recollection is, we did have a whole lot of that embedded in the first quarter, so that’s kind of a forward opportunity for us.

Kent Lucien

Yes, that really won’t begin to take effect until the second quarter forward.

Russell Gunther - Bank of America

Okay great. So there’s room for further improvement off of that. Already a nice pickup in the first quarter and the occupancy line?

Last question is a bit of housekeeping. Could you just remind me in terms of -- with regard to overdraft and processing transaction, are you guys on a as received basis low-to-high, high-to-low, where are you on that?

Peter Ho

We are low- high.

Russell Gunther - Bank of America

Okay, thanks soo much.

Peter Ho

Yes.

Operator

I have a follow-up question from the line of Brett Rabatin representing Sterne Agee. Please proceed.

Brett Rabatin - Sterne Agee

Hi, I just want to follow-up on the securities portfolio and what the duration was in the health and the maturity in the AFS portfolio? And I think you mentioned kind of a backup in duration during the quarter given rates. Can you talk about the sensitivity to higher rates on the duration?

Peter Ho

Yes, so I provided the AFS duration at 2.49 years, the overall is 3.2 years. I apologize, but I have to do some arithmetic to get just the HDM duration. But because there is mortgages in the portfolio, the duration is going to move up as rates go up, and that's the main reason that the duration increased in the quarter.

Brett Rabatin - Sterne Agee

Okay, but you guys weren't shortening or extending any duration during the quarter, if I understood correctly?

Kent Lucien

No, no, there's a little bit of that merely through the acquisition of the municipal securities. So, they do have some duration to them.

Brett Rabatin - Sterne Agee

Right.

Kent Lucien

But in terms of the strategy, the objective of maintaining a conservative portfolio on all dimensions, including duration, that's still in play.

Brett Rabatin - Sterne Agee

Okay. Thanks again.

Peter Ho

Your welcome.

Operator

At this time there are no further audio questions. I would now like to turn the call back over to management for closing remarks.

Cindy Wyrick

I'd like to thank everyone for joining us today and for your continued interest in Bank of Hawaii. As always, if you have additional questions or feel you need further clarification on any of the topics we discussed today, please give me a call. Thanks so much everyone and have a great day.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a great day.

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