Call it a creative power play.
City National Bank's Russell Goldsmith, whose family-owned Los Angeles bank has a powerhouse of wealthy clients, definitely drew attention this week when the bank said it was teaming up oddly enough with three local utility companies on a community reinvestment program.
Goldsmith's goal is to tap into the utilities' network of suppliers owned by minorities, women, disabled veterans and LGBT community members who need small-business loans but lack access to capital.
The bank has committed to lend those firms $350 million as part of an overall $4.2 billion commitment in small-business loans of $1 million or less. That commitment is, in turn, a big chunk of the bank's five-year, $11 billion Community Reinvestment Act spending plan that it announced in April as part of its proposed sale to Royal Bank of Canada.
Granted, banks often roll out high-profile CRA packages when they are engaged in a major M&A transaction. Yet the bank's unusual partnership with the utilities shows a creativity that other banks should imitate when confronted with intractable socioeconomic problems, experts said.
"It seemed like an innovative approach to a challenge that the whole banking industry faces," Goldsmith said in an interview. "We all want to help minority and women entrepreneurs grow their businesses and [the utilities] are vetting and working with suppliers and often times they're underfunded and need financial advice and support."
The utilities Southern California Gas Co., Southern California Edison and San Diego Gas & Electric are co-hosting three workshops in which suppliers with good credit will be invited to learn more about City National's banking products.
City National, which is often referred to as "the bank to the stars" because of its long ties to Hollywood, did not come up with the idea itself but moved quickly to embrace it.
Rather, Dennis Arriola, the president and CEO of Southern California Gas, approached Mike Cahill, a City National executive vice president and general counsel, to find a way in which the two companies could work together.
"When I learned about City National's desire to expand its lending programs to smaller and diverse companies, it just made sense," Arriola wrote in an email in response to questions from American Banker. "It's a 'chicken and egg' dilemma: these entrepreneurs have calculable and competitive services to provide companies like SoCalGas, but can't grow fast enough due to capital and liquidity constraints."
To be sure, City National has plenty of reasons to do this right now.
The bank wants to garner the support of consumer advocacy groups and avoid having public hearings held by the Federal Reserve on its proposed sale to the $1 trillion-asset RBC.
Still, Paulina Gonzalez, the executive director of the California Reinvestment Coalition, which is not opposing the sale, called City National's effort to work with utilities to lend to diverse small businesses a unique opportunity.
"This initiative is an example of the type of innovation that can result from thoughtful and significant CRA plans," Gonzalez said.
Robert Gnaizda, a longtime bank critic who is now general counsel to the National Diversity Coalition, an ad hoc group of 14 community organizations, criticized the memorandum of understanding between City National and SoCalGas as too weak. The agreement, signed last month, states specifically that the partnership is informal and allows either party to withdraw with 10 days' notice.
The coalition has filed a formal protest with the Federal Reserve against the RBC deal and wants the agency to hold a public hearing.
Regulators should ensure that City National is "a bank for the poor as well as the wealthy," Gnaizda said.
Ken Thomas, an independent bank consultant, said it was unusual for a bank to "come out swinging on a diversity initiative" so early in a merger-approval process. The deal was announced in January and is slated to close by yearend.
Moreover, he encouraged other banks to show the same kind of creativity. "This is a very positive and clearly innovative development worthy of CRA credit that hopefully will be expanded beyond just utilities to other industries where we need more diversity," Thomas said.
More than 20 years ago, California's legislature enacted a series of statutes to encourage supplier diversity, with specific goals for 34 utilities and telecommunications companies. The California Public Utilities Commission oversees the program, and an independent third party called the Supplier Clearinghouse certifies that businesses have a minimum of 51% ownership and control.
The clearinghouse is "looking at the balance sheets, the ownership and tax records to really understand the businesses and say they meet the criteria," said Stephanie Green, the CPUC's executive director of utility supplier diversity, business and community outreach.
City National's Goldsmith said he was attracted to partnering with utilities because of the extensive vetting process.
"We are lending and investing those dollars in a prudent and responsible way where we have a high likelihood of getting our loan repaid and fostering the growth of entrepreneurs," Goldsmith said.
Cahill, City National's general counsel, called small-business loans a "sweet spot" of its CRA commitment but said an additional goal is to originate $700 million in residential mortgages to minority borrowers.
"There's an opportunity to develop banking relationships and to develop residential mortgages by lending to those small businesses who reside in [low- and moderate-income] Census tracks," Cahill said.
The 1977 Community Reinvestment Act established a regulatory regime for monitoring the level of lending and investments in neighborhoods traditionally underserved by lending institutions.
Working with small businesses is not a big change for the bank, Goldsmith said, which is in the eighth year of a 10-year, $17.5 billion CRA commitment that will be superseded by the new CRA commitment when the sale to RBC is completed, Goldsmith said.
"We are a bank for entrepreneurs," Goldsmith said. "And we've come up with a new way to reach out to promising, proven minority- and women-owned businesses."