City National's CEO Discusses Q1 2012 Results - Earnings Call Transcript

| About: City National (CYN)

City National Corporation (NYSE:CYN)

Q1 2012 Earnings Call

April 19, 2012 5:00 pm ET

Executives

Cary Walker – Senior Vice President and Manager of Corporate Communications

Russell Goldsmith – Chairman and Chief Executive Officer

Christopher J. Carey – Executive Vice President and Chief Financial Officer

Analysts

Steven Alexopoulos – J.P. Morgan Securities LLC

Aaron James Deer – Sandler O'Neill & Partners L.P.

Joseph Morford – RBC Capital Markets

Brian Paul Klock – Keefe, Bruyette & Woods, Inc.

Stephen E Scinicariello – UBS Securities LLC

L. Erika Penala – Bank of America Merrill Lynch

Jennifer Haskew Demba – SunTrust Robinson Humphrey, Inc.

Ken A. Zerbe – Morgan Stanley

Jeff King Davis – Guggenheim Securities, LLC

Casey Haire – Jefferies & Co.

John G. Pancari – Evercore Partners Inc.

Operator

Good afternoon. I would like to welcome everyone to this discussion of City National Corporation’s first quarter 2012 financial results. My name is Christie and I will be your coordinator for today. At this time, all participants are in 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 will 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 2012 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. Such 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 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 first quarter 2012 financial results, to obtain a copy, please visit our website at cnb.com.

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

Russell Goldsmith

Good afternoon and thank you all for joining us again. I'm pleased to report to you today that City National announced this afternoon that its first quarter net income was $46.3 million, a 17% increase from the first quarter of 2011. This is $0.86 a share, up from $0.74 last year.

The first quarter was quite solid. Assets grew 11% from the first quarter of last year reaching a new City National record of $24 billion in assets. Loans and deposits both grew at double-digit rates and credit quality continued to improve. Of course, City National still faces the challenges of extremely low interest rates and a modestly recovering economy, like the rest of the banking industry and that impacts our performance. At the same time we are also investing selectively as we always do in a number of good opportunities and additional capabilities that will build long-term value for our shareholders and our clients.

In a few minutes Chris Carey and I will be happy to take your questions. First though, we’d both like to briefly discuss some of the first quarter highlights. Let me start with loan growth. Average loans excluding of course our covered loans were $12.4 billion which is an increase of 10% from the first quarter of last year.

I'm happy to say that loans increased for the fourth consecutive quarter and period end balances grew $439 million from year-end 2011. That’s a quarterly increase of 4%. In part it reflected kind of an order of importance for stronger gains in C&I lending. Second, a modest pick up in commercial real estate lending and third, new and refinanced home loans to private client borrowers. So I think there are some positive trends in those numbers in where we’re seeing the growth.

Loan production actually reached a new record for City National in the first quarter. At $741 million, it was up 15% from the fourth quarter and 51% from a year ago. Line utilization actually ticked up slightly, but at the same time, it’s still well below our historical levels. We have seen a steady rise in both loan outstandings and loan commitments through last year and now into the first quarter of 2012. And I’m happy to say that our loan pipeline, looking forward, remains healthy.

Credit quality, I’m also happy to say remains very solid and improved noticeably in our criticized and classified assets. Excluding the covered loan portfolio, non-performing assets declined slightly and we had net recoveries of about $4.5 million in the quarter as opposed to net charge-offs in the last quarter. Excluding those covered loans, City National recorded no loan loss provision in the first quarter of 2012 as compared to a modest provision in the last quarter of last year.

Given the improving strength and increased size of our loan portfolio today, City national remains quite well reserved at 2.09% of total loans. Nonetheless, we still expect to have some loan loss provisions during the remainder of this year provided we have the loan growth that we’re anticipating.

On the deposit side, average deposits also hit a new record level, increasing 11% to $20.2 billion. Core deposits now stand at a truly remarkable 97% of the company’s average balances which is a tremendous resource for City National going forward.

Turning to our wealth management businesses, City National’s assets under management grew to $32.5 billion in the quarter, up about 4% from the previous quarter. This increase reflected recent strength in the equity markets.

Trust and investment fee revenue also edged up by about 2% from the fourth quarter. Total wealth management income for the quarter was $39 million. These numbers include revenue but not assets from our minority stake in Matthews International Capital Management, now with $17.8 billion in assets under management. They continue to do a very good job.

Let me just say a few words about the economy. Here in California, we are continuing to see modest signs of continuing improvement and even some improvement in confidence by some but not all investors, businesses and consumers. The unemployment rate in California is still much too high but it has come down just under 2% from its peak in 2010. The state is adding jobs at a faster clip than the country is as a whole and housing inventories and unemployment are still at excessive levels. Some areas and industries however are doing quite well. The port of Los Angeles in Long Beach for example, just had a record month. Home sales in Southern California have increased significantly and the median price has stabilized.

The San Francisco Bay area has clearly been leading the economic rebound for quite some time and over the past year it has grown jobs at twice the rate as the rest of the State. The unemployment rate up there is under 8%, which is about where it is in Orange County as well.

We are continuing to see particular employment strength in technology, healthcare, agriculture and entertainment even some improvement in professional services. For skilled or educated workers, employment opportunities are, for the most part, reasonably strong which is good for the client base we focus on.

More recently we've started to see some improvement in other industries like retail and commercial real estate that had previously been lagging. I'm sure most of you know that New York City's economy is doing quite well. We are even seeing some modest improvements in Nevada as visitor volumes and gaming revenues are rising there.

Early in the quarter, as you may have noticed, we hired a team of bankers who are experienced in the national franchise financing business, this step is a logical one building upon and reflecting our success for a number of years now in financing franchises in the quick serve restaurant industry.

City National continually and selectively adds talented people, products and has recently added a few new strategically located banking offices. We are also investing significantly in our technology. Just last week, we launched our state-of-the-art mobile banking service that gives clients 24/7 access to their accounts on their mobile devices. We did this in part through our new and expanded online channels team.

Assuming that the U.S. economy along with Europe stay on the levels that they’re at, we expect City National to deliver another solid performance in 2012. Certainly we’re off to a very good start here in the first quarter.

Although such low interest rates will continue to put pressure on our margin, City National is heading into the second quarter of 2012 with a fairly positive economic environment to operate in with a strong balance sheet and exceptionally low cost deposit base. A growing clientele in some of the nation’s most dynamic economies, a very talented team of bankers and investment advisors at a number of opportunities.

Let me turn the call now over to our talented Chief Financial Officer for more detail on our first quarter results, Chris?

Christopher J. Carey

Thank you, Russell, good afternoon all. I'm going to add a few words about covered assets, the net interest margin, non-interest income and expense. First covered assets.

Although we recorded a $2.8 million net gain related to updating our cash flow projections, it was partly offset by $1.9 million in net other expenses relating to covered assets. The net impact of these items was income of $0.9 million compared with an income, pre-tax income $0.3 million in the fourth quarter 2011. So all in all, not much of a change from the fourth quarter.

As many of you know, this does not include the more stable interest income from the covered loans that had a core yield of 6.3% in this quarter versus 6.2% in the fourth quarter and as we continue to do, we provide much more detail on page 14 of the financial tables that accompany our news release.

Looking at the margin, you can see that it actually gained 4 basis points from the fourth quarter. In January, we told you that we had begun to shift a small portion of our securities portfolio from short to longer duration. We shifted approximately 1.2 billion of short duration securities to a long duration core book. As you can see from the release, the average duration of total securities at the end of the first quarter was 3.1 compared to 2.4 at the end of the fourth quarter.

Just so that I won’t get questions the whole second quarter, the repositioning that began a few months ago is done. We don’t expect securities yields to go any higher in the second quarter or the near future. Even though we saw margin expansion in the first quarter, we anticipate modest net interest margin pressure through 2012.

Moving to non-interest income, which was down from the fourth quarter but that was mostly due to lower FDIC loss sharing income which I kind of already covered. We also mentioned earlier that income from trust and investment fees grew from the fourth quarter, so did income from brokerage, mutual fund fees and cash management services.

Finally, let’s turn to expenses. They grew just 2% from the first quarter of 2011 primarily because of higher compensation costs. Legal and professional fees were up slightly but still in line with our budget. At the same time, FDIC assessment expanse decreased 54% due to the changes in the FDIC assessment rules and particularly is favorable to us because of our low risk balance sheet.

OREO expense went down 17%, a reflection of the decline in covered assets and also slight decline in our OREO assets, legacy OREO assets. Growing revenue in today’s interest rate environment is a challenge, so we feel good about our expense management, especially due to the fact that we continue to invest for the future.

So my conclusion as Russel said earlier, City National is off to a good start in 2012. We are adding loans, one use improved slightly in the quarter, there are still a lot of room to grow as the economy gains traction and business confidence improves. Our margin is holding up well, all the things considered and City National continues to generate steady amounts of net interest income. Credit quality is very solid and our balance sheet is strong. We have plenty of capital investment, organic growth and select acquisitions.

We are in great position in capturing new opportunities going forward. 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 Steven Alexopoulos of J.P. Morgan.

Steven Alexopoulos – J.P. Morgan Securities LLC

Hey, guys.

Russell Goldsmith

Hi, Steve.

Christopher J. Carey

Hi, Steve.

Steven Alexopoulos – J.P. Morgan Securities LLC

Chris, I know you don’t want to have any questions on moving the low yielding securities, but I did have one or actually two. One is, what is the balance now of low yielding securities now you have done? And secondly, is the right way to think about this, that all deposits that come in about loan growth will end up in the core portfolio?

Christopher J. Carey

Well, first, the answer to the first question, it’s about $2.5 billion, so it’s still pretty healthy. And I think it depends on the second question, it really kind of depends how much the excess is. So we would probably balance out the excess frankly if that’s what happens and split it between the two portfolios.

Steven Alexopoulos – J.P. Morgan Securities LLC

Okay, got you.

Russell Goldsmith

Obviously, our preference is loan growth and we are working hard to try to get a better match of deposit growth and loan growth.

Steven Alexopoulos – J.P. Morgan Securities LLC

Okay. And just maybe to follow-up on the loan growth, looking at the C&I, how much of the growth is coming from the entertainment niche and your efforts there versus the rest of the portfolio?

Russell Goldsmith

Entertainment is a piece of the puzzle, but in this quarter it's not a particularly large piece of that puzzle. There is a little bit more of our other specialty units in particular.

Steven Alexopoulos – J.P. Morgan Securities LLC

Okay. Just one final one, you mentioned San Francisco being strong. Just wondering how well positioned are you guys for what's going on with social media on the C&I side. I imagine jumbo mortgage that you’re pretty strong but what about on the commercial side?

Russell Goldsmith

We don't do a lot of lending to tech companies and the successful social media like a lot of successful tech companies aren’t really significant borrowers. They are typically significant depositors. So we’re not anticipating that the boom there will drive anything in particular on the lending side.

Steven Alexopoulos – J.P. Morgan Securities LLC

Okay, thanks for taking my questions.

Russell Goldsmith

Thanks for being with us.

Operator

Your next question comes from the line of Aaron Deer with Sandler O’neill & Company

Aaron James Deer – Sandler O'Neill & Partners L.P.

Hi, good afternoon guys.

Russell Goldsmith

Hi, Aaron.

Aaron James Deer – Sandler O'Neill & Partners L.P.

In kind of going through the conference calls this week a lot of the folks in the industry have been complaining about pricing pressure particularly on the commercial real estate. So I was curious, that the scenario where you saw some pretty decent growth and I’m curios what kind of competition you are facing there and what kind of terms you're willing to do to bring in the business?

Russell Goldsmith

Well, it’s actually an interesting question because I've gotten that question over the past three years as the sort of political tone is our banks lending. And our experience through this whole period, first of all City National has been a steady and consistent lender through the whole period, but I hate to admit it, but so if some of our competitors. When we go compete for a perspective client almost without exception, there is at least one or two other banks there. So banks as you and other people on the call appreciate have a lot of liquidity today and are eager to put it to work as we were just discussing vis-à-vis our own balance sheet.

So at City National, we try to be competitive and we try to structure our loans in a way that we think are very sound, and you strike that balance, I think we pass on some loans as we always have, because we don’t like to structure or we think the pricing doesn’t match up correctly with the risk in the term. And at the same time, as you can see from our numbers, we had strong production in the quarter. So we are clearly being competitive. I also think people value what our lenders provide here with the kind of customization and the service and expertise that we offer in a broader array of specialty areas in particular. So it’s not all about price, but our pricing is definitely competitive.

Aaron James Deer – Sandler O'Neill & Partners L.P.

That’s great. And then to be – I know even active in particularly in doing more small business and it looks like you hired another team in the small business sales force. How much of that is SBA product and with that are you retaining all of that or any that in sold off?

Christopher J. Carey

If you’re talking about the franchise finance, we retain all of that.

Russell Goldsmith

I think that’s some of the SBA. Well, that’s the comment that we made in the release and in my comments, we’ve done some repositioning and our brand sales force, so that we’re more focused on small business lending. And we have seen a pickup, I think we’ve reported that in the fourth quarter and a pickup in SBA lending. And we keep the bank portion of that and obviously the SBA portion goes to our brands with the SBA.

Aaron James Deer – Sandler O'Neill & Partners L.P.

Okay, great. Thank you.

Operator

Your next question comes from the line of Joe Morford with RBC Capital.

Joseph Morford – RBC Capital Markets

Good afternoon, Russel and Chris.

Russell Goldsmith

Hey, Joe, how you’re doing?

Joseph Morford – RBC Capital Markets

Just fine, how are you?

Russell Goldsmith

Good.

Christopher J. Carey

Good.

Joseph Morford – RBC Capital Markets

I guess question on the first, I was curious about loan pay down activity in the quarter and the kind of C&I, CRE portfolio to that contribute much of the growth and how did that compare with past couple of quarters?

Christopher J. Carey

Well, we still every quarter we have sort of schedule the amortization of the couple of $100 million and then, I mean the unexpected pay down is the stuff that uses variable this quarter was manageable was not $150 million to $200 million range. So let me – we’re just still going to experience some non-schedule pay down, I think that’s going to continue for a while and almost – we always have some of it.

Joseph Morford – RBC Capital Markets

Sure.

Christopher J. Carey

But we were happy what the overall net growth $440 million.

Joseph Morford – RBC Capital Markets

Yep. And what about expectations for the pace of covered loan run off going forward?

Christopher J. Carey

I would say what I’ve been saying just used the pace that I mean use the approximate days that have occurred in the first quarter. I do think eventually it will slowdown, but we saw a pre-pace come down a little bit, but the amortization was still pretty healthy in the quarter. I mean I think the overall rate in the quarter is like 5.8%, which is a tad higher I think but I probably use that rate.

Joseph Morford – RBC Capital Markets

Okay. And then lastly, can you quantify any kind of seasonal impact to the compensation numbers this quarter in payroll tax type of stocks that…

Christopher J. Carey

It’s pretty big, I mean compared to the fourth quarter, our FICO tax is up $6 million and it typically would then go down about $5 million in the second quarter. So that is probably the biggest seasonal thing that has a negative effect on the first quarter earnings.

Joseph Morford – RBC Capital Markets

Perfect, thanks so much, Chris.

Christopher J. Carey

You’re welcome.

Operator

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

Brian Paul Klock – Keefe, Bruyette & Woods, Inc.

Hey good afternoon, Russel and Chris.

Russell Goldsmith

Hey Brian.

Brian Paul Klock – Keefe, Bruyette & Woods, Inc.

It’s actually Chris, I would be following up on Joe’s question on the compensation. So that on the highly compensated employee that’s just like (inaudible) that $6 million you referenced?

Christopher J. Carey

No, I don’t think it is just highly compensated, but….

Brian Paul Klock – Keefe, Bruyette & Woods, Inc.

Okay.

Christopher J. Carey

The best I could find and I guess, but yeah, but it’s – you always get a big run up in the first quarter with bonuses and a lot of people do max out, but you have lots of people that max-ed out during the year, by the time you get to the fourth quarter and then, the clocks starts again in the first quarter.

Brian Paul Klock – Keefe, Bruyette & Woods, Inc.

So if you want to say that just for the $5 million all things are equal 115 is a better run rate to go into the second quarter.

Christopher J. Carey

Everything being equal which never seems to be [out]

Brian Paul Klock – Keefe, Bruyette & Woods, Inc.

Okay and then maybe Russell you can kind of help give a little bit more color on the C&I portfolio, like you said, good solid growth. I guess first is was there any syndicated credit participations in there, did you buy any books of business and if not, then just where there specialty lines of business, I know you talked about entertainment, Maybe you can kind of talk about what kind of products or what kind of industry did you see that growth in?

Russell Goldsmith

On the syndicated, you look at the total production of 740 roughly about 20% of that was syndicated.

Brian Paul Klock – Keefe, Bruyette & Woods, Inc.

Okay.

Russell Goldsmith

What was the other question? We didn’t buy a portfolio; I think that was your other question?

Brian Paul Klock – Keefe, Bruyette & Woods, Inc.

Right, so there is nothing so outside of the syndicate everything was organic and then – I guess outside of trade finance, specialty businesses like venture capital or other sort of technology, life sciences type business, maybe we can talk about what other, where you saw the growth, what type of industry drove that good growth?

Russell Goldsmith

Because actually credit spread around. Yes, the trade finance was a nice pickup as our international team did a nice job and I think we are familiar with the fact that the European banks have created some opportunities, which our people were able to take advantage of and pickup some trade finance and that was a nice piece of it.

And in terms of some of shared national credits, that really did spread across some of our specialty areas, entertainment had a piece, real estate had a piece and so forth. So these are areas where we have expertise, we have relationships and they are a part of the portfolio in individual divisions.

Brian Paul Klock – Keefe, Bruyette & Woods, Inc.

Okay, great. I will get back in the queue, thanks guys.

Russell Goldsmith

Thanks, Brian.

Operator

Your next question comes from the line of Steve Scinicariello with UBS Securities.

Stephen E Scinicariello – UBS Securities LLC

Hi, everybody.

Russell Goldsmith

Hi, Steve.

Christopher J. Carey

Hi.

Stephen E Scinicariello – UBS Securities LLC

Just have quick ones for you. I know you mentioned that line utilization still remains pretty low and I know that that offer such tremendous upside potential for you guys down the road. So I am curious, in your conversations with some of these clients, I mean what is it that’s holding back the use of those lines and what’s it really going to take and maybe timing wise to kind of start ratcheting these things up in the right direction?

Russell Goldsmith

Well, you are right, there is a lot of conversations going on out there and I think it's encouraging, you saw the pickup and our commercial real estate numbers in the quarter. I think that reflects a little bit of a rise in confident and we’re hearing kind of more chatter that's not in the numbers that would seem to suggest.

If that trend continues that we may see more confidence and more borrowing, but I think what affects our client’s is what’s affecting more broadly the country as a whole. You got an economy that’s growing, but it's growing at a modest rate. Lots of businesses are doing fine, but are challenged to see the revenues grow sufficiently strongly that they want to borrow and expand in one way or another.

The debt ceiling crisis last summer, if you go back and track it in the numbers you'll see that what by making that into a political issue and getting the country have to think about default you can see it in the business confidence and consumer confidence numbers last summer that hurt the economy and hurt confidence.

I think we kind of come back from that but you guys follow this closely as well concerns about Europe, concerns about the election, uncertainty about tax policy and at some point people are going to start talking about the fiscal cliff that’s out there at the end of the year.

So there are a lot of variables that I think are causing lots of particularly smaller businesses to hold back and yet as each month moves along and we see that jobs are being created the economy is growing. Europe isn’t exploding, but confidence is building. And I think we’ve seen time and again confidence is a lagging indicator not a leading indicator. Certainly the stock market would have you believe that confidence is rising. So I think there City National’s business clients aren’t going to be all that different, but larger clients as we’ve been saying for sometime somewhat like City National have been the ones that had the resources and the opportunity and the kind of the drive to expand, excuse me.

Stephen E Scinicariello – UBS Securities LLC

It makes sense. And then just one another question, just in terms of the deposit growth continues to be so strong. I’m just wondering kind of just a little bit of a new paradigm that we are in, where you’re continuing to build these relationships and still have the loan, building loan growth as well. I’m just curious what are some of the really key drivers that people just keep continuing to grow their deposits with you guys?

Russell Goldsmith

Well, I think for City National it’s a number of factors. Obviously the macro factor given what we are just saying about the economy a lot of people have cash on the sidelines that they’re not putting to work and interest rates are very, very low. So your alternatives particularly on the short-end are limited, so that clearly that’s a factor.

I think as we’ve seen over the last few years, the City National has been gaining market share, has enhanced its reputation as a company because we stay profitable for the past 19 consecutive years every quarter in that period including this first quarter we are talking about.

Today the fact that City National isn’t a financial player that is shall we say has generated some of the issues that Americans are understandably angry about, we didn’t do sub-prime mortgages, we didn’t do a lot of the things that have cause people to want to switch banks, and we’ve got a terrific team of people that were out there on the street every day, knocking on doors and bringing in new clients.

And then our fundamental business model has been as a private bank and business bank is very much focused on bringing in deposits getting paid for what we do providing state-of-the-art, treasury management, investment management and lending that meets the need of specialized industries that have a lot of cash. So it’s a combination of a whole host of things, I think that’s working for City National today.

Stephen E Scinicariello – UBS Securities LLC

Make sense, thank you so much.

Russell Goldsmith

Thank you.

Operator

Your next question comes from the line of Erika Penala with Bank of America.

L. Erika Penala – Bank of America Merrill Lynch

Good afternoon.

Russell Goldsmith

Hi, Erika.

L. Erika Penala – Bank of America Merrill Lynch

Hi, I just want to, I am sorry, if you had already addressed this. But I didn’t noticed also that the yields on C&I picked up five basis points and directionally whether the banks you’ve seen this go the other way, is there something was unusual that happen this quarter or is it the comment on the firming of pricing within your segment and your footprint?

Christopher J. Carey

I don’t think it’s necessarily the firming in pricing. Although I think that we might be getting closer to that point. But we had a little higher loan fees this quarter than last quarter. So that’s really the reason. So I wouldn’t read too much into it, but that’s probably a little firming, but without the loan fees probably would have been done slightly.

L. Erika Penala – Bank of America Merrill Lynch

Okay, got it. And then just wanted to clarify – you mentioned expenses, you mentioned that excluding some of the seasonal factors, the run rate in the second quarter would be about in line with the first quarter?

Christopher J. Carey

Well, that’s what somebody else said I really said that the we had higher FICO cost by $6 million in the first quarter, which is typical and that that number would go down in itself by roughly $5 million.

And then I think, Brian said if everything else is equal in the run rate would be $5 million less and I said yeah, but normally everything else isn’t equal. But clearly we're going to have that decline in the second quarter. We are still investing and growing the company, I think we're doing it at a more measured phase, because we want still have a solid year from an overall earnings standpoint. It's going to be a benefit from that, because it's a big spike up and it spikes down a lot.

L. Erika Penala – Bank of America Merrill Lynch

And I guess may be the better question to ask is, as we take a step back, clearly your efficiency ratio is higher today because you are very much levered to an improving economy, but in near-term with rates where they are, what’s a good sort of range in terms of how we should think about your efficiency ratio over the next few quarters?

Christopher J. Carey

So I guess first of all, we call it an expense to revenue ratio because I don’t think it necessarily measures efficiency particularly if you have lot of wealth businesses, and we're not really focused on that. We’re focused on trying to grow earnings in a more challenging environment.

And main reason our efficiency ratio is higher is because we're making less net interest income because of the low rate environment. So what we’re trying to do is simply continue to grow earnings at a credible amount and then rates will go up eventually and push our efficiency ratio or expense-to-revenue ratio down and ROE up. So I'm not, we're trying to manage our expenses low and as long as revenue is tough to come by, we’ll keep our expense growth lower.

Operator

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

Jennifer Haskew Demba – SunTrust Robinson Humphrey, Inc.

Thank you, good afternoon. Just curious, I have two questions. Russell, you’ve been having maybe a heightened level of discussions with potential sellers over the last few months, given that we've seen more activities on the M&A front for the industry and stock prices were up a bit?

Russell Goldsmith

Did you have two questions or?

Jennifer Haskew Demba – SunTrust Robinson Humphrey, Inc.

Yeah, and I have another one, yes.

Russell Goldsmith

Okay, thank you, Jennifer. We really don't comment on the dialogue that we may or may not be having. I think as you know, we tend to be actively engaged as a potential acquire we’re talking and looking at a range of things as you saw over the last couple of years and we did that in the FDIC space, we did that buying the ABL portfolio early last year.

I think it's safe to assume that we’re actively engaged in looking at opportunities that meet our criteria fit, focus, and price.

Jennifer Haskew Demba – SunTrust Robinson Humphrey, Inc.

Okay.

Russell Goldsmith

But I think the same time there is still a mismatch out there for a lot of bank, potential banks sellers as to what the realities are of valuations for banks today versus what they were in 2007.

Jennifer Haskew Demba – SunTrust Robinson Humphrey, Inc.

Can you give us some comments on what you’re seeing in your efforts in the southeast in the entertainment niche so far and what are your expectations on long-term and whether you pursue other avenues of business in this area?

Russell Goldsmith

Nothing that SunTrust needs to worry about, I can assure you. The office that we have there in Atlanta, we’re delighted about it, actually I’m looking forward to come down to Atlanta next month for our kind of official opening, but the fact is that office is really aimed primarily at our very robust music industry business, it’s an adjunct to our opening about six months earlier our office in Nashville and obviously ties very much into our strong presence in New York and here in Los Angeles in the music business, the Atlanta office I must say is doing very well by our measures we’ve only been there about five months and we have a little under $30 million in deposits and little over $10 million in loans.

So we’re very pleased with it, it’s obviously very small relative to the overall bank, but it’s a nice addition to our very dynamic entertainment business.

Jennifer Haskew Demba – SunTrust Robinson Humphrey, Inc.

Thanks.

Operator

Your next question comes from the line of Ken Zerbe with Morgan Stanley.

Ken A. Zerbe – Morgan Stanley

Just one follow-up on what prior questions on C&I loan growth, is in your view do you think that the end of period loan balances and CNR actually sustainable at these levels over there unusual or timing differences whatever that may cause that to fluctuate, because the end of period growth is actually very strong this quarter.

Russell Goldsmith

I don’t think there is anything kind of aberrational about it, and obviously we mentioned that we picked up the trade loans, which are tend to be relatively short in duration, but that’s an area that we think we’ll continue to be able to, to at least sustain at this level. So yeah, I think that’s a sustainable level based on what we can see today.

Ken A. Zerbe – Morgan Stanley

Okay, then the other question I have is just on the balance sheet repositioning the $1.2 given the timing [with] happen at first quarter or we’re going to see any residual impact on NII or NIM in second quarter as a result of that?

Christopher J. Carey

Our treasurer tells me no. I don't think there will be much research of comments. I think we’re kind of where we want to be there.

Ken A. Zerbe – Morgan Stanley

Okay, perfect. Thank you.

Operator

Your next question comes from the line of Jeff Davis with Guggenheim Securities.

Jeff King Davis – Guggenheim Securities, LLC

Good afternoon.

Russell Goldsmith

Hi, Jeff.

Christopher J. Carey

Hi, Jeff.

Jeff King Davis – Guggenheim Securities, LLC

The last few quarters the company – maybe three of the last six quarters, you guys have had recoveries in various portfolios. Is there any rhyme or reason to where you are getting recoveries, is it just the credit have been charged off, values have bounced back on whatever the particular credit was or the moral suasion of your borrowers and then how long might we see recoveries run and/or de minimis charge-offs?

Christopher J. Carey

I don't know if there is any big clear explanation. I think some of these we've had litigation where we were right and they were wrong and it just took a while to have the judicial system demonstrate that fact to some people. Some of it is just resolution of situations that took a while to work out or have payments that are stretched out over a period of time.

I do think we've seen some stabilization in real estate values and some improvements, but I don't think that's really contributing to the recoveries that you’re seeing as to get this. The larger ones that come to mind really have involved workouts that we’re in dispute actually several years ago and took a while to sort out.

Jeff King Davis – Guggenheim Securities, LLC

Then Russel, thinking about charge-offs over the next year and then maybe this year into next year, is it fair to say, expectation should be set at a pretty de minimis level?

Russell Goldsmith

Yeah, I think that’s right, I think, the good news is the legacy City National portfolio didn’t have a lot of problems that we haven’t already resolved, and so we've seen the great bulk of the recoveries that we’re going to get from that I think.

Jeff King Davis – Guggenheim Securities, LLC

Okay, thank you.

Russell Goldsmith

Thanks.

Operator

Your next question comes from the line of Casey Haire with Jefferies.

Casey Haire – Jefferies & Co.

Hey good afternoon, guys. Just a couple of follow-ups on the M&A discussion. In terms of, I guess ideally, would you guys, in a perfect world, would you guys like a bank target or an Asset Manager?

Russell Goldsmith

That’s kind of like asking me, which one of my children do I like best, we love both businesses, and I think we've demonstrated, we’re ambidextrous that we can buy businesses in either space, and really look for opportunities that are great fits that share our focus that are priced on a reasonable and fair basis. We want to grow both sides of our company, we can do that through organic moves, and we can do that through acquisitions and so, we look in both areas. And given the strength of our balance sheet, the capital that we have, the talent of the team in this organization. We can do deals in both zones.

Casey Haire – Jefferies & Co.

Okay. And on the bank side of things, what do you see is kind of like a likely target size, just given, sort of the broader environment out there?

Russell Goldsmith

Well, you never say never, but I think we’ve got a long track record of doing acquisitions at a size level that are manageable. So we don’t like bet the bank on any individual transaction.

I think that on the bank side, our focus would be banks that are in our existing footprint around the country and probably the size of the bank that we on a kind of a normal basis would be looking at is probably somewhere between $0.5 billion and $2 billion or $3 billion in size. Whether that kind of opportunity presents itself in a way that we find attractive is a real question, but we continue to look at those opportunities and my guess is over the next few years something will work out but we’ll see.

Casey Haire – Jefferies & Co.

Okay and just last one from me. Just as a refresher in terms of provision as loan pipeline sound pretty good what’s a good rule of thumb in terms of a ratio to assign to, to loan growth in terms of provision. Clearly it depends on the mix but just as a general rule of thumb is there a coefficient to use?

Christopher J. Carey

Yeah, I don’t know if that is a good rule of thumb. So I’d rather not get one out.

Russell Goldsmith

It depends a lot on what the loan is and quarter-to-quarter it’s going to be dominated by what the entire portfolio is doing is going to be probably much more significant. What we’ve been saying is that because we think we’re going to grow loans from here we don’t want people to assume there will be no provision going forward. So we think it’s more of a growth story than anything in terms of any need to increase the reserves and we expect credit quality to stay strong. So hopefully and it’s our view that the size of the provision is not going to be the big issue in 2012.

Casey Haire – Jefferies & Co.

Okay. Thank you.

Operator

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

John G. Pancari – Evercore Partners Inc.

Good afternoon.

Russell Goldsmith

Hi, John.

John G. Pancari – Evercore Partners Inc.

Can you give us a little more color on the growth in the commercial mortgage book, I know you mentioned that has been – you saw a good increase and up 5% in the quarter, just want to see where you are actually seeing the opportunities that you’re putting on?

Russell Goldsmith

It’s a mix and it’s in our kind of traditional spaces with our kind of clients. So you’re seeing owner occupied, you’re seeing industrial, we stay out of speculative development, we stay out of things like hotel, we do have some weak financing in our real estate portfolio that’s kind of the mix on the commercial side. Some of its investment, some of its lesser amount would be kind of development.

John G. Pancari – Evercore Partners Inc.

Okay. All right. And then on the trade finance you mentioned that you saw that tick up there, can you quantify how much of a change you saw in the quarter and how big that portfolio was right now?

Russell Goldsmith

A little over $100 million, I think $125 million plus there. And I think the portfolio is a little north of $200 million.

John G. Pancari – Evercore Partners Inc.

Okay, all right. And then lastly, can you talk a little bit about one more detail about the loan price competition you’re seeing and if you’re also seeing pressure on the loan structure as well?

Russell Goldsmith

Well, as I trying to indicate, I think City National is a competitive, but conservative lender and so at any point in time, we’ll see some other institution and it varies by space and sector and geography that may be more aggressive on price or maybe more aggressive on structure, there is always somebody that’s going further than we think they should, and over the last three or four years some of those people demonstrated that they went too far.

So it’s competitive out there, but as we demonstrated this quarter, we’re able to make meaningful number producing over $700 million in new loans on a basis that look interest rates are low, so margins are under pressure, but cost of funds are also low. So we’re able to book loans that are competitively priced, I don’t think the pricing in the first quarter is all that different from the fourth quarter and structures haven’t for our bank changed materially either.

John G. Pancari – Evercore Partners Inc.

Thank you.

Russell Goldsmith

You bet, thank you.

Operator

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

Brian Paul Klock – Keefe, Bruyette & Woods, Inc.

Hey, guys just real quick, and I apologize if you did already answered this question I apologize, the residential mortgage non-performing loans did pick up this quarter after dropping off quite a bit through the – throughout 2011, was there anything that drove that increase in the residential mortgage NPLs?

Russell Goldsmith

It’s happy to hear from you again Brian, it’s were – we are talking about really small stuff at this point relative to everything else, it’s just three mortgages, and I think one was in New York and two was in Northern California. So there is really no trend that’s borrower specific situations and out of a $3 billion, $4 billion in the home equity, it’s an uptick, but it’s pretty modest.

Brian Paul Klock – Keefe, Bruyette & Woods, Inc.

Right, I mean maybe your asset quality numbers continue to be pristine so just wanted to see if there is anything to worry about, but thanks for taking my followup.

Russell Goldsmith

I’m sure there things to worry about, that’s not one of them.

Brian Paul Klock – Keefe, Bruyette & Woods, Inc.

All right, thanks.

Russell Goldsmith

Thank you.

Operator

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

Russell Goldsmith

Thank you Christie and thank you all for joining us for our call today. As always, we appreciate your interest in City National and look forward to talking with you again at the end of the second quarter. Meanwhile, Chris and I are happy to take up any questions that may occur to you later. Thank you very much.

Operator

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

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