American Financial Group
Annual Report 2018

Plain-text annual report

2018 2018 Annual Report Annual Report 1 1 2018 ANNUAL REPORT 2 Annual Report 2018 Contents 10 35 36 Directors’ Report Auditor’s Independence Declaration Consolidated Statement of Financial Position 37 Consolidated Statement of Profit or Loss and Other Comprehensive Income 38 Statement of Changes in Equity 39 Statement of Cash Flows 40 Notes to the Financial Statements 85 Directors’ Declaration 87 91 93 Independent Audit Report Shareholder Information Corporate Directory 2018 Annual Report 3 4 Annual Report 2018 31% 33% 28% $33.3m $30.2m FY16 FY17 FY18 FY17 FY18 AFG normalised return on equity ROE has increased to 33% Normalised NPAT up 10% to $33.3M Non-Majors 41% 59% Majors 41% of flows to non-majors Q4 2018 up from 35% Q4 2017 Broker numbers grew to over 2,950 nationally up from 2,875 at 30 June 2017 FY2018 Residential settlements of $35.3B with trail book now up 9% to $137.8B up to 10,000 customers per month 209 employees 55% 2018 Annual Report 5 5.4 3.0 FY16 5.5 4.2 FY17 5.7 4.7 FY18 Ordinary Dividends (cents per share) Interim Final $ Investment of 30.4% (fully diluted) of Think Tank Group Pty Ltd for $10.9 million FY2018 Commercial settlements of $2.62B with the Asset Finance now up 21% to $537M Strong bedrock for AFG Business AFG Home Loans settlements have increased from $2.7B to $3.2B 4,000 + individual products 50 + lenders 1 in 11 Australian residential mortgages are arranged by an AFG broker 55% of Australian mortgages are written through a broker and growing Broker & consumer advocacy Responsible, strong and active voice for consumers. Participating in industry and regulatory debates and developments. 6 Annual Report 2018 Chairman’s Letter On behalf of the Board of Directors, it gives me great pleasure to present Australian Finance Group (AFG) results for the 2018 financial year (FY18). The company continues to successfully deliver earnings diversification through the core residential and commercial aggregation business, the higher margin AFG Home Loans business line, and has commenced increasing the volume of applications through its AFG Business platform. AFG’s strategic focus on the under-served small to medium enterprise (SME) market also saw the company acquire a significant stake in leading commercial SME lender Think Tank Group Pty Ltd (Thinktank). I am very pleased to report that the company has delivered significant progress across a number of key performance measures. Company update Strong organic growth and cash flow generation capabilities of the business has resulted in AFG reporting net profit after tax (NPAT) of $33.3 million for FY18. This figure represents an increase of 10.4% on FY17 normalised profit. The growth in AFG’s profit is reflective of our resilient core business with residential settlements of $35.3 billion representing growth of 3% in a benign credit environment. The earnings diversification strategy of AFG Home Loans continues to deliver results for shareholders with settlements of $3.2 billion up 20% on FY17. The growth in normalised earnings of 10.4% in FY18 was achieved whilst retaining a robust balance sheet and strong cash flows. This delivered a dividend yield of 15.9% (including a 12 cent per share special dividend) and a healthy 7.4% excluding the special dividend. In addition, return on equity for shareholders remains a highlight at 33% in FY18, up from 31% in FY17. Tony Gill Chairman The strength of AFG’s cash flows and balance sheet provides the company with significant financial resilience. AFG’s lack of corporate debt continues to allow the company to take advantage of merger and acquisition opportunities should they present without significant strain on its balance sheet. Alternatively, it provides for a flexible capital management policy to be maintained, while still pursuing strategic opportunities and maintaining a capital light business model. AFG continues to generate consistent growth in sustainable earnings despite challenging regulatory and economic conditions. This reinforces our strategy of earnings diversification to maintain an extensive footprint across the financial services industry whilst also enjoying the resilience provided by a $145.4 billion loan book and a distribution network of over 2,950 brokers across Australia. Acquisition A highlight of FY18 has been our 30.4% (fully diluted) investment in Thinktank. Established in 2005, Thinktank operates nationally and has a loan book in excess of $800 million. This investment provides an opportunity for AFG to broaden its product offering to the SME sector via a white label commercial property mortgage. Thinktank’s penetration of the SME market will also be enhanced through its access to AFG’s extensive broker network. AFG has appointed two Directors to the Thinktank Board and they are working with Thinktank to deliver value to both businesses. 2018 Annual Report 7 Looking ahead For the past three years the financial sector has been the focus of a number of regulatory reviews. With the mortgage broking sector being the dominant channel for the country’s largest asset class, it is unsurprising the examination of the industry includes brokers. In this environment AFG is focused on acting with integrity to enhance competition and drive positive outcomes for consumers. An effectively functioning financial system requires an appropriate balance of regulation and self- regulation. With this as a cornerstone of our thinking, AFG will continue to work with industry, regulators and government and strive to deliver a market leading value proposition for our brokers within a sound governance framework. I would like to thank my fellow board members for what has been a very productive and successful year for the company. Each Director has made significant contributions to the development, growth and governance of AFG. Finally, I have once again been enormously impressed by the effort, dedication and ability of our brokers and AFG staff to ensure the needs of their customers are at the forefront of everything they do. AFG’s annual results are a testament to their hard work, and on behalf of the board, I thank them for that commitment. Yours sincerely, Tony Gill Chairman 8 Annual Report 2018 CEO’s Report It is with great pleasure I report on another successful year for AFG, my second as Chief Executive Officer. Our core residential business continues to perform solidly. Regulatory reviews of the financial sector and tightened lending conditions have impacted product mix with investor and refinance volumes falling, offset by first home buyers and upgraders increasing in H1 FY18. These trends have been maintained in the final two quarters of FY18. In further evidence that the broker channel delivers a vital distribution base for lenders with and without the broad branch network possessed by the big four Banks, the flows of business to the non-major lenders on AFG’s panel is now at around 40%. In a competitive environment, AFG now has over 2,950 active brokers, further extending AFG’s national distribution network providing quality lending solutions and service to consumers. The growth was led by NSW and Victoria with weaker economic conditions evident in other states reflecting the challenges being experienced by those economies. Our diversified funding partners continue to deliver choice to consumers and we have achieved strong settlement volumes in our own-branded AFG Home Loans business. We have five core prime mortgage funders which will continue to protect the business against individual lender appetite that may vary over time. AFG Home Loans has now grown to service more than 19,000 retail customers. A highlight for our AFG Securities business was the finalisation and close out of AFG 2013-1 and 2014-1 evidencing AFG’s ability over the entire RMBS life cycle. All investors in these trusts generated returns in accordance with the original Information Memorandum and no losses were experienced over the life of the investments. In addition, we launched our residential mortgage backed security (RMBS) funded AFG Home Loans Link product in the latter half of FY18. The Link product targets the growing near prime or ‘used to be prime’ segment whilst maintaining AFG’s high quality credit decision making process. The AFG Securities business grew strongly in the second half of FY18 to produce full year settlements David Bailey CEO of $509.8 million - up 33%, and lodgements of $1.0 billion - up 50% on FY17. Our strategic investment in commercial property lender Thinktank represents the next evolutionary step for AFG to diversify its earnings base. Thinktank is a competitive non-major commercial property lender, with a focus on the sub $3 million market and has a loan book in excess of $800 billion. The opportunity to blend Thinktank’s commercial property lending expertise with AFG’s distribution and securitisation capability will benefit both businesses. In connection with the investment, AFG will distribute a white label Commercial Property product through our network of brokers. AFG aims to bring the same discipline to this white label proposition as we have successfully demonstrated with our residential white label program. It will also enable us to deliver further competition and choice to the SME market place at a time when it is most needed. Commercial lending The AFG Business platform was rolled out with a soft launch during H1 FY18. Commercial mortgages are the main offering on the platform as well as unsecured finance product offerings. We are also currently piloting asset finance. The panel has now expanded to 15 lenders with more currently undergoing development and integration. The platform allows new-to-commercial brokers to lodge applications in a common format across all lenders. It is backed by a new accreditation process that is as quick and simple as the platform itself. The platform comes with in-built training materials and sales tools, plus a dedicated commercial help desk to support our brokers. 2018 Annual Report 9 Lending environment Outlook Australian mortgage brokers continue to win market share by providing value, choice and competition to consumers. Brokers fill vital roles in areas that the banks have vacated: helping vulnerable customers, regional and remote borrowers, first home buyers and those with complex borrowing needs. Providing assistance in these areas takes a lot of time – time that the bigger lenders are often not prepared to give. The past 12 months has seen a significant examination of the lending sector in Australia. The government has stated they will consider the findings of the ASIC Broker Remuneration Review, the Royal Commission into Misconduct in the Banking & Financial Services Industry, the Productivity Commission Inquiry into Competition in the Australian Financial System and advice from Treasury before making any decisions that may affect the sector. Industry regulator, ASIC, spent considerable time examining significant amounts of data to evaluate broker remuneration and did not recommend wholesale changes to the model. They made a series of proposals for a way forward. Our industry has come together, and positive steps are being taken as we work to address those proposals to improve consumer outcomes and confidence in the finance industry. Treasury, in its submission to the financial services royal commission, recognised the value brokers provide to consumers’ understanding and access to lending, particularly in regional areas. They also recognised the importance of brokers to non-major lenders and the downward pressure on home loan pricing more generally that is delivered by the broker channel. Ultimately, the findings of these inquiries should assist the government to promote a competitive and stable financial industry that contributes to Australia’s productivity. The mortgage broking sector provides vital competition to deliver on that aim. The broker value proposition is strong, and broker introduced business now represents over 55% of the home lending market. Australian consumers and lenders are clearly comfortable with the channel. A mortgage broker’s business depends upon delivering a good outcome for their clients– more than 70% of their business is referred from existing customers. It is pleasing that regulators and government have acknowledged the important role brokers play in the lending market. A recent Deloitte Access Economics report, “The Value of Mortgage Broking”, showed that the mortgage broking industry contributes $2.9 billion to the Australian economy each year, supporting more than 27,100 (full-time equivalent) jobs. The channel is continuing to grow at a strong rate which is testament to the value Australian consumers derive from the use of a broker. With size, however, comes responsibility and the need to ensure the customer remains front and centre in everything we do. With competition and consumers at the core of our business AFG will continue to work with regulators to remove any perceived conflicts within the largest distribution channel in the Australian mortgage market. We will remain a first-choice partner for lenders and broking groups as we deliver a market leading offering whilst maintaining high standards of compliance and governance. The industry will continue to evolve and as an agile business in the sector with access to broad distribution and funding, we see the future direction will provide opportunity for AFG and look forward to another successful year for the company. I would like to thank the brokers across the country who make up our extensive distribution network and the AFG staff who work with them to provide choice and support for Australian consumers seeking informed and fair access to finance. Yours sincerely, David Bailey CEO 10 Directors' Report Annual Report 2018 Directors’ Report The Directors present their report together with the financial report on the consolidated entity consisting of Australian Finance Group Limited (‘the Company’ or ‘AFG’), and its controlled entities (‘the Group’), for the financial year ended 30 June 2018 and the auditor’s report thereon. Directors The Directors and Company Secretary of the Company at any time during or since the end of the financial year are: Malcolm Watkins (Executive Director) Anthony (Tony) Gill (Non-Executive Chairman) Mr Gill has been the Chairman of the Board since 2008. Mr Gill has extensive experience across Australia’s finance industry, most recently with Macquarie Bank for more than 16 years, as Group Head of the Banking and Securitisation Group. Mr Gill is a Director of First Mortgage Services, First American Title Insurance and sits on the Board of the Butterfly Foundation for Eating Disorders and is a member of ASIC’s External Advisory Panel. Mr Gill is a former member of the Board of Genworth Mortgage Insurance Limited (GMI). Mr Gill holds a Bachelor of Commerce and is a Chartered Accountant (retired). Brett McKeon (Managing Director and Chief Executive Officer) Resigned 31 May 2017 (Executive Director) Appointed 1 June 2017 Mr McKeon is a founding Director of AFG and the Group’s former Managing Director. Mr McKeon has worked for over 30 years in the finance industry and has considerable management, capital raising, public company and sales experience and is an experienced Director in both the public and private arenas. Mr McKeon was awarded The Ernst & Young Entrepreneur of the Year for WA in 2006. In 2016 Mr McKeon was appointed to the newly reconstituted Financial Sector Advisory Council, a non-statutory body that provided advice to the federal government on policies that will maintain an efficient, competitive and dynamic financial sector. Mr McKeon drives AFG’s advocacy activity through the company’s guiding principles of fairness, shared prosperity and the provision of choice for Australian consumers. Founding Director Mr Watkins plays a key role in the strategic direction of AFG. Across the past 24 years Mr Watkins has driven the company’s tactical development of market-leading IT and Marketing divisions, which have long set the company apart from competitors. Mr Watkins is now stewarding the expansion of the AFG Business portfolio and will oversee the extraction of value from AFG’s recent acquisition of a 30% stake in leading commercial property lender, Thinktank, through a seat on the lender’s board. Mr Watkins is tasked with ensuring the opportunity to blend Thinktank’s commercial property lending expertise with AFG’s broad distribution and securitisation capabilities will deliver strategic value to both businesses. Mr Watkins is a former member of the Board of the Mortgage and Finance Association of Australia (MFAA). Kevin Matthews (Non-Executive Director) Mr Matthews is a founding Director of the Group. He previously held a role as an Executive Director and was responsible for negotiating and managing key relationships with banks and lending institutions, including product development and the Commercial line of business. Mr Matthews ceased to be an Executive Director and became a Non-Executive Director on 1 May 2015. Mr Matthews has worked in the finance industry for more than 40 years and has been a licensed finance broker for more than 30 years. He is a former Director of the Mortgage and Finance Association of Australia (MFAA) and served on the MFAA’s National Brokers Committee for 12 years. Mr Matthews is also a Senior Fellow of the Financial Services Institute of Australasia (FINSIA) and a life member of the MFAA. 2018 Annual Report Directors' Report (continued) 11 12 Directors' Report (continued) Annual Report 2018 Craig Carter (Independent Non-Executive Director) Mr Carter joined the AFG Board in early 2015, and is the Chair of the Audit Committee, a member of the Risk and Compliance Committee, and a member of the Remuneration and Nomination Committee. Following a career spanning 35 years in stockbroking and investment banking, specialising in Corporate Advice and Equity Capital Markets, Mr Carter now actively manages his own business interests across a portfolio of equities, agriculture and real estate. He is also Vice President of the Fremantle Football Club. Mr Carter was a Member of the Australian Stock Exchange and is a Fellow of the Financial Services Institute. Mr Carter is a well-known professional with unique experience in equities, capital markets and corporate transactions. This experience provides a platform for robust perspectives and a long reputation of integrity and good governance. Melanie Kiely (Independent Non-Executive Director) Ms Kiely is an experienced Executive and Company Director with over 25 years of experience in health care, financial services and consulting in Australia, Europe and South Africa. Ms Kiely is also currently a Director of the Black Dog Institute and was recently with the Silver Chain Group as Executive General Manager, Social Care. Prior to this, Ms Kiely held senior executive positions at HBF Health Fund, nib health funds, MBF and was an Associate Partner at Accenture. She has also held a number of Board positions in the financial services and health sectors. Ms Kiely has an Honours Degree in Business Science from the University of Cape Town and is a Graduate of the Australian Institute of Company Directors. Ms Kiely joined the AFG Board as a Non-Executive Director in March 2016 and is Chair of the Remuneration and Nomination Committee, a member of the Audit Committee and a member of the Risk and Compliance Committee. Jane Muirsmith (Independent Non-Executive Director) Ms Muirsmith is an accomplished digital and marketing strategist, having held several executive positions in Sydney, Melbourne, Singapore and New York. Jane is Managing Director of Lenox Hill, a digital strategy and advisory firm and is a Non-Executive Director of Cedar Woods Properties Ltd, HealthDirect Australia and the Telethon Kids Institute. She is a Graduate of the Australian Institute of Company Directors and a Fellow of Chartered Accountants Australia and New Zealand, where she is Chair of the WA Business Advisory Committee. Ms Muirsmith is also a member of the Ambassadorial Council UWA Business School. Ms Muirsmith was appointed to the AFG Board in March 2016 and is Chair of the Risk and Compliance Committee, a member of the Audit Committee and a member of the Remuneration and Nomination Committee. The above-named Directors held office during the whole of the financial year and since the end of the financial year except where noted otherwise. Company Secretary Lisa Bevan (Company Secretary) Ms Bevan joined AFG in 1998 and was appointed to the position of Company Secretary in 2001. Ms Bevan is a Chartered Accountant, holds a Bachelor of Commerce degree and has a Diploma of Corporate Governance from the Governance Institute of Australia. Ms Bevan is responsible for managing AFG’s secretariat, compliance, governance and risk management programs. Ms Bevan also oversees the legal and human resources functions. Interests in the shares and rights of the Company As at the date of this report, the interests of the Directors in the shares of the Group were: Director Number of ordinary shares Number of rights over ordinary shares Tony Gill 1,125,000 - Brett McKeon 21,179,773 196,064 Malcolm Watkins 19,602,689 64,708 Kevin Matthews 15,029,516 Craig Carter Melanie Kiely Jane Muirsmith 500,000 67,164 65,000 - - - - Changes in state of affairs Other than matters dealt with in this report there were no significant changes in the state of affairs of the Group during the financial year. 2018 Annual Report Directors' Report (continued) 13 Dividends Total dividends paid during the financial year ended 30 June 2018 were $47,690k (2017: $20,622k), which included: • • • A final fully franked ordinary dividend of $11,816k (5.5 cents per fully paid share) was declared out of profits of the Company for 2017 and paid on 28 September 2017. An interim fully franked ordinary dividend of $10,096k (4.7 cents per fully paid share) was declared out of profits of the Company for 2018 and paid on 29 March 2018. A special fully franked ordinary dividend of $25,778k (12.0 cents per fully paid share) was declared out of profits of the Company for 2018 and paid on 29 March 2018. A final fully franked ordinary dividend of $12,244k (5.7 cents per fully paid share) has been declared out of profits of the Company for the financial year ended 30 June 2018 and is to be paid on 27 September 2018. Principal Activities The Group’s principal activities in the course of the financial year continued to be: • • Mortgage origination and management of home loans and commercial loans; and Distribution of own branded home and business loan products, funded via traditional mortgage management products, white label and its established RMBS programme. 14 Directors' Report (continued) Annual Report 2018 Corporate Governance Statement The Company’s Corporate Governance Statement can be found at investors.afgonline.com.au/investor/?page= corporate-governance Review of Operations For the year ended 30 June 2018 the Group recorded a net profit after tax of $33,309k, a decrease of 14.8% over the same period in 2017. The comparative period included the initial recognition of the AFGHL trail book which for the first time recognised loans settled prior to FY17. Prior year net profit after tax has been normalised to reflect the impact of FY17 settlements in relation to the additional commissions earned on the AFG Home Loan (‘AFGHL’) white label trail book. Normalised net profit was $33,309k an increase of 10.4% over the same period in 2017 ($30,164k). Net profit for the period Initial recognition of value of AFGHL white label trail book relating to prior years’ settlements 30 June 2018 $’000 30 June 2017 $’000 % change 33,309 - 39,104 (8,940) (14.8%) Normalised net profit for the period 33,309 30,164 10.4% The increase in normalised profit was attributable to the following: • • • • An increase in AFGHL settlements of 20% to $3.21B (2017: $2.68B). $125.8M increase in settlement volumes in the securitisation programme to $509.8M (2017: $384M) and the loan book increasing 20% to $1.37B (2017: $1.14B); Increased residential trail book of $11.3B to $137.8B (2017: $126.5B); and Increased residential settlements of $1.0B to $35.3B (2017: $34.3B). Net cash flows from operating activities increased 22.5% to $32,486k (2017: $26,517k) driven by normalised profit growth and positive working capital movements compared to prior period. The following table reconciles the unaudited underlying earnings to the reported profit after tax for the period in accordance with Australian Accounting Standards: In thousands of AUD 30 June 2018 30 June 2017 Operating Income Profit after tax Operating Income Profit after tax Underlying profit from continuing operations Change in the present value of trail commission receivable and payable 533,053 70,343 28,052 5,257 499,020 88,531 Provision for clawbacks - - Total result from continuing operations 603,396 33,309 (1,450) 586,101 26,160 13,959 (1,015) 39,104 On 29th March 2018 AFG paid a special dividend of $25,778k to shareholders. Strong organic growth and cash flow generation of the business allowed AFG to pay a Special Dividend of 12 cents per share. The strength of AFG’s cash flows and balance sheet provides the company with significant financial resilience. AFG’s lack of corporate debt and low capital intensity continues to allow the company to take advantage of merger and acquisition opportunities should they arise without significant strain on its balance sheet. Alternatively, it provides for a flexible dividend policy to be maintained, while AFG continues to evaluate financially material strategic opportunities. 2018 Annual Report Directors' Report (continued) 15 On 19th April 2018 AFG announced that it had made a strategic investment of 30.4% (fully diluted) in Think Tank Group Pty Ltd (“Thinktank”) for $10.9 million in cash consideration, with additional contingent consideration payable of $1,488k. In connection with the investment, AFG will distribute a white label Commercial Property product through its network of brokers. The strategic investment in Thinktank represents the next evolutionary step for AFG to diversify its earnings base. The ongoing success of AFGHL and the introduction of AFG Business are important parts of AFG’s overall strategy. The investment in Thinktank allows AFG to participate further in commercial property lending - both directly through the white label opportunity and indirectly through AFG’s shareholding to generate further earnings for AFG. Likely Developments and Expected Results The Group will continue to provide choice and lead the market by building on the strengths of our traditional wholesale mortgage broking business while developing our significant distribution network to access other areas of the finance market. Further information about likely developments in the operations and the expected results of those operations in future financial years have not been included in this report because disclosure of the information would, in the opinion of the Directors, be likely to result in unreasonable prejudice to the Group. Environmental regulation The Group is not subject to any significant environmental regulation under a law of the Commonwealth or of a State or Territory in respect of its activities. Subsequent events On 10 August 2018, the Group secured a new residential warehouse facility, replacing its existing NAB warehouse. The new warehouse comprises four classes of secured, limited and floating rate notes, with the senior note being issued to NAB, mezzanine notes issued to Deutsche Bank AG Sydney Branch and AFG holding the subordinated notes. The maturity date for this new facility is 31 December 2018. On 23 August 2018, the Directors recommended the payment of a dividend of 5.7 cents per fully paid ordinary share, fully franked based on tax paid at 30%. The dividend has a record date of 3 September 2018 and a payment date of 27 September 2018. The aggregate amount of the declared dividend expected to be paid out of retained earnings at 30 June 2018 is $12,244k. The financial effect of this dividend has not been brought to account in the financial statements for the year ended 30 June 2018. On 14 September 2018 AFG Trust 2013-2 was successfully redeemed with all investors having been repaid in full. AFG Trust 2013-2 will be shutdown. There has not been any matter or circumstance, other than that referred to in the financial statements or notes thereto, that has arisen since the end of the financial year, that has significantly affected, or may significantly affect, the operations of the Group, the results of those operations, or the state of affairs of the Group in future financial years. Share options There were no options issued or exercised during the financial year (2017: Nil). Indemnification of insurance of officers and auditors During the financial year, the Group paid a premium in respect of a contract insuring the Directors of the Group (as named above) against a liability incurred as a Director to the extent permitted by the Corporations Act 2001. The contract of insurance prohibits disclosure of the nature of the liability and the amount of the premium. The Group has not otherwise, during or since the financial year, indemnified or agreed to indemnify an officer or auditor of the Group or of any related body corporate against a liability incurred as such an officer or auditor. 16 Directors' Report (continued) Annual Report 2018 Directors’ meetings The number of Directors’ meetings (excluding circulatory resolutions) held during the year and each Director’s attendance at those meeting is set out in the table below. The Directors met as a Board 12 times during the year. 11 meetings were main meetings and 1 meeting was convened to consider special business. Special meetings are convened at a time to enable the maximum number of Directors to attend and are generally held to consider specific items that cannot be held over to the next scheduled main meeting. Apologies were received from Directors in all instances where they were unable to attend a meeting. Directors’ Board Meetings Tony Gill Brett McKeon Malcolm Watkins Kevin Matthews Craig Carter Melanie Kiely Jane Muirsmith Main Meetings Held Main Meetings Attended Special Meetings Held Special Meetings Attended 11 11 11 11 11 11 11 11 10 11 11 11 11 11 1 1 1 1 1 1 1 1 1 1 1 1 1 1 Committee membership As at the date of this report, the Company had an Audit Committee, Remuneration and Nomination Committee and a Risk and Compliance Committee. Members acting on the Committees of the Board during the year were: Audit Craig Carter (C) Melanie Kiely Jane Muirsmith Notes Remuneration and Nomination Risk and Compliance Melanie Kiely (C) Craig Carter Jane Muirsmith Jane Muirsmith (C) Craig Carter Melanie Kiely (C) designates the Chair of the Committee The following table sets out the number of meetings of the Committees of the Board and the number of meetings attended by each Director who is/was a member of that Committee: Committee Meetings Directors Craig Carter Melanie Kiely Jane Muirsmith Audit Remuneration and Nomination Risk and Compliance Maximum Possible Meetings Attended Maximum Possible Meetings Attended Maximum Possible Meetings Attended 5 5 5 5 5 5 5 5 5 5 5 5 4 4 4 4 4 4 2018 Annual Report Directors' Report (continued) 17 Rounding The amounts contained in this report and in the financial report have been rounded to the nearest $1,000 (where rounding is applicable) and where noted ($000) under the option available to the Company under ASIC Corporations Instrument 2016/191. The Company is an entity to which the class order applies. Non–audit services The following non-audit services were provided by the entity’s auditor, Deloitte Touche Tohmatsu. The Directors are satisfied that the provision of non-audit services is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001 (Cth). The Directors are of the opinion that the services as disclosed in Note 11 to the Financial Statements do not compromise the external auditor’s independence, based on advice received from the Audit Committee, for the following reasons: • • All non-audit services have been reviewed and approved to ensure that they do not impact the integrity and objectivity of the auditor; and None of the services undermine the general principles relating to auditor independence as set out in APES 110 ‘Code of Ethics for Professional Accountants’ issued by the Accounting Professional & Ethical Standards Board, including reviewing or auditing the auditor’s own work, acting in a management or decision-making capacity for the Company, acting as advocate for the Company or jointly sharing economic risks and rewards. The nature and scope of each type of non-audit service provided means that auditor independence was not compromised. Deloitte Touche Tohmatsu received or is due to receive the following amounts for the provision of non-audit services: Other non-audit services $ 162,600 162,600 Auditor’s Independence declaration The auditor’s independence declaration is included on page 35 of this financial report for the year ended 30 June 2018. This report is made in accordance with a resolution of the Directors.   18 Directors' Report (continued) Annual Report 2018 2018 Annual Report Directors' Report (continued) 19 Remuneration Report Message from the Chair of the Remuneration & Nomination Committee Dear Shareholder, On behalf of the Board I am pleased to present AFG’s Remuneration Report for FY18. The AFG Board remains committed to an Executive Remuneration structure that drives a strong performance culture in line with our strategy and delivers sustainable returns for shareholders in the short and longer term. At the same time, it is important to focus on conduct, responsible lending and ensuring positive customer outcomes. Feedback from shareholders, stakeholders and proxy advisors is valuable to our remuneration process. In line with this and consistent with prior years, the Board has actively sought feedback. To continue to provide a clear link between strategy, sustainable returns and customer outcomes with employee retention, conduct and performance, we have made the following changes: • • • The inclusion of a strategic STI target for FY18 relating to AFG Business settlement volumes in addition to the Group’s financial target and AFGHL settlement target. AFGHL has been a key driver of the company’s profit growth over the last two financial years. AFG Business is an important element in the earnings diversification strategy and therefore alignment of Executive remuneration to its success is also important. Further information is provided in section 3. An increase in FY18 to the compound annual growth rate earnings per share (EPS) for the LTI grant to 10% per annum growth target to achieve 100% payment (FY17: 7.5%). The 10% growth target has also been retained for FY19, notwithstanding our view that credit growth in the Australian residential mortgage market will continue to be benign, a stretch target is reflective of the Group’s earnings diversification strategy through higher margin business lines. This change reflects our ongoing intent to set challenging targets in the context of industry outlook and the economic environment. An increased emphasis on profit relative to the strategic targets. In FY17 the STI targets were split 50/50 between profit and strategic targets to continue to drive the growth in the profitable AFGHL business. In FY18 the STI target was 60% profit and with 40% allocated to strategic targets with a profit gateway for strategic targets. This change has been retained in FY19. Key Management Personnel (KMP) changes Mr Sanger was appointed as Chief Operating Officer during the year, this role was previously held by Mr Bailey prior to his appointment as Chief Executive Officer. The Chief Operating Officer role takes responsibility for information technology, marketing, customer service and AFG Securities credit and operations teams. Mr Sanger joined AFG in March 2018 following 17 years of senior experience in telecommunications. Mr Sanger’s previous role focussed on strategy and maintained an ‘outward in’ focus with respect to customers which will help facilitate our overall strategy across all aspects of the business. FY18 Performance & Remuneration Outcomes Summary FY18 was a successful year with strong growth in normalised NPAT of 10.4% to $33.3m. Normalised NPAT removes the recognition impact in FY17 relating to the initial actuarial assessment and asset recognition of the AFGHL trail book. AFGHL settlements grew strongly again in FY18 up 20% to $3,223k (FY17: $2,680k) and continues to be a strong driver of the company’s profit growth. 20 Directors' Report (continued) Annual Report 2018 AFG Business successfully launched during the year and has expanded to a lender panel of 15 from the initial launch panel of 5 lenders. The asset finance module will be added during the first half of FY19 providing brokers with access to additional lenders of this asset class. Whilst settlements through the platform did not meet expectations AFG Business remains an important part of strategy and will remain a remuneration target for executives in FY19. Performance against other KPI measures was also strong with the Group’s loan book ending the year at $145.4 billion up 9.2% from FY17. This demonstrates growth in the core business generating ongoing stability for future investment and growth. A 5 year history of AFG’s NPAT, Residential Loan Book, AFGHL Loan Book and Commercial Loan Book growth is provided below: Net Profit After Tax* MILLIONS 0 $5 $10 $15 $20 $25 $30 $35 $40 $45 FY14 FY15 FY16 FY17 FY18 * Grey shading of FY17 profit shows the initial recognition of AFGHL white label trail book relating to loans settled in prior periods. Residential Loan Book BILLIONS 0 $20 $40 $60 $80 $100 $120 $140 FY14 FY15 FY16 FY17 FY18 Commercial Loan Book 0 $1 $2 $3 BILLIONS $4 $5 $6 $7 $8 FY14 FY15 FY16 FY17 FY18 AFGHL Portfolio 0 $1 $2 $3 BILLIONS $4 $5 $6 $7 $8 FY14 FY15 FY16 FY17 FY18 AFGHL Settlements MILLIONS 0 $500 $1,000 $1,500 $2,000 $2,500 $3,000 $3,500 FY14 FY15 FY16 FY17 FY18 Including the special dividend the Group delivered a dividend yield for FY18 of 15.9% based on the closing share price at 30 June 2018 of $1.41. Based on ordinary dividends alone the yield was 7.4%. In line with this performance, the key remuneration outcomes, which are detailed further in the Remuneration Report include: • • • Total FY18 STI payments made at 89%, reflecting stretch performance when compared to FY17 results for NPAT (108%) and AFGHL (115%), offset by AFG Business not achieving target. STI payments relating to AFG Business (20% allocation) were forfeited. No performance rights vested during the year with the first measurement date under existing plans being 30 June 2019. Further detail on the remuneration results are detailed in section 3 of the report, which reflect the outcomes of a good year for shareholders and employees. Yours sincerely, Melanie Kiely Chair, Remuneration & Nomination Committee 2018 Annual Report Directors' Report (continued) 21 Introduction 1 ) The Remuneration Report outlines AFG’s remuneration philosophy, framework and outcomes for all Non-Executive Directors, Executive Directors and other Key Management Personnel (collectively KMP). The report is written in accordance with the requirements of the Corporations Act 2001 (Cth) (the Act) and its regulations. This information has been audited as required by section 308(3C) of the Act. 2 ) Key Management Personnel KMP are those persons who have specific responsibility for planning, directing and controlling material activities of the Group. In this report, “Executives” refers to the KMP excluding the Non-Executive Directors (“NED”). The current KMPs of the Group for the entire financial year unless otherwise stated are as follows: Non-Executive Directors Tony Gill Kevin Matthews Craig Carter1 Melanie Kiely2 Jane Muirsmith3 Executive Directors Brett McKeon Malcolm Watkins Executives David Bailey Lisa Bevan Ben Jenkins John Sanger Non-Executive Chairman Appointed 28 August 2008 Non-Executive Director Non-Executive Director Non-Executive Director Non-Executive Director Appointed 20 January 1995 Appointed 25 March 2015 Appointed 31 March 2016 Appointed 31 March 2016 Executive Director Executive Director Appointed 19 June 1996 Appointed 8 December 1997 Chief Executive Officer Appointed 16 June 2017 Company Secretary Chief Financial Officer Appointed 9 March 1998 Appointed 14 December 2015 Chief Operating Officer Appointed 6 March 2018 1 Craig Carter is Chairman of the Audit Committee. 2 Melanie Kiely is Chair of the Remuneration and Nomination Committee. 3 Jane Muirsmith is Chair of the Risk and Compliance Committee. Other than Kevin Matthews, all Non-Executive Directors listed above are Independent Directors. 3 ) Executive Remuneration Structures The Group aims to reward Executives with a level of remuneration commensurate with their responsibilities and position within the Group and their ability to influence shareholder value creation within the context of appropriate conduct, and consumer outcomes. The remuneration framework links rewards with the strategic goals and performance of the Group and provides a market competitive mix of both fixed and variable rewards including a blend of short and long-term incentives. The variable (or “at risk”) remuneration of Executives is linked to the Group performance through measures based on the operational performance of the business and is subject to a gateway for appropriate conduct. 22 Directors' Report (continued) Annual Report 2018 AFG Business Strategy To provide customer choice and competition, expand our core wholesale mortgage broking business while diversifying earnings with complimentary businesses. Executive Remuneration Strategy Remuneration component Performance measure Strategic objective/performance link Fixed annual remuneration (FAR) comprises base salary, superannuation contributions and other benefits Key result areas for the role: Key roles and responsibilities as set out in the individual’s employment contract and position description. Short-term incentive (STI) paid in cash Group Financial Measures FY18 & onwards: Group Net Profit After Tax and at least 1 key strategically relevant KPI target with a clear link to long term strategy. Allocation to NPAT target will remain the same at 60% in FY19. 90% NPAT hurdle for any STI payment including strategic targets. To provide competitive fixed remuneration set with reference to role, market and experience to attract, retain and engage key talent. Considerations: • Role and responsibility • External benchmarking • Contribution, competencies and capabilities • Company and individual performance Rewards Executives for their contribution to achievement of Group outcome and the achievement of strategically relevant KPI targets in the given financial year. Long-term incentive (LTI) awards are made in the form of performance rights FY18 & FY19 grant: • 65% of a KMP’s entitlement allocated to a 3-year CAGR EPS target Ensures a strong link to the long-term creation of shareholder value. • CAGR EPS was chosen as a performance hurdle as it is: • 35% of a KMP’s entitlement allocated to relative TSR targets, 50% measure against the ASX Diversified Financials Index and 50% against the ASX Small Industrials Index. Both TSR targets include a gateway requirement for absolute TSR to be positive. • A key indicator of the creation and growth in shareholder value over the long term. • Provides a reliable measurement of the creation of shareholder value and has been given a higher weighting than the individual TSR measures due to the difficulty in identifying appropriate peer groups or comparison indices for comparison against Company performance. • TSR was chosen as a performance hurdle as it: • Provides a relative, external market performance measure with a requirement for TSR to be at least positive even if relative performance against Indices is on target. This will help to ensure Executive remuneration is clearly tied to positive shareholder value creation. 2018 Annual Report Directors' Report (continued) 23 3.1 ) Executive Remuneration Outcomes STI award outcomes FY18 The combined cash bonus pool available to be paid to the Executives for on-target performance in the 2018 financial year was $451,757 and the minimum is nil. For the 2018 financial year, 89% of the target STI bonus amount was achieved by the Executives as outlined below. Target NPAT ($’000) AFGHL settlements AFGB settlements FY17 000’s FY18 000’s Growth Target Assessment *$30,164 $33,309 $2,680,000 $3,223,000 - $11,792 10% 20% 100% 108% 103% 0% * FY17 result normalised to remove prior year impact of actuarial assessment of AFGHL trail book. FY17 NPAT component of STI was paid using this normalised number to remove the accounting uplift relating to prior year settlements. Target STI opportunity As a % of fixed remuneration STI outcome % Achieved % Forfeited David Bailey Brett McKeon Malcolm Watkins Lisa Bevan Ben Jenkins John Sanger Total $220,000 $21,680 $27,517 $84,800 $62,500 $35,2601 $451,757 40% 16% 17% 33% 23% 36% $192,681 $18,988 $24,100 $74,270 $54,739 $36,904 $401,682 88% 88% 88% 88% 88% 105% 89% 12% 12% 12% 12% 12% 0% 1 John Sanger STI was allocated 60% to NPAT and 40% to individual KPI given his start date. In FY19 his allocation is aligned to other KMP. 3.2 ) Fixed Annual Remuneration No significant changes to the remuneration structure were required during the financial year. The targeted remuneration mix for: • • The CEO is 53% fixed and 47% variable (at risk): and Other members of the Executive team are in the range of 61% to 75% fixed and 25% to 39% variable (at risk). 24 Directors' Report (continued) Annual Report 2018 3.3 ) STI Plan AFG Executives are entitled to participate in the AFG STI plan. The amount of the STI award each participant may become entitled to (if any) will be determined by the Remuneration and Nomination Committee based on achievement against set performance targets. Objective The AFG STI plan rewards Executives for the achievement of objectives directly linked to AFG’s business strategy that is focused on growth and choice. Participation All Executives STI opportunity The STI available to each Executive is set at a level based on role, responsibilities and market data for the achievement of stretching targets against specific KPIs. The target STI opportunity for each Executive in FY18 is listed at 3.1 as an absolute dollar amount and as a percentage of the Executive’s fixed base. Performance period The performance period is the relevant Financial Year. KPIs and weightings are set and reviewed each year to ensure that the STI targets remain relevant for the current environment and Executives remain focused on clear goals for the period. Link between performance and reward The KPI targets are selected based on what needs to be achieved over each financial performance period to deliver the business strategy over the long term. From FY18 onwards the KPIs will include a financial target and current year delivery of a strategically relevant KPI relating to the Group’s long-term strategy. The weightings for each KPI is set for each performance period based on the specific business targets set by the Board. A minimum threshold hurdle is set for each KPI included in the scorecard before any payment is made in respect of that KPI measure. Further details of the KPIs that will be used to assess 2019 performance are set out at 3.4. In order for any STI award to be payable, a conduct gateway must also be achieved. Assessment of performance The Board reviews and approves the performance assessment and STI payments for the CEO and all other Executives. Payment method STI payments are delivered as cash. 3.4 ) FY19 STI Opportunity Offers to participate in STI awards for 2019 were made to Executives under the STI Plan on the terms set out on the next page. The amount of the STI award each participant may become entitled to (if any) will be determined by the Remuneration and Nomination Committee and approved by the Board based on achievement against the targeted NPAT as approved by the Board (60%), targeted AFGHL settlement volumes (20%) and AFG Business (AFG’s new digital broking platform for commercial SME lending) settlement volumes (20%). The allocation of these targets is dependent upon the Executive’s role in the business however all have a NPAT target. 2018 Annual Report Directors' Report (continued) 25 In order for any STI award to be payable, a conduct gateway must be achieved and a threshold profit target must be satisfied, being 90% of target. The percentage of the STI award that will become payable, if any, will be determined over the performance period by reference to the following schedule: Target Group NPAT AFG Home Loans Settlements AFG Business Achievement % STI Award Payable Less than 90% 90%-100% 100%-150% Less than 70% 70-100% 100%-150% Less than 75% 75%-100% 100%+ 0% 50%-100% Straight line between 100%-150% 0% Straight line between 70%-100% Straight line between 100%-150% 0% 75%-100% Straight line over 100% The Board has discretion to take into account unbudgeted extraordinary items as part of its overall assessment. From time to time bonuses may be paid outside this structure in relation to a special project or special circumstances subject to approval from the Remuneration and Nomination Committee. 3.5 ) The LTI Plan – 2018 and 2019 Grants AFG has established the LTI Plan to assist in the longer term motivation, retention and reward of KMP and certain senior employees. The LTI Plan is designed to align the interests of Executives and senior management with the interests of shareholders by providing an opportunity for the participants to receive an equity interest in AFG and to ensure a focus on long term sustainable growth. Details of the LTI Grants are provided below. 2017 LTI Grant 2018 & 2019 LTI Grant Instrument Quantum Performance rights to acquire ordinary AFG shares Performance rights to acquire ordinary AFG shares 65% of an Executive’s annual LTI entitlement weighted to an EPS target 65% of an Executive’s annual LTI entitlement weighted to an EPS target 35% of an Executive’s annual LTI entitlement weighted to TSR targets 35% of an Executive’s annual LTI entitlement weighted to TSR targets Grant date 1 July 2016, other than those approved at the 2016 AGM; and 1 July 2018, other than those approved at the 2018 AGM; and 1 July 2017, other than those approved at the 2017 AGM TSR Small Industrials Index $0.66 TSR Diversified Financials Index $0.67 EPS $1.00 (being the 20-day Volume Weighted Average Price leading up to 30 June 2016) TSR – Absolute TSR must be positive 1 July 2019 other than those subject to approval at the 2019 AGM TSR Small Industrials Index 2018 $0.77; 2019 $0.84 TSR Diversified Financials Index 2018 $0.75; 2019 $0.79 EPS $1.25 (being the 20-day Volume Weighted Average Price leading up to 30 June 2018) TSR – Absolute TSR must be positive EPS – 2.5% CAGR EPS EPS – 5.0% CAGR EPS Grant date fair value Gateway performance measure 26 Directors' Report (continued) Annual Report 2018 Key performance measure Performance & Service period Performance assessment 2017 LTI Grant TSR 2018 & 2019 LTI Grant TSR Relative Total Shareholder Return (pro-rata vesting between hurdles) 50% measured against the Diversified Financials Index, 50% against Small Industrials 50th Percentile – 50% vesting 75th Percentile – 100% vesting 85th Percentile – 125% vesting (stretch target) 90th Percentile – 150% vesting (stretch target) Relative Total Shareholder Return (pro-rata vesting between hurdles) 50% measured against the Diversified Financials Index, 50% against Small Industrials 50th Percentile – 50% vesting 75th Percentile – 100% vesting 85th Percentile – 125% vesting (stretch target) 90th Percentile – 150% vesting (stretch target) EPS accretion EPS accretion 2.5% CAGR – 25% vesting 7.5% CAGR – 100% vesting 10.0% CAGR – 125% vesting (stretch target) 12.5% CAGR – 150% vesting (stretch target) 5.0% CAGR – 50% vesting 10% CAGR – 100% vesting 11.25% CAGR – 125% vesting (stretch target) 12.5% CAGR – 150% vesting (stretch target) 1 July 2016 – 30 June 2019 1 July 2018 – 30 June 2021 30 June 2019 and 30 June 2020 Performance period not yet complete. 30 June 2021 Performance period not yet complete. Common LTI Plan Rules & Design Considerations Link between performance and reward TSR TSR encapsulates performance across the underlying key performance measures throughout the business aimed at achieving targeted business outcomes that will result in increased shareholder wealth through share price growth and dividends. Stretch targets are available giving Executives the opportunity to increase the number of performance rights by up to 50% for exceptional performance. EPS Long term EPS accretion targets are set at levels that are challenging yet achievable in a sustainable manner. EPS directly links creation of shareholder wealth to the delivery of the businesses strategy over a long term period. Stretch targets are available giving Executives the opportunity to increase the number of performance rights by up to 50% for exceptional performance. Cessation of employment If the participant ceases employment for cause or resigns, unless the Board determines otherwise, any unvested Performance Rights will automatically lapse. Dividends & voting Clawback and preventing inappropriate benefits Generally, if the participant ceases employment for any other reason, all of their unvested Performance Rights will remain on foot and subject to the original performance condition. However, the Board retains discretion to determine that some of their Rights (up to a pro rata portion based on how much of the Performance Period remains) will lapse. The Performance Rights do not carry dividends or voting rights prior to vesting. The Plan Rules provide the Board with broad ‘clawback’ powers if, amongst other things, the participant has acted fraudulently or dishonestly, engaged in gross misconduct or has acted in a manner that has brought AFG or its related bodies corporate into disrepute, or there is a material financial misstatement, or AFG is required or entitled under law or Company policy to reclaim remuneration from the participant, or the participant’s entitlements vest as a result of the fraud, dishonesty or breach of obligations of any other person and the Board is of the opinion that the incentives would not have otherwise vested. 2018 Annual Report Directors' Report (continued) 27 Change of control 2017 LTI Grant 2018 & 2019 LTI Grant In a situation where there is likely to be a change of control, the Board has the discretion to accelerate vesting of some or all of the Performance Rights. Where only some of the Performance Rights have vested on a change of control, the remainder of the Performance Rights will immediately lapse. If the change of control occurs before the Board exercises its discretion: • A pro-rata portion of the Performance Rights equal to the portion of the relevant Performance Period that has elapsed up to the expected or actual (as appropriate) date of the change of control will immediately vest; and the Board may, in its absolute discretion, decide whether the balance should vest or lapse. Restrictions on dealing The participant must not sell, transfer, encumber, hedge or otherwise deal with Performance Rights. Unless the Board determines otherwise, the participant will be free to deal with the Shares allocated on vesting of the Performance Rights, subject to the requirements of AFG’s Policy for dealing in securities. Reconstructions, corporate action, rights issues, bonus issues, etc. The rules of the LTI Plan include specific provisions dealing with rights issues, bonus issues, corporate actions and other capital reconstructions. These provisions are intended to ensure that there is no material advantage or disadvantage to the participant in respect of their Performance Rights as a result of such corporate actions. 28 Directors' Report (continued) Annual Report 2018 f o n o i t r o p o r P n o i t a r e n u m e r n o i t a r e n u m e R s t n e m y a P l a t o T r e h t O d e s a b - e r a h S s t n e m y a p m r e t - g n o L r e h t O s e s u n o B l t n e m y o p m e t s o P m r e t - t r o h S d e t a e R l e c n a m r o f r e P r e h t O s t n e m y a P s e r a h S s t h g R i g n o L e v a e l e c i v r e s y r a n o i t e r c s i D t n e m e r i t e R n o i t a u n n a r e p u S l a t o T n o N s e s u n o B s t fi e n e b s t fi e n e b y r a t e n o m h s a C s u n o b s e e f & y r a a S l 7 1 0 2 e n u J 0 3 d n a 8 1 0 2 e n u J 0 3 d e d n e s r a e y e h t r o f n o i t a r e n u m e r e v i t u c e x E l s e b a T n o i t a r e n u m e R y r o t u t a t S ) 4 % % 7 3 % 0 3 % 6 3 % 6 4 % 1 2 % 1 2 % 3 3 % 2 3 % 6 2 % 3 2 % 3 3 - % 2 3 % 3 3 6 6 6 3 1 9 , , 9 2 7 5 6 6 3 2 2 7 2 2 , 9 9 0 3 7 7 , 9 0 2 , 1 2 2 0 7 5 4 4 2 , 9 0 2 7 9 3 , 8 0 6 9 8 3 , 6 0 4 0 8 3 , , 3 4 4 3 6 3 5 5 6 8 4 1 , - 8 6 3 , 8 8 2 , 2 , 9 4 4 6 3 4 2 , $ $ $ $ $ $ - - - - - - - - - - - - - - - - - - - - - - - - - - - - 2 7 3 , 3 4 1 9 9 8 , 2 2 5 0 6 9 5 , 1 8 2 8 4 , 5 2 5 3 6 , 9 9 0 2 , 3 7 1 , 6 6 ) 9 2 8 8 7 , ( 9 9 0 2 2 , 1 4 8 , 2 5 3 2 3 1 , 7 7 7 3 2 0 5 5 , 9 6 1 , 2 3 6 7 , 1 3 5 2 - 0 0 0 5 4 , 7 6 6 6 1 , 7 5 8 , 2 1 - - - - 6 7 8 , 1 4 3 8 0 0 0 3 , 3 4 4 7 8 1 , ) 6 4 7 9 2 , ( - - - - - - - - - - - - - - - - - - - - - - - - - - - - $ 6 1 6 9 1 , 9 4 0 0 2 , 9 4 0 0 2 , 8 8 2 9 1 , 1 5 3 7 1 , 2 1 0 9 1 , 6 1 6 9 1 , 9 4 0 0 2 , 9 4 0 0 2 , 6 1 6 9 1 , 8 3 9 5 , - 8 4 1 , 7 9 5 8 4 3 0 1 , $ $ $ $ P M K 6 4 3 7 2 7 , 7 6 6 5 , 1 8 6 2 9 1 , 8 9 9 8 2 5 , 8 1 0 2 , 7 2 2 8 3 5 0 2 4 5 , 0 8 4 8 3 1 , 7 2 3 , 4 9 3 7 1 0 2 y e l i a B d v a D i , 7 6 4 6 6 7 0 2 4 5 , 0 0 5 8 8 2 , 7 4 5 2 7 4 , 7 1 0 2 0 5 5 , 1 4 1 7 6 6 5 , 8 8 9 8 1 , 5 9 8 6 1 1 , 8 1 0 2 2 n o e K c M t t e r B 8 1 9 8 7 1 , 1 5 4 6 , 6 4 5 , 1 1 2 0 2 4 5 , 8 6 9 9 1 3 , 7 6 6 5 , 4 0 2 8 3 3 , 0 2 4 5 , 7 5 3 , 5 1 3 7 6 6 5 , 0 6 1 , 7 2 3 0 2 4 5 , 0 0 1 , 4 2 8 2 5 7 3 , 0 7 2 , 4 7 0 2 3 2 9 , 9 3 7 4 5 , 5 5 3 6 6 , 7 6 3 , 8 4 1 8 1 0 2 8 9 5 8 6 1 , 7 1 0 2 i 3 s n k t a W m o c a M l l 4 6 4 0 4 2 , 7 1 0 2 , 1 3 0 0 4 2 8 1 0 2 4 n a v e B a s i L 5 8 3 5 5 2 , 7 1 0 2 , 1 5 9 4 5 2 8 1 0 2 i s n k n e J n e B - - - - 0 6 8 9 2 1 , 7 1 8 , 1 4 0 9 6 3 , 9 3 1 , 1 9 8 1 0 2 7 1 0 2 1 r e g n a S n h o J 9 9 9 2 1 8 , , 1 6 3 9 0 3 , 2 8 6 , 1 0 4 , 1 8 3 0 8 3 , 1 8 1 0 2 4 0 6 , 1 8 1 , 2 0 0 1 , 7 2 3 8 1 , 3 2 6 1 2 3 , 1 3 5 , 1 7 1 0 2 l a t o T l a t o T : s e t o N k e e w r e p s y a d 5 2 s . i s a b e m i t t r a p a n o d e y o p m e s l i i s n k t a W m o c l l a M k e e w r e p s y a d 4 s i s a b e m i t t r a p a n o d e y o p m e s l i n a v e B a s i L k e e w r e p s y a d 2 s i s a b e m i t t r a p a n o d e y o p m e s l i n o e K c M t t e r B 8 1 0 2 h c r a M 6 n o O O C d e t n o p p a s a w i r e g n a S n h o J 1 2 3 4 2018 Annual Report Directors' Report (continued) 29 5 ) Non-Executive Director Remuneration 5.1 ) Remuneration Policy The Board seeks to set aggregate remuneration at a level that provides the Company with the ability to attract and retain Directors of the highest calibre, whilst incurring a cost that is acceptable to shareholders. The amount of aggregate remuneration sought to be approved by shareholders and the fee structure is reviewed annually against fees paid to NEDs of comparable companies. The Board considers advice from external consultants when undertaking the annual review process. The Company’s constitution and the ASX listing rules specify that the NED fee pool shall be determined from time to time by a general meeting. The latest determination was the Shareholders’ meeting held on 24 April 2015 when shareholders approved an aggregate fee pool of $1,000,000 per year. The Board will not seek any increase to the NED pool at the 2018 AGM. 5.2 ) Structure The remuneration of NEDs consists of Directors’ fees, which is inclusive of statutory superannuation and Committee fees. The below summarises the NED fees from the date AFG listed on the ASX: • • Chairman: $150,000 inclusive of superannuation Non-Executive Directors: $90,000 inclusive of superannuation NEDs do not receive retirement benefits, other than statutory superannuation contributions, nor do they participate in any incentive programs. Directors may also be reimbursed for travel and other expenses incurred in attending to the Company’s affairs. Some of the NED’s have received non-cash benefits arising from their attendance at AFG’s conference. The table below outlines the NED remuneration for the years ended 30 June 2018 and 30 June 2017: Year 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 Tony Gill Kevin Matthews Craig Carter James Minto Melanie Kiely Jane Muirsmith Total Total Board and Committee Fees $ Short-term benefits (non-monetary) $ 136,986 136,986 82,192 82,192 82,192 82,192 - 82,192 82,192 82,192 82,192 82,192 465,754 547,946 - 19,192 - 20,008 - - - - - - - - - 39,200 Superannuation $ 13,014 13,014 7,808 7,808 7,808 7,808 - 7,808 7,808 7,808 7,808 7,808 44,246 52,054 Total $ 150,000 169,192 90,000 110,008 90,000 90,000 - 90,000 90,000 90,000 90,000 90,000 510,000 639,200 30 Directors' Report (continued) Annual Report 2018 Additional Disclosures Relating to Rights and Shares 5.3 ) Rights awarded, vested and lapsed during the year The table below discloses the number of rights granted to Executives as remuneration during FY17 and FY18 as well as the number of rights that vested, lapsed or forfeited during the year. Rights do not carry any voting or dividend rights and shares can be allocated once the vesting conditions have been met until their expiry date. Following the FY15 plan the Group moved to a 3-year performance period being the 2017 year below, the 2017 plan does not vest until 30 June 2019. KMP Year / Tranches (T) Rights awarded during the year Grant date Fair value per rights at award date $ Vesting date Exercise price Expiry date No. forfeited during the year Brett McKeon Malcolm Watkins 2017 / T1 97,500 1-Jul-16 $1.00 30-Jun-19 2017 / T2 39,179 1-Jul-16 $0.67 30-Jun-19 2017 / T3 39,773 1-Jul-16 $0.66 30-Jun-19 - - - 30-Jun-19 - 30-Jun-19 - 30-Jun-19 - 2018 / T1 11,274 1-Jul-17 $1.25 30-Jun-20 - 30-Jun-20 - 2018 / T2 5,059 1-Jul-17 $0.75 30-Jun-20 - 30-Jun-20 - 2018 / T3 4,927 1-Jul-17 $0.77 30-Jun-20 - 30-Jun-20 - 2017 / T1 19,500 1-Jul-16 $1.00 30-Jun-19 2017 / T2 7,836 1-Jul-16 $0.67 30-Jun-19 2017 / T3 7,954 1-Jul-16 $0.66 30-Jun-19 - - - 30-Jun-19 - 30-Jun-19 - 30-Jun-19 - 2018 / T1 16,910 1-Jul-17 $1.25 30-Jun-20 - 30-Jun-20 - 2018 / T2 7,588 1-Jul-17 $0.75 30-Jun-20 - 30-Jun-20 - 2018 / T3 7,391 1-Jul-17 $0.77 30-Jun-20 - 30-Jun-20 - 2017 / T1 46,800 1-Jul-16 $1.00 30-Jun-19 2017 / T2 18,806 1-Jul-16 $0.67 30-Jun-19 Lisa Bevan 2017 / T3 19,091 1-Jul-16 $0.66 30-Jun-19 - - - 30-Jun-19 - 30-Jun-19 - 30-Jun-19 - 2018 / T1 43,680 1-Jul-17 $1.25 30-Jun-20 - 30-Jun-20 - 2018 / T2 19,600 1-Jul-17 $0.75 30-Jun-20 - 30-Jun-20 - 2018 / T3 19,091 1-Jul-17 $0.77 30-Jun-20 - 30-Jun-20 - 2018 Annual Report Directors' Report (continued) 31 KMP Year / Tranches (T) Rights awarded during the year Grant date Fair value per rights at award date $ Vesting date Exercise price Expiry date No. forfeited during the year 2017 / T1 91,000 1-Jul-16 $1.00 30-Jun-19 2017 / T2 36,567 1-Jul-16 $0.67 30-Jun-19 2017 / T3 37,121 1-Jul-16 $0.66 30-Jun-19 - - - 30-Jun-19 - 30-Jun-19 - 30-Jun-19 - 2018 / T1 143,000 1-Jul-17 $1.25 30-Jun-20 - 30-Jun-20 - 2018 / T2 64,167 1-Jul-17 $0.75 30-Jun-20 - 30-Jun-20 - 2018 / T3 62,500 1-Jul-17 $0.77 30-Jun-20 - 30-Jun-20 - 2017 / T1 32,500 1-Jul-16 $1.00 30-Jun-19 2017 / T2 13,060 1-Jul-16 $0.67 30-Jun-19 2017 / T3 13,257 1-Jul-16 $0.66 30-Jun-19 - - - 30-Jun-19 30-Jun-19 30-Jun-19 - 2018 / T1 44,200 1-Jul-17 $1.25 30-Jun-20 - 30-Jun-20 2018 / T2 19,833 1-Jul-17 $0.75 30-Jun-20 - 30-Jun-20 2018 / T3 19,319 1-Jul-17 $0.77 30-Jun-20 - 30-Jun-20 - - - - - 2018 / T1 37,987 6-Mar-18 $1.54 30-Jun-20 - 30-Jun-20 - 2018 / T2 14,189 6-Mar-18 $1.11 30-Jun-20 - 30-Jun-20 - 2018 / T3 14,063 6-Mar-18 $1.12 30-Jun-20 - 30-Jun-20 - David Bailey Ben Jenkins John Sanger T1 – Earnings Per Share allocation T2 – TSR (Diversified Financials) allocation T3 – TSR (Small Industrials) allocation 32 Directors' Report (continued) Annual Report 2018 5.4 ) Shareholdings of KMP* Ordinary shares held in Australian Finance Group Limited ASX:AFG (number) Balance 1 July 2017 Granted as remuneration Sold during the period Net change other Balance 30 June 2018 Held nominally 30 June 2018 Directors Tony Gill Brett McKeon 2,250,000 21,179,773 Malcolm Watkins 19,602,689 Kevin Matthews 15,000,000 Craig Carter Melanie Kiely Jane Muirsmith Executives Lisa Bevan David Bailey Ben Jenkins John Sanger 500,000 - - 1,533,333 1,066,666 - - - - - - - - - - - - - - - - - - - - - - - - (1,125,000) 1,125,000 1,125,000 - - 21,179,773 21,179,773 19,602,689 19,602,689 29,516 15,029,516 15,029,516 - 500,000 500,000 67,164 65,000 67,164 65,000 67,164 65,000 - - - 1,533,333 1,066,666 - 35,000 35,000 83,333 546,666 - - * Includes shares held directly, indirectly and beneficially by the KMP 6 ) Executive service agreements Remuneration and other terms of employment for Executives are formalised in employment agreements. Each of these employment agreements provides for the payment of fixed and performance-based remuneration and employer superannuation contributions. The following outlines the details of these agreements: Name Agreement expires Notice of termination by Company Employee notice Brett McKeon No expiry, continuous agreement 12 months (or payment in lieu of notice) 12 weeks Malcolm Watkins No expiry, continuous agreement 12 months (or payment in lieu of notice) 12 weeks David Bailey Lisa Bevan Ben Jenkins John Sanger No expiry, continuous agreement 12 months (or payment in lieu of notice) 12 weeks No expiry, continuous agreement 12 months (or payment in lieu of notice) 12 weeks No expiry, continuous agreement 6 months (or payment in lieu of notice) 12 weeks No expiry, continuous agreement 3 months (or payment in lieu of notice) 12 weeks 2018 Annual Report Directors' Report (continued) 33 7 ) Remuneration Governance 7.1 ) Remuneration and Nomination The Remuneration and Nomination Committee is responsible for ensuring AFG has remuneration strategies and a framework that fairly and responsibly rewards Executives and Non-Executive Directors with regard to performance, the law and corporate governance. The Committee ensures that AFG remuneration policies are directly aligned to business strategy, financial performance and support increased shareholder wealth over the long term. As at 30 June 2018 the Committee comprised independent Non-Executive Director Melanie Kiely (Chair), and independent Non-Executive Directors Craig Carter and Jane Muirsmith. Further information on the role of the Remuneration and Nomination Committee is set out in the Committee’s Charter available at www.afgonline.com.au and in the Corporate Governance Statement also available on the Company’s website. 7.2 ) Remuneration Philosophy The performance of the Company depends upon the quality of its Directors and Executives. To prosper, the Company must attract, motivate and retain highly skilled Directors and Executives. The Board embodies the following principles in its remuneration framework: • • • Remuneration levels for KMP are set to attract and retain appropriately qualified and experienced Directors and Executives; Alignment of Executive reward with shareholder interest and strategy; The relationship between performance, conduct and remuneration of Executives is clear and transparent. 7.3 ) Use of Independent Consultants In performing its role, the Remuneration and Nomination Committee can directly commission and receive information and advice from independent external advisors. The Committee has protocols in place to ensure that any advice and recommendations are provided in an appropriate manner and free from undue influence of management. No remuneration advice or recommendations from independent consultants was received during the financial period ended 30 June 2018. 7.4 ) Policy for Dealing in Securities AFG has a policy for dealing in securities to establish best practice procedures that protect AFG, Directors and employees against the misuse of unpublished information that could materially affect the value of AFG securities. Directors, Executives and their connected persons are restricted by trading windows. 7.5 ) Remuneration Report approval at 2017 AGM The 30 June 2017 Remuneration Report was presented to shareholders and was approved at the 2017 Annual General Meeting. 34 Directors' Report (continued) Annual Report 2018 8 ) Other Transactions and Balances with KMP and their Related Parties ( i ) During the year, the Group made payments to Genworth Mortgage Insurance Australia Limited, one of our providers of Lenders Mortgage Insurance (LMI). Mr Gill is a Non-Executive Director of Genworth Mortgage Insurance Australia Limited. These dealings were in the ordinary course of business and were on normal terms and conditions. The payments made for the provision of LMI policies were $706k (2017: $427k). These payments are not considered to be material to the financial results of the Group and therefore do not impact on Mr Gill’s independence as a Director. ( ii ) Mr Gill is an Independent Director of First Mortgage Services (FMS), one of our providers of loan settlement services. During the year, the Group made payments to FMS. These dealings were in the ordinary course of business and were on normal terms and conditions. The payments made for the provision of the settlement services were $333k (2017: $253k). These payments are not considered to be material to the financial results of the Group and therefore do not impact on Mr Gill’s independence as a Director. ( iii ) As part of the demerger of the property business on 22 April 2015, the Group entered into a shared services agreement with Establish Property Group Ltd (EPG). Mr McKeon, Ms Bevan and Mr Bailey, are Directors of EPG and McCabe Street Limited. Under the terms of the shared services agreement, the Group provided premises, administration, accounting and some company secretarial services to EPG at an agreed arm’s length rate for part of the year. During the year the shared services agreement was terminated when EPG moved out of the AFG office in September 2017. EPG paid $6k (2017: $120k) for services under the shared services agreement for the 2018 financial year. In addition to the above, the Group’s head Office is located at 100 Havelock Street West Perth. The Group leases these premises at commercial arm’s length rates from an investee of EPG, Qube Havelock Street Development Pty Ltd (Qube). AFG paid rent of $1,583k which has been paid to Qube (2017: $1,567k). In addition to the above McCabe Street has an outstanding loan owing to AFG amounting to $209k (2017: $201k), this loan is on commercial terms at arms length. Independent Audit of Remuneration Report 9 ) The Remuneration Report has been audited by Deloitte. Please see page 87 of this Annual Report for Deloitte’s report on the Remuneration Report. This Directors’ Report, including the Remuneration Report, is signed in accordance with a Resolution of Directors of AFG. Tony Gill Chairman Perth 27 September 2018 2018 Annual Report Directors' Report (continued) 35 Independence declaration under Section 307C of the Corporations Act 2001 Deloitte Touche Tohmatsu ABN 74 490 121 060 Tower 2, Brookfield Place 123 St Georges Terrace Perth WA 6000 GPO Box A46 Perth WA 6837 Australia Tel: +61 8 9365 7000 Fax: +61 8 9365 7001 www.deloitte.com.au The Board of Directors Australian Finance Group Limited Level 4, 100 Havelock Street West Perth WA 6005 27 September 2018 Dear Directors Australian Finance Group Limited In accordance with section 307C of the Corporations Act 2001, I am pleased to provide the following declaration of independence to the directors of Australian Finance Group Limited. As lead audit partner for the audit of the financial statements of Australian Finance Group Limited for the financial year ended 30 June 2018, I declare that to the best of my knowledge and belief, there have been no contraventions of: (i) the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and (ii) any applicable code of professional conduct in relation to the audit. Yours sincerely DELOITTE TOUCHE TOHMATSU Leanne Karamfiles Partner Chartered Accountants Liability limited by a scheme approved under Professional Standards Legislation. Member of Deloitte Touche Tohmatsu Limited 36 Annual Report 2018 Consolidated Statement of Financial Position As at 30 June 2018 In thousands of AUD Assets Cash and cash equivalents Trade and other receivables Loans and advances Other financial assets Investment in associate Property, plant and equipment Intangible assets Total assets Liabilities Trade and other payables Interest-bearing liabilities Employee benefits Current tax payable Provisions Deferred income Deferred tax liability Total liabilities Net assets Equity Share capital Share-based payment reserve Other capital reserves Retained earnings Total equity attributable to equity holders of the Company Non-controlling interest Total equity Note 14(a) 15 17 18 19 16 20 21 13(b) 22 23 13(c) 25(a) 2018 2017 88,710 810,117 1,379,857 15 12,815 1,379 516 124,801 737,580 1,152,171 31 - 1,898 745 2,293,409 2,017,226 783,676 1,381,761 4,543 2,074 2,855 4,123 21,053 715,803 1,164,478 4,559 1,249 1,667 2,693 19,482 2,200,085 1,909,931 93,324 107,295 43,541 814 (87) 49,056 93,324 - 93,324 43,541 408 (91) 63,410 107,268 27 107,295 The Consolidated Statement of Financial Position should be read in conjunction with the Notes to the Financial Statements. 2018 Annual Report 37 Consolidated Statement of Profit or Loss and Other Comprehensive Income For the year ended 30 June 2018 In thousands of AUD Continuing Operations Commission and other income Securitisation interest income Operating income Commission and other cost of sales Securitisation interest expense Gross profit Other income Administration expenses Other expenses Results from operating activities Finance income Finance expenses Share of profit of an associate Net finance and investing income Profit before tax from continuing operations Income tax expense Profit from continuing operations Attributable to: Owners of the Company Non-controlling interests Other comprehensive income Items that may be reclassified subsequently to profit or loss Net change in fair value of available-for-sale financial assets Income tax on other comprehensive income Other comprehensive (loss)/income for the year, net of income tax Note 2018 2017 7 8 9 12 12 13(a) 551,084 52,312 603,396 (493,938) (36,875) 72,583 13,412 (3,788) (37,129) 45,078 2,463 (18) 186 2,631 47,709 (14,400) 33,309 33,336 (27) 33,309 (15) - (15) 539,759 46,342 586,101 (474,557) (31,711) 79,833 16,700 (2,885) (38,955) 54,693 2,277 (14) - 2,263 56,956 (17,852) 39,104 39,053 51 39,104 2 - 2 Total comprehensive income for the year 33,294 39,106 Total comprehensive income for the year attributable to: Owners of the Company Non-controlling interests Total comprehensive income for the year Earnings per share Basic earnings (cents per share) Diluted earnings (cents per share) 33,321 (27) 33,294 15.50 15.41 39,055 51 39,106 18.20 18.15 26 26 The Consolidated Statement of Profit or Loss and Other Comprehensive Income should be read in conjunction with the Notes to the Financial Statements. 38 Annual Report 2018 Statement of Changes in Equity For the year ended 30 June 2018 In thousands of AUD Share capital Foreign currency translation reserve Fair value reserve Share- based payment reserve Retained earnings Total Non- controlling interest Total equity Balance at 1 July 2016 43,541 (14) (60) 97 44,980 88,544 (24) 88,520 Total comprehensive income for the period Profit Other comprehensive income Total comprehensive income for the period Transactions with owners, recorded directly in equity Dividends to equity holders Share-based payment transactions Total transactions with owners - - - - - - Balance at 30 June 2017 43,541 Balance at 1 July 2017 43,541 Total comprehensive income for the period Profit Other comprehensive income Total comprehensive income for the period Transactions with owners, recorded directly in equity Dividends to equity holders Share-based payment transactions Total transactions with owners - - - - - - - - - - - - (14) (14) - - - - - - - (17) (17) - - - (77) (77) - 4 4 - - - Balance at 30 June 2018 43,541 (14) (73) - - - - 311 311 39,053 39,053 - (17) 39,053 39,036 (20,623) (20,623) - 311 (20,623) (20,312) 51 - 51 - - - 39,104 (17) 39,087 (20,623) 311 (20,312) 408 63,410 107,268 27 107,295 408 63,410 107,268 27 107,295 - - - - 406 406 814 33,336 33,336 (27) 33,309 - 4 - 4 33,336 33,340 (27) 33,313 (47,690) (47,690) - 406 (47,690) (47,284) 49,056 93,324 - - - - (47,690) 406 (47,284) 93,324 The Consolidated Statement of Changes in Equity should be read in conjunction with Notes to the Financial Statements. 2018 Annual Report 39 Statement of Cash Flows Note 2018 2017 For the year ended 30 June 2018 In thousands of AUD Cash flows from operating activities Cash receipts from customers Cash paid to suppliers and employees Interest received Interest paid Income taxes paid Net cash generated by operating activities 14(b) Cash flows from investing activities Net interest received Acquisition of property, plant and equipment Investment in intangible assets Investment in Thinktank Contingent consideration Thinktank Increase in other loans and advances Loans and advances to customer borrowings Net cash used in investing activities Cash flows used in financing activities Repayments from warehouse facilities Proceeds from bondholders Decrease in loans from funders Dividends paid to equity holders of the parent 25(c) Net cash generated by financing activities Net decrease in cash and cash equivalents Cash and cash equivalents at 1 July Cash and cash equivalents at 30 June 14(a) The Statement of Cash Flows should be read in conjunction with the Notes to the Financial Statements. 496,851 (467,799) 52,313 (36,875) (12,004) 32,486 2,429 (178) - (11,141) (992) (3,267) (224,763) (237,912) (67,225) 284,340 (90) (47,690) 169,335 (36,091) 124,801 88,710 462,454 (439,031) 46,341 (31,711) (11,536) 26,517 2,303 (280) (150) - - (539) (105,608) (104,274) (48,905) 141,677 (257) (20,622) 71,893 (5,864) 130,665 124,801 40 Annual Report 2018 Notes to the Financial Statements 1 ) Reporting entity 2 ) Basis of preparation 3 ) Significant accounting policies 4 ) Determination of fair values 5 ) Financial risk management 6 ) Segment information 7 ) Revenue 8 ) Other income 9 ) Other expenses 10 ) Employee costs 11 ) Auditors’ remuneration 12 ) Finance income and expenses 13 ) Income tax 14 ) Cash and cash equivalents 15 ) Trade and other receivables 16 ) Trade and other payables 17 ) Loans and advances 18 ) Investment in associate 19 ) Property, plant and equipment 20 ) Interest-bearing liabilities 21 ) Employee benefits 22 ) Provisions 23 ) Deferred income 24 ) Operating leases 25 ) Capital and reserves 26 ) Earnings per share 27 ) Share based payments 28 ) Financial instruments 29 ) Group entities 30 ) Parent entity 31 ) Capital and other commitments 32 ) Contingencies 33 ) Related parties 34 ) Subsequent events 42 42 44 53 53 56 58 58 58 58 59 59 60 61 62 62 63 64 65 65 68 68 69 69 69 71 71 72 80 82 82 82 83 84 2018 Annual Report 41 42 Notes to the Financial Statements Annual Report 2018 1) Reporting entity The Consolidated Financial Statements for the financial year ended 30 June 2018 comprise Australian Finance Group Limited (the ‘Company’), which is a for profit entity and a Company domiciled in Australia and its subsidiaries (together referred to as the ‘Group’) and the Group’s interest in associates and jointly controlled entities. The Group’s principal activities in the course of the financial year were mortgage origination and lending. The Company’s principal place of business is 100 Havelock Street, West Perth, Western Australia. 2) Basis of preparation ( a ) Statement of compliance The Financial Report complies with Australian Accounting Standards, and International Financial Reporting Standards (‘IFRS’) as issued by the International Accounting Standards Board (“AASB”). The Financial Report is a general-purpose financial report, for a ‘for-profit’ entity, which has been prepared in accordance with the requirements of the Corporations Act 2001 (Cth) and Australian Accounting Standards and other authoritative pronouncements of the Australian Accounting Standards Board. The Financial Report has also been prepared on a historical cost basis, except where noted. The Financial Statements comprise the Consolidated Financial Statements of the AFG Group of companies. The Financial Report is presented in Australian dollars and all values are rounded to the nearest thousand dollars ($000’s) unless otherwise stated. The Consolidated Financial Statements were authorised for issue by the Board of Directors on 27 September 2018. ( b ) Basis of measurement The Consolidated Financial Statements have been prepared on a historical cost basis except for the following material items: • • Receivables and payables relating to trail commission are initially measured at fair value and subsequently at amortised cost; Financial instruments at fair value through profit or loss are measured at fair value; • Available-for-sale financial assets are measured at fair value except for equity instruments that do not have a quoted price in an active market and whose fair value cannot be reliably measured. ( c ) Functional and presentation currency These Consolidated Financial Statements are presented in Australian dollars (“AUD”). The Group is of a kind referred to in ASIC Corporations Instrument 2016/191 dated 31 March 2016 and in accordance all financial information presented in Australian dollars has been rounded to the nearest thousand dollars unless otherwise stated. ( d ) Use of estimates and judgements The preparation of Financial Statements in conformity with AASB’s requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected. Information about critical judgements in applying accounting policies that have the most significant effect on the amounts recognised in the Financial Statements is included in the following notes: • • Notes 15 and 16 - Net present value of future trail commissions: recognition of future trail commissions receivable and payable Note 3(a)(i) - Consolidation of special purpose entities Information about assumptions and estimates that have a significant risk of resulting in a material adjustment within the next financial years are included in the following: • • • Note 4 - Determination of fair value assumptions used in forecasting and discounting future trail commissions Note 27 - Measurement of share-based payments Note 28 - Valuation of financial instruments 2018 Annual Report Notes to the Financial Statements 43 • Taxation The Group’s accounting for taxation requires Management’s judgment in assessing whether deferred tax assets and certain deferred tax liabilities are recognised on the Statement of Financial Position. Deferred tax assets, including those arising from un-recouped tax losses, capital losses and temporary differences, are recognised only where it is considered more likely than not that they will be recovered, which is dependent on the generation of sufficient future taxable profits. Assumptions about the generation of future taxable profits depend on Management’s estimates of future cash flows. These depend on estimates of future income, operating costs, capital expenditure, dividends and other capital management transactions. Judgments and assumptions are also required about the application of income tax legislation. These judgments and assumptions are subject to risk uncertainty, hence there is a possibility that changes in circumstances will alter expectations, which may impact the amount of deferred tax assets and deferred tax liabilities recognised on the Statement of Financial Position and the amount of other tax losses and temporary differences not yet recognised. In such circumstances, some or all of the carrying amounts of recognised deferred tax assets and liabilities may require adjustment, resulting in a corresponding credit or charge to the Consolidated Statement of Profit or Loss and Other Comprehensive Income. ( e ) Changes in accounting policies and disclosures The accounting policies adopted are consistent with those of the previous financial year except as follows: ( i ) Adoption of new and revised Accounting Standards The Group has adopted all of the new and revised Standards and Interpretations, including amendments to the existing standards issued by the Australian Accounting Standards Board (the AASB) that are relevant to their operations and effective for the current reporting period. The adoption of these amendments has not resulted in any significant changes to the Group’s accounting policies nor any significant effect on the measurement or disclosure of the amounts reported for the current or prior periods. Management assesses the impact of new standards and interpretations. Assessment of the expected impacts of these standards and interpretations is ongoing, however, it is expected that that there will be no significant changes in the Group’s accounting policies. ( ii ) Accounting Standards and Interpretations Issued But Not Yet Effective At the date of authorisation of the Financial Statements, the Standards and Interpretations that were issued but not yet effective, which have not been early adopted are listed below: Affected Standards and Interpretations AASB 15 ‘Revenue from Contracts with Customers’ AASB 16 ‘Leases’ Application date* Application date for Group 1 January 2018 30 June 2019 1 January 2019 30 June 2020 AASB 9 ‘Financial instruments’ and the relevant amending standards 1 January 2018 30 June 2019 * Reporting period commences on or after the application date Management have performed an assessment of the impact of applying the new standards: AASB 15 ‘Revenue from Contracts with Customers’ a full assessment of AASB 15 on all revenue streams has been performed and the amendments are not expected to have a material impact on the measurement of the trail commission receivable and revenue in the financial statements on implementation. The standard requires trail commissions to be disclosed as contract assets, under AASB 139 trail commissions are disclosed as trail commission receivables. Additional disclosures will be prepared under the new standard. 44 Notes to the Financial Statements Annual Report 2018 AASB 16 ‘Leases’ the Group has limited number of operating leases which will result in the recognition of right of use assets and corresponding liabilities. A full assessment has been performed and no significant net impact has been identified. Additional disclosures will be prepared under the new standard. AASB 9 ‘Financial Instruments’ and the relevant amending standards introduce new requirements for the classification and measurement of financial assets and impairment of financial assets. The classification and measurement of financial assets is determined on the basis of the contractual cashflow characteristics and the objective of the business model associated with holding the asset. Key changes include: • • • • the Held to Maturity (HTM) and Available for Sale (AFS) asset categories will be removed; a new asset category measured at Fair Value through Other Comprehensive Income (FVOCI) is introduced. This applies to financial asset debt instruments with contractual cashflow characteristics that are solely payments of principal and interest and held in a model whose objective is achieved by both collecting contractual cashflows and selling financial assets; a new asset category for non-traded equity investments measured at FVOCI is introduced; and all other financial assets and financial liabilities will continue to be measured on the same bases as is currently adopted under IAS 39. The classification and measurement of financial liabilities will remain largely unchanged. The Group’s securitised assets will remain measured at amortised cost due to the contractual cashflows being solely payments of principal and interest (SPPI) and are held for collect principal and interest. The IFRS 9 impairment requirements are based on an expected credit loss model (ECL) that replaces the incurred loss model under the current accounting standard. The Group will be generally required to recognise either a 12-months’ or lifetime ECL, depending on whether there has been a significant increase in credit risk since initial recognition. The ECL model will apply to debt instruments accounted for at amortised cost or at FVOCI. AASB 9 will change the Group’s current methodology for calculating the provision for doubtful debts, in particular for collective provisioning. Utilising an expected credit loss model does not have a material impact on the Group’s results. This model will be adopted by the Group upon implementation and is expected to result in additional disclosures. 3) Significant accounting policies Except as expressly described in the Notes to the Financial Statements, the accounting policies set out below have been applied consistently to all periods presented in these Consolidated Financial Statements and have been applied consistently by all Group entities. ( a ) Basis of consolidation The Consolidated Financial Statements incorporate the Financial Statements of the Company and entities (including structured entities) controlled by the Company and its subsidiaries. Control is achieved when the Company: • • • Has power over the investee Is exposed, or has rights, to variable returns from its involvement with the investee Has the ability to use its power to affect its returns When the Group has less than a majority of the voting rights or similar rights of an investee, the Group considers all relevant facts and circumstances in assessing whether it has power over an investee, including: • • • The contractual arrangement with the other vote holders of the investee Right arising from other contractual arrangements The Group’s voting rights and potential voting rights Consolidation of a subsidiary begins when the Group obtains control over the subsidiary and ceases when the Group loses control of the subsidiary. Specifically, income and expenses of a subsidiary acquired or disposed of during the year are included in the Consolidated Statement of Profit or Loss and Other Comprehensive Income from the date the Company gains control until the date when the company ceases to control the subsidiary. Subsidiaries are entities controlled by the Group. When necessary, adjustments are made to the Financial Statements of subsidiaries to bring their accounting policies in line with the Group’s accounting policies. 2018 Annual Report Notes to the Financial Statements 45 Non-controlling interest is determined as the non-controlling interest’s proportion of the fair value of the recognised identifiable assets, liabilities and contingent liabilities at the date of the original acquisition. Post-acquisition of non-controlling interest in the identifiable assets and liabilities of a subsidiary comprises the non-controlling interest’s share of movements in equity since the date of the original controlling acquisition, after eliminating intra-group transactions. Profit or loss and each component of other comprehensive income are attributed to the owners of the Company and to the non-controlling interests. Total comprehensive income of subsidiaries is attributed to the owners of the Company and to the non-controlling interests even if this results in the non-controlling interests having a deficit balance. All intra-group balances, and any unrealised income and expenses arising from intra-group transactions, are eliminated in preparing the Consolidated Financial Statements. Unrealised gains arising from transactions with equity accounted investees are eliminated against the investment to the extent of the Group’s interest in the investee. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment. Changes in the Group’s ownership interests in subsidiaries that do not result in the Group losing control over the subsidiaries are accounted for as equity transactions. The carrying amounts of the Group’s interests and the non-controlling interests are adjusted to reflect the changes in their relative interests in the subsidiaries. Any difference between the amount by which the non-controlling interests are adjusted and the fair values of the consideration paid or received is recognised directly in equity and attributed to the owners of the Company. When the Group loses control of a subsidiary, a gain or loss is recognised in the profit or loss and is calculated as the difference between (i) the aggregate of the fair value of the consideration received and the fair value of any retained interest and (ii) the previous carrying amount of the assets, and liabilities of the subsidiary and any non-controlling interests. All the amounts previously recognised in other comprehensive income in relation to that subsidiary are accounted for as if the Group has directly disposed of the related assets and liabilities of the subsidiary. The fair value of any investment retained in the former subsidiary at the date when control is lost is regarded as the fair value on initial recognition for subsequent accounting under AASB 139, when applicable, the cost on initial recognition of an investment in an associate or a joint venture. ( i ) Special purpose entities Special purpose entities are those entities over which the group has no ownership interest but in effect the substance of the relationship is such that the Group controls the entity so as to obtain the majority of the benefits from its operation. The Group has established the following special purpose entities to support the specific funding needs of the Group’s securitisation programme: • • AFG 2010-1 Trust and its Series (SPE) to conduct securitisation activities funded by short term warehouse facilities provided by reputable lenders AFG 2013-2 Trust, AFG 2016-1 Trust, AFG 2017-1 Trust and AFG 2018-1 Trust (SPE-RMBS) to hold securitised assets and issue Residential Mortgage Backed Securities (RMBS) The special purpose entities meet the criteria of being controlled entities under AASB 10 – Consolidated Financial Statements. The elements indicating control include, but are not limited to, the below: • • • • • The Group has existing rights that gives it the ability to direct relevant activities that significantly affect the special purpose entities’ returns The Group is exposed, and has rights, to variable returns from its involvement with the special purpose entities The Group has all the residual interest in the special purpose entities Fees received by the Group from the special purpose entities vary on the performance, or non-performance, of the securitised assets The Group has the ability to direct decision making accompanied by the objective of obtaining benefits from the special purpose entities’ activities The Group continues to retain control over the financial assets, for which some, but not substantially all, the risks and rewards have been transferred to the warehouse facilities providers and the bondholders. The securitised assets and the corresponding liabilities are recorded in the Statement of Financial Position and the interest earned and paid recognised in the Consolidated Statement of Profit or Loss and Other Comprehensive Income. 46 Notes to the Financial Statements Annual Report 2018 ( ii ) Investments in associates (equity accounted investee) Associates are those entities in which the Group has significant influence, but not control, over the financial and operating policies. Investments in associates are accounted for using the equity method (equity accounted investee) and are initially recognised at cost. The cost of the investment includes transaction costs (see Note 18). The Consolidated Financial Statements include the Group’s share of the profit or loss and other comprehensive income of the investee, after adjustments to align the accounting policies with those of the Group, from the date that significant influence commences until the date that significant influence ceases. ( b ) Financial instruments ( i ) Non-derivative financial assets Initial recognition and measurement Financial assets within the scope of AASB 139 are classified as financial assets at fair value through profit or loss, loans and receivables, held to maturity investments, or available–for-sale financial assets. The Group determines the classification of its financial assets at initial recognition. All financial assets are recognised initially at fair value plus transaction costs, except in the case of financial assets recorded at fair value through profit or loss. Subsequent measurement The subsequent measurement of financial assets depends on their classification as described below: Financial assets at fair value through profit or loss The Group’s investments in equity securities are classified as financial assets at fair value through profit or loss. An instrument is classified as at fair value through profit or loss if it is held for trading or is designated as such upon initial recognition. Financial instruments are designated at fair value through profit or loss if the Group manages such instruments and makes purchase and sale decisions based on their fair value in accordance with the Group’s risk management and investment strategy. Upon initial recognition, attributable transaction costs are recognised in profit or loss when incurred. Financial instruments at fair value through profit or loss are subsequently measured at fair value, and changes therein are recognised in the profit or loss. Loans and receivables Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an active market. Subsequent to initial recognition loans and receivables are measured at amortised cost using the effective interest method, less impairment losses. Loans and receivables comprise trade and other receivables and loans and advances which relate mainly to residential mortgages issued under the securitisation programme. Available-for-sale financial assets Available-for-sale financial assets are non-derivative financial assets that are designated as available-for- sale and that are not classified in any of the previous categories. Subsequent to initial recognition, available-for-sale financial assets are measured at fair value and changes therein, other than impairment losses (see Note 3(b)(ii)), are recognised in other comprehensive income and presented within equity in the fair value reserve. When an investment is derecognised, the cumulative gain or loss is transferred to profit or loss. Derecognition A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognised when: • • The rights to receive cash flows from the asset have expired The Group has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a “pass-through” arrangement; and either (a) the Group has transferred substantially all the risks and rewards of the asset, or (b) the Group has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset When the Group has transferred its rights to receive cash flows from an asset or has entered into a pass-through arrangement, it evaluates if and to what extent it has retained the risks and rewards of ownership. When it has neither transferred nor retained substantially all of the risks and rewards of the asset, nor transferred control of the asset, the asset is recognised to the extent of the Group’s continuing involvement in the asset. In that case, the Group also recognises an associate liability. The transferred asset and the associated liability are measured on a basis that reflects the rights and obligations that the Group has retained. 2018 Annual Report Notes to the Financial Statements 47 The Group utilises SPE-RMBS to hold securitised assets (financial assets) and issue residential mortgage asset backed securities to investors. After the securitisation transaction, the Group continues to retain control of the financial assets for which some but not substantially all the risks and rewards have been transferred to the investors. Consequently, the securitised assets do not meet the requirements of AASB 139 - Financial Instruments: Recognition and Measurement in respect of the derecognition of financial instruments. The securitised assets have been recorded in the Statement of Financial Position with the related interest recognised through the Consolidated Statement of Profit or Loss and Other Comprehensive Income. ( ii ) Impairment of financial assets A financial asset not carried at fair value through profit or loss is assessed at each reporting date to determine whether there is any objective evidence that it is impaired. A financial asset is impaired if objective evidence indicates that a loss event has occurred after the initial recognition of the asset, that has a negative effect on the estimated future cash flows of that asset. Objective evidence that financial assets are impaired can include failure to meet repayment of principal and interest in accordance with the terms of the governing agreement (loans and advances within the SPE), indications that a debtor or issuer will enter bankruptcy, disappearance of an active market for a security, or wider economic and financial market indicators pertaining to a particular industry sector or local economy. In addition, for an investment in an equity security, a significant or prolonged decline in its fair value below its cost is objective evidence of impairment. Significant financial assets and loans and advances within the special purpose entities are individually assessed and regularly tested for impairment. The remaining financial assets are assessed collectively in groups that share similar credit risk characteristics. In assessing collective impairment the Group uses historical trends of the probability of default, timing of recoveries and the amount of loss incurred, adjusted for Management’s judgement as to whether current economic and credit conditions are such that the actual losses are likely to be greater or less than suggested by historical trends. An impairment loss in respect of a financial asset measured at amortised cost is calculated as the difference between its carrying amount, and the present value of the estimated future cash flows discounted at the original effective interest rate. Losses are recognised in profit or loss and reflected in an allowance account against receivables. For the SPE loans and advances the present value of estimated cash flows recoverable is determined after taking into account net realisable value from sale of collateral held. When a subsequent event causes the amount of impairment loss to decrease, the decrease in impairment loss is reversed through the profit or loss. An impairment loss in respect of an available-for- sale financial asset is recognised by transferring the cumulative loss that has been recognised previously in equity to profit or loss. When a subsequent event causes the fair value of an impaired available- for-sale asset to increase and the increase can be related objectively to an event occurring after the impairment loss was recognised in profit or loss, then the impairment loss is reversed with the amount of the reversal recognised in profit or loss. However, any subsequent recovery in the fair value is recognised in other comprehensive income. ( iii ) Non-Derivative financial liabilities Initial recognition and measurement Financial liabilities within the scope of AASB 139 are classified as financial liabilities at fair value through profit or loss, or loans and borrowings. The Group determines the classification of its financial liabilities at initial recognition. All financial liabilities are recognised initially at fair value, in the case of loans and borrowings, net of directly attributable transactions. The Group initially recognises financial liabilities (including liabilities designated at fair value through profit or loss) on the trade date at which the Group becomes a party to the contractual provisions of the instrument. The Group derecognises a financial liability when its contractual obligations are discharged, cancelled or expired. The Group’s non-derivative financial liabilities include interest-bearing liabilities and trade and other payables. Subsequent measurement Subsequent to initial recognition, interest-bearing liabilities are measured at amortised cost using the effective interest rate method. 48 Notes to the Financial Statements Annual Report 2018 Derecognition A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as the derecognition of the original liability and the recognition of a new liability. The difference in respect of the carrying amounts is recognised in the income statement. ( iv ) Share capital Ordinary shares Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares and share options are recognised as a deduction from equity at the time of issuance, net of any related income tax benefit. Repurchase of share capital When share capital recognised as equity is repurchased the amount of consideration paid, including directly attributable costs, is recognised as a reduction in equity. Dividends Dividends are recognised as a liability in the period in which they are declared. ( c ) Cash and short-term deposits Cash and short-term deposits in the Consolidated Statement of Financial Position comprise cash at bank and on hand, short term deposits with a maturity of three months or less, as well as restricted cash such as proceeds and collections in the special purpose entities’ accounts which are not available to the shareholders. For the purpose of the Statement of Cash Flows, cash and cash equivalents consist of the cash and term deposits as defined above, net of outstanding bank overdrafts. ( d ) Property, plant and equipment ( i ) Recognition and measurement Items of property, plant and equipment are measured at cost less accumulated depreciation (see (iii) below) and impairment losses (see accounting policy 3(f)). Purchased software that is integral to the functionality of the related equipment is capitalised as part of that equipment. Borrowing costs related to the acquisition or construction of qualifying assets are capitalised as part of the cost of the assets. Where parts of an item of property, plant and equipment have different useful lives, they are accounted for separately. Gains and losses on disposal of an item of property, plant and equipment are determined by comparing the proceeds from disposal with the carrying amount and are recognised net within “other income” in profit or loss. ( ii ) Subsequent costs The cost of replacing part of an item of property, plant and equipment is recognised in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Group and its costs can be measured reliably. The costs of the day-to-day servicing of property, plant and equipment are recognised in profit or loss as incurred. ( iii ) Depreciation Depreciation is recognised in profit or loss on a straight-line basis over the estimated useful lives of each part of an item of property, plant and equipment. Leased assets are depreciated over the shorter of the lease term and their useful life unless it is reasonably certain that the Group will obtain ownership by the end of the lease term. Land is not depreciated. The estimated useful lives for the current and comparative periods are as follows: ( i ) plant and equipment 2-5 years ( ii ) fixtures and fittings 5-20 years Depreciation methods, useful lives and residual values are reassessed at each reporting date. 2018 Annual Report Notes to the Financial Statements 49 ( e ) Intangibles ( i ) Software development costs Software development costs are recognised as an expense when incurred, except to the extent that such costs, together with previous unamortised deferred costs in relation to that project, are expected beyond reasonable doubt, to provide future economic benefits. Any deferred development costs are amortised over the estimated useful lives of the relevant assets. that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the “cash-generating unit”). An impairment loss is recognised if the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. A cash-generating unit is the smallest identifiable asset group that generates cash flows that largely are independent from other assets and groups. The unamortised balance of software development costs deferred in previous periods is reviewed regularly and at each reporting date, to ensure the criterion for deferral continues to be met. Where such costs are considered to no longer provide future economic benefits they are written-off as an expense in the profit or loss. The recoverable amount of an asset or cash- generating unit is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. ( ii ) Other intangible assets Other intangible assets that are acquired by the Group, which have finite useful lives, are measured at cost less accumulated amortisation (see above (i)) and impairment losses (see accounting policy 3(f)). ( iii ) Subsequent expenditure Subsequent expenditure is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure is recognised in profit or loss when incurred. ( iv ) Amortisation Amortisation is recognised in profit or loss on a straight-line basis over the estimated useful lives of intangible assets from the date that they are available for use. The estimated useful lives for the current and comparative periods are as follows: ( i ) Capitalised software development costs 2.5 - 5 years ( ii ) Software licenses 2.5 - 5 years Impairment of non-financial assets ( f ) The carrying amounts of the Group’s non-financial assets, other than deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists then the asset’s recoverable amount is estimated. Impairment losses recognised in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates that have been used to determine the recoverable amount. An impairment loss is reversed only to the extent that the assets carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss has been recognised. ( g ) Employee benefits ( i ) Long-term employee benefits The Group’s liability in respect of long-term employee benefits is the amount of future benefits that employees have earned in return for their service in the current and prior periods; that benefit is discounted to determine its present value, and the fair value of any related assets is deducted. Consideration is given to the expected future wage and salary levels, and periods of service. The discount rate is the yield at the reporting date on government bonds that have maturity dates approximating the terms of the Group’s obligations and that are denominated in the same currency as the Group’s functional currency. ( ii ) Short-term benefits Short-term employee benefits are measured on an undiscounted basis and are expensed as the related service is provided. For the purpose of impairment testing, assets are grouped together into the smallest group of assets A liability is recognised for employee benefits such as wages, salaries, annual leave and sick leave if 50 Notes to the Financial Statements Annual Report 2018 the Group has present obligations resulting from employees’ services provided to reporting date. • Trail commissions: The Group receives trail commissions from lenders on loans they have settled that were originated by the Group. The trail commissions are received over the life of the loans based on the individual loan balance outstanding. The Group also makes monthly trail commission payments to authorised mortgage originators (brokers) based on the individual loan balance outstanding. On initial recognition, trail commission revenue and receivables are recognised at fair value, being the expected future trail commission receivables discounted to their net present value. In addition, an associated payable and expense to the brokers are also recognised, initially measured at fair value being the future trail commission payable to brokers discounted to their net present value. Subsequent to initial recognition and measurement both the trail commission asset and trail commission payable are measured at amortised cost. The carrying amount of the trail commission asset and trail commission payable are adjusted to reflect actual and revised estimated cash flows by recalculating the carrying amount by computing the present value of estimated future cash flows at the original effective interest rate. The resulting adjustment is recognised as income or expense in the Consolidated Statement of Profit or Loss and Other Comprehensive Income. Where trail commission does not meet the revenue recognition criteria to be recognised at fair value they are recognised in line with the cashflow received. ( ii ) Fees for services Revenue from contracts to provide marketing, compliance and administration services to the brokers is recognised with reference to the stage of completion for the contract of services. ( iii ) Rendering of other services Revenue from contracts to provide other services is recognised by reference to the stage of completion of the contract. A provision is recognised for the amount expected to be paid under short-term and long-term cash bonus or profit sharing plans if the Group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably. ( iii ) Share-based payment transactions The grant date fair value of options and shares granted to employees is recognised as an employee expense, with a corresponding increase in equity over the period in which the employees become unconditionally entitled to the options or shares. The amount recognised as an expense is adjusted to reflect the actual number of options or shares that vested, except for those that fail to vest due to market conditions not being met. ( h ) Provisions A provision is recognised if, as a result of a past event, the Group has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting expected future cash flows at a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the liability. The unwinding of the discount is recognised as a finance cost. Provision for clawbacks on settlements within the period are raised on both commission received and commission payable. Clawbacks will be re- measured each reporting period. ( i ) Revenue ( i ) Commission revenues The Group provides loan origination services and receives origination commission on the settlement of loans. Additionally, the lender normally pays a trail commission over the life of the loan. Commission revenue is recognised as follows: • Origination commissions: Origination commissions are recognised upon the loans being settled and receipt of commission net of clawbacks. 2018 Annual Report Notes to the Financial Statements 51 ( iv ) Securitisation and residential mortgage backed securities programme Revenue arising from issuing residential loans which are funded by the warehouse facility is initially recognised at the fair value of the consideration received or receivable when it is probable that future economic benefits will flow to the Group and these benefits can be measured reliably. Loans and advances are initially recognised at fair value. Subsequent to initial recognition, the loans are measured at amortised cost using the effective interest method over the estimated actual (but not contractual) life of the mortgage loan, taking into account all income and expenditure directly attributable to the loan. Interest income is the key component of this revenue stream and it is recognised as it accrues using the effective interest method. The rate at which revenue is recognised is referred to as the effective interest rate and is equivalent to the rate that effectively discounts estimated future cash flows throughout the estimated life to the net carrying value of the loan. Acquisition costs are also spread across the estimated life of the loan. ( j ) Other Income ( i ) Sponsorship and incentive income Sponsorship and incentive income is the income generated from sponsorship and incentive payment arrangements with Lenders. The income is brought to account when services relating to the income have been performed. ( k ) Lease payments The determination of whether an arrangement is, or contains, a lease is based on the substance of the arrangement at inception date, whether fulfilment of the arrangement is dependent on the use of a specific asset or assets or the arrangement conveys a right to use the asset, even if that right is not explicitly specified in an arrangement. Payments made under operating leases are recognised in the profit or loss on a straight-line basis over the term of the lease. Lease incentives received are recognised as an integral part of the total lease expense, over the term of the lease. Minimum lease payments made under finance leases are apportioned between the finance expense and the reduction of the outstanding liability. The finance expense is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. ( l ) Finance income and expenses Finance income comprises interest income on funds invested, changes in the fair value of financial assets at fair value through profit or loss and foreign currency gains. Interest income is recognised as it accrues, using the effective interest method. Finance expenses comprise interest payable on borrowings and changes in fair value of financial assets at fair value through profit or loss. ( m ) Borrowing costs Borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset are capitalised as part of the cost of that asset and subsequently amortised over the life of that asset. Borrowing costs that are not directly attributable to the acquisition, construction or production of a qualifying asset are recognised in the profit or loss using the effective interest method. ( n ) Income tax expense Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the balance sheet date. Deferred income tax is generally provided on all temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax assets are recognised where management consider that it is probable that future taxable profits will be available to utilise those temporary differences. The carrying amount of deferred income tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilised. Unrecognised deferred income tax assets are reassessed at each balance sheet date and are recognised to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered. 52 Notes to the Financial Statements Annual Report 2018 Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date. Income taxes relating to items recognised directly in equity are recognised in equity and not in the profit or loss. ( i ) Tax consolidation The Company and its wholly-owned Australian resident entities have formed a tax consolidated group with effect from 1 July 2004 and are therefore taxed as a single entity from that date. The head entity within the tax-consolidated group is the Company. Current tax expenses, deferred tax liabilities and deferred tax assets arising from temporary differences of the members of the tax-consolidated group are recognised in the separate Financial Statements of the members of the tax-consolidated group using the ‘group allocation’ approach by reference to the carrying amounts of assets and liabilities in the separate Financial Statements of each entity and the tax values applying under tax consolidation. Any current tax liabilities (or assets) and deferred tax assets arising from unused tax losses of the subsidiaries is assumed by the head entity in the tax-consolidated group and are recognised by the Company as amounts payable (receivable) to (from) other entities in the tax-consolidated group in conjunction with any tax funding arrangement amounts (refer below). Any difference between these amounts is recognised by the Company as an equity contribution or distribution. The Company recognises deferred tax assets arising from unused tax losses of the tax-consolidated group to the extent that it is probable that future taxable profits of the tax-consolidated group will be available against which the asset can be utilised. Any subsequent period adjustments to deferred tax assets arising from unused tax losses as a result of revised assessments of the probability of recoverability is recognised by the head entity only. ( ii ) Nature of tax funding arrangements and tax sharing arrangements The head entity, in conjunction with other members of the tax-consolidated group, has entered into a tax funding arrangement which sets out the funding obligations of members of the tax-consolidated group in respect of tax amounts. The tax funding arrangements require payments/(receipts) to/ (from) the head entity equal to the current tax liability (asset) assumed by the head entity and any tax loss deferred tax asset assumed by the head entity, resulting in the head entity recognising an intra-group receivable (payable) equal in amount to the tax liability (asset) assumed. The inter-entity receivables (payables) are at call. Contributions to fund the current tax liabilities are payable as per the tax funding arrangement and reflect the timing of the head entity’s obligation to make payments for tax liabilities to the relevant tax authorities. The head entity in conjunction with other members of the tax-consolidated group has also entered into a tax sharing agreement. The tax sharing agreement provides for the determination of the allocation of income tax liabilities between the entities should the head entity default on its tax payment obligations. No amounts have been recognised in the Financial Statements in respect of this agreement as payment of any amounts under the tax sharing agreement is considered remote. ( iii ) Goods and services tax Revenue, expenses and assets are recognised net of the amount of goods and services tax (GST), except where the amount of GST incurred is not recoverable from the taxation authority. In these circumstances, the GST is recognised as part of the cost of acquisition of the asset or as part of the expense. Receivables and payables are stated with the amount of GST included. The net amount of GST recoverable from, or payable to, the Australian Taxation Office (ATO) is included as a current asset or liability or as part of the expense. Cash flows are included in the Statement of Cash Flows on a gross basis. The GST components of cash flows arising from investing and financing activities which are recoverable from, or payable to, the ATO are classified as cash flows from operating activities. ( o ) Deferred income Professional indemnity insurance income is deferred to the extent it gives rise to future economic benefits and recognised as income on the stage of completion of the contract. 2018 Annual Report Notes to the Financial Statements 53 4) Determination of fair values A number of the Group’s accounting policies and disclosures require the determination of fair value, for both financial and non-financial assets and liabilities. Fair values have been determined for measurement and/or disclosure purposes based on the following methods. Where applicable, further information about the assumptions made in determining fair values are disclosed in the notes specific to that asset or liability. Trail commissions The Group receives trail commissions from lenders on settled loans over the life of the loan based on the loan book balance outstanding. The Group also makes trail commission payments to brokers when trail commission is received from lenders. The fair value of trail commission receivable from lenders and the corresponding payable to brokers is determined by using a discounted cash flow valuation. These calculations require the use of assumptions which are determined by management using a variety of inputs including external actuarial analysis of historical information. Further assumptions are disclosed in Note 28(d). Trade and other receivables/payables All trade and other receivables/payables have a remaining life of less than one year and the notional amount is deemed to reflect the fair value. Investments in equity instruments The fair value of financial assets at fair value through profit or loss and available-for-sale assets is determined by reference to their quoted closing bid price at reporting date. Other financial instruments The carrying amount of all other financial assets and liabilities recognised in the Statement of Financial Position approximate their fair value, with the exception of the trail commission receivables and payables that are initially recognised at fair value and subsequently carried at amortised cost. 5) Financial risk management ( a ) Overview The Group has exposure to credit, liquidity and market risks from the use of financial instruments. This note presents information about the Group’s exposure to each of the above risks, the objectives, policies and processes for measuring and managing risk, and the management of capital. Further quantitative disclosures are included throughout the financial report. The Board of Directors has overall responsibility for the establishment and oversight of the risk management framework. The Risk and Compliance Committee is responsible for developing and monitoring risk management policies. Risk management policies are established to identify and analyse the risks faced by the Group, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Group’s activities. The Group, through its training and management standards and procedures, aims to develop a disciplined and constructive control environment in which all employees understand their roles and obligations. The Risk and Compliance Committee oversees how management monitors compliance with the Group’s risk management policies and procedures and reviews the adequacy of the risk management framework in relation to the risks faced by the Company and the Group. ( b ) Credit risk Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations and arises principally from the Group’s receivables from customers. Receivables Trade and other receivables The Group’s exposure to credit risk is influenced mainly by the individual characteristics of each customer. The demographics of the Group’s customer base, including the default risk of the industry in which customers operate, has less of an influence on credit risk. 54 Notes to the Financial Statements Annual Report 2018 The Group’s trade and other receivables relate mainly to high credit quality financial institutions who are the members of the lender panel. New panel entrants are subject to commercial due diligence by the Group’s management prior to joining the panel. The Group bears the risk of non-payment of future trail commissions by lenders should they not maintain solvency. However, should a lender not meet its obligations as a debtor then the Group is under no obligation to pay out any future trail commissions to brokers. Excluding financial institutions on the lender panel, trade and other receivables from other customers are rare given the nature of the Group’s business. In the unlikely event that trade and other receivables arise, limits will be established for each customer that represents the maximum open amount without requiring approval from the Group’s Board. These limits are reviewed on an ongoing basis by management. The risk limits reflect the business strategy and market environment of the Group as well as the level of risk that the Group is willing to accept. Customers that fail to meet the Group’s benchmark creditworthiness may transact with the Group only on a cash or prepayment basis. The Group does not require collateral in respect of trade and other receivables. Loans and advances To mitigate exposure to credit risk on loans and advances, the Group has adopted the policy of only dealing with creditworthy counterparties and obtaining sufficient collateral or other security where appropriate. The Group’s loans and advances relate mainly to loans advanced through its residential mortgage securitisation programme. Credit risk management is linked to the origination conditions externally imposed on the Group by the warehouse facility provider including geographical limitations. As a consequence, the Group has no significant concentrations of credit risk. The Group has established a credit quality review process to provide early identification of possible changes in credit worthiness of counterparties by the use of external credit agencies, which assigns each counterparty a risk rating. Risk ratings are subject to regular review. The Group’s maximum exposure is the excess of the net realisable value and the carrying amount of the loans, net of any impairment losses. Subsequent to June 2016 all loans with a loan to value ratio of greater than 80% are subject to a lenders mortgage insurance contract. The Group has established an allowance for impairment that represents the estimate of incurred losses in respect of its receivables. The main component of this allowance is a specific loss component that relates to individually significant exposures, and a collective loss component established for groups of similar assets in respect of losses that have been incurred but not yet identified. The collective loss allowance is determined based on historical data of payment statistics and industry data for similar classes of financial assets. Throughout this financial year and the comparative year no loans that would otherwise be past due or impaired have been renegotiated. ( c ) Liquidity risk Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due or will have to do so at an excessive cost. The Group’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group’s reputation. To limit this risk, the Group manages assets with liquidity in mind, and monitors future cash flows and liquidity on a regular basis. This incorporates an assessment of expected cash flows and the availability of high grade collateral which could be used to secure additional funding if required. The liquidity position is assessed and managed under a variety of scenarios, giving due consideration to stress factors relating to both the market in general and specifically to the Group. ( d ) Market risk Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices will affect the Group’s income or the value of its holdings of financial instruments. 2018 Annual Report Notes to the Financial Statements 55 Currency risk The Group is exposed to foreign currency risk on cash assets that are denominated in a currency other than AUD. The currencies giving rise to this risk are denominated in US dollars (USD) and New Zealand dollars (NZD). The Group elects not to enter into foreign exchange contracts to hedge this exposure as the net movements would not be material. The Group has no significant exposure to currency risk. Other market risk The Group is exposed to an increase in the level of credit support required within its securitisation programme arising from changes in the credit rating of mortgage insurers used by the SPE, and the composition of the available collateral held. The Group regularly reviews and reports on the credit ratings of those insurers as well as the Company’s maximum cash flow requirements should there be any adverse movement in those credit ratings. ( e ) Capital management The Board’s policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business. The Board of Directors monitors the return on capital, which the Group defines as net operating income divided by total shareholders’ equity and aims to maintain a capital structure that ensures the lowest cost of capital available to the Group. The Board of Directors also monitors the level of dividends to ordinary shareholders. The SPEs are subject to the external requirements imposed by the warehouse facility providers. The terms of the warehouse facilities provide a mechanism for managing the lending activities of the SPE and ensure that all outstanding principal and interest is paid at the end of each reporting period. Similarly, the SPE-RMBS are subject to external requirements imposed by the bondholders and the rating agencies. The terms of the RMBS transactions provide a mechanism for ensuring that all outstanding principal and interest is paid at the end of each reporting period. There were no breaches in the current period. AFG Securities Pty Ltd is subject to externally imposed minimum capital requirements by the Australian Securities and Investments Commission (ASIC) in accordance with the conditions of their Australian Financial Services Licence. Interest rate risk Interest rate risk is the risk to the Group’s earnings and equity arising from movements in interest rates. Positions are monitored on an ongoing basis to ensure risk levels are maintained within established limits. The Group’s most significant exposure to interest rate risk is on the interest-bearing loans within the SPE which fund the residential mortgage securitisation programme. To minimise its exposure to increases in cost of funding, the Group only lends monies on variable interest rate term. Should there be changes in pricing the Group has the option to review its position and offset those costs by passing on interest rate changes to the end customer. Prepayment risk Prepayment risk is the risk that the Group will incur a financial loss because its customers and counterparties repay or request repayment earlier than expected. The Group’s key exposure relates to the net present value of future trail commissions receivable and payable. The Group uses regression models to project the impact of varying levels of prepayment on its net income. The model makes a distinction between the different reasons for repayment and takes into account the effect of any prepayment penalties. The model is back tested against actual outcomes. For the loans and advances within the SPE and SPE-RMBS, the Group minimises the prepayment risk by passing back all principal repayments to the warehouse facility providers and bondholders. 56 Notes to the Financial Statements Annual Report 2018 6) Segment information AASB 8 requires operating segments to be identified on the basis of internal reports about business activities in which the Group is engaged and that are regularly received by the chief operating decision maker, the Board of Directors, in order to allocate resources to the segment and to assess its performance. The Group has identified two reportable segments based on the nature of the products and services, the type of customers for those products and services, the processes followed to produce, the method used to distribute those products and services and the similarity of their economic characteristics. The following summary describes the operations in each of the Group’s reportable segments: AFG Wholesale Mortgage Broking The mortgage broking segment refers to the operating activities in which the Group acts as a wholesale mortgage broker that provides its contracted brokers with administrative and infrastructure support as well as access to a panel of lenders. The Group receives two types of commission payments on loans originated through its network; • Upfront commissions on settled loans Upfront commissions are received by the Group from lenders as a percentage of the total amount borrowed. Once a loan settles, the Group receives a one-off payment linked to the total amount borrowed as an upfront commission, a large portion of which is then paid by the Group to the originating broker. • Trail commissions on the loan book Trail commissions are received by the Group from lenders over the life of the loan (if it is in good order and not in default), as a percentage of the particular loan’s outstanding balance. The trail book represents the aggregate of residential mortgages outstanding that have been originated by the Group’s contracted brokers and are generating trail income. AFG Home Loans AFGHL offers the Group’s branded mortgage products, funded by third party wholesale funding providers (white label products) or AFG Securities mortgages (securitised loans issued by AFG Securities Pty Ltd) that are distributed through the Group’s distribution network. AFGHL sits on the Group’s panel of lenders alongside the other residential lenders and competes with them for home loan customers. The segment earns fees for services, largely in the form of upfront and trail commissions, and net interest margin on loans funded by its securitisation programme. Segment results that are reported to the Board of Directors include items directly attributable to the relevant segment as well as those that can be allocated on a reasonable basis. Other/Unallocated Other/unallocated items are comprised mainly of other operating activities from which the Group earns revenue and incurs expenses that are not required to be reported separately since they don’t meet the quantitative thresholds prescribed by AASB 8 or are not managed separately and include corporate and taxation overheads, assets and liabilities. Information regarding the results of each reportable segment is included in the following table. Performance is measured based on segment profit before tax, as included in the internal management reports that are reviewed by the Board of Directors. 2018 Annual Report Notes to the Financial Statements 57 Year ended 30 June 2018 In thousands of AUD Revenue External customers Inter-segment Other operating income Interest income Total segment revenue Results Segment profit/(loss) before income tax Income tax expense Net profit after tax Assets and liabilities Total segment assets Total segment liabilities Other segment information Depreciation and amortisation Interest expense Year ended 30 June 2017 In thousands of AUD Revenue External customers Inter-segment Other operating income Interest income Total segment revenue Results Income tax expense Net profit after tax Assets and liabilities Total segment assets Total segment liabilities Other segment information Depreciation and amortisation Interest expense AFG Wholesale Mortgage Broking AFG Home Loans Other / Unallocated 508,670 93,301 29,152 3,230 - - - 25 541,052 93,326 1,425 (29,152) 10,182 2,438 (15,107) 33,357 18,729 (4,377) Total 603,396 - 13,412 2,463 619,271 47,709 (14,400) 33,309 789,370 780,377 1,474,700 1,416,783 29,339 2,925 2,293,409 2,200,085 (168) - (17) - (814) (3) AFG Wholesale Mortgage Broking AFG Home Loans Other / Unallocated 492,506 22,558 3,857 - 518,921 92,224 - - 248 92,472 1,371 (22,558) 12,843 2,029 (6,315) (999) (3) Total 586,101 - 16,700 2,277 605,078 56,956 (17,852) 39,104 720,439 713,264 1,228,925 1,184,995 67,862 11,672 2,017,226 1,909,931 (182) - (15) - (747) (12) (944) (12) Segment profit before income tax 35,999 28,672 (7,715) 58 Notes to the Financial Statements Annual Report 2018 7) Revenue In thousands of AUD Commissions Interest on commission income receivable Mortgage management services Securitisation transaction fees 8) Other income In thousands of AUD Sponsorship and incentive income Software licence fees Professional indemnity insurance Fees for services Other 9) Other expenses In thousands of AUD Advertising and promotion Consultancy and professional fees Information technology Occupancy costs Employee costs Depreciation and amortisation Operating lease costs Impairment loss on receivables 10) Employee costs In thousands of AUD Wages and salaries Other associated personnel expenses Change in liabilities for employee benefits Share-based payment transactions Superannuation 2018 500,955 49,040 132 957 2017 491,358 47,277 305 819 551,084 539,759 2018 3,396 2,755 2,213 4,482 566 13,412 2018 1,840 1,451 3,296 426 2017 7,544 2,413 2,163 3,904 676 16,700 2017 5,014 1,972 3,285 400 Note 10 26,905 25,285 999 2,030 182 37,129 2018 18,572 5,837 229 385 1,882 26,905 944 1,975 80 38,955 2017 16,910 6,100 189 311 1,775 25,285 2018 Annual Report Notes to the Financial Statements 59 11) Auditors’ remuneration In AUD Audit services Amounts due and receivable for: Audit of the financial report of the Group and other entities of the Group Deloitte Touche Tohmatsu Other services - Deloitte Touche Tohmatsu Tax compliance services Other non-audit services 12) Finance income and expenses In thousands of AUD Recognised in profit or loss Interest income on loans and receivables Interest income on bank deposits Net foreign exchange gain / (loss) Finance income Net change in fair value of financial assets designated at fair value through profit or loss Interest expense Finance expense 2018 2017 210,000 210,000 203,500 203,500 - 162,600 162,600 36,750 68,000 104,750 2018 2017 337 2,096 30 2,463 (15) (3) (18) 202 2,111 (36) 2,277 (2) (12) (14) Net finance income and expense 2,445 2,263 60 Notes to the Financial Statements Annual Report 2018 13) Income tax ( a ) Current tax expense In thousands of AUD Income tax recognised in profit or loss Current tax expense Current period Adjustments for prior periods Deferred tax expense Origination and reversal of temporary differences Income tax expense reported in the statement of profit or loss Numerical reconciliation between tax expense and pre-tax accounting profit In thousands of AUD Profit before tax from continuing operations Income tax using the Company’s domestic tax rate of 30% (2017: 30%) Non-deductible expenses Over provision in prior periods Other adjustments 2018 2017 12,938 (111) 1,573 14,400 2018 47,709 14,313 211 (111) (13) 11,824 (12) 6,040 17,852 2017 56,956 17,087 952 (12) (175) 14,400 17,852 ( b ) Current tax assets and liabilities The current tax liability for the Group of $2,074k (2017: $1,249k) represents the amount of income taxes payable in respect of current and prior financial years. ( c ) Deferred tax assets and liabilities Deferred tax assets and liabilities are attributable to the following: In thousands of AUD Assets Liabilities Net Property, plant and equipment and intangibles Trade and other receivables Employee benefits Trade and other payables Other items Tax (assets) / liabilities Set off of tax Net tax liabilities 2018 2017 2018 120 2017 455 2018 120 2017 455 - - 235,120 214,514 235,120 214,514 - - (1,237) (1,714) (211,281) (192,147) (1,669) (1,626) - - - - - - (1,237) (1,714) (211,281) (192,147) (1,669) (1,626) (214,187) (195,487) 235,240 214,969 21,053 19,482 214,187 195,487 (214,187) (195,487) - - - - 21,053 19,482 21,053 19,482 2018 Annual Report Notes to the Financial Statements 61 14) Cash and cash equivalents ( a ) Cash and cash equivalents In thousands of AUD Cash at bank Short term deposits Unrestricted cash Cash collections accounts1 Restricted cash2 Restricted cash Cash and cash equivalents Cash and cash equivalents in the Statement of Cash Flows 2018 48,364 1,276 49,640 22,055 17,015 39,070 88,710 88,710 2017 89,559 1,276 90,835 27,599 6,367 33,966 124,801 124,801 1 Discloses amounts held in the special purpose securitised trusts and series on behalf of the warehouse funder and the bondholders 2 Discloses cash collateralised standby letter of credit, liquidity reserve account and cash provided in trust by the warehouse providers to fund pending settlements. The effective interest rate on short term deposits in 2018 was 2.27% (2017: 2.14%). The deposits had an average maturity of 65 days (2017: 85 days). The Group’s exposure to interest rate risk and a sensitivity analysis for financial assets and liabilities are disclosed in Note 28. ( b ) Reconciliation of cash flows from operating activities In thousands of AUD Cash flows from operating activities Profit for the period from continuing operations Adjustments to reconcile the profit to net cash flows: Income tax expense from continuing operations Depreciation and amortisation Net interest income from investing activities Expense recognised in respect of equity-settled share-based payments Share of profit in an associate Present value of future trail commission income Present value of future trail commission expense Other non-cash movements Working capital adjustments: Changes in assets and liabilities (Decrease)/Increase in receivables and prepayments Increase in trade and other payables Increase/(Decrease) in deferred income (Decrease)/Increase in employee entitlements (Decrease)/Increase in provisions Cash generated from operations Income tax paid Net cash generated by operating activities 2018 2017 33,309 39,104 14,400 999 (2,432) 381 (186) (70,343) 62,832 226 39,186 (489) 4,700 1,406 (13) (300) 44,490 (12,004) 32,486 17,852 944 (2,314) 298 - (88,531) 68,590 115 36,058 1,315 819 (2,177) 733 1,346 38,094 (11,577) 26,517 62 Notes to the Financial Statements Annual Report 2018 15) Trade and other receivables In thousands of AUD Current Trade and other receivables Accrued income Net present value of future trail commissions receivable1 Prepayments Non-current Net present value of future trail commissions receivable1 2018 2017 1,329 - 1,329 170,191 3,735 175,255 634,862 634,862 810,117 909 98 1,007 152,850 1,863 155,720 581,860 581,860 737,580 1 See fair value determinations for trail commissions – Note 4. Trade and other receivables are shown net of a provision for impairment of $4k (2017: $4k). The Group’s exposure to credit and currency risks and impairment losses related to trade and other receivables are disclosed in Note 28. 16) Trade and other payables In thousands of AUD Current Note 2018 2017 Present value of future trail commissions payable 4 Other trade payables Non-trade payables and accrued expenses Non-current Net present value of future trail commissions payable 150,340 62,632 2,529 215,501 568,175 568,175 135,285 56,676 3,444 195,405 520,398 520,398 783,676 715,803 Trade payables are non-interest-bearing and are normally settled on 60-day terms. Non-trade payables are non-interest-bearing and are normally paid on a 60-day basis. The Group’s exposure to liquidity risk related to trade and other payables is disclosed in Note 28. 2018 Annual Report Notes to the Financial Statements 63 17) Loans and advances In thousands of AUD Current Securitised assets1 Other secured loans2 Capitalised origination cost Non-current Securitised assets1 Capitalised origination cost Other secured loans2 Less: Provision for impairment 2018 2017 331,372 297,613 1,916 205 1,268 235 333,493 299,116 2018 1,042,477 555 3,755 (423) 2017 851,472 690 1,134 (241) 1,046,364 853,055 1,379,857 1,152,171 1 The originated mortgage loans and securitised assets are held as security for the various debt interests in the special purpose securitised trusts and series. 2 Other secured loans include: a) Loans and advances to Brokers secured over future trail commissions’ payable to the broker and in some cases personal guarantees. Interest is charged on average at 11.06% p.a. (2017: 10.81% p.a.). b) Loan and advances to McCabe St Limited are secured over its land and assets. Interest is charged on average at 4.08% p.a. (2017: 3.99% p.a.). Loans and advances that are performing in accordance with the underlying contract are classified as neither past due nor impaired. If a customer fails to make payment that is contractually due then the receivable asset is classified as past due. If subsequently all contractually due payments are made the asset reverts to its neither past due or impaired status. At the end of the reporting period, the balance of the Group’s securitised assets includes a provision for impairment of $423k (2017: $241k). During the financial year, new loans issued in the Group’s securitisation programme were $509,753k (2017: $385,047k). The Group’s exposure to credit, currency and interest rate risks related to loans and advances is disclosed in Note 28. 64 Notes to the Financial Statements Annual Report 2018 18) Investment in associate In thousands of AUD Non-current Cost of investment1 Contingent consideration liability Share of post-acquisition profit 1 Includes transaction costs 2018 2017 11,141 1,488 186 12,815 - - - - On 19th April 2018 AFG announced that it had made a strategic investment of 30.4% (fully diluted) in Think Tank Group Pty Ltd (“Thinktank”) for $10.9 million in cash consideration, with additional contingent consideration payable of $1,488k. In connection with the investment AFG will distribute a white label Commercial Property product through its network of brokers. The strategic investment in Thinktank represents the next evolutionary step for AFG to diversify its earnings base. The ongoing success of AFGHL and the introduction of AFG Business are important contributors to the future growth of AFG. The investment in Thinktank allows AFG to participate further in commercial property lending - both directly through the white label opportunity and indirectly through AFG’s shareholding to generate further earnings for AFG. Associates are all entities over which the Group has significant influence but not control. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies. This investment has been classified as an investment in an associate due to the Group’s significant involvement in the financial and operating policy decisions including Board representation of Thinktank. In thousands of AUD Thinktank’s summarised financial information 2018 2017 Balance Sheet Current assets Non-current assets Total Assets Current liabilities Non-current liabilities Total Liabilities Net assets Income Statement Profit after tax1 Reconciliation to carrying amounts: Carrying amount of investment Group’s share of profit after tax for the period1 Acquisition costs Contingent consideration liability 1 Month of May and June only. AFG acquired 33.55% undiluted investment in Thinktank effective 1 May 2018. 29,300 838,170 867,470 6,669 850,363 857,032 10,438 553 12,815 186 11,141 1,488 12,815 - - - - - - - - - - 2018 Annual Report Notes to the Financial Statements 65 19) Property, plant and equipment In thousands of AUD Consolidated Balance at 1 July 2016 Acquisitions Disposals and write-offs Depreciation Balance at 30 June 2017 Balance at 1 July 2017 Acquisitions Disposals and write-offs Depreciation Balance at 30 June 2018 Plant and equipment Fixtures and fittings 269 105 (23) (141) 210 210 201 (50) (115) 246 2,110 199 - (621) 1,688 1,688 55 - (610) 1,133 Total 2,379 304 (23) (762) 1,898 1,898 256 (50) (725) 1,379 20) Interest-bearing liabilities This note provides information about the contractual terms of the Group’s interest-bearing loans and borrowings. For more information about the Group’s exposure to interest rate risk, see Note 28. In thousands of AUD Current Securitisation warehouse facilities Loans from funders Secured bond issues Non-current Secured bond issues Loans from funders 2018 2017 496,896 648,541 20 261,795 758,711 84 191,191 839,816 623,049 324,636 1 26 623,050 324,662 1,381,761 1,164,478 66 Notes to the Financial Statements Annual Report 2018 Terms and debt repayment schedule Terms and conditions of outstanding loans were as follows: In thousands of AUD Warehouse facilities Secured bond issues Loans from funders 2018 2017 Weighted average effective interest rate Year of maturity Face value Carrying amount Weighted average effective interest rate Year of maturity Face value Carrying amount 3.12% 2018-2019 496,896 496,896 2.73% 2017 648,541 648,541 3.00% 2018-2023 883,425 884,844 3.02% 2018-2019 513,064 515,826 6.00% 2018-2020 21 21 6.00% 2018-2020 111 111 1,380,342 1,381,761 1,161,716 1,164,478 ( a ) Warehouse and secured bond issues ( i ) Warehouse facilities The warehouse facilities provide funding for the financing of loans and advances to customers within the SPE and its Series. The security for advances under these facilities is a combination of fixed and floating charges over all assets of the SPE. If the warehouse facility is not renewed or should there be a default by the trustee under the existing terms and conditions, the warehouse facility funder will not have a right of recourse against the remainder of the Group. Customer loans and advances are secured against residential properties only. Up until 1 July 2014, all new loans settled irrespective of their LVR were covered by a separate individual lenders mortgage insurance contract. Subsequent to this date, all new loans settled with an LVR of less than or equal to 80% were settled on the basis that no lenders mortgage insurance policy was required. When purchased, a lender’s mortgage insurance contract covers 100% of the principal of the loan. During the financial year there were no breaches to the agreement that permitted the warehouse facility provider to demand payment of the outstanding value. As at the reporting date the unutilised securitisation warehouse facility for all Series is $93,364k (2017: $83,150k). The interest is recognised at an effective rate of 3.12% (2017: 2.73%). The Group has secured an extension to the term of the NAB residential warehouse facilities that were due to expire on 31 December 2018. The Series 4 warehouse facilities that were due to expire have been extended to 10 May 2019. Liquidity facility The Liquidity facility is established by the warehouse facility providers to temporarily fund any excess amount of interest, fees and any other charges which may accrue from the date of cash flows calculation, to the date of cash flows payment. As at the reporting date the unutilised facility has not been drawndown (2017: $10,323k). Additional credit support includes subordinated credit enhancement held by the Company of $20,740k (2017: $7,414k). 2018 Annual Report Notes to the Financial Statements 67 ( ii ) Secured bond issues SPE-RMBS were established to provide funding for loans and advances (securitised assets) originated by AFG Securities Pty Ltd. The bond issues have a legal final maturity of 31.5 years from issue and a weighted average life of up to 5 years. The security for loans and advances is a combination of fixed and floating charges over all assets of the SPE-RMBS. Under the current trust terms, a default by the borrowing customer will not result in the bondholders having a right of recourse against the Group (as Originator, Trust Manager or Servicer). The interest is recognised at a weighted effective rate of 3.00% (2017: 3.02%). Liquidity facility Various mechanisms have been put in place to support liquidity within the transaction to support timely payment of interest, including; • • • • principal draws which are covered by Redraw Notes for redraws that cannot be covered by normal collections (available principal), a liquidity facility between 1% and 1.3% of the initial invested amount of all notes, $150k Reserve Account which is an Extraordinary Expense Ledger account, and available income. Additional credit support includes subordinated credit enhancement held by the Company (unrated Class C Notes) of $2,460k (2017: $3,200k). During the financial year there were no breaches to the terms of the SPE-RMBS that gave right to the bondholders to demand payment of the outstanding value. ( b ) Loans from funders Some of the upfront commissions received from specific funders at the point of loan origination are refunded by the Group via reduced ongoing management fees over a period of 5 years. The Group recognises the upfront commission from these funders as a loan, and interest is charged on this facility by the funders. The principal and interest will be paid back over the 5-year period. Interest is recognised at an effective rate of 6.00% (2017: 6.00%). 68 Notes to the Financial Statements Annual Report 2018 ( c ) Other finance facilities In thousands of AUD Standby facility Bank guarantee facility Facilities utilised at reporting date Standby facility Bank guarantee facility Facilities not utilised at reporting date Standby facility Bank guarantee facility The facilities are subject to annual review. 21) Employee benefits In thousands of AUD Current Salaries and wages accrued Liability for long service leave Liability for annual leave Non Current Liability for long-service leave 22) Provisions In thousands of AUD Provision for Clawbacks Provision for Contingent Payment1 Other 1 Provision for contingent payment to Thinktank (see note 18). 2018 200 276 476 113 276 389 87 - 87 2017 200 276 476 82 276 358 118 - 118 2018 2017 1,788 1,405 1,235 4,428 115 115 2,031 1,312 1,141 4,484 75 75 4,543 4,559 2018 1,206 1,488 161 2,855 2017 1,450 - 217 1,667 2018 Annual Report Notes to the Financial Statements 69 23) Deferred income In thousands of AUD Current Sponsorship income Lease incentives Unearned professional indemnity insurance 24) Operating leases Leases as lessee Non-cancellable operating lease rentals are payable as follows: In thousands of AUD Less than one year Between one and five years 2018 2017 3,352 369 402 4,123 1,669 577 447 2,693 2018 2,223 2,041 4,264 2017 2,168 4,143 6,311 The Group leases a number of office facilities under operating leases. The leases run for a period of up to 6 years, with an option to renew the lease after that date. Lease payments are generally increased every year to at least reflect Consumer Price Index (CPI) movements, with regular adjustments to reflect market rentals. During the financial year ended 30 June 2018 $2,030k was recognised as an expense in the Consolidated Statement of Profit or Loss and Other Comprehensive Income in respect of operating leases (2017: $1,975k). 25) Capital and reserves ( a ) Share capital The Company On issue at 1 July On issue at 30 June – fully paid Share Capital ($’000) Ordinary shares ($’000) 2018 43,541 43,541 2017 43,541 43,541 2018 214,813 214,813 2017 214,813 214,813 The Company does not have authorised capital or par value in respect of its issued shares. All issued shares are fully paid and rank equally with regard to the Company’s residual assets. The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at meetings of the Company. 70 Notes to the Financial Statements Annual Report 2018 ( b ) Fair value reserve The fair value reserve comprises the cumulative net change in fair value of available-for-sale financial assets until the investments are derecognised or impaired. ( c ) Dividends Dividends paid in the current year by the Group are: 2018 Final 2017 ordinary 1st interim 2018 ordinary Special dividend 2017 1st interim 2017 ordinary Final 2016 ordinary Declared and unrecognised as a liability: 2018 Final 2018 ordinary Cents per share Total amount ($’000) Franked / unfranked Date of payment 5.5 4.7 12.0 4.2 5.4 11,816 10,096 25,778 47,690 9,023 11,600 20,623 100% 100% 100% 28/09/2017 29/03/2018 29/03/2018 100% 100% 31/03/2017 30/09/2016 5.7 12,244 12,244 100% 27/09/2018 Dividends declared or paid during the year or after 30 June 2018 were franked at the rate of 30%. In thousands of AUD Dividend franking account 30 per cent franking credits available to shareholders of Australian Finance Group Limited for subsequent financial years 2018 12,763 29,780 2017 20,998 48,995 42,543 69,993 The ability to utilise the franking credits is dependent upon the ability to declare dividends. In accordance with the tax consolidation legislation the Company as the head entity in the tax-consolidated group has also assumed the benefit of $42,543k (2017: $69,993k) franking credits. 2018 Annual Report Notes to the Financial Statements 71 26) Earnings per share (EPS) Basic EPS amounts are calculated by dividing the profit for the year attributable to ordinary equity holders of Australian Finance Group Limited by the weighted average number of ordinary shares outstanding during the year. Diluted EPS amounts are calculated by dividing the profit attributable to ordinary equity holders of Australian Finance Group Limited by the weighted average number of ordinary shares during the year plus the weighted average number of ordinary shares that would be issued on conversion of all the dilutive potential ordinary shares into ordinary shares. The following reflects in the income and share data used in the basic and dilutive EPS computations: In thousands of AUD 30 June 2018 30 June 2017 Profit attributable to ordinary equity holders of the Company 33,336 39,053 Weighted average number of ordinary shares for basic EPS (thousands) Effect of dilution: Performance rights Weighted average number of ordinary shares adjusted for the effect of dilution Thousands Thousands 214,813 214,813 1,289 593 216,102 215,406 There have been no other transactions involving ordinary shares or potential ordinary shares between the reporting date and the date of authorisation of these financial statements. 27) Share based payments Executive Rights plan (Long-Term Incentive Plan) The Group has in place an Executive Long-Term Incentive Plan (LTIP) which grants rights to certain Executives subject to the achievement of performance and service requirements. Eligible Executives are granted rights to a value determined by the Board that is benchmarked against direct industry peers and other Australian listed companies of a similar size and complexity. Executives participating in the plan will not be required to make any payment for the acquisition of rights. The rights lapse if the performance and service criteria are not met. The rights granted under the plan are subject to instalment vesting over a three-year period. The rights are subject to Total Shareholder Return (TSR) and Earnings Per Share (EPS) performance hurdles in addition to continuous service vesting conditions. The Board has the full discretion to determine whether some or all of the rights vest or lapse or whether unvested rights remain subject to vesting conditions in the event of a change of control. Refer to section 3.5 of the remuneration report for further detail. In any event, any rights that remain unvested will lapse immediately after the end of the relevant vesting period. 72 Notes to the Financial Statements Annual Report 2018 The following table outlines performance rights that are conditionally issued under LTIP: Offer Date Vesting date Balance at start of the year Granted during the year Vested during the year Expired during the year Forfeited during the year 1/07/2016 30/06/2019 - 1/07/2017 30/06/2020 593,136 593,136 695,396 - - - - - - Balance at end of the year 593,196 1,288,592 28) Financial instruments ( a ) Credit risk Exposure to credit risk The carrying amount of the Group’s financial assets represents the maximum credit exposure. ( i ) Trade and other receivables Exposure to credit risk The Group’s maximum exposure to credit risk for trade and other receivables by type of customer is detailed below: In thousands of AUD Type of customer Financial institutions Brokers Other Carrying amount 2018 2017 804,779 735,291 201 1 446 5 All outstanding trade and other receivables are with customers located within Australia. The amounts owing from financial institutions include the net present value of trail commissions’ receivable of $805,053k (2017: $734,710k). The majority of the Group’s net present value of future trail commission receivable is from counterparties that are rated between AA+ and A-. The following table provides information on the credit ratings at the reporting date according to the Standard & Poor’s counterparty credit with AAA and BBB being respectively the highest and the lowest possible ratings. In thousands of AUD Standard & Poor’s Credit rating AA+ AA- A+ A A- BBB+ BBB BBB- Not rated Current Non-Current Current Non-Current 2018 2018 2017 2017 10 37 12 47 128,253 478,420 116,517 443,550 7,262 2,076 7,411 3,481 11,940 2,097 7,661 170,191 27,088 7,746 27,644 12,986 44,541 7,823 28,577 634,862 - 9,144 8,108 2,044 515 1,508 15,002 152,850 - 34,807 30,866 7,782 1,962 5,742 57,104 581,860 2018 Annual Report Notes to the Financial Statements 73 ( ii ) Loans and advances Exposure to credit risk The Group’s maximum exposure to credit risk for loans and advances at the reporting date by customer type are summarised as follows: In thousands of AUD Customer type Residential mortgage borrowers Brokers Other Carrying amount 2018 2017 1,373,849 1,149,086 5,462 546 2,201 884 1,379,857 1,152,171 Residential mortgage borrowers The Group minimises credit risk by obtaining security over residential mortgage property for each loan. The estimated value of collateral held at balance date was $2,551,566k (2017: $2,165,326k). During the year ended 30 June 2018 the Group has taken possession of three additional residential properties that were held as security for loans issued by the Group. The carrying amount of the repossessed residential property was $287k (2017: $752k). Three properties have been sold before the end of the financial year, with the shortfall repaid by our lender’s mortgage insurance. In monitoring the credit risk, mortgage securitisation customers are grouped according to their credit characteristics using credit risk classification systems. This includes the use of the Loan to Value Ratio (LVR) to assess its exposure to credit risk from loans originated through the securitisation programme. The table below summarises the Group exposure to residential mortgage borrowers by current LVR, with the valuation used determined as at the time of settlement of the individual loan. In thousands of AUD Loan to value ratio Greater than 95% Between 90%-95% Between 80%-90% Less than 80% Carrying amount 2018 2017 1,324 51,734 204,896 1,115,895 1,373,849 2,393 55,042 181,976 909,675 1,149,086 The Group exposure to credit risk by geographic region at reporting date is limited to Australia. 74 Notes to the Financial Statements Annual Report 2018 Impairment Losses The aging of the Group’s loans and advances at the reporting date was: In thousands of AUD Not past due Past due 31-120 days Past due 121 days to one year Past due more than one year Gross 2018 1,370,251 1,718 1,568 312 1,373,849 Impairment allowance 2018 - - - (312) (312) Gross 2017 1,143,899 3,519 1,191 477 1,149,086 Impairment allowance 2017 - - - (241) (241) The impairment loss provision as at 30 June 2018 of $312k (2017: $241k) is a specific provision for loans that are past due. Securitisation loans Loans and advances of SPEs: The Group is required to provide the warehouse facility provider with a level of subordination or Credit Support. The Group’s maximum exposure to credit risk on securitised loans at reporting date is the carrying amount of subordinated notes. The SPE-RMBS loans and advances: Under the current trust terms, a default by the customers will not result in the bond holders having a right of recourse against the Group (as Originator, Trust Manager or Servicer). Importantly, all residential mortgages under SPE-RMBS with an LVR exceeding 80% are insured by a lender’s mortgage insurance contract which covers 100% of the principal. The Group’s maximum exposure is the loss of future interest income on its Class C notes investment, which eliminate on consolidation. No impairment loss was recognised during 2018 (2017: Nil). Other secured loans The Group has minimal exposure to credit risk for loans made during the year. No impairment loss was recognised during 2018 (2017: Nil). 2018 Annual Report Notes to the Financial Statements 75 ( b ) Liquidity risk Liquidity risk is the risk that the Group will encounter difficulty in meeting the obligations associated with its financial liabilities that are settled by delivering cash or another financial asset. The Group’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group’s reputation. The Board of Directors reviews the rolling cash flow forecast on a monthly basis to ensure that the level of its cash and cash equivalents is at an amount in excess of expected cash outflows over the proceeding months. Excess funds are generally invested in at call bank accounts with maturities of less than 90 days. Within the special purpose entities, the Group also maintains sufficient cash reserves to fund redraws and additional advances on existing loans. The following are the contractual maturities of financial liabilities based on undiscounted payments, including estimated interest payments and excluding the impact of netting agreements for the Group. 2018 In thousands of AUD Securitisation warehouse facilities Carrying amount Contractual cash flows 6 months or less 6-12 months 1-2 years 2-5 years 496,896 517,636 517,636 - - - Secured bond issues1 885,885 909,479 164,363 100,899 155,385 488,832 Loans from funders 22 22 14 6 2 - More than 5 years - - - Net present value of future trail commissions payable 718,515 862,335 98,906 90,676 157,501 315,903 199,349 Trade and other payables 65,161 64,612 64,612 - - - - 2,166,479 2,354,084 845,531 191,581 312,888 804,735 199,349 1 Excludes set up costs amortisation 2017 In thousands of AUD Securitisation warehouse facilities Carrying amount Contractual cash flows 6 months or less 6-12 months 1-2 years 2-5 years 648,541 655,955 655,955 - - - Secured bond issues 515,827 531,253 68,169 127,096 136,596 199,392 Loans from funders 111 114 56 30 25 3 More than 5 years - - - Net present value of future trail commissions payable 655,683 796,078 90,408 83,186 145,554 293,515 183,415 Trade and other payables 60,120 60,120 60,120 - - - - 1,880,282 2,043,520 874,708 210,312 282,175 492,910 183,415 The obligation in respect of the net present value of future trail commission only arises if and when the Group receives the corresponding trail commission revenue from the lenders. It is not expected that the cash flows included in the maturity analysis could occur significantly earlier, or at significantly different amounts. 76 Notes to the Financial Statements Annual Report 2018 Securitisation warehouse facilities Secured bond issuances are based on expected cashflows rather than contractual as each must be repaid to secured bondholders on receipt of funds from underlying mortgage customers. The warehouse facilities are short term funding facilities that are generally renewable bi-annually or annually. If the warehouse facility is not renewed or should there be a default by the trustee under the existing terms and conditions, the warehouse facility funder will not have a right of recourse against the remainder of the Group. Should the warehouse facility not be renewed then the maximum exposure to the Group would be the loss of future income streams from excess spread, being the difference between the Group’s mortgage rate and the underlying cost of funds and inability to fund new loans. On 9 May 2018, the Group secured an extension to the term of the jointly funded ANZ/NAB residential warehouse facility to 10 May 2019. The funding continues to be provided through the issue of four classes of secured, limited and floating rate notes, with the senior notes being issued jointly to NAB/ANZ, mezzanine notes to Deutsche Bank and the subordinated notes to AFG. On 28 June 2018, the Group secured a short-term extension of the NAB residential warehouse facility that was due to expire on 10 July 2018 to 28 September 2018. Subsequent to this, the NAB warehouse was terminated and a new warehouse established with NAB and Deutsche Bank AG Sydney Branch, effective 10 August 2018. The new warehouse comprises four classes of secured, limited and floating rate notes, with the senior notes being issued to NAB, Deutsche Bank holding the two mezzanine notes and AFG the subordinated Class C Notes. The new warehouse availability period expires on the 31 December 2018. Secured bond issues The securities are issued by the SPE-RMBS with an expected weighted average life of 4 to 5 years. They are pass through securities that may be repaid early (at the call date) by the issuer (the Group) in certain circumstances. The above maturity assumes that the securities will be paid at the securities call date. The Directors are satisfied that the Group’s ability to continue as a going concern will not be affected. For terms and conditions relating to trade payables and net present value of future trail commissions payable refer to Note 16. ( c ) Market risk ( i ) Currency risk Exposure to currency risk As at reporting date the Group held cash assets denominated in NZD and USD. Fluctuations in foreign currencies are not expected to have material impact on the Consolidated Statement of Profit or Loss and Other Comprehensive Income and equity of the Group and have therefore not formed part of the disclosures. 2018 Annual Report Notes to the Financial Statements 77 ( ii ) Interest rate risk Profile The table below summarises the profile of the Group’s interest-bearing financial instruments at reporting date. In thousands of AUD Fixed rate instruments1 Financial assets Financial liabilities Variable rate instruments Financial assets Financial liabilities Carrying amount 2018 2017 805,053 718,515 86,538 1,468,332 1,381,761 86,571 734,710 655,683 79,027 1,276,738 1,164,478 112,260 The Group’s main interest rate risk arises from securitised assets, cash deposits and interest-bearing facilities. All the Group’s borrowings are issued at variable rates, however the vast majority pertains to the warehouse facility which is arranged as ‘pass through’ facilities, and therefore the exposure to the interest rate risk is mitigated by the ability to pass any rate increases onto borrowers. 1 Discount rate for trail commission receivable and payable is fixed for the life of the loan. Cash flow sensitivity analysis for variable rate instruments Due to the market conditions existing at 30 June 2018, the Group does not expect that interest rates will move in excess of 100 basis points (bps) from current conditions in the next reporting period. This has therefore formed the basis for the sensitivity analysis. A change of 100 basis points in interest rates at the reporting date would have increased/(decreased) equity and profit or loss by the amounts shown below. This analysis assumes that all other variables, in particular foreign currency rates, remain constant. The analysis is performed on the same basis for 2017. Effect in thousands of AUD 30 June 2018 Variable rate financial assets Variable rate financial liabilities Cash flow sensitivity (net) 30 June 2017 Variable rate financial assets Variable rate financial liabilities Cash flow sensitivity (net) After tax profit Equity 100bp increase 100bp decrease 100bp increase 100bp decrease 10,239 (10,239) 10,239 (10,239) 3,478 6,761 8,922 4,541 4,381 (3,478) (6,761) (8,922) (4,541) (4,381) 3,478 6,761 8,922 4,541 4,381 (3,478) (6,761) (8,922) (4,541) (4,381) 78 Notes to the Financial Statements Annual Report 2018 ( iii ) Prepayment risk Net present value of future trailing commissions receivable and payable Exposure to prepayment risk The Group will incur financial loss if customers or counterparties repay or request repayment earlier or later than expected. A change in the pattern of repayment by end consumers will have an impact on the fair value of future trail commissions receivable and payable. Refer to Note 28 (d) for more details. Sensitivity analysis Management have engaged the use of actuaries for the purposes of reviewing the run-off rate of the loans under management. Management does not expect the run-off rate to change in excess of 5% positive or 5% negative of the rates revealed from the actuarial analysis. The change estimate is calculated based on historical movements of the prepayment rate. The effect from changes in prepayment rates, with all other variables held constant, is as follows: In thousands of AUD 2018 2017 After tax profit +5% (3,746) -5% 3,960 +5% (2,939) -5% 3,122 Securitised assets The Group is exposed to prepayment risk on its securitised assets. The warehouse facilities and the secured bond issues funding the securitisation operations are pass through funding facilities in nature. All principal amounts prepaid by residential mortgage borrowers are passed through to the warehouse facility provider or the bond holders as part of the monthly payment terms. Consequently, the Group has no material exposure to prepayment risk on its securitised assets. ( iv ) Equity price risk Exposure to equity price risk The Group’s maximum exposure to this risk, deemed insignificant, is presented by the carrying amounts of its financial assets designated at fair value through profit or loss and available-for-sale financial asset carried in the Statement of Financial Position. ( v ) Other market risks The Group is exposed to other market risks on the credit support (securitisation loan receivable) provided by the Group in relation to the warehouse facilities. The value of the loan is dynamic in that it can change due to circumstances including the credit ratings of mortgage insurers. The Group has assessed that if this were to occur, it would not have a material impact on the Group’s profit after tax and equity. 2018 Annual Report Notes to the Financial Statements 79 ( d ) Accounting classifications and fair values Fair value hierarchy The different levels have been defined as follows: • • • Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities Level 2: inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices). Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs). Fair value of financial assets and liabilities that are not measured at fair value (but fair value disclosures are required) With the exception of the trail commission receivables and payables that are initially recognised at fair value and subsequently carried at amortised cost, the carrying amount of all financial assets and liabilities recognised in the Statement of Financial Position approximate their fair value. Trail commissions are received from lenders on settled loans over the life of the loan based on the loan book balance outstanding if the respective loans are in good order and not in default. The Group is entitled to the trail commissions and the Group also makes trail commission payments to Brokers when trail commission is received from lenders. Trail commissions are actuarially assessed on future cashflow based on a number of assumptions including estimated loan life, discount rate, payout ratio and income rate. Refer to Note 3 for the accounting policies regarding trail commissions receivables and payables. The trail commission assets and liabilities at 30 June 2018 relate to the Residential and the AFGHLs white label loan books. No trail commission asset or liability is recognised for the commercial loan book due to the volatility of key assumptions required to value the asset and liability. In thousands of AUD Financial assets 30 June 2018 30 June 2017 Carrying amount Fair value Carrying amount Fair value Future Trail commission receivables 805,053 832,315 734,710 768,604 Financial liabilities Future Trail commission payables 718,515 742,368 655,683 685,316 The fair value of trail commission receivable from lenders and the corresponding payable to brokers is determined by using a discounted cash flow valuation. These calculations require the use of assumptions which are determined by the management, using a variety of inputs including external actuarial analysis of historical information, by reference to market observable inputs. The valuation is classified as level 2 in the fair value measurement hierarchy. 80 Notes to the Financial Statements Annual Report 2018 The key assumptions underlying the fair value calculations of trail commission receivable and the corresponding payable to brokers at the reporting date is summarised in the following table: Average loan life Discount rate per annum1 Percentage paid to brokers2 30 June 2018 30 June 2017 Between 3.2 and 5.0 years Between 3.1 and 5.0 years Between 5% and 13.5% Between 85% and 93.4% Between 5% and 13.5% Between 85% and 93% 1 Discount rates once set are not adjusted during the life of the loan. The spread in discount rate captures loans settled in previous financial years as well as the current financial year. 2 The percentage paid to brokers is fixed by the terms of their respective agreement with the Group. As a consequence, management does not expect changes to the percentage paid to brokers to be reasonably possible. 29) Group entities Composition of the Group Parent entity Australian Finance Group Limited Significant subsidiaries Australian Finance Group (Commercial) Pty Ltd Australian Finance Group Securities Pty Ltd AFG Securities Pty Ltd AFG 2010-1 Trust AFG 2013-1 Trust AFG 2013-2 Trust AFG 2014-1 Trust AFG 2016-1 Trust AFG 2017-1 Trust AFG 2018-1 Trust New Zealand Finance Group Ltd AFG Home Loans Pty Ltd Venture Lending Pty Ltd Investment in associates Think Tank Group Pty Ltd* Country of incorporation Ownership interest 2018 2017 Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia New Zealand Australia Australia 100 `100 100 100 100 - 100 - 100 100 100 100 100 - Australia 33.55 100 100 100 100 100 100 100 100 100 - - 100 100 51 - Venture Lending Pty Ltd, AFG 2013-1 Trust and AFG 2014-1 Trust were shutdown during the year ended 30 June 2018. AFG 2017-1 Trust and AFG 2018-1 Trust were opened during the year ended 30 June 2018. * On 19th April 2018 AFG announced that it had made a strategic investment of 30.4% (fully diluted) in Think Tank Group Pty Ltd (“Thinktank”) for $10.9M in cash consideration, with additional contingent consideration payable of $1,488k (see Note 18). 2018 Annual Report Notes to the Financial Statements 81 Additional disclosures with respect to Consolidated Structured Entities Subscription of Subordinated Notes within the Trust Structures As part of the funding arrangement for the Group’s Securitisation business the Company has subscribed for the subordinated note in each of the independent funding structures. These notes represent the first loss position for each of the securitisation vehicles. In the event that a loss is incurred in the relevant structure, then the balance of subordinated note is first applied against such losses. A loss would only be incurred within the respective Trust in the event that the sale of the underlying security was not sufficient to cover the loan balance, there was no mortgage insurance policy in existence and the loss could not be covered out of the excess spread generated by the respective Trust. The weighted average loan to value ratio of all outstanding loans as at time of settlement was below 70% and as at year end, approximately 65% (2017: 61%) of the loans (in dollar value) have a lenders mortgage insurance policy which have been individually underwritten by a mortgage insurer. With respect to those loans which do not have mortgage insurance, the weighted average loan to value ratio for all of these loans is 45% (2017: 59%). At no point since the inception of the Securitisation business has the subordinated note been required to be accessed to cover any lending losses within the respective Trusts. In thousands of AUD Subordinated notes held in AFG 2010-1 Trust and Series1 Subordinated notes held in SPE-RMBS trusts following a term transaction: • AFG 2013-1 • AFG 2013-2 • AFG 2014-1 • AFG 2016-1 • AFG 2017-1 • AFG 2018-1 2018 20,740 - 750 - 450 560 700 2017 7,414 1,500 750 500 450 - - 1 The level of subordination subscribed by the company will increase or decrease over time depending upon a number of factors including the size of the warehouse or RMBS term structure as well as the ratings methodology used for these warehouse facilities Subsequent to year end the Group secured a new residential warehouse facility, replacing its existing NAB warehouse. The new warehouse comprises four classes of secured, limited and floating rate notes, with the senior note being issued to NAB, mezzanine notes issued to Deutsche Bank AG Sydney Branch and AFG holding the subordinated notes. The maturity date for this new facility is 31 December 2018. Other Holders of RMBS are limited in their recourse to the assets of the Securitisation vehicle (subject to limited exceptions). AFG Group companies may however incur liabilities in connection with RMBS which are not subject to the limited recourse restrictions (for example where an AFG Group company acts as a trust manager or servicer of a Securitisation vehicle). 82 Notes to the Financial Statements Annual Report 2018 30) Parent entity Throughout the financial year ending 30 June 2018, the parent Company of the Group was Australian Finance Group Limited. In thousands of AUD Results of the parent entity Profit for the period Other comprehensive income Total comprehensive income for the period In thousands of AUD Financial position of parent entity at year end Current assets Total assets Current liabilities Total liabilities Total equity of the parent entity comprising of: Share capital Reserves Retained earnings Total equity 2018 2017 20,975 (15) 20,960 19,259 2 19,261 2018 2017 202,286 863,306 224,774 807,370 43,542 690 11,704 55,936 235,504 819,415 202,439 737,157 43,542 298 38,418 82,258 See Notes 31 and 32 for the parent entity capital and other commitments, and contingencies. Refer to Note 20 (c) for the parent entity’s guarantees. 31) Capital and other commitments There are no capital commitments as at the reporting date. 32) Contingencies Third Party Guarantees Bank guarantees have been issued by third party financial institutions on behalf of the Group and its subsidiaries for items in the normal course of business such as operating lease contracts. The amounts involved are not considered to be material to the Group. Contingent Liability The contingent liability refers to the contingent consideration payable of $1,488k in relation to the Thinktank strategic investment. Other than above, no material claims against these warranties have been received by the Group at the date of this report, and the Directors are of the opinion that no material loss will be incurred. 2018 Annual Report Notes to the Financial Statements 83 33) Related parties ( a ) Other related parties A number of key management personnel held positions in other entities that result in them having control over the financial or operating policies of these entities. A number of these entities transacted with the Group in the reporting period. The terms and conditions of the transactions with the other related parties were no more favourable than those available, or which might reasonably be expected to be available, on similar transactions to non-key management personnel related entities on an arm’s length basis. The aggregate amounts recognised during the year relating to other related parties were as follows: ( i ) During the year, the Group made payments to Genworth Mortgage Insurance Australia Limited, one of our providers of Lenders Mortgage Insurance (LMI). Mr Gill is a Non- Executive Director of Genworth Mortgage Insurance Australia Limited. These dealings were in the ordinary course of business and were on normal terms and conditions. The payments made for the provision of LMI policies were $706k (2017: $427k). These payments are not considered to be material to the financial results of the Group and therefore do not impact on Mr Gill’s independence as a Director. ( ii ) Mr Gill is an Independent Director of First Mortgage Services (FMS), one of our providers of loan settlement services. During the year, the Group made payments to FMS. These dealings were in the ordinary course of business and were on normal terms and conditions. The payments made for the provision of the settlement services were $333k (2017: $253k). These payments are not considered to be material to the financial results of the Group and therefore do not pact on Mr Gill’s independence as a Director. ( iii ) As part of the demerger of the property business on 22 April 2015, the Group entered into a shared services agreement with Establish Property Group Ltd (EPG). Mr McKeon, Ms Bevan and Mr Bailey, are Directors of EPG and McCabe Street. Under the terms of the shared services agreement, the Group provided premises, administration, accounting and some company secretarial services to EPG at an agreed arm’s length rate for part of the year. During the year the shared services agreement was terminated when EPG moved out of the AFG Office on 1 September 2017. EPG paid $6k (2017: $120k) for services under the shared services agreement for the 2018 financial year. In addition to the above, the Group’s head Office is located at 100 Havelock Street West Perth. The Group leases these premises at commercial arm’s length rates from an investee of EPG, Qube Havelock Street Development Pty Ltd (Qube). AFG paid rent of $1,583k which has been paid to Qube (2017: $1,567k). In addition to the above McCabe Street has an outstanding loan owing to AFG amounting to $209k (2017: $201k), this loan is on commercial terms at arms length. ( b ) Subsidiaries Loans are made by the parent entity to wholly owned subsidiaries to fund working capital and purchases of shares from one subsidiary to the other subsidiary. Loans outstanding between the Company and its subsidiaries are unsecured, have no fixed date of repayment and are non-interest bearing. Interest-free loans made by the parent entity to all its subsidiaries are payable on demand. 84 Notes to the Financial Statements Annual Report 2018 34) Subsequent events On 10 August 2018, the Group secured a new residential warehouse facility, replacing its existing NAB warehouse. The new warehouse comprises four classes of secured, limited and floating rate notes, with the senior note being issued to NAB, mezzanine notes issued to Deutsche Bank AG Sydney Branch and AFG holding the subordinated notes. The maturity date for this new facility is 31 December 2018. On 23 August 2018, the Directors recommended the payment of a dividend of 5.7 cents per fully paid ordinary share, fully franked based on tax paid at 30%. The dividend has a record date of 3 September 2018 and a payment date of 27 September 2018. The aggregate amount of the proposed dividend expected to be paid out of retained earnings at 30 June 2018 is $12,244k. The financial effect of this dividend has not been brought to account in the financial statements for the year ended 30 June 2018. On 14 September 2018 AFG Trust 2013-2 was successfully redeemed with all investors having been repaid in full. AFG Trust 2013-2 will now be shutdown. Other than the above, there has not been any matter or circumstance, other than that referred to in the Financial Statements or notes thereto, that has arisen since the end of the financial year, that has significantly affected, or may significantly affect, the operations of the Group, the results of those operations, or the state of affairs of the Group in future financial years. 2018 Annual Report Directors’ Declaration 85 Directors’ Declaration In accordance with a resolution of the Directors of Australian Finance Group Limited, I state that: In the opinion of the Directors: a. The Financial Statements and Notes to the Financial Statements of Australian Finance Group Limited are in accordance with the Corporations Act 2001, including: (i) Giving a true and fair view of the consolidated entity’s financial position as at 30 June 2018 and of its performance for the year ended on that date (ii) Complying with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Regulations 2001 The Financial Statements and Notes to the Financial Statements also comply with International Financial Reporting Standards as disclosed in Note 2(a) There are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable. b. c. The Directors have been given the declarations by the Chief Executive Officer, and the Chief Financial Officer required by Section 295A of the Corporations Act 2001. On behalf of the Board Tony Gill Chairman Dated at Perth, Western Australia on 27 September 2018. 86 Annual Report 2018 2018 Annual Report Independent Audit Report 87 Independent Audit Report to the members of Australian Finance Group Limited Deloitte Touche Tohmatsu ABN 74 490 121 060 Tower 2, Brookfield Place 123 St Georges Terrace Perth WA 6000 GPO Box A46 Perth WA 6837 Australia Tel: +61 8 9365 7000 Fax: +61 8 9365 7001 www.deloitte.com.au Independent Auditor’s Report to the members of Australian Finance Group Limited Report on the Audit of the Financial Report Opinion We have audited the financial report of Australian Finance Group Limited (the “Entity”) and its subsidiaries (the “Group”) which comprises the consolidated statement of financial position as at 30 June 2018, the consolidated statement of profit or loss and other comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows for the year then ended, and notes to the financial statements, including a summary of significant the directors’ declaration. accounting policies and other explanatory information, and In our opinion, the accompanying financial report of the Group is in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the Group’s financial position as at 30 June 2018 and of its financial performance for the year then ended; and (ii) complying with Australian Accounting Standards and the Corporations Regulations 2001. Basis for Opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Report section of our report. We are independent of the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (the Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. We confirm that the independence declaration required by the Corporations Act 2001, which has been given to the directors of the Entity, would be in the same terms if given to the directors as at the time of this auditor’s report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key Audit Matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial report for the current period. These matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Liability limited by a scheme approved under Professional Standards Legislation. Member of Deloitte Touche Tohmatsu Limited 88 Independent Audit Report Annual Report 2018 Key Audit Matter Trail commission receivable and payable As at 30 June 2018 the Group has recognised trail commissions receivable of $805.1 million (2017: $734.7 million) and trail commissions payable of $718.5 million (2017: $655.7 million) as disclosed in notes 15 and 16. As disclosed in note 28, the determination of the fair value of the trail commissions receivable and payable at initial recognition and the subsequent measurement at amortised cost requires management to exercise significant judgements including:    the estimation of the discount rate, the percentage paid to members, and run off rate assumptions. How the scope of our audit responded to the Key Audit Matter Our procedures included, but were not limited to:  Evaluating the key controls and processes management have in place to determine the trail commission receivable and payable;  Challenging the reasonableness of management’s assumptions in the determination of the trail commission receivable and payable based on industry comparative run off rates and market observable inputs for the discount rate;  Agreeing the percentage of trail commission due to members to a sample of member agreements;  Comparing previously forecast trail commission income and expense by management to the actual results to assess historical accuracy of managements estimates;  Engaging internal experts to independently develop a model, using the inputs and assumptions applied by management, to recalculate the valuation of the trail commission receivable and payable. This was compared to management's valuation, in order to test the integrity and mathematical accuracy of management’s model;  Assessing the extraction of loan data used in management’s model for completeness; and  Evaluating the accuracy of the loan data by matching a sample of loans listed on the external Lender Commission Statements from the lenders to applications submitted by the Brokers. We also assessed the appropriateness of the disclosures included in Note 28 to the financial statements. Other Information The directors are responsible for the other information. The other information comprises the information included in the Group’s annual report for the year ended 30 June 2018, but does not include the financial report and our auditor’s report thereon. Our opinion on the financial report does not cover the other information and we do not express any form of assurance conclusion thereon. In connection with our audit of the financial report, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. 2018 Annual Report Independent Audit Report 89 Responsibilities of the Directors for the Financial Report The directors of the Entity are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In preparing the financial report, the directors are responsible for assessing the ability of the Group to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or has no realistic alternative but to do so. Auditor’s Responsibilities for the Audit of the Financial Report Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this financial report. As part of an audit in accordance with the Australian Auditing Standards, we exercise professional judgement and maintain professional scepticism throughout the audit. We also:  Identify and assess the risks of material misstatement of the financial report, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as intentional omissions, involve collusion, fraud may misrepresentations, or the override of internal control. forgery,  Obtain an understanding of internal control relevant to the audit 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 Group’s internal control.  Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors.  Conclude on the appropriateness of the directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial report or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern.  Evaluate the overall presentation, structure and content of the financial report, including the disclosures, and whether the financial report represents the underlying transactions and events in a manner that achieves fair presentation.  Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the financial report. We are responsible for the direction, supervision and performance of the Group’s audit. We remain solely responsible for our audit opinion. We communicate with the directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. 90 Independent Audit Report Annual Report 2018 We also provide the directors with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with the directors, we determine those matters that were of most significance in the audit of the financial report of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. Report on the Remuneration Report Opinion on the Remuneration Report We have audited the Remuneration Report included in pages 14 to 26 of the directors’ report for the year ended 30 June 2018. In our opinion, the Remuneration Report of Australian Finance Group Limited, for the year ended 30 June 2018, complies with section 300A of the Corporations Act 2001. Responsibilities The directors of the Entity are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. DELOITTE TOUCHE TOHMATSU Leanne Karamfiles Partner Chartered Accountants Perth, 27 September 2018 2018 Annual Report Shareholder Information 91 Shareholder Information Additional information required by the Australian Stock Exchange Ltd (ASX) and not disclosed elsewhere in this report is set out below. The information is current as at 31 August 2018. ( a ) Number of holders of equity securities Ordinary share capital 214,812,671 fully paid ordinary shares are held by 2,827 individual shareholders All issued ordinary shares carry one vote per share. ( b ) Distribution of holders of equity securities The number of shareholders by size of holding is set out below: Range 100,001 and Over 10,001 to 100,000 5,001 to 10,000 1,001 to 5,000 1 to 1,000 Total Unmarketable Parcels* Securities 179,513,200 27,352,025 5,445,004 2,346,699 155,743 214,812,671 1,440 % No. of holders 83.57 12.73 2.53 1.09 0.07 100 0.00 61 1,058 679 749 280 2,827 57 % 2.16 37.4 24.02 26.49 9.90 100 2.02 *An unmarketable parcel is considered to be a shareholding of 319 shares or less, being a value of $500 or less in total, based on the Company’s last sale price on the ASX at 31 August 2018 of $1.57. ( c ) Substantial shareholders The names and the number of securities held by substantial shareholders are set out below: Commonwealth Bank of Australia and its related bodies corporate MBM Investments ATF The Brett McKeon Family Trust MSW Investments ATF The Malcolm Stephen Watkins Family Trust Oceancity Investments ATF The Matthews Family Trust and Finequest Corporation Pty Ltd Banyard Holdings Pty Ltd ATF The B&K McGougan Trust Australian Ethical Investment Limited # Shares 23,585,931 21,179,773 19,602,689 15,029,516 14,788,765 13,461,256 % of issued capital 10.98% 9.86% 9.13% 7.00% 6.88% 6.27%   92 Shareholder Information Annual Report 2018 ( d ) Twenty largest holders of quoted equity securities Top holders  HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED CITICORP NOMINEES PTY LIMITED NATIONAL NOMINEES LIMITED MBM INVESTMENTS PTY LTD THE BRETT MCKEON FAMILY OCEANCITY INVESTMENTS PTY LTD THE MATTHEWS FAMILY BANYARD HOLDINGS PTY LTD B & K MCGOUGAN J P MORGAN NOMINEES AUSTRALIA LIMITED TAL DISTRIBUTION HOLDINGS LIMITED MRS KAREN JANE MCGOUGAN ZERO NOMINEES PTY LTD ASSURED FINANCIAL SERVICES PTY LTD LISA BEVAN # Shares 41,137,074 25,905,090 25,562,730 21,179,773 15,000,000 14,788,765 5,907,823 4,577,180 4,000,000 2,400,000 2,000,000 1,450,000 EDI NOMINEES PTY LTD 1,200,000 ADRIEN MANN (SOUTH PACIFIC) PTY LTD ANGELA MIDDLETON NEWECONOMY COM AU NOMINEES PTY LIMITED <900 ACCOUNT> WOODROSS NOMINEES PTY LTD NOLDEX PTY LTD DAVID BAILEY J & P CHICK PTY LIMITED EGMONT PTY LTD 1,110,000 1,000,250 850,916 819,488 655,000 505,000 500,000 500,000 % of issued capital 19.15 12.06 11.90 9.86 6.98 6.88 2.75 2.13 1.86 1.12 0.93 0.68 0.56 0.52 0.47 0.40 0.38 0.30 0.24 0.23 0.23 Company Secretary Ms L. Bevan Registered Office Level 4, 100 Havelock Street, West Perth WA 6005 Share Registry Link Market Service - Level 12, 680 George Street, Sydney NSW 2000 2018 Annual Report Shareholder Information 93 Corporate Directory Directors Anthony (Tony) Gill (Non-Executive Chairman) Kevin Matthews (Non-Executive Director) Melanie Kiely (Non-Executive Director) Brett McKeon (Executive Director) Malcolm Watkins (Executive Director) Company Secretary Lisa Bevan Company Secretary Notice of AGM The annual general meeting of Australian Finance Group Limited will be held on Friday 23 November 2018 at 9.00am WST at Level 4, 100 Havelock Street, West Perth WA 6005. Craig Carter (Non-Executive Director) Jane Muirsmith (Non-Executive Director) Corporate Office Share Registry Australian Finance Group Limited Level 4 100 Havelock Street West Perth WA 6005 Postal Address PO Box 710 West Perth WA 6872 Phone 08 9420 7888 Email investors@afgonline.com.au Website www.afgonline.com.au Link Market Services Level 12 680 George Street Sydney NSW 2000 Postal Address Locked Bag A14 Sydney South NSW 1235 Phone 1300 554 474 Email registrars@linkmarketservices.com.au Stock Listing Australian Finance Group Limited’s ordinary shares are listed on the Australian Securities Exchange (ASX code: AFG). 12 94 Corporate Directory Annual Report Annual Report 2018 2018 www.afgonline.com.au Level 4, 100 Havelock Street West Perth WA 6005 T 08 9420 7888 F 08 9420 6858 Australian Finance Group Ltd. Australian Credit Licence: 389087 ABN: 11 066 385 822 ACN: 066 385 822 

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