BNK Banking Corporation Limited Level 14, 191 St Georges Terrace Perth WA 6000 26 August 2022 BNK Banking Corporation Limited – Full Year Final Report (Appendix 4E) for the year ended 30 June 2022 The Directors of BNK Banking Corporation Limited (the “Company”) are pleased to announce the audited results of the Company for the year ended 30 June 2022 as follows: Results for announcement to the market Extracted from the audited Financial Statements for the year ended Revenue from continuing operations1 Revenue from discontinuing operations Profit/(loss) after tax attributable to members Movement (18%) (21%) 956% $’000 30 June 2022 $’000 30 June 2021 21,411 266,225 59,787 26,151 337,405 5,659 From continuing operations (excl. gain on sale of discontinuing operations)2 (267%) (12,391) (3,374) From discontinuing operations 699% 72,178 9,033 1 Includes gross contract asset reduction of income by $11m during FY22. As comparable FY21 increase in income of $3m (net movement of $14m) 2 Includes net contract asset expense of $6.6m and $5.9m of Finsure disposal related expenses in FY22. Dividend Information Special Dividend 2022 Ex-dividend Date Record Date Payment Date Amount Per Share (cents) 34 Franked Amount per Share (cents) 34 Tax rate for franking credit 30% 18 July 2022 19 July 2022 26 July 2022 Net Tangible Assets per share 30 June 2022 $1.55 30 June 2021 $0.74 The remainder of the information requiring disclosure to comply with Listing Rule 4.3A is contained in the attached copy of the Financial Statements and comments on performance of the Company included in the Investor Presentation dated 26 August 2022. The following subsidiaries were disposed of during the year ended 30 June 2022: Finsure Finance and Insurance Pty Ltd (previously 100% owned) Beagle Finance Pty Limited (previously 100% owned) Finsure Holding Pty Ltd (previously 100% owned) Finsure Domain Names Pty. Ltd. (previously 100% owned) 1300 Home Loan Holdings Pty Limited (previously 100% owned) Mystro CRM Pty Limited (previously 100% owned) Wikibroker Pty limited (previously 100% owned) Further information regarding BNK Banking Corporation Limited and its business activities can be obtained by visiting the Company’s website at bnk.com.au Yours faithfully Jessie Klarić Company Secretary bnk.com.au | info@bnk.com.au | 1300 BNK BANK | ABN 63 087 651 849 | AFSL/Australian Credit License 246884 | BSB 806043 BNK Banking Corporation Limited Annual Financial Report ABN: 63 087 651 849 30 June 2022 1 Contents CORPORATE INFORMATION .......................................................................................................... 3 MESSAGE FROM OUR CHAIRMAN, DON KOCH ........................................................................ 4 DIRECTORS’ REPORT .....................................................................................................................6 REMUNERATION REPORT (AUDITED) ....................................................................................... 14 INDEPENDENT AUDITOR’S DECLARATION ............................................................................. 28 STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME ................ 29 STATEMENTS OF FINANCIAL POSITION ................................................................................. 30 STATEMENTS OF CHANGES IN EQUITY ................................................................................... 31 STATEMENTS OF CASH FLOWS ............................................................................................... 33 NOTES TO THE FINANCIAL REPORT ........................................................................................ 34 DIRECTORS’ DECLARATION ....................................................................................................... 85 INDEPENDENT AUDITOR’S REPORT ......................................................................................... 86 ADDITIONAL ASX INFORMATION .............................................................................................. 93 2 CORPORATE INFORMATION ACN: 087 651 849 Directors Mr. Don Koch Mr. Jon Denovan Mr. Peter Hall Ms. Elizabeth Aris Ms. Michelle Guthrie Mr. Calvin Ng Company Secretary Ms Jessie Klaric (Chairman and Non-Executive Director) (Independent Non-Executive Director) (Independent Non-Executive Director) (Independent Non-Executive Director (Independent Non-Executive Director) (Non-Independent, Non-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: Level 5, 50 Cavill Avenue Surfers Paradise Qld 4217 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 MESSAGE FROM OUR CHAIRMAN, DON KOCH BNK Banking Corporation Limited Annual Financial Report 30 June 2022 Dear Shareholder, During the 2022 Financial Year, the BNK Group delivered improved financial performance, whilst concurrently implementing several initiatives to create a stronger platform for future growth. FY22 Results Statutory NPAT was $59.8 million compared to $5.7 million for the prior year. The Company remains in a strong capital position with a Capital Adequacy Ratio (Level 2) of 47.5%, an increase of 26.1% from FY21. A full explanation of the financial results is contained within the Operating and Financial Review. Strong Platform for Growth The past 12 months have seen BNK achieve many important milestones, further building on the Company’s foundation for long term success. The sale of Finsure to MA Financial Group Limited was completed on 7 February 2022, with BNK receiving $152.2 million in consideration. The sale represents an outstanding result. The gain on sale was recognised in the second half of the financial year, which was the primary driver of the Group’s $59.8m Statutory NPAT. On 3 May 2022, the Board announced its intention to return $60m in sale proceeds to shareholders, with an initial $40m returned to shareholders as a fully franked dividend on 26 July 2022. The Board intends to pay the approximate remaining $20m as a capital return upon obtaining regulatory approval. The material return to shareholders and the strong capital position of BNK following the Finsure sale are the first of many highlights. Our growth trajectory in settlements are highlighted by a record $309 million in total settlements in the fourth quarter, and 83% year on year growth in the balance sheet and Bendigo & Adelaide Bank funded portfolio to $985m. Our improved deposit base, which grew 52% year on year, and low arrears/strong risk management capabilities, particularly during Covid, demonstrate the Company’s ability to perform strongly across all key areas. Furthermore, the Company commenced its successful securitisation program, which has provided additional funding diversity in FY22 following the announcement in mid-2021 of a $250 million warehouse program with Bendigo & Adelaide Bank, and a $500 million warehouse with Goldman Sachs. The success of the Company’s wholesale arm, Better Choice, was recognised by being awarded Non-Bank Lender of the Year at the Australian Lending Awards for the second consecutive year, adding to the significant accolades received by the Company. We are a fast growing and well capitalised company, strongly positioned to accelerate growth, with significant expansion and margin transformation opportunities ahead. Board and Leadership Changes During the 2022 Financial Year, we further bolstered the BNK Board with the appointment of new and experienced Board & management team driving the next stage of growth, with additional NEDs bringing diverse capabilities and skills. Michelle Guthrie and Calvin Ng both joined the Board in July 2021. Michelle brings media, entertainment, funds management, technology and professional services spanning more than 30 years, with Calvin contributing significant investment banking, mergers & acquisitions and funds management experience and was also a co- founder of Finsure. We also strengthened our management team with the appointment of Allan Savins as CEO. Allan’s impact on the performance of the business has been immediate and we look forward to Allan’s continued contribution to the company’s success. 4 MESSAGE FROM OUR CHAIRMAN (continued) Summary FY22 represented a milestone year for the Company and I am highly encouraged by the strong results we have delivered in the last 12 months, which once again demonstrates the value proposition to our distribution networks and the commitment and dedication of the BNK team. In closing, I would like to thank shareholders for their continued support of the Company and we look forward to a strong 2023 Financial Year as we embark on a journey of business transformation towards higher margin returns and opportunity. 5 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 2022 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 below. Current directors Mr Don Koch Mr Jon Denovan Mr Peter Hall Ms Elizabeth Aris Ms Michelle Guthrie Mr Calvin Ng Mr John Kolenda Chairman and Non-Executive Director Deputy Chairman and Non-Executive Director Non-Executive Director Non-Executive Director Non-Executive Director (commenced 15 July 2021) Non-Executive Director (commenced 15 July 2021) Executive Director (ceased 7 February 2022) Don Koch (Independent Chairman and Non-Executive Director) Mr Koch was appointed a Director on 11 June 2019 and Chairman of the Group on 7 July 2021. 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 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, Co-Chair and Advisor with the UTS Business School Industry Advisory Board, Chair of Cache Investment Management, (an Investment Management platform) Chair of ResusRight (a medtech manufacturer), Director of Target Fifteen and a Board Member of Glaucoma Australia. He holds a Masters in Banking and Finance from UTS, is a graduate of the Australian Institute of Company Directors and has completed the International Directors Program with INSEAD in Switzerland. Mr Koch is the Chair of the Remuneration Committee and a Member of the Risk & Compliance Committee, Board Credit Committee and Audit Committee. Peter Hall (Independent 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) and Chair of the CoreLogic RP Data sponsored Residential Valuation Industry Advisory Group. 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, was a Fellow of the Australian Institute of Company Directors 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. Mr Hall is a Non-Executive Director of Pioneer Credit Limit (commenced January 2021). Jon Denovan (Deputy Chairman and Independent Non-Executive Director) Mr Denovan is a lawyer with significant banking, commercial, and property experience. Mr Denovan is a Special Counsel with leading national law firm having previously been the Managing Director/Partner of that firm (then known Gadens Lawyers Australia Limited). Mr Denovan is recognised as a leading lawyer in financial services regulation in Australia. Mr Denovan is currently a director and deputy chair BNK Banking Corporation Limited, chair of Sydney Bus Museum, and a director numerous other finance and property private companies. He was previously chair of Trainworks Limited (a NSW government instrumentality), a director of Aussie Home Loans Limited, the Credit and Investments Ombudsman Limited (CIO), and the Mortgage & Finance Association of Australia (MFAA). Mr 6 DIRECTORS’ REPORT (continued) Jon Denovan (Independent Deputy Chairman and Non-Executive Director) (continued) Denovan was the first honorary member of the Mortgage & Finance Association of Australia in recognition of his contribution to the mortgage industry. Complementing Mr Denovan’s skills in the finance industry is his significant experience in the property industry having worked with many leading property companies. Mr Denovan is the Chair of the Audit Committee, a member of the Risk & Compliance Committee and Board Credit Committee. Elizabeth Aris (Independent Non-Executive Director) Ms Aris was appointed a Director on 18 June 2021 and is a senior business executive with experience in the US, China and Australia. Ms Aris is a Board Member or Advisor to a number of growth stage Technology businesses operating in multiple countries, and was recently Group Executive, Enterprise & Government at TPG Telecom. Prior to that Ms Aris held senior executive positions at Tasmanet, Trujillo Technology Group, Alcatel- Lucent (now Nokia) and Telstra, and consulting roles with Microsoft and Sprint. Ms Aris commenced her career in banking, and was a member of the Retail Bank executive team at Westpac. She has served as a Non- Executive Director in both publicly listed and private companies and spent 5 years in New York establishing a technology start up from concept to operations. Ms Aris holds a Bachelor of Commerce (UWA) and a Post Graduate Diploma of Corporation Finance (UNSW). Ms Aris is a member of the Remuneration Committee. During the last three years, Ms Aris has served on the Board of Vivid Technology Limited (Non-Executive Director from October 2018 to July 2019). Michelle Guthrie (Independent Non-Executive Director) Ms Guthrie was appointed a Director on 15 July 2021. Ms Guthrie has had an extensive career in media, entertainment, funds management, technology and professional services spanning more than 30 years, in both executive and non-executive roles. Ms Guthrie was Managing Director of the Australian Broadcasting Corporation between 2016 and 2018. Prior to that, Ms Guthrie held senior roles with Google, where she was the Managing Director of several divisions in APAC. Ms Guthrie was Managing Director of Providence Equity, a funds management firm based in Hong Kong, Chief Executive of Star Group and Corporate Counsel for Foxtel and News International. Ms Guthrie commenced her working career at Allen, Allen & Hemsley and holds a Bachelor of Arts and Law (Sydney). Ms Guthrie has served on the Board of the following listed companies in the last three years: StarHub Limited (Non-Executive Director from August 2017 to date) Catapult Group International Limited (Non-Executive Director from December 2019 to date) Mighty Kingdom Limited (from November 2020 to date) Calvin Ng (Non-Independent Non-Executive Director) Mr Ng was appointed a Director on 15 July 2021. Mr Ng has significant investment banking, mergers & acquisitions and funds management experience. Mr Ng is a co-founder and Managing Director of the Aura Group, an independent corporate advisory, funds and wealth management firm. He was also a co-founder of Finsure, which merged with Goldfields Money Limited in 2018 to form BNK. Mr Ng holds a Bachelor of Commerce and Bachelor of Laws (UNSW) and was admitted to practice in the Supreme Court of NSW in 2010. Mr Ng has served on the Board of the following listed companies in the last three years: iBuyNew Group Limited (from February 2013 to September 2019) Catapult Group International Limited (Non-Executive Director from November 2013 to November 2019) FORMER DIRECTORS John Kolenda (Previous Executive Director) Mr Kolenda ceased to be a director upon completion of the sale of Finsure to MA Financial Group Limited on 7 February 2022. Jon Sutton (Previous Chairman and Independent Non-Executive Director) Mr Sutton was appointed to the Board on 22 October 2019 and resigned as a director on 7 July 2021. 7 DIRECTORS’ REPORT (continued) COMPANY SECRETARY Jessie Klaric Ms Klaric was appointed as company Secretary on 14 March 2022. Ms Klaric has over 15 years’ experience providing legal advice to financial institutions and joined BNK in 2019 as Senior Legal Counsel. Prior to joining BNK Jessie worked at Dentons for over 10 years including a secondment to Bankwest in 2014. Malcolm Cowell Mr Cowell was the previous Company Secretary from 1 March 2017 until 14 March 2022. PRINCIPAL ACTIVITIES The principal activities of the Group were the provision of retail banking, mortgage management and mortgage broker aggregation services. RECONCILIATION BETWEEN THE STATUTORY RESULTS (IFRS) AND THE MANAGEMENT REPORTED (NON IFRS) RESULTS The discussion of operating performance in the Operating and Financial Review section of this report is presented on a statutory basis under IFRS with certain adjustments to reflect a management reported basis of the underlying performance of the business, unless otherwise stated. Management reported results are non-IFRS financial information and are not directly comparable to the statutory results presented in other parts of this financial report. A reconciliation between the two is provided in this section and the guidance provided in Australian Securities and Investments Commission Regulatory Guide 230 'Disclosing non IFRS financial information' ('RG 230') has been followed when presenting the management reported results. Non-IFRS financial information has not been audited by the external auditor, but has been sourced from the financial records of the Group. The reconciliation between the statutory results (IFRS) and the management/underlying reported (non- IFRS) results is presented below: Statutory Net Profit After Tax ($’000s) Revenue adjustments Disposal of Subsidiary (before tax) Sale of equities Expense adjustments IFRS fair value adjustments from Finsure acquisition Software development costs Restructuring and transition costs Share Based Payments Tax effect of adjustments Disposal of Subsidiary (net of tax) Underlying Net Profit after Tax ($’000s) (Management-reported results) FY22 FY21 % change 59,786 5,659 956.9% - (319) - - 4,833 1,742 (745) (72,178) (57) - 573 1,832 - - (888) - (6,881) 7,119 (196.7%) The adjustments summarised above reflect the current year (FY22) impact of: the gain on sale from the disposal of Finsure including distribution received (note 2.2.1); the costs related to the Finsure sale, including restructuring and accelerated share based payments (noted within operating expenses 2.4); and distribution received from an investment in Cuscal (noted within other income 2.3). Adjustments for the prior year (FY21) reflect the impact of: the amortisation of fair value adjustments to intangible assets arising from the acquisition of Finsure in 2018; the adoption of new accounting standard requirements mandating the expensing of software development costs that were previously eligible to be capitalised; and the disposal of non-core subsidiaries. 8 DIRECTORS’ REPORT (continued) Key operating and financial metrics for the period were as follows: Key Metric Amounts in thousands of AUD 30 June 2022 ($’000s) 30 June 2021 ($000s) Movement Net interest revenue Net-commission (expense)/income Non-interest revenue/(expense) Gain from discontinued operations, net of tax Statutory net profit after tax Underlying net (loss)/profit after tax Cash earnings Total assets On balance sheet loans – direct funded On balance sheet loans – warehouse funded Off balance sheet lending portfolio Aggregation loan book Deposits Other key metrics Net interest margin (average) Cost to income ratio Capital adequacy ratio 12,924 (4,808) 3,306 72,178 59,787 (6,881) 671 1,441,782 782,698 207,825 1,684,559 - 964,589 1.26% 104% 47.51% 7,784* 4,108* 1,933* 9,033 5,659 7,119 2,383 1,321,840 501,705 38,234 1,933,474 56,619,729 635,647 1.67% 72.1% 22.02% 67.3% (217.0%) 71.0% 699.0% 956.9% (196.7) (71.8%) 9.1% 56.0% 443.6% (12.9%) - 51.7% (27.1%) 43.7% 115.6% * Restated FY21 to exclude discontinued operations elements OPERATING AND FINANCIAL REVIEW The Group recorded an underlying net loss after tax for the year ended 30 June 2022 (FY22) of $6,880,730 (2021: profit of $7,119,000). Statutory net profit after tax of $59,786,787 a significant increase on the prior period due to the gain on disposal of Finsure, whilst cash earnings of $671,125 represented a material decrease over the comparative year. Earnings per share for 30 June 2022 is 51.61 (2021: 5.85). Sale of Finsure The sale of Finsure to MA Financial Group Limited announced to the market on 15 December 2021 completed on 7 February 2022 with the Group receiving $152.2 million in consideration. On 3 May 2022, the Board announced an intention to return $60m in sale proceeds to shareholders. On 26 July 2022, $40m was returned to shareholders as a fully franked dividend. The Board intends to pay the remaining $20m as a capital return, once regulatory approval is obtained. The assets and liabilities of Finsure are no longer represented in the financial report for June 2022, and the gain on sale was recognised in the second half of the financial year. During the reporting period, Finsure continued to generate loan originations through its platform of funders reflecting the ongoing productivity growth of accredited brokers and strong property market conditions. Finsure’s statutory net profit result for the period from 1 July 2021 to 7 February 2022 was $5.1m. Record settlements and loan-book growth The Group had increased settlements of on balance sheet loans, with the direct funded loan book increasing 56% year on year. The distribution capability of the Group’s Better Choice brand combined with capital and deposit raising initiatives during the year were key enables of this growth. Deposit growth of 52% resulted in a loan to deposit ratio of 81% demonstrating the ability to continue to raise deposits in the current environment which will fund growth. In May 2021, the Group launched its first securitisation warehouse arrangement funded by Bendigo & Adelaide Bank and Blackstone. The warehouse further diversifies the Group’s funding sources in a capital efficient manner. Loans originated into the warehouse are accounted for on balance sheet but the Group has achieved regulatory capital relief for the structure. 9 DIRECTORS’ REPORT (continued) OPERATING AND FINANCIAL REVIEW (continued) In August 2021, the Group launched its second securitisation warehouse arrangement funded by Goldman Sachs. The warehouse leverages the Groups specialist lending capabilities. Loans originated into the warehouse are not recognized on balance sheet. BNK receives servicing fees and a post term out a profit share. As at 30 June 2022, the Bullion Trust warehouse’s lending book had grown to $207.8m, with the Goldman Sach’s warehouse’s lending book being $242.9m Total lending settlements of $1,044m represented an 85% increase on the prior year. On balance sheet settlements of $426.6m (for directly funded loans) represented a 77% increase on the comparative year driving the 67% increase in net interest income. The total loan book for the Banking division of $2.7b increased by 8%, however the pivot to higher margin on balance sheet lending resulted in improved cash returns from the portfolio. Section 5.1 of the annual report provides details on the material risks the Group is facing. There are sections on market, interest rate, credit, liquidity and operational risk which are the key risks facing the Group. There is also a section providing an overview of risk management, including roles and responsibilities Strong credit quality The loan book comprises 99% residential mortgages with an average loan to valuation ratio of 63.8%. Credit quality remains sound with loans more than 90 days in arrears equating to less than 0.3% of total on balance sheet loans. No credit write-offs occurred in the half, and the business now reflects a diversified national lender Liquidity investments 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. The increase in liquidity assets during the year to $140m reflects the strong increase in deposits and the proceeds of the Finsure sale. Operating expenses The Group continued to invest in its people and processes, with operating expenses increasing by 40% to $25.3m, compared to a 67.3% increase in Net Interest Income. This included a significant uplift in the risk management team and building to accommodate continued growth. Capital The Group’s policy is to maintain a minimum capital adequacy ratio (CAR) as per APRA required levels plus 1.5%. The CAR at 30 June 2022 of 47.5% presents the Group with further growth opportunity for both on- balance sheet lending assets as well as investing in growth. In addition, it will fund the $60m distribution from the proceeds of the Finsure sale. The Bank launched its second wholesale funding arrangement during the year through the issue of $14m of floating rate subordinated notes. The notes further diversify the Bank’s sources of funding. Whilst classified as a liability in the financial report, the notes meet the eligibility criteria to be included in the Bank’s Tier 2 capital for regulatory capital purposes, and are repayable in 2031. 10 DIRECTORS’ REPORT (continued) DIVIDENDS No dividend was paid or declared by the Company in the period. Declared after end of year After the balance sheet date the following dividends were proposed and paid by the board of directors. The dividends have not been recognised as liabilities and there are no tax consequences. Ordinary Total amount Cents per share 0.34 Total amount $’000 40,359 40,359 Date of payment 26 July 2022 The financial effect of these dividends have not been brought to account in the consolidated financial statements for the year ended 30 June 2022 and will be recognised in subsequent financial reports. 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 Don Koch Peter Hall Jon Denovan Elizabeth Aris Michelle Guthrie Calvin Ng - 103,000 - 10,000 - 7,335,747 - - - - - - Interests in ordinary shares noted above were acquired by the Directors at their own expense and do not form part of their remuneration. 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 D Koch P Hall J Denovan J Kolenda E Aris M Guthrie C Ng J Sutton 16 16 16 8 16 15 15 - 16 16 16 8 16 15 15 - 4 4 4 - - - - - 4 4 4 - - - - - 6 6 6 - - - - - 3 3 - - 3 - - - 4 4 - - 4 - - - 5 5 5 - - - - - 5 5 5 - - - - - 6 6 5 - - - - - 11 DIRECTORS’ REPORT (continued) CHANGES IN THE STATE OF AFFAIRS On 21 September 2021, the Group announced it had appointed advisors to commence a strategic review of the Group with the objective of maximising shareholder value. On 15 December 2021, the Group announced the sale of the Finsure aggregation business to MA Financial for $145 million in cash, subject to regulatory approval and cash adjustments. On 7 February 2022, the Company completed the sale of the Finsure aggregation business for consideration of $152.2 million (before costs and income tax) comprising the sale price of $145 million plus the Finsure cash adjustment under the Share Sale Agreement. 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 26 July 2022 a fully-franked special dividend of 34 cents per share, for a total distribution to shareholders of approximately $40 million was paid. BNK is proposing to distribute $60 million in proceeds from the sale of Finsure to its shareholders, by way of the above noted special dividend ($40m) and a capital return. Further information in relation to the planned capital return of approximately $20 million will be announced once regulatory approvals are obtained. 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 AND ADDRESSING CLIMATE RISK The Company’s operations are not subject to any significant environmental regulations under either Commonwealth or State legislation. The Group acknowledges the global threat posed by climate change to the environment and economy, and supports initiatives to minimise the threat. The Group primarily services individuals through the provision of residential loans for the construction or purchase of houses, and mortgage brokers through the provision of aggregation services. The Group does not have any material exposure to environmentally sensitive industries. LIKELY DEVELOPMENTS AND EXPECTED RESULTS OF OPERATIONS 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. 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 2022: 12 DIRECTORS’ REPORT (continued) 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 $ 28,463 510,185 168,686 678,871 707,334 AUDITORS INDEPENDENCE DECLARATION The lead auditor’s independence declaration provided in accordance with S307C of the Corporations Act 2001 is set out on page 28 and forms part of the Directors’ report for the financial year ended 30 June 2022. 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. 13 DIRECTORS’ REPORT (continued) REMUNERATION REPORT (AUDITED) This Remuneration Report for the year ended 30 June 2022 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 2022 (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 2022: Non-Executives Director Position Appointment date Don Koch1 John Sutton Jon Denovan Peter Hall Elizabeth Aris Michelle Guthrie Calvin Ng Non-Executive Director/Chairman Non-Executive Chairman Non-Executive Director Non-Executive Director Non-Executive Director Non-Executive Director Non-Executive Director 11 June 2019 22 October 2019 2 September 2019 13 November 2015 18 June 2021 15 July 2021 15 July 2021 Resignation/ completion date - 7 July 2021 - - - - - 1 Appointed Chairman 7th July 2021. Executives Executive Position Brett Morgan John Kolenda Allan Savins Simon Bednar Andrew Kitchen Dara Wettner Amber Smith Chief Executive Officer, Banking and Wholesale Executive Director and Chief Executive Officer, Finsure Chief Executive Officer General Manager, Aggregation Chief Financial Officer Chief Risk Officer Chief Operating Officer Appointment date 12 October 2020 Resignation/ completion date 17 January 2022 13 March 2018 7 February 2022* 17 January 2022 17 September 2018 26 October 2020 11 January 2021 12 October 2020 - 7 February 2022* - - - * Ceased to be Executives of the Group following the sale of Finsure to MA Financial Group Limited. 14 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 Officers 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 No remuneration consultants were engaged by the Company for the year ended 30 June 2022. Remuneration Report approval at 2021 Annual General Meeting (AGM) The 2021 Remuneration Report received positive shareholder support at the 2021 AGM with a vote of 99.7%. 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: 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). 15 DIRECTORS’ REPORT (continued) REMUNERATION REPORT (AUDITED) 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. The TLTIP introduced from 1 July 2021 links reward to growth in shareholder value over a 3 year period, with hurdles comprising growth in earnings per share and growth in cash earnings per share over the 3 year vesting period (see note 3.3 for FY22 modification). 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. Equity 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. For STI’s within the Group, only service vesting conditions are applied. 16 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. The Board implemented the Transformational Long Term Incentive Plan (TLTIP) for members of the executive leadership team (ELT) with effect from 1 July 2021. Pursuant to the TLTIP, members of the ELT were granted performance rights equivalent to 150% of their base remuneration on 18 August 2021, and calculated with reference to the 30 day VWAP for the Company’s securities for the 30 day period ended 30 June 2021, and underlying earnings per share for the year ended 30 June 2021. All rights were valued at the grant date of 18 August 2021. The performance rights are subject to an initial 3 year performance period with the following hurdles: growth in share price over the 3 year vesting period; and growth in cash earnings per share over the 3 year vesting period. Upon completion of the initial 3 year vesting period, the Board will determine the amount of performance rights to vest based upon the measured outcomes. Subject to achievement of the vesting conditions, 60% of the performance rights under the TLTIP will be eligible to vest immediately with the remaining 40% deferred for a further year (i.e. making a 4 year period before the TLTIP can be exercised in accordance with the APRA BEAR requirements). The vesting criteria for the TLTIP are summarised below Hurdle 1 Hurdle 2 Compound annual growth in Share price Compound annual growth in underlying EPS Proportion vesting per Tranche Less than 15% 15% >15% – 30% >30% Less than 15% 15% > 15% - 30% Nil 50% Pro-rata on a straight-line basis between 50% – 100% > 30% 100% Modified Vesting Conditions of LTIs On 28 January 2022, due to the sale of Finsure, the Board approved the final vesting of LTIs for Finsure executives, when the share price was $1.24.This included removing the EPS performance hurdle described above and subsequently reducing the potential LTI grant by 50%. On 3 May 2022, the Remuneration Committee of the group approved the final vesting for BNK executives when the share price was $1.125. The terms of the LTIs prior to alteration were as described above and the LTIP scheme was subsequently terminated with all performance rights not granted being cancelled. The difference between the fair value of the rights before and after the alteration is considered immaterial. 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 STI and TLTIP 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. 17 DIRECTORS’ REPORT (continued) REMUNERATION REPORT (AUDITED) 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 2022 (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 2022 2021 2020 2019 2018 59,787,040 Nil $0.96 5,659,000 Nil $0.735 3,824,000 Nil $0.43 3,614,000 Nil $0.64 (406,000) Nil $1.28 31.4%1 4.42% 3.50% 3.60% (1.65%) 1 ROCE for continuing operations equates to (10.48%) Profitability is one of the financial performance targets considered in setting remuneration for executives, and has been calculated based on financial information prepared in accordance with Australian Accounting Standards. Performance to budget is another key measure considered by the BNK Board when appropriate to the business objectives. 18 DIRECTORS’ REPORT (continued) REMUNERATION REPORT (AUDITED) 4.1 Remuneration of key management personnel BNK Banking Corporation Limited Annual Financial Report 30 June 2022 Short-term benefits Post- employment Other long term Shared-based payments Termination Total Performance related Salary & fees Cash bonus $ $ Non- monetary benefits (B) $ Total Superannuation Long service leave STI (A) LTI (C) $ $ $ $ $ 380,452 366,035 330,256 211,559 266,349 121,246 240,669 167,651 50,000 - - - - - - - - - 10,000 5,833 - - 4,376 2,861 430,452 366,035 340,256 217,392 266,349 121,246 245,045 170,512 32,707 33,260 27,500 15,780 25,731 10,962 22,500 14,668 6,806 - - - - - - 33,500 24,000 - - 6,000 - - - 225,246 36,022 159,415 - 136,846 - 121,594 - $ - - - - - - - - $ % 721,905 466,123 527,171 233,172 434,925 132,208 389,139 185,180 31% 8% 30% - 31% - 31% - Current Executives Allan Savins1 Year 2022 2021 Andrew Kitchen2 2022 2021 2022 2021 2022 2021 Dara Wettner3 Amber Smith4 1 Appointed Chief Executive Officer from 17 January 2022 (previously General Manager, Banking & Wholesale) 2 Appointed Chief Financial Officer from 26 October 2020 3 Appointed Chief Risk Officer from 11 January 2021 4 Appointed Chief Operating Officer from 12 October 2020 (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. 19 DIRECTORS’ REPORT (continued) REMUNERATION REPORT (AUDITED) Short-term benefits Post employment Total Superannuation Salary & fees Cash bonus $ $ Non- monetary benefits (B) $ Shared-based payments Termination Total Performance related STI (A) LTI (C) Other long term Long service leave $ $ $ $ $ $ $ % Former Executives Brett Morgan1 John Kolenda2 Simon Bednar2 Don Koch3 Jussi Nunes4 Malcolm Cowell5 Steve Ellis6 Gerard Ng7 Lisa Stedman8 Total KMP remuneration Year 2022 2021 2022 2021 2022 2021 2021 2021 2021 2021 2021 2021 2022 2,085,274 328,000 2021 248,291 306,359 411,189 660,000 208,069 330,003 132,685 86,999 28,846 77,743 48,653 48,843 50,000 - 153,000 - 75,000 - - - - - - - 2,586,622 - 5,417 7,083 11,667 20,000 - - - - 287 - - - 31,459 36,064 303,707 313,442 575,856 727,500 283,069 330,003 132,685 86,999 29,133 77,743 48,653 48,843 2,444,733 2,622,686 14,009 16,271 - - 14,617 30,875 11,479 14,101 2,740 5,305 4,622 4,385 137,064 164,448 - - - - 5,078 8,380 - - - - - - 5,078 15,186 32,560 - - 47,500 53,964 30,000 - - - - - 36,000 126,024 137,500 - - 365,841 7,699 226,777 37,330 - - 3,863 - - - 1,235,718 84,914 - - - - - - - 100,000 - - - - - 100,000 350,276 329,713 941,697 735,199 583,505 436,588 144,164 201,100 35,736 83,048 53,275 89,228 3,948,617 3,124,734 - - 39% 1% 39% 9% - - 11% - - - 31% 3% 1 Appointed Chief Executive Officer from 12 October 2020 and resigned 17 January 2022 2 Ceased to be a KMP of the Company following the sale of Finsure on 7 February 2022 3 Interim Chief Executive Officer from 26 May 2020 to 12 October 2020 4 Resigned 5 September 2020 5 Interim Chief Financial Officer from 5 September 2020 to 26 October 2020 6 Resigned 6 October 2020 7 Interim Chief Risk Officer from 6 October 2020 to 12 December 2020 8 Resigned 29 August 2020 (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 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. 20 BNK Banking Corporation Limited Annual Financial Report 30 June 2022 DIRECTORS’ REPORT (continued) REMUNERATION REPORT (AUDITED) 4.2 Analysis of cash bonuses included in remuneration – audited Details of the vesting profile of the short-term incentive cash bonuses awarded as remuneration to each key management personnel are detailed below: Brett Morgan John Kolenda Allan Savins Simon Bednar Included in remuneration $50,000 $153,000 $50,000 $75,000 The amounts included in remuneration for the financial year represent the amount related to performance for the previous financial year based on achievements, as approved by the Remuneration Committee on 30 July 2021. In determining the extent of any performance based incentive the Board assesses the achievement of an individual’s performance in context of the overall Group result. 4.3 Equity instruments - audited Performance rights refer to rights over ordinary shares of BNK, which vest on a one-for-one basis under the BNK Equity Incentive Plan and the Transformational Long Term Incentive Plan (TLTIP). 4.3.1 Rights over equity instruments granted as compensation – audited Details on rights over ordinary shares in the Company that were granted as remuneration to each key management personnel during the reporting period are as follows: Simon Bednar 26,295 Service 1 September 2021 20,625 Service 1 September 2021 1 September 2021 0.80 0.80 30 June 2026 30 June 2026 Participant Allan Savins Allan Savins Allan Savins Number granted Vesting condition FY22 700,000 Service and performance Immediate 41,875 Andrew Kitchen Simon Bednar Simon Bednar 600,000 Service and performance 650,000 Service and performance Immediate 67,455 Amber Smith Dara Wettner Dara Wettner 440,000 Service and performance 500,000 Service and performance Immediate 7,500 Grant date Fair value /performance right at grant date ($) Expiry date 18 August 2021 0.5225 30 June 2027 18 August 2021 0.5225 30 June 2027 18 August 2021 0.5225 30 June 2027 1 September 2021 0.80 0.80 30 June 2026 30 June 2026 18 August 2021 0.5225 30 June 2027 18 August 2021 0.5225 30 June 2027 Dara Wettner 5,000 Service 1 September 2021 1 September 2021 0.80 0.80 30 June 2026 30 June 2026 John Kolenda Brett Morgan 1,200,000 Service and performance Immediate 40,700 18 August 2021 0.5225 30 June 2027 1 September 2021 0.80 30 June 2026 21 DIRECTORS’ REPORT (continued) REMUNERATION REPORT (AUDITED) 4.3.2 Performance rights granted During the reporting period the Group granted the following performance rights to the KMP’s; a) On 18 August 2021, 3,690,000 performance rights were granted to executives under the Transformational Long Term Incentive Plan (TLTIP). The vesting conditions for the rights provided for 60% vesting in 3 years with the remainder vesting in 4 years. The sale of Finsure saw the vesting conditions of these performance rights accelerated by the Board with 1,407,204 rights terminated, 800,000 rights forfeited, and 1,482,796 exercised. Of the rights exercised between 10% and 19% remain in escrow until 30 June 2025. Refer to 3.3 for details of the modification. b) On 1 December 2021, 1,200,000 performance rights were awarded to Mr John Kolenda as part of the TLTIP. These performance rights vesting conditions were accelerated on the sale of Finsure, with 576,000 terminated and 624,000 exercised of which 21% are held in Escrow until 30 June 2025. Refer to 3.3 for details of the modification. c) On 1 September 2021, 231,250 performance rights were awarded to 4 employees in recognition of their performance for the year ended 30 June 2021 (‘FY21 Bonus”). 157,530 of these performance rights vested immediately, with the remaining rights, deferred to 1 September 2025. The sale of Finsure saw 26,295 of performance rights exercised in February 2022, whilst 21,800 have been forfeited. 25,625 remain vested to 1 September 2025. 4.3.3 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: Participant Number Grant date % vested % forfeited Financial years FY22 FY22 in which grant Allan Savins 66,667 16 April 2019 66,667 16 April 2019 16,667 5 December 2019 16,667 5 December 2019 100% 100% 100% 100% 16,666 5 December 2019 0% 40,000 28 August 2020 40,000 28 August 2020 100% 0% 0% 0% 0% 0% 0% 0% 0% 700,000 18 August 2021 50.4% 49.6% 41,875 1 September 2021 100% 20,625 1 September 2021 0% Simon Bednar 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 50,000 28 August 2020 50,000 28 August 2020 650,000 18 August 2021 67,455 1 September 2021 26,295 1 September 2021 22 100% 100% 100% 100% 100% 100% 100% 52% 100% 100% 0% 0% 0% 0% 0% 0% 0% 0% 0% 48% 0% 0% vests 2021 2022 2021 2022 2023 2021 2025 20221 2022 2026 2021 2022 2021 2022 2022 2021 2022 20221 2022 20221 DIRECTORS’ REPORT (continued) REMUNERATION REPORT (AUDITED) 4.3.3 Details of equity incentives affecting current and future remuneration – audited (Continued) Participant Number Grant date % vested FY22 % forfeited FY22 Financial years in which grant vests Brett Morgan 40,700 1 September 2021 100% Andrew Kitchen 600,000 18 August 2021 Amber Smith 440,000 18 August 2021 John Kolenda 62,500 1 December 2020 62,500 1 December 2020 1,200,000 18 August 2021 50.9% 52.9% 100% 100% 52% Dara Wettner 500,000 18 August 2021 50.9% 1 Refer to 3.3 for details of modification 7,500 1 September 2021 100% 5,000 1 September 2021 0% 0% 49.1% 47.1% 0% 0% 48% 49.1% 0% 0% 2022 20221 20221 2021 20221 20221 20221 2022 2026 a) On 16 April 2019, 400,000 performance rights were awarded to two senior employees 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 and second tranche, 266,666 have been exercised. For the third tranche, 133,334 vested on 1 July 2021. b) On 5 December 2019, 100,000 performance rights were awarded to two employees in recognition of their performance for the year ended 30 June 2019 (‘FY19 Bonus”). One third of these performance rights each vest on 30 September 2020, 30 September 2021 and 30 September 2022 subject to the approval of the Remuneration Committee and continued service. For the first and second tranche, 66,668 have been exercised. For the remaining tranche, 16,666 were vested and exercised on 7 February (due to the Finsure Sale), and 16,666 remain to be exercised on 30 September 2022. c) On 28 August 2020, 180,000 performance rights were awarded to two employees in recognition of their performance for the year ended 30 June 2020 (‘FY20 Bonus”). 50% of the performance rights vested immediately, with the remaining 50% deferred to 31 July 2024 subject to continued service. Of the remaining performance rights, 50,000 were exercised on 7 Feb 2022 (Finsure sale) and 40,000 remain to be vested. d) On 1 December 2020, 125,000 performance rights were awarded to Mr John Kolenda as a FY20 Bonus following receipt of shareholder approval at the 2020 Annual General Meeting. These performance rights were exercised at the time of the Finsure Sale in February 2022. 4.3.4 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: Current key management personnel Participant Allan Savins Andrew Kitchen Amber Smith Dara Wettner Granted in year $ (A) 234,301 159,415 121,594 142,846 23 Value of rights exercised in year $ (B) 509,562 350,865 267,623 299,888 DIRECTORS’ REPORT (continued) REMUNERATION REPORT (AUDITED) 4.3.4 Analysis of movements in equity instruments – audited Former key management personnel Participant Brett Morgan Simon Bednar John Kolenda Granted in year $ (A) 32,560 251,605 326,040 Value of rights exercised in year $ (B) 32,560 659,547 928,760 (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. 4.3.5 Summary of rights holdings Current key management personnel Participant Allan Savins Andrew Kitchen Amber Smith Dara Wettner Held at 1 July 2021 140,000 - - - Granted as remuneration Exercised Lapsed Forfeited (347,270) (294,900) (207,284) (245,750) (477,938) (305,100) (232,716) (261,750) 762,500 600,000 440,000 512,500 - - - - Former key management personnel Participant Simon Bednar Brett Morgan John Kolenda Held at 1 July 2021 150,000 - 125,000 5. Executive Contracts Granted as remuneration Exercised Lapsed Forfeited (312,000) (21,800) (576,000) 743,750 62,500 1,200,000 (581,750) (40,700) (749,000) - - - Held at 30 June 2022 77,292 - - 5,000 Vested during the year 477,939 305,100 232,716 261,750 Vested and unexercisable at 30 June 2022 - - - - Held at 30 June 2022 - - - Vested during the year 581,750 40,700 686,500 Vested and unexercisable at 30 June 2022 - - - Remuneration arrangements for KMP are formalised in employment agreements. Details of these contracts are provided below: Executives Salary per annum Term for cause Andrew Kitchen Dara Wettner Amber Smith Allan Savins $315,000 plus superannuation $260,000 plus superannuation $260,000 plus superannuation $400,000 plus superannuation None None None None 24 Term of agreement and notice period Continuing with 3 months’ notice by either party Continuing with 3 months’ notice by either party Continuing with 3 months’ notice by either party Continuing with 3 month notice by either party DIRECTORS’ REPORT (continued) REMUNERATION REPORT (AUDITED) 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 2021 AGM held on 25 November 2021 when shareholders approved an aggregate fee pool of $800,000 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 2022: Type of Fee Amount per annum Chairman base fee Non-executive Director base fee Chair of Board sub-committees Membership of Board sub-committees $130,000 $70,000 $10,000 per committee $5,000 per committee NEDs receive superannuation contributions of 10.0% (10.5% from 1 July 2022) of earnings but do not receive any other retirement benefits, nor do they participate in any incentive programs. The remuneration of NEDs for the years ended 30 June 2022 and 30 June 2021 is detailed in table below. Short-term benefits Post- employment Salary & fees $ Non- monetary benefits Other Superannuation Long- term benefits Long service leave Non-executive directors Don Koch2 Peter Hall Jon Denovan Elizabeth Aris3 Michelle Guthrie4 Calvin Ng4 Former directors Jon Sutton1 2022 2021 2022 2021 2022 2021 2022 2021 2022 2021 2022 2021 2022 2021 154,091 62,707 100,000 86,809 89,924 77,821 77,311 2,301 67,348 - 64,167 - 2,936 142,813 Total 2022 2021 555,776 372,451 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 15,409 5,957 10,000 8,247 8,992 7,393 7,731 219 6,735 - 6,417 - 294 13,567 55,578 35,383 - - - - - - - - - - - - - - - - Total 169,500 68,664 110,000 95,056 98,917 85,214 85,042 2,520 74,083 - 70,583 - 3,229 156,380 611,354 407,834 1 Retired as Chairman and Director on 7 July 2021 2 Appointed Chairman on 7 July 2021 3 Appointed 18 June 2021 4 Appointed 15 July 2021 25 DIRECTORS’ REPORT (continued) REMUNERATION REPORT (AUDITED) 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 2022 Directors Peter Hall Don Koch Jon Denovan Elizabeth Aris Michelle Guthrie Calvin Ng 2022 Executives Allan Savins Andrew Kitchen Dara Wettner Amber Smith Balance at the start of the year or commencement date 72,034 - - 10,000 - 7,335,747 Acquired Other movement Balance at the end of the year or date of resignation 30,966 - - - - - - - - - - - 103,000 - - 10,000 - 7,335,747 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 1,517,939 - - - 477,938 305,100 261,750 232,716 (132,386) - (236,325) - 1,863,491 305,100 25,425 232,716 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 2022 483,769 Interest charged during KMP period 19,3451 Write-off or allowance for doubtful debt Balance at end of period Number of KMP in group - 478,7851 1 1 Amounts to 7 Feb 2022, being date Simon Bednar left group. (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 to the 7 February (Finsure Sale date), 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 1 July 2021 to 7 February 2022 totaled $281,995 (30 June 2021:$446,457) and the balance receivable at 7 February 2022 was $42,835 (30 June 2021:$21,570). During the period 1 July 2021 to 7 February 2022, the Group paid $27,500 to Shadow Charters Pty Ltd, a related entity of Mr John Kolenda for boat charter services (30 June 2021:$42,175). 26 DIRECTORS’ REPORT (continued) REMUNERATION REPORT (AUDITED) 10. Remuneration incentives approved subsequent to balance date Subsequent to 30 June 2022, and at the date of signing, no incentives have been recommended by the Remuneration Committee for members of the Executive Leadership Team. End of Remuneration Report Signed in accordance with a Resolution of Directors Don Koch - Chairman Dated this 26th day of August 2022 27 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 2022 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 PAR_SIG_01 PAR_NAM_01 PAR_POS_01 PAR_DAT_01 PAR_CIT_01 KPMG Nicholas Buchanan Partner Sydney 26 August 2022 KPMG, an Australian partnership and a member firm of the KPMG global organisation of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. The KPMG name and logo are trademarks used under license by the independent member firms of the KPMG global organisation. Liability limited by a scheme approved under Professional Standards Legislation. 28 STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME For the year ended 30 June 2022 CONTINUING OPERATIONS In thousands of AUD Interest revenue from banking activities Interest expense from banking activities Net interest income Commission income Commission expense Net commission income/(expense) Other income Total net revenue Consolidated Bank Note 2022 $ 20211 $ 2022 $ 2.3 2.3 2.3 2.3 2.3 2.3 20,217 11,334 (7,293) (3,550) 12,924 7,784 (2,112) (2,696) (4,808) 3,306 11,422 12,884 (8,776) 4,108 1,933 13,825 18,668 (7,931) 10,737 - (1,080) (1,080) 1,966 11,623 2021 $ 10,785 (3,521) 7,264 - (712) (712) 5,199 11,751 Operating expenses Impairment of loans, advances and other receivables Impairment of insurance receivable and ATMs Profit/(Loss) before income tax from continuing operations Income tax (expense)/benefit Profit/(Loss) from continuing operations 2.4 (26,584) (17,669) (19,308) (10,174) 4.1.1 (843) - (384) (881) (635) - (16,005) (5,108) (8,321) 2.5.1 3,614 1,735 3,995 (12,391) (3,374) (4,325) (384) (881) 312 1,013 1,325 Discontinued operations Profit from discontinued operation, net of tax 2.2.1 72,178 9,033 79,925 - Profit/(Loss) for the period attributable to equity holders of the parent 59,787 5,659 75,600 1,325 Other comprehensive income Items that are or may be reclassified subsequently to profit or loss, net of income tax Total comprehensive income for the period 59,787 5,659 75,600 1,325 Earnings per share Basic earnings per share (cents) Diluted earnings per share (cents) Earnings per share – continuing operations Basic earnings per share (cents) Diluted earnings per share (cents) 5.3 5.3 5.3 5.3 51.61 50.55 5.85 5.77 (10.70) (10.48) (3.49) (3.44) - - - - - - - - 1 Comparative amounts have been re-presented due to discontinued operations. See Notes 2.2 restated to conform to current year of presentation of profit / (loss) from continuing operations. The accompanying notes form part of these financial statements 29 STATEMENTS OF FINANCIAL POSITION As at 30 June 2022 In thousands of AUD Note 2022 2021 2022 2021 Consolidated Bank ASSETS Cash and cash equivalents Due from other financial institutions Other financial assets Loans and advances Commissions and other receivables Contract assets Investment in subsidiaries Property, plant and equipment Goodwill and other intangible assets Deferred tax assets/liabilities net TOTAL ASSETS LIABILITIES Deposits Other financial liabilities Commissions and other payables Trail commission payable Current tax liability Provisions Deferred tax assets/liabilities net TOTAL LIABILITIES 4.1.1 4.2 4.2 3.1 4.4.1 4.4.3 6.1.1 7.1 7.2 2.5.2 4.3 4.5 4.4.2 4.4.3 7.3 2.5.2 $ $ $ $ 140,027 102,528 164,586 990,066 8,826 21,032 - 812 7,407 - 1,435,284 47,285 8,820 148,148 539,939 25,607 505,706 - 2,646 43,689 - 1,321,840 139,627 102,528 164,586 990,506 7,259 - 19,896 374 306 1,659 1,426,741 964,589 245,519 7,059 7,453 17,423 1,037 1,828 1,244,908 635,647 61,258 27,592 453,381 - 1,678 14,310 1,193,866 964,589 245,190 4,057 - 23,149 444 - 1,237,429 41,591 8,820 148,148 541,527 7,361 - 61,925 538 324 2,121 812,355 635,647 61,646 3,665 - - 299 - 701,257 NET ASSETS 190,376 127,974 189,312 111,098 EQUITY ATTRIBUTABLE TO EQUITY HOLDERS Contributed equity Issued capital, net of raising costs Reserves Retained earnings TOTAL EQUITY 5.2.2 118,943 1,634 69,799 190,376 116,728 1,234 10,012 127,974 118,943 1,634 68,735 189,312 116,728 1,234 (6,864) 111,098 The accompanying notes form part of these financial statements 30 STATEMENTS OF CHANGES IN EQUITY For the year ended 30 June 2022 In thousands of AUD Consolidated Attributable to equity holders Balance at 1 July 2020 Profit for the period Sale of financial assets Total comprehensive income Transactions with owners of the Company Issue of share capital Equity raising costs, net of tax Cost of share-based payments Balance at 30 June 2021 Balance at 1 July 2021 Profit for the period Sale of financial assets Total comprehensive income Transactions with owners of the Company Issue of share capital Equity raising costs, net of tax Cost of share-based payments Balance at 30 June 2022 Note Issued Capital Equity Raising Costs Treasury Shares $ $ $ 106,270 (2,754) (103) - - - 13,765 - - - - (553) - - - - - - - - 120,035 (3,307) (103) 120,035 (3,307) (103) - - 2,240 - - - - (25) - - - - - 122,275 - (3,332) - (103) 5.2.2 5.2.3 7.5.2 5.2.2 5.2.3 7.5.2 Property, Plant and Equipment Revaluation Reserve $ - - - - - - - - - - - - - - - Financial Assets Revaluation Reserve General Reserve for Credit Losses Share-based Payments Reserve Retained Earnings Total Equity $ $ $ (140) 446 1,029 - 140 140 - - - - - - - - - - - - - - - - - 446 446 - - - - - 446 $ 4,493 5,659 (140) 5,519 - - - $ 109,241 5,659 - 5,659 13,000 (553) 627 10,012 127,974 - - - (765) - 627 891 891 10,012 - - 59,787 - 127,974 59,787 - 59,787 59,787 (2,240) - 2,640 1,291 - - - 69,799 - (25) 2,640 190,376 The accompanying notes form part of these financial statements 31 STATEMENTS OF CHANGES IN EQUITY For the year ended 30 June 2022 In thousands of AUD Bank Attributable to equity holders Balance at 1 July 2020 Profit for the period Total comprehensive income Transactions with owners of the Company Issue of share capital Equity raising costs, net of tax Cost of share-based payments Balance at 30 June 2021 Balance at 1 July 2021 Profit for the period Total comprehensive income Note Issued Capital Equity Raising Costs Treasury Shares $ $ $ 106,270 (2,754) (103) - - 13,765 - - - - - (553) - 5.2.3 5.2.4 7.5.2 - - - - - 120,035 (3,307) (103) 120,035 (3,307) (103) Transactions with owners of the Company Issue of share capital Equity raising costs, net of tax Cost of share-based payments Balance at 30 June 2022 5.2.2 5.2.3 7.5.2 2,240 - - - (25) - - - - 122,275 (3,332) (103) Property, Plant and Equipment Revaluation Reserve $ - - - - - - - - - - - - General Reserve for Credit Losses Share-based Payments Reserve Retained Earnings $ $ $ 446 1,029 (8,189) - - - - - 446 446 - - - 446 - - 1,325 1,325 (765) - 627 891 - - - (6,864) 891 (6,864) 75,600 75,600 - - - 68,736 (2,240) - 2,639 1,291 Total Equity $ 96,699 1,325 1,325 13,000 (553) 627 111,098 111,098 75,600 75,600 - (25) 2,639 189,312 The accompanying notes form part of these financial statements 32 STATEMENTS OF CASH FLOWS For the year ended 30 June 2022 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 2022 2021 2022 2021 $ $ $ $ 21,786 12,111 20,236 359,607 232,043 785 11,478 1,894 (7,268) (3,694) (7,932) (3,521) 19 827 - 4,005 Payments to suppliers and employees (386,820) (233,492) (22,170) (12,344) Net increase in loans, advances and other receivables Net (decrease)/increase in deposits and other borrowings Net (payments)/receipts for financial securities (447,632) (254,866) (447,626) (253,679) 328,942 289,856 328,942 289,856 (109,810) (85,494) (110,147) (85,494) Net cash provided by/(used in) operating activities (241,176) (42,709) (237,912) (47,805) CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of subsidiaries Proceeds from sale of investments Proceeds from sale of property, plant and equipment Payments for property, plant and equipment Payments for intangible assets 152,225 94 152,225 - - (3) - - - (25) (411) 356 - (3) - Net cash from/(used in) investing activities 152,222 (342) 152,578 - - - (25) (184) (209) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from the issue of capital Payments for equity raising costs Payments for treasury shares Payments for lease liabilities Proceeds of borrowings 5.2.2 5.2.3 5.2.4 - 13,000 - 13,000 (36) - (765) - (2,502) (1,279) (36) - (138) (765) - (129) 184,234 61,258 183,544 61,646 Net (used in)/cash from financing activities 181,696 72,214 183,370 73,752 Net increase/(decrease) in cash held 92,742 29,163 98,036 25,738 Cash and cash equivalents at beginning of the year 47,285 18,122 41,591 15,853 Total cash and cash equivalents 140,027 47,285 139,627 41,591 The accompanying notes form part of these financial statements 33 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 2022 was authorised for issue in accordance with a resolution of the directors on 26th August 2022. 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, except where stated. The report is presented in Australian dollars with all values rounded to the nearest thousand dollars ($’000) in accordance with ASIC Corporations Instrument (Rounding in Financial/Directors’ Reports) 2016/191 unless otherwise indicated. The Company presents its statement of financial position in order of liquidity. (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. 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 are explained in the relevant notes to this financial report as referenced below: Identification and measurement for impairment of loans and receivables Net present value of future trail commissions receivable and payable Impairment of goodwill and other intangibles Reference 3.2 4.4 7.2 34 NOTES TO THE FINANCIAL REPORT 2. FINANCIAL PERFORMANCE 2.1 Operating segments The Group has two operating businesses, which are its reportable segments. All operations are in Australia. AASB 8 requires operating segments to be identified on the basis of internal information provided to the chief decision makers, the Chief Executive Officers, in relation to the business activities of the Group. The Group has determined it has two 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 and Better Choice Home Loans brands (and soon to be launched BNK Bank brand). Loans are originated via online applications and accredited brokers. Loans are held on balance sheet, and originated through third party wholesale funding providers. 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. Aggregation (discontinued during the reporting period) The Aggregation segment provides contracted administrative and infrastructure support to approximately 2,100 mortgage brokers, connecting them with a panel of approximately 60 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 Infynity CRM platform provides enhanced capability for Aggregation to diversify its revenues from third party lead generation opportunities 35 NOTES TO THE FINANCIAL REPORT 2. FINANCIAL PERFORMANCE (CONTINUED) 2.1 Operating segments (continued) In thousands of AUD Banking1 Revenue Interest income Inter-segment interest income Total interest income Commission and non-interest income Inter-segment commission and other income Total commission and non-interest income Total segment revenue Interest expense Inter-segment interest expense Other Total interest expense Commission expense Inter-segment commission expense Total commission expense $ 20,217 - 20,217 1,194 - 1,194 21,411 7,214 - 79 7,293 2,696 - 2,696 30 June 2022 Aggregation (Discontinued 7 Feb 2022) $ Total Banking Aggregation Total 30 June 2021 $ $ 2 - 2 266,223 - 266,223 20,219 - 20,219 267,417 - 267,417 11,345 (11) 11,334 18,817 (4,000) 14,817 $ 83 - 83 $ 11,428 (11) 11,417 337,323 - 337,323 356,140 (4,000) 352,140 266,225 287,636 26,151 337,406 363,557 - - 58 58 154,677 - 154,677 7,214 - 137 7,351 157,059 - 157,059 3,461 - 89 3,550 8,775 - 8,775 - (11) 155 144 309,686 - 309,686 3,461 (11) 244 3,694 318,461 - 318,461 Segment profit/(loss) before tax (16,005)1 7,5432 (8,462)3 (1,108) 9,129 8,021 Material non-cash expenses: Depreciation and amortisation Share-based payments Segment assets Segment liabilities 380 2,639 1,441,782 1,251,406 778 - 1,158 2,639 415 627 1,886 - 2,301 627 - - 1,441,782 1,251,406 778,511 719,350 543,329 474,516 1,321,840 1,193,866 1 Banking segment equates to consolidated position 2 Note 2.2.1 for discontinued operations segment profit before tax 3 Before net tax benefit $1,168k and gain on disposal after tax $67,081k 36 NOTES TO THE FINANCIAL REPORT 2. FINANCIAL PERFORMANCE (CONTINUED) 2.2 Discontinued Operation On 15 December 2021, the Group executed a Share Sale Agreement (SSA) for the sale of BNK’s 100% owned subsidiary, Finsure Holding Pty Ltd and related Aggregation subsidiaries to MA Financial Group Limited (MAF). The sale completed on 7 February 2022, resulting in the Group receiving cash consideration of $152.2 million, comprising $145 million (before costs and tax on disposal) consideration for the shares plus cash adjustments of $7.2 million. The Aggregation division was previously classified as held-for-sale (31 December 2021). The comparative Consolidated Statement of Profit or Loss and Other Comprehensive Income has been represented to show the discontinued operation separately from continuing operations. 2.2.1 Results of discontinued operation In thousands of AUD Revenue Elimination of inter-segment revenue External revenue Expenses Elimination of inter-segment expenses External expenses Results from discontinued operating activities Income tax expense Results from discontinued operating activities, net of tax Gain on sale of discontinued operation Income tax on gain on sale of discontinued operation Profit from discontinued operations, net of tax Basic earnings per share Diluted earnings per share 2.2.2 Assets and liabilities of discontinued operations In thousands of AUD Assets Cash and cash equivalents Commission receivables Contract assets Property, plant and equipment Goodwill and other intangible assets Deferred Tax Asset Liabilities Commission and other payables Trail Commission payable Provisions Deferred tax liabilities 2022 $ 2021 $ 266,225 337,405 266,225 337,405 258,682 324,276 258,682 7,543 2,446 5,097 88,089 (21,008) 72,178 62.31 61.02 324,276 13,129 4,096 9,033 - - 9,033 9.33 9.22 2022 $ 2021 $ 8,309 3,317 571,978 1,037 5,437 131,734 721,812 4,207 535,509 719 141,597 682,032 3,750 39,252 473,339 1,475 5,777 137,076 660,699 25,527 441,196 923 142,646 610,292 Net assets from discontinued operating activities 39,780 50,377 37 NOTES TO THE FINANCIAL REPORT 2. FINANCIAL PERFORMANCE (CONTINUED) 2.2.3 Cash flows from / (used in) discontinued operation In thousands of AUD Net cash from/(used in) operating activities Net cash from/(used in) investing activities Provisions Net cash from/(used in) financing activities Net cash flows for the period 2022 $ 5,611 215 (203) (1,356) 4,267 2021 $ 8,392 255 290 (5,198) 3,739 38 NOTES TO THE FINANCIAL REPORT 2. FINANCIAL PERFORMANCE (CONTINUED) 2.3 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 Securitisation liabilities Subordinated debt Other Total interest expense Net interest income Consolidated 20211 $ 2022 $ 19,399 - 818 20,217 3,868 53 2,233 1,113 26 7,293 10,807 - 526 11,334 3,181 67 44 236 22 3,550 2022 $ 17,851 - 817 18,668 3,868 24 2,900 1,113 26 7,931 Bank 2021 $ 10,259 - 526 10,785 3,181 31 52 236 21 3,521 12,924 7,784 10,737 7,264 Weighted average interest rate - loans and advances Weighted average interest rate - deposits Spread 3.15% 0.95% 2.20% 3.00% 0.45% 2.55% 3.15% 0.95% 2.20% 3.00% 0.45% 2.55% 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 2,657 6,566 (11,335) (2,112) 3,218 4,210 (4,732) 2,696 1,756 7,832 3,296 12,884 1,723 3,908 3,145 8,776 - - - - 1,080 - 1,080 - - - - - 712 - 712 Net commission income/(expense) (4,808) 4,108 (1,080) (712) Other income Service fees and other residual income Aggregation services fee income Lending fees Transaction fees Sponsorship income Dividends received Other Total other income 977 - 817 1,156 - 337 19 3,306 734 - 803 391 - 4 2 1,933 492 - (37) 1,155 - 337 19 1,966 577 - 225 391 - 4,004 2 5,199 1 Comparative amounts for consolidated have been re-presented due to discontinued operations. See Notes 2.2 restated to conform to current year of presentation of profit / (loss) from continuing operations. 39 NOTES TO THE FINANCIAL REPORT 2. FINANCIAL PERFORMANCE (CONTINUED) 2.3 Income (continued) Accounting policy - recognition and measurement 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. Commission income and expense 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 note on Interest income and expense). Other fees 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. Other income, service fees 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. Dividends Revenue is recognised when the Company’s right to receive the payment is established, which is generally when the dividend has been declared. 40 NOTES TO THE FINANCIAL REPORT 2. FINANCIAL PERFORMANCE (CONTINUED) 2.3 Income (continued) Accounting policy - recognition and measurement (continued) 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 at the point of the loans being settled, net of any offset balance (drawdown). Commissions’ clawbacks are recognised upon receipt where loans have been discharged within contractual timeframes. Trailing commissions The Group receives trailing commissions from lenders on settled loans over the life of the loans based on the individual loan balance outstanding. Contractually, where loans fall into delinquency, trailing commissions may be reduced or held for such a period until loans are repaired to non-delinquent status. The Group also makes trailing commission payments to authorised mortgage originators (brokers) based on the individual loan balance outstanding. On initial recognition, the Group recognises a contract asset under AASB 15 which represents the Group’s estimate of the variable consideration to be received from lenders on the settled loans. The Group used the expected value method of estimating the variable consideration which requires significant judgment. In estimating the variable consideration the Group assesses observed historical data in determining the extent that it is highly probable that a significant reversal in the amount of cumulative revenue recognised will not occur. In addition, a corresponding expense and payable to the relevant brokers is also recognised, initially measured at fair value being the net present value of expected future trailing commission payable to relevant brokers. The value of trail commission receivable from lenders and the corresponding payable to brokers is determined by using a discounted cash flow valuation to determine the expected value. These calculations require the use of assumptions which are determined using a variety of inputs including analysis of historical information. Key assumptions underlying the calculation include the average loan life, discount rate and percentage paid to brokers. Refer to 4.4.1. 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 over time. 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. 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. 41 NOTES TO THE FINANCIAL REPORT 2. FINANCIAL PERFORMANCE (CONTINUED) 2.4 Operating Expenses In thousands of AUD Depreciation and amortisation Information technology Cloud based software development Banking services delivery Securitisation operating expenses Employee benefits Professional services Marketing Occupancy Other administration expenses Total operating expenses Consolidated 2022 $ 380 1,673 1,053 423 251 14,311 5,877 198 265 2,153 26,584 20211 $ 415 1,883 1,869 531 48 10,449 893 213 179 1,189 17,669 2022 $ 185 1,185 1,053 423 9,243 5,810 92 123 1,194 19,308 Bank 2021 $ 215 1,304 1,576 531 - 4,562 871 87 135 893 10,174 1 Comparative amounts for consolidated have been re-presented due to discontinued operations. See Notes 2.2 restated to conform to current year of presentation of profit / (loss) from continuing operations. Accounting policy - recognition and measurement The Group recognises an expense when it has an obligation to settle for goods or services received. 2.5 Income tax 2.5.1 The major components of income tax expense/(benefit) are: In thousands of AUD Recognised in profit or loss Current tax Deferred tax Income tax expense/(benefit) on continuing operations recognised in Profit or Loss Recognised in OCI Financial instruments at fair value through OCI Equity raising costs Income tax expense/(benefit) on continuing operations recognised in Other Comprehensive Income Tax reconciliation Profit/(Loss) before tax Prima facie income tax expense/(benefit) on profit before income tax at 30% (2021:30%) Adjust for tax effect of: Non-assessable income Non-deductible expenses Prior period adjustments Income tax expense/(benefit) on continuing operations recognised in Profit or Loss Consolidated 20211 $ 20221 $ 2022 $ Bank 2021 $ (6,029) 2,415 - 1,735 (7,304) 3,309 - (1,013) (3,614) 1,735 (3,995) (1,013) - 11 11 - 213 213 - 11 11 (16,005) (5,108) (8,321) (4,801) (1,533) (2,496) - 213 213 312 94 - 1,335 (148) - 44 (246) (2,631) 1,132 - (1,200) 93 - (3,614) (1,735) (3,995) (1,013) 1 Tax expense from gain on sale and on discontinued operations is shown under note 2.2 42 NOTES TO THE FINANCIAL REPORT 2. FINANCIAL PERFORMANCE (CONTINUED) 2.5 Income tax (continued) 2.5.2 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 and s.40-880 costs Lease liabilities Net present value of trail commission payable Cloud based software development costs 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 2021 $ 2022 $ 584 814 311 450 259 2,235 1,757 2 86 6,498 332 619 528 518 1,010 136,013 1,820 458 3,243 144,541 2022 $ 522 670 133 450 121 - 1,561 - 86 3,543 5 228 - 5,360 5 100 6,309 1,779 5 8,326 (6,498) (1,828) 151,712 787 992 158,851 (144,541) (14,310) 1,779 - 1,884 (3,543) 1,659 Bank 2021 $ 333 201 90 401 163 - 1,580 - 337 3,105 - - - 786 198 984 (984) 2,121 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 on continuing operations only except to the extent that it relates to items recognised in other comprehensive income. Income tax expense (revenue) relating to discontinued operations is excluded from above table and disclosed in note 2.2 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 the Group 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. 43 NOTES TO THE FINANCIAL REPORT 2. FINANCIAL PERFORMANCE (CONTINUED) 2.5 Income tax (continued) 2.5.2 Deferred tax assets and liabilities (continued) 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. The Group 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. 3. LOANS AND ADVANCES 3.1 Loans and advances In thousands of AUD Residential loans Commercial loans Personal loans Overdrafts Add: Unamortised broker commissions Gross loans and advances Provision for credit losses – refer note 3.2 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 2022 $ 972,090 13,166 327 452 986,035 5,895 991,930 (1,864) 990,066 Consolidated 2021 $ 522,554 14,009 546 1,299 538,408 2,556 540,964 (1,025) 539,939 2022 $ 972,090 13,166 327 452 986,035 6,127 992,162 (1,656) 990,506 Bank 2021 $ 522,554 14,009 546 1,299 538,408 4,144 542,552 (1,025) 541,527 452 138 3,152 988,188 991,930 1,299 1,560 4,065 534,040 540,964 452 138 3,152 988,420 992,162 1,299 1,560 4,065 535,628 542,552 Gross loans and advances stated above includes securitisation warehouse loans recognised for accounting purposes. Refer to note 4.5 for further information of the warehouse facility. 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. All loans and advances greater than 30 days in arrears are reviewed individually and assessed for recoverability with reference to the valuation of collateral held. Expected credit loss provisions are recognised as set out in note 3.2. Refer to note 5.1.4 for further information regarding credit risk. 44 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 2022 $ 1,864 1,864 1,025 839 - 1,864 Bank 2021 2022 2021 $ $ $ 1,025 1,656 1,025 1,025 1,656 1,025 1,025 631 725 322 (22) 725 322 (22) 1,025 1,656 1,025 Refer to note 5.1.4 for further information on the expected credit loss provisions recognised at balance date including detail around the loans subject to COVID-19 repayment deferrals. At 30 June 2022, the Company had nil customers 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. During the period the level of loan restructures completed were not considered to have a material effect on the provision. 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. 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). 45 NOTES TO THE FINANCIAL REPORT 3. LOANS AND ADVANCES 3.2 Provision for credit losses (cont’d) 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. Expert judgement is used by the Group in the selection and assigned risk weighting of key variables including collateral, LMI, ownership type, number of payments ahead, counterparty industry and recovery costs. For loans secured by residential properties, LVR ratios are a key parameter in determining LGD. These are used to determine an expected LGD for the three different economic scenarios described below. 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. PD represents the likelihood of a loan experiencing a default ever. As described above, arrears data from the last 24 months is used to calculate a probability measure determining the probability that an exposure will move to a specific 30 day arrears buckets. From here a Roll Rate Matrix is created based on the average probabilities over the historic data for each of the arrears buckets. This is then applied to the exposure amount as at 30 June 2022. 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. Management overlay An additional overlay has been placed on high debt to income customers. As interest rates were originally forecast to rise in 2023/24, BNK identified customers with high Debt to Income ratios (being greater than 6) as being more exposed to mortgage stress and higher probability of default. BNK has provisioned an additional 5bp overlay on this cohort of balances to account for any future losses, while actual behaviour is observed and modelled. This overlay will remain until further analysis demonstrates that higher DTI values do not correlate to a higher probability of default or are incorporated into ECL modelling. Forward looking information To incorporate forward looking information into the ECL the Group leverages RBA forecasts to develop a Base, Negative and Positive economic scenario covering four macroeconomic metrics (unemployment, GDP growth, House Price Index and bankruptcies rates). These are used to determine a multiplier which is applied to PD and LGD components of the model and a probability weighting is further applied to each scenario. Judgement is used in determining the multiplier for each scenario as well as the weighting applied. The three economic scenarios are described below. 46 NOTES TO THE FINANCIAL REPORT 3. LOANS AND ADVANCES 3.2 Provision for credit losses (cont’d) Scenarios and Sensitivity Analysis Base Scenario: Within this scenario BNK expects unemployment to remain below historical averages, GDP to perform within government target rates, house prices to slightly reduce (specifically inner-city Melbourne and Sydney) and bankruptcy rates to increase to historical averages. Sensitivity analysis shows a 100% weighting to the base scenario would reduce the ECL provision from $1.86m to $1.32m. Negative Scenario: Within this scenario BNK expects unemployment to increase to historical averages and GDP to fall but not into recessionary levels. House prices are forecast to significantly reduce (specifically inner-city Melbourne and Sydney) and bankruptcy rates to increase above long term historical averages in the negative scenario. Sensitivity analysis shows a 100% weighting to the negative scenario would increase the ECL provision from $1.86m to $3.85m. Positive Scenario Within this scenario BNK expects unemployment to remain at current levels, GDP to outperform historical averages, house prices to remain flat and bankruptcy rates to remain flat. Sensitivity analysis shows a 100% weighting to the positive scenario would decrease the ECL provision from $1.86m to $0.77m. Sensitivity analysis table In thousands of AUD Model Used Baseline Scenario1 Negative Scenario1 Positive Scenario1 1 Scenarios using 100% weighting 30 June 2022 Model Outcome 1,864 1,320 3,850 770 Variance to actual - (544) 1,986 (550) 30 June 2021 Model Outcome 1,025 754 2,565 451 Variance to actual - (271) 1,540 (574) 47 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 2020 Transfers to/(from) Stage 1 Stage 2 Stage 3 New and increased provisions Bad debts written off Closing balance – 30 June 2021 Opening balance – 1 July 2021 Transfers to/(from) Stage 1 Stage 2 Stage 3 New and increased provisions Bad debts written off Closing balance – 30 June 2022 Gross exposure 267,520 13,844 - - 255,383 - 536,747 Provision 205 396 - - 224 - 825 Gross exposure 1,481 - 1,412 - - - 2,893 536,747 825 2,893 - - - 361,649 - 898,396 - - - 703 - 1,528 - 307 - - - 3,200 Provision 37 - 58 - - - 95 95 - 20 - - - 115 Gross exposure 1,441 - - 123 - (240) 1,324 1,324 - - 86 - - 1,410 Provision 87 - - 40 - (22) 105 105 - - 71 - - 176 1 Management overlay on exposures with a DTI >6 48 Management overlay Provision Gross exposure 13,844 (13,844) - - - - - Total Gross exposure 284,286 - - 1,412 123 255,383 (240) 540,964 Provision 725 - - 58 40 224 (22) 1,025 396 (396) - - - - - - - 540,964 1,025 - 88,9241 - - - 88,924 - 45 - - - 45 - 89,231 86 361,649 - 991,930 - 65 71 703 - 1,864 3. LOANS AND ADVANCES (CONTINUED) 3.2 Provision for credit losses (continued) Reconciliation of expected credit loss provision In thousands of AUD Stage 1 Stage 2 Bank Stage 3 Opening balance – 1 July 2020 Transfers to/(from) Stage 1 Stage 2 Stage 3 New and increased provisions Bad debts written off Closing balance – 30 June 2021 Opening balance – 1 July 2021 Transfers to/(from) Stage 1 Stage 2 Stage 3 New and increased provisions Bad debts written off Closing balance – 30 June 2022 Gross exposure 269,165 13,844 - - 255,328 - 538,337 Provision 205 396 - - 224 - 825 Gross exposure 1,481 - 1,412 - - - 2,893 538,337 825 2,893 - - - 152,234 - 690,571 - - - 495 - 1,320 - 307 - - - 3,200 Provision 37 - 58 - - - 95 95 - 20 - - - 115 Gross exposure 1,441 - - 123 - (240) 1,324 1,324 - - 86 - - 1,410 Provision 87 - - 40 - (22) 105 105 - - 71 - - 176 1 Management overlay on exposures with a DTI >6 49 Management overlay Provision Gross exposure 13,844 (13,844) - - - - - Total Gross exposure 285,931 - 1,412 123 255,328 (240) 542,554 Provision 725 - 58 40 224 (22) 1,025 396 (396) - - - - - - - 542,554 1,025 - 88,9241 - - - 88,924 - 45 - - - 45 - 89,231 86 152,234 - 784,105 - 65 71 495 - 1,656 NOTES TO THE FINANCIAL REPORT 3. LOANS AND ADVANCES 3.3 Derecognition of loans and advances The Company was party to a Receivables Acquisition & Servicing Agreement (RASA) with Bendigo & Adelaide Bank Limited (BEN) that enabled the Company to sell residential loans (owner occupied and investment) to BEN as required to assist with regulatory capital and/or liquidity management requirements. Following the implementation of the Group’s prime residential lending warehouse in 2021, the RASA was placed into run off. During 2022, other than loans sold into the Bullion Trust, the remaining loans were purchased back by the Company and placed on balance sheet with the RASA facility closed. The balance of loans serviced by the Group and Company at reporting date: In thousands of AUD Owner occupier loans Investment loans 2022 $ - - - 2021 $ 18,779 18,017 36,796 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. 50 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 2022 $ 140,027 Consolidated 2021 $ 47,285 2022 $ 139,627 Bank 2021 $ 41,591 Total cash and cash equivalents 140,027 47,285 139,627 41,591 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 Equity settled share-based payment transactions Gain on sale of discontinued operation, net of tax Movement in assets and liabilities Loans and receivables Investments Deposits Other assets Deferred tax assets Deferred tax liabilities Current tax payable Payables Provisions Net cash flow from operating activities Consolidated 2021 $ 2022 $ 2022 $ Bank 2021 $ 59,787 5,659 75,600 1,325 380 (462,005) 436,464 843 (641) 2,639 2,301 (118,508) 110,428 1,317 370 627 185 - - 635 144 2,639 215 - - 1,264 80 627 (72,178) - (79,925) - (447,631) (109,810) 328,942 2,107 (6,498) (5,983) 17,424 14,343 641 (241,176) (254,866) (85,494) 289,856 (3,641) - 2,238 - 6,634 370 (42,709) (447,626) (110,147) 328,942 2,555 (1,422) 1,884 (7,121) (4,111) (144) (237,912) (253,679) (85,494) 289,856 29 451 - - (2,399) (80) (47,805) 51 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) 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 2021 $ 2022 $ 2022 $ Bank 2021 $ 102,528 164,586 - 8,820 148,006 142 102,528 164,586 - 8,820 148,006 142 267,114 156,968 267,114 156,968 55,046 39,862 7,620 102,528 51,443 54,758 36,312 22,073 164,586 - 1,200 7,620 8,820 - - 122,326 25,680 148,006 55,046 39,862 7,620 102,528 51,443 54,758 36,312 22,073 164,586 - 1,200 7,620 8,820 - - 122,326 25,680 148,006 (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. This shareholding was sold in FY22. 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 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. 52 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, a gain or loss is recognised based on 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. 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. The cumulative gain/loss recognised in OCI is transferred from OCI to retained earnings. 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 2022 $ 690,494 274,095 964,589 Consolidated 2021 $ 397,535 238,112 635,647 690,495 143,146 126,741 4,207 964,589 397,535 105,445 127,997 4,670 635,647 2022 $ 690,494 274,095 964,589 690,495 143,146 126,741 4,207 964,589 Bank 2021 $ 397,535 238,112 635,647 397,535 105,445 127,997 4,670 635,647 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 Accrued commission income Securitisation deposits Sub-lease finance lease receivable Prepayments Other debtors Less provision for impairment Total commissions and other receivables 53 Consolidated 2021 $ 19,418 373 817 1,915 3,168 (84) 25,607 2022 $ 530 3,253 - 1,230 3,897 (84) 8,826 2022 $ - - - 3,432 3,911 (84) 7,259 Bank 2021 $ - - - 1,703 5,742 (84) 7,361 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 Accrued commission payable Lease liabilities - refer to note 7.4 Trade creditors and accrued expenses Total commissions and other payables 4.4.3 Contract assets and trail commission payable In thousands of AUD Contract assets Net present value of future trail commission receivable Trail commission payable Net present value of future trail commission payable Consolidated 2021 $ 19,863 3,368 4,361 27,592 2022 $ 262 866 5,931 7,059 Consolidated 2021 $ 2022 $ 21,032 505,706 7,453 453,381 2022 $ - 405 3,652 4,057 2022 $ - - Bank 2021 $ - 543 3,122 3,665 Bank 2021 $ - - Accounting policy - Recognition and measurement The Group receives trailing commissions from lenders on settled loans over the life of the loans based on the individual loan balance outstanding. Contractually, where loans fall into delinquency, trailing commissions may be reduced or held for such a period until loans are repaired to non-delinquent status. The Group also makes trailing commission payments to authorised mortgage originators (brokers) based on the individual loan balance outstanding. On initial recognition, the Group recognises a contract asset under AASB 15 which represents the Group’s estimate of the variable consideration to be received from lenders on the settled loans. The Group used the expected value method of estimating the variable consideration which requires significant judgment. In addition, a corresponding expense and payable to the relevant brokers is also recognised, initially measured at fair value being the net present value of expected future trailing commission payable to relevant brokers. The value of trail commission receivable from lenders and the corresponding payable to brokers is determined by using a discounted cash flow valuation to determine the expected value. These calculations require the use of assumptions which are determined using a variety of inputs including analysis of historical information. Key assumptions underlying the calculation include the average loan life, discount rate and percentage paid to brokers. The key assumptions underlying the estimate 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 2022 Between 1.5% and 6.5% Between 5% and 93% - 5.6 years 5.6 years 2021 Between 1.5% and 6.5% Between 50% and 95% 3.6 to 3.9 years 3.0 to 4.4 years 4.5 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. The terms and conditions for creditors and other liabilities are payable between 7 and 30 days. 54 NOTES TO THE FINANCIAL REPORT 4. LIQUIDITY AND FUNDING 4.5 Other financial liabilities In thousands of AUD Term funding facility Securitisation liabilities Subordinated debt Total borrowings 2022 $ 13,797 208,155 23,567 245,519 Consolidated 2021 $ 13,772 37,846 9,640 61,258 2022 $ 13,797 207,826 23,567 245,190 Bank 2021 $ 13,772 38,234 9,640 61,646 Accounting policy - Recognition and measurement All borrowings are initially recognised at cost, being the fair value of the consideration received net of any issue costs associated with the borrowings. Subsequent to initial measurement, they are measured at amortised cost using the effective interest rate method. Term Funding Facility During the comparable period, the Group has drawn down its available funding allowance under the RBA’s Term Funding Facility (TFF). The Group’s drawdown comprises two tranches repayable as follows: $8.0 million fixed for three years at 0.25% repayable August 2023 $5.7 million fixed for three years at 0.10% repayable October 2023 The Group has provided collateral in the form of RBA repo-eligible semi government securities for an equal value of the TFF. The Group’s entitlement under the TFF was fully drawn at balance date. Securitisation liabilities During the comparable period the Group launched its first prime residential warehouse funding facility. This was facilitated through the establishment of the Bullion Warehouse No.1 Trust (the Trust). Loans originated and funded by the warehouse continue to be recognised by the Group with the rights to the cashflows from the loans equitably assigned to the Trust. In thousands of AUD Securitisation warehouse funding facilities - utilised Securitisation warehouse funding facilities - unutilised Securitisation warehouse funding approval limit 2022 $ 207,826 42,174 250,000 Consolidated 2021 $ 37,846 212,154 250,000 2022 $ 207,826 42,174 250,000 Bank 2021 $ 37,846 212,154 250,000 Subordinated debt On 1 February 2021, the Group issued $8.75 million of subordinated floating rate notes. The notes are fully paid, unsecured with a maturity date of 1 February 2031, with an option to redeem the notes early on or after 1 February 2026, subject to APRA’s approval. On 12 May 2021, the Group issued a further tranche of subordinated floating rate notes totaling $1.25 million. The notes have the same terms and conditions as the first tranche with a maturity date of 12 May 2031 and an optional early redemption date of 1 August 2026, subject to APRA’s approval. On 30 September 2021, the Group issued a further tranche of subordinated floating rate notes totaling $14 million. The notes have the same terms and conditions as the first tranche with a maturity date of 30 September 2031 and an optional early redemption date of 30 September 2026, subject to APRA’s approval. 55 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 Australian Prudential Regulation Authority (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 Officers & Executive Management The Chief Executive Officers are 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. Asset & Liability Committee (ALCO) The management ALCO meets regularly to review the Group’s interest rate risk, market risk, liquidity, credit quality and capital settings. The Committee monitors trends in the economy, reports risk metrics against Board defined triggers and forecasts movements in balance sheet positions to minimise risk and maximise financial outcomes. Non-Financial Risk Committee (NFR) The NFR assists the Board Risk & Compliance Committee in overseeing the implementation of BNK’s risk management and compliance frameworks, focusing particularly on non-financial risks. The Committee monitors the appropriateness, adequacy and effectiveness of BNK’s: Risk Management Strategy (“RMS”) in managing the enterprise-wide risks it faces in achieving its strategic and business objectives; and Compliance framework to ensure compliance obligations are met at all times. 56 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 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. 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 Risk & Compliance Committee. 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 and borrowings). 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, deposits, borrowings and securitisation notes. 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. - 57 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 2022 Financial assets Cash and cash on hand Due from other financial institutions Investment securities Loans and advances Commission and other receivables Securitisation deposits Other financial assets Total financial assets Weighted average Effective interest Rate (%) - 0.45 2.08 3.15 - - - Financial liabilities Deposits Lease liabilities Commission and other payables Securitisation liabilities Subordinated notes Term finance Facility Total financial liabilities Net financial assets/(liabilities) 2021 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 Securitisation deposits Other financial assets Total financial assets Financial liabilities Deposits Lease liabilities Commission and other payables Securitisation liabilities Subordinated notes Term finance Facility Total financial liabilities Net financial assets/(liabilities) 0.95 5.00 - 2.71 5.90 0.19 - 0.51 0.34 3.00 - 5.00 - - 0.45 5.00 - 1.93 5.44 0.19 Floating interest rate - - 7,042 666,201 - - - 673,243 690,494 - - - - - 690,494 (17,251) - - 7,070 445,912 - - - - 452,982 397,535 - - - - - 397,535 55,447 Consolidated 1 year or less 1 to 2 years Fixed interest rate 2 to 3 years 3 to 5 years > 5 years - 102,528 106,201 39,463 - - - 248,192 270,571 - - 208,155 23,567 - 502,293 (254,101) - - 7,512 178,222 - - - 185,734 2,147 - - - - - 2,147 183,587 - - 5,613 101,349 - - - 106,962 371 866 - - - 13,797 15,034 91,928 - - 16,145 800 - - - 16,945 1,006 - - - - - 1,006 15,939 - 8,820 - 2,195 - - - - 11,015 234,383 - - 37,846 9,640 - 281,869 (270,854) - - 88,548 34,036 - 817 - - 123,401 2,044 - - - - - 2,044 121,357 58 - - 7,850 55,018 - - - - 62,868 249 3,368 - - - 13,772 17,389 45,479 - - 18,857 1,247 - - - - 20,104 1,389 - - - - - 1,389 18,715 - - 22,073 - - - - 22,073 - - - - - - - 22,073 - - 25,681 - - - - - 25,681 47 - - - - - 47 25,634 Non- interest bearing 140,027 - - - 24,928 3,253 - 168,208 - - 13,646 - - - 13,646 154,562 47,285 - - - 528,292 - 373 142 576,092 - - 477,606 - - - 477,606 98,486 Amount per Statement of Financial Position 140,027 102,528 164,586 986,035 24,928 3,253 - 1,421,357 964,589 866 13,646 208,155 23,567 13,797 1,224,620 196,737 47,285 8,820 148,006 538,408 528,292 817 373 142 1,273,143 635,647 3,368 477,606 37,846 9,640 13,772 1,177,879 94,264 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 2022 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 Weighted average Effective interest Rate (%) - 0.45 2.08 3.15 - - Financial liabilities Deposits Lease liabilities Creditors and other payables Securitisation liabilities Subordinated notes Term Finance Facility Total financial liabilities Net financial assets/(liabilities) 2021 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 Lease liabilities Creditors and other payables Securitisation liabilities Subordinated notes Term Finance Facility Total financial liabilities Net financial assets/(liabilities) 0.95 5.00 - 2.71 5.90 0.19 - 0.51 0.34 3.00 - - 0.45 5.00 - 1.93 5.44 0.19 Floating interest rate - - 7,042 666,201 - - 673,243 690,494 - - - - - 690,494 (17,251) - - 7,070 445,912 - - 452,982 397,535 - - - - - 397,535 57,447 1 year or less 1 to 2 years Fixed interest rate 2 to 3 years 3 to 5 years > 5 years Non-interest bearing Bank - 102,528 106,201 39,463 - - 248,192 270,571 - - 207,825 23,567 - 501,962 (253,770) - 8,820 - 2,195 - - 11,015 234,383 - - 38,234 9,640 - 282,257 (271,242) - - 7,512 178,222 - - 185,734 2,147 - - - - - 2,147 183,587 - - 88,548 34,036 - - 122,584 2,044 - - - - - 2,044 120,540 59 - - 5,613 101,349 - - 106,962 371 405 - - - 13,797 14,574 92,388 - - 7,850 55,018 - - 62,868 249 543 - - - 13,772 14,564 49,304 - - 16,145 800 - - 16,945 1,006 - - - - - 1,006 15,939 - - 18,857 1,247 - - 20,104 1,389 - - - - - 1,389 18,715 - - 22,073 - - - 22,073 - - - - - - - 22,073 - - 25,681 - - - 25,681 47 - - - - - 47 25,634 139,627 - - - 3,911 - 143,538 - - 3,652 - - - 3,652 139,886 41,591 - - - 5,743 142 47,476 - - 3,122 - - - 3,122 44,354 Amount per Statement of Financial Position 139,627 102,528 164,586 986,035 3,911 - 1,396,687 964,589 405 3,652 207,825 23,567 13,797 1,213,835 182,852 41,591 8,820 148,006 538,408 5,743 142 742,710 635,647 543 3,122 38,234 9,640 13,772 700,958 44,752 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 +/- 50 basis points (2021: +/- 25 basis points) from the year-end rates, with all other variables held constant. Judgement of reasonably possible movements(amounts in thousands of AUD): 100 basis points increase (2021: 25bps) 100 basis points decrease (2021: 25bps) Consolidated higher (lower) Bank higher (lower) 2022 208 (208) 2021 303 (303) 2022 208 (208) 2021 303 (303) During the current financial year the methodology of assessment has changed with repricing over the course of 3 years. Comparatives have not been restated. 5.1.3 Market risk - Equity investments The Group holds no equity investments at 30 June 2022. 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% (2021: +/- 10%) from the year-end rates, with all other variables held constant. Judgement of reasonably possible movements (amounts in thousands of AUD): 10% increase (2021:10%) 10% decrease (2021: 10%) Consolidated Impact on equity Bank Impact on equity 2022 - - 2021 10 (10) 2022 - - 2021 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. 60 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) 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 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 2022, the Group repossessed one residential property with a fair value of $220,000 which was sufficient to payout the loan balance and expenses in the amount of $179,639 (2021: one property with a fair value of $240,000). 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 2022 $ 651,087 321,081 13,368 223 26 250 986,035 Consolidated 2021 $ 351,443 171,217 14,206 371 68 1,103 538,408 2022 $ 651,087 321,081 13,368 223 26 250 986,035 Bank 2021 $ 351,443 171,217 14,206 371 68 1,103 538,408 As at 30 June 2022 there were no borrowers (2021: nil) who individually have facilities which represent 10% or more of the regulatory capital base. i. Credit quality – loans and advances The credit quality of the Group’s loans and advances 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 2021 $ 2022 $ 2,994 697 283 3,974 - - 2,860 1,192 164 4,216 - - 2022 $ 2,994 697 283 3,974 - - Bank 2021 $ 2,860 1,192 164 4,216 - - 982,061 986,035 534,192 538,408 982,061 986,035 534,192 538,408 61 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) ii. Collateral – loans and advances 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: Percentage of exposure that is subject to collateral requirements Type of credit exposure Deposits with banks and short-term securities Investment securities Residential loans Personal loans Overdrafts Term loans 2022 2021 Principal type of collateral held - - 100 53 98 100 - - 100 91 90 100 Marketable securities Marketable securities Residential property Residential property and/or motor vehicles Residential property Commercial and/or residential property, floating charges over business assets The following table shows the Group’s Loan to Value Ratio (LVR) on its residential mortgages. Valuation amounts used in these calculations are based on the security value taken at the time the loans were originated or subsequent revaluation. In thousands of AUD Loan To Value Ratio 0 – 60.0% 60.01 – 80.0% 80.01 – 90.0% >90.01% Consolidated 2021 $ 2022 $ 335,844 505,724 104,509 26,091 972,168 162,293 278,709 65,384 16,275 522,661 2022 $ 335,844 505,724 104,509 26,091 972,168 Bank 2021 $ 162,293 278,709 65,384 16,275 522,661 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 Consolidated 2021 $ 2022 $ - 17,620 - 84,908 102,528 - 8,820 - - 8,820 2022 $ - 17,620 - 84,908 102,528 Bank 2021 $ - 8,820 - - 8,820 62 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) Investment securities In thousands of AUD Long Term Credit Rating 1 (AAA to AA-)* 2 (A+ to A-)* Unrated * 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 2021 $ 2022 $ 105,088 53,465 6,033 164,586 148,006 - 148,006 2022 $ 105,088 53,465 6,033 164,586 Bank 2021 $ 148,006 - 148,006 Consolidated 2021 $ 2022 $ 5 699 8,444 12,414 21,562 327,016 55,579 37,130 105,399 525,124 2022 $ 3,911 3,911 Bank 2021 $ - - - 5,742 5,742 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 receivables are from counterparties that are rated between BBB and AA-. Accounting policy - Recognition and measurement As set out in note 3.1, loans are initially reviewed when they reach 30 days in arrears, and individually assessed for recoverability. They are then 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. There have been no instances of loan restructures during this reporting period. 63 NOTES TO THE FINANCIAL REPORT 5.1 FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES 5.1.4 Credit risk (continued) 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. The Group’s policy is to apply a minimum level of 21% (2021: 18%) 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 21% (2021: 18%); the Board has determined a target liquidity trading range of 18% - 25% in normal market situations. 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 2022 there were no deposits greater than 10% of total liabilities (2021: 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 2022 $ 363,833 1,069,753 34.0% Consolidated 2021 $ 205,637 622,706 33.1% 2022 $ 363,433 1,066,655 34.1% Bank 2021 $ 199,372 601,424 33.0% 64 NOTES TO THE FINANCIAL REPORT 5. FINANCIAL RISK AND CAPITAL MANAGEMENT 5.1. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES 5.1.6 Operational risk 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 including the risk of modern slavery - 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 - Anti-money laundering (AML)/Know your customer(KYC) protocols - - Requirements for the periodic assessment of operational risks faced, and the adequacy of controls and IT security and vendor management 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 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. 65 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 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. At the reporting date, the Group does not hold any Level 1 financial assets. 66 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 financial assets Total financial assets Financial liabilities Deposits Accrued commission payable Other financial liabilities 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 Other financial liabilities Creditors and other payables Total financial liabilities Consolidated Fair value Carrying amount 2022 $ 2021 $ 2022 $ 2021 $ 140,027 530 102,528 158,477 1,021,766 - 1,423,328 47,285 19,418 8,820 147,236 549,658 142 772,559 47,285 140,027 19,418 530 8,820 102,528 164,586 148,006 990,066 539,939 142 763,610 - 1,397,737 965,437 262 245,519 5,931 1,217,149 635,647 19,863 61,258 4,361 721,129 964,589 635,647 19,863 61,258 4,361 721,129 262 245,519 5,931 1,216,301 Bank 139,627 102,528 158,477 1,018,355 3,911 - 1,422,898 41,591 8,820 147,264 551,246 5,743 142 754,806 139,627 102,528 164,586 990,506 3,911 - 41,591 8,820 148,005 541,527 5,743 142 1,401,158 745,828 965,437 245,190 3,652 1,214,279 635,647 61,646 3,266 700,559 964,589 635,647 61,646 245,190 3,266 3,652 1,213,431 700,559 67 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 unlisted equity instruments held at fair value. This unlisted equity instrument was sold during current reporting period. 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. Other financial liabilities Refer to note 4.5. Recognised at amortised cost, the other financial liabilities comprise the RBA Term Funding Facility, securitisation liabilities and subordinated floating rate notes. 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. 5.2.2 Capital management The Company’s regulator, the Australian Prudential Regulation Authority (APRA) prescribes minimum capital requirements for the Company (Level 1) and the Group (Level 2). The Board determines the minimum capital adequacy ratio (CAR) applicable to both Level 1 and 2 in order to ensure sufficient buffer is maintained above the APRA prescribed minimums. Regulatory capital comprises eligible capital instruments, retained earnings and reserves less prescribed deductions. The CAR is determined as the percentage of regulatory capital to risk weighted assets. Risk weighted assets are determined by applying prescribed risk weights to individual assets, with the risk weights set according to Basel III standard methodology, reflecting the risk attached to each asset. The Group has documented its strategy to manage capital in its internal capital adequacy assessment process which includes the capital management plan. Capital management is an integral part of the Group’s risk management framework. 68 NOTES TO THE FINANCIAL REPORT 5. FINANCIAL RISK AND CAPITAL MANAGEMENT 5.2 CAPITAL MANAGEMENT 5.2.2 Overview (continued) The APRA Prudential 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). The Group’s policy is to apply a minimum target of 15.0% capital (2021: 17.5%). 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 (Level 2) 2022 2021 162,362 25,773 188,135 42,126 9,999 52,125 Bank (Level 1) 2022 $ 157,943 25,566 183,509 2021 $ 40,861 9,999 50,860 396,023 236,706 396,843 236,825 21.48% 46.24% 22.02% 47.51% Disclosures required under Prudential Standard APS 330 Public Disclosure can be located on our website at: https://bnk.com.au/investor-centre/disclosure-statements/. 5.2.3 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 Exercise of performance rights Less equity raising costs 5.2.4 Bank 2022 $ 122,275 2021 $ 120,035 Number of shares 114,187,400 - 4,015,388 118,202,738 - 118,202,738 2022 $ 120,035 - 2,240 122,275 (3,332) 118,943 Number of shares 94,270,399 18,572,000 1,345,001 114,187,400 - 114,187,400 2021 $ 106,270 13,000 765 120,035 (3,307) 116,728 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. 69 NOTES TO THE FINANCIAL REPORT 5. FINANCIAL RISK AND CAPITAL MANAGEMENT 5.2 CAPITAL MANAGEMENT 5.2.4 Equity raising costs In thousands of AUD 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 2022 $ 3,307 36 (11) 3,332 Bank 2021 $ 2,754 766 (213) 3,307 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 In thousands of AUD Balance at the beginning of the year Acquired during the year to fulfil the exercise of performance rights 2022 $ (103) - (103) 2021 $ (103) - (103) 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 7.5.2. At 30 June 2022, 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 in equity and the resulting surplus or deficit is retained within the reserve. 70 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 Discontinuing operations Continuing operations 2022 $ 2021 $ 2022 $ 2021 $ Consolidated 2022 $ Net profit/(loss) attributable to ordinary share holders 72,178 9,033 (12,391) (3,374) 59,787 Basic earnings per share (cents) Diluted earnings per share (cents) 62.31 61.02 9.33 9.22 (10.70) (10.48) (3.49) (3.44) 51.61 50.55 2021 $ 5,659 5.85 5.77 Weighted average number of ordinary shares Issued Share Capital 1 July Effect of performance rights exercised Weighted average ordinary shares for basic earnings per share 30 June Effect of performance rights exercised Weighted average ordinary shares for diluted earnings per share 30 June 2022 2021 114,187,400 1,656,622 94,270,399 2,505,611 115,844,022 96,776,010 2,438,234 1,244,267 118,282,256 98,020,277 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. After the balance sheet date the following dividends were proposed by the board of directors. The dividends have not been recognised as liabilities and there are no tax consequences. (2021: 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% (2021: 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% (2021: 30%) 71 2022 $ 2,546 17,408 144 20,098 2021 $ 2,544 - 2 2,546 NOTES TO THE FINANCIAL REPORT 6. GROUP STRUCTURE 6.1.1 Investments in subsidiaries In thousands of AUD Note Investments in subsidiaries at cost 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 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 Bullion Trust No.1 Segment Aggregation Aggregation Aggregation Aggregation Aggregation Aggregation Aggregation Aggregation Aggregation Banking Banking Banking Banking Banking Banking Banking Bank 2022 $ 19,896 2021 $ 61,925 Ownership 2022 - - - - - - - - - 100% 100% 100% 100% 100% 100% 100% 2021 100% 100% 100% 100% 100% 100% 100% 100% 100% 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. Consolidated structured entities (CSEs) are established for specific pre-defined purposes operating within a contractual framework. During the comparable year, the Group established the Bullion Trust No.1 for the purpose of originating residential loans for securitisation purposes. The financial statements of subsidiaries and CSEs 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. 72 NOTES TO THE FINANCIAL REPORT 7. OTHER NOTES 7.1 Property, plant and equipment In thousands of AUD Note 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 2021 $ 2022 $ 837 (802) 35 44 (29) 15 171 (165) 6 1,581 (825) 756 1,145 (926) 219 44 (25) 19 539 (426) 113 4,191 (1,896) 2,295 2022 $ 66 (45) 21 44 (29) 15 145 (140) 5 761 (428) 333 Bank 2021 $ 64 (33) 31 44 (25) 19 145 (124) 21 761 (294) 467 Total property, plant and equipment 812 2,646 374 538 Reconciliations of the carrying value for each class of property, plant and equipment are set out below: In thousands of AUD Opening written down value at 1 July 2021 Additions Disposals Depreciation Closing written down value at 30 June 2022 In thousands of AUD Opening written down value at 1 July 2021 Additions Disposals Depreciation Closing written down value at 30 June 2022 Computer equip & IT hardware $ 113 Total $ 2,646 (90) (17) 6 (1,472) (362) 812 Computer equip & IT hardware $ 21 - - (16) 5 Total $ 538 3 - (167) 374 Consolidated Motor vehicles $ 19 - (4) 15 Bank Motor vehicles $ 19 - - (4) 15 Right of Use Asset $ 2,295 (1,240) (299) 756 Office Equip & L/H imp $ 219 (142) (42) 35 Right of Use Asset $ Office Equip & L/H imp $ 467 - - (134) 333 31 3 - (13) 21 73 NOTES TO THE FINANCIAL REPORT 7. OTHER NOTES 7.1 Property, plant and equipment (continued) 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. 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. The right-of-use asset is initially measured at cost, which comprises the initial amount of the lease liability (refer to note 7.4) 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 re-measurements of the lease liability. 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 3-7 years 3-5 years 8 years 2-5 years 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. 74 NOTES TO THE FINANCIAL REPORT 7. OTHER NOTES 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 Other intangible assets Accumulated amortisation Consolidated 2021 $ 19,172 2022 $ 7,100 2022 $ - Bank 2021 $ - 171 16,565 170 170 - - - - - - 176 (40) 136 8,704 (3,116) 5,588 4,075 (1,865) 2,210 176 (22) 154 - - - - - - 176 (40) 136 306 - - - - - 176 (22) 154 324 Total goodwill and other intangibles 7,407 43,689 Consolidated Software Broker relationships Other Intangible Total $ 6,296 571 (345) (934) 5,588 - (5,588) - - Bank Software $ - - - - - - - $ $ 2,407 - - (197) 2,210 - (2,210) - - $ 44,432 755 (345) (1,153) 43,689 - (36,264) (18) 7,407 - 176 - (22) 154 - - (18) 136 Broker relationships Other Intangible Total $ - - - - - - - $ - 176 (22) 154 - (18) 136 $ 162 184 (22) 324 - (18) 306 Reconciliation of intangible assets In thousands of AUD Goodwill Balance at 1 July 2020 Additions Disposals Amortisation Balance at 1 July 2021 Additions Disposals Amortisation Closing balance at 30 June 2022 Reconciliation of intangible assets In thousands of AUD $ 19,172 - - - 19,172 - (12,072) - 7,100 Balance at 1 July 2020 Additions Amortisation Balance at 1 July 2021 Additions Amortisation Closing balance at 30 June 2022 Brand names & trademarks $ 16,557 8 - - 16,565 - (16,394) - 171 Brand names & trademarks $ 162 8 - 170 - - 170 75 NOTES TO THE FINANCIAL REPORT 7. OTHER NOTES 7.2 Goodwill and other intangible assets (continued) Accounting policy - recognition and measurement 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 or developing software, that is not cloud based Software as a Service (SaaS) 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: - Other 10 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 Banking Total goodwill 2022 $ - 7,100 7,100 2021 $ 12,000 7,172 19,172 With Aggregation leaving the Group during 2022, the Group now only has a single CGU remaining for Bank. Bank CGU was tested for impairment using the value in use approach, by discounting future cash flows (5 years) estimated from the continuing use of the CGU. The recoverable amount for the 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 the Group’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 net income growth rates Budgeted cost rates 2022 12% 2.5% 10-75% 2–11% 2021 11% 2.5% 8-37% 2-10% 76 NOTES TO THE FINANCIAL REPORT 7. OTHER NOTES 7.2 Goodwill and other intangible assets (continued) 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 from companies considered comparable over 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 the CGU taking into account past experience and adjustments regarding expectations of future outcomes including economic conditions. No impairment loss has been recognised for the CGU at 30 June 2022. The CGU is generating headroom of $79m. Management has estimated that changes in two key assumptions could cause the carrying amount to exceed the recoverable amount, these 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 (reduce the headroom to nil). Input Discount rates (post-tax) Average budgeted revenue growth Banking 9.5% (12.5%) 7.3 Provisions In thousands of AUD Note Provision for annual leave Provision for long service leave Total provisions Consolidated 2021 $ 1,249 429 1,678 2022 $ 749 288 1,037 2022 $ 429 15 444 Bank 2021 $ 295 4 299 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. 7.4 Leases Lease liabilities are payable as follows. In thousands of AUD Consolidated ($) Interest Future minimum lease payments Present value of lease payments Future minimum lease payments Bank ($) Interest Less than one year Between one and five years 358 582 37 22 321 560 168 264 17 10 Present value of lease payments 151 254 77 NOTES TO THE FINANCIAL REPORT 7. OTHER NOTES 7.4 Leases (continued) 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. 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 (refer to note 7.2) and a lease liability at the lease commencement date. 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. 7.5 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. 78 NOTES TO THE FINANCIAL REPORT 7. OTHER NOTES 7.5.1 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 2022 $ 3,127 193 1,241 - 4,561 2021 $ 3,097 200 136 100 3,533 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. 7.5.2 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 a) 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 each vest on 30 September 2020, 30 September 2021 and 30 September 2022 subject to the approval of the Remuneration Committee and continued service. For the first and second tranche, 116,669 have been exercised whilst 50,001 have been forfeited. For the remaining tranche, 33,332 were vested and exercised on 7 February (due to the Finsure Sale), 33,332 were forfeited and 16,666 remain to be exercised on 30 September 2022. b) On 28 August 2020, 450,000 performance rights were awarded to six employees in recognition of their performance for the year ended 30 June 2020 (‘FY20 Bonus”). Of these, 50% of the performance rights vested immediately, with the remaining 50% deferred to 31 July 2024 subject to continued service. Of the remaining performance rights, 65,000 have been forfeited, 90,000 exercised (Finsure sale) and 40,000 remain to be vested. c) On 1 December 2020, 125,000 performance rights were awarded to Mr John Kolenda as a FY20 Bonus following receipt of shareholder approval at the 2020 Annual General Meeting. These performance rights were exercised at the time of the Finsure Sale in February 2022. d) On 18 August 2021, 4,950,000 performance rights were granted to executives under the Transformational Long Term Incentive Plan (TLTIP). The vesting conditions for the rights provided for 60% vesting in 3 years with the remainder vesting in 4 years. The sale of Finsure saw the vesting conditions of these performance rights accelerated by the Board with 1,790,748 rights terminated, 1,134,572 rights forfeited, and 2,024,680 exercised. Of the rights exercised between 10% and 19% remain in escrow until 30 June 2025. e) On 1 December 2021, 1,200,000 performance rights were awarded to Mr John Kolenda as part of the TLTIP. These performance rights vesting conditions were accelerated on the sale of Finsure, with 576,000 terminated and 624,000 exercised of which 21% are held in Escrow until 30 June 2025. f) On 1 September 2021, 287,500 performance rights were awarded to 6 employees in recognition of their performance for the year ended 30 June 2021 (‘FY21 Bonus”). Of these, 194,885 performance rights vested immediately, with the remaining rights, deferred to 1 September 2025. The sale of Finsure saw 38,440 of performance rights exercised in February 2022, whilst 28,550 have been forfeited, 25,625 remain vested to 1 September 2025. 79 NOTES TO THE FINANCIAL REPORT 7. OTHER NOTES 7.5.2 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 2022 in relation to the BNKEIP performance rights was $21,085 (2021: $127,818). b) 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 options vesting conditions are limited to service. The amount recognised in profit and loss for the year ended 30 June 2022 in relation to these performance rights was $0 (2021:$148). c) 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 options vesting conditions are limited to service. The amount recognised in profit and loss for the year ended 30 June 2022 in relation to these performance rights was $130 (2021:$ 47,728). d) 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 options vesting conditions are limited to service. The amount recognised in profit and loss for the year ended 30 June 2022 in relation to these performance rights was $16,879 (2021: $46,783) e) The fair value of the FY20 Bonus performance rights of $365,000 was determined with reference to the share price on the grant dates of $0.60 and $0.76 respectively. The options vesting conditions are limited to service. With the majority of the remaining shares, after forfeit vesting on the sale of Finsure, the balance of the fair value of the grant has been recognised in profit and loss for the year ended 30 June 2022 in relation to these performance rights being $97,518 (2021: $75,482). f) The fair value of the FY21 Transformational LTI (TLTIP) of $3,213,375 has been measured using a combination of the Monte Carlo simulation and Binomial Tree. The inputs used in the measurement of the fair values at grant date of the TLTIP performance rights are summarised below. The key terms and conditions related to the grants under the TLTIP 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 TLTIP 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) $0.275 to $0.770 $0.77 Nil 40.0% Nil 0.18% 80 NOTES TO THE FINANCIAL REPORT 7. OTHER NOTES 7.5.2 Share-Based Payments (continued) With the accelerated vesting conditions of all LTIs following the sale of Finsure, $592,814 of rights due to employees leaving the group were forfeited, $1,236,626 fair value of rights were terminated, and $1,383,935 of rights were exercised. The terminated and exercised elements of these rights were fully recognised in the profit and loss for the period ended 30 June 2022, being $2,620,561. g) The fair value of the FY21 Bonus performance rights (1 September 2021) of $230,000 was determined with reference to the share price on the grant date of $0.80. The options vesting conditions are limited to service. For the rights that vested immediately, and the majority of the remaining shares, after forfeit vesting on the sale of Finsure, the balance remaining has been recognised in profit and loss for the year ended 30 June 2022 being $207,160. Unlisted Options On 1 October 2020, the Company issued 500,000 unlisted options to Bell Potter Securities Limited (BP). BP has been engaged to provide a broad range of corporate advisory services. On 1 December 2020, the Company issued a further 1,000,000 unlisted options to BP following receipt of shareholder approval at the Company’s 2020 AGM. At the reporting date all options remain unexercised. The unlisted options were valued using the Black Scholes method using the following inputs: Grant date Number granted Fair value at grant date Share price at grant date Exercise price Expected volatility Expiry date Expected dividends Risk-free interest rate BP Options tranche 1 BP Options tranche 2 1 October 2020 500,000 $0.20 $0.65 $0.75 54% 1 October 2023 - 0.25% 1 December 2020 500,000 $0.22 $0.76 $1.00 53% 1 December 2023 - 0.25% BP Options tranche 3 1 December 2020 500,000 $0.17 $0.76 $1.25 53% 1 December 2023 - - 0.25% 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. 81 NOTES TO THE FINANCIAL REPORT 7. OTHER NOTES 7.5.3 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 on loans from KMP 2022 $ 26,239 2021 $ 3,644 45 478,7841 19,3451 - 483,768 33,464 1 Where applicable, data only up to 7 February 2022, the date of KMP leaving the group. 7.5.4 Transactions with other related parties 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. 7.5.5 Related party transactions with director related entities (continued) Mr John 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. Sub-lease income and other amounts recouped for services from Aura Group 1 Period covers 1 July 2021 to 7 February 2022. 2022 $ 281,9961 2021 $ 446,457 During the period 1 July 2021 to 7 February 2022, the Group paid $27,500 to Shadow Charters Pty Ltd, a related entity of Mr John Kolenda for boat charter services (30 June 2021: $42,175). 82 NOTES TO THE FINANCIAL REPORT 7. OTHER NOTES 7.6 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 Total advisory and other services Total amounts paid/payable to KPMG 2022 $ 510,185 168,686 678,871 2021 $ 335,716 111,000 446,716 28,463 28,463 25,047 25,047 707,334 471,763 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. 7.7 Standby borrowing facilities The Company has an overdraft facility of $10,000,000 (2021: $1,200,000) with CUSCAL Ltd which is secured by a cash deposit. As at 30 June 2022, the entire facility was unused (2021: $nil). 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 2022 $ - 2021 $ - 30,496 29,397 13,861 22,990 256 60,149 113 36,964 32 64 297 637 - 1,030 123 252 1,082 2,253 - 3,710 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. As part of the Finsure sale, the share sale agreement (SSA) contains certain warranties and indemnities. The SSA contains warranties covering title, authority, the conduct of business, and a range of other matters. The warranties are supported by a general indemnity and a tax indemnity which are capped and time bound. BNK considers the warranties and the indemnities were entered into on market standard terms for a transaction such as the Finsure Transaction. The Group considers the possibility of any outflow to be remote and therefore no provision has been recognised in relation to the Finsure sale warranties. 83 NOTES TO THE FINANCIAL REPORT 7. OTHER NOTES 7.8 Commitments and contingencies (continued) 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. 7.9 Events subsequent to balance date On 26 July 2022 a fully-franked special dividend of 34 cents per share, for a total distribution to shareholders of approximately $40 million, was paid. BNK is proposing to distribute $60 million in proceeds from the sale of Finsure to its shareholders, by way of the above noted special dividend ($40m) and a capital return. Further information in relation to the planned capital return of approximately $20 million will be announced once regulatory approvals are obtained. Dividend Declared after end of year After the balance sheet date the following dividends were proposed and paid by the board of directors. The dividends have not been recognised as liabilities and there are no tax consequences. In thousands of AUD Special Total Cents per share $ Date of Payment 0.34 40,359 26 July 2022 40,359 The financial effect of these dividends have not been brought to account in the consolidated financial statements for the year ended 30 June 2022 and will be recognised in subsequent financial reports. 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. 8. ACCOUNTING POLICIES AND NEW STANDARDS 8.1 Change in accounting policy There were no new material accounting standards that have significantly impacted the Group during the reporting period. 84 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 2022 are in accordance with the Corporations Act 2001, including: i. Giving a true and fair view of its financial position as at 30 June 2022 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 2022. On behalf of the Board Don Koch Chairman 26 August 2022 85 Independent Auditor’s Report To the shareholders of BNK Banking Corporation Ltd Report on the audits of the Financial Reports Opinions We have audited the consolidated Financial Report of BNK Banking Corporation Ltd (the Group Financial Report). We have also audited the Financial Report of BNK Banking Corporation Ltd (the Company Financial Report). In our opinion, each of the accompanying Group Financial Report and the Company Financial Report are in accordance with the Corporations Act 2001, including: • • giving a true and fair view of the Group’s and Company’s financial position as at 30 June 2022 and of their financial performance for the year ended on that date; and complying with Australian Accounting Standards and the Corporations Regulations 2001. Basis for opinions The respective Financial Reports of the Group and the Company comprise: • Statements of financial position as at 30 June 2022 • 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 Ltd the Company and the entities it controlled at the year-end or from time to time during the financial year. 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 audit of the Financial Report 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 (including Independence Standards) (the Code) that are relevant to our audits of the Financial Reports in Australia. We have fulfilled our other ethical responsibilities in accordance with these requirements 86 KPMG, an Australian partnership and a member firm of the KPMG global organisation of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. The KPMG name and logo are trademarks used under license by the independent member firms of the KPMG global organisation. Liability limited by a scheme approved under Professional Standards Legislation 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 • Net Present Value of future trail commission receivable and payable Key Audit Matters are those matters that, in our professional judgement, 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 $1.8 million – Group and Company Refer to Note 3.2 to the Group Financial Report and Company Financial Report The key audit matter How the matter was addressed in our audit The provision for credit losses relating to loans and advances held at amortised costs is a key audit matter due to the: • • significance of the loans and advances balances; and the degree of complexity and judgement applied by the Group and Company in determining the expected credit loss (ECL) provisions, including post-model adjustments. 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 reflecting potential future economic events. This involves significant judgement applied by the Group and Company and required by us in challenging these assumptions. We exercised judgement to assess the ECL model’s application of the requirements of AASB 9 Financial Instruments. This includes: • • • the Group and Company’s definition in determining what represents a significant increase in credit risk; the method used to estimate the probability of default, loss given default and exposure at default; and judgement around the impact of current economic Working with our credit specialists, our procedures included: • • • Assessed the appropriateness of the Group and Company’s accounting policies against the requirements of the accounting standard, including the Group’s definition of what represents a significant increase in credit risk. Evaluated the Group and Company’s processes and tested key controls such as: o Review and approval by management of the reconciliation of historical loan portfolio data used in the ECL model to the gross balances recorded within the general ledger as well as the underlying core banking system; o The assessment and approval by management of the ECL model and key assumptions used by the Group and Company. Assessed the methodology used to estimate the probability of default, loss given default and exposure at default used in the ECL model, including relevant adjustments such as the impact of increasing interest rates and inflation on forward looking information, against the requirements in the accounting standards and our understanding of industry 87 conditions including increasing interest rates and inflation on forward looking information. We involved credit specialists to supplement our senior audit team members in assessing this key audit matter. • • • • • 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 as well as the assumptions for post- model adjustments. We did this by comparing the key assumptions to our understanding of the related loans and advances portfolio as well as the industry and markets the Group and Company operate in; Compared the output of the ECL model and the post-model adjustments to the ECL provision recorded in the financial reports; and Assessed the Group and Company’s disclosures in the financial reports using our understanding obtained from our testing and against the requirements of the accounting standards. Carrying Value of Goodwill $7.1 million – Group Refer to Note 7.2 to the Group Financial Report The key audit matter How the matter was addressed in our audit A key audit matter was the Group’s annual testing of goodwill for impairment, required by AASB 136 Impairment of Assets, given the extent of judgement involved and the size of the balance (being 0.5% of total assets). We focused on the Group’s determination of the identified Cash Generating Units (“CGUs”) as well as the key assumptions the Group applied in their value in use (“VIU”) model, including: • • • Forecast cash flows, including growth rate; Terminal value growth rate; and Discount rate used. These assumptions are complicated in nature and vary according to the conditions and environment the Group is subject to from time to time. The assumptions are based on historical performance and Our procedures included: • Evaluated the Group’s identification of the CGUs against the requirements of the accounting standards. We also compared the Group’s assessment against our understanding of the operations of the Group’s business and how independent cash flows were generated; • Worked with our valuation specialists to: consider the appropriateness of the VIU method applied by the Group to perform the annual test of goodwill for impairment against the requirements of the accounting standards assess the integrity of the VIU model o o 88 forward-looking forecasts taking into account the Group’s strategy, market conditions, current economic outlook, 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. o o used, including testing the accuracy of the underlying calculations; assessed the terminal value growth rate using our knowledge and experience of the Group and the industry it operates in; 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. • • • • Considered the sensitivity of the models by varying key assumptions, such as discount rate and growth rates. We did this to identify those assumptions at higher risk of bias or inconsistency in application and to focus our further procedures; Comparing the Group’s forecast cash flows contained in the VIU model to Board approved forecasts; Assessing the accuracy of previous Group forecasts to inform our evaluation of forecasts incorporated in the VIU model; Challenged the Group’s significant forecast cash flow and growth rate assumptions: o We compared key events to the Board approved plan and strategy. o We checked the consistency of the growth rates to the Group’s stated plan and strategy, past performance of the Group, and our experience regarding the feasibility of these in the economic environment in which they operate. o We assessed market and regulatory impacts on the Group’s key assumptions for indicators of bias and inconsistent application, using our knowledge and experience of the industry, the Group’s performance and its operations. • Assessed the disclosures in the Group’s financial report using our understanding obtained from our testing and against the requirements of the accounting standards. 89 Net Present Value of future trail commission receivable $21.0 million and payable $7.4 million – 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’s policy is to recognise: Our procedures included: • • a contract asset representing the expected value of future trail commission receivable in accordance with AASB 15 Revenue from Contracts with Customers; and a corresponding trail commission payable representing the net present value of future trail commissions payable in accordance with AASB 9 Financial Instruments. This is a key audit matter due to the complexity and the degree of judgement we use in assessing the Group’s estimate of the value of trail commissions receivable and payable. Key assumptions in the estimate are: • • • Assessed the appropriateness of the Group’s accounting policy against the requirements of the accounting standard. Understand the Group’s processes and tested key controls such as the assessment and approval by management of assumptions used in the Group’s Net Present Value (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; • Discount rates ; • Worked with our valuation specialists to: • Weighted average life of portfolio loans – there is a degree of estimation uncertainty in relation to the expected weighted average life continuing on the current trend of actual performance of the underlying portfolio. We involved our valuation specialists in assessing this key audit matter. o o o o 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 discount rates against publicly available market data for comparable entities; assess the weighted average life of portfolio loans based on actual performance adjusted for expectations of future performance. We do this using our understanding of the underlying portfolio and the industry; and assess the integrity of the Group’s NPV model including testing the accuracy of the underlying calculations. • Evaluated the sensitivity of the NPV model estimate by considering reasonably possible changes to the discount rate and weighted average life rates. We did this to identify those 90 assumptions at higher risk of bias or inconsistency in application and to focus our further procedures; and • Assessed the disclosures in the Group’s financial report using our understanding obtained from our testing and against the requirements of the accounting standards. Other Information Other Information is financial and non-financial information in BNK Banking Corporation Ltd’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 audit, 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 gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 • • implementing necessary internal control 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 and 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 is 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 91 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: https://www.auasb.gov.au/admin/file/content102/c3/ar1_2020.pdf This description forms part of our Auditor’s Report. Report on the Remuneration Report Opinion Directors’ responsibilities In our opinion, the Remuneration Report of BNK Banking Corporation Ltd for the year ended 30 June 2022, 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 14 to 27 of the Directors’ report for the year ended 30 June 2022. 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 26 August 2022 92 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 26 August 2022. (a) Distribution of equity securities Spread of holdings 1 - 1,000 1,001 - 5,000 10,000 5,001 - 100,000 10,001 - 100,001+ TOTAL Number of holders 153 1,621 118 310 85 2,287 Number of units 82,097 3,937,793 968,020 11,186,652 102,528,176 118,702,738 Percentage of total issued capital 0.069% 3.317% 0.815% 9.424% 86.338% 100% (b) Twenty largest holders of quoted equity securities Rank Shareholder 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 SF Legacy Investments Limited 1800homeloans Pty Ltd J P Morgan Nominees Australia HSBC Custody Nominees Resimac Limited Ng Capital Management Pte Ltd Resimac Limited Keybridge Capital Limited Daring Investments Pty Ltd Todlaw Pty ltd National Nominees Limited Carpe Diem Asset Management Koleet Pty Ltd Holding Corporation Pty Ltd Aoyin Group Limited Bond Street Custodians Limited Firstmac Limited Pyramid Capital Pty Ltd Citicorp Nominees Pty Limited Vanval Investments Pty Ltd Number of units 11,269,346 7,832,149 6,807,006 5,654,157 5,411,285 5,139,571 4,468,902 4,102,750 3,996,529 3,935,000 3,408,165 2,430,190 2,150,144 1,973,207 1,921,407 1,898,686 1,769,416 1,581,969 1,466,120 1,153,333 Percentage of issued capital 9.493% 6.598% 5.734% 4.763% 4.558% 4.329% 3.764% 3.456% 3.366% 3.315% 2.871% 2.047% 1.811% 1.662% 1.618% 1.599% 1.490% 1.332% 1.235% 0.971% 66.02% 93
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