Innovation

Getting In On The Ground Floor Of Pot And Hemp Banking

Two Pennsylvania-based banks are at the cutting edge by offering banking services to hemp and medical marijuana companies

George Yacik

March 24, 2020

Wyomissing-based Customers Bank is taking what might be considered the safer route, offering deposit services to companies in the hemp industry, which is legal both in many states and at the federal level. But Jonestown Bank & Trust is offering banking services to companies that deal in medical pot, which is legal in the state but still illegal at the federal level.

Jonestown has been providing banking services to medical marijuana companies for over a year, after it was approached by an existing customer who was getting into the business. For support the client brought along (now former) state Sen. Mike Folmer, who advocated for the legalization of medical marijuana in Pennsylvania and asked the bank to consider it.

“We spent nine months prior to that examining and determining whether this was something we wanted to get into, because initially I really wasn't for it, for the same reasons as just about everyone else in our industry,” says Troy A. Peters, president and CEO of the $619.5 million asset community bank. “I wasn't real keen on the idea. We did a lot of due diligence. We talked to a lot of banks around the country, our attorneys, our regulators, both state and federal. Nobody said we can't do it. We ultimately stepped into it and it's been good.”

“We felt we have a strong enough compliance program and culture to pull it off,” he adds. “We felt that's what we're here for. We are a community bank and we want to serve the needs of our community. Our stance is, if it's legal we should be able to bank it. Do you want that cash in a regulated system or under the mattress?”

One concern is that one of the bank’s pot customers might do business with someone in another state, which might raise a red flag. But Peters says “medical marijuana is pretty tightly controlled in Pennsylvania. The buyer must be a resident of Pennsylvania” and have a state-issued card to buy it.

“Banks have to balance providing services to legal businesses with making sure they aren't getting involved with financing illegal activity,” notes Michael Perito, managing director at Keefe, Bruyette & Woods, where he covers the banking industry. “Hemp is legal but with a lot of restrictions. Where some of the issues come in is when people that are producing hemp also produce related but not legal substances, that are legal state-by-state but not at the federal level.”

Customers Bank began lending to companies in the hemp industry after the 2018 Farm Bill was passed by Congress. While hemp production and sale are now legal at the federal level, it is still illegal in some states – in other words, just the opposite of medical marijuana, which is legal in many states but illegal federally.

“It is an underserved legal business that we think is an opportunity for us to grow deposits and to serve that market,” says Tim Romig, the bank’s executive vice president, managing director & market president for Pennsylvania and New Jersey. “This is 100 percent legal. There is no reason not to bank these folks.”

“It doesn't happen often that regulation creates business opportunities, it usually makes them more difficult,” Romig says, referring to the passage of the farm bill. “This is an opportunity where regulation is going to make it easier and create an opportunity for us to do business with a group of folks that we haven't been able to do business with before.”

Still, banking hemp companies isn’t like banking other industries. “Because of the due diligence we do, which involves a site visit and background checks, the onboarding process takes a little bit longer than for regular customers,” Romig says. The bank has to satisfy its internal compliance as well as regulators that the customer doesn’t stray into the federally-illegal pot business.

That’s one reason why neither Customers nor Jonestown is making loans to these clients; they’re only taking deposits until the regulatory smoke clears.

“If the hemp customer drifts over into the medical marijuana business, that would be an illegal business for us to bank,” Romig says. “If it's a deposit account it's a lot easier to end that relationship than if we had extended a loan. But we are looking at putting in more due diligence in place to make loans,” possibly by early next year. “The hope is that in the interim we get legislative relief on a federal level on medical marijuana.”

Jonestown’s Peters notes that there are three tiers to companies in the medical pot business: dispensaries and growers, those who provide products and services to the industry, and “incidental” players, such as a landlord of a building that houses a dispensary. The bank will make loans to the second and third tiers but not the first.

“The concern with lending to tier 1 companies is if their property is seized, your lien position goes out the window,” he said. “You could wind up with having a large loan with no collateral.”

Likewise, Customers Bank won’t do business with retailers that sell hemp-based products, like CBD oil, in case they do business in a state where it’s illegal.

However, Perito from Keefe, Bruyette & Woods sees opportunities for banks in these businesses as legalization spreads.

“There is a first-mover advantage that can be material if you prove to customers that you're willing to bear some risk for them to give them the services they need,” Perito says. “There could be some goodwill that's built up by that over time.”

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