1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For quarterly period ended MARCH 31, 1999 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 0-18539 EVANS BANCORP, INC. (Exact name of registrant as specified in its charter) NEW YORK 16-1332767 (State of other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 14 -16 NORTH MAIN STREET, ANGOLA, NEW YORK 14006 (Address of principal executive offices) (Zip Code) (716) 549-1000 (Issuer's telephone number) NOT APPLICABLE (Former name, former address and former fiscal year, if changed since last report.) Indicate by check (X) whether the issuer (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: Common Stock, $.50 Par Value--1,695,179 shares as of March 31, 1999
2 INDEX EVANS BANCORP, INC. AND SUBSIDIARY PAGE PART 1. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Consolidated balance sheets--March 31, 1999 and December 31, 1998 1 Consolidated statements of income--Three months ended March 31, 1999 and 1998 2 Consolidated statements of cash flows--Three months ended March 31, 1999 and 1998 3 Notes to consolidated financial statements-- March 31, 1999 and 1998 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 6 Item 3. Quantative and Qualitative Disclosures About Market Risks 9 PART II. OTHER INFORMATION 10 Item 1. Legal Proceedings Item 2. Changes In Securities Item 3. Defaults upon Senior Securities Item 4. Submission of Matters to a Vote of Security Holders Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K SIGNATURES 10
3 <TABLE> <CAPTION> PART I - FINANCIAL INFORMATION PAGE 1 ITEM I - FINANCIAL STATEMENTS EVANS BANCORP, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS March 31, 1999 and December 31, 1998 (Unaudited) March 31, December 31, ASSETS 1999 1998 -------------- --------------- <S> <C> <C> Cash and due from banks $ 5,247,836 $ 7,300,780 Federal Funds sold 9,460,000 0 Securities: Classified as available-for-sale, at fair value 45,819,401 45,969,587 Classified as held-to-maturity, at amortized cost 3,994,972 4,090,385 Loans, net 108,406,972 110,526,449 Properties and equipment, net 3,786,763 3,696,658 Other assets 2,898,758 2,536,371 ------------- ------------- TOTAL ASSETS $ 179,614,702 $ 174,120,230 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Deposits: Demand $ 25,325,332 $ 25,857,037 NOW and money market accounts 7,121,243 7,554,104 Regular savings 53,621,548 47,676,615 Time Deposits, $100,000 and over 27,961,136 24,208,290 Other time accounts 38,849,638 38,787,590 ------------- ------------- 152,878,897 144,083,636 Federal Funds Purchased 0 2,225,000 Other Borrowed Funds 5,000,000 7,000,000 Other liabilities 3,271,673 2,188,181 ------------- ------------- TOTAL LIABILITIES 161,150,570 155,496,817 ------------- ------------- STOCKHOLDERS' EQUITY Common Stock, $.50 par value 10,000,000 shares authorized; 1,698,950 shares issued 849,475 849,475 Capital surplus 10,990,720 10,990,720 Retained earnings 6,504,771 6,400,764 Unrealized gains on available for sale securities 228,035 443,308 ------------- ------------- 18,573,001 18,684,267 Less: Treasury stock, at cost (2,419 and 1,352 shares respectively) (108,869) (60,854) ------------- ------------- Total stockholders' equity 18,464,132 18,623,413 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 179,614,702 $ 174,120,230 ============= ============= </TABLE> See Notes to Consolidated Financial Statements.
4 <TABLE> <CAPTION> PART I - FINANCIAL INFORMATION PAGE 2 ITEM I - FINANCIAL STATEMENTS EVANS BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME For the Three Months ended March 31, 1999 and 1998 (Unaudited) Three Months Ended March 31, 1999 1998 -------------- ------------- <S> <C> <C> INTEREST INCOME Loans $2,328,626 $2,310,399 Federal funds sold 39,211 30,964 Securities: Taxable 354,481 324,629 Non-taxable 295,404 260,924 ---------- ---------- Total Interest Income 3,017,722 2,926,916 INTEREST EXPENSE Interest on Deposits 1,120,084 1,211,402 Short Term Borrowing 83,875 11,152 ---------- ---------- NET INTEREST INCOME 1,813,763 1,704,362 PROVISION FOR LOAN LOSSES 35,000 30,001 ---------- ---------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 1,778,763 1,674,361 ---------- ---------- NON-INTEREST INCOME: Service charges 177,321 171,198 Other 137,021 72,559 Securities Gains 1,064 4,592 ---------- ---------- Total Non-interest Income 315,406 248,349 ---------- ---------- NON-INTEREST EXPENSE: Salaries and employee benefits 739,620 662,835 Occupancy 215,782 191,498 Supplies 33,108 31,114 Repairs and maintenance 53,969 45,328 Advertising and public relations 46,667 27,000 Professional services 63,142 68,489 FDIC assessments 4,212 4,125 Other 262,014 216,284 ---------- ---------- Total Non-interest Expense 1,418,514 1,246,673 ---------- ---------- Income before income taxes 675,655 676,037 ---------- ---------- INCOME TAXES 181,200 185,700 ---------- ---------- NET INCOME $ 494,455 $ 490,337 ========== ========== NET INCOME PER COMMON SHARE-BASIC $ 0.29 $ 0.29 ========== ========== WEIGHTED AVERAGE NUMBER OF COMMON SHARES 1,695,179 1,698,950 ========== ========== </TABLE> See Notes to Consolidated Financial Statements.
5 <TABLE> <CAPTION> PART I - FINANCIAL INFORMATION PAGE 3 ITEM I - FINANCIAL STATEMENTS EVANS BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS For the Three Months Ended March 31, 1999 and 1998 (Unaudited) Three Months Ended March 31, 1999 1998 ------------- ------------ <S> <C> <C> OPERATING ACTIVITIES Interest received $ 2,853,510 $ 2,457,431 Fees and commissions received 300,172 268,545 Interest paid (1,231,916) (1,208,701) Cash paid to suppliers and employees (1,559,382) (1,190,540) Income taxes paid (5,000) (47,223) ------------ ------------ Net cash provided by operating activities 357,384 279,512 ------------ ------------ INVESTING ACTIVITIES Available for sale securities Purchases (6,056,445) (11,469,420) Proceeds from sales 2,842,567 4,892,987 Proceeds from maturities 2,142,991 2,793,975 Held to maturity securities Purchases (97,640) (188,104) Proceeds from maturities 1,058,841 311,252 Additions to properties and equipment (52,084) (137,463) Decrease(Increase) in loans, net of repayments 360,280 (3,165,495) Proceeds from sales of loans 1,686,333 613,502 ------------ ------------ Net cash provided by(used in) investing activities 1,884,843 (6,348,766) ------------ ------------ FINANCING ACTIVITIES Increase in deposits 8,795,261 2,955,223 Purchase of Treasury Stock (48,015) 0 Repayment of Short Term Borrowing (3,191,969) (705,687) Dividends Paid (390,448) (288,822) ------------ ------------ Net cash provided by financing activities 5,164,829 1,960,714 ------------ ------------ Net increase(decrease) in cash and cash equivalents 7,407,056 (4,108,540) Cash and cash equivalents, January 1 7,300,780 10,336,532 ------------ ------------ Cash and cash equivalents, March 31 $ 14,707,836 $ 6,227,992 ============ ============ </TABLE> See Notes to Consolidated Financial Statements.
6 <TABLE> <CAPTION> PART I - FINANCIAL INFORMATION PAGE 4 ITEM I - FINANCIAL STATEMENTS EVANS BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS For the Three Months Ended March 31, 1999 and 1998 (Unaudited) Three Months Ended March 31, 1999 1998 ----------- ---------- <S> <C> <C> RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Net income $ 494,455 $ 490,337 --------- --------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 158,455 (96,797) Provision for credit losses 35,000 30,001 Gain on sale of assets (5,447) (8,779) (Decrease)Increase in accrued interest payable (27,956) 13,854 Increase in accrued interest receivable (192,261) (294,919) Increase in other liabilities 140,909 146,042 Increase in other assets (245,771) (227) --------- --------- Total adjustments (137,071) (210,825) --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES $ 357,384 $ 279,512 ========= ========= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Net unrealized gain on available for sale securities $ 339,758 $ 177,086 ========= ========= </TABLE> See Notes to Consolidated Financial Statements.
7 PART I - FINANCIAL INFORMATION PAGE 5 ITEM 1 - FINANCIAL STATEMENTS EVANS BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 1999 AND 1998 (UNAUDITED) 1. GENERAL The accounting and reporting policies followed by Evans Bancorp, Inc., a bank holding company, and its subsidiary, Evans National Bank, in the preparation of the accompanying interim financial statements conform with generally accepted accounting principles and with general practice within the banking industry. The accompanying financial statements are unaudited. In the opinion of management, all adjustments necessary for a fair presentation of financial position and results of operations for the interim periods have been made. Such adjustments are of a normal recurring nature. The results of operations for the three month period ending March 31, 1999 are not necessarily indicative of the results to be expected for the full year. 2. SECURITIES Securities which the Bank has the ability and intent to hold to maturity are stated at cost, plus discounts accrued and less premiums amortized. Securities which the Bank has identified as available for sale are stated at fair value. 3. ALLOWANCE FOR LOAN LOSSES The provision for loan losses is based on management's evaluation of the relative risks inherent in the loan portfolio and, on an annual basis, generally exceeds the amount of net loan losses charged against the allowance. 4. INCOME TAXES Provision for deferred income taxes are made as a result of timing differences between financial and taxable income. These differences relate principally to directors deferred compensation, pension premiums payable and deferred loan origination expenses. 5. PER SHARE DATA The per share of common stock information is based upon the weighted average number of shares outstanding during each period, retroactively adjusted for stock dividends. The Company adopted Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share," during the fourth quarter of 1997. Only basic earnings per share is disclosed because the Company does not have any dilutive securities or other contracts to issue common stock or convert to common stock. 6. NEW ACCOUNTING STANDARDS PRONOUNCEMENTS SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information was issued in 1997 by the Financial Accounting Standards Board. This Statement establishes standards for the way that public business enterprises report information about operating segments in annual financial statements. Management has determined that the Bank is the Company's only operating segment. As such additional disclosures are not considered necessary.
8 PART I - FINANCIAL INFORMATION PAGE 6 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS MATERIAL CHANGES IN FINANCIAL CONDITION Total deposits increased 6.1% in the first quarter of 1999 versus an increase of 2.1% over the first three months of 1998. Tax collections in local municipalities traditionally contribute to significant increases in the total deposits in the first quarter. Time Deposits over $100,000 have increased 15.5%, as municipalities have placed funds in short-term time deposits since December 31, 1998 and Regular Savings Deposits have increased 12.5%. Deposit increases also reflect the expansion of the Bank's trade area to include West Seneca, NY since opening a new branch in February, 1999. Total net loans outstanding decreased 1.9% over the first three months of 1999 which compares to an increase of 2.5% over the first quarter of 1998. Total commercial loans decreased approximately $760,000 over the first quarter of 1999 due in part to repayment on various construction, lines of credit and short term loans. On the consumer side, loans decreased approximately $1.3 million, which reflects the current trend towards residential and home equity mortgage refinancing and the sale of $1.7 million in residential mortgages to the Federal National Mortgage Association ("FNMA"). The securities portfolio decreased .5% over the first three months of 1999 versus growth of 9.0% which occurred in the first quarter of 1998. Available funds continue to be invested in US government and agency securities and tax-advantaged bonds issued by New York State municipalities and school districts. Tax collections in local municipalities have also impacted Federal Funds Sold by increasing $9.5 million since December 31, 1998. The annualized return on average assets at March 31, 1999 was 1.15% versus 1.24% at December 31, 1998. The return on average equity at March 31, 1999 was 10.85% versus 11.63% at December 31, 1998. The capital to assets ratio of 10.52% at March 31, 1999 compares to 10.81% at December 31, 1998. Total assets have increased approximately $5.5 million or 3.16% since December 31, 1998. MATERIAL CHANGES IN THE RESULTS OF OPERATIONS Net interest income for the quarter ending March 31, 1999 increased 6.4% over the first quarter of 1998. Interest income increased 3.1%. Interest income on federal funds sold increased 26.6%. Interest paid on deposits, impacted by Federal Reserve dropping short-term interest rates, decreased 7.5%. The cost of short-term borrowing was substantially higher due to the increased use of the Bank's funding options as a member of the Federal Home Loan Bank. The Bank's year-to-date net interest margin at March 31, 1999 was 4.55% as compared to 4.65% at March 31, 1998. The year-to-date yield on average earning assets has declined from 8.24% at March 31, 1998 to 7.78% at March 31, 1999. The yield on loans has declined to 8.52% from 9.01% over that time period and the tax-equivalent yield on federal funds sold and investments has decreased to 6.26% from 6.51%. Comparatively, the year-to-date cost of funds on interest-bearing balances decreased from 4.17% at March 31, 1998 to 3.81% at March 31, 1999. This decrease reflects a change in the mix of interest-bearing deposits. Time deposits, typically carry higher interest rates, made up 52.4% of interest-bearing deposits at March 31, 1999 versus 53.3% the previous year. The year-to-date provision for loan losses was $35,000 through March 31, 1999 versus $30,001 through the first quarter of 1998. Management has increased the amount set aside for potential loan losses due to the substantial increase in the volume of the portfolio experienced over the past two years. Management believes that the credit quality of the portfolio remains high. Non-interest expenses increased 13.8% for the quarter ending March 31, 1999 over the quarter ending March 31, 1998. This compares to an increase of only 6.2% in the first quarter of 1998 over the first quarter of 1997. All expense categories were impacted by the branch expansion into West Seneca. Annual salary adjustments and an increase in the number of full-time equivalent employees from 80 at March 31, 1998 to 85 at March 31, 1999 contributed to the 11.6% increase in salary and benefit expense. Occupancy Expense is up 12.7% over the same time period in 1998, along with Advertising and Public Relations, up 72.8% relating to the branch expansion cost. Repairs and Maintenance are also up 19.1%.
9 PAGE 7 Net income for the first quarter of $494,455 reflects an increase of .8% over the first quarter of 1998. The effective combined tax rate for the first three months of 1999 was 27% compared to 28% for the same period in 1998. The 27% and 28% rate for 1999 and 1998 demonstrates the impact of increasing the Bank's investment in tax-advantaged municipal bonds and the benefit realized from a favorable deferred tax position. YEAR 2000 The Company has long been aware of the complexity and significance of the issues associated with the arrival of the Millennium (Year 2000). The "Year 2000" problem centers around the world's computer systems and a common programming practice that condenses a century date to just two digits, i.e. "98" to represent 1998, to conserve storage space. As a result, these systems may interpret "00" as 1900 rather than 2000, causing potential data corruption, misinterpretation, or system failure. The Company, with the support and direction of its Board of Directors and Senior Management, has dedicated financial and human resources to formally adapt strategies and work towards resolving all potential Year 2000 issues. In the third quarter of 1997, the Company began formalizing its strategy to address the data processing and business impacts we anticipated to be associated with Year 2000 issues. Our ultimate approach was to adopt the five-phase format recommended by the Federal Financial Institutions Examination Council, and follow guidance provided us by our regulatory authorities who periodically monitor and evaluate our progress. These phases, and our activities, are described as follows: Awareness Phase While this can be considered an ongoing phase relating to education of employees, customers, and vendors, our primary activities defined the Year 2000 problem; obtained Board of Director and Executive level support; established a project team to include the Senior Vice President of Administration, the Bank Auditor; Manager of Data Processing, Manager of Systems Development, representatives form each functional area of the Bank, legal counsel, and the principal of our main-frame software vendor. This committee was responsible for development and implementation of an overall strategy to identify and resolve issues associated with year 2000. Assessment Phase Implementing this phase provided an assessment of the size and complexity, identifying affected areas of our business, identified the required resources, and enabled us to develop a comprehensive plan. An inventory of all hardware and software was completed to establish a specific Year 2000 status, i.e. "already deemed compliant", "requiring replacement or renovation", or "becoming obsolete". Priorities were then determined. Certain systems were identified as mission critical. Non-information technology systems were also addressed. Key vendors, such as providers of power, heating, and telephone services, among others, were contacted regarding their Year 2000 readiness. The Bank has received letters certifying Year 2000 compliance from those suppliers whose services are deemed critical to bank operations. However, in the event of an infra-structure failure, i.e. lack of power, etc., a Bank committee has developed a contingency plan so that business can continue with minimal interruption. The Bank also performed a customer risk assessment in the last quarter of 1998. Renovation Phase The Company does not write or create computer code or perform programming activities. We are reliant on vendors and software suppliers to furnish enhancements in a timely manner. Renovation of our core processing system was completed in early 1998 in conjunction with a plan developed by the vendor, other user financial institutions, and our Company. These renovations were successfully tested in collaboration with all user institutions at our back-up site. The renovated system was successfully installed in June 1998. Additional in-house testing was conducted throughout the remainder of the year. Validation Phase This is probably the most critical and intensive phase of the entire project. It is this phase that we validate, through a variety of testing methods, that each system can process after the turn of the century, with particular emphasis on those identified as "mission critical". As stated above, renovation to our core processing systems was successfully tested, and all testing of mission critical systems was successfully completed by year end 1998. In each case, we followed a comprehensive written test plan involving user representation to validate test results. All systems, including those designated mission critical, have been renovated and successfully tested as of December 31, 1998.
10 PAGE 8 Two non-critical systems warranted as "Year 2000 compliant" by the vendor were tested in the first quarter of 1999. Additionally, fully integrated testing will be performed again during the second quarter of 1999. Implementation Phase The Company's Year 2000 ready systems are in place and presently functioning. As a part of implementation, we plan continued testing in 1999, along with fully integrated tests. Quality reviews will be conducted throughout 1999 and the year 2000 to ensure proper functioning of our systems. The implementation phase involves contingency planning. The Company maintains a formal Business Resumption plan, and is in the process of supplementing that plan with a contingency plan relevant to Year 2000 issues. The contingency planning process was well under way by year end 1998, and is expected to be completed and validated by June 30, 1999. The Company believes, however, that due to the widespread nature of potential Year 2000 issues, the contingency planning process is an ongoing one which will require further modifications as the Company obtains additional information, specifically regarding third party Year 2000 readiness. The Company has identified significant (large) commercial depositors and performed an assessment of their efforts towards Year 2000 readiness. Should these depositors be unable to function financially as a result of their own Year 2000 issues, or significantly reduce their deposit levels, there could be an impact on the Bank's own cash flow. Our initial assessment evaluates this risk as minimal, and all customers identified in this risk assessment are aware of the Year 2000 issues and are planning Year 2000 readiness efforts. The Company will periodically monitor these depositors throughout 1999. A risk assessment of large commercial borrowers was also completed representing approximately 70 commercial customers, or 74% of commercial loan outstandings. Based on survey results, all are rated as moderate to low risk. We plan to selectively monitor the progress of certain moderate risk borrowers throughout 1999. New commercial loans exceeding our borrowing threshold for risk ratings will be measured to assure information technology utilized by the borrower will by Year 2000 ready. The Company has a comprehensive Customer Awareness program that includes training and education of employees regarding Year 2000 issues and financial industry efforts toward readiness. Our awareness program provides periodic communication to customers and the community describing our preparation efforts. Management continues to quantify expenses related to Year 2000 readiness. The Company has not been required to provide additional staff for the express purpose of Year 2000 readiness, but rather has utilized existing internal staff. Our budgeted expenses approximate $45,000, of which $15,000 will be allocated for renovation of core processing software. Expenses associated with Year 2000 preparedness are not expected to have a material impact on the financial condition of the Company. The Company's objective is to migrate to the Year 2000 with minimal impact on customers, and be prepared for January 1, 2000. We believe that the manner in which we have addressed this issue underscores our strengths. The Company has the resources and the technological expertise to address such new issues, but is small enough to enable us to make adjustments to internal programs and systems without affecting the ability to service our customers. The Company cannot provide assurance that failure of third parties to adequately address the Year 2000 issue will not have an adverse impact. The Company intends to continue to assess critical suppliers and customers to determine their readiness. The Company is confident that with the implementation of the Year 2000 initiatives as scheduled, the possibility of significant interruptions to normal operations should be reduced. The preceding "Year 2000" discussion contains various statements which represent the Company's beliefs or expectations regarding future events. All forward-looking statements involve a number of risks and uncertainties that could cause the actual results to differ materially from the projected results. Factors that cause the differences include, but are not limited to, the actions of governmental agencies or other third parties with respect to Year 2000 problems.
11 PAGE 9 ITEM 3 - QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS The Company does not hold investments in instruments (ie: such as derivative financial or commodity instruments) that are considered to be subject of any market risk. PART II - OTHER INFORMATION ITEM 1. Legal Proceedings - None to report ITEM 2. Changes in Securities - None to report ITEM 3. Defaults upon Senior Securities - None to report ITEM 4. Submission of Matters To a Vote of Security Holders The 1999 Annual Shareholders meeting of the Registrant was held on April 27, 1999. At the meeting, Robert W. Allen, William F. Barrett and David C. Koch were reelected as directors for a term of three (3) years. The following votes were cast for the nominees: FOR WITHHELD Robert W. Allen 1,219,559 27,821 William F. Barrett 1,221,738 25,642 David C. Koch 1,220,634 26,746 The following directors also continue their terms of office: David M. Taylor Phillip Brothman Richard M. Craig LaVerne G. Hall Richard C. Stevenson Thomas H. Waring, Jr. Also, at the 1999 Annual Shareholders meeting, the shareholders approved The Evans Bancorp, Inc. 1999 Stock Option Plan by the following vote: FOR AGAINST ABSTAIN 1,128,293 96,586 22,501 ITEM 5. Other Information: A cash dividend of $.23 per share was paid on April 1, 1999 to holders of record on February 23, 1999. A total of $390,448 was paid on 1,697,598 shares. ITEM 6. Exhibits and Reports on form 8-K - None to report The following Exhibits are filed as part of this Report: EXHIBIT NO. DESCRIPTION PAGE 27 Financial Data Schedule 11
12 PAGE 10 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed by the undersigned thereunto duly authorized. Evans Bancorp, Inc. DATE May 14, 1999 /s/Richard M. Craig Richard M. Craig President and Chief Executive Officer DATE May 14, 1999 /s/James Tilley James Tilley Senior Vice President
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