Annual Report I 2019

Annual Report 2019

Banking | Lending | Saving | Planning

Chairman’s Report

The last three years have seen significant investment and growth in our credit union. It all began in 2016, when our Board of Directors and Executive Staff developed a vision and strategic direction that called for significant infrastructure investments to ensure that our systems, structure, and business model would support a modern day business strategy and set the stage for future growth. During those three years, we re-built our infrastructure.Weupgraded our core systems, online and mobile banking platforms, mortgage lending, and card service technology. We launched new products and services like VA loans, solar lending, and new home equity line of credit products. We changed our name and brand to reflect our purpose and distinction in a highly competitive marketplace. We re-designed our branches to accommodate a consultative, advice- driven Member service experience that aligns with our brand. In the process, we opened four new branches: Pacific Plaza and the School of Infantry aboard Camp Pendleton, Wildomar, and Escondido. We have even remodeled two existing branches with this new Member experience – Temecula-Winchester and Fire Mountain. And, our senior leaders, headed by President/CEO Bill Birnie, have built a caring, proactive corporate culture. All of these changes are designed to better resonate with our key audiences and to position Frontwave Credit Union for future growth. Frontwave Credit Union’s assets increased $58.7 million, a 7.17% increase from 2018, ending the year at $877.5 million. Gross loans increased by $58.2 million, a 10.47% increase over 2018, and ended the year at $613.9 million. The majority of this growth was in real estate loans, with a $46.3 million increase (19.17% over 2018), with $25.5 million of this growth in VA loans, a new product for the credit union. Commercial real estate loan participations also contributed to loan growth with a $29.4 million increase (117.2% over 2018), as well as solar loans, with a $4.2 million increase (838.46% over 2018). Total shares grew by $53.7 million (up 7.71% from 2018) to $750.2 million. The majority of this growth was in share certificates, with a $30.1 million increase or 29.95%, regular shares with a $10.2 million increase or 6.73%, and dividend share drafts, which increased $6.0 million or 6.81%. With loan growth outpacing share growth during 2019, the ratio between the two saw upward movement from 79.84% at the end of 2018, to 81.83% at the end of 2019. Interest income from loans improved by $2.1 million or 8.61%, due to a combination of loan growth and an increased average loan yield from 4.46% during 2018, to 4.58% in 2019. Share dividend expense increased by $1.3 million in 2019, or 52.93% from 2018. This increase in dividend expense was primarily due to increasing share certificate rates earlier in the year combined with the growth of share, dividend share draft, IRA’s, and share certificate accounts. This resulted in an increase in average cost of funds from of 0.32% in 2018, to 0.46% in 2019. Throughout 2019, the Federal Reserve Bank (FRB) made three 0.25% rate decreases 1 , which reduced the credit union’s FRB earnings during the second half of 2019. Investment income increased overall, however, by $184.3 thousand or 3.52% from 2018, as excess cash was redeployed from the FRB into longer-term bond investments.

In 2019, we began to see the fruits of our labor with higher than industry norms in asset growth (7.17%), share growth (7.71%), and loan growth (10.47%), which includes a 19.17% increase in our real estate portfolio. These results demonstrate that we are fulfilling our mission of making financial dreams come true for our Members! Unfortunately, with investments come expenses, which challenged our growth in net income. To exacerbate matters, during the last three years, Frontwave has been working to resolve a legal matter unrelated to the Membership. In 2019, we reached an acceptable settlement in this matter, which you will see reflected in the Treasurer’s Report. This will be my last Annual Report as Chairman. The Board of Directors will elect a new Chairperson following the 2020 Annual Meeting in March. I will, however, remain as a member of the Board. It has been a great honor and pleasure to serve as Chairman of this financially strong, growing, and vibrant credit union and to have played a modest role in its considerable success. Speaking as a fellow Member, I assure you that I have been proud to represent you as Chairman. Frontwave Credit Union is a financial institution that cares deeply about its Members and the communities it serves. Frontwave has a great future and will always have your back. DREAM BIG. WE GOT YOU! Richard Rothwell Chairman of the Board Non-interest income increased $98.4 thousand or 0.46% over 2018. Total operating expenses increased by $7.6 million or 17.21% during 2019. With the name change in 2019, the credit union increased its investment in marketing and promotion from $2.5 million in 2018, to $4.0 million in 2019. The credit union also invested heavily in infrastructure, which significantly improved our overall member experience. The credit union settled a legal matter at the end of 2019, which had an adverse impact on net income and consequently our net worth. Our earnings trend, asset growth, loan growth and share growth, however, are all positive for the year. The credit union ended the year with a net loss of $2.6 million, down $6.5 million or -164.68% from 2018. The return on average assets (ROAA) for the year was -0.30%, down from the 2018 ROAA of 0.49%. The credit union’s ratio of net worth to total assets, which measures the financial strength of the credit union, ended the year at 12.89% down from 14.12% at the end of 2018. Our net worth remains exceptionally high with the average for the U.S. Credit Union Industry at 11.40% at the end of 2019 2 . The NCUA considers anything above 7.00% to be “well capitalized.” Our high net worth provides the credit union with protection from uncertainties in the economic environment, and enables the credit union to offer competitive rates, open additional branches, and improve and expand services to our members.

Treasurer’s Report

Gary Greving Treasurer Source:

1. https://www.federalreserve.gov/monetarypolicy/openmarket.htm 2. https://go.callahan.com/rs/866-SES-086/images/4Q19_Trendwatch.pdf

Condensed Statement of Financial Condition Assets 12/31/18

Total Assets

12/31/19 72,368,576 514,574,336 44,892,866 54,446,297 (5,411,634) 158,652,059 7,079,959 30,855,686 877,458,145 750,225,827 52,047,928 61,021,490 760,654 13,402,246 877,458,145 26,135,460 5,416,026 21,488,498 53,039,983 (18,958,457) (28,824,936) (4,022,652) 81,386 1,315,324 (3,872,500) (2,557,176)

Cash, prepaids, receivables & other assets....$ Regular loans to members.................................. Visa ® loans to members....................................... Purchased loans..................................................... Less allowances for loan losses......................... Investments............................................................. NCUA Share Insurance Fund.............................. Fixed assets (net)................................................... Total Assets ...............................................$ Liabilities and Equity Shares of members..............................................$ Reserves................................................................... Undivided earnings............................................... Unrealized gain/(loss) on AFS Investments.... Other liabilities...................................................... Total Liabilities & Equity ........................$ Proft and Loss Analysis Interest from loans .............................................$ Interest from investments.................................. Other income.......................................................... Total Income ..............................................$ Compensation & benefit expenses.................$ Office operating costs.......................................... Education and promotion.................................. Other non-operating income (expense)......... Available for dividends........................................ Less dividends paid............................................. Net Income ................................................$

67,118,735 487,325,533 43,727,623 25,063,367 (4,649,454) 164,618,015 6,864,469 28,709,473 818,777,760 696,521,851 52,038,128 63,578,666 (4,633,718) 11,272,833 818,777,760 24,062,638 5,231,654 21,390,123 50,684,415 (18,567,201) (23,152,713) (2,478,825) 0 6,485,676 (2,532,227) 3,953,449

$877,458,145

$818,777,760

2019 2018

Loans

$613,913,499

$555,721,673

2019 2018

Shares

$750,225,827

$696,521,851

2019 2018

Net Income

($2,557,176)

$3,953,449

0

2019 2018

Share Certificates: 17%

Other Loans: 11%

Auto Loans: 33%

Checking: 30%

Unsecured Visa: 10%

IRA: 5%

HELOC/2nd Mortgage: 3%

Regular Shares: 22%

Residential Mortgage: 44%

Money Market: 26%

Share Portfolio

Loan Portfolio

At Frontwave Credit Union, safeguarding our members’ assets, ensuring an independent Opinion Audit and other regulatory audits are performed annually, as well as verifying members’ accounts are the primary responsibilities of the Supervisory Committee. The Committee performed its duties during 2019 in collaboration with the credit union’s Internal Audit and Compliance Department, certified public accountants, the National Credit Union Administration (NCUA), and the California Department of Business Oversight (DBO). The Supervisory Committee continued to engage the outside auditing firm of Turner, Warren, Hwang & Conrad to perform these independent audits of Frontwave Credit Union’s financial statements, and regulatory audits. We are pleased to inform you that the audits for 2019 were completed successfully. Frontwave Credit Union’s financial statements comply with generally accepted accounting principles and fairly represent the financial condition of the credit union. Regulatory audits reflected Frontwave to be in compliance. Based on the results of the contracted financial and regulatory audits, Frontwave Credit Union’s internal audits, and examinations conducted by the NCUA and DBO, the Committee finds that Frontwave Credit Union is a financially sound organization and Supervisory Committee Report

substantially in compliance with credit union regulations. For insight into the 2019 financial performance of Frontwave Credit Union, please refer to the Statement of Financial Condition, published in this Annual Report. As we enter 2020 and a new decade, the compliance and regulatory landscape that governs Frontwave Credit Union continues to evolve and change. The Supervisory Committee’s mission to protect our members’ interests in compliance with policies, procedures, and all relevant laws, rules and regulations remains paramount and our top priority. Finally, the Supervisory Committee wishes to thank the Management Team and Board of Directors for their diligence, support, and dedication to the welfare of our membership and to Frontwave

Credit Union. William Shute Chairman, Supervisory Committee

2019 LEADERS

Richard Rothwell Chairman

Michael Brigagliano Vice Chairman

Gary Greving Treasurer

James Cothran Secretary

George Hoagland Director

Bill Birnie President/CEO

Brian Sutton Director

Kelley Mayer Director

Gerald Polyascko Director

Marlon Ramos Director

WEBSITE frontwavecu.com MEMBER SOLUTION CENTER 800.736.4500 EXPRESS LINE 800.829.7676

LOCATIONS

Barstow Camp Pendleton/Mainside Camp Pendleton/Pacific Plaza Camp Pendleton/SOI Escondido Oceanside/Fire Mountain Oceanside/Rancho Del Oro

San Diego/MCRD San Marcos Temecula/Temecula Parkway Temecula/Winchester Twentynine Palms Wildomar Yucca Valley