Annual Report I 2019

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

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