Company Half-Owned by Credit Union Loses Over $17M in Q2

A company that provides banking services to cannabis businesses and is half-owned by a Denver-area credit union lost $17.6 million in the three months that ended June 30.

The second-quarter loss of Safe Harbor Financial (Nasdaq: SHFS) compared with a gain of $336,344 a year earlier and a loss of $1.4 million in the first quarter.

The diluted loss per share was 40 cents. For Partner Colorado Credit Union ($690.1 million in assets, 35,472 members), which owns 22.6 million shares, its share of the loss would be about $9 million.

Safe Harbor shares closed Monday at 49 cents, down from 53 cents on June 30.

As previously reported, the credit union itself lost $9.3 million in the second quarter, which it attributed to its spinoff of its marijuana CUSO as a public company in September 2022. It recorded the loss on its NCUA Call Report on the line for pay and benefits.

After the NCUA posted the results, President/CEO Doug Fagan responded to a query from CU Times saying Aug. 1 the loss was “due to the final pieces of contractual deal expenses” recognized in the second quarter, but he said there were no write-downs in the quarter directly related to the deal. He wouldn’t say how many employees were related to the cost, or further explain it.

Fagan said in June that the board spun off its cannabis business because it had become too large, and it wanted to build other lines of business. However, its $168.5 million in cannabis business deposits accounted for 30% of total deposits on June 30, up from 19% a year earlier. Cannabis loans were $35.6 million, or 8.7% of total loans in June, up from 4.3% a year earlier.

The CUSO spinoff was valued at $185 million last fall. It netted the credit union a gain of about $50 million recorded in the fourth quarter. But the deal went into the red this year with losses of $44.4 million in the first quarter and $9.3 million in the second quarter.

Meanwhile, Safe Harbor Financial still carries a “going concern” note in its second quarter report filed with the SEC. But the amount of its working capital deficit shrank from $39.3 million on Dec. 31 to $9.4 million on June 30; most of it related to obligations left over from its purchase of Abaca, an Arkansas cannabis company, for $30 million, half in stock. Most of the relief came in March, when the credit union bargained away part of the cash it was owed in the deal for a secured, five-year note.

Safe Harbor Financial’s revenue more than doubled from $1.8 million in the second quarter of 2022 to $4.6 million in this year’s second quarter. But expenses, excluding some large write-downs, rose nearly four-fold.

• Pay and employee benefits tripled to $2.5 million in the second quarter from $794,997 a year earlier.
• General and administrative expenses rose nearly seven-fold to $1.8 million from $279.557 a year earlier.
• Professional services tripled to $620,735 from $188,214 a year earlier.

However, the biggest factors in the loss were impairment write-downs of $13.2 million on goodwill and $3.7 million on finite-lived intangible assets.

The company attributed the write-downs to the termination of a bank deal related to the Abaca acquisition. Under the Master Services and Revenue Sharing Agreement with Central Bank of Arkansas, Safe Harbor Financial provided “expertise and intellectual property to cannabis related businesses primarily located in Arkansas.”

In an earnings call Monday, Safe Harbor CEO Sundie Seefried said the company was expanding its financial partners beyond PCCU, including the relationship it announced May 11 with Five Star Bank, a New York-based subsidiary of Financial Institutions, Inc.

Seefried said the relationship with Central Bank was “Arkansas-centric and didn’t offer a national platform.”

However, with the Five Star relationship, “Safe Harbor can now offer new products on the national platform, including interest-bearing accounts, real estate backed lending and lines of credit for our cannabis businesses. These were products that we could not offer with Central Bank of Arkansas.”

Seefried was president/CEO of PCCU until 2021, when she became head of its cannabis CUSO and subsequently Safe Harbor.