Big loan deal shows pot banking is becoming more mainstream

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East West Bank in Pasadena, Calif., 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 non-bank lenders – are slowly becoming more comfortable to do business with marijuana-related businesses.

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.

East West Bank, which had $62.2 billion in assets at the end of the first quarter, said last year it ran a small, invitation-only program for marijuana users.

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 could be increased to $100 million as part of the agreement.

In an interview, AFC Gamma CEO Leonard Tannenbaum praised East West for lending to the cannabis industry, saying marijuana companies need more banks to get involved – offering depository services. , armored car collection services for cash, payment services and loan options.

“We need more banks to accommodate our customer base,” Tannenbaum said.

The two banks participating in the credit facility, including East West, have combined assets of more than $70 billion, according to AFC Gamma.

East West, which had $62.2 billion in assets at the end of the first quarter, has immersed itself in providing services to the marijuana industry in recent months.

The bank, which declined to comment for this story, told American Banker last year that he ran a small, invite-only program for marijuana users, but did not provide details.

In its February annual report to investors, East West’s risk disclosures included a new sentence about its services to marijuana-related businesses.

“We face certain legal, reputational and financial risks due to serving clients in new or evolving industries that are subject to changing and sometimes conflicting laws, such as digital currency or cannabis-related businesses,” East West said in the filing. .

Providing banking services to marijuana-related businesses is legally cumbersome because cannabis, while legal for medicinal or recreational use in 40 states, remains illegal under federal law.

Banks that service marijuana businesses are required to develop detailed frameworks for approving and monitoring customers, who are considered high risk under anti-money laundering rules. These procedures may include pre-screening new cannabis customers and periodically visiting their physical locations.

The revolving loan to AFC Gamma has a variable interest rate equal to the prime rate plus half 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 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 businesses.

Valley National began offering deposit services to a few medical marijuana companies in 2020, but has recently expanded to providing services to recreational dispensaries and has also offered limited loans for real estate purposes, according to recent financial disclosures.

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