2018Annual ReportCREDIT UNION BAYWIDE

Credit Union Baywide Annual Report 2018

Our Mission Helping members achieve their financial goals.

Our Vision To be New Zealand’s leading co-operative banking provider.

Our Values Own It We are courageous, own all our actions and always act with integrity.

Deliver It We innovate and are inspired to deliver the best outcomes every time.

Grow Together We are in it together; growing ourselves, each other and our customers.

To be New Zealand’s leading co-operative banking provider page i

Table of Contents

Directors’ Review ........................................................................................................................................... ii

Our Board ..................................................................................................................................................... iii

Chief Executive’s Review ............................................................................................................................. vii

Trustees’ Report ........................................................................................................................................... viii

Corporate Social Responsibility ................................................................................................................... ix

Statement of Corporate Governance ........................................................................................................... x

NZCU Baywide Internal Directory ................................................................................................................ xi

Financial Statements ................................................................................................................................... xii

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Directors’ Review

I am pleased to present the Directors’ review on behalf of the Board of Directors.

We have achieved strong growth in assets again this past year together with a satisfactory operating result in a difficult environment with ever-narrowing interest margins and rising costs.

Our drive continues to deliver on various strategic initiatives around member value, growth, profitability and our people and infrastructure. As I noted last year, we have been working collaboratively with a group of New Zealand Credit Unions to replace our core banking system over the past two years. For your Board, this replacement of the old core banking system was seen as critical to meeting the fast-evolving needs of our members, as well as addressing the significant risks of running on the old legacy system. Our new core banking system will be the pillar for our key future initiatives, and we were delighted that management have delivered on this immense project in March. While this was a little later than initially planned, and like most IT projects came in over budget projections, we have successfully achieved this conversion at a fraction of the cost of our competitors. You do not have to look far to see failed multi-million dollar core banking conversion projects, and we are immensely proud of the efforts of all involved in our project. I would like to thank the staff involved for all their work and members for their patience and tolerance throughout the project. At the same time we have been investing in a new, modern branch experience in Lower Hutt and Palmerston North this past year. Also underway are new Napier and Hastings branches, as well as a brand new head office building to house our administration teams. The Friendly Societies and Credit Unions Amendment Act has now been passed by Parliament, and I’d like to acknowledge the unanimous support by all the political parties to make these long-anticipated changes to align Credit Unions with other financial service providers in New Zealand. The role of competitive, New Zealand member-owned (co-operative) financial institutions like NZCU Baywide has never been more important for the

delivery of choice and the maintenance of competition in banking in New Zealand. Our focus on delivering value to members is another distinction that exists with Credit Unions and one that must be preserved as the cornerstone of transparency and genuine caring in banking. The fact that NZCU Baywide has a clear line of sight to the customer, who is also a member and an owner, is in itself a clear differentiator from our competitors. The Board and management have been working through a range of issues related to Co-op Money NZ (CMNZ) this past year. As a major investor in this business (of around $3.3 million) we have a vested interest in ensuring CMNZ is run efficiently and profitably. The withdrawal of support by some Credit Unions from this co-operative business has resulted in a significant decline in business volumes, which in turn has negatively impacted costs and returns for NZCU Baywide and the remaining group of supporting Credit Unions. It is unfortunate and disappointing that the Credit Union co-operative family is now divided and some have chosen not to collaborate through CMNZ to provide value for their members. Your Board remain committed to supporting the broader CMNZ co-operative model as we work collaboratively to re-engineer this business and leverage our combined investment. My thanks go to my fellow Directors for their contributions over the past year. Your diligence and efforts during this period of significant change and challenge has been invaluable as we continue to shape NZCU Baywide for the future. I’d also like to thank our Chief Executive, staff and management for their outstanding commitment, hard work and dedication again this year in meeting the needs of our members. We appreciate the significant efforts of staff right across the organisation throughout a period of significant workloads and change. You should all be very proud of your contribution which is very much appreciated. Lastly, on behalf of NZCU Baywide, I wish to thank all members for your business and support. Iain Taylor Chair, Board of Directors

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Our Board

Top L-R: Jared McGillicuddy (Associate Director), Iain Taylor, Alan Bartlett, Grant Travis, Graham Clouston Bottom L-R: Claire Matthews, Katrine Imrie, Chris Lord

NZCU Baywide Board Meeting Attendance Register

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Iain Taylor Chair

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Alan Bartlett Vice Chair

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Chris Lord Director

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Claire Matthews Director

11 8 19 18

Graham Clouston Director

11 8 19 18

Grant Travis Director

11 8 19 18

Katrine Imrie Director

11 8 19 13

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Iain Taylor, Chair

BA/LLB, CU Management Certificate Solicitor Director since 1994. Iain is also a Trustee and chairs the Governance and Directors Nominating Committees. Iain is a qualified solicitor and partner in the law firm Gifford Devine, specialising in property, commercial and trust law. Iain has a strong commitment to the Hawke’s Bay and Central region and is actively involved with a number of school, sports and community groups. Iain’s involvement includes serving for eight years on the Board of the Hawke’s Bay Hockey Association and three years on the Central Districts Hockey Association. Iain is also honorary solicitor to the Hawke’s Bay Cricket Association, Trustee of the Central Districts Cricket Association Charitable Trust and a former member of the Karamu High School Board of Trustees. In addition Iain is a member of the NZ Institute of Directors (IoD) and serves on the Hawke’s Bay sub branch of the IoD.

Alan Bartlett, Vice Chair

BBS (Acctg & Fin), CA, CPP Chartered Accountant Director since 2004. Alan is also a Trustee and serves on the Governance and Audit and Risk Committees. Alan is a qualified Chartered Accountant and is a Director with the local accounting firm, Moore Stephens Markhams Hawke’s Bay Limited. Alan strongly believes in the Credit Union philosophy and with Credit Unions owned by their members it means the benefits go back into the communities and that is something he is proud to be part of.

Graham Clouston, Director

Dip TA (ATAA), ACLA Asset Manager Director since 2010. Graham also serves on the Audit and Risk Committee. Graham is the Executive Director of Smoogro Asset Management which manages financial assets and initiates markets related investments on behalf of family held entities. Graham is also a Director and Deputy Chair of angel investor, Launch Taranaki Ltd.

Graham, with 44 years involvement in the Credit Union Movement, has a strong commitment to the Credit Union people helping people cooperative model. He supports absolutely the growth and development of Credit Unions in New Zealand for the benefit of everyone. Graham is also a Director of Co-op Money NZ and Co-op Insurance NZ.

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Claire Matthews, Director

PhD (in banking studies), MBS (Distinction), BA(SocSci), DipBankStud, DipBusAdmin, National Certificate in Maori (Te Waharoa) (level 2), Certificate in Mauri Ora, FFin, INFINZ (Cert) University Management Director since 2010. Claire also serves on the Governance and Directors Nominating Committees. Claire is the Director, Academic Quality for the Massey Business School, a role she’s had since 2014. She joined Massey University in late 1996 as a senior lecturer, and in that role her primary teaching responsibilities were in the University’s post-graduate banking programmes. From 2009 to 2014, Claire also had overall responsibility for the Personal Financial Planning endorsement within the Graduate Diploma of Business Studies. Claire is Chair of Co-op Money NZ, Co-op Services NZ and Co-op Insurance NZ. She has a PhD in Banking on the subject of Switching Costs in the New Zealand Banking Market. She is a Fellow of the Financial Services Institute of Australasia, and a Certified Member of INFINZ.

Chris Lord, Director

M Communications (Hons), Te Ara Reo Māori Level 3, Te Wānanga o Aotearoa Communications Content and Publications Advisor Director since October 2015. Chris is also a Trustee and serves on the Audit and Risk Committee. Chris works in a communications role at Hawke’s Bay District Health Board, developing and reviewing content for both print and digital media. She is a champion for clear, consistent and easily understood communications. Chris is a strong supporter of Credit Unions and their emphasis on working with people to achieve their financial, professional and personal goals and is a vocal advocate for good governance adding value to both not-for-profit and commercial businesses. Chris currently sits on a number of boards spanning the financial, arts, education and health-related sectors; prior to this she was 12 years on the Board of Credit Union Bay Health holding a number of roles including Director, Trustee, Treasurer and Deputy Chair.

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Katrine Imrie, Director

RN

Company Director Director since 2008. Katrine also serves on the Directors Nominating Committee. Katrine is a property manager and Director of a corporate gifts and wedding planning business, GK Occasions Ltd.

Katrine holds voluntary Board positions as Chairperson of Neighbourhood Support PN, Secretary of the Stewart Centre Trust (Brain Injury Centre), House Manager and Board member of Abbeyfield Palmerston North and Board member on the Abbeyfield New Zealand Trust. Katrine worked as a registered nurse for 35 years, the last 20 in senior management roles. Katrine has a particular passion to keep the personal touch in the workings of the Credit Union and to get the young involved.

Grant Travis, Director

BBS (Acctg & Fin, Pers Mgmt), CA

Chartered Accountant

Director since 2009. Grant also chairs the Audit and Risk Committee. Grant is a Chartered Accountant who has held senior management positions with Massey University and prior to that in the public health system. He currently undertakes some contracting work. He is a Trustee of the NZ Credit Union Foundation and the Colin Smith Memorial Fund and a member of the Institute of Directors. Grant has been a credit union member for nearly 40 years and is passionate about members helping each other through the co-operative model. He is particularly interested in the strategic direction of the Credit Union and its continued growth in strength and relevance within the NZ financial sector.

Jared McGillicuddy, Associate Director

BBS(Acctg), PGDipAcc, CA, CISA, CRISC Risk Assurance Manager Associate Director since May 2016. Jared is a Chartered Accountant, Certified Information Systems Auditor, and Certified in Risk and Information Systems Control and currently works for Central Technical Advisory Services, where he provides audit and assurance services to the health sector. Prior to this Jared held positions with professional service firms Ernst & Young and PricewaterhouseCoopers. Over the past decade he has worked extensively for, and on boards, and believes strongly in the values of successful member-owned organisations.

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Chief Executive’s Review

It is with pleasure I submit my report for the year to June 2018. In March 2018 we launched our brand new modern Oracle core banking system, following an intensive project spanning two years. Our total implementation cost was $2.8

million. While this was over initial budget, it was not a surprise to us given the complexity and enormity of this undertaking, which some experts liken to trying to change the tyre on your car while driving down the motorway at 100kms per hour! This investment is very good value when compared to the costs of other core banking system conversions we have seen in New Zealand. I am enormously proud of all our team for their efforts. Those staff involved directly in the project have demonstrated outstanding determination, skill and commitment, while our broader team have shown tremendous resilience and been unwavering in their drive to learn the new system and look after our members with the various issues encountered. I want to also acknowledge and thank our members for your understanding and support as we worked through the various changes and a number of problems that affected some accounts after the core conversion. My team and I have really appreciated your patience and understanding as we worked through these for you. NZCU Baywide must continue to evolve to remain relevant to all our members today, and tomorrow. This will be achieved by leveraging technology, combined with our actions each and every day that exemplify our values, and our drive to help members achieve their financial goals. Like any business it is critical for us to attract and retain younger members, especially the millennials. They will become the borrowing and investing members of tomorrow and the drivers of revenue generation for NZCU Baywide into the future. We must therefore respond to the technological developments in the digital world. This digital transformation will facilitate the engagement with millennials as well as enabling all members to access NZCU Baywide seamlessly in branch, via telephone, website or mobile anytime, anywhere, anyhow. The next phase of our business transformation is now underway as we look to leverage the opportunities of our new core banking system. This will see us initially implement the necessary technology framework to enable a range of business applications to be easily

integrated to the core system. In turn, this work will enable us to initially enhance our loan processing and deliver replacement internet and mobile banking solutions to improve the customer experience. The detailed financial results are outlined in the Financial Statements included within this Annual Report. The surplus of $1.01 million is down from $1.21 million in 2017, while total assets are up by $69 million to $380 million.

This year, your Credit Union has absorbed significant costs as a result of some Credit Unions choosing to take their business away from Co-op Money NZ, as noted in the Directors’ Review. This financial result is satisfactory in a very competitive environment, but does require continued focus on increasing profitability through growing the valued relationships with our members. The ongoing low interest rate environment continues to impact our overall interest margin and this means that we have to operate smarter and indeed more efficiently to achieve financial performance results similar to prior years. Delivering improved scale and efficiency through our growth strategy has been a key to our on-going successes in recent years. Moving forward, access to capital outside of retained earnings is an important component of our growth strategy and we look forward to updating members further as this initiative unfolds. I’d like to express my sincere appreciation to our Directors, our management team and our entire staff for their time, energy and commitment in delivering on our purpose – “To help members achieve their financial goals”. Finally, I’d like to thank our members for your continued loyalty and support. My team and I are very privileged to serve you and I can assure you that we are focussed on responding to changing times and positioning NZCU Baywide to continue to be relevant for its member-owners of tomorrow.

Gavin Earle Chief Executive

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Trustees’ Report Continued focus on delivering a diversified growth strategy has seen NZCU Baywide continue to grow lending assets over the year. An increased focus towards personal loans saw this loan book grow by 15%, while home loans remained stable over the year. Home loans disbursements for the year were $72 million while personal lending disbursements exceeded $30 million for the year – this is an increase of 13% from last year and is pleasing to see how our personal loan offering is playing an important part in the financial journey of more and more New Zealanders. The strength of our products was also confirmed through one of our personal loan products picking up the Canstar Award for the second year in a row – a very pleasing achievement! Our customers continue to shift more towards online lending and we are now seeing more applications through our online channel rather than our more traditional branch channel. This is both a New Zealand and worldwide trend and on the back of the new banking system, NZCU Baywide is now well positioned to continue to develop our online and digital lending offering for our customers and everyday kiwis. The New Zealand lending market continues to grow, with debt levels across the country now sitting at record levels. The lending market continues to be extremely competitive with

traditional lenders now being challenged by new entrants to the market – all driven to quickly gain a share of the market. These new entrants are forcing us to continue to adapt and be flexible with our products, systems and processes, while remain steadfast to our commitment of being a responsible lender and ensuring our customers get a fair deal. We need to ensure we can continue to remain relevant in a very competitive market and while we are comfortable that our strategy to date has been successful, we need to stay nimble and focussed on ongoing improvement. Looking ahead, environmental forces such as regulatory change, rising house prices across the regions and increasing debt levels will continue to offer opportunity and challenge. With many regions seeing house prices continuing to rise, we expect to see some of the customers we have helped into their first home look to move their home loan to a Bank – this provides a challenge for NZCU Baywide to continue to grow, but also provides an exciting opportunity to help the next generation of first home borrowers across the country. Our strategy remains on diversified lending growth across New Zealand, with continued focus around our personal loan products. The introduction of our new core banking system now provides us with a strong foundation to continue to develop improved systems and processes for our customers into the future.

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Corporate Social Responsibility We recognise that Corporate Social Responsibility (CSR) means we have an obligation to understand, respect and respond to the communities in which we operate. Good CSR requires us to achieve social and environmental sustainability, as well as economic sustainability.

Being 100% owned by our customers, we are not driven solely by profit motives like most corporations in our sector. Instead, we are different in the way that we conduct business for the benefit of our customer-owners, and through them, the wider community in which they live and work.

We believe there is a link between ethical business behaviour and corporate performance. For us, social responsibility is more than a marketing slogan – it is central to customer-owners and their communities, which means it is also central to the way we operate.

Some examples of CSR in action

We provide face to face access with people from local communities, trained and genuinely focussed on being fair, responsible and ethical in looking after our customers’ financial interests.

We deliver high customer service standards.

Our customer benefits programme provides discounts for various services.

We deal swiftly and fairly with any complaints.

We recognise our customers’ rights as owners.

We hold customer appreciation and education evenings in branches.

We comply with our legal and regulatory obligations.

We are committed to our core values of own it; deliver it; and grow together. At the heart of our culture, our values anchor our behaviours and reflect how we treat each other, our customers, and other stakeholders.

We actively promote fairness and equal opportunities at all levels of the organisation, including wellness, career development, and learning and development.

We support staff actively involved in community initiatives.

We support community groups with our free community marquee programme.

We encourage a paperless workplace, and electronic statements and communication.

We are conscious of our footprint on our environment and seek ways to reduce it.

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Statement of Corporate Governance NZCU Baywide is a not-for-profit financial co-operative registered as a “Credit Union” under the Friendly Societies and Credit Unions Act 1982. NZCU Baywide is governed by our Board of Directors on behalf of, and for the benefit, of our members. THE BOARD OF DIRECTORS The Board is elected by, and is accountable to, our member-owners. The Board is committed to a high standard of corporate governance and operates under the framework set out in our Rules, the Friendly Societies and Credit Unions Act 1982, the Trust Deed and our Corporate Governance Policies, which take into account our statutory obligations. The Board oversees the Credit Union and its operations, and is responsible for organisational governance and risk management. This includes setting our strategic direction, establishing goals for management and monitoring achievement of these goals. The Board is responsible for appointing the Chief Executive. The Board delegates responsibility for the day-to-day management of the Credit Union to the Chief Executive and the executive leadership team. The Board has a responsibility to ensure that it has the collective and individual skills to effectively undertake its responsibilities and is committed to high standards of corporate governance. All new Directors participate in an induction programme which sets out their roles and responsibilities. The Board meets at least eleven times a year. THE CREDIT UNION’S RULES Our Rules shape how we are governed. They cover things such as the rights of members, the objects of the Credit Union, the appointment of Directors and how meetings of members and Directors are managed. THE BOARD’S COMMITTEES The Board has three permanent working committees to assist the Board on three specific areas of focus – the Governance, Audit and Risk, and Directors Nomination committees. Each committee has Terms of Reference approved by the Board and is chaired

by a Director. All Directors may attend Board Committee meetings.

Audit and Risk Committee The Audit and Risk Committee assists the Board in its oversight of financial reporting, internal controls, audit and the effectiveness and integrity of the risk management framework. Our external and internal auditors are invited to attend meetings.

Directors Nominating Committee The Director Nominating Committee assists the Board in planning the Board’s composition, evaluating the competencies required of prospective Directors, establishing that they are Fit and Proper persons, and their skills, knowledge and experience are appropriate to the Board’s needs.

Governance Committee The Governance Committee assists the Board with its responsibility to ensure the Credit Union operates with a clear, consistent and effective governance framework that meets our legal obligations and required standards. GOVERNANCE DIFFERENCES Credit Union Baywide is a not-for-profit financial services co-operative, and our Board’s role is to govern the Credit Union on behalf of, and for the benefit of, its member-owners. Because of this, our members have a say in how the Credit Union is governed. Every year members have the opportunity to nominate and vote for Directors on our Board. DIRECTOR ELECTIONS Every year our members can nominate candidates to stand for election as Directors. At the same time, elected Directors retire by rotation and can choose to stand for re-election. THE BOARD’S PERFORMANCE The Board’s performance is reviewed annually. The review includes a Director self-assessment, and a peer and Chair’s review. The Chair provides individual feedback to Directors while the Board discusses its own performance and agrees on action plans for any development areas identified. Ultimately the performance of the Board is also reviewed annually by the members at the Annual General Meeting, where members are able to hold Directors to account.

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NZCU Baywide Internal Directory Board of Directors Iain Taylor Chair

Alan Bartlett Vice Chair

Chris Lord Director

Claire Matthews Director

Graham Clouston Director

Grant Travis Director

Katrine Imrie Director

Jared McGillicuddy Associate Director

Trustees

Alan Bartlett

Chris Lord

Iain Taylor

Patron Roy Gardiner QSM Executive Gavin Earle Chief Executive / Secretary

Andrew Quayle GM Sales, Marketing and Channels

Blair Cross GM Credit and Banking Operations

Chris Fenwick Chief Financial Officer

CUB Annual Report 2018_FINALFinancial Statements_30 June 2018