This past week, I had the privilege of attending the Bank Director Bank Audit & Risk Committees Conference in Chicago. This was the first time since leaving my post as SVP of Operations at a community bank that I’ve attended a bank-specific conference. While it was good to catch up with current overall Audit and Risk trends in banking, I couldn’t help but view the conference through the green colored glasses of cannabis banking — often finding how niche lines of business such as legal cannabis can directly solve many of the issues facing community financial institutions today.
Along with hearing about new ESG requirements, attending a surprisingly engaging session on CECL and learning some great risk management tips from John Epperson at Crowe, what I saw at the event reinforced what compelled me to join this nascent industry in the first place. Financial institutions and legal cannabis businesses can make great partners — helping each other be successful in ever-evolving ways.
When I first started my cannabis banking journey, it was the search for low cost deposits and fee revenue that brought community banks and cannabis businesses together. While that’s not currently an issue with most FIs, we all know those challenges will once again present themselves once excess liquidity caused by recent conditions runs off. In the meantime, an increasing number of financial institutions are expanding their offerings to cannabis-related businesses (CRBs), going far beyond a depository relationship to offering a full-suite of business and banking services, including lending which is one of the biggest pain points for CRBs with the highest opportunity for financial institutions.
At the event, Steve Hovde from Hovde Group did a great job of looking at both the current issues faced by banks today and the avenues for creating value for institutions such as good Net Interest Margin (or NIM), fee revenue, low cost deposits and organic loan growth. Cannabis banking is uniquely positioned as a solution for all of these value creators.
He also shared that NIM is the lowest it’s been in as long as most of us can remember — the average between all banks is running at 2.48%. Traditional wisdom in banking says the minimum an FI can run on for a margin is 3.00%. That’s pretty tight my friends.
We also heard that on average FIs are holding about 14% of deposits with the Fed. That’s a low earning scenario that isn’t helping that NIM any. So, what do you do with those excess deposits when there’s no demand for loans in your market?
From my perspective, it’s simple. Cannabis businesses are borrowing from non-financial lenders at exorbitant rates with unreasonable requirements because they aren’t able to work with most traditional lenders. This is particularly unfortunate when a borrower has had a long standing relationship with their lender but has to go elsewhere for their needs as they move into a new opportunity.
More and more, financial institutions are stepping up to solve this problem for CRBs while alleviating a significant one for themselves. Yes, there is some additional effort and risk involved with working with this industry, but the fee revenue and rate opportunities go a long way to raise an institution’s NIM. Banks and Credit Unions are by nature some of the best risk managers out there, and when they identify extra effort and risk, there is always reward to compensate.
To add to this, David Ruffin of Intellicredit closed the conference by talking about lending specifically. Some of the key statistics he shared during his presentation further support the idea of lending to cannabis businesses:
- 88% of FIs see the current loan environment as challenging (you need more lending opportunities)
- Non-bank lenders have gained about 50% of market share (and traditional lenders are giving them more opportunity by not lending to the cannabis industry)
- 68% of FIs are willing to accept some risk to grow their loan portfolio (that 68% should take a look at cannabis lending)
He also suggested that now is the time to take some additional risk. Reserves are up, NPL down, and most, if not all, FIs have added capital since the last financial crisis. There is wiggle room to take risks now, and it may pay off nicely.
David even called out the cannabis industry specifically when he suggested that lenders “look for less traditional opportunities, rooted in alternative lifestyles”.
In closing, after putting my banker’s hat back on for a few days, I was reassured that there couldn’t be a better time than now to connect traditional financial institutions with legal cannabis businesses as they are perfectly matched to solve some of each other’s principle issues and find growth together.