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Good day and welcome to the Renasant Corporation 2017 Fourth Quarter Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.
I would now like to turn the conference over to Kevin Chapman. Please go ahead, sir.
Good morning and thank you for joining us for Renasant Corporation's 2017 fourth quarter earnings webcast and conference call. Participating with me in this call today are members of Renasant's executive management team.
Before we begin, let me remind you that some of our comments during this call may be forward-looking statements, which involve risks and uncertainty. A number of factors could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements. Those factors include, but are not limited to, interest rate fluctuations, regulatory changes, portfolio performance and other factors discussed in our recent filings with the Securities and Exchange Commission.
We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time.
In this quarterly call, in particular our statements about the outlook and expectations with respect to the recent enactment of the Tax Cuts and Jobs Act, effective January 1st of 2018, including among other things the expected impact of this legislation on our net deferred tax assets, the impact of the reevaluation of the net deferred tax assets on our fourth quarter 2017 earnings and our effective tax rate and future years are forward-looking statements.
In addition, some of the financial measures that we may discuss this morning may be non-GAAP financial measures. A reconciliation of the non-GAAP measures to the most comparable GAAP measure can be found in our earnings release, which has already been posted to our website at www.renasant.com in the press release section under Investor Relations' tab.
And now I'll turn the call over to Robin McGraw, Chairman and CEO of Renasant Corporation. Robin?
Thank you, Kevin. Good morning everyone and thank you for joining us today. Looking at our results for the fourth quarter of 2017, net income was approximately $16.5 million, as compared to $23.6 million for the fourth quarter of 2016. This decrease is a result of the immediate impact of the Tax Cuts and Jobs Act, which was enacted into law on December 22, 2017. While we expect to see significant long-term benefits from this law, we will require to revalue our net deferred tax assets from the date of enactment as a result of the new law.
This revaluation full details of which are provided in our earnings release, resulted in a write-down of the company’s net deferred tax assets of approximately $14.5 million, which was charged against fourth quarter earnings.
Our basic and diluted EPS was $0.33 for the fourth quarter and as compared to $0.55 respectively for the fourth quarter of 2016. Excluding the write-down of our net deferred tax asset and the merger expenses incurred during the quarter, net income for the fourth quarter of 2017 was $31.5 million or $0.64 per share.
Net income for the year ending December 31, 2017, was $92.2 million as compared to $90.9 million for the same period in 2016. Basic and diluted EPS were $1.97 and $1.96 respectively for 2017, as compared to basic and diluted EPS of $2.18 and $2.17 respectively, for the same period in 2016.
Excluding the write-down of our net deferred tax assets and other non-recurring expenses incurred during the year, net income for the year was $113.7 million or $2.42 per share. Our results of operations as of and for the year ended December 31, 2017 include the impact of our acquisition of Metropolitan BancGroup, Inc. which was completed on July 1, 2017. The assets acquired and the liabilities assumed have been recorded at estimated fair value and are subject to change pending finalization of all valuations.
Turning our attention to the recently enacted Tax Cuts and Jobs Act, among other things, the new legislation permanently lowers the federal corporate tax rate effective the year’s including or beginning January 1, 2018. The United States generally accepted accounting principles required the company to revalue our net deferred tax asset on the date of enactment, based on the reduction of the overall future tax benefit expected to be realize by the lower tax rate.
After reviewing our inventory of deferred tax assets and liabilities on the date of enactment and giving consideration as a future impact of the lower corporate tax rates and other provision in the new legislation, we estimated the write-down of our net deferred tax assets to be approximately $14.5 million, which is inclusive of a $2 million write-down of deferred tax items accounted for and accumulated other comprehensive income.
This write-down is included in our operating results for the fourth quarter of 2017, and is an increase to the provision for income taxes. Our initial estimates may be adjusted in future periods based on a number of factors and uncertainties including the finalization of our 2017 tax returns. Further clarification from the Financial Accounting Standards Board and the proper treatment of tax effects of items presented and accumulated other comprehensive income and additional guidance released on the new legislation.
As a result of acquisition of Metropolitan coupled with organic balance sheet growth our assets exceeded $10 billion at the end of the third quarter of 2017. In order to delay the adverse impact the Durbin Amendment of the Dodd-Frank Act, which, among other things, imposes limitations on the amount of debit card interchange fees certain banking institutions may collect. We initiated several strategic initiatives to manage our consolidated assets below $10 billion at December 31, 2017, which is the threshold at which bank holding companies are subject to the Durbin Amendment.
More specifically, we sold certain investment securities and shortened the holding period of our mortgage loans held for sale. The proceeds from these initiatives were used to reduce certain wholesale funding sources. The pre-tax cost of the overall initiative of the fourth quarter of 2017, which includes interest income foregone on the securities and mortgage loans sold, approximated $450,000, and were slightly offset by a pre-tax gain of $91,000 resulting from the sale of investment securities.
We have previously disclosed the estimated impact of the Durbin Amendment on our interchange fee income in 2018, would be approximately $2.1 million to $2.3 million per quarter beginning in the third quarter of this year. During the first quarter of 2018, we intend to lengthen the holding period of our mortgage loans held for sale. Portfolio and purchase securities to reestablish the balance of our investment securities portfolio at a level consistent with the amounts reported in previous periods.
Turning our focus to our balance sheet. Total assets at December 31, 2017 were approximately $9.8 billion as compared to approximately $8.7 billion at December 31, 2016. Total loans were approximately $7.6 billion at December 31, 2017 as compared to $6.2 billion at December 31, 2016 and $7.4 billion at September 30, 2017, which represents an annualized growth rate of 9.15% on a linked quarter basis.
Loans not purchased increased to $5.6 billion at December 31, 2017 from $4.7 billion at December 31, 2016, which represents an annual growth rate of 18.56%. For the fourth quarter of 2017, the yield on total loans was 5.07% as compared to 4.88% for the third quarter of 2017 and 5.07% for the fourth quarter of 2016. Excluding purchase accounting adjustments, our core loan yield was 4.52% for the fourth quarter of 2017, up from 4.49% for the third quarter of 2017 and 4.40% for the fourth quarter of 2016.
Total deposits increased to $7.9 billion at December 31, 2017, from $7.1 billion at December 31, 2016. Non-interest bearing deposits averaged $1.9 billion or 23.3% of average deposits for the fourth quarter of 2017 as compared to $1.6 billion or 22.6% of average deposits for the same period in 2016. For the fourth quarter of 2017 cost of total deposits was 36 basis points as compared to 33 basis points for the third quarter of 2017 and 28 basis points for the fourth quarter of 2016.
Looking at our capital ratios, our tangible common equity ratio was 9.56%, our tier 1 leverage capital ratio was 10.16%, our common equity tier 1 risk based capital ratio was 11.32%, our tier 1 risk based capital ratio was 12.37% and our total risk based capital ratio was 14.43% as of December 31, 2017. Our regulatory capital ratios are in excess of regulatory minimums required to be classified as well capitalized.
Net interest income was $93.3 million for the fourth quarter of 2017 as compared to $90 million for the third quarter of 2017 and $78 million for the fourth quarter of 2016. Excluding purchase accounting adjustments, our net interest margin increased to 3.78% for the fourth quarter of 2017 compared to 3.76% for the third quarter of 2017 and 3.69% for the fourth quarter of 2016. Our non-interest income is derived from diverse lines of business, which primarily consists of mortgage, wealth management and insurance revenue sources, along with income from deposit and loan products.
Non-interest income for the fourth quarter of 2017 was $32.4 million, as compared to $30.3 million for the fourth quarter of 2016. Non-interest expense was $76.8 million for the fourth quarter of 2017, as compared to $71.6 million for the fourth quarter of 2016. For the fourth quarter and full year 2017, we have exceeded our stated goal of achieving a sub-60% efficiency ratio as our efficiency ratio was 57.75% and 59.55% for the fourth quarter and full year of 2017 respectively.
Shifting to our asset quality. At December 31, 2017, our overall credit quality metrics continue to remain strong. At or near historic lows in all credit quality metrics including NPAs, loans, 30 to 89 days past due and our internal watchlist. More information on our financials I'll refer you to our press release for specific numbers and ratios.
In closing, excluding the immediate impact from the Tax Cuts and the Jobs Act, we closed 2017 with very strong results. Our continued efforts to grow net interest income, while focusing on expense containments contributed to our profitability during the year.
Furthermore, neither our strategies to deleverage the balance sheet during the fourth quarter nor the conversion and integration of Metropolitan's operations during the third quarter significantly impacted our day-to-day operations as evidenced by our strong loan growth during the year.
The strong finished to 2017 was a leading factor considered by our Board of Directors when approving an increase in our quarterly dividend which was payable on January 2, 2018. The 0.01 increase to $0.19 increased our annual cash dividend from $0.72 to $0.76.
Our strong performance in 2017 along with the recent conversion and integration of Metropolitan had positioned us well at the start of 2018. The expected future benefits from the Tax Cuts and Jobs Act, and continued focused on our key strategic initiatives will contribute to the future success in 2018.
Now Rachel, I'll turn the call back over to you for questions and answers.
Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Stuart Lotz with KBW. Please go ahead.
Hi, guys. Good morning.
Good morning.
Sorry, I'm on for Catherine. We were just looking for some commentary around what you are expecting for your tax rate for 2018, given the Tax Cuts and Jobs Act. And if any of that was going to be offset either on the expenses or if you thought it would be more computed away from lower loan yields or higher deposit costs? Thank you.
I’ll let Kevin answer that.
Good morning, Stuart. Just as we look at our effective tax rate for 2018 and period beyond, right now we are targeting and project our effective tax rate to be in the 23%, 24% range. And would expect that -- just based on what we know would expect that to start occurring in Q1 and hold throughout the year. Just as we learned more about the jobs tax cut and the details behind it that may change our estimates, but that's where we are right now was in that 23%, 24% range.
Going to your second part of your question about what happens to that is it competed away. We do think that just competition, overall competition around loans, deposits may prevent all of that from trickling through to the bottom line. We are anticipating that -- there could be some margin pressures whereas we have been expanding margins, the last quarter we expanded margin 2 to 3 basis points all of last year, each quarter I think we expanded margins if we look at it.
I'm not sure that's going to hold - would need a quarter or two to see what competitive reaction is to say that we’ll have margin expansion, but we do think that margin at a minimum will be flat. It would be variable upon -- competitive pressures around what's done with the tax increase.
Robin do you have anything else to discuss just specifics to the jobs or the tax rate or the tax savings?
No, [indiscernible].
Perfect. Thank you, guys.
Thank you, Stuart.
The next question comes from Brad Milsaps with Sandler O'Neill. Please go ahead.
Hey, good morning.
Good morning, Brad.
Hey, Kevin and Robin I know you guys -- you’ve made some smart moves at the end of the year to reduce the size of the balance sheet, can you give us a sense of how large it might balloon to sort of in the first quarter and going forward? I know typically the first part of the year you also get in some I think seasonal tax for municipal deposits so that could help you. But just kind of curious kind of give a sense of the size of the balance sheet and how that might impact the NIM I know you got a lot of moving parts there with what you did in the fourth quarter and then probably what's you’ve already put back on.
Good morning, Brad, this is Kevin. So just to give a little bit color of the amount of deleverage that occurred, as Robin mentioned, we ended 9/30 at little over $10.3 billion. And as we got into the fourth quarter, we saw that some of our security portfolio the pledging of our securities have freed up a little bit. And so we -- the actual assets that we liquidated to converted cash, we sold about $450 million of securities.
And then the other thing that we looked at was increasing the turnover time in our mortgage loans held for sale portfolio. We typically hold those mortgages for about 45 to 60 days, we reduced that to about 25 to 30 days and that allowed us to reduce the mortgage loans held for sale portfolio about $100 million.
We are currently in the process of where we've already started lengthening the time of our mortgage loans held for sale portfolio. So that that will cause a little bit of increase as I mentioned we saw -- the reduction that we had was $100 million. So we'll start extending that portfolio in Q1. Our intent is to replenish our security portfolio to get liquidity on balance sheet liquidity levels to amounts where we had on back in Q3 and would anticipate that occurring in the later part of this quarter, just with rate movements with the tax change that occurred.
We're looking at which securities we want to purchase and also waiting to see particularly on the municipal security portfolio, what happens with yields in light of the recent tax change. But overall, as we get towards the end of Q1, we would anticipate our security portfolio getting back close to levels where we were at the end of Q3.
Okay, that's helpful. And then in terms of expenses, you touched on this a little bit, but you feel like you have most of the cost savings in the run rate for Metropolitan. And then just some of your outlook around, sort of what you're thinking kind of a run rate for expenses in the fourth quarter a pretty good starting point. I know you've got -- the rate is coming through et cetera, but just kind of curious what your thoughts are around the expense growth rate?
Yes, so just specific to Metropolitan, we have realized the majority of those, there is a small amount that we will realize in Q1. But the majority of those we realized in Q4 and we are ahead of our expectations as far as the total call size we were in Q4. But the remaining amount in Q1 would just allow us to continue to exceed that.
As we look at our expenses into Q1, into 2018, just using fourth quarter excluding the merger of the baseline that’s going to be relatively close, we did have a couple of upticks in our expenses in occupancy and equipment expense as well as some salaries and employee benefits just adjusting our incentive accruals to year-end payouts. So just the incentive accruals at the end of the year were slightly higher than the run rate for the previous nine months.
Our increase in occupancy and equipment expense we brought several software initiatives online in Q4. They weren't for [DFAS] [ph] or anything like that, really just softwares that we brought on to improve operational performance. We will see reductions in expenses in future periods not next quarter, not in Q2, but as we get into the latter part of 2018 we'll see some expense reductions as that software replaces existing software. So our run-rate, I would anticipate our run-rate in Q1 as well as in 2018 to be consistent with Q4 excluding the merger expenses.
Great. Thank you, guys.
The next question comes from Michael Rose with Raymond James. Please go ahead.
Hey guys. How are you doing?
Hey, Michael.
Hey, just wanted to touch on maybe some initial expectations for the loan growth this year. Clearly you guys have done a fantastic job growing the portfolio. So maybe if you can -- as Mitch normally does would be with the pipeline and maybe some initial expectations for this year. Thanks.
Yes, good morning, Michael. Let me start with the pipeline and then I'll talk a little bit production in Q4 and maybe come back to what we're expecting going forward. The current 30 day pipeline at the beginning of the quarter is $160 million. That compares to $145 million same period prior year, as we typically see beginning Q1, the pipeline falls back a little bit at $160 million we are beginning the year with a strong pipeline. That does compare prior quarter to $190 million.
As I say we typically see that fall back some, but we continue in each state region in our business lines to see a strong pipeline. We also continue to see good production and pipeline from the Metropolitan Bank markets as they represent about 20% of this current pipeline of $160 million.
If we further break that down by state and region 26% would be in Tennessee, 17% in Alabama and Florida, 29% in Georgia and 28% in Mississippi. Again Metropolitan making up about 20%, Metropolitan Bank markets end up close to 10% in our commercial business lines, who are all of those continue to grow and produce well. This pipeline should produce about $56 million in growth in non-acquired outstandings in the next 30 days.
If we look at Q4, we had total new loan production of about $445 million that compared to $395 million in Q3 and if we look at the markets that contributed to that production 30% Alabama, Florida, 26% from Georgia, 24% Mississippi and 20% in Tennessee. As we've seen in the last number of quarters, we see each region and state continuing to produce 20% plus of our production.
That production resulted in growth in non-acquired on an annualized basis linked quarter 22%, as Robin mentioned earlier year-over-year over 18%, and annualized net loan growth for the quarter were around 9% and of course for year little over 7%. We continue to again see a strong pipeline, we expect high single low double-digit growth in 2018 we see that to continue.
Okay, it’s really helpful. And maybe if I can follow-up on the tax rate question for Kevin. A lot of banks have talked about the FTE adjustment, as you think about the tax rate going down there is an offset it was about 3.3% this quarter. Do you have a sense for what that drops to next -- in the first quarter?
As far as an impact on margin, we would anticipate that to have a couple of basis point impact just on the total margin, just due to the change in FTE rate. So not significant, but just a couple basis of impact.
Okay, that's helpful. And then just on the fee piece, do you guys expect any impact on mortgage banking from any of the tax stuff or what are you seeing from your clients is clearly a bigger piece of the revenue part for you guys. So any color there would be great. Thanks.
Yes, Michael, it’s Jim Gray, really not anticipating any impact on mortgage from the tax piece, most of our average mortgage loan is $200,000 and the tax cut law don’t really impact the deduction of interest loans below that. So I mean above -- at that level or it’s at the $1 million. So don’t really anticipate any impact from the tax-cut law on mortgage production, other than just discontinued reduction of refinance. The Mortgage Bankers Association is projecting about a 29%, 30% reduction in refinance this next year. And so we would anticipate continuing to see a reduction in refinance.
And remind me, what your split is between purchase and refi?
We were 72% purchase, 28% refi for the fourth quarter, for the year we were 74% purchase, 26% rate refi and to kind of put that in perspective, last year we were 65% purchase and 35% refi. So about a 9% or 10% reduction in the percentage of refi versus purchase. Really when you look at our overall production for 2017 we were $1.955 billion, we were $2.172 billion in 2016 and 100% of that reduction can be attributed to a reduction in refinance activity. We actually had a slight improvement in the purchase activity.
Okay, that’s helpful. Thanks for taking my questions guys.
Thank you, Michael.
The next question comes from Matt Olney with Stephens. Please go ahead.
Hey thanks, good morning guys.
Good morning, Matt.
Hey, I want to start on the efficiency ratio, you guys made some good progress there during 2017, you are now well below 60% your stated goal. I'm curious, where you think it can go from here? Any new goals that you want to share with us and what will be the primary driver of moving this down further? Thanks.
Good morning, Matt. As far as goals, I would just remind you of what we stated when we targeted the 60%. That number is fungible and that it would continue to improve that our short-term goal is to get below 60%, but after we reach that the goal would be to continue to see measured improvement in that.
And ultimately what our goal is as I guess ultimately to get that down to the mid-50s. And if we break down that efficiency ratio, about 3 to 4 percentage points of the efficiency ratio is tied up in our non-banking lines of businesses of mortgage, insurance, wealth management. Each of those lines are less efficient than the bank. And so if we're in the -- corporately if we're in the 55% range, that means the bank is operating in the low-50 range. And that's ultimately where we want to get to.
And that's what our goal is, is just continue to see measured improvement in that efficiency ratio from here on out. Short-term goals I guess would get it to 55%. But that's going to happen over a period of time. How we get there, it's really if you look at 2017 and how we saw the improvement that's going to be the roadmap for how we get it lower. And it's really going to be driven off revenue lift.
Our growth in revenues is really what drove the efficiency ratio. We really -- we didn't see that 2016, just with the flatten yield curve and just pressure as we saw on the revenue that prevented us from getting there in 2016. 2017 is where that really came through particularly as we saw the revenue lift as margin expanded balance sheet grew plus margin expansion, tighter constraint on the expenses all of those for what drove it below 60. That's what's going to continue to drive it to lower levels from here. And we think we're in a position for that to occur as well.
Okay, that's helpful. And then on the margin front, as you noted in prepared remarks as a pretty heavy quarter on the accretion from purchase accounting. Can you give us what the remaining discount is on those acquired loans?
Yes, so our remaining discount is in the $70 million range. The -- outside of our normal accretion, our credible yield as well as accretion that came from pay-offs, pay downs of loans that was relatively flat compared to previous periods. What we did see as we saw an uptick in some income we collected from a previously charged off loan. Typically that line item over the course of the year has averaged about $1.5 million per quarter, it was a little bit higher this quarter primarily because we had a loan associated with one of our loss share deals that we collected a substantial amount from the borrower.
It really wasn't a release of -- it wasn't a release of the purchase accounting adjustment, it was cash collected from a previous loan that was charged-off as through the loss share acquisitions. So that large uptick really didn't even impact our -- the remaining amount of our purchase accounting. So our credible yield, non-accretable difference remaining still holds in a $70 million to $71 million range.
And within that Kevin, to give us a better idea of duration, how much of that $70 million is from Metropolitan versus previous deals?
Just specific to Metropolitan, Metropolitan is in the $15 million range with the remainder being from the previous acquisitions.
Okay, very helpful. Thank you, guys.
Thank you, Matt.
The next question comes from Brian [indiscernible] with the Hoppe [ph] Group. Please go ahead.
Thanks, good morning.
Good morning.
Just question on a back to loans, the decline that you saw in purchase loans was that quicker pace this quarter? With Metropolitan deal you're fairly reasonably closed, or could we see this kind of pace in the next couple of quarters?
Brian, this is Mitch. I think what we experienced this quarter was just the ordinary course of business of payoff and pay down. As I mentioned, net growth on a linked quarter was just over 9%. So we did have good production as I mentioned earlier, but as far as payoffs pay downs pretty much in line that what we would see on a normal run rate.
Okay. Did you have loans from the purchase bucket going to the non-purchase bucket or is that -- was that a factor at all as far as just that category growth?
No, not really.
Okay, all right. Just your thoughts on the loan deposit ratio in 90s or so do you -- is there a limit that you would like to go keep under like a 100% or just your thoughts about funding the strong loan growth that you are having?
Yes, Brian, Kevin, good question. We target around the 90% loan to deposit ratio. Our loan to deposit ratio this quarter is a little bit elevated just because of the deleveraging. We did reduce deposits several hundred million just as far as the deleveraging effort. Some of those deposits have frankly rolled back in already this quarter. So is just being off the balance sheet short-term. But at 12/31 that loan to deposit ratio was elevated a little bit, but as we look long-term we do target more in that 90% range, if we get up about 100%, we're not targeting 100% loan to deposits we're really trying to keep it in that 90%.
Okay, great. Thanks for taking my questions.
Thank you, Brian.
The next question comes from John Rodis with FIG Partners. Please go ahead.
Good morning, guys.
Good morning, John.
Just to clarify on the loan outlook of high single-digit to low double-digit, that includes the runoff of acquired loans, correct?
That is correct.
And then -- and just sort of bigger picture given the lower tax rate and so forth, have you guys seen any sort of meaningful change in sort of the outlook for your borrowers and stuff, just in recent conversations and so forth?
John, this is Mitch. We -- as we have throughout the year the sentiment that we hear is good and we continue to hear that. I guess it’s maybe yet to be seen what the current tax changes will yield. But like I say what we hear is good production, what we see in production, what we are currently reflecting in the pipeline. Certainly we’ve not seen a decrease there in any of those and remain optimistic as I believe the -- our customer base does as well.
Okay, that makes sense. Thank you. And then Kevin just a follow-up on the interest recoveries, you said the higher run rate this quarter was driven by one loan, I know that's going to be a vital number going forward, but I assume you would expected or we should expected to sort of drop back down to that around that $1 million a quarter level give or take?
Yes, on the average, if we exclude the one large item on the average it’s typically around $1.5 million per quarter.
And can you say how much that one loan was this quarter?
It was about $3 million. So if you back it out we were right in that $1.5 million range for Q4.
Okay, super. Thanks, guys.
Thanks, John.
[Operator Instructions] The next question comes from Andy Stapp with Hilliard Lyons. Please go ahead.
Good morning, nice quarter.
Thank you, Andy.
Thank you, Andy.
Yes, there is a lot moving parts to what will impact the margin including the December Fed rate hike or average securities linked in the holding period for the loans held for sale. Just want to make sure that for all those items reflected in your guidance for stable margin?
They were, and you’re about a lot of moving parts including the December Fed movement. But yes all of those items were factored in just as we look at margin and it being flat just as we look at what happens with competition with the most recent tax change, increases and then just what we are anticipating continued pressure on the liability side. But all of those items were factored in to the guidance of a flattish margin.
And is that flattish margin offset really reflect the impact of tax reform on the FTE margin?
It does, it does.
Okay. And is that stable outlook for just Q1 or the entire year?
Right now Q1, but we’re somewhat anticipating the same for the remainder of 2018.
Okay, great.
Primarily more of a short-term look.
What’s that, I am sorry.
That outlook is more of a short-term outlook.
Yes, okay, alright. The rest of my questions have been answered.
Thank you Andy.
This concludes our question-and-answer session. I would like to turn the conference back over to Robin McGraw, for any closing remarks.
Thank you, Rachel. We appreciate everybody joining us today and we appreciate your time and interest in Renasant Corporation and look forward to speaking with you again soon. Thank you.
The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.