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Within 90 days of Safe Harbor Financial (SHFS), Partner Colorado Credit Union’s CUSO subsidiary, becoming a public company, the December 2022 financial result showed a negative retained earnings of $39.7 million.

The company’s stock has fallen from a peak of over $10 per share in October 2022 to drop as low as $0.38 in May. Auditors have raised a going concern footnote as a result of its December 2020 financial position.

Partner Colorado Credit Union, the CUSO’s founder and owner, has restructured its initial sale terms of $185 million in cash and stock. This resulted in PCCU recording a $44 million dollar loss in the March quarter, to offset the gains from the sale recognized in the 4th quarter of 2022.

Except for ongoing revenue from its operating service agreements with SHFS, the credit union has yet to receive any payments from this sale closed in September 2022.

How could such an initial optimistic announcement turn south so quickly?

No one knows how this start-up effort to transform a private, relatively small Fintech front-end platform for introducing cannabis-related businesses (CRBs) to financial partners will turn out.

However, PCCU’s effort to tap into the public market’s fervor for “FinTech-Cannabis” related startups has multiple lessons for credit unions. One can see possible parallels in the continued interest and fundraising today in credit unions for FinTech-labeled businesses.

Is the startup scalable?

One topic is scalability. Safe Harbor was started in 2015 with the full support of all of PCCU’s operational capabilities, especially branches.

The credit union offices were able to open accounts, receive cash deposits, make loans, and provide transaction services. Is this geographically based start-up model scalable outside the jointly operated locally-incubated context?

Is the compliance process and technology support so unique, that other local financial institutions and FinTechs would be unable to develop their own capabilities?

“At the end of last year, there were 168 credit unions, 479 banks, and 126 non-depository institutions that were serving marijuana-related businesses, according to FinCEN.” (CU Times)

No free market

One observation at this stage is that there is no “free” market. The credit union is learning that a private firm using the SPAC process has to “pay to play” to become publicly traded.

Reviewing some disclosures from the May 2023, 10-Q SEC filing suggests why this is the situation.

The first is to note that this sale was structured as Safe Harbor buying out the NLIT SPAC, not the reverse as suggested in the $185 million announcement.

Secondly, it is impossible to tell which investors got paid what in this transaction. Certainly, the brokers, accountants, lawyers, and other facilitators were paid fees. But which SPAC shareholders were paid what return?

What is known is that the seller, PCCU, has not received anything from the sale. Moreover, it has converted a significant amount of the debt portion to stock and extended the much-reduced debt payments further out.

The new entity’s first major transaction was to acquire in November 2022 another cannabis business for $30 million in stock and cash. The tangible assets in this acquisition were minimal. The contribution to immediate earnings, unstated. It would seem to be a transaction negotiated before the full financial impact of the PCCU sale was known.

SHFS continues to compare in its filings the current financials with its pre-public quarterly results. This previous financial performance, under the credit union’s auspices, reveals a very modest business, albeit, with a positive financial bottom line.

The impact on CPCU

The credit union appears well-capitalized. The cannabis business relationships from SHFS are important. About $35-40% of its deposit base appears to be from CRBs—much probably held in share draft accounts.

Prior to the public sale, PCCU recorded its CUSO investment at $8.0 million. To date, the credit union has not received any of the payments, including the $3,143,388 in cash and equivalents held by Safe Harbor prior to the sale.

As stated throughout the SEC filings, PCCU is the SHFS’s primary banking partner:

Currently the Company substantially relies on PCCU to hold customer deposits and fund its originated loans. As of this time, substantially all of the Company’s revenue is generated by deposits and loans hosted by its PCCU pursuant to various services agreements.

“Concentration limits for the deployment of loans are further categorized as i) real estate secured, ii) construction, iii) unsecured and iv) mixed collateral with each category limited to a percentage of PCCU’s net worth. In addition, loans to any one borrower or group of associated borrowers are limited by applicable National Credit Union Association regulations to the greater of $100,000 or 15% of PCCU’s net worth.”

Further disclosures show that the credit union has limits on the amount of total CRB-related loans it will hold as part of its service agreements:

“PCCU’s Board of Directors has approved aggregate lending limits at the lessor of 1.3125 times PCCU’s net worth or 60% of total CRB deposits.

CRB deposit limits: “Under the Support Services Agreement PCCU will continue to allow its ratio of CRB-related deposits to total assets up to 65% unless otherwise dictated by regulatory, regulator or policy requirements.” Actual CRB deposits at March 31, 2023, $214 million and $161 at December 31, 2022.

PCCU’s CEO and CFO are members of the SHFS board; the credit union owns 55% of the voting stock from the restructuring. The credit union’s current operations certainly benefit from SHFS’s clients apart from what may be received from the sale of the CUSO.

The transparency opportunity

SHFS’s SEC filings provide many details of its business history and financial twists and turns. The 10-Q filed May 15, 2023, can be found here; and the definitive proxy statement Schedule 14 A, filed April 23, 2023, for the firm’s annual meeting is here.

Two financial questions are partially answered in these documents. If the SPAC held $100 million in cash, how did the working capital become so depleted by year-end? How did SHFS end up with over $39.7 million in negative retained earnings in December 2022 requiring the complete restructuring of the transaction with PCCU?

Below are some excerpts from these documents. The story is complex. There is not a single narrative point of view as the filings show different elements of the financials in various footnotes.

I have selected some to illustrate the information available. There is both quantitative and qualitative (business risk factors) information provided.

One positive note that may bode well for the future is that Safe Harbor’s website and links are one of the most comprehensive examples of transparency I have reviewed. The stock valuation information is detailed both currently and historically. All of the required SEC and financial reports can be accessed online at the SHFS website.

On its investor relations page, the firm makes this commitment: “Safe Harbor Financial (Nasdaq: SHFS) seeks to enhance shareholder value not only through exceptional business performance and practices, but also through responsible and effective communication with its shareholders. The latest company information relevant to the individual and institutional investor includes stock price and history, upcoming events and presentations and financial documents. Safe Harbor Financial trades on the Nasdaq under the ticker symbol SHFS.”

That is an example credit unions should totally embrace as well.

Editor’s Note: For selected excerpts from SEC 10-Q filings, continue reading on Chip’s blog. After the initial publishing of Chip’s blog, Safe Harbor Financial announced that it had entered into an agreement to resolve $64.7 million in payment obligations.


  • Chip Filson

    A nationally recognized leader in the credit union industry, Filson is an astute author, frequent speaker, and consultant for the credit union movement. He has more than 40 years of experience in government, financial institutions, and business. Chip co-founded Callahan and Associates. Filson has held concurrent positions at the NCUA as president of the Central Liquidity Facility and Director of the Office of Programs, which includes the NCUSIF and the examination process. He holds a magna cum laude undergraduate degree in government from Harvard University. After being awarded a Rhodes Scholarship, he earned a master’s degree in politics, philosophy, and economics from Oxford University in England. He also holds an MBA in management from Northwestern University’s Kellogg School in Chicago.

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