Maryland banks in the Cannabis space expect windfall from Recreational sales, but fear it won't last
The few regional banks in Maryland that operate in the cannabis space are expecting a big windfall when recreational sales kick off on Saturday, but questions remain about how long that high will last.
With cannabis still federally illegal, large national institutions have avoided working with the industry and cannabis banking remains dominated by smaller, regional banks. In Maryland, only three financial institutions openly advertise their work with the cannabis industry: Shore United Bank in Easton, Bulldog Federal Credit Union in Hagerstown and CFG Bank in Baltimore. Each expects to take in many more millions of dollars following the start of recreational sales but the cannabis industry's volatility coupled with uncertainty around the prospect of federal legalization means the boost in business could be short-lived.
“The small banks definitely have a sweet spot now, they operate in a niche market because of the compliance requirements,” said Mary Ann Scully, dean of Loyola University Maryland's business school and the former CEO of Howard Bank. “Once there is federal legalization, this will no longer be a niche market, and then the game changes.”
The smallest player in Maryland’s cannabis banking industry is Bulldog Federal Credit Union with almost $230 million in assets. The credit union’s cannabis business currently makes up 2% of its portfolio, said Megan Roberts, a member service representative for the credit union that works on Bulldog's cannabis team.
Roberts said the credit union has been preparing for recreational cannabis sales for a while now and that the new industry could increase the company’s cannabis business by three or four times.
“It has been a long time coming, but we think this is gonna be pretty big. As soon as we heard the legislation passed, we had July 1 circled and started talking to our cannabis clients about how they’re gearing up,” she said.
Shore United Bank (Nasdaq: SHBI) has also been preparing for the start of recreational sales, but the bank isn’t quite sure what the impact will be, CEO Lloyd L. "Scott" Beatty Jr. said. Like Bulldog, cannabis represents about 2% of Shore’s total portfolio. As a $3.5 billion bank, that equates to about $70 million and Beatty expects that figure to grow.
“I don’t know what the exact numbers will be, but in terms of recreational, we are all looking at this like the holy grail. From a deposit standpoint, we will see a pretty substantial increase,” he said.
Beatty though is worried about just how long that increase will last. When Shore first started working with the medical cannabis industry, Beatty said deposits were consistent. However, after a few years, the business started to decline, and Beatty is worried the same thing could happen with recreational sales.
He's looking at other states that have legalized recreational cannabis as a guide for what might happen in Maryland.
“If you look across the country it has been a big money maker. We work with companies in Arizona, Colorado and Illinois and when recreational started there the volume of cash was larger,” Beatty said. “For Maryland, we don’t know what the size of the market will be or what the numbers are going to be.”
CFG Bank, the largest Maryland bank in the cannabis space with $4.2 billion in total assets, declined to make anyone available for an interview for this story.
One bank that knows the impact of recreational cannabis well is Parke Bank in Sewell, New Jersey. Parke has been in the cannabis business since 2010 when a major customer and friend of the bank’s CEO Vito Pantilione got one of the state's first medical cannabis licenses.
Parke Bank saw its cannabis business grow over a decade with medical sales, but when recreational cannabis sales started in April 2022, it actually hurt Parke’s cannabis business. The bank went from $375 million in cannabis deposits on Dec. 31, 2021 to $123.5 million as of March 31. Pantilione said that as more money entered the space, larger businesses started buying up dispensaries and, as a $2 billion bank, Parke couldn’t compete with larger financial institutions.
“Big companies started buying up the smaller companies and wanted to bank with $30 billion to $40 billion banks. Once they entered the space our deposits eroded,” Pantilione said.
It isn’t just a loss of clients that led to the decrease in cannabis deposits, but existing clients pulling cash from their accounts. Pantilione said the middle of 2022 was the peak for the bank, but as recreational cannabis companies looked to expand they had to liquidate some of their funds.
“When recreational started, all that investment capital was sitting in deposits. That money though had to be used. The costs of the business are huge. You might buy a $4 million piece of real estate for a growing facility and then make $12 million of investment,” he said.
One factor keeping even larger banks from cannabis is that banks have to follow different rules in the different states they operate in. Loyola's Scully said the state-by-state regulation makes cannabis banking not worth it for the JPMorgan Chase and Bank of Americas of the world. The lack of banking options for cannabis companies also means the regional banks can charge almost whatever they want in fees, so their bottom lines could take a hit if cannabis becomes federally legal and more institutions enter the space.
"For someone like Bank of America, operating in a space that is only legal in 30 states runs against their rules about trying to get scale,” Scully said. “Once it is federally legal, that changes. If and when cannabis is legalized, the larger banks will get into the game and the smaller banks will have competition.”
