Regional banks, credit unions begin lending to pot firms

Loans to marijuana companies, long taboo even at banks and credit unions that take deposits from cannabis firms, are finally gaining a degree of mainstream acceptance.

A handful of insured depository institutions, including two banks with more than $40 billion of assets, have started offering credit in states where the drug is legal, according to interviews with lenders and industry consultants as well as publicly available information.

The newfound openness to lending comes as the U.S. cannabis industry continues to mature and builds a heftier financial track record. Some banks and credit unions have been accepting deposits from pot companies in recent years, in accordance with stringent federal guidelines, which has given them an unusually deep understanding of those businesses’ cash flows.

“Banks are realizing their visibility into these businesses is better than any other commercial loan that they have, because they see the activity day in and day out,” said Kevin Hart, founder and CEO of the compliance firm Green Check Verified, which works with 50 banks and credit unions.

Loans represent a big step beyond the initial deposit services that banks and credit unions began offering to the cash-heavy pot industry several years ago. For cannabis businesses that have expensive non-bank debt, banks can offer a potential avenue for refinancing into more favorable terms, even as they continue to pay higher rates than other companies.

One of the regional banks that is establishing a presence in cannabis lending is the $41 billion-asset Valley National Bancorp in New Jersey, which has made a small number of real estate-backed loans. The entry into lending follows an initiative to accept deposits from marijuana businesses, an effort that now includes several dozen clients, said Rick Kraemer, the bank’s chief financial services officer.

“I think we are starting to gain better comfort,” Kraemer said, “and from what I understand, the rest of the industry is as well.”

Pasadena, California-based East West Bancorp has also offered credit. The bank has previously posted a job opening for a portfolio manager who would evaluate credit applications from “existing and new” cannabis-related businesses.

East West got a mention in a publication by the consulting firm MGO, which lauded the $57 billion-asset bank for “demonstrating the benefits of providing an even playing field for cannabis entrepreneurs” by offering loans and other banking services.

Janie Beaman, an East West spokesperson, said that the bank is conducting a small pilot program that is invitation-only and is not accepting applications for new accounts. She declined to provide more details on the bank’s marijuana banking program.

On a recent podcast, East West national relationship manager Peter Su, who joined the bank this year to focus on cannabis clients, said he was told that regulators encouraged East West to begin offering services to marijuana companies.

“Mind you, this is before my time here, but I’m told that that was kind of the evolution where the regulators came to them and said, 'Look we want to see bigger banks ... get into this space. Are you willing?' So they dipped their toes in,” Su said during a podcast hosted by a cannabis-focused venture capital firm.

A Federal Reserve Board spokesperson declined to comment Monday, and a representative of the San Francisco Fed did not immediately respond to a request for comment.

A spokesperson for the California Department of Financial Protection and Innovation, which also regulates East West, pointed to guidance that the agency released in 2019 to help give clarity to banks and credit unions that were looking to offer services to the industry.

The involvement from Valley National and East West is significant in that cannabis banking has historically been the realm of smaller banks and credit unions. The regional banks’ entry is welcome news for bigger operators that might need larger loans, consultants say.

Other smaller lenders that have offered credit to marijuana-related businesses include Illinois-based Credit Union 1, Seattle-based Salal Credit Union and Massachusetts-based GFA Federal Credit Union, according to executives at those institutions.

To be sure, the vast majority of banks and credit unions are continuing to steer clear of any businesses linked to marijuana, wary of any potential legal ramifications since the drug remains illegal at the federal level.

Only 684 out of the thousands of U.S. banks and credit unions were offering services to marijuana-related businesses as of last December, according to the Financial Crimes Enforcement Network, which receives suspicious activity reports from banks that serve the industry. That number was up substantially from 2018 but down slightly from just prior to the pandemic.

Some banks that offer deposit services either have not made the jump into loans or are not offering credit beyond a few cannabis-related customers. The result is that almost all of such businesses that need to borrow are forced to turn to more expensive non-bank lenders.

“Most of our clients in the regulated industry are working with banks for checking and savings, but the idea of getting a loan from the bank is just completely foreign to them,” said Aaron Lachant, a partner at the Los Angeles law firm Nelson Hardiman who is also board chair of the cannabis consulting firm MMLG.

Federal lawmakers have sought to give the banking industry more legal clarity through the SAFE Banking Act, which cleared the U.S. House of Representatives earlier this year. But the bill has been stuck in the Senate, where some Democrats have sought to fold it into a broader package that legalizes the drug and expunges marijuana arrest records.

For now, many loans involving marijuana companies are tied to real estate — lending to a strip mall operator that has a dispensary as a tenant, for example. That is largely a function of how easily collateral like land or a storefront can be repurposed if the situation goes south.

“You can turn a dispensary into any other retail operation, but if you’re talking about things in a [cultivation] facility like lights and processing equipment, that’s pretty specific to their industry,” said Troy Peters, president and CEO of Jonestown Bank & Trust, a community bank in south central Pennsylvania that has done some real estate loans. Pennsylvania has legalized marijuana for medical purposes, but not for recreational use.

Valley National, the New Jersey-based regional bank, is similarly hesitant to broaden into non-real estate-backed loans before the industry gets more legal clarity on how to serve marijuana customers.

But non-real estate loans are taking place at some institutions. Seattle-based Salal Credit Union, for example, offers secured capital equipment loans in addition to commercial real estate loans.

In one notable deal, an unnamed bank is offering a $12 million revolving credit facility to the Oakland, California-based cannabis retail chain Harborside. Tom DiGiovanni, Harborside’s chief financial officer, said the loan is another sign that the industry has become less “radioactive” to financial institutions.

Partner Colorado Credit Union, one of the earliest financial institutions to offer services to the cannabis industry, is also looking to expand beyond its current pipeline of real estate loans, with plans eventually to roll out equipment and construction loans. It will do so through Safe Harbor Financial, a cannabis banking entity that it owns.

Sundie Seefried, who is stepping aside as Partner Colorado’s CEO next month to lead the Safe Harbor division, said that the new banking entity is planning to launch a line of credit for long-standing cannabis clients in July. That product will help give clients flexibility to deal with any delays in payment processing and courier services, she said.

“We know the money is in transit, they know the money is in transit, but the money didn’t get there in time for them to make payroll,” Seefried said. “They can pay off their line of credit pretty quickly once the money comes in.”