Jason Watson, CPA, and Quentin Leighty, President of First National Bank in Monument, Colorado, discuss the controversial issue of Marijuana Banking.
In this Bourbon and Business podcast episode, Jason Watson, CPA, and Quentin Leighty, President of First National Bank in Monument, Colorado, discuss the controversial issue of Marijuana Banking. Quentin sheds light on the gray areas of banking regulations at the Federal and State level, and, offers insight about the recently passed SAFE Banking Act, which protects financial institutions in legalized states that want to offer banking services to MMJ businesses. Special Thanks to Axe and the Oak Distillery for hosting our Bourbon and Business series!
This material is based on content from our website and our book, Taxpayer’s Comprehensive Guide to LLCs and S Corps.
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WCG Inc. (formerly Watson CPA Group)
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00;00;14;16 [Jason]: Welcome my name is Jason Watson with The Watson CPA
Group and I'm going to keep saying that 500 times, we're now
considered WCG Incorporated. We are here at the Axe and the
Oak, part of a, I should say, a part of our Bourbon and Business
series for our, our podcasts. Quentin Leighty is joining me with First
National Bank of Monument. And today we're going to talk about, I
think somewhat controversial, but if you take a step back and look
at it, there's some real economic impact of
00;00;45;26 what maybe some rules and regulations are preventing, and that is
marijuana, cannabis, pot industry, whatever you want to call it.
Colorado and Washington, I believe, were the first one's
00;00;57;10 [Quentin]: First two, yeah.
00;00;57;29 [Jason]: to legalize it. I think that was also the same year that
Denver and Seattle were in the Super Bowl.
00;01;05;15 [Quentin]: Could be.
00;01;05;18 [Jason]: Yeah, I think Roger Goodell had to tell it, had to tell the
player does it matter where you land, it's still a banned substance in
the NFL. But anyway we, from a CPA perspective we have, we're,
we're in this weird dichotomy. The activity is illegal, federally. We
can still sign a tax return, we can still prep the return. There are
certain rules, especially with the capitalization of expenses. And as
it goes into inventory you can't immediately deduct things like rent
00;01;40;07 for the grow warehouse, and other things like that. That all has to
be capitalized inventory, meaning that you're not going to realize
the expense of that until you sell the product.
00;01;53;01 [Jason]: Luckily, I don't know too many marijuana stores that have a
lot of inventory, seems to sell pretty quick, at least in our
experience. For our State Board here in Colorado, they have come
out and said we are cool and the gang with you signing and
preparing tax returns as CPA's and that is our governing body.
Which is nice because we can deal with that on a local level,
banking not so much, right?
00;02;22;22 [Quentin]: No.
00;02;23;10 [Jason]: So let's talk about some of the handcuffs that you have
from a national perspective.
00;02;30;12 [Quentin]: Yeah, and so you know especially being a community
bank, our regulators play a big role in our, you know, our business
decisions, they should in all all institutions. But, they have the
power and, and we, we have choice in regulator but we were
chartered in 1901 and to change that is not real appetizing to us.
So we are under the Office of the Comptroller of the Currency,
which is the Treasury Department. There is also the Federal
Reserve, the FDIC, but then there's the State.
00;02;57;18 [Jason]: So can you just tell us a little bit about that because there
are different governing agencies depending on the bank.
00;03;05;00 [Quentin]: Yes, you can, you can choose to be in a national charter
which we are, first National Bank.
00;03;09;05 [Jason]: Okay, okay.
00;03;09;18 [Quentin]: If you are, you're either going to have a name "National"
or the letters "NA" in your name somewhere, and that signifies that
you're chartered through the OCC, which is Treasury Department.
The Federal Reserve is another regulatory body that you can
choose to have as your, be a FED member.
00;03;24;09 [Jason]: Okay, you've got Treasury let's say on this side, you've got
Federal Reserve, okay.
00;03;27;04 [Quentin]: And then you've got State, State banking commission,
and then FDIC. Those go hand in hand, so they rotate who does
the exam. So FDIC will do one and then the State and they, they
work together.
00;03;39;02 [Jason]: Okay.
00;03;39;07 [Quentin]: The others are independent.
00;03;41;07 [Jason]: Okay, so we have really three in the State and the FCC,
kind of churn within their own bucket.
00;03;46;10 [Quentin]: That's right.
00;03;47;00 [Jason]: Okay. So, so if you're to begin one today, you had $100
million land in your pocket and you want to begin a bank, let's say,
what would you choose?
00;03;56;10 [Quentin]: You know, we've had a great relationship with our
regulator, and we feel like they are really strong just understanding
community banking because they have been around for a long
time. I think most of my competitors would say State and FDIC and
I think partly because they know the local economy and what's
going on, and it's more of a local focus. I think they have a smaller
budget, which can be good or bad. And so I think, I think if you look
over the trend in the last 10 years,
00;04;31;08 more banks have moved to the state charter and away from some
of the federal charters.
00;04;34;25 [Jason]: Okay. Is that for what reasons? Because of the local
relationship you can build with your regulator and some of the local
laws that are more flexible?
00;04;42;16 [Quentin]: I think that and I think some accountability. You know,
you can go to Denver and meet with them direct, and the actual
head of that department versus you know, the head of the
department we deal with is in D.C.
00;04;52;16 [Quentin]: They do have a Denver office and we have a great
relationship with those folks. But there is an additional layer.
00;04;59;29 [Jason]: Okay, somebody in Washington still has to sign off on this
stuff. Okay.
00;05;01;27 [Quentin]: Yeah. So for banking, and especially for national charter,
you know that it wasn't really an option. There was some guidance
given by the Treasury Department, I think in 2014 about, "Well, if
your state allows this, here's how to go about it so that we don't
come down on you." But the reality was there is still this federal
piece to it that, we had this kind of a "Oh, go ahead and do it,
nobody is going to get mad at you" versus put it on paper saying,
"Look, here it is fine, it's okay to do this
00;05;34;02 kind of banking.". And so what it triggered was a lot of state
chartered banks got into this space. I shouldn't say a lot, a few, and
they, because there's not many of us willing to do it because of the
risk to our organizations from the government's side of things, they,
the fees they can charge on these accounts is unbelievable. And
so, it's capitalism at its best, right? But it's, it's, it's not fair, in my
opinion, it's an industry that, you
00;06;03;06 know, if you pull, if you take them out of the banking system what's
the alternative? Right?
00;06;07;24 [Jason]: Right, right.
00;06;07;26 [Quentin]: I mean, you, do we want cash in people's safe at their
business? Do we want them taking cash home or having to pay a
fee to pay their taxes?
00;06;18;03 [Quentin]: You know, we can't track their activities and, and what,
what's going on in the industry. We all want to know what's going on
in whatever industry
00;06;26;08 [Jason]: Sure.
00;06;26;10 [Quentin]: It is that we're interested in.
00;06;27;12 [Jason]: Sure, you can't do any analysis, no data collection, no data
mining. I mean, the IRS is having difficulty figuring out what's a
reasonable amount for this expense, that expense because again,
people are using cash to pay for a lot of things.
00;06;38;26 [Quentin]: Well and then it provides an incentive, right, to not report
all of your earnings and not to be totally above board.
00;06;45;14 [Jason]: Right.
00;06;45;17 [Quentin]: And so we think those things are important.
00;06;47;02 [Jason]: Yeah, totally. Let's take a step back again. So we have the
Federal Reserve is in the middle, Treasury Department is over
here, and we have the FDIC and the State on this side. Which ones
allow you to take marijuana dollars, for lack of a better word.
00;07;04;20 [Quentin]: So
00;07;04;29 [Jason]: None of them?
00;07;06;06 [Quentin]: I, I think they would, I think they would all say, "Well,
we've given an avenue for that" but the reality is there's still big
question marks about the criminal nature. So, there's certain things
where we have to basically monitor the accounts to the level where
we're asserting that they're doing everything above board. Well, we
don't know, how, how would we ever know if, if that pot shop is
allowing people to buy from across state lines, where it's not legal,
with the intent of taking it to their state or whether they're reporting
all of
00;07;39;11 their information correctly? We, we can't, we don't know how to be
the police for any industry
00;07;45;12 [Jason]: Right.
00;07;45;16 [Quentin]: But especially that industry.
00;07;46;21 [Jason]: Are you doing that for any other industry?
00;07;49;14 [Quentin]: Not to the extent that it's required there.
00;07;51;16 [Jason]: Okay.
00;07;51;23 [Quentin]: Not to the extent. There are certain high risk industries,
you know online gambling.
00;07;55;29 [Jason]: Okay.
00;07;56;06 [Quentin]: Things, things that has a tendency for money laundering
and fraud that we have to monitor and watch closer. But nothing
like an illegal substance from the federal government.
00;08;07;05 [Jason]: Okay. So dollars aren't into, or they aren't entering into
the banking system. Kind of help us figure, tell us why that's not
good for the economy.
00;08;17;12 [Quentin]: Yeah. I mean it's, you know, those dollars then if they're
not sitting in an account where we can then lend them out, they're
not, the multiplier effect isn't happening.
00;08;25;03 [Jason]: Right. So what's your lend ratio? Like if someone puts 100
bucks, I mean, that's probably not a fair example.
00;08;29;08 [Quentin]: Yeah.
00;08;29;27 [Jason]: Tell us what you can, you know, leverage, you know,
$10,000 into.
00;08;34;08 [Quentin]: We keep higher capital than normal, so we keep a little
bit higher capital base than even our peer group. But even at that,
we're putting out 88 cents of every dollar that's deposited in, we're
loaning it back out.
00;08;42;21 [Jason]: Okay.
00;08;43;13 [Quentin]: And so if that money is not in the banking system, it's
sitting on the sidelines not being redeployed
00;08;48;19 [Jason]: Right.
00;08;48;21 [Quentin]: For other projects, whether they're any industry, I mean it
doesn't have to be marijuana related. You know, w'e've taken the
deposit
00;08;55;13 [Jason]: Totally.
00;08;55;18 [Quentin]: and loan it out anywhere else.
00;08;57;21 [Jason]: Totally.
00;08;58;01 [Quentin]: And each bank should have the option to choose if they
want to do that kind of stuff or not. We don't have the expertise in
that industry, we wouldn't do it.
00;09;03;15 [Jason]: Right.
00;09;04;15 [Quentin]: But we can definitely help benefit the community by
taking those deposits and redeploying them into new construction
for people's homes, or helping somebody buy a new tractor,
whatever that item is.
00;09;15;07 [Jason]: Right.
00;09;15;15 [Quentin]: But when it's sitting on the sidelines, it really doesn't get
that churned and multiplying effect.
00;09;20;08 [Jason]: I mean it's still being spent, let's say you like the think that
it's still ending up
00;09;23;23 [Quentin]: Sure, it's not all sitting in retail.
00;09;25;10 [Jason]: Yeah, but you're not getting, you're not getting that big
leverage. You know, economists always argue about that dollar
here. Let's say you give a tax break that puts a dollar back in
someone's pocket. You know, does the GDP end up being a 7x or
an 8x to that dollar? Like, hey we're going to add eight times to the
GDP for that dollar. Maybe we're not talking about that as much but
if you can take money in, lend it out, for someone can go buy a
house.
00;09;54;21 Well now a realtor gets paid, you know.
00;09;57;10 [Quentin]: Right.
00;09;57;15 [Jason]: And now the guy who sold the house buys another house.
You know, it's just a huge whipsaw effect by having those dollars in
your bank that you can then lend out.
00;10;08;26 [Quentin]: Well, and, and you know, if you gum up that system too
much and the banks won't take it, which is what's on now, you know
they're forced to pay taxes in cash, pay a service to come get their
cash. Nobody likes receiving cash for tax payments.
00;10;25;20 [Jason]: No. No.
00;10;25;26 [Quentin]: So it's just time consuming, it's inefficient, it's frustrating.
00;10;28;14 [Jason]: Our preparation fee comes in cash, that's nice.
00;10;33;00 [Jason]: Reported of course.
00;10;34;02 [Quentin]: Yeah. So, you know, it's, there's just a lot of unintended
consequences.
00;10;38;23 [Jason]: There is, and we have a handful of customers that run
marijuana farms, warehouses I should say, with the retail
component. Those are usually dovetailed pretty tightly, and they all
attempt to run this like a legitimate business. They got advertising
expenses, they got labor, lots of labor. They, you know, they're,
they're paying rent. They're doing all the things a normal owner
does. You know, it's just very interesting, if you were to line up 50
people and
00;11;08;18 say pick out which guys are running marijuana farms, you couldn't
do it.
00;11;12;09 [Quentin]: Yeah.
00;11;12;20 [Jason]: It's impossible. It's, its's not like you can, could you clearly
tell someone's different than everybody else. They're all small
business owners try to make a buck, you know, and they chose this
as their profession. So.
00;11;22;00 [Quentin]: We had a, we had a real estate investor that has done
real estate investment their whole adult lives. Twenty five years
doing that type of investment. And they also had a medical
marijuana operation. And so they wanted some financing on some
real estate, totally separate from anything to do with the marijuana,
and so we went to a regulator and said, "Is this something we can
do?" You know, there's some gray areas and the
00;11;48;10 [Jason]: To use their debt service, their financial debt worth as
00;11;50;19 [Quentin]: Yeah, can we loan it to these people since they're in that
industry, even though it's not, maybe, all of what they do and the
answer was, "Peel out all marijuana income and if it can cash flow
without that then you're fine."
00;12;02;07 [Quentin]: And so, even though they were receiving a decent
amount of cash flow, if those properties didn't cash flow on their
own, then forget about it, you can't loan them the money.
00;12;11;04 [Jason]: Yeah.
00;12;11;17 [Quentin]: And it's just, some common sense things that don't really
play in there.
00;12;13;19 [Jason]: Yeah. Yeah. No, that's unfortunate. So you, okay, so I can
really see, so what, what does the future hold, you think? I mean
00;12;20;23 [Quentin]: Yeah.
00;12;21;25 [Jason]: You know, Washington and New York whatever, those guys
move at glacial speeds.
00;12;27;24 [Quentin]: It's becoming a federal issue.
00;12;29;15 [Jason]: Are we a decade away? Are we
00;12;31;07 [Quentin]: I don't think so. I think it's moving faster than that
because just two weeks ago, I think it was, the Safe Act passed the
House.
00;12;38;22 [Jason]: Okay.
00;12;38;27 [Quentin]: And so the Safe Act basically says you can bank, if
you're in a state where it's legal, you can bank it without worry from
your regulator for repercussions or for them telling you don't get into
this industry.
00;12;49;22 [Jason]: Okay.
00;12;50;09 [Quentin]: So, the House's are and it was very bipartisan, there
were only, there were over 90 Republicans that voted for it as well.
And so it was really strong, and, and our State was one of the
leaders in this because we are kind of at the forefront of this whole
process. And so the House voting it in, now it kicks over to the
Senate. The Senate's going to be tougher. There's more discussion
to be had. But Senator Gardner here in Colorado is pushing hard
for it, and, and really with the arguments that you know, this stuff
needs to be banked. There's too many other, there's too many other
avenues that this goes
00;13;21;08 without it being in the banking system, and, and different entities
trying to be formed, those types of things that aren't healthy for our
economy.
00;13;30;06 [Quentin]: And so, it is becoming a hot button. I've read things that
say maybe as soon as three months we could have it in to law and
available.
00;13;38;10 [Jason]: Federally, you mean?
00;13;40;08 [Quentin]: Yes.
00;13;40;24 [Jason]: Wow.
00;13;41;22 [Quentin]: Now
00;13;42;07 [Jason]: Yeah. Just like in construction Yeah.
00;13;44;16 [Quentin]: We're going to wait and see on that because it will
00;13;46;28 [Jason]: So three Congress months is like five years.
00;13;51;05 [Quentin]: Could be, you're right. But there is a lot of movement on
it right now and, and community banks are, are leading that fight,
we're trying to say, listen this needs to be
00;13;58;00 [Jason]: How are the big banks responding to this?
00;14;00;03 [Quentin]: Well, I think a lot of them are already doing it, they just
won't tell you that.
00;14;02;26 [Jason]: Okay.
00;14;03;21 [Quentin]: And so they, you know there's, there's some level of,
"Well, we have a proprietary way of doing this and we don't want
everyone in here." We want to get our $1,000 a month fee and
00;14;12;01 [Jason]: Right.
00;14;12;10 [Quentin]: And continue to do this and so they haven't been as
vocal but I think, I sense that they would welcome a change there
because nobody likes to have a huge department working on just
trying to see okay, who's doing marijuana and you know, should we
kick them out?" Should it should it be an account that's allowed?
Those types of things, it's really not productive.
00;14;30;16 [Jason]: Yeah. Yeah. No, it's tough. So, all right, well thanks for that,
I know that's controversial. It's certainly controversial for a CPA. I
know a lot of CPAs who don't want to touch that, for maybe
religious reasons, philosophical, but I think a lot of them are just
afraid of the regulation
00;14;45;02 [Quentin]: Yeah.
00;14;45;14 [Jason]: Behind it and, and for banks I think the same thing. And,
during that transition between someone saying, "Hey, we're going
to look the other way" to the point that you actually have it on, on
paper, it's going to be kind of a gray area for operations, you know.
Real quick, before I forget, how does like a credit union work?
Where, where are they regulated? And do they have different rules
than a bank? Yeah. And I, I know nothing about the difference.
00;15;09;19 [Quentin]: Sure. So.
00;15;10;02 [Jason]: Between credit unions and banks.
00;15;11;00 [Quentin]: Well, so yeah, it's a great question and I think a lot of
don't understand the difference. Credit unions were initially put into
place to help serve the underserved. So, people that couldn't get
banking services, they couldn't qualify for a loan because they, they
had no income or bad credit or they had a unique business that
they worked for that had seasonal cash flows that the typical
banking product didn't work for. Think about like migrants coming
across and they don't have everything they need.
00;15;38;25 [Jason]: Right.
00;15;39;02 [Quentin]: Or they haven't been set up long enough for a traditional
loan so they would serve the underserved. And then the camel got
its nose under the tent.
00;15;46;12 [Jason]: Right.
00;15;46;20 [Quentin]: And they have expanded into the biggest financial
institutions in the country.
00;15;50;08 [Jason]: Oh sure.
00;15;50;11 [Quentin]: For instance, especially in this county, we see that a lot.
There's a 300,000 square foot office being built up in
00;15;56;25 [Jason]: Yes.
00;15;57;00 [Quentin]: Our neck of the woods for a credit union to serve the
underserved, as you can imagine.
00;16;01;01 [Jason]: Right.
00;16;02;07 [Quentin]: And so thats not what's happening and while they are
nonprofit and they pay no taxes, so.
00;16;07;14 [Jason]: How about the regulation? Can they take marijuana
dollars? Or is that
00;16;09;17 [Quentin]: So their regulator is, we, I'm biased here so just fair
warning, but
00;16;16;19 [Jason]: Full disclosure.
00;16;17;00 [Quentin]: Their regulator's more of a cheerleader for them than,
ours is really there to make sure we're doing what we need to do
the right way. And theirs really has.
00;16;24;01 [Jason]: But they're certainly influential in the economy now.
00;16;26;05 [Quentin]: They are, they're getting large.
00;16;26;13 [Jason]: We can't, we can't ignore what they can do.
00;16;29;21 [Quentin]: No, no question and they do operate a lot, there, there's
similarities a lot to community banking, which is the frustration
because we, we'll compete with anybody on a level playing field, all
day long.
00;16;41;22 [Jason]: Right.
00;16;42;00 [Quentin]: But, but the playing field is not level.
00;16;43;16 [Jason]: Oh, okay.
00;16;44;01 [Quentin]: And so when you get it, you know, if you had a
competitor that, you know, was doing the same business lines as
you but your tax rate is 30% and there is zero.
00;16;53;05 [Jason]: Right.
00;16;53;25 [Quentin]: Imagine what they could do with that 30%,
00;16;55;24 [Jason]: Right. Exactly. That's huge. You're right.
00;16;56;04 [Quentin]: So, that's been the frustration and so the net result is
higher pay for their top people than what we can afford to do, nicer
real estate, bigger real estate, just more stadiums named after
them, or event centers named after them. And so that tax benefit
really, you see it come into play there.
00;17;19;11 [Jason]: Nonprofit is kind of watered down.
00;17;21;13 [Quentin]: It's a nonprofit
00;17;21;24 [Jason]: So it's a watered down term.
00;17;22;24 [Quentin]: That's right. And we don't have a problem with the ones
that stick to that original mission because there is a need there.
00;17;28;14 [Jason]: Sure.
00;17;28;27 [Quentin]: But it's when we're, when we're getting competition, head
to head from the doctors and the lawyers and you know, that's the
"underserved" that the lines have been really blurred as to what
they can and can't do.
00;17;41;17 [Jason]: I agree, 100%. Well thank you for spending time with those
talking about a controversial topic, the marijuana stuff, how not
putting cash into the banking system, not putting cash directly into
the economy, or getting it in there but in kind of weird ways. But no,
but you know, thank you for sharing your thoughts on that. My
name is Jason Watson with WCG Incorporated. Tax and accounting
firm here in Colorado Springs. Quinten Leighty, First National Bank
of Monument. Thanks for joining us. Ax and the Oak is a gracious
hosts here for our Bourbon and Business series
00;18;12;07 for our podcasts. And thanks, and we'll talk to you soon.