ANNUAL REPORT 2016 · (see Chart A: Loan Portfolio 2007–2016 and Chart B: Total Funding). One...

2016

ANNUAL REPORT

Who We Are 04 // Our Past10 Years in Review 06 // Chairman’s Report 08 // Board of Directors 12 // CEO’s Report 14 // Executive Team 18 // Community Support 20 // Directors’ Report 28 // Corporate Governance Statement 30 // Concise Financial Report 40 //

Directors’ Declaration 50 // Independent Audit Report 52 // Auditor’s Independence Declaration 53

CONTENTS

Newcastle Permanent’s vision is to be the leading retail banking business in Australia. We offer a better way of banking with a comprehensive range of retail banking services, superior value products, exceptional service and a meaningful contribution to the local communities that support us.

Employing nearly 1,000 people and servicing more than 325,000 customers, we are the largest building society in Australia with almost $10 billion in total assets.

Newcastle Permanent is financially the strongest customer-owned banking institution in Australia in terms of net assets and just like the major banks, we are supervised by the Australian Prudential Regulation Authority (APRA), under the Banking Act 1959.

Newcastle Permanent is 100% owned by our customers so all the value we create is shared only with our customers and their communities, not with shareholders like the major banks.

Our goal is to help our customers achieve financial success and help to build successful and vibrant communities in the regions where we operate.

As we continue to expand our digital and physical presence, even more people will be able to enjoy the benefits of our customer-owned banking model that is focused on people and their communities, not just profits.

WHO WE ARE

ANNUAL REPORT 2016 ANNUAL REPORT 20166 7

OUR PAST 10 YEARS IN REVIEW

TOTAL RETAIL DEPOSITS UP 109%

HOME LOAN PORTFOLIO UP

88%TOTAL ASSETS UP

$3.8bn

HOME

OF THE YEAR 8 TIMES

LENDER

BUILDINGSOCIETYOF THE YEAR 10 TIMES

OUR COMMUNITY OUR GROWTH

OUR AWARDS

$1billionCREATED IN CUSTOMER VALUE

GROWN TO MORE THAN 325,000

CUSTOMERS

SERVICING600,000MORE REGIONAL AUSTRALIANS

OUR CUSTOMERS

CUSTOMER SATISFACTION

94%AVERAGE

2016

2006

30%IN BRANCHESGROWTH130%

MORE ATMS2006

2016

35 YEARS SUPPORTING SURF LIFE SAVING

231,

800

PEOPLE ENTERTAINED

CINEMA UNDER THE STARS EVENTS89

FOOTBALLS GIVEN TO ENTRY-LEVEL PLAYERS

55,000

YEAR 5 & 6 STUDENTS SAT OUR PRIMARY SCHOOL MATHS COMPETITION

188,101

$400KSTAFF DONATIONS

4,000STAFF VOLUNTEER HOURS

IN CHARITABLE FOUNDATION GRANTS

2006 – 2016

$13.1MILLION

ANNUAL REPORT 20168 9ANNUAL REPORT 2016

FINANCIAL RESILIENCE

Newcastle Permanent’s Tier 1 capital ratio is superior to all of the major Australian banks and customer-owned financial institutions. Tier 1 capital is the core measure of a banking institution’s financial strength (see Chart E: Tier 1 Capital Ratios).

In a year when the major banks have been directed by the Prudential Regulator to meet increased capital requirements, Newcastle Permanent’s exceptional capital position, developed through prudent financial management, has allowed us to focus on executing our strategic priorities rather than on short term capital management initiatives.

Both Moody’s Investors Service and Standard & Poor’s international credit rating agencies have reaffirmed Newcastle Permanent’s long term credit ratings, which remain unsurpassed by any customer-owned banking organisation.

Our relentless focus on delivering an effective strategic plan and driving key financial metrics has ensured Newcastle Permanent continues to thrive despite the persistently challenging operating environment. Our performance, combined with the value that our customers derive from conducting their business with us, reinforces that there remains a significant benefit in continuing to differentiate ourselves as a building society rather than a bank, considering the negative perceptions and experiences associated with banks.

WORKING FOR OUR CUSTOMERS

As a customer-owned organisation, Newcastle Permanent has a clear focus on operating for the benefit and long term success of our customers and the communities where we operate.

Our constant focus on delivering a compelling customer value proposition ensures our products are highly competitive and our customers are highly satisfied with the products and services they receive.

This financial year, Newcastle Permanent created a total of $95.6 million in long term value for our customers, made up of $54.7 million of Mutuality Dividend (which is the additional financial benefit our customers receive by banking with Newcastle Permanent rather than the four major banks) and $40.9 million net profit after tax (see diagram on page10).

This value our customers receive is in stark contrast to the major banks, which penalise their customers with relatively lower quality products, inferior interest rates, higher fees, relatively low levels of customer satisfaction and token levels of community support in order to earn record profits so they can pay dividends to their shareholders.

We believe our customer-owned business model produces better outcomes for our customers and their communities without the negative consequences of the banks’ excessive focus on generating profits for the benefit of their shareholders.

CHAIRMAN MICHAEL SLATER

Newcastle Permanent’s consistently strong business outcomes since the Global Financial Crisis (GFC) in 2007 are the direct result of a resolute focus on delivering against our strategic plan priorities, an elevated multi-year investment program that has delivered a range of strategically important projects, excellence in execution and effective risk management, all of which is supported by an effective system of applied governance.

During the year, Newcastle Permanent completed a number of strategic projects valued at more than $7.8 million. An elevated investment program exceeding $70 million over the past eight years has driven sustainable business growth and ensured Newcastle Permanent continues to meet its customers’ needs more effectively than its competitors (see Chart D: Investment in Projects and Capital Expenditure).

In fact, Newcastle Permanent is significantly outperforming its competitors in the customer-owned banking sector on many key measures including asset growth, capital position, infrastructure and capability investment, community support, industry awards and customer satisfaction.

CHART C: PRODUCTS PER CUSTOMER2007–2016

CHAIRMAN’S REPORT

CONTINUED HIGH PERFORMANCE

In this, my final year as Chairman, I am proud to report that Newcastle Permanent has again performed exceptionally well against our balanced Strategic Performance Scorecard, including record results in the home lending component of our core business of retail banking (see Chart A: Loan Portfolio 2007–2016 and Chart B: Total Funding).

One area of striking performance against the industry sector was the attainment of 11.5% home loan portfolio growth compared to the industry average of 6.7%. These results were achieved in a challenging business context characterised by historically low interest rates, which is driving intense competition for home loans and customer deposits and is contributing to ongoing pressure on interest margin.

Despite the demanding operating environment, Newcastle Permanent achieved a net profit after tax of $40.9 million, which is an increase on last year’s result. This profit is fully retained in the business to support our already exceptional financial strength and to help provide our customers with highly competitive products and services including better interest rates and lower fees compared to the major banks’ equivalent products. The success of our business strategy is also evident in the growth of our retail banking products-per-customer, which is now equivalent to the major banks (see Chart C: Products Per Customer).

To serve current and future generations of customers, Newcastle Permanent has significantly advanced its digital and mobile capability with a range of enhancements, including a new responsive website, online product application capability and new mobile and tablet apps, all of which were deployed this year. These initiatives have been very well received by our customers, with demand for digital (online) banking services evident on a range of measures, including 37.5% growth in internet banking transactions over the past two years.

We are also undertaking a significant investment in a new, state-of-the-art internet and mobile banking platform, which is due to be launched during the next calendar year.

CHART D: INVESTMENT IN PROJECTS AND CAPITAL EXPENDITURE

CHART A: LOAN PORTFOLIO 2007–2016

$4.5

bn

$5.6

bn

$4.8

bn

$6.1

bn

$5.0

bn

$6.6

bn

$6.8

bn

$7.0

bn

$7.3

bn

$8.1

bn

2007 2008 20112009 20122010 2013 20152014 2016

CHART E: TIER 1 CAPITAL RATIOS % OF RISK WEIGHTED ASSETS

Source: Most recently available APS330 disclosures.*Excludes Newcastle Permanent.

NEWCASTLE PERMANENT

18.86%

10.3

1%

REGIONALBANKS

11.8

8%

MAJORBANKS

TOP 5 MUTUALS*

14.5

0%

2007 2008 20112009 20122010 2013 20152014 2016

1.88

2.27

2.02

2.33

2.17

2.40

2.43

2.45

2.44

2.50

CHART B: TOTAL FUNDING 2007–2016

2007 2008 20112009 20122010 2013 20152014 2016

$5.2

bn

$6.1

bn

$5.7

bn

$6.7

bn

$5.6

bn

$7.2

bn

$7.5

bn

$7.8

bn

$8.0

bn

$8.8

bn

2016

$ 10.

3 m

2015

$ 10.

0 m

2013 2014

$ 12.

1m

2017 BUDGET

$ 15.

0 m

$ 7.8

m

ANNUAL REPORT 2016 ANNUAL REPORT 201610 11ANNUAL REPORT 201510 11

A TEAM ACHIEVEMENT

A sustained focus on achieving strategic objectives depends upon a collaborative and complementary team environment. I am proud of the commitment shown by Newcastle Permanent’s staff and my fellow Directors in helping the organisation consistently achieve its strategic outcomes over the past decade during my tenure as Chairman.

Over this time there has been a committed and highly effective partnership with the CEO and Executive Team that has contributed, in no small part, to the achievement of our strategic goals.

In recent years, consistent with the Board Renewal Policy there has been significant change and renewal in the composition of our Board of Directors. This process recognises the importance of ensuring that the Board remains open to new ideas and independent thinking, including the introduction of new skills, diversity and capability where appropriate, while concurrently retaining the skills and expertise of existing Directors with their valuable knowledge of Newcastle Permanent. The current Board represents a good blend of skills, experience, diversity and independence of thought.

In my ultimate year as Chairman, I have every confidence that the stewardship of the Board will continue to guide the organisation to provide ongoing value for its customers and support for their communities. Our customers can rest assured that the diversity, experience and expertise of the Board of Directors will guide Newcastle Permanent strongly and sustainably into the future.

OUR FUTURE

The year ahead will be one of adjustment for Newcastle Permanent as the Board of Directors appoints a new Chair in my stead to lead the organisation forward.

It has been a source of great pride that I have been afforded the opportunity to make a contribution to the success of this wonderful organisation for more than 14 years, including almost 10 years as the Chairman.

Newcastle Permanent has continued to grow and prosper despite and since the GFC in 2007 and I expect the high level of performance will be maintained into the foreseeable future.

As the responsibility passes to the new Chair, customers can feel satisfied that Newcastle Permanent is on an exceptionally sound footing so we can look to the future with pride, enthusiasm and confidence.

MICHAEL SLATER CHAIRMAN

CHAIRMAN’S REPORT CONTINUED

MEANINGFUL SUPPORT FOR OUR COMMUNITIES

Core to our ethos is our dedication to improving the lives of all the people who live in the local communities that support Newcastle Permanent.

We have continued our meaningful support through community sponsorships, staff donations and corporate fundraising initiatives, which total more than $1.5 million each year in regional NSW.

In addition, the Newcastle Permanent Charitable Foundation (Foundation) was established by Newcastle Permanent in 2003 to help redress community disadvantage in regional NSW communities. Meeting the many volunteers who enthusiastically give their time to support the disadvantaged has been a rewarding experience. The Foundation distributes more than $1.5 million each year to improve the lives of more marginalised members of the community. To date, the Foundation has provided more than $15 million to facilitate more than 500 vital community projects.

Also being Chairman of the Foundation, it has given me tremendous personal satisfaction to see the many wonderful projects the Foundation has helped bring to life to support less fortunate people in our local communities. Although I am stepping down as Chairman of Newcastle Permanent this year, I am looking forward to continuing to serve the community as Chairman of the Foundation.

Retained as capital for financial strength

Total value delivered to customers through better interest rates and lower fees compared

to the major banks

PROFIT

MUTUALITY DIVIDEND

OVERALL CUSTOMER VALUE

$40.9M

$54.7M

$95.6M

+

=

Left–Right: Terry Millett (CEO), Michael Slater (Chairman)

ANNUAL REPORT 2016 ANNUAL REPORT 201612 13ANNUAL REPORT 2015 ANNUAL REPORT 201512 13ANNUAL REPORT 201512

MICHAEL D. SLATERBCom, MBA, FCPA, FCIS, FGIA, FAICD, FTIA, FAIM, FCIM Chairman Board Member since August 2002 Chairman of the Corporate Governance & Nominations Committee

Michael is a qualified accountant and has financial and management experience with expertise in financial and management analysis, commercial and organisational reviews and audits, due diligence and corporate governance. As well as being Chairman of Newcastle Permanent Building Society, he is also the Chairman of Newcastle Friendly Society Ltd, Chairman of Newcastle Permanent Community Foundation Company Ltd, which is the trustee of Newcastle Permanent Charitable Foundation, and Chairman of Regional Development Australia Hunter. Michael is also a Director of the Hunter Westpac Rescue Helicopter Service Ltd and serves as a member of its Audit Committee, Finance Committee, RFT Committee and Corporate Governance & Nominations Committee. Michael is a former Chairman and Director of Corky’s Carbon and Combustion Pty Ltd and former Director of Denis Veitch and Associates Pty Ltd, Corporate Internet Business Information Systems Pty Ltd, the Hunter Economic Development Corporation and NIB Holdings Limited. Michael holds a Bachelor’s Degree in Commerce and a Master’s Degree in Business Administration. He is a Fellow of the Australian Society of Certified Practising Accountants, Fellow of the Governance Institute of Australia and a Fellow of the Australian Institute of Company Directors (AICD), holding an Advanced Diploma from AICD. Michael was named Business Leader of the Year at the 2016 Hunter Business Awards.

JEFFREY R. EATHER BCom, CPA, FGIA, MAICD

Board Member since May 2013 Chairman of the Audit Committee Member of the Corporate Governance & Nominations and Risk Management Committees

Jeff is a qualified accountant with strong governance credentials and hands-on business experience, having overseen some of Newcastle’s leading corporations including in his former role as CEO of NBN Television. He is also a Director of Newcastle Friendly Society Ltd and Hunter Water Corporation, the Managing Director of The Callaghan Institute and was formerly Chairman of the University of Newcastle Foundation. Jeff holds a Bachelor of Commerce from the University of Newcastle and is a Certified Practising Accountant, a Fellow of the Governance Institute of Australia and a Member of the Australian Institute of Company Directors.

ROSS E. GRIFFITHS Dip Bus Studies (Acc), MBA, FCA (Aust), GAICDBoard Member since January 2015 Member of the Audit and Risk Management Committees

Ross is a chartered accountant with extensive retail banking, finance and risk management experience. Ross had 28 years’ experience at one of Australia’s major banks before retiring in 2014. His appointments at that bank included Group Chief Credit Officer and Head of Credit Management. Ross is a former Director of Mirabela Nickel Limited and Commonwealth Managed Investments Limited, which was the Responsible Entity for two ASX listed Property Trusts. He holds a Diploma of Business Studies (Accounting) and Masters of Business Administration. Ross is also a Fellow of Chartered Accountants Australia and New Zealand and a Graduate of the Australian Institute of Company Directors.

Left–Right: Ross Griffiths, Jeffrey Eather, Jennifer Leslie, Andrew Yost (Co. Sec.), Michael Slater (Chairman), Samantha Martin-Williams, David Shanley, Philip Neat.

JENNIFER M. LESLIE BCom, CFP, FCA (Aust) – FPS, MAICD, TFASFABoard Member since June 2015 Member of the Audit and Remuneration Committees

Jennifer is a Fellow of Chartered Accountants Australia and New Zealand, Certified Financial Planner, a Member of the Australian Institute of Company Directors and a Trustee Fellow of the Association of Superannuation Funds of Australia. She has a well-established career forged in the Hunter Region, including 11 years as Managing Director of Pitcher Partners Newcastle and Hunter Wealth Management. Jennifer holds a Bachelor of Commerce (Accounting) and Diploma of Financial Planning. She is also a Director of Newcastle Friendly Society Ltd, a Director of Mai Wel Ltd (where she is Chair of the Audit and Finance Committee), a member of the AMP Customer Consultancy Group, a former Advisory Board Member of the Maitland-Newcastle Catholic Development Fund and a former Advisor Member of the AMP Customer Advice Review Panel.

SAMANTHA J. MARTIN-WILLIAMS

B.Bus, M.HR&IR, M.CommLaw, FAICD, GIA (Cert) Board Member since February 2012 Member of the Risk Management and Remuneration Committees

Samantha has had a career with over 20 years of diverse business experience in industries including financial services, education, human resources, health and logistics. Samantha has leadership experience at CEO level with expertise in transformation, corporate governance and business growth. She has degrees in business, industrial relations and commercial law and a Certificate in Governance and Risk Management from the Governance Institute of Australia. She currently serves on the Board of Newcastle Permanent Community Foundation Company Ltd, which is the Trustee of Newcastle Permanent Charitable Foundation, the Salvation Army Advisory Board and is a conjoint lecturer at the University of Newcastle Business School. Samantha is a Fellow of the Australian Institute of Company Directors. Samantha has been awarded honours including the Telstra Business Woman of the Year, NSW.

PHILIP J. NEAT MAICD, FAMI, CPM, GIA (Cert)Board Member since July 2003 Chairman of the Risk Management Committee Member of the Corporate Governance & Nominations and Remuneration Committees

Phil has been an adviser for over 30 years to major Australian and international corporations involved in the infrastructure, property development and resource/mining sectors. He had a background in journalism before establishing his own consultancy. Phil also serves on the Board of Newcastle Permanent Community Foundation Company Ltd, which is the Trustee of Newcastle Permanent Charitable Foundation. He is a Member of the Australian Institute of Company Directors, the Governance Institute of Australia and a Fellow of the Australian Marketing Institute.

DAVID E. SHANLEY BCom, CFP, GAICDBoard Member since July 2003 Chairman of the Remuneration Committee Member of the Audit and Corporate Governance & Nominations Committees

David has more than 35 years’ experience in the finance sector with a background in the building society and credit union industries. For over 25 years David has been an adviser to personal and corporate clients on technical financial planning issues. He is a Certified Financial Planner (CFP), a member of the Financial Planning Association and a Graduate of the Australian Institute of Company Directors. David is also a Director of Newcastle Friendly Society Ltd and Newcastle Permanent Community Foundation Company Ltd, which is the Trustee of Newcastle Permanent Charitable Foundation.

BOARD OF DIRECTORS

ANNUAL REPORT 2016 ANNUAL REPORT 201614 15ANNUAL REPORT 2015 15

INTRODUCTIONAs the Chairman reported, Newcastle Permanent has again performed strongly given the strategic priorities, operating environment, intense competitive pressure from the major banks and the many challenges presented during the year. These challenges included the ongoing management of regulatory home lending constraints such as limits for new residential investment lending growth and loan-to-valuation ratio composition.

Our financial performance has been very pleasing this year with outstanding home loan portfolio growth and a strong profit result in a historically low interest rate environment, being more notable considering the home lending composition constraints mentioned above, a 25 basis point reduction in the official cash rate (OCR) in May 2016, and the materially elevated level of home loan repayments relative to expectations (see Chart F: Total Home Lending Assets).

Despite being in a historically low interest rate environment, which is reflected in both lending and deposit rates, our retail deposits grew by 9.9% this year. This is reflective of our consistently competitive and high quality product suite which continues to deliver to the needs of our customers (see Chart G: Total Retail Deposits).

A highlight of Newcastle Permanent’s performance has been the results achieved across a range of customer-centric performance metrics and our ability to consistently deliver against a balanced scorecard for the benefit of all our key stakeholders.

CEO TERRY MILLETT

CEO’S REPORT

Completion of a multi-year project to upgrade the capability and process for Online Account Opening;

Completion of the multi-year project to upgrade our Web Content Management system and website;

Significant progress on the project to implement the periodic review of fees and charges to improve competitiveness, simplicity and maintain adherence to regulatory requirements;

Continuation of a multi-year project to replace the existing internet and mobile banking platform; and

A large number of projects undertaken as a result of regulatory and industry requirements and to strengthen Newcastle Permanent’s hardware and software Information Technology infrastructure.

The major banks’ focus on generating ever increasing profits to provide significant dividends to shareholders weakens their ability to deliver a competitively strong Customer Value Proposition. In contrast, Newcastle Permanent focuses on providing the best value and quality products and services to its customers as part of a market leading Customer Value Proposition.

Newcastle Permanent has maintained its exceptional customer satisfaction, strong balance sheet growth, profitability and an exemplary capital positon. In fact, on many measures that are relevant to customers, Newcastle Permanent is delivering a better retail banking proposition than the major banks, including:

Superior customer satisfaction, which was independently measured this year at 92.3%, significantly better than the best of the major banks (see Chart H: Customer Satisfaction v. The Four Major Banks);

Outstanding product quality and value, evidenced by a number of industry awards received again this year;

Exceptional home loan credit quality, with our arrears rate of just 0.13% which is nearly three times better than the major banks, reflecting our approach to responsible home lending that helps ensure our customers are far less likely to get into financial distress (see Chart I: Home Loan Arrears Rates);

An extensive community support program to help enhance the communities where our customers live; and

Exceptional pricing competitiveness relative to the equivalent products offered by the major banks evidenced by the $54.7 million in Mutuality Dividend that our customers enjoy by doing their banking with Newcastle Permanent rather than the four major banks.

The ongoing strengthening of our Customer Value Proposition includes the opening of our newest and 60th branch in Dubbo, which further improves the accessibility of high quality banking services for new and existing customers in the Central West region of NSW.

HERE FOR THE COMMUNITY

We recognise that Newcastle Permanent can only be successful if our customers and their communities succeed too. Therefore a vital element of our customer-owned banking model is to make a meaningful contribution every year in a wide-ranging community support program.

Proportional to our size we make a far greater investment in this area than any of the major banks with more than $1.5 million invested every year in children’s sport and education programs to help our children lead happy and healthy lives. This includes major partnerships with junior football and support for Surf Life Saving on every beach from the Central Coast all the way to the Queensland border.

Newcastle Permanent also supports community events that enrich and entertain the community such as our free Cinema Under the Stars outdoor cinema program for young families, which tours throughout Central and Northern NSW each Summer and is the largest of its kind in Australia, entertaining around 50,000 people every year.

Our staff are also actively involved in supporting the community through our CommunityAssist program which provides them with two paid leave days each year to undertake charity or community work.

In addition, for almost 20 years the vast majority of our staff have also generously donated a portion of their salaries each fortnight to support local charities and community organisations. This year approximately $60,000 was donated to four charities.

Newcastle Permanent also supports a number of well-known fundraising drives each year to help these charities continue their vital work in the community. This year we helped to raise approximately $30,000 for a number of charities including:

Australia’s Biggest Morning Tea for Cancer Council NSW;

Pink Ribbon Day for Cancer Council NSW;

Jeans for Genes Day for Children’s Medical Research Institute; and

Give Me 5 for Kids appeal that benefits children’s wards in regional hospitals.

Further details of our community program are provided in the Community Support section of this Annual Report.

The excellent results this year, despite the difficult operating environment are a testimony of an unwavering focus and organisational alignment around delivering against our strategic plan priorities. The secret of Newcastle Permanent’s success over many years has been the combination of making the right strategic choices, executional excellence and the ability to achieve end-to-end alignment of resources around the key strategic priorities. This simple principle is very difficult to deliver consistently, as many less successful retail banking institutions have discovered.

This is the sixth consecutive year of a significant investment program which is driving major improvements in our key systems and processes. At any given time Newcastle Permanent is concurrently managing 15 to 20 major projects and dynamically allocates resources, to ensure alignment with strategic and operational priorities and to be responsive to the ever changing legislative, regulatory and scheme-based mandatory requirements.

A low interest rate environment requires close attention to organisational efficiencies, however we have not wavered from our commitment to delivering strategically important projects. Given the large number of projects undertaken during the year, it is not practical to list them all, however some of the key initiatives aligned to enhancing our Customer Value Proposition and improving the effectiveness of major business processes include:

Completion of a complex multi-year project to replace the Home Loan Origination System including the business to business electronic data interchange linkages to our accredited Mortgage Broker organisations;

CHART H: CUSTOMER SATISFACTION V. THE FOUR MAJOR BANKS

Source: Roy Morgan Customer Satisfaction Survey, six months to June 2016

NEWCASTLE PERMANENT

92.3%

NAB

78.0%

CBA

81.2%

WESTPAC

78.1%

ANZ

78.9%

CHART G: TOTAL RETAIL DEPOSITS$BILLION

CHART F: TOTAL HOME LENDING ASSETS$BILLION

20162015201420132012

$ 7.8

6bn

$ 6.2

5bn

$ 6.5

1bn

$ 6.7

2bn

$ 7.0

4bn

2012 2013 2014 2015 2016

$ 5.6

9bn

$ 5.9

0bn

$ 6.1

1bn

$ 6.4

3bn

$ 7.0

7bn

CHART I: HOME LOAN ARREARS RATES% OF TOTAL HOME LOANS 90+ DAYS

Source: Standard and Poor’s RMBS data May 2016

NEWCASTLE PERMANENT

0.41

%

REGIONALBANKS

MAJORBANKS

0.92

%

0.13%

ANNUAL REPORT 201616 ANNUAL REPORT 201516

CEO’S REPORT CONTINUED

LEADING THE PACKAgain this year, our products and services have been recognised through a variety of industry awards. Some of the notable awards were:

Our seventh Building Society of the Year award and third Personal Lender of the Year Award in Money magazine’s annual Consumer Finance Awards;

2016 Home Lender of the Year in the Mozo Experts Choice Awards – one of the largest online databases of bank and finance reviews in Australia;

Best Mutual Lender in RFi Group’s 2016 Australian Lending Awards and finalist in the Best Customer Experience, Best Investor Lender and Best Secured Personal Loan Lender categories;

Money magazine’s 2016 Best of the Best Awards including Cheapest Home Loan Package – Non-Bank, Best Savings Account – Non-Bank, Cheapest Business Credit Card, Cheapest Personal Loan (Unsecured) – Non-Bank and Cheapest Three-Year Fixed Home Loan – Non-Bank; and

2016 Mozo Experts Choice Awards for Best First Home Loan, Best Fixed Home Loan, Best Fixed Investor Loan, Best Home Loan Package and Best Offset Home Loan.

In addition, Newcastle Permanent achieved 31 of the highest 5-star ratings from CANSTAR for our retail banking products including 25 for home loan products alone – more than any of the major banks.

HERE FOR OUR PEOPLEWe believe that Newcastle Permanent employees are the best in the business, and it’s my honour to lead them in their relentless efforts to provide superior service to our customers.

This year, we had an outstanding response to the Employee Engagement Survey, undertaken each year to form an understanding of employees’ views and attitudes and measure employee engagement across four key criteria – Commitment, Advocacy, Satisfaction and Pride. We significantly exceeded industry benchmarks in all areas, reflecting the quality of leadership at Newcastle Permanent and a shared passion to offer an industry-leading customer experience.

MOVING FORWARD

Our results this year are the culmination of effective strategic planning, executed to the highest standard over many years and the continued effectiveness of the professional working relationship of the Newcastle Permanent Executive Team. These relationships have been a key contributor to the level of focus on the strategic goals and objectives defined in the Newcastle Permanent Strategic Plan, successful implementation of key strategic and operational initiatives and overall organisational performance.

With a constant focus on delivering the best retail banking experience available, we will continue to implement strategic initiatives to keep our customers highly satisfied, deliver competitive products against the major banks and continue our community support program to make a meaningful difference in people’s lives.

I would like to acknowledge the exceptional contribution of our outgoing Chairman, Michael Slater, to the strategic leadership of Newcastle Permanent. Over nearly a decade as Chairman, Michael has provided significant guidance and support to his fellow Directors and to me as Chief Executive Officer. I would like to congratulate Michael on his highly successful tenure as one of Newcastle Permanent’s longest serving Chairmen. I would also like to acknowledge the vital stewardship and contribution of our Board of Directors which is critical to Newcastle Permanent’s success.

This year’s results are also testament to the cohesive efforts of every staff member throughout Newcastle Permanent and I would like to thank them for their dedication and enthusiasm in bringing our values to the service they provide our customers.

To our customers, right throughout regional NSW and beyond, I would like to thank you for choosing a better way of banking over that offered by major banks. You are the reason Newcastle Permanent exists – to empower our customers with the best financial products and services while helping to build better communities. Without your support, Newcastle Permanent would not be Australia’s strongest customer-owned financial institution or one of the most decorated home lenders in our country.

We are committed to continuing to provide you with a superior experience and the best value retail banking products and services in the market as well as support for your communities, long into the future.

TERRY MILLETT CHIEF EXECUTIVE OFFICER


TERRY MILLETTBSc, MAgr (Preliminary year), Grad Dip Computing, MBA, FAIM, FAICD

CHIEF EXECUTIVE OFFICERTerry joined Newcastle Permanent in July 2005 and was appointed to the role of Chief Executive Officer in September 2008. He has over 20 years’ experience in the financial services industry. Prior to joining Newcastle Permanent, Terry held senior management roles with a major Australian bank over a nine-year period. These roles included responsibility for Retail Banking in regional NSW, development of a group-wide Private Banking business and leadership of the Funds Management, Insurance and Financial Advisory business in New Zealand. He has also held senior roles with a major Funds Management and Insurance group over a 10 year period. In his prior role with Newcastle Permanent, Terry was Chief Member Officer with responsibility for leading the member-facing components of the organisation.

DAVID HARNEYCHIEF INFORMATION OFFICERDavid commenced with Newcastle Permanent in October 2011 as Senior Manager Development and Support IT, and was appointed to the position of Chief Information Officer in September 2013. Prior to joining Newcastle Permanent, David was Group Manager, Portals and Device Development at Singtel Optus Pty Ltd. He has over 20 years’ experience in IT&T and project delivery.

SHAUN HASSALLBCom, CA

HEAD OF RISK MANAGEMENTShaun commenced with Newcastle Permanent in January 2007 and was appointed to the position of Head of Risk Management in December 2013. Prior to this appointment Shaun held the position of Financial Controller and acted in the position of Chief Financial Officer on a number of occasions. He is a Chartered Accountant with over 10 years’ experience working within the chartered accounting profession and other commercial finance roles.

DAVID KETTBCom, Grad Dip Management

HEAD OF SUPPORT SERVICESDavid joined Newcastle Permanent in 1991. He has held senior roles in Retail Branch Banking, Finance, Compliance and Risk Management with Newcastle Permanent and has over 20 years’ experience in the financial services sector.

MICHAEL LEACHBSc (Computer Science), MBA, AMAMI CPM, GAICD

HEAD OF MARKETINGMichael commenced with Newcastle Permanent in August 2006. He has over 20 years’ experience in financial services Sales, Marketing and Product Management at most of the major banks in Australia. Michael’s previous roles include General Manager of Marketing at a major regional bank and General Manager of Marketing at one of the major Australian banks.

Left – Right: Mark Williams, Andrew Yost, David Kett, Michael Leach, Terry Millett (CEO), Lincoln Rees, Shaun Hassall, David Harney.

LINCOLN REESMBA (CSU), FAICD, FAIM, FFINSIA

CHIEF MEMBER OFFICER

Lincoln joined Newcastle Permanent in February 2009. He has 20 years’ experience in the financial services industry, having held several senior executive roles in Retail Banking. Lincoln has had responsibility for leading national distribution teams in the areas of Mortgage Lending, Wealth and Business Banking in major financial services organisations.

MARK WILLIAMSBCom, CA, GAICD, F Fin

CHIEF FINANCIAL OFFICER

Mark joined Newcastle Permanent in July 2006 as Financial Controller and was appointed to the position of Chief Financial Officer in December 2009. He is a Chartered Accountant with over 20 years’ experience working within the chartered accounting profession and in a number of finance roles in the commercial and government sectors. Mark has also previously acted as a Director and Chairman of the Audit Committee of a financial institution, and is currently a Director and member of the Audit & Risk Committee of an authorised deposit-taking institution.

ANDREW YOSTB Leg S, LLM, Grad Dip ACG, FGIA, FCIS

COMPANY SECRETARY AND LEGAL COUNSEL

Andrew commenced with Newcastle Permanent in August 2004. He is a Chartered Company Secretary and a qualified lawyer. Andrew has practised law extensively in the areas of banking and finance, and corporate and commercial law, both in private practice and in corporate legal roles. Andrew has worked at partnership level in private practice and has held Chief Legal Counsel roles in a subsidiary of an ASX 50 company and in an Australian subsidiary of a large multi-national company.

EXECUTIVE TEAM


HEALTHY BODIESCOMMUNITY FOOTBALL We’re committed to providing opportunities for families to lead happy, healthy and active lives. That’s why we get a real kick out of supporting community football.

NORTHERN NSW FOOTBALLAs the Official Community Partner of Northern NSW Football, we support players and families by helping keep registration fees as low as possible and providing entry level players with a free ball to get them started.

Coaches, clubs and zones also benefit from our partnership, receiving support and funding for essential equipment and assistance for grassroots coaches to obtain their coaching accreditation free of charge.

CENTRAL COAST MARINERSACTIVE SCHOOLS PROGRAM AND SCHOOL HOLIDAY CLINICS As the Official Partner of the Central Coast MarinersACTIVE Schools Program, we help children stay healthy and active. This innovative, school-based program provides young children with the opportunity to play football at no cost, while also promoting the benefits of healthy eating, teamwork and positive life choices.

As the Official Partner of the Central Coast Mariners School Holiday Clinics, we help children across the Central Coast and Central West hone their football skills with professional coaches and trainers.

SURF LIFE SAVINGOur local surf life savers do a lot of good in our community and that’s something we never take for granted! That’s why we’ve proudly supported Surf Life Saving (SLS) for more than 35 years.

As the major sponsor of six SLS branches from the Central Coast to the Queensland border, we assist Surf Life Saving branches and clubs purchase essential safety equipment, perform volunteer patrols and provide training and leadership programs to nurture our surf life savers of tomorrow. With a focus on junior SLS, we’re helping to sustain the future of SLS in our local communities.

Congratulations to all this year’s Newcastle Permanent Junior Surf Life Savers of the Year:

Central Coast Cerys Cousins, MacMasters Beach SLSC Dylan Barrett, Oceans Beach SLSC

Hunter Jade Williams, Cooks Hill SLSC Luke Walmsley, Caves Beach SLSC

Lower North Coast Annelise Romer, Forster SLSC Jordan Fowler, Forster SLSC

Mid North Coast Grace Kuhnell, Wauchope-Bonny Hills SLSC Isaac Plunkett, Port Macquarie SLSC

North Coast Poppy Smyth, Coffs Harbour SLSC Patrick de Carle, Sawtell SLSC

Far North Coast Hayley Smith, Cudgen Headland SLSC Zane Patience, Cabarita SLSC

Through the many components of our community support program, we enrich the communities where our customers and staff live.

We help children and their families to lead healthy, active and happy lives by investing more than $1.5 million in children’s education,

community sport and free, family-friendly community events.

Almost 15,000 primary students participated Over 1,000 goals scored More than 600 school holiday participants

CENTRAL COAST MARINERS HIGHLIGHTS THIS YEAR

228 clubs4,487 teams8,200 volunteers60,420 players9,000 free balls to new startersMore than 40,000 matches played544 accredited coaches48 free coaching courses 6.3% increase in female players

NORTHERN NSW FOOTBALL HIGHLIGHTS THIS YEAR

Giving back to the communities that support us.

Supported by

35 year partnership6 SLS branches 60 SLS clubs7,426 volunteers patrolling our beaches11,475 junior surf life savers21 junior carnivals

SURF LIFE SAVING HIGHLIGHTS THIS YEAR

COMMUNITYSUPPORT

HEALTHY MINDSWe are passionate about investing in children’s education, that’s why we support a range of programs focused on improving numeracy and environmental awareness.

PRIMARY SCHOOL MATHEMATICS COMPETITIONFor 35 years, we’ve helped children develop their numeracy and problem-solving skills.

Numeracy and problem-solving skills are vital life skills for children, and through the Newcastle Permanent Primary School Mathematics Competition, thousands of children have the opportunity to take part in one of Australia’s longest running annual mathematics competitions.

BLACKBUTT RESERVE JUNIOR RANGER PROGRAMWe help children learn more about our natural environment.

As the major sponsor of the Newcastle Permanent Blackbutt Reserve Junior Ranger Program, we’re providing opportunities for children to learn more about our native plant life and wildlife through free education programs.

This year, four themed Junior Ranger Fun Days were held during the school holidays; Rapt in Reptiles, Aquatic Action, Nature Venture and Indigenous Footprints. Children and their parents came and enjoyed free, interactive, environmentally-based activities within the Reserve.

HAPPY LIVESCINEMA UNDER THE STARS We help bring families and communities together by providing free outdoor cinema events across regional NSW.

Each year, Newcastle Permanent’s Cinema Under the Stars events delight thousands of families with a unique opportunity to enjoy a night of free, family-friendly entertainment in some of the most beautiful parks our communities have to offer.

Cinema Under the Stars has been running for nine years and is now Australia’s largest free regional outdoor cinema program.

CHRISTMAS CAROLSWe support a number of Christmas Carol events that bring communities together to share in the magic of Christmas.

These hugely popular, family-friendly events provide an opportunity for our customers, staff and the wider community to celebrate the festive season with an evening of great music and family entertainment.

COMMUNITY FUN RUNSWe invest in community fun runs because we think it’s important for people of all ages and fitness levels to lead a healthy, active lifestyle.

Throughout the year, we proudly supported the Newcastle Permanent Lake Macquarie Running Festival, the Newcastle Permanent Tamworth Ten, Forster Running Festival, Port Macquarie Running Festival, Mudgee Running Festival and Ballina Lions Club Fun Run-Walk.

35 yearsAlmost 20,000 studentsOver 330 schoolsZero calculators!

MATHS COMPETITION HIGHLIGHTS THIS YEAR

15+ year partnership 2,800 participants47 volunteers600 native trees planted25 nesting boxes built

BLACKBUTT RESERVE HIGHLIGHTS THIS YEAR

4 free carols events120 Christmas carols10,000 free Santa hatsMore than 40,000 smiling faces

CAROLS HIGHLIGHTS THIS YEAR

16 free events4 blockbuster movies20,000 bags of free popcornAlmost 40,000 keen moviegoers

CINEMA HIGHLIGHTS THIS YEAR

6 fun runs6,000 participants 56,000,000 steps

FUN RUN HIGHLIGHTS THIS YEAR

COMMUNITY SUPPORT CONTINUED

ANNUAL REPORT 201626

PASSIONATE PEOPLE

STAFF COMMUNITYASSIST PROGRAMSupporting the community is something our people are very passionate about. Our Staff CommunityAssist program was established to enable staff to make a real difference within their local community through staff donations and volunteering.

STAFF DONATIONS This year, our staff donated almost $60,000 to local charities and community groups. The majority of staff contribute part of their fortnightly salary to the scheme and they have raised almost $630,000 for charity since the scheme commenced in 1997.

Participating staff vote for the charities and community groups they would like to support.

STAFF VOLUNTEERINGThe success of our staff volunteering program is another great example of the generosity and community spirit at Newcastle Permanent.

We provide each staff member with two paid community leave days each year which they can use to volunteer for local community organisations. This year, our staff contributed more than1,000 volunteer hours to assist local community organisations across the regions we operate in.

CHARITIES WE SUPPORTED Throughout the year, we participated in fundraising activities and collections for some great causes including:

Australia’s Biggest Morning Tea for Cancer Council NSW

Jeans for Genes Day for the Children’s Medical Research Institute

Pink Ribbon Day for Cancer Council NSW

Give Me 5 for Kids Appeal for children’s hospitals in the Hunter, Central Coast and Coffs Harbour regions

Christmas Toy Drive for the Salvation Army

Blood Donations for the Australian Red Cross Blood Service.

Collectively, our staff and customers raised almost $30,000, donated hundreds of toys and generously gave blood to those who need it most in our local communities.

Animal Rights and Rescue Group

Heartfelt

Children’s Cancer Institute – Build for a Cure

The Flying Free Project

STAFF DONATION RECIPIENTS

The Rotary Club of Newcastle – Youth Driver Awareness Program

Hunter Youth Mentor Collaborative

Mount Hutton Pet Hospital

Cancer Council NSW

Lifeline – Bookfest

Cerebral Palsy Alliance

Vision Australia

Mai Wel Group

Salvation Army

Royal Institute for Deaf & Blind Children

Cure Brain Cancer Foundation

CHARITIES OUR STAFF VOLUNTEERED TO HELP

COMMUNITY SUPPORT CONTINUED


RELATIONSHIP OF THE CONCISE FINANCIAL REPORT TO THE FULL FINANCIAL REPORT The concise financial report is an extract from the full financial report for the year ended 30 June 2016. The financial statements and specific disclosures included in the concise financial report have been derived from the full financial report.

The concise financial report cannot be expected to provide as full an understanding of the financial performance, financial position and financing and investing activities of Newcastle Permanent Building Society Limited (‘Newcastle Permanent’) and its controlled entities as the full financial report. Further financial information can be obtained from the full financial report.

The full financial report and auditor’s report will be sent to members on request, free of charge. Please call 13 19 87 and a copy will be forwarded to you.

The Directors present their report on the consolidated entity consisting of Newcastle Permanent and the entities it controlled at the end of, or during, the year ended 30 June 2016.

DIRECTORSThe following persons were Directors of Newcastle Permanent during the financial year and up to the date of this report. Directors were in office for the entire period unless otherwise stated.

M.D. SlaterJ.R. Eather S.J. Martin-WilliamsR.E. Griffiths P.J. Neat J.M. Leslie D.E. Shanley

Mr W.J.Elliott was a Director from the beginning of the financial year until his retirement on 23 October 2015.

MEETINGS OF DIRECTORSThe number of meetings of Newcastle Permanent’s Board of Directors and of each Board Committee held during the year ended 30 June 2016 and the numbers of meetings attended by each Director were:

Board Meetings

DirectorNo. of

MeetingsNo.

Attended

Michael Slater5 13 10

Jeff Eather 13 13

Warren Elliott2,5 5 4

Ross Griffiths 13 13

Jennifer Leslie 13 13

Samantha Martin-Williams 13 13

Phil Neat3,5 13 10

David Shanley 13 13

PRINCIPAL ACTIVITIESDuring the year the principal continuing activities of the consolidated entity consisted of the provision of a range of financial products and services to members and the operation of a charitable trust.

There has been no significant change in the nature of these activities during the year ended 30 June 2016.

DIRECTORS’REPORT

Notes1. The Chairman of the Board frequently attends Committee meetings by virtue of his office.2. Mr W.J. Elliott retired from the Board on 23 October 2015.3. Mr P.J. Neat appointed:

a. Mr M.D. Slater as his proxy for the Board meeting on 15 April 2016;b. Ms S.J. Martin-Williams as his proxy for the Risk Management Committee meeting on 11 September 2015; andc. Mr D.E. Shanley as his proxy for the Remuneration Committee meeting on 3 May 2016.

4. In addition to the formal Board meetings noted, the Directors were also involved in one workshop regarding strategic planning.5. Leave of absence may be granted by the Board in advance to excuse a Director from attending a particular meeting*Number of meetings noted is the number of meetings of the Board or relevant Committee that were held while that Director was on the Board.

Audit Committee Risk Management Committee

Corporate Governance & Nominations Committee

RemunerationCommittee Workshops4

No. of Meetings

No. Attended

No. of Meetings

No. Attended

No. of Meetings

No. Attended

No. of Meetings

No. Attended

No. Attended

Michael Slater1 - - - - 4 4 - - 1

Jeff Eather5 6 6 5 5 4 3 - - 1

Warren Elliott2,5 - - 1 1 - - 2 1 -

Ross Griffiths 6 6 5 5 - - - - 1

Jennifer Leslie5 6 5 - - - - 5 5 1

Samantha Martin-Williams - - 5 5 - - 5 5 1

Phil Neat3,5 - - 5 4 4 4 5 4 1

David Shanley 6 6 - - 4 4 5 5 1

REVIEW OF OPERATIONSThe consolidated entity has delivered a solid and consistent performance for the year ended 30 June 2016 with net profit after tax attributable to members of Newcastle Permanent being $40,920,000 (2015: $36,469,000), an increase of 12.2%.

Total equity of the consolidated entity increased from $849,142,000 at 30 June 2015 to $877,401,000 at 30 June 2016 (an increase of 3.3%).

For further information in respect of the consolidated entity’s review of operations, refer to the Chairman’s and the Chief Executive Officer’s reports.

SIGNIFICANT CHANGES IN THE STATE OF AFFAIRSThere were no significant changes in the state of affairs of the consolidated entity during the financial year.

MATTERS SUBSEQUENT TO THE END OF THE FINANCIAL YEARNo matters or circumstances have arisen since 30 June 2016 that have significantly affected, or may significantly affect:

i. the consolidated entity’s operations in future financial years; orii. the results of those operations in future financial years; oriii. the consolidated entity’s state of affairs in future financial years.

LIKELY DEVELOPMENTS AND EXPECTED RESULTS OF OPERATIONSLikely developments, future prospects and business strategies of the operations of the consolidated entity and the expected results of those operations have not been included in this report as the Directors believe on reasonable grounds that the inclusion of such information would be likely to result in unreasonable prejudice to the consolidated entity.

ENVIRONMENTAL REGULATIONThe consolidated entity has assessed whether there are any particular or significant environmental regulations which apply to it and has determined that there are none.

INSURANCE OF OFFICERSDuring the financial year, Newcastle Permanent paid a premium to insure the Directors, Company Secretary and the Senior Executive Management of Newcastle Permanent and its controlled entities.

The liabilities insured are legal costs that may be incurred in defending civil or criminal proceedings that may be brought against the officers in their capacity as officers of entities in the consolidated entity and any other payments arising from liabilities incurred by the officers in connection with such proceedings. This does not include such liabilities that arise from conduct involving a wilful breach of duty by the officers or the improper use by the officers of their position or of information to gain advantage for themselves or someone else or to cause detriment to Newcastle Permanent and its controlled entities. It is not possible to apportion the premium between amounts relating to the insurance against legal costs and those relating to other liabilities.

In accordance with normal commercial practice, disclosure of the total amount of premium payable under, and the nature of liabilities covered by, the insurance contract is prohibited by a confidentiality clause in the contract.

No insurance cover has been provided for the benefit of the auditor of the consolidated entity.

PROCEEDINGS ON BEHALF OF NEWCASTLE PERMANENTNo person has applied to the Court under section 237 of the Corporations Act 2001 for leave to bring proceedings on behalf of Newcastle Permanent or to intervene in any proceedings to which Newcastle Permanent is a party for the purpose of taking responsibility on behalf of Newcastle Permanent for all or part of those proceedings.

No proceedings have been brought or intervened in on behalf of Newcastle Permanent with leave of the Court under section 237 of the Corporations Act 2001.

ROUNDING OF AMOUNTSNewcastle Permanent is an entity referred to in ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191 issued by the Australian Securities and Investments Commission, relating to the ‘rounding off’ of amounts in the Directors’ report. Amounts in the Directors’ report have been rounded off in accordance with that Instrument to the nearest thousand dollars, or in certain cases, to the nearest dollar.

AUDITOR’S INDEPENDENCE DECLARATIONA copy of the Auditor’s Independence Declaration, as required under Section 307C of the Corporations Act 2001, is set out on page 53.

DISCLOSURE OF PRUDENTIAL INFORMATIONNewcastle Permanent is an Authorised Deposit-taking Institution regulated by the Australian Prudential Regulation Authority (APRA). As a result of this regulation, Newcastle Permanent is required to comply with Australian Prudential Standards (APSs) released by APRA. APS 330 Public Disclosure requires Newcastle Permanent to disclose information regarding its composition of regulatory capital base and risk exposures and a reconciliation of the balance sheet in the financial statements to the balance sheet prepared under the regulatory scope of consolidation. Please refer to the ‘Regulatory Disclosures’ section of Newcastle Permanent’s website for further information.

This report is made in accordance with a resolution of Directors.

M.D.SLATER CHAIRMAN J.R.EATHER DIRECTOR

Newcastle9 September 2016


Although Newcastle Permanent is not bound by the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations (‘ASX Principles’), the Board has elected to adopt a best practice approach and apply them where possible.

As the ASX Principles relate to listed companies, the terminology typically refers to listed entities and security holders. We have changed the terminology where applicable to refer to Newcastle Permanent and its members for greater relevance.

This statement was approved by the Board on 19 August 2016 and was current as at that date.

PRINCIPLE 1: LAY SOLID FOUNDATIONS FOR MANAGEMENT AND OVERSIGHT

Recommendation 1.1: Respective roles and responsibilities of the Board and management

Role of the Board

The Board’s primary role is to govern Newcastle Permanent so that long term member value is enhanced and protected. The Board is responsible for the overall corporate governance of Newcastle Permanent.

Responsibilities of the Board and powers that it has reserved to itself include:

providing leadership to Newcastle Permanent by:

• establishing policies, procedures, corporate values and governance responsibilities; and

• setting the tone of, influencing and overseeing Newcastle Permanent’s culture;

approving the Strategic Plan and overseeing the performance and activities of Newcastle Permanent through management’s implementation of the approved strategies and goals;

approving and monitoring capital expenditure and major corporate initiatives;

overseeing the management of Newcastle Permanent’s business, including appointing the Chief Executive Officer (‘CEO’) and Senior Executives and evaluating the performance of the CEO and Senior Executives;

ensuring that appropriate controls are in place to manage risk;

ensuring that effective risk, legal and regulatory compliance systems are in place and monitored;

approving and monitoring financial, regulatory and other reporting; and

starting new business activities, terminating existing business activities or initiating major changes to the field of Newcastle Permanent’s business activities.

The role and responsibilities of the Board are set out in the Board Charter.

Role of the CEO and Senior Executives

The Board delegates to the CEO, subject to Board oversight, the day to day management of Newcastle Permanent consistent with the corporate strategic plan, objectives, culture, budgets and risk appetite agreed to and set by the Board. The CEO is authorised to sub delegate any of his functions to other officers and employees.

The CEO and Senior Executives are also responsible for providing the Board with accurate, clear and timely information to enable the Board to perform its role.

All delegations are comprehensively set out in a Delegations Manual. The delegations to the CEO and Senior Executives are designed to assist in decision making and the efficient operation of Newcastle Permanent. The Board reserves the power to make decisions in relation to specific matters as set out in the Delegations Manual.

Recommendation 1.2: Process for undertaking appropriate checks before appointing or recommending the appointment of a Director

In general, a proposed new Director of Newcastle Permanent is required to satisfy a fit and proper assessment prior to their appointment to that role, which means that the person must:

possess the competence, character, diligence, honesty, integrity and judgment to perform their duties;

not be disqualified from holding a responsible person position under the Banking Act 1959 (Cth); and

not suffer from an actual or perceived conflict of interest that would create a material risk that the Director will fail to perform their duties properly.

There are very limited circumstances where the fit and proper assessment may occur shortly after a person is appointed as a Director, such as where the Director is appointed pursuant to a members’ resolution at the Annual General Meeting.

Once appointed, all Directors must satisfy a fit and proper assessment annually. The specific requirements of the fit and proper assessment are set out in the Fit and Proper Policy. For a new Director appointment, the assessment will generally include verification of the person’s qualifications and experience, criminal history, personal insolvency and reference checks, ASIC ‘banned and disqualified persons’ and APRA ‘disqualification register’ searches and enquiries.

Where a person is standing for election or re-election as a Director of Newcastle Permanent, the explanatory notes in the Notice of Annual General Meeting include a summary of the Director’s relevant qualifications, skills, experience and other material information to assist members in making an informed decision on whether to elect or re-elect the candidate. The explanatory notes also include a statement as to whether the Board considers the candidate to be an independent Director and supports the election or re-election of the candidate.

Recommendation 1.3: Written agreement with each Director and Senior Executive setting out the terms of their appointment

Directors

Each Director has signed a letter of appointment acknowledging the terms of their appointment to the Board. The letter of appointment allows each Director to gain an understanding of:

the expectations of them as Directors and their commitment to the role;

the structure of Newcastle Permanent, its governance framework and key policies;

the roles and responsibilities of the Board and management team; and

the strategic, financial, operational and risk management position of Newcastle Permanent.

Executives

The CEO and Senior Executives have each entered into a written employment agreement with Newcastle Permanent, which sets out, amongst other things:

a description of their position, duties, responsibilities and remuneration;

the person or body to whom they report; and

the circumstances in which their employment may be terminated and any entitlements on termination.

Recommendation 1.4: Company Secretary should be accountable directly to the Board

The Company Secretary of Newcastle Permanent has a direct and independent reporting responsibility to the Board and each of its Committees. The Company Secretary reports directly to the Chairman as the representative of the Board, however each Director can communicate directly with the Company Secretary and vice versa.

The Board is responsible for the appointment and termination of the Company Secretary, and also the terms and conditions of that appointment.

The Company Secretary is charged with advising on and facilitating Newcastle Permanent’s corporate governance processes and as such, holds primary responsibility for ensuring that the Board processes and procedures run efficiently and effectively.

Recommendation 1.5: Diversity Policy and workplace gender equality

In recognition of the value and benefits that diversity on a Board can deliver, the Board has adopted a Diversity Policy, which relates to the Boards of Newcastle Permanent and the other group companies, Newcastle Friendly Society Ltd and Newcastle Permanent Community Foundation Company Ltd (‘Newcastle Permanent Group’).

The Diversity Policy confirms the Board’s commitment to encouraging a corporate culture that supports diversity within the workplace and on the Board. The Diversity Policy also acknowledges that the concept of diversity is broad and not limited to any one value. It includes gender, age, ethnicity and cultural background, and importantly, the ability to have an open mind.

The process for selecting and identifying prospective candidates for appointment as new Directors is transparent, independent and free from conscious or unconscious biases. When undertaking searches for prospective candidates, the Board stipulates as one of its criteria that appropriately skilled and experienced female candidates should be shortlisted by the independent search firm. The overriding qualification in the Diversity Policy however remains that the principal criteria for selecting and appointing Directors must be based on the skills, experience and expertise that they can bring to the role, and the overall prospect of adding value to the Newcastle Permanent Group.

CORPORATE GOVERNANCE STATEMENT


The Committees have written Charters that contain the mandates and operating procedures of the Committee. The structure and composition of the Committees and their respective Charters are reviewed on a regular basis to match the skills of Directors with the work of the relevant Committee and to balance the level of time that each of the Directors must dedicate to the governance of Newcastle Permanent.

The Board has established a Corporate Governance Framework for the governance and management of Newcastle Permanent, including a system of internal control, legal and regulatory compliance, business risk management processes and the establishment of appropriate ethical and behavioural standards.

The Board has also adopted its own Charter that contains:

expectations and obligations for key governance roles, including the Board, individual Directors, the Chairman, Company Secretary and the CEO;

Board processes and operating procedures;

key Board functions; and

continuous improvement provisions for the Board and individual Directors.

The Board has the capacity to engage independent consultants directly to assist it in the execution of its duties. Throughout the year, the Board has done so where it was deemed prudent or mandatory, including with respect to reviewing and advising on risk management policies and procedures, remuneration and in relation to Board performance assessment, remuneration and Director independence.

Recommendation 2.1: A Nominations Committee should be established

The Board has established a Corporate Governance & Nominations Committee, which currently consists of the following four non-executive Directors:

Mr M.D. Slater (Chairman)

Mr J.R. Eather

Mr P.J. Neat

Mr D.E. Shanley

All of the current members of the Committee are independent Directors, including the Chairman. The Committee met four times during the 2016 financial year. Details of the individual attendances at the Committee meetings are set out in the Directors’ Report.

The Corporate Governance & Nominations Committee oversees the appointment, induction and succession planning processes for Directors and Committee members and makes recommendations to the Board on the selection, appointment and succession planning process of Newcastle Permanent’s CEO.

The Corporate Governance & Nominations Committee facilitates the annual review of the effectiveness of the Board, its Committees and individual Directors. It also monitors, evaluates and makes recommendations to the Board in respect of Newcastle Permanent’s key governance documents, such as the Corporate Governance Framework, Board Charter, Code of Conduct and other Board policies, as well as reviewing compliance with new statutory and regulatory requirements.

PRINCIPLE 2: STRUCTURE THE BOARD TO ADD VALUEBoard Composition

The names of the Directors of Newcastle Permanent and their respective qualifications, experience and special responsibilities are set out in the Directors’ Report, which appears separately in the Annual Report.

The composition of the Board is determined using the following principles:

a minimum of five and not more than nine Directors as required by the Constitution of Newcastle Permanent, with a broad range of relevant expertise;

a majority of independent, non-executive Directors;

a relevant blend of skills, including personal experience in accounting and financial management, retail banking, risk management, legal skills, local contacts and networks and business experience at CEO or Senior Management level;

a non-executive, independent Director appointed as Chairman; and

enough Directors to serve on various committees without overburdening the Directors or making it difficult for them to fully discharge their responsibilities.

Some of the criteria established for determining the composition of the Board and its Committees are laid out in mandatory Prudential Standards issued by Newcastle Permanent’s prudential regulator, the Australian Prudential Regulation Authority (‘APRA’).

The Corporate Governance & Nominations Committee is responsible for making recommendations to the Board on the appointment of Directors consistent with the criteria established by the Board. The process of Board succession planning and Director renewal is an ongoing process. The process for selecting and identifying prospective candidates for appointment to the Board of Newcastle Permanent is transparent, impartial and independent. It is outlined in the Board Charter and, except in extraordinary circumstances, includes the utilisation of an independent, external recruitment / search agency to identify and shortlist candidates.

Board Processes

The full Board currently holds a minimum of 12 scheduled meetings each year, plus strategy meetings and any extraordinary meetings at such other times as may be necessary to address any specific, significant matters that may arise. In addition to attending Board and Committee meetings, the non-executive Directors allocate time for strategy sessions, attendance at the Asset & Liability Committee meetings (which is a management committee) and preparation in advance of meetings. The Chairman commits additional time and meets regularly with the CEO to review and discuss business and strategic issues.

To assist in the execution of its responsibilities and streamlining of its processes, the Board has established the following Board Committees:

Corporate Governance & Nominations Committee

Audit Committee

Risk Management Committee

Remuneration Committee

In 2015, the Board adopted the following measurable objectives related to increasing the level of female participation on the Boards of Newcastle Permanent and the Newcastle Permanent Group:

• short term: to 25% for Newcastle Permanent and 30% for the Newcastle Permanent Group by 30 June 2016; and

• long term: to 30% for both Newcastle Permanent and the Newcastle Permanent Group by June 2019.

These objectives are outlined in the Board’s Diversity Policy.

The objectives and the progress towards achieving them are reviewed each year. As at 30 June 2016, the level of female participation on the Boards of Newcastle Permanent and the Newcastle Permanent Group were 28.5% and 30% respectively and therefore, the short term objectives have been met.

Newcastle Permanent also has an Equal Employment Opportunity Policy, which confirms its commitment to providing equality of opportunity to employees or applicants for employment at all levels of the organisation.

In accordance with the requirements of the Workplace Gender Equality Act 2012, Newcastle Permanent lodged its annual gender equality report with the Workplace Gender Equality Agency on 23 May 2016. A copy of this report is available to review at newcastlepermanent.com.au/gender-equality

Recommendation 1.6: Process for evaluating the performance of the Board, its Committees and individual Directors

Board Performance Assessment

The Board Charter provides that the performance of the Directors in discharging their functions should be regularly assessed. The Board undertakes a monthly review of its performance at the conclusion of each scheduled Board meeting by each Director completing an individual assessment. The assessments are collated and analysed by an independent, expert governance consultant, with the results submitted for review, consideration and discussion by the Board at its next Board meeting. The object is to optimise the effectiveness and efficiency of Board performance and processes.

Committee Performance Assessment

The Board Committees undertake a review of their own performance. The performance of the Chairman of each Committee is assessed on an annual basis. The assessment is facilitated by an independent, external governance consultant with expertise in this area. Outcomes from those reviews are considered by the Chairman of the Board and through the Corporate Governance & Nominations Committee. The individual Committee Chairmen have a separate feedback session with the Chairman of the Board and formulate individual development plans.

CORPORATE GOVERNANCE STATEMENT CONTINUED

Director Performance Assessment

The Board also undertakes an annual performance assessment of each Director, assessed by their peers, as well as an evaluation of the Board performance as a whole. The performance assessment for the Chairman of the Board considers both his performance as a Director and as Chairman. A biennial skills analysis is also undertaken for each Director. Those assessments are facilitated by an independent, external governance consultant with expertise in this area. Outcomes from those reviews are considered in a dedicated meeting, developing actions and goals to guide improvement. Individual Directors have a feedback session with the Chairman and formulate individual development plans. The Chairman of the Audit Committee undertakes the feedback session with the Chairman in relation to the Chairman’s performance. Additionally, the Chairman’s assessment is considered separately by the Corporate Governance & Nominations Committee.

The Board does not endorse the reappointment of a Director who is not satisfactorily performing their role.

The most recent Committee and Director performance assessments were completed in April 2016.

Recommendation 1.7: Process for evaluating the performance of the CEO and Senior Executives

The Board is ultimately responsible for evaluating the performance of the CEO and Senior Executives. The Board reviews the performance of the CEO and Senior Executives annually, with the evaluation of the Senior Executives including recommendations from the CEO. This includes approving all merit based salary increases and incentive bonuses that might be paid to the CEO and Senior Executives.

The Remuneration Committee undertakes those reviews on behalf of the Board and makes appropriate recommendations to the Board for its decision. The CEO’s performance evaluation is carried out in accordance with the CEO Evaluation Workbook. The Senior Executive performance criteria flow directly from the pre-determined criteria set out in the CEO Performance Evaluation Workbook.

The Board also undertakes, through its relevant Committees, a separate assessment of the performance of the Company Secretary, Head of Risk Management and Internal Audit Manager in relation to their independent reporting obligations to the Board and its Committees.

In accordance with Newcastle Permanent’s current performance and development review process, the performance of the CEO and Senior Executives was reviewed by the Remuneration Committee and Board in August 2016.


Significant Achievements during the Year

The significant achievements of the Corporate Governance & Nominations Committee during the year included:

reviewing key governance documents and processes, including the Corporate Governance Framework, Board Charter and the process for the nomination and election of a new Chair of the Board;

overseeing the development of measurable objectives for gender diversity on the Boards of the Newcastle Permanent Group;

overseeing the annual Board performance evaluation process and biennial Director skills assessment; and

ongoing monitoring of developments in the regulatory environment and making recommendations to the Board as a result.

Recommendation 2.2: Board skills and diversity

Directors are required to have relevant experience in a field which is complementary to Newcastle Permanent’s activities, or to have appropriate qualifications and experience sufficient to provide meaningful contributions to the operation of the Board and to its role in governing Newcastle Permanent and overseeing the proper functioning of management.

A biennial skills analysis is undertaken for each Director, with the most recent assessment occurring in April 2016. The graphs below set out a summary of the 2016 skills analysis results for the Board collectively and detail:

the technical skills and governance competencies that the Board considers necessary or desirable for its Directors;

the number of Directors that the Board considers should possess each skill and competency on the Board ; and

the number of Directors that were assessed as having each skill and competency at the desired level in the 2016 skills analysis.1

The skills analysis identified that the current Board composition meets, and in many cases, exceeds the current needs of Newcastle Permanent, with a blend of skills and experience in areas applicable to the governance of Newcastle Permanent.

The skills analysis assists the Board to identify any potential skill gaps that may be addressed through the Board’s succession planning processes, as well as professional development and training opportunities for the Directors.

The Board also recognises the value of diversity and its application to the structure of the Board is set out under Recommendation 1.5.

Recommendations 2.3 and 2.4: Independence of Directors

Independent Decision Making

The Board recognises that not only is it critical to have a majority of independent Directors, it is essential that all Directors possess, exhibit and bring to bear, independent decision making qualities in all Board deliberations.

The Board regularly meets without any management representatives present, generally prior to each monthly scheduled Board meeting.

Independent Professional Advice

Each Director has the right of access to all relevant Newcastle Permanent information and, subject to the protocols adopted in the Board Charter, to Newcastle Permanent’s Executives.

Subject to prior consultation with the Chairman, individual Directors may, in appropriate circumstances, seek independent professional advice at Newcastle Permanent’s expense. The Director must consult with an advisor suitably qualified in the relevant field and obtain the Chairman’s approval of the fee payable for the advice before proceeding with the consultation. A copy of the advice received by the Director is made available to all other members of the Board.

Independence of Directors

The Board Charter incorporates a requirement for the independence of non-executive Directors to be assessed on an ongoing basis and formally at least once each year. The criteria for assessment have been based on the factors set out in the ASX Principles and APRA Prudential Standard CPS 510 – Governance (‘CPS 510’).

The formal annual review is undertaken by the Corporate Governance & Nominations Committee with a report and recommendation made by the Committee to the Board.

The financial criteria for independence and relationships between Directors and associated entities that have been adopted by the Board are also quite stringent.

The last formal assessment found that all of the Directors were independent based on the criteria established.

Independence and Director Tenure

The Board acknowledges that Board renewal is a fundamental governance consideration that supports, amongst other things, the Board continuing to be independent from, and prepared to question and challenge, the ideas and recommendations of management. However, the Board also agrees with the view outlined in the ASX Principles that a Director’s independence is not necessarily a trait that is diminished by duration of tenure on the Board.

The Board has adopted an additional process to assist in determining whether a Director’s independence may have been affected by their tenure on the Board. This process involves an independent consultant reviewing and assessing the actual or perceived independence of a Director if their duration of service is greater than 10 years and the Director intends to stand for re-election at the Annual General Meeting when they are next required to retire by rotation under the Constitution of Newcastle Permanent.

In July 2016, the independence of Directors M.D. Slater and P.J. Neat was assessed under this process because both Directors have tenures of greater than 10 years and are standing for re-election at the 2016 Annual General Meeting. The independent consultant assessed Directors M.D. Slater and P.J. Neat as being independent Directors under the criteria outlined in CPS 510 and the Board Charter.

The dates that the current Directors were appointed to the Board are outlined in the Directors’ Report. As represented in the diagram below, the Board continues to be well-served by Directors with a mix of tenure, some with longer tenures who have a detailed understanding of Newcastle Permanent and others with shorter tenures who have brought fresh perspectives to the Board.

Conflict of Interest

Directors must keep the Board advised, on an ongoing basis, of any interest that could potentially conflict with those of Newcastle Permanent. The Board has developed procedures to assist Directors with the disclosure of potential conflicts of interest and all material personal interests.

Directors are required to be meticulous in ensuring that not only actual, but potential and perceived conflicts of interest are disclosed as required by the Corporations Act and Newcastle Permanent’s own policies. A register is maintained of all standing conflicts of interest and material personal interests disclosed by the Directors. Individual interests that might arise during a particular meeting are noted in the minutes of that meeting and dealt with by the Board at the time, as required by law.

Where the Board believes that a significant conflict exists for a Director on a Board matter, the Director concerned does not receive the relevant Board papers, is not present at the meeting whilst the item is considered and does not vote on the matter.

Details of Directors’ related-entity transactions with Newcastle Permanent and the consolidated entity are set out in the notes on ‘Key Management Personnel Disclosures’ in Newcastle Permanent’s full financial report.

Recommendation 2.5: Independence of the Chair

As indicated above, all Directors of Newcastle Permanent have been assessed as independent and as such, the Chairman is independent.The Board Charter provides that the Chairman must be an independent, non-executive Director. This means that the roles of Chairman and CEO cannot be exercised by the same person.

Recommendation 2.6: Director Induction and Education

Newcastle Permanent has induction procedures for new Directors to enable them to participate in Board decision making at the earliest opportunity. New Directors are supplied with key Board governance documents, the corporate strategic plan and corporate policies and are invited to have individual meetings with the Chairman, Company Secretary and CEO. Prospective candidates for the role of Director are also invited to attend Board meetings as an invited guest prior to being offered a Board appointment. All of these steps are designed to ensure that new Directors gain an understanding of:

Newcastle Permanent’s culture, values and financial, strategic, operational and risk management position;

the rights, duties and responsibilities of the Directors; the roles and responsibilities of Senior Executives; the role of Board Committees; meeting arrangements; and

Director interaction with each other, Senior Executives and other stakeholders.

In order to achieve continuing improvement in Board performance, all Directors are encouraged to undertake ongoing professional education and development in fields relevant to their role on the Board and the operations of Newcastle Permanent. The professional education is aligned to the individual development plans for each Director. Professional development is undertaken through approved external service providers, as well as through regular sessions provided by in-house specialists in relevant areas. Minimum ongoing professional education is mandated for each Director and records are maintained to ensure those requirements are met.


1. The relevant threshold required by the Board for each skill is ‘extensive’ experience and each competency is ‘strong’ experience or, in both cases, a rating of four on a five-point rating scale. The only exception to this is the requirement for CEO / Senior Management experience in the financial sector or APRA-regulated institutions, which is assessed at an ‘operational’ experience level or a rating of three on a five-point rating scale.

TECHNICAL SKILLS AND EXPERIENCE GOVERNANCE COMPETENCIES

LENGTH OF TENURE

29%0 – 2 YEARS

14%4 – 6

YEARS

43%10+ YEARS

14%2 – 4

YEARS

DESIRED NO. OF DIRECTORS WITH RELEVANT SKILLS OR COMPETENCY

NO. OF DIRECTORS AT DESIRED LEVEL

DESIRED NO. OF DIRECTORS WITH RELEVANT SKILLS OR COMPETENCY

NO. OF DIRECTORS AT DESIRED LEVEL

CEO/Snr Mgt Exp. in Financial Sector/APRA – Regulated Institutions

CEO/Snr Mgt Exp. in Substantial Organisations

Strategy Development and Implementation

Risk Management

Financial Services Industry

Capital Markets

Finance

Accounting

37

33

22

22

22

22

34

34

Strategy

Contemporary Corporate Governance

Applied Governance

Decision Making

Policy Framework

Risk Management

Compliance

Monitoring

CEO Selection, Monitoring and Evaluation

47

45

44

34

33

56

33

45

33


PRINCIPLE 4: SAFEGUARD INTEGRITY IN CORPORATE REPORTING

Recommendation 4.1: Audit Committee and its structure

The Board has established an Audit Committee which is appointed by the Board from amongst the non-executive Directors. It currently consists of the following four Directors, all of whom are independent:

Mr J.R. Eather (Chairman)

Mr R.E. Griffiths

Ms J.M. Leslie

Mr D.E. Shanley

The Audit Committee Charter mandates that the Chairman of the Committee must be an independent Director and cannot be the same person as the Chairman of the Board. The Charter also sets out the membership of the Committee, its invitees, meeting protocols and the duties and powers of the Committee.

The Charter is reviewed at least once per year by the Audit Committee with any changes recommended to the Board. Only the Board can approve changes to the Charter.

The Audit Committee advises on the establishment and maintenance of a framework of internal control and appropriate ethical standards for the management of the consolidated entity.

The Audit Committee also advises the Board on all aspects of internal and external audit, the appointment and review of Newcastle Permanent’s auditors, statutory financial reporting and controls, review and testing of internal controls, procedures and systems, and Newcastle Permanent’s compliance with internal policies, regulatory standards and legal obligations. The Committee also reviews any proposal for the external auditor to provide non-audit services and whether it might compromise the independence of the external auditor.

The Audit Committee met six times during the 2016 financial year. Further details on the qualifications and experience of the Audit Committee members and the individual attendances at the Committee meetings are set out in the Directors’ Report.


The significant achievements of the Audit Committee during the year included:

approval of the Internal Audit Plan for the 2016 to 2018 financial years;

review of, and recommendations in relation to, the group consolidated financial statements;

review and oversight of all internal and external audit activity and the compliance management framework; and

overseeing the commencement of PricewaterhouseCoopers’ engagement as the external auditor.

PRINCIPLE 3: ACT ETHICALLY AND RESPONSIBLY

Ethical and responsible decision making is fundamental to the operations of Newcastle Permanent. The Committees established by the Board assist in such processes, particularly through the governance oversight of the Corporate Governance & Nominations Committee, the Audit Committee and ultimately the Board.

The Board has also established a number of policies that ensure and create a culture of Newcastle Permanent acting fairly and transparently, and in an ethical and responsible manner in all of its dealings with relevant stakeholders. In addition, Newcastle Permanent has a Whistleblowing Policy to encourage employees to disclose unacceptable activities and protect them from repercussions of reporting. That policy includes the use of an independent, external contractor to which reports can be made.

Recommendation 3.1: Newcastle Permanent’s Code of Conduct

Each Director, manager and employee must comply with Newcastle Permanent’s Code of Conduct Policy, which includes:

aligning the behaviour of the Board and management with the Code of Conduct by maintaining appropriate core values and objectives;

fulfilling responsibilities to members and customers by maintaining high standards of product quality, service standards and commitments to fair value;

ensuring compliance with responsibilities to individuals, such as privacy, use of privileged or confidential information and conflict resolution;

dealing with and managing conflicts of interest in accordance with approved policies;

controlling and monitoring corporate opportunities by preventing Directors and employees from taking advantage of property, information or position for personal gain;

ensuring confidentiality of corporate information;

dealing fairly with each other, members and third parties;

protecting and properly using Newcastle Permanent’s assets;

complying with all laws; and

reporting unethical behaviour.

The Code of Conduct Policy also includes a specific Directors’ Code of Conduct, which imposes additional standards and requirements on them, consistent with their duties as Directors of Newcastle Permanent.

Recommendation 4.2: Declarations from the CEO and CFO

The CEO and Chief Financial Officer (‘CFO’) have declared in writing to the Board that, in their opinion, Newcastle Permanent’s:

financial records have been properly maintained;

financial statements comply with appropriate accounting standards and give a true and fair view of the financial position and performance of Newcastle Permanent; and

financial statements are founded on a sound and effective system of risk management and internal control.

Those declarations were received prior to the Board approving Newcastle Permanent’s financial statements.

Recommendation 4.3: External auditor attendance at the Annual General Meeting

Newcastle Permanent ensures that a representative of its external auditor attends the Annual General Meeting and is available to answer questions from members relevant to the external audit.

PRINCIPLE 5: MAKE TIMELY AND BALANCED DISCLOSURE

This Principle is designed for entities that are listed on the ASX. Since Newcastle Permanent is not a listed entity, this Principle is not relevant to it.

PRINCIPLE 6: RESPECT THE RIGHTS OF MEMBERS

Recommendation 6.1: Information on Newcastle Permanent’s website

Newcastle Permanent includes details of its most recent annual reports in electronic form on its public website. The website also includes a summary of the financial highlights for the immediately preceding financial year and the most recent prudential disclosures regarding the capital adequacy, risk exposures and remuneration practices of Newcastle Permanent.

Other details regarding Newcastle Permanent’s history, Member Charter, strategy, Board and management structures and other member-related information is readily available on the website.

Recommendation 6.2: Member relations program

Newcastle Permanent does not have a member communication policy but strives to keep all its members informed of its activities.

Newsletters are regularly distributed to members, providing a basis to inform members on developments and issues that may be of interest. Financial, regulatory and other general information is available on Newcastle Permanent’s website as indicated above.

Copies of the Constitution are available to any member on request. The Annual General Meeting is also a key engagement point with members. Details on the processes to encourage member participation at the Annual General Meeting are set out in Recommendation 6.3 below.

Recommendation 6.3: Processes to facilitate and encourage participation at general meetings

Election to Receive Communications

Newcastle Permanent informs all members when they become a member of the company, that they are entitled to receive copies of the Annual Report and Notice of Annual General Meeting. This is consistent with the requirements of the Corporations Act.

Members can change their mind about receiving the Annual Report and Notice of Annual General Meeting at any time.

Meetings

Newcastle Permanent provides written notice of its Annual General Meeting to all members that have requested notice, and places notices in conspicuous locations in all its branches and Head Office for at least three weeks in advance of the Annual General Meeting.

Members are given ample opportunity, and are encouraged to ask questions in relation to each of the items of business before the Annual General Meeting, including the financial results, as well as in relation to operational performance or any other matters not included on the agenda for the meeting. The external auditor also attends the Annual General Meeting to answer questions from members.

The full financial report is available on request to all members and includes relevant information about the operations of Newcastle Permanent during the year, changes in the state of affairs and details of future developments.

The Board encourages full participation of members at the Annual General Meeting, to ensure a high level of accountability and identification with Newcastle Permanent’s strategy and goals. Important issues are presented to the members as single resolutions.

Recommendation 6.4: Electronic communications

Newcastle Permanent offers members the choice of receiving their account statements via email. Members are also able to make general enquiries online through the public website or product and service enquiries through a secure message via internet banking. Members that elect to receive the Annual Report also have the option of receiving it electronically.



PRINCIPLE 7: RECOGNISE AND MANAGE RISKRecommendation 7.1: Risk Management Committee and its structure

The Board has established a stand-alone Risk Management Committee, which currently consists of the following four members, all of whom are independent:

Mr P.J. Neat (Chairman)Mr J.R. EatherMr R.E. Griffiths

Ms S.J. Martin-Williams

The Chairman of the Risk Management Committee must be an independent Director. The Committee has a formal Charter, which is reviewed at least once per year by the Committee, with any changes recommended to the Board for approval.

The Risk Management Committee oversees and makes recommendations to the Board in relation to:

the establishment, review, ratification and implementation of Newcastle Permanent’s risk management strategy and framework, risk appetite and risk tolerance levels;

the establishment of an aggregate view of Newcastle Permanent’s risk profile;

Newcastle Permanent’s risk culture;

managing the group’s insurable interests;

the conduct of any new activities Newcastle Permanent may decide to pursue or undertake; and

due diligence activities, including potential mergers or acquisitions.

The Committee met five times during the 2016 financial year. Details on the individual attendances at the Committee meetings are set out in the Directors’ Report.


The significant achievements of the Risk Management Committee during the year included:

overseeing the review of Newcastle Permanent’s home loan serviceability model;

reviewing Newcastle Permanent’s Risk Management Strategy, Strategic and Corporate Risk Profiles, risk appetite, risk policies and Risk Appetite Statement;

overseeing the review of the stress testing methodologies for Newcastle Permanent’s material risks; and

reviewing the qualitative and quantitative indicators utilised to measure and monitor Newcastle Permanent’s risk culture.

Recommendation 7.2: Review of risk management framework

The Board has an approved risk management framework that includes policies designed to identify, assess, monitor and mitigate all material business risks.

Newcastle Permanent’s risk management framework includes a specific Risk Appetite Statement that articulates, in both qualitative and quantitative terms, the risk appetite and tolerance for each of Newcastle Permanent’s material risks.

The Risk Management Committee regularly reviews and makes recommendations to the Board regarding the risk management framework. In March 2016, the Committee reviewed Newcastle Permanent’s Strategic Risk Profile and the risk appetite settings for each of its material risks. In April 2016, the Committee reviewed and recommended amendments to the Risk Appetite Statement and the policies and tolerances for Newcastle Permanent’s material risks.

In June 2016, the Committee reviewed the Corporate Risk Profile of Newcastle Permanent to ensure that all business risks were identified and appropriate controls were implemented to manage the risks in accordance with the Board’s risk appetite.

Recommendation 7.3: Structure and role of internal audit function

Newcastle Permanent maintains an in-house internal audit function as well as using the service of a co-sourced internal audit service provider. The internal auditors work with management to systematically review systems and operations, based on the key areas of risk and strategic activities. Those reviews are aimed at identifying how well risks are managed and identifying areas where efficiencies or innovations could be made to enhance the effectiveness and efficiency of governance, risk management and control processes.

The internal auditors report functionally to the Audit Committee and administratively to the Company Secretary as a delegate of the Board. The Audit Committee has direct access to the internal auditors and both the Audit Committee and the internal auditors have access to management to seek all necessary information and explanations.

Recommendation 7.4: Management of economic, environmental and social sustainability risks

Newcastle Permanent considers and has processes in place to manage its material risk exposures, including the economic, environmental and social sustainability risks pertaining to its activities.

Newcastle Permanent maintains a strong capital and liquidity position as a key mechanism for managing its exposure to economic risks. It also monitors and manages its material exposure to economic risks through the use of quantitative risk limit frameworks, modelling and stress testing.

Newcastle Permanent has practices in place to manage environmental and social sustainability risks. For example, its procurement practices incorporate environmental and social responsibility considerations in major purchasing decisions and a number of operational initiatives have been introduced to reduce Newcastle Permanent’s environmental impact such as reducing energy and water consumption.

Overall, Newcastle Permanent takes a long term view regarding its business activities, with the goal of being economically, environmentally and socially sustainable.

PRINCIPLE 8: REMUNERATE FAIRLY AND RESPONSIBLY

Recommendation 8: The Board should establish a Remuneration Committee

The Board has established a Remuneration Committee, which currently consists of the following four non-executive Directors, all of whom are independent:

Mr D.E. Shanley (Chairman)Ms J.M. LeslieMs S.J. Martin-Williams

Mr P.J. Neat

The Chairman of the Committee must be an independent Director. The Chairman of the Risk Management Committee is a member of the Remuneration Committee to facilitate linkages between risk management and remuneration practices.

The Remuneration Committee reviews and makes recommendations to the Board on remuneration packages and policies applicable to the CEO, Senior Executives and Directors. It is also responsible for making recommendations to the Board about employment agreements, incentive performance packages, superannuation entitlements and termination entitlements.

The Remuneration Committee has direct oversight of, and makes recommendations to the Board in relation to, the Remuneration Policy required in accordance with APRA Prudential Standard CPS 510. This includes oversight of remuneration and incentive schemes for an expanded group of personnel including those whose primary functions relate to risk management, compliance, internal audit and financial control.

The Remuneration Committee met five times during the 2016 financial year. Details on the individual attendances at the Committee meetings are set out in the Directors’ Report.


The significant achievements of the Remuneration Committee during the year included:

overseeing the finalisation of the Enterprise Agreement renegotiations;

reviewing the Remuneration Committee Charter, including the process and factors taken into consideration when determining the fee payable to the Chair of the Board; and

reviewing the Remuneration Policy and annual incentive schemes.

Recommendation 8.2: Policies regarding the remuneration of Directors and Senior ExecutivesThe Board has adopted a Remuneration Policy that contains, amongst other things, an alignment of remuneration with Newcastle Permanent’s risk management framework. Any incentive schemes that operate are based on pre-determined criteria and key performance indicators.

Remuneration levels are competitively set to attract and retain appropriately qualified and experienced Directors and Senior Executives. The Remuneration Committee obtains independent advice on the appropriateness of remuneration packages and trends in comparable organisations and makes recommendations to the Board regarding the remuneration of Directors and Senior Executives.

The structure of remuneration for Directors is distinct from that of the executives and management. Recommendations for increases in Directors’ remuneration must be submitted to and approved by the members at the Annual General Meeting. Directors do not participate in any performance incentive schemes in order to preserve the independence of the Board and its decision making processes. Directors first appointed after 1 January 2011 do not receive any retirement benefits from Newcastle Permanent other than compulsory superannuation entitlements.

The remuneration for Senior Executives comprises a mix of fixed and performance-based remuneration, as well as other benefits prescribed in Newcastle Permanent’s approved policies from time to time. The CEO and Senior Executives may be entitled to a payment upon termination of employment from Newcastle Permanent. Where so entitled, the termination payment has been agreed in the contract of employment and is not payable where termination of employment is for misconduct.

Recommendation 8.3: Equity-based remuneration schemes

Newcastle Permanent does not have equity-based remuneration schemes for its Directors or employees.

ASSOCIATED ENTITIES Newcastle Permanent has several associated entities, which are consolidated into the group for reporting purposes. These associated entities include:

Newcastle Friendly Society Limited

Newcastle Permanent Community Foundation Company Limited

Newcastle Permanent Charitable Foundation

NPBS Securities Pty Ltd*

NPBS CP Trust No.1*

Newcastle Permanent Funding Trust No.1

*On 30 June 2016, NPBS Securities Pty Ltd lodged an application for voluntarily deregistration as a company, since it was no longer required by the consolidated group. NPBS CP Trust No.1, a related entity was wound up on 15 June 2016 for the same reason.

COMPANY SECRETARYMr Andrew Yost is the Company Secretary of Newcastle Permanent, having been appointed to that position on 19 August 2004. He is a Chartered Secretary and a qualified lawyer. Andrew holds a Master of Laws (LLM) degree, a Graduate Diploma in Applied Corporate Governance and has completed the Advanced Management Program at Harvard Business School. He was admitted to practise in the Supreme Court of NSW and the High Court of Australia in 1993 and to the Supreme Court of South Australia in 2001. He has practised law extensively in the areas of banking and finance, and corporate and commercial law, both in private practice and in corporate legal roles.

Andrew has worked at partnership level in private practice and has held Chief Legal Counsel roles in a subsidiary of an ASX 50 company and in an Australian subsidiary of a large multi-national company. He is a member of the Australian Corporate Lawyers Association, the Law Society of NSW and a Fellow of the Governance Institute of Australia and the Institute of Chartered Secretaries and Administrators.



CONCISE FINANCIAL REPORT

INCOME STATEMENTS For the year ended 30 June 2016

These income statements should be read in conjunction with the accompanying notes.

Parent Entity Consolidated Entity

2016 2015 2016 2015

Notes $’000 $’000 $’000 $’000

Interest revenue 4 369,504 381,218 370,717 383,140

Interest expense 4 (197,930) (215,291) (197,837) (215,489)

Net interest income 171,574 165,927 172,880 167,651

Fee and commission revenue 5 19,497 18,970 19,459 18,932

Fee and commission expense (5,828) (5,096) (5,828) (5,096)

Net fee and commission income 13,669 13,874 13,631 13,836

Other operating income 6 5,827 1,649 5,827 1,649

Impairment losses on loans and advances to members (991) (706) (991) (706)

Depreciation and amortisation expense (7,611) (7,744) (7,611) (7,744)

Personnel related expenses (82,153) (78,221) (82,242) (78,312)

Operating expenses (42,851) (43,572) (44,720) (45,545)

Profit before income tax 57,464 51,207 56,774 50,829

Income tax expense (16,544) (14,738) (17,344) (14,782)

Profit for the year 40,920 36,469 39,430 36,047

Attributable to:

Non-controlling interests - - (1,490) (422)

Members of Newcastle Permanent Building Society Limited 40,920 36,469 40,920 36,469

STATEMENTS OF COMPREHENSIVE INCOME For the year ended 30 June 2016


2016 2015 2016 2015

$’000 $’000 $’000 $’000

Profit for the year 40,920 36,469 39,430 36,047

Other comprehensive income, net of tax

Items that may be reclassified to profit or loss:

Changes in the fair value of cash flow hedges (11,171) (2,649) (11,171) (2,649)

Items that may not be reclassified to profit or loss:

Changes in the fair value of property - (1,631) - (1,631)

Other comprehensive income for the year, net of tax (11,171) (4,280) (11,171) (4,280)

Total comprehensive income for the year 29,749 32,189 28,259 31,767

Attributable to:

Non-controlling interests - - (1,490) (422)

Members of Newcastle Permanent Building Society Limited 29,749 32,189 29,749 32,189


CONCISE FINANCIAL REPORT CONTINUED

BALANCE SHEETS As at 30 June 2016


2016 2015 2016 2015

$’000 $’000 $’000 $’000

Assets

Cash and cash equivalents 605,807 595,784 634,015 614,153

Prepayments and other receivables 11,101 22,259 7,048 8,580

Derivative financial instruments 72,542 74,794 72,542 74,794

Held-to-maturity investments 930,952 837,382 949,465 861,080

Loans and advances to members 8,049,203 7,255,957 8,049,203 7,255,957

Other financial assets 294 294 294 294

Deferred tax assets 2,635 - 2,694 472

Intangible assets 6,054 4,330 6,054 4,330

Property, plant and equipment 47,365 50,376 47,365 50,376

Investment properties 4,488 4,566 4,488 4,566

Total assets 9,730,441 8,845,742 9,773,168 8,874,602

Liabilities

Payables 9,240 12,509 9,360 12,769

Derivative financial instruments 7,642 2,837 7,642 2,837

Deposits 7,308,490 6,679,046 7,297,864 6,654,808

Life investment contract liabilities - - 728 895

Life insurance contract liabilities - - 19,951 21,329

Borrowings 1,542,641 1,318,909 1,544,587 1,317,787

Current tax liabilities 1,935 136 2,316 137

Provisions 13,304 12,092 13,319 12,125

Deferred tax liabilities - 2,773 - 2,773

Total liabilities 8,883,252 8,028,302 8,895,767 8,025,460

Net assets 847,189 817,440 877,401 849,142

Equity

Reserves 37,283 46,895 37,283 46,895

Retained profits 809,906 770,545 809,906 770,545

Parent entity interest 847,189 817,440 847,189 817,440

Non-controlling interest - - 30,212 31,702

Total equity 847,189 817,440 877,401 849,142

STATEMENTS OF CHANGES IN EQUITY – CONSOLIDATED ENTITYFor the year ended 30 June 2016

Attributable to members of Newcastle Permanent Building Society Limited

Reserves Retained Profits Total Non-controlling interests

Total equity

$’000 $’000 $’000 $’000 $’000

Balance at 1 July 2015 46,895 770,545 817,440 31,702 849,142

Profit for the year - 40,920 40,920 (1,490) 39,430

Other comprehensive income (11,171) - (11,171) - (11,171)

Total comprehensive income for the year (11,171) 40,920 29,749 (1,490) 28,259

Transfers between reserves and retained profits 1,559 (1,559) - - -

Balance at 30 June 2016 37,283 809,906 847,189 30,212 877,401


Reserves Retained Profits Total Non-controlling interests

Total equity

$’000 $’000 $’000 $’000 $’000

Balance at 1 July 2014 42,530 742,721 785,251 32,203 817,454

Profit for the year - 36,469 36,469 (422) 36,047

Other comprehensive income (4,280) - (4,280) - (4,280)

Total comprehensive income for the year (4,280) 36,469 32,189 (422) 31,767

Extra-ordinary bonuses credited to life insurance contracts

- - - (79) (79)

Transfers between reserves and retained profits 8,645 (8,645) - - -

Balance at 30 June 2015 46,895 770,545 817,440 31,702 849,142


CONCISE FINANCIAL REPORT CONTINUED

STATEMENTS OF CHANGES IN EQUITY – PARENT ENTITYFor the year ended 30 June 2016


Reserves Retained Profits Total Equity

$’000 $’000 $’000

Balance at 1 July 2015 46,895 770,545 817,440

Profit for the year - 40,920 40,920

Other comprehensive income (11,171) - (11,171)

Total comprehensive income for the year (11,171) 40,920 29,749

Transfers between reserves and retained profits 1,559 (1,559) -

Balance at 30 June 2016 37,283 809,906 847,189


Reserves Retained Profits Total Equity

$’000 $’000 $’000

Balance at 1 July 2014 42,530 742,721 785,251

Profit for the year - 36,469 36,469

Other comprehensive income (4,280) - (4,280)

Total comprehensive income for the year (4,280) 36,469 32,189

Transfers between reserves and retained profits 8,645 (8,645) -

Balance at 30 June 2015 46,895 770,545 817,440

STATEMENTS OF CASH FLOWS For the year ended 30 June 2016


2016 2015 2016 2015

$’000 $’000 $’000 $’000

Cash flows from operating activities

Interest received 369,279 380,214 370,498 382,120

Other income 5,886 1,666 5,886 1,647

Fees and commissions received 21,830 21,041 21,792 21,029

Interest paid (191,277) (215,500) (197,720) (214,595)

Donations paid - - (1,476) (1,522)

Payments to suppliers and employees (inclusive of GST) (132,794) (128,420) (133,406) (129,548)

Income tax paid (15,372) (18,707) (15,378) (18,763)

(Increase)/decrease in operating assets:

Net movement in held-to-maturity investments (93,570) (48,984) (88,385) (50,111)

Net movement in loans and advances to members (793,658) (293,532) (793,602) (293,532)

Increase/(decrease) in operating liabilities:

Life insurance contract contribution receipts - - 32 40

Life insurance contract withdrawal payments - - (1,683) (1,825)

Life investment contract contribution receipts - - 35 38

Life investment contract withdrawal payments - - (209) (428)

Net increase in deposits 629,444 350,988 643,056 355,163

Net cash inflow/(outflow) from operating activities (200,232) 48,766 (190,560) 49,713

Cash flows from investing activities

Payments on unwinding of interest rate swaps (947) - (947) -

Payments for intangible assets (3,392) (3,391) (3,392) (3,391)

Payments for property, plant and equipment (3,984) (3,878) (3,984) (3,878)

Proceeds from sale of property, plant and equipment 84 99 84 99

Net cash outflow from investing activities (8,239) (7,170) (8,239) (7,170)

Cash flows from financing activities

Net increase/(decrease) in borrowings 215,844 (262,574) 218,661 (266,874)

Transfer from cash collateral reserve of a related entity 2,650 1,200 - -

Net cash inflow/(outflow) from financing activities 218,494 (261,374) 218,661 (266,874)

Net increase/(decrease) in cash and cash equivalents 10,023 (219,778) 19,862 (224,331)

Cash and cash equivalents at the beginning of the financial year 595,784 815,562 614,153 838,484

Cash and cash equivalents at the end of the financial year 605,807 595,784 634,015 614,153


NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2016

This concise financial report relates to both Newcastle Permanent as an individual entity and the entities it controlled at the end of, or during, the year ended 30 June 2016. The accounting policies adopted have been consistently applied to all years presented.

Newcastle Permanent is an entity referred to in ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191 issued by the Australian Securities and Investments Commission, relating to the rounding off of amounts in the Directors’ report. Amounts in the concise financial report have been rounded off in accordance with that Instrument to the nearest thousand dollars.

1. PRESENTATION CURRENCYThe presentation currency used in this concise financial report is Australian dollars.

2. CHANGES IN ACCOUNTING POLICYThere have been no changes in accounting policy during the financial year ended 30 June 2016.

Comparative information is reclassified where appropriate to enhance comparability.

3. DIVIDENDSNewcastle Permanent is a customer-owned building society and is prohibited from paying dividends.

4. ANALYSIS OF CONSOLIDATED INTEREST REVENUE AND INTEREST EXPENSEThe following table shows the average balance for each of the significant categories of interest-bearing assets and liabilities, the amount of interest revenue or expense and the average interest rate.

2016 2015

Average Balance*

Interest Average Rate Average Balance*

Interest Average Rate

Consolidated entity $’000s $’000s % $’000s $’000s %

Interest revenue

Cash and cash equivalents 702,032 14,888 2.12% 769,141 18,827 2.45%

Held-to-maturity investments 911,395 25,080 2.75% 815,246 26,355 3.23%

Loans and advances to members 7,644,124 330,749 4.33% 7,046,672 337,958 4.80%

9,257,551 370,717 4.00% 8,631,059 383,140 4.44%

Interest expense

Deposits 7,009,848 149,891 2.14% 6,505,809 165,097 2.54%

Borrowings 1,484,142 47,946 3.23% 1,361,389 50,392 3.70%

8,493,990 197,837 2.33% 7,867,198 215,489 2.74%

Net interest income 172,880 167,651

* Average balances are calculated on an average of monthly closing balances.


2016 2015 2016 2015

$’000 $’000 $’000 $’000

5. FEE AND COMMISSION REVENUEFee revenue 8,446 8,620 8,446 8,620

Commission revenue 11,029 10,219 10,991 10,181

Government subsidies 22 131 22 131

19,497 18,970 19,459 18,932

6. OTHER OPERATING INCOMENet gain on disposal of plant and equipment 4 - 4 -

Rental income from operating leases 380 363 380 363

Bad debts recovered 3,459 332 3,459 332

Other income 1,984 954 1,984 954

5,827 1,649 5,827 1,649

7. MATTERS SUBSEQUENT TO THE END OF THE FINANCIAL YEARNo matters or circumstances have arisen since the end of the financial year which significantly affected or may significantly affect the operations of the consolidated entity, the results of those operations, or the state of affairs of the consolidated entity in future financial years.

8. MANAGEMENT DISCUSSION AND ANALYSISa. Income statement

Net interest revenue

Consolidated: $172.9m (2015: $167.7m)Parent entity: $171.6m (2015: $165.9m)

Net interest revenue increased from $167.7m for the year ended 30 June 2015 to $172.9m for the year ended 30 June 2016 in respect of the consolidated entity. For the parent entity, net interest revenue has increased from $165.9m for the year ended 30 June 2015 to $171.6m for the year ended 30 June 2016.

The movement in net interest revenue between 30 June 2015 and 30 June 2016 is comprised as follows:

Parent entity ($m)

Consolidated ($m)

Decrease in interest revenue (11.7) (12.4)

Decrease in interest expense 17.3 17.6

Increase in net interest revenue 5.6 5.2

Interest revenue

The decrease in interest revenue reflects:i. lower interest income on loans and advances to members of $7.2m; andii. lower interest income on cash and cash equivalents and held-to-maturity

investments of $5.2m.

Loans and advances to members

The total loan portfolio increased by $793.2m between 30 June 2015 and the year ended 30 June 2016 to $8.0b which generated additional interest revenue of $27.2m. However, the average return on home loans decreased which is the result of two key factors, being:

the weighted average official cash rate of 1.97% for the year ended 30 June 2016 being 39 basis points lower than for the year ended 30 June 2015; and

NPBS responding to an increasingly competitive home lending environment and in this environment, ensuring that its lending products represented best value to its members.

Cash and cash equivalents and held-to-maturity investments

While the balance of cash and cash equivalents and held-to-maturity investments increased by $108.2m between 30 June 2015 and 30 June 2016 to $1.6b, the weighted average return decreased. This decrease was consistent with the reduction in the weighted average official cash rate during the year ended 30 June 2016.

Interest expense

Despite growth in NPBS’ funding of $869.9m from $8.0b at 30 June 2015 to $8.8b at 30 June 2016, total interest expense has decreased by $17.6m.

The decrease in interest expense primarily reflects a lower average cost of funds for the year ended 30 June 2016 driven by the reduction in the official cash rate which occurred throughout the 2015 and 2016 years.

Other operating income

Consolidated & parent entity: $5.8m (2015: $1.6m)

The increase in other operating income of $4.2m primarily reflects:

the partial recovery of an impairment loss that was recognised during the year ended 30 June 2009 ($3.1m); and

the receipt of payroll tax rebates from the Office of State Revenue under the NSW Jobs Action Plan and incentives negotiated with a number of NPBS’ partners ($1.2m).


Net fee and commission income

Consolidated: $13.6m (2015: $13.8m)

Parent entity: $13.7m (2015: $13.9m)

The decrease in net fee and commission income in both the parent entity and consolidated entity primarily reflects a continued decrease in the volume of transactions that are subject to excess transaction fees. This decrease has occurred as members have increased their use of fee-free transaction accounts, which offer an unlimited number of transactions and no fee, where certain conditions are met.

Non-interest expenses excluding income tax expense

Consolidated: $135.6m (2015: $132.3m)

Parent entity: $133.6m (2015: $130.2m)

Total operating expenses were $135.6m for the year ended 30 June 2016 compared to $132.3m for the year ended 30 June 2015 in respect of the consolidated entity, which represents an increase of $3.3m (2.5%).

Total operating expenses in respect of the parent entity were $133.6m for the year ended 30 June 2016 compared to $130.2m for the year ended 30 June 2015, which represents an increase of $3.4m (2.6%).

The movement in total non-interest expenses for both the consolidated entity and parent entity is comprised as follows:

Parent entity ($m) Consolidated entity ($m)

Increase in personnel expenses 3.9 3.9

Decrease in general administrative expenses (0.7) (0.8)

Decrease in depreciation and amortisation expense (0.1) (0.1)

Increase in impairment losses on loans and advances 0.3 0.3

Increase in non-interest expenses 3.4 3.3

Personnel expenses represent 58.2% of the consolidated entity’s operating expenses (2015:57.0%). The increase in personnel expenses is primarily attributable to annual performance based salary increases and salary increases granted under the parent entity’s Enterprise Agreement, the applicable on-costs and the revaluation of employee leave provisions reflecting changes to salaries.

Impairment losses on loans and advances for the year ended 30 June 2016 represent 0.01% of the total loan portfolio (2015:0.01%) reflecting the parent entity’s approach to prudent lending and resulting high credit quality.

The consolidated entity’s cost to income ratio has reduced from 73.0% at 30 June 2015 to 71.4% at 30 June 2016.

b. Balance sheet

Assets

Total assets of the consolidated entity increased by $898.6m from $8.9b at 30 June 2015 to $9.8b at 30 June 2016, representing an increase of 10.1%.

Total assets of the parent entity increased by $884.7m from $8.8b at 30 June 2015 to $9.7b at 30 June 2016, representing an increase of 10.0%.

The composition of the consolidated entity’s assets at 30 June 2016 is broadly consistent with the composition at 30 June 2015. Loans and advances to members comprise 82.4% of total assets (2015:81.8%) and total cash and cash equivalents and held-to-maturity investments comprise 16.2% of total assets (2015:16.6%). With respect to loans and advances to members, home loans represent 97.6% (2015:97.0%).

The key movements in assets between 30 June 2015 and 30 June 2016 included:

Parent entity ($m) Movement (%) Consolidated ($m) Movement (%) Comment

Increase in loans and advances to members 793.2 10.9 793.2 10.9 (i)

Increase in held-to-maturity investments 93.6 11.2 88.4 10.3 (ii)

Increase in cash and cash equivalents 10.0 1.7 19.9 3.2 (ii)

i The growth in loans and advances to members during the 2015/16 year of $793.2m primarily consisted of growth in the home loan portfolio of $813.4m (11.5%). Growth in the home loan portfolio has been achieved as a result of:

the ongoing impact of the sustained period of accommodative monetary policy, with the official cash rate at a historically low level;

the continued competitive pricing of NPBS’ home loan products; and

the implementation and execution of successful integrated promotional strategies to drive home loan acquisition activity.

ii The increase in cash and cash equivalents and held-to-maturity investments of $108.2m is primarily driven by:

Impact on cash and cash equivalents and held-to-maturity investments ($m)

Increase in deposits 643.1

Increase in borrowings 218.7

Increase in gross loans and advances to members (793.6)

Payments for intangible assets and plant and equipment (7.3)

Other net cash receipts 47.3

Total 108.2

Liabilities

Total liabilities of the consolidated entity increased by $870.3m from $8.0b at 30 June 2015 to $8.9b at 30 June 2016, representing an increase of 10.8%.Total liabilities of the parent entity increased by $855.0m from $8.0b at 30 June 2015 to $8.9b at 30 June 2016, representing an increase of 10.6%.

The key movements in liabilities included:

Parent entity ($m) Movement (%) Consolidated ($m) Movement (%) Comment

Increase in retail funding 621.2 9.6 635.6 9.9 (i)

Increase in wholesale funding 232.0 15.6 234.3 15.8 (ii)

i The increase in retail funding consisted of an increase in at-call deposits of $393.3m (10.2%) and an increase in fixed-term deposits of $242.3m (9.4%).

At 30 June 2016, retail funding represents 80.4% of the consolidated entity’s total funding (2015:81.2%).

ii In line with its strategy of maintaining a diversified funding base and an appropriate proportion of long term funding, the consolidated entity obtains a proportion of its funding from various wholesale funding sources. Wholesale funding represents 19.6% of the consolidated entity’s total funding (2015: 18.8%).

Wholesale funding increased by $234.3m (15.8%) between 30 June 2015 and 30 June 2016 as a result of the consolidated entity continuing to diversify its wholesale funding sources and increase its proportion of long term funding. At 30 June 2016, long term funding represents 15.1% of total funding (14.7% at 30 June 2015).

c. Statement of changes in equity

Total equity of the consolidated entity has increased by $28.3m (3.3%) from $849.1m at 30 June 2015 to $877.4m at 30 June 2016.Total equity of the parent entity has increased by $29.8m (3.6%) from $817.4m at 30 June 2015 to $847.2m at 30 June 2016.

The movements were:

Parent entity ($m) Consolidated ($m)

Profit for the year ended 30 June 2016 40.9 39.4

Decrease in the cash flow hedge reserve (11.1) (11.1)

Total 29.8 28.3

The decrease in the cash flow hedge reserve represents the after-tax effect of the changes in the fair value of derivative financial instruments designated as cash flow hedges during the 2016 financial year.

d. Cash flow statement

There has been an increase in cash and cash equivalents during the year of $19.9m in respect of the consolidated entity and an increase of $10.0m in respect of the parent entity.

The increase in the consolidated entity’s cash and cash equivalents and held-to-maturity investments is discussed at Section 8(b) (ii) above.

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2016

ANNUAL REPORT 201650

NEWCASTLE PERMANENT BUILDING SOCIETY LIMITEDDIRECTORS’ DECLARATIONFOR THE YEAR ENDED 30 JUNE 2016

The Directors declare that in their opinion, the concise financial report of the consolidated entity for the year ended 30 June 2016 as set out on pages 40 to 49 complies with Accounting Standard AASB 1039 Concise Financial Reports.

The concise financial report is an extract from the full financial report for the year ended 30 June 2016. The financial statements and specific disclosures included in the concise financial report have been derived from the full financial report.

The concise financial report cannot be expected to provide as full an understanding of the financial performance, financial position and financing and investing activities of the consolidated entity as the full financial report, which is available on request.

This declaration is made in accordance with a resolution of the Directors.

M.D.SLATER CHAIRMAN J.R.EATHER DIRECTOR

Newcastle 9 September 2016


INDEPENDENT AUDIT REPORT

AUDITOR’S INDEPENDENCE DECLARATION

Auditor’s Independence Declaration

As lead auditor for the audit of Newcastle Permanent Building Society Limited for the year ended 30 June 2016, I declare that to the best of my knowledge and belief, there have been:

1. no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and

2. no contraventions of any applicable code of professional conduct in relation to the audit.

This declaration is in respect of Newcastle Permanent Building Society Limited and the entities it controlled during the period.

Craig Stafford Partner SydneyPricewaterhouseCoopers 9 September 2016

PricewaterhouseCoopers, ABN 52 780 433 757Darling Park Tower 2, 201 Sussex Street, GPO BOX 2650, SYDNEY NSW 1171T: +61 2 8266 0000, F: +61 2 8266 9999, www.pwc.com.au

Liability limited by a scheme approved under Professional Standards Legislation.

Independent auditor’s report to the members of Newcastle Permanent Building Society LimitedReport on the concise financial reportWe have audited the accompanying concise financial report of Newcastle Permanent Building Society Limited (the company) which comprises the consolidated balance sheets as at 30 June 2016, consolidated statements of comprehensive income, consolidated income statements, consolidated statements of changes in equity and consolidated statements of cash flows for the year then ended, derived from the audited financial report of the company for the year ended 30 June 2016 for both Newcastle Permanent Building Society Limited and Newcastle Permanent (the consolidated entity). The concise financial report does not contain all the disclosures required by the Australian Accounting Standards and accordingly, reading the concise financial report is not a substitute for reading the audited financial report.

Directors’ responsibility for the concise financial report The directors are responsible for the preparation of the concise financial report in accordance with Accounting Standard AASB 1039 Concise Financial Reports, and the Corporations Act 2001, and for such internal control as the directors determine are necessary to enable the preparation of the concise financial report.

Auditor’s responsibilityOur responsibility is to express an opinion on the concise financial report based on our audit procedures which were conducted in accordance with Auditing Standard ASA 810 Engagements to Report on Summary Financial Statements. We have conducted an independent audit, in accordance with Australian Auditing Standards, of the financial report of the consolidated entity for the year ended 30 June 2016. We expressed an unmodified audit opinion on that financial report in our report dated 9 September 2016. The Australian Auditing Standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance whether the financial report for the year is free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the concise financial report. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the concise financial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation of the concise financial report in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control.

Our procedures include testing that the information in the concise financial report is derived from, and is consistent with, the financial report for the year, and examination on a test basis of audit evidence supporting the amounts, discussion and analysis, and other disclosures which were not directly derived from the financial report for the year. These procedures have been undertaken to form an opinion whether, in all material respects, the concise financial report complies with AASB 1039 Concise Financial Reports and whether the discussion and analysis complies with the requirements laid down in AASB 1039 Concise Financial Reports.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions.

IndependenceIn conducting our audit, we have complied with the independence requirements of the Corporations Act 2001. We confirm that the independence declaration required by the Corporations Act 2001, which has been provided to the directors of Newcastle Permanent Building Society Limited on 9 September 2016, is also applicable to this concise financial report.

Auditor’s opinionIn our opinion, the concise financial report and discussion and analysis of the consolidated entity for the year ended 30 June 2016 complies with Australian Accounting Standard AASB 1039 Concise Financial Reports.

PricewaterhouseCoopers Craig Stafford 9 September 2016Sydney Partner

PricewaterhouseCoopers, ABN 52 780 433 757Darling Park Tower 2, 201 Sussex Street, GPO BOX 2650, SYDNEY NSW 1171T: +61 2 8266 0000, F: +61 2 8266 9999, www.pwc.com.au

Liability limited by a scheme approved under Professional Standards Legislation.

ecoStar is an environmentally responsible paper made Carbon Neutral. The greenhouse gas emissions of the manufacturing process including transportation of the finished product to BJ Ball Papers Warehouse has been measured by the Edinburgh Centre for Carbon Management (ECCM) and offset by the Carbon Neutral Company and the fibre source has been independently certified by the Forest Stewardship Council (FSC). ecoStar is manufactured from 100% post consumer recycled paper in a process chlorine free environment under the ISO 14001 environmental management system.

Newcastle Permanent Building Society Limited ACN 087 651 992 Australian Financial Services Licence/ Australian Credit Licence 238273

Head Office: 307 King Street, Newcastle WestPO Box 5001 Hunter Region Mail Centre NSW 2310call 13 19 87 or visit newcastlepermanent.com.au

ANNUAL REPORT 2016 · (see Chart A: Loan Portfolio 2007–2016 and Chart B: Total Funding). One...

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