Heritage Financial Corp (HFWA) 2010 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Heritage Financial earnings release conference call. (Operator Instructions). As a reminder, this conference is being recorded. And I would like to now turn the conference over to our host, Mr. Brian Vance. Please go ahead.

Thank you, Karen. Welcome to all that have called in to our Q3 earnings conference call, and those that may listen in later on the recorded version. Attending with me this morning is Don Hinson, our Senior Vice President and Chief Financial Officer.

Our earnings press release for Q3 went out this morning before market open, and hope that you have had an opportunity to review the release prior to the call.

Please refer to the forward-looking statements in the recent press release, and then I will read just a forward-looking statement comment. Statements concerning future performance, developments or events, expectations for growth and market forecast, and other guidance on future periods constitute forward-looking statements. Forward-looking statements are subject to a number of risks and uncertainties that may cause actual results to differ materially from stated expectations.

Specific factors include, but are not limited to, the effect of interest rate changes, risk associated with acquisition of other banks and opening new branches, the ability to control costs and expenses, credit risk of -- in lending activities, including changes in level and trend of loan delinquencies and write-offs, changes in general economic conditions, either nationally or in our market area.

These factors could affect the Company's financial results. You should not place undue reliance on forward-looking statements, and we undertake no obligation to update any such statements. The Company does not undertake, and specifically declaim, any obligation to revise any potentially forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.

Additional information on these and other factors are included in the Company's filings with the Securities and Exchange Commission.

I would like to begin with some highlights of our third quarter. Diluted earnings per common share increased to $0.15 for the quarter ended September 30, from a net loss of $0.003 per diluted common share for the quarter ended September 30, 2009.

Acquisition of assets and liabilities of the Cowlitz Bank in an FDIC-assisted transaction, a new branch in Puyallup, Washington was opened, increasing the total combined branch network of Heritage Bank and Central Valley Bank to 30 branches.

Noninterest-bearing demand deposits to total deposits increased to 16.8% at September 30, 2010, up from 14.9% at June 30, '10.

Ratio of nonperforming noncovered assets to total noncovered assets decreased to 2.53% at September 30 from 3.10% at June 30. Solid and improving coverage ratios at September 30 included an allowance for loan losses to total noncovered loans of 3.3%, and allowance for loan losses to nonperforming noncovered loans of 95.6%.

We will comment on a variety of areas. We will start with earnings. We posted Q3 net income of $2 million. The Q3 net income applicable to common shareholders, including the preferred stock dividend, was $1.7 million or $0.15 per share, which was an increase from Q2 2010 net income applicable to common shareholders of $523,000 or $0.05 per share, and a significant increase from Q2 2009 net loss applicable to common shareholders of $18,000 or $0.003 per share.

Our total loan loss provision for Q3 was $2.2 million compared to Q2 2010 provision of $3.2 million. Net noncovered charge-offs for the quarter were $3.3 million compared to $1.7 million in Q2.

The decrease in the provision for loan losses was due to improving trends in the ratio of nonperforming, noncovered loans to total noncovered loans, and of the allowance for loan losses to nonperforming, noncovered loans. Our loan loss allowance to total noncovered loans decreased slightly to 3.33% at September 30 from 3.45% at June 30.

Our pretax pre-provision earnings before preferred dividends for Q3 were $5.3 million as compared to $5.0 million for prior-year quarter Q3 2010 -- or 2009, a 4.8% increase. Our pretax pre-provision ROA was 1.70% for Q3.

A couple of balance sheet comments. We believe we have a strong liquid balance sheet. At quarter end we held $150 million in overnight interest-bearing funds, primarily at the Federal Reserve Bank. Our loan to deposit ratio at quarter end was 81%, which is a slight decrease from 88.7% at Q2 2010, was largely due to our acquisition of Cowlitz Bank.

[Focal date] total noncovered loans decreased approximately $3.9 million during the quarter. This decrease was due substantially to charge-offs recognized during the quarter ended September 30.

A $21 million decrease in commercial loans is largely attributed to the reclassification of certain commercial business loans to multifamily and commercial real estate loans in order to be more consistent with interagency reporting guidelines.

The decline in the real estate construction portfolio of $10.9 million was mostly the result of a combination of $1.8 million in charge-offs, $591,000 of transfers to other real estate owned and loan payoffs.

We have total noncovered construction exposure of 8.3% of total noncovered loans, with only 4% represented in the residential 1 to 4 family construction, including land development.

Our total quarter-to-date net deposit increase of $239 million -- we had a total quarter to date net deposit increase of $239 million, which was mostly due to the Cowlitz Acquisition.

Our non-maturity deposits totaled deposits, less all CDs, as of quarter end increased approximately $151.7 million from Q2 2010. At the same time total CDs increased approximately $87.3 million from Q2.

Our non-maturity deposit ratio is a very strong 64.2% of total deposits, and is virtually the same after the Cowlitz Acquisition. Net cost of all deposits for the quarter was 0.85%.

A few comments on our net interest margin. Our net interest margin for Q3 was a healthy 4.42%. This is an 18 basis point decrease from 4.60% in Q2, mostly due to the increase of overnight funds sitting at the Fed, which is largely due to the cash acquired in the Cowlitz transaction.

Sustained focus on non-maturity deposit growth and pricing CDs generally below area competitors continues to drive cost of funds lower, which is the primary driver to our strong net interest margin. The effect of nonaccrual loans on the margin for Q3 was 14 basis points.

Noninterest income was $2.9 million for the three months ended September 30 compared to $2.1 million for the three months ended September 30, '09. The increase was due substantially to the $438,000 pretax gain on the Cowlitz acquisition and an increase in service charges on deposit accounts.

A few comments on noninterest expense. Noninterest expense was $10.3 million for the quarter ended September 30 compared to $7.6 million for the same quarter ended September 30 last year. The increase was due to a general increase in salary and benefits expense, and of course, the addition of the Cowlitz staff, and increased professional services in the amount of $368,000, increased occupancy and equipment expense in the amount of $298,000, increased data processing expense of $116,000. And of course, these increases are due primarily to the Cowlitz Acquisition.

Noninterest expense increased $1.9 million from the prior quarter ended June 30, also due primarily to the Cowlitz Acquisition.

Noninterest expense control has been a focus of ours and will continue to be; however, continuing growth-related expenses and other expenses such as loan resolution expenses will make it unlikely that we can maintain our goal of efficiency ratio under 60%. For the quarter ended September 30 our efficiency ratio was 66.3% compared to 60.3% for the quarter ended September 30, '09.

A few comments on overall on loan quality. Nonperforming, noncovered loans decreased $3.3 million, mostly due to $3.2 million in net charge-offs, of which $1.4 million were commercial and $1.8 million were construction, the nonperforming, noncovered construction loan balances totaling $591,000 that were transferred to the other real estate owned, and the principal pay downs, as there were other transactions, both inflows and outflows as well.

Our noncovered residential construction loans as of September 30 totaled $29.9 million. A breakdown of this total is as follows -- residential land, $3.9 million; single-family homes, $13.3 million' and A&D residential, $12.7 million.

Our total nonperforming loans of $26.4 million breaks down as follows -- commercial, $3.5 million; owner occupied commercial real estate, $1.1 million; investor owned commercial real estate, $1.4 million; real estate mortgages, $2.7 million; and real estate construction, $17.7 million.

I will break down the residential construction $17.7 million as follows -- $6.8 million in single-family residential construction, $2.6 million in A&D lots for sale, and $8.3 million in condos for sale.

A breakout of all potential problem loans of $46.1 million is as follows -- construction, $15.8 million; C&I, $20.6 million; owner occupied CRE, $2.3 million; investor owned CRE, $3.6 million; real estate mortgages, $3.8 million.

And a breakout by county of all nonperforming and potential problem loans is Thurston County, Olympia, 21%; Pierce County, Tacoma, 62%; Mason County, Shelton, 2%; King County, Seattle area, 7%; all other counties, 8%.

Total nonperforming loans, plus total potential problem loans, were up $6.6 million quarter-over-quarter. This was mostly due to two credit relationships totaling $10.6 million that were downgraded during Q3, of which about $7.1 million was a medical related relationship that we believe will be restructured and upgraded in early 2011. And the balance was a Pierce County condominium project of which the sales have slowed.

OREO. We added OREOs totaling -- other real estate owned -- totaling $591,000 in Q3, of which $71,000 was subsequently sold, leaving an ending balance of $1.9 million. We had a year-to-date gain on sale of OREO properties of $33,000, which reflects the accurate valuation of our OREO properties as we originally booked them.

Our coverage ratio ended the quarter at a strong 95.6%, up slightly from Q2, which was 88.4%. Our allowance at the quarter end was a likewise strong 3.3%. Our coverage ratio remains one of the strongest in the Pacific Northwest.

Liquidity. Total available liquidity sources, cash and borrowing lines is over $404 million. And as mentioned earlier, we have $150 million in overnight cash. The abnormally large amounts of overnight cash are being held for strategic growth opportunities.

This $150 million also includes $34.8 million of Internet CDs from the Cowlitz Acquisition, which were immediately lowered to 15 basis points and are still on our balance sheet.

A general review of Q3 2010. I would characterize Q3 as one focused on growth initiatives. We acquired Cowlitz Bank. We added a new branch, and we added a new senior commercial lender. And subsequent to quarter end we announced the addition of a team of three new C&I lenders in the Tacoma/Puyallup area.

Our improvements include, we continue to fine-tune our overall deposit structure and cost of funding. The Cowlitz addition brought a nice C&I-focused deposit mix, which actually improved our DD&A percentage. And our overall strong non-maturity deposits of 64% did not change as a result of this acquisition. And we continue to reduce the construction exposure.

Our noninterest expense growth net of acquisitions was signaled in Q1 -- in our Q1 earnings conference call, as we execute our growth initiatives, as well as incur higher loan administration expense and other higher operating costs that are also -- that we also see, and that others are seeing as well.

We have continued to focus on maintaining a strong coverage ratio. And as I indicated earlier, our coverage ratio of 95.6% is one of the strongest among publicly traded banks in the Pacific Northwest.

I would like to ask Don Hinson to give you just a little more color on our Cowlitz Acquisition. Don.

Thanks, Brian. As you probably know, on July 30 Heritage Bank acquired certain assets and assumed certain liabilities of Cowlitz Bank from the FDIC in an FDIC-assisted transaction.

As part of the purchase and assumption agreement the Bank and the FDIC entered into shared-loss agreements. Under the terms of these agreements the FDIC will absorb 80% of losses and share in 80% of the recoveries.

All of the loans acquired in the Cowlitz Acquisition are covered loans, except for approximately $2.3 million in consumer loans, for which the FDIC has no reimbursement obligation.

As part of the acquisition, Heritage Bank acquired the following assets at fair value -- loans of $145.3 million; cash and cash equivalents of $74.1 million; an FDIC receivable of $70.1 million that has subsequently settled in cash; investment securities of $33.7 million; an FDIC indemnification asset of $16.1 million; core deposit intangible of $1.7 million; FHLB stock of $1.2 million; and $1.2 million of other assets.

Heritage Bank also assumed liabilities for the fair value of $343.9 million in deposits and $575,000 in other liabilities of Cowlitz Bank. As a result of the purchase accounting we recorded a pretax gain of $438,000.

Subsequent to the acquisition we repriced $168 million in Internet CDs to 15 basis points. As a result, these accounts have decreased $133 million. In addition, we coordinated the withdrawal of $27 million of Washington State NOW accounts, which are public deposits, and another $10 million of brokered CDs.

Now I will turn the call back over to Brian.

Just some general outlook calls and kind of our view of the next few quarters is as follows. Our net interest margin is likely to see a slight reduction as we continue to see abnormally high levels of cash.

Loan growth in the short run will continue to be muted by exiting construction loans in a slow economy. But we are hopeful we can begin to see overall loan growth -- net loan growth as our new lenders productions begins to gain traction and as we begin to build out our recent acquisition.

We will likely continue to see a modest increase in noninterest expense as we continue to execute growth strategies and integrate our recent acquisition. These two factors will likely cause our efficiency ratio to show a slight increase.

We continue to see stubborn pockets of economic recession in certain markets, and continue to see real estate valuation deterioration and a stubbornly high unemployment rate.

As we have discussed on several occasions, we intend to add one to two new branches to Heritage Bank per year. Our two new branches for 2010 of which the first, Puyallup, has been opened and the second will be announced soon.

Our new markets, Seattle, Bellevue, Vancouver and Portland, Oregon, present excellent growth opportunities for us, and we need to build out these markets to increase our marketshare. And we continue to look for opportunities in these markets.

I would also add that with the Cowlitz acquisition we have the number one commercial marketshare exposure in Cowlitz County. And we hope to continue to build on that marketshare.

Our Cowlitz system conversion is scheduled for November 13. We believe the conversion process is going well. And we continue to be excited about the possibilities this acquisition brings to our organization. And we continue to be active with the FDIC on possible assisted transactions.

In closing, I would like to reiterate the following points. We have a strongly capitalized Company with a risk-weighted capital ratio of 19.7% and a tangible common equity to tangible asset ratio of 10.1%.

We have a strong liquidity position and a strong and net interest margin; a very strong coverage ratio at 95.6%. And our current single-family construction exposure currently is much lower than most of our peers at 4% of total loans.

And with our strong capital and liquidity positions I believe we are well-positioned to strategically grow our Company. As well as our nonperforming asset levels are steadily improving, along with our coverage ratio and our provision levels.

I would welcome any questions you may have. And would once again refer you to our forward-looking statements in our press release as I answer any of these questions dealing with the forward-looking comments.

Karen, with that, I would open up the call for any questions our investors may have.

(Operator Instructions). Jeff Rulis, D.A. Davidson.

A question on the -- you did talk about the noninterest expense slightly increasing. I guess, more specifically on the compensation line and with the Cowlitz conversion expected, any disruption as to how the baseline comp line would change or that is roughly a good run rate going forward?

Well, boy, that is a tough one. There is lots of noise in that number. Because as you would imagine, when we acquired Cowlitz there were some employees that we let go early on. There were some that were staged over a few weeks' period of time. So those expenses are in the P&L. Then, of course, there are a few that we have held through conversion.

So as to if we were to use and take a look at our -- I will ask Don for some guidance here too -- but if we were to look at just the overall salary expense from Q3 to Q4, it is probably not a lot of change from quarter to quarter. Don, you want to add to that?

It would be hard to predict real accurately, but I would expect probably salary expense to be similar in Q4 and to Q3, since our conversion will not occur until sometime later this month. So you'll have -- even the people we are keeping on for just transition purposes will be here through November.

I would imagine it's going to be pretty similar if I had to make an estimate on that.

So no major -- I guess I was looking for just larger severance items or anything that was pulling through, but if it is roughly flat to up, as you sort of guided to, that is fine.

Then on the margins, I guess, a similar question. It is still a little bit noisy with Cowlitz, but you suggested some reduction there. But there is also those overnight funds that you talked about with Cowlitz. Would that suggest that maybe some pressure on margins, but maybe not at the magnitude of the drop you had in this quarter?

Yes, I would guess that. We clearly understand and realize that we have a lot of cash in our balance sheet, which has allowed us -- you saw the cost of funds continues to go down. So it allows us to reprice deposits at, I will say, competitive rates.

But at the same time, we are holding that cash with the hopes of being able to employ it either through new lending activities, or if we are successful with another acquisition, oftentimes new cash is needed to be utilized in those transactions.

So the long and the short of it is, is that I am guessing that the core bank probably operating about the same levels of net interest margin. I didn't see a lot of compression there. But just as we work through the getting rid of the excess CDs, etc., from Cowlitz we might see a little bit of a drop. Don, you have a comment?

Well, I would say that as we move out some of this -- we noticed it throughout the quarter that we looked month-to-month that our September was a little better than our August due to where we moved out some of those CDs. So I would expect it to start working its way back up to a more normalized level once the rest of these CDs are moved out.

The difficulty is is that even at 15 basis points, the folks aren't pulling those CDs out and we can't force it until maturity. So at this point I'm going to guess that they probably just roll off to the maturity schedule.

I guess, as profitability improves, you have been asked this a ton, but just any further additional thoughts on the TARP and timing of repayment, what you can say on that?

We continue to look at TARP. I will make this comment about TARP. TARP is becoming more of a strategic item than it has been in a last little while. Because, as we know, TARP is still regulatory capital, and with what we are hearing from regulators in terms of what their liking is for levels of Tier 1 leveraged capital and risk-based capital, TARP may be a strategic tool for us in the event of another potential acquisition.

So I will say that probably has changed a little bit since our last conversation. And really driven from, I just don't know where the regulators are coming from on regulatory capital. I clearly understand with $150 million in cash and literally -- basically no other debt on our balance sheet that writing a check to redeem those securities is probably a wise decision from an expense point of view. But I am looking at it from more of a strategic just here lately, and may continue to for the next little while.

Okay. Would that -- have you taken a look at the small business TARP or TARP Junior, that program, as a possibility?

Yes, but we don't see it as a possibility. We are active SBA lenders as it is, and for us to want to convert TARP to the SBA lending, I don't see that as a viable option for us.

Thank you.

Bobby Bohlen, KBW.

Thank you for taking my question. I was wondering if you could give us some update on what the M&A market is looking like up there? You were able to do -- close the Cowlitz deal this quarter, but it seems like the FDIC might be backing -- slowing down from some of their activity, especially given some of the whole bank M&A transaction that we have seen, and also some of the -- kind of the creative transactions that we have seen up in the Pacific Northwest.

So any of those whole bank transactions might be something more near in the future, if you could give an update of your views on the M&A up there?

Sure, Bobby. And these are just my personal thoughts. I have no -- the FDIC is not consulting me on any of their activities. But I do see the transactions you are referring to that the FDIC is beginning to find solutions for some of the larger banks, which I think is a good thing for the overall economy in the Pacific Northwest.

I think that the larger transactions, the larger banks, the larger troubled banks, I think have a better opportunity for those recap situations than do the smaller banks.

So my personal belief is that I think the FDIC will continue to be active with the smaller banks, and I am going to say those under $500 million or so. So my belief is I think we will continue to see closures in the Pacific Northwest in those smaller ones. And maybe a few of the larger ones that are still left there may be continued recap possibilities for those.

So as to open bank transactions, I have indicated on several occasions that we are interested in looking at those. And we will continue to, because I think as we work through this cycle there will be those banks that clearly survive, but I think will likely be looking for partners with strong currency. And I would like to think that we are one of those partners that may get a phone call or two. So we continue to be interested in that activity.

Okay, thank you.

Tim Coffey, FIG Partners.

Don, I had a question about the deposit side. How much compression could we see in your cost of funds?

How much continued decline in the cost of funds?

Yes.

I think it continues to slow, because we are getting down to where -- the cost of overall deposits is 0.85% this last quarter and interest-bearing deposits 0.99%. It could come down a little bit more as we see these mature, but it has been down for so long now that the repricing is [slowing] on the deposits, so I don't think it is going to come down a whole lot more.

Okay, okay. And then as far as [we are looking at] or at organic non-CD deposit growth, do you have any kind of idea, any kind of forecast about what you're looking at?

We have an given growth guidance in the past and we are probably not prepared yet to do so.

Okay, but in terms of the markets that you are in, the Cowlitz operation, the C&I team that [you're lending], the expectation would be that we would see more non-CD deposit growth, right?

Oh, absolutely, yes. I think that is the strong thing about the legacy Cowlitz Bank was a very nice core C&I piece of business. As I indicated earlier, even though they had all of the Internet CDs and the brokered CDs, etc., when you get all that out of the equation it was not dilutive to our non-maturity deposit base.

As I indicated earlier, our DDA balances actually went up. So I think that what our challenge and opportunity though is -- and that is primarily in -- that C&I base is in Cowlitz County with the four branches we have in and around Longview. I think clearly our opportunity and challenge is to grow the markets of Portland, Vancouver, Seattle, Bellevue.

As I have said several times, we have no illusions. We have a toehold in those markets, but also we believe that is an excellent opportunity for growth, both on the core deposit side as well as core C&I lending and that is where we are focusing a lot of our time these days.

Thank you. Those are all my questions.

Tim O'Brien, Sandler O'Neill.

Could you provide a little bit of color on the downgrades that -- those $10 million in downgrades, just what triggered that?

Well, probably other than what I have said, we had the one C&I loan. It is a medical related loan. It is a long term relationship. They are building out a new strategy, a new facility in a new market. And the triggers were simply that the buildout was coming a little slower than their original projections, and we felt it was prudent to downgrade the credit appropriately and manage at a little higher level.

But I think I would stress this is a relationship we have had for a number of years, and we feel pretty good about the long-term prospects of that.

The other was a condominium loan we have had for some time in the Pierce County market. They have sales all along, but sales have slowed, as with most condos, and we downgraded that during the quarter as well. So that is about all we really have at this point, but hopefully that helps a little bit.

Then heading into the winter months, my sense is from past years that residential sales slow down up in the Pacific Northwest in the winter months. Are you -- what you guys did as far as a little bit of reserve release, you still feel confident, I guess, that that is a trend that could continue in the fourth quarter even though sales might slow on the residential front.

How does that jive with your thinking, the cyclical side of -- the seasonal side of the construction business with your credit management practices, could you shed a little light there?

Sure. Well, certainly we do see a slow down every fourth and first quarter due to the construction sales. We saw a slow down in the construction in the vertical inventory even before -- as we moved into the third quarter, because of the $8,000 first-time home buyer rebate ending. We saw that slow as we moved into the third quarter. And we will likely see sales slow in general.

We still feel very confident that all of our vertical inventory are loans that, while the sales may slow, we just don't see any loss potential in that segment. We also believe that the horizontal inventory has bottomed in valuation. I don't see that changing any and so I don't see any risk there -- any greater risk than what has been present.

In terms of the reserve release, I don't think that had -- it had more to do I think just the loans in our portfolio in general as opposed to any cyclical nature. And I will remind everybody that we've got one of the strongest coverage ratios at almost 96% in the universe. And I continue to feel very comfortable about our overall allowance position.

Then last question is -- of the remaining Internet related deposits, how much of those are scheduled to mature in the fourth quarter? And what does the maturity structure look like for those deposits running out into the next year?

Well, again, we have about $34 million. I think they are pretty staggered over a two- or three-year time period. So I think there is going to be a few million each quarter. If I were to look at the maturity schedule on those they were pretty well spread out.

My guess is too on that, these people are going to wake up sooner than later that they can get better than 15 basis points at some point. I would be surprised that a bulk of that is not gone by the end of the second quarter, if not before. I'm shocked that they are still there, to be honest with you.

So even though you lowered the rate paid on those, and a lot of people decided to stick with the terms, if they call you up and say, you know, I will take my money back, you are happy to send it.

We will send them a check today.

Thanks a lot, guys.

(Operator Instructions). [Eric Grubelich], private investor.

(technical difficulty) were just answered. But maybe if you could elaborate a little bit more on your comments about the vertical and horizontal construction segments. If you looked by county, could you give us a little bit of color there? What is looking better, what is looking a little worse?

Sure. As I indicated earlier, when we look at just the troubled loans in general, 60% some of them, without going back to my notes, come out of Pierce County, Tacoma area. And most all of that is in construction. Remind everybody that our single-family construction is still at only 4% of our total portfolio, so it is a fairly insignificant -- I won't say insignificant, but it is a very manageable level.

The vertical inventory, again, most of that would be in Pierce County. We are -- most of that is at entry price points which are, oh, in the low $200,000s, high $190,000s in that range in terms of price points. I would say 80%, 90% of our inventory is in entry-level price points.

Those price points continue to soften. Real estate -- single-family real estate values in general continue to soften in the Puget Sound region. The rate of decline has slowed substantially, but we see most markets valuations continuing to decrease. And we have certainly seen that in the new construction market as well.

Whereas we could sell an entry priced home for $220,000 in the second quarter, that might be $210,000 today. These are rough numbers, but we continue to see price points decline a bit.

On the horizontal inventory, I really think we have seen stabilization to the values there. And these are finished, for-sale lots, again primarily in Pierce in and around the Tacoma area. I think we are seeing stabilization there.

But still we are seeing price points, depending on the size of the lot and depending on where it's located, close in or further out -- fortunately most all of our product is close in -- we are seeing price points on a liquidation base, bulk value, $30,000 at the low end to the $45,000 ranges at the low higher-end. And those -- as I said again, those have stabilized here in the last little while.

Okay, and then just one last question. If I looked at your reserve and your nonperformers, together with the increase in the potential problems, is it fair to say your classifieds are down a little bit, but the special mention may be up a little bit this quarter?

I do know one of those credits I referred to earlier was special mention, so, yes, without going back and looking at those numbers specifically, that may be a fair representation.

Okay, thanks a lot.

Thank you for the question.

There are no further questions. Please continue.

Well, Karen, if there are no further questions, I think that concludes our conference call for Q3. I appreciate your continued interest, and would invite those that didn't -- well, I guess if you're on the call you aren't going to be calling in for a recording, but it will continue to be held as a recording for the next little while. But again, I appreciate your interest in our Company. Thanks for calling in today.

Ladies and gentlemen, this conference will be made available for replay after 1 PM Pacific time today running through November 15, 2010, at midnight. You may access the AT&T Executive playback service at any time by dialing 1-800-475-6701 and entering the access code of 173483. Again those numbers are 1-800-475-6701 and entering access code 173483.

That does conclude our conference for today. Thank you for attending, and for using AT&T Executive Teleconference. You may now disconnect.