Dan Fischer:
Hello, everyone. It’s great to be here this afternoon. I’m the CEO of Citizens State Bank and we’re a local community bank, privately-owned kind of boutique institution. We specialize in c*nnabis banking. We’ve been in the business for about two years and I’m really enjoying the community and hopefully can share some insights for you this afternoon.

Moderator:
I know there’s still the wait for federal legislation. You know, at the beginning it was credit unions and and, you know, private investors. You know, I’ve been told by some in the c*nnabis industry they have so much cash they have to warehouse it. But I’m surprised that Citizens State Bank has just fully jumped in. Talk us through that. How that came about and the path forward and how it’s going.

Dan Fischer:
Sure. So the the owner of our bank, I said we’re a privately owned and have some experience in the c*nnabis business and really felt like the industry was underserved, especially in the Michigan market. And we felt like if we opened a bank that was committed to the business and went about the business the right way that we’d be very successful at it from a customer service perspective, from a product perspective, and just from a thought process perspective.

And I think a lot of people that got into the c*nnabis business who thought it was easy to make money in this business when prices were up, have found that it’s not so easy. And I think some of the institutions that wanted to jump into the c*nnabis banking business didn’t really think through that as well. There’s a tremendous amount of compliance concerns.

There’s a lot of cost involved in building the infrastructure to support it from a regulatory perspective. And then you do have to be willing to offer your customers the ability to borrow. And so we’re we have a different strategy and we’ve been pretty aggressive in offering and making capital available to our customers that are deposit customers with us.

And I think that the industry has changed, especially in the lending side, most significantly in the appraisal area. So when people first started lending on c*nnabis properties at the bank level or at the credit union level, we were looking at things called green appraisals, which I think are not so green anymore. And so I think that’s probably the most significant change that’s taken place other than more people being in the business.

And, like everything else, fees coming down and having more competition. But, also on the lending side, a lot more conservative approach to collateral and how that collateral is valued. And so that has put some pressure. I think if you see some of the companies out there that maybe have struggled in the c*nnabis side were very highly leveraged from an investor perspective and borrowed aggressively and had access to capital, whether it be private capital or through some of the institutions that were making some of the larger loans.

And those have not worked out very well. So I think those are the most significant changes that I see in the industry as far as the SAFE Banking Act and the change in banking regulation. There’s a lot of dysfunction in Washington right now, and I don’t think I’ve heard anybody on the news in the last six or eight months even mentioned the SAFE Banking Act.

There was some discussion about reclassifying c*nnabis to a narcotic. I think that’s something that probably will not happen. But I think that there is definitely some opportunity for people to choose good banks in Michigan and to borrow and to have a good relationship with their banks. And that would certainly be the advice I would give people is if you’re interested in borrowing, at some point you should work with an institution that gives you access to capital.

Moderator:
Dan, when a lender or prospective lender approaches you, what do you look for in a basic loan application, if you will, whether on the grow side, the retail side or the operational side? I mean, what are you looking for that gives you that stamp of confidence to proceed forward and say, hey, this looks like a good investment?

Dan Fischer:
Yes. So when we look at our borrowers, we look at their deposit relationship because that’s important to us as a lender. We look at the strength of the guarantors of the company because in many cases in c*nnabis loans that we’ve looked at and done over the last several years, they’ve been startup or expansion operations.

People that were in cultivation wanted to expand into processing and retail or vice versa. Vertically integrated companies are more desirable, cultivation is less desirable today than it was initially several years ago. And then most of the activity from a cash perspective, which is a benefit to the bank, is in the retail side. So those are the things that we look at. But when we lend, we look at cash flow like we would normally look at for an existing business. We also look at how long the business has been in existence. And, you know, do they have a good track record? And if you’re working off a pro forma analysis, how realistic are their numbers? Right. So if they’re plugging in $3,000 a pound, you know, that’s not going to work, right?

So we have our own data about what the market looks like and can look at those pro formas, I think with some what of a scientific approach. But we definitely look at the strength of the guarantors as well. And their ability to make sure that they can cover the debt from a cash flow perspective and a repayment perspective, should there be a lull in the market or a challenge.

And so a lot of our customers have other businesses and have other sources of income, and so they don’t necessarily need the cash flow from the business to service the loan. And that makes us feel comfortable. Sometimes we’ll take a lean on their personal real estate as an abundance of caution or if it’s a start up. So we look at a lot of different things.
 

Those rates typically start in the prime plus 3 or 4% range. If the borrower is very strong, the guarantors are strong and they bring other non-c*nnabis business to the bank, their rates will drop down, more into the prime to prime plus range. But again, the deposit relationship is super important to us. So someone who might bring a cultivation facility that is really going to only have an average balance of 100 grand in their checking account and there’s really no fee opportunity and they want to borrow 80% on the green value of the cultivation facilities is not going to happen.
 

So each situation is different, each borrower is different and we’re 100% relationship driven. So if we have a relationship with the folks and we’re comfortable with them, then we’re going to try to customize the deal that meets their needs.

Moderator:
Let’s take a look at interest rates. The country is more than $33 trillion in debt, which is also pushing up interest rates just as a general outlook. What do you foresee for the interest rate market, especially since we’re heading into a presidential election year?

Dan Fischer:
Yes. So the best way to answer that question I think is, what really has caused interest rates to go up 550 basis points in the last 18 months?

And, COVID created some inflationary conditions in the economy as a result of supply chain issues and the overall shutdown. But we should have really cycled through that by now. And, the catalyst for inflation in this country started with the pipeline being shut off and the move away from energy independence that has actually been the catalyst for all the inflation that’s taking place in the economy.
 

We’re in a situation right now where the borrowing costs are the highest they’ve been in 16 years. Residential mortgage rates are 8%.

You know, there’s short term interest rates and longer term interest rates and the yield curve, which is the difference between short term rates and long term rates, is now flat, which is a good sign. The Fed, in my opinion, cannot continue to raise interest rates and the geopolitical unrest in the world right now is also creating a new variable.

Just recently because there’s a flight to quality, so people are buying treasuries as a result of the geopolitical uncertainty. And so therefore, that’s pushing the prices down artificially. And it appears that inflation is still present and interest rates may be coming down, but they’re really not coming down. So the curve is flattening and that’s a good sign. Lower short term interest rates have to come down in order for small businesses and all businesses to function.

If we continue to see interest rates rise, we are going to have a very, very serious recessionary period, in my opinion. And I think people are questioning, are we going to see a recession, hard landing, soft landing. They use those terms, but I believe the recession is already here. Credit card delinquencies are at an all time high, 401K hardship withdrawals are at an all time high. So that means the average person doesn’t really have a lot of additional savings in cash. So I think, long answer to a short question, I think interest rates will come down if the Fed doesn’t raise them any more.
 

And I don’t think they can right now with what’s going on geopolitically, it would be absolutely the kiss of death if they raise rates any more. But we are seeing our customers not borrow. We’re seeing them use cash and the overall credit environment for banks, especially middle market lenders, is basically nonexistent. I mean, they are not making loans.

So that is definitely not a positive. So hopefully we’ll see the geopolitical unrest settle down. If it escalates, oil prices will go up. That will put more pressure on inflation and we’ll have a recession. Sorry for the doom and gloom.

Moderator:
With all of the regulations on the c*nnabis industry, how does a small bank navigate working with c*nnabis businesses from a compliance standpoint?

Dan Fischer:
What is important, whether it’s a credit union regulator or a bank regulator is they don’t want you to have more than a certain percentage of your balance sheet in c*nnabis assets. So if you’re a credit union that has 100% of your assets in in c*nnabis, it’s not favorably looked upon. We run about 20% of our total assets, both on the loan side and the deposit side that are in c*nnabis or c*nnabis related businesses.

And that’s the threshold regulators are looking at 20 to 25% as being acceptable. And it’s like any other concentration. If you have a concentration in commercial real estate, mobile home parks or residential mortgage I mean it’s looked at the same way. So as long as you know what your regulators are comfortable with and it’s part of your strategic plan, you know then you can do that.

But it varies as far as who’s in that space, market to market. I would think California would be a totally different kind of landscape or Colorado than what we have in Michigan.