Q1 2022 Independent Bank Group Inc Earnings Call
Greetings and welcome to the Independent Bank Group first quarter 2022 earnings Conference call. At this time, all participants are in a listen only mode.
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As a reminder, this conference is being recorded.
And now I'd like to turn the call over to Paul Langdale Executive Vice President of corporate development and strategy. Thank you you may begin.
Good morning, everyone I am Paul Langdale Executive Vice President of corporate development and strategy for independent Bank group and I would like to welcome you to the independent Bank Group first quarter 2022 earnings call. We appreciate you joining us the related earnings press release, and the slide presentation can be accessed on our website at <unk> Dot com.
I would like to remind you that remarks made today may include forward looking statements. Those statements are subject to risks and uncertainties that could cause actual and expected results to differ we intend such statements to be covered by safe Harbor provisions for forward looking statements. Please see page five of the text in the release or page two of the slide presentation for our Safe Harbor statement.
All comments made during today's call are subject to that statement. Please note that if we give guidance about future results that guidance is a statement of managements beliefs at the time. The statement is made and we assume no obligation to publicly update guidance in this call. We will discuss several financial measures considered to be non-GAAP under the SEC's rules reconciliations of these financial measures to the most direct.
Comparable GAAP financial measures are included in our release.
I'm joined this morning by David Brooks, our chairman and CEO , Dan Brooks, Our Vice Chairman and Michelle Hickox Executive Vice President and CFO at the end of their remarks, David will open the call to questions with that I'll turn it over to David.
Thanks, Paul Good morning, everyone and thank you for joining the call today.
For the first quarter, we were pleased to announce adjusted earnings of $1 22 per diluted share as well as strong organic loan growth of 13, 1% annualized for the quarter, excluding mortgage warehouse and Pvp.
This continued growth is driven by demand from our relationship borrowers across Texas, and Colorado as our markets continue to experience strong economic and demographic growth.
During the quarter, we also optimize our balance sheet by strategically reducing noncore funding in preparation for additional rate hikes by the fed.
This resulted in a reduction of interest expense by $3 $6 million or 27% versus the linked quarter and resulted in a lower overall cost of interest bearing deposits.
The strategy evolved together with our ongoing retail initiative that is focused on fortifying and enhancing our core deposit franchise.
That overview I'll now turn the call over to Michele for more detail.
On the operating results for the quarter.
Thank you David good morning, everyone.
Slide six shows selected financial data for the quarter first.
First quarter adjusted net income totaled $52 1 million or $1 22 per diluted share a decrease of $2 9 million or six cents per diluted share over the linked quarter.
Net interest income was $131 1 million in the first quarter, which was down from $132 7 million versus the linked quarter.
P. P. P fee income was down from 4 million to $1 2 million in acquired loan accretion was down from $5 7 million to $3 6 million from Q4 of 21 to Q1 of 'twenty two.
These decreases were offset by $3 6 million dollar decline in interest expense, which was due to a reduction in rates on deposit accounts in the fourth quarter.
Noncash, earning assets grew during the quarter, primarily driven by the 13, 1% annualized loan growth, but also through opportunistic investments in our securities portfolio.
As noted on slide 21, we designated 188 million of longer duration municipal bonds as held to maturity during the quarter.
The NIM, excluding accretion was 3.13% at 26 basis points from the linked quarter. This increase was driven by the reduction of higher cost funding as well as higher securities yields and loan growth. In addition to a reduction in shift in cash balances.
Total noninterest income was $12 9 million for the first quarter, a decrease of $2 2 million versus the linked quarter. This was primarily due to decreases in mortgage banking revenue from the interest rate headwinds broadly impacting mortgage volumes.
Noninterest expense totaled $82 5 million for the first quarter. The increase is $2 5 million versus the linked quarter was mostly driven by an increase of $3 3 million in salaries and benefits.
The change includes a $1 2 million dollar increase in payroll taxes from the linked quarter, which are seasonally higher in the first quarter and also includes taxes paid related to annual stock vesting.
In addition, 401k expenses higher by 633000 in Q1 due to matching on annual bonuses.
The increases in salaries and benefit expense was partially offset by a $1.2 million decrease in other noninterest expenses.
Slide 19 shows our deposit mix and cost.
Positive totaled $14 9 billion at quarter end, a reduction of $704 million versus the linked quarter. This was primarily driven by our efforts to reduce noncore funding in advance of fed rate hikes.
These efforts included the strategic exiting of a bankruptcy trustee specialty treasury vertical as well as reducing brokered money.
As a result of this and other efforts interest bearing deposit costs decreased an additional 10 basis points during the quarter to 22 basis points.
The chart on slide 20 illustrates the change by vertical and shows the stability of our core deposit customer accounts since year end.
Capital ratios are presented on slide 22 in the first quarter. The company's consolidated capital ratios remained strong with a common equity tier one capital ratio of 11 point O, 9% and total capital ratio of $13 72 per cent.
Tangible common equity increased to $8, 16%.
That concludes my comments, so I will turn it over to Dan to discuss the loan portfolio.
Thanks Michelle.
Overall loans held for investment excluding mortgage warehouse purchase loans were $12 billion at quarter end compared to 11.7 billion in the linked quarter.
Excluding the impact of the P. P. P loans core loans held for investment increased by $372 $1 million over the linked quarter.
Which represents a 13, 1% annualized rate of loan growth.
Loan growth continues to be driven by broad based relationship lending to our customers across Texas and Colorado.
Average mortgage warehouse purchase loans decreased to $549 6 million for the quarter.
This decrease was primarily driven by upward pressure on mortgage rates, resulting in decreased demand lower volumes in <unk>.
Sure hold times across the mortgage industry.
Credit quality metrics remain healthy.
Total nonperforming assets increased slightly to $71 1 million or four 1% of total assets at quarter end, which was driven primarily by one commercial real estate loans totaling $15 3 million being added to non accrual during the quarter.
Net charge offs totaled one basis point annualized during the quarter.
During the quarter, we sold a note at a discount of $1 $4 million that had been previously reserved in our ACO.
We reduced the ACO with $1.4 million credit provision taken during the quarter.
At March 31, 2020 to the allowance for credit losses for loans is $146 3 million or one point to 2% of loans held for investment excluding mortgage warehouse loans.
These are all the comments I had related to the loan portfolio. This morning, so with that I'll turn it back over to David.
Thanks, Dan.
Looking ahead, we are now confident in our ability to grow our core loan portfolio at the 8% to 10% level for the remainder of 2022.
We are also very encouraged by the success of our balance sheet optimization initiative.
Head of additional tightening by the fed.
We believe that we are well positioned to benefit from a rising rate environment and we continue to deliberately booked new business with the forward curve in mind.
Our top priority remains to create long term shareholder value by growing our franchise across our four great markets and to deliver consistent high performance to our shareholders customers.
And communities.
We will continue to strategically invest in people and technology to position our company for a future and we remain optimistic about the growth opportunities ahead.
I'm grateful to all of our bankers for their tireless dedication to earning new business and expanding existing relationships each day and I'm excited to build on this momentum we have established in the first quarter as we continue to grow that platform across Texas and Colorado.
Thank you for taking the time to join US today and now we'll open the line to questions operator.
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Our first question is coming from the line of Brad Milsap with Piper Sandler. Please proceed with your questions.
Hey, good morning.
Good morning, Brett.
Thanks for taking my questions.
Michel maybe I kind of wanted to start with you know your plans for how you plan.
Plan to manage the balance sheet going forward do you think most of the runoff on the deposit side is complete and I think last quarter, you talked about maybe growing the bond portfolio by another half a billion dollars with some of your excess cash in 2022.
You've got a better loan growth guide now less cash just kind of curious how to think about managing some of the liquidity as it pertains to the overall balance sheet.
Yeah, you know I said the whole time, Brad that you know that was our plan for the bond portfolio that they would certainly depend on our loan growth as it came in and liquidity and we did have some I would call specialty treasury deposits and that went out right before the end of the quarter.
And then I think we had said we were going to exit our bankruptcy trustee vertical which was about 200 million and so really all of that outflow was related to those types of funds and our core deposits were stable to actually at the bit for that quarter.
We haven't raised our deposit rates at all at this point and and you know really hopefully we can lag that is for a bit and we will manage deposit run off that way right. Even if we start to see significant outflows that means we may have to raise rates.
The bond portfolio I would say at this point half a billion is probably still a good bogey for the rest of the year, but that could change. If we continue to get you know the loan growth where it is.
Great. Thank you and can you remind us.
Sort of what your interest rate sensitivity kind of what you guys are.
Assume in terms of you know maybe loan and deposit betas as you kind of think about you know what.
If the fed does move kind of what we could expect.
You know in terms of you know your NIM are continuing to move higher.
And you know I think betas on loans and deposits.
I mean, maybe lower than what people expect but I think mark what our model says for the rest of the year and I think we're assuming an additional 125 basis points in rate hikes in our model could add 25 to 30 basis points starting in through the rest of the year.
Yeah.
Okay, Great I'll hop back in queue. Thank you.
Okay. Thanks, Brett.
Thank you our next question or something from the line of Michael Young with true Securities. Please proceed with your question.
Hey, good morning, everyone I wanted to start on the loan growth outlook of 8% to 10% a little better there. So could you just walk us through kind of the improvement is the increased pipelines that you're seeing in demand or less payoffs and pay downs any other clarity there would be would be appreciated and.
Also as a follow up on that just a loan yields are you seeing any increased pricing in the market at this point as rates move higher.
Good morning, Michael Yes, we feel good about obviously the.
Excuse me the loan growth, we've seen last couple of quarters.
Really driven by that.
The biggest factor is just the strength of the markets you know all four of our markets or our are doing extremely well and our customers and new customers are investing and purchasing assets and doing things that caused them to want to borrow money. So.
So that's the number one factor we also had a slowdown we saw slowdown in the first quarter of pay downs.
And which we had hoped for and kind of signaled in the first quarter that you're in the first quarter call back in January that we expected that.
Over the course of the year as rates go up but we have in fact seen that we think that's a trend that will continue to see and should give us some tailwind as we go through the year.
Thirdly, but certainly not least important we've continued to add.
A lot of talent across our four markets both the.
Both in our commercial C&I as well as in on the community banking and commercial banking real estate side. So.
We've got really the.
Not only the largest but really the strongest and deepest team of lenders that we've had.
In the history of the company, we think right now so we feel good about that and we think that portends again Brad.
I'm sorry, yeah, Michael for.
For the continuation of strong loan growth, Yes, you know where we've been guiding seven eight.
Now we can.
Continue to deliver eight to 10 ish kind of growth for the balance of the year. The pipelines are really strong.
We're off to a good start here in the second quarter, it's up very early obviously, but you know all the science of everything we can see right now appears positive.
Other good news Michelle alluded to just a moment ago, we express some concern in the first quarter.
We felt confident we'd be able to hold our deposit betas down a little below historic averages here at least for the first couple raises.
But we also expressed concern that that the competition with all the liquidity in the cockpit for high quality loans might keep loan yields depressed for a while in fact, we have not seen that we've actually seen better yields and your ability to increase our pricing boat.
Obviously, the floating rates floating up with your indexes, but but to US as you know we we still do a lot of real estate lending that's been our core of ours for a long time a three.
Three to five year fixed rates, we've seen the ability here.
In the late in the first quarter and early in the second quarter to push those rates three.
We're seeing rates for instance on the loans that we booked here in April so.
So far the rates are coming on right at or little above are the yields of our current portfolio. So we're not seeing any pull down at this point are you on the yields on our overall portfolio. So that's a change from really.
<unk> struggled with that for two years since the beginning of the pandemic and the rate cuts.
So we're seeing positive trends on that so as Michelle said, we think the continued increase in rates will will help our net interest margin. We think that will be a product out as Michelle said improving loan yields and then being able to at least lag here early on the deposit betas.
Okay, great. Thank you for all that color, David and the only other question I have is just on kind of mortgage warehouse, obviously, a little bit weaker with the rising interest rates, but in terms of the yield you're actually getting on that portfolio is there at some point would you look to you know maybe let that continue to shrink so that you can.
Finding higher yielding either loan growth or securities or do you think you'll have those yields will kind of rise enough that still be attractive as we move forward into a higher rate environment.
Yeah, we certainly saw more headwind that has been our biggest challenge right in the first quarter was a decline.
And the mortgage warehouse and our retail mortgage business, which hurt our fee income.
Materially and so that that is going to continue to be our biggest headwind I say that from a high level standpoint, Michael.
Then in the in the details as you ask yeah, we're seeing a real trade right between pricing and volumes in a super competitive are we have seen.
Maybe knock on wood here some of the worst behavior of some of the participants in the market seems to be slowing a little bit.
That said, we will continue to balance that up and we're not going to.
We try not to provide services and products and everything for for AR on a on a non-profit basis, that's not our not our usual beam so.
So that said are we kind of expect the mortgage warehouse the level out here around $500 million. That's the way we're thinking about it going forward, but you know, we'll see how that that goes in you know in in.
And that will also and I think you alluded to it Michael just now.
If we continue to see you.
<unk> then what we think is the normal type of loan demand and pipelines and we could choose to just you.
You know continue to let that roll down a little bit and replace it would be loans and fees from our from our normal commercial business.
So, we'll just manage it but I think for for wait we're thinking about it internally is we're planning for the rest of the year, it's around $500 million in pricing kind of level to where it is today.
Okay, great. Thanks, David I appreciate it.
Thanks, Mike.
Yeah.
Thank you. Our next question is coming from the line of Brett rabbits with hub group. Please proceed with your questions.
Hey, good morning, David Michelle.
Right good morning, Brett.
I wanted to first ask about expenses and you know and obviously, there's some noise with a mortgage in and the first quarter. Obviously has had some higher expenses unusual Michel was just I was just curious you know one what are you seeing from inflationary pressures in and.
You know, maybe if you could give us some.
Some thoughts around what the year looks like and then you know David you said just looks like the best funding thing you've ever had you know I didn't know if you wanted to continue to try and grow that and so that might play into expenses. This year. Yeah. I was just hoping for some color on how you see the expense level training throughout the year.
Yeah, you know first quarter expenses are always a bit higher I think than a lot of people expect you know because we have stock best things that we have payroll taxes payroll taxes reset and this year. We paid we had matching on our bonuses. So there were some things in there in the first quarter that wont be in continuing the run.
Right and I still feel good about the guidance of a little over 5% increase from year over year expenses from 'twenty, one I think which would put us at about $330 million of expense for the year.
They run rate you know could be down a bit in the second quarter, but I I anticipate that expenses are going to be in that 82 to 80 $383 million range for the rest of the year each quarter.
<unk>.
Okay.
That's great color.
And then you know credit obviously continues to be a really good and you only had one basis point Uh huh net charge offs, but you did have at 115 million dollar commercial real estate credit and was just curious if there was any trends in classified assets and maybe what that one commercial real estate property was one time or what type of what type of a property in wise.
Hey, Brett this is Dan good morning, Yeah. As you noted there's just one credit that was downgraded to non accrual.
Already on our adversely classified list, that's and office property I.
I would say not anything unusual about it and we expect it'll be managed in the normal course, I think probably the bigger message is as expected. We continued to see a reduction in criticized and classified loans in the quarter.
And in fact adversely graded credits are half of what they were a year ago. So those trends continue to be very good.
Okay great.
Appreciate that Dan and then just lastly for me, maybe David you've been a little less I'd be lying about prospects for M&A, maybe in the past three six months and it seems like everyone's.
Taking a bit of a pause trying to figure out what their own bank might make in the next year or two and if we might have a slowdown in the economy I'm, assuming that you would tell us that.
Do you think M&A is more on the backburner from here and given the pipeline you are focused on organic growth.
Give us any thoughts on how you view M&A and.
What you might think that could mean for for your franchise in the next year or so.
Well from the highest level, we we still view that as a core competency of our company. We've demonstrated over the last 32 33 years that said you know it ebbs and flows with the economy and how people feel about their franchises and companies and as you just alluded to Bret.
The banker.
Bankers in Texas, and Colorado continue to feel very good about their companies and performance of their company. So you know my focus continues to be just to build quality relationships with high quality companies and the major markets in Texas and we'll see at the you know this.
This quarter, the only thing change really from from how I felt about last quarter is just the volatility in the stock prices.
You know in January one and the same financials, we're gonna be the number one performing asset class in 2022, and then from that to you.
Pretty significant a decline in the.
The banks like Index, and then just a lot of volatility and in all the stocks.
No.
We'll see how it plays out but I don't think any of those things.
Help you know how.
Banks are thinking about their strategic plan.
And you know when the face of volatility people like the whole day and they've got is my kind of experience over the years.
So you know I still believe the M&A, we're going to see M&A you know Oh in the next 12 to 18 months, but just timing of it I really think it depends on so many things that we don't control you know how the fed.
Your interest rate increase cycle here goes how it affects the economy, how the war and in Ukraine goes and how people feel about that and the chance of it spreading or becoming accelerated in some ways. So there's so many things, we don't control, but and and I think that's been points back Brad as you said to us to control, what we control which.
<unk>.
You know grow our company continue to add.
Add terrific talent, both on the administrative side and on the and on the production side.
<unk> to invest and then embedded in those expense numbers, Michelle talked about we're investing in infrastructure and people and teams and building out our risk.
Management across the company at a level that will allow us to grow and do the things we wanted to do in the future. So.
Okay, that's great color I appreciate that.
Thanks, Brett.
Thank you our next questions come from the line of Brady Gailey with K B W. Please proceed with your question.
Hey, Thanks, good morning, guys.
More of a break.
So maybe on the flip side of M&A.
Doesn't look like you all did any buybacks in the quarter I know you repurchased about 1% of the company in the back half of last year, but yeah, Hi, how are you thinking about the buyback, especially given the pullback in bank stocks.
Yes, I mean.
We continue to you know.
I believe that when there's disruption and volatility in the in the markets. Those are chances for us to be opportunistic. We have you haven't seen those kinds of opportunities here early in the second quarter, but we'll see you know what kinds of volumes and things are coming out of earnings season here I think the market seems to be kind of.
On hold here for a minute waiting to see how everything goes next week or two so we'll see how it comes out the other side ready, but yes, we will be aggressive when the stocks are are we believe mispriced.
Sure.
And I know the.
Dip in deposit balances was kind of a strategic run off of brokered deposits is there any more of that left going forward or are you kind of happy with your deposit mix at this point.
You know, we still have a bit of that I think most of our broker is gone and obviously, where we use that as a liquidity source when needed, but I think the majority of that run off has happened at this point.
But it's you know those those are still available to us at that point in time, when we need to bring them back.
Okay.
Right great. Thanks, guys.
Thanks, Brett.
Thank you our next questions come from the line of Michael Rose with Raymond James. Please proceed with your questions.
Hey, good morning, everyone. Thanks for.
Taking my questions obviously.
Asset quality has been one of the hallmarks of the company you know excluding one seemingly idiosyncratic addition, this quarter.
More broadly speaking anything that might you know give a little caution in the outlook and obviously the reserve to loans has come down, but just given the growth and maybe some some broader macro concerns on the horizon.
Should we expect you know further reserve releases to be somewhat limited from here or is the outlook. Just so good in your markets that you know, we could expect that reserve level to come down a little bit from here. Thanks.
I think.
Michael This is Dan I'll take that.
I think as we really look at the portfolio, we have as you know low nonperforming assets and.
I would say rather minimal charge offs are consistent with our credit culture and really our history in managing our loan portfolio. So we expect that to continue to be the case that certainly was the case through the pandemic.
As we look ahead of potential headwinds in the economy. We are certainly continue to expect our portfolio to perform in a similar fashion.
And.
In addition to that and certainly the opportunities we have on the loan growth side that we've already spoken to this morning, I think would indicate that we.
We will not be in a position, where we would expect to release any additional provision. We certainly would expect that we would continue to grow.
The book and have the adequate reserves already in place to manage that and based on what we know today, we certainly wouldn't expect to make any additional provision in 2022.
Based on that but hopefully that gives you a little bit of color.
Yeah. That's very helpful. Maybe just one follow up on capital as well you guys have increased the dividend.
Four quarters in a row.
Here you know it.
It seems like capital is going to build you know obviously earnings are strong internal capital generation is solid.
Should we think about.
You know further dividend increases it looks like you guys have been trending around.
It's 30% or so payout ratio is that what we should expect moving forward.
I think more.
Good morning, Michael I think.
That's a good way to think about around 30% of our of our earnings. Although you know again as we talked about over the last couple of quarters. If you know if we don't see you know M&A.
Prospects immediate prospects and we'll continue to.
To look at dividend increases and it certainly the board could decide to pay out at a higher level you know in the future that if that looks like a good way to return that capital to our shareholders and also pending.
The stock rebuy.
The stock repurchase plan and how active we are with that could also impact how we think about dividend increases, but our lean if that's helpful would be toward.
Dividend increases as we go forward.
And Andrew it's helpful.
Based upon the fact that we expect earnings to go up so.
Yep exactly perfect maybe just one final one for me obviously the tax rate.
Down this quarter it looks like to be a permanent change as kind of 19, 5% kind of what we should be using going forward. Thanks.
Yeah, it really that or a little over 20% is probably a better run rate we had a permanent difference related to the contribution of some property. So I wouldn't I wouldn't use that a little over 20% in your modeling.
Perfect. Thanks, Michelle Thanks for taking my questions Hey, Thanks, Michael.
Thank you as a reminder, if you would like to ask a question. Please press star one on your telephone keypad.
Our next questions come from the line of Matt Olney with Stephens. Please proceed with your questions.
Thanks, Good morning, everybody.
Hey, good morning, Matt.
I think Michelle mentioned the bank has not yet changed any deposit pricing recently did I hear that correctly, Michelle and any more color and are you seeing any movements from competition that are trying to get ahead of some of the the fed tightening.
Yeah.
I you know, we we really haven't seen a whole lot of competition. You know we will get one off calls from some of our relationship managers, where maybe they have a another bank or a lot of times, it's a credit union, that's offering a higher rate or a promotional product.
We haven't really heard a lot of noise from our field and at this point.
So we have not increased our rates at this point.
Okay.
For that.
And then I guess on the other side on the loan side, just remind me of the dollar amount of loans that will reprice immediately with with higher rates from the from the fed that we saw in March and probably here again in a few weeks.
So and we have about 1 billion and a half of loans that are tied directly to the index, Matt that well that that's what repriced with the March rate increase and.
To date, we have a little over $3 billion that have increased from that rate increase that we're on a different either they reset at the end of the month or on a 30 day basis or something like that and so I don't think that would be consistent with future rate increases.
Ultimately over the course of.
What a year or so we would expect about half of our portfolio to reprice, that's right about half of it has.
Has some sort of variable rate, it's just that the timeframe on which they've repriced it extended a bit more most of that is within the first 90 days, Matt and then the rest kind of just quarter by quarter as annual rate suggests.
Okay got it thank you for that.
Yeah, and then I guess earlier I think Michelle you mentioned potentially growing that securities portfolio. During the course of the year end.
And I guess, we've seen more attractive yields in recent weeks have you started to take advantage of this yet are still being.
Patient and then within the target type of security you are looking at any more color on the.
That you've seen in recent weeks.
Yeah, I mean, we have been rent that reinvesting our cash flow. It's right now it's about $60 million a quarter, it's come back a bit as rates have increased it increased right.
We've been buying mortgage backs and the yields on those it's been about 330 leased but we then invested in more munis that yields about been about for 'twenty and then treasuries just a managed senior housing portfolio at on days that rates go up we've gotten that to 50. So we have been able to increase.
The investment rate of the portfolio significantly over this past month.
Okay. Thanks for that and just to clarify Michelle those are just reinvestment of cash flows from what's coming off it doesn't sound like you've increased the size of the book in recent weeks am I am I getting that right.
We are still growing the portfolio, but like I mentioned earlier, you know it will really depend on loan growth, which has been good a bit better than expected. So I I think growing the portfolio to two and a half a billion by the end of the year. It is still a good target at this point that you know that's a long time away. So we will certainly manage it.
It is our liquidity and loan growth comes in.
Okay.
Under that two and a half billion dollar a scenario that you've mentioned the security side, what would that imply the excess liquidity position would look like at the end of the year.
Yeah that that depends on what happens with our deposit flow, but I would expect that they ended the year, we'll be back in sort of our.
Where would you be comfortable with liquidity either ended the year in that 12% to 15% range.
Got it okay.
Thank you very much.
Thanks, Matt.
Thank you there are no further questions at this time I would now like to turn the call back over to David Brooks for any closing comments.
I really appreciate everyone. Joining this morning, we continue to feel good about our position here as we as we move forward in this year with the uncertainties head I appreciate everyone's interest.
Interest in the call if you have a great day.
This does conclude today's teleconference. We appreciate your participation you may disconnect your lines at this time.
The rest of your day.