The Oregon bank that swung open its doors to Colorado’s legal-marijuana industry has had a long history of financial problems that only recently appear to be subsiding.
At one point, records show federal authorities threatened to close MBank if it didn’t shore up balance sheets wrecked with bad loans and poor working capital. Scores of community banks nationally were shuttered during the recent financial crisis.
By all accounts, MBank should not exist today, a fact its chief executive, Jef Baker, readily admits. But MBank eventually prevailed, and the $165 million institution averted takeover and sale.
“Our bank years ago should have died,” Baker told The Denver Post. “It was lacking capital and had seriously troubled assets. We had to work really hard on being creative on how to survive.”
Regulatory agency reports show it averted disaster mostly because the bank divested itself of millions of dollars in poorly performing real estate loans and a backlog of foreclosed homes.
In just one year, nonperforming assets were slashed from 51.5 percent to 1.2 percent. Similarly, MBank zeroed out the repossessed homes on its balance sheets, driving delinquent loans from more than $4 million down to an imperceptible $183,000, according to quarterly financial statements.
Bauer Financial, which rates banks based on their financial statements, recently ranked MBank with 3.5 out of 5 stars, demonstrably better than the two-star “problematic” rating it earned just a year ago.
In a word, MBank is profitable. But its open venture into the marijuana sector has raised eyebrows in the financial world.
“There’s certainly a liquidity risk if you have too much of a concentration in any one area, and concentrating on this area makes the move even more interesting,” said Jenifer Waller, Colorado Bankers Association’s vice president. “You need a bank that can handle that heavy concentration. And when it’s an illegal industry, it raises all kinds of issues.”
Recreational marijuana is legal in Colorado and Washington but remains illegal under federal law.
“We’re not one that advocates marijuana in any way; that’s up for others to decide,” Baker said. “Our job is to provide services to those who need it. Our core value is providing banking to the underserved.”
Baker was the bank’s CFO in 2009 when it ran awry of the Federal Deposit Insurance Corporation, which ordered it to stop risky business practices including carrying an inordinately large number of poor-quality loans, federal documents show.
Financial reports show the bank had been hemorrhaging money — losses of $2.8 million in 2008 and $13.4 million in 2009 — and regulators insisted it shore up its books or prepare for closure.
Its CEO resigned after less than a year on the job, bringing founder Rex Brittle out of retirement. The staff was cut by half, overhead was trimmed and the community bank stopped being so involved in the community.
The bank limped along, gut-shot by a housing bubble that blasted its balance sheet. The FDIC said in a July 2009 cease-and-desist order that MBank and its parent, Merchants Bancorp, needed to ditch “a board of directors which failed to provide adequate supervision over … the active management of the bank.”
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By late 2010, the bank’s condition continued to deteriorate and the FDIC gave a harshly worded ultimatum: Find cash, or find a buyer.
It appeared a savior came in the form of a $30 million infusion of capital from LIME Financial Services, a Portland-based venture-capital investment firm. Then, shortly after balance sheets showed a profit, MBank backed away from the deal, its board believing it could recover on its own, according to area media reports.
Market watchers say the bank rallied to raise $5 million on its own, mostly from board directors and key employees. The bank now boasts a clean slate of bank-owned foreclosures that once topped $10 million.
“We can certainly appreciate those who struggle,” Baker said of marijuana businesses in need of bank accounts. “That’s why it’s a good fit.”
David Migoya: 303-954-1506, firstname.lastname@example.org or twitter.com/davidmigoya