Banking on Cannabis: A CEO’s Perspective

By Dan Fischer, CEO of Citizens State Bank

The cannabis industry, with its unique challenges and opportunities, has been a focal point for
Citizens State Bank for the past two years. As the CEO of a locally rooted, privately-owned
boutique institution, I’ve witnessed the evolution of cannabis banking with great interest. In
this article, we’ll delve into our journey—why we stepped into cannabis banking, how we
navigate compliance complexities, the changing landscape of lending, our approach to
borrowers, and the broader economic outlook. Join me in exploring the intricate dance
between financial services and the burgeoning cannabis industry, and how Citizens State Bank
has positioned itself as a key player in this dynamic space.

Why Cannabis Banking?

Our foray into cannabis banking was spurred by a recognition of the industry’s underserved
nature, particularly in the Michigan market. As a privately-owned boutique institution, we saw
an opportunity to fill this gap and provide community-minded banking services rooted in
hospitality, urgency, and extraordinary customer service.

Navigating Compliance Challenges

Undoubtedly, cannabis banking comes with its own set of challenges, primarily in compliance.
There’s a significant amount of regulatory diligence involved, coupled with the costs of building
infrastructure to support it. We chose a more aggressive approach, making capital available to
our cannabis-related deposit customers, albeit with a keen focus on compliance concerns.

Evolving Landscape in Lending

The lending landscape in the cannabis industry has undergone notable changes. Initially, the
lending side witnessed a surge, especially in green appraisals. However, with time, a more
conservative approach has taken root. Collateral valuation, particularly in the appraisal area,
has become more stringent, reflecting a maturing industry.
Customized Approach to Borrowers
When assessing loan applications, we take a 100% relationship-driven approach. The strength
of the borrower’s deposit relationship, the experience of guarantors, and the vertical
integration of cannabis operations play pivotal roles in our decision-making. Each borrower is
unique, and customization is key to meeting their individual needs.
Interest Rates and Economic Outlook
Interest rates have been a critical factor, with an increase of 550 basis points in the last 18
months. We’ve maintained an aggressive stance with terms like a 20-year amortization and a
five-year fixed rate. While geopolitical uncertainties persist, a thoughtful approach to interest
rates is crucial. A downturn in rates is expected to mitigate the challenges businesses face.

Navigating Geopolitical Unrest

The ongoing geopolitical unrest adds a layer of complexity. The flight to quality, with people
investing in treasuries due to uncertainty, has created artificial pressure on interest rates. The
prospect of a serious recession looms if interest rates continue to rise.

Compliance and Regulation Balance

Regulators expect financial institutions not to have an excessive concentration in cannabis
assets. Striking a balance around the 20-25% mark is considered acceptable. As with any
concentration, understanding regulatory thresholds and weaving it into our strategic plan has
been crucial.

In conclusion, cannabis banking is a dynamic space, demanding a nuanced approach. By staying
attuned to regulatory changes, understanding borrower dynamics, and maintaining a strong
customer relationship focus, Citizens State Bank is committed to being a trusted partner in this
evolving industry.

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