Floating loans to movie producers and rock stars may not be the banking industry's cure-all. But for a pair of banks, the entertainment business has provided a well-timed safe harbor.
City National Corp. has continued to expand its growing entertainment lending group outside of its Los Angeles base, hiring bankers in New York and Nashville, Tenn.
Avenue Financial Holdings Inc., based in Nashville, has built its $370 million loan portfolio largely around entertainment since the company was formed in 2007.
Entertainment lending helped both companies offset exposure to businesses that were hit hard during the recession such as mortgages and commercial real estate. (About a quarter of the loans at each bank involves entertainment.)
To be sure, entertainment lending does have risks. The film industry is struggling with the rise of Internet-based distribution, while the music industry faces challenges from Internet downloads.
Ron Samuels, Avenue's chairman, president and chef executive, is optimistic. He says that the emergence of young musicians such as Justin Bieber and Taylor Swift — largely due to the Internet — is a good sign. "You can't ignore CD sales being down," but a new model is being defined, he says.
Debora Vrana, a spokeswoman for the $21.3 billion-asset City National, declined to comment.
Still, entertainment "has held up very well during the downturn," which has helped City National, says Aaron James Deer, an analyst at Sandler O'Neill & Partners LP. (Deer does not follow the $561 million-asset Avenue.)
It certainly helps both banks to have ties to show business.
Russell Goldsmith, City National's president and chief executive, is a former chairman of Republic Pictures, and Bruce Rosenblum, the president of Warner Bros. Television, is on the board.
Avenue lists Kix Brooks, formerly of the country-music duo Brooks & Dunn, as a founder and Joe Galante, a former Sony Music Nashville chairman, once was a director.
The companies also remain healthy by widely accepted metrics. City National Bank had a nonperforming assets ratio of 3.44% at March 31, and a total risk-based capital ratio of 15.91%, according to data from the Federal Deposit Insurance Corp. Avenue Bank's nonperforming assets ratio was 1.68% at March 31, and its total risk-based capital ratio was 12.26%.
City National and Avenue typically fight against bigger rivals for entertainment clients. They include Wells Fargo & Co.'s Wells Fargo Private Bank and Republic Bank, which regained its indepedence last year after years of ownership by Merrill Lynch & Co. and Bank of America Corp.
A key way to compete involves luring talent from the big banks. Earlier this month, City National hired bankers from Comerica Inc. and Wells Fargo to join its New York office. In June, it lured another Wells Fargo banker in Nashville.
From a banking perspective, the New York and Nashville markets are "big deposit generators," says Jeff Davis, an analyst at Guggenheim Securities LLC. "It's not just a niche for City National, it's a meaningful piece of their business," he says.
City National does not detail where it makes loans in the entertainment industry. Analysts say the business has three components: private banking for affluent clients, transactional loans for production and other entertainment projects, and daily operational loans to ancillary businesses.
The latter category, perhaps the least sexy, is believed by Deer to be the company's biggest business. It would include post-production houses, boutique animation studios and talent agencies. Blockbusters are not a focal point. "I don't think City National is doing a lot of financing of the new Harry Potter film," Deer says.
City National has reportedly been involved with more than 60 film projects since 1995, according to Internet Movie Database. Its projects include "The Kids are All Right," starring Annette Bening and Julianne Moore; and "Vicky Cristina Barcelona," a Woody Allen film starring Penelope Cruz and Scarlett Johansson.
The business has offset setbacks elsewhere. City National's $167 million purchase of Business Bank Corp. in 2007 put it in Las Vegas, Nev., right before the city's real estate market crashed.
City National's exposure to Las Vegas real estate, as a percentage of its total loan portfolio, is fairly minor, Deer says. City National said in its March annual report that it has "very few residential mortgage loans in Nevada."
Chip Roame of bank consultant Tiburon Strategic Advisors said entertainment became a larger piece of City National's pie because real estate and small business lending shrank. But entertainment has remained relatively healthy and City National has used it to buffet against losses, Roame said.
Entertainment remains City National's bread and butter. The entertainment industry, as a portion of City National's commercial loans and leases, grew from 21.5% to 22% from 2009 to 2010. It remains the company's largest industry for commercial loans and leases, with about $994 million in total loans and leases.