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Executives

Cary Walker - Senior Vice President of Investor Relations

Russell D. Goldsmith - Chief Executive Officer, President, Director, Member of Special Matters Committee, Chairman of City National Bank and Chief Executive Officer of City National Bank

Christopher J. Carey - Chief Financial Officer, Executive Vice President, Chief Financial Officer of City National Bank and Executive Vice President of City National Bank

Analysts

Joe Morford - RBC Capital Markets, LLC, Research Division

Brian Klock - Keefe, Bruyette, & Woods, Inc., Research Division

Aaron James Deer - Sandler O'Neill + Partners, L.P., Research Division

Rahul Patil - Evercore Partners Inc., Research Division

Bob Ramsey - FBR Capital Markets & Co., Research Division

Herman Chan - Wells Fargo Securities, LLC, Research Division

Brett D. Rabatin - Sterne Agee & Leach Inc., Research Division

Gaston F. Ceron - Morningstar Inc., Research Division

Gary P. Tenner - D.A. Davidson & Co., Research Division

City National Corp (CYN) Q2 2013 Earnings Call July 18, 2013 5:00 PM ET

Operator

Good afternoon. I would like to welcome everyone to the discussion of City National Corporation's Second Quarter 2013 Financial Results. My name is Stephanie, and I will be your coordinator for today. [Operator Instructions] This call is being recorded and will be available shortly after it is completed on City National's website at cnb.com.

Now I will turn the call over to Cary Walker, Senior Vice President and Manager of Corporate Communications for City National. Please proceed.

Cary Walker

Thank you, and good afternoon. Here to discuss City National's second quarter 2013 results are our President and Chief Executive Officer, Russell Goldsmith; and Chris Carey, our Chief Financial Officer.

This call will include comments and forward-looking statements based on current plans, expectations, events and financial industry trends that may affect the company's future operating results and financial position. These statements involve risks and uncertainties, and future activities and results may differ materially from these expectations. Speakers on this call claim the protection of the Safe Harbor provisions of the Securities Litigation Reform Act of 1995. For more complete discussion of the risks and uncertainties that may cause actual results to differ materially from expected results, see the company's annual report on Form 10-K in the year ended December 31, 2012.

This afternoon, City National released its financial results for the second quarter of 2013. To obtain a copy of our news release, please visit our website at cnb.com. After comments by management today, we will open up the call to your questions.

And now, I'll turn it over to our CEO, Russell Goldsmith.

Russell D. Goldsmith

Good afternoon, and thank you all for joining us for today's call. I'm pleased to say that this afternoon City National, as you know, announced a strong second quarter with positive results across the board. Second quarter net income grew 9% to $59.7 million. For the first half of the year, City National's net income was $111 million, which is up 10% from the first half of 2012. Assets, loans, deposits and wealth management fee income all increased at strong double-digit rates. Our very good credit quality picture improved again, and the company did a very good job of balancing expense controls even as we continue to invest meaningfully in its capabilities.

In a few minutes, Chris Carey will take you through more of the numbers in this strong quarter. I thought it might be useful if today I gave you a few comments on a few of the more significant investments and initiatives that we've been making in the past couple of years at City National. They are either meeting or exceeding our profit and growth expectations, I'm happy to say. For example, a year ago we acquired Rochdale Investment Management, which was then a $5 billion investment firm based in New York, that we are combining with City National Asset Management to form City National Rochdale, which is today a $20 billion investment management firm that will -- that is serving both its existing clients and accelerating the growth and performance of the combined company in a much more effective way than either company would have been able to do on their own. The early results are encouraging. Second quarter trust and investment fee income grew to $50 million for all of City National's interests, which is up 46% from last year and 7% from the first quarter. And while it was not the whole story, Rochdale and the merger with City National Asset Management was a nice contributor to that growth across our wealth management businesses. At about the same time, in fact, even in the same month that we purchased Rochdale, City National also acquired First American Equipment Finance in Rochester, New York. Combining First American with our legacy City National leasing business has now created a stronger national equipment finance and leasing business for First American and City National. It has more than doubled the size of our previous legacy leasing portfolio to upwards of $700 million, and the portfolio's average yield is quite attractive and above our average margin.

Our City National specialty banking businesses, which have been doing well for us for a number of years also continue to grow dynamically. In the past 18 months or so, we've added 3 specialized teams that have a more national focus to our specialty banking businesses. We've added a dedicated asset-based lending team, our second franchise finance team and both of those are already profitable. Earlier this year, we added a mortgage warehouse team and they have just funded their first loans this month, so we're encouraged that they, too, will be a positive addition to our specialty businesses. As most of you know, City National has also continued through the past 5 years to strategically expand its branch system. We've gone from about 60 offices and now we're approaching 80 offices, close to that, by year-end. As one example after over 11 years in New York City, just this past month we opened our very first ground floor retail branch in Manhattan, and we'll add another later this year at our Park Avenue headquarters, but we're not getting into being a big retail bank in the city, but we thought it was time with more than $2.7 billion in loans and deposits in our New York bank that we needed to better serve our existing client base and build our brand awareness and enhance our growth in New York. And I can tell you that it is already having a positive effect.

It's interesting that with the expansion there in New York and the acquisitions of Rochdale and First American, City National now has 200 colleagues in Manhattan and 300 in the state of New York, so almost 10% of our total colleague base is today in New York State. If you have a chance, when you're in New York or if you are already in New York, to visit our office at 44th and 6th as I did earlier this week, you'll get a early view of the next generation of City National's banking offices that reflect who we are principally as a private and business bank and kind of upscale branch banking. It will also show you how we're responding to the changes that are going on, not only with our client base but with American bank clients in general as to how they are evolving in their use of a banking branch. I think you'll also get a stronger sense of the service model of City National and our expanding technology capabilities for our clients' banking transactions. We are particularly optimistic about the opportunities and the economies in both New York and in the San Francisco Bay Area. We're expanding in both of these regions. Earlier this quarter, we opened our 11th branch office in the Bay Area, and we're going to open another one in the dynamic South of Market neighborhood in San Francisco; as well as expand and move our Palo Alto office to a much larger or visible office, also in Palo Alto, in order to accommodate our expanding team in technology banking for entrepreneurs and their companies.

In another step forward for our City National technology team, we just announced yesterday that we're adding 2 experienced tech bankers to our tech team and they are starting our new loan production office in Boston. With this new team now in place and our previously expanded team in Palo Alto, we now have the ability to serve the growing technology sector in this country in each of its primary tech corridors, from the Silicon Valley to Silicon Beach to San Diego, and from Silicon Alley up into Boston and Route 128. To help City National with its expanding commitment to technology, we were pleased to announce about a month ago that our Board of Directors has added the Chief Strategy Officer of Hewlett-Packard, Mohamad Ali, to join our board in September.

These are just a few of -- a few examples of the many investments that City National is strategically making to enhance its performance, its capabilities and its growth. I'm pleased to note that while these are all at different stages, they are all performing well and are up to our initial expectations. Hopefully that gives you a little color on some of the initiatives we've talked about, and when we talk about the fact that we're making investments you'll have a little clearer sense of what we're doing, but this is just a part of a much bigger overall story, which is the successful performance by our company in the second quarter. The company really delivered across the board again this quarter. Our loan portfolio, excluding those covered by the FDIC, grew an additional $600 million from the first quarter. That's a 4% increase quarter-over-quarter, but up a very dramatic 17% from 1 year ago to $15.8 billion. On the deposit side at the end of the second quarter, deposits were up another 3% from the first quarter and up a very solid 12% from the second quarter of last year to a year -- to a period in total of $23.7 billion.

As these numbers reflect our outstanding team at City National continues to add new clients, make new loans, grow fee income and add client investment assets, while at the same time improving credit quality and absorbing the meaningful cost of more technology, more products and facilities, new regulatory requirements and additional colleagues. To that last point, I think it's important to note and to put in perspective that in the past 5 quarters, City National's colleague base has grown almost 10%. We've added on a net basis, 300 new jobs, which gives us a total colleague base today of 3,551. We have been creating these jobs, expanding our capabilities and building for the future even while growing net income significantly.

Chris Carey will cover a lot more information on the quarter. But let me first, as I usually do, comment briefly on the economy in the regions City National is in. As the bank's growth over the past year attest, the economic conditions in the communities we serve have continued to improve. The unemployment rate in California fell to 8.6% in May. That's down more than 2 percentage points from this same time last year. It's worth highlighting, however, that in most of the areas City National is in, such as Orange County, the Bay Area, New York, San Diego, the unemployment rate is much lower. We're seeing strength in a broad array of industries in these communities. Obviously, tech and entertainment are 2 positive examples, but we are also seeing positive trends in such areas as tourism, health care, agriculture and professional services. California's housing market, which is so critical to the state's economy, continues to perform quite well. Thanks to low interest rates, pent-up demand, shrinking inventories and the improvements in the economy and the improvements in employment. Statewide, the median home price in California is up a remarkable 34% from a year ago, while the unsold inventory index is down to an unbelievable 2.9 months. It was just announced yesterday that the median home price in Southern California has surged 28% in the past year alone. Given the fact that we have a mortgage portfolio just north of $4 billion, that's both a good indicator on the economy and good news for our private bank, which is where most of our mortgages are held.

I would also add that over the past few weeks, I've met with clients and members of our advisory board in New York, Nevada, Northern and Southern California, and I would say generally the people that I talked with and the businesses that are banking with us are feeling somewhat better about economic conditions. It varies, of course. Some areas like the Silicon Valley in San Francisco are incredibly robust economies at this time. And other areas like Nevada, are in fact, recovering, but are doing so at a relatively slow pace. But overall, the economy we see is clearly stronger than it's been in 5 years and it's reflected in a number of things, including our year-to-date loan volume. I'm happy to tell you one indicator that we've continually pointed to is up for the fourth quarter in a row, and that is another increase in our clients' line utilization rate. There are a number of other data points that would support this view and they match up, I think, to a meaningful degree with the recent comments coming from the Federal Reserve. But as we've discussed previously and as last week's retail numbers suggest a bit to the contrary, and as a 2% GDP growth rate reflects, business conditions vary considerably with many spots in the economy still at modest levels. Even housing which is on fire, in some respects, is still not building nearly the number of units that we need to bring down unemployment and get to a more normal run rate in that key American industry.

At the same time and in spite of all the recent volatility in some longer-term interest rates, interest rates, in fact, remain very low by any standard. And banks everywhere continue to face short-term margin pressure, as do we. We certainly expect to benefit meaningfully when short-term rates rise, but as you probably heard chairman Bernanke reiterate again today, that is still out in the future. Nonetheless and in light of all of these factors and more, we are reasonably pleased with the progress City National is making in this economic environment, as you'll see reflected in these very solid second quarter results.

Now for more insights into those numbers, we're fortunate to have with us our birthday celebrant, our CFO, Chris Carey.

Christopher J. Carey

Thanks, Russell. Good afternoon all. Before you take to questions, I'll add a few words about credit quality, capital, deposits, net interest margin, covered assets, noninterest income and expenses.

Let's start with credit quality. It continued to improve by virtually every measure. Charge-offs of $3.1 million were more than offset by $10.6 million in recoveries. Non-accruals fell to just 48 basis points of total loans, down 7 basis points from prior quarter. And loans that are 30 to 89 days past due declined by nearly half from 37 million to 20 million. In light of our recoveries and the continuing improvement of City National's asset quality, the company did not record a provision of first quarter in the first half this year.

Turning to capital which is getting a lot of attention right now, let me say a few words about that. The new Basel rules came out, and all of City National's estimated pro forma ratios are comfortably above the Basel III rules that will become fully implemented in 2019. Our Tier 1 common ratio under Basel I was 8.8% at June 30. Using Basel rules on a pro forma basis with 6/30/13 numbers, it comes in at an estimated 8.6%, so just down 20 basis points. The company has always been more capitalized, so we don't expect the new rules to have any meaningful impact on our business and capital planning.

One thing to note before I leave the subject of capital, you can see that accumulated Other Comprehensive Income, or OCI, declined from the first quarter. The change reflects lower unrealized gains that are available for sale securities portfolio and it was due mostly to higher medium and long-term interest rates, although in anticipation of higher rates we also sold some longer duration securities that had significant extension risks and recognize $5.6 million in security gains.

Now let's move to deposits. They resumed their growth after a typical seasonal decline in the first quarter. Second period -- second quarter period balances reached another record of $23.7 billion. Core deposits increased 13%, we saw a good linked quarter growth as well. A strong low cost deposit base is one of the things -- one of the many things, I think, that set City National apart, and it becomes increasingly significant as the economy recovers and loan demand starts to build.

That really brings us to net interest margin which was actually up 3 basis points in the second quarter. The increase was due primarily to the redeployment of securities into loans and also solid deposit growth that was used to eliminate short-term borrowings. Looking ahead, we expect deposit growth with short-term interest rates and the steady run off of FDIC covered loans to put some modest pressure on the margin. Covered loans continue to make a nice contribution to net interest income, the portfolio's base yield in the second quarter was 7%. If we include the prepayment income, the yield was 14%. Total second quarter expense for the covered asset portfolio came to just under $2 million, most of it $1.5 million was a noncash charge that reflects a quarterly update of cash flow projections. As most of you know this number fluctuates from one quarter to the next, and in the first quarter it came in at 200,000. We'll give you a lot more detail about covered assets on Page 14 of the financial tables, which accompanied the press release.

Noninterest income was up significantly from the second quarter, and one reason was the company's acquisition of Rochdale. I will note that excluding the impact of Rochdale, trust and investment income was still up 16% due to solid gains in client assets and market appreciation. Other income was also up over $2 million in this quarter, thanks principally to a $2 million rebound in swap income from the first quarter. Finally, let's take a quick look at expenses, the increase year-over-year reflects our investment in new talent and offices, which Russell talked about earlier. Excluding the acquisition of Rochdale and First American, expenses went up 2% and they were flat compared to the first quarter of this year.

So in summary, we are very encouraged with our performance halfway through the year. We continue to grow earnings, add clients and enhance our capabilities. Today's rate environment presents a challenge, but we're growing and we see tremendous opportunities ahead.

Now Russell and I will be happy to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Joe Morford with RBC Capital Markets.

Joe Morford - RBC Capital Markets, LLC, Research Division

Happy birthday, Chris. I guess first question was just on the commercial loan growth in the quarter, and you kind of touched on this a little, Russell, but was the increased line utilization, did that account for much of the growth and you're getting a sense that customers are any more confident in making investments and I didn't see them taking down deposits but have you seen leading indicators to that at all?

Russell D. Goldsmith

Well, we saw a modest uptick, we went from 60.7% to 61.4% in line utilization, but that's up from 57% just 4 quarters ago. So I think the trend there is good and you've seen a steady, slow but steady rise, I think, in confidence and willingness of people to do things. And as I mentioned, we also have some new teams contributing to that total as well, but the existing teams are also doing a good job. So it's kind of improvement across the board, some modest rise in confidence across the board. I do think also when people start to smell that interest rates are going up, that both incentivizes them to get on with the plans, and I think there is a sense in whether it's coming from Chairman Bernanke or the stock market, or just the mere fact that this economic recovery has continued now albeit at a modest pace. It's continued for a long period now, and that combination I think is helping to give some lift to loan demand, but it's -- I wouldn't overstate it at the same time, it's not robust, it's not frothy, the only place it looks a little extra robust and frothy is the surge in home prices and the fact that there really are very small inventory levels in some geographies.

Joe Morford - RBC Capital Markets, LLC, Research Division

Right, and certainly up here. I guess, the other question was just drilling down into the niche, you did talk about the technology, but just wondering if you could give us a little better idea of what type of the business are you looking to compete in? Is it the early stage? Is it more the mid to late? Are you doing some of the capital call financing? And if you have any metrics that size up your business in terms of deposits or loans or things like that would be helpful.

Christopher J. Carey

Well, as I think, you know, Joe, we've actually been serving as a bank to entrepreneurs and companies and technology for over a decade and really the principal focus, I'd say, has been on the deposit side. We've had a lot of strength both in San Diego and Northern California. We've also been doing capital call lines for venture capital firms or private equity firms throughout California and even a little in New York, so some of that relates to tech and a lot of it doesn't. When we expanded with the addition of a couple key bankers in the fourth quarter who are based in Palo Alto, that gave us the skill set both on the credit side and the bank side to do some early-stage lending, and we've started to put some, I'd say, modestly sized loans to early-stage companies, venture-backed early-stage companies that our bankers know and have relationships with. And the team in Boston, we looked at their first credit yesterday actually, and that's with kind of middle-stage company that's got a lot of revenue and is growing dynamically and I think has had 6 stages of fundraising and look to be doing very well. So I think the good news is we're not going to be over concentrated in any one sector and have some diversity, at the same time, to do this carefully and very selectively, and I don't know what the sizing of this will be in 2 years but it will still be a very small part of our total portfolio as a company. Frankly, franchise finance is growing faster and is much more significant as one example of specialty area. But we're very enthused about what we're doing in all these areas and I think the tech area has a lot of opportunity and is actually off to a very quick start.

Operator

Your next question comes from the line of Brian Klock with Keefe, Bruyette, & Woods.

Brian Klock - Keefe, Bruyette, & Woods, Inc., Research Division

And I guess maybe just a follow-up quickly on that, you obviously when you come into town don't forget that we're here in Boston. So thinking about your expertise and it makes a lot of sense to leverage that, that expertise into this area, and I guess maybe thinking about like -- you talked about not being over concentrated with certain industry lines, what do you think, longer term, would make you think about kind of now branching out into other business lines over here in Boston as some of your competitors have done, we've got a neighbor of yours that has branched out here into the personal banking and done pretty well, so what do you think about City National's plans in this Boston banking market?

Russell D. Goldsmith

It's a good and logical question, but at this juncture, really, we have just a small loan production office focused on technology. Boston does seem to be rather well banked. And in our minds at this point we don't have any particular plans to do that. At some point, I could easily see us picking up private banking and wealth management as we build our tech client base. And certainly, we've seen in other areas, Nashville and Atlanta are good examples where you start out staying focused on a particular industry. But City National's private banking and wealth management are very strong and so sometimes you pick up some additional business as you move along. But certainly, for right now, the focus would be just tech entrepreneurs, companies, investors, because it's really we look at it more as an adjunct of infrastructure for technology nationally.

Brian Klock - Keefe, Bruyette, & Woods, Inc., Research Division

Sure, makes sense, makes sense. And I guess just a quick question for Chris, and happy birthday to you, Chris. Sorry to dig into the details, on your birthday, but on the miscellaneous fee income, when you take out the FDIC-related items there, that item was up about $4.6 million in the second quarter versus the first and now there's usually customer-swap related activity there. Can you give us any idea of what that kind of linked quarter increase was related to?

Christopher J. Carey

Yes, the biggest increase from a linked quarter was swap income which was $2 million and then we had $0.5 million more at lease residual income.

Operator

Your next question comes from the line of Aaron Deer with Sandler O'Neill Partners.

Aaron James Deer - Sandler O'Neill + Partners, L.P., Research Division

I just want to start by following up on the line utilization question. Chris, I remember in the past you've talked about kind of where line utilizations were and where they were historically and it provided some matrix in terms if we got back to a normal level how much loan growth that could drive. I'm wondering if kind of given where your -- the current balances are and what the commitments are what that might be today.

Christopher J. Carey

It's probably at least $1 billion.

Aaron James Deer - Sandler O'Neill + Partners, L.P., Research Division

Okay, and then obviously, we've seen a steep in the yield curve you mentioned that we really need the short ends to come out before you get a real benefit. But if we're in this rate environment for a while, where we're anchored at the short end but have the steeper long end, what kind of impact can that have in terms of how can that help as asset yields reprice for you?

Christopher J. Carey

Well, I think the most immediate effect everybody has seen is in the mortgage business that repriced overnight. And any of the term lending we're not doing as much term lending everywhere else because most of our commercial real estate lending we're doing swaps and we're doing quoting and our clients are putting swaps on to fix it. So right now, it would be the mortgage side of it and maybe you'd get over time, eventually you're going to get some benefit in the securities portfolio, but I don't think that's going to be that much right now. And that's pretty short term. Everybody is shortening the duration there any way.

Operator

Your next question comes from the line of John Pancari with Evercore Partners.

Rahul Patil - Evercore Partners Inc., Research Division

This is Rahul Patil on behalf of John. Just a quick follow-up question, you mentioned earlier that you sold some longer-duration securities this quarter. Where are you currently reinvesting cash flows and at what yields?

Christopher J. Carey

Well, our strategy for the most part is to go shorter now. So you're getting yields under 1.5, 50 basis points, so 1.5.

Rahul Patil - Evercore Partners Inc., Research Division

Okay. And then separately, just a question on occupancy expense. With the new branches that you've opened up and that you plan to open, is that expense already in the run rate? Or how should we think about it occupancy expense going...

Russell D. Goldsmith

The New York lease expense and much of the operating costs, is all in there. But the amortization of the improvements, it's just starting for the 1 branch that we just opened and we've got another branch in New York that we're still doing the build up so that's not in there. But -- and once you've signed the lease, it usually takes a little longer in New York unfortunately, but it can take 3 to 6 months to get everything going. You start paying the lease right away, so the full cost, though is not in the numbers yet, but we've got a reasonable amount of it in the numbers. And we actually -- and we hire the people, in many cases, in advance of the -- sometimes advance of signing the lease, which -- so we have many of the people on board, it's more of the improvements that aren't being amortized on the ones that aren't complete yet.

Operator

Your next question comes from the line of Bob Ramsey with FBR.

Bob Ramsey - FBR Capital Markets & Co., Research Division

Sort of along similar lines, compensation expense was up close to $5 million sequentially. And I think of this as being seasonally a quarter that would be flat or down. How much of that is related to the new banking offices and hires in those areas? Or are there other factors that have an influence there?

Russell D. Goldsmith

Well, total salaries and benefits is actually down $1 million in the quarter, if you're looking at first quarter to second quarter so...

Bob Ramsey - FBR Capital Markets & Co., Research Division

Got you. Yes, I think I was looking at something a little bit off. So, okay. I guess similarly though I am asking the same question a little differently, is there expense in there related to the hires of the new offices that you've got and how should we think about that line going forward?

Russell D. Goldsmith

No. I think much of it is in there from the hires, frankly, we -- so I don't think you're going to see a big move up from the -- what we're doing on the branch side. I mean, we just hired a couple people in Boston, but I think that -- unless we, -- we're opportunistic, we find talent, we hire them. But I don't think you're going see too much volatility in that number in the remaining 2 quarters unless we find a large team or something.

Bob Ramsey - FBR Capital Markets & Co., Research Division

Okay. And then, I know you all also mentioned in the introductory comments that your mortgage warehouse team has just funded their first group of loans, I was wondering if you could talk a little bit about sort of what the goals are in terms of balances for that business, and if you have any sense of what the mix is going to be, purchase versus refi?

Russell D. Goldsmith

Well, I mean this year originally our goals, I think, were somewhat modest. We'd hope to get by the end of the year up to around $200 million or so. And obviously we -- as we went into this, we knew the refi boom was going to be ending at some point in time as we were doing the build-up. So for us, we like the business overall. We got kind of a once-in-a-lifetime opportunity to get a team that was doing a really good job in a much larger company that closed it down. So I think that refi boom has probably ended a little bit sooner and that might affect the volumes, but the team has a lot of long-term relationships with clients that all had to run their balances down, so we're still expecting to get somewhere in the same range by the end of the year, if things go well. We might be a little bit off, but we hope to get to profitability by the end of the year.

Bob Ramsey - FBR Capital Markets & Co., Research Division

And how are you thinking about loan yields in that business?

Russell D. Goldsmith

Well, the yields has had very fat yields and you were getting yields with fees and everything a little bit over 4%. I think that will come under pressure. But I think the yields are still going to look pretty good, too. A lot of the C&I lending yields, so I would still hope we'd be certainly in the mid to high 3s with the fees and everything. And look, it's going to shift to more purchase. The purchase business even though rates have gone up and that's going to slow it, I know that some time kill the refinance but rates are so low that we think the purchase business will be pretty strong for a couple of years if they stay at these somewhat lower levels for a while.

Operator

Your next question comes from the line of Herman Chan with Wells Fargo Securities.

Herman Chan - Wells Fargo Securities, LLC, Research Division

Question for Chris, there is some positive developments on the margin in Q2, I want to get your view on some of the puts and takes that we should consider, as you know, that's modest pressure going forward?

Christopher J. Carey

Well, I've been telling everybody it's going to continue to decline for the last 4 years, so I was finally wrong. But I still think there's headwinds. And we had a stronger quarter here in a number of fronts and we delevered the balance sheet a little bit, so I still think that the cautionary thing is that we will, unless something changes which is we're not expecting on short term raise that we would have some modest pressure with some [indiscernible] which would mean the margin percentage would still trend down a little bit throughout this year.

Herman Chan - Wells Fargo Securities, LLC, Research Division

Got it. And on the credit recoveries, that's been a positive trend for 3 quarters now. Do you have a line of sight on the sustainability of that trend? And are you seeing any particular recovery, usually, in the loan type in Q2? I'm assuming, historically, that's been more on the commercial and the construction side.

Christopher J. Carey

Well, so I think the macro is that we don't have as much left to come back, but we still have some recoveries out there that will probably come back over the next 6 to 9 months or so. So it's almost impossible to predict when we will actually recover them. But the bucket of recoveries is much smaller so I think this thing is going to play out definitely over the next year. We did have 1 large recovery of $5 million and after that, the next largest one was just about $1 million. And that's kind of what impacted this quarter so much, but that's probably as much clarity as I can give you because it's very hard to tell the timing of most of these things.

Operator

Your next question comes from the line of Brett Rabatin with Sterne Agee.

Brett D. Rabatin - Sterne Agee & Leach Inc., Research Division

Yes, it's Sterne Agee. Was just hoping to maybe talk thematically, Chris, you've been talking about how the margin will still be under a little bit of pressure until the short end of the curve moves higher. I was wondering if you guys think you can improve kind of the ROA from sort of 80 basis point run rate with operating leverage or kind of how you think about your near-term profitability and just the implementation and results of what you guys have been doing here with all these different initiatives with technology and warehouse, et cetera.

Christopher J. Carey

Well, we have been -- as we've been adding people and buying companies, the companies are somewhat a little bit more efficient on ROA usually, but that's because you're generating some goodwill, so there's little bit of an accounting difference there. But as we hire these teams, we're losing money. In warehouse, for example, you have 15 people on board where we didn't get anything. But over time between trying to manage expenses and these new initiatives, we think we can gradually, which we have been, drive the ROA up, but we really can't get to the level that is acceptable in our minds, which is well north of 1, without getting some help from short-term interest rates rising. So we think we can make -- we can improve it and has been improving, but it's not going to get us to where we need to be. We have to have short term rates for us.

Brett D. Rabatin - Sterne Agee & Leach Inc., Research Division

Okay. And then maybe as a follow-up, some of the other highly asset-sensitive companies have kind of talked around what they view their normalized profitability level with short-term rates being higher, do you guys think about that? And is that something that may be you'd be willing to share with us?

Russell D. Goldsmith

Yes. We think about it a lot. I'm looking forward to a more normal interest rate but I don't know.

Christopher J. Carey

Well, we've said that we'd get funds back to what used to be considered normal, 4%, that we should be able to drive an ROE in the 14% to 15% range. And I think that will be -- look pretty good relative to probably where the industry will be.

Russell D. Goldsmith

Also, I think to add to your first question and what would help the numbers Chris just mentioned, as you look at the various initiatives that we've tacked on over the last couple of years, they, by virtue of being more specialized expertise-driven lending functions, they do tend to produce a better margin. And so, we're -- in that sense, we're averaging up a little bit, whether it's equipment finance or some of the other specialized areas where you get paid a little bit better for what you provide.

Operator

Your next question comes from the line of Gaston Ceron with Morningstar Equity.

Gaston F. Ceron - Morningstar Inc., Research Division

I just wanted to dig just little bit deeper on your plans for New York. I know you talked a little bit, but if you -- I don't know if you mentioned this earlier, but if you expand your focus just a little bit longer, I mean where -- how do you see that business kind of evolving in 5 to 10 -- in 5, just in the next, say, 5 to 7 years? I mean, I'm just trying get an idea of how big these sort of non-California outposts, for lack of a better word, are going to get in regards -- at the bank over there?

Christopher J. Carey

Well, I don't really have a number that I can give you for where we're going to be in New York in 5 to 10 years. I think clearly by adding the 2 branches, we're going to increase our visibility and accessibility. We're very pleased with where we are that kind of if you rolled up the loans and deposits. If New York was a standalone bank, it's almost a $3 billion bank by itself. And that's from starting with 5 or 6 people 11 years ago and growing organically. I think there's a lot of upside for us in New York. Our people there do a terrific job that we've gotten a terrific response. And as we're building more momentum now with brand identification, we continue to add people to our organization there. Obviously, adding Rochdale has increased our wealth management capabilities in the city. So we're enthused about it. We'll have the 2 branches. I can envision us at some point in the future having a few more branches in Manhattan, but it's not in our plans to shift gears and try to be in the kind of retail banking wars in New York. We're a private bank, a business bank. We're focused on key industries in New York, like the entertainment industry. Broadway, where we've got over half the shows' banking with us. We've got accountants, law firms, advertising agencies, real estate investors, entrepreneurs. We clearly are going to tap into the start-up arena there with technology firms in Silicon Alley, and our new team in Boston will help with that. So I think there are lots of opportunities. Even in the branch system, even before opening and put together tens of millions of dollars in new deposits. So for the high-end retail client who's looking for a bank that actually does deliver a relationship, and there are people to talk to and you aren't just sent to ATM machines at the front door. And especially people who want to utilize their branch through mobile banking and online banking and portals, and things like that. I think we present a terrific value proposition for a whole range of people. And as you know, New York City is a unique and remarkable economy to be a participant in. So I think City National can grow and grow fairly dynamically. But you'd have to apply your own growth rate to that. But if you grow 10% or 15% a year off of the base that we've got there now, you probably get a conservative idea of where we'll go.

Operator

Your next question comes from the line of Gary Tenner with D.A. Davidson.

Gary P. Tenner - D.A. Davidson & Co., Research Division

I had a question just regarding loan pricing. I know you've kind of pointed out that you're not doing a lot of term fixed financing, staying pretty short. But to the degree that you're having those conversations with your clients, have you observed any sort of alleviation of pricing competition over the past, say, 45 to 60 days?

Russell D. Goldsmith

Well, I think it's still very competitive. I think -- I mean -- and well, we've been having most of the discussions on the mortgage side, so it actually made us a little bit better because everybody shifted up. The market shifted up. And so I think there's a better dialogue going there, but I would say that we overall still have it. It's a very competitive market and there's no let up on pricing at the moment.

Christopher J. Carey

I think in some areas we're seeing some stabilization. And certainly if somebody's coming in on a term loan, the impact of rates rising is starting to have some subtle effects. So it's a mixed picture but it's still very competitive. I think when you find creditworthy potential clients, and we do that every day, it's a competitive environment.

Gary P. Tenner - D.A. Davidson & Co., Research Division

And then just a follow-up on the deposit side, in terms of the -- your escrow and title deposits, have you quantified at all, or can you quantify how much of that could be at risk of running off, just as kind of refi volumes decline in the back half of the year?

Russell D. Goldsmith

Yes. I think we think maybe by the end of the third quarter we could lose 10% to 20% of it in a refi, as refi I think slows down which is somewhat of a drop in the bucket for us these days. It's nice to be able to stay. It's a little over $2.5 billion, so I'm not sure that will happen, but I think that the outside numbers, we think at the moment, probably $0.5 billion.

Operator

[Operator Instructions]

Your next question is a follow-up from Brian Klock with Keefe, Bruyette, Woods.

Brian Klock - Keefe, Bruyette, & Woods, Inc., Research Division

Just a quick question for you, Chris. On the securities portfolio, you did mention obviously that the AFS portfolio was down just under $700 million sequentially. And you've obviously, you've reduced the Fed funds side on the borrowing side. So I guess should we think about if the loan growth continues at such a strong clip, and if you do have some deposit run-offs, should we be thinking about you funding some of that growth out of securities portfolio? So should there be some more delevering from that perspective going on?

Christopher J. Carey

Yes. If we -- if that happens, if the deposit growth slows down, we will definitely fund it out of the investment portfolio.

Brian Klock - Keefe, Bruyette, & Woods, Inc., Research Division

Okay. And then, I know you've always talked about trying to keep the entire security portfolio in that liquidity and at 1/3, 2/3 when you manage that duration. I guess in that $7 billion AFS portfolio, how much of that is in that 1-year duration?

Christopher J. Carey

About $2.5 billion.

Operator

At this time, there are no more questions in the audio queue, so I'd like to turn the call back over to Mr. Goldsmith.

Russell D. Goldsmith

I would like to thank everybody who participated in the call or listens in after-the-fact. Thank you for joining City National today. We always appreciate your interest in City National, and we look forward to talking to you again at the end of the third quarter. Meanwhile, of course, for more detail or questions, feel free to call the birthday boy but try not to do it today. In any event, I hope everybody has a good summer, and thank you again for being on the call.

Operator

Thanks for your participation in today's conference. This concludes the presentation. You may now disconnect.

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