New CEO Works to Stem Losses at South Jersey Credit Union

If Mike Dinneen was looking for a challenge when he became president/CEO of a small credit union in South Jersey last summer, he found it.

First Harvest Federal Credit Union had lost $673,075 in the first half of 2023 as net revenue and originations fell, expenses rose and loan loss provisions more than doubled to $677,484.

Dinneen made several painful moves that put the credit union in the red by $3.1 million for the year, but ones he told CU Times he believes will help First Harvest return to profitability this year.

Dinneen said the credit union has stabilized and reduced its expense base significantly, with January 2024 showing its lowest operating expense in nearly two years.

“January 2024 was also our highest monthly interest income in many years,” Dinneen said.

“Absent of any changes in the interest rate market, we are confident that as we rationalize our expenses, streamline our focus into our core South Jersey market, continue to attract new members, and refocus into auto and consumer loans and away from mortgages, our credit union will return to profitable operations in 2024,” he said.

Dinneen started as president/CEO of First Harvest July 1, 2023.

He had spent most of the first 20 years of his career in banking before moving to the credit union world at American Heritage Federal Credit Union in early 2018 when it had $2.1 billion in assets and 167,851 members. Before he left, he was SVP of marketing and business development for a credit union with $4.7 billion in assets and nearly 300,000 members.

First Harvest was considerably smaller. In June 2023 it had $467.7 million in assets, just over 42,000 members, eight branches in southern New Jersey and one lone Pennsylvania branch three hours from the credit union’s headquarters in Deptford, N.J., just outside Camden, N.J., which is just across the Delaware River from Philadelphia.

The $3.1 million loss for 2023 represented income moving south by $4.6 million from 2022, or down 98 basis points, of which:

• 40 basis points came from higher professional and outside services.
• 28 basis points came from higher pay and benefits, and only another 4 bps from other types overhead.
• 21 basis points from lower net revenue (a 24 bps drop in non-interest income offset by a 3 bps gain in net interest income).

Compared with other credit unions, loan loss provisions were relatively light, taking only 5 bps from earnings.

Dinneen said the credit union invested in its asset recovery efforts last year, including provisions, personnel and systems. The moves helped lower its 60-day-plus delinquency rate from 1.24% at the end of 2022 to 1.02% at the end of 2023, with a further drop in January.

Dinneen said the credit union’s woes were the product of economic factors affecting all credit unions and others peculiar to First Harvest.

Low-yield participations: First Harvest held $101.9 million in fixed-rate, long-term mortgage participations as of June 30, bought in earlier years when interest rates were low. The balance had been reduced to $94.2 million by Dec. 31.

“In the rate shock environment in which we find ourselves, our dividend expense is far outpacing the average yield on this portfolio,” Dinneen said. “We made a concerted effort to reduce that long-term mortgage exposure by over 7% in 2023 through amortizations and loans sales and have reinvigorated our dealer partnerships to replenish these balances with higher-yielding, member-generating, shorter-term auto loans in 2024.”

Borrowings: Borrowing has been rising among many credit unions. At First Harvest they had grown from $19.5 million, or 5.1% of assets, in December 2019 to $45.5 million, or 9.6% of assets, by December 2022. Interest on borrowings rose from $726,931 in 2022 to $1.4 million last year.

By December 2023, borrowings had been reduced to $38 million, or 8.4% of assets. Dinneen said the credit union plans to cut borrowing another 25% this year.

Call center outsourcing: In late 2022, the credit union created an outsourcing arrangement for its member service call center, which Dinneen said ended up being more expensive than projected. “Upon my arrival, we determined to rehire the entire member service team, which has already led to lower expenses, and more importantly, increased consumer loan production and overall member satisfaction,” he said.

Investments in the future: The credit union had executed a rebrand, a core conversion and a card conversion in the last several years. “These initiatives were designed to enhance our infrastructure, reputation and core, but the successful completion of them carried elevated labor and vendor costs in 2022 and 2023,” Dinneen said.

And then there was the issue of its Pennsylvania outpost in Williamsport, 190 miles west of its New Jersey headquarters.

First Harvest, then South Jersey Federal Credit Union, acquired the Williamsport, Pa., branch through the 2016 merger of WAT Credit Union, which ended its life with $11.2 million in assets, 1,740 members and its single office in Williamsport.

In October 2023, First Harvest’s board met with the board of Members 1st Federal Credit Union, based in Enola, Pa., which as of Dec. 31 had with $7.4 billion in assets, 573,603 members served through 60 branches in 10 Pennsylvania counties.

Members 1st has no branch in Williamsport or elsewhere in Lycoming County, but eight other credit unions serve the county through 11 locations.

In November, the boards submitted an application for a “spin-off” of the Williamsport branch from First Harvest to Members 1st.

The term “spin off” is usually associated with a transaction involving a business selling part of their operation to another business. Dinneen said the term has special meaning under NCUA rules, and it is essentially a transfer to another credit union without a gain.

Dinneen said Members 1st has agreed to assume all of the liabilities, assets, members at the location as well as hire its staff. About 1,000 members with $14 million in share deposits are attached to the Williamsport branch.

“Since the transaction is modeled this way, we will not be generating any cash or gain from it,” Dinneen said.

“Spin offs” appear to be unusual among credit unions. In the CU Times archive only one reference to one could be found: Two Florida credit unions transferring Jacksonville assets in 2012.

The credit unions announced the spin off Feb. 21, saying members will vote on the transfer April 8. If they approve, the transaction is expected to close in the third quarter of this year.

The credit unions pitched it as a benefit to the members in the Williamsport area. They would belong to an organization based in Pennsylvania with branches in other counties to serve them as well.

For First Harvest, Dinneen said the benefits include allowing First Harvest to better focus on its core membership in South Jersey. For the Williamsport employees, he said they will have easier routes to receive training and build their careers with a credit union that has a closer network of branches.

“As I got to know Mike Wilson, the CEO of Members 1st, and his leadership team, it became evident that they would be outstanding stewards of our Williamsport family,” Dinneen said. “Their willingness to assume our Williamsport membership, hire our staff and operate the branch, and their overall legacy of investment in the greater credit union movement, made this unique transaction possible.”