BNK Bank
Annual Report 2020

Plain-text annual report

BNK Banking Corporation Limited Annual Financial Report ABN: 63 087 651 849 30 June 2020 1 Contents CORPORATE INFORMATION ............................................................................................................... 3 DIRECTORS’ REPORT ........................................................................................................................... 4 INDEPENDENT AUDITOR’S DECLARATION .................................................................................. 22 STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME .................... 23 STATEMENTS OF FINANCIAL POSITION ....................................................................................... 24 STATEMENTS OF CHANGES IN EQUITY ....................................................................................... 25 STATEMENTS OF CASH FLOWS ..................................................................................................... 27 NOTES TO THE FINANCIAL REPORT ............................................................................................. 28 DIRECTORS’ DECLARATION ............................................................................................................. 78 INDEPENDENT AUDITOR’S REPORT .............................................................................................. 79 ADDITIONAL ASX INFORMATION .................................................................................................... 85 2 CORPORATE INFORMATION ACN: 087 651 849 Directors Mr. Jon Sutton Mr. Jon Denovan Mr. Peter Hall Mr. Don Koch Mr. John Kolenda Company Secretary Mr. Malcolm Cowell (Chairman and Non-Executive Director) (Non-Executive Director) (Non-Executive Director) (Interim Chief Executive Officer and Director) (Executive Director) The registered office and principal place of business of the Company is: Level 14, 191 St George’s Terrace Perth WA 6000 Phone: +(618) 9438 8888 Other Locations: Sydney Office Level 24, 52 Martin Place Sydney NSW 2000 Share Registry: Advanced Share Registry 110 Stirling Hwy Nedlands WA 6009 Tel +(618) 9389 8033 Fax +(618) 6370 4203 Exchange Listing Australian Securities Exchange Limited Level 40, Central Park 152-158 St George’s Terrace Perth WA 6000 ASX Code: BBC Auditors: KPMG 300 Barangaroo Avenue Sydney NSW 2000 Website Address: www.bnk.com.au Corporate Governance: A copy of the Corporate Governance Policy Statement can be located using the following website address: https://bnk.com.au/investor-centre/corporate-governance/ 3 BNK Banking Corporation Limited Annual Financial Report 30 June 2020 DIRECTORS’ REPORT Your Directors present their report on the consolidated entity comprising BNK Banking Corporation Limited (“BNK” or the “Company”) and the entities it controlled (“the Group”) together with the consolidated financial report for the year ended 30 June 2020 and the auditor’s report thereon. DIRECTORS The details of the Company’s Directors in office at any time during or since the end of the year up to the date of this report are as follows. Directors were in office for the entire period unless otherwise stated. Current directors Mr Jon Sutton Mr Peter Hall Mr Don Koch Mr Jon Denovan Mr John Kolenda Former directors Mr Peter Wallace Mr Derek LaFerla Mr Simon Lyons Chairman and Non-Executive Director (appointed director 22 October 2019 and Chairman from 26 November 2019) Non-Executive Director Interim Chief Executive Officer and Director (Interim Chief Executive Officer from 25 May 2020) Non-executive Director (appointed 2 September 2019) Executive Director Chairman and Non-Executive Director (resigned 26 November 2019) Non-Executive Director (resigned 30 August 2019) Managing Director (resigned 25 May 2020) Jon Sutton (Chairman and Non-Executive Director) Mr Sutton was appointed a director on 22 October 2019. He has more than 25 years of experience. Jon was the CEO and Managing Director of the Bank of Queensland (BOQ) and retired in 2018. Prior to joining BOQ he served as CEO and Managing Director of Bankwest, and was part of the acquisition team that purchased Bankwest from its parent HBOS. Jon has also held senior roles in CBA as the Head of Agribusiness and has over ten years’ experience in markets experience having worked in senior roles in CBA’s Global Markets Division. Mr Sutton is a Director of Sydney Football Club and an Advisory Board Member to SendFX. Mr Sutton was appointed Chairman following the Company’s 2019 Annual General Meeting, is the Chair of the Remuneration Committee and a Member of the Audit Committee, Credit Committee and Risk & Compliance Committee. Peter Hall (Non-Executive Director) Mr Hall was elected as a Director in November 2015 and is an experienced financial services industry professional. Previous Board and industry appointments include: Non-Executive Director of BLSSA Pty Ltd (the licensing Board for Advantedge Financial Services, a NAB subsidiary), Chair of the CoreLogic RP Data sponsored Residential Valuation Industry Advisory Group, Ministerial Advisory Board Member for NSW Housing Minister and Chairman and Council Member of the Lenders Mortgage Insurance sub-committee. Mr Hall has also held the senior executive position of Country Executive of Genworth Financial Aust. & NZ and Managing Director of Genworth Financial Mortgage Insurance Aust. & NZ. Mr Hall holds a Graduate Diploma of Management, has completed Executive Management Programs at GE’s global management college, a former Senior Associate of the Financial Services Institute of Australia and has received a Distinguished Service Award from the Australian Securitisation Forum. Mr Hall is the Chair of the Risk & Compliance Committee, Chair of the Board Credit Committee and is also a Member of the Audit Committee and Remuneration Committee. Don Koch (Interim Chief Executive Officer and Director) Mr Koch was appointed a Director on 11 June 2019. Mr Koch was CEO of ING Bank in Australia from 2009 to 2012 before transferring to become CEO of ING Bank Italy from 2012 to 2016. He most recently ran a program for ING Asia as a joint venture with a large local bank within China, the largest digital economy in the world. He was the former CIO and part of the team that launched ING Direct in Australia. Mr Koch is a Governor on the Cerebral Palsy Association Research Foundation, Advisor to the UTS Business School Industry Advisory Board, Director of Target Fifteen and an Advisory Board Member of Glaucoma Australia ICT Committee. He spent the early part of his career in various roles at the Commonwealth Bank of Australia and Citibank Australia, and has completed the International Directors Program with INSEAD in Switzerland. Mr Koch was appointed Interim Chief Executive Officer on 25 May 2020 following the resignation of Mr Simon Lyons. 4 DIRECTORS’ REPORT (continued) Jon Denovan (Non-Executive Director) Mr Denovan was appointed a Director on 2 September 2019. Mr Denovan is a Special Counsel with leading national law firm, Dentons, and is a leading industry authority on regulation and compliance for the mortgage industry. He is regularly consulted by the Commonwealth Government and industry bodies on matters relevant to the National Consumer Credit Protection Act, National Credit Code, best interests obligations, amongst others. Mr Denovan is the Chair of the Audit Committee, and a member of the Risk & Compliance Committee and Credit Committee. John Kolenda (Executive Director) Mr Kolenda was appointed a Director on 13 March 2018. Mr Kolenda is the Managing Director of Finsure Group, and has extensive experience in the mortgage broking and aggregation sector. Mr Kolenda was the General Manager Sales & Distribution at Aussie Home Loans for ten years from 1994, before founding X Inc, which was a successful mortgage originator before its merger with the mortgage broking operations of Ray White in 2007. Mr Kolenda founded several businesses before launching Finsure Group in 2011. Mr Kolenda co-founded and chairs Aura Group Pty Ltd, a boutique corporate advisor and investment house. Aura Group has more than $300 million in assets under management and advice. During the last three years he has served as a Director of the following listed companies:   The Agency Group Australia Limited – appointed 19 December 2016 and resigned 20 December 2019 IBuyNew Group Limited – appointed 1 February 2013 and resigned 22 March 2017 COMPANY SECRETARY Malcolm Cowell Mr Cowell was appointed as Company Secretary on 1 March 2017 and was the Chief Financial Officer of the Company until 10 December 2018. He is a Chartered Accountant with 30 years’ experience in banking and professional services, and continues to serve in the Group as General Manager, Finance. PRINCIPAL ACTIVITIES The BNK Group is a vertically integrated banking institution regulated by the Australian Prudential Regulation Authority (“APRA”) offering retail banking, mortgage management and broker aggregation services. OPERATING AND FINANCIAL REVIEW Key operating and financial metrics for the period are as follows: Key Metric Amounts in thousands of AUD 30 June 2020 Statutory 30 June 2019 Statutory Net interest revenue Net-commission income Non-interest revenue Net statutory profit after tax Total on balance sheet assets On balance sheet loans Loans managed off balance sheet Wholesale managed loan book Aggregation commission loan book Total loan book Deposits Other key banking metrics Ave. Net Interest Margin Capital adequacy ratio 4,813 19,129 14,441 5,324 839,287 283,561 46,804 2,299,524 45,472,632 48,102,521 345,791 1.61% 21.22% 3,451 17,398 9,392 3,614 646,142 214,323 37,528 2,340,000 38,091,000 40,629,851 287,126 Movement % Statutory 39.5% 9.9% 53.8% 47.3% 29.9% 32.3% 24.7% (1.7%) 19.4% 18.2% 20.4% 1.95% 20.35% (17.4%) (0.60%) * Refer to the reconciliation to statutory profit/(loss) below The Group has recorded statutory net profit after tax for the year ended 30 June 2020 (FY20) of $5,324,000 (2019: profit of $3,614,000), a 47.3% increase over the corresponding period (a 63.1% increase on a proforma1 basis). 1 The merger between the Company and Finsure occurred on 17 September 2018. Proforma refers to the profit/loss result had the merger occurred on 1 July 2018. 5 DIRECTORS’ REPORT (continued) Sound result despite COVID-19 The Group’s result for FY20 represents a sound outcome in light of the impact of COVID-19 experienced by the Australian economy. Record settlements achieved by Finsure and the Bank demonstrated the value proposition offered to brokers and retail customers alike, whilst settlement volumes for Better Choice reflected the shift in focus to higher margin on balance sheet loans and the impact of tightening credit conditions imposed by its external funding partners. Repayment deferrals for BNK’s banking customers as at 30 June 2020 were significantly below system levels at 5%, compared to 10% reported by APRA and reflects the quality and diversification of the portfolio. The increase in NPAT demonstrates the Group’s strategy is yielding increased operating leverage. Closure of the Bank’s two branches in regional Western Australia was completed in Q320 and the Group is now a branchless bank pursuing a fully digital banking strategy, complemented by a broker led lending distribution capability through the Finsure and Better Choice brands. Record settlements and loan-book growth Record Finsure settlements of $15.6b represent a 23% increase and $129m in new loans onto the banking balance sheet, represents a year-on-year growth of +73%. Total loan-book grew to an overall balance of $48.1b, or +18% growth and Total Bank lending assets grew from $214m in FY19 to $284m in FY20 (+33%). Additionally, the number of loan writers grew 1,740 importantly driving further diversification of revenue streams for Finsure, whilst Better Choice distribution network increased to a potential 6,500+ brokers after joining the PLAN Australia lending panel. As the effects of COVID-19 became more apparent to the Australian economy, BNK adopted a prudent response and took steps to deliberately moderate loan originations through Q420. BNK has slowly reactivated loan originations from June 2020 onwards and the pipeline is indicating improved opportunities to cautiously grow the on balance sheet loan portfolio. Net income for the period grew +27% reflecting healthy portfolio growth. Net commission income grew +10% for the period reflecting continued growth in Finsure’s trail commission loan book. Aggregation service fees increased +39% as the shift in commission model to fee based income streams continues. Service fees and residual income received by Better Choice and the BNK increased +22%. Net interest margin declined to 1.61% (2019: 1.95%) as a result of the two official rate cuts passed on during the year, and elevated liquidity levels held following the onset of COVID-19. The Bank’s credit quality has been maintained at a sound level with a loss coverage ratio (bad debt provisions as a portion of lending asset-base) of 25bps, an increase from 12bps in FY19 as additional overlays were applied to modelled outcomes. There were no lending write-offs in FY20 however loss provisions increased as a result of the growth in the loan book. BNK’s close contact with customers and proactive approach has led to a number of customers returning to full performing status ahead of agreed deferral timeframes. The Group has continued its objective of reducing portfolio concentration from Western Australia (WA), as well as diversifying origination channels with the on balance sheet for WA reducing from 67% in FY19 to 46% at 30 June 2020. 6 DIRECTORS’ REPORT (continued) Funding effectively for growth Deposits comprise at-call accounts and term deposits which are sourced directly from retail customers and through various deposit brokers. The Bank continues to successfully achieve a key objective to increase its growing the Bank’s deposit base, and transform its funding mix. Transactional accounts now account for 36% of total deposits and the Bank leveraged its Mozo awards through promotion of the Retire Style and Cash Management Accounts through new platforms, contributing to this funding diversification. As part of the Commonwealth Government’s industry support response to COVID-19, BNK became eligible to $8m of low cost funding under the RBA’s Term Funding Facility. This amount has been subsequently drawn down and is repayable in August 2023. Liquidity investments and other assets The Group’s cash and liquidity investments predominantly comprise physical cash, at call deposits, negotiable certificates of deposits, government (including semi-government) bonds, and floating rate notes. Liquidity management falls under the remit of Asset & Liability Committee (ALCO), which ensures the Group operates within its policy settings. ALCO also reviews and approves changes in product level interest rates and the implementation of new products. BNK maintained elevated liquidity levels through H220, which are progressively being reduced which is having a positive impact to the overall cost of funds (COF). For FY21, BNK is targeting COF sub 1%. Investment in technology continues to be critical to the Group. Successful completion and rollout of the innovative Infynity CRM platform was completed in Q220. Infynity is an industry leading cloud based CRM with open API connectivity enabling Finsure’s marketplace to integrate with more products and services offered by 3rd parties. Better Choice continued to consolidate legacy books onto its new Loanworks platform and BNK continued to engage with Temenos for delivery of its R18 core banking system upgrade. Operating expenses The Group continued to invest in its people and processes, with operating expenses increasing 17% to $27.8m. This included redundancy and closure costs for the two branches in regional Western Australia, legal costs associated with the investigation and process of the ATM insurance claim, and termination costs. The Group responded to the impact of COVID-19 through temporary board and executive salary reductions, and a critical review of operating expenses. Disciplined cost management processes have been reinforced across the Group and discretionary expenditure curtailed where possible without undue detriment to the business. Capital The Group’s policy is to maintain a minimum capital adequacy ratio (CAR) as per APRA required levels. The CAR at 30 June 2020 of 21.22% presents the Group with further growth opportunity for both on-balance sheet lending assets as well as investing in other assets that provide means for the Group to generate organic capital. The Group completed a placement in February 2020, raising $7m of new share capital, and approval has been received from APRA to issue a Tier 2 hybrid equity instrument, which will provide funding diversity once completed. The Group has recently appointed Bell Potter as Corporate Advisor to assist with raising the Tier 2 hybrid instrument. 7 DIRECTORS’ REPORT (continued) DIVIDENDS No dividend was paid or declared by the Company in the period and up to the date of this report. The Directors do not recommend that any amount be paid by way of dividend, for the financial year ended 30 June 2020. INTEREST IN SHARES AND OPTIONS OF THE COMPANY As at the date of this report, the Directors hold shares of the Company in their own name or a related body corporate, as notified by the Directors to the ASX in accordance with S205G(1) of the Corporations Act 2001 as follows: Number of ordinary shares Number of options or performance rights over ordinary shares Jon Sutton Don Koch Peter Hall Jon Denovan John Kolenda 60,000 - 72,034 - 13,302,952 - - - - - Interests in ordinary shares noted above were acquired by the Directors at their own expense and do not form part of their remuneration. SHARE OPTIONS AND RIGHTS OVER SHARES The Company has 1,791,666 performance rights on issue to certain key management personnel and employees. The performance rights entitle the holder to a grant of shares subject to certain conditions being met. Refer to the Remuneration Report for further details. INDEMNIFICATION AND INSURANCE OF DIRECTORS AND OFFICERS The Company has paid or agreed to pay a premium in relation to a contract insuring the Directors and Officers listed in this report against those liabilities for which insurance is permitted under S199B of the Corporations Act 2001. The terms of the policy prohibit disclosure of details of the amount of the insurance cover and the premium paid. The Company has not otherwise, during or since the relevant period, indemnified or agreed to indemnify an Officer or auditor of the Company or of any related body corporate against a liability incurred as such an Officer or auditor. MEETINGS OF DIRECTORS The number of Board and Committee meetings held during the financial year, and attendance by each Director is as follows: Board Audit Committee Risk & Compliance Committee Remuneration Committee Credit Committee Attended Eligible Attended Eligible Attended Eligible Attended Eligible Attended Eligible J Sutton D Koch P Hall J Denovan J Kolenda P Wallace D LaFerla S Lyons 17 21 21 21* 19 5 2 17 18 21 21 19 21 5 2 17 * Attendance by invitation. 4 5 5 5 - 2 1 4 5 5 4 - 2 1 3 4 4 3 - 1 - 3 3 4 3 - 1 - 4* 4* 3* 3* 2 2 5 - 1* 3 1 4* 2 2 5 - - 3 1 4* 2 2* 2 1 - - - - 2 2* 2 2 - - - - 8 DIRECTORS’ REPORT (continued) CHANGES IN THE STATE OF AFFAIRS Except for the matters discussed above and elsewhere in this Directors’ Report, in the opinion of the Directors, there were no other significant changes in the state of affairs of the Company that occurred during the financial year under review. EVENTS SUBSEQUENT TO THE END OF THE FINANCIAL YEAR On 14 July 2020 the Company received partial indemnification from the insurer in respect of $1,197,750 of the ATM fraud claim. On 7 August 2020, the Company announced the appointment of Mr. Brett Morgan as Chief Executive Officer of the Banking and Wholesale divisions with Mr. John Kolenda to assume the position of Chief Executive Officer of the Aggregation divisions. On 28 August 2020, the Company issued 450,000 performance rights to certain executives and employees. Other than the matters noted above, in the opinion of the Directors there has not arisen in the period between the end of the financial year and the date of this report any other material item, transaction or event that is likely to significantly affect the operations of the Company. PROCEEDINGS ON BEHALF OF THE COMPANY No person has applied to the Court under S237 of the Corporations Act 2001 for leave to bring proceedings on behalf of the company, or to intervene in any proceedings to which the company is a party for the purpose of taking responsibility on behalf of the company for all or part of those proceedings. ENVIRONMENTAL REGULATIONS The Company’s operations are not subject to any significant environmental regulations under either Commonwealth or State legislation. LIKELY DEVELOPMENTS AND EXPECTED RESULTS OF OPERATIONS On 14 July 2020 the Company received partial indemnification from the insurer in respect of $1,197,750 of the ATM fraud claim. On 11 August 2020, the Company submitted the remaining information to its insurer in relation to the balance of the claim. The outcome of the claim has not been finalised at the date of this report. Since balance date, the number of customers subject to COVID-19 repayment deferral arrangements has decreased with approved deferral arrangements now comprising 4.5% of the loan portfolio, a reduction from 5.0% at 30 June 2020. No other matter, circumstance or likely development in the operations has arisen since the end of the financial year that has significantly affected or may significantly affect: (i) The operations of the Company; (ii) The results of those operations; or (iii) The state of affairs of the Company in the financial years subsequent to this financial year. 9 DIRECTORS’ REPORT (continued) NON-AUDIT SERVICES The following non-audit services were provided by the entity's auditor, KPMG. The directors are satisfied that the provision of non-audit services is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001 and APES 110 Code of Ethics for Professional Accountants. The nature and scope of each type of non-audit service provided means that auditor independence was not compromised. Details of the amounts paid to the auditor of the Company, KPMG for audit and non-audit services for the year ended 30 June 2020: Non audit services Accounting and tax opinions Audit and assurance services Audit and review of financial statements Regulatory assurance services Total audit and assurance services Total amounts paid to KPMG $ 50,000 292,270 108,000 400,270 450,270 AUDITORS INDEPENDENCE DECLARATION The lead auditor’s independence declaration provided in accordance with S307C of the Corporations Act 2001 is set out on page 22 and forms part of the Directors’ report for the financial year ended 30 June 2020. The Remuneration Report commencing on the following page forms part of this Directors’ Report. ROUNDING OFF The Group is a kind referred to in ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191 and in accordance with that Instrument, amounts in the consolidated financial statements and directors’ report have been rounded off the nearest thousand dollars, unless otherwise stated. 10 DIRECTORS’ REPORT (continued) REMUNERATION REPORT (AUDITED) This Remuneration Report for the year ended 30 June 2020 outlines the remuneration arrangements of the Group in accordance with the requirements of the Corporations Act 2001 (the Act) and its regulations. This information has been audited as required by section 308(3C) of the Act. The Remuneration Report is presented under the following sections: 1. Introduction 2. Remuneration governance 3. Executive remuneration arrangements A. Remuneration principles and philosophy B. Approach to setting remuneration C. Detail of incentive plans 4. Executive remuneration outcomes for 2020 (including link to performance) 5. Executive contracts 6. Non-executive director remuneration (including statutory remuneration disclosures) 7. Additional disclosures relating to options, performance rights and shares 8. Loans to key management personnel and their related parties 9. Other transactions and balances with key management personnel and their related parties 10. Remuneration incentives approved subsequent to balance date 1. Introduction The Remuneration Report details the remuneration arrangements for key management personnel (KMP) who are defined as those persons having authority and responsibility for planning, directing and controlling the major activities of the Group, directly or indirectly, including any director (whether executive or otherwise) of the Group. The table below outlines the KMP of the Group and their relevant changes during the year ended 30 June 2020: Non-Executives Director Jon Sutton Don Koch1 Jon Denovan Peter Hall Peter Wallace Derek La Ferla Position Non-Executive Chairman Non-Executive Director Non-Executive Director Non-Executive Director Non-Executive Chairman Non-Executive Director Appointment date 22 October 2019 11 June 2019 2 September 2019 13 November 2015 8 August 2014 16 November 2015 Resignation date - - - - 26 November 2019 30 August 2019 1 Non-Executive Director until 25 May 2020. Mr Koch is currently fulfilling the role of Interim Chief Executive Officer. Mr Brett Morgan will commence on 12 October 2020 as Chief Executive Officer of the Banking and Wholesale divisions, and Mr Koch will revert to his role as Deputy Chairman and Chair of the Audit Committee. Executives Executive Don Koch John Kolenda Allan Savins1 Simon Bednar1 Jussi Nunes Steve Ellis Lisa Stedman Simon Lyons Position Interim Chief Executive Officer Executive Director and Chief Executive Officer of Finsure General Manager, Banking & Wholesale General Manager, Aggregation Chief Financial Officer Chief Risk Officer Chief Operating Officer Managing Director Appointment date 26 May 2020 13 March 2018 17 September 2018 17 September 2018 10 December 2018 17 July 2016 10 July 2019 18 January 2016 Resignation date - - - - - - - 25 May 2020 1 Key Management Personnel from 1 July 2019 11 DIRECTORS’ REPORT (continued) REMUNERATION REPORT (AUDITED) 2. Remuneration governance The Board of Directors is responsible for determining and reviewing compensation arrangements for the executive team. The Remuneration Committee assists the Board in meeting its responsibilities to ensure that remuneration practices are appropriate with regards to the Group’s size and scale of operations, and to ensure that the Group can continue to attract and retain high caliber individuals to key executive roles. Remuneration Committee The Remuneration Committee comprises three Non-Executive Directors (NEDs) with all being independent. The Remuneration Committee meets periodically and is required to make recommendations to the board on matters related to the remuneration arrangements for NEDs and executives. The Chief Executive Officer (or previously Managing Director) attends certain Remuneration Committee meetings by invitation, where management input is required. Executives are not present during any discussions related to their own remuneration arrangements. The Board approves the remuneration arrangements of the executive leadership team and all awards including incentive plans and other employee benefit programs. The Board also sets the aggregate remuneration of NEDs, which is then subject to shareholder approval, and NED fee levels. Further information on the remuneration committee’s role, responsibilities and membership can be found on the company website at https://bnk.com.au/investor-centre/corporate-governance/. Use of remuneration consultants To ensure the Remuneration Committee is fully informed when making remuneration decisions, the Remuneration Committee may seek external remuneration advice. During the year, the Remuneration Committee engaged BDO Reward Pty Ltd (BDO) to review the Group’s remuneration framework, and provide advice in relation to remuneration benchmarking, variable remuneration schemes and balanced scorecard structures. This engagement was undertaken given the significant change in the Group’s structure over the preceding two years and to ensure the Group would comply with the requirements of the Banking Executive Accountability Regime (BEAR) that now applies to the Group. BDO was paid $101,750 for these services. The engagement by the Remuneration Committee was based on an agreed set of protocols that would be followed by BDO, members of the Remuneration Committee and members of the key management personnel for the way in which remuneration recommendations would be developed and provided to the Board. The protocols included the prohibition of BDO providing advice or recommendations to key management personnel prior to the advice or recommendations being provided to the Remuneration Committee and not unless BDO had approval from the Remuneration Committee. These arrangements were implemented to ensure that BDO would be free to carry out its work free from undue influence by members of the key management personnel about whom the recommendations may relate. The Board is satisfied that the recommendations by BDO were free from undue influence of members of the key management personnel about whom the recommendations may relate. The recommendations and advice provided by BDO are being considered by the Remuneration Committee and Board for implementation in the 2021 financial year. Remuneration Report approval at 2019 Annual General Meeting (AGM) The 2019 Remuneration Report received positive shareholder support at the 2019 AGM with a vote of 98%. 3. Executive remuneration arrangements 3.1 Remuneration principles and philosophy The objective of the Group’s remuneration strategy is to attract and retain executives who will create shareholder value and fairly and responsibly reward them for performance. The Board believes it is critical to consider how long-term sustainable value is created in the Group and link remuneration structures to this value creation. The Group’s remuneration policy is also intended to encourage behaviours that support an improvement in the financial performance of the business over time, sound risk management practices and positive customer service experiences. To this end, the Group applies the following principles to its remuneration framework: 12 DIRECTORS’ REPORT (continued) REMUNERATION REPORT (AUDITED)  Provide competitive rewards to attract and retain high-caliber people;  Link executive rewards to shareholder value; and  Provide for a significant proportion of the executive remuneration to be “at risk” – that is, dependent upon meeting predetermined performance indicators. In accordance with best practice corporate governance, the structure of NED remuneration is separate and distinct from executive remuneration (refer to section 6 of this Remuneration Report for information on NED remuneration). Remuneration is comprised of three distinct components within BNK, these are described below: Vehicle Purpose Link to performance Remuneration component Fixed remuneration Short term performance based incentive (STI) Represented by total employment cost (TEC). Comprises base salary, superannuation contributions and other benefits. Paid in cash or performance rights. Long term incentive plan (LTI) Performance rights. To provide competitive fixed remuneration set with reference to role, market and experience. Group and individual performance are considered during the annual remuneration review. Rewards executives for their contribution towards achievement of Company outcomes, as well as their performance against individual key performance indicators (KPIs). Rewards executives for their contribution to the creation of shareholder value over the longer term. Linked to other internal financial measures, strategic objectives, risk management, compliance and leadership. Vesting of incentive is dependent on achieving key strategic objectives, including implementation of products distribution arrangements, shareholder returns and corporate transactions. 3.2 Approach to setting remuneration The Group aims to reward executives with a level and mix of remuneration commensurate with their position and responsibilities within the Group and aligned with market practice of entities of a similar size, nature and complexity. Remuneration levels are considered annually through a remuneration review that considers the performance of the Group and individual, and the broader economic environment. 3.3 Detail of incentive plans Short-term incentive (STI) In determining the extent of any performance based incentive the Board assesses the achievement of an individual’s performance in context of the overall Group result. Incentives are awarded in accordance with the requirements of the Banking Executive Accounting Regime (BEAR). The BEAR was implemented in Australia to establish clear and heightened expectations of accountability for directors and executives of Authorised Deposit-taking Institutions, and to ensure there are clear consequences in the event of a material failure to meet those expectations. BEAR applies to BNK from 1 July 2019 and results in a proportion of variable remuneration for a year being deferred for a period of 4 years from grant date. 13 DIRECTORS’ REPORT (continued) REMUNERATION REPORT (AUDITED) Long-term incentive (LTI) LTI awards will be made to executives in order to align remuneration with the creation of shareholder value over the long-term. As such, LTI awards are only made to executives and other key talent who have an impact on the Group’s performance against the relevant long-term performance measure. Shareholders of the Company approved the continuation of the BNK Equity Incentive Plan (“the Plan”) at the 2019 Annual General Meeting held on 26 November 2019. Pursuant to the terms of the Plan, executives may be offered performance rights that entitle the executive to the Company delivering fully paid ordinary shares, either issued by the Company or acquired on-market, at the election of the Board. Termination and change of control provisions Where a participant ceases employment prior to their award vesting due to resignation or termination for cause, awards will be forfeited unless otherwise agreed by the Board. Where a participant ceases employment for any other reason, they may retain a portion of the unvested benefit pro-rated to reflect participant’s period of service during the LTI grant performance period. These unvested benefits only vest subject to meeting the relevant LTI performance measures, subject to the Board’s discretion. In the event of a change of control of the Group, the performance period end date will generally be brought forward to the date of the change of control and awards will vest subject to performance over this shortened period, subject to ultimate Board discretion. Hedging of equity awards The Group has a policy prohibiting executives from entering into arrangements to protect the value of the equity awards. The prohibition includes entering into contracts to hedge their exposure to options awarded as part of their remuneration package. 4.1 Executive remuneration outcomes for 2020 (including link to performance) Group performance and its link to short-term incentives In considering the Group’s performance and benefits for shareholder wealth, the remuneration committee has regard to the following: Profit/(loss) Dividends paid Share price balance date Return on capital employed at 2020 5,324,000 Nil $0.43 2019 3,614,000 Nil $0.64 2018 (406,000) Nil $1.28 2017 (996,000) Nil $1.00 2016 (95,000) Nil $0.91 4.70% 3.60% (1.65%) (4.93%) (0.56%) Profitability is one of the financial performance targets considered in setting remuneration for executives, and has been calculated in accordance with Australian Accounting Standards. Performance to budget is another key measure considered by the BNK Board when appropriate to the business objectives. During the year ended 30 June 2020, the fixed remuneration of the Group’s Board and executive leadership team was reduced by 20% on a temporary basis in response to the impact of COVID-19 on the Group. This initiative was adopted to maximise the Group’s ability to retain its valued team of employees and in order to ensure the Group was well positioned to come out of COVID-19 and progress its growth objectives strongly. Subsequent to balance date, the Remuneration Committee considered and the Board approved recommendations for remuneration outcomes for members of the executive leadership in relation to the year ended 30 June 2020 as set out in section 10 of the Remuneration Report. 14 BNK Banking Corporation Limited Annual Financial Report 30 June 2020 Termination Total Performance related Shared- based payments LTI (C) Other long term Long service leave DIRECTORS’ REPORT (continued) REMUNERATION REPORT (AUDITED) 4.1 Remuneration of key management personnel Short-term benefits Post- employment Salary & fees STI (A) Cash bonus Total Superannuation Jussi Nunes2 Executives Don Koch1 John Kolenda Year 2020 2020 2019 2020 2019 2020 2019 Lisa Stedman3 2020 Allan Savins4 2020 Simon Bednar4 2020 Steve Ellis $ 33,720 627,000 518,833 344,846 194,209 223,385 218,574 282,692 358,327 281,568 Former Executives Simon Lyons Malcolm Cowell5 Total 2020 2019 448,557 429,745 92,360 2019 2020 2,600,095 1,453,722 2019 $ - - - - - - - - - - - - - - - Non- monetary benefits (B) $ - 15,000 11,792 7,500 - - - - - 5,010 $ - - - 25,000 - - 50,000 - 20,000 - 33,720 642,000 530,625 377,346 194,209 223,385 268,574 282,692 383,327 286,578 50,000 100,000 76,137 41,000 574,694 570,745 15,000 100,000 165,000 1,424 103,647 54,216 108,784 2,803,742 1,672,938 $ $ $ $ - - - 834 667 171 1,126 - 4,828 16,151 - - - - - 27,140 131,194 - 66,057 66,057 $ - - - - - - - - - - $ 36,923 642,000 530,625 410,941 212,360 271,918 425,084 309,548 491,053 396,099 (40,129) 20,003 40,680 433,749 303 (18,145) 22,099 24,159 199,934 589,101 212,500 - - 212,500 - 826,030 1,044,112 141,679 3,384,511 2,353,860 % 0% 0% 0% 6% 0% 10% 43% 0% 19% 17% 11% 51% 28% 9% 32% 3,203 - - 32,760 17,484 21,222 24,190 26,856 36,841 27,313 38,285 19,615 8,433 186,480 69,722 1 Interim Chief Executive Officer from 26 May 2020 2 Appointed as Group Chief Financial Officer on 10 December 2018 3 Appointed as Chief Operating Officer on 10 July 2019 4 Assessed as KMP from 1 July 2019 5 Ceased to be Chief Financial Officer on 10 December 2018. Remuneration information disclosed above represents the period Mr Cowell was a KMP. (A) – The fair value of performance rights granted as a STI is determined by recognising the grant date fair value over the relevant service condition period. (B) – Non-cash benefits generally comprise housing allowance and/or car parking benefits (C) – The fair value of performance rights is calculated at the grant date using the Monte-Carlo simulation model, taking into account the impact of the market and non- market conditions attached to the performance rights. 15 BNK Banking Corporation Limited Annual Financial Report 30 June 2020 DIRECTORS’ REPORT (continued) REMUNERATION REPORT (AUDITED) 4.2 Analysis of bonuses included in remuneration – audited Details of the short-term incentive cash bonus awarded as remuneration to key management personnel are detailed below: Short-term incentive bonus Simon Lyons Allan Savins Jussi Nunes Included in remuneration $50,000 $25,000 $25,000 % awarded in year % forfeited in year 29 - - 71 - - 4.3 Equity instruments - audited Performance rights refer to rights over ordinary shares of BNK, which vest on a one-for-one basis under the BNK Equity Incentive Plan. 4.3.1 Rights over equity instruments granted as compensation – audited Details on rights over ordinary shares in the Company that were granted as remuneration to each key management personnel during the reporting period are as follows: Vesting condition Number of rights granted during FY20 50,000 Service and performance1 50,000 Service and performance1 50,000 Service and performance1 Rights holder Allan Savins Jussi Nunes Simon Bednar Fair value at Grant date grant date ($) Expiry date 5 December 2019 5 December 2019 5 December 2019 0.58 0.58 0.58 29 November 2023 29 November 2023 29 November 2023 1 Refer to note 7.4.2 for further information of the vesting conditions. 4.3.2 Details of equity incentives affecting current and future remuneration – audited Details of the vesting profiles of the performance rights held by each executive of the Group are detailed below: % vested % forfeited in which grant Financial years Participant Number Grant date in year in year vests Simon Lyons1 666,667 9 February 2017 100,000 30 October 2017 Steve Ellis 200,000 9 February 2017 50,000 30 October 2017 50,000 1 November 2018 0% 0% 0% 0% 0% Allan Savins 66,666 16 April 2019 100% 66,667 16 April 2019 66,667 16 April 2019 16,667 5 December 2019 16,667 5 December 2019 16,666 5 December 2019 0% 0% 0% 0% 0% 16 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% (A) (A) (A) (A) 2021 2020 2021 2022 2021 2022 2023 DIRECTORS’ REPORT (continued) REMUNERATION REPORT (AUDITED) 4.3.2 Details of equity incentives affecting current and future remuneration – audited (continued) % vested % forfeited in which grant Financial years Participant Number Grant date in year in year Simon Bednar 66,666 16 April 2019 100% 66,667 16 April 2019 66,667 16 April 2019 16,667 5 December 2019 16,667 5 December 2019 16,666 5 December 2019 Jussi Nunes 16,667 5 December 2019 16,667 5 December 2019 16,666 5 December 2019 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% vests 2020 2021 2022 2021 2022 2023 2021 2022 2023 1 Ceased to be an executive on 25 May 2020. (A) Performance rights previously subject to performance conditions and change of control provisions. Amounts vested during 2019 based on the Board exercising its ultimate discretion following the merger with Finsure. 4.3.3 Analysis of movements in equity instruments – audited The value of performance rights in the Company granted during and exercised during the reporting period is detailed below: Participant Allan Savins Simon Bednar Jussi Nunes Granted in year $ (A) 29,000 29,000 29,000 Value of rights exercised in year $ (B) 45,100 45,100 - (A) The value of rights granted in the year is the fair value of the rights calculated at grant date. This amount is allocated to remuneration over the vesting period. (B) The value of rights exercised during the year is calculated at the market price of shares of the Company as at close of trading on the date the rights are exercised. 4.3.4 Summary of rights holdings Participant Simon Lyons1 Steve Ellis Jussi Nunes Allan Savins Simon Bednar Held at 1 July 2019 766,667 300,000 - 200,000 200,000 Granted as remuneration Exercised - - 50,000 50,000 50,000 - (125,000) - (66,666) (66,666) Lapsed - - - - - Forfeited - - - - - 1 Ceased to be a KMP on 25 May 2020. Held at 30 June 2020 766,667 175,000 50,000 183,334 183,334 Vested during the year - - - 66,666 66,666 Vested and exercisable at 30 June 2020 766,667 175,000 - - - 17 DIRECTORS’ REPORT (continued) REMUNERATION REPORT (AUDITED) 5. Executive Contracts Remuneration arrangements for KMP are formalised in employment agreements. Details of these contracts are provided below: Executives Salary per annum Term for cause Don Koch John Kolenda Jussi Nunes Steve Ellis Lisa Stedman Allan Savins Simon Bednar $400,000 plus superannuation for the period he is acting as Interim Chief Executive Officer Consultancy agreement totaling $660,000 per annum $330,000 plus superannuation up to the Maximum Superannuation Contribution Base $220,000 plus superannuation contributions currently at 9.5% $300,000 plus superannuation contributions currently at 9.5% $350,000 plus superannuation contributions currently at 9.5% $300,000 plus superannuation contributions currently at 9.5% None None None None None None None Term of agreement and notice period Fixed term for 3 months ending 26 August 2020 Continuing with 1 month notice by either party Continuing with 3 months’ notice by either party Continuing with 1 month notice by either party Continuing with 1 month notice by either party Continuing with 1 month notice by either party Continuing with 1 month notice by either party 6. Non-executive director remuneration arrangements - Audited Remuneration policy The board seeks to set aggregate remuneration at a level that provides the Group with the ability to attract and retain directors of the highest caliber, whilst incurring a cost that is acceptable to shareholders. The amount of aggregate remuneration sought to be approved by shareholders and the fee structure is reviewed annually against fees paid to NEDs. The Company’s constitution and the ASX listing rules specify that the NED fee pool shall be determined from time to time by a general meeting. The latest determination was at the 2018 AGM held on 9 November 2018 when shareholders approved an aggregate fee pool of $650,000 per year. Structure The remuneration of NEDs consists of directors’ fees. The table below summarises the base NED fees excluding superannuation contributions for the financial year ended 30 June 2020: Type of Fee Amount per annum Chairman Non-executive Director $130,000 $70,000 NEDs receive superannuation contributions of 9.5% of earnings but do not receive any other retirement benefits, nor do they participate in any incentive programs. 18 DIRECTORS’ REPORT (continued) REMUNERATION REPORT (AUDITED) 6. Non-executive director remuneration arrangements – Audited (continued) The remuneration of NEDs for the years ended 30 June 2020 and 30 June 2019 is detailed in table below. Short-term benefits Post- employment Salary & fees $ Non- monetary benefits Other7 Superannuation Long- term benefits Long service leave Non-executive directors Jon Sutton1 Don Koch2 Peter Hall Jon Denovan3 2020 79,717 2020 2019 2020 2019 2020 63,000 5,833 67,667 64,111 56,000 John Kolenda4 2019 14,722 Former directors Peter Wallace5 Derek La Ferla6 Total 2020 2019 2020 2019 2020 2019 54,167 115,277 11,667 68,527 332,217 268,470 - - - - - - - - - - - 10,000 - - - - - 40,000 - - - 20,000 - - - 70,000 7,573 5,985 554 6,428 7,041 5,320 1,399 5,146 14,751 1,108 8,410 31,561 32,155 - - - - - - - - - - - - - Total 87,290 68,985 6,387 74,095 81,152 61,320 16,121 59,313 170,028 12,775 96,937 363,777 370,625 1 Appointed 22 October 2019 2 Remuneration for the period 1 July 2019 to 25 May 2020 3 Appointed 2 September 2019 4 Non-Executive Director until 17 September 2018 5 Retired as a Director on 26 November 2019 6 Retired as a Director on 30 August 2019 7 Additional once-off payments for additional board services in relation to the Finsure merger. 7. Additional disclosures relating to options and shares The numbers of shares in the Company held during the financial year by each director of the Company and other key management personnel, including their personally related parties, are set out below. There were no shares granted during the reporting period as compensation. Shareholdings of key management personnel 2020 Directors Peter Wallace Derek LaFerla Peter Hall Simon Lyons John Kolenda Don Koch Jon Sutton Jon Denovan Balance at the start of the year or commencement date 105,838 - 59,034 948,000 13,927,478 - - - Acquired Other movement Balance at the end of the year or date of resignation - - - - (624,526) - - - 105,838 - 72,034 948,000 13,302,952 - 60,000 - - - 13,000 - - - 60,000 - 19 DIRECTORS’ REPORT (continued) REMUNERATION REPORT (AUDITED) 2020 Executives Jussi Nunes Steve Ellis Lisa Stedman Allan Savins Simon Bednar Balance at the start of the year or commencement date Acquired through exercise of vested performance rights Other movement Balance at the end of the year or date of resignation - - - 1,062,719 1,153,333 - 125,000 - 66,666 66,666 - - - - - - 125,000 - 1,394,605 1,219,999 8. Loans to key management and their related parties (i) Details of aggregate of loans to key management personnel and their related parties: Aggregate Balance at beginning of period/KMP appointment 2020 499,487 Interest charged during KMP period 36,386 Write-off or allowance for doubtful debt Balance at end of period Number of KMP in group - 492,354 1 (ii) Terms and conditions of loans to key management personnel and their related parties Loans to key management personnel are made on terms equivalent to an arm’s length transaction, that is terms and conditions are similar to those offered to other customers at the time a loan is funded. All loans are secured by appropriate forms of collateral. 9. Other transactions and balances with key management personnel and their related parties During the period, the Group sub-leased office space to Aura Group Pty Ltd, a related entity of Mr. John Kolenda. Rental income and recharges received during the period totaled $446,325 (2019:$635,101) and the balance receivable at 30 June 2020 was $79,825. During the period, the Group paid $131,060 to Dentons, a related entity of Mr. Jon Denovan for legal services, which included corporate matters and services provided in the normal course of business, and the balance payable at 30 June 2020 was $491. 10. Remuneration incentives approved subsequent to balance date Subsequent to 30 June 2020, the Remuneration Committee recommended to the Board the following incentives for members of the Executive Leadership Team. In recognition of previously unfulfilled employment contracts conditions, for two executives, the following were approved: Executive Jussi Nunes (CFO) Lisa Stedman Award $100,000 cash bonus payable in September 2020 in lieu of 600,000 performance rights. 300,000 performance rights subject to the following conditions:  60,000 eligible to vest immediately and 40,000 deferred for 3 years to 10 July 2023  60,000 eligible to vest at 10 July 2021 subject to achievement of FY21 KPIs and 40,000 eligible to vest on 10 July 2024  60,000 eligible to vest at 10 July 2022 subject to achievement of FY22 KPIs and 40,000 eligible to vest on 10 July 2025 20 DIRECTORS’ REPORT (continued) REMUNERATION REPORT (AUDITED) In addition to the above, the Remuneration Committee approved the following in recognition of performance for the year ended 30 June 2020 and retention purposes: Executive Simon Bednar Aggregation) (GM Allan Savins Award Increase in base salary to $325,000   Vesting of first tranche of FY19 bonus performance rights (16,667)  100,000 performance rights with 50,000 to vest immediately, and vesting eligibility of the remaining 50,000 deferred for 4 years subject to continued service, satisfactory performance and claw back provisions.  Vesting of first tranche of FY19 bonus performance rights (16,667)  80,000 performance rights with 40,000 to vest immediately, and vesting eligibility of the remaining 40,000 deferred for 4 years subject to continued service, satisfactory performance and claw back provisions. The performance rights noted in this section have been issued on 28 August 2020. John Kolenda has also been awarded 125,000 performance rights in relation to FY20. The issue of these performance rights however is subject to shareholder approval at the 2020 Annual General Meeting. End of Remuneration Report Signed in accordance with a Resolution of Directors Jon Sutton - Chairman Dated this 28th day of August 2020 21 Lead Auditor’s Independence Declaration under Section 307C of the Corporations Act 2001 To the Directors of BNK Banking Corporation Limited I declare that, to the best of my knowledge and belief, in relation to the audit of BNK Banking Corporation Limited for the financial year ended 30 June 2020 there have been: i. ii. no contraventions of the auditor independence requirements as set out in the Corporations Act 2001 in relation to the audit; and no contraventions of any applicable code of professional conduct in relation to the audit. KPM_INI_01 Nic Buchanan Partner Sydney 28 August 2020 22 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Liability limited by a scheme approved under Professional Standards Legislation. STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME For the year ended 30 June 2020 In thousands of AUD Note 2020 2019 2020 2019 Consolidated Bank Interest revenue Interest expense Net interest income Commission income Commission expense Net commission income/(expense) Other income Total net revenue Operating expenses Transaction expenses Impairment reversal/(expense) on loans, advances and other receivables Impairment of bailment cash Profit/(Loss) before income tax from continuing operations Income tax (expense)/benefit Profit/(Loss) for the period attributable to equity holders of the parent Other comprehensive income Items that are or may be reclassified subsequently to profit or loss, net of income tax 2.2 2.2 2.2 2.2 2.2 2.2 $ $ $ $ 10,643 8,793 10,568 8,912 (5,830) (5,342) (5,612) (5,181) 4,813 3,451 4,956 3,731 290,509 187,042 (271,380) (169,644) 19,129 14,441 17,398 9,392 - (475) (475) 4,951 38,383 30,241 9,432 - (253) (253) 1,623 5,101 2.3 (27,858) (23,652) (8,191) (6,634) - (860) - (860) (634) (20) (584) 4.1.1 (2,923) - (2,923) (20) - 6,968 5,709 (2,266) (2,413) 2.4.1 (1,644) (2,095) (8) 571 5,324 3,614 (2,274) (1,842) Net change in fair value of financial assets – OCI 4.2 (48) (297) - (205) Total comprehensive income for the period 5,276 3,317 (2,274) (2,047) Basic earnings per share (cents) Diluted earnings per share (cents) 5.3 5.3 6.14 6.03 5.14 5.05 The accompanying notes form part of these financial statements 23 STATEMENTS OF FINANCIAL POSITION As at 30 June 2020 In thousands of AUD Note 2020 2019 2020 2019 Consolidated Bank ASSETS Cash and cash equivalents Commissions and other receivables Due from other financial institutions Loans and advances Other financial assets Investment in subsidiaries Property, plant and equipment Goodwill and other intangible assets Deferred tax assets TOTAL ASSETS LIABILITIES Deposits Commissions and other payables Current tax liability Provisions Deferred tax liabilities TOTAL LIABILITIES 4.1.1 4.4.1 4.2 3.1 4.2 6.1.1 7.1 7.2 2.4.2 4.3 4.4.2 7.3 2.4.2 $ $ $ $ 18,122 412,620 33,335 283,561 38,231 - 3,808 49,610 - 839,287 19,381 285,485 32,344 214,323 46,194 - 1,197 47,218 - 15,853 6,559 33,335 285,206 38,138 61,925 744 4,809 1,178 646,142 447,747 17,431 3,379 32,344 216,891 46,032 61,925 735 3,104 1,766 383,607 345,791 365,636 - 1,308 13,686 726,421 287,126 245,225 - 1,292 12,063 545,706 345,791 1,785 - 219 - 347,795 287,126 1,035 - 374 - 288,535 NET ASSETS 112,866 100,436 99,952 95,072 EQUITY ATTRIBUTABLE TO EQUITY HOLDERS Contributed equity Issued capital, net of raising costs Reserves Retained earnings TOTAL EQUITY 5.2.2 103,516 1,232 8,118 112,866 96,567 1,075 2,794 100,436 103,516 1,372 (4,936) 99,952 96,567 1,167 (2,662) 95,072 The accompanying notes form part of these financial statements 24 STATEMENTS OF CHANGES IN EQUITY For the year ended 30 June 2020 In thousands of AUD Attributable to equity holders Note Issued Capital Other Contributed Equity Equity Raising Costs Treasury Shares P,P & E Revaluation Reserve Consolidated Financial Assets Revaluation Reserve General Reserve for Credit Losses Share- based Payments Reserve Retained Earnings Total Equity $ $ $ $ $ $ $ $ $ $ Balance at 1 July 2018 Profit for the period Other comprehensive income Total comprehensive income Transactions with owners of the Company 24,080 1,831 (1,631) - - - Issue of share capital 5.2.2 73,277 Equity raising costs, net of tax 5.2.4 - Transfers 1,831 (1,831) Cost of share-based payments Balance at 30 June 2019 Balance at 1 July 2019 Sale of branch building Profit for the period Other comprehensive income Total comprehensive income Transactions with owners of the Company - 99,188 99,188 - - - - Issue of share capital 5.2.2 7,082 Equity raising costs, net of tax Acquisition of treasury shares 5.2.4 5.2.5 Cost of share-based payments - - - Balance at 30 June 2020 106,270 - - - - - - - - - - - - - - - - - - - - - (990) - - (2,621) (2,621) - - - - - (133) - - - - - - - - - - - - - - - - - - (103) - 97 - - - - - - - 97 97 (97) - - - - - - - - 205 - (297) (297) - - - - (92) (92) - - (48) (48) - - - - 342 357 (716) 24,565 - - - - - 104 - 446 - - - (301) - - 568 624 3,614 3,614 - (297) 3,614 3,317 - - 72,976 (990) (104) - - 568 2,794 100,436 446 624 2,794 100,436 - - - - - - - - - - - - (62) - - 467 1,029 - (97) 5,324 5,324 - (48) 5,324 5,179 - - - - 7,020 (133) (103) 467 8,118 112,866 (2,754) (103) (140) 446 The accompanying notes form part of these financial statements 25 STATEMENTS OF CHANGES IN EQUITY For the year ended 30 June 2020 In thousands of AUD Attributable to equity holders Note Issued Capital Other Contributed Equity Equity Raising Costs Treasury Shares $ $ $ $ 24,080 1,831 (1,631) Balance at 1 July 2018 Profit for the period Other comprehensive income Total comprehensive income Transactions with owners of the Company - - - - - - - - Issue of share capital 5.2.2 73,277 Equity raising costs, net of tax 5.2.4 - Transfers 1,831 (1,831) Cost of share-based payments Balance at 30 June 2019 Balance at 1 July 2019 Sale of branch building Profit for the period Other comprehensive income Total comprehensive income Transactions with owners of the Company - 99,188 99,188 - - - - Issue of share capital 5.2.2 7,082 Equity raising costs, net of tax Acquisition of treasury shares 5.2.4 5.2.5 Cost of share-based payments - - - Balance at 30 June 2020 106,270 - - - - - - - - - - - - - - - - (990) - - (2,621) (2,621) - - - - - (133) - - Property, Plant and Equipment Revaluation Reserve $ Bank Financial Assets Revaluation Reserve General Reserve for Credit Losses Share- based Payments Reserve Retained Earnings Total Equity $ $ $ $ $ 97 - - - - - - - 97 97 (97) - - - - - - - - 205 - (205) (205) - - - - - - - - - - - - - - - 342 357 (716) 24,565 - - - - - 104 - 446 - - - (301) - - 568 624 (1,842) (1,842) - (205) (1,842) (2,047) - - 72,976 (990) (104) - - 568 (2,662) 95,072 446 624 (2,662) 95,072 - - - - - - - - 446 - - - - (62) - - 467 1,029 - (97) (2,274) (2,274) - - (2,274) (2,371) - - - - 7,020 (133) (103) 467 (4,936) 99,952 - - - - - - - - - - - - - - - - (103) - (2,754) (103) The accompanying notes form part of these financial statements 26 STATEMENTS OF CASH FLOWS For the year ended 30 June 2020 In thousands of AUD CASH FLOWS FROM OPERATING ACTIVITIES Interest received Fees and commissions received Interest and other costs of finance paid Other income received Consolidated Bank Note 2020 2019 2020 2019 $ $ $ $ 10,643 8,793 10,568 177,748 128,434 1,597 8,912 365 (5,830) (5,342) (5,612) (5,182) 1,786 338 1,108 168 Payments to suppliers and employees (181,392) (134,024) (9,005) (7,636) Net increase in loans, advances and other receivables (69,400) (43,699) (68,216) (47,619) Net (decrease)/increase in deposits and other borrowings 58,665 91,903 58,665 91,903 Net (payments)/receipts for investments 6,903 (46,692) 6,903 (46,692) Net cash provided by/(used in) operating activities (877) (289) (3,992) (5,781) CASH FLOWS FROM INVESTING ACTIVITIES Cash acquired in a business combination Investment in subsidiary Proceeds from sale of property, plant and equipment Payments for property, plant and equipment - - 506 (42) 294 - - (212) - - 506 (25) - (8,950) - (56) Payments for intangible assets (3,609) (2,962) (1,882) (1,335) Net cash from/(used in) investing activities (3,145) (2,880) (1,401) (10,341) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from the issue of capital Payments for equity raising costs Payments for treasury shares Payments for lease liabilities Repayment of borrowings 5.2.2 5.2.4 5.2.5 7,082 20,302 7,082 20,302 (133) (103) (1,160) (1,278) - - - (11,003) (133) (103) (108) - (1,278) - - - Net (used in)/cash from financing activities 5,686 8,021 6,738 19,024 Net increase/(decrease) in cash held 1,664 4,852 1,346 2,902 Cash and cash equivalents at beginning of the year 19,381 14,529 17,431 14,529 Cash and cash equivalents at end of the year Less provision for non-recovery of ATM bailment cash 4.1.1 Total cash and cash equivalents 21,045 (2,923) 19,381 18,776 17,431 - (2,923) - 18,122 19,381 15,853 17,431 The accompanying notes form part of these financial statements 27 NOTES TO THE FINANCIAL REPORT 1. BASIS OF PREPARATION 1.1 Corporate information BNK Banking Corporation Limited (the “Company”, “the Bank” or “BNK”) is a for-profit entity and provides a range of retail banking products and financial services directly and through third party intermediaries. The Company is a publicly listed company limited by shares, incorporated and domiciled in Australia. Its registered office and principal place of business is Level 14, 191 St George’s Terrace, Perth 6000, Western Australia. BNK is listed on the Australian Securities Exchange (ASX:BBC). The financial report for BNK and its controlled entities (the Group) for the year ended 30 June 2020 was authorised for issue in accordance with a resolution of the directors on 28 August 2020. 1.2 Basis of accounting (a) Basis of preparation The financial report includes the consolidated and stand-alone financial statements of the Group and the Bank, respectively. This financial report is a general purpose financial report, which has been prepared in accordance with the requirements of the Corporations Act 2001, Australian Accounting Standards and other authoritative pronouncements of the Australian Accounting Standards Board. The financial report has been prepared on a going concern basis and is stated at historical costs, not taking into account changing money values, except where stated. Cost is based on the fair values of the consideration given in exchange for assets. The report is presented in Australian dollars with all values rounded to the nearest thousand dollars ($’000) in accordance with ASIC Corporations Instrument 2016/191 unless otherwise indicated. This is the first set of financial statements in which AASB 16 Leases has been applied. Refer to note 8.2 for further information regarding the impact upon transition to this standard. The Company presents its statement of financial position in order of liquidity. An analysis regarding recovery or settlement within 12 months after the reporting date (current) and more than 12 months after the reporting date (non–current) is presented in the notes to the financial statements. (b) Statement of compliance The financial report complies with the Corporations Act 2001, Australian Accounting Standards and International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board. 1.3 Significant accounting judgements and estimates The preparation of financial statements 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 adjusted as required. This is particularly pertinent in the year ended 30 June 2020 where the impact of the COVID-19 pandemic has caused significant impact to the Australian (and global) economy with inherent uncertainty as to future economic conditions. Revisions to accounting estimates are recognised in the period on which the estimate is revised and in any future periods affected. Specific adjustments to inputs and assumptions as a result of COVID-19 are explained in the relevant notes to this financial report as referenced below: Identification and measurement for impairment of loans and receivables Derecognition of financial assets, sale of loans Utilisation of carry forward tax losses, recognition of deferred tax asset Capitalisation of intangible assets Net present value of future trail commissions Impairment of goodwill and other intangibles Reference 3.2 3.3 2.4 7.2 4.4 7.2 28 NOTES TO THE FINANCIAL REPORT 1. 2. BASIS OF PREPARATION (CONTINUED) FINANCIAL PERFORMANCE 2.1 Operating segments The Group has three operating businesses, which are its reportable segments. AASB 8 requires operating segments to be identified on the basis of internal information provided to the chief decision maker, the Interim Chief Executive Officer/Managing Director, in relation to the business activities of the Group. The Group has determined it has three segments for which information is provided regularly to the Board of Directors. The following describes the operations of each of the Group’s reportable segments: Banking The Group’s banking business refers to the provision of banking products and services such as loans and deposits under the Goldfields Money brand (and soon to be launched BNK Bank brand). Loans are originated via online applications, accredited brokers and through the Group’s Wholesale mortgage management division. Loans are held on balance sheet as well through off balance sheet arrangements. Deposits are originated through direct marketing efforts as well as through a number of third party intermediaries. BNK’s award winning deposits are guaranteed by the Australian Government Deposit Guarantee for up to $250,000 per customer. The segment earns net interest income and service fees from providing a range of services to its retail and small business customers. Wholesale mortgage management The Wholesale mortgage management segment offers prime and commercial loans under the Better Choice Home Loans brand, funded by a range of third party wholesale funding providers (white label products). The segment earns fees for services, largely in the form of upfront and trail commissions as well as mortgage management administration fees. Aggregation The Aggregation segment provides contracted administrative and infrastructure support to 1,740 mortgage brokers, connecting them with a panel of approximately 65 lenders. The segment is primarily branded as Finsure and LoanKit and is one of Australia’s largest aggregators. Aggregation derives commissions including upfront commissions which are earned upon each loan settlement, and ongoing trail commissions. Additional revenue in the form of fees for service including recurring software as a service (SaaS), compliance, professional development and other support services. The implementation of the Infynity CRM platform in the year ended 30 June 2020 provides enhanced capability for Aggregation to diversify its revenues from third party lead generation opportunities. 29 NOTES TO THE FINANCIAL REPORT 2. FINANCIAL PERFORMANCE (CONTINUED) 2.1 Operating segments (continued) 30 June 2020 In thousands of AUD Revenue Interest income Inter-segment interest income Total interest income Commission and non-interest income Inter-segment commission income Total commission and non-interest income Banking $ Aggregation Wholesale $ $ 166 - 166 2 - 2 10,721 (246) 10,475 4,951 - 4,951 30 June 2019 Banking Aggregation Wholesale $ $ $ 136 - 136 5 - 5 Total $ 9,053 (260) 8,793 Total $ 10,889 (246) 10,643 8,912 (260) 8,652 1,623 - 1,623 286,870 - 286,870 14,260 (1,131) 13,129 306,081 (1,131) 304,950 183,805 - 183,805 12,561 (1,555) 11,006 197,989 (1,555) 196,434 Total segment revenue 15,426 287,036 13,131 315,593 10,275 183,941 11,011 205,227 Interest expense Inter-segment interest expense Other Total interest expense Commission expense Inter-segment commission expense Total commission expense Segment profit/(loss) before tax Material non-cash expenses: Depreciation and amortisation Share-based payments 5,574 - 38 5,612 627 (394) 233 - (246) 440 194 265,281 (737) 264,544 - - 24 24 6,603 - 6,603 5,574 (246) 502 5,830 272,511 (1,131) 271,380 5,181 - - 5,181 253 - 253 - (260) 421 161 163,763 (1,555) 162,208 - - - - 5,181 (260) 421 5,342 7,183 - 7,183 171,199 (1,555) 169,644 (2,267) 8,989 246 6,968 (2,414) 10,189 (2,066) 5,709 421 422 1,831 - 81 - 2,333 422 288 403 678 79 6 52 972 534 Segment assets Segment liabilities 388,169 346,018 416,332 363,380 34,786 17,023 839,287 726,421 321,133 286,484 292,722 245,499 32,287 13,723 646,142 545,706 30 NOTES TO THE FINANCIAL REPORT 2. FINANCIAL PERFORMANCE (CONTINUED) 2.2 Income Net interest income In thousands of AUD Interest revenue Loans and advances Sub-lease Finance lease Due from other institutions Total interest income Interest expense Deposits Lease liabilities Other Total interest expense Net interest income Consolidated 2019 $ 2020 $ 9,756 134 753 10,643 5,574 248 8 5,830 7,618 - 1,175 8,793 5,182 - 160 5,342 2020 $ 9,849 - 719 10,568 5,574 38 - 5,612 Bank 2019 $ 7,821 - 1,091 8,912 5,181 - - 5,181 4,813 3,451 4,956 3,731 Weighted average interest rate - loans and advances Weighted average interest rate - deposits Spread 3.74% 1.30% 2.44% 4.81% 2.23% 2.58% 3.74% 1.30% 2.44% 4.81% 2.23% 2.58% Net commission income Commission income Upfront commission Trail commission income Change in net present value of future trail commissions receivable Total commission income Commission expense Upfront commission expense Trail commission expense Change in net present value of future trail commission payable Total commission expense 94,490 78,183 63,438 55,075 117,836 290,509 68,529 187,042 90,345 68,496 60,021 47,089 112,539 271,380 62,534 169,644 - - - - - 475 - 475 - - - - - 253 - 253 Net commission income/(expense) 19,129 17,398 (475) (253) Other income Service fees and other residual income Aggregation services fee income Lending fees Transaction fees Sponsorship income Cash convenience income Insurance recovery (refer note 4.1.1) Dividends received Other Total other income 1,616 6,105 679 16 1,659 261 2,898 4 1,203 14,441 1,327 4,390 600 26 1,881 830 - 6 332 9,392 442 - 128 16 - 261 2,898 4 1,202 4,951 249 - 181 26 - 830 - 6 331 1,623 The Group has applied AASB 16 Leases with effect from 1 July 2019. Information about the effect of initially applying this standard is described in Note 8.2. 31 NOTES TO THE FINANCIAL REPORT 2. FINANCIAL PERFORMANCE (CONTINUED) 2.2 Income (continued) Accounting policy - recognition and measurement Banking Interest income and expense Interest income and expense is recognised in profit or loss using the effective interest rate method. This is the rate that exactly discounts the estimated future cash receipts or payments over the expected life of the financial instrument or a shorter period, where appropriate, to the net carrying amount of the financial asset or liability. The calculation of the effective interest rate includes transaction costs (such as payments made to brokers for the introduction of loans) and fees and points paid or received that are an integral part of the interest rate. Transaction costs include incremental costs that are directly attributable to acquisition or issue of a financial asset or financial liability. The ‘amortised cost’ of a financial asset or financial liability is the amount at which the financial asset or financial liability is measured on initial recognition minus the principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between that initial amount and the maturity amount and, for financial assets, adjusted for any expected credit loss allowance. The ‘gross carrying amount of a financial asset’ is the amortised cost of a financial asset before adjusting for any expected credit loss allowance. The effective interest rate of a financial asset or financial liability is calculated on initial recognition of a financial asset or a financial liability. In calculating interest income and expense, the effective interest rate is applied to the gross carrying amount of the asset (when the asset is not credit- impaired) or to the amortised cost of the liability. The effective interest rate is revised as a result of periodic re-estimation of cash flows of floating rate instruments to reflect movements in market rates of interest. Banking fees and commissions Fee and commission income and expense that are integral to the effective interest rate on a financial asset or financial liability are included in the effective interest rate (refer above). Other fee and commission income including account servicing fees, cash convenience income is recognised as the related services are performed. If a loan commitment is not expected to result in the draw-down of a loan, then the related loan commitment fee is recognised on a straight-line basis over the commitment period. Service and residual income A contract with a customer that results in a recognised financial instrument in the Group’s financial statements may be partially in the scope of AASB 9 Financial Instruments and partially in the scope of AASB 15 Revenue from Contracts with Customers. If this is the case, then the Group first applies AASB 9 to separate and measure the part of the contract that is in the scope of AASB 9 and then applies AASB 15 to the residual. Service fees and residual income arises from the management of loans and receivables which have previously been originated by BNK and sold to other parties. Service fees are recognised from rendering of services principally for the management of the loans, and residual income is recognised from the residual amount collected from customers after transferring to the legal owner of the loans a contractually agreed return. Other fee and commission expenses relate mainly to transaction and service fees, which are expensed as the services are incurred. Dividends Revenue is recognised when the Company’s right to receive the payment is established, which is generally when the dividend has been declared. Rental income Rental income arising from operating leases is accounted for on a straight-line basis over the lease terms and is included in revenue in the statement of comprehensive income due to its operating nature. 32 NOTES TO THE FINANCIAL REPORT 2. FINANCIAL PERFORMANCE (CONTINUED) 2.2 Income (continued) Accounting policy - recognition and measurement (continued) Aggregation and Wholesale Commission revenues The Group provides loan origination services and receives upfront origination commission on the settlement of loans. Additionally the lender normally pays a trailing commission over the life of the loan. Commission revenue is recognised as follows: Origination commissions Origination commissions are recognised upon the loans being settled and receipt of commission net of clawbacks. Trailing commissions The Group receives trailing commissions from lenders on loans they have settled that were originated by the Group. The trailing commissions are received over the life of the loans based on the individual loan balance outstanding. The Group also makes trailing commission payments to authorised mortgage originators (brokers) based on the individual loan balance outstanding. On initial recognition, trailing commission revenue and receivables are recognised at the transaction price using the expected value approach as a contract asset under AASB 15, being the expected future trailing commission receivables discounted to their net present value. In addition, an associated payable and expense to the relevant brokers are also recognised, initially measured at fair value being the future trailing commission payable to relevant brokers discounted to their net present value. These calculations require the use of assumptions which are determined by management with the assistance of external actuaries. Subsequent to initial recognition and measurement both the trailing commission asset and trailing commission liability are measured at amortised cost. The carrying amount of the trailing commission asset and trailing commission payable are adjusted to reflect actual and revised estimated cash flows by recalculating the carrying amount with reference to the present value of estimated future cash flows at the original effective interest rate. The resulting adjustment is recognised as income or expense in the Consolidated Statement of Profit or Loss. Aggregation service fee income The Group offers contracts to brokers based upon their settlement volumes. Brokers with high volume transactions receive 100% distribution of all commissions and are charged a monthly fee in arrears for the aggregation service. Revenue from flat fees is recognised at the point in time the service is provided. The Group earns Software as a Service income for subscription to its proprietary loan origination platform "Infynity" and also provides compliance and licensing services to its brokers. The Group charges a fee for both of these services, with revenue recognised at the point in time the service is provided. Sponsorship income Sponsorship income is the income generated from sponsorship arrangements with other lenders, supporting the continuous education of the Group's brokers. The income is brought to account when services relating to the income have been performed over time. 33 NOTES TO THE FINANCIAL REPORT 2. FINANCIAL PERFORMANCE (CONTINUED) 2.3 Operating Expenses In thousands of AUD Depreciation and amortization* Information technology Banking services delivery Employee benefits Professional services Marketing Occupancy Other administration expenses Total operating expenses Consolidated 2020 $ 2,333 1,543 402 16,576 1,546 1,784 477 3,197 27,858 2019 $ 972 1,308 355 12,985 1,588 2,212 1,277 2,955 23,652 2020 $ 421 846 402 4,359 1,080 85 163 835 8,191 * The Group has adopted AASB 16 with respect to operating leases with effect from 1 July 2019 utilising the modified retrospective approach. Comparative periods have not been restated, refer to note 8.2 for further information. Accounting policy - recognition and measurement The Group recognises an expense when it has an obligation to settle for goods or services received. 2.4 Income tax 2.4.1 The major components of income tax expense/(benefit) are: Consolidated 2019 $ 2020 $ - 1,644 - 2,095 1,644 2,095 (60) 93 (33) (116) - (116) 2020 $ - 8 8 - 93 (16) 6,969 5,709 (2,266) (2,414) 2,091 1,712 (680) (724) 138 - (585) 325 (60) 118 126 - 562 80 (60) 133 1,644 2,095 8 (571) In thousands of AUD Recognised in profit or loss Current tax Deferred tax Income tax expense/(benefit) recognised in Profit or Loss Recognised in equity Financial instruments at fair value through OCI Equity raising costs Income tax expense/(benefit) recognised in Other Comprehensive Income Tax reconciliation Profit/(Loss) before tax Prima facie income tax expense/(benefit) on profit before income tax at 30% (2019:30%) Adjust for tax effect of: Non-deductible expenses Change in corporate tax rate Prior period adjustments Income tax expense/(benefit) recognised in Profit or Loss 34 Bank 2019 $ 288 826 355 3,882 615 109 261 298 6,634 Bank 2019 $ - (571) (571) (77) - (77) NOTES TO THE FINANCIAL REPORT 2. FINANCIAL PERFORMANCE (CONTINUED) 2.4 Income tax (continued) 2.4.2 Deferred tax assets and liabilities In thousands of AUD Deferred tax assets comprise temporary differences attributable to: Provision for doubtful debts Accrued expenses Provisions Equity raising costs Lease liabilities Net present value of trail commission payable Other Carry forward losses and R&D offsets Total deferred tax assets Deferred tax liabilities comprise temporary differences attributable to: Prepayments and other assets Intangible assets Net present value of trail commission receivable Deferred commission expense Property, plant and equipment Total deferred tax liabilities Set-off Net deferred tax asset/(liability) Consolidated 2019 $ 2020 $ 1,135 232 420 560 1,360 102,886 236 2,858 109,687 77 282 404 612 - 69,125 75 4,202 74,777 6 5,418 32 5,730 116,159 410 1,380 123,373 (109,687) (13,686) 80,808 218 52 86,840 (74,777) (12,063) 2020 $ 1,119 72 65 374 202 - - - 1,832 5 - - 410 239 654 (654) 1,178 Bank 2019 $ 77 139 112 355 - - 666 688 2,037 1 - - 218 52 271 (271) 1,766 Accounting policy - Recognition and measurement The income tax expense (revenue) for the year comprises current income tax expense (income) and deferred tax expense (income) recognised in profit or loss except to the extent that it relates to items recognised in other comprehensive income. Current income tax expense charged to profit or loss is the tax payable on taxable income. Current tax liabilities (assets) are measured at the amounts expected to be paid to (recovered from) the relevant taxation authority. Deferred income tax expense reflects movements in deferred tax asset and deferred tax liability balances during the year as well as unused tax losses. Deferred tax assets and liabilities are calculated at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled and their measurement also reflects the manner in which management expects to recover or settle the carrying amount of the related asset or liability. The Company has formed a tax consolidated group (TCG) under the tax consolidation regime. The members of the TCG have entered into tax funding and tax sharing agreements, which set out the funding obligations and members. Any current tax liabilities/assets and deferred tax assets from unused tax losses from subsidiaries in the tax consolidated group are recognised by the Bank as utilised and funded in line with the tax funding agreement. The measurement and disclosure of deferred tax assets and liabilities have been performed on a “separate taxpayer within a group” approach in accordance with UIG 1052 Tax Consolidation Accounting. Use of judgements and estimates Deferred tax assets relating to temporary differences and unused tax losses are recognised only to the extent that it is probable that future taxable profit will be available against which the benefits of the deferred tax asset can be utilised. Management assesses the probability through the consideration of factors leading to losses and the preparation of forecasts that indicate the Group’s ability to generate taxable profits in the future. 35 NOTES TO THE FINANCIAL REPORT 3. LOANS AND ADVANCES 3.1 Loans and advances In thousands of AUD Residential loans Term loans Personal loans Overdrafts Add: Unamortised broker commissions Gross loans and advances Provision for credit losses Loans and advances net of provisions Maturity analysis – gross loans and advances Overdrafts Not longer than 1 year Longer than 1 and not longer than 5 years Longer than 5 years 2020 $ 263,446 18,796 854 469 283,565 721 284,286 (725) 283,561 Consolidated 2019 $ 190,030 22,377 1,313 444 214,164 418 214,582 (259) 214,323 2020 $ 263,446 19,982 854 469 284,751 1,180 285,931 (725) 285,206 Bank 2019 $ 190,030 24,748 1,313 444 216,535 615 217,150 (259) 216,891 469 20 5,863 277,934 284,286 444 1,549 11,540 201,049 214,582 469 20 7,508 277,934 285,931 444 4,117 11,540 201,049 217,150 Accounting policy - Recognition and measurement All loans are initially recognised at fair value, net of transaction costs incurred and inclusive of loan origination fees. Loans are subsequently measured at amortised cost based on the Group’s business model objective; this is to originate loans and advances on its balance sheet and hold to collect repayments of principal and interest. Any difference between the proceeds (net of transaction costs) and the redemption amount is recognised in the statement of comprehensive income over the period of the loans using the effective interest method. Loans and advances are reported at their recoverable amount representing the aggregate amount of principal and unpaid interest owing to the Group at the reporting date, less any allowance or provision for impairment. All loans and advances greater than 30 days in arrears are reviewed and graded according to the anticipated level of credit risk. Expected credit loss provisions are recognised as set out in note 3.2. The classification adopted is described below:    Non-accrual loans - are loans and advances where the recovery of all interest and principal is considered to be reasonably doubtful and hence provisions for impairment are recognised. Restructured loans - arise when the borrower is granted a concession due to continuing difficulties in meeting the original terms. Loans with revised terms are included in non-accrual loans when impairment provisions are required. Past-due loans - are loans where payments of principal and/or interest are at least 90 days in arrears but due to mortgage security available full recovery of both principal and interest is expected. Refer to note 5.1.4 for further information regarding credit risk including detail around the loans subject to COVID- 19 repayment deferrals. 36 NOTES TO THE FINANCIAL REPORT 3. LOANS AND ADVANCES 3.2 Provision for credit losses In thousands of AUD Expected credit loss provision Total provisions for credit losses Expected credit loss provision Opening balance Bad debts provided for during the year Bad debts written off during the year Closing balance Consolidated Bank 2020 2019 2020 2019 $ $ $ $ 725 725 259 259 725 725 259 259 258 467 - 725 240 19 - 259 258 467 - 725 240 19 - 259 On 23 March 2020, APRA advised ADIs that for customers who chose to defer loan repayments as part of a COVID-19 support package, ADIs are not required to treat the period of a repayment holiday as a loan in arrears. Similarly, loans that have been granted a repayment deferral as part of a COVID-19 support package, are not required to be considered as restructured. APRA noted however that ADIs would need to consider these loans with regards to credit loss provisioning under AASB 9. Refer to note 5.1.4 for further information on the expected credit loss provisions recognised at balanced date including detail around the loans subject to COVID-19 repayment deferrals. Accounting policy - Recognition and measurement Financial assets Expected credit loss provision Financial assets at amortised cost consist of cash and cash equivalents, amounts due from other financial institutions, investment securities and loans and advances. Under AASB 9, loss allowances are measured on either of the following bases:  12-month ECLs: these are ECLs that result from possible default events within the 12 months after the reporting date (Stage 1); and  lifetime ECLs: these are ECLs that result from all possible default events over the expected life of a financial instrument (Stages 2 and 3). If credit risk of a financial asset has increased significantly since initial recognition and when estimating ECLs, the Group considers reasonable and supportable information that is relevant and available without undue cost or effort in determining to reclassify it from Stage 1 to Stage 2 or 3. This includes both quantitative and qualitative information and analysis, based on the Group’s historical experience and informed credit assessment and including forward- looking information. The Group assumes that the credit risk on a financial asset has increased significantly if it is more than 30 days past due. The Group considers a financial asset to be in default when:  the borrower is unlikely to pay its credit obligations to the Group in full, without recourse by the Group to actions such as realising security (if any is held); or  the financial asset is more than 90 days past due. Upon determination that a customer is in default, an assessment is made whether the loan is to be classified as past due or impaired. The maximum period considered when estimating ECLs is the maximum contractual period over which the Group is exposed to credit risk. 37 NOTES TO THE FINANCIAL REPORT 3. LOANS AND ADVANCES 3.2 Provision for credit losses (cont’d) The key inputs into the measurement of ECL are the term structure of the following variables:  probability of default (PD);  loss given default (LGD); and  exposure at default (EAD). Management overlays take into account factors such as borrower industry, unemployment rates and further collateral declines. ECL for exposures in Stage 1 is calculated by multiplying the 12-month PD by LGD and EAD. Lifetime ECL is calculated by multiplying the lifetime PD by LGD and EAD. LGD is the magnitude of the likely loss if there is a default. The Group estimates LGD parameters based on the history of recovery rates of claims against defaulted counterparties. The LGD models consider the structure, collateral, seniority of the claim, counterparty industry and recovery costs of any collateral that is integral to the financial asset. For loans secured by residential properties, LVR ratios are a key parameter in determining LGD. They are calculated on a discounted cash flow basis using the effective interest rate as the discounting factor. EAD represents the expected exposure in the event of a default. The Group derives the EAD from the current exposure to the counterparty and potential changes to the current amount allowed under the contract and arising from amortisation. The EAD of a financial asset is its gross carrying amount at the time of default. For lending commitments, the EADs are potential future amounts that may be drawn under the contract, which are estimated based on historical observations and forward-looking forecasts. As described above, and subject to using a maximum of a 12-month PD for Stage 1 financial assets, the Group measures ECL considering the risk of default over the maximum contractual period (including any borrower’s extension options) over which it is exposed to credit risk, even if, for credit risk management purposes, the Group considers a longer period. The maximum contractual period extends to the date at which the Group has the right to require repayment of an advance or terminate a loan commitment or guarantee. ECLs are a probability-weighted estimate of credit losses. Credit losses are measured as the present value of all cash shortfalls (i.e. the difference between the cash flows due to the entity in accordance with the contract and the cash flows that the Group expects to receive). ECLs are discounted at the effective interest rate of the financial asset. 38 NOTES TO THE FINANCIAL REPORT 3. LOANS AND ADVANCES 3.2 Provision for credit losses Reconciliation of expected credit loss provision In thousands of AUD Stage 1 Stage 2 Consolidated Stage 3 Opening balance – 1 July 2019 Transfers to/(from) Stage 1 Stage 2 Stage 3 Net financial assets originated New and increased provisions Bad debts written off Closing balance – 30 June 2020 In thousands of AUD Opening balance – 1 July 2019 Transfers to/(from) Stage 1 Stage 2 Stage 3 Net financial assets originated New and increased provisions Bad debts written off Closing balance – 30 June 2020 Gross exposure 212,432 (14,616) - - 69,704 - - 267,520 Provision 188 - - - - 17 - 205 Gross exposure 1,420 - 61 - - - - 1,481 Provision 30 - 7 - - - - 37 Stage 1 Stage 2 Gross exposure 214,077 (14,616) - - 69,704 - - 269,165 Provision 188 - - - - 17 - 205 Gross exposure 1,420 - 61 - - - - 1,481 Provision 30 - 7 - - - - 37 Gross exposure 730 - - 711 - - - 1,441 Provision 41 - - 46 - - - 87 Bank Stage 3 Gross exposure 730 - - 711 - - - 1,441 Provision 41 - - 46 - - - 87 39 Management overlay Provision Gross exposure - Management overlay Provision Gross exposure - - - - - 13,844 - 13,844 - - - - 13,844 - 13,844 Total Gross exposure 214,582 (14,616) 61 711 69,704 13,844 - 284,286 Provision 259 - 7 46 - 413 - 725 Total Gross exposure 216,227 (14,616) 61 711 69,704 13,844 - 285,931 Provision 259 - 7 46 - 413 - 725 - - - - - 396 - 396 - - - - - 396 - 396 NOTES TO THE FINANCIAL REPORT 3. LOANS AND ADVANCES 3.3 Derecognition of loans and advances The Company is party to a Receivables Acquisition & Servicing Agreement (RASA) with Bendigo & Adelaide Bank Limited (BEN) that enables the Company to sell residential loans (owner occupied and investment) to BEN as required to assist with regulatory capital and/or liquidity management requirements. Loans sold to BEN have to meet certain criteria and are derecognised on the basis that the risks and rewards associated with the loans have been substantially transferred. The Company retains the servicing responsibilities and is entitled to the residual income from the loans once the funder’s cost of funds and other costs have been met. Service fee and residual income is recognised in profit and loss as noted in Note 2.2. The RASA has a limit of $90,000,000 and is subject to annual review by BEN. In the event that the RASA program criteria were not to BEN’s satisfaction, the limit could be reduced or cancelled and/or BEN may appoint an alternative servicer of the loans. The Company is not obligated to repurchase the loans subsequent to their sale. Loans sold in to the RASA are sold at their carrying amount inclusive of accrued interest, with no gain or loss recognised by the Company. The RASA is utilised primarily for capital management purposes and the Group’s business model has been determined as originating loans to hold and collect principal and interest repayments. Loan sales in current and previous periods have occurred prior to a capital raising in order to ensure the Group complies with its capital adequacy requirements. The Company’s objective is to originate and hold as many loans on balance sheet as possible, given the higher yields derived from on balance sheet loans compared to loans sold to the RASA. Sales therefore only occur when the Company is nearing its prudential capital ratio. The balance of loans serviced by the Company at reporting date: In thousands of AUD 2020 $ 2019 $ Owner occupier loans Investment loans Loan sales: Year ended 30 June 2020 Date of sale 3 October 2019 19 December 2019 22 January 2020 30 June 2019 Nil 28,336 18,471 46,807 26,599 10,929 37,528 Number of loans 8 14 15 - Proceeds $(‘000s) 3,711 5,684 5,009 - Accounting policy - Recognition and measurement The Company derecognises loans when the contractual rights to the cash flows from the loan expire, or it transfers the rights to receive the contractual cash flows in a transaction in which substantially all of the risks and rewards of ownership of the loans are transferred. On derecognition of the loans, the difference between the carrying amount of the asset and the consideration received is recognised in profit or loss. Any interest in transferred financial assets that qualify for derecognition that is created or retained by the Company is recognised as a separate asset or liability. 40 NOTES TO THE FINANCIAL REPORT 4. LIQUIDITY AND FUNDING 4.1.1 Cash and cash equivalents In thousands of AUD Cash at bank and on hand Less provision for non-recovery of bailment cash Total cash and cash equivalents Consolidated 2019 $ 19,381 - 19,381 2020 $ 21,045 (2,923) 18,122 2020 $ 18,776 (2,923) 15,853 Bank 2019 $ 17,431 - 17,431 Included within cash at bank and on hand are balances relating to ATM bailment and cash in transit arrangements with ATM Co Pty Ltd and Tuff Enterprises Pty Ltd, both of which were placed into liquidation in August 2019. The liquidator has not identified the location of the Company’s cash totalling approximately $2,923,000. The Company has lodged a claim with its insurer for the missing cash, and provided relevant documentary evidence, in conjunction with the insurer’s appointed forensic specialists. The Company has recognised a provision against the cash. In addition, a receivable for the estimated insurance recovery has been recognised (refer note 4.4.1) as at the reporting date. As set out in note 7.9, subsequent to the reporting date the Company received partial indemnification from the insurer in respect of $1,197,750 of the claim. Further information was requested by the insurer regarding the balance of the claim of approximately $1,725,250. This information has been provided to the insurer and police, and the balance is subject to finalisation by the insurer. In the event that part or all of the remaining balance of the claim is denied, the receivable will be impaired in subsequent periods. Recognition and measurement Cash and cash equivalents include cash on hand, deposits held at call with banks, other short-term highly liquid investments with original maturities of 3 months or less, and bank overdrafts. Bank overdrafts are shown within short-term borrowings in current liabilities on the statement of financial position. Cash flows on net basis For the purposes of the Statement of Cash Flows, cash and cash equivalents consist of cash and cash equivalents as defined above, net of outstanding bank overdrafts. Cash flows arising from loans, deposits, and investments are presented on a net basis in the Statement of Cash Flows. 4.1.2 Reconciliation to the Statement of Cash Flows In thousands of AUD Operating profit/(loss) after income tax Non-cash items Depreciation and amortisation Change in fair value of NPV asset Change in fair value of NPV liability Impairment of financial assets Leave provisions Share-based payments Gain on sale of financial assets Gain on sale of property, plant and equipment Insurance recovery Movement in assets and liabilities Loans and receivables Investments Deposits Other assets Deferred tax assets Deferred tax liabilities Current tax receivable/payable Payables Provisions Net cash flow from operating activities 41 Consolidated 2019 $ 2020 $ 2020 $ Bank 2019 $ 5,324 3,614 (2,274) (1,843) 2,333 (117,836) 112,539 3,557 183 405 (1,062) (78) (2,898) (69,400) 6,903 58,665 1,467 - 1,623 - (2,587) (16) (877) 972 (68,529) 62,534 19 183 292 - - - (43,699) (46,692) 91,903 1,002 667 805 (7) (3,170) (183) (289) 421 - - 3,507 (156) 405 (1,062) (78) (2,898) (68,216) 6,903 58,665 (178) 587 - - 226 156 (3,992) 288 - - 19 91 265 - - - (46,069) (46,692) 91,903 (2,665) (1,099) - (7) 119 (91) (5,781) NOTES TO THE FINANCIAL REPORT 4. LIQUIDITY AND FUNDING 4.2 Financial assets In thousands of AUD Due from other financial institutions at amortised cost Investment securities at amortised cost (a) Investment in Cuscal Limited at fair value through OCI (b) Investments in listed companies at fair value Maturity analysis Due from other financial institutions - Not longer than 3 months - 3 months to 1 year - 1 year to 5 years Investment securities - Not longer than 3 months - 3 months to 1 year - 1 year to 5 years - More than 5 years Consolidated 2019 $ 2020 $ 33,335 37,996 142 93 71,566 19,500 6,215 7,620 33,335 11,115 - 19,715 7,166 37,996 32,344 45,890 142 162 78,538 32,344 - - 32,344 - 13,766 22,088 10,036 45,890 2020 $ 33,335 37,996 142 - 71,473 19,500 6,215 7,620 33,335 11,115 - 19,715 7,166 37,996 Bank 2019 $ 32,344 45,890 142 - 78,376 32,344 - - 32,344 - 13,766 22,088 10,036 45,890 (a) Investment securities are investments in debt securities comprising floating rate notes issued by other banks, and bonds issued by Commonwealth and state-governments, initially recognised at fair value and subsequently at amortised cost. (b) The shareholding in Cuscal Ltd (“Cuscal”) is classified as at fair value through other comprehensive income. These shares are held to enable the Company to receive essential banking services - refer to Note 7.7. Cuscal operates an off market exchange whereby financial institutions holding Cuscal shares are able to trade with each other. The investment in Cuscal is considered a Level 2 investment in the fair value hierarchy and fair value has been determined using the market comparison technique with reference to recent sales transacted by financial institutions. Accounting policy - Recognition and measurement On initial recognition, a financial asset is classified as measured at: amortised cost, fair value through profit or loss (FVTPL) or fair value value through other comprehensive income (FVOCI). A financial asset is measured at amortised cost if it meets both of the following conditions and is not designated as at FVTPL:   the asset is held within a business model whose objective is to hold assets to collect contractual cash flows; and the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest (SPPI). On initial recognition of an equity investment that is not held for trading, the Group may irrevocably elect to present subsequent changes in fair value in OCI .This election is made on an investment-by-investment basis. In addition, on initial recognition, the Group may irrevocably designate a financial asset that otherwise meets the requirements to be measured at amortised cost or at FVOCI as at FVTPL if doing so eliminates or significantly reduces an accounting mismatch that would otherwise arise. 42 NOTES TO THE FINANCIAL REPORT 4. LIQUIDITY AND FUNDING 4.2 Financial assets (continued) The Group derecognises a financial asset when the contractual rights to the cash flows from the financial asset expire, or it transfers the rights to receive the contractual cash flows in a transaction in which substantially all of the risks and rewards of ownership of the financial asset are transferred or in which the Group neither transfers nor retains substantially all of the risks and rewards of ownership and it does not retain control of the financial asset. On derecognition of a financial asset, the difference between the carrying amount of the asset (or the carrying amount allocated to the portion of the asset derecognised) and the sum of: (i) the consideration received (including any new asset obtained less any new liability assumed) and (ii) any cumulative gain or loss that had been recognised in OCI. From 1 July 2018 any cumulative gain/loss recognised in OCI in respect of equity investment securities designated as at FVOCI is not recognised in profit or loss on derecognition of such securities. Any interest in transferred financial assets that qualify for derecognition that is created or retained by the Group is recognised as a separate asset or liability. In transactions in which the Group neither retains nor transfers substantially all of 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, determined by the extent to which it is exposed to changes in the value of the transferred asset. Refer to notes 5.1.2, 5.1.4 and 5.1.5 for further details on interest rate risk, credit risk and liquidity risk. 4.3 Deposits In thousands of AUD Call deposits Term deposits Maturity analysis - At call - Not longer than 3 months - Longer than 3 months but less than 12 months - Longer than 12 months but less than 5 years 2020 $ 122,021 223,770 345,791 Consolidated 2019 $ 55,517 231,609 287,126 122,021 100,816 103,694 19,260 345,791 55,517 105,249 121,082 5,278 287,126 2020 $ 122,021 223,770 345,791 122,021 100,816 103,694 19,260 345,791 Bank 2019 $ 55,517 231,609 287,126 55,517 105,249 121,082 5,278 287,126 Accounting policy - Recognition and measurement Call deposits and term deposits are initially recognised at fair value, net of any directly attributable transaction costs. Subsequent to initial measurement, they are measured at amortised cost using the effective interest rate method. 4.4 Receivables and payables 4.4.1 Commission and other receivables In thousands of AUD Net present value of future trail commission receivable Accrued commission income Sub-lease finance lease receivable Insurance receivable Prepayments Other debtors Less provision for impairment Total commissions and other receivables Consolidated 2019 $ 2020 $ 387,197 16,551 1,121 2,898 1,564 3,372 (83) 412,620 269,361 12,826 - - 955 2,343 - 285,485 2020 $ - - - 2,898 974 2,770 (83) 6,559 Bank 2019 $ - - - - 403 2,976 - 3,379 43 NOTES TO THE FINANCIAL REPORT 4. LIQUIDITY AND FUNDING 4.4 Receivables and payables (continued) 4.4.2 Commissions and other payables In thousands of AUD Net present value of future trail commission payable Accrued commission payable Lease liability – refer to note 8.2 Trade creditors and accrued expenses Total commissions and other payables Consolidated 2019 $ 2020 $ 342,954 15,300 4,646 2,736 365,636 230,415 11,652 - 3,158 245,225 2020 $ - - 671 1,114 1,785 Bank 2019 $ - - 1,035 1,035 Accounting policy - Recognition and measurement The Group receives trailing commissions and mortgage management administration fees from lenders on loans they have settled that were originated by the Group. The trailing commissions and mortgage management administration fees are received over the life of the loans based on the individual loan balance outstanding. The Group also makes trailing commission payments to authorised mortgage originators (brokers) based on the individual loan balance outstanding. On initial recognition, trailing commission revenue and receivables are recognised initially at transaction price using the expected value method as a contract asset under AASB 15, being the expected future trailing commission receivables discounted to their net present value. In addition, an associated payable and expense to the relevant brokers are also recognised, initially measured at fair value being the future trailing commission payable to relevant brokers discounted to their net present value. These calculations require the use of assumptions which are determined by management. Subsequent to initial recognition and measurement both the trailing commission asset and trailing commission payable are measured at amortised cost. The carrying amount of the trailing commission asset and trailing commission payable are adjusted to reflect actual and revised estimated cash flows by recalculating the carrying amount with reference to the present value of estimated future cash flows at the original effective interest rate. The resulting adjustment is recognised as income or expense in the Income Statement. The key assumptions underlying the fair value calculations of trailing commission receivable and the corresponding payable to brokers at the reporting date is summarised in the following table: Discount rate per annum Percentage paid to brokers Weighted average life – Aggregation Weighted average life – Wholesale Weighted average life – Total portfolio 2020 Between 3.5% and 6.5% Between 5% and 95% 3.7 to 3.9 years 3.0 to 4.4 years 3.9 years 2019 Between 4.5% and 6.5% Between 5% and 95% 4.2 to 4.7 years 1.8 to 3.9 years 4.3 years Liabilities for trade creditors and other amounts are non-interest bearing and carried at amortised cost, which is the fair value of the consideration to be paid in the future for goods and services received, whether or not billed to the Company. The terms and conditions for creditors and other liabilities are payable between 7 and 30 days. 44 NOTES TO THE FINANCIAL REPORT 5. FINANCIAL RISK AND CAPITAL MANAGEMENT 5.1 FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES 5.1.1 Introduction and overview Risk is inherent in the Group’s activities but it is managed through a process of ongoing identification, measurement and monitoring, subject to risk limits and other controls. The Group has exposure from its use of financial instruments to market, interest rate, credit, liquidity and operational risk. This note presents information about the Group’s exposure to each of the above risks, the objectives, policies and processes for measuring and managing those risks, and the Company’s management of capital. Risk management framework The Group’s activities expose it to a variety of risks. Maintaining a robust risk management framework is critical to the Group’s continued success and remains at the forefront of the Group’s processes and business activities. The Group’s risk management framework includes a dedicated risk function, various risk committees, risk appetite statements and limits and attestation processes. Risk management roles and responsibilities Board of Directors The Board of Directors is responsible for the overall risk management framework and approving risk appetite, strategies and principles. The prudential standards issued by the (APRA) addresses risk management requirements and the Board carries out its responsibilities in ensuring the Group maintains appropriate risk settings relative to the size and the maturity of the Group’s businesses. Board Risk & Compliance Committee Risk management is overseen by the Risk & Compliance Committee comprising non-executive directors of the Company. It assists the Board in the development of the risk strategy, managing and monitoring relevant risk decisions including policies and limits. Chief Executive Officer & Executive Management The Chief Executive Officer is responsible for the ongoing management of the risk management framework including its periodic review and renewal subject to requisite Board direction and approvals. Executive Management are responsible for implementing the Board-approved risk management strategy and for developing policies, procedures, processes and controls for identifying and managing risks. Chief Risk Officer The Chief Risk Officer is responsible for managing the risk management function. This includes assisting the Board, Board committees and divisional management risk committees to develop and maintain the risk management framework. The position has reporting lines to the Board, Board committees and senior management to conduct risk management activities in an effective and independent manner. Internal Audit Risk management and other processes in the Group are audited annually by the internal audit function, which examines both the adequacy of the procedures and compliance with the procedures. The results of the work of the internal audit function are tabled to management and to the Audit Committee. Risk Measurement and Reporting Systems Monitoring and controlling risks is primarily performed based on limits established by the Board of the Company. These limits reflect the business strategy and market environment of the Group as well as the level of risk the Group is willing to accept. Information is compiled, examined and processed in order to analyse, control and identify risks on a timely basis. This information is presented and explained to the Risk & Compliance Committee and/or the Board. The reporting includes aggregate counterparty credit exposures, delinquency summary, loan security summary, loan type exposures, liquidity ratios, value at risk (VaR), and significant changes to risk profile. The Board and/or Risk & Compliance Committee receive summarised risk reporting on key risk measures. 45 NOTES TO THE FINANCIAL REPORT 5. FINANCIAL RISK AND CAPITAL MANAGEMENT 5.1. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES 5.1.1 Introduction and overview (continued) Risk Mitigation The Group actively manages risk through a framework that includes use of collateral, delegations, limit frameworks and credit concentrations. Market risk The objective of the Group’s market risk management is to minimise risk and optimise desired return by managing and controlling market risk. Market risk is the risk that changes in interest rates, foreign exchange rates or other prices and volatilities that will have an adverse effect on the Group’s financial condition or results. Management of market risk is the responsibility of senior management through the Asset & Liability Committee (ALCO), who report directly to the Board. The Group does not operate a trading book or involve itself actively in foreign exchange, commodities or equity markets. Interest rate risk Interest rate risk is the risk of variability of the fair value of future cash flows arising from financial instruments due to the changes in interest rates. The Company is exposed only to interest rate risk arising from changes in market interest rates (Interest Rate Risk in the Banking Book). 5.1.2 Interest rate risk in the banking book The Company is exposed to interest rate risk in its banking book due to mismatches between the repricing dates of assets (loans and advances and investments) and liabilities (deposits). The interest rate risk in the banking book is monitored by management. The level of mismatch on the banking book is set out in the tables below which displays the period that each asset and liability will reprice as at the balance date. The major classes of financial assets and liabilities that are subject to interest rate variation are loans and advances, cash with banks, investments and deposits. The fundamental principles that the Company applies to mitigate interest rate risk are: - Board approved risk appetite and limits include Value at Risk and Book Sensitivity (Present Value Basis Point); Forecasting and scenario modelling of growth and interest rates; - - Monitoring current and future interest rate yields on its loans and savings portfolio and cash and investments and effect on profit and equity; and the interest rates on the major proportion of these assets and liabilities can be adjusted in the short-term to minimise any significant mismatch of interest margins - Monitoring market rates for loans and savings and amending the Company’s interest rates to remain competitive; Regular meetings to measure and monitor the impact of movements in interest rates. - 46 NOTES TO THE FINANCIAL REPORT 5. RISK AND CAPITAL MANAGEMENT 5.1 FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES 5.1.2 Interest rate risk in the banking book (continued) In thousands of AUD 2020 Financial assets Cash and cash on hand Due from other financial institutions Investment securities Loans and advances Commission and other receivables Sub-lease finance lease receivable Other financial assets Total financial assets Financial liabilities Deposits Lease liabilities Commission and other payables Total financial liabilities Net financial assets/(liabilities) 2019 Financial assets Cash and cash on hand Due from other financial institutions Investment securities Loans and advances Commission and other receivables Other financial assets Total financial assets Financial liabilities Deposits Commission and other payables Total financial liabilities Net financial assets/(liabilities) Weighted average effective interest rate (%) - 0.82 0.77 3.74 - 5.00 - 1.30 5.00 - 0.15 1.70 1.98 4.81 - - 2.23 - Floating interest rate - - - 269,573 - - - 269,573 122,021 - - 122,021 147,552 Consolidated Fixed interest rate Non-interest 1 year or less - 33,335 37,996 6,568 - - - 77,899 204,948 - - 204,948 1 year or more - - - 7,420 - 1,121 - 8,541 18,822 4,646 - 23,468 (127,049) (14,927) bearing 18,122 - - - 411,499 - 235 429,856 - - 360,990 360,990 68,866 11,342 - - 190,740 - - 202,082 - 32,344 13,765 11,212 - - 57,321 - - 32,125 12,212 - - 44,337 55,517 - 55,517 223,876 - 223,876 5,089 - 5,089 146,565 (166,555) 39,248 8,039 - - - 285,485 304 293,828 2,644 245,225 247,869 45,959 47 Amount per Statement of Financial Position 18,122 33,335 37,996 283,565 411,499 1,121 235 785,869 345,791 4,646 360,990 711,427 74,442 19,381 32,344 45,890 214,164 285,485 304 597,568 287,126 245,225 532,351 65,217 NOTES TO THE FINANCIAL REPORT 5. RISK AND CAPITAL MANAGEMENT 5.1.1 FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES 5.1.2 Interest rate risk in the banking book (continued) In thousands of AUD 2020 Financial assets Cash and cash on hand Due from other financial institutions Investment securities Loans and advances Commission receivables Other financial assets Total financial assets Financial liabilities Deposits Lease liabilities Creditors and other payables Total financial liabilities Net financial assets/(liabilities) 2019 Financial assets Cash and cash on hand Due from other financial institutions Investment securities Loans and advances Commission receivables Other financial assets Total financial assets Financial liabilities Deposits Commissions payable Creditors and other payables Total financial liabilities Net financial assets/(liabilities) Weighted average effective interest rate (%) - 0.82 0.77 3.74 - - 1.30 5.00 - Floating interest rate - - - 270,763 - - 270,763 122,022 - - 122,022 148,741 Bank Fixed interest rate Non-interest 1 year or less - 33,335 37,996 6,568 - - 77,899 204,948 - - 204,948 1 year or more - - - 7,420 - - 7,420 18,822 671 - 19,493 bearing 15,853 - - - 6,559 142 22,554 - - 1,114 1,114 (127,049) (12,073) 21,440 0.15 1.70 1.98 4.81 - - 2.23 - - 9,392 - - 193,111 - - 202,503 - 32,344 13,765 11,212 - - 57,321 - - 32,125 12,212 - - 44,337 55,517 - - 55,517 223,876 - - 223,876 5,089 - - 5,089 8,039 - - - - 142 8,181 2,644 - 1,035 3,679 Amount per Statement of Financial Position 15,853 33,335 37,996 284,751 6,559 142 378,636 345,791 671 1,114 347,576 31,059 17,431 32,344 45,890 216,535 - 142 312,342 287,126 - 1,035 288,161 146,986 (166,555) 39,248 4,502 24,181 48 NOTES TO THE FINANCIAL REPORT 5. FINANCIAL RISK AND CAPITAL MANAGEMENT 5.1 FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES 5.1.2 Interest rate risk in the banking book (continued) Interest rate sensitivity Taking into account past performance, future expectations, economic forecasts and management’s knowledge and experience of the financial markets, the Group believes the impact on profit or loss and the impact on equity in the following table are ‘reasonably possible’ over the next 12 months, if interest rates had changed by +/- 25 basis points (2019: +/- 50 basis points) from the year-end rates, with all other variables held constant. Judgement of reasonably possible movements(amounts in thousands of AUD): 25 basis points increase (2019: 50bps) 25 basis points decrease (2019: 50bps) Consolidated higher (lower) Bank higher (lower) 2020 88 (88) 2019 339 (339) 2020 88 (88) 2019 339 (339) 5.1.3 Market risk - Equity investments The Group is exposed to market risk on the value of shares through its investments in Cuscal (refer to note 4.2) and an ASX listed company. Market rate sensitivity Taking into account past performance, future expectations, economic forecasts and management’s knowledge and experience of the financial markets, the Group believes the impact on equity in the following table are ‘reasonably possible’ over the next 12 months, if the fair value of the investment had changed by +/- 10% (2019: +/- 10%) from the year-end rates, with all other variables held constant. Judgement of reasonably possible movements (amounts in thousands of AUD): 10% increase (2019:10%) 10% decrease (2019: 10%) Consolidated Impact on equity Bank Impact on equity 2020 16 (16) 2019 21 (21) 2020 10 (10) 2019 10 (10) Credit risk 5.1.4 Credit risk is the risk that the Group will incur a loss because its customers or counterparties failed to discharge their contractual obligations. New or potential exposures are subject to the Group’s credit risk management framework. The credit risk management framework includes delegated limits, approval levels, collateral requirements, servicing criteria, concentration limits as well as other principles designed to manage the level of credit risk exposure. Maximum exposures to credit risk The maximum exposure to credit risk in the Bank equals the drawn down portion in the Statement of Financial Position and the undrawn portion of all committed facilities of loans and receivables as listed in Note 7.8. The maximum exposure to credit risk in the Aggregation and Wholesale businesses are in respect of accrued commission receivable and trade debtors. The major classes of financial assets that expose the Group to credit risk are loans to customers (including undrawn and unused credit commitments), cash with banks, investments and amounts due from other financial institutions and accrued commission receivable. Collateral and other credit enhancements Loans and advances, except unsecured overdrafts, are backed by collateral. The amount and type of collateral required depends on the assessment of the credit risk of the customer. Guidelines are implemented regarding the acceptability of types of collateral and valuation parameters. The main types of collateral obtained are as follows:   For retail lending; mortgages over residential properties and consumer assets such as motor vehicles For commercial lending; mortgages over real estate properties and equitable charges over business assets 49 NOTES TO THE FINANCIAL REPORT 5. FINANCIAL RISK AND CAPITAL MANAGEMENT 5.1 FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (Continued) 5.1.4 Credit Risk (continued) Management monitors the market value of collateral however collateral is generally not revalued except in some circumstances where a loan is individually assessed as impaired or a customer seeks an increased loan against existing collateral. For residential lending the Group may also require the customer to acquire Mortgage Insurance where the loan does not meet a specified criteria, usually determined by the loan to value ratio. The terms and conditions of collateral are specific to individual loan and security types. It is the Group’s policy to dispose of repossessed collateral in an orderly fashion and the proceeds used to repay or reduce the outstanding claim. During the year ended 30 June 2020, the Group has repossessed one residential property with a fair value of $280,000 (2019: nil). Concentrations of credit risk – Banking activities The Group monitors concentration of credit risk by purpose. An analysis of concentrations of credit risk at the reporting date is shown below: In thousands of AUD Owner occupier home loans Investment home loans Commercial loans Secured personal loans Unsecured personal loans Overdrafts 2020 $ 127,889 135,558 18,796 723 130 469 283,565 Consolidated 2019 $ 111,732 78,297 22,377 1,105 208 445 214,164 2020 $ 127,889 135,558 19,982 723 130 469 284,751 Bank 2019 $ 111,732 78,297 24,748 1,105 208 445 216,535 As at 30 June 2020 there were no borrowers (2019: one) who individually have facilities which represent 10% or more of the regulatory capital base. Historically, the Bank has been exposed to geographical concentration risk by lending predominately to customers in Western Australia. Since the completion of the merger with Finsure in 2018, the Bank’s distribution capability has increased significantly, such that broader diversification of the loan portfolio can be achieved. The Group’s objective is to continue reduce the concentration risk to Western Australian borrowers over time in order to benefit from a diversified loan book. The graph below demonstrates the progress the Bank has made in the last 2 years in achieving this: 50 NOTES TO THE FINANCIAL REPORT 5. FINANCIAL RISK AND CAPITAL MANAGEMENT 5.1 FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES 5.1.4 Credit risk (continued) i. Credit quality – loans and receivables The credit quality of the Group’s loans and receivables is summarised in the tables below: In thousands of AUD Past due but not impaired 30 days & less than 90 days 90 days & less than 182 days 182 days or more Impaired – mortgage loans Impaired – personal loans Neither past due or impaired Total loans and advances Consolidated 2019 $ 2020 $ 1,359 164 964 2,487 - - 877 542 575 1,994 - - 2020 $ 1,359 164 964 2,487 - - Bank 2019 $ 877 542 575 1,994 - - 281,078 283,565 212,170 214,164 282,264 284,751 214,541 216,535 The table above represents customers who were in arrears prior to the onset of COVID-19. The Company has agreed to vary repayment arrangements following the onset of the COVID-19 pandemic for certain customers. The table set out below summarises these arrangements as at 30 June 2020 (2019:nil). In thousands of AUD Loans subject to temporary modification due to financial difficulty: 3 month interest only repayments 6 month interest only repayments 2 to 4 month repayment deferral 5 to 7 month repayment deferral Residential mortgages $ 13,042 24 1,145 5,365 6,508 SME loans Total $ 911 - 264 - 647 $ 13,953 24 1,409 5,395 7,155 These represent a small proportion of BNK’s customer base, and BNK has active engagement with these customers to assess and determine ongoing arrangements once the agreed deferral period becomes due to expire. The ECL provision includes COVID-19 overlays to reflect the enhanced risk profile of the current economic environment. ii. Collateral – loans and receivables The Group holds collateral and other credit enhancements against certain of its credit exposures. The table below sets out the principal types of collateral held against different types of financial assets: Type of credit exposure Deposits with banks and short-term securities Investment securities Residential loans Personal loans Overdrafts Term loans Percentage of exposure that is subject to collateral requirements 2020 2019 Principal type of collateral held Marketable securities Marketable securities Residential property Residential property and/or motor vehicles Residential property Commercial and/or residential property, floating charges over business assets - - 100 84 90 100 - - 100 85 90 100 51 NOTES TO THE FINANCIAL REPORT 5. FINANCIAL RISK AND CAPITAL MANAGEMENT 5.1 FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES 5.1.4 Credit risk (continued) iii. Credit quality – Amounts due from other financial institutions and investment securities The Group invests in short term securities and investment securities issued by other Australian banks as part of its liquidity management process (refer to note 5.1.5). The Group’s liquidity investments are held with a range of Australian banks or Government agencies and are selected with reference to credit ratings determined by Standard & Poors or Moody’s credit rating agencies. Deposits with other banks and short-term securities In thousands of AUD Long Term Credit Rating 1 (AAA to AA-)* 2 (A+ to A-)* 3 (BBB+ to BBB-)* Unrated Investment securities In thousands of AUD Long Term Credit Rating 1 (AAA to AA-)* 2 (A+ to A-)* * Or equivalent rating by other rating agencies Accrued commission receivable and other debtors In thousands of AUD Long Term Credit Rating 1 (AAA to AA-)* 2 (A+ to A-)* 3 (BBB+ to BBB-)* Unrated * Or equivalent rating by other rating agencies Consolidated 2019 $ 2020 $ - 23,835 - 9,500 33,335 - 26,344 2,000 4,000 32,344 Consolidated 2019 $ 2020 $ 37,996 - 37,996 45,890 - 45,890 Consolidated 2019 $ 2020 $ 246,576 37,054 32,814 87,304 403,748 173,914 26,579 24,414 59,623 284,530 2020 $ 23,835 - 9,500 33,335 2020 $ 37,996 - 37,996 2020 $ 2,898 - - 3,661 6,559 Bank 2019 $ - 26,344 2,000 4,000 32,344 Bank 2019 $ 45,890 - 45,890 Bank 2019 $ - - - 3,379 3,379 The Group’s other outstanding receivables arise from transactions with customers located within Australia. The amounts owing from other financial institutions include the net present value (NPV) of future trail commission receivable and accrued commission income. The majority of the Group’s NPV trail commission and accrued commission receivable is from counterparties that are rated between BBB and AA-. 52 NOTES TO THE FINANCIAL REPORT 5.1 FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES 5.1.4 Credit risk (continued) Accounting policy - Recognition and measurement As set out in note 3.2, loans are considered to be in default when they reach 90 days past due. An assessment is then made to determine whether loans are classified as impaired or past due. Impaired loans Loans for which the Company determines that it is probable that it will be unable to collect all principal and interest due according to the contractual terms of the loan. Past due but not impaired loans Loans where contractual interest or principal payments are past due, but the Group believes that impairment is not appropriate on the basis of the level of security / collateral available and / or the stage of collection of amounts owed to the Group. Loans with renegotiated terms The Group renegotiates loans to customers in financial difficulties to maximise collection opportunities and minimise the risk of loss. Loans that have been restructured due to deterioration in the borrower’s financial position are considered on a selective basis where the borrower has demonstrated reasonable efforts to meet their commitments, and where the Group has made concessions that it would not otherwise consider. Once the loan is restructured it remains in this category for 12 months independent of satisfactory performance after restructuring. , Allowances for impairment Refer to note 3.2 for the Group’s policy with respect to provisioning for expected credit losses. Write-off policy Bad debts are written off as determined by management and recommended to the Board of Directors when it is reasonable to expect that the recovery of the debt is unlikely. Bad debts are written off as expenses in the Income Statement or against the provision for impairment. Where the Group holds collateral against loans and advances, it is in the form of mortgage interests over property, other registered securities over assets, and guarantees. Estimates of fair value are based on the value of collateral assessed at the time of borrowing. These estimates are generally only updated when loan is individually assessed as impaired. 5.1.5 Liquidity risk Liquidity risk is the risk that the company will be unable to meet its payment obligations when they fall due under normal and stress circumstances. The Group’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient funds available to meet its liabilities under both normal and stressed conditions, without incurring unacceptable losses. Sources of liquidity risk include unforeseen withdrawals of demand deposits, increased demand for loans and drawdown on available credit limits, and inability to liquidate a marketable asset. The Group maintains a portfolio of short term liquid assets to ensure that sufficient liquidity is maintained for daily operational requirements. The Group has documented its strategy to manage liquidity risk in a liquidity policy and liquidity management plan which includes the following activities by Management: - On a daily basis, an assessment is made of the daily cash position and the investment action to be undertaken. - On a daily basis, a summary of the Group’s liquidity position, including movements in major liquid assets and liabilities is reviewed. - On a monthly basis, the liquidity position is reported to the Board, including an explanation of significant movements and corrective action taken, where applicable. - Regularly reporting current and emerging liquidity management trends to the Board and highlighting risk areas and relevant market conditions/expectations. 53 NOTES TO THE FINANCIAL REPORT 5. FINANCIAL RISK AND CAPITAL MANAGEMENT 5.1. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES 5.1.5 Liquidity risk (continued) The Group’s policy is to apply a minimum level of 13% (2019: 13%) of funds as liquid assets to maintain adequate funds for meeting customer withdrawal requests. This ratio is checked daily. In order to minimise the risk of the liquidity ratio falling below 13% (2019: 13%); the Board has determined a target liquidity trading range of 14% - 19% in normal market situations. Since the impact of COVID-19 became prevalent in early calendar year 2020, the Board recommended the Group hold higher levels of liquidity above this range. In the event that liquidity ratio falls below 13% or is considered to be at risk of falling below that level, specific remedial measures are required to be taken by the Board and Management. Deposits are the liability class that presents the major source of risk to the Group’s liquidity management. Concentrations within this class of financial liability are measured in terms of exposures to individual depositors and groups of related depositors. As at 30 June 2020 there were no deposits greater than 10% of total liabilities (2019: nil). The liquidity ratio is calculated based on the formula prescribed by APRA in APS 210 as summarised below: In thousands of AUD High quality liquid assets Adjusted liability base for regulatory purposes Liquidity ratio 5.1.6 Operational risk Consolidated 2019 $ 90,321 397,411 22.7% 2020 $ 90,197 348,719 25.9% 2020 $ 87,177 331,771 26.2% Bank 2019 $ 87,625 328,807 26.6% Operational risk is a risk of direct or indirect loss arising from a wide variety of causes associated with the Group’s processes, personnel, technology and infrastructure, and from external factors other than credit, market and liquidity risks (such as those arising from legal and regulatory requirements and generally accepted standards of corporate behaviour). Operational risks arise from all of the Company’s operations and are faced by all business entities. The Group’s objective is to manage operational risk so as to balance the avoidance of financial loss and damage to the Group’s reputation, against excessive cost and control procedures that restrict initiative and creativity. The primary responsibility for the development and implementation of controls to address operational risk is assigned to senior management within each business unit. This responsibility is supported by the development of the Company’s overall standards for management of operational risk in the following areas: - Compliance with regulatory and other legal requirements - Third party supplier relationships - Business continuity and contingency planning - People and key person risk including training and professional development - Outsourcing risk associated with materially outsourced services - Competition risk - Fraud risk - Requirements for appropriate segregation of duties, including independent authorisation of transactions - Requirements for the reconciliation and monitoring of transactions - Documentation of controls and procedures. These were enhanced significantly prior to the closure of the branches during the period - Requirements for the periodic assessment of operational risks faced, and the adequacy of controls and procedures to address the risks identified - Requirements for the reporting of operational losses and proposed remedial action - Ethical and business standards - Risk mitigation, including insurance where this is effective 54 NOTES TO THE FINANCIAL REPORT 5. FINANCIAL RISK AND CAPITAL MANAGEMENT 5.1 FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES 5.1.6 Operational risk The Group experienced a significant operational risk event in the year ended 30 June 2020 in relation to its ATM bailment business (refer to note 4.1.1 for further details). As a result, the Group has now exited this line of business. Resources for lending, operations and aggregation processes are reviewed regularly and significant investment has occurred in the current year in people and processes to enhance the operational risk management framework. Following the onset of COVID-19, work from home practices were implemented across the Group in order to protect our people from the risk of the disease. Security of data and restriction of access to IT systems was a key area of focus to ensure the businesses of the Group could continue to function and service customers and brokers effectively, without increasing risk of data breaches. This was a controlled and managed process with oversight by the Board. Staff in certain locations have commenced a return to office process on a staged basis. 5.1.7 Fair value of financial assets and liabilities Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Wherever possible, fair values are calculated by the Group using unadjusted quoted market prices in active markets for identical instruments. A quoted price in an active market provides the most reliable evidence of fair value. For all other financial instruments, the fair value is determined by using other valuation techniques. As part of the fair value measurement, the Group classifies its assets and liabilities according to a hierarchy that reflects the observability of significant market inputs. The three levels of the hierarchy are described below:    Level 1 — Quoted (unadjusted) market prices in active markets for identical assets or liabilities Level 2 — Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable in an active market Level 3 — Valuation techniques for which significant inputs to the fair value measurement are not based on observable market data The Group measures most financial instruments at amortised cost, however disclosure of fair value is made throughout these financial statements. The Company uses valuation techniques that are appropriate in the circumstances and for which sufficient data is available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs. All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorised within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole: For assets and liabilities that are recognised in the financial statements on a recurring basis, the Group determines whether transfers have occurred between Levels in the hierarchy by re-assessing categorisation (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period. Fair value is determined on the basis of the present value of expected future cash flows under the terms and conditions of each financial asset or liability. Significant assumptions used in determining the cash flows are that the cash flows will be consistent with the contracted cash flows under the respective contracts. The information is only relevant to circumstances at the reporting date and will vary depending on the contractual rates applied to each asset or liability, relative to market rates and conditions at the time. No assets held are regularly traded by the Group. Investments in listed entities are tradeable on public markets and are classified as Level 1 financial assets in the fair value hierarchy. Amounts due from other financial institutions, investment securities and investments in Cuscal Limited can be traded in a secondary market. The investment in Cuscal is classified as a Level 2 financial asset in the fair value hierarchy. 55 NOTES TO THE FINANCIAL REPORT 5. FINANCIAL RISK AND CAPITAL MANAGEMENT 5.1. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES 5.1.7 Fair value of financial assets and liabilities (continued) In thousands of AUD Financial assets Cash and cash equivalents Accrued commission receivable Due from other financial institutions Investment securities Loans and advances Other receivables Other financial assets Total financial assets Financial liabilities Deposits Accrued commission payable Lease liability Creditors and other payables Total financial liabilities Financial assets Cash and cash equivalents Due from other financial institutions Investment securities Loans and advances Other receivables Other financial assets Total financial assets Financial liabilities Deposits Lease liability Creditors and other payables Total financial liabilities Consolidated Fair value Carrying amount 2020 $ 2019 $ 2020 $ 2019 $ 19,381 12,826 32,344 46,545 225,830 2,343 304 18,122 16,551 33,335 37,996 283,561 8,872 235 339,573 398,672 19,381 12,826 32,344 45,890 214,323 2,343 304 327,411 287,126 11,652 - 3,158 287,126 11,652 - 3,158 301,936 368,473 301,936 345,791 15,300 4,646 2,736 Bank 17,431 32,344 46,545 15,853 33,335 37,996 225,830 285,206 6,560 142 325,268 379,092 2,976 142 17,431 32,344 45,890 216,891 2,976 142 315,674 287,126 - 1,035 345,791 671 1,114 288,161 347,576 287,126 - 1,035 288,161 18,122 16,551 33,335 37,948 287,637 8,872 235 402,700 345,791 15,300 4,646 2,736 368,473 15,853 33,335 37,948 289,282 6,560 142 383,120 345,791 671 1,114 347,576 56 NOTES TO THE FINANCIAL REPORT 5. FINANCIAL RISK AND CAPITAL MANAGEMENT 5.1. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES 5.1.7 Fair value of financial assets and liabilities (continued) The fair value estimates were determined by the following methodologies and assumptions: Cash and Amounts Due from other financial institutions The carrying values of cash and liquid assets and receivables due from other financial institutions redeemable within 12 months approximate their fair value as they are short term in nature or are receivable on demand. Accrued commission receivable and other receivables The carrying values of receivables approximate fair value as they are short term in nature and collected within 12 months. Loans and advances The carrying value of loans and advances is net of provisions for doubtful debts. For variable rate loans, (excluding impaired loans) the amount shown in the statement of financial position is considered to be a reasonable estimate of fair value. For fixed rate loans the fair values are based on cash flows discounted at a rate reflecting current market rates adjusted for counterparty credit risk. Investment Securities Investment Securities comprise floating rate notes issued by Australian banks and bonds issued by the Commonwealth and state governments. These securities can be traded in secondary markets and fair value has been determined by indicative prices as quoted on Bloomberg. Other financial assets Refer to Note 4.2, the balance comprises equity instruments. Deposits The fair value of call and variable rate deposits, and fixed rate deposits repricing within 12 months, is the amount shown in the statement of financial position. Discounted cash flows were used to calculate the fair value of other term deposits, based upon the deposit type and the rate applicable to its related period maturity. Accrued commission payable, creditors and other payables The carrying values of payables approximate fair value as they are short term in nature. 5.2 CAPITAL MANAGEMENT 5.2.1 Overview The Group is licensed as an Authorised Deposit-taking Institution (ADI) under the Banking Act 1959 and is subject to prudential supervision by APRA. The Group has documented its strategy to manage capital in its internal capital adequacy assessment process which includes the capital management plan. The Standards include APS 110 Capital Adequacy which: - Imposes on the Board a duty to ensure that the Company and Group maintains an appropriate level and quality of capital commensurate with the level and extent of the risks to which the Company and Group is exposed from its activities; and - Obliges the Company and Group to have in place an Internal Capital Adequacy Assessment Process (ICAAP). Three Pillars – There are three pillars to the Basel III capital framework. Pillar 1 – involves specific capital charges for credit risk, operational risk, and the risk of financial market trading activities. Pillar 2 – involves the Company making an assessment of any additional capital necessary to cover other risks not included in Pillar 1. Pillar 3 – involves increased reporting by the Company to APRA. 57 NOTES TO THE FINANCIAL REPORT 5. FINANCIAL RISK AND CAPITAL MANAGEMENT 5.2 CAPITAL MANAGEMENT 5.2.1 Overview (continued) The Board has determined that, for the Company, the prudent level of capital is the sum of the following: - the specific capital charge for Pillar 1 risks - the additional capital required to cover Pillar 2 risks, where applicable - a buffer to cover other capital factors, where applicable Various limits are applied to elements of the capital base. The main deductions from capital include deferred tax assets, intangible assets, equity investments in other ADI’s and goodwill. The Group’s policy is to apply a minimum target of 17.0% capital (2019: 17.0%). In accordance with the Group’s capital management objectives, the Company’s and Group’s regulatory minimum capital requirements were exceeded at all times throughout the year. In thousands of AUD Tier 1 capital Tier 2 capital Total regulatory capital Risk weighted assets Capital adequacy ratio Consolidated 2020 2019 31,278 446 31,724 25,317 446 25,763 Bank 2020 $ 30,082 446 30,528 2019 $ 26,395 446 26,841 149,519 21.22% 126,579 20.35% 147,532 20.69% 125,849 21.33% Disclosures required under Prudential Standard APS 330 Public Disclosure can be located on our website at: https://bnk.com.au/investor-centre/disclosure-statements/. 5.2.2 Share capital In thousands of AUD Note Share capital Movements in ordinary shares on issue Beginning of the financial year Issued during the year in a placement Acquisition of Finsure Exercise of performance rights Expiry of unlisted options Less equity raising costs Bank 2020 $ 106,270 2019 $ 99,188 Number of shares 82,415,399 11,700,000 - 155,000 - 94,270,399 - 94,270,399 2020 $ 99,188 7,020 - 62 - 106,270 (2,754) 103,516 Number of shares 25,907,066 15,385,000 40,750,000 373,333 - 82,415,399 - 82,415,399 2019 $ 24,080 20,002 52,975 301 1,830 99,188 (2,620) 96,568 5.2.3 5.2.4 Terms and conditions of ordinary shares The Company does not have authorised capital nor par value in respect of its issued capital. Ordinary fully paid shares have the right to receive dividends as declared and, in the event of winding up the Company, to participate in the proceeds from the sale of all surplus assets in proportion to the number of and amounts paid up on shares held. Ordinary fully paid shares entitle their holder to one vote, either in person or by proxy, at a meeting of the Company. 58 NOTES TO THE FINANCIAL REPORT 5. FINANCIAL RISK AND CAPITAL MANAGEMENT 5.2 CAPITAL MANAGEMENT 5.2.3 Other contributed equity Balance at the beginning of the year Transfer to share capital upon expiry of listed options Balance at the end of the year Bank 2020 $ - - - 2019 $ 1,830 (1,830) - As part of the public offer of ordinary shares in Goldfields Money Limited in May 2012, 4,500,000 options were issued, with one option attached to every two ordinary shares subscribed to under the offer. The unlisted options had an exercise price of $1.50 and an expiry date of 11 May 2019. The options lapsed unexercised. The fair value of the options that was recognised as other contributed equity has been transferred to share capital. 5.2.4 Equity raising costs Balance at the beginning of the year Equity raising costs incurred Deferred tax recognised directly in equity Balance at the end of the year Accounting policy - Recognition and measurement Bank 2020 $ 2,621 40 93 2,754 2019 $ 1,631 1,277 (287) 2,621 The transaction costs of a new equity transaction are accounted for as a deduction from equity (net of any related income tax benefit) to the extent they are incremental costs directly attributable to the equity transaction that otherwise would have been avoided. Transaction costs include registration and other regulatory fees, amounts paid to legal, accounting and other professional advisers, printing costs and stamp duties. 5.2.5 Treasury shares reserve Balance at the beginning of the year Acquired during the year to fulfil the exercise of performance rights Balance at the end of the year Bank 2020 $ - (103) (103) 2019 $ - - - Pursuant to the BNK Equity Incentive Plan, the Company may issue new shares or acquire shares on market to allocate to staff upon exercising performance rights as set out in note 7.4.2. At 30 June 2020, the Company does not hold any treasury shares. Accounting policy - Recognition and measurement When shares recognised as equity are repurchased, the amount of the consideration paid, which includes directly attributable costs, is recognised as a deduction from equity. Repurchased shares are classified as treasury shares and are presented in the treasury shares reserve. When treasury reserve shares are sold or reissued subsequently, the amount received is recognised as an increase equity and the resulting surplus or deficit is retained within the reserve. 59 NOTES TO THE FINANCIAL REPORT 5. FINANCIAL RISK AND CAPITAL MANAGEMENT 5.3 EARNINGS PER SHARE Basic earnings per share amounts are calculated by dividing the net profit or loss for the year attributable to ordinary equity holders of the Company by the weighted average number of ordinary shares outstanding during the year. Diluted earnings per share amounts are calculated by dividing the net profit or loss attributable to ordinary equity holders of the Company adjusted for the weighted average number of ordinary shares outstanding during the year plus the weighted average number of ordinary shares that would be issued on the conversion of all the dilutive potential ordinary shares into ordinary shares. The following reflects the income and share data used in the basic and diluted earnings per share computations: In thousands of AUD Net profit/(loss) attributable to ordinary share holders Weighted average number of ordinary shares for basic earnings per share for diluted earnings per share Basic earnings per share (cents) Diluted earnings per share (cents) Consolidated 2020 $ 2019 $ 5,324 3,614 2020 2019 86,727,399 88,274,386 70,324,932 71,558,495 6.14 6.03 5.14 5.05 5.4 DIVIDENDS PAID OR PROPOSED AND FRANKING ACCOUNT No dividend was paid or declared by the Company in the period and up to the date of this report. The Directors do not recommend that any amount be paid by way of dividend, for the financial period ended 30 June 2020 (2019: nil). Franking credit balance In thousands of AUD The amount of franking credits available for the subsequent financial years are: Franking account balance as at the end of the financial year at 30% (2019: 30%) Franking credits that will arise from the payment/(receipt) of income tax payable/receivable as at the end of the financial year Franking credits that arise from the receipt of franked dividends Franking credits available for subsequent reporting periods at 30% (2019: 30%) 2020 $ 2019 $ 2,542 2,540 - 2 - 2 2,544 2,542 60 NOTES TO THE FINANCIAL REPORT 6. GROUP STRUCTURE 6.1.1 Investments in subsidiaries In thousands of AUD Investments in subsidiaries at cost Note 6.1.2 Subsidiaries Subsidiary name Finsure Holding Pty Ltd Finsure Finance & Insurance Pty Ltd Finsure Domain Names Pty Ltd Finsure Wealth Pty Ltd Beagle Finance Pty Ltd Smart Finance & Wealth Pty Ltd 1300 Home Loan Holdings Pty Ltd Mystro CRM Pty Ltd Wikibroker Pty Ltd Australian Asset Aggregation Pty Ltd Fintek Pty Ltd Iden Holdings Pty Ltd Better Choice Home Loans Pty Ltd Future Financial 1 Pty Ltd Pioneer Mortgage Holdings Pty Ltd Romavale Pty Ltd Australian Capital Home Loans Pty Ltd Bare 123 Pty Ltd Segment Aggregation Aggregation Aggregation Aggregation Aggregation Aggregation Aggregation Aggregation Aggregation Aggregation Aggregation Wholesale Wholesale Wholesale Wholesale Wholesale Wholesale N/A - Dormant Bank 2020 $ 61,925 2019 $ 61,925 Ownership 2020 100% 100% 100% 100% 100% 100% 100% 100% 100% 51% 60% 100% 100% 100% 100% 100% 100% 100% 2019 100% 100% 100% 100% 100% 100% 100% 100% 100% 51% 60% 100% 100% 100% 100% 100% 100% 100% Accounting policy - Recognition and measurement ‘Subsidiaries’ are entities controlled by the Group. The Group ‘controls’ an entity if it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. The Group reassesses whether it has control if there are changes to one or more of the elements of control. This includes circumstances in which protective rights held (e.g. those resulting from a lending relationship) become substantive and lead to the Group having power over an investee. The financial statements of subsidiaries are included in the consolidated financial statements from the date on which control commences until the date on which control ceases. Non-controlling interests are measured at their proportionate share of the acquiree’s identifiable net assets at date of acquisition, and not considered material to the Group. Intra-group balances and transactions, and any unrealised income and expenses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment. Business Combinations The Group accounts for business combinations using the acquisition method when control is transferred to the Group. The consideration transferred in the acquisitions is generally measured at fair value, as are the identifiable net assets acquired. Any goodwill that arises is tested annually for impairment. Any gain on a bargain purchase is recognised in profit or loss immediately. Transaction costs are expensed as incurred. The consideration transferred does not include amounts related to the settlement of pre-existing relationships. Such amounts are generally recognised in profit or loss. 61 NOTES TO THE FINANCIAL REPORT 6.1.2 Deed of Cross Guarantee Pursuant to ASIC Corporations (Wholly owned Companies) Instrument 2016/785 the wholly-owned subsidiaries listed below are relieved from the Corporations Act 2001 requirements for preparation, audit and lodgment of financial reports and Directors’ reports: Finsure Holding Pty Ltd Finsure Finance & Insurance Pty Ltd    Beagle Finance Pty Ltd It is a condition of the Instrument that the subsidiaries agreeing to guarantee each other’s’ liabilities (“the Closed Group”) enter into a Deed of Cross Guarantee. The Company, as an APRA regulated ADI is prevented from guaranteeing its subsidiaries liabilities, and therefore isn’t a party to the Deed of Cross Guarantee. The effect of the Deed is that each entity listed above guarantees to each creditor payment in full of any debt in the event of a winding up of any of the subsidiaries under certain provisions of the Corporations Act 2001. If a winding up of a subsidiary party to the Deed occurs under other provisions of the Act, the remaining subsidiary/(ies) will only be liable in the event that after six months any creditor has not been paid in full. A consolidated statement of comprehensive income and consolidated statement of financial position, comprising the three entities party to the Deed, after eliminating all transactions between parties to the Deed of Cross Guarantee for the year ended 30 June 2020 is set out as follows: Income Statement for the Closed Group Statement of Financial Position for the Closed Group In thousands of AUD Commission income Commission expense Net commission income Interest income Interest expense Net interest income/(expense) Other income Total net revenue Operating expenses Profit before income tax from continuing operations Income tax expense Net profit after tax Items that will be reclassified to profit and loss Revaluation of financial assets Total comprehensive income for the period, net of tax 2020 $ 279,046 (265,228) 13,818 166 (439) (273) 8,596 22,141 (12,150) 9,991 (2,901) 7,090 (97) 6,993 In thousands of AUD Assets Cash and cash equivalents Trade and other receivables Other financial assets Property, plant and equipment Goodwill and other intangibles Total assets Liabilities Trade and other payables Provisions Deferred tax liabilities Total Liabilities Net assets Share capital Reserves Retained earnings Total equity 62 2020 $ 1,164 377,542 11,702 2,232 3,502 396,142 355,128 702 3,592 359,422 36,720 8,950 (84) 27,854 36,720 NOTES TO THE FINANCIAL REPORT 7. OTHER NOTES 7.1 Property, plant and equipment In thousands of AUD Note Freehold land and buildings – at fair value Accumulated depreciation Office equipment and leasehold improvements Accumulated depreciation Motor vehicles Accumulated depreciation Computer equipment and IT hardware Accumulated depreciation Right of use assets Accumulated depreciation Consolidated 2019 $ 520 (14) 506 2020 $ - - - 1,131 (851) 280 44 (20) 24 676 (453) 223 4,191 (910) 3,281 1,343 (1,019) 324 88 (31) 57 749 (439) 310 - - - Total property, plant and equipment 3,808 1,197 2020 $ - - - 48 (19) 29 44 (20) 24 283 (196) 87 761 (157) 604 744 Bank 2019 $ 520 (14) 506 280 (227) 53 88 (31) 57 357 (238) 119 - - - 735 Reconciliations of the carrying value for each class of property, plant and equipment are set out below: Please try to fit highlighted items below into a single row thanks In thousands of AUD Opening written down value at 1 July 2019 Additions Disposals Depreciation Closing written down value at 30 June 2020 In thousands of AUD Opening written down value at 1 July 2019 Additions Disposals Depreciation Closing written down value at 30 June 2020 Computer equip & IT hardware $ 310 25 (36) (76) 223 Total $ 4,568 867 (568) (1,059) 3,808 Computer equip & IT hardware $ Total $ 119 1,496 25 (5) (52) 87 28 (537) (243) 744 Consolidated Motor vehicles $ 57 - (23) (10) 24 Bank Motor vehicles $ 57 - (23) (10) 24 Freehold Land & Buildings $ 506 Right of Use Asset $ 3,371 Office Equip & L/H imp $ 324 - (499) (7) - 820 - (910) 3,281 22 (10) (56) 280 Freehold Land & Buildings $ Right of Use Asset $ Office Equip & L/H imp $ 506 761 - (499) (7) - - - (157) 604 53 3 (10) (17) 29 63 NOTES TO THE FINANCIAL REPORT 7. OTHER NOTES 7.1 Property, plant and equipment (continued) A significant increase (decrease) in estimated fair net rental in isolation would result in a significantly higher (lower) value. A significant increase (decreases) in estimated capitalisation rate in isolation would result in a significantly lower (higher) value. The revaluation adjustment net of applicable deferred income taxes was debited to an asset revaluation reserve in shareholders’ equity. During the year ended 30 June 2020, the Company closed its Kalgoorlie and Esperance branches. Sale of the Kalgoorlie building was completed on 30 June 2020 and the Esperance lease expires 28 August 2020. The Group has adopted AASB 16 Leases with effect from 1 July 2019 utilising the modified retrospective approach. Refer to note 8.2 for further details. Accounting policy - Recognition and measurement Each class of property, plant and equipment is carried at cost or fair value less, where applicable, any accumulated depreciation and impairment losses. Property Freehold land and buildings are shown at their fair value (being the amount for which an asset could be exchanged between knowledgeable willing parties in an arm's length transaction), based on periodic valuations by external independent valuers, less subsequent depreciation for buildings. Valuations are performed with sufficient frequency to ensure that the fair value of a revalued asset does not differ materially from its carrying amount. A fair value measurement of a non-financial asset takes into account a market participant's ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use. Increases in the carrying amount arising on revaluation of land and buildings are recorded in other comprehensive income and credited to a revaluation reserve in shareholders' equity. Decreases that offset previous increases of the same asset are charged against fair value reserves directly in equity; all other decreases are charged to the profit and loss. Plant and Equipment 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 assets employment and subsequent disposal. The expected net cash flows are discounted to their present values in determining recoverable amounts. The cost of fixed assets constructed within the economic entity includes the cost of materials, direct labour, borrowing costs and an appropriate proportion of fixed and variable overheads. 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 company and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the statement of comprehensive income during the financial period in which they are incurred. Right of use assets The Group has recognised right of use assets relating to its leases pursuant to AASB 16 Leases. Refer to note 8.2 for details. 64 NOTES TO THE FINANCIAL REPORT 7. OTHER NOTES 7.1. Property, plant and equipment (continued) Depreciation 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 rates used for each class of depreciable assets are: Class of fixed asset Office plant and equipment and Leasehold improvements Right of use assets Motor vehicles Computer equipment and programs Depreciation rate Method of Depreciation 15-33% 20-33% 12.5% 20-50% Straight-line Straight-line Straight-line Straight-line 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. Gains and losses on disposals are determined by comparing proceeds with the carrying amount. These gains or losses are included in the statement of comprehensive income. When revalued assets are sold, amounts included in the revaluation reserve relating to that asset are transferred to profit or loss. 7.2 Goodwill and other intangible assets In thousands of AUD Goodwill – at cost Brandnames, trademarks and domain names Software Accumulated amortisation Broker relationships Accumulated amortisation Consolidated 2019 $ 19,172 2020 $ 19,172 2020 $ - Bank 2019 $ - 16,557 16,527 162 132 14,254 (2,780) 11,474 4,075 (1,668) 2,407 10,691 (1,832) 8,859 4,075 (1,415) 2,660 5,085 (438) 4,647 3,274 (302) 2,972 - - - - - - Total goodwill and other intangibles 49,610 47,218 4,809 3,104 Reconciliation of intangible assets In thousands of AUD Goodwill Opening balance at 1 July 2019 Additions Amortisation Closing balance at 30 June 2020 19,172 - - 19,172 16,527 30 - 16,557 65 Consolidated Software Broker relationships Total Brand names & trademarks $ $ 8,859 3,564 (949) 11,474 $ 2,660 - (253) 2,407 $ 47,218 3,594 (1,202) 49,610 NOTES TO THE FINANCIAL REPORT 7. OTHER NOTES 7.2 Goodwill and other intangible assets (continued) Reconciliation of intangible assets In thousands of AUD Goodwill Opening balance at 1 July 2019 Additions Amortisation Closing balance at 30 June 2020 - - - - Accounting policy - recognition and measurement Brand names & trademarks $ 132 30 - 162 Bank Software $ 2,972 3,564 (136) 4,647 Broker relationships Total $ - - - - $ 3,104 1,841 (136) 4,809 Goodwill and other intangible assets with a finite life recognised upon acquisition of subsidiaries are measured at cost less accumulated impairment losses. Costs incurred in acquiring software and licenses that will contribute to future period financial benefits through revenue generation and/or cost reduction are capitalised to computer software. Costs capitalised include external direct costs of materials, service, consultants spent on the project and internal costs of employees directly engaged in delivering the project. For software in the course of development, amortisation commences once development is complete and the software is in use. Other intangible assets are recognised at cost less accumulated amortisation and impairment losses. Subsequent expenditure is recognised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure, including expenditure on internally generated goodwill and brands is recognised in profit or loss. Amortisation Amortisation is calculated to write-off the asset less its estimated residual value using the straight-line method over their estimated useful lives, and is generally recognised in profit or loss. Goodwill is not amortised, but tested annually for impairment. The estimate useful lives of intangible assets with a finite useful life are as follows: - Software - Broker relationships 3-10 years 6 years Amortisation methods, useful lives and residual values are reviewed at each reporting date and adjusted as appropriate. Impairment testing for CGUs containing goodwill For the purpose of impairment testing, goodwill has been allocated to the Group’s cash generating units (CGUs) as follows: In thousands of AUD Aggregation Wholesale Banking Total goodwill 2020 $ 12,000 1,000 6,172 19,172 2019 $ 12,000 1,000 6,172 19,172 66 NOTES TO THE FINANCIAL REPORT 7. OTHER NOTES 7.2 Goodwill and other intangible assets (continued) Each CGU was tested for impairment using the value in use approach, by discounting future cash flows estimated from the continuing use of each CGU. The recoverable amount for each CGU was determined to be above the carrying amount. The key assumptions used in the estimation of the recoverable amount are set out below. The values assigned to the key assumptions represent management’s best estimates of future CGU performance, after considering internal and external sources of information. Input Discount rates (post-tax) Terminal value growth rate Budgeted revenue growth rates 2020 11% 2.5% 11-42% 2019 12-14% 2.5% 5-38% Discount rates were determined after assessing the Group’s weighted average cost of capital and adjusting for risks specific to the CGU and/or the risks inherent to the cash flow forecasts. The cash flow projections include specific estimates for five years and a terminal growth rate thereafter. The terminal growth rate was determined based on management’s estimate of the long-term growth rate, consistent with the assumptions that a market participant would expect. Budgeted revenue was based on the Group’s plans for each CGU taking into account past experience and adjustments regarding expectations of future outcomes, including the potential impacts of COVID-19. No impairment loss has been recognised for any CGU at 30 June 2020. Management has estimated that a reasonably possible change in two key assumptions could cause the carrying amount to exceed the recoverable amount, being the discount rate or budgeted revenue growth rates. The following table shows the amount by which these assumptions would need to change individually for the estimated recoverable amount to be equal to the carrying amount. Input Discount rates (post-tax) Average budgeted revenue growth Aggregation Wholesale 0.7% (1.3%) 11.5% (11.4%) Banking 1.8% (4.1%) 7.3 Provisions In thousands of AUD Note Provision for annual leave Provision for long service leave Total provisions Consolidated 2019 $ 973 319 1,292 2020 $ 992 316 1,308 2020 $ 216 3 219 Bank 2019 $ 275 99 374 Accounting policy - recognition and measurement Provision is made for the Group's liability for employee benefits arising from services rendered by employees to the reporting date. Employee benefits that are due to be settled within one year have been measured at the amounts expected to be paid when the liability is settled, plus related on-costs. Employee benefits payable later than one year have been measured at the present value of the estimated future cash outflows to be made for those benefits. Contributions are made by the Group to employee nominated superannuation funds and are charged as expenses when incurred. 67 NOTES TO THE FINANCIAL REPORT 7. OTHER NOTES 7.4 Related Party Disclosures Information regarding individual Directors and Executive compensation and some equity instrument disclosures as required by the Corporations Regulation 2M.3.03 is provided in the Remuneration Report section of the Directors’ report. Disclosure of the compensation and other transactions with key management personnel (KMP) is required pursuant to the requirements of Australian Accounting Standard AASB 124 Related Party Disclosures. The KMP of the Company comprises the Non-Executive Directors and Executives. 7.4.1 Key Management Personnel (KMP) The aggregate compensation of KMP during the year comprising amounts paid or payable or provided for was as follows: In thousands of AUD Short-term employee benefits Post-employment benefits Other long-term benefits Termination benefits 2020 $ 2019 $ 3,136 218 182 212 3,748 2,011 102 611 - 2,724 In the above table, remuneration shown as short term benefits means (where applicable) wages, salaries and other contributions, paid annual leave and paid sick leave, and bonuses, value of fringe benefits received, but excludes out of pocket expense reimbursements. 7.4.2 Share-Based Payments Shareholders of the Company approved the continuation of the BNK Equity Incentive Plan or (“the Plan”) at the 2019 Annual General Meeting. Pursuant to the terms of the Plan, executives and employees may be offered performance rights that entitle the executive to the Company delivering fully paid ordinary shares, either issued by the Company or acquired on market at the election of the Board. Additionally, the Plan enables the Company to grant fully paid ordinary shares to employees from time to time. Performance rights – grant dates  On 9 February 2017, 1,700,000 performance rights were granted to executives in accordance with the terms of the BNK Equity Incentive Plan (BNKEIP). Mr Lyons exercised 333,333 of these performance rights during the year ended 30 June 2019, and the remainder were exercised on 5 August 2020. On 5 December 2019, Mr Ellis exercised 125,000 of his performance rights;  On 30 October 2017, 200,000 performance rights were granted to two executives and two employees in recognition of their performance for the year ended 30 June 2017 (‘FY17 Bonus’). Vesting of these performance rights was approved by the Board in September 2018, and 150,000 have been exercised to date.  On 20 December 2017, 7,000 ordinary shares were issued to several employees.  On 1 November 2018, 100,000 performance rights were granted to four employees in recognition of their performance for the year ended 30 June 2018 (‘FY18 Bonus’). These performance rights vest subject to the employees remaining employed by the Company until 1 July 2020. As this condition has been met, these performance rights have vested subsequent to balance date.  On 16 April 2019, 500,000 performance rights were awarded to three senior employees of Finsure as retention rights. One third of these performance rights each vest on 1 July 2019, 1 July 2020 and 1 July 2021. For the first tranche that vested on 1 July 2019, 133,332 have been exercised.  On 5 December 2019, 250,000 performance rights were awarded to five employees in recognition of their performance for the year ended 30 June 2019 (‘FY19 Bonus”). One third of these performance rights vest on 30 September 2020, 30 September 2021 and 30 September 2022 subject to the approval of the Remuneration Committee and continued service. 68 NOTES TO THE FINANCIAL REPORT 7. OTHER NOTES 7.4.2 Share-Based Payments (continued) Performance rights – fair value and vesting conditions a) The fair value of the BNKEIP performance rights has been measured using a Monte Carlo simulation. The inputs used in the measurement of the fair values at grant date of the BNKEIP performance rights are summarised below. The key terms and conditions related to the grants under the BNKEIP are as follows; all performance rights are to be settled by the physical delivery of shares. The inputs used in the measurement of the fair values at grant date of the BNKEIP performance rights were as follows: Fair value at grant date Share price at grant date Exercise price Expected volatility Expected dividends Risk free interest rate (based on government bonds) $0.2613 to $0.7830 $1.02 Nil 31.54% Nil 2.13% The amount recognised for the period ended 30 June 2020 in relation to the BNKEIP performance rights was $128,168 (2019: $309,884). b) The fair value of the FY17 Bonus performance rights of $236,000 was determined with reference to the share price on the grant date of $1.18. The fair value of the grant is being recognised over the 32 month vesting period. The amount recognised in profit and loss for the year ended 30 June 2020 in relation to these performance rights was $88,439 (2019: $88,681). d) The fair value of the FY18 Bonus performance rights of $90,000 was determined with reference to the share price on the grant date of $0.90. The fair value of the grant is being recognised over the 20 month vesting period. The amount recognised in profit and loss for the year ended 30 June 2020 in relation to these performance rights was $54,177 (2019:$35,674). e) The fair value of the retention performance rights of $315,000 was determined with reference to the share price on the grant date of $0.63. The fair value of the grant is being recognised over the respective vesting period of each tranche. The amount recognised in profit and loss for the year ended 30 June 2020 in relation to these performance rights was $135,947 (2019:$131,192.) f) The fair value of the FY19 Bonus performance rights of $145,000 was determined with reference to the share price on the grant date of $0.58. The fair value of the grant is being recognised over the respective vesting period of each tranche. The amount recognised in profit and loss for the year ended 30 June 2020 in relation to these performance rights was $58,390. Other share based-payments: Equity settled shares On 22 December 2017, 7,000 fully paid ordinary shares were issued to employees in connection with their performance for the year ended 30 June 2017. The shares will be held in escrow and released to the employees subject to their continued service until 1 July 2020. The fair value of the shares issued is $1.00 per share and the fair value of $7,000 is being recognised over the vesting period until 30 June 2020. The amount recognised in profit and loss for the year ended 30 June 2020 in relation to these shares was $2,337 (2019: $2,331) and these shares have now vested. 69 NOTES TO THE FINANCIAL REPORT 7. OTHER NOTES 7.4.2 Share-Based Payments (continued) Accounting policy - recognition and measurement The grant date fair value of equity-settled share-based payment arrangements granted to employees is generally recognised as an expense with a corresponding increase in equity over the vesting period of the awards. The amount recognised is adjusted to reflect the number of awards for which the related service and non-market performance conditions are expected to be met, such that the amount ultimately recognised is based on the awards that meet the related service and non-market performance conditions at the vesting date. 7.4.3 Transactions with KMP The Company’s policy for lending to Directors and management is that all loans are approved and deposits accepted on the same terms and conditions that applied to the general public for each class of loan or deposit. There are no loans that are impaired in relation to the loan balances with Directors or other KMPs. The Company’s policy for receiving deposits from KMP is that all transactions are approved and deposits accepted on the same terms and conditions that applied to the general public for each type of deposit. Total value of term and savings deposits from KMP at reporting date Total interest paid/payable on deposits to KMP Total value of loans to KMP at reporting date Total interest received/receivable from on loans from KMP 7.4.4 Transactions with other related parties 2020 $ 4,442 2019 $ 44,322 109 492,354 36,386 1,171 - - Other transactions between related parties include deposits from Director related entities or close family members of Directors, and other KMP. The Company’s policy for receiving deposits from related parties is that all transactions are approved and deposits accepted on the same terms and conditions that applied to customers for each type of deposit. There are no benefits paid or payable to the close family members of the KMP. 7.4.5 Jon Denovan - Dentons Mr Denovan was elected as a non-executive director in September 2019. Currently, Mr Denovan is a Partner with the national legal firm, Dentons for which payments for legal services have been made on normal commercial terms. Services include corporate advice, lending document reviews, license compliance services and loan settlements. Legal service paid/payable during the year to Dentons Amounts (owing)/payable at balance date 2020 $ 131,060 491 70 NOTES TO THE FINANCIAL REPORT 7. OTHER NOTES 7.4.6 John Kolenda – Aura Group Holdings Pte Ltd Mr Kolenda is Chairman and major shareholder of Aura Group Holdings Pte Ltd and its controlled entities (Aura Group). The Group’s subsidiary, Finsure Holding Pty Ltd has a sub-lease agreement with Aura Group and in addition pays/recoups a number of shared costs relating to the tenancy and certain employees. Amounts disclosed below relate to the period since 17 September 2018. Sub-lease income and other amounts recouped for services from Aura Group Amounts paid to Aura Group for services Amounts receivable from Aura Group 7.5 Auditor’s remuneration Auditors of the Group – KPMG In AUD Audit and review of the financial statements Regulatory audit services Total audit and assurance services Accounting and tax opinions Other advisory services Total advisory and other services Total amounts paid/payable to KPMG 2020 $ 446,325 2019 $ 635,101 - 79,824 263,933 194,495 2020 $ 291,270 109,000 400,270 50,000 - 50,000 2019 $ 267,000 89,000 356,000 - 7,000 7,000 450,270 363,000 Pursuant to the Company’s policy, the Chair of the Audit Committee approves non-audit services prior to their commencement. The Directors are satisfied the provision of non-audit services has complied with the auditor independence requirements in Australia. 71 NOTES TO THE FINANCIAL REPORT 7. OTHER NOTES 7.6 Standby borrowing facilities The Company has an overdraft facility of $1,200,000 (2019: $1,200,000) with CUSCAL Ltd which is secured by a cash deposit. As at 30 June 2020, the entire facility was unused (2019: $nil). 7.7 Material service contracts The Group has service contracts with and is economically dependent upon the following suppliers: (a) (b) CUSCAL Ltd CUSCAL provides central banking services, chequing services, card services, settlement services, and maintains the applications software used by the Company. This company operates the switching facilities used to link Redicards operated through rediATMs, and other approved electronic funds transfer suppliers, to the Company's core banking system. TransAction Solutions Limited (TAS) This company, an Integrated Data Processing Centre, provided and maintained the computer mainframe hardware utilised by the Company to host the Company’s Core Banking System and Internet Banking application, as well as providing hosted desktop management systems. (c) Temenos Australia Pty Ltd Temenos provides the Company’s T24 software as a service (SaaS) based Core Banking System which is used to record and maintain customer balances as well as providing Internet Banking and Mobile Banking applications. 7.8 Commitments and contingencies In thousands of AUD (a) Capital expenditure (b) Outstanding loan commitments Loans approved not advanced Loan funds available for redraw Unutilised overdraft limits Total lending commitments (c) Lease commitments Due not later than one month Due later than one month and not later than three months Due later than three months and not later than one year Due more than one year but less than five years Due more than five years 2020 $ - 2019 $ - 701 14,765 498 15,964 6,187 9,052 538 15,777 92 187 860 2,765 - 3,904 120 243 1,050 4,224 - 5,637 The Group has obligations under the terms of these leases of its office premises for terms of up to 6 years, with options to extend the leases. Lease payments are payable in advance by equal monthly instalments due on the 1st day of each month. Accounting policy - recognition and measurement Transactions are classified as contingent liabilities where the Group’s obligations depend on uncertain future events and principally consist of obligations to third parties. Items are classified as commitments where the Company has irrevocably committed itself to future transactions. These transactions will either result in the recognition of an asset or liability in future periods. The determination of whether an arrangement is, or contains, a lease is based on the substance of the arrangement at the inception date. The arrangement is assessed for whether fulfilment of the arrangement is dependent on the use of a specific asset or assets or the arrangement conveys a right to use the asset or assets, even if that right is not explicitly specified in an arrangement. 72 NOTES TO THE FINANCIAL REPORT 7. OTHER NOTES 7.9 Events subsequent to balance date On 14 July 2020 the Company received partial indemnification from the insurer in respect of $1,197,750 of the ATM fraud claim. On 7 August 2020, the Company announced the appointment of Mr. Brett Morgan as Chief Executive Officer of the Banking and Wholesale divisions with Mr. John Kolenda to assume the position of Chief Executive Officer of the Aggregation divisions. On 28 August 2020, the Company issued 450,000, performance rights to certain executives and employees. No other matters or circumstances of a material nature have arisen since the end of the financial year which in the opinion of the Directors significantly affected or may significantly affect the operations of the Company, the results of the operations or the state of affairs of the Group in future financial years. 73 NOTES TO THE FINANCIAL REPORT 8. ACCOUNTING POLICIES AND NEW STANDARDS 8.1 Accounting policies not described elsewhere in this financial report (i) (ii) Borrowings All loans and borrowings are initially recognised at fair value, net of transaction costs incurred. Borrowings are subsequently measured at amortised cost. Any difference between the proceeds (net of transaction costs) and the redemption amount is recognised in the statement of comprehensive income over the period of the loans and borrowings using the effective interest method. 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 Tax 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 cash flow statement on a gross basis, except for the GST component of investing and financing activities, which are disclosed as operating cash flows. 8.2 New accounting standards adopted in current period Australian Accounting Standards and Interpretations effective from the beginning of the current reporting period and their impact upon this financial report are as follows: 8.2.1 AASB 16 Leases A. Adoption of AASB 16 Leases The Group leases a number of branch and office premises. The leases typically run for a period of up to 5 years, and include fixed increases in lease payments or are referenced to CPI. Previously, these leases were classified as operating leases under AASB 117. The Group has applied AASB 16 using the modified retrospective approach and therefore the comparative information has not been restated and continues to be reported under AASB 117. In implementing AASB 16, the Group has elected to recognise the right-of-use asset equal to the lease liability, adjusted for lease balances previously recognised on the Group’s balance sheet as at transition date. Lease liabilities were determined by applying a weighted average incremental borrowing rate of 5.2%. Information about leases for which the Group is a lessee is presented below. i. Right-of-use assets Right-of-use assets relate to leased branch and office premises that are presented within property, plant and equipment. IN THOUSANDS OF AUD Consol Bank Balance recognised at 1 July 2019 upon adoption of AASB 16 New leases entered into during the period Depreciation charge for the period Balance at 30 June 2020 $ 3,371 820 (910) 3,281 $ 761 - (157) 604 74 NOTES TO THE FINANCIAL REPORT 8. ACCOUNTING POLICIES AND NEW STANDARDS 8.2.1 AASB 16 Leases (continued) ii. Operating leases – comparative period At 30 June 2019, the future minimum lease payments under non-cancellable operating leases were payable as follows. IN THOUSANDS OF AUD 30 June 2019 Due not later than one year Due later than one year and not later than five years Greater than five years $ 1,373 4,358 107 5,838 The lease liability recognised at transitional date is materially consistent to the lease commitments disclosed in the 30 June 2019 financial report, when remeasured on a discounted basis. Differences arise due to the exclusion of leases expiring within 12 months of the transitional date. IN THOUSANDS OF AUD Operating lease commitments at 30 June 2019 as disclosed in the Group’s consolidated financial statements Discounted using the incremental borrowing rate at 1 July 2019 Recognition exemption for leases with less than 12 months of term remaining at transition date Lease liabilities recognised at 1 July 2019 $ 5,838 5,211 (194) 5,017 iii. Sub-lease finance lease receivable The Group sub-leases portions of excess office space to third parties in its capacity as lessor. Leases under AASB 16 IN THOUSANDS OF AUD Balance recognised at 1 July 2019 upon adoption of AASB 16 Repayments Balance at 30 June 2020 Consol Bank $ 1,410 (289) 1,121 $ - - - 75 NOTES TO THE FINANCIAL REPORT 8. ACCOUNTING POLICIES AND NEW STANDARDS 8.2.1 AASB 16 Leases (continued) Finance lease receivables The following table sets out a maturity analysis of lease receivables, showing the undiscounted lease payments to be received after the reporting date. Gross investment in finance leases, receivable IN THOUSANDS OF AUD Less than one year Between one and two years Between two and three years Between three and four years Unearned finance income Net investment in finance leases iv. Lease liability 30 June 2020 $ 368 414 398 67 1,247 (126) 1,121 The Group has recognised lease liabilities based on the modified retrospective approach as of 1 July 2019 in relation to its branch and office leases. A reconciliation of the lease liability at 30 June 2020 is set out below. IN THOUSANDS OF AUD Balance recognised at 1 July 2019 upon adoption of AASB 16 New lease entered into during the period Repayments Balance at 30 June 2020 Consol $ 5,017 820 (1,191) 4,646 Bank $ 779 - (108) 671 Lease liabilities are payable as follows. IN THOUSANDS OF AUD Less than one year Between one and five years Consol ($) Bank ($) Interest Future minimum lease payments Present value of lease payments Future minimum lease payments Interest 1,509 3,582 5,091 210 235 445 1,299 3,347 4,646 161 594 755 31 53 84 Present value of lease payments 130 541 671 Accounting policy - recognition and measurement The Group has applied AASB 16 using the modified retrospective approach and therefore the comparative information has not been restated and continues to be reported under AASB 117 in accordance with the accounting policies contained in the Group’s 30 June 2019 Annual Financial Report. 76 NOTES TO THE FINANCIAL REPORT 8. ACCOUNTING POLICIES AND NEW STANDARDS 8.2.1 AASB 16 Leases (continued) Policy applicable from 1 July 2019 At inception of a contract, the Group assesses whether a contract is, or contains, a lease. A contract is, or contains a lease if the contact conveys the right to control the use of an identified asset for a period of time in exchange for consideration. To assess whether a contract conveys the right to control the use of an identified asset, the Group uses the definition of a lease in AASB 16. This policy is applied to contracts entered into (or changed) on or after 1 July 2019. Group acting as a lessee At commencement or on modification of a contract that contains a lease component, the Group allocates consideration in the contract to each lease component on the basis of its relative stand-alone price. The Group recognises a right-of-use asset and a lease liability at the lease commencement date. The right-of- use asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for any lease payments made at or before the commencement date, plus any initial direct costs incurred and an estimate of costs to dismantle and remove any improvements made to branches or office premises. The right-of-use asset is subsequently depreciated using the straight-line method from the commencement date to the end of the lease term. In addition, the right-of-use asset is periodically reduced by impairment losses, if any, and adjusted for certain remeasurements of the lease liability. The lease liability is initially measured at the present value of the lease payments that are not paid at the lease commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Group’s incremental borrowing rate. Lease payments included in the measurement of the lease liability comprise the following: Fixed payments, including in-substance fixed payments; or Variable lease payments that depend on an index or a rate, initially measured using the index or rate as at the commencement date. The lease liability is measured at amortised cost using the effective interest method. It is remeasured when there is a change in future lease payments arising from a change in an index or rate, if there is a change in the Group’s assessment of whether it will exercise a purchase, extension or termination option or if there is a revised in- substance fixed lease payment. When the lease liability is remeasured in this way, a corresponding adjustment is made to the carrying amount of the right-of-use asset, or is recorded in profit or loss if the carrying amount of the right-of-use asset has been reduced to zero. The Group presents right-of-use assets within ‘property, plant and equipment’ and lease liabilities in ‘other liabilities’ in the Consolidated Statement of Financial Position. Short-term leases and leases of low-value assets The Group has elected not to recognise right-of-use assets and lease liabilities for leases of low-value assets and short-term leases. The Group recognises the lease payments associated with these leases as an expense on a straight-line basis over the lease term. Group acting as a lessor At inception or on modification of a contact that contains a lease component, the Group allocates the consideration in the contract to each lease component on the basis of their relative stand-alone selling prices. When the Group acts as lessor, it determines at lease inception whether the lease is a finance lease or an operating lease. To classify each lease, the Group makes an overall assessment of whether the lease transfers substantially all of the risks and rewards incidental to ownership of the underlying asset. If this is the case, the lease is a finance lease; if not, then it is an operating lease. As part of this assessment, the Group considers certain indicators such as whether the lease is for the major part of the economic life of the asset. 77 DIRECTORS’ DECLARATION In accordance with a resolution of the Directors of BNK Banking Corporation Limited, I declare that: 1. In the opinion of the Directors: a. The consolidated financial statements and notes of BNK Banking Corporation Limited for the financial year ended 30 June 2020 are in accordance with the Corporations Act 2001, including: i. Giving a true and fair view of its financial position as at 30 June 2020 and performance for the financial year ended on that date; ii. Complying with Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Regulations 2001. b. The Directors draw attention to Note 1.2(b) to the consolidated financial statements which include a statement of compliance with International Financial Reporting Standards. c. There are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable. 2. This declaration has been made after receiving the declarations required to be made to the Directors in accordance with section 295A of the Corporations Act 2001 for the financial year ended 30 June 2020. On behalf of the Board Jon Sutton Director 28 August 2020 78 Independent Auditor’s Report To the shareholders of BNK Banking Corporation Limited Report on the audits of the Financial Reports Opinions We have audited the consolidated Financial Report of BNK Banking Corporation Limited (the Group Financial Report). We have also audited the Financial Report of BNK Banking Corporation Limited (the Company Financial Report). In our opinion, each of the accompanying Group Financial Report and Company Financial Report are in accordance with the Corporations Act 2001, including: • giving a true and fair view of the Group’s and of the Company’s financial position as at 30 June 2020 and of its financial performance for the year ended on that date; and • complying with Australian Accounting Standards and the Corporations Regulations 2001. The respective Financial Reports of the Group and the Company comprise: • Statements of financial position as at 30 June 2020 • Statements of profit or loss and other comprehensive income, statements of changes in equity, and statements of cash flows for the year then ended • Notes including a summary of significant accounting policies • Directors’ Declaration. The Group consists of BNK Banking Corporation Limited (the Company) and the entities it controlled at the year-end or from time to time during the financial year. Basis for opinions We conducted our audits in accordance with Australian Auditing Standards. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinions. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audits of the Financial Reports section of our report. We are independent of the Group and Company in accordance with 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 audits of the Financial Reports in Australia. We have fulfilled our other ethical responsibilities in accordance with the Code. KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Liability limited by a scheme approved under Professional Standards Legislation. 79 Key Audit Matters The Key Audit Matters we identified for both the Group and Company are: • Loans and Advances - Provision for credit losses The additional Key Audit Matters we identified for the Group are: • Carrying Value of Goodwill and other intangible assets • Net Present Value of future trail commission receivable and payable Key Audit Matters are those matters that, in our professional judgment, were of most significance in our respective audits of the Financial Reports of the current period. These matters were addressed in the context of our audits of each of the Financial Reports as a whole, and in forming our opinions thereon, and we do not provide a separate opinion on these matters. Loans and Advances - Provision for credit losses $0.7m – Group and Company Refer to Note 3.2 to the Group and Company Financial Report The key audit matter How the matter was addressed in our audit Expected credit loss (ECL) provisions for loans and advances held at amortized cost is a key audit matter due to the significance of loans and advance balances, the degree of complexity and judgement applied by the Group and Company in determining the provisions, and the judgement required by us in challenging these estimates. The ECL model is reliant on numerous data inputs and assumptions including past historical data the Group and Company used to determine probabilities of default as well as incorporating forward-looking information. We used judgement to assess the ECL model’s application of the requirements in AASB 9 Financial Instruments. This includes the assumptions made by the Group and Company in determining what represents a significant increase in credit risk, the method used to calculate the probability of default and loss given default based on the staging criteria required and judgement around the impact of COVID-19 on forward-looking information. We involved credit specialists to supplement our senior audit team members in assessing this key audit matter. Our procedures included: • Evaluated the Group and Company’s processes and tested key controls such as: - Reconciliation of historical loan portfolio data used in the model to determine probability of default to the underlying core banking system; and - Management’s review and approval of the ECL model and key assumptions used. • Assessed the methodology in the ECL model, including relevant adjustments for COVID-19, against the requirements in the accounting standards and our understanding of industry practice; • Tested the integrity of the ECL model, including the accuracy of the underlying calculations; • Tested a sample of key data elements used in determining the probability of default such as historical default rates to relevant source systems; • Challenged the assumptions for calculating the exposures at default used by the Group and Company to determine the loss given default in the ECL model by comparing these to our understanding of the Group’s loans and advances portfolio, including those in COVID- 19 deferral programs, and the industry and markets the Group and Company operate in; • Comparing the output of the ECL model to the expected credit loss provision recorded in the financial report; and • Assessment of the Group’s disclosures using our understanding obtained from our testing and the requirements of the accounting standards. 80 Carrying Value of Goodwill and other intangible assets $49.6million – Group Refer to Note 7.2 to the Group Financial Report The key audit matter How the matter was addressed in our audits A key audit matter was the Group’s annual testing of goodwill and other intangible assets for impairment given the extent of judgement involved and the financial significance of the Goodwill and other identifiable intangible assets recognised. We focused on the key assumptions the Group applied in their value in use (“VIU”) models for each CGU, including: • Budgeted revenue growth rates; • Terminal value growth rates; and • Discount rates used specific to each of the three CGUs, Banking, Aggregation and Wholesale. These assumptions and rates are complicated in nature and vary according to the conditions and environment the specific Cash Generating Unit (CGU) is subject to from time to time. The assumptions and rates are based on historical performance and forward looking budgeting taking into account the Group’s strategy, market conditions, COVID-19 impacts, emerging regulatory changes and industry developments making them judgemental in nature. The Group’s modelling is sensitive to small changes in the discount rates and terminal value growth rates used. We involved valuation specialists to supplement our senior audit team members in assessing this key audit matter. Our procedures included: • Considered the Group’s determination of their CGUs based on our understanding of the operations of the Group’s business and how independent cash flows were generated, against the requirements of the accounting standards; • Worked with our valuation specialists to: - - - assess the appropriateness of the Group’s use of the value in use method to perform the annual test of goodwill for impairment against the requirements of the accounting standards; assess the integrity of the VIU models used, including the accuracy of the underlying calculation formulas; and independently develop a discount rate range considered comparable using publicly available market data for comparable entities, adjusted by risk factors specific to the Group and the industry it operates in. • Assessed the reasonableness of the budgeted revenue growth rates contained in the VIU models by comparing Board approved forecasts to Group budgets and actual results to inform our evaluation of the forecasts incorporated in the models; • Challenged the significant budgeted revenue growth rate assumptions and terminal value growth rates in light of the Group’s strategy taking into account market conditions including the impacts of COVID-19 and emerging regulatory changes. We compared budgeted revenue growth rates and terminal value growth rates to industry trends and expectations, and considered differences for the Group’s operations. We used our knowledge of the Group, their past performance, business and customers, and our industry experience; • Considered the sensitivity of the models by varying key assumptions, such as discount rates and growth rates, within a reasonably possible range. We did this to identify those assumptions at higher risk of bias or inconsistency in application and to focus our further procedures; and • Assessed the disclosures in the financial report using our understanding obtained from our testing and against the requirements of the accounting standards. 81 Net Present Value of future trail commission receivable $387.2million and payable $343.0million – Group Refer to Note 4.4 to the Group Financial Report The key audit matter How the matter was addressed in our audit The Group earns and pays trail commissions over the life of the loans resulting in a trail commission receivable of $387 million and trail commission payable of $343 million. This is a key audit matter due to the significant judgement we applied to assess the Group’s estimation of the value of trail commissions receivable and payable across trail commission portfolios. We focused on the key assumptions the Group applied in their net present value (NPV) model, including: • Discount rates per annum; • Percentage of commissions paid to brokers across different portfolios; and • Weighted average life of aggregation, wholesale, and total portfolio loans. We involved our valuation specialists in assessing this key audit matter. Our procedures included: • Evaluated the Group’s processes and tested key controls such as the review and approval of assumptions used in the Group’s NPV model for estimating the value of the trail commissions receivable and payable; • Assessed the extraction of loan data used in the Group’s NPV model for completeness and accuracy by testing a sample of commission contract rates back to broker agreements; • Worked with our valuation specialists to: - - - assess the appropriateness of the methodology adopted in the Group’s NPV model across the trail commission portfolios against accepted industry practice and the requirements of the accounting standards; evaluate the key assumptions such as discount rates, weighted average life and percentages of commissions paid against publicly available market data for comparable entities; and assess the integrity of the Group’s NPV model including the accuracy of the underlying calculation formulas. • Evaluated the sensitivity of the NPV model calculations by considering reasonably possible changes to the discount rate and weighted average life rates. We did this to identify those assumptions at higher risk of bias or inconsistency in application and to focus our further procedures; and • Assessment of the adequacy of disclosures against the requirements of the accounting standards. 82 Other Information Other Information is financial and non-financial information in BNK Banking Corporation Limited’s annual reporting which is provided in addition to the Financial Reports and the Auditor’s Report. The Directors are responsible for the Other Information. Our opinions on the Financial Reports do not cover the Other Information and, accordingly, we do not express an audit opinion or any form of assurance conclusion thereon, with the exception of the Remuneration Report and our related assurance opinion. In connection with our audits of the Financial Reports, our responsibility is to read the Other Information. In doing so, we consider whether the Other Information is materially inconsistent with the Financial Reports or our knowledge obtained in the audits, or otherwise appears to be materially misstated. We are required to report if we conclude that there is a material misstatement of this Other Information, and based on the work we have performed on the Other Information that we obtained prior to the date of this Auditor’s Report we have nothing to report. Responsibilities of the Directors for the Financial Reports The Directors are responsible for: • preparing the Financial Reports that give a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 • implementing necessary internal controls to enable the preparation of a Financial Report that gives a true and fair view and is free from material misstatement, whether due to fraud or error • assessing the Group and Company’s ability to continue as a going concern and whether the use of the going concern basis of accounting is appropriate. This includes disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless they either intend to liquidate the Group or Company or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audits of the Financial Reports Our objective is: • • to obtain reasonable assurance about whether each of the Financial Reports as a whole are free from material misstatement, whether due to fraud or error; and to issue an Auditor’s Report that includes our opinions. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error. They 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 the Financial Report. A further description of our responsibilities for the audits of the Financial Reports is located at the Auditing and Assurance Standards Board website at: http://www.auasb.gov.au/auditors_responsibilities/ar1.pdf. This description forms part of our Auditor’s Report. 83 Report on the Remuneration Report Opinion Directors’ responsibilities In our opinion, the Remuneration Report of BNK Banking Corporation Limited for the year ended 30 June 2020, complies with Section 300A of the Corporations Act 2001. 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 responsibilities We have audited the Remuneration Report included in pages 11 to 21 of the Directors’ report for the year ended 30 June 2020. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. KPMG Nicholas Buchanan Partner Sydney 28 August 2020 KPM_INI_01 PAR_SIG_01 PAR_NAM_01 PAR_POS_01 PAR_DAT_01 PAR_CIT_01 84 ADDITIONAL ASX INFORMATION Additional information required by the Australian Stock Exchange Ltd and not shown elsewhere in this report is as follows. The information is current as at 28 August 2020. (a) Distribution of equity securities Spread of holdings 1 - 1,000 1,001 - 5,000 10,000 5,001 - 10,001 - 100,000 100,001+ TOTAL Number of holders 84 1,550 80 244 89 1,846 Number of units Percentage of total issued capital 48,314 3,753,031 668,795 9,465,271 81,101,655 82,415,399 0.051 3.949 0.704 9.960 85.337 100 % (b) Twenty largest holders of quoted equity securities Rank Shareholder Number of units Percentage of issued capital 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 JOHN KOLENDA SF LEGACY INVESTMENTS LIMITED CALVIN NG HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED RESIMAC LIMITED AOYIN GROUP LIMITED CARPE DIEM ASSET MANAGEMENT PTY LTD RTL GROUP INVESTMENTS PTY LTD NOAH JAMES INVESTMENTS PTY LTD KOLEET PTY LTD INVIA CUSTODIAN PTY LTD FIRSTMAC LIMITED CITICORP NOMINEES PTY LTD MR WAYNE HOSKING + MISS BERNADETTE WILLIAMS SAVOT 1 PTY LTD 16 SIMON BEDNAR & JENNIFER BEDNAR 17 18 19 20 VANVAL INVESTMENTS PTY LTD SIMON LYONS & JENNIFER LYONS PYRAMID CAPITAL K M K SUPER HOLDINGS PTY LTD TOTAL 13,302,952 9,200,000 7,674,747 5,219,881 4,468,902 2,629,996 2,430,190 2,000,000 1,989,252 1,841,144 1,784,021 1,769,416 1,698,420 1,440,000 1,394,605 1,153,333 1,153,333 1,089,667 775,000 745,000 14.00 9.68 8.07 5.49 4.70 2.77 2.56 2.104 2.09 1.94 1.88 1.86 1.79 1.52 1.47 1.21 1.21 1.15 0.82 0.78 63,759,869 67.09 85 

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