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Edited Transcript of FBNK earnings conference call or presentation 19-Apr-17 2:30pm GMT

Thomson Reuters StreetEvents

Q1 2017 First Connecticut Bancorp Inc Earnings Call

FARMINGTON Oct 13, 2017 (Thomson StreetEvents) -- Edited Transcript of First Connecticut Bancorp Inc earnings conference call or presentation Wednesday, April 19, 2017 at 2:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jennifer Daukas

First Connecticut Bancorp Inc. - IRO

* John Patrick

First Connecticut Bancorp Inc. - Chairman, President & CEO

* Greg White

First Connecticut Bancorp Inc. - EVP, CFO & Treasurer

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Conference Call Participants

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* Damon DelMonte

Keefe, Bruyette & Woods - Analyst

* Matt Breese

Piper Jaffray & Co. - Analyst

* Dave Bishop

FIG Partners - Analyst

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Presentation

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Operator [1]

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Good day and welcome to the First Connecticut Bancorp first-quarter 2017 earnings conference call. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Jennifer Daukas. Please go ahead.

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Jennifer Daukas, First Connecticut Bancorp Inc. - IRO [2]

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Thanks, Fran. Good morning, everyone. I am the Investor Relations Officer for the Company.

Before we begin with our presentation, we would like to remind you to read our safe harbor advisement on forward-looking statements on our earnings announcement. Forward-looking statements, by their nature, are subject to risks and uncertainties. Certain factors could cause actual results to differ materially from expected results. Our comments today are intended to qualify for the Safe Harbor afforded by that advisement.

Thank you and now here is John Patrick, our Chairman, President, and CEO.

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John Patrick, First Connecticut Bancorp Inc. - Chairman, President & CEO [3]

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Good morning, everyone, and thank you for joining us on the call this morning. I am extremely pleased to announce our first-quarter earnings, up 41% from a year ago, and our earnings of $5.1 million for the quarter, or $0.32 a diluted share.

Couple things before I turn it over to Greg. As important as the rise in revenue that we had, the thing I'm most pleased with is, if you take a look at our expense management year over year and quarter to quarter, over the last 18 to 24 months we've always watched expenses, but within our strategic direction and our strategic plan, which guides our company and our employees, we have been focused in total quality improvement and being able to manage and drive our expenses down without -- by creating further efficiencies within the organization.

And it's a concept that our team embraced holistically and I think it's resulting in great results from an expense management perspective. You can directly see this in the first quarter, as you did in the fourth quarter last year.

We remain focused on growing our tangible book value and, as you can see, we did that markedly year over year. But we have also been talking about that we are focused on growing our ROA, ROE, which has seen market improvement quarter over quarter and year over year. And additionally, the expense management that I discussed earlier is reflected in our efficiency ratio getting into the 60%s.

We are certainly not satisfied with where we are right now and we continue to focus on improving all those metrics, but we believe that we are off to a very, very good start this year.

The quarter was pretty basic. As we talk about our model of taking in deposits and making good loans, we saw good loan growth, both in the mortgage banking side and on the commercial side. Secondarily, good deposit growth as well as opening our net new accounts on an ongoing basis.

So with that, let me turn it over to Greg and he will just comment on a couple other things from the financials.

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Greg White, First Connecticut Bancorp Inc. - EVP, CFO & Treasurer [4]

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Thanks, John. Let me start with the margin, since it was up significantly quarter over quarter, to set the expectations a little bit there if I could.

Our yield on interest-earning assets was up 18 basis points quarter over quarter. That was driven by a 12 basis point increase in our average loan yield. Of that 12 basis points about 7 or 8 of the those basis points were related to the 25 basis point Fed tightening from December of last year. So the other 4 or 5 basis points in that 12 basis point increase were largely due to the recognition of fees, especially unamortized origination fees on commercial loans that either paid off or refinanced with us.

So then the rest of what drove that asset yield higher: we had a 29 basis point increase in our yield on our securities portfolio; a $55 million reduction to our average Fed funds sold balances quarter over quarter; and an increase in our loans to total interest-earning asset as a percent of total interest-earning assets, meaning a positive mix benefit, if you will. We also had a 1 basis point decline in our cost of interest-bearing liabilities as well, so we are very pleased with the results, but the stars were a little bit aligned there obviously.

Then the only other comment would be our tax rate in the first quarter was 26.5%. That's down from the fourth quarter. The fourth quarter was a little elevated due to a write-off of a deferred tax asset related to our foundation established back in 2011, so the 26.5% from Q1 is a good rate to use going forward.

I will turn it back to you, John.

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John Patrick, First Connecticut Bancorp Inc. - Chairman, President & CEO [5]

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Thanks, Greg. As always, we appreciate the fact that there's a lot of calls that everybody needs to be on today, so you can all read the release and analyze the numbers.

My last couple of comments are that we continue to grow the bank. We are focused in on having -- creating franchise value and growing tangible book value, as well as our earnings-per-share growth. Our asset quality for the quarter continued to remain very strong and continues to look very favorable as we look into the future, as well as our pipelines are strong both on the commercial side and on the mortgage banking side. So all in all, we are off to a great start this year.

And as we said before, I think in keeping with the same theme, and I think it's reflected -- as Greg said, the stars were aligned relative to the margin, but we've talked for a long time about when rates rise and the fact that we are going to remain very, very focused on being asset-sensitive and that we had an asset-sensitive balance sheet. I think you are starting to see the benefits of that, the benefits of us being patient relative to building that asset-sensitive balance sheet during that period of time.

Then, secondarily, again as we talked about and I talked about earlier, the expense piece. We also mentioned building a scalable franchise and so you're seeing the benefit of that. A variety of things that have been driven by our strategic plan, which we have a focus on within our company, throughout our organization and the culture within the organization is really what's driving these results.

So at this point in time, let me turn it over for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Damon DelMonte, KBW.

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Damon DelMonte, Keefe, Bruyette & Woods - Analyst [2]

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Good morning, guys. How's it going today? Great. My first question is, Greg, could you just kind of go over the drivers of the margin increase again?

I got the first part. I think you said 7 to 8 basis points due to the Fed rate move in December; another 4 to 5 basis points that was fee-related from some commercial loans. And then what were the other two things you said after that?

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Greg White, First Connecticut Bancorp Inc. - EVP, CFO & Treasurer [3]

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Then if you look at the secure -- in the average balance table you see the securities portfolio yield was up 29 basis points linked-quarter. Then also our Fed funds sold had a reduction of about $55 million. We were selling Fed funds in the fourth quarter; we were not in the first quarter.

And then just total loans as a percent of interest-earning assets went up a little bit, so we had a positive mix increase benefit there, too.

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Damon DelMonte, Keefe, Bruyette & Woods - Analyst [4]

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That's helpful. Again, the 7 to 8 basis points on the Fed rate move in December, how are you looking at the margins impact based on the latest move in March?

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Greg White, First Connecticut Bancorp Inc. - EVP, CFO & Treasurer [5]

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We're sticking with each quarter we should get a probably 4 to 5 basis point increase in our margin each 25 basis point Fed increase. And obviously that does assume some cost of funds increase, which did not happen in quarter one so I would almost call that maybe a long-term view of a Fed increase. The immediate impact could be better than that, which obviously that's what occurred Q1.

But that's why I wanted to point that kind of 7 to 8 basis points of the loan yield increase was kind of very in lockstep with what we've been saying, roughly 30% of loans reprice almost immediately.

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Damon DelMonte, Keefe, Bruyette & Woods - Analyst [6]

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Got you, okay. Then kind of along the lines of the deposit pricing trends you guys are seeing, I think a common thought is that until the bigger banks start to get more aggressive with their deposit pricing, the smaller banks are going to be able to lag and keep their cost of funds lower.

What are you guys seeing across your footprint right now? Are the larger players, whether it be Bank of America or Wells Fargo or the next tier down, the Peoples, Webster, KeyCorp I guess now in the market, what are you seeing from them from competition and what are you seeing even from smaller community bank levels?

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John Patrick, First Connecticut Bancorp Inc. - Chairman, President & CEO [7]

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Damon, this is John. It's very isolated, so we are seeing certain markets may have run a special from the Community Bank side of things. Somebody might jump into the market with a special; they may have a funding need and then they kind of -- it seems to kind of jump out.

That's not to say that it's not highly competitive, but from the Bank of America and Wells we don't necessarily -- they haven't done anything necessarily to drive depositors to them. In fact, the negative publicity from Wells has helped us a little bit.

From a Bank of America side of things, it just -- anecdotal story; I had a conversation with one of our branch managers today who had a customer moving something from Bank of America. If you want to move anything with your account at Bank of America you have to make an appointment before you go in there, from my understanding, at least, of this situation.

As long as they keep doing those type of things, we will still be able to continue to grow. I think -- I don't want to say regardless of rate, but that's still a competitive advantage when you can talk to somebody within the branch network without having to make an appointment first.

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Damon DelMonte, Keefe, Bruyette & Woods - Analyst [8]

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Okay, that's helpful. Thank you. Then I guess one final question on loan growth; the outlook very strong to start off the year at, call it, 9% linked-quarter annualized.

Has your view on the growth for the year changed at all? I know last year you guys kind of took a more measured approach to growth and you were -- dialed it back a little bit. What are you seeing for 2017?

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John Patrick, First Connecticut Bancorp Inc. - Chairman, President & CEO [9]

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I think we are seeing just about the same type of growth as we talked about before, Damon, from last year. A), number one, I will say the credit side of things has gotten a little frostier than it was before and a lot of times you will see that in the first quarter.

We have -- our pipelines, as I said before, remain very, very strong and we anticipate that we are going to try to grow deposits quicker than we are growing loans again this year; managing our loan to deposit ratio, which we are comfortable with. And so we will take the opportunities as we see them, but I would anticipate right now that we will see loan growth at similar levels that we talked about last year.

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Damon DelMonte, Keefe, Bruyette & Woods - Analyst [10]

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Okay. And do you guys have kind of a year-end target for your loan-to-deposit ratio?

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Greg White, First Connecticut Bancorp Inc. - EVP, CFO & Treasurer [11]

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We don't target the ratio, per se. What we talk about is growing deposits at about $200 million and growing loans about $175 million.

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Damon DelMonte, Keefe, Bruyette & Woods - Analyst [12]

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Okay, that's all I had for now. I will hop back in afterwards.

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Operator [13]

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Matt Breese, Piper Jaffray.

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Matt Breese, Piper Jaffray & Co. - Analyst [14]

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Good morning. Thanks for taking my question, guys. Just going back to the margin, Greg, last quarter you had said the 30% of loans that repriced immediately, but then there was another subset that reprices on a lag, three to six months.

And so two-part question: What is the dollar amount of those loans? And absent any sort of Fed hike, what is the repricing capabilities of those loans and what impact will it have on the margin? Again, without any Fed hikes.

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Greg White, First Connecticut Bancorp Inc. - EVP, CFO & Treasurer [15]

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Yes, without a Fed hike; I don't have that answer in front of me. I would think it would be pretty neutral the repricing loans, a mix of loans repricing up, loans down.

And then as far as -- I would say you would have to -- between immediate and a year we are approaching close to another $100 million of loans. Not quite, but -- of repricing, which was the first part of your question.

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Matt Breese, Piper Jaffray & Co. - Analyst [16]

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Right. So really additional margin expansion is predicated on the Fed hikes. If we don't get one would that imply things are kind of flattish from here?

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Greg White, First Connecticut Bancorp Inc. - EVP, CFO & Treasurer [17]

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Well, I'd say let's not ignore, obviously, the Fed tightening in March, obviously.

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Matt Breese, Piper Jaffray & Co. - Analyst [18]

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Right, right. Okay, so some flow-through from that and then Fed-dependent thereafter?

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Greg White, First Connecticut Bancorp Inc. - EVP, CFO & Treasurer [19]

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Yes. Yes, yes; I'd say our origination yield is pretty close to portfolio yields currently. So if rates stayed here, yes, clearly the margin would -- we'd get a little pickup from the March tightening and then origination yields would kind of keep margins roughly the same, depending on the mix.

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Matt Breese, Piper Jaffray & Co. - Analyst [20]

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Got it, okay. Then just going back to the deposit beta question; there's been zero beta. What is your gut on when we should actually expect some? And do you think that is a 2017 or a 2018 event?

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John Patrick, First Connecticut Bancorp Inc. - Chairman, President & CEO [21]

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I think it is dependent upon are there more rate increases this year or not? The other thing that we watch, Matt, too, is that -- I think everybody is watching -- is that it's great to see short-term interest rates go up with what the 10-year is doing. So we had a nice movement in 10-year earlier in the quarter, the last three weeks have saw -- have seen the 10-year come back down a little bit too, so no one is rushing to, at least as I said before in our market, be the first one out there raising rates.

Also, I think that -- I've said this before where we have significantly invested in infrastructure, in technology, in information security, and in risk management. There's a lot of companies that are taking the opportunity to do some of that now and so they are managing things from the expense side of things. And again even the mutuals that, quite frankly, don't have any access to outside capital except retained earnings, they aren't rushing out there to raise interest rates that we are seeing on the deposit side very quickly.

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Matt Breese, Piper Jaffray & Co. - Analyst [22]

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Got it, okay. Then in terms of your geography, could you just talk about your core markets in Central Connecticut and Hartford versus Western Mass? Where are you getting better yields? Where is there more activity? Which one are you more excited about?

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John Patrick, First Connecticut Bancorp Inc. - Chairman, President & CEO [23]

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Excited, I don't know about excited. I would say that we look at the markets; they are very similar. I think Western Massachusetts, from an economic perspective, is probably doing better. It is doing better than Central Connecticut.

That said, we've been dealing with (inaudible) economy in Central Connecticut for the last 15 years, so we are used to dealing in an economy that grows relatively slowly here or no growth at all. From a competitive perspective, it's competitive all over the place.

So I wouldn't say that we are getting better pricing in Massachusetts versus Connecticut or vice versa; it's very competitive throughout the market. Keeping in mind that, as you know, Western Massachusetts for us is 26 miles up highway, so not a huge difference relative to geography.

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Matt Breese, Piper Jaffray & Co. - Analyst [24]

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Right, understood. Thanks, guys. That's all I had.

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Operator [25]

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Dave Bishop, FIG Partners.

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Dave Bishop, FIG Partners - Analyst [26]

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Good morning, guys. Just curious, in terms of the tenor of loan demand there; there was some euphoria after the election here. Just curious when you speak to some of the business customers within the market, have they become more optimistic sort of following the election there and has that tapered off?

Just curious when you take the pulse of the business community out there what you are hearing.

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John Patrick, First Connecticut Bancorp Inc. - Chairman, President & CEO [27]

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I don't think, at least in our marketplace, there was much exuberance as there was throughout the United States. There was -- we have had some pent-up demand, especially on the manufacturing sector here with United Technologies, specifically Pratt & Whitney and the F-35. Additionally, we are seeing some of the businesses that we do business with -- Electric Boat has a pretty significant backlog.

So from the manufacturing side of things, there's still some very good optimism. Those projects have not gotten off to as quick a start as they anticipated that they were going to be. Pratt is working through some issues on the F-35, but once those -- but the backlogs continue to remain very, very strong. And I think once some of these projects that are out there that -- the businesses that we deal with and rely on Pratt and Electric Boat and others, once those major projects on a national basis start taking off we will see some of the benefit of that.

When we take a look -- so we monitor by taking a look at what is line utilization. Our company is taking down new term debt for equipment financing and that type of thing. While there's that optimism, they are cautious not to pull the trigger too early and so line debt and that type of thing remains pretty stable from where it was. But I think overall the backlog that our companies are seeing are very healthy.

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Dave Bishop, FIG Partners - Analyst [28]

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Got it, got it. And then just in terms of some of the deposit flows this quarter, is that -- is some of the typical seasonality we see there, especially on the interest NOW accounts, the rebuild from those balances on a seasonal basis?

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John Patrick, First Connecticut Bancorp Inc. - Chairman, President & CEO [29]

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Yes, that's some of the municipal balances coming in in January, as well as -- we still continue to open a significant number of checking accounts in our marketplace, too. So it's a combination of both, but primarily municipal.

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Dave Bishop, FIG Partners - Analyst [30]

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And outlook for potential new branches this year?

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John Patrick, First Connecticut Bancorp Inc. - Chairman, President & CEO [31]

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We still have Manchester on the drawing board and we would anticipate that that will be opening later this year as we've talked about before.

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Dave Bishop, FIG Partners - Analyst [32]

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Got it, thank you.

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Operator [33]

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(Operator Instructions) This concludes our question-and-answer session. I would like to turn the conference back over to John Patrick for any closing remarks.

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John Patrick, First Connecticut Bancorp Inc. - Chairman, President & CEO [34]

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Thank you very much. Again, I appreciate everyone's interest in our company. We had a really good quarter; but that said, it is a quarter. We are focused on the second quarter and the remainder of the year. Very focused on making sure that we are growing our earnings per share on an annualized basis, as well as focused on tangible book value.

But, overall, we are very pleased with where we were in the first quarter and thank you all for joining us today.

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Operator [35]

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The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.