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Lake Trust Credit Union, other financial institutions wade into Michigan cannabis banking market

As the cannabis industry continues to expand in Michigan, there are a limited number of options for the businesses to put their money while their business is still illegal at the federal level.

But that is changing.

Nearly $125 million worth of recreational cannabis was sold statewide in September, up from $60 million the same month last year. So it follows that despite the regulatory risk that banks and credit unions meet when dealing in cannabis, some are still choosing to do it.

One of those institutions is Brighton-based Lake Trust Credit Union.

Lake Trust started looking at the cannabis industry in 2018 and took two years before it began signing on clients in June 2020. The credit union now has 20 cannabis members, out of a total 176,900, and it is onboarding three more to join within a month.

It has gone slow on purpose, said Ray Zillgitt, the credit union’s senior vice president of risk management and general counsel. Caution is key because stakes are high.

“The risk that we have is tremendous, right? I mean, literally, I could go to jail if we are allowing money-laundered funds to come through our (cannabis) program,” he said. “I don’t look very good in orange, in all honesty.”

Lake Trust had total assets of $2.2 billion in 2020, according to its latest financial reports. It saw net income in 2020 of $10 million, up from $9.3 million in 2019.

“The reason we decided to get into cannabis banking was twofold: The first piece of it is that we clearly saw there was a need, there was a lot of unbanked and underbanked cannabis businesses,” Zillgitt said. “In fact, on a monthly basis we would probably have to kick out two or three because we were not allowed to bank them under federal rules. And … historically credit unions have banked unbanked and underbanked populations and communities so that was the right thing to do.”

Lake Trust also wanted to help make the industry safer, he said.

“Some of the stories we heard when we were interviewing these … cannabis businesses was that they’ve got their employees walking around with backpacks with $50,000-$70,000 in there to go buy money orders to pay their bills. It was just absurd,” Zillgitt said.

As the cannabis industry launched in Michigan, conflicting federal and state laws kept most banks and credit unions from participating in the up-and-coming industry. This left many to deal in cash.

Medical marijuana and adult-use grow facility New Generation Meds in Lansing is among cannabis operations that have been able to break away from cash. It started banking with Lake Trust in August 2020 after first starting to grow in February.

“Now the majority of our transactions and even sales, they’re all done through (Automated Clearing House, or ACH), wire transfers or checks, so the cash aspect of it is not as big of a thing as it used to be because we are able to have a bank that provides us with services to where we don’t have to handle cash,” said Meghan Sweeney, office manager for New Generation Meds. “It’s kind of crazy … but everything has just felt so normal.”

The operation has 1,500 plants designated as medical, and recently secured an adult-use license that will allow it to grow 2,000 more plants. Sweeney declined to disclose financial specifics.

“It was very hard for us to find a bank. I mean, even through construction, (financial institutions) … were nervous,” Sweeney said. “Even though we weren’t doing anything with any sort of cannabis (yet) they were a little bit nervous. Then Lake Trust (came) right before we were going to do our sales and … we’ve been blessed, I guess.”

She said it’s been helpful navigating rules and regulations with Lake Trust’s private bankers. Meeting the bank’s requirements helps New Generation stay compliant with the annual financial statements required by the state’s Marijuana Regulatory Agency, she said.

Patricia Herndon, executive vice president of government relations for the Michigan Bankers Association, said Lake Trust is among the bigger players she’s seen enter the ring. She estimates around 5-10 banks in Michigan work with cannabis businesses. The Michigan Credit Union League recently told MiBiz a similar figure: around 10 credit unions participating.

Financial industry participation isn’t slowing down, Herndon said, and in the last six months to a year the bankers association has started working to connect businesses with financial institutions that have dived into cannabis.

“The availability of financial services and banks that are engaging in primary, secondary, tertiary levels of cannabis banking continues to grow,” Herndon said.

That means there are fewer businesses paying in duffel bags of cash nowadays.

Others to jump on the green bandwagon include Frankenmuth Credit Union, an institution with $1 billion in assets and 60,000 members. It announced in July that it was launching a cannabis program called Envy. It did so as a partnership with a company that specializes in providing cannabis banking solutions and assisting with regulatory compliance in 32 states, Green Check Verified, according to a news release. Frankenmuth plans to add one or two new clients per month through the end of the year.

“It was important for Frankenmuth Credit Union to provide banking services to cannabis-related businesses, but it was also important that we did so in the right way,” CEO Vickie Schmitzer said in the release. “This meant conducting extensive research into what the industry needed and developing a compliant program around those needs.”

Others jumping in this year to accept cannabis clients in Michigan include Citizens State Bank, with around $85 million in assets, which recently expanded from Ontonagon in the Upper Peninsula to a new headquarters in Royal Oak. There’s also Battle Creek-based BlueOx Credit Union, which partnered with Abingdon, Md.-based Safe Harbor Financial to create a cannabis banking arm called Solid Harbor of Michigan. Safe Harbor Financial first established cannabis financial services in Colorado in 2014. Farmington Hills-based Level One Bancorp Inc. also works with cannabis businesses and expects to continue to do so after being acquired by Muncie, Ind.-based First Merchants Corp.

Even with growth in financial services for cannabis, it’s still risky and will continue to be without regulatory reform and, chiefly, federal legalization. An example can be seen with Live Life Credit Union, which told Crain’s in 2019 that it had doubled its assets in 10 months by pivoting to providing banking services to the state’s legal marijuana businesses. But Live Life was later the subject of a marijuana banking crackdown, getting slapped in February this year with a cease-and-desist order for failing to comply with reporting procedures and barred from opening new cannabis-related accounts until May.

Focusing more resources on meticulous compliance with the complex regulatory process can reduce risk for financial institutions, but that raises costs that are often born by the retailers and growers, Herndon said. Those banks and credit unions must complete extra due diligence with clients and file reports showing revenues from cannabis sales didn’t go to criminal activities and aren’t being used as a cover for any sort of trafficking of illegal substances, according to the American Bar Association.

Gov. Gretchen Whitmer in April was one of nearly two dozen governors to sign a letter to U.S. lawmakers urging passage of the Secure and Fair Enforcement (SAFE) Banking Act, which would allow financial institutions to bank marijuana businesses under federal law without fear of penalties. The SAFE Act passed the House of Representatives in 2019 and was reintroduced and passed again this year. It is awaiting a decision by the Senate and a “yes” vote is far from assured.

Cannabis companies generally see the SAFE Act as a step forward, but not a full fix.

“Just the SAFE Act itself might give a few more banks some greater comfort in getting into that risk proposition, but you’re probably not going to see the whole flood gates open,” Herndon said.

The Cannabis Administration and Opportunity Act, a measure with broader reach that would legalize cannabis at the federal level, has a longer path to approval.

Posted By: Crain’s Detroit Business on November 9, 2021.  For more information, please click here to read the source article.

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