From pot producers to wholesalers, banks are largely uninterested in dealing with the legal questions and increased compliance of marijuana-related clientele. The result is that many legal growers and dispensaries have gone to extreme lengths to keep cash safe, often storing it in locked offices, one $20 bill at a time.
But a select few banks are using marijuana to their advantage, carving out a niche as banker to the marijuana trade, an industry that rakes in billions of dollars and can be needle-moving for the smallest of institutions.
Legal pot dealers pay dearly for bank accounts
Whereas most banks pay their depositors for keeping their cash at their institution, the flow of money is mostly reversed when the customer makes its money from marijuana sales. Growers and dispensaries pay banks an up-front fee to open an account, plus ongoing monthly fees thereafter. The fees help defray the cost of compliance, as banks do far more due diligence on companies who profit from pot.
Severn Bancorp (NASDAQ:SVBI) is one such bank dealing with marijuana-related businesses. Based in Maryland, a state where medicinal marijuana use is legal but recreational use is not, it began opening accounts for marijuana-related companies at least two years ago. That decision, though controversial, probably brings in a tremendous amount of fee income plus deposits that cost it a pittance. It has a team of about five people who are dedicated to working with businesses who make their money in marijuana, according to the Baltimore Business Journal (subscription required).
Severn Bancorp charged one customer as much as $3,000 just to open an account, plus monthly fees of $1,750 thereafter, according to a story by The Washington Post. And it appears that depositors aren't collecting much in the way of interest, as Severn's deposit growth has been fueled largely by noninterest-bearing deposits, believed to be driven by a growing list of clients who make their money selling marijuana.
For Severn Bancorp, which suffered greatly during the Great Financial Crisis -- its non-performing assets ratio rose from 1.1% in 2007 to 8.5% in 2009 -- marijuana clients are an unlikely boon for business.
The company's noninterest-bearing deposits soared from 2.3% of average deposits in 2015 to 14.7% of average deposits in the most recent quarter. Fee income has grown markedly, rising to $190,000 in the third quarter of 2017, six times higher than the prior-year period, likely driven by the increase in marijuana-related accounts.
Severn Bancorp is quiet about its foray into marijuana. In its quarterly filing, the bank discloses only that its deposit growth was driven by a "campaign designed to attract deposits in certain local emerging markets." Likewise, it says its fee income has grown because of "onboarding fees received on a new deposit product." It doesn't specifically call out marijuana-related businesses in its financial filings, but as it is reported to be the only Maryland bank in the business, it's likely that pot is starting to move the needle.
With low-cost deposits flowing in, Severn Bancorp has reduced its reliance on costlier certificates of deposit. It also completely repaid the U.S. Treasury for its financial crisis-era capital injection, redeeming the Treasury's remaining preferred stock stake in September 2016, and repurchasing its TARP warrants roughly one year later in December 2017.
A booming business
Few banks disclose their links to marijuana producers, but as many as 390 banks and credit unions are accepting deposits from the pot industry, according to a July 2017 report from FinCEN, a federal financial crimes regulator.
In a recent search of SEC filings, I found Hoquiam, Wash.-based Timberland Bancorp (NASDAQ:TSBK) as the only publicly traded bank with admitted exposure to marijuana. It disclosed in its annual report that it gathered approximately 1.8% of its total deposits from "businesses associated with the marijuana industry" during its 2017 fiscal year.
For Timberland, deposit growth from pot is a drop in the bucket, but the fees the accounts bring in are adding up. Deposit service charges grew nearly 14% year over year in 2017, primarily the result of higher fees it charges to marijuana-related businesses to open and maintain accounts at the 22-branch community bank, according to its disclosure.
As interest rates rise, banks may be more willing to work with marijuana producers if it means bringing in valuable deposits on which they pay nothing in interest. One-month LIBOR, a benchmark for short-term interest rates, recently rose above 1.55%, up from less than 0.2% for much of 2015. Banks that take in millions in marijuana-related deposits can deploy the cash in risk-free securities and earn a respectable return, in addition to any profits from higher service charges on the accounts.
It's a business that's still in its infancy, but with more than 4,900 commercial banks and thousands more credit unions in the United States, a willingness to take on the marijuana industry is one way financial institutions can differentiate themselves and haul in customers who are willing and eager to pay thousands of dollars in fees just to open a checking account.