East West Bank in Pasadena, California, has agreed to participate in providing a $60 million credit facility to a company that lends to cannabis businesses, according to the borrower.
The deal suggests that some relatively large banks — after long leaving the pot industry to rely on smaller banks and credit unions, or more expensive nonbank lenders — are slowly becoming more comfortable doing business with marijuana-related companies.
The borrower on the revolving loan, made by East West and a second, unnamed bank, is AFC Gamma, a publicly traded company that lends to the marijuana industry.
The West Palm Beach, Florida-based company plans to use the proceeds to fund loans for new and existing borrowers, as well as for general corporate purposes. The size of the credit facility may be increased to $100 million under the deal.
In an interview, AFC Gamma Chief Executive Leonard Tannenbaum praised East West for lending to the cannabis industry, saying that marijuana companies need more banks to become involved — offering deposit services, armored car pickup services for cash, payment services and loan options.
“We need more banks to accommodate our customer base,” Tannenbaum said.
The two banks that are participating in the credit facility, including East West, collectively have more than $70 billion of assets, according to AFC Gamma.
East West, which had assets of $62.2 billion at the end of the first quarter, has been dipping its toes into providing services to the marijuana industry in recent months.
The bank, which declined to comment for this story,
In its February annual report to investors, East West’s risk disclosures included a new sentence about its services to marijuana-related companies
“We face certain legal, reputational and financial risks as a result of serving customers in new or evolving industries that are subject to changing, and at times conflicting, laws, such as digital currency or cannabis related businesses,” East West said in the filing.
Providing banking services to marijuana-related companies is legally fraught because cannabis, though legal for medicinal or recreational purposes in 40 states, remains illegal under federal law.
Banks that serve marijuana businesses are required to develop detailed frameworks for approving and monitoring customers, which are deemed high-risk under anti-money laundering rules. Such procedures may include doing due diligence on new cannabis-related customers and making periodic visitors to their physical locations.
The revolving loan to AFC Gamma carries a floating interest rate of the prime rate plus a half of a percentage point, with a minimum prime floor of 4%. The relatively low interest rate will allow AFC Gamma to capture a wider spread between the rate it pays to borrow and the rate it charges its customers, Tannenbaum said.
Valley National Bancorp, a $43.5 billion-asset lender in Wayne, New Jersey, is another regional bank that provides services to marijuana companies.
Valley National started offering deposit services to a few medical-use marijuana companies in 2020, but it has recently expanded into providing services to recreational-use dispensaries and has also offered limited loans for real estate purposes, according to recent financial disclosures.
