PCCU Takes Another Hit From Former Cannabis CUSO

Partner Colorado Credit Union’s spinoff of its marijuana CUSO as a public company cost members another $9.3 million in the second quarter, according to reports from the Denver-area credit union.

PCCU of Arvada, Colo. ($690.1 million in assets, 35,472 members as of June 30), reported a $9.3 million net loss in the three months ending June 30, or $263 per member, which the credit union attributed to the sale of Safe Harbor Financial (SHFS) in September 2022.

That wiped out the remainder of gains recorded from the sale. And while President/CEO Doug Fagan said in June the sale was designed to reduce the credit union’s large exposure to cannabis businesses, the credit union’s latest statement showed that the percent of its cannabis-related loans rose from 21% Dec. 31 to 30% June 30, and cannabis deposits rose from 5.4% Dec 31 to 8.7% June 30.

And the second-quarter loss shown in its Call Report came from an unusual place.

The credit union’s Call Report showed $12 million in expenses for employee pay and benefits in the second quarter, up from $2.7 million in the first quarter and about $3 million per quarter in 2022.

The credit union’s two-page results sheet posted in its lobby stated that almost all of the quarter’s net loss resulted from the sale of its cannabis CUSO, Safe Harbor Financial, in September 2022. However, neither the posted two-page lobby summary nor the Call Report posted by the NCUA explained the surge in employee costs.

PCCU was asked for comment on the source of the loss on Friday. On Tuesday, Fagan in an email declined to explain the contents of the Safe Harbor-related employee expense or how many employees it applied to.

“The loss in Q2 was due to the final pieces of contractual deal expenses that were not recognizable, per GAAP, until the second quarter. I am not at liberty to disclose any further information on those expenses,” Fagan wrote. “We did not have any write downs in Q2 that were directly related to the sale of Safe Harbor.”

PCCU started working with cannabis businesses in 2015 and in 2017 created a CUSO called Safe Harbor Services. In February 2021 the credit union reorganized the CUSO as Safe Harbor Financial, stating that one goal was to attract “potential investors.” Sundie Seefried announced she would resign in July 2021 as the credit union’s president/CEO to become CEO of the new CUSO, which she did.

A deal to sell the CUSO to a shell company called Northern Lights Acquisition Corp. was announced in early 2022, and on Sept. 28, 2022 the deal was completed. Seefried became president/CEO of the new public company: Safe Harbor Financial.

The deal caught the attention of Chip Filson, who wrote about it in his “Just a Member” blog that he started after retiring in 2019 from Callahan & Co., the Washington, D.C., credit union company he co-founded in 1985 with two other former NCUA regulators.

“Hopefully the members will be the big winners in Safe Harbor’s public offering. The history of this effort was that it was all done with the credit union’s resources,” Filson wrote in March 2022.

PCCU had valued the CUSO on its books with the NCUA at about $8.5 million, or about $238 per member. In the September 2022 sale, the credit union was to get $70 million cash, or $1,942 each, plus a 51% stake in the new company, which at $10.31 per share Sept. 28 was worth $117.4 million, or $3,256 per member.

But it didn’t work out that way.

Instead, the credit union has received $13 million cash received in the fourth quarter, or $362 per member, and $14.5 million cash promised, or $406 per member. Plus they have stock, which at its July 31 price of 55 cents per share, was worth about $12.4 million, or $329 per member.

The credit union began recording the deal in the fourth quarter, posting a gain of about $50 million on the sale. It then posted losses from Safe Harbor of $44.4 million in the first quarter and $9.3 million in the second quarter.

As a result, its net worth fell and its risk-based ratio fell from 14.82% on March 31, 2023 to 13.68% on June 30. The ratios were down from 17.38% on Sept. 30, 2022, before it recorded effects from the CUSO spinoff.

Filson wrote about the deal again in May in his “Just a Member” blog. On Monday Filson told CU Times that a publicly traded company would be required by the Securities and Exchange Commission to provide the public with explanations for a net loss and its relation to employee expenses.

While a credit union isn’t subject to the same disclosure requirements under law, Filson said the large increase in the pay and benefits expense line “needs to be explained.”

“Explaining these transactions is critical to maintaining the trust and confidence of member owners.” Filson said.

Company officials said they sold the cannabis CUSO last September to reduce their exposure to the cannabis business.

However, Filson noted that the credit union’s two-page lobby statement showed cannabis-related loans and deposits were up, while non-cannabis deposits were down since the September 2022 deal.

“They have increased significantly their dependence on the marijuana business after they sold it,” Filson said.