Home truths from The Rock

With The Rock Building Society in its last months as an independent financial institution, the chair of the board used the society's final annual report to review the shortcomings of the Rockhampton-based business.

MyState Financial, based in Tasmania, proposed a takeover of The Rock last month. Shareholders in the latter will vote on a proposed scheme of arrangement for the takeover in November.

Stephen Lonie, chair of The Rock, described the financial results in the 2011 financial year as "disappointing" and said they "were impacted by a need to address a number of significant one-off issues."

Two issues, Lonie noted, were "The Rock's past failures to satisfy the requirements of its key regulators", the Australian Securities and Investments Commission and the Australian Prudential Regulation Authority.

These included the incorrect calculation of fees and interest on some customer accounts by the new core banking platform, and the, initially, slow response by The Rock to this problem.

The nature of APRA's issues are less clear. Lonie wrote that the regulator "expressed its concern with The Rock's approach to compliance obligations."

The Rock's underlying business problems have been apparent since at least the advent of the financial crisis, which highlighted its poor risk management, inadequate funding base and lacklustre returns. The problems of the last year have mainly highlighted the high costs associated with its transition to a new banking platform.

These factors all informed the strategic review cited by Lonie in his opening comments in the society's annual report.

This review concluded that the society should address its single focus on a residential mortgage-insured home loan product; its lack of scale - taking into account its "significant investment" in its core banking platform - and the continuing challenge to attract retail deposits and sell home loans, he said.

"What the board and management learned this year, above all else," Lonie wrote in the annual report, "is that The Rock's ADI licence is its most precious asset."