City National Corporation's CEO Discusses Q1 2014 Results - Earnings Call Transcript

Apr.24.14 | About: City National (CYN)

Start Time: 17:00

End Time: 17:38

City National Corporation (NYSE:CYN)

Q1 2014 Earnings Conference Call

April 24, 2014, 17:00 PM ET

Executives

Cary Walker - SVP of IR

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

Christopher J. Carey - CFO, EVP, CFO of City National Bank and EVP of City National Bank

Analysts

Joe Morford - RBC Capital Markets

Aaron Deer - Sandler O'Neill & Partners, L.P.

Steven Alexopoulos - JP Morgan Chase & Co.

Rahul Patil - Evercore Partners Inc.

David Rochester - Deutsche Bank AG

Brett Rabatin - Sterne Agee & Leach Inc.

Timothy Coffey - FIG Partners, LLC

Gaston Ceron - Morningstar Inc.

Casey Haire - Jefferies & Co.

Operator

Good afternoon. I would like to welcome everyone to this discussion of City National Corporation's First Quarter 2014 Financial Results. My name is Nicole, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. After the speakers' remarks, there will be a question-and-answer period for analysts and investors. (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'll turn this 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 first quarter results are Chairman and Chief Executive Officer, Russell Goldsmith; and our Chief Financial Officer, Chris Carey. 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 expectations. Speakers on this call claim the protection of the Safe Harbor provisions of the Securities Litigation Reform Act of 1995.

For a 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 for the year ended December 31, 2013. This afternoon, City National released its financial results for the first quarter of 2014. To get a copy of our news release, please go to our website at cnb.com. After comments by management today, we'll open up this call to your questions.

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

Russell D. Goldsmith

Good afternoon. Thank you all for joining us this afternoon. One hour ago, City National announced its financial results for the first quarter of 2014. As I'm sure you've seen from our news release, City National has begun its 60th anniversary year with a good, solid quarter.

Net income grew 6% from a year ago to $54.5 million or $0.90 a share. The company is performing well and has considerable momentum going into the new year. Earnings continue to grow at a healthy pace despite continuing low interest rates, the continuing and expected run-off of those covered assets we acquired from the FDIC and the new payment of $1.7 million in dividends in the quarter for the additional preferred stock that we issued in November of last year.

Loans, deposits and investments fee income all grew significantly at double-digit levels from one year ago. Credit quality continued to be strong and the company did a good job of managing its expenses while investing and growing. City National has now been profitable in every quarter for the past 21 consecutive years and with nearly $30 billion in assets, City National today is America's 23rd largest commercial bank.

Let me review a few of the first quarter highlights starting with loan growth. City National added $581 million to its loan portfolio in the first quarter, which is up 3.4% from year-end which is a strong 13.5% annualized rate, and that's consistent with the discussions that we all had a quarter ago where we tried to describe a level of loan growth that we anticipated for 2014.

C&I lending which increased 19% from the first quarter of last year was responsible in this quarter for just over two-thirds of the growth linked quarter-to-quarter. Residential and commercial real estate mortgages also made strong contributions.

In the first quarter looking at our businesses; entertainment, specialty banking and private client services in the bank performed especially well. The City National loan portfolio is very well diversified which we view as a real strength of the company. Of course, pricing remained quite competitive.

Credit quality continued to improve in the first quarter but unlike some other banks, I think it's noteworthy that City National did not and does not release any loan loss reserves in order to bolster its earnings. The gross charge-offs of just $2.5 million were more than offset by 6.7 million in recoveries.

Nonperforming assets were down slightly and loans 90 days past due on accrual were virtually unchanged. Overall, credit trends are stable and strong and the company remains well reserved at 172 basis points of total loans. Of course, we still expect to resume some provisioning at some point this year with our loan portfolio growing at this rate and the pool of loans available for recoveries becoming smaller every quarter.

City National has been able to fund this loan growth with its exceptionally strong and low cost deposit base. Average balances grew 13% from the first quarter of last year and now stand at $25.4 billion. Remarkably, 98% of those deposits are very low cost core deposits.

As many of you know, City National's deposits typically run-up late in the calendar year as clients set aside money for annual bonuses, distribution, taxes and so forth and then they subside in the first quarter. For the most part that held true in the first quarter of this year. Average deposits were off slightly from the fourth quarter but period end balances actually went up a little bit quarter-to-quarter.

City National's first quarter results also benefited from another strong performance by our growing Wealth Management businesses. Trust and investment fees grew 14% year-over-year and 5% from the fourth quarter, thanks in large part to market appreciation and the strong performance of City National, Rochdale and some of our investment affiliates. Altogether they are now responsible for more than 66 billion in investment assets that are managed or administered by our companies. And that does not include the $25 billion plus of client assets managed by Matthews International in which City National holds a minority ownership interest.

Early in this quarter, as I mentioned, City National celebrated its 60th anniversary. It has succeeded over those years in part by constantly striving to get better by doing a better job for our clients and by adding resources, capabilities, people and products in four very strong regions of the United States and in its growing national businesses.

In the first quarter we continued to invest in City National's future in a number of ways. The company opened new bank offices in Long Beach and the South of Market district of San Francisco. We also moved into an expanded regional center in Palo Alto where our growing technology team is doing quite well.

As usual, City National continued to add terrific talent to our talented team of colleagues. In fact we've added a net total of nearly 100 colleagues since the end of the first quarter of 2013. Several weeks ago, for example, we announced the addition of an outstanding commercial banker Michael Walker to serve as our new Northern California Regional Executive to head our commercial bank there and to join our executive committee. We think Michael and the team he's building on top of the terrific team we already have there will help our growth in the dynamic San Francisco Bay Area.

These and many other investments including end product and technologies have positioned City National very well even in today's slow growing economy. Looking ahead and assuming the economy continues to improve, short-term interest rates will rise as we expect and City National which is asset sensitive will benefit meaningfully from both stronger loan demand and higher margins.

That reflects our view on the U.S. economy that after slow economic growth in the first quarter that the U.S. GDP growth rate will get close to 3% through the rest of the year, thanks in part to the highly accommodated policies of the federal reserve and an increasingly self-sustaining recovery and assuming no unexpected event of one dimension or another.

Here in California, its economy continues to perform even better than the nation's. Last year it grew at a rate of close to 4% and we expect more of the same this year. Exports, technology, tourism, healthcare, professional services among many areas are leading the way.

The 11 California counties that City National was in which contain about 27 million of the state's population, those 11 counties continue to outperform the state as a whole and the U.S. The California economy is particularly strong in the regions we are focused upon notably Orange County, the San Francisco Bay Area and West Los Angeles here in California. And the economy in New York City is also doing quite well.

Overall, we are seeing rising optimism in our client base. Loan commitments increased 15% from the first quarter of last year to the first quarter of this year and outstandings went up about 16%. All-in-all, City National's first quarter results reaffirm the fundamental strength of its diversified and focused business model as a premier, private and business bank. It's very liquid and conservative balance sheet and the ability of our outstanding organization to execute well.

The investments we've been making are producing good results and the signs we see of an improving economy give us some additional encouragement about the next few years.

Now to delve into the exciting details of our earnings report, let me turn to our CFO, Mr. Chris Carey.

Christopher J. Carey

Thank you, Russell. Good afternoon all. First, as Russell mentioned, we had a very solid quarter on the fundamental side with strong loan, deposit, wealth management, income growth coupled with good expense management. However, the results for the quarter included some higher cost largely non-cash from our covered asset portfolio that had a $0.04 negative impact that I will talk about a little bit later.

We also had the new preferred stock issuance impact for the first time in this quarter since it was issued in the fourth quarter of last year and that's about $0.03 a share. Much of that will be offset on a run rate basis when later in this year in July and August we pay off 105 million on some high cost sub-debt. So first I'll just touch on the margin. You can see it moved up slightly in the first quarter as the company was able to replace some lower yielding investments with the growing volume and higher yielding loans.

In addition, we continue to build our health maturity investment portfolio adding almost 250 million to it during the quarter. We also continue to shorten the duration of our available-for-sale portfolio in anticipation of eventual higher rates.

Now, let me say a few words about covered assets. Although overall our covered loan portfolio has continued to make nice contribution to net interest income with the 7% core yield during the quarter, our first quarter expense for covered assets came to 3.6 million. Last quarter it was 300,000.

Since the time of our FDIC acquisition, the net expense related to covered assets has been somewhat volatile and we expect that to continue as we get closer to the expiration of some of our loss-sharing agreements. Two of which, the smaller ones, will expire by mid-2015. However, many of the higher expenses that we are likely to experience over the next year or so should be offset by future benefits of higher interest income somewhat even beyond the expiration of the loss share agreements.

Now let's move to noninterest expense. Year-over-year, it was up only 2% and as you can see it was 4.1 million lower than the fourth quarter, despite a 6 million seasonal increase in employer taxes due to FICA. Legal and professional fees, occupancy costs, OREO expenses all went down.

FDIC expenses also were lower due to the current quarter adjustment to the rate. For the rest of this year we are forecasting that assessment should average about 3 million a quarter, but that will probably be a little bit lumpy. The company is constantly trying to identify cost savings opportunities as we told you before and as we told you last quarter. We expect the expense growth this year to be very much in line with the 3% we had last year, which is a little bit above what we generated in the first quarter.

All-in-all, we're very pleased with the quarter and confident as we look at the rest of 2014. Our business is performing well despite rate pressure and the gradual runoff of FDIC assets. The company's balance sheet is strong, investments we've made over the past several years are producing results and as the economy appears to slowly be gaining momentum especially in markets we serve.

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

Question-and-Answer Session

Operator

At this time, I would like to invite questions from analysts and investors. (Operator Instructions). Our first question comes from the line of Joe Morford of RBC Capital Markets. Your line is now open.

Joe Morford - RBC Capital Markets

Good afternoon, guys.

Russell D. Goldsmith

Hi, Joe. A big basketball game tonight.

Joe Morford - RBC Capital Markets

It is. It's the City National arena or whatever. But yes, looking forward to that.

Russell D. Goldsmith

We want everybody to view it as such, even if it isn't.

Joe Morford - RBC Capital Markets

Yes. I guess for questions, Chris, first, I was just wondering kind of how much more kind of remixing do you think you can do with the shrink in the investments to fund the loan growth? You made a pretty significant move this quarter and I'm just kind of curious how low you think you could take them?

Christopher J. Carey

Well, Joe, I think it really is a function of what happens on the deposit side and we typically have a run up at the end of the year as we did and it pulls back and that's frankly part of what helped the margins. So, the economy ends up being about where we thought we still expect deposit growth this year. So it remains to be seen whether we'd get anywhere near the same kind of positive expect. And overall, we kind of think our yield on our portfolio, the investment portfolio, would trend back down a little bit. It was up this quarter but it would trend back down a bit through the year.

Joe Morford - RBC Capital Markets

Okay. And then I was also just curious about the tax rate, Chris, it was a little higher than we were expecting this quarter. And just kind of what your expectations were for the run rate for the year? Is this a good level or what?

Christopher J. Carey

Well, I think it could be for the next quarter or two. We are working on some things that we think we could get relief but that would probably be later in the year in the third and fourth quarter.

Joe Morford - RBC Capital Markets

Okay. Thanks so much.

Operator

Thank you. Our next question comes from the line of Aaron Deer of Sandler O'Neill. Your line is now open.

Aaron Deer - Sandler O'Neill & Partners, L.P.

Hi. Just a follow-up on Joe's question with respect to the securities, I guess what kind of securities you had that you're suggesting that we could see the yield come down a little bit here, Chris? And how is this, the remixing – I'm gathering that this is going to actually increase your asset sensitivity. Is that right?

Christopher J. Carey

Yes. So assuming that portfolio grows throughout the year which is one scenario, in terms of what we would be doing more than anything we would be putting it in what we call our short-term investment portfolio. It'd be in AFS. And so that is the shorter end of the portfolio where typically the duration is no more than two and it ranges anywhere from half to two. But again, it depends on what really happens with deposit and loan volumes, but if we grow the portfolio it's likely we'll be growing in the shorter duration for part of the portfolio.

Aaron Deer - Sandler O'Neill & Partners, L.P.

Okay. And then Russell, you mentioned kind of where commitments and outstandings have come from over the past year. How does that compare to line usage today versus a year ago?

Russell D. Goldsmith

Usage is actually not trending up. It's fairly stable this quarter but I think the underlying sentiment would seem to suggest that as the year progresses, we should get benefit both from the rising commitments and then I think ultimately some rising utilization rates. But that remains to be seen.

Aaron Deer - Sandler O'Neill & Partners, L.P.

Okay. Thanks for taking my questions.

Russell D. Goldsmith

Thanks, Aaron.

Operator

Thank you. Our next question comes from the line of Steven Alexopoulos of JP Morgan. Your line is now open.

Steven Alexopoulos - JP Morgan Chase & Co.

Hi. Good afternoon, guys.

Russell D. Goldsmith

Hi, Steve.

Steven Alexopoulos - JP Morgan Chase & Co.

I want to start – the loan yields ex covered declined only 2 bps this quarter. It looks like you saw it increase on the commercial real estate side. Maybe some commentary, do you feel like you're reaching the bottom overall on the portfolio yields or getting close to it? And I know the commercial real estate yields bounce around a lot, but why would they push up this quarter?

Christopher J. Carey

So, first of all, we're getting closer, right, because the residential mortgage yield barely moved down. I don't have a – there can always be some fees in the commercial real estate line that might impact in some of that, but I wouldn't expect it to continue to go up from there. The biggest category at C&I average base is at 8.3 billion and that – the decrease was less than it had been trending last year. So we think we're getting close to the bottom. With that said, the competition is still severe. We expect to grow the book and so I still think that – for example, I would still say in my normal comment that there will be slight pressure on the margin and we'll see a slightly modest decline in the overall margin going forward. So I think we're getting closer through the worst of the cycle.

Russell D. Goldsmith

I would also add that as we see some of the portfolios that we've been building over the last couple of years like our equipment leasing portfolio, our technology portfolio, we're seeing just a hint of construction at this point picking up. So we're benefiting a bit from some areas where we get somewhat better margins as part of the growth. And that I think is reflective of a bit of encouragement about the initiatives that we've been undertaking in the last couple of years. And so that's helping too.

Steven Alexopoulos - JP Morgan Chase & Co.

That's helpful. And Russell, maybe to follow up on that, can you give some color on the strong C&I loan growth? Again, how much might be coming from the entertainment segment, any other industries starting to pick up given your comments, you're seeing more optimism?

Russell D. Goldsmith

I think that we're seeing it across the board as I was just suggesting; technology, franchise, finance, equipment leasing, construction I mentioned, commercial and residential real estate mortgages. We're still seeing very strong purchase activity in the mortgage space in our client base. It's probably – yes, which would pick up some of those mortgages. The technology team has really performed well and so we're getting some traction there and our commercial banking unit and even through our branch system where we reach out to small business, they had an improvement in the quarter. So, obviously generating a 13.5% annualized rate is encouraging given that the economy is still not operating at full speed.

Steven Alexopoulos - JP Morgan Chase & Co.

Okay. Thanks for the color. I appreciate it.

Russell D. Goldsmith

Thanks for the call, Steve.

Operator

Thank you. Our next question comes from the line of John Pancari of Evercore. Your line is now open.

Rahul Patil - Evercore Partners Inc.

Hi. This is Rahul on behalf of John. A question on the securities book. The [securities] (ph) went up this quarter 15 to 16 bps. Did you see any benefit from a lower premium amortization in this quarter? And if so, can you quantify that?

Christopher J. Carey

That value is minimal. I think if you look at what happened in the portfolio, the bigger impacts were we increased the health maturity portfolio by a couple hundred million and we decreased the available-for-sale and the part of available-for-sale was the shortest component of it. So I think there was a modest decline in premium amortization, but the bigger was the mix change.

Rahul Patil - Evercore Partners Inc.

Okay. And then in terms of your loan yields, the new loans that are coming on, can you just give us an update on where the new C&I loans are getting priced at today versus three months ago?

Christopher J. Carey

So I would say, number one, for a comparable loan I don't think the pricing is much different. I do think we have some of the newer businesses, as Russell mentioned, the tech lending and the leasing area we are getting higher yields, but some of that was softening in the last couple of quarters. The range across our business groups is pretty wide and our specialty businesses in general can get by our yields and can get the yields certainly above prime. When you go to middle market lending that's where it tends to be the most competitive. But in some of the private client areas we do some really high net worth lending where there's liquid collateral, we don't do too much of that but that pricing is pretty skinny. So we're really in a range from 1 over LIBOR to 1 or 2 over prime.

Rahul Patil - Evercore Partners Inc.

Okay. Thank you.

Operator

Thank you. Our next question comes from the line of Dave Rochester of Deutsche Bank. Your line is now open.

David Rochester - Deutsche Bank AG

Hi. Good afternoon, guys. Can you talk about the size of the loan pipeline going into 2Q versus the pipe from last quarter? It sounds like you're seeing a lot of momentum heading into this quarter. You've expanded the sales force and that's certainly going to help with that. And are you thinking at this point that loan growth could at least hit that mid teens growth rate you had last year?

Russell D. Goldsmith

Well, I think we're always loath to get too optimistic on the pipelines just because they're in the pipelines doesn't mean they come out of the pipe and into the portfolio. But for what it's worth, the pipelines look pretty good at the moment and they're running at a little bit higher rate than we saw at certain points last year in certain parts of the bank, not every part of the bank. I think at the moment we're sticking with the thought that we'll grow loans – as we said 90 days ago, we'll grow loans substantially but not necessarily quite as robustly as we did last year. The first quarter is a little bit ahead of last year's first quarter but I think it's too early to declare a trend. Let's see where we are in 90 days from now on what comes out of the pipe and how the second quarter looks. But I think generally speaking we're feeling that things are on the way up, which is fairly typical at City National.

David Rochester - Deutsche Bank AG

That sounds positive. That's good. And Chris, you said you were thinking that you're getting close in the loan yield pressure. I take it based on that comment you've seen spreads generally holding across your businesses this quarter versus last quarter. Is that fair?

Christopher J. Carey

In many areas, not everywhere but in many areas they are.

David Rochester - Deutsche Bank AG

Where specifically are you seeing a little bit of pressure, if any?

Christopher J. Carey

Well, again I think in every area there is some pressure but I think what we've seen over time is that middle market lending is where there's the most pressure. I mean you have less people doing real estate lending or I think you're seeing some of that's come back now, it might help us. People have flocked into that and that's put more pressure on the pricing behind that price and I said a little bit around the specialty areas tend to have less pressure but by the way some of them, franchise get some pressure on the pricing. But nobody has no pressure on the pricing, but the more specialized lending we do it tends to be – the degree of it is a little less.

David Rochester - Deutsche Bank AG

Okay. And just one last one, if I can. On the securities side, can you just remind us how large that shorter duration bucket is at this point?

Christopher J. Carey

The shorter duration bucket is a little over 3 billion.

David Rochester - Deutsche Bank AG

Great. All right, thanks guys.

Russell D. Goldsmith

Thank you.

Operator

Thank you. Our next question comes from the line of Brett Rabatin of Sterne Agee. Your line is now open.

Brett Rabatin - Sterne Agee & Leach Inc.

Hi. Good afternoon. I wanted to ask about just thinking about the expenses and stress testing, and if we should expect anything in terms of any builds in the back half of the year or if you guys are basically all set in terms of how you're looking at that incremental expenses in that area?

Russell D. Goldsmith

Well, we spent a lot of money there, so most of it is in our run rate and we still are tweaking things a little bit and so there will be a modest change but not enough that you would notice. I mean we're showing up some resources. We had finished the process. We think it went very well, so I would say while we are going to be adding a little more resources it's not going to show up in our run rate.

Brett Rabatin - Sterne Agee & Leach Inc.

Okay, great. Thanks for the color.

Operator

Thank you. Our next question comes from the line of Tim Coffey of FIG Partners. Your line is now open.

Timothy Coffey - FIG Partners, LLC

Good afternoon, everybody.

Russell D. Goldsmith

Hi, Tim.

Timothy Coffey - FIG Partners, LLC

The company has been seeing some good number of recoveries out of the construction portfolio. Is that a product of just having written stuff down to a level that they are now able to move rather quickly?

Russell D. Goldsmith

Tim, were you asking about the recoveries in construction?

Timothy Coffey - FIG Partners, LLC

Yes.

Russell D. Goldsmith

Yes, I mean that's through the cycle. That was the area disproportionately that have highest net charge-offs, so what we're seeing is the final recovery amount. Some of those items take literally obviously years to resolve. So that's what you saw in this quarter. As we've said, we are getting close to the end of this net recoveries at the quarter mode. It's likely this year we won't have net recoveries every quarter. We may have another quarter where we have it, but we wouldn't think every quarter we'll have net recoveries.

Timothy Coffey - FIG Partners, LLC

Okay. And what about the appetite of the markets, demand for construction in that discipline. Is that improving?

Russell D. Goldsmith

I think we are seeing signs that construction levels are picking up and with that that construction lending is an opportunity that's picking up. I think it is noteworthy that I think loans in this space and projects in this space are getting underwritten on a more conservative basis with more capital, more equity in the deal. So, we're encouraged by that but it's a little early in the year to really know for sure. But we think there's going to be some positive growth here on a sound footing for City National. If we drive around the markets that we're in, you're seeing levels of construction, you're seeing cranes that we all bought four years ago that all moved to China.

Timothy Coffey - FIG Partners, LLC

Okay. Those were my questions. Thank you.

Russell D. Goldsmith

Welcome.

Operator

Thank you. (Operator Instructions). Our next question comes from the line of Gaston Ceron of Morningstar Equity. Your line is now open.

Gaston Ceron - Morningstar Inc.

Hi. Good afternoon.

Russell D. Goldsmith

Hi.

Gaston Ceron - Morningstar Inc.

Hi. Just wanted to – as we think about rates hopefully normalizing at some point in the not so far future here, how should we think about your operating expenses and your efficiency, what sort of trend as rates normalize and revenue obviously improves?

Christopher J. Carey

Well, I guess the question of the day or the year maybe what does normalize mean these days? At one point in time we might have thought normalized fed funds would be 4% and that would give you a different answer, but there is some chance it may be normalized. Fed funds is 2, 2.5 or 3. I think for us to try to put a number on that right now without really – and I don't want to speculate on that rate. It's very clear as Russell said earlier, we are very asset sensitive. So the moment rates start moving up, we are going to have improvements in our earnings, in our efficiency ratio, on our margin. But it's really tied to how long that takes to happen and what that normalization level ends up being and I think it's pretty early to speculate on what that might be.

Gaston Ceron - Morningstar Inc.

Fair enough. And then just a separate follow-up, if I could. With all the success you've had in wealth management, I know I've asked about this before, but with all the success there, any kind of appetite for expanding further in that business?

Russell D. Goldsmith

Well, I think I'd say a couple of things to that. One, we're very, very pleased with the lineup that we have built in our wealth management businesses. The merger of City National Asset Management and Rochdale Investment has gone very smoothly and has real momentum. Convergent Wealth Advisors is doing well. The lenders are improving. City National Securities is doing well. Our affiliates are generally doing pretty well and obviously Matthews which doesn't show up in the asset number has been particularly strong. So we feel like we have not only going investments but for our clients, we have capabilities really at every level through our City National Rochdale capabilities and Convergent Wealth Advisors in particular. We have a really complementary and very compelling investment, opportunities in a broad array for fixed income to four equities to emerging markets to proprietary and non-proprietary products in both companies. So, I don't think there's anything that we feel we need to require to be able to continue to meet the financial and investment needs of our client base and to have some real growth and momentum in doing that. But at the same time, of course, we like to keep looking. We kick a lot of tires and look for opportunities that might enhance the value we can deliver to our clients and our shareholders. Sometimes that's a team, sometimes that's individuals and as we demonstrated into the case of Rochdale, very occasionally that can be a company. I think we would principally be looking at things that would fit with our existing capabilities and existing units. But at this point it's not a high priority to be buying something to do that because I think they're doing very well with the people and the products they have in place.

Gaston Ceron - Morningstar Inc.

Great, good to know. Thank you.

Operator

Thank you. Our next question comes from the line of Casey Haire of Jefferies. Your line is now open.

Casey Haire - Jefferies & Co.

Good afternoon, guys. A couple more follow-ups on the expense side of things. Number one, the comp line; I was little surprised by how small that balance was quarter-to-quarter. I think it's probably one of the smaller FICA bounces you have had in what was a pretty good loan growth quarter and you're also hiring. Just a little color as to how you're able to keep that line relatively low this quarter?

Russell D. Goldsmith

Well, we still had a pretty big bounce up in the FICA but we have typically a little bit less in incentives in the quarter, particularly because I said on last quarter's call we had some adjustments to profit sharing and things like that. So, I'd say that's the same thing. I mean we still would look if the FICA number goes down roughly 5 million in quarter two from where it is.

Casey Haire - Jefferies & Co.

Okay. And then just to clarify on the overall expense guide for 2014, it's my understanding that it's 3% on the GAAP expense number of 2013 which would put the all-in GAAP expense number for this year at around 8.75% or so. My question…

Christopher J. Carey

I'll answer it this way. Yes, we think it's about 3% on the GAAP number. That's the rate. However, we're trying to do better but also I would add while we're trying to do better we also are always looking to hire talent and teams, so that's assuming – that's sort of our basic plan. But if we have opportunities to do other things, we're not just focused on 2014 clearly. We're focused on the next couple of years minimally. And so at the moment, we're looking at our plan and that's where it was and we all think we can find more talent and bring in more people. And if we can offset all that through other things, great. If not, we'll benefit the next year.

Casey Haire - Jefferies & Co.

Okay. And just last one on the provision outlook, just curious. Hypothetically, if we sustain this growth rate in sort of the low teens and the recoveries continue at this 4 million or 5 million per quarter level, would that bring about provisions or would we still be at the zero level?

Russell D. Goldsmith

There's a lot of variables in that question. Obviously one is and I'm not sure that we'd see recoveries maintained at that level through all the quarters and it depends how much loan growth that we have and obviously we try to be vigilant about potential surprises in the loan portfolio on the negative side. So I think we'll stick with our view that at some point in the year we anticipate some relatively modest level of provisioning. But just because the first quarter went so well, it actually is consistent with the view we've been articulating and it's just a matter of when.

Christopher J. Carey

Look, I think it's fair to say our credit costs it's incredibly unlikely that we will have net recoveries every quarter. And that's why I said earlier, while we could have a quarter with some net recoveries for the next three quarters we just don't see the pipeline we could do that every quarter.

Casey Haire - Jefferies & Co.

Okay. Thank you.

Operator

Thank you. (Operator Instructions). I'm showing no questions at this time. I'd like to hand the call back over to Mr. Goldsmith for any closing remarks.

Russell D. Goldsmith

Thank you, operator. I want to thank everybody who participated in the call and those of you who asked some questions. Thank you for joining us and for your interest in City National. We always appreciate it. We'll look forward to talking with you again at the end of the second quarter. Of course if something else occurs to you that you want to find about, feel free to give Chris a call or me. We're happy to be helpful. Thanks, again. Bye.

Operator

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

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