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2023 ReportAnnual Report 2018 Contents Auswide Bank – what we do 2017/18 performance highlights Four-year performance history Chairman and Managing Director’s report Strategic direction Customer experience Supporting our community Empowering our people Investing in technology Managing risk Board of Directors Leadership team Directors’ statutory report Auditor’s independence declaration Consolidated statement of profit or loss and other comprehensive income Consolidated statement of financial position Consolidated statement of cash flows Consolidated statement of changes in equity Notes to the consolidated financial statements Directors’ declaration Independent auditor’s report Corporate governance summary Shareholder information Financial glossary 2 4 6 8 10 13 14 17 18 19 20 22 26 41 42 43 44 45 49 94 95 99 101 104 AUSWIDE BANK – 30 JUNE 2018 1 Auswide Bank what we do For over 50 years Auswide Bank has been providing an extensive range of personal and business banking products and services to our valued customers. Auswide Bank isn’t a big bank and we don’t want to be. We believe it’s the small things that reveal who each of us are. Small is real. Small is sincere. It’s the smile on a familiar face and knowing how hard you’ve worked to get ahead. Small is finding your voice and meaning what you say. At Auswide Bank, we’re here to help you find that voice, to tell your story and at last be heard. We want you to discover a whole new way to engage with your bank. We want you to discover how powerful small can truly be. Auswide Bank. Discover the power of small. 2 ANNUAL REPORT MISSION Our Mission is to demonstrate the ‘power of small’ by placing our customers at the centre of everything we do. VISION Our Vision is to be the Bank that our customers and partners want their friends, family and colleagues to bank with. OUR VALUES EMPOWER MAKE IT HAPPEN PURPOSE OWN IT Empowering customers and staff to initiate change Make decisions and adapt quickly to meet our customers’ needs Identify your purpose and be passionate about it Own our actions, decisions, customers and outcomes WOW Exceed our customers’ expectations and celebrate their successes and our own ETHICAL A commitment to be ethical and operate in a sustainable workplace REAL Build open and honest relationships and deliver on our promises AUSWIDE BANK – 30 JUNE 2018 3 2017/18 performance highlights 18.1% 5.0% STATUTORY NET PROFIT AFTER TAX up by 18.1% to $17.9m (2016–17: $15.1m) LOAN BOOK GROWTH of 5.0% to $2.911b (2016–17: $2.773b) 3 basis points NET INTEREST MARGIN up by 3 basis points to 1.93% 14.89% CAPITAL ADEQUACY RATIO increased to 14.89% 6.1% 5.5c NET INTEREST REVENUE up 6.1% to $61.0m (2016–17: $57.5m) STATUTORY EARNINGS PER SHARE up by 5.5 cents per share to 42.8 cents per share 1.9% 3c UNDERLYING COST TO INCOME RATIO down 1.9% to 63.3% (2016–17: 65.2%) TOTAL DIVIDEND up 3c to 34c per share. 4 ANNUAL REPORT 4 ANNUAL REPORT Auswide Bank Limited delivered a strong result in 2017/18, continuing the improvements in profitability and shareholder returns we have achieved over the past few years. AUSWIDE BANK – 30 JUNE 2018 5 AUSWIDE BANK – 30 JUNE 2018 5 Four-year performance history NET INTEREST INCOME ($M) LOANS PORTFOLIO ($M) $51.2 $53.9 $57.5 $61.0 80 70 60 50 40 30 20 10 0 2,666 2,773 2.911 2,330 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Jun 15 Jun 16 Jun 17 Jun 18 Jun 15 Jun 16 Jun 17 Jun 18 NET INTEREST INCOME LOAN PORTFOLIO Focusing on organic growth has supported consistent improvement in Net Interest Income Enhancing customer experience is one of our strategic priorities, supporting 25% growth in our loan portfolio over four years 6 ANNUAL REPORT June 17 12.06 2.36 DIVIDEND (CENTS PER SHARE) CAPITAL ADEQUACY RATIO (%) 30.0 30.0 31.0 16.0 16.0 17.0 14.0 14.0 14.0 34.0 18.0 16.0 35 30 25 20 15 10 5 0 Tier 1 Tier 2 15.15 2.56 14.31 2.41 14.42 2.36 12.59 11.90 12.06 14.89 2..21 12.68 20 15 10 5 0 Jun 15 Jun 16 Jun 17 Jun 18 Jun 15 Jun 16 Jun 17 Jun 18 TOTAL DIVIDEND CAPITAL ADEQUACY RATIO Strong operating and financial performance supported a 9.7% increase in total dividend to 34 cents per share The strength of Auswide Bank is a priority of our Strategic Plan and we have the strongest capital adequacy ratio of Australia’s listed banks LOANS ARREARS ($M) 30 25 20 15 10 5 0 30–60 days past due 60–90 days past due Over 90 days past due 11.9 3.2 7.2 15.5 6.7 4.4 10.8 2.9 6.4 9.4 4.7 NET INTEREST MARGIN (%) NIM (bps) RBA Cash Rate (%) 2.5 2.5 2.0 2.0 1.5 1.5 /- -/ 0.0 Jun 15 Jun 16 Jun 17 Jun 18 Jun 15 Jun 16 Jun 17 Jun 18 LOAN ARREARS ($M) NET INTEREST MARGIN (%) Improving loan credit quality has been a highlight of our performance, with total arrears 30 days past due decreasing to 0.48% of the total loan book (2016/17: 0.72%) Maintained solid Net Interest Margin in spite of highly competitive mortgage markets and historically low interest rates AUSWIDE BANK – 30 JUNE 2018 7 Chairman and Managing Director’s report Auswide Bank Limited has delivered another year of strong growth in all key financial metrics and improving returns for the 2017/18 financial year, based on a disciplined approach to net interest margin, loan book growth and expense management. Improvement in our cost to income ratio and earnings per share growth over the year have been amongst the best in the listed banking sector. This is a commendable performance in an ongoing challenging environment. Additionally we maintain the strongest capital adequacy position of the listed banks, which positions us well for the uncertain economic and regulatory times ahead. Net Interest Margin for the 2017/18 financial year was 1.93 per cent compared to 1.90 per cent in the 2016–17 financial year, which represents a very strong performance. Net Interest Margin has been impacted by interest rates at historic lows and the continuation of highly competitive housing finance markets across the 2017/18 financial year, in addition to elevated funding costs between February and June 2018. We are pleased to inform shareholders that Auswide Bank reported statutory net profit after tax (NPAT) of $17.886 million for the 2017/18 financial year, an improvement on the previous year of 18.1 per cent. Underlying NPAT for the consolidated group was $17.108 million compared to the previous year’s figure of $15.691 million, representing an increase of 9.0 per cent. Based on this strong financial performance, the Board is pleased to be in a position to reward shareholders with a final dividend for 2017/18 of 18 cents per share. Together with the increased interim dividend of 16 cents per share, this brings the total dividend for the year to 34 cents per share. This is an increase of three cents per share from last financial year, and represents a dividend yield of 6.04 per cent, fully franked. Net Interest Revenue increased by 6.1 per cent to $61.020 million, compared with $57.509 million in the previous financial year. The Bank’s underlying cost to income ratio improved by a pleasing 1.9 per cent, from 65.2 per cent to 63.3 per cent. This can be attributed to strict cost management disciplines as a key element of our Strategic Plan. Our loan book grew by 5.0 per cent to $2.911 billion at 30 June 2018, from $2.773 billion at the end of the previous financial year. It is a creditable performance to expand our loan book in line with system growth while closely managing net interest margin during a period of significant competition and volatility in Bank Bill Swap Rates. Consumer lending increased by $14.4 million, or 49.6 per cent partially assisted by an uplift in loan originations through the MoneyPlace platform. Our business banking book increased by 11.9 per cent from $107.5 million to $120.3 million. 8 ANNUAL REPORT Our improving loan credit quality is a success story. We continue to focus on our culture of risk management, prudent loan underwriting standards and sound controls across the business that allow us to grow the loan book and maintain a solid arrears position. Total arrears greater than 30 days past due (excluding the effects of hardship accounts) decreased from $20.1 million dollars to $14.1 million dollars. Arrears have decreased as a percentage of the Group’s total loan book from 0.72 per cent at 30 June 2017 to 0.48 per cent at 30 June 2018. The Board is satisfied that the provisions set aside cover the risks arising from current and future doubtful debts. Auswide Bank’s capital position provides headroom for loan growth and is well above “unquestionably strong” benchmarks determined by the prudential regulator. Capital increased during the financial year, with a capital ratio of 14.89 per cent at 30 June 2018, which represents a 0.47 per cent improvement on the prior corresponding period. On 10 January 2018, the Group announced it had entered into an agreement to divest its controlling equity stake in MoneyPlace. The transaction was completed on 22 January 2018. The sale had a one-off positive impact on full financial year results with a NPAT contribution of $1.227 million. The sale also had a positive impact on Auswide Bank’s strong capital position. Auswide Bank will continue to receive income from its personal loan investment in MoneyPlace. The strategic alliance with MoneyPlace provides a technically advanced personal loan system solution to a niche consumer finance market. The relationship provides an avenue to increase the Group’s consumer lending ambitions. The Group has diversified the branch network, including 23 branches and agencies across Queensland, and a business centre in Brisbane. Auswide Bank also employs Business Development managers in Sydney and Melbourne to conduct interstate business. All regional loan staff and panel valuers are locally based ensuring an in-depth knowledge of the local economy and developments in the real estate market. We are proud of our roots in regional Queensland communities, as we grow a national presence. Auswide Bank recognises that customers value online services which provide speed, ease of use and accessibility of ‘banking anywhere anytime’. In response, the customer team is preparing a ‘Branch 25’ strategy which aims to create an end-to-end digital banking experience for our customers. Auswide Bank is initiating projects to deliver online application capabilities, allowing both new and existing clients to apply for loans, transaction accounts and savings products via the bank’s website. By delivering the technical capabilities to support end-to-end customer experience, Auswide Bank aims to deliver to its customers a truly exceptional online experience which is seamless and stress free. OUTLOOK We remain optimistic that we can continue the growth of our consumer loan book in 2018–19, to reach $60 million to $70 million by 30 June 2019 with a blended gross interest rate of approximately 8 per cent to 9 per cent. The business banking pipeline remains a high priority and continues to improve, and we expect to achieve above system growth in the current financial year. Net Interest Margin is targeted to remain stable across the next financial year, but we expect to be challenged by funding volatility and home lending markets that will continue to be competitive. Importantly, we are in an exceptionally strong capital position which provides significant growth capability over the next 12 months without the need for additional capital. We will maintain an ongoing focus on cost controls whilst continuing to invest in the business for future growth and improving customer experience. Our three-year cost to income goal is 60 per cent as we manage current and emerging opportunities as well as headwinds presented by uncertain economic conditions, increasing regulatory activity and significant competition. Regulatory activity has been a prominent feature of the financial services market during the reporting period, and we anticipate that industry changes will continue in the current financial year. However, Auswide Bank will be presented with customer growth opportunities from the reputational challenges affecting bigger banks over the period ahead. As a smaller bank with our roots in serving customers and the community, Auswide Bank has conducted operations in a way that has meant we have not had to confront similar issues. The damage to customer and community trust for the major players in the sector is an opportunity as we extend our digital reach and customer value proposition, backed by sound governance and risk management and an ongoing focus on our customers. Our business continues to grow and create value for shareholders because we put our customers first. This is a core value of Auswide Bank and is illustrated by our Mission to demonstrate the ‘power of small’ by placing our customers at the centre of everything we do. We would like to thank the people who work for Auswide Bank and bring our competitive advantage to life every day in everything they do for our customers. We would also like to thank the Board for their support and guidance throughout the year. Most of all, we would like to thank our two most important stakeholders, our customers and shareholders, for their continuing support for Auswide Bank. John Humphrey Chairman Martin Barrett Managing Director AUSWIDE BANK – 30 JUNE 2018 9 Strategic direction Our actions in managing Auswide Bank are guided by the three-year Strategic Plan adopted by the Board in March 2016. Its purpose is to ensure we remain focused on the structure, transformation, growth and strength of the bank, and it has underpinned our continued strong financial performance in 2017/18. Auswide Bank has completed a number of major operational initiatives over the life of the current three-year plan, that align with these strategic priorities. Structure • Appointed Chief Customer Officer to unite sales channels, product and marketing to drive enhanced customer experience • Project Swift reduced mortgage application processing time • Implemented executive leadership development program and talent matrix to manage succession planning Transformation • Streamlined online experience for home and personal loan customers and account opening • Introduced annual survey to identify and address key customer issues and increase customer retention • Commenced product simplification project to better meet customer needs, create a competitive advantage for Auswide and mitigate risk • Progressed business banking process review with appointment of Business Banking Manager Growth • Brand campaign to increase awareness and make Auswide Bank a preferred option in customers’ initial consideration set in targeted markets • Customer Team Incentive Program rolled out to drive sustainable growth through behaviour, sales and service targets • YCU integration successfully completed and ongoing engagement with other potential M&A partners • Continued investment in new digital and online customer technology Strength • BBB+ (Fitch) and Baa2 (Moody’s) credit ratings to reflect funding strength • • Introduced cyber-attack vigilance and protection programs, training and support Internal Audit outsourced to PwC to leverage capability and industry best practice • External Audit outsourced to Deloitte to leverage expertise and resources • Internal Capital Adequacy and Assessment Process (ICAAP) completed annually for submission to APRA • Continued sophistication of risk management capabilities • Maintain industry leading capital position The next version of the Strategic Plan is currently being developed, taking a three to six year view of the operating environment and priorities for the business. As a challenger bank, we see a challenging market outlook but sound growth market outlook and growth opportunities for Auswide Bank over that period. The Strategic Plan will build on our progress to date in digital transformation of customer experience and operating efficiency. Digital banking services that extend our footprint beyond our branch network and traditional regional markets will be a feature of our competitive positioning in the future. Lifting consumer awareness of the Auswide Bank brand will also be an important element of the Strategic Plan. In an environment in which the big banks face significant reputational challenges, Auswide Bank’s focus on putting the customer at the centre of everything we do has created a range of growth opportunities. Auswide Bank has the strongest capital adequacy position among Australia’s listed banks, which supports our plans to continue to expand our presence in business banking and consumer lending. We have worked hard to develop a resilient, customer focused culture within Auswide Bank, and our people are empowered and supported to raise concerns about any element of our operations. The Strategic Plan will consider the landscape for the financial services industry and lessons from the ongoing regulatory activities in the sector. Ongoing vigilance and attention to positive organisational culture, governance and risk management will continue to be central among our strategic priorities. 10 ANNUAL REPORT The priorities over the life of the three-year Strategic Plan include: RESTRUCTURING the Bank’s sales channels, products and marketing to better allocate resources to improve customer experience IMPLEMENTING and re-engineering the end- to-end home loan process AUTOMATING processes and simplifying products BUILDING the Auswide Bank brand through consistent messaging and enhanced customer service CONTINUING to invest in technology, skills and training STRENGTHENING the Bank through management capabilities, risk and audit processes, and capital strength CONTINUING to reduce and further enhance the Bank’s cost to income ratio REVIEWING M&A and fintech opportunities as they arise. AUSWIDE BANK – 30 JUNE 2018 11 12 ANNUAL REPORT Customer experience During the financial year, Auswide Bank commenced a Customer Journey Strategy to enhance our customers’ experience of the bank’s products and services. This process aligns with the Bank’s three-year Strategic Plan goals to: • restructure sales channels, products and marketing to better allocate resources to improve customer experience • automate processes and simplifying products • build the Auswide Bank brand through consistent messaging and enhanced customer service • continue to reduce and further enhance the Bank’s cost to income ratio. The purpose of the strategy is to understand and map the Customer Journey to: • ensure our services and products meet the requirements of their intended market segments • personalise messaging for each audience • evolve our technology to attract new customers and meet their needs • have real conversations in an omni-channel environment. Following on from the Customer Journey Strategy, a Product Simplification Project was commenced on 1 July 2018 to review Auswide Bank’s current product set and remove or modify products and services that are insufficiently profitable, that unnecessarily increase complexity and lack strong current or likely future demand. We anticipate that the project will achieve a range of goals during the current financial year, including: • Simplify customer choice and ‘path to purchase’ while continuing to meet their core needs • Reduce number and complexity of management and administration processes • Allow our people to become Subject Matter Experts on chosen products • Provide a platform to allow Auswide Bank to better deliver on chosen products • Reduce compliance risks • Reduce customer issues and complaints • Reduce compliance, operations, support and other costs, and refocus our people. The Customer Journey Strategy has four phases: PHASE 1 Research & Development PHASE 2 Product & Service Alignment PHASE 3 Staff Roll Out/Opportunity PHASE 4 Targeted Marketing/Touchpoints AUSWIDE BANK – 30 JUNE 2018 13 CUSTOMER PULSE Customer Journey Voice of the Customer Real Conversation Supporting our community Auswide Bank is proud to support local communities through sponsorships, staff volunteering and in-kind contributions to help schools, groups and clubs to benefit their communities. In 2017/18 Auswide Bank contributed to over 40 community events and projects across south-east and regional Queensland with more than $137,000 in funding. Some of the highlights of our community support are highlighted here. Auswide Bank was proud to support the Queensland Young Achievers Awards for the third consecutive year. These awards encourage positive achievements of people under 29 years of age in a range of endeavours. In 2017/18 Auswide Bank staff were actively involved in fundraising campaigns for a range of causes. We again donated to the Salvation Army Red Shield Appeal. The Salvation Army plays a pivotal role in regional communities and we continue to enjoy a strong relationship with them. In addition, Auswide Bank sponsored the Mackay Show and International Cycling Spectacular. The Central Queensland University student scholarship program continued in 2017/18, with Auswide providing scholarships for business, finance or accounting students. These students represent an important customer demographic for our future, and they are potential leaders and employees in our local regions. We also continue to support Central Queensland businesses through the Bundaberg Business Excellence Awards. Auswide Bank was proudly the anchor sponsor of the restoration of Bert Hinkler’s Armstrong Siddeley historical vehicle. The 1926 model was called the “most significant Armstrong Siddeley restoration of its type in the world” by the Armstrong Siddeley Car Club of Australia. Our commitment was a reflection of our roots in Bundaberg, Bert Hinkler’s home town, and Auswide Bank was proud to be involved in this special project. From top to bottom: 2017/2018 Queensland Young Achiever Awards; Bass Hill Soccer Club; Bert Hinkler’s Historical Armstrong Siddeley Car Restoration 14 ANNUAL REPORT In 2017/18 Auswide Bank contributed to over 40 community events and projects across south-east and regional Queensland. AUSWIDE BANK – 30 JUNE 2018 15 The Bank will continue in 2018-2019 to maintain its focus on creating a positive culture and environment that supports our people, our customers and shareholders. 16 ANNUAL REPORT 16 ANNUAL REPORT Empowering our people The Bank has a strong commitment to provide regulatory compliance and risk training, as well as increasing the knowledge, capability, professional and personal development of our people. During 2017-2018 we continued to recognise the importance of our people leadership, with the continuation of the Leadership Empowerment Series. A strong focus this year included understanding each leader’s behavioural profile and how their leadership style affects and influences those around them. In addition, our leaders now have an increased awareness of: • their individual motivating factors • being able to leverage their strengths and manage key self-development areas • strategies for coaching and developing their people • their own developmental learning style • understanding their team dynamics. The Bank continues to adopt strategies to improve on the social and emotional health and wellbeing of our people by playing our role in keeping them engaged, healthy and productive both at work and in their everyday lives. With our focus on increasing employee benefits, Wellness Empowerment Days have been introduced throughout the business. The annual Auswide Bank Employee Engagement & Satisfaction Survey was conducted with more than 96 per cent of staff engaging. The response rate continues to place Auswide Bank in the top percentile among Australian companies, with our people taking the opportunity to provide feedback and comments that will contribute to building a better bank. The Bank will continue in 2018-2019 to maintain its focus on creating a positive culture and environment that supports our people, our customers and shareholders. AUSWIDE BANK – 30 JUNE 2018 17 AUSWIDE BANK – 30 JUNE 2018 17 Investing in technology Through our investments in technology during 2017/18, Auswide Bank focused on the areas of customer acquisition and on-boarding, as well as enhancing IT security and fraud prevention. Customer acquisition objectives include frictionless and efficient customer on-boarding, development of Auswide Bank’s digital products and dedicated customer support to deliver the same level of convenience as branches. IT security and fraud enhancements have involved improvements to customer transactional security, fraud detection and prevention. Additional layers of protection have been added through multiple platforms and technologies to make transacting online, by card and other channels safer for customers. Our digital branch, ‘Branch 25’, will create an end-to-end digital banking experience for new and existing customers, combining speed, ease of use, and ‘available anywhere anytime’ service. This digital service will be accessible around Australia, complementing our existing branch footprint. We will be reviewing our current offering and implementing new capabilities in FY19 with a focus on customer transactional security improvements as well as fraud detection and prevention. Our investments in technology are guided by the Strategic Plan, as shown in the table below that outlines deliverables completed in 2017/18 and our priorities for the current financial year. H1 2017/18 H2 2017/18 1. New Collections capability 2. Enhanced Cyber Security uplift and Training 1. Enhanced document processing automation for Loan Origination 2. Credit Card product development and launch 3. Wearable payment technologies – pay-band Future 1. Contact Centre technology uplift 2. Next generation Core Banking Upgrade 3. Online Lending capability uplift 18 ANNUAL REPORT Managing risk Auswide Bank has a comprehensive risk and compliance management program to actively identify and eliminate risk where possible, and mitigate and minimise the impact of those risks that cannot be eliminated. Continuing to strengthen our risk management approach is an important element of the Group’s Strategic Plan and a high priority for the Board and management team. Since 2013, changes to the bank’s business strategy and risk appetite have resulted in a simpler business model and more conservative underwriting actively reducing mortgages with higher risk profiles, such as mortgages with interest-only features and mortgages with high LVR (loan-to-valuation ratios). Auswide Bank is well placed to manage the risks associated with these loan product concentrations in line with established risk appetite settings. In addition, Auswide Bank continues to enhance the way we measure, monitor and report risk related matters. The Board Risk Committee provides strong oversight of the risk profile and risk management of the bank with reference to the Board determined risk appetite. Our people have a strong inclination to take responsibility for risk management across each business unit, and this culture underpins our Strategic Plan. This is supported by the Bank’s ‘Three Lines of Defence’ risk management model with risk management accountabilities allocated for risk ownership (first line), functional oversight (second line) and assurance (third line). LINE 1 BUSINESS UNITS LINE 2 RISK AND COMPLIANCE MANAGEMENT LINE 3 AUDIT MANAGEMENT Business units identify, assess, control and mitigate risks through internal policies and corrective actions to address process and control deficiencies. Risk and Compliance Management maintains a risk management framework, measures risk exposures to support decision making, and provides risk management support, supervision and expertise to the business. They report to the Board and leadership team and make credit risk decisions under approved delegations and loan portfolio management. An independent internal audit function, outsourced to PricewaterhouseCoopers, ensures the Bank has industry leading capabilities to review internal controls, risk management processes and governance systems. AUSWIDE BANK – 30 JUNE 2018 19 Board of Directors John Humphrey LL.B Chairman Martin Barrett BA (Econ), MBA Managing Director Barry Dangerfield Non-Executive Director Member of the Audit Committee Board Member since September 2013 Board Member since February 2008 Professor Humphrey was appointed Chairman of the Board following the 2009 Annual General Meeting. He was a senior partner in the Brisbane office of international law firm, King & Wood Mallesons until 1 January 2013, where he specialised in commercial law and corporate mergers and acquisitions. He is now Executive Dean of the Faculty of Law at QUT and is currently a non- Executive Director and Chairman of Spotless Holdings Ltd and Horizon Oil Limited and a non-Executive Director of Lynas Corporation Limited. Mr Barrett has extensive experience in the banking sector, having previously held the positions of Managing Director (Queensland, Western Australia and National Motor Finance Business) and General Manager NSW/ACT Corporate and Business Bank at St George Bank Ltd. Prior to working at St George Bank, Mr Barrett held senior roles at regional financial institutions in the United Kingdom and at National Australia Bank. Chairman of the Group Board Remuneration Committee Member of the Audit Committee Member of the Risk Committee Board Member since November 2011 Mr Dangerfield had a successful 39 year banking career with Westpac Banking Corporation having held positions across Queensland and Northern Territory as Regional Manager of Business Banking, Head of Commercial and Agribusiness, and Regional General Manager of Retail Banking. Mr Dangerfield is a Director of the Bundaberg Friendly Society Medical Institute which operates the Friendly Society Private Hospital and Pharmacies in Bundaberg and he is Chairman of the Institutes Audit and Risk committee. 20 ANNUAL REPORT Greg Kenny GAICD, GradDipFin Non-Executive Director Chairman of the Risk Committee Member of the Audit Committee Member of the Group Board Remuneration Committee Board Member since November 2013 Mr Kenny had a long and successful career with Westpac Banking Corporation and St George Bank Ltd, and prior to that with Bank of New York and Bank of America in Australia. At St George Bank, he held the positions of Managing Director (NSW and ACT), General Manager Corporate and Business Bank, and General Manager Group Treasury and Capital Markets. Sandra Birkensleigh BCom, CA, GAICD, ICCP (Fellow) Non-Executive Director Chairperson of the Audit Committee Member of the Risk Committee Member of the Group Board Remuneration Committee Board Member since February 2015 Ms Birkensleigh was a partner at PricewaterhouseCoopers for 16 years until 2013. During her career, her predominant industry focus was Financial Services (Banking and Wealth Management). Ms Birkensleigh has also advised on risk management in other sectors such as retail and consumer goods, retail and wholesale electricity, resources, and education. Ms Birkensleigh is currently a non-Executive Director of MLC Insurance Limited, the National Disability Insurance Agency, Horizon Oil Limited, 7-11 Holdings and its subsidiaries and the Sunshine Coast Children’s Therapy Centre. She is an independent member of the Audit Committee of the Reserve Bank of Australia, and a Council Member of the University of the Sunshine Coast. AUSWIDE BANK – 30 JUNE 2018 21 Leadership team Bill Schafer Chief Financial Officer and Company Secretary • Group Accounting and Treasury • Budgeting and financial analysis • Financial and management reporting • Statutory, ASX and regulatory reporting Mark Rasmussen Chief Operating Officer • Lending Services • Banking Services • Mortgage Origination Services • Support Services Operations including Business Continuity Planning • Capital, funding and liquidity • Reengineering Services planning strategy • Investor Relations Damian Hearne Chief Customer Officer • Customer experience strategy and management • Retail and business banking sales and distribution • Mortgage broker and third party relationships • Marketing, products and partnerships 22 ANNUAL REPORT Martin Barrett Managing Director • Strategy development and implementation • Group operational and financial performance • Regulatory engagement • Risk culture and management • Customer satisfaction and growth • Shareholder returns Stephen Caville Chief Information Officer Gayle Job Chief People & Property Officer Craig Lonergan Chief Risk Officer • Group Information Technology strategy and management • IT Strategic Plan • Key technology project implementation • People engagement and • Risk profile within Board approved performance risk appetite • Payroll management, remuneration • Risk management strategy and and benefits practices • Talent acquisition, recruitment and retention strategies • Risk management and compliance framework and control systems • Learning and development • Risk culture awareness • Employment law regulation and • Credit portfolio review compliance • Staff wellbeing and workplace health and safety • Property portfolio management of leased and bank owned assets AUSWIDE BANK – 30 JUNE 2018 23 Financial Statements 24 ANNUAL REPORT Contents Directors’ statutory report Auditor’s independence declaration Consolidated statement of profit or loss and other comprehensive income Consolidated statement of financial position Consolidated statement of cash flows Consolidated statement of changes in equity Notes to the consolidated financial statements Directors’ declaration Independent auditor’s report Corporate governance summary Shareholder information Financial glossary 26 41 42 43 44 45 49 94 95 99 101 104 AUSWIDE BANK – 30 JUNE 2018 25 Directors’ statutory report 30 JUNE 2018 REVIEW AND RESULTS OF OPERATIONS The underlying net profit after tax (NPAT) for the consolidated entity for financial year 2017/18 was $17.108m compared to $15.691m for 2016/17. This represents an increase of 9.0%. The statutory consolidated NPAT for the 2017/18 financial year was $17.886m compared to the result of $15.149m for the 2016/17 year, an increase of 18.1%. The underlying NPAT has been calculated after adjusting for the effects of discontinued operations on the sale of MoneyPlace. The operating losses arising from the bank’s controlling interest and the gain on sale of the investment in MoneyPlace have been adjusted against the consolidated NPAT. In addition, there were professional fees and stamp duty relating to the M&A transactions in the 2016/17 financial year and an amount $0.092m before tax ($0.064m after tax) representing professional fees on the sale of MoneyPlace in the 2017/18 financial year. The total loan book increased from $2.773b at 30 June 2017 to $2.911b at 30 June 2018. Despite modest loan book growth in the first half of the financial year due to prudential restrictions on investor lending, the loan book growth for 2017/18 was 5.0%. Home loan settlements across the financial year totalled $543.530m, an increase of 1.4% on the $536.066m in home loan settlements for 2016/17. Personal loans The personal loan book growth improved during the 2017/18 financial year in terms of Auswide Bank’s own originations reaching a balance of $17.638m, an increase of $2.577m across the financial year. Personal loans have not been reported as a separate segment for the financial year. An uplift in loan originations through MoneyPlace has resulted in an increased return on Auswide Bank’s investment. The investment in MoneyPlace has grown from $14.042m at 30 June 2017 to $20.813m at 30 June 2018, representing an increase of $6.771m. Auswide Bank has entered into arrangements with additional consumer lenders and at 30 June 2018 $2.055m and $3.018m had been provided to Ratesetter and SocietyOne respectively. Customers Auswide Bank implemented a Customer Service Strategy during the financial year. The key aspects of the strategy include gaining a better understanding of the customer journey, ensuring the service and product objectives meet the requirements of intended segments and evolving technology to attract customers and meet their needs. The successful execution of this strategy will enrich the experience for customers of Auswide Bank. The Digital Branch – Branch 25 Auswide Bank recognises that customers value online services which provide speed, ease of use and the accessibility of ‘banking anywhere anytime’. In response, the customer team is preparing a ‘Branch 25’ strategy which aims to create an end-to-end digital banking experience for our customers. Auswide Bank is initiating projects to deliver online application capabilities, allowing both new and existing clients to apply for loans, transaction accounts and savings products via the bank’s website. By delivering the technical capabilities to support an end-to-end customer experience, Auswide Bank aims to deliver to its customers a truly exceptional online experience which is seamless and stress free. Business banking Auswide Bank continues to grow the business banking segment through central and south-east Queensland via selective provision of finance and banking services to SME’s. The establishment of the Brisbane branch following the acquisition of YCU and the employment of a full time business banker based in Brisbane during 2017/18 aided growth. The appointment of a business banker in Mackay will continue this focus in 2018/19. 26 ANNUAL REPORT PRINCIPAL ACTIVITIES AND SIGNIFICANT CHANGES Auswide Bank Ltd is an approved deposit-taking institution and licensed credit and financial services provider. Auswide Bank provides deposit, credit, insurance and banking services to personal and business customers across Australia, principally in regional and metropolitan Queensland, Sydney and Melbourne. Funding for loans is raised through a combination of retail and wholesale deposits as well as through securitisation markets. In June 2017 Auswide Bank settled $300m in new residential mortgage backed securities via ABA Trust 2017-1. The residential mortgage loans were originated by Auswide Bank’s branch network and brokers with all underwriting completed by Auswide Bank loans consultants. A refreshed three year strategic plan was adopted by the Board in March of 2016. The strategic plan focuses on the structure, transformation, growth and strength of the bank, which is to be achieved by: • Restructuring of the sales channels, products and marketing to provide better allocation of resources to improve customer experience; • Implementation and re-engineering of the end to end home loan process; • Automation of process and simplification of products, including online loans and account opening; • Building the ‘Auswide Bank’ brand with consistency of messaging and enhanced customer service; • Continued investment in technology, skills and training; • Strengthening the bank through management capabilities, risk and audit processes and capital strength; • Continued drive to lower, and further enhance, the cost to income ratio; and • Review of M&A and Fintech opportunities as they arise. Investment in MoneyPlace In December 2015 the Group announced it would be entering into a strategic relationship and equity investment with MoneyPlace Holdings. Auswide Bank Ltd acquired a 19.3% equity stake in MoneyPlace which settled on 4 January 2016. In February 2017 Auswide Bank made a follow-on investment which resulted in the Group obtaining a controlling interest in MoneyPlace Holdings. On 10 January 2018, the Group announced that it had entered into an agreement to divest its equity stake in MoneyPlace. The transaction was completed on 22 January 2018. The sale, which occurred in the Bank’s second half, had a one-off positive impact on full financial year results with an NPAT contribution of $1.227m. The sale also had a positive impact on Auswide Bank’s strong capital position. Auswide Bank will continue to receive income from its personal loan investment in MoneyPlace. The strategic alliance with MoneyPlace provides a technically advanced personal loan system solution to a niche consumer finance market. The relationship provides an avenue to increase the Group’s consumer lending ambitions. Branch network The Company has a diversified branch network consisting of 23 branches and agencies across Queensland, and a business centre in Brisbane. The Company also employs Business Development Managers in Sydney and Melbourne to conduct interstate business. All regional loan staff and panel valuers are locally based ensuring an in-depth knowledge of the local economy and developments in the real estate market. Technology Investment in technology continues with a focus on the areas of customer acquisition and on-boarding as well as enhancing IT security and fraud prevention. Customer acquisition objectives include frictionless and efficient customer on-boarding, development of Auswide Bank digital products ‘available anywhere anytime’ and dedicated customer support to deliver the same level of convenience as branches. IT security and fraud enhancements have involved improvements to customer transactional security, fraud detection and prevention. Additional layers of protection have been added through multiple platforms and technologies to make transacting online, by card and other channels safer for customers. AUSWIDE BANK – 30 JUNE 2018 27 PRINCIPAL ACTIVITIES AND SIGNIFICANT CHANGES (CONTINUED) Credit cards Auswide Bank launched an ‘on-balance sheet’ credit card in April 2018. The Low Rate Visa credit card was developed and is issued directly by Auswide Bank and includes unique features such as a Reserve Bank of Australia ‘cash rate’ tracker function and a competitive interest rate on both purchases and cash advances. The credit card complements the Bank’s existing financing activities and will build stronger banking relationships with eligible customers. The Bank has maintained its partnership with Card Services, a division of Citigroup Pty Ltd Australian Credit Licence 238098, in respect of its existing card portfolio and providing a premium platinum rewards credit card to eligible customers. Net Interest Margin The Net Interest Margin (NIM) has been impacted by interest rates at historic lows and the continuance of highly competitive housing finance markets across the 2017/18 financial year, in addition to elevated funding markets in the last quarter of the financial year. In order to maintain stability in NIM, the bank closely monitors the competitive pricing of products and continues to proactively manage assets and liabilities. The net interest margin for the 2017/18 year was 1.93% compared to 1.90% in the 2016/17 financial year. Arrears and collections In accordance with data disclosed in the financial accounts of the bank, total arrears greater than 30 days past due (excluding the effects of hardship accounts) decreased from $20.1m to $14.1m. Arrears have decreased as a percentage of the Group’s total loan book from 0.72% at 30 June 2017 to 0.48% at 30 June 2018. The Board is satisfied that the provisions set aside cover the risks arising from current and future doubtful debts. Risk Auswide Bank takes a proactive approach to risk management, which can be demonstrated by the Bank’s adoption of methodologies to curtail excessive exposures to risky product markets. The early introduction of Investor, High LVR and Interest Only lending initiatives together with continued review of underwriting and serviceability assessments ensured that Auswide Bank was well placed to manage the risks associated with its lending portfolio together with regulatory requirements. The Board Risk Committee provides strong oversight of the risk framework across the organisation. The Board remains focused on the portfolio quality as the loan book grows and this is highlighted by the continuing positive trend in relation to loan arrears. ACQUISITIONS The Board will continue to monitor opportunities to acquire loan books or suitable institutions as they arise and the Board will review any offers made which may complement the overall operations of the Group. MATTERS SUBSEQUENT TO THE END OF THE FINANCIAL YEAR There has been no other matter or circumstance since the end of the financial year that will significantly affect the results of operations in future years or the state of affairs of the Company. CAPITAL The capital adequacy ratio for the Auswide Bank Group at 30 June 2018 was 14.89% (2017: 14.42%). The tier 1 capital ratio at 30 June 2018 was 12.68% (2017: 12.06%). The Group's strong capital position allows for continued growth with significant capital headroom. DIVIDENDS A fully franked interim dividend of 16.0 cents per ordinary share was declared and paid on 26 March 2018 (30 March 2017 – 14.0 cents). A fully franked final dividend of 18.0 cents per ordinary share has been declared by the Board and will be paid on 21 September 2018 (22 September 2017 - 17.0 cents). 28 ANNUAL REPORT Directors’ statutory report (continued)30 JUNE 2018 DIRECTORS The names and particulars of the Directors of the Company in office during or since the end of the financial year are: Professor John S Humphrey LL.B Professor Humphrey was appointed to the Board on 19 February 2008, and was appointed Chairman following the 2009 Annual General Meeting. He was a senior partner in the Brisbane office of international law firm, King & Wood Mallesons (until 1 January 2013), where he specialised in commercial law and corporate mergers and acquisitions. He is now Executive Dean of the Faculty of Law at Queensland University of Technology. He was a Non-Executive Director of Downer-EDI Limited (until November 2016) and is currently a Non-Executive Director of Horizon Oil Limited. Professor Humphrey is a member of the Audit Committee and is an independent Director. Mr Barry Dangerfield Mr Dangerfield was appointed to the Board on 22 November 2011. Mr Dangerfield has had a successful 39 year banking career with Westpac Banking Corporation having held positions across Queensland and the Northern Territory of Regional Manager Business Banking, Head of Commercial and Agribusiness and Regional General Manager Retail Banking. Mr Dangerfield is the Chairman of the Group Board Remuneration Committee, a member of the Audit Committee, a member of the Risk Committee and is an independent Director. Mr Dangerfield served as a Director of Money Place Holdings Pty Ltd until January 2018. Mr Dangerfield is currently a Director of the Bundaberg Friendly Society Medical Institute which operates the Friendly Society Private Hospital and Pharmacies in Bundaberg and is Chairman of the Institute’s Audit and Risk Committee. Mr Gregory N Kenny GAICD, GradDipFin Mr Kenny was appointed to the Board on 19 November 2013. Mr Kenny has had a long and successful career with Westpac Banking Corporation and St George Bank Ltd, and prior to that with Bank of New York and Bank of America in Australia. At St George Bank he held the positions of Managing Director (NSW and ACT), General Manager Corporate and Business Bank and General Manager Group Treasury and Capital Markets. Mr Kenny served as a Director of MoneyPlace Holdings Pty Ltd until January 2018. Mr Kenny is the Chairman of the Risk Committee, a member of the Audit Committee, a member of the Group Board Remuneration Committee and is an independent Director. Mr Martin J Barrett BA(ECON), MBA Mr Barrett commenced as Chief Executive Officer of Wide Bay Australia Ltd (now Auswide Bank Ltd) on 4 February 2013, and was subsequently appointed Managing Director on 19 September 2013. Mr Barrett has extensive experience in the banking sector, having previously held the positions of Managing Director (Queensland, Western Australia and National Motor Finance Business) and General Manager NSW/ACT Corporate & Business Bank at St George Bank Ltd. Prior to working at St George Bank, Mr Barrett held senior roles at regional financial institutions in the United Kingdom and at National Australia Bank. Mr Barrett served as a Director of MoneyPlace Holdings Pty Ltd until January 2018. Mr Barrett is an Executive Director. Ms Sandra C Birkensleigh BCom, CA, GAICD, ICCP (Fellow) Ms Birkensleigh was appointed to the Board on 2 February 2015. Ms Birkensleigh was previously a partner at PricewaterhouseCoopers for 16 years until 2013. During her career her predominant industry focus has been Financial Services (Banking and Wealth Management). Ms Birkensleigh has also advised on risk management in other sectors such as retail and consumer goods, retail and wholesale electricity companies, resources and the education sector. Ms Birkensleigh is currently a Non-Executive Director of MLC Insurance Limited, the National Disability Insurance Agency, Horizon Oil Limited, 7-11 Holdings and its subsidiaries and the Sunshine Coast Children’s Therapy Centre. She is an independent member of the Audit Committee of the Reserve Bank of Australia, and a Council Member of the University of the Sunshine Coast. Ms Birkensleigh is the Chairperson of the Audit Committee, a member of the Group Board Remuneration Committee, a member of the Risk Committee and is an independent Director. COMPANY SECRETARY Mr William R Schafer BCom, CA Mr Schafer was appointed Company Secretary in August 2001. He has extensive experience in public accounting and management. He is an Associate of the Institute of Chartered Accountants. AUSWIDE BANK – 30 JUNE 2018 29 DIRECTORS’ MEETINGS During the financial year, 15 meetings of the Directors, 5 meetings of the Audit Committee, 3 meetings of the Remuneration Committee and 6 meetings of the Risk Committee were held, in respect of which each Director attended the following number: JS Humphrey B Dangerfield GN Kenny MJ Barrett SC Birkensleigh Board Audit Remuneration Risk Held Attended Held Attended Held Attended Held Attended 15 15 15 15 15 14 15 14 15 15 5 5 5 5 5 3 5 4 5* 5 n/a 3 3 n/a 3 n/a 3 3 n/a 3 n/a n/a 6 6 6 6 6 6 6* 5 * Mr Barrett, who is not a member of the Audit or Risk Committees, attended the Audit and Risk Committee meetings by invitation. DIRECTORS’ SHAREHOLDINGS The Directors currently hold shares of the Company in their own name or a related body corporate as follows: JS Humphrey MJ Barrett B Dangerfield GN Kenny Ordinary Shares 31,551 158,970 43,291 15,000 RELATED PARTY DISCLOSURE No persons or entities related to key management personnel provided services to the Company during the year. REMUNERATION REPORT The Board Remuneration Committee consists of independent Directors Mr Barry Dangerfield, Mr Greg Kenny and Ms Sandra Birkensleigh. Mr Barry Dangerfield is Chairman of the Committee. The objective of the Board Remuneration Policy is to maintain behaviour that supports the sustained financial performance and security of Auswide Bank Ltd and to reward efforts which increase shareholder and customer value. This objective is upheld by: • appropriately balanced measures of performance weighted towards long-term shareholder interests; • variable performance based pay for the Executive Management Team involving a long-term incentive plan subject to an extended period of performance assessment; • recognition and reward for strong performance; • a considered balance between the capacity to pay and the need to pay to attract and retain capable staff at all levels; • • the exercise of Board discretion as an ultimate means to mitigate unintended consequences of variable pay and to preserve the interests of the shareholders; and short-term and long-term incentive performance criteria are structured within the overall risk management framework of the Company. Remuneration of Non-Executive Directors The fees payable for Non-Executive Directors are determined with reference to industry standards, the size of the Company, performance and profitability. The Directors’ fees are approved by the shareholders at the Annual General Meeting in the aggregate and the individual allocation is approved by the Board. The Company’s Non-Executive Directors receive only fees (including superannuation) for their services. They are not entitled to receive any benefit on retirement or resignation (other than superannuation) and do not participate in any share based remuneration. Remuneration of Executive Directors and Senior Executives Remuneration of the Managing Director for 2017/18 was subject to review and recommendation of the Remuneration Committee and ratification by the Board. Remuneration of the Executive Management Team for 2017/18 was subject to ratification by the Remuneration Committee. The Remuneration Policy for executives uses a range of components to focus the Managing Director and the Executive Management Team toward achieving Auswide Bank’s strategy and business objectives. Auswide Bank’s overall philosophy is to adopt, where possible, a Total Target Reward methodology which links remuneration directly to the performance and behaviour of an individual with Auswide Bank’s results. 30 ANNUAL REPORT Directors’ statutory report (continued)30 JUNE 2018 The Total Target Reward framework is designed to: • reward those who deliver the highest relative performance through the Company’s incentive programs; • attract, recognise, motivate and retain high performers; • provide competitive, fair and consistent rewards, benefits and conditions; and • align the interests of senior executives and shareholders through ownership of Company shares. In setting an individual’s Total Target Reward, the Committee considers: • input from the Company’s Managing Director on the Total Target Reward for the Executive Management Team who report directly to the Managing Director; • market data from comparable roles in the financial services industry; • the performance of both the individual and Auswide Bank Ltd over the last year; and • general remuneration market environment and trends. Each individual’s actual remuneration will reflect: • the degree of individual achievement in meeting key performance measures under the performance management framework; • parameters approved by the Board based on the Company’s financial and risk performance and other qualitative factors; • Auswide Bank Ltd’s share price performance and relative shareholder returns; and • the timing and level of deferral in relation to any vesting conditions applicable. Components of the Total Target Reward include: • Fixed Annual Remuneration (FAR) provided as cash and benefits (including employer superannuation and fringe benefits); • cash based short-term incentives reflecting both individual and business performance for the current year that supports the longer term objectives of Auswide Bank; and • equity based long-term incentives provided to drive management decisions focused on the long-term prosperity of Auswide Bank through the use of challenging performance hurdles. Short Term Incentives (STI) Payment of STIs is conditional upon the achievement of key performance measures tailored to the respective role. The performance measures and objectives are selected to provide a robust link between executive reward and the key business drivers of long term shareholder value. The KPls are measured relating to Company and personal performance accountabilities and include financial, strategic, operational and customer/stakeholder measures. These measures are chosen and weighted to best align the individual’s reward to the KPls of the Company and its overall performance. The financial performance objectives are profit before and after income tax compared to budgeted amounts and management of costs in line with divisional organisational budgets. These measures reasonably capture the effects of a number of material risks and minimise actions that promote short-term results at the expense of longer-term business growth and success. The non-financial objectives vary with position and responsibility and include measures such as achieving strategic outcomes, compliance and support of the Company’s risk management policies and compliance culture, customer satisfaction, communication and staff development. Performance based payments were made to the Executive Management Team under the STI scheme as an incentive payment to recognise and reward the achievement of KPI targets relating to the financial year ended 30 June 2017. Cash payments were granted on the 21 September 2017, and allocated to the Executive Management Team as follows: • Mr MJ Barrett (Managing Director): $37,500; • Mr WR Schafer (Chief Financial Officer): $23,400; • Mr SM Caville (Chief Information Officer): $13,525; • Mr D Hearne (Chief Customer Officer): $20,250; • Mrs GM Job (Chief People Officer): $13,563; • Mr CA Lonergan (Chief Risk Officer): $15,524; and • Mr MS Rasmussen (Chief Operating Officer): $16,003. AUSWIDE BANK – 30 JUNE 2018 31 REMUNERATION REPORT (CONTINUED) Short Term Incentives (STI) (continued) The payment of STIs is at the complete discretion of the Board and can be adjusted downwards to zero, if necessary, to protect the financial soundness of the Company and taking into account a qualitative overlay that reflects Auswide Bank’s management of business risks, shareholder expectations and quality of the financial results. Executive Long Term Incentive Plan (ELTIP) The ELTIP was established by the Board to encourage the Executive Management Team to drive the long-term prosperity of Auswide Bank and have a greater involvement in the achievement of the Company’s objectives. Under the ELTIP an offer may be made to the members of the Executive Management Team every year as determined by the Board. The maximum value of the offer is determined as a percentage of the FAR of each member of the Executive Management Team. The maximum percentages used are up to 50.0% for the Managing Director and up to 30.0% for Executive Managers. In order for the shares to vest, certain performance criteria must be satisfied within a predetermined performance period. KPI targets were considered by the Remuneration Committee to be appropriate measures of performance, as they had been specifically chosen for each executive with the aim of achieving the strategy and business objectives of the Company. The KPI targets for the Managing Director were assessed by the Remuneration Committee. The KPI targets for the other senior executives were assessed by the Managing Director and then ratified by the Remuneration Committee. Any reward payable to the Executive Management Team under the ELTIP offer will be calculated as follows: • no reward will be payable if Total Shareholder Return (TSR) is negative irrespective of the benchmark group performance; • Auswide Bank’s share price performance baseline for TSR calculation for the financial year ELTIP offer is below the set value; • Auswide Bank’s NPAT performance baseline for growth calculation for the financial year ELTIP offer is below the set value. 32 ANNUAL REPORT Directors’ statutory report (continued)30 JUNE 2018 Actual and potential ELTIP allocations Share based payment arrangements affecting remuneration of key management personnel in the current year or future financial years are detailed in the following table. KMP Maximum value $ Vesting date 2014 Offer – June 2014 July 2014 – June 2018 Vested in the 17/18 financial year $ Not yet assessed for vesting $ Barrett, MJ 2015 Offer – June 2015 Barrett, MJ 2016 Offer – September 2016 Barrett, MJ Schafer, WR Caville, SM Job, GM Lonergan, CA Rasmussen, MS 25,000 25,000 30,000 30,000 30,000 25,000 25,000 25,000 5,000 5,000 5,000 4,333 4,333 4,333 4,333 4,333 4,333 5,000 5,000 5,000 5,000 5,000 5,000 1/07/2017 1/07/2018 July 2015 – June 2019 1/07/2017 1/07/2018 1/07/2019 July 2016 – June 2020 1/07/2018 1/07/2019 1/07/2020 1/07/2018 1/07/2019 1/07/2020 1/07/2018 1/07/2019 1/07/2020 1/07/2018 1/07/2019 1/07/2020 1/07/2018 1/07/2019 1/07/2020 1/07/2018 1/07/2019 1/07/2020 2017 Offer – September 2017 July 2017 – June 2021 Barrett, MJ Schafer, WR Caville, SM Hearne, D Job, GM Lonergan, CA Rasmussen, MS 12,500 12,500 12,500 5,333 5,333 5,333 5,333 5,333 5,333 6,374 6,374 6,374 5,333 5,333 5,333 5,333 5,333 5,333 5,333 5,333 5,333 1/07/2019 1/07/2020 1/07/2021 1/07/2019 1/07/2020 1/07/2021 1/07/2019 1/07/2020 1/07/2021 1/07/2019 1/07/2020 1/07/2021 1/07/2019 1/07/2020 1/07/2021 1/07/2019 1/07/2020 1/07/2021 1/07/2019 1/07/2020 1/07/2021 25,000 – 30,000 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 25,000 – 30,000 30,000 25,000 25,000 25,000 5,000 5,000 5,000 4,333 4,333 4,333 4,333 4,333 4,333 5,000 5,000 5,000 5,000 5,000 5,000 12,500 12,500 12,500 5,333 5,333 5,333 5,333 5,333 5,333 6,374 6,374 6,374 5,333 5,333 5,333 5,333 5,333 5,333 5,333 5,333 5,333 Vesting of shares to key management personnel is at the complete discretion of the Board and can be adjusted downwards, to zero if necessary, to protect the financial soundness of the Company and taking into account a qualitative overlay that reflects Auswide Bank’s management of business risks, shareholder expectations and quality of the financial results. AUSWIDE BANK – 30 JUNE 2018 33 REMUNERATION REPORT (CONTINUED) Details of the nature and amount of each major element of the remuneration of each Director and each of the named Officers of the Company receiving the highest remuneration and the key management personnel are: Short-term employee benefits Post employment benefits 2018 Cash salary and fees $ Cash bonus $ Non- monetary $ Super- annuation $ Other long term benefits $ Share based payments $ Total $ Performance based Fixed Performance based SPECIFIED DIRECTORS Humphrey, JS Chairman (non-exec) Birkensleigh, S Director (non-exec) Dangerfield, B Director (non-exec) Kenny, GN Director (non-exec) 146,119 91,324 91,324 91,324 – – – – Barrett, MJ Managing Director 552,052 37,500 Total remuneration – Specified Directors 972,143 37,500 OTHER KEY MANAGEMENT PERSONNEL Schafer, WR Chief Financial Officer Caville, SM Chief Information Officer Hearne, D Chief Customer Officer Job, GM Chief Customer Officer Lonergan, CA Chief Risk Officer Rasmussen, MS Chief Operating Officer Total remuneration – Specified Executives 2017 SPECIFIED DIRECTORS Humphrey, JS Chairman (non-exec) Birkensleigh, S Director (non-exec) Dangerfield, B Director (non-exec) Kenny, GN Director (non-exec) 317,891 183,942 268,427 184,466 191,560 227,541 23,400 13,525 20,250 13,563 15,524 16,003 1,373,827 102,265 146,119 91,324 91,324 91,324 – – – – Barrett, MJ Managing Director 550,364 25,000 Total remuneration – Specified Directors 970,455 25,000 OTHER KEY MANAGEMENT PERSONNEL Schafer, WR Chief Financial Officer Caville, SM Chief Information Officer Hearne, D Chief Customer Officer Job, GM Chief Customer Officer Lonergan, CA Chief Risk Officer Rasmussen, MS Chief Operating Officer Total remuneration – Specified Executives 325,872 187,149 272,940 187,682 195,060 221,877 15,298 13,260 – 13,298 15,000 15,721 1,390,580 72,577 – – – – – – – – – – – – – – – – – – – – – – – – – – 34 ANNUAL REPORT 13,881 8,676 8,676 8,676 – – – – – – – – 160,000 100,000 100,000 100,000 20,049 11,187 55,006 675,794 59,958 11,187 55,006 1,135,794 20,049 18,454 20,049 18,492 18,697 20,049 7,872 4,688 5,061 5,546 3,817 4,409 115,790 31,393 13,881 8,676 8,676 8,676 19,616 – – – – – – – – – – – – – – – 369,212 220,609 313,787 222,067 229,598 268,002 1,623,275 160,000 100,000 100,000 100,000 10,834 25,003 630,817 59,525 10,834 25,003 1,090,817 19,616 18,082 19,616 18,120 18,321 19,616 7,833 4,529 4,880 5,369 3,673 4,294 113,371 30,578 – – – – – – – 368,619 223,020 297,436 224,469 232,054 261,508 1,607,106 Directors’ statutory report (continued)30 JUNE 2018 Employment contracts All named Key Management Personnel and the Managing Director have employment contracts. Major provisions of those agreements are summarised below: Current personnel Managing Director - M J Barrett • Original contract dated – 4 February 2013 • Amended contract dated – 15 July 2016 • Term of agreement – no fixed term • Auswide Bank Ltd or M J Barrett may terminate this agreement by providing six months written notice or provide payment in lieu of the notice period. • Payment of six months redundancy pay on termination of employment if position is made redundant. • Short Term Incentive (STI) – Up to a maximum of $150,000 on achieving KPIs on the basis of percentage allocation in terms of CEO scorecard and measured by populating actual results and discretionary. The CEO must complete a full year of service to be eligible to receive the STI for each applicable financial year, the bonus entitlement will be calculated based on the 30th June results and the overall performance including discretionary as determined by the Board Remuneration Committee and paid on the 30th September. • Long Term Incentive (LTI) – Grant of performance rights up to a maximum value of $150,000 (or such other amount determined by the Board), and as determined by the Board Remuneration Committee. The grant of performance rights, under the terms of Auswide Performance Rights Plan Rules, to subscribe for or be transferred at no cost one share for every performance right exercised. The Managing Director must complete a full year of service to be eligible to receive the LTI for each applicable financial year, the bonus entitlement will be calculated based on the 30th June results and overall performance including discretionary as determined by the Board Remuneration Committee and paid on the 1st July. The performance rights carry no dividend or voting rights. Subject to the vesting conditions 33.33% of the performance rights vest on the second anniversary of the measured performance year, 33.33% on the third anniversary and 33.33% on the fourth anniversary. The vesting conditions are as follows: • • • the Managing Director must be employed at the vesting date; any personal income tax payable on exercise of the performance rights is payable by the Managing Director. the number of performance rights will be adjusted for any capital reconstructions (eg consolidation or splits). Chief Financial Officer & Company Secretary – W R Schafer • Original contract dated – 28 May 2007 • Amended contract dated – 6 December 2016 • Term of agreement – no fixed term • Auswide Bank Ltd or W R Schafer may terminate this agreement by providing four months written notice or provide payment in lieu of the notice period. • Payment on early termination due to a takeover and not being offered ongoing employment in Bundaberg in an equivalent position, equal to six months salary plus two weeks salary per year of service with a minimum payment of 20 weeks and a maximum payment of 104 weeks. • Short Term Incentive (STI) – Payment under the STI Scheme will be subject to the Company’s performance as well as the individual’s own performance in accordance with KPIs determined by the Company and advised on an annual basis. STI up to 15.0% of base salary to the 30th June each year on satisfaction of the KPIs as in place from time to time assessed and determined in the sole and absolute discretion of the Board Remuneration Committee. • Long Term Incentive (LTI) – The grant of performance rights, under the terms of Auswide Performance Rights Plan Rules, is subject to the Company’s performance and the individual’s own performance in accordance with KPIs agreed between the individual and the Company on an annual basis. LTI up to a maximum value of $30,000 or such other amount determined by the Board Remuneration Committee. Awards made under the LTI are at the absolute and sole discretion of the Board. The right to participate in the LTI on an ongoing basis is subject to the discretion of the Board. The granting of an award to an individual under the LTI in one year does not guarantee that similar awards will be made in the future. AUSWIDE BANK – 30 JUNE 2018 35 REMUNERATION REPORT (CONTINUED) Current personnel (continued) Chief Risk Officer – C A Lonergan • Original Contract dated – 10 February 2014 • Amended contracts dated – 1 July 2014, 9 December 2016 • Term of agreement – no fixed term • Auswide Bank Ltd or C A Lonergan may terminate this agreement by providing three months written notice or provide payment in lieu of the notice period. • Payment of six months redundancy pay on termination of employment if position is made redundant. • Short Term Incentive (STI) – Payment under the STI Scheme will be subject to the Company’s performance as well as the individual’s own performance in accordance with KPIs determined by the Company and advised on an annual basis. STI up to 15.0% of base salary to the 30th June each year on satisfaction of the KPIs as in place from time to time assessed and determined in the sole and absolute discretion of the Board Remuneration Committee. • Long Term Incentive (LTI) – The grant of performance rights, under the terms of Auswide Performance Rights Plan Rules, is subject to the Company’s performance and the individual’s own performance in accordance with KPIs agreed between the individual and the Company on an annual basis. LTI up to a maximum value of $30,000 or such other amount determined by the Board Remuneration Committee. Awards made under the LTI are at the absolute and sole discretion of the Board. The right to participate in the LTI on an ongoing basis is subject to the discretion of the Board. The granting of an award to an individual under the LTI in one year does not guarantee that similar awards will be made in the future. Chief Information Officer – S M Caville • Original contract dated – 1 November 2010 • Amended contract dated – 8 December 2016 • Term of agreement – no fixed term • Auswide Bank Ltd or S M Caville may terminate this agreement by providing four months written notice or provide payment in lieu of the notice period. • Payment on early termination due to a takeover and not being offered ongoing employment in Bundaberg in an equivalent position, equal to six months salary plus two weeks salary per year of service with a minimum payment of 20 weeks and a maximum payment of 104 weeks. • Short Term Incentive (STI) – Payment under the STI Scheme will be subject to the Company’s performance as well as the individual’s own performance in accordance with KPIs determined by the Company and advised on an annual basis. STI up to 15.0% of base salary to the 30th June each year on satisfaction of the KPIs as in place from time to time assessed and determined in the sole and absolute discretion of the Board Remuneration Committee. • Long Term Incentive (LTI) – The grant of performance rights, under the terms of Auswide Performance Rights Plan Rules, is subject to the Company’s performance and the individual’s own performance in accordance with KPIs agreed between the individual and the Company on an annual basis. LTI up to a maximum value of $30,000 or such other amount determined by the Board Remuneration Committee. Awards made under the LTI are at the absolute and sole discretion of the Board. The right to participate in the LTI on an ongoing basis is subject to the discretion of the Board. The granting of an award to an individual under the LTI in one year does not guarantee that similar awards will be made in the future. Chief Operating Officer – M S Rasmussen • Original contract dated – 3 February 2014 • Amended contracts dated – 29 January 2015, 12 December 2016 • Term of agreement – no fixed term • Auswide Bank Ltd or M S Rasmussen may terminate this agreement by providing three months written notice or provide payment in lieu of the notice period. • Payment of six months redundancy pay on termination of employment if position is made redundant. • Short Term Incentive (STI) – Payment under the STI Scheme will be subject to the Company’s performance as well as the individual’s own performance in accordance with KPIs determined by the Company and advised on an annual basis. STI up to 15.0% of base salary to the 30th June each year on satisfaction of the KPIs as in place from time to time assessed and determined in the sole and absolute discretion of the Board Remuneration Committee. 36 ANNUAL REPORT Directors’ statutory report (continued)30 JUNE 2018 • Long Term Incentive (LTI) – The grant of performance rights, under the terms of Auswide Performance Rights Plan Rules, is subject to the Company’s performance and the individual’s own performance in accordance with KPIs agreed between the individual and the Company on an annual basis. LTI up to a maximum value of $30,000 or such other amount determined by the Board Remuneration Committee. Awards made under the LTI are at the absolute and sole discretion of the Board. The right to participate in the LTI on an ongoing basis is subject to the discretion of the Board. The granting of an award to an individual under the LTI in one year does not guarantee that similar awards will be made in the future. Chief Customer Officer – D Hearne • Contract dated – 20 June 2016 • Term of agreement – no fixed term • Auswide Bank Ltd or D Hearne may terminate this agreement by providing four months written notice or provide payment in lieu of the notice period. • Payment of six months redundancy pay on termination of employment if position is made redundant. • Short Term Incentive (STI) – Payment under the STI Scheme will be subject to the Company’s performance as well as the individual’s own performance in accordance with KPIs determined by the Company and advised on an annual basis. STI up to 25.0% of base salary as at the 30th June each year and on satisfaction of the KPIs as in place from time to time assessed and determined in the sole and absolute discretion of the Board Remuneration Committee. • Long Term Incentive (LTI) – The grant of performance rights, under the terms of Auswide Performance Rights Plan Rules, is subject to the Company’s performance and the individual’s own performance in accordance with KPIs agreed between the individual and the Company on an annual basis. LTI up to a maximum value of 15.0% of base salary as at the 30th June each year (or such other amount determined by the Board Remuneration Committee). Awards made under the LTI are at the absolute and sole discretion of the Board. The right to participate in the LTI on an ongoing basis is subject to the discretion of the Board. The granting of an award to an individual under the LTI in one year does not guarantee that similar awards will be made in the future. Chief People Officer – G M Job • Original contract dated – 4 June 2007 • Amended contract dated – 6 December 2016 • Term of agreement – no fixed term • Auswide Bank Ltd or G M Job may terminate this agreement by providing three months written notice or provide payment in lieu of the notice period. • Payment on early termination due to a takeover and not being offered ongoing employment in Bundaberg in an equivalent position, equal to four months salary plus two weeks salary per year of service with a minimum payment of 16 weeks and a maximum payment of 104 weeks. • Short Term Incentive (STI) – Payment under the STI Scheme will be subject to the Company’s performance as well as the individual’s own performance in accordance with KPIs determined by the Company and advised on an annual basis. STI up to 15.0% of base salary to the 30th June each year on satisfaction of the KPIs as in place from time to time assessed and determined in the sole and absolute discretion of the Board Remuneration Committee. • Long Term Incentive (LTI) – The grant of performance rights, under the terms of Auswide Performance Rights Plan Rules, is subject to the Company’s performance and the individual’s own performance in accordance with KPIs agreed between the individual and the Company on an annual basis. LTI up to a maximum value of $30,000 or such other amount determined by the Board Remuneration Committee. Awards made under the LTI are at the absolute and sole discretion of the Board. The right to participate in the LTI on an ongoing basis is subject to the discretion of the Board. The granting of an award to an individual under the LTI in one year does not guarantee that similar awards will be made in the future. AUSWIDE BANK – 30 JUNE 2018 37 REMUNERATION REPORT (CONTINUED) Consequences of performance on shareholder wealth The tables below set out summary information about the Consolidated Entity’s earnings from continuing and discontinued operations and movements in shareholder wealth for the five years to 30 June 2018: Net profit before tax Net profit after tax Share price at start of year Share price at end of year Interim dividend Final dividend Basic earnings per share Diluted earnings per share 30 June 2018 $’000 25,158 17,886 30 June 2018 $5.14 $5.63 16.00 cps 18.00 cps 42.83 cps 42.83 cps 30 June 2017 $’000 21,870 15,149 30 June 2017 $5.08 $5.14 14.00 cps 17.00 cps 37.35 cps 37.35 cps 30 June 2016 $’000 17,606 11,699 30 June 2016 $5.05 $5.08 14.00 cps 16.00 cps 31.20 cps 31.20 cps 30 June 2015 $’000 19,028 13,262 30 June 2015 $5.50 $5.05 14.00 cps 16.00 cps 36.07 cps 36.07 cps 30 June 2014 $’000 20,192 14,062 30 June 2014 $5.25 $5.50 13.00 cps 15.00 cps 38.75 cps 38.75 cps Dividends franked to 100% at 30% corporate income tax rate. Loans to key management personnel The following table outlines the aggregate of loans to key management personnel. Details are provided on an individual basis for each of the key management personnel whose indebtedness exceeded $100,000 at any time during this reporting period. Loans have been made in accordance with the normal terms and conditions offered by the Company and charged at 140 basis points below the standard variable rate or 20 basis points below the standard fixed rate on applicable loan types, available to the general public at any time. Similar rates are, however, available to the general public, therefore this interest rate would approximate an arm’s length interest rate offered by the Company. Loans are also made in accordance with the Staff Share Plan approved by shareholders in 1992. The loans are repayable over 5 years at 0% interest, with the loans being secured by a lien over the relevant shares. Such loans are only available to employees of the Company and there is no applicable arm’s length interest to take into account. Loans for the year ended 30 June 2018 Directors Executives Total: Key management personnel Loans for the year ended 30 June 2017 Directors Executives Total: Key management personnel Individuals with loans above $100,000 in reporting period Directors MJ Barrett Executives WR Schafer Balance 30 June 2017 $ (1,806,591) (589,242) (2,395,833) Balance 30 June 2016 $ (1,910,317) (1,618,330) (3,528,647) Balance 30 June 2017 $ Interest charged $ 64,387 7,079 71,466 Interest charged $ 62,203 18,546 80,749 Write-off $ – – – Balance 30 June 2018 $ (1,846,339) (172,494) (2,018,833) Number in Group 30 June 2018 1 4 5 Write–off $ Balance 30 June 2017 $ Number in Group 30 June 2017 $ – – – (1,806,591) (589,242) (2,395,833) 1 4 5 Interest* charged $ Write–off $ Balance 30 June 2018 $ Highest in period $ (1,806,591) 64,387 (478,247) 6,593 – – (1,846,339) (1,906,203) (66,842) (499,099) Does not include SM Caville, GM Job or CA Lonergan as their loans were less than $100,000. * Actual interest charged is affected by the use of the Company’s offset account. 38 ANNUAL REPORT Directors’ statutory report (continued)30 JUNE 2018 Equity holdings and transactions The following table is in respect of ordinary shares held directly, indirectly or beneficially by key management personnel. Directors JS Humphrey B Dangerfield GN Kenny MJ Barrett Executives WR Schafer SM Caville GM Job CA Lonergan Total Balance 30 June 2017 Received as remuneration Options exercised Net change other Balance 30 June 2018 31,551 43,291 15,000 149,818 34,000 44,240 105,970 8,064 431,934 – – – 9,152 – – – – 9,152 – – – – – – – – – – – – – 8,000 – 6,494 3,936 18,430 31,551 43,291 15,000 158,970 42,000 44,240 112,464 12,000 459,516 * Balance at financial year end or the date the individuals ceased being key management personnel. AUSWIDE BANK – 30 JUNE 2018 39 INDEMNITIES AND INSURANCE PREMIUMS FOR OFFICERS AND AUDITORS During the financial year the Company has paid premiums to cover directors and officers for losses arising from claims or allegations made against them for wrongful acts committed or alleged to have been committed by them in their capacities as directors or officers of the Company. The policy will also reimburse the Company where it is permitted by law to indemnify Insured Persons in relation to such claims or allegations. Cover is provided for the costs of defending such claims or allegations. During the reporting period and subsequent to 30 June 2018, no amounts have been paid pursuant to the policy. NON-AUDIT SERVICES During the year, Deloitte Touche Tohmatsu, the Company’s Auditor, performed certain other services in addition to their statutory duties. The Board has considered the non-audit services provided during the year by the Auditor, and in accordance with advice provided by the Board Audit Committee, is satisfied that the provision of those non-audit services during the year by the Auditor is compatible with, and did not compromise, the auditor independence requirements of the Corporations Act 2001 for the following reasons: • All non-audit services were subject to the Corporate Governance procedures adopted by the Company and have been reviewed by the Board Audit Committee to ensure they do not impact the integrity and objectivity of the Auditor, and • The non-audit services provided do not 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 and Ethical Standards Board, as they did not involve reviewing or auditing the Auditor’s own work, acting in a management or decision making capacity for the Company, acting as an advocate for the Company or jointly sharing risks and rewards. A copy of the Auditor’s Independence Declaration, as required under Section 307C of the Corporations Act 2001, is included in the Directors’ Statutory Report. Non-audit services paid to Deloitte Touche Tohmatsu are as follows: Services provided in connection with: Tax advisory services Other assurance services 2018 $ 88,841 87,166 176,007 2017 $ 76,804 82,114 158,918 This Report is signed for and on behalf of the Board of Directors in accordance with a resolution of the Board of Directors. JS Humphrey Director Brisbane 23 August 2018 SC Birkensleigh Director 40 ANNUAL REPORT Directors’ statutory report (continued)30 JUNE 2018 Auditors’ independence declaration 30 JUNE 2018 Deloitte Touche Tohmatsu ABN 74 490 121 060 Riverside Centre Level 23 123 Eagle Street Brisbane QLD 4000 GPO Box 1463 Brisbane QLD 4001 Australia Tel: +61 7 3308 7000 Fax: +61 7 3308 7002 www.deloitte.com.au The Board of Directors Auswide Bank Ltd PO Box 1063 Bundaberg QLD 4760 23 August 2018 Dear Board Members Auswide Bank Ltd In accordance with section 307C of the Corporations Act 2001, I am pleased to provide the following declaration of independence to the directors of Auswide Bank Ltd. As lead audit partner for the audit of the financial statements of Auswide Bank Ltd 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 David Rodgers Partner Chartered Accountants Liability limited by a scheme approved under Professional Standards Legislation Member of Deloitte Touche Tohmatsu Limited AUSWIDE BANK – 30 JUNE 2018 41 Consolidated statement of profit or loss and other comprehensive income FOR THE YEAR ENDED 30 JUNE 2018 Consolidated Company Notes 2 2 3 10 4 35 Interest revenue Interest expense Net interest revenue Other non interest income Employee benefits expense Depreciation expense Amortisation expense Occupancy expense Bad and doubtful debts expense Fees and commissions General and administration expenses Other expenses Profit before income tax expense Income tax expense Profit for the year from continuing operations Profit/(loss) for the year from discontinued operations Profit for the year Other comprehensive income, net of income tax Items that may be reclassified to profit or loss Revaluation of cash flow hedge to fair value Revaluation of RMBS investments to fair value Income tax relating to these items Items that will not be reclassified to profit or loss Revaluation of land and buildings to fair value 21 Income tax relating to this item Other comprehensive income/(loss) for the year, net of income tax Total comprehensive income for the year Profit for the year attributable to: Owners of the Company Non-controlling interests Total comprehensive income attributable to: Owners of the Company Non-controlling interests Earnings per share From continuing and discontinued operations Basic (cents per share) Diluted (cents per share) From continuing operations Basic (cents per share) Diluted (cents per share) 22 22 26 26 26 26 2018 $’000 128,933 (67,913) 61,020 9,348 19,427 1,992 690 2,320 1,320 8,847 10,671 702 24,399 7,355 17,044 611 17,655 (265) (3) 80 1,446 (434) 824 18,479 17,886 (231) 17,655 18,710 (231) 18,479 42.83 42.83 40.81 40.81 2017 $’000 125,905 (68,397) 57,508 9,760 18,935 1,918 662 2,353 979 9,594 10,701 246 21,880 6,677 15,203 (194) 15,009 861 (12) (255) – – 594 15,603 15,149 (140) 15,009 15,743 (140) 15,603 37.35 37.35 37.48 37.48 2018 $’000 128,933 (67,913) 61,020 9,348 19,427 1,992 690 2,320 1,320 8,847 10,671 702 24,399 7,355 17,044 2,301 19,345 (265) (3) 80 1,446 (434) 824 20,169 19,345 – 19,345 20,169 – 20,169 2017 $’000 125,905 (68,397) 57,508 9,760 18,935 1,918 662 2,353 979 9,594 10,701 246 21,880 6,677 15,203 – 15,203 861 (12) (255) – – 594 15,797 15,203 – 15,203 15,797 – 15,797 The above consolidated statement of profit or loss and other comprehensive income should be read in conjunction with the accompanying notes. 42 ANNUAL REPORT Consolidated statement of financial position AS AT 30 JUNE 2018 ASSETS Cash and cash equivalents Due from other financial institutions Accrued receivables Financial assets Loans and advances Other investments Property, plant and equipment Other intangible assets Deferred tax assets Other assets Goodwill Total assets LIABILITIES Deposits and short term borrowings Payables and other liabilities Loans under management Current tax liabilities Deferred income tax liabilities Provisions Subordinated capital notes Total liabilities Net assets EQUITY Contributed equity Reserves Retained profits Equity attributable to owners of the Company Non-controlling interests Contributed equity Retained profits Total non-controlling interests Total equity Notes 6 7 8 9 10 11 12 15 4 13 14 16 17 10 4 4 18 19 20 21 22 Consolidated Company 2018 $’000 86,361 15,389 5,298 2017 $’000 120,065 11,763 6,735 2018 $’000 86,361 15,389 5,298 2017 $’000 121,142 11,763 6,714 254,293 291,948 286,679 322,334 2,910,847 2,773,220 2,910,990 2,773,390 1,144 15,576 1,956 4,573 8,475 46,363 1,069 14,606 7,935 5,256 8,406 48,975 1,144 15,576 1,956 4,573 8,476 46,363 5,153 14,606 2,564 5,256 8,260 46,363 3,350,275 3,289,978 3,382,805 3,317,545 2,446,825 2,304,604 2,446,860 2,304,604 26,007 607,166 721 1,891 2,923 18,637 708,020 1,222 2,947 2,840 26,000 639,552 1,182 1,891 2,923 18,325 738,406 1,222 1,580 2,758 28,000 28,000 28,000 28,000 3,113,533 3,066,270 3,146,408 3,094,895 236,742 223,708 236,397 222,650 191,612 15,232 29,898 236,742 – – – 184,752 13,978 23,687 222,417 1,431 (140) 1,291 191,746 15,232 29,419 236,397 – – – 184,752 14,167 23,731 222,650 – – – 236,742 223,708 236,397 222,650 The above consolidated statement of financial position should be read in conjunction with the accompanying notes. AUSWIDE BANK – 30 JUNE 2018 43 Consolidated statement of cash flows FOR THE YEAR ENDED 30 JUNE 2018 Notes Cash flows from operating activities Interest received Other non interest income and receivables Interest paid Cash paid to suppliers and employees (inclusive of goods and services tax) Income tax paid Net cash provided by/(used in) operating activities 23 Cash flows from investing activities Net movement in financial assets Net movement in amounts due from other financial institutions Net movement in loans and advances Net movement in other investments Payments for non current assets Net cash inflow/(outflow) from discontinued operations Consolidated Company 2018 $’000 128,674 17,721 (66,757) (32,831) (8,472) 38,335 37,651 (3,626) 2017 $’000 126,296 9,350 (71,532) (40,470) (4,398) 19,246 (65,623) 10,251 2018 $’000 128,674 19,089 (66,757) (32,441) (6,754) 41,811 35,651 (3,626) 2017 $’000 126,292 11,898 (71,529) (41,406) (5,743) 19,512 (70,159) 10,251 (141,788) (113,241) (141,762) (113,842) (75) (1,679) 6,660 (557) (6,001) – 4,008 (1,679) – (3,382) (1,537) – Net cash provided by/(used in) investing activities (102,857) (175,171) (107,408) (178,669) Cash flows from financing activities Net movement in deposits and short-term borrowings Net movement in loans under management Proceeds from share issue Treasury shares Dividends paid Net cash provided by/(used in) financing activities Net movement in cash and cash equivalents Cash and cash equivalents at the beginning of the financial year 137,263 (99,656) 291 (134) (6,946) 30,818 (33,704) 120,065 124,012 94,191 349 – (10,354) 208,198 52,273 67,792 135,324 (97,845) 291 – (6,954) 30,816 (34,781) 121,142 125,109 97,411 349 – (10,362) 212,507 53,350 67,792 Cash and cash equivalents at end of the financial year 6 86,361 120,065 86,361 121,142 For the purposes of the consolidated statement of cash flows, cash includes cash on hand and deposits on call. The cash at the end of the year can be agreed directly to the consolidated statement of financial position. The above consolidated statement of cash flows should be read in conjunction with the accompanying notes. 44 ANNUAL REPORT Consolidated statement of changes in equity FOR THE YEAR ENDED 30 JUNE 2018 l a t o T y t i u q e 0 0 0 $ ’ 5 5 6 6 1 2 , 9 4 1 , 5 1 – – ) 2 ( 5 2 ) 2 1 ( 4 1 6 8 ) 8 5 2 ( – – – – – – ) 0 4 1 ( ) 0 4 1 ( – – – 5 2 – – – – ) 8 2 1 , 2 1 ( – 9 4 3 4 7 7 , 1 1 3 4 , 1 – – 1 3 4 , 1 – – – – 2 8 2 2 3 2 , ) 0 4 1 ( ) 9 8 1 ( - n o N - e r a h S w o fl h s a C l e b a l i a v A l u f t b u o D t e s s A 0 0 0 $ ’ 0 0 0 $ ’ 0 0 0 $ ’ g n i l l o r t n o c d e s a b i g n g d e h s t s e r e t n i s t n e m y a p e v r e s e r l e a s r o f e v r e s e r 0 0 0 $ ’ s t b e d 0 0 0 $ ’ e v r e s e r 0 0 0 $ ’ e v r e s e r y r o t u t a t S l a r e n e G e v r e s e r 0 0 0 $ ’ 0 0 0 $ ’ e v r e s e r s t fi o r p 0 0 0 $ ’ n o i t a u a v e r l i d e n a t e R e r a h S l a t i p a c 0 0 0 $ ’ y r a n d r o i d t L k n a B e d w s u A i f o s r e n w o o t e b a t u b i r t t A l ) 4 1 2 ( ) 4 8 7 ( 3 1 1 8 8 3 2 , 6 7 6 2 , 4 3 8 5 , 5 4 3 3 , 8 6 6 0 2 , 9 2 6 2 8 1 , – – – – – – 1 6 8 ) 8 5 2 ( ) 1 8 1 ( – – – – – – – – ) 2 1 ( 4 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – ) 2 ( – – – – – 9 4 1 , 5 1 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – ) 8 2 1 , 2 1 ( – – 9 4 3 4 7 7 , 1 5 0 1 8 8 3 2 , 6 7 6 2 , 4 3 8 5 , 5 4 3 3 , 5 1 8 5 3 , 9 2 6 2 8 1 , i s e i r a d i s b u s i f o p u d n w o t e u d s t fi o r p d e n a t e r o t i r e f s n a r T S B M R l f o n o i t a u a v e r n o t n e m t s u d a y t i l i j b a i l x a t d e r r e f e D s t n e m t s e v n i e g d e h w o fl h s a c l f o n o i t a u a v e r o t e u d ) e s a e r c e d ( e s a e r c n I h s a c l f o n o i t a u a v e r n o t n e m t s u d a y t i l i j b a i l x a t d e r r e f e D e g d e h w o fl e u a v l r i a f o t l a t o t - b u S l n a p e r a h s ff a t s r o f l a t i p a c e r a h s f o e u s s I S B M R l f o n o i t a u a v e r o t e u d ) e s a e r c e d ( e s a e r c n I e u a v l r i a f o t s t n e m t s e v n i l s e e y o p m e o t s e r a h s f o e u s s I y n a p m o c t n e r a p f o s r e b m e m o t e b a t u b i r t t a t fi o r P l s t s e r e t n i g n i l l l o r t n o c - n o n o t e b a t u b i r t t a t fi o r P : r a e y e h t r o f e m o c n i e v i s n e h e r p m o c l a t o T 6 1 0 2 y u J l 1 t a e c n a a B l y t i t n e d e t a d i l o s n o C l n a p t n e m t s e v n e r d n e d v d r o f i i i l a t i p a c e r a h s f o e u s s I n o i t i s i u q c a n o g n i s i r a s t s e r e t n i g n i l l o r t n o c - n o N s e r a h s i i y r a n d r o - d a p r o r o f d e d v o r p s d n e d v D i i i 8 0 7 , 3 2 2 1 9 2 , 1 ) 9 8 1 ( ) 1 8 1 ( 5 0 1 8 8 3 2 , 6 7 6 2 , 4 3 8 5 , 5 4 3 3 , 7 8 6 3 2 , 2 5 7 , 4 8 1 7 1 0 2 e n u J 0 3 t a e c n a a B l i . s e t o n g n y n a p m o c c a e h t h t i w n o i t c n u n o c n j i d a e r e b d u o h s l y t i u q e n i s e g n a h c f o t n e m e t a t s d e t a d i l o s n o c e v o b a e Th AUSWIDE BANK – 30 JUNE 2018 45 Consolidated statement of changes in equity (continued) FOR THE YEAR ENDED 30 JUNE 2018 6 8 8 , 7 1 – ) 1 3 2 ( ) 1 3 2 ( ) 0 6 0 , 1 ( ) 0 6 0 , 1 ( 5 5 5 7 3 4 7 9 , 1 ) 3 ( 6 4 4 , 1 ) 4 3 4 ( ) 5 6 2 ( 0 8 1 9 2 , 1 3 5 3 4 2 ) 1 1 2 ( ) 4 3 1 ( 4 1 9 6 , ) 9 4 6 3 1 ( , 2 4 7 , 6 3 2 – – – – – – – – – – – – – – – – – – – 5 5 5 7 3 – – – – – – – – – – 1 4 2 – – – – – – – – – ) 5 6 2 ( 0 8 ) 6 6 3 ( – – – – – – – – – – – ) 3 ( – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 6 4 4 , 1 ) 4 3 4 ( – – 8 0 7 , 3 2 2 1 9 2 , 1 ) 9 8 1 ( ) 1 8 1 ( 5 0 1 8 8 3 2 , 6 7 6 2 , 4 3 8 5 , 5 4 3 3 , l a t o T y t i u q e 0 0 0 $ ’ - n o N 0 0 0 $ ’ s t s e r e t n i g n i l l o r t n o c - e r a h S d e s a b 0 0 0 $ ’ s t n e m y a p i g n g d e h 0 0 0 $ ’ e v r e s e r l e a s r o f e v r e s e r 0 0 0 $ ’ s t b e d 0 0 0 $ ’ e v r e s e r w o fl h s a C l e b a l i a v A l u f t b u o D 0 0 0 $ ’ e v r e s e r y r o t u t a t S l a r e n e G e v r e s e r 0 0 0 $ ’ d t L k n a B e d w s u A i f o s r e n w o o t e b a t u b i r t t A l 0 0 0 $ ’ e v r e s e r t e s s A n o i t a u a v e r l i d e n a t e R s t fi o r p 0 0 0 $ ’ 7 8 6 3 2 , 6 8 8 , 7 1 – – 4 7 9 , 1 – – – – – – – – – – – – – – – – – – e r a h S l a t i p a c 0 0 0 $ ’ y r a n d r o i 2 5 7 , 4 8 1 n o t s e r e t n i g n i l l o r t n o c - n o n f o n o i t a d i l o s n o c e D l e c a P y e n o M f o l a s o p s i d S B M R l f o n o i t a u a v e r o t e u d ) e s a e r c e d ( e s a e r c n I e u a v l r i a f o t s t n e m t s e v n i d n a l l f o n o i t a u a v e r o t e u d ) e s a e r c e d ( e s a e r c n I s t n e m y a p d e s a b - e r a h s f o n o i t i n g o c e R l s e e y o p m e o t s e r a h s f o e u s s I i s e i r a d i s b u s i f o p u d n w o t e u d s t fi o r p d e n a t e r o t i r e f s n a r T e u a v l r i a f o t s g n d i l i u b d n a l n o i t a u a v e r n o t n e m t s u d a y t i l i j b a i l x a t d e r r e f e D h s a c l f o n o i t a u a v e r o t e u d ) e s a e r c e d ( e s a e r c n I e u a v l r i a f o t e g d e h w o fl s g n d i l i u b d n a d n a l f o l n o i t a u a v e r n o t n e m t s u d a y t i l i j b a i l x a t d e r r e f e D l n a p e r a h s ff a t s r o f l a t i p a c e r a h s f o e u s s I e g d e h w o fl h s a c f o l a t o t - b u S i d n e d v d r o f i l a t i p a c e r a h s f o e u s s I l n a p t n e m t s e v n e r i s t s o c e u s s i e r a h S s e r a h s y r u s a e r T i – d a p r o r o f d e d v o r p s d n e d v D i i i s t s e r e t n i g n i l l l o r t n o c - n o n o t e b a t u b i r t t a t fi o r P : r a e y e h t r o f e m o c n i e v i s n e h e r p m o c l a t o T t n e r a p f o s r e b m e m o t e b a t u b i r t t a t fi o r P l y n a p m o c 7 1 0 2 y u J l 1 t a e c n a a B l y t i t n e d e t a d i l o s n o C 46 ANNUAL REPORT – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 1 9 2 ) 1 1 2 ( ) 4 3 1 ( 4 1 9 6 , ) 9 4 6 3 1 ( , – 2 0 1 8 8 3 2 , 6 7 6 2 , 4 3 8 5 , 7 5 3 4 , 7 4 5 3 4 , 2 5 7 , 4 8 1 1 4 2 ) 6 6 3 ( 2 0 1 8 8 3 2 , 6 7 6 2 , 4 3 8 5 , 7 5 3 4 , 8 9 8 9 2 , 2 1 6 , 1 9 1 8 1 0 2 e n u J 0 3 t a e c n a a B l s e r a h s y r a n d r o i i . s e t o n g n y n a p m o c c a e h t h t i w n o i t c n u n o c n j i d a e r e b d u o h s l y t i u q e n i s e g n a h c f o t n e m e t a t s d e t a d i l o s n o c e v o b a e Th l a t o T y t i u q e 0 0 0 $ ’ 7 2 0 5 1 2 , 3 0 2 5 1 , 8 3 8 , 1 ) 2 1 ( 4 1 6 8 ) 8 5 2 ( 9 4 3 3 6 6 2 3 2 , 4 7 7 , 1 ) 6 3 1 , 2 1 ( 0 5 6 2 2 2 , – – – – – – – – – – – – – – – – – – – – – – – – – – – – 1 6 8 ) 8 5 2 ( ) 1 8 1 ( – – – - n o N 0 0 0 $ ’ s t s e r e t n i g n i l l o r t n o c - e r a h S d e s a b 0 0 0 $ ’ s t n e m y a p i g n g d e h 0 0 0 $ ’ e v r e s e r l e a s r o f e v r e s e r 0 0 0 $ ’ s t b e d 0 0 0 $ ’ e v r e s e r w o fl h s a C l e b a l i a v A l u f t b u o D 0 0 0 $ ’ e v r e s e r y r o t u t a t S l a r e n e G e v r e s e r 0 0 0 $ ’ 0 0 0 $ ’ e v r e s e r t e s s A n o i t a u a v e r l i d e n a t e R ) 4 8 7 ( 3 1 1 8 8 3 2 , 6 7 6 2 , 4 3 8 5 , 5 4 3 3 , – – ) 2 1 ( 4 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – ) 6 3 1 , 2 1 ( – – – 9 4 3 4 7 7 , 1 5 0 1 8 8 3 2 , 6 7 6 2 , 4 3 8 5 , 5 4 3 3 , 7 6 8 5 3 , 9 2 6 2 8 1 , s t fi o r p 0 0 0 $ ’ 6 2 8 8 1 , 3 0 2 5 1 , 8 3 8 , 1 – – – – – – – – – – e r a h S l a t i p a c 0 0 0 $ ’ y r a n d r o i 9 2 6 2 8 1 , y n a p m o c t n e r a p f o s r e b m e m o t e b a t u b i r t t a t fi o r P l : r a e y e h t r o f e m o c n i e v i s n e h e r p m o c l a t o T 6 1 0 2 y u J l 1 t a e c n a a B l y n a p m o C S B M R l f o n o i t a u a v e r o t e u d ) e s a e r c e d ( e s a e r c n I e u a v l r i a f o t s t n e m t s e v n i i s e i r a d i s b u s l n o i t a u a v e r n o t n e m t s u d a y t i l i j b a i l x a t d e r r e f e D h s a c l f o n o i t a u a v e r o t e u d ) e s a e r c e d ( e s a e r c n I e u a v l r i a f o t e g d e h w o fl s t n e m t s e v n i S B M R f o l n o i t a u a v e r n o t n e m t s u d a y t i l i j b a i l x a t d e r r e f e D l n a p e r a h s ff a t s r o f l a t i p a c e r a h s f o e u s s I e g d e h w o fl h s a c f o l a t o t - b u S i f o p u d n w o t e u d s t fi o r p d e n a t e r o t i r e f s n a r T i t n e m t s e v n e r d n e d v d r o f i i l a t i p a c e r a h s f o e u s s I n a p l i i s e r a h s y r a n d r o - d a p r o r o f d e d v o r p s d n e d v D i i i ) 1 8 1 ( 5 0 1 8 8 3 2 , 6 7 6 2 , 4 3 8 5 , 5 4 3 3 , 1 3 7 , 3 2 2 5 7 , 4 8 1 7 1 0 2 e n u J 0 3 t a e c n a a B l i . s e t o n g n y n a p m o c c a e h t h t i w n o i t c n u n o c n j i d a e r e b d u o h s l y t i u q e n i s e g n a h c f o t n e m e t a t s d e t a d i l o s n o c e v o b a e Th AUSWIDE BANK – 30 JUNE 2018 47 Consolidated statement of changes in equity (continued) FOR THE YEAR ENDED 30 JUNE 2018 l a t o T y t i u q e 0 0 0 $ ’ 0 5 6 2 2 2 , 1 4 2 5 4 3 9 1 , ) 3 ( 6 4 4 , 1 ) 4 3 4 ( ) 5 6 2 ( 0 8 1 9 2 0 6 0 3 4 2 , ) 1 1 2 ( 4 1 9 6 , ) 7 5 6 3 1 ( , , 7 9 3 6 3 2 – – – – – – – – – – – – – – - n o N 0 0 0 $ ’ s t s e r e t n i g n i l l o r t n o c - e r a h S d e s a b 0 0 0 $ ’ s t n e m y a p i g n g d e h 0 0 0 $ ’ e v r e s e r l e a s r o f e v r e s e r 0 0 0 $ ’ s t b e d 0 0 0 $ ’ e v r e s e r w o fl h s a C l e b a l i a v A l u f t b u o D 0 0 0 $ ’ e v r e s e r y r o t u t a t S l a r e n e G e v r e s e r 0 0 0 $ ’ 0 0 0 $ ’ e v r e s e r t e s s A n o i t a u a v e r l i d e n a t e R – – 1 4 2 – – – – – ) 1 8 1 ( 5 0 1 8 8 3 2 , 6 7 6 2 , 4 3 8 5 , 5 4 3 3 , – – – – – ) 5 6 2 ( 0 8 – – ) 3 ( – – – – – – – – – – – – – – – – – – – – – – – – – – – – 6 4 4 , 1 ) 4 3 4 ( – – s t fi o r p 0 0 0 $ ’ 1 3 7 , 3 2 5 4 3 9 1 , – – – – – – – – – – – – – e r a h S l a t i p a c 0 0 0 $ ’ y r a n d r o i 2 5 7 , 4 8 1 y n a p m o c t n e r a p f o s r e b m e m o t e b a t u b i r t t a t fi o r P l : r a e y e h t r o f e m o c n i e v i s n e h e r p m o c l a t o T S B M R l f o n o i t a u a v e r o t e u d ) e s a e r c e d ( e s a e r c n I e u a v l r i a f o t s t n e m t s e v n i d n a l l f o n o i t a u a v e r o t e u d ) e s a e r c e d ( e s a e r c n I s t n e m y a p d e s a b - e r a h s f o n o i t i n g o c e R 7 1 0 2 y u J l 1 t a e c n a a B l y n a p m o C 48 ANNUAL REPORT e u a v l r i a f o t s g n d i l i u b d n a l n o i t a u a v e r n o t n e m t s u d a y t i l i j b a i l x a t d e r r e f e D h s a c l f o n o i t a u a v e r o t e u d ) e s a e r c e d ( e s a e r c n I e u a v l r i a f o t e g d e h w o fl s g n d i l i u b d n a d n a l f o l n o i t a u a v e r n o t n e m t s u d a y t i l i j b a i l x a t d e r r e f e D 1 4 2 ) 6 6 3 ( 2 0 1 8 8 3 2 , 6 7 6 2 , 4 3 8 5 , 7 5 3 4 , 6 7 0 3 4 , 2 5 7 , 4 8 1 e g d e h w o fl h s a c f o l a t o t - b u S – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 1 9 2 l n a p e r a h s ff a t s r o f l a t i p a c e r a h s f o e u s s I ) 1 1 2 ( 4 1 9 6 , i t n e m t s e v n e r d n e d v d r o f i i l a t i p a c e r a h s f o e u s s I n a p l s t s o c e u s s i e r a h S ) 7 5 6 3 1 ( , – s e r a h s i i y r a n d r o - d a p r o r o f d e d v o r p s d n e d v D i i i 1 4 2 ) 6 6 3 ( 2 0 1 8 8 3 2 , 6 7 6 2 , 4 3 8 5 , 7 5 3 4 , 9 1 4 9 2 , 6 4 7 , 1 9 1 8 1 0 2 e n u J 0 3 t a e c n a a B l i . s e t o n g n y n a p m o c c a e h t h t i w n o i t c n u n o c n j i d a e r e b d u o h s l y t i u q e n i s e g n a h c f o t n e m e t a t s d e t a d i l o s n o c e v o b a e Th Notes to the consolidated financial statements 30 JUNE 2018 NOTE 1 SIGNIFICANT ACCOUNTING POLICIES (a) Basis of preparation The financial statements are general purpose financial statements that have been prepared in accordance with the requirements of the Corporations Act 2001, Australian Accounting Standards and Interpretations, and comply with other requirements of the law. The financial statements comprise the consolidated financial statements of the Group (or the ‘Consolidated Entity’), consisting of Auswide Bank Ltd (‘the Company’) and subsidiaries, and the separate financial statements of Auswide Bank Ltd as an individual parent entity. Auswide Bank Ltd is a for-profit listed public company, incorporated and domiciled in Australia. The financial statements comply with all International Financial Reporting Standards (‘IFRS’) in their entirety. The financial statements have been prepared on an accrual basis and are based on historical costs, except for land and buildings, hedging instruments, financial assets held at fair value through profit or loss, and available-for-sale financial assets that have been measured at fair value. The presentation currency of the financial statements is Australian Dollars (AUD). The following is a summary of the material accounting policies applied by the Group in the preparation of the financial statements. Except where stated, the accounting policies have been consistently applied. (b) Principles of consolidation The consolidated financial statements comprise the financial statements of Auswide Bank Ltd (‘the Company’), being the parent entity, and entities controlled by the Company and its subsidiaries. The Company and its subsidiaries together are referred to in these financial statements as the Group. 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; and • has the ability to use its power to affect its returns. The Company has power when it has rights that give it the current ability to direct the activities that significantly affect the investee’s returns. The Group not only has to consider its holdings and rights but also the holdings and rights of other shareholders in order to determine whether it has the necessary power for consolidation purposes. The existence and effect of potential voting rights where the Group has the practical ability to exercise them are considered when assessing whether the Group controls another entity. The Company reassesses whether it has control of an investee if facts and circumstances indicate changes to the aforementioned elements have occurred. A list of the controlled entities is provided in Note 11. The acquisition of subsidiaries is accounted for using the acquisition method of accounting. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases. Intercompany transactions, balances and unrealised gains or losses on transactions between Group entities are fully eliminated on consolidation. When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with the Group’s accounting policies. Equity interests in a subsidiary not attributable, directly or indirectly, to the consolidated entity are presented as ‘non- controlling interests’. The consolidated entity initially recognises non-controlling interests that are present ownership interests in subsidiaries and are entitled to a proportionate share of the subsidiary’s net assets on liquidation at either fair value or at the non-controlling interests’ proportionate share of the subsidiary’s net assets. Subsequent to initial recognition, non- controlling interests are attributed their share of profits or loss and each component of other comprehensive income. Non- controlling interests are shown separately within the equity section of the statement of financial position and statement of profit or loss and other comprehensive income. (c) Goodwill Goodwill acquired in a business combination is initially measured at cost, being the excess of the cost of the business combination over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities recognised at the date of the acquisition. Goodwill is subsequently measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill is allocated to each of the Group’s cash-generating units (or groups of cash- generating units) that is expected to benefit from the synergies of the business combination. A cash-generating unit or groups of cash-generating units to which goodwill has been allocated are tested for impairment annually, or more frequently if events or changes in circumstances indicate that goodwill might be impaired. If the recoverable amount of the cash-generating unit is less than its carrying amount, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro rata based on the carrying amount of each asset in the unit. Any impairment loss for goodwill is recognised directly in profit or loss. An impairment loss recognised for goodwill is not reversed in subsequent periods. On disposal of the relevant cash-generating unit, the attributable amount of goodwill is included in the determination of the profit or loss on disposal. AUSWIDE BANK – 30 JUNE 2018 49 Notes to the consolidated financial statements 30 JUNE 2018 NOTE 1 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (d) Investments in associates (f) Leases An associate is an entity over which the Group has significant influence. 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. Leases of fixed assets where substantially all the risks and benefits incidental to the ownership of the asset, but not the legal ownership, are transferred to the Group are classified as finance leases. An investment in an associate is accounted for using the equity method of accounting from the date on which the investee becomes an associate. The financial statements of the associate are used by the Group to apply the equity method. The reporting dates and accounting policies of the associate have been aligned to that of the Group where necessary. Finance leases are capitalised at the lease’s inception at the fair value of the leased property or, if lower, the present value of the minimum lease payments, including any guaranteed residual values. The corresponding lease payments are allocated between the reduction of the lease liability and the lease interest expense for the period. Investments in an associate are carried in the consolidated and parent entity statement of financial position at cost plus post-acquisition changes in the Group’s share of net assets of the associate, less any impairment in value. The consolidated and parent entity profit or loss reflects the Group’s share of the results of operations of the associate. Leased assets are depreciated on a straight-line basis over the asset’s expected useful life where it is likely that the Group will obtain ownership of the asset at the end of the lease term or over the shorter of the asset’s expected useful life and the lease term where there is no reasonable certainty that the Group will obtain ownership at the end of the lease term. Where there has been a change recognised directly in the associate’s equity, the Group recognises its share of any changes and discloses this, when applicable, in the consolidated and parent entity statement of changes in equity. (e) Revenue recognition Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. Revenue is measured at the fair value of the consideration received or receivable. Lease payments for operating leases, where substantially all the risks and benefits remain with the lessor, are charged to profit or loss on a straight line basis over the period of the lease. Rental income from operating leases where the Group is lessor is recognised in profit or loss on a straight-line basis over the lease term. The respective leased assets are included in the Statement of Financial Position based on their nature. Initial direct costs incurred in negotiating and arranging an operating lease are added to the carrying amount of the leased asset and recognised on a straight-line basis over the lease term. Interest revenue: (g) Employee benefits Loan interest revenue is calculated on the daily loan balance outstanding and charged in arrears to the customer’s loan account. Loan interest revenue is recognised as it accrues using the effective interest method, which is the rate that exactly discounts estimated future cash receipts over the expected life of the financial asset to the net carrying amount of the financial asset. When a loan is classified as impaired, the Group generally ceases to recognise interest and other income earned but not yet received. Loan interest is generally not brought to account if a loan has been transferred to a debt collection agency, or a judgement has been obtained. Provision is made for the liability for employee benefits arising from services rendered by employees to the end of the reporting period. Short-term employee benefits Liabilities for wages, salaries, sick leave and bonuses, that are expected to be settled wholly within twelve months of the end of the reporting period are recognised in the statement of financial position in respect of employee services provided to the end of the reporting period and are measured at the amounts expected to be paid when the liability is settled, plus related on-costs. Dividend revenue: Long-term employee benefits Dividend revenue is recognised when the shareholder’s right to receive the payment is established. Fees and commissions: Fees and commissions are recognised on an accrual basis once a right to receive consideration has been attained or when service to the customer has been rendered. All revenue is stated net of the amount of goods and services tax (GST). Liabilities for long service leave and annual leave are not expected to be settled within twelve months of the end of the reporting period. They are recognised as provisions for employee benefits and are measured at the present value of the expected future payments to be made in respect of services provided to the end of the reporting period. Consideration is given to expected future salary and wage increases and periods of service. Regardless of when settlement is expected to occur, liabilities for long service leave and annual leave are presented as current liabilities in the Statement of Financial Position if the entity does not have an unconditional right to defer settlement for at least twelve months after the end of the reporting period. 50 ANNUAL REPORT Superannuation Contributions are made by the Group to an employees’ superannuation fund and are charged as an expense when incurred. The Group has no legal obligation to cover any shortfall in the fund’s obligation to provide benefits to employees on retirement. (h) Taxation Income tax expense for the period is the tax payable on the current period’s taxable income based on the applicable income tax rate adjusted by changes in deferred tax assets and liabilities attributable to temporary differences between the tax base of assets and liabilities and their carrying amounts in the financial statements, and to unused tax losses. The income tax expense is calculated on the basis of the tax laws enacted or substantively enacted at the end of the reporting period. Provisions are established where appropriate on the basis of amounts expected to be paid to the tax authorities. Deferred income tax loss is recognised in full, using the liability method, on temporary differences, between the carrying amounts of assets and liabilities in the consolidated financial statements and their respective tax bases. However, deferred tax liabilities are not recognised if they arise from the initial recognition of goodwill. Deferred income tax is also not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the end of the reporting period and are expected to apply to the period when the asset is realised or liability is settled. Deferred tax is credited to profit or loss except where it relates to items that may be credited directly to equity, in which case the deferred tax is adjusted directly against equity. Deferred tax assets are only recognised for deductible temporary differences and unused tax losses if it is probable that future taxable profits will be available against which deductible temporary differences and losses can be utilised. The amount of benefits brought to account or which may be realised in the future is based on the assumption that no adverse change will occur in income taxation legislation and the anticipation that the economic entity will derive sufficient future assessable income to enable the benefit to be realised and comply with the conditions of deductibility imposed by the law. Current and deferred tax are recognised in profit or loss, except when they relate to items that are recognised in other comprehensive income or directly in equity, in which case the current and deferred tax are also recognised in other comprehensive income or directly in equity, respectively. Where current tax or deferred tax arises from the initial accounting for a business combination, the tax effect is included in the accounting for the business combination. Tax consolidation legislation The Company and all its wholly-owned Australian resident entities have formed an income tax consolidated Group under the Australian Consolidation System as of the financial year ended 30 June 2008. Auswide Bank Ltd is the head entity in the tax consolidated Group, and as a consequence recognises current and deferred tax amounts relating to transactions, events and balances of the wholly-owned Australian controlled entities in this Group as if those transactions, events and balances were its own, in addition to the current and deferred tax amounts arising in relation to its own transactions, events and balances. The tax consolidated Group has not entered into a tax sharing agreement. (i) Goods and Services Tax (GST) Revenues, expenses and assets are recognised net of the amount of GST, except where the amount of GST incurred is not recoverable from the Australian Taxation Office. In these circumstances, the GST is recognised as part of the cost of acquisition of the asset or as part of an item of the expense. Receivables and payables in the Statement of Financial Position are shown inclusive of GST. Cash flows are presented in the Consolidated Statement of Cash Flows on a gross basis, except for the GST component of investing and financing activities, which are disclosed as operating cash flows. (j) Cash and cash equivalents Cash and cash equivalents includes cash on hand, deposits held at call with banks and other short-term highly liquid investments with original maturities of three months or less. (k) Financial instruments Recognition Financial assets and financial liabilities are recognised when a group entity becomes a party to the contractual provisions of the instrument. Financial assets and financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities at fair value through profit or loss) are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fair value through profit or loss are recognised immediately in profit or loss. Subsequent to initial recognition these instruments are measured as set out below. AUSWIDE BANK – 30 JUNE 2018 51 NOTE 1 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (k) Financial instruments (continued) Financial assets Financial assets at fair value through profit or loss A financial asset is classified as fair value through profit or loss (FVTPL) if acquired principally for the purpose of selling in the short term or if so designated by management. Financial assets at FVTPL are stated at fair value, with realised and unrealised gains and losses arising from changes in the fair value included in profit or loss in the period in which they arise. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. These instruments are measured at amortised cost using the effective interest rate method, less any impairment losses. Held-to-maturity investments Investment with fixed maturities that the Group has the positive intent and ability to hold to maturity are classified as held-to-maturity investments. These investments are stated at amortised cost using the effective interest rate method, less any impairment losses. Other financial liabilities, including borrowings, trade payables and other non-derivative financial liabilities are originally measured at fair value. Other financial liabilities are subsequently measured at amortised cost, using the effective interest method. Derecognition The Group derecognises a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in transferred financial assets that is created or retained by the Group is recognised as a separate asset or liability. On derecognition of a financial asset in its entirety, the difference between the asset’s carrying amount and the sum of the consideration received and receivable and the cumulative gain or loss that had been recognised in other comprehensive income and accumulated in equity is recognised in profit or loss. The Group derecognises a financial liability when its contractual obligations are discharged or cancelled or expire. The difference between the carrying amount of the financial liability derecognised and the consideration paid and payable is recognised in profit or loss. Available-for-sale financial assets Impairment Available-for-sale investments are non-derivative investments that are not designated as another category of financial assets. Unquoted equity securities, whose fair value cannot be reliably measured, are carried at cost. Other available-for- sale assets that are traded in an active market are stated at fair value. Unrealised gains and losses arising from changes in fair value are taken directly through equity through other comprehensive income. Financial liabilities and equity instruments Debt and equity instruments are classified as either financial liabilities or as equity in accordance with the substance of the contractual agreement. Other than for assets held at FVTPL, the Group assess whether there is objective evidence that a financial instrument has been impaired, at each reporting date. Financial assets are considered to be impaired where there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been affected. In the case of available-for-sale financial instruments, a prolonged decline in the value of the instrument is considered to determine whether an impairment has arisen. Impairment losses are recognised in the consolidated statement of profit or loss and other comprehensive income. Refer to Note 1n for further details regarding impairment of financial assets. Equity instruments Derivative financial instruments An equity instrument is any contract that evidences a residual interest in the asset of an entity after deducting all of its liabilities. Equity instruments issued by the Group entity are recognised at the proceeds received, net of direct issue costs. Equity instruments include contributed equity. Financial liabilities Financial liabilities are classified as either financial liabilities ‘at FVTPL’ or ‘other financial liabilities’. Financial liabilities are classified at FVTPL when the liability is either held for trading or is designated as at FVTPL. These liabilities are stated at fair value, with any gains or losses arising on remeasurement recognised in profit or loss. The Group enters into derivative financial instruments, including interest rate swaps, to manage its exposure to interest rate risk. Derivatives are initially recognised at fair value at the date the derivative contract is entered into and are subsequently remeasured to their fair value at the end of each reporting period. The resulting gain or loss is recognised in profit or loss immediately unless the derivative is designated and effective as a hedging instrument, in which event the timing of the recognition in profit or loss depends on the nature of the hedge relationship. 52 ANNUAL REPORT Notes to the consolidated financial statements30 JUNE 2018 Hedge accounting The Group designates certain hedging instruments, which include interest rate swaps, as cash flow hedges. At the inception of the hedge relationship, the entity documents the relationship between the hedging instrument and the hedged item, along with its risk management objectives and its strategy for undertaking various hedge transactions. Furthermore, at the inception of the hedge and on an ongoing basis, the Group documents whether the hedging instrument is highly effective in offsetting changes in cash flows of the hedged item attributable to the hedged risk. The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in other comprehensive income and accumulated under the heading of cash flow hedging reserve. The gain or loss relating to the ineffective portion is recognised immediately in profit or loss, and is included in the ‘other gains and losses’ line item. Amounts previously recognised in other comprehensive income and accumulated in equity are reclassified to profit or loss in the periods when the hedged item affects profit or loss, in the same line as the recognised hedged item. However, when the hedged forecast transaction that is hedged results in the recognition of a non-financial asset or a non-financial liability, the gains and losses previously recognised in other comprehensive income and accumulated in equity are transferred from equity and included in the initial measurement of the cost of the non-financial asset or non- financial liability. Hedge accounting is discontinued when the consolidated entity revokes the hedging relationship, when the hedging instrument expires or is sold, terminated, or exercised, or when it no longer qualifies for hedge accounting. Any gain or loss recognised in other comprehensive income and accumulated in equity at that time remains in equity and is recognised when the forecast transaction is ultimately recognised in profit or loss. When a forecast transaction is no longer expected to occur, the gain or loss accumulated in equity is recognised immediately in profit or loss. (l) Property, plant and equipment Freehold land and buildings are stated in the consolidated statement of financial position at their revalued amounts, being the fair value at the date of revaluation, less any subsequent depreciation for buildings and subsequent accumulated impairment losses. Freehold land is not depreciated. Revalued amounts are based on periodic, but at least triennial, valuations by external independent valuers. Any accumulated depreciation at the date of revaluation is eliminated against the gross carrying amount of the asset and the net amount is restated to the re-valued amount of the asset. Plant and equipment are measured on the cost basis less depreciation and impairment losses. The carrying amount of plant and equipment is reviewed annually by directors to ensure it is not in excess of the recoverable amount from these assets. The recoverable amount is assessed on the basis of the expected net cash flows that will be received from the asset’s employment and subsequent disposal. The expected net cash flows have been discounted to their present values in determining recoverable amounts. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance are charged to profit or loss during the financial period in which they are incurred. Any revaluation increase arising on the revaluation of freehold land and buildings is recognised in other comprehensive income and accumulated within equity, except to the extent that it reverses a revaluation decrease for the same asset previously recognised in profit or loss, in which case the increase is credited to profit or loss to the extent of the decrease previously expensed. A decrease in the carrying amount arising on the revaluation of such land and buildings is recognised in profit or loss to the extent that it exceeds the balance, if any, held in the properties revaluation reserve relating to a previous revaluation of that asset. The depreciable amount of all fixed assets including building and capitalised lease assets, but excluding freehold land, is depreciated on a straight line basis over their useful lives to the economic entity commencing from the time the asset is held ready for use. Leasehold improvements are depreciated over the shorter of either the unexpired period of the lease or the estimated useful lives of the improvements. The depreciation periods used for each class of depreciable assets are: • Buildings – 40 years • Plant and equipment – 4 to 6 years • Leasehold improvements – 4 to 6 years or the term of the lease, whichever is the lesser The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each reporting date. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount. AUSWIDE BANK – 30 JUNE 2018 53 NOTE 1 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (l) Property, plant and equipment (continued) An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Gains and losses on disposals are determined by comparing proceeds with the carrying amount. These gains and losses are included in profit or loss. When revalued assets are sold, amounts included in the revaluation reserve relating to that asset are transferred to retained earnings. (m) Intangible assets Purchased items of computer software which are not integral to the computer hardware owned by the Group are classified as intangible assets. Intangible assets are stated in the statement of financial position at cost less any accumulated depreciation and impairment. Computer software has a finite life and accordingly is amortised on a straight line basis over the expected useful life of the software. Amortisation periods ranging from 4 to 6 years are applied. An intangible asset is derecognised on disposal, or when no future economic benefits are expected from use or disposal. Gains or losses arising from derecognition are measured as the difference between the net disposal processes and the carrying amount of the assets and are taken to profit or loss at the date of derecognition. No internally generated intangible assets are recognised by the Group. (n) Impairment of assets At the end of each reporting period, the Board assesses whether there is any indication that its tangible and intangible assets may be impaired. The assessment will include the consideration of external and internal sources of information, including dividends received from subsidiaries, associates or jointly controlled entities. If such an indication exists, an impairment test is carried out on the asset by comparing the recoverable amount of the asset, being the higher of the asset’s fair value less costs to sell and value in use, to the asset’s carrying amount. Any excess of the asset’s carrying amount over its recoverable amount is recognised immediately in profit or loss, unless the asset is carried at a revalued amount in accordance with another standard (for example, in accordance with the revaluation model in AASB 116 ‘Property, Plant and Equipment’). Any impairment loss of a revalued asset is treated as a revaluation decrease in accordance with that other standard. Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. Impairment testing is performed annually for goodwill, intangible assets with indefinite lives and intangible assets not yet available for use. Further impairment considerations are discussed within the respective policy note throughout this section. Loans and advances – doubtful debts A provision for losses on impaired loans is recognised when objective evidence is available that a loss event has occurred and as a consequence it is not likely that all amounts owed will be received. Specific provisions for doubtful debts are recognised for individual loans that are identified as impaired by undertaking an assessment of estimated future cash flows. Collective provisions are determined by segmenting the portfolio into asset classes with similar credit risk characteristics. Each exposure within each segment is allocated a probability of default and a loss given default percentage to calculate an expected loss. Key elements determining the segmentation of an exposure include the product type, LVR, whether the exposure is covered by Lenders’ Mortgage Insurance and the arrears position. Where loan terms have been renegotiated (e.g. loans provided hardship relief), impairment provisioning is determined on the basis of the arrears position as if the renegotiation had not taken place. Restructured loans are returned to performing status after meeting restructured terms for a minimum six month period. A reserve for credit losses is also maintained to cover risks inherent in the loan portfolio. Movements in the reserve for credit losses are recognised as an appropriation of retained earnings. Bad debts are written off, as determined by management, when it is reasonable to expect that the recovery of the debt is unlikely. All write-offs are on a case-by-case basis, taking into account the exposure at the date of the write-off. On secured loans, the write-off takes place following ultimate realisation of collateral value. Bad debts are written off against the provision for impairment where impairment has previously been recognised in relation to a loan. If no provision for impairment has previously been recognised, write-offs for bad debts are recognised as expenses in profit or loss. 54 ANNUAL REPORT Notes to the consolidated financial statements30 JUNE 2018 (o) Deposits Deposits are initially measured at fair value plus transaction costs and subsequently measured at their amortised cost using the effective interest rate method. Interest on deposits is recognised on an accruals basis. (p) Securitisation Where the Group enters into transactions that transfer substantially all the risks and rewards of ownership of the transferred assets, the Group derecognises the transferred assets. Where the Group enters into transactions that transfer assets recognised on its Statement of Financial Position, but retains substantially all of the risks and rewards of ownership of the transferred assets, the transferred assets are not derecognised and a secured liability for funds raised is recognised. In transactions in which the Group neither retains nor transfers substantially all the risks and rewards of ownership of a financial asset and it retains control over the asset, the Group continues to recognise the asset to the extent of its continuing involvement. Refer to Note 10 for further details regarding the securitisation structures in place. (q) Fair value of assets and liabilities The Group measures some of its assets and liabilities at fair value on either a recurring or non-recurring basis, depending on the requirements of the applicable Accounting Standard. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly (i.e. unforced) transaction between independent, knowledgeable and willing market participants at the measurement date. As fair value is a market-based measure, the closest equivalent observable market pricing information is used to determine fair value. Adjustments to market values may be made having regard to characteristics of the specific asset or liability. The fair values of assets and liabilities that are not traded in an active market are determined using one or more valuation techniques. These valuation techniques maximise, to the extent possible, the use of observable market data. To the extent possible, market information is extracted from either the principal market for the asset or liability (i.e. the market with greatest volume and level of activity for the asset or liability) or, in the absence of such a market, the most advantageous market available to the entity at the end of the reporting period (i.e. the market that maximises the receipts from the sale of the asset or minimises the payments made to transfer the liability, after taking into account transaction costs and transport costs). For non-financial assets, the fair value measurement also takes into account a market participant’s ability to use the asset in its highest and best use or to sell it to another market participant that would use the asset in its highest and best use. In measuring fair value, the Group uses valuation techniques that maximise the use of observable inputs and minimise the use of unobservable inputs. Assets and liabilities measured at fair value are classified, into three levels, using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. Classifications are received at each reporting date and transfers between levels are determined based on a reassessment of the lowest level input that is significant to the fair value measurement. The categories are as follows: Level 1 Measurements based on quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date. Level 2 Measurements based on inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 Measurement based on unobservable inputs for the asset or liability. The fair values of assets and liabilities that are not traded in an active market are determined using one or more valuation techniques. These valuation techniques maximise, to the extent possible, the use of observable market data. If all significant inputs required to measure fair value are observable, the asset or liability is included in Level 2. If one or more significant inputs are not based on observable market data, the asset or liability is included in Level 3. Valuation techniques: The Group selects a valuation technique that is appropriate in the circumstances and for which sufficient data is available to measure fair value. The availability of sufficient and relevant data primarily depends on the specific characteristics of the asset or liability being measured. The valuation techniques selected by the economic entity are consistent with one or more of the following valuation approaches: Market approach Valuation techniques that use prices and other relevant information generated by market transactions for identical or similar assets or liabilities. Income approach Valuation techniques that convert estimated future cash flows or income and expenses into a single discounted present value. AUSWIDE BANK – 30 JUNE 2018 55 NOTE 1 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (q) Fair value of assets and liabilities (continued) • assets (or disposal groups) that are classified as held for Cost approach Valuation techniques that reflect the current replacement cost of an asset at its current service capacity. Each valuation technique requires inputs that reflect the assumptions that buyers and sellers would use when pricing the asset or liability, including assumptions about risks. When selecting a valuation technique, the Group gives priorities to those techniques that maximise the use of observable inputs and minimise the use of unobservable inputs. Inputs that are developed using market data (such as publicly available information on actual transactions) and that reflect the assumptions that buyers and sellers would generally use when pricing the asset or liability are considered observable, whereas inputs for which market data is not available and therefore are developed using the best information available about such assumptions are considered unobservable. For recurring and non-recurring fair value measurements, external valuers may be used when internal expertise is ether not available or when the valuation is determined to be significant. External valuers are selected based on market knowledge and reputation. The fair value of liabilities and the entity’s own equity instruments (excluding those related to share-based payment arrangements) may be valued, where there is no observable market price in relation to the transfer of such financial instrument, by reference to observable market information where such instruments are held in assets. Where this information is not available, other valuation techniques are adopted and where significant, are detailed in the respective note to the financial statements. (r) Business combinations Acquisitions of businesses are accounted for using the acquisition method. The consideration transferred in a business combination is measured at fair value which is calculated as the sum of the acquisition-date fair values of assets transferred by the Group, liabilities incurred by the Group to the former owners of the acquiree and the equity instruments issued by the Group in exchange for control of the acquiree. Acquisition- related costs are recognised in profit or loss as incurred. At the acquisition date, the identifiable assets acquired and the liabilities assumed are recognised at their fair value, except that: • deferred tax assets or liabilities and assets or liabilities related to employee benefit arrangements are recognised and measured in accordance with AASB 112 ‘Income Taxes’ and AASB 119 ‘Employee Benefits’ respectively; • liabilities or equity instruments related to share-based payment arrangements of the acquiree or share-based payment arrangements of the Group entered into to replace share-based payment arrangements of the acquiree are measured in accordance with AASB 2 ‘Share- based Payment’ at the acquisition date; and sale in accordance with AASB 5 ‘Non-current Assets Held for Sale and Discontinued Operations’ are measured in accordance with that Standard. Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree, and the fair value of the acquirer’s previously held equity interest in the acquiree (if any) over the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed. If, after reassessment, the net of the acquisition-date amounts of the identifiable assets acquired and liabilities assumed exceeds the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree and the fair value of the acquirer’s previously held interest in the acquiree (if any), the excess is recognised immediately in profit or loss as a bargain purchase gain. Non-controlling interests that are present ownership interests and entitle their holders to a proportionate share of the entity’s net assets in the event of liquidation may be initially measured either at fair value or at the non-controlling interests’ proportionate share of the recognised amounts of the acquiree’s identifiable net assets. The choice of measurement basis is made on a transaction-by-transaction basis. Other types of non-controlling interests are measured at fair value or, when applicable, on the basis specified in another Standard. Where the consideration transferred by the Group in a business combination includes assets or liabilities resulting from a contingent consideration arrangement, the contingent consideration is measured at its acquisition-date fair value. Changes in the fair value of the contingent consideration that qualify as measurement period adjustments are adjusted retrospectively, with corresponding adjustments against goodwill. Measurement period adjustments are adjustments that arise from additional information obtained during the ‘measurement period’ (which cannot exceed one year from the acquisition date) about facts and circumstances that existed at the acquisition date. The subsequent accounting for changes in the fair value of contingent consideration that do not qualify as measurement period adjustments depends on how the contingent consideration is classified. Contingent consideration that is classified as equity is not remeasured at subsequent reporting dates and its subsequent settlement is accounted for within equity. Contingent consideration that is classified as an asset or liability is remeasured at subsequent reporting dates in accordance with AASB 139 ‘Financial Instruments: Recognition and Measurement’, or AASB 137 ‘Provisions, Contingent Liabilities and Contingent Assets’, as appropriate, with the corresponding gain or loss being recognised in profit or loss. Where a business combination is achieved in stages, the Group’s previously held equity interest in the acquiree is remeasured to its acquisition date fair value and the resulting gain or loss, if any, is recognised in profit or loss. 56 ANNUAL REPORT Notes to the consolidated financial statements30 JUNE 2018 Amounts arising from interests in the acquiree prior to the acquisition date that have previously been recognised in other comprehensive income are reclassified to profit or loss where such treatment would be appropriate if that interest were disposed of. If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the Group reports provisional amounts for the items for which the accounting is incomplete. Those provisional amounts are adjusted during the measurement period (see above), or additional assets or liabilities are recognised, to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the amounts recognised as of that date. (s) Rounding of amounts The Company is a company of the kind referred to in ASIC Corporations (Rounding in Financials/Directors’ Reports) Instrument 2016/191, dated 24 March 2016, and in accordance with that Corporations Instrument amounts in the directors’ report and the financial statements are rounded off to the nearest thousand dollars, unless otherwise indicated. (t) Comparative figures When required by Accounting Standards, comparative figures have been adjusted to conform to changes in presentation for the current financial year. Prior year figures have been adjusted to recognise discontinued operations for comparative purposes. (u) Critical accounting estimates and judgements The preparation of financial statements in conformity with AASBs requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future periods affected. Directors considered a range of valuations in relation to the Available for Sale (AFS) financial asset. Key judgements were applied to determine the entities that the Group controlled and valuation adopted – refer to Note 33. In addition, details on critical estimates and judgements in respect of credit risk are disclosed in Note 32. (v) Application of new and revised Accounting Standards Amendments to AASBs and the new interpretations that are mandatorily effective for the current year The Group applied, for the first time, certain standards and amendments which are effective for annual periods beginning on or after 1 July 2017. AASB 2016-2 Amendments to Australian Accounting Standards – Disclosure Initiative: Amendments to AASB 107 The Group has applied these amendments for the first time in the current year. The amendments require an entity to provide disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities, including both cash and non-cash changes. The Group’s liabilities consist of borrowings (Note 16) and certain other financial liabilities (Note 17). A reconciliation between the opening and closing balances of these items is provided in Note 16. Consistent with transition provisions of the amendments, the Group has not disclosed comparative information for the prior period. Apart from the additional disclosures in Note 16, the application of these amendments has had no impact on the Group’s consolidated financial statements. AASB 2016-1 Amendments to Australian Accounting Standards – Recognition of Deferred Tax Assets for Unrealised Losses The Group has applied these amendments for the first time in the current year. The amendments clarify how an entity should evaluate whether there will be sufficient future taxable profits against which it can utilise a deductible temporary difference. The application of these amendments has had no impact on the Group’s consolidated financial statements as the Group already assesses the sufficiency of future taxable profits in a way that is consistent with these amendments. Management have made critical accounting estimates when applying the Group’s accounting policies with respect to the impairment of financial assets, loans and advances, other investments and goodwill – refer Notes 9, 10, 11 and 14, respectively. AASB 2017-2 Amendments to Australian Accounting Standards – Further Annual Improvements 2014 – 2016 Cycle The adoption of these standards and interpretations did not have any material impact on the current or any prior period and are not likely to materially affect future periods. Management have made significant judgements when applying the Group’s accounting policies with respect to loans assigned to a special purpose vehicle used for securitisation purposes – refer to Note 10. Management have made critical accounting estimates and judgements in relation to the assessment of the fair value of the assets and liabilities on the date of acquisition of MoneyPlace Holdings Pty Ltd (MoneyPlace). The Board of AUSWIDE BANK – 30 JUNE 2018 57 NOTE 1 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (v) Application of new and revised Accounting Standards (continued) Standards and Interpretations in issue not yet adopted Certain new accounting standards and interpretations have been published that are not mandatory for the 30 June 2018 reporting period and have not been early adopted by the Group. The Group’s assessment of the impact of these new standards and interpretations is set out below. Standard/Interpretation AASB 9 Financial Instruments Effective for annual reporting periods beginning on or after Expected to be initially applied in the financial year ending 1 January 2018 30 June 2019 AASB 15 Revenue from Contracts with Customers (and the related clarifications) 1 January 2018 30 June 2019 AASB 16 Leases AASB 2016-5 Amendments to Australian Accounting Standards - Classification and Measurement of Share-based Payment Transactions 1 January 2019 30 June 2020 1 January 2018 30 June 2019 AASB 2017-1 Amendments to Australian Accounting Standards - Transfer of Investment Property, Annual Improvements 2014-2016 Cycle and Other Amendments 1 January 2018 30 June 2019 AASB Interpretation 22 Foreign Currency Transactions and Advance Consideration 1 January 2018 30 June 2019 AASB 9 Financial Instruments (effective for annual periods beginning on or after 1 January 2018) AASB 9 issued in November 2009 introduced new requirements for the classification and measurement of financial assets. AASB 9 was subsequently amended in October 2010 to include requirements for the classification and measurement of financial liabilities and for derecognition, and in November 2013 to include the new requirements for hedge accounting. Another revised version of AASB 9 was released in July 2014 mainly to include impairment requirements for financial assets and amendments to the classification and measurement requirements by introducing a ‘fair value through other comprehensive income’ (FVTOCI) measurement category for certain debt instruments. Classification and measurement 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 for the Group. The Group has identified the following assets as financial assets that are required to be assessed under AASB 9; • cash and cash equivalents; • due from other financial institutions; • • loans and advances; investments in managed investment schemes; • certificates of deposits; • external RMBS investments; • • securitisation notes; loans to controlled entities; and • unlisted shares. Assessments of each category of financial asset are underway; consideration is being given to the contractual cash flows received as well as the intention of the business to hold these assets. Significant progress has been made and the majority of assessments have been completed. Further consideration is required for the classification of a limited number of instruments. 58 ANNUAL REPORT Notes to the consolidated financial statements30 JUNE 2018 Impairment Transition impact The AASB 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. The AASB 9 impairment requirements are based on an expected credit loss model with a three stage approach to measuring expected credit losses (ECL) on debt instruments accounted for at amortised costs with assets migrating through the following three stages based on the change in credit quality since initial recognition; (1) 12 month ECL – exposures where there has not been a significant increase in credit risk since initial recognition, and that are not credit impaired. Modelling has been performed based on the probability of default events occurring within the next 12 months is recognised. (2) Lifetime ECL – not credit impaired – for credit exposures where there has been a significant increase in credit risk since initial recognition, but are not credit impaired. Modelling has been performed on the probability of default over the estimated life of the loan with a lifetime ECL recognised. (3) Lifetime ECL – credit impaired – financial assets are assessed as credit impaired when one or more events that have a detrimental impact on the estimated future cash flows of that asset have occurred. The Bank’s methodology for specific provisions remains unchanged. Auswide Bank is now undertaking modelling for an overlay for macroeconomic factors using reasonable and supportable forecasts of future economic conditions including management judgement to estimate the amount of the ECL. It is expected that there will be an increase to the provision for doubtful debts once this modelling is finalised. Any increase to the provision as a result of adopting AASB 9 will be recognised through an adjustment to opening retained earnings, in accordance with AASB9. Hedge Accounting The new hedge accounting rules will align the accounting for hedging instruments more closely with the group’s risk management practices. As a general rule, more hedge relationships might be eligible for hedge accounting, as the standard introduces a more principles-based approach. The group has confirmed that its current hedge relationships will qualify as continuing hedges upon the adoption of AASB 9. The information provided in this note is focused upon material items; it does not represent a complete list of expected adjustments. Any adjustments that arise as a result of the transition process will be recognised in either retained earnings or an appropriate equity reserve at the date of transition. The quantitative impact continues to be calculated and will be recognised as an adjustment to opening retained earnings in the financial results at 31 December 2018. AASB 15 Revenue from Contracts with Customers (effective for annual periods beginning on or after 1 January 2018) The standard contains a single model that applies to contracts with customers and two approaches to recognition revenue: at a point in time or over time. The model features a contract- based five-step analysis of transactions to determine whether, how much and when revenue is recognised. A significant portion of Auswide Bank’s revenues are outside the scope of AASB 15 Revenue from contracts with customers, as they are within the scope of AASB 9 Financial assets. Management’s current assessment of this standard indicates that no material financial implications are expected. AASB 16 Leases (effective for annual periods beginning on or after 1 January 2019) The standard introduces a model for the identification of lease arrangements and accounting treatments for both lessors and lessees. This standard will supersede the current lease guidance including IAS 17 Leases and the related interpretations when it becomes effective. AASB 16 distinguishes lease and service contracts on the basis of whether an identified asset is controlled by a customer. Operating and finance lease distinctions are replaced by a model where a right-of-use asset and a corresponding liability have to be recognised for all leases by lessees held for branches and vehicles, with the exception of short-term leases and leases of low value assets. Management have identified operating leases held for branches and vehicles that will be required to be recognised on balance sheet. However, the Group has not quantified the financial impact, as this standard does not mandatorily apply before 1 January 2019. AASB 2016-5 Amendments to Australian Accounting Standards – Classification and Measurement of Share-based Payment Transactions (effective for annual periods beginning on or after 1 January 2018) The Directors of the Company do not anticipate that the application of the amendments in the future will have a significant impact on the Group’s consolidated financial statements as the Group does not have any cash-settled share-based payment arrangements or any withholding tax arrangements with tax authorities in relation to share- based payments. Other standards The Group has not yet assessed the impact of the other listed Standards; however, none are expected to have a material impact on future or prior periods. AUSWIDE BANK – 30 JUNE 2018 59 NOTE 2 INTEREST REVENUE AND INTEREST EXPENSE The following tables show the average balance for each of the major categories of interest bearing assets and liabilities, the amount of interest revenue or expense and the average interest rate from continuing operations. Month end averages are used as they are representative of the entity’s operations during the period. Interest revenue 2018 Deposits with other financial institutions Investment securities Loans and advances Other Interest expense 2018 Deposits from other financial institutions Customer deposits Negotiable certificates of deposit (NCDs) Floating rate notes (FRNs) Subordinated notes Net interest revenue 2018 Interest revenue 2017 Deposits with other financial institutions Investment securities Loans and advances Other Interest expense 2017 Deposits from other financial institutions Customer deposits Negotiable certificates of deposit (NCDs) Floating rate notes (FRNs) Subordinated notes Net interest revenue 2017 Average balance $’000 62,816 204,856 2,841,792 47,780 3,157,244 622,330 2,025,886 205,623 80,769 28,000 2,962,608 64,836 205,709 2,729,706 34,245 3,034,496 614,050 1,953,439 184,868 85,667 28,000 2,866,024 Average interest rate % 1.54 2.28 4.26 4.60 4.08 3.20 1.95 2.29 2.65 6.29 2.29 1.41 2.38 4.36 3.15 4.15 3.15 2.07 2.45 2.63 6.34 2.39 Interest $’000 967 4,680 121,086 2,200 128,933 19,886 39,412 4,713 2,142 1,760 67,913 61,020 894 4,896 119,038 1,077 125,905 19,371 40,462 4,532 2,257 1,775 68,397 57,508 The following tables show the net interest margin, and are derived by dividing the difference between interest revenue and interest expenditure by the average balance of interest earning assets. Interest margin and interest spread 2018 Interest revenue Interest expense Net interest spread Benefit of net interest-free assets, liabilities and equity 3,157,244 2,962,608 128,933 67,913 Net interest margin – on average interest earning assets 3,157,244 61,020 Interest margin and interest spread 2017 Interest revenue Interest expense Net interest spread Benefit of net interest-free assets, liabilities and equity 3,034,496 2,866,024 125,905 68,397 Net interest margin – on average interest earning assets 3,034,496 57,508 4.08 2.29 1.79 0.14 1.93 4.15 2.39 1.76 0.13 1.90 60 ANNUAL REPORT Notes to the consolidated financial statements30 JUNE 2018 NOTE 3 PROFIT BEFORE INCOME TAX Profit before income tax from continuing operations includes the following revenues and expenses whose disclosure is relevant in explaining the financial performance of the Consolidated Group. Included in the profit before income tax are the following revenue items: Other non interest income Fees and commissions Other income Consolidated Company 2018 $’000 8,874 474 9,348 2017 $’000 9,057 703 9,760 2018 $’000 8,874 474 9,348 The profit before income tax is arrived at after charging the following items: Provisions for employee entitlements Superannuation contributions paid Consolidated Company 2018 $’000 323 1,474 1,797 2017 $’000 158 1,455 1,613 2018 $’000 323 1,474 1,797 NOTE 4 INCOME TAX RELATING TO CONTINUING OPERATIONS (a) Income tax recognised in profit or loss (i) Major components of income tax expense for the year are: Current income tax Deferred income tax Income tax expense reported in profit or loss Consolidated Company 2018 $’000 6,732 623 7,355 2017 $’000 6,431 246 6,677 2018 $’000 6,732 623 7,355 (ii) Numerical reconciliation of income tax expense to prima facie tax payable: Tax on profit before income tax at 30% (2017: 30%) Tax effect of permanent differences Add non-deductible expenses: Depreciation of buildings Merger expenses Less: Other items – net Income tax expense Consolidated Company 2018 $’000 7,320 49 – (14) 7,355 2017 $’000 6,564 49 80 (16) 6,677 2018 $’000 7,320 49 – (14) 7,355 2017 $’000 9,057 703 9,760 2017 $’000 158 1,455 1,613 2017 $’000 6,431 246 6,677 2017 $’000 6,564 49 80 (16) 6,677 AUSWIDE BANK – 30 JUNE 2018 61 NOTE 4 INCOME TAX RELATING TO CONTINUING OPERATIONS (CONTINUED) (b) Income tax recognised in other comprehensive income Consolidated Company 2018 $’000 2017 $’000 2018 $’000 2017 $’000 Current income tax Other Deferred income tax Arising on items that may be reclassified to profit or loss: Fair value remeasurement of available-for-sale financial assets Fair value remeasurement of hedging instruments entered into for cash flow hedges Arising on items that will not be reclassified to profit or loss: Fair value remeasurement of land and buildings Total income tax recognised directly in other comprehensive income (c) Current tax assets and liabilities Current tax liabilities Current tax liabilities – – (1) (79) (80) 434 434 354 – – (3) 258 255 – – 255 – – (1) (79) (80) 434 434 354 Consolidated Company 2018 $’000 721 721 2017 $’000 1,222 1,222 2018 $’000 1,182 1,182 (d) Deferred tax balances Deferred tax balances are presented in the statement of financial position as follows: Deferred tax assets Deferred income tax liabilities Deferred income tax assets Employee leave provisions Other provisions Property, plant & equipment Capital losses available Project acquisition costs Premium on loans purchased Subordinated notes prepaid expenses Other items 62 ANNUAL REPORT Consolidated Company 2018 $’000 4,573 (1,891) 2,682 2017 $’000 5,256 (2,947) 2,309 2018 $’000 4,573 (1,891) 2,682 Consolidated Company 2018 $’000 2017 $’000 2018 $’000 865 959 819 1,466 179 124 34 127 815 1,294 729 1,886 280 131 24 97 865 959 819 1,466 179 124 34 127 4,573 5,256 4,573 5,256 – – (3) 258 255 – – 255 2017 $’000 1,222 1,222 2017 $’000 5,256 (1,580) 3,676 2017 $’000 815 1,294 729 1,886 280 131 24 97 Notes to the consolidated financial statements30 JUNE 2018 In respect of each temporary difference the adjustment was charged to income. Deferred tax liabilities Asset revaluation reserve Prepayments Available for sale reserve Cash flow hedging reserve Revaluation of financial assets Consolidated Company 2018 $’000 1,867 137 44 (157) – 1,891 2017 $’000 1,433 179 45 (77) 1,367 2,947 2018 $’000 1,867 137 44 (157) – 1,891 2017 $’000 1,433 179 45 (77) – 1,580 In respect of each temporary difference the adjustment was charged to income, except for the revaluations of the RMBS investments which were charged to the available for sale reserve in equity, the revaluations of hedging instruments entered into for cash flow hedges which were charged to the cash flow hedge reserve in equity, and the revaluations of land and buildings which were charged to the asset revaluation reserve in equity. NOTE 5 DIVIDENDS PAID Dividends paid during the year Interim for current year Final for previous year Consolidated Company 2018 $’000 6,740 6,917 13,657 2017 $’000 5,696 6,440 12,136 2018 $’000 6,740 6,917 13,657 2017 $’000 5,696 6,440 12,136 Dividends paid are fully franked on ordinary shares. In accordance with Accounting Standards, dividends are only provided for as declared or paid. Subsequent to the reporting date, the Board declared a dividend of 18.0 cents per ordinary share ($7.583m), for the six months to 30 June 2018, payable on 21 September 2018. The final dividend for the six months to 30 June 2017 ($6.917m) was paid on 22 September 2017, and was disclosed in the 2016/17 financial accounts in accordance with Accounting Standards. The tax rate at which the dividends have been franked is 30% (2017: 30%). The amount of franking credits available for the subsequent financial year are: Balance as at the end of the financial year Credits/(debits) that will arise from the payment of income tax payable per the financial statements Debits that will arise from the payment of the proposed dividend Dividends - cents per share Dividend proposed Fully franked dividend on ordinary shares Interim dividend paid during the year Fully franked dividend on ordinary shares Final dividend paid for the previous year Fully franked dividend on ordinary shares Consolidated Company 2018 $’000 26,266 721 (3,250) 23,737 2017 $’000 24,761 1,222 (2,964) 23,019 2018 $’000 26,266 1,182 (3,250) 24,198 2017 $’000 24,761 1,222 (2,964) 23,019 Consolidated Company 2018 2017 2018 2017 18.0 16.0 17.0 17.0 14.0 16.0 18.0 16.0 17.0 17.0 14.0 16.0 AUSWIDE BANK – 30 JUNE 2018 63 NOTE 6 CASH AND CASH EQUIVALENTS For the purposes of the consolidated statement of cash flows, cash and cash equivalents include cash on hand and in banks. Cash and cash equivalents at the end of the reporting period as shown in the consolidated statement of cash flows can be reconciled to the related items in the consolidated statement of financial position as follows: Cash at bank and in hand Deposits on call Consolidated Company 2018 $’000 35,801 50,560 86,361 2017 $’000 29,825 90,240 120,065 2018 $’000 35,801 50,560 86,361 NOTE 7 DUE FROM OTHER FINANCIAL INSTITUTIONS Deposits with Special Service Providers (SSPs) Subordinated loans Maturity analysis No maturity specified NOTE 8 ACCRUED RECEIVABLES Interest receivable Securitisation receivables Other Consolidated Company 2018 $’000 15,264 125 15,389 15,389 15,389 2017 $’000 11,638 125 11,763 11,763 11,763 2018 $’000 15,264 125 15,389 15,389 15,389 Consolidated Company 2018 $’000 4,850 – 448 5,298 2017 $’000 4,509 1,606 620 6,735 2018 $’000 4,850 – 448 5,298 2017 $’000 30,902 90,240 121,142 2017 $’000 11,638 125 11,763 11,763 11,763 2017 $’000 4,509 1,606 599 6,714 64 ANNUAL REPORT Notes to the consolidated financial statements30 JUNE 2018 NOTE 9 FINANCIAL ASSETS Held to maturity financial assets carried at amortised cost Certificates of deposit 210,178 253,440 210,178 253,440 Consolidated Company 2018 $’000 2017 $’000 2018 $’000 2017 $’000 Available for sale financial assets carried at fair value External RMBS investments Investment in Managed Investment Scheme (MIS) Financial assets at amortised cost Notes – Securitisation program & other Maturity analysis Up to 3 months From 1 to 5 years Later than 5 years 1,147 25,886 17,082 254,293 102,178 108,000 44,115 254,293 1,470 14,042 22,996 291,948 159,240 94,200 38,508 291,948 1,147 25,886 49,468 286,679 102,178 108,000 76,501 286,679 1,470 14,042 53,382 322,334 159,240 94,200 68,894 322,334 Cash held within securitised trusts at 30 June 2018 of $17.082m (2017: $22.996m) is restricted for use only by the trusts. NOTE 10 LOANS AND ADVANCES Term loans Loans to controlled entities Continuing credit loans Provision for impairment Total loans Provision for impairment Total provision Opening balance Bad and doubtful debts unwound/(provided for) during the year Total provision for impairment Charge to profit or loss for bad and doubtful debts comprises: Total provision Bad debts recognised directly Maturity analysis Up to 3 months From 3 to 12 months From 1 to 5 years Later than 5 years Consolidated Company 2018 $’000 2017 $’000 2018 $’000 2017 $’000 2,782,321 2,631,078 2,782,322 2,631,079 – 131,723 2,914,044 – 146,456 2,777,534 142 131,723 2,914,187 197 146,428 2,777,704 (3,197) (4,314) (3,197) (4,314) 2,910,847 2,773,220 2,910,990 2,773,390 (4,314) 1,117 (3,197) 1,117 (2,437) (1,320) (5,047) 733 (4,314) 733 (1,712) (979) (4,314) 1,117 (3,197) 1,117 (2,437) (1,320) 3,039 12,259 39,045 2,856,504 2,910,847 2,928 1,870 41,536 2,726,886 2,773,220 3,039 12,259 39,045 2,856,647 2,910,990 (5,047) 733 (4,314) 733 (1,712) (979) 2,928 1,870 41,536 2,727,056 2,773,390 The Group has entered into securitisation transactions on residential mortgage loans that do not qualify for derecognition. The special purpose entities established for the securitisations are considered to be controlled in accordance with Australian Accounting Standards & Australian Accounting Interpretations. The Company is entitled to any residual income of the securitisation program after all payments due to investors and costs of the program have been met; to this extent the economic entity retains credit and liquidity risk. AUSWIDE BANK – 30 JUNE 2018 65 NOTE 10 LOANS AND ADVANCES (CONTINUED) The impact on the Group is an increase in liabilities – Loans under management – of $607.166m (30 June 2017 – $708.020m). B notes of $32.395m which are owned by the Company and which represent the Group’s exposure on the securitised mortgages have been eliminated from the consolidated figures. Concentration of risk The loan portfolio of the Company does not include any loan which represents 10% or more of capital. NOTE 11 OTHER INVESTMENTS AND RELATED PARTIES Unlisted shares – at cost Controlled entities – at directors' valuation Consolidated Company 2018 $’000 1,144 – 1,144 2017 $’000 1,069 – 1,069 2018 $’000 1,144 – 1,144 2017 $’000 1,069 4,084 5,153 The carrying amounts of unlisted shares were reassessed by the directors as at 30 June 2018 with the reassessments being based on whether there were internal or external indicators that the investment was impaired. (a) Controlled entities Name Company Auswide Bank Ltd Controlled entities Place of incorporation and operation Proportion of ownership and voting power held by the Company Contribution to consolidated operating profit after income tax Investment carrying value 2018 % 2017 % 2018 $’000 2017 $’000 2018 $’000 2017 $’000 Australia – – 17,044 15,203 Mortgage Risk Management Pty Ltd Australia Widcap Securities Pty Ltd Australia Auswide Performance Rights Pty Ltd MoneyPlace Holdings Pty Ltd (MoneyPlace) Australia Australia MoneyPlace Holdings Pty Ltd (MoneyPlace) 100.0 100.0 100.0 100.0 100.0 100.0 – – – – – – – 62.4 842 (236) – – – – – – – – – 4,083 In December 2015 the Group entered into a strategic relationship and equity investment with MoneyPlace Holdings. Auswide Bank Ltd acquired a 19.3% equity stake in MoneyPlace which settled on 4 January 2016. In February 2017 Auswide Bank made a follow-on investment and acquired an additional 43.7% equity stake in MoneyPlace, via a subscription agreement. This brought the total investment to 63.3%, and resulted in the Group obtaining a controlling interest in MoneyPlace Holdings. As a result of a share issue to minority holders, the proportion of ownership in MoneyPlace at 30 June 2017 was 62.4%. In January 2018, the Group announced that it had entered into an agreement to divest its equity stake in P2P lender MoneyPlace. This transaction was completed on 22 January 2018. The proceeds of the sale exceeded the carrying amount of the related net assets and, accordingly, no impairment losses were recognised. Further information in relation to this entity can be found in Notes 34 and 35. Mortgage Risk Management Pty Ltd (MRM) MRM is a wholly owned subsidiary of Auswide Bank Ltd and was previously registered as a Lenders’ Mortgage Insurance provider. MRM has been in wind-down since ceasing to write insurance business in 2012, and is no longer actively trading. Widcap Securities Pty Ltd Widcap Securities Pty Ltd is a wholly owned subsidiary which acts as the manager and custodian for Auswide Bank’s public RMBS and Warehouse Securitisation programs. 66 ANNUAL REPORT Notes to the consolidated financial statements30 JUNE 2018 Auswide Performance Rights Pty Ltd Auswide Performance Rights Pty Ltd is the trustee company for the Auswide Performance Rights Plan, set up to assist in the retention and motivation of executives, senior managers and qualifying employees. (b) Warehouse and securitisation trusts Auswide Bank has an external securitisation program which is comprised of the following trusts: • Wide Bay Trust No. 5 • Wide Bay Trust No. 6 • WB Trust 2008-1 • WB Trust 2009-1 • WB Trust 2010-1 • WB Trust 2014-1 • ABA Trust 2017-1 • ABA Trust No. 7 These trusts are fully consolidated at the reporting date. (c) Details of material associates Details of each of the Group’s material associates at the end of the reporting period are as follows: Name of associate Principal activity Place of incorporation and operation Proportion of ownership interest and voting power held by the Group Finance Advice Matters Group Pty Ltd (FAMG) Financial Planning Australia 2018 25.0% 2017 25.0% J1-Plan has been liquidated and was deregistered by ASIC on 17 July 2018. Financial Advice Matters Group Pty Ltd (FAMG) is accounted for using the equity method in these consolidated financial statements. (d) Investments accounted for using the equity method Summarised financial information in respect of each of the Group’s material associates is set out below. The summarised financial information below represents amounts shown in the associates’ financial statements prepared in accordance with AASBs. Financial Advice Matters Group Pty Ltd (FAMG) Share of associate’s balance sheet: Current assets Non-current assets Current liabilities Non-current liabilities Net assets Share of associate’s revenue and profit: Revenue Profit/(loss) before income tax Income tax Profit/(loss) after income tax Total comprehensive income for the year Dividends received from associate during the year 2018 $’000 405 527 (178) (59) 695 2018 $’000 1,203 102 (28) 74 74 – 2017 $’000 352 528 (206) (357) 317 2017 $’000 1,348 78 (22) 56 56 129 The above figures were based on the unaudited accounts of Financial Advice Matters Group Pty Ltd (FAMG). (e) Related party transactions Balances and transactions between the Company and its subsidiaries which are related parties of the Company, have been eliminated on consolidation and are not disclosed in this note. AUSWIDE BANK – 30 JUNE 2018 67 NOTE 12 PROPERTY, PLANT AND EQUIPMENT Carrying amounts of: Freehold land and buildings Plant and equipment Freehold land and buildings At independent valuation – June 2018 Provision for depreciation Movement in carrying amount Opening net book amount Revaluation increase Depreciation charge Carrying amount at end of year Plant and equipment At cost Provision for depreciation Movement in carrying amount Opening net book amount Additions Disposals Depreciation charge Carrying amount at end of year Consolidated Company 2018 $’000 9,676 5,900 15,576 2017 $’000 8,399 6,207 14,606 2018 $’000 9,676 5,900 15,576 Consolidated Company 2018 $’000 9,690 (14) 2017 $’000 8,750 (351) 2018 $’000 9,690 (14) 2017 $’000 8,399 6,207 14,606 2017 $’000 8,750 (351) 9,676 8,399 9,676 8,399 8,399 1,446 (169) 9,676 8,568 – (169) 8,399 8,399 1,446 (169) 9,676 Consolidated Company 2018 $’000 28,581 (22,681) 2017 $’000 27,896 (21,689) 2018 $’000 28,581 (22,681) 8,568 – (169) 8,399 2017 $’000 27,896 (21,689) 5,900 6,207 5,900 6,207 6,207 1,620 (103) (1,824) 5,900 6,976 1,023 (42) (1,750) 6,207 6,207 1,620 (103) (1,824) 5,900 6,976 1,023 (42) (1,750) 6,207 All land and buildings were revalued as at 4 June 2018 by certified practicing valuers Henry Brown of Taylor Byrne Pty Ltd. The valuations were assessed to fair market values based on comparable sales in regional Queensland and by capitalisation of assessed net income. The Company’s policy is to engage external experts to comprehensively revalue freehold land and buildings every three years with an assessment performed by the Board of Directors in intervening years. NOTE 13 OTHER ASSETS Prepayments Consolidated Company 2018 $’000 8,475 8,475 2017 $’000 8,406 8,406 2018 $’000 8,476 8,476 2017 $’000 8,260 8,260 68 ANNUAL REPORT Notes to the consolidated financial statements30 JUNE 2018 NOTE 14 GOODWILL (a) MoneyPlace Holdings Pty Ltd Auswide Bank Ltd acquired a 19.3% equity stake in MoneyPlace which settled on 4 January 2016. In February 2017 Auswide Bank made a follow-on investment and acquired an additional 43.7% equity stake in MoneyPlace, via a subscription agreement. This brought the total investment to 63.3%, and resulted in the Group obtaining a controlling interest in MoneyPlace. Auswide Bank’s interest in MoneyPlace was subsequently disposed of in January 2018. Upon gaining a controlling interest in MoneyPlace, an independent valuation was procured. After applying the principles of acquisition accounting, the initial equity investment was revalued to facilitate the calculation of the consideration transferred. The independent valuation identified the net assets (including intangible assets such as software and customer contracts), and it was established that the resultant difference be recognised as goodwill on consolidation. The financial accounting for this business combination was prepared in accordance with Australian Accounting Standards and as set out in Notes 1(c) & (r), and recognises the acquisition date as 28 February 2017. (b) Queensland Professional Credit Union Ltd (YCU) On 19 May 2016, the Group acquired 100% of the shares of Queensland Professional Credit Union Ltd trading as Your Credit Union (YCU), via a court approved Scheme of Arrangement which involved the demutualisation of YCU and resulted in Auswide Bank Ltd obtaining control of YCU. All of YCU’s assets, liabilities and obligations, whether actual or contingent were transferred to Auswide Bank Ltd. In addition, all duties, obligations, immunities, rights and privileges which apply to YCU, had YCU continued in existence, apply to Auswide Bank Ltd as a continuation of, and the same legal entity as YCU. The financial accounting for this business combination was prepared in accordance with Australian Accounting Standards and as set out in Notes 1(c) & (r), and recognises the acquisition date as 19 May 2016. (c) Mackay Permanent Building Society Ltd (MPBS) Pursuant to a bidder’s statement lodged with the Australian Securities & Investments Commission on 15 November 2007, the Company issued an off-market takeover offer for 100% of the ordinary shares in Mackay Permanent Building Society Ltd (MPBS). On 11 January 2008 the Company announced the fulfilment of conditions pertaining to the off-market takeover offer set out in the bidder’s statement and gave notice that the offer was unconditional effective 10 January 2008. In accordance with APRA’s approval for the transfer of business the financial and accounting records of the entities were merged on 1 June 2008. The financial accounting for this business combination was prepared in accordance with Australian Accounting Standards and as set out in Notes 1(c) & (r), and recognises the acquisition date as 10 January 2008. Movements in Goodwill: Balance at beginning of the year Derecognised on disposal of subsidiary Recognised on acquisition of subsidiary Balance at end of year Impairment testing Consolidated Company 2018 $’000 48,975 (2,612) – 46,363 2017 $’000 46,363 – 2,612 48,975 2018 $’000 46,363 – – 2017 $’000 46,363 – – 46,363 46,363 The cash-generating unit selected for impairment testing of goodwill was the Auswide Bank Ltd parent entity, as it is impractical to identify a separate MPBS cash generating unit, or YCU cash generating unit, within the Company and Consolidated entities. A separate cash generating unit was identified as a result of the acquisition of MoneyPlace. Upon the acquisition, an independent valuation was procured and goodwill was assessed as part of this process. On disposal goodwill was subsequently derecognised. The goodwill disclosed in the Statement of Financial Position at 30 June 2018 was supported by the impairment testing and no impairment adjustment was required. AUSWIDE BANK – 30 JUNE 2018 69 NOTE 14 GOODWILL (CONTINUED) Impairment testing of goodwill was carried out by comparing the net present value of cash flows from the cash-generating unit to the carrying value of the cash generating unit. The cash flows were based on projections of future earnings before taxation, depreciation and amortisation, minus forecast capital expenditure. The cash flows have been projected over a period of five years. The terminal value of the business beyond year five has been determined using a constant growth perpetuity. The key assumptions used in carrying out the impairment testing were as follows: • Budgeted trading result for the financial years ending 30 June 2019/20 Represents the cash-generating potential of the parent entity based on the forecast approved by the Board of Directors. • Estimated growth rate 7.0% (2017: 5.0%) represents growth in cash-generating unit cash flows over years one to five (beyond 30 June 2018). Such growth is considered to be reasonable by management and the Board of Directors given historical loan book growth and strategic long-term growth targets. Due to an enhanced impairment testing model being developed for the 2018 financial year, the 7.0% growth rate is not directly comparable to the 5.0% growth comparative from the prior year. • Terminal growth rate 2.0% (2017: 5.0%) represents the terminal growth rate (beyond five years). • Discount rate 11.25% (2017: 12.2%) is the discount rate used in impairment testing representing the Cost of Equity to the consolidated Group at 30 June 2018 The trigger points at which the carrying value of the cash-generating unit would exceed its recoverable amount, while holding all other variables constant, are as follows: • terminal growth rate – 0.0% (2017: 4.0%); and • discount rate – 13.3% (2017: 13.1%). NOTE 15 OTHER INTANGIBLE ASSETS Consolidated Company 2018 $’000 1,956 1,956 2017 $’000 7,935 7,935 2018 $’000 1,956 1,956 Consolidated Company 2018 $’000 9,138 (7,182) 1,956 7,935 587 – (5,876) (690) 1,956 2017 $’000 14,427 (6,492) 7,935 2,719 905 5,160 – (849) 7,935 2018 $’000 9,138 (7,182) 1,956 2,564 82 – – (690) 1,956 2017 $’000 2,564 2,564 2017 $’000 9,056 (6,492) 2,564 2,719 507 – – (662) 2,564 Carrying amounts of: Software Software At cost Provision for amortisation Movement in carrying amount Balance at 1 July Additions Additions due to business combinations Disposals Amortisation Balance at 30 June 70 ANNUAL REPORT Notes to the consolidated financial statements30 JUNE 2018 NOTE 16 DEPOSITS AND SHORT TERM BORROWINGS Call deposits Term deposits Negotiable certificates of deposit (NCDs) Floating rate notes (FRNs) Maturity analysis On call Up to 3 months From 3 to 12 months From 1 to 5 years Consolidated Company 2018 $’000 752,954 1,355,032 257,839 81,000 2017 $’000 2018 $’000 726,103 752,989 1,331,229 1,355,032 147,272 100,000 257,839 81,000 2017 $’000 726,103 1,331,229 147,272 100,000 2,446,825 2,304,604 2,446,860 2,304,604 752,954 859,632 800,335 33,904 909,521 613,597 756,275 25,211 752,989 859,632 800,335 33,904 909,521 613,597 756,275 25,211 2,446,825 2,304,604 2,446,860 2,304,604 The Company’s deposit portfolio does not include any deposit which represents 10% or more of total liabilities. Reconciliation of liabilities arising from financing activities The table below details changes in the Group’s liabilities arising from financing activities, including both cash and non-cash changes. Liabilities arising from financing activities are those for which cash flows were, or future cash flows will be, classified in the Group’s consolidated statement of cash flows as cash flows from financing activities. Consolidated entity Opening balance 30 June 2017 $’000 Financing cash flows $’000 Others changes $’000 Consolidation of subsidiary $’000 Disposal of subsidiary $’000 Closing balance 30 June 2018 $’000 Deposits and short term borrowings 2,304,604 Loans under management 708,020 137,262 (99,655) 6,968 (1,199) (35) – (1,974) 2,446,825 – 607,166 NOTE 17 PAYABLES AND OTHER LIABILITIES Trade creditors Accrued interest payable Other creditors Maturity analysis Up to 3 months From 3 to 12 months From 1 to 5 years Consolidated Company 2018 $’000 2,573 12,758 10,676 26,007 19,550 6,195 262 26,007 2017 $’000 3,235 10,814 4,588 18,637 12,473 5,987 177 18,637 2018 $’000 2,566 12,758 10,676 26,000 19,543 6,195 262 26,000 2017 $’000 3,032 10,814 4,479 18,325 12,231 5,917 177 18,325 AUSWIDE BANK – 30 JUNE 2018 71 NOTE 18 PROVISIONS Employee entitlements Balance at beginning of year Provided for during the year Used during the year Balance at end of year Maturity analysis Current provision Non-current provision Other provisions Total provisions Consolidated Company 2018 $’000 2,800 238 (155) 2,883 2,547 336 2,883 40 2,923 2017 $’000 2,881 575 (656) 2,800 2,439 361 2,800 40 2,840 2018 $’000 2,718 320 (155) 2,883 2,547 336 2,883 40 2,923 2017 $’000 2,881 493 (656) 2,718 2,357 361 2,718 40 2,758 The provision for employee benefits represents annual leave and long service leave entitlements accrued. NOTE 19 SUBORDINATED CAPITAL NOTES Inscribed debenture stock Maturity analysis Later than 5 years NOTE 20 CONTRIBUTED EQUITY Fully paid ordinary shares Balance at beginning of year Issued during the year Staff share plan Dividend reinvestment plan Share issue costs Treasury shares Treasury shares Balance at end of year Consolidated Company 2018 $’000 28,000 2017 $’000 28,000 2018 $’000 28,000 2017 $’000 28,000 28,000 28,000 28,000 28,000 2018 Shares No. 2018 Shares $’000 2017 Shares No. 2017 Shares $’000 40,686,033 184,752 40,251,196 182,629 59,666 1,383,041 – 291 6,914 (211) (19,768) (134) 77,095 357,742 – – 349 1,774 – – 42,108,972 191,612 40,686,033 184,752 Effective 1 July 1998, the Company Law Review Act abolished the concept of par value shares and the concept of authorised capital. Accordingly, the Company does not have authorised capital or par value in respect of its issued shares. All ordinary shares have equal voting, dividend and capital repayment rights. (a) Staff Share Plan 17 October 2017 – 59,666 ordinary shares were issued. Shares issued pursuant to the Company’s staff share plan were at a price of 90% of the weighted average price of the Company’s shares traded on the Australian Securities Exchange for the 10 days prior to the issue of the invitation to subscribe for the shares. 72 ANNUAL REPORT Notes to the consolidated financial statements30 JUNE 2018 The members of the Company approved a staff share plan in 1992 enabling the staff to participate to a maximum of 10% of the shares of the Company. The share plan is available to all employees under the terms and conditions as decided from time to time by the Directors, but in particular, limits the maximum loan to each participating employee to 40% of their gross annual income. The plan requires employees to provide a deposit of 10% with the balance able to be repaid over a period of 5 years at no interest. The total number of shares issued to employees since the inception of the staff share plan The total number of shares issued to employees during the financial year The total market value at date of issue, 17 October 2017 (9 November 2016) The total amount paid or payable for the shares at that date (b) Dividend Reinvestment Plan (DRP) Consolidated Company 2018 Shares No. 2017 Shares No. 2018 Shares No. 2017 Shares No. 2,920,673 2,861,007 2,920,673 2,861,007 59,666 77,095 59,666 77,095 $’000 $’000 $’000 $’000 323 291 393 349 323 291 393 349 The Board of Directors resolved to underwrite the Dividend Reinvestment Plan (DRP) in respect of the final dividend for the 2016/17 financial year, payable on 22 September 2017. 22 September 2017 – 1,383,041 ordinary shares were issued The Board of Directors resolved to suspend the DRP for the interim dividend payable on 26 March 2018 for the 2017/18 financial year. Shares issued under the plan rank equally in every respect with existing fully paid permanent ordinary shares and participate in all cash dividends declared after the date of issue. The shares issued under the DRP on 22 September 2017 were issued at a discount of 2.5% on the weighted sale price of the Company’s shares sold during the five trading days immediately following the Record Date. (c) Auswide Performance Rights Pty Ltd As at the reporting date Auswide Performance Rights Pty Ltd holds 19,768 shares ($134,262) for the purpose of facilitating the Executive LTI scheme. AUSWIDE BANK – 30 JUNE 2018 73 NOTE 21 RESERVES Available for sale reserve Asset revaluation reserve Cash flow hedge reserve Share-based payment reserve Statutory reserve General reserve Doubtful debts reserve Movements in reserves: Available for sale reserve Balance at beginning of year Increase/(decrease) due to revaluation of RMBS investments to mark-to-market Deferred tax liability adjustment on revaluation of RMBS investments Balance at end of year Consolidated Company 2018 $’000 102 4,357 (366) 241 2,676 5,834 2,388 15,232 105 (3) – 102 2017 $’000 105 3,345 (181) (189) 2,676 5,834 2,388 13,978 113 (12) 4 105 2018 $’000 102 4,357 (366) 241 2,676 5,834 2,388 15,232 105 (3) – 102 2017 $’000 105 3,345 (181) – 2,676 5,834 2,388 14,167 113 (12) 4 105 The balance of this reserve represents the excess of the mark-to-market valuation over the original cost of the RMBS investments. Asset revaluation reserve Balance at beginning of year Increase/(decrease) due to revaluation increment on land and buildings Deferred tax liability adjustment on revaluation increment on land and buildings Balance at end of year 3,345 1,446 (434) 4,357 3,345 – – 3,345 3,345 1,446 (434) 4,357 3,345 – – 3,345 The balance of this reserve represents the excess of the independent valuation over the original cost of the land and buildings. Cash flow hedge reserve Balance at beginning of year Gain/(loss) arising on changes in fair value of hedging instruments entered into for cash flow hedges Interest rate swaps Deferred tax related to gains/losses recognised in other comprehensive income Balance at end of year (181) (784) (181) (784) (265) 80 (366) 861 (258) (181) (265) 80 (366) 861 (258) (181) The cash flow hedging reserve represents the cumulative effective portion of gains or losses arising on changes in fair value of hedging instruments entered into for cash flow hedges. The cumulative gain or loss arising on changes in fair value of the hedging instruments that are recognised and accumulated under the heading of cash flow hedging reserve will be reclassified to profit or loss only when the hedged transaction affects the profit or loss, or is included as a basis adjustment to the non-financial hedged item, consistent with the relevant accounting policy. There were no cumulative gains/losses arising on changes in fair value of hedging instruments reclassified from equity into profit or loss during the year. 74 ANNUAL REPORT Notes to the consolidated financial statements30 JUNE 2018 Share based payments reserve Balance at beginning of year Granted during the year Vested during the year Balance at end of year Consolidated Company 2018 $’000 2017 $’000 2018 $’000 2017 $’000 (189) 375 55 241 (214) – 25 (189) – 241 – 241 – – – – The share based payments reserve relates to shares available for long term incentive (LTI) based payments to employees. Statutory reserve Balance at end of year 2,676 2,676 2,676 2,676 This is a statutory reserve created on a distribution from the Queensland Building Society Fund. General reserve Balance at end of year 5,834 5,834 5,834 5,834 A special reserve was established upon the Company issuing fixed share capital in 1992. The special reserve represented accumulated members’ profits at that date and was transferred to the general reserve over a period of 10 years being finalised in 2001/2002. Doubtful debts reserve Balance at end of year 2,388 2,388 2,388 2,388 Under APRA Prudential Standard 220, the Company is required to hold a general reserve for credit losses. The current reserve has been assessed and meets the requirements of Auswide Bank’s impairment policy. Total reserves 15,232 13,978 15,232 14,167 NOTE 22 NON-CONTROLLING INTEREST Reconciliation of non-controlling interest in controlled entities: Balance at beginning of year Non-controlling interests arising on the acquisition of MoneyPlace Share of operating profit/(loss) for the year Deconsolidation of non-controlling interest on the disposal of MoneyPlace Balance at end of year Consolidated 2018 $’000 1,291 – (231) (1,060) – 2017 $’000 – 1,431 (140) – 1,291 In January 2018, Auswide Bank disposed of its holding in MoneyPlace. All holdings relating to the controlling interest in MoneyPlace have been deconsolidated in the financial accounts at 30 June 2018. Further information can be found in Notes 34 and 35. AUSWIDE BANK – 30 JUNE 2018 75 NOTE 23 CASH FLOW STATEMENT Reconciliation of profit from ordinary activities after tax to the net cash flows from operations: Consolidated Company Profit after tax from continuing operations Depreciation and amortisation Bad debts expense (Profit)/loss on disposal of non-current assets Movement in assets Accrued interest on investments Prepayments and other receivables Deferred tax asset Movement in liabilities Creditors and accruals Deferred tax payable Income tax payable Employee benefit provisions Other provisions Reserves Net cash generated from operating activities 2018 $’000 17,886 2,659 1,320 (1,188) (341) 7,722 683 11,339 (1,056) (501) 83 82 (353) 38,335 2017 $’000 15,149 2,790 979 28 173 (658) 185 (1,396) 738 1,633 (81) (39) (255) 19,246 2018 $’000 19,345 2,659 1,320 104 (341) 7,521 683 10,354 311 (40) 83 165 (353) 41,811 Cash flows arising from the following activities are presented on a net basis: • Deposits to and withdrawals from customer deposit accounts. • Advances and repayments on loans, advances and other receivables. • Sales and purchases of investment securities. • • Insurance and reinsurance premiums. (Profit)/loss on disposal of fixed assets. NOTE 24 EXPENDITURE COMMITMENTS Capital expenditure commitments Capital expenditure contracted for within one year Lease expenditure commitments (as Lessee) Non-cancellable operating leases Up to 1 year From 1 to 2 years From 2 to 5 years Later than 5 years Consolidated Company 2018 $’000 227 2017 $’000 1,463 2018 $’000 227 Consolidated Company 2018 $’000 2,092 1,143 949 – 4,184 2017 $’000 2,166 1,669 1,813 74 5,722 2018 $’000 2,092 1,143 949 – 4,184 Non-cancellable operating leases relate to leases of branches across Queensland. 2017 $’000 15,203 2,603 979 28 173 2,352 185 (2,475) (630) 1,633 (163) (121) (255) 19,512 2017 $’000 1,463 2017 $’000 2,166 1,669 1,813 74 5,722 76 ANNUAL REPORT Notes to the consolidated financial statements30 JUNE 2018 NOTE 25 CONTINGENT LIABILITIES AND CREDIT COMMITMENTS Approved but undrawn loans Approved but undrawn credit limits Bank guarantees NOTE 26 EARNINGS PER SHARE Basic earnings per share From continuing operations From discontinued operations Total basic earnings per share Diluted earnings per share From continuing operations From discontinued operations Total diluted earnings per share Basic earnings per share Consolidated Company 2018 $’000 104,447 90,479 985 195,911 2017 $’000 55,264 88,364 550 144,178 2018 $’000 104,447 90,479 985 195,911 2017 $’000 55,264 88,364 550 144,178 2018 Cents per share 2017 Cents per share 40.81 2.02 42.83 40.81 2.02 42.83 37.48 (0.13) 37.35 37.48 (0.13) 37.35 The earnings and weighted average number of ordinary shares used in the calculation of basic earnings per share are calculated as follows: Profit for the year attributable to owners of the Company Earnings used in the calculation of basic earnings per share Profit for the year from discontinued operations used in the calculation of basic earnings per share from discontinued operations 2018 $’000 17,886 17,886 (842) 2017 $’000 15,149 15,149 54 Earnings used in the calculation of basic earnings per share from continuing operations 17,044 15,203 Weighted average number of ordinary shares for the purposes of basic earnings per share 41,771,336 40,567,981 2018 Shares No. 2017 Shares No. Diluted earnings per share The earnings used in the calculation of diluted earnings per share are as follows: Earnings used in the calculation of basic earnings per share Earnings used in the calculation of diluted earnings per share Profit for the year from discontinued operations used in the calculation of diluted earnings per share from discontinued operations 2018 $’000 17,886 17,886 (842) 2017 $’000 15,149 15,149 54 Earnings used in the calculation of diluted earnings per share from continuing operations 17,044 15,203 The weighted average number of ordinary shares for the purposes of diluted earnings per share reconciles to the weighted average number of ordinary shares used in the calculation of basic earnings per share as follows: Weighted average number of ordinary shares used in the calculation of basic earnings per share 41,792,633 40,567,981 Weighted average number of ordinary shares used in the calculation of diluted earnings per share 41,792,633 40,567,981 2018 Shares No. 2017 Shares No. AUSWIDE BANK – 30 JUNE 2018 77 NOTE 27 KEY MANAGEMENT PERSONNEL DISCLOSURES (a) Details of key management personnel Key management personnel have been taken to comprise the Directors and members of Executive Management who are collectively responsible for the day-to-day financial and operational management of the Group and the Company. The following were key management personnel for the entire reporting period unless otherwise stated. (i) Directors JS Humphrey Chairman – Non-executive Director MJ Barrett Managing Director B Dangerfield Director – Non-executive GN Kenny Director – Non-executive SC Birkensleigh Director – Non-executive (ii) Executives WR Schafer Chief Financial Officer, Company Secretary SM Caville Chief Information Officer D Hearne GM Job Chief Customer Officer Chief People Officer CA Lonergan Chief Risk Officer MS Rasmussen Chief Operating Officer Each of the key management personnel, relatives of key management personnel and related business entities which hold share capital and/or deposits with the Company do so on the same conditions as those applying to all other members of the Company. (b) Key management personnel compensation The aggregate compensation made to directors and other members of key management personnel of the Company and the Group is set out below. Short term benefits Cash salary and fees Cash bonus Post employment benefits Superannuation Share based payments Other long term benefits Consolidated Company 2018 $’000 2,346 140 176 55 43 2017 $’000 2,361 98 173 25 41 2018 $’000 2,346 140 176 55 43 2017 $’000 2,361 98 173 25 41 2,760 2,698 2,760 2,698 Remuneration is calculated based on the period each employee was classified as key management personnel. Remuneration to Directors was approved at the previous Annual General Meeting of the Company. (c) Other transactions with key management personnel Interest on loans to key management personnel has been paid on terms and conditions no more favourable than those available on similar transactions to members of the general public. The Bank’s policy for receiving deposits from other related parties and in respect of other related party transactions is that all transactions are approved and deposits are accepted on the same terms and conditions that apply to members of the general public for each type of deposit. Dividends of $148,507 (2017: $126,363) were paid to key management personnel and associates. These were made on terms no more favourable than those made on dividend payments to other shareholders. There were no other transactions in which key management personnel provided services to the Company. 78 ANNUAL REPORT Notes to the consolidated financial statements30 JUNE 2018 NOTE 28 REMUNERATION OF AUDITORS Amounts received or due and receivable by the auditors of Auswide Bank Ltd, Deloitte Touche Tohmatsu, are as follows: Audit and review of financial statements Other assurance services Total audit and assurance services Tax advisory services Other services Total non-audit services Total auditors' remuneration Consolidated Company 2018 $’000 2017 $’000 2018 $’000 2017 $’000 342,436 14,000 356,436 88,841 87,166 176,007 532,443 417,210 19,486 436,696 76,804 82,114 158,918 595,614 342,436 14,000 356,436 88,841 87,166 176,007 532,443 417,210 19,486 436,696 76,804 82,114 158,918 595,614 NOTE 29 EVENTS SUBSEQUENT TO BALANCE DATE The financial statements were approved by the Board of Directors on the date the directors’ declaration was signed. NOTE 30 BUSINESS AND GEOGRAPHICAL SEGMENT INFORMATION The Company operates predominantly in one industry. The principal activities of the Company are confined to the raising of funds and the provision of finance for housing, consumer lending and business banking. The Company commenced funding personal loans in May 2013. The personal loans portfolio was immaterial at balance date and has not been reported as a segment. Funding of business loans commenced in April 2014. The business loans portfolio was immaterial at balance date and has not been reported as a segment. The Company commenced lending for credit cards in April 2018. The credit card portfolio was immaterial at balance date and has not been reported as a segment. The Company operates principally within the states of Queensland, New South Wales and Victoria. NOTE 31 CONCENTRATION OF ASSETS AND LIABILITIES AND OFF BALANCE SHEET ITEMS The Directors are satisfied that there is no undue concentration of risk by way of geographical area, customer group or industry group. NOTE 32 FINANCIAL INSTRUMENTS The Group has exposure to the following risks from its use of financial instruments: • Capital risk • Market risk • Liquidity risk • Credit risk AUSWIDE BANK – 30 JUNE 2018 79 NOTE 32 FINANCIAL INSTRUMENTS (CONTINUED) (a) Capital risk management The Board and Management of Auswide Bank Ltd are responsible for instituting a Risk Management Framework (RMF) including policies and processes to reduce such risks to prudent levels at both a Company and Group level. The Board has established the following committees and delegated responsibilities to develop and monitor risk within their relevant areas and consistent with the Group wide Risk Management Framework: The Board Risk Committee; • assists the Board in the effective management of its responsibilities to set and oversee the risk profile and the risk management framework of Auswide Bank; • ensures management have appropriate risk systems and practices to effectively operate within the Board approved risk profile for Auswide Bank; and • deals with, and where applicable resolve, determine and recommend, all matters falling within the scope of its purpose and duties as set out in the Charter and other matters that may be delegated by the Board to the Committee from time to time. The Board Audit Committee; • overviews the management of the financial reporting and disclosure practices; • overviews the internal audit functions; • reviews compliance with APRA reporting and other statutory requirements; • oversight of financial accounts; • addresses changes in the adoption of accounting principles and the application thereof in interim and annual reports; • • reviews reports from the External Auditors; and reviews reports from the Internal Auditor, the Internal Audit program and any Management responses to issues raised. The Asset and Liability Management Committee (ALCO); • • reviews the balance sheet and recommends changes with regard to capital management, funding and securitisation activities (including product related issues); and reviews measures of liquidity and capital adequacy position against the policy and guidelines established in the Board policy. APRA’s Prudential Standard APS 110 Capital Adequacy aims to ensure the Authorised Deposit-taking Institutions (ADI’s) maintain adequate capital, on both an individual and group basis, to act as a buffer against the risks associated with the Group’s activities. APRA requires capital to be allocated against credit, market and operational risk, and the Group has adopted the ‘standard model’ approach to measure the capital adequacy ratio. The Board of Directors takes responsibility to ensure the Company and Group maintain a level and quality of capital commensurate with the type, amount and concentration of risks to which the company and consolidated group are exposed from their activities. The Board has regard to prospective changes in the risk profile and capital holdings. The Company’s management prepares a three year capital plan and monitors actual risk-based capital ratios on a monthly basis to ensure the capital ratio complies with Board targets. During the 2018 and 2017 financial years the capital adequacy ratios of both the Group and Company were maintained above the target ratio. The capital adequacy calculations at 30 June 2018 and 30 June 2017 have been prepared in accordance with the revised prudential standards incorporating the Basel III principles. APRA Prudential Standards and Guidance Notes for ADIs provide guidelines for the calculation of capital and specific parameters relating to Tier 1, Common Equity Tier 1 and Total Capital. Tier 1 capital comprises the highest quality components of capital and includes ordinary share capital, general reserves and retained earnings less specific deductions. Tier 2 capital comprises other capital components including general reserve for credit losses and cumulative subordinated debt. 80 ANNUAL REPORT Notes to the consolidated financial statements30 JUNE 2018 Consistent with Basel III, the approach to capital assessment provides for a quantitative measure of the capital adequacy and focuses on: • credit risk arising from on-balance sheet and off-balance sheet exposures; • market risk arising from trading activities; • operational risk associated with banking activities; • • securitisation risks; and the amount, form and quality of capital held to act as a buffer against these and other exposures. Details of the capital adequacy ratio on a Company and consolidated basis are set out below: Total risk weighted assets Capital base Risk-based capital ratio Consolidated Company 2018 $’000 2017 $’000 2018 $’000 2017 $’000 1,375,364 1,289,918 1,374,572 1,283,508 204,827 14.89% 186,007 14.42% 204,339 14.87% 184,532 14.38% The APS 330 Pillar III Disclosures inclusive of the Capital Disclosure Template, Regulatory Capital reconciliation and the Capital Instruments Disclosures are available in the Prudential Disclosures section of the Bank’s website at www.auswidebank.com.au. (b) Market risk management Market risk is the risk, that changes in market prices, such as interest rates, will affect Auswide Bank Ltd's income or the worth of its holdings of financial instruments. The Board's objective is to manage market risk exposures while optimising the return on risk. Interest rate risk Interest rate risk is the potential for loss of earnings to Auswide Bank Ltd due to adverse movements in interest rates. The Asset and Liability Management Committee (ALCO) is responsible for the analysis and management of interest rate risk inherent in the balance sheet through balance sheet and financial derivative alternatives. These risks are quantified in the Visual Risk Report. The ALCO’s functions and roles include: (i) (ii) review measures of profitability, particularly net interest and fee income including strategies and directives; review management interest rate view as well as asset and liability repricing data; (iii) receive and review reports from management concerning the organisation's credit risk; (iv) receive and review management reports on interest rate risk against guidelines and limits established in Board policy; (v) consider and approve pricing on interest bearing assets and liabilities as well as fee revenue attached to these products in co-operation with the Product Pricing sub-committee; (vi) oversee lending and depositing activities, including the provision of discretion pursuant to Board policies; (vii) receive and review reports from management regarding significant asset and liability exposure; (viii) oversee securitisation activities for the organisation, including recommendations for future securitisation transactions; (ix) review and maintain liquidity and capital management plans, including contingency measures; and (x) make recommendations to the Board on changes to the following policies; • Lending; • Term Deposits; and • Finance related policies (including capital and liquidity). At the reporting date, if interest rates had been 2.0% higher or lower and all other variables were held constant, the Group's net profit would decrease by $8.404m or increase by $7.336m (2017: decrease by $7.547m or increase by $6.781m). This is mainly due to the Company's exposures to fixed and variable rate loans, and deposit and securitisation liabilities. AUSWIDE BANK – 30 JUNE 2018 81 NOTE 32 FINANCIAL INSTRUMENTS (CONTINUED) (b) Market risk management (continued) The sensitivity analysis was derived from the Visual Risk Report which calculates risk associated with movements in interest rates through the input of parameters for all financial assets and liabilities. The parameters used were consistent with those adopted for the prior period. (c) Liquidity risk management The Board of Directors have approved an appropriate liquidity risk management framework for the management of the Group's short, medium and long-term funding and liquidity management requirements. The Group manages liquidity risk by maintaining adequate reserves, credit facilities and reserve borrowing facilities, and daily monitoring and forecasting cash flows. Liquidity is monitored by management and a projection of near future liquidity (30 days) is calculated daily. This information is used by management to manage expected liquidity requirements. An additional reserve equivalent to a minimum of 6% of the Company’s liability base assessed on a quarterly basis is set aside and isolated as additional liquidity available in a crisis situation via the RBA repurchase facility (Repo). The undrawn limits on the securitisation warehouses were as follows: Securitisation trust Wide Bay Trust No. 5 Wide Bay Trust No. 6 ABA Trust No. 7 Total Maturity analysis Up to 1 year 2018 $’000 25,360 – 27,032 52,392 2017 $’000 168,647 143,326 – 311,973 52,392 311,973 The maturity analysis for the respective groups of financial assets and liabilities have been included in the notes to the financial statements. Counterparty risk As part of Auswide Bank Ltd’s investment policy individual counterparties need to have the appropriate investment grading and are monitored in respect of their credit rating. Further, limits are placed on the amount of funds which may be placed with institutions with certain credit ratings. (d) Credit risk management Under the direction of the Board of Directors, management has developed risk management policies and procedures to establish and monitor the credit risk of the Company. The risk management procedures define the credit principles, lending policies and the decision making processes which control the credit risk of the Company. Credit risk is minimised by the availability and application of insurances including lenders' mortgage insurance, property insurance, mortgage protection insurance and consumer credit insurance. Credit risk in the loan portfolio is managed by generally protecting all loans in excess of 80% LVR with one of the recognised mortgage insurers and by securing the loans by first mortgages of residential property. The Company has a diversified Branch Network consisting of 23 branches and agencies across Queensland, and a business centre in Brisbane city. The Company also employs Business Development Managers in Sydney and Melbourne to conduct interstate business. All regional loan staff and panel valuers are locally based ensuring an in depth knowledge of the local economy and developments in the real estate market. The Board of Directors and management receive reports on a monthly basis to monitor and supervise the past due loans in the portfolio and ensure credit procedures are adhered to on a timely and accurate basis. The economic entity's maximum exposure to credit risk at balance date in relation to each class of recognised financial asset is the carrying amount of those assets as indicated in the balance sheet. The maximum credit risk exposure does not take into account the value of any security held or the value of any mortgage or other insurance to cover the risk exposure. 82 ANNUAL REPORT Notes to the consolidated financial statements30 JUNE 2018 The past due loans and advances for the Group (excluding effects of hardship accounts) comprise: 30 days and less than 60 days 60 days and less than 90 days 90 days and less than 182 days 182 days and less than 273 days 273 days and less than 365 days 365 days and over Consolidated Company 2018 $’000 4,682 – 1,682 1,994 1,874 3,826 14,058 2017 $’000 6,418 2,867 4,676 2,234 278 3,676 20,149 2018 $’000 4,682 – 1,682 1,994 1,874 3,826 14,058 2017 $’000 6,418 2,867 4,676 2,234 278 3,676 20,149 As at 30 June 2018 there were 11 loans totalling $2.792m (30 June 2017: 14 loans totalling $3.208m) on which interest was not being accrued due to impairment. Concentration of credit risk The Company minimises concentrations of credit risk in relation to loans receivable by undertaking transactions with a large number of customers principally within the states of Queensland, New South Wales and Victoria. The concentration of the loans and advances throughout Australia are as follows: Queensland New South Wales Victoria South Australia Western Australia Tasmania Northern Territory 2018 % 77.0 10.6 8.1 1.0 2.3 0.2 0.8 2017 % 78.9 9.9 7.7 0.9 1.8 0.1 0.7 100.0 100.0 AUSWIDE BANK – 30 JUNE 2018 83 NOTE 32 FINANCIAL INSTRUMENTS (CONTINUED) (e) Terms, conditions and accounting policies The Group's accounting policies, including the terms and conditions of each class of financial asset, financial liability and equity instrument, both recognised and unrecognised at the balance date, are as follows: Recognised financial instruments Notes to accounts Accounting policies Terms and conditions FINANCIAL ASSETS Short term deposits 6,7 Accrued receivables Certificates of deposit Notes RMBS investments Managed investment schemes 8 9 9 9 9 Loans and advances 10 FINANCIAL LIABILITIES Deposits Payables and other liabilities 16 17 Dividends payable 5 Short term deposits are stated at amortised cost. Interest is recognised when earned. Short term deposits have an effective interest rate of 1.39% (2017 – 1.17%). Amounts receivable are recorded at their recoverable amount. Certificates of deposit are carried at amortised cost. Interest revenue is recognised when earned. Certificates of deposit have an effective interest rate of 1.97% (2017 – 2.07%). Notes are carried at amortised cost. These notes are an overcover required as part of the securitisation of loans. They have an effective interest rate of 3.33% (2017 – 3.41%). RMBS investments are recorded at fair value through the Available for Sale Reserve. Investments in managed investment schemes are recorded at fair value through the Available for Sale Reserve Loan interest is calculated on the closing daily outstanding balance and is charged in arrears to the customer's account on a monthly basis. Loans and advances are recorded at amortised cost. These investments have an effective interest rate of 9.13% (2017 – 8.83%). New mortgage loans approved with an LVR in excess of 80% will be insured under an arrangement with QBE, and are secured by first mortgage over residential property. Personal loans are approved on both a secured and unsecured basis and are not insured. Loans made for the purchase of staff shares are secured by the shares themselves. Certain of the Company's loans have been securitised and continue to be managed by the Company. Further details are disclosed in Note 10. The securitisation notes have a maturity period of greater than 30 years. The securitisation notes are eligible for repayment once the balance of the trust falls below 10% of the invested amount. Interest paid to the note holders is repriced on a monthly basis at a set margin above BBSW. Deposits are recorded at the principal amount. Interest is brought to account on an accrual basis. Details of maturity of the deposits are set out in Note 16. Interest is calculated on the daily balance. Liabilities are recognised for amounts to be paid in the future for goods and services received, whether or not billed to the economic entity. Dividends payable are recognised when declared by the Company. Trade creditors are normally settled on 30 day terms. Details of the final dividend declared by the Company for the financial year ended 30 June 2018 are disclosed in Note 5. These notes are issued for a period of 10 years non call 5 years, at which time they can be redeemed. Interest is repriced quarterly at a set margin above 90 day BBSW. Subordinated capital notes 19 The subordinated capital notes are inscribed debenture stock. 84 ANNUAL REPORT Notes to the consolidated financial statements30 JUNE 2018 (f) Derivatives Each of the securitisation trusts has an Interest Rate Swap in place to hedge against fixed rate loans held in the trust. The mark-to-market values at the end of the year were as follows: Wide Bay Trust No. 5 WB Trust 2008-1 WB Trust 2009-1 ABA Trust 2017-1 WB Trust 2014-1 WB Trust 2010-1 2018 $’000 2017 $’000 9 850 31 17 156 42 48 864 77 43 269 43 Auswide Bank enters into interest rate swaps from time to time and has International Swaps and Derivatives (ISDAs) in place with the ANZ and Wesptac Banks. Auswide Bank currently has three interest rate swaps, two with ANZ and one with Westpac Bank. These are designated as effective hedges and are accounted for as cash flow hedges. Refer to Note 1(k) for further details. AUSWIDE BANK – 30 JUNE 2018 85 s t e s s a l i a c n a n fi n o s e t a r t s e r e t n i o t s e r u s o p x e s ' p u o r G e Th d e . i l i p p a e r a s e g e t a r t s g n g d e h e v i t c e ff e t s o c i t s o m e h t g n i r u s n e , e t i t e p p a k s i r d e n fi e d d n a s w e v e t a r i t s e r e t n i h t i w n g i l a , e t a d e c n a a b e h t l t a d e s i n g o c e r n u d n a d e s i n g o c e r h t o b , s e i t i l i b a i l l i a c n a n fi d n a s t e s s a l i a c n a n fi f o s e t a r t s e r e t n i e v i t c e ff e e h t d n a s k s i r e t a r t s e r e t n i o t e r u s o p x e s ' p u o r G e Th : s w o l l o f s a e r a . e t o n s i h t f o n o i t c e s t n e m e g a n a m k s i r e h t n i d e l i a t e d e r a s e i t i l i b a i l l i a c n a n fi d n a o t l l y l r a u g e r d e t a u a v e e r a s e i t i v i t c a g n g d e H i . s t c a r t n o c p a w s e t a r t s e r e t n i f o e s u e h t y b d n a s e i t i l i b a i l l d n a s t e s s a e t a r e b a i r a v d n a d e x fi n e e w t e b x m e t a i r p o r p p a n a g n n a t n a m i i i i y b p u o r G e h t y b d e g a n a m s i k s i r e Th . s e t a r t s e r e t n i l e b a i r a v d n a d e x fi h t o b t a s d n u f d n e l d n a w o r r o b p u o r G e h t n i s e i t i t n e e s u a c e b k s i r e t a r t s e r e t n i o t d e s o p x e s i p u o r G e Th k s i r e t a r t s e r e t n I ) g ( ) D E U N T N O C I ( S T N E M U R T S N I I L A C N A N F I 2 3 E T O N 86 ANNUAL REPORT e g a r e v a d e t h g e W i t n u o m a g n y r r a c i l a t o T e t a r t s e r e t n i e v i t c e ff e t e e h s e c n a a b r e p l g n i r a e b t s e r e t n i n o N s r a e y 5 o t 1 m o r F s s e l r o r a e Y 1 e t a r t s e r e t n i l e b a i r a V % 7 1 0 2 % 8 1 0 2 7 1 0 2 0 0 0 $ ’ 8 1 0 2 0 0 0 $ ’ 7 1 0 2 0 0 0 $ ’ 8 1 0 2 0 0 0 $ ’ 7 1 0 2 0 0 0 $ ’ 8 1 0 2 0 0 0 $ ’ 7 1 0 2 0 0 0 $ ’ 8 1 0 2 0 0 0 $ ’ 7 1 0 2 0 0 0 $ ’ 8 1 0 2 0 0 0 $ ’ s t n e m u r t s n i l : n i i g n i r u t a m e t a r t s e r e t n i d e x F i i a c n a n F i s t e s s a l i a c n a n F i 1 1 . 1 0 6 . 1 – 0 2 2 . 6 2 4 . 7 3 . 1 8 4 . 1 – 9 5 2 . 4 1 . 4 5 6 . 1 9 4 . 1 3 6 7 , 1 1 6 7 6 6 , 4 3 5 , 7 7 7 , 2 6 8 9 , 7 0 2 3 , 8 4 9 , 1 9 2 3 9 2 4 5 2 , – – – – 5 6 0 0 2 1 , 1 6 3 6 8 , 9 8 3 5 1 , 5 4 5 5 9 0 2 5 5 9 8 2 2 5 , 6 7 6 6 , 8 2 2 5 , 4 3 6 . 9 2 6 . 0 0 0 8 2 , 0 0 0 8 2 , – – – – 0 4 8 2 , 3 2 9 2 , 0 4 8 2 , 3 2 9 2 , – – – – – – 0 0 0 8 2 , 0 0 0 8 2 , – – – – – – 7 3 6 8 1 , 7 0 0 6 2 , 7 3 6 8 1 , 7 0 0 6 2 , – – – – – – 4 8 2 . 9 0 3 . 0 2 0 8 0 7 , 6 6 1 , 7 0 6 – – 7 4 3 , 7 4 1 , 7 1 8 3 2 1 1 8 1 , 1 4 2 8 8 4 5 , 2 9 4 9 1 5 , , 7 6 4 8 2 4 s e i t i l i b a i l r e h t o d n a s e b a y a P l s e t o n l a t i p a c d e t a n d r o b u S i s n a o l d e s i t i r u c e S s n o i s i v o r P 1 0 1 , 2 6 0 3 , , 1 2 9 0 1 1 , 3 7 7 4 , 1 2 0 3 9 8 2 , 8 5 5 2 7 1 , 2 2 7 , 7 5 1 , 1 7 4 2 2 6 , 1 , 9 4 8 2 4 7 , 1 , 5 9 5 5 4 2 , 1 0 2 4 , 1 8 1 , 1 s e i t i l i b a i l l i a c n a n fi l a t o T , 4 0 6 4 0 3 2 , , 5 2 8 6 4 4 2 , – – 1 1 2 5 2 , 5 0 9 3 3 , , 0 9 2 3 5 5 , 1 , 7 6 9 9 5 6 , 1 3 0 1 , 6 2 7 3 5 9 2 5 7 , i s g n w o r r o b m r e t t r o h s d n a s t i s o p e D , 3 4 0 4 1 9 2 , 5 3 0 8 7 5 , , 9 4 2 4 9 5 1 5 5 , 1 6 1 9 9 3 3 6 2 , 8 4 9 , 7 3 0 2 , , 5 9 3 6 5 0 2 , , 4 1 3 5 7 2 3 , 6 1 3 , 7 3 4 8 5 , , 7 7 0 2 9 5 5 3 1 , 0 2 6 , 1 6 4 6 1 4 4 2 7 , 4 7 4 2 3 1 , 2 9 1 , 2 , 2 1 6 4 7 1 , 2 s e c n a v d a d n a s n a o L s t e s s a l i a c n a n fi l a t o T s e i t i l i b a i l l i a c n a n F i – – – – – – – – – – – – 0 2 5 9 1 1 , 1 4 8 5 8 , i l s t n e a v u q e h s a c d n a h s a C 8 6 6 , 1 1 4 9 2 5 1 , s n o i t u t i t s n i l i a c n a n fi r e h t o m o r f e u D – – i l s e b a v e c e r d e u r c c A 2 4 0 4 1 , 6 8 8 5 2 , , 0 1 9 4 5 2 5 2 3 , 1 1 2 6 9 9 2 2 , 2 8 0 , 7 1 s t e s s a l i a c n a n F i Notes to the consolidated financial statements30 JUNE 2018 7 1 0 2 0 0 0 $ ’ 8 1 0 2 0 0 0 $ ’ 7 1 0 2 0 0 0 $ ’ 8 1 0 2 0 0 0 $ ’ e t a g e r g g A e u a v l r i a f t e n t n u o m a g n y r r a c i l a t o T t e e h s e c n a a b r e p l l s e u a v r i a f i t e n e n m r e t e d o t d e s u s n o i t p m u s s a & s d o h t e M . s e i t i l i b a i l s t e s s a l l i a c n a n fi i a c n a n F i d n a s t e s s a l i a c n a n fi s u o i r a v f o s e u a v l r i a f e h t i s e n m r e t e d p u o r G e h t w o h t u o b a n o i t a m r o f n i i s e d v o r p n o i t c e s s i Th s t n e m u r t s n i l i a c n a n F i ) h ( 5 6 0 0 2 1 , 1 6 3 6 8 , 5 6 0 0 2 1 , 1 6 3 6 8 , t r o h s o t e u d e u a v l r i a f i s e t a m x o r p p a t n u o m a g n y r r a C i l n o d e s a b s i s y a n a w o fl h s a c d e t n u o c s i d g n i s u d e t a m i t s E . y t i r u t a m o t m r e t i l s t n e a v u q e h s a c d n a h s a C l i a c n a n fi r e h t o m o r f e u D 3 6 7 , 1 1 9 8 3 5 1 , 3 6 7 , 1 1 9 8 3 5 1 , . s t n e m t s e v n i f o s e p y t r a l i m i s r o f s e t a r g n d n e i l t n e r r u c s n o i t u t i t s n i 6 7 6 6 , 8 2 2 5 , 6 7 6 6 , 8 2 2 5 , . e r u t a n m r e t j d e t s u d a ) e b a l l i a v a f i ( e c i r p t e k r a m d e t o u q s i e u a v l r i a F s t e s s a l i a c n a n F i , 1 6 2 3 9 2 8 8 4 5 5 2 , 8 4 9 , 1 9 2 3 9 2 4 5 2 , . s t s o c n o i t a s i l a e r y n a r o f , 9 7 9 8 8 7 , 2 3 7 1 , 6 2 9 2 , 4 3 5 , 7 7 7 , 2 , 3 4 0 4 1 9 2 , 4 4 7 , 0 2 2 3 , , 9 3 6 8 8 2 3 , 6 8 9 , 7 0 2 3 , , 4 1 3 5 7 2 3 , . s n a o l f o s e p y t r a l i m i s r o f s e t a r g n d n e i l t n e r r u c l n o d e s a b s i s y a n a w o fl h s a c d e t n u o c s i d g n i s u d e t a m i t s E s e c n a v d a d n a s n a o L s t e s s a l i a c n a n fi l a t o T s e i t i l i b a i l l i a c n a n F i , 6 0 3 8 9 2 2 , , 4 6 9 9 3 4 2 , , 4 0 6 4 0 3 2 , , 5 2 8 6 4 4 2 , l n o d e s a b s i s y a n a w o fl h s a c d e t n u o c s i d g n i s u d e t a m i t s E m r e t t r o h s d n a s t i s o p e D . s t i s o p e d f o s e p y t r a l i m i s r o f s e t a r g n d n e i l t n e r r u c i s g n w o r r o b t r o h s o t e u d e u a v g n y r r a c l i i s e t a m x o r p p a e u a v l r i a F i l s e b a v e c e r d e u r c c A r i a f i l s e t a m x o r p p a e u a v g n y r r a c , s e i t i l i i b a i l m r e t t r o h s r o F s e i t i l i b a i l r e h t o d n a s e b a y a P l l e u a v r i a f e h t m r e t g n o l i e r a h c h w s e i t i l i b a i l e h t r o F . e u a v l 7 3 6 8 1 , 7 0 0 6 2 , 7 3 6 8 1 , 7 0 0 6 2 , d e s a b l , s i s y a n a w o fl h s a c d e t n u o c s i d g n i s u d e t a m i t s e s i . s e i t i l i b a i l f o s e p y t r a l i m i s r o f s e t a r t n e r r u c n o 7 3 9 0 1 7 , 3 9 6 9 0 6 , 0 2 0 8 0 7 , 6 6 1 , 7 0 6 . s n a o l f o s e p y t r a l i m i s r o f s e t a r g n d n e i l t n e r r u c l n o d e s a b s i s y a n a w o fl h s a c d e t n u o c s i d g n i s u d e t a m i t s E s n a o l d e s i t i r u c e S 1 4 8 2 , 3 2 9 2 , 0 4 8 2 , 3 2 9 2 , 0 0 0 8 2 , 0 0 0 8 2 , 0 0 0 8 2 , 0 0 0 8 2 , 1 2 7 , 8 5 0 3 , , 7 8 5 6 0 1 , 3 1 0 1 , 2 6 0 3 , , 1 2 9 0 1 1 , 3 t r o h s o t e u d e u a v l r i a f n o d e s a b e u a v l r i a f i s e t a m x o r p p a t n u o m a g n y r r a C i . e r u t a n m r e t i s e t a m x o r p p a t n u o m a g n y r r a C i . e r u t a n l a u t c a r t n o c s e t o n l a t i p a c d e t a n d r o b u S i s e i t i l i b a i l l i a c n a n fi l a t o T s n o i s i v o r P AUSWIDE BANK – 30 JUNE 2018 87 NOTE 32 FINANCIAL INSTRUMENTS (CONTINUED) (h) Financial instruments (continued) Value of the Group's financial assets and financial liabilities: Some of the Group's financial assets and financial liabilities are measured at fair value at the end of each reporting period. The following table gives information about how the fair values of these financial assets and financial liabilities are determined (in particular the valuation technique(s) and inputs used). Consolidated entity Financial assets Financial assets held to maturity: Value FV hierarchy Valuation technique(s) and key input(s) 2018 $’000 2017 $’000 Certificates of deposit 210,178 253,440 N/A Quoted price. Financial assets held at amortised cost: Notes – securitisation program 17,082 22,996 Loans and advances Financial assets at cost: 2,926,173 2,788,979 N/A N/A Held at amortised cost. Held at amortised cost. Shares in unlisted companies 1,144 1,069 N/A Held at cost. Financial assets available for sale: External RMBS investments 1,147 1,470 Level 2 Investment in Managed Investment Schemes (MIS) 25,886 14,042 Level 3 Mark-to-market value based on consideration, maturity and interest rates. The fair value is derived from the value of the underlying assets within the managed investment scheme. Total Financial liabilities 3,181,610 3,081,996 Financial liabilities held at amortised cost: Deposits and short term borrowings 2,439,964 2,298,306 Securitised loans Total 609,693 710,937 3,049,657 3,009,243 N/A N/A Held at amortised cost. Held at amortised cost. 88 ANNUAL REPORT Notes to the consolidated financial statements30 JUNE 2018 Company Financial assets Financial assets held to maturity: Value FV hierarchy Valuation technique(s) and key input(s) 2018 $’000 2017 $’000 Certificates of deposit 210,178 253,440 N/A Quoted price. Financial assets held at amortised cost: Notes – securitisation program 49,468 53,382 Loans and advances Financial assets at cost: 2,926,173 2,788,979 N/A N/A Held at amortised cost. Held at amortised cost. Shares in unlisted companies 1,144 5,153 N/A Held at cost. Financial assets available for sale: External RMBS investments 1,147 1,470 Level 2 Investment in Managed Investment Scheme (MIS) 25,886 14,042 Level 3 Mark-to-market value based on consideration, maturity and interest rates. The fair value is derived from the value of the underlying assets within the managed investment scheme. Total Financial liabilities Financial liabilities held at amortised cost: 3,213,996 3,116,466 Deposits and short term borrowings 2,453,720 2,310,901 Securitised loans Total 609,693 710,937 3,063,413 3,021,838 N/A N/A Held at amortised cost. Held at amortised cost. Reconciliation of Level 3 fair value measurements: Shares in unlisted companies Investments in MIS Consolidated entity Opening balance Total gains or losses: – in profit or loss – in other comprehensive income Purchases Disposals Closing balance Company Opening balance Total gains or losses: – in profit or loss – in other comprehensive income Purchases Disposals Closing balance 2018 $’000 1,069 – – 75 – 1,144 2017 $’000 512 – – 557 – 1,069 2018 $’000 14,042 – – 11,844 – 25,886 Shares in unlisted companies Investments in MIS 2018 $’000 5,153 – – 75 (4,084) 1,144 2017 $’000 1,771 – – 4,640 (1,258) 5,153 2018 $’000 14,042 – – 11,844 – 25,886 2017 $’000 3,413 – – 12,629 (2,000) 14,042 2017 $’000 3,413 – – 12,629 (2,000) 14,042 AUSWIDE BANK – 30 JUNE 2018 89 NOTE 33 BUSINESS COMBINATION (a) MoneyPlace Holdings Pty Ltd In December 2015 the Group announced it would be entering into a strategic relationship and equity investment with MoneyPlace Holdings (MoneyPlace). Auswide Bank acquired a 19.3% equity stake in MoneyPlace which settled on 4 January 2016. In February 2017 Auswide Bank made a follow-on investment and acquired an additional 43.7% equity stake in MoneyPlace, via a subscription agreement. This bought the total investment to 63.3%, and resulted in the Group obtaining a controlling interest in MoneyPlace Holdings. MoneyPlace commenced loan originations in January 2016 after receiving its retail and wholesale Australian Financial Service Licence and provides loans of $5,000 to $35,000 through its peer-to-peer (P2P) platform. MoneyPlace is Australia’s second fully licenced P2P lender. The strategic alliance with MoneyPlace provides a technically advanced personal loan system solution to a niche consumer finance market. The relationship provides an avenue to increase the Group's consumer lending ambitions and provides significant opportunities for platform collaboration and value accretion. Consideration Transferred The consideration paid to obtain 43.7% of Money Place Holdings Pty Ltd equalled $4.344m which was made up of cash, convertible shares and the fair value of previously held investments. The initial investment of 19.3% was independently revalued to $2.260m on acquisition date in accordance with AASB 3 'Business Combinations', and the resulting gain recognised in profit or loss. As the investment in additional equity holdings gave the Group control of MoneyPlace, the initial investment must be revalued to fair value before effecting the acquisition accounting. An independent valuation was obtained and fair value movements taken to profit or loss and the updated value of the initial tranche was reflected in the consideration applied in the purchase price accounting. The estimate recognised takes into account all current information available and represents the Group’s best estimate based on following a defined process. The fair value of MoneyPlace was estimated with reference to the following valuation approaches; • triangulation of discounted cash flow analysis (DCF) and expected returns analysis (3 and 5 year scenarios); • high level multiple of cumulative loan originations (Loan Multiples) range based on those observed for comparable companies at a similar stage of operation; • values implied by historical fund raisings and indicative offers implied by recent negotiations with institutional funders. Acquisition related costs for MoneyPlace amounting to $0.188m have been excluded from the consideration transferred and have been recognised as an expense in profit or loss in the current year, within the 'General and administration expenses' line item. Assets acquired and liabilities assumed at the date of acquisition at fair value Current assets Cash and cash equivalents Other assets Non-current assets Intangible assets Current liabilities Payables and other liabilities Deferred income tax liabilities Provisions Net assets No contingent liabilities have been identified from the acquisition of MoneyPlace. 90 ANNUAL REPORT 2017 $’000 4 97 5,160 (1,083) (1,345) (97) 2,736 Notes to the consolidated financial statements30 JUNE 2018 Non-Controlling Interests The non-controlling interest (36.7% ownership interest in Money Place Holdings Pty Ltd) recognised at acquisition date was measured by reference to the fair value of the non-controlling interest and amounted to $1.005m. Goodwill arising on acquisition Consideration transferred Plus: non-controlling interests (36.7% in MoneyPlace) Less: fair value of identifiable net assets acquired Goodwill arising on acquisition 2017 $’000 4,344 1,005 (2,736) 2,613 Upon gaining a controlling interest in MoneyPlace, an independent valuation was procured. After applying the principles of acquisition accounting, the initial equity investment was revalued to facilitate the calculation of the consideration transferred. The independent valuation identified the net assets (including intangible assets such as software and customer contracts), and it was established that the resultant difference be recognised as goodwill on consolidation. None of the goodwill arising on the acquisition of MoneyPlace is expected to be deductible for tax purposes. Net cash outflow on acquisition Consideration paid in cash Less: cash and cash equivalent balances acquired Net cash outflow on acquisition Divestment of equity stake in MoneyPlace 2017 $’000 1,799 (4) 1,795 In January 2018, the Group announced that it had entered into an agreement to divest its equity stake in P2P lender MoneyPlace. This transaction was completed on 22 January 2018. The proceeds of the sale exceeded the carrying amount of the related net assets and, accordingly, no impairment losses were recognised. Auswide Bank will continue to receive income from its personal loan investment into MoneyPlace which is expected to continue to grow over time. Further explanation can be found in Note 35. AUSWIDE BANK – 30 JUNE 2018 91 NOTE 34 DISPOSAL OF A SUBSIDIARY In January 2018 the Group announced that it had entered into an agreement to divest its 62.4% equity stake in P2P lender MoneyPlace. This transaction was completed on 22 January 2018. Consideration received The total consideration received upon the divestment was $6.805m. Assets and liabilities over which control is lost as a result of this divestment Cash Other assets Software development Other intangibles Goodwill Deferred income tax liabilities Loans Payables and other liabilities Net assets disposed of Gain on disposal of a subsidiary Consideration received Net assets disposed of Non-controlling interests Gain on disposal The gain on disposal is included in the profit for the year from discontinued operations, see Note 35 for further explanation. Net cash inflow on disposal of a subsidiary Consideration received in cash and cash equivalents Less: cash and cash equivalent balances disposed of 2018 $’000 145 175 5,668 208 2,612 (1,298) (85) (723) 6,702 2018 $'000 6,805 (6,702) 1,084 1,187 2018 $'000 6,805 (145) 6,660 92 ANNUAL REPORT Notes to the consolidated financial statements30 JUNE 2018 NOTE 35 DISCONTINUED OPERATION In January 2018, the Group announced that it had entered into an agreement to divest its equity stake in P2P lender MoneyPlace. This transaction was completed on 22 January 2018. The proceeds of the sale exceeded the carrying amount of the related net assets and, accordingly, no impairment losses were recognised. Auswide Bank will continue to receive income from its personal loan investment in MoneyPlace which has continued to increase. The results of the discontinued operations included in the profit (loss) for the year are set out below. The comparative profit (loss) and cash flows from discontinued operations have been re-presented to include those operations classified as discontinued in the current year. Consolidated Company Profit for the year from discontinued operations Revenue Expenses Profit/(loss) before income tax Income tax benefit/expense Gain on disposal of MoneyPlace Profit for the year from discontinued operations Cash flows from discontinued operations Net cash inflows/(outflows) from operating activities Net cash inflows/(outflows) from investing activities Net cash inflows/(outflows) from financing activities Net increase in cash generated by the subsidiary 2018 $’000 280 (966) (686) 110 (576) 1,187 611 (505) (356) 285 (576) 2017 $’000 466 (638) (172) (22) (194) – (194) 119 25 (1,221) (1,077) 2018 $’000 2017 $’000 – – – – – 2,301 2,301 – – – – – – – – – – – – – – – AUSWIDE BANK – 30 JUNE 2018 93 Directors’ declaration 30 JUNE 2018 In accordance with a resolution of the Directors of Auswide Bank Ltd ('the Company'), we declare that: (a) the financial statements comprising of the consolidated statement of profit or loss and other comprehensive income, consolidated statement of financial position, consolidated statement of cash flows, consolidated statement of changes in equity and accompanying notes, and the remuneration disclosures that are contained in the remuneration report are in accordance with the Corporations Act 2001, and: (i) give a true and fair view of the financial position of the company and consolidated entity as at 30 June 2018 and of the performance for the year ended on that date; and (ii) comply with Australian Accounting Standards (including the Australia Accounting Interpretations) and the Corporations Regulations 2001; (b) the financial report complies with International Financial Reporting Standards (IFRS) as disclosed in Note 1; and (c) in the Directors' opinion there are reasonable grounds to believe that the Company and its subsidiaries will be able to pay its debts as and when they become due and payable. The Directors have been given the declarations required by Section 295A of the Corporations Act 2001 from the Managing Director and Chief Financial Officer for the financial year ended 30 June 2018. The declaration is made in accordance with a resolution of the Board of Directors made pursuant to Section 295(5) of the Corporations Act 2001, and is signed for and on behalf of the Directors by: JS Humphrey Director Brisbane 23 August 2018 SC Birkensleigh Director 94 ANNUAL REPORT Independent auditor’s report Deloitte Touche Tohmatsu ABN 74 490 121 060 Riverside Centre Level 25 123 Eagle Street Brisbane QLD 4000 GPO Box 1463 Brisbane QLD 4001 Australia Tel: +61 7 3308 7000 Fax: +61 7 3308 7002 www.deloitte.com.au Independent Auditor’s Report to the Members of Auswide Bank Ltd Report on the Audit of the Financial Report Opinion We have audited the financial report of Auswide Bank Ltd (the “Company”) 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 accounting policies and other explanatory information, and the directors’ declaration. 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 their 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 Company, 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. Liability limited by a scheme approved under Professional Standards Legislation Member of Deloitte Touche Tohmatsu Limited AUSWIDE BANK – 30 JUNE 2018 95 Independent auditor’s report (continued) 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. Key Audit Matter How the scope of our audit responded to the Key Audit Matter Loan impairment provisions Our audit procedures included, but were not limited to: As at 30 June 2018 the Group has a loan loss impairment provision of $3.2m as disclosed in Note 10. Significant judgement is required in the application of assumptions, including: – Historic loss rates – Expected future cash flows – Availability of Lenders Mortgage Insurance; and – The recoverability of loans. Impairment of non current assets As at 30 June 2018 the Group’s assets subject to impairment tests include Goodwill of $46.4m, arising from the acquisitions of Mackay Permanent Building Society (MPBS) and Queensland Professional Credit Union (YCU) as disclosed in Note 14. The recovery of non-current assets requires significant judgement due to assumptions required in preparing a discounted cash flow model (‘value in use’), including: – Future cash flows for the Cash Generating Unit (‘CGU’) – – Discount rates; and – Terminal value growth rates. – – – Testing the controls relevant to the approval, recording and monitoring of loans and advances to customers – Evaluating the controls over the determination and review of both specific impairment provisions and the collective impairment models – Testing on a sample basis, the data used in the determination of collective impairment model and evaluating whether the modelling assumptions used and the relevant risks considered were reasonable – Assessing loans specifically provided for by identifying loans that met the criteria set out by the Group’s relevant accounting policies – Recalculating on a sample basis the specific provision impairment calculation focusing on: - - - expected future cash flows from customers the availability of Lenders Mortgage Insurance the realisation of collateral held; and - Evaluating both the individual and collective impairment provisions against historic loan loss experience and assessing the recoverability of collateral. We also assessed the appropriateness of the disclosures in Note 10 to the financial statements. In conjunction with our valuation specialists, our audit procedures included, but were not limited to: – – Evaluating the appropriateness of management’s identification of the Group’s CGU and testing of key controls over the impairment assessment process, including identifying indicators of impairment Assessing the reasonableness of cash flow projections and assessed growth rates against external economic and financial data and the Group’s own historical performance Assessing the key assumptions and methodology used by management supported by external specialists in the externally prepared impairment model, in particular the weighted average cost of capital, the cost of debt and the terminal growth rate Evaluating the value in use estimate determined by management against its market capitalisation; and Testing the mathematical accuracy of the impairment model. We also assessed the appropriateness of the disclosures in Note 14 to the financial statements. 96 ANNUAL REPORT Other Information The directors are responsible for the other information. The other information comprises the Directors’ Report which we obtained prior to the date of this auditor’s report, and also includes the following information which will be included in the Group’s annual report (but does not include the financial report and our auditor’s report thereon): Chairman’s Report, Managing Director’s Report, Corporate Governance Summary and Shareholder Information, which is expected to be made available to us after that date. Our opinion on the financial report does not cover the other information and we do not and will 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 identified above 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 on the other information that we obtained prior to the date of this auditor’s report, 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. When we read the Chairman’s Report, Managing Director’s Report, Board of Directors and Leadership Team, Corporate Governance Summary and Shareholder Information, if we conclude that there is a material misstatement therein, we are required to communicate the matter to the directors and use our professional judgement to determine the appropriate action. Responsibilities of the Directors for the Financial Report The directors of the Company 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 fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. • 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. AUSWIDE BANK – 30 JUNE 2018 97 Independent auditor’s report (continued) 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. 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 30 to 39 of the Directors’ Report for the year ended 30 June 2018. In our opinion, the Remuneration Report of Auswide Bank Ltd for the year ended 30 June 2018, complies with section 300A of the Corporations Act 2001. Responsibilities The directors of the Company 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 David Rodgers Partner Chartered Accountants Brisbane, QLD 23 August 2018 98 ANNUAL REPORT Corporate governance summary Auswide Bank Ltd maintains corporate governance policies and practices which follow the recommendations outlined by the Australian Securities Exchange (ASX) and which comply with the Corporations Act 2001, the ASX Listing Rules and APRA Prudential Standards CPS 510 Governance. The Board of Directors of Auswide Bank Ltd has adopted a Corporate Governance Statement which sets out the Company’s compliance with the Australian Securities Exchange (ASX) Corporate Governance Council’s Corporate Governance Principles and Recommendations. The Corporate Governance Statement is available under the Governance section of the Company’s website located at www.auswidebankltd.com.au. The Governance section also details other relevant corporate governance information, including the Board and Committee Charters, policies and codes of conduct. The following is a summary of Auswide Bank’s compliance with the principles outlined in ASX’s Corporate Governance Principles and Recommendations (3rd edition): PRINCIPLE 1: LAY SOLID FOUNDATIONS FOR MANAGEMENT AND OVERSIGHT The Board Charter, together with the Corporate Governance Statement set out the roles and responsibilities of the Board and separate functions of management and delegated responsibilities. The Corporate Governance Statement also details checks undertaken and provision of material information to shareholders prior to recommendation and appointment of Directors. In accordance with the regulatory standards, the Board has established a Group Board Remuneration Committee which carries out a performance evaluation of the Managing Director and review of the performance evaluations of other senior executives, which is provided to the Board following a report of discussions between the Chairman of the Committee and the Managing Director. A performance evaluation of the Board, the Board Committees and each individual Director’s contribution to the Board is performed annually as outlined in the Corporate Governance Statement. Auswide Bank recognises that a gender balanced diverse and inclusive workforce with a wide array of perceptions resulting from such diversity, promotes innovation and a positive and successful business environment. Auswide Bank’s Diversity Policy is available in the Corporate Governance section of its website at www.auswidebankltd.com.au. The measurable objectives and Auswide Bank’s progress in achieving them, are outlined in the Corporate Governance Statement. Auswide Bank is in compliance with Principle 1 and full details are available in the Corporate Governance Statement, Board Charter, Remuneration Committee Charter, together with other policies and codes located in the Governance section at www.auswidebankltd.com.au. PRINCIPLE 2: STRUCTURE THE BOARD TO ADD VALUE Auswide Bank’s Board Charter outlines the structure of the board and its composition, together with the Board Renewal policy. Details of Directors’ skills, knowledge, experience, independence and diversity are discussed in the Corporate Governance Statement and in the Directors’ Statutory Report of this Annual Report. The Board does not have a separate formal Nomination Committee, with the full Board addressing such issues that would be otherwise considered by the Nomination Committee. These matters include Board succession issues and ensuring that the Board has the appropriate balance of skills, knowledge, experience, independence and diversity to enable it to discharge its duties and responsibilities effectively. Auswide Bank is in compliance with Principle 2 and full details are available in the Corporate Governance Statement and Board Charter, together with other charters, policies and codes located in the Governance section at www.auswidebankltd.com.au. The Directors’ Statutory Report of this Annual Report also provides details relevant to this principle. PRINCIPLE 3: ACT ETHICALLY AND RESPONSIBLY Auswide Bank promotes and supports a culture of honest and ethical behaviour. The standards of behaviour expected of all Directors, management and employees are detailed in the bank’s Codes of Conduct. Auswide Bank is in compliance with Principle 3 and full details are available in the following Codes of Conduct – ‘Corporate Code of Conduct’ and ‘Code of Conduct for Directors and Key Executives’ located in the Governance section at www.auswidebankltd.com.au. AUSWIDE BANK – 30 JUNE 2018 99 Corporate governance summary PRINCIPLE 4: SAFEGUARD INTEGRITY IN CORPORATE REPORTING The Audit Committee has a documented Charter, approved by the Board. The Audit Committee’s focus is on the issues relevant to verifying and safeguarding the integrity of Auswide Bank’s financial operations and reporting structure. The names and qualifications of the members of the Audit Committee, the number of meetings held and the number of meetings attended are set out in the Directors’ Statutory Report. Declarations have been signed by the Managing Director and Chief Financial Officer before approval by the Board of Auswide Bank’s financial statements for the financial period as detailed in the Corporate Governance Statement. Auswide Bank is in compliance with Principle 4 and full details are outlined in the Board Audit Committee Charter, Corporate Governance Statement and ‘Appointment of External Auditors and Rotation of External Partners’ statement located in the Governance section at www.auswidebankltd.com.au. The Directors’ Statutory Report also provides details relevant to this principle. PRINCIPLE 5: MAKE TIMELY AND BALANCED DISCLOSURE Auswide Bank is committed to the promotion of investor confidence by providing equal, timely, balanced and meaningful disclosure to the market. The Company’s Continuous Disclosure Policy outlines its processes for complying with its continuous disclosure obligations under the Listing Rules. Auswide Bank is in compliance with Principle 5 and full details are outlined in the Continuous Disclosure Policy and Corporate Governance Statement located in the Governance section at www.auswidebankltd.com.au. PRINCIPLE 6: RESPECT THE RIGHTS OF SECURITY HOLDERS Auswide Bank believes it is important for its shareholders to make informed decisions about their investment in the company and aims to provide shareholders with access to quality information and encourage two-way communication. Auswide Bank is in compliance with Principle 6 and full details are outlined in the Governance section at www.auswidebankltd.com.au, including the Corporate Governance Statement. PRINCIPLE 7: RECOGNISE AND MANAGE RISK The Risk Committee has a documented Charter, approved by the Board. The Risk Committee has the responsibility to set and oversee the risk profile and the risk management framework of the Company, and to ensure management have appropriate risk systems and practices to effectively operate within the Board approved risk profile. The Risk Committee reviews the Group’s Risk Management Framework at least annually to satisfy itself that the framework continues to be sound. The names and qualifications of the members of the Risk Committee, the number of meetings held and the number of meetings attended are set out in the Directors’ Statutory Report. Auswide Bank is in compliance with Principle 7 and full details are outlined in the Board Risk Committee Charter and Corporate Governance Statement located in the Governance section at www.auswidebankltd.com.au, together with the Charter for Corporate Social Responsibility located in the Social Responsibility section at www.auswidebankltd.com.au. The Directors’ Statutory Report of this Annual Report also provides details relevant to this principle. PRINCIPLE 8: REMUNERATE FAIRLY AND RESPONSIBLY The Remuneration Committee has a documented Charter, approved by the Board. The Remuneration Committee’s primary function is to assist the Board in fulfilling its responsibilities to shareholders and regulators in relation to remuneration, by ensuring that Auswide Bank has clear remuneration policies and practices that fairly and responsibly reward individuals having regard to performance, the Group’s Risk Management Framework, the law and the highest standards of governance. The names and qualifications of the members of the Remuneration Committee, the number of meetings held and the number of meetings attended are set out in the Directors’ Statutory Report. Further information in relation to the Company’s policies and practices regarding the remuneration of Non-Executive Directors, Executive Directors, and other Senior Executives can be found in the Remuneration Report section of the Directors’ Statutory Report, together with employment contract details of the Managing Director and Key Management Personnel. Auswide Bank is in compliance with Principle 8 and full details are outlined in the Board Remuneration Committee Charter and Corporate Governance Statement located in the Governance section at www.auswidebankltd.com.au. The Directors’ Statutory Report of this Annual Report also provides details relevant to this principle. 100 ANNUAL REPORT Shareholder information A. REGISTERED OFFICE The registered office and principal place of business of Auswide Bank Ltd is: Level 5 Auswide Bank Head Office 16-20 Barolin Street Bundaberg QLD 4670 Australia Ph 07 4150 4000 Fax 07 4152 356 Email auswide@auswidebank.com.au Website www.auswidebank.com.au B. SECRETARY The Secretary is: William (Bill) Ray Schafer BCom CA C. AUDITOR The principal auditors are: Deloitte Touche Tohmatsu Level 25 Riverside Centre 123 Eagle Street Brisbane QLD 4000 Ph 07 3308 7000 Fax 07 3308 7001 Website www.deloitte.com.au D. 2018 ANNUAL GENERAL MEETING The 2018 Annual General Meeting is to be held on Tuesday 20 November 2018 at 11.00am EST: King & Wood Mallesons Level 33 Waterfront Place 1 Eagle Street, Brisbane, Queensland. Voting rights of shareholders A shareholder is entitled to exercise one vote in respect of each fully paid ordinary permanent share held in accordance with the provisions of the Constitution. Key dates Annual General Meeting 20 November 2018 Full year results and final dividend announcement 24 August 2018 Ex dividend date Record date 10 September 2018 11 September 2018 Participation in DRP (final date for receipt of application) Suspended Dividend payment 21 September 2018 Half year results and interim dividend announcement 23 February 2018 Ex dividend date Record date 1 March 2018 2 March 2018 Participation in DRP (final date for receipt of application) Suspended Dividend payment 26 March 2018 AUSWIDE BANK – 30 JUNE 2018 101 Shareholder information E. SECURITIES INFORMATION Share Register The register of holders of Permanent Ordinary shares is kept at the office of: Computershare Investor Services Pty Limited Level 1 200 Mary Street Brisbane QLD 4000 Ph 1300 552 270 Fax 07 3237 2152 Online Contact www-au.computershare.co/Investor/Contact Website www.computershare.com.au Issued shares The Company's securities listed on the Australian Stock Exchange (ASX) as at 15 September 2018 are: Class of security Permanent ordinary shares Distribution of Shareholdings Permanent Ordinary Shares 10 September 2018 Range 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 – Over Total number of shareholders Less than marketable parcel of $500 Top 20 Shareholders Permanent Ordinary Shares 10 September 2018 Name National Nominees Limited Citicorp Nominees Pty Limited HSBC Custody Nominees (Australia) Limited JP Morgan Nominees Australia Limited Ronald Ernest Hancock & Lorraine Pearl Hancock Ronald Ernest Hancock Milton Corporation Limited Kathy Sawyer GDC & DMC Super Pty Ltd ATF Graham Cockerill S/F A/c Ron Hancock Super Pty Ltd ATF The Hancock Superfund A/c Cloud 7 Nominees Pty Ltd ATF Peter Sawyer Famacct No2 A/c JW & GJ Kennedy Super Pty Ltd Ronald Ernest Hancock & Lorraine Pearl Hancock ATF The Hancock Family A/c Hestearn Pty Ltd Sawfam Pty Ltd ATF Sawyer Super Fund No2 A/c BNP Paribas Noms Pty Ltd ATF DRP Noela Olsen Delma Cran Charles Geoffrey Morris & Ann Lois Morris ATF C & A Morris Family A/c 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Lohse Holdings Pty Ltd ATF Peter Lohse Super Fund A/c Top 20 holders of fully paid ordinary shares 102 ANNUAL REPORT ASX Code ABA Number 42,128,740 No of Shareholders 3,666 1,886 623 514 52 6,741 170 No. of Shares 3,306,486 1,194,492 1,162,511 1,110,033 890,750 706,816 433,570 432,719 410,046 337,056 328,486 324,321 320,000 308,543 296,362 285,793 279,520 264,074 258,985 250,000 % 7.85 2.84 2.76 2.63 2.11 1.68 1.03 1.03 0.97 0.80 0.78 0.77 0.76 0.73 0.70 0.68 0.66 0.63 0.61 0.59 12,900,563 30.62 E. SECURITIES INFORMATION (CONTINUED) Substantial Shareholders The following organisations have disclosed a substantial shareholding notice to the ASX. Name National Nominees Ltd ACF Australian Ethical Investments Limited(1) RE Hancock (associated entities + associates)(2) No. of Shares % of Total 2,906,102 2,182,863 6.91 5.42 (1) Substantial shareholder notice dated 06/10/2017. (2) Substantial shareholder notice dated 19/05/2016. On-Market Buyback There is no on-market buy back. Dividend Reinvestment Plan The Board of Directors resolved to suspend the dividend reinvestment plan for the final dividend payable for the half year ended 30 June 2018, due to the strength of the capital position. Shareholder Online Investor Centre We encourage shareholders to take advantage of the Computershare Investor Centre website available at www.computershare.com.au where you can register and: • View your shareholding, dividend and transaction history online • Update your registered address, TFN and dividend instructions • Elect to receive eCommunications about your shareholding • Retrieve copies of dividend payment statements. Alternatively, please contact Computershare Investor Services Pty Limited directly on 1300 552 270. Annual Report Mailing The Company's Annual Report is available online at www.auswidebank.com.au under Shareholder Information. The default option for receiving Annual Reports is via this website. You have the choice of receiving an email when the Annual Report becomes available online or electing to receive a printed Annual Report by mail. To change your Annual Report elections online visit www.computershare.com.au/easyupdate/aba If you do not have internet access call 1300 308 185 and follow the voice instructions. AUSWIDE BANK – 30 JUNE 2018 103 Financial glossary For your reference, this glossary provides definitions for some of the terms used in financial reporting, particularly by financial institutions listed on the ASX. Not all terms may have been used in the Annual Report and Financial Statements. ADI AGM APRA ASIC Asset ASX Bad Debt Basel Basis Point An Authorised Deposit-taking Institution is a corporation authorised under the Banking Act 1959 and includes banks, building societies and credit unions regulated by APRA. Annual General Meeting. Australian Prudential Regulation Authority. Australian Securities and Investments Commission. A resource which has economic value and can be converted to cash. Assets for an ADI include its loans because income is derived from the loan fees and interest payments generated. Australian Securities Exchange Limited (ABN 98 008 624 691). The amount that is written off as a loss and classified as an expense, usually as a result of a poor-performing loan. The Basel Accords are the recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision, which has the purpose of improving the consistency of capital regulations internationally. One hundredth of one percent or 0.01 percent. The term is used in money and securities markets to define differences in interest rates or yields. Capital Adequacy Ratio A ratio of an ADI's capital to its risk, obtained by dividing total capital by risk-weighted assets. This ratio shows an ADI's capacity to meet the payment terms of liabilities and other risks. Cost-to-income Ratio Obtained by dividing operating cost by operating income, this ratio shows a company's costs in relation to its income. A Credit Rating lower ratio can be an indication that a company is better at controlling its costs. An analysis of a company's ability to repay debt or other obligations. Dividend A portion of a company's profits that may be paid regularly by the company to its shareholders. Dividend Payout Ratio The amount of dividends paid to shareholders relative to the amount of total net income of a company, represented as Dividend Yield a percentage. Computed by dividing the annual dividend by the share price. DRP A Dividend Reinvestment Plan allows shareholders to reinvest some or all of their dividends into additional shares. Earnings per Share The amount of company earnings per each outstanding share of issued ordinary shares. Ex-Dividend Date The date used to determine a shareholder's entitlement to a dividend. Liability Liquidity A company's debts or obligations that arise during the course of business operations. Liabilities for ADIs include interest- bearing deposits. For an ADI, liquidity is a measure of the ability of the ADI to fund growth and repay debts when they fall due, including the paying of depositors. Market Capitalisation The total value of a company's shares calculated by multiplying the shares outstanding by the price per share. NCD Net Interest Income Net Interest Margin (NIM) Net Profit After Tax (NPAT) Net Tangible Asset Backing per Share Non Interest Income Price-to-Earnings Ratio (P/E Ratio) Record Date Return on Average Ordinary Equity RMBS Securitisation SSP Subordinated Capital Notes Tier 1 Capital Tier 2 Capital A Negotiable Certificate of Deposit is a short term security typically issued by an ADI to a larger institutional investor in order to raise funds. The difference between the revenue that is generated from an ADI's assets, and the expenses associated with paying out its liabilities. The difference between the interest income generated by an ADI and the amount of interest the ADI pays out to their depositors, divided by the amount of their interest-earning assets. Total revenue minus total expenses, with tax that will need to be paid factored in. An indication of the company's net worth, calculated by dividing the underlying value of the company (total assets minus total liabilities) by the number of shares on issue. Income derived primarily from fees and commissions, rather than income from interest-earning assets. A measure of the price paid for a share relative to the annual income or profit earned by the company per share. The date used to identify shares traded and registered up until Ex-Dividend Date. A measurement of how well a company uses the funds provided by its shareholders, represented by a ratio of the company's profit to shareholder's equity. Residential mortgage-backed securities are a type of bond backed by residential mortgages on residential, rather than commercial, real estate. Refers to setting aside a group of income-generating assets, such as loans, into a pool against which securities are issued. Securitisation is performed by an ADI in order to raise new funds. Special Service Provider such as an authorised settlement clearing house. Subordinated notes or subordinated debentures are a type of capital represented by debt instruments. Subordinated notes have a claim against the borrowing institution that legally follows the claims of depositors. Subordinated notes or debentures come ahead of stockholders. Describes the capital adequacy of an ADI. Tier 1 Capital is core capital and includes equity capital and disclosed reserves. Describes the capital adequacy of an ADI. Tier 2 Capital is secondary capital that includes items such as undisclosed reserves, general loss reserves, subordinated term debt and more. Underlying Cash NPAT The actual reflection of a company's profit. One-off items may be removed from the statutory profit for the company to arrive at this profit figure. 104 ANNUAL REPORT AUSWIDE BANK LTD ABN 40 087 652 060 Australian Financial Services & Australian Credit Licence 239686 Head Office Auswide Bank 16 – 20 Barolin Street PO Box 1063 Bundaberg QLD 4670 T 07 4150 4000 F 07 4152 3499 E auswide@auswidebank.com.au 1300 138 831 auswidebank.com.au (Retail Website) auswidebankltd.com.au (Corporate Website)
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