The Future of Hemp Business Banking: Strategies for Hemp and Cannabis Businesses

- Good afternoon, everyone. Good morning to those of you on the west coast like me. Thank you for being here. We're so excited about this upcoming webinar series that the bank is launching.

We want to welcome you this morning. This is designed to support business leaders with helpful and timely information about the hemp business and the banking services that support it. I'm Ryan Palmquest, leader of the First Citizens Hemp Banking Group.

This first webinar, the Future of Hemp Business Banking, is a great example of what we're planning to present in the upcoming sessions that we've put together.

2023, I think we all would agree, is shaping up to be a major year of developments involving hemp and cannabis from a legal, business and regulatory perspective.

So it's the perfect time to take stock of where we are and where we're headed. At this point, I'd like to turn over the microphone here to my banking colleague JP Connell, who will introduce our expert panelists for the day. JP, take it away.

- Yeah. Thanks, Ryan. We're proud to have some great experts here to share their insights about the state of the hemp and cannabis industry and the perspectives on where this is all headed. One, Pamela Epstein, the Chief Legal and Regulatory Officer for Terpene Belt, Inc. Pamela is well known as an industry thought leader and also serves as president of the California Cannabis Industry Association.

Also joining us is Richard Chang, an attorney with Weaver Johnston Nelson, where he's equity partner and chair of the hemp products practice. And once again, I'm JP Connell, vice president of First Citizens Hemp Business Banking Group.

Simply put, First Citizens is a hemp-friendly bank. And we have the expertise as well, is the knowledge to help our hemp businesses manage and grow their operations.

We could not be more excited to hear about what our panelists have to say about the forces shaping our sector.

And just one final note before we get started, we expect to have time at the end of the presentation to take some questions from the audience.

If you already have a question in mind or think of one during this discussion, please click Q&A in the bottom right corner of your screen, then type your question in the box that pops up, and hit send. And so with that, let's jump right in. Back to you, Ryan.

- Thank you, JP. Well, the bank was very thoughtful about the experts that they brought on here to this panel. And we're so excited to have them join us. Let's start with Pamela Epstein here. Pamela, the hemp and cannabis sectors are an interesting place, to say the least. I think we'd all agree. But before we get to where we are now, and where we're going, can you please walk us through a brief history of how we got to where we are today?

- Sure. Good afternoon. And I want to express my sincere gratitude for Ryan, JP, and the team at First Citizens for hosting this important and timely webinar and allowing me to share with you the reasons why I believe the words on everyone's lips should be the 2023 Farm Bill. As we look ahead to the future opportunities, it's crucial that we understand the historical context that has led us to where we are today, to do distinct, regulatory pathways for industrial hemp and marijuana markets. Juxtaposed to the fact that you cannot change botany, and both of these industries actually stem from the cannabis sativa L plant.

So where did this all begin? It began with the Agricultural Improvement Act, which we commonly refer to as the Farm Bill. The Farm Bill is a comprehensive piece of legislation that is reauthorized about every five years since 1933. It establishes policies and regulations that impact various aspects of the agricultural industry from crop subsidies to food stamps and rural development. It serves as a significant legislative framework for shaping the agricultural sector and the overall food and farming landscape of the country, which will become important as we talk about what the Farm Bill is and is not.

From 2014 to 2018, the Farm Bill witnessed significant changes in the legal status and regulations surrounding hemp cultivation and hemp production. In 2014, the Farm Bill introduced a pilot program that allows states to cultivate industrial hemp for research purposes. And this marked a pivotal shift in the perception of hemp as an agricultural commodity, and provided an opportunity to explore its economic and environmental benefits, foreshadowing both of them were enormous and productive opportunities.

So then in 2018, the Farm Bill further expanded the provisions of hemp by removing it from the Controlled Substances Act, where cannabis has been classified as a Schedule I substance since the 1970s. This action effectively legalized the cultivation, production and commercialization of hemp at the federal level. The 2018 Farm Bill also granted authority to regulate hemp to the USDA, who established a domestic hemp production program and provided guidelines and regulation for hemp cultivation, including licensing requirements, testing protocols and interstate transportation.

However, unlike the USDA, the FDA did not receive any express direction from Congress to develop regulation for downstream consumer manufactured products.

An interesting point of fact is that testing only happens prior to harvest at one time in the entire life cycle of hemp. And it is only for the presence of one cannabinoid—delta-9 THC.

So while the definition of hemp played a pivotal role in opening up new opportunities for farmers, researchers, businesses, hemp businesses—both plant-touching and ancillary—it was not without its issues. We first saw CBD extraction emerge as a significant sector for manufacturing of CBD products, but subsequently became the conduit for the production of intoxicating hemp-derived products.

So why is this important, and why do words matter? The Farm Bill defined hemp broadly, encompassing all parts of the plant cannabis sativa L, its extracts, its derivatives, its cannabinoids, its isomers, its acids and salts of acids—whether growing or not—with a delta-9 THC concentration of not more than 0.3% on a dry weight basis. That created industry ambiguity, particularly with the rise of conversion of cannabinoids of CBD and the production of products, as you may know, the delta-8, delta-10, or THCP, which can be upwards of 30 times stronger than delta-9 outside of regulated marijuana programs.

We stand now at a really important inflection point with the 2023 Farm Bill. Its mandatory reauthorization provides an opportunity for Congress to directly address the existing loophole in the hemp definition and direct and authorize the FDA to consider downstream manufactured products. This is particularly crucial for banking institutions, considering the highly regulated nature of the banking industry and the importance of clear standards for all of us. Clarity in regulations benefits the entire ecosystem, from plant-touching operators to ancillary service providers. And we often say all roads lead back to the Farm Bill. And as you're going to hear about, the Farm Bill actually provides an anchor point in the definition of what is hemp and what is marijuana in other critical pieces of legislation.

- Pamela, thanks so much for that. We have to have that foundation, right, to continue the discussion. So we really appreciate you providing the background for those on the call who may need it. So let's now turn to Richard Chang.

Richard, the new Farm Bill isn't the only pending legislation that could have major ramifications for the hemp and cannabis industry.

Can you give us an overview of the SAFE Banking Bill and what its prospects are for passage this time around? What would it do if it actually was adopted this time?

- Yeah, it's a good question.

To echo Pamela's credits to First Citizens Bank, thank you for having me on and allowing me to provide this content through your audience.

To your point, the 2023 Farm Bill is certainly not the only piece of legislation that's being considered. Over the last 4 years, there's been numerous federal bills that's been considered, everything from the STATES Act to the MORE Act, and everything else.

But one particular bill that has received a lot of attention over and over again is the SAFE Banking Act. And the reason I think it's received a lot of consideration and obviously attention is because if you think about it, it's really one degree short of really being so plant-touching impactful, right? Because you're talking about financial institutions and what people can and can't do.

So really, the SAFE Banking Act really does two things. It gives cannabis-based businesses access to traditional banking.

More or less, the cannabis industry for the longest time, has been this stigmatized, underground market that has not had access to traditional banking. It is very much of a cash-based business. The second thing the SAFE Banking Act does is it limits the ability for regulators to penalize or to scrutinize financial institutions for providing those banking services. So those are the two primary aspects of the SAFE Banking Act.

So let's back up into the history of the SAFE Banking Act. It was first introduced in 2019. I believe it was around March or April of 2019. And I don't want to go through all the iterations, because we are now on the 8th iteration of the SAFE Banking Act.

But over time, it's evolved. It's changed.

But if you think about it, the purpose has never really deviated that much. It was still about access to traditional banking services and to limit the level of liability for financial institutions. In 2021, it took a bigger turn, since you're starting to see more bipartisan support in Congress compared to the original version.

And so the last version before the most recent one, it was actually snuck in through a couple of interesting paths. One was during COVID through a couple of COVID-related bills. And then most recently, before this most recent iteration, was through the National Defense Authorization Act. And it was put in there.

It never passed, of course. And if you look at the history, it's always been passing more or less on the House side, less so on the Senate side. So now we're looking at the most current version. And historically speaking, it's really been Democratic senators who have been putting the most amount of roadblocks, criticizing the SAFE Banking Act for not having enough social equity programs within the programs.

So what are we looking at now?

Again, the premise is still the same. You're still talking about traditional banking services and limited liability for financial institutions. But in addition to that, I think this version is going to look at access for banking through minority-owned businesses, community depositories. And there's certainly a provision that requires parties to track this data. So you're looking at a lot more of the social equity programs that's being intertwined into this SAFE Banking Act much more than ever before. And also, there is a small focus on anti money laundering as well.

Oh, and just to be clear, most recently just about a month ago on May 11, there was a hearing on it. So that's where we are currently.

There was a hearing. And there was some criticism on it. And obviously, there were witnesses that came out to talk about the effects of the most recent bill. But as of today, it's still pending.

- Yeah, appreciate that insight, Richard, and obviously your expertise as well. Now coming back, Pamela, for a second question, and really building on to that, is naturally many of us are focused on what this will mean for banking in general, and banks like ourselves that are trying to support the market as well as the appropriate financial products. Can you tell us a little bit about the importance of the availability of banking services to the hemp and cannabis sectors?

- Absolutely. I think everybody can agree that banking is fundamental.

When you really break it down and you think about it, you've most likely had a bank account or a bank account in your name since you were born. And people were sending money to your parents to set up college funds. It is so ingrained as a fundamental almost right for businesses and individuals to obtain banking. So the banking services are paramount to any business's success. And so they are no different, and they're even more vital, I would argue, for the cannabis and the hemp sectors who have been living without or under significant constraints for years, as they're trying to build their business.

These industries face significant challenges when they look to access just minimal basic banking services, due to the classification as a Schedule I substance. So for those on the call that don't know, when you are a Schedule I substance, you are deemed to have no medical benefit at all and the highest potential for abuse. So to put that in context, that means that cannabis is higher than opioids.

Because opioids are lower on the schedule, and you just need a prescription to get them. So we are basically being told that we have no value medically and that we have a high rate of abuse.

So nonetheless, financial institutions have remained somewhat cautious and hesitant to engage because of the regulatory uncertainties. However, first and foremost, as hemp became carved out of the Controlled Substances Act, there were banks that were leading the way, blazing the trail, to use all puns intended, such as for citizens who were gaining some security from that allowance. That means that there needs to be increased due diligence, and that you need to have an ongoing and iterative practice.

So having banking access, crucial, allowing that banking access to evolve amid the security risks and the potential for illegal activities is equally important. As Richard said, this oftentimes resulted in businesses needing to conduct their business primarily in cash. That makes them potential targets. So we want to see those banking services shift having bank accounts, payroll processing, electronic payments, loans, lines of credit, investment opportunities. These are all essential fundamentals for businesses that want to grow and expand.

So the availability of these banking services enables both regulatory compliance and financial transparency. It allows a bank to track and report their financial activities accurately to ensure adherence to tax regulation and other legal requirements. So when we look at the relationship in a symbiotic way, we want to promote a more stable and responsible industry. Therefore, we're producing economic opportunity. And the bank then can foster coming in, because you can tick off all of those diligence requirements.

So overall, while we know that banking is essential, and we know that it's going to help create a thriving and well-regulated industry, we need to then work through all of these opportunities legislatively, both at the federal level and the state level, to build legitimacy and credibility. So it is up to those trailblazers like First Citizens and like businesses that are willing to go the extra mile to invest in their compliance. That means having a strategic compliance officer. That means making a culture of compliance part of your business, and understanding that cost of compliance will be higher as we go through the process.

So we're going to talk about—I think later—ways that there can be more availability for the hemp and the cannabis industry. That comes with more clarity when you can remove ambiguity off of the table and say these products are not intoxicating. These products contain no cannabinoids. I think Richard is probably going to talk to us about the nuances of who you are as an actor along the supply chain. That's really important to know both how you operate within the ecosystem and who you serve. Because as you go through diligence with a bank, you're responsible not only for what you are doing, but what you are putting in to that supply chain. Because the flow of money is particularly important for a banking institution.

So that's my take on the importance of banking and the quagmire that is the current setup between having one part of the plant that is pulled out of the Controlled Substances Act, and another part of the plant that is still on the schedule, and the 50-state experiment that we have, where you've got around 30 plus states now with some form of regulated marijuana. And now you have states that have specific adult use hemp-related programs that you've got this fluidity of, an intoxicant throughout the marketplace.

- No, all great points, and it makes sense. Very interesting indeed and appreciate the insights that you just provided. So Richard, over to you again, what's your view of the role in importance of banking for the industry?

- A lot of what I had to say Pamela already covered. So I certainly won't bore everybody with repeating what she said. But this is what I'll add to it. If we take a couple of steps back, I think it's important for industry stakeholders, or people who are thinking about getting into it, or even just other industries who are thinking about getting into the cannabis ecosystem, if you will, is that I really look at the industry in three parts, as far as parties are concerned.

You usually have the suppliers. You have the users. And when you say the word users, I mean the word loosely. Because depending on where you fall in the supply chain, that could shift the role. Or you're talking about third parties. So depending on where you fall in the supply chain, you could very well be a supplier to one but be a user to another. So you usually start off with the people who are growing it, the cultivators, or maybe even the seed developers, and all the way down to distributions, or extraction companies, or white labelers, all the way down to retail and transportation companies.

So that's the entire supply chain continuum. And where you fall upstream, midstream, or downstream, that will dictate your role. And that will change your needs for banking. That will change your needs for how you want to operate a business, and what's the most effective way.

So going back to your question JP, as it relates to banking, I think depending on where you fall on the spectrum, your banking needs are going to have some very big commonalities. But they have different levels of risk and somewhat different levels of need as well. There are going to be certain roles that is more equipment heavy, for example, than others. And if that's the case, you may need certain lines of credit. And maybe you may need a loan. Or maybe your banking needs are just different, because you need cash on hand. Or conversely, you may actually have tangible assets that can serve as a form of collateral for a bank versus some other forms within the supply chain.

So to really answer your question, I think it's extremely important for cannabis-based businesses to have traditional banking for all the reasons that Pamela already said, which I won't repeat. But I'll bring up three interesting points, though. One, if you think about it, one of the biggest concerns with the cannabis industry historically has always been criminal activity, or the potential of creating criminal activity, whether it's theft, or it's crimes involving guns, or any types of other criminal activities.

Well, if you think about it, if it's a cash-based business, doesn't that increase the risk? And if a business has access to traditional banking, wouldn't that decrease the risk of traditional criminal activity? So that in itself is enough incentive to offer some protection to financial institutions to allow financial institutions to accept the ability to bank cannabis-based businesses. So that's one.

Secondarily, at the end of the day, many of these cannabis-based businesses are owned by small businesses. Now granted, you could have MSOs. You could have some bigger companies out there.

We all know who they are. You have the publicly-traded companies. But there's a large part of this business that's owned by the small business owner. By having traditional banking, by having that ability to come up with a financial statement, or by having access to show that you have this traditional banking statements, it helps in their personal lives to get home equity loans, or to have home loans, or to do other things using the money they generated.

Because one of the biggest problems with generating revenue within the cannabis business is that how other businesses are viewing you and how you derive your money. Because there's always the risk of RICO and potential money laundering. And if it's tainted money per se, then people get wary. People get worried.

Oh, I don't want to get caught up in this. I have many physician clients who want to get into state-sponsored medical cannabis programs. But they're too afraid to. Why?

Because it's tied to potentially federally illegal money eventually, whether it's directly or indirectly. So just from a personal standpoint, allowing small business owners to have access to other industries just like any other business owner is the second point.

And I think the third one is I think a bigger picture in that if you have an industry that has never had traditional access to traditional banking, but then they suddenly do, I think that changes the perception of the industry as a whole, which has a trickle down effect in how other state and federal agencies views this agency, views this industry. And they are more apt to make proper legislation and to have a progressive form of legislation.

Because they're thinking, oh, well now it's a legitimate business. Oh, now they have banking.

Chase is banking them. First Citizens is banking them, or all the big banks are banking them.

Now it changes the perception of how the cannabis industry is viewed. And that could also not only have an effect on consumers, but also from agency to agency.

An example is FTC or FDA. They have been fairly silent on CBD products. And now granted, under the FTC, that gets into a little bit too much legalese. There's a reason for that.

I get it. The whole dietary supplement regulation, we won't get into that. But nevertheless, they've had plenty of time to come up with proper regulations. They've have plenty of time to come up with proper guidance.

They haven't yet. And if this industry has that momentum of getting traditional banking or being viewed as a more traditional industry, that may actually jump-start other agencies to provide more guidance, if not more favorable guidance.

- Now Richard and Pamela, I appreciate those responses, as JP and I are truly passionate about bringing stability and legitimacy to banking for our clients. This hits home with us very much so.

One more question here. And please everyone remember. Please feel free to drop your questions in the chat box. We would love to address some of those questions. I think we'll have time here at the end.

But one more question from JP and I. And this one's to both of you. The title of our presentation today is The Future of Hemp Banking.

So as you look down the line, what does the future hold for hemp, cannabis and the ability of the banking world to support them?

This time, I know Richard, you just went. I'd love to hear from you again. Go ahead.

- Sure. Well, I'll make it simple for you.

I think a big part of it is what they do with the SAFE Banking Act. I think that would have a really big impact.

Aside from that, I think other federal agencies coming up with their own guidance will have an impact on this industry. And that could very well impact the banking aspect of it.

I think we've already seen it in the last couple of years, that more and more hemp-derived cannabinoid-based products are being produced, that is being sold whether it's at a gas station, or at a vape shop or at whatever CBD shop. And there's been a Ninth Circuit case. It's a federal case that's provided some legitimacy.

We're not going to go into the whole risk aspect. Because there's plenty of risk, and there's plenty of argument on the other side. But I think as more products are being produced—and as this industry, what I've learned in the 9 plus, almost 10 years I've been in this industry—this industry is filled with plenty of really smart people, very creative people that come up with stuff all the time. Five years ago, 6 years ago, I would have never thought about delta-8 THC being as, you know, widespread and broad-sweeping as it is today.

People are smart.

They take CBD, and they heat it up with acid and solvents. And they create this other new product that people can use.

And I'm certainly not saying I support it one way or the other. I'm just simply saying that people are smart. And if there's one thing about this industry, is that there's constant change. And with that constant change, I think banking, we'll see different types of clientele. I think the banking industry will experience changes within itself. And I think the banking industry will have to evolve with the industry, if it continues to bank it.

And we're already seeing it.

There's now hemp-derived cannabinoid biopharmaceutical companies that's making cancer drugs, that's being sold in other countries.

There's all kinds of crazy stuff out there. There's all kinds of really cool stuff out there.

But again, I think my point is that there's going to be a lot of change. I think we've barely scratched the surface on what we've learned about what each different cannabinoid can do. They're finding out CBG and CBN have different effects on sleep and on depression.

That's just the beginning of it. And again, there's over 160 different cannabinoids out there. And there's all these different secondary ancillary cannabinoids that we have barely even scratched the surface.

- Yeah. Richard, thanks so much. Pamela, your thoughts on the question?

- Yeah, crystal ball. I think two of the driving forces are de-risking and public health and safety.

And I think everything filters through that lens. Because we want to make sure that there's no products that are being supported by the credible industry that are harmful. And I think Richard touched on a good point. We don't know what we don't know. So we have to really think about it in terms of what we do know in the canons of public health and safety that we have.

And so hemp provides us this unique opportunity. The hemp plant, which is the cannabis sativa L plant, which has a more minimal amount of, right now, one cannabinoid, meaning delta-9 THC. Your body when it intakes cannabinoids does not know the difference. It couldn't tell you whether it was sourced from hemp, from cannabis or from orange peels.

So we're really talking about a safety data lexicon. And hemp provides us this unique opportunity to continue to push the envelope. I agree with Richard. The most innovative people I know are in the cannabis and the hemp industries.

And one of the things that we also need to look at in the greater context of this conversation around banking is 280E. Because 280E really is limiting, especially on the cannabis side. So if you're talking about the same compound in two different realms, we want to bring that plant together and regulate it based on a restraint-based continuum, so that everybody can play in a very healthy, de-risked sandbox.

So as we are looking at what happens in the Farm Bill, what happens in SAFE Banking, SAFE Banking—while it is important and gives direction and comfort to banks to come in—it does not address any of the federal illegality around 280E and cannabis, or how we're going to reconcile these two industries, as we start to see what can be considered adult use hemp in different states around the country. Because we're going to have to figure out how everybody plays together to capitalize on the enormous upside that is here.

And so what does that mean when we look at my favorite piece of legislation—because I can't help it—the 2023 Farm Bill? That means that we want to go back to what was the impetus of the Farm Bill, supporting farmers and farming, activities, agricultural products. That means that I cannot—as a farmer—I don't have the right to repair my equipment. Tractors are expensive, as I've recently learned. They are a quarter of a million to almost $1 million. You cannot fix them.

Mother nature is on your board of directors when you are in farming. And she does not take her Ps and Qs from anybody, so if it is inclement weather, and you can't get your tractor out there, if you have a labor shortage.

We really do want to see an increase to that 0.3% to 1%.

But what we also have to remember in so doing is providing guardrails around downstream cannabinoid products from non-cannabinoid products. Because they really are different.

Fiber, grain, seed, terpenes, they all contain no cannabinoids. And so they should have a different roadmap or a different ability to transact with their consumers versus cannabinoid products.

And not all cannabinoid products are treated the same. It's a restraint-based continuum. When we look at other intoxicating markets, so that we can understand where we're looking at our line of sight, we can look to alcohol. Alcohol is restraint-based.

Not everything is treated the same. And they have a demarcation line on what is intoxicating and what is not. And once we have that framework, you're going to see a lot more availability of capital and a lot more comfortability from your financial institutions. You'll see a reduction in overly duplicative regulation, where it does not need to be.

And ultimately, one of the other things that I would like to see in the Farm Bill, if anybody in Congress is listening, would be the removal of the ineligibility of the status of hemp as a commodity for access to the Specialty Block Grant Program. We really want to see the USDA providing additional support to true industrial hemp. That means we also have to continue to pivot through what is a cannabinoid versus a non-cannabinoid product and getting the government really comfortable with the rest of the cannabis plant.

And then as we validate scientifically the luxury of the difference between phytocannabinoids, chemically converted cannabinoids, and novel synthetic cannabinoids, and we get the DEA and the DOJ to provide us with the definition of these terms, it becomes more important. Because at the end of the day, if you are using pressure, if you are using heat, if you are converting something, we should be testing not only for the presence of IE potency, but the purity of that product.

And we should be able to educate the consumer to know what they are consuming. And high tides raise all ships. We will then have a very clear, transparent way to get these products to the consumers.

We know it's amazing. The cannabinoid industry, and I take that to mean in its totality, billions of dollars are transacting. I would like more of those billions of dollars to transact in regulated, along a continuum marketplace. Because then, the best companies, the compliant companies will be able to get the financial and banking services that they so direly need to create stability, to create growth, and to transact with the very real user base that's expansive that Richard touched on.

- Wow, some very thought-provoking stuff, you certainly got my mind spinning. But I really appreciate both of your insights there. And I believe that's the center of the conversation that you guys summarized right there. So we now have time for a few questions from our listeners, which is always my favorite part of the show. So please feel free to throw some questions in there in the chat box.

And while you're doing that—well, we gathered the questions here. Let me just say. First Citizens Hemp Banking has a deep understanding of your financial challenges that you face in this industry.

We know what you've been through. We understand the day-to-day grind. We understand the disappointment and the frustrations around some of these same things that Pamela and Richard have spoken around. And we want to be that solution for our clients across the country.

With years of experience, our dedicated hemp banking team helps navigate these complex nuances of this regulatory environment, ensuring that the challenges you do face, you won't face alone, which is a really big part of our mission here at the bank. You can count on us for merchant services, loans and lines of credit, equipment finance, and leasing. We have all the other financial services and products, and we believe they're best in class around the country.

We're super proud of the fact that we offer all of these bank products and services to our hemp clients. Once you are a part of our hemp program, you have access and availability to apply for all of these products and services, which we think distinguishes us and separates us from some of the competitors out there.

So finally, if you have a question we can't get to—because we always end up getting so many good questions, particularly when we have experts like this online—feel free to—or if you're just not comfortable, feel free to reach out on FirstCitizens.com. You can Google First Citizens Hemp. Click on that. The link pops right up first on Google. You can find First Citizens fairly easily, and JP and I will get to any of those questions after the fact, if we run out of time today. So with that being said, JP, do you have any questions in there that you'd like to kick off with?

- Let's see.

It does look like we have a question posed. And Pamela, this was directed more so at you. Do you mind elaborating in providing an example of how changes to the Farm Bill that distinguish cannabinoid from non-cannabinoid products can support farmers in AG processors as well?

- Sure. I can give you an example near and dear to my heart, Terpene Belt Farms.

So Terpene Belt is a AG producer. Actually, according to the 2022 USDA hemp report, we produce about 66% of California's floral hemp production in about 3.5% of the countries. What I will tell you is we do not farm for cannabinoids. We farm for terpenes.

Now terpenes are a particularly interesting example. Because we are not farmed from the stock or the seed. We are farmed from the flowering tops of the plants, the same place that cannabinoids are farmed from. But we use steam distillation, fresh, never frozen. So in under 90 minutes, we take that plant from harvest through steam distillation. And we don't have steam that runs hot enough to pull cannabinoids.

So cannabinoids are a byproduct. We can mulch them back into the field. There are other avenues for those. But we are sourcing specifically for a non-cannabinoid raw material that can be used ubiquitously, both within cannabis, within hemp, and within non-cannabinoid products. And so we are fully encumbered by cannabinoids in our process. So the USDA has been very hesitant to extend grant or loans to those from the flowering tops of the plants, because they cannot guarantee that they are not producing an intoxicating product.

Because again, there's a big difference between flower.

It's like a leopard, can't change its spots, right? It's light and it's airy. 0.3% is truly de minimis. But when you have, whether growing or not, and you draw it down into a final form product, that's where the hesitation comes in from the USDA and other actors. We see other bills moving forward, like the Hemp Exemption Act, where they want to specifically have a lower threshold for seed and fiber.

I would contend that it is easier, or should be more broadly applicable, to separate out cannabinoids from non-cannabinoid based products as you flow them through. For public health and safety, they go this way. And ultimately, that provides you a basis for turning the lights on. When you want to fully deschedule or federally legalize, you will already have good institutional makeup around what is final form, fit for purpose regulation. So if it's going into a product that has fit for human consumption, you will be dealing with cannabinoids as a full operating system, separate and apart for non-cannabinoid material, which really was one of the driving factors towards reinvigorating farming and farm AG processing products at the commencement of the Farm Bill in 2014 to 2018.

- Pamela, I appreciate that. Thank you so much. And we have another couple of questions here from the chat box I was going to address. And one of the questions is near and dear to my heart. So I'm going to respond to that one personally. It says, why is it so easy for you to do loans when other hemp banks don't? And I think that Pamela and Richard both explained why that's the case.

We are passionate about these businesses. We know that they need access to capital. We know that these companies are well-run, that they have some tremendous ideas, technology. They need access to traditional banking. And that's not simply just taking deposits. When I set up this program, established this program as a director of this business line, JP and I made sure that we would have access and a conduit to get capital to these businesses that so badly needed it.

Now, of course, our businesses need to qualify like any other applicants in the bank. I want to make sure that's clear. However, I have been pleasantly surprised with how many great companies and clients we have that qualify for these great products and services that the bank has to offer.

It all starts with compliance. As Pamela and Richard have both said, you have to evolve.

You have to make sure that you're adhering to state and federal law. You've got to make sure that the regulations are being adhered to and you're doing things the right way.

We invest heavily on the compliance side. We have an incredible team. The backbone of our program is that compliance team that are doing things behind the scenes to make this happen for us. So that's how we lend to our hemp clients. And we're super proud that we're able to do that.

Another question here that I've got, Richard, this one's in for you. Given the way this industry has evolved, what other industries do you anticipate hemp crossing into? I'm curious about that.

- Hemp has crossed over to a lot of different industries.

One industry that is near and dear to my heart, and I'll steal your term, is healthcare.

And let's talk broader. It's not just hemp. It's cannabis as a whole.

As we've seen over the last I would say 12 years, maybe 11 years, you see all these different states having adult use. But before that, many times, they will have some form of a medical cannabis program within the state, a state-sponsored program.

So as that's evolved—and then of course now with hemp, you have these different hemp-cannabinoid based products. Again, we don't know where it's going to go.

We don't know where it's going to go. And as I previously mentioned, there are certain cannabinoids that's already been associated with sleep studies, or anxiety, or mood disorders or whatnot. With healthcare being as broad as it is, I'm seeing a lot of crossover between the two industries, between cannabis and healthcare, and how it's impacting healthcare directly and indirectly.

For example, physicians are consistently considering alternative forms of medicine to get away from the opioids in the world, of course, cannabis being an alternative. But they're a little bit reticent about getting involved. Why? Because they have DEA registrations.

Many times, they're certified by Medicare to receive Medicare funding. Or they're under a Medicaid contract. If you're in a nursing home or assisted living, you could be receiving some type of—well, more so with the nursing home, you're almost always receiving some form of federal funding.

So those federal funding coupled with the fact that some states are more regulated and more restrictive within their state licensing boards, you have all these consistent questions by healthcare providers that want to get into this. But they're a little bit reticent about doing so for legitimate reasons. But yet, there's still such a big connection between the two industries. Because you do have this hemp/cannabis-based products that's impacting wellness, that's impacting human behavior, that's impacting patient care.

And quite frankly, I have physicians that are saying, well, to heck with it. I'm going to stay away from the state-sponsored medical cannabis programs. Maybe I should just consider recommending a hemp-derived cannabinoid product that has a similar effect, that has a similar mirroring cannabinoid. I've heard those talks, especially in states that have a low supply of state-sponsored products, Texas being one of them. I can tell you that right now.

So I do see a lot of crossover between the healthcare and cannabis industry. And of course, I may be biased. Because I got into the cannabis industry about almost 10 years ago from the healthcare side. I still remember my first project.

It came out of an office in New York. They said hey, you're a healthcare guy. Maybe you can figure this out. And the question was, what are the physician liabilities prescribing versus recommending medical cannabis? That's how I fell into it. And that's how my career in this industry slowly derived. And it grew ever since.

But again, even if I take away that bias, I'm seeing that heavy crossover more and more significantly. It's even impacting how hospitals are treating patients. In states like where Pamela is, you have Ryan's Law, where I believe it's a mandate that you have to allow the patients a Right to Try law in the state of California for particular illnesses. And in other states like Connecticut or Minnesota, you have certain protections on certain licensed professionals that help administer cannabis-based products, so that it stays away from state liability with regards to a license or some type of other forms of registration.

And of course, hospitals they have JCAHO accreditation. Accreditation is another concern. So you have all types of crossover concerns between the cannabis industry and healthcare more and more so than ever before.

- I appreciate that, Richard. I've seen so many pharma companies and these other organizations starting to approach the bank looking for funding to further them in this crossover. So I think you're spot on. A few more great questions here in the chat box, and I think we have some time for them.

One question here, would legalization at the federal level allow for cannabis to be imported from around the world? That's interesting. Is that much of a threat to US farmers? Or are they competitive enough to withstand that competition? So we know that the cost and margins can be compressed quite aggressively when compared to other countries in some of the things that they can do. Pamela, Richard, whichever one of you wants to jump in here, what are your thoughts about international competition, if we were to open it up and legalize cannabis here in the States?

- Pamela, go ahead.

- Well, I mean you've got hemp and the hemp cannabinoids. You've got states. You've got seed cultivar programs. I think when you're looking at importation, you want to think about where along the supply chain you are. What are you bringing into the country? What state are you bringing it into? Because states are now developing different programs.

So all roads to me lead back to are you a cannabinoid product? Are you a hemp product? Where are you on that supply chain? Because you're going to encounter many different regulatory hurdles as you move forward in that process. For example, California is going to want you to have to be able to show where you're purchasing your hemp from. And now we have AB-45.

So they're going to want you to test that to cannabis testing standards. So if you're bringing something in, we've seen a lot of things be held at customs in order to get them in. And then they may not actually pass the quality assurance and the quality testing that is coming in.

So I think competition is definitely always fierce. Cost of inputs is specifically important. But we are going to have a higher level of scrutiny for our products that are coming in, especially as you're starting to see these programs from a cannabinoid-based sediment coming to bear.

And then consumer education, I'll tell you to Richard's point, I got into cannabis because I had debilitating migraines. And it is medicine for me. I take it in that palliative manner. I want to know where my cannabis is coming from. And this know your farmer, know where your product got into, this isn't just something that happens with fruits and vegetables. This is actually happening in cannabis as well. So consumers are also going to dictate that along with the states.

And they saw another question. I just wanted to touch on it quickly. Your compliance officer is both for your internal company. For a bank, you always want to look for that. Because that's where getting due diligence is important. It's understanding what questions you're asking if you're the financial institution. And it's understanding how to answer those questions and to have a dialogue around risk mitigation and opportunities with influencing legislation, with moving through the process in which states that you're operating.

Richard mentioned Texas. That's an important one. We're going to see how this sediment between cannabinoid hemp and medical marijuana play out in the great state of Tennessee, who has an expressed prohibition on all things related to marijuana, is bringing on a medical marijuana program, but in the interum has invested deeply on August 1 into getting their arms around regulation around delta-8.

So that's a particular interesting jurisdiction that's one to watch. I will for sure be watching how that plays out.

- That's great. Thank you. Pamela, I appreciate that. Richard, do you have something there?

- In my opinion, I think the question was how would it affect cross border or international impacts, if we were to legalize on a federal level [INAUDIBLE]. And even today, we have the customs border patrol who have a lot of different regulations specific to cannabis. And they issue out pretty unambiguous statement, reminding people that cannabis is still illegal in the United States as a Schedule I drug.

But I think if we were to legalize it, it's not that it would-- I do think it would actually increase cross-border transactions, and more US-based businesses getting involved on cross-border transactions. However, I do think it's still going to be very, very heavily regulated in terms of disclosures, how you get products into the country. To Pamela's point, it depends on where you fall in the supply chain.

What is in your products? I still remember a long time ago when hemp products were very unregulated. You have hemp products that you can actually buy online. And many times, they came from London, or Russia or China. And they have all kinds of crazy metals. And they had contaminants. So I think you're looking at more public health issues at that point in addition to disclosure issues and some risk mitigation concerns, again, assuming that the question being posed is, what if we were to legalize it?

- Yeah.

Thank you both for that answer. I appreciate that. One more question here that I think we should address is, how is the relationship of First Citizens Bank with banking regulators, specifically the FDIC Federal Reserve Bank, with our cannabis banking partners. We work very closely, obviously, with federal regulators from several different bodies.

We have had phenomenal results and audit testing. And we're super proud of that.

We've actually been told we have a best in class compliance platform. And that is something we are incredibly proud of.

We have a responsibility to our clients to ensure that we're operating legally on a federal and state level. That is something we take quite seriously here at the bank. And I think that that's shown through to the regulators when we have those discussions, is that they know we've put a lot of time and energy and invested tremendously in ensuring that we're doing things the right way. And that allows us to do all the great things that we're doing for the industry. And we're going to continue to do so.

Everybody, I think that's about it for the questions on there. If you have any other questions, please again reach out to us at FirstCitizens.com. It's your first result there on Google. We're front and center. We want to be out there, and we want you to know how to find us.

I must say, this has been a wonderful session, a wonderful kickoff to our hemp webinar business banking series here. I sincerely thank the panelists, Pamela, Richard, wonderful. Thank you so much for speaking your mind, for coming prepared with some great information.

To our audience, please watch our website and watch for your email. We're going to be launching a new webinar here in the near future. We are so passionate about being thought leaders in this sector. We want to do more than just bank. We want to continue the conversation, facilitate the conversation. We want to see our clients succeed. We want our clients to get some of these answers that they're looking for from the regulators, from the government agencies that are covering all these subjects.

So much more to come as we think about this, but rest assured, we're going to have more great panelists like Richard and Pamela. And thank you guys for coming. Have a great rest of your week, everybody. Thank you so much.

- Thanks for having us.

- Thank you guys.