California Business Bank's latest regulatory consent order tells a cautionary tale of how regulators are thinking about loan concentrations.
The Irvine, Calif.-based bank has long been the subject of regulatory consent orders, with its latest one issued by the Federal Deposit Insurance Corp. and California Department of Financial Protection and Innovation (DFPI) in May marking its fifth since 2010. While many of the consent orders have encompassed the same concerns over management, this latest one touches on a new topic: the bank's gas station portfolio.
Under the order, California Business Bank must write and implement a plan for addressing its commercial real estate (CRE) loan concentration within 90 days. CRE loans accounted for 61.4% of California Business Bank's total loans and 193.0% of the bank's risk-based capital in the first quarter, according to S&P Global Market Intelligence data.
In an interview with S&P Global Market Intelligence, the bank's President and CEO Thomas Meyer said its ratio of gas station to risk-based capital is just above 150%. The portfolio also has no delinquencies or classified assets, the CEO added.
Still, "with that kind of an exposure, that's why the examiners have been calling for a report and wanting us to put a limit, as you do other commercial real estate sectors, on how much you would lend against it," Meyer said.
The gas station portfolio is a niche business line for California Business Bank and regulators wanted reassurance the bank knew what it was doing given the concentration, Meyer said, adding that there was "nothing out of the ordinary," in his opinion, about the consent order.
Concentration risk
At a time when gas stations are one of the less concerning sectors within CRE, the order showcases regulators' growing concern about concentrations in any one sector, whether it is stressed or not, industry experts told Market Intelligence.
"It sounds like they have a concentration risk associated with those types of loans that has caught the attention of the FDIC," Gary Bronstein, the leader of Kilpatrick Townsend's financial services team, said in an interview. "The regulators have been ratcheting things up in the last several months, so I think you're going to be seeing more of these."
An outsized concentration of loans in a single industry raises a red flag for regulators because the risk of credit losses is higher should that industry experience problems, Bronstein said.
Regulators are keeping a particularly close eye on CRE.
"If you're 50% commercial real estate, especially now given the market and the anticipated downturn in commercial real estate, you're going to draw a little bit more scrutiny. [Regulators would] like to see a little bit more diversity," Dennis Merkley, a Howard & Howard attorney who advises financial institutions, said in an interview. "The high concentration is definitely an issue."
However, the gas station industry appears to be holding strong, even in a state like California where electric vehicles (EVs) are making up a larger percentage of cars on the road.
California has been a leader in passing laws that bolster clean energy and EV adoption, with EVs reaching 25% market share of new passenger car and truck sales in the state last year.
Even so, gas-powered vehicles continue to make up a large share of California's fleet, and so far, variation in demand for oil and gas is probably not enough to put any of the state's gas stations out of business, said Alan Jenn, an assistant professor at the EV group of the Institute of Transportation Studies at University of California, Davis.
"The shifts that we've seen thus far are, I would say, workable for businesses to still be in operation," Jenn said in an interview.
Long-standing management issues
Unlike the new concerns about California Business Bank's gas station concentration, management concerns have long plagued the bank's consent orders.
Regulators' concerns about the bank's management also could have made its CRE portfolio more of a concern for the FDIC, said Jonathan Joseph, the founder and a partner at California-based law firm Joseph Cohen & Del Vecchio, which does not represent California Business Bank.
"To the extent that those loans or some of those loans in their gas station portfolio aren't performing well or are rated substandard or worse by the bank's regulators, then the bank may need to have a team which has experience with workouts and restructuring," Joseph said in an interview.
The latest consent order specifically calls for the bank to have and retain "a chief executive officer with proven ability in managing a bank of comparable size and risk profile" and "a senior lending officer with significant lending, collection, and loan supervision experience and experience in upgrading a low-quality loan portfolio."
Meyer has worked at California Business Bank since June 2023, and the bank's chief credit officer, Sean Henning, has been with the bank since January, Meyer said. California Business Bank hired a CFO in November 2023, but the role has been vacant since May, he added.
Prior to filling those roles, the bank's CEO position had been vacant since February 2021, the CFO position had been vacant since June 2022 and the chief credit officer position had been vacant since September 2021, according to a December 2023 California DFPI settlement agreement.
In the interim, an executive committee consisting of Board Chairman Richard Tan and two other board members managed the bank's day-to-day operations, according to the DFPI settlement.
On top of the vacancies, California Business Bank has experienced turnover with at least five other CEOs since 2010 and at least two other CFOs since 2010.
