City National CEO Discusses Q2 2011 Results - Earnings Call Transcript

Jul.21.11 | About: City National (CYN)

City National Corporation (NYSE:CYN)

Q2 2011 Earnings Call

July 21, 2011 5:00 pm ET

Executives

Cary Walker – SVP and Manager of Corporate Communications

Russell Goldsmith – President and CEO

Chris Carey – CFO

Analysts

John Pancari – Evercore Partners

Steven Alexopoulos – JP Morgan

Joe Morford – RBC Capital Markets

Aaron Deer – Sandler O'Neill and Partners

Brian Klock – KBW

Brian Foran – Nomura

Jennifer Demba – SunTrust

Gary Tenner – D.A. Davidson

Lana Chan – BMO Capital Markets

Operator

Good afternoon. I would like to welcome everyone to this discussion of City National Corporation's Second Quarter 2011 Financial Results. My name is Missy [ph], 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 analyst 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 the call over to Cary Walker, Senior Vice President and Manager of Corporate Communications for City National. Please proceed sir.

Cary Walker

Thank you. Good afternoon. Here to discuss City National's second quarter 2011 highlights are Russell Goldsmith, our President and Chief Executive Officer; 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.

The speakers on this call claim the protection of the Safe Harbor provisions contained in 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, 2010. This afternoon City National issued a news release outlining its second quarter 2011 financial results. To obtain a copy, please visit our website at cnb.com. After comments by management today, we'll open this call to your questions.

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

Russell Goldsmith

Good afternoon, and thank you all for joining us again for our quarterly earnings update.

As you know just a little while ago, City National announced its second quarter net income of $47.5 million, which is $0.88 a share, which is up from $0.78 just a year ago.

I am pleased to say this is City National’s best quarter in over three years. Year to date the company has earned $87.2 million on revenue of nearly $558 million.

City National’s second-quarter results improved across the board. Assets grew to a new record of $22.5 billion, our capital levels are strong, credit quality which is a critical factor improved for the seventh consecutive quarter. Revenue increased 3% from the first quarter. We benefited from rising net interest income and an increase in C&I lending. Deposits also grew up to $18.8 billion, and remarkably our percentage of core deposits increased to 96%. All in all it was City National’s best quarter, as I said, in more than three years.

The fundamentals of our business are strong. We also continue to benefit from the fact that we avoided virtually all of the mortgage related pitfalls of the past few years that we read about so much and therefore City National is not burdened by the cost and risk that some other financial institutions are continuing to deal with.

New loan production at City National increased for the second straight quarter and the production growth has been higher than it has been in more than three years as well. Between March 31 and June 30, our loans actually grew across the board. During that time, City National added about $393 million in loans to its balance sheet. The lion’s share of that about $332 million were C&I, and while they did include $170 million of asset based credits that we acquired in May, it also reflects nice net organic growth.

City National has been in the asset base lending business for years and the recently acquired portfolio is a relatively small but positive addition to our $11.5 billion loan portfolio. It brings us further diversification, strong credit quality, and reasonable returns. It consists of positions in syndicated loans and credit lines to larger and quite credit worthy quality companies.

Importantly, we have also added a strong team of experienced lenders to manage and grow this portfolio. This is an approach that is totally consistent with our long-standing and successful philosophy to have a number of discrete specialized lending portfolios run by talented lenders, who are experienced and proven in their sectors. Line utilization among our existing C&I clients is still low by historical standards, and has actually declined. I think that reflects the nation’s modest economic growth rate and some continuing uncertainty and caution by our clients about where the economy is headed and when they will see revenue growth,

In the second quarter, loan commitments actually increased faster than utilization, but that is in its own way modestly (inaudible) because some of our borrowers are clearly getting themselves prepared to expand their usage of credit in the future at some point. We do continue to see some modest signs of increasing confidence and improvements in the economy of the regions that City National is in.

Commercial loans for finished properties increased from the first quarter, residential mortgage lending also went up for us as borrowers continue to take advantage of low interest rates. We are of course particularly pleased that credit quality continued to improve significantly. This is clearly a big part of our story.

Non-performing assets were down 16% from the first quarter of this year, and for the second quarter in a row City National recorded net loan recoveries. Excluding the loans covered by the FDIC, non-accruals, OREO criticized and classified all declined. Excluding those covered loans City National has not recorded any loan-loss provision so far this year, and we now expect that our provision for the remainder of this year will be quite low.

In any event, the company remains quiet adequately reserved, especially in light of its strong balance sheet and conservative risk profile and the diverse composition of our own portfolio. At the same time it is worth noting that we’re not boosting our net income by reversing any loan reserves. We are not reversing any loan reserves. Since the outlook for our business is clearly affected by the economy, let me say a few words about that.

By and large, economic conditions continued to show modest improvement. Here in California, the technology and entertainment industries are performing well, international trade is growing, tourism, agriculture and commercial real estate are also showing real signs of improvement, and in the geographies where we are located residential real estate continues to show some positive signs. The multi-family space is particularly strong.

Personal income and consumer spending are up a bit, and although the state’s unemployment rate is still way too high at 11.7%, it is actually fallen nearly a percentage point during the past five months. In New York City, where we have two offices, the economy is quite strong as many of you know. Nevada is still facing an uphill climb, but there are some encouraging signs including tourism in Las Vegas, which has begun to improve.

Obviously, there is still a lot of uncertainty coming out of Washington, Europe, and in various parts of the world, and this clearly affects the economy and confidence level here at home, but anecdotally and through our regular survey of clients through what we call the City National Business Confidence Index, we continue to see signs of gradually improving confidence among many of our clients. Meanwhile, City National’s entire organization continues to work hard and successfully in a very competitive environment, and the world of limited loan demand by creditworthy borrowers, to add clients and win new business. That is evident and our success is evident from our loan and deposit growth this quarter.

Turning to deposits, in the second quarter of this year core deposits grew $768 million to more than $18 billion, and as I said, they now account for a truly remarkable 96% of City National’s deposit balances. During the past three years, City National has added nearly $8 billion in core deposits, which for us is a remarkable increase of 71%. With this very ample supply of low-cost funding, City National is very well positioned to meet the needs of its creditworthy borrowers and to grow revenue meaningfully and rapidly as loan demand increases and someday interest rates rise.

As we have consistently done again here in the second quarter, City National has invested in the future of this company with the addition of talented new people, its competitive new products and important new banking officers. In the second quarter, we enhance our Las Vegas franchise by acquiring the two officers of a bank there, Nevada Commerce Bank, which had been taken over by the FDIC. This added $118 million in deposits, and $56 million in net loans, while generating an $8 million gain in this quarter for us.

In fact, just this past weekend, we successfully consolidated those two offices into our existing bank system in Las Vegas. We are fortunate to have a terrific team of colleagues, who are quite experienced now and very effective at performing these integrations smoothly and rapidly. Although Nevada is only 2% of our assets today, it is profitable for us, and we believe in its long-term value as a part of City National.

Another step that City National took in the second quarter to invest and expand the bank’s footprint and create jobs was the opening of two more offices in West Los Angeles. We also added our first office in Nashville, Tennessee, to better serve the vibrant music industry there.

We are fortunate to have added a strong and experienced team of outstanding national bankers, which will enable our world-class entertainment division to expand even further and to meet the needs [ph] both in New York and in California. All in all, over the last two years, City National has successfully and seamlessly added 15 new banking offices for a total of 79, five of those new offices where on a de novo basis, and 10 came from our 4 FDIC acquisitions.

We have also consolidated 14 other offices from those FDIC acquisitions into pre-existing City National offices. While our primary focus continues to be as a premier private and business bank, City National also continues to benefit from and build upon its expanded branch network to grow its successful and proven preferred banking initiative, which targets affluent professionals and individuals and small business owners with our own unique brand of personal service and financial [ph] capabilities.

In just three years, our preferred banking program has brought in close to $1 billion in deposits and investments, while also growing loans. In light of the slow growing and still challenging but positive economic environment and the continuing low interest rate environment, we are quite pleased with our City National second quarter results. We now expect City National to perform well in the second quarter of 2011 with just modest credit costs for the remainder of this year.

Our company has a strong balance sheet, plenty of capital and exceptional deposit base, an outstanding team of 3300 colleagues and a growing clientele in very attractive regions, most of which are showing some improving economic conditions. The investments that we have made over the past several years are working, and we fully expect them to strengthen our company’s performance as they gain further traction and as the economy improves.

Now before we turn to your questions, let me turn the call over to our dynamic CFO, Chris Carey, for more details on the second quarter. Chris.

Chris Carey

Thank you, Russell. Good afternoon all. I’m going to touch on nearly 4 areas, credit quality, non-interest income, and interest margin and expenses. So first credit quality, the big story continues to be a very solid across-the-board improvement, all key credit quality metrics that has resulted in net recoveries and actually a build in our loan loss reserve despite a CR provision [ph] for the quarter.

We had a 16% linked quarter decline in both non-performing loans, as well as REO and our 30 to 89 day past due loans are also at a very low level, 35 million. And while we May not maintain this continued rate of improvement in the coming quarters, we still feel that we will see continuing improvement on those fronts.

Turning to non-interest income, income from trust and investment fees grew 3% from the first quarter, while fee income tied to foreign exchange and letters of credit was up 8%. Income from cash management and transaction fees were down a little, primarily because more clients opted to pay for these services of higher deposit balance.

Notably, the second-quarter results reflect a pre-tax gain of $8.2 million or $0.09 a share from the acquisition of Nevada Commerce Bank. We have also included 10.7 million in FDIC loss sharing expense that fell through non-interest income. In the first quarter this was actually 8.6 million income, and while I’m going to talk about it a little more, there is also additional income in non-interest income that shows up in other related REO transfers, that keeps us at least on a positive basis in non-interest income from this activity.

As many of you know from our expansive 10-Q disclosures, the loss sharing line includes a number of items that are netted together. The bottom line is that the change from the first quarter reflects improvements in the company’s portfolio of FDIC covered assets. In the first quarter, as you may remember, the net impairment of our current asset portfolio has the difference between our provision on it and gain from our indemnification asset write up was a little more than 4 million. In the second quarter, it was next to nothing.

As a result of a much smaller covered loan position in the second quarter, the gain on indemnification asset came in about 13 million lower than the first quarter. The other 6 million difference from the first quarter reflected larger gains on the sale of REO properties. When we sell a property for more than its book value, we share the gains with the FDIC and we have been successful. That is offset by a gain of sale of REO.

So obviously there are a lot of moving parts in the covered asset portfolio, but the bottom line overall is credit trends appear to be stabilizing, and as time goes on, their impact on our quarterly results should subside, and as I think all of you know, we still get a very healthy slug in non-interest income.

Now let me turn to margin, you can see that margin held up well in the second quarter despite one more day, thanks in large part to solid loan growth and the strong yield in our covered asset portfolio. But despite that it is still likely to remain under modest pressure at least through the rest of this year. And as I said before, we focus more on non-interest income, and that grew nicely from the first quarter despite the low rates.

We are very much looking for to really capturing the value of all these deposits we have gathered when eventually rates go up, although it looks like that continues to be pushed out.

Finally a word about expenses, the increase from first-quarter was due primarily across A associate recovered assets, and as I said last quarter where there were a little bit lower and a little bit variable quarter-to-quarter, they included a $7.3 million increase in write down of covered REO properties, as well as a $1.4 million of additional legal and professional fees stemming from covered assets.

As we told you last quarter, 80% of the costs involved covered assets are reimbursed and recorded as non-interest FDIC loss sharing income. Second-quarter expenses also included some front loading of our marketing costs, but we also are boosting our marketing costs for the entire year, as we think there are a lot of opportunities to take advantage in our different markets. Finally you can see that our FDIC assessments came in 1.3 million lower than they did in the first quarter, and it will come down again in the third quarter.

So in conclusion, we are very pleased with City National’s performance in the second quarter, despite the continuing significant headwinds of low interest rates, and the still sluggish economy, we continue to grow earnings, deposits and assets, loan production is up and credit quality continues to improve rapidly. Just as important, we are making the investments needed to grow our company organically and create long-term value for our shareholders.

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 John Pancari with Evercore Partners.

John Pancari - Evercore Partners

Good afternoon.

Russell Goldsmith

Hi, John.

Chris Carey

Hello.

John Pancari - Evercore Partners

On your average C&I loans, excluding the asset backed purchase, I think they were down 1% in the quarter excluding that, can you talk about your general outlook, what you seeing there, I’m sorry if you mentioned it earlier on the call, but just curious about your pipeline and line utilization as well and what happened with commitments in the quarter, just to get an idea on the trajectory there?

Russell Goldsmith

Let me just make a slight correction, so our average C&I loans even without the purchase are up in the quarter, because they are up with the average recovers is doing right now, they are up $260 million, and the loan purchase was $170, but the average impact of that one purchase was 105.

So I really think the averages are a little bit skewed this quarter because of the purchase, but when we look at point-to-point for C&I, we had 332 million growth with about half of that from the purchase, and half of that organically. So our pure organic growth on a linked quarter basis was 3.5%, which some would analyze that to get to a much higher number, of course.

So at the moment, without making a big projection of where we go, our momentum was pretty good, and most of that has to do with we had good organic loan production. Loan production numbers that we are talking about, of course, exclude the purchase.

John Pancari - Evercore Partners

Right, thank you for the correction. I do see that. Can you just come on line utilization, where that went at the end of the quarter?

Chris Carey

Well, neutralization was down, and commitments are up, which I think reflects the fact that our organization is doing a good job of attracting new clients, and that is how we are picking up additional loans. But given as I said the state of the economy and the outlook that the number of clients have, while they may be expanding their commitments or putting commitments in place, the utilization rate is actually down a bit.

John Pancari - Evercore Partners

Okay, that is helpful. Thank you, and then separately on the residential mortgage book, perhaps some good growth in the quarter, just curious what your plans are there in terms of capitalizing on some demand on that front?

Russell Goldsmith

Well, we have really a long-term consistent approach to that. We really utilize the mortgage portfolio for our existing client base, our private client base and there is demand, as I said, because of low interest rates, and I think the recognition in most of our geography is that home prices have stabilized, so we’re seeing a good level of activity. But there is really no change in our approach there. We underwrite them very conservatively, and as you can see from our results they held up extremely well. We don’t ever buy brokered loans, we have never done sub-prime mortgages, and we have very few exceptions (inaudible) loans on our balance sheet.

John Pancari - Evercore Partners

Okay, and then my last question on the loan side here and I will step off, the incremental decline that you would expect in commercial real estate, can you give us an idea of how much longer we can expect compression in that book?

Russell Goldsmith

Well, as you know John, when I talk about commercial real estate I always sort of segment it. We have been shrinking and the market has been shrinking construction, and I think we are getting to the low point. I think it is less than 3% or so of our loan portfolio, and it went down from 4.15 down to 3.55. We are actually kind of happy of the part that we have really been actively trying to grow, the commercial real estate mortgages or the finished portfolio, was up this quarter.

So finally we have had an increase there, which we are happy about, and we think there is other good things to come there. And you know, there is activity now on construction, I mean it is more on the multi-family front, so I’m really thinking, we’re not at the low point we are pretty close to it and that is starting to come back up a little bit.

John Pancari - Evercore Partners

Great, thank you.

Operator

Your next question comes from the line of Steven Alexopoulos with JP Morgan.

Steven Alexopoulos – JP Morgan

Hi, good afternoon guys.

Russell Goldsmith

Hi, Steve.

Chris Carey

Hi, Steve.

Steven Alexopoulos – JP Morgan

Maybe I will start, in terms of the growth in C&I outstandings, and the increase in commitments. Can you give us a sense of what industries you are seeing this growth, is it just an entertainment impact or is it broad-based?

Russell Goldsmith

It is really across the board. You know, as I mentioned in my comments and as I think you know, we have developed over the years a really diversified mix of lending. So in this quarter you are seeing in our franchisee finance unit, some real estate as Chris was just saying, yes there's some pickup in entertainment, a couple of production loans, I know we are in the mix, obviously residential looks good. A little bit of a bump up in some home equity lending, and then a mix of C&I across a broad range of our client base, international trade a variety of things.

So I think the organization is firing on all cylinders and you are seeing some companies and individuals recognizing that this is a time to step up a little bit more.

Steven Alexopoulos – JP Morgan

Okay. With the growth in non-interest-bearing deposits up so much, why would companies be holding more cash and simultaneously borrowing more and increasing commitments, just from a macro view?

Russell Goldsmith

Well, first of all, you know, they aren't necessarily the same companies, right, and the personal side you are seeing a lot of people holding cash. Again we are attracting clients across the board so you are seeing inflows as new clients join us. Some of these deposit flows are coming from new branches, the two branches that I mentioned in West LA that we opened, we picked up meaningful deposits in those two offices, and they've been open just a few months.

Chris Carey

And Nashville.

Russell Goldsmith

And Nashville is another area where we are seeing a nice pickup and that office is just getting started. So you can have – some clients are bringing in deposits and other clients who are borrowing or raising their commitments. Obviously there's some overlap as people balance their needs, and no pun intended in their business or prepare for the possibility that they are going to need to work through their cash and borrow from us in the future.

Operator

Next in line is Joe Morford with RBC Capital Markets.

Joe Morford - RBC Capital Markets

Thanks, good afternoon Russell and Chris.

Chris Carey

Hi, Joe.

Russell Goldsmith

Hi Joe, how about those giants.

Joe Morford - RBC Capital Markets

Yes, hanging in there. I just was curious I guess first follow up to Steven’s question, with the growth kind of steady throughout the quarter or was it kind of building as we went on, and any comments there?

Russell Goldsmith

I think it is pretty steady. I don't think there's any particular trend to be seen in that, Joe.

Joe Morford - RBC Capital Markets

Okay. And what about, any comments on what you are seeing in terms of the competitive landscape, kind of if I think back to last quarter and some of your comments that you’ve talked about some aggressive pricing in the market that if you are kind of more willing to wait for demand to come back and you would get your share. Are you getting pretty reasonable pricing and stuff with the business you had seen in the quarter?

Russell Goldsmith

I'm not sure that I phrased it quite that way or meant it to sound that way, if that's how it came across but I think in the first and second quarter it is very competitive out there. There are some, as you know, some aggressive big players in California and Nevada and New York where we do business, and everybody is hungry for business. Some are hungrier than others, some are more aggressive than others. I was in a meeting just last week with all of our branch managers and a number of our other people from our what we call our core system, our retail brand system and we were talking about small business lending, which we’ve been doing very well in. And I asked the question have any of you in trying to bring in a new loan found a situation where we were the only bank competing for that loan?

There was not a single person or single loan where they didn't have competition when it came to perspective loans. So part of what I've been saying and many in the industry have been saying, the banking industry is aggressively looking for credit worthy borrowers. And so when we find them inevitably, unfortunately, we see competition there. So pricing is competitive, and we are being competitive on pricing to a reasonable extent. I think we are still being quite vigilant on structure and credit quality, and hope that our competitors will bear that in mind as they make their proposals as well. But they don't always do that.

Operator

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

Aaron Deer - Sandler O'Neill and Partners

Hi, good afternoon guys.

Russell Goldsmith

Hi, Aaron.

Aaron Deer - Sandler O'Neill and Partners

Russell, question about the asset purchase and pardon me if I missed this in your opening comments, I’m just curious what if you can give a little bit more detail in terms of what is in the portfolio in terms of types and size and what kind of yields you are picking up on that?

Russell Goldsmith

You know, this is a portfolio of asset based loans, but they are with really what we view as a really solid, very creditworthy companies. These are nationally syndicated credits. We have a lot of experience in a variety of regions dealing with nationally syndicated credits or what you would call club loans, smaller groups of lenders, and they tend to be in the 15 million to 30 million range in terms of commitments or outstandings.

We have got an experienced team of lenders who manage this portfolio, so while we acquired the portfolio it is not a one-time thing, but rather as I was saying earlier consistent with our philosophy and proven strategy of having a number of discrete portfolios within our broader $11.5 billion loan portfolio, and each portfolio where it is franchisee finance or this asset based lending portfolio or others, has a team on top of it that knows what they are doing.

Chris Carey

And the yield is in the 225 to 275 plus fees. So it is a reasonable yield [ph].

Russell Goldsmith

And given just the enormous liquidity that we have on our balance sheet and the strong levels of deposits, this was a very good time for us to be tack this on to our portfolio.

Aaron Deer - Sandler O'Neill and Partners

That actually brings up a question that maybe Chris can address is the securities growth in the quarter, it looks like the AFS came up to put some of that excess liquidity to work, what kind of product was added there in terms of yield and duration, and was there some munis in the mix that helped bring the effect of tax rate down in the quarter?

Russell Goldsmith

No, the munis – we are having trouble buying as much munis as we like, and as you and some people know, we have been at it for a while now, and we are basically kind of only kind of holding it even [ph]. we just had some true ups in the quarter that made the rate a little lighter that we would have thought, the duration is on the short side, and you can see our overall duration our overall portfolio now is very short at 2.3. so it is in the, generally speaking, more in the one-year range, and we have learnt to move out a little bit, but we are not in a rush to get too aggressive there.

Operator

Your next question comes from the line of Brian Klock with KBW.

Brian Klock - KBW

Good afternoon gentlemen.

Russell Goldsmith

Hi, Brian.

Chris Carey

Hi, Brian.

Brian Klock - KBW

Chris, just I guess maybe just a couple of housekeeping items all the noise with the FDIC items, the provision was $1.7 million, the indemnified gain of 1.2 that offset that, is that in the FDIC loss sharing line item or is it within that other?

Chris Carey

No, the offset is in the loss sharing item.

Brian Klock - KBW

Okay. And then within the other, the 23.2 million of other, how much of it is FDIC related, I guess, how much would be core then?

Chris Carey

The FDIC component of the other is 14.7 million this quarter versus 12.3 million last quarter, and as you know, we put a lot more detail in our Q – we may start to put more detail even in the financial schedules that we send out with the press release because we want to make it as easy as possible for people to understand it.

Operator

Your next question comes from the line of Brian Foran with Nomura.

Brian Foran - Nomura

Hi, actually I'm try to work through the FDIC as well and maybe the other side of that, which is as we think that the expenses this quarter, so I'm assuming we can basically subtract out the entire $22 million when we think about normalized because it is 90% of the OREO balances are OREO and then should we also be subtracting out some other amount for legal or professional or appraisal type fees associated with managing those OREO balances?

Russell Goldsmith

Yes, so for example, in this quarter out of the OREO expense of $22 million, 20.2 is from FDIC and then in legal and professional we have another $2.8 million related to the FDIC and then another $1 million maybe in others somewhat related to appraisal expense. So pretty hefty number overall, but if you take out sort of onetime impairments and a gain like we had this quarter, which would only recur if we had another transaction, frankly what tends to happen quarter to quarter is these things net, they all net to a pretty de minimis number.

Brian Foran - Nomura

And then just to make sure I understand the reported versus kind of a core fee run rate, I was thinking 92 million reported adjusted for the FDIC loss sharing expense at $10.7 million, the security gains of 1 million loan sales, of 8 million in the acquisition gain of $8 million, so I was getting $85 million there, subtracting out the $14.7 million OREO offset you mentioned that was getting a core of 70, and then I am guessing money market fee waivers or something like $9 million or $10 million this quarter. So kind of 70 run rate now, but 80 assuming some day rates are more than zero. Is that – I know there's a lot of moving parts, I just want to make sure I'm not mistranslating something.

Russell Goldsmith

I don't think you are mistranslating. I don't know if you captured everything but it sounds like you are in the ballpark.

Operator

Your next question comes from the line of Jennifer Demba with SunTrust.

Jennifer Demba - SunTrust

Thank you, good evening.

Russell Goldsmith

Hi, Jennifer.

Jennifer Demba - SunTrust

Just curious about your appetite to purchase more loans specifically asset-based loans in the future or any other type?

Chris Carey

Well, I think we've demonstrated that we are out there opportunistically looking for opportunities, acquisitions of one sort or another whether it is a portfolio, a branch, a bank that meets our fit, focus and price mantra. So if something were to come forward that made sense, we obviously take a very hard look at it.

Russell Goldsmith

I guess I would add that there's a lot out there for sale as everybody knows, so if you look at the big world of all that's for sale, we probably, people would probably say our appetite is limited. We don't look at most of it frankly, but we are certainly open to looking at things that fit within our box, which is a lot smaller than a lot of people. We really are happy with what we did here, but there's a lot of things we do look at, and some things we look at quickly and pass it on.

Jennifer Demba - SunTrust

Okay. And Russell, can you just talk about long-term plans for Nashville, would you see that only being entertainment focused business over the long-term or can you just kind of give us some color there?

Russell Goldsmith

We are very enthused about being in Nashville, and I guess the fact that you are from SunTrust maybe makes that a more interesting question. But because of our presence in New York and Los Angeles in the music industry, we found so many existing clients and potential clients had a real interest in City National coming to Nashville. It complements what we are doing for our existing clients and creates an opportunity for a number of people who are interested in banking with us to do that.

We've been able as you have probably seen from our earlier press releases to assemble a terrific team of experienced individuals, who are based there in Nashville and understand the industry. And a great fit into our outstanding entertainment division. We are principally focused on the music industry and the entertainment industry in Nashville and the southeast. At the same time we are an outstanding private bank and I'm sure we will be doing some private banking as we get some root into the community. But I don't see us in the foreseeable future expanding beyond Nashville itself in Tennessee. This is really aimed, a very focused expansion, principally in conjunction with our entertainment business.

Operator

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

Gary Tenner - D.A. Davidson

Good afternoon.

Russell Goldsmith

Hi, Gary.

Gary Tenner - D.A. Davidson

Just wanted to ask two quick questions on that asset disposition gain, I don’t know if you discussed that in detail, but just what was that?

Russell Goldsmith

On the asset disposition gains that is related to the FDIC.

Gary Tenner - D.A. Davidson

So that is…

Russell Goldsmith

That is an FDIC related asset disposition gain.

Gary Tenner - D.A. Davidson

Okay, and then I was just wondering kind of what your view is on Reg Q, and how that might impact the bank?

Russell Goldsmith

Well, I mean, I think first of all it is not going to affect almost any bank very much this year, because rates are so low I think it is unlikely to have a big affect. I think we are all going to be watching it and there is different ways that this thing can play out over time. I think there is some limits on the deposit insurance if you put money in it currently. So I think in the short run it may not have much of an impact.

I think longer term what we will have to look at it as get higher, and it is probably going to add some cost I think that banks that have a lot of deposits, where they have to pay for balances, I think it may have less of an impact. But it is a little bit hard to forecast. I have repeatedly told people I think we just all have to watch it. I mean there are some people who think it is a positive, and obviously some who think it is a real negative. But I think in the short while there is not going to be much of an impact, and longer term it likely will have some impact, and we don’t think overall it should be too negative. But we are not sure where it will really go.

Gary Tenner - D.A. Davidson

(Operator instructions) Your next question comes from the line of Lana Chan with BMO Capital Markets.

Lana Chan - BMO Capital Markets

Hi, good afternoon.

Russell Goldsmith

Hi, Lana.

Lana Chan - BMO Capital Markets

Just one last question on the reserve, as your credit quality has been improving over the last couple of quarters and you are getting these net recoveries, when would we start seeing more of a reserve drawdown?

Russell Goldsmith

Well, we have a very complex methodology, and pursuant to that methodology we are still within a totally reasonably level of allowance, and I think our view as a company is a conservative one. We like having strong reserves, and frankly are not big fans of reserve reversals.

Lana Chan - BMO Capital Markets

Okay, so we should expect over time for you guys to really more growth into that reserve with low growth?

Russell Goldsmith

The reserve is appropriate at the level that it is at now given the loans that we have. But as credit quality improves, yes, we will clearly be trying to grow our loans and keeping this reserve as an appropriate reserve given our loans outstanding.

Operator

Your next question comes from the line of Brian Klock with KBW.

Brian Klock - KBW

Hi guys, just a real quick follow-up, on the (inaudible) that you guys acquired, did you buy that at par or was there a discount included in that?

Russell Goldsmith

It is very, very close to par Brian.

Brian Klock - KBW

Then, may I guess within the reserve analysis there is probably some reserve allocated to that portfolio?

Russell Goldsmith

Absolutely.

Brian Klock - KBW

And I guess just last question to I guess, the Nashville office, you talked about deposits that you are actually seeing some inflows in there from the first quarter that you had those guys in the shop, maybe you can remind us about the loan book that the potential loan book they can bring over, and probably hasn’t been able to show up on your second quarter numbers yet, so maybe just remind us on what is in their pipeline?

Russell Goldsmith

You know, I don’t think that there is anything material from a lending standpoint from Nashville at this point, and I don’t know how robust their pipeline is at this point. But we don’t normally talk about pipelines, but we are delighted with the team. It has gotten a great reaction in Nashville, and I’m looking forward to being there when we open the permanent office in September.

Operator

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

Russell Goldsmith

Well, I want to thank everybody for joining us on our second-quarter earnings call today, and for again taking the time to understand City National and its performance. We really do appreciate your interest and look forward to talking with you again three months from now at the end of the third quarter. Meanwhile, of course, if you have any further questions, please feel free to call Chris or me. Thank you very much for your participation today.

Operator

Thank you for participating in today’s conference. This concludes the presentation. You may now disconnect.

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