-
Extinguishment of debt
For the
quarter ended September 30, 2009 we recorded a $5.3 million pre-tax gain from
the extinguishment of debt resulting from the foreclosure of one of our
participated loans. See Note 1
Summary of
Significant Accounting Policies for more information on the accounting
treatment of the loan participations.
Noninterest Expense
Noninterest expense decreased $5.2
million or 27%, for the three months ended September 30, 2009 compared to the
same period in 2008. The decrease is primarily due to a $5.9 million goodwill
impairment charge associated with Millennium in the third quarter of 2008.
Excluding the goodwill impairment charge, noninterest expenses increased
$746,000, or 6%, compared to third quarter of 2008. The increase is primarily
due to a $927,000 increase from Loan legal and other real estate expenses
related to nonperforming assets. This increase was offset by a $375,000 decrease
in salaries and benefits due to staff reductions and lower producer compensation
in Millennium.
For the nine months ended September 30,
2009, noninterest expense increased $43.1 million or 94% from prior year. The
increase is due to $45.4 million and $5.9 million of impairment charges related
to the banking segment and Millennium, respectively.
Excluding the goodwill impairment
charges, noninterest expenses were $43.4 million during the nine months ended
September 30, 2009, an increase of $3.6 million, or 9%, from the same period in
2008. The year-over-year increase includes additional FDIC premiums of $2.2
million due to the FDIC special assessment and newly implemented rate structure
and $2.9 million of legal and other real estate expenses related to
nonperforming assets. These increases are offset by a $1.9 million decrease in
salaries and benefits due to staff reductions and reduced incentive
compensation.
For the three and nine months ended
September 30, 2009, increases in Occupancy expenses were primarily due to
expenses related to a new Wealth Management location which was occupied in the
fourth quarter of 2008.
For the nine months ended September 30,
2009, Amortization of intangibles decreased $288,000 due to a lower carrying
value on the customer related intangible that resulted from the Millennium
impairment charge in the fourth quarter of 2008.
The Companys efficiency ratio in the
third quarter of 2009 was 51% compared to 79% in the third quarter of 2008.
Absent the gain on extinguishment of debt in the third quarter of 2009 and the
branch sale gain and impairment charges in the third quarter of 2008, the
efficiency ratio was 64% and 62%, respectively. For the nine months ended
September 30, 2009 and 2008, the efficiency ratio is 124% and 68%, respectively.
Absent the gain on extinguishment of debt in 2009 and the branch sale gains and
impairment charges in 2008, the year-to-date efficiency ratio was 66% and 72%,
respectively.
On September 29, 2009, the FDIC
announced that at on December 29, 2009, insured institutions will be required to
prepay their estimated quarterly risk-based assessments for the fourth quarter
of 2009 and for all of 2010, 2011 and 2012. We expect the prepayment amount will
be approximately $11.0 million. To account for the prepayments, the entire
amount of the prepaid FDIC assessment will be recorded as an asset (prepaid
expense) on December 29, 2009 and expensed over the subsequent three years.
Income Taxes
Generally, the provision for income taxes is determined by
applying an estimated annual effective income tax rate to income before income
taxes. The rate is based on the most recent annualized forecast of pretax
income, permanent book versus tax differences and tax credits. However, when a
reliable estimate of the annual effective tax rate cannot be made, the actual
effective tax rate for the year-to-date period may be used. In the third quarter
of 2009, the Company concluded that minor changes in the Companys 2009
estimated pre-tax results and projected permanent items produced significant
variability in the estimated annual effective tax rate, and thus, the estimated
rate may not be reliable. Accordingly, the Company has determined that the
actual effective tax rate for the year-to-date period is the best estimate of
the effective tax rate. We re-evaluate the combined federal and state income tax
rates each quarter. Therefore, the current projected effective tax rate for the
entire year may change.
For the three months ended September
30, 2009, the Companys income tax expense, which includes both federal and
state taxes, was $2.2 million compared to $882,000 for the same period in 2008.
For the nine months ended September 30, 2009, the income tax benefit was $2.3
million compared to an income tax expense of $4.1 million for the same period in
2008. The combined federal and state effective income tax rates for the three
and nine months ended September 30, 2009 were 31.8% and 4.7%, respectively,
compared to 42.3% and 36.1% for the same periods in 2008. Our income tax
provision in the first nine months of 2009 reflects the impact of the $45.4
million goodwill impairment charge, which is not tax deductible. The change in
the effective tax rate year over year is primarily the result of the
nondeductible goodwill impairment charge and other permanent differences related
to tax exempt interest and federal tax credits.
29
The Company recognizes deferred tax
assets only to the extent that they are expected to be used to reduce amounts
that have been paid or will be paid to tax authorities. Management has
determined, based on all positive and negative evidence, that the Companys
deferred tax asset at September 30, 2009 is more likely-than-not-to be realized,
and accordingly, no valuation allowance has been recorded.
Liquidity and Capital
Resources
Liquidity management
Increasing our liquidity position is
a key initiative for us during 2009. The objective of liquidity management is to
ensure the Company has the ability to generate sufficient cash or cash
equivalents in a timely and cost-effective manner to meet its commitments as
they become due. Funds are available from a number of sources, such as from the
core deposit base and from loans and securities repayments and maturities.
Additionally, liquidity is provided from sales of the securities portfolio,
lines of credit with major banks, the Federal Reserve and the FHLB, the ability
to acquire brokered deposits and the ability to sell loan participations to
other banks.
The Companys liquidity management
framework includes measurement of several key elements, such as the loan to
deposit ratio, volatile liabilities as a percentage of long-term earning assets,
and liquid assets plus availability on secured lines as a percentage of certain
liabilities. The Companys liquidity framework also incorporates contingency
planning to assess the nature and volatility of funding sources and to determine
alternatives to these sources. Strong capital ratios, credit quality and core
earnings are essential to retaining cost-effective access to the wholesale
funding markets. Deterioration in any of these factors could have an impact on
the Companys ability to access these funding sources and, as a result, these
factors are monitored on an ongoing basis as part of the liquidity management
process.
While core deposits and loan and
investment repayments are principal sources of liquidity, funding
diversification is another key element of liquidity management. Diversity is
achieved by strategically varying depositor types, terms, funding markets, and
instruments.
Parent Company
liquidity
The parent companys liquidity
is managed to provide the funds necessary to pay dividends to shareholders,
service debt, invest in subsidiaries as necessary, and satisfy other operating
requirements. The parent companys primary funding sources to meet its liquidity
requirements are dividends and other payments from subsidiaries and proceeds
from the issuance of equity (i.e. stock option exercises).
In December 2008, the Company was
approved by the U.S. Treasury for a $62.0 million Capital Purchase Program
investment. At the same time, the Company had the opportunity to privately place
a Convertible Trust Preferred Security offering. As a result, the Company
decided to take advantage of both the private and public capital
sources.
On December 12, 2008, we completed a
private placement of $25.0 million in Convertible Trust Preferred Securities
that qualify as Tier II regulatory capital until they would convert to EFSC
common stock. We also received $35.0 million from the U.S. Treasury under the
Capital Purchase Program on December 19, 2008.
As of December 31, 2008, $20.0 million
of the capital funds were used to pay off the Companys line of credit and term
loan. Our line of credit with a major bank was closed during the first quarter
of 2009. In December 2008, we also injected $18.0 million into Enterprise to
support continued loan growth and bolster its capital ratios.
As of September 30, 2009, the Company
had $82.6 million of outstanding subordinated debentures as part of nine Trust
Preferred Securities Pools. These securities are classified as debt but are
included in regulatory capital and the related interest expense is
tax-deductible, which makes them a very attractive source of funding. Management
believes our current level of cash at the holding company of approximately $17.0
million will be sufficient to meet all projected cash needs in 2009.
On June 17, 2009, the Company filed a
Shelf Registration statement on Form S-3 for up to $35 million of certain types
of our securities. Proceeds from an offering would be used for capital
expenditures, repayment or refinancing of indebtedness or other securities from
time to time, working capital, to make acquisitions, or for general corporate
purposes. The Registration became effective on July 1, 2009. We are sensitive to
the dilution a stock offering may have on our shareholders and therefore, are
carefully monitoring the equity markets.
30
Enterprise liquidity
Enterprise is subject to State and FDIC
regulations, which among other things may limit its ability to pay dividends or
transfer funds to the parent Company. Accordingly, consolidated cash flows as
presented in the consolidated statements of cash flows may not represent cash
immediately available for the payment of cash dividends to the Companys
shareholders or for other cash needs.
During the third quarter of 2009, we
continued to strengthen our liquidity position. Core deposit balances increased
$122.8 million, including $94.9 million in certificates of deposit, both from
the CDARS program and our own CDs. Loan balances declined $21.0 million as loan
clients continued using their cash to paydown outstanding loans. The increase in
core deposits along with the reduced loan funding requirements enabled us to
reduce brokered time deposits by $28.5 million and short-term borrowings by
$22.2 million. In addition, we increased our investment portfolio by $42.0
million and increased cash reserves by $48.0 million.
Enterprise has a variety of funding
sources available to increase financial flexibility. In addition to amounts
currently borrowed, at September 30, 2009, Enterprise could borrow an additional
$121.7 million from the FHLB of Des Moines under blanket loan pledges and an
additional $290.6 million from the Federal Reserve Bank under a pledged loan
agreement. Enterprise has unsecured federal funds lines with three correspondent
banks totaling $30.0 million at September 30, 2009.
As of September 30, 2009, of the $197.5
million of the securities available for sale, $64.1 million was pledged as
collateral for public deposits, treasury, tax and loan notes, and other
requirements. The remaining $133.4 million could be pledged or sold to enhance
liquidity, if necessary.
In July 2008, Enterprise joined the
Certificate of Deposit Account Registry Service, or CDARS, which allows us to
provide our customers with access to additional levels of FDIC insurance
coverage. The Company considers the reciprocal deposits placed through the CDARS
program as core funding and does not report the balances as brokered sources in
its internal or external financial reports. As of September 30, 2009, the Bank
had $133.0 million of reciprocal CDARS deposits outstanding. In addition to the
reciprocal deposits available through CDARS, we also have access to the one-way
buy program, which allows us to bid on the excess deposits of other CDARS
member banks. The Company will report any outstanding one-way buy funds as
brokered funds in its internal and external financial reports. At September 30,
2009, we had no outstanding one-way buy deposits.
Finally, because the bank is
well-capitalized, it has the ability to sell certificates of deposit through
various national or regional brokerage firms, if needed. At September 30, 2009,
we had $207.6 million of brokered certificates of deposit outstanding compared
to $336.0 million outstanding at December 31, 2008, a decrease of $128.4
million.
Over the normal course of business, the
Company enters into certain forms of off-balance sheet transactions, including
unfunded loan commitments and letters of credit. These transactions are managed
through the Companys various risk management processes. Management considers
both on-balance sheet and off-balance sheet transactions in its evaluation of
the Companys liquidity. The Company has $468.0 million in unused loan
commitments as of September 30, 2009. While this commitment level would be
difficult to fund given the Companys current liquidity resources, the nature of
these commitments is such that the likelihood of funding them is low.
Regulatory capital
The Company and its bank affiliate
are subject to various regulatory capital requirements administered by the
Federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possible additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Company and its bank affiliate must
meet specific capital guidelines that involve quantitative measures of assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The banking affiliates capital amounts and classification
are also subject to qualitative judgments by the regulators about components,
risk weightings and other factors.
Quantitative measures established by
regulation to ensure capital adequacy require the Company and its banking
affiliate to maintain minimum amounts and ratios (set forth in the following
table) of total and Tier 1 capital to risk-weighted assets, and of Tier 1
capital to average assets. To be categorized as well capitalized, banks must
maintain minimum total risk-based (10%), Tier 1 risk-based (6%) and Tier 1
leverage ratios (5%). Management believes, as of September 30, 2009 and December
31, 2008, that the Company and its banking affiliates meet all capital adequacy
requirements to which they are subject.
31
The following table summarizes the
Companys risk-based capital and leverage ratios at the dates indicated:
|
At Sept 30
|
|
At December 31
|
(Dollars in
thousands)
|
2009
|
|
2008
|
Tier
I capital to risk weighted assets
|
|
7.54
|
%
|
|
|
8.89
|
%
|
Total capital to risk
weighted assets
|
|
11.87
|
%
|
|
|
12.81
|
%
|
Leverage ratio (Tier I capital to average assets)
|
|
6.97
|
%
|
|
|
8.67
|
%
|
Tangible common equity to
tangible assets
|
|
5.14
|
%
|
|
|
6.07
|
%
|
Tier
I capital
|
$
|
171,481
|
|
|
$
|
190,254
|
|
Total risk-based
capital
|
$
|
269,926
|
|
|
$
|
273,977
|
|
Critical Accounting Policies
The impact and any associated risks
related to the Companys critical accounting policies on business operations are
discussed throughout Managements Discussion and Analysis of Financial
Condition and Results of Operations, where such policies affect our reported
and expected financial results. For a detailed discussion on the application of
these and other accounting policies, see the Companys Annual Report on Form
10-K for the year ended December 31, 2008.
The Companys consolidated financial
position reflects material amounts of assets and liabilities that are measured
at fair value. Securities available for sale and state tax credits held for sale
are carried at fair value. The fair value of securities available for sale is
based upon measurements from an independent pricing service, including dealer
quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading
levels, trade execution data and other information. Fair value of state tax
credits held for sale is determined using an internal valuation model with
observable market data inputs. Considerable judgment may be required in
determining the assumptions used in certain pricing models, including interest
rate, credit risk and liquidity risk assumptions. Changes in these assumptions
may have a significant effect on values.
New Accounting Standards
In June 2009, the FASB issued Accounting
Standards Codification (ASC) 860
Transfers
and Servicing
(formerly FASB No. 166,
Accounting for Transfers of Financial Assets
an amendment of FASB Statement No. 140
) which
requires additional information regarding transfers of financial assets,
including securitization transactions, and where companies have continuing
exposure to the risks related to transferred financial assets. This standard
eliminates the concept of a qualifying special-purpose entity, changes the
requirements for derecognizing financial assets, and requires additional
disclosures. It is effective for fiscal years beginning after November 15, 2009.
We are currently evaluating the impact that the adoption of this standard will
have on our financial position, results of operations, cash flows or
disclosures.
In June 2009, the FASB issued FASB No.
167,
Amendments to FASB Interpretation No.
46(R)
(FASB 167) which has not yet been
codified in the ASC. FASB 167 amends Interpretation No. 46(R) to require ongoing
reassessments of whether an enterprise is the primary beneficiary of a variable
interest entity. Additionally, FASB 167 requires enhanced disclosures that will
provide users of financial statements with more transparent information about an
enterprises involvement in variable interest entities. FASB 167 is effective
for fiscal years beginning after November 15, 2009. We are currently evaluating
the impact that the adoption of FASB 167 will have on our financial position,
results of operations, cash flows or disclosures.
ITEM 3: QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
The disclosures set forth in this item
are qualified by the section captioned Safe Harbor Statement Under the Private
Securities Litigation Reform Act of 1995 included in Item 2 Managements
Discussion and Analysis of Financial Condition and Results of Operations of this
report and other cautionary statements set forth elsewhere in this report.
Market risk arises from exposure to
changes in interest rates and other relevant market rate or price risk. The
Company faces market risk in the form of interest rate risk through transactions
other than trading activities. Market risk from these activities, in the form of
interest rate risk, is measured and managed through a number of methods. The
Company uses financial modeling techniques to measure interest rate risk. These
techniques measure the sensitivity of future earnings due to changing interest
rate environments. Guidelines established by the Asset/Liability Management
Committees and approved by the Companys Board of Directors are used to monitor
exposure of earnings at risk. General interest rate movements are used to
develop sensitivity as the Company feels it has no primary exposure to a
specific point on the yield curve. These limits are based on the Companys
exposure to a 100 basis points and 200 basis points immediate and sustained
parallel rate move, either upward or downward.
32
Interest rate simulations for September
30, 2009 demonstrate that a rising rate environment will initially have a
negative impact on net interest income because the Enterprise prime rate is set
higher than the market prime rate and will not increase with the cost of our
deposits and other interest-bearing liabilities.
The following table represents the
Companys estimated interest rate sensitivity and periodic and cumulative gap
positions calculated as of September 30, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beyond
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
or no stated
|
|
|
|
(in
thousands)
|
Year 1
|
|
Year 2
|
|
Year 3
|
|
Year 4
|
|
Year 5
|
|
maturity
|
|
Total
|
Interest-Earning Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale
|
$
|
70,790
|
|
|
$
|
39,308
|
|
|
$
|
24,090
|
|
$
|
10,520
|
|
$
|
787
|
|
|
$
|
52,026
|
|
$
|
197,521
|
Other investments
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
13,548
|
|
|
13,548
|
Interest-bearing deposits
|
|
82,651
|
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
82,651
|
Federal funds sold
|
|
1,771
|
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
1,771
|
Loans (1)
|
|
1,476,673
|
|
|
|
203,065
|
|
|
|
135,952
|
|
|
199,357
|
|
|
5,373
|
|
|
|
92,945
|
|
|
2,113,365
|
Loans held for sale
|
|
2,130
|
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
2,130
|
Total interest-earning assets
|
$
|
1,634,015
|
|
|
$
|
242,373
|
|
|
$
|
160,042
|
|
$
|
209,877
|
|
$
|
6,160
|
|
|
$
|
158,519
|
|
$
|
2,410,986
|
|
Interest-Bearing Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings, NOW and Money market deposits
|
$
|
757,542
|
|
|
$
|
-
|
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
|
$
|
-
|
|
$
|
757,542
|
Certificates of deposit
|
|
634,083
|
|
|
|
147,700
|
|
|
|
28,526
|
|
|
13,760
|
|
|
96
|
|
|
|
14,023
|
|
|
838,188
|
Subordinated debentures
|
|
32,064
|
|
|
|
10,310
|
|
|
|
14,433
|
|
|
-
|
|
|
28,274
|
|
|
|
-
|
|
|
85,081
|
Other borrowings
|
|
351,156
|
|
|
|
20,396
|
|
|
|
22,096
|
|
|
87
|
|
|
7
|
|
|
|
10,368
|
|
|
404,110
|
Total interest-bearing liabilities
|
$
|
1,774,845
|
|
|
$
|
178,406
|
|
|
$
|
65,055
|
|
$
|
13,847
|
|
$
|
28,377
|
|
|
$
|
24,391
|
|
$
|
2,084,921
|
|
Interest-sensitivity GAP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAP by
period
|
$
|
(140,830
|
)
|
|
$
|
63,967
|
|
|
$
|
94,987
|
|
$
|
196,030
|
|
$
|
(22,217
|
)
|
|
$
|
134,128
|
|
$
|
326,065
|
Cumulative
GAP
|
$
|
(140,830
|
)
|
|
$
|
(76,863
|
)
|
|
$
|
18,124
|
|
$
|
214,154
|
|
$
|
191,937
|
|
|
$
|
326,065
|
|
$
|
326,065
|
Ratio of interest-earning assets to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
interest-bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Periodic
|
|
0.92
|
|
|
|
1.36
|
|
|
|
2.46
|
|
|
15.16
|
|
|
0.22
|
|
|
|
6.50
|
|
|
1.16
|
Cumulative
GAP as of September 30, 2009
|
|
0.92
|
|
|
|
0.96
|
|
|
|
1.01
|
|
|
1.11
|
|
|
1.09
|
|
|
|
1.16
|
|
|
1.16
|
(1) Adjusted for the impact of the
interest rate swaps.
33
ITEM 4: CONTROLS AND PROCEDURES
As of September 30, 2009, under the
supervision and with the participation of the Companys Chief Executive Officer
(CEO) and the Chief Financial Officer (CFO), management has evaluated the
effectiveness of the design and operation of the Companys disclosure controls
and procedures pursuant to Exchange Act Rule 13a-15. Based on that evaluation,
the CEO and CFO concluded that the Companys disclosure controls and procedures
were effective as of September 30, 2009, to ensure that information required to
be disclosed in the Companys periodic SEC filings is processed, recorded,
summarized and reported when required. There were no changes during the period
covered by this Quarterly Report on Form 10-Q in the Companys internal controls
that have materially affected, or are reasonably likely to materially affect,
those controls.
PART II OTHER
INFORMATION
ITEM 6: EXHIBITS
Exhibit
|
|
|
Number
|
|
|
Description
|
|
|
|
Registrant herby agrees to furnish to the Commission,
upon request, the instruments defining the rights of holders of each issue
of long-term debt of Registrant and its consolidated
subsidiaries.
|
|
|
|
*31.1
|
|
Chief Executive Officers Certification required by Rule
13(a)-14(a).
|
|
*31.2
|
|
Chief Financial Officers Certification required by Rule
13(a)-14(a).
|
|
**32.1
|
|
Chief Executive Officer Certification pursuant to 18
U.S.C. § 1350, as adopted pursuant to section § 906 of the Sarbanes-Oxley
Act of 2002.
|
|
**32.2
|
|
Chief Financial Officer Certification pursuant to 18
U.S.C. § 1350, as adopted pursuant to section § 906 of the Sarbanes-Oxley
Act of 2002.
|
* Filed herewith
** Furnished herewith. Notwithstanding
any incorporation of this Quarterly Statement on Form 10-Q in any other filing
by the Registrant, Exhibits furnished herewith and designated with two (**)
shall not be deemed incorporated by reference to any other filing unless
specifically otherwise set forth herein.
34
SIGNATURES
Pursuant to the requirements of the
Securities Exchange Act of 1934, as amended, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized,
in the City of Clayton, State of Missouri on the day of November 6, 2009.
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ENTERPRISE FINANCIAL SERVICES CORP
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By:
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/s/ Peter F. Benoist
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Peter F.
Benoist
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Chief Executive
Officer
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By:
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/s/ Frank H. Sanfilippo
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Frank H.
Sanfilippo
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Chief Financial
Officer
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35
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