Saturday, August 22, 2015

Banks Are Far From Amazon

If you haven't read the New York Times article on Amazon working conditions, you should. By trying to create a meritocracy, the unintended consequence included nothing more than petty zinging and flaming. The kind you see on social media. Except at least Amazonians do it to your face, but in a public setting. My response to reading the article is in my tweet below.

Jeff Bezos refutes the characterization of Amazon in the article as a soulless, dystopian workplace, stating it's not the Amazon he knows. Possibly true. Using anecdotes to make your entire case is lazy. What is the company turnover rate? How much overtime do they dish out? Because the article indicates nights and weekends are the norm. A little facts supported by anecdotes would have been more effective, and in keeping with journalistic standards. Not that I'm an expert on journalistic standards, but when a blogger like myself comments on lack of facts from the Old Gray Lady, journalism in the USA is in trouble.

While reading the Amazon article, I thought to banking. How far from a meritocracy we have become. In some financial institutions, the inertia reminds me more of a government agency than a shareholder owned company. One bank chairman said that when he wants to get something strategic done quickly in his company it takes two weeks. In banking, it takes two years.

Regulation counts as a progress inhibitor. Especially since the financial crisis. Bankers are wary of charting a different path for fear of how regulators would react. Plain vanilla business models receive the most favorable examiner reactions. Veer off the norm, scrutiny is sure to follow.

Internal to our banks is the inertia that comes from compartmental-ism, mediocrity, and old-school leadership. While there is not much we can do about regulatory attitudes towards moving our industry forward, there is plenty to do about our business models.  Here are a few suggestions to create a greater meritocracy that rewards moving the bank forward while minimizing the unintended consequences that Amazon is likely dealing with.

1. Create incentive systems with meaningful and transparent awards for achievement. I have spoken and written on this subject often. Use incentives as a positive means to reward behaviors positive to your institution. At Amazon and in many other meritocracies, incentive systems are wielded like sledge hammers to drive underachievers into the ground. Instead, lift achievers up. Persistent underachievers will self select out or be shown the door.

2. Fire people. When an executive tells me about the issues they are having with a subordinate that is hurting the bank, I always ask if the subordinate is an employee at will. Why? Because you can fire them! As one banker told me, there is nothing more motivating than a strategic firing. If an employee is not putting forth the effort, has a bad attitude, or simply doesn't care or works against where you want the bank to go, FIRE THEM! The remaining employees will take note.

3. Build a collaboration culture. Some banks have tried this and it morphed into a crazy number of meetings. But you must forge forward with the pre-eminent question being "how should this be"? Usually the answer is obvious. Get the people you need to move an initiative forward into a room and don't leave until you work it out. You don't need standing meetings for this. Be bent on taking action once the talking is done.

4. Promote learning from failure. Do not penalize failure. This is true if a bank employee is working to innovate and move the institution forward, but the initiative fails. I often hear about bank employees getting "written up" (an audit comment, examiner comment, or supervisor action) for trying a process that may not have worked or unknowingly violated an esoteric rule. Wrist slaps are for employees that ignore supervisory directives, or knowingly violate policy. Not for trying something that doesn't work out. That's called innovation.

What do you recommend for creating a meritocracy without pounding your people into the pavement?

~ Jeff

Saturday, August 15, 2015

Bankers: Don't Hate the Dividend

Me to Bank CEO: Have you considered, instead of a growth strategy, maximizing profits and paying out most of it in dividends? CEO: *crickets*

And so it goes with my suggestion that slow growth, superior profits and high dividends is a viable strategy. Particularly for financial institutions in slow growth markets. This strategy could also manifest itself in mutuals and credit unions, as they can pay a bonus dividend to core depositors out of their robust profits.

But as I told one banker yesterday, not many are drinking my Kool Aid. 

Growth is sexy. With growth comes accolades. Management gurus spew bromides such as "grow or die". And so our industry has been cut in half in the past twenty years, because so many of us chose the latter.

I think it may have been a business professor that told me growth above and beyond market growth would only last for a short time. The bank CEO, mentioned above, was asking for my opinion on his growth and acquisition strategy. His market grew at 3.6% the prior year. The market leader, of the "too big to fail" variety, actually grew market share from the prior year while the CEO's bank declined in market share. So they weren't succeeding taking business from the 800 pound gorilla to sustain growth. Nor was their market growing at a pace that would fuel book value and EPS. Hence my suggestion.

When I suggested it he sought examples. I didn't have the answer off the top of my head but he motivated me to look at the strategy from a total return perspective. I have an affinity for total return because it focuses on what you deliver to your shareholders, regardless of how you deliver it. Capital appreciation plus dividends, no matter the proportion. My suggestion to the CEO was 4% EPS growth combined with a 5% dividend yield delivering a 9% total return.

Getting back to my research, I reviewed all publicly traded banks and thrifts with between $1 billion and $5 billion in total assets. I eliminated any bank with greater than a 2% non-performing asset/total asset ratio to control for credit quality challenges that impacts profits and trading multiples. The results are in the below table.

I admit that the lower dividend paying banks delivered a better three-year total return than the higher dividend banks. But not materially so. Certainly not a slam dunk that motivates the vast majority of bankers to opt for a lower dividend, higher growth strategy.

The remaining ratios are very similar: ROAA, price/book, and price/earnings. Shareholders don't appear to penalize the higher dividend strategy by ascribing lower trading multiples to those banks' stock valuations. In fact, by growing slowly, maximizing profits, and paying the majority of profits in shareholder dividends (or depositor dividends for mutuals and CUs), one could argue that this is a lower risk strategy and avoids the roller coaster "high-highs" and "low-lows" that banking's high fliers tend to experience during economic cycles. Lower risk shareholders should expect slightly lower returns. So it is intuitive, right?

But no. Instead, those in slow growth markets set sail hoping to perpetually grow faster than their markets will allow, and rely on acquisitions to stoke their growth. Grow or die. Are we going to get a different result than we have gotten?

~ Jeff

Saturday, August 01, 2015

Bankers: Play to Win

I recently read Playing to Win: How Strategy Really Works by A.G. Lafley, Chairman and CEO of Procter and Gamble, and Roger L. Martin, Dean of the Rotman School of Management at the University of Toronto.

The book identified five choices businesses have to make to win, called the Cascade of Choices, because each one cascades from the prior one. And I thought, bravo! But then I tried to think of banks that are making these choices.

Banks rarely had to choose. Instead of focusing on small and medium sized, closely held businesses and the personal banking/wealth needs of their owners (note: Cobiz Financial), we choose to be everything to everyone in towns where we operate. This has sapped resources to the point of ineffectiveness, never committing to any particular path for fear of being wrong. 

In sports, you can never be the hero without the risk of being the goat. In our risk management meetings deep within the bowels of headquarters, we work diligently to avoid being the goat, never allowing us to be the hero.

Here are Lafley and Martin's Cascade of Choices, with my commentary following each one.

1. What is your winning aspiration? The purpose of your financial institution, the motivating aspiration.

I've called this vision, future-picture, high definition destination, and aspiration. It's all the same thing. What does your financial institution aspire to be? If you hear someone say that aspiring doesn't matter, ask yourself: Are they holding you down?

2. Where will you play? A playing field where you can achieve your aspiration.

Equally important, where will you not play in achieving your aspiration? I recall banks that went toe-to-toe with the old Commerce Bank of Cherry Hill, New Jersey on locational convenience. Commerce paid top dollar for prime locations touting extended hours and dubbing themselves America's Most Convenient Bank. Today, those banks are unwinding excess branch expenses that resulted from playing on Commerce's turf.

3. How will you win? The way you will win on the chosen playing field.

On Service! I take my liberties poking bankers on the service imperative because superior service must graduate beyond the platitude it has become. If you will win on your chosen playing field on service, then you focus on customers proven to appreciate service, price accordingly, hire capable employees that can be of service, develop them to hone their skills, and reward their success. 

4. What capabilities must be in place? The set and configuration of capabilities required to win in the chosen way.

The author of a recent American Banker article opined that it wasn't likely millenials will replace human interaction with financial technology. They still wanted someone to advise them and help them with their budget. Do banks have this ability now? If a millenial walked into your branch for financial advice or to help with their budget, could your bankers do it? 

5. What management systems are required? The systems and measures that enable the capabilities and support the choices.

I recently penned a BAI Banking Strategies article Linking Accountability to Strategy. I took the wild leap of faith that a bank would have branch and officer profitability reporting abilities. My experience tells me many don't, and they often revert to lender production and portfolio size to maintain accountability. This may have unintended consequences that is not consistent with your strategy. So in moving through the Cascade of Choices, make sure you have the management systems in place to execute on your strategy.

There you have it. I highly recommend the book. P&G thought so highly of Lafley that they brought him back shortly after he retired. In the introduction to the book on Amazon, the pitch read:

"This is A.G. Lafley's guidebook. Shouldn't it be yours as well?"

~ Jeff

Friday, July 24, 2015

Guest Post: Second Quarter Economic Commentary by Dorothy Jaworski

The Crisis Begins
If your country was in default on its debt, in economic distress, and almost out of cash, would you vote “no” to a potential deal to get out of immediate trouble?  Even if it meant spending less money- that you don’t have?  None of us would do that, but tell that to the Greeks.  60% of them voted “no” in a national referendum on July 5th and thus rejected a deal with creditors and the likely chance to stay in the Euro.  Greece may have to go bankrupt, impacting the many financial institutions who own the sovereign debt of Greece and impacting the many consumers who will lose part of their deposits as banks fail.

And so, the crisis the world has feared for several years is here.  Investors will now worry about the ripple effect from other countries with debt levels that are unsustainable, including Spain, Portugal, Italy, and closer to home, Puerto Rico, and who have economies that are weak.  All of this Greek drama could hurt the Euro initially, but it could actually improve if Greece exited.  If selling in stocks and bonds begins in earnest over this crisis, we will have some of the first tests of liquidity in the markets since new regulations kicked in and restricted financial institutions from trading or making markets. 

After calls by the IMF and the World Bank for the Federal Reserve to postpone interest rate hikes, the calls seemed to be falling on deaf ears.  Fed officials keep telegraphing rate hikes later this year “if the economy improves.”  The Greek referendum and Puerto Rico’s threat of bankruptcy may do the trick.  The Fed keeps insisting that they will tighten this year enough though we have had negative growth of -.2% in 1Q15 and 2Q15 growth does not look all that great.  Inflation remains low.  The European drama may change their minds, along with a greater than expected, or publicized, slowdown in China and recession in Brazil and Russia.  Japan seems to have the only economy with decent GDP growth near 4%.

Unemployment Measures
The Fed keeps pointing at the low unemployment rate and saying that is their reason to raise rates.  Have you seen the unemployment rate in June?  It was reported at 5.3%, down from 5.5% in May.  Payroll jobs grew a modest +223,000, but household employment fell by -56,000, while the labor force was declining by -432,000.  So job growth is negative and the labor force declines, making the unemployment rate drop.  And that is supposed to be so good that rates have to rise?  Perhaps it is that the Fed “thinks” they have to tighten.  They “think” they have to return short term rates to “normal” in order to be able to lower rates when recession comes.  Yes, I actually read this recently!  It would be strange to see the Fed tighten when job growth is pathetic, wage growth is stubbornly low, and inflation is not threatening anyone. 

While the unemployment rate may appear to be “good” at 5.3%, so many other employment measures are weak.  The labor force declined in June and the labor force participation rate dropped to 62.6%, matching a low from 1977.  The pool of available workers is still high at 14.4 million, with the augmented unemployment rate high at 8.8%.  Greenspan would never tighten with the pool of labor so high!  There are plenty of job openings, over 5 million, but employers are having trouble matching workers with the requisite skills.  Part-time jobs are still the only alternative for many workers who actually want full-time work, showing how prevalent underemployment really is.  Meanwhile, workers continue to exit the workforce, including the retiring baby boomers, who are taking with them knowledge, skill, and expertise without providing that knowledge to others.  So my question to the Fed is- do you “think” you should tighten now or wait until we actually have sustainable growth? 

The so-called economic recovery is now six years old, as of June.  The longest uninterrupted recovery lasted 10.7 years under the Maestro, Fed Chairman Alan Greenspan, in the 1990s.  Growth over the past six years has averaged about 2.0%, compared to +4.5% for the past ten recoveries.  The data still point to a mix of strength and weakness, with housing showing the most strength and inflation and manufacturing data releases showing the most weakness.  Growth is high enough to just move along, but not much more.  Am I proud of the +200,000 to +250,000 payroll growth each month?  No.  Am I proud of the 5.3% unemployment rate?  No.  Do I “think” the Fed should tighten?  No.  Why do I keep questioning the Fed?  Because I see an economy barely able to generate growth and that same economy fragile enough for growth to slip away, before it ever gets to a sustainable level.  Like I have said before, go ahead and tighten.  Then you will be able to lower rates again- soon.

Large Hadron Collider Update
Our favorite machine is back in business- bigger and faster than ever!  On Easter Sunday, the Large Hadron Collider of Switzerland started up again after a two year period in 2013 and 2014 for maintenance and upgrades to add twice as much speed to the machine.  In June, the Collider began smashing protons together at 13 trillion electron volts, or “TeV,” in an effort to find new particles.  In 2012, researchers found evidence of the Higgs Boson particle, which is the particle believed to give everything mass.  What will they find this time?

First Federal Update
After our merger is approved by regulatory agencies, we will become part of Penn Community Bank.  We have great team members and everyone will be working to combine our banks and systems so that we can better serve our customers.  Stay tuned!

Thanks for reading!  07/06/15

Dorothy Jaworski has worked at large and small banks for over 30 years; much of that time has been spent in investment portfolio management, risk management, and financial analysis. Dorothy has been with First Federal of Bucks County since November, 2004. She is the author of Just Another Good Soldier, which details the 11th Infantry Regiment's WWII crossing of the Moselle River where her uncle, Pfc. Stephen W. Jaworski, gave his last full measure of devotion.

Saturday, July 11, 2015

The "About Me" That LinkedIn Doesn't Tell You

How difficult is it to get to know someone that, well, you don't know? Very. Many of my readers know me. I'm not sure this is a good thing. Colleagues used to tell me that when meeting someone I should use "Jeff Lite". Just so you know... I'm not sure there is a Jeff Lite.

Most of my readers, however, don't know me. And the benefits of having a blog is that I can write what I want. I have written About Me posts in the past (see links), telling you my sports teams and some other personal information. So this post would be a complement to those.

Not in My LinkedIn Bio

I think people that care too much what other people think are crazy. I think people that care nothing about what other people think are crazy too. We are all mostly in between the two crazies. I lean towards the latter. My wife thinks I lean a little too much. This leads to spirited discussions on what I choose to wear. I dress for comfort. And economy. If it were up to me, my blue jeans would come from the Dollar Store. What are they eight bucks? C'mon.

Modern day trappings are too expensive! If we had to, my family could cut our living expenses by a third. Over $200 a month for cable? Ridiculous. Two thousand dollars for a couch? You haven't been to Big Lots. Three hundred dollars for a pair of shoes? My most comfortable shoes are Tom McCann's I bought at Kmart years ago in a traveling pinch. I am convinced if I were living alone my flatware, furniture, clothes, etc. would all be bought at discount stores. I would have Tupperware-like containers that were once the olive or lunch-meat containers, and all my drink containers would be used milk jugs. I would live in an RV, like Trapper John MD. But electronics and other gizmos, that's another story.

I don't understand why a three person family would have a 4,000 square foot house. I also don't get status cars. If someone came up to you and said: "Buy this thing, it costs you 100% more than the other thing and will cost much more to operate, but people will think better of you." I don't think any of us would do it. But somehow we do. Marketing. It's all about Marketing!

I believe in personal responsibility. I was on jury duty a couple of months ago and didn't get selected. If I was on a jury and someone said "I did it, but here is why"... It probably wouldn't matter to me, with limited exceptions. They did it. A Navy lieutenant once said be careful pointing fingers, because the rest are pointing back at you. If you did something, don't say it was because of him, her, or that person over there. You did it! Own up to it. In my view, society would be a better place if I can convince everyone to think the same.

Victimhood and personal offense. There are many current events swirling around us that offend people. Most aren't even impacted by the event! I know there are bad breaks in life. But they supposed to contribute to the person we are trying to become. And if you are suffering bad break after bad break, perhaps it is because of your choices. Or you're Job from the Bible. That guy couldn't catch a break. But for others not named Job, see my personal responsibility diatribe above. We are quick to align with the victim industry. After all, protectors of "victims" are here to help, right? How is that working out? Most of those protectors have bigger than 4,000 square foot houses.

I see things in black and white. If you are a victim, this was not a racist statement. I once ordered a black-and-white milkshake and my friend worried that people would think I was a racist. That is where we are in society. A racist milkshake. But I digress. Many people think everything is a gray area. I see most things as black and white. Don't know if that's good or bad, but it's me.

American capitalism should evolve so we all strive to maximize our God-given talents, earn the fruits of our successes, and give what we don't need to the charity of our choosing, that is NOT the federal government. The challenge is to determine what we need since pensions have gone the way of the dodo bird and with 401k's we need to estimate when we'll die. I currently estimate 92. So if you see me on the street at 93, run me over because I will be broke. I will carry a note in my pocket forgiving you. As penance, though, could you run a GoFundMe campaign for my funeral? As I said, I will be broke.

I think intelligence is being aware of how much you don't know. And the ability to predict consequences further into the future. Maybe that's because I don't know so much. Like specific lines from Goodfellas.

Which reminds me, I can't channel surf past certain movies, like Shawshank Redemption and Field of Dreams. I am compelled to stop and watch. At least until the wife walks by and says something like, "oh my God this again?!". Oddly, I can surf past other fantastic movies, like The Godfather and Hot Tub Time Machine.

As in my Scranton days, I still drink beer. But my tastes have definitely evolved. Sorry Genny 12-Horse.

I would go to jail for my daughters. That is for the benefit of anyone that might contemplate harming them. I write this because I'm a bank consultant, and probably couldn't sell the polishing the rifle in the back yard bit. Because I don't own a rifle. But there are many ways to skin a cat :) 

My now-wife was my high school prom date. She saw the potential. She's wondering when I'm going to realize the potential. But hey, I'm working on it.

There you have it. Hopefully you have a better idea of the person behind the words. Why don't you tell me something about you that is surprising?

I hope you are enjoying your summer! Thank you for reading!

~ Jeff

Thursday, July 02, 2015

Bankers: Build Your Own Small Business Loan Platform

Banks that grow revenues do it in spread or fees. To grow spread, increase your net interest margin, or grow earning assets while maintaining net interest margin. To grow fees, either increase your fee schedule or the activities that generate fees, or grow fee-based lines of business. 

Since 2007, banks have been challenged to grow revenues. And if the bank strategic planning sessions I attend are an indicator, bankers think small business account acquisition and growth will be a significant driver of revenues.

This presents a challenge. Many if not most small businesses are not “bankable”, in the lending sense of the word. I once offered this hypothetical situation to a senior lender: An owner of a three year old engineering firm wanted to expand. The expansion would take him into the red for the next two years and his seed capital, taken from his personal savings and a home equity loan was not enough to fund the expansion. He leased his office space. Would the senior lender make the loan? His response: “I’m glad you’re not one of my lenders.”

Would his reaction be different at your bank? Check out your current and recent past loan pipeline. How many non real-estate backed business loans did you make? Yet this hypothetical business is more typical of the businesses that will lead our economy forward. So to grow revenue, perhaps your bank should be a little more creative in getting capital to businesses of the future.

No risk appetite to do early stage business lending? There are alternatives to help that business get much needed capital to grow without plunking a risky loan on your balance sheet. Perhaps develop a small business lending marketplace with several options. One option could be balance sheet lending in the form of home equity loans or other similar avenues that fit your bank’s risk appetite. Think: Your Bank’s Small Business Capitalizer package.

If outside of your risk appetite, how about SBA lending? Ridgestone Bank, a $395 million in assets Wisconsin bank was ranked seventh in SBA 7(a) lending last year, generating between $20 – 25 million in gain on sale of loans per year. 

SBA loans not an option for our hypothetical engineering firm? How about a partnership with a peer to peer lending platform such as Prosper that can be co-branded with your financial institution? Prosper will pay an affiliate fee for each loan offered. OnDeck Capital, which specializes in business cash flow lending, will also affiliate with financial institutions, providing another avenue to fund our hypothetical engineering firm.

It’s not necessarily the affiliate fees that will move our revenue needle, but providing budding businesses within our communities the needed capital to succeed will build loyalty, deposit balances, and eventually “bankable” loans should these businesses succeed. Instead, we send them elsewhere, giving a potential competitor the opportunity to win these businesses’ relationships.

Imagine the “Your Bank” small business loan platform, with multiple opportunities for the local business person to help fund their growth. You start with the least expensive, such as “bankable” real-estate secured loans from your bank, and work through the other options such as SBA, OnDeck, Prosper, and even equity platforms such as Kickstarter. That would be a bank dedicated to small business capital formation, and growth, within their communities.

And a growing community usually leads to revenue growth at your bank.

Or you could stick to business as usual, and hope small businesses come your way. Your choice.

~ Jeff

Note: This article was previously published in the April 2015 issue of ABA Bank Marketing and Sales magazine in the Growing Revenue series.

Monday, June 22, 2015

Bankers Need to Encourage, Even Compel Employees to Use Tech Tools

Chris Cox, the head of Regions Bank eBusiness unit, was quoted in Bank Technology News on how personal financial management (PFM) tools will soon be part of a customer's everyday interaction with their bank once they login. I believe him.

But will they do it through your financial institution? In a separate article, Jim Marous of The Financial Brand, opined that Mint, a PFM tool that "screen scrapes" financial information from various financial institutions and aggregates it into their tool, is a serious threat to banks, thrifts and credit unions. I believe him, too.

PFM tools have been dogged by low adoption rates. Woe to the retail banker or IT manager in convincing the CEO that PFM is a must-have . If it was so critical, why are so few people using it? I doubt this will surprise you, but I have my opinions.

First, the likely adopters of bank technology tools are probably younger customers. I'm 49 years old and I have not demanded that my bank have a PFM tool because I don't think I would invest the time to learn and use it. In fact, I don't know if my bank has a PFM tool. My daughter is more likely to want and use such a tool. And guess what? She doesn't have any money... yet. 

Bank profits are driven from balances, and expenses are driven by number of accounts and gizmos attached to those accounts. So effectively implementing a technology gizmo that is targeted to younger customers that currently generate little revenues does not make for a solid business case.

Secondly, I believe that PFM and other customer-facing technology tools have low adoption rates by your employees. Don't believe me? Why don't you poll them. Let me know how it turns out.

People sell what they know. When I was a branch banker, I sold the heck out of home equity loans and retail checking accounts. Why? I knew them much better than business checking or a commercial line of credit. So my branch had a lot of retail deposits and loans. It was what I knew and was most comfortable.

I read an industry article, and I apologize that I can't recall where I read it or I would link to it (although I suspect it was a Jim Marous piece again), that a bank required their employees to open accounts using the same online account opening tool that customers would use if they did it themselves in their pajamas. The employees didn't have to wear pajamas, but you get my point.

It forced the employees to know the tool that was available to customers. And why wouldn't you do it this way? You invest the money in developing or purchasing an intuitive online account opening tool and then saddle your employees with opening accounts using a clunky core processor user interface (UI) or tool? Why do we need both? 

And if choosing, you should choose the one available to customers so your employees are subject matter experts on it. Imagine a customer calling the nearby branch for help using an online tool and the branch employee guides them through it, instead of transferring them to your call center or eBanking unit.  

Don't stop at account opening. Transfer the logic to other customer tools, such as PFM. First, get your employees on it and using it via their own personal accounts. Only by repetition will they achieve the subject matter expertise to enroll their clients into it, train them on how to use it, and answer "how-to" questions about it. 

And don't stop at retail banking tools. Many if not most community banks are focused on the business segment, and there are plenty of available tools to help harried business owners make their financial lives simpler. Since employees are typically not business owners, this will take a little more diligence in giving them the needed training and repetition to be fluent in the available tools. Perhaps you can set up a "test account" at a "test bank" and require employees to use the tool a certain number of times prior to crowning them "cash flow management" qualified.

Mint, Yodlee, Moven, and other technology platforms are working hard to win the loyalty of your customers via their "cool" platforms. Many, such as Geezeo, focus on helping community financial institutions offer cool tech solutions and yet retain customer loyalty through the FIs own brand. To win the loyalty of those that demand such technologies now, and when they have the wealth to drive profits, financial institutions must develop front line staff to be fluent in what is available. Only then will they enthusiastically demonstrate the technology (go into an Apple store and have a "genius" demonstrate the Apple Watch and you'll know what I mean), describe features and benefits and their own experience with the tool, get customer adoption rates higher, and build greater loyalty to your brand.

Or you could let Mint do it.

~ Jeff

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