The bcu Directors unanimously recommend that you vote in favour of the bcu Merger resolution at the General Meeting*
A Notice of General Meeting is included as Annexure A to this Member Booklet, and a proxy form for the bcu Opportunity for General Meeting accompanies this Member Booklet. The bcu General Meeting will be held at 10.00am our future (New South Wales time) on Tuesday 22 October 2019 at C.ex Coffs, 2-6 Vernon Street, Coffs Harbour.
The Australian Prudential Regulation Authority (APRA) has Member Booklet approved this Member Booklet pursuant to Rule 9 of the Transfer Rules. In deciding whether to approve this Member Booklet, APRA has consulted with the Australian Securities For the proposed Merger of and Investments Commission (ASIC). Neither APRA nor ASIC accepts any responsibility for the accuracy or otherwise Bananacoast Community of any of the matters contained in this Member Booklet Credit Union Ltd (bcu) with or attached to this Member Booklet. Police & Nurses Ltd (P&N Bank) *Subject to there being no Superior Proposal Member Booklet 1 Important notices
Purpose Defined terms This document contains information for bcu Members relating to Capitalised terms and certain abbreviations used in this document have bcu’s proposed Merger with P&N Bank and will assist bcu Members in the defined meanings set out in section 7 of this document. deciding how to vote on the bcu Merger Resolution at the bcu General A number of figures, amounts, percentages, prices, estimates, Meeting. The information comprises the information document calculations of value and fractions in this document are subject to the which is legally required to be provided to bcu Members under the effect of rounding. Accordingly, the actual calculations may differ from Financial Sector (Transfer and Restructure) Act 1999 (Cth) (Transfer Act) the calculations set out in this document. and the Financial Sector (Business Transfer and Group Restructure) Unless otherwise specified, all references to “$”, “A$”, “dollar” and “cent” Determination No. 2 of 2017 (Cth) (Transfer Rules). are references to Australian currency. bcu Members should read this document before making a decision as to how to vote on the bcu Merger Resolution. Privacy and personal information bcu, P&N Bank and their respective registries may collect personal Responsibility statements information in the process of implementing the Merger. The personal Except as outlined below, the information contained in this document information they may collect about you includes your name, contact has been provided by bcu and is the responsibility of bcu. details and details of your bcu membership, and the names of The information contained in pages 6 and 7 titled ‘P&N Bank’ individuals appointed by you to act as a proxy, corporate representative and section 4.6 (Intentions of P&N Bank for the future) (P&N Bank or attorney at the bcu General Meeting. The collection of some of this Information) has been provided by P&N Bank and is the responsibility information is required or authorised by the Corporations Act. of P&N Bank. bcu has not verified the P&N Bank Information bcu Members who are individuals and the other individuals in respect and neither bcu nor its officers, employees or advisers assumes of whom personal information is collected as outlined above have any responsibility for the accuracy or completeness of the certain rights to access the personal information collected in relation P&N Bank Information. to them. Such individuals should contact [email protected] in the The Independent Expert has prepared the Independent Expert’s Report first instance if they wish to request access to that personal information. included at Schedule 1 and is responsible for that report. None of bcu, The personal information is collected for the primary purpose of P&N Bank nor their respective officers, employees or advisers assumes assisting bcu and P&N Bank to conduct the bcu General Meeting and any responsibility for the accuracy or completeness of the Independent implement the Merger. The personal information may be disclosed Expert’s Report, except that bcu and P&N Bank are responsible for the to bcu’s and P&N Bank’s registries/transfer agents and advisers and to information given to the Independent Expert by them. print and mail service providers. No investment advice The main consequence of not collecting the personal information The information contained in this document does not constitute outlined above would be that bcu may be hindered in, or prevented financial product advice and has been prepared without reference to from, conducting the bcu General Meeting and implementing your own particular needs. Before making any decision in relation to the Merger. the Merger, including any decision to vote in favour or against the bcu bcu Members who appoint an individual as their proxy, corporate Merger Resolution at the bcu General Meeting, you should consider representative or attorney to vote at the bcu General Meeting should whether that decision is appropriate in light of your particular needs, inform such an individual of the matters outlined above. objectives and circumstances. If you are in any doubt about what you No internet site is part of this document should do in relation to your own financial position, please consult your financial or legal adviser. bcu and P&N Bank maintain internet websites. Any references in this document to a website is a textual reference for information only and Disclaimer as to forward-looking statements does not form part of this document. Certain statements in this document relate to the future. These Notice to foreign members forward-looking statements involve known and unknown risks, uncertainties, assumptions and other important factors that could The release, publication or distribution of this document in jurisdictions cause the actual results, performance or achievements of bcu or other than Australia may be restricted by law or regulation in such other P&N Bank to be materially different from future results, performance jurisdictions, and persons outside Australia who come into possession or achievements expressed or implied by such statements. Such of this document should seek advice on and observe any such risks, uncertainties, assumptions and other important factors include, restrictions. Any failure to comply with such restrictions may constitute among other things, general economic conditions, interest rates, the a violation of applicable laws or regulations. regulatory environment, competitive pressures and market demand. This document complies with disclosure requirements in Australia and The forward-looking statements in this document reflect views Australian law, which may be different to those requirements and laws held only at the date of this document. Other than as required by in other countries outside of Australia. law, neither bcu nor P&N Bank nor any other person gives any References to time representation, assurance or guarantee that the occurrence of the Unless otherwise indicated, all references to time in this document are events expressed or implied in any forward-looking statements in this to New South Wales time. document will actually occur. Subject to any continuing obligations under law, bcu and P&N Bank Date of document and their respective directors and officers disclaim any obligation or This document is dated 20th August 2019. undertaking to disseminate after the date of this document any updates or revisions to any forward-looking statements to reflect any change in expectations in relation to those statements or any change in events, conditions or circumstances on which any such statement is based.
2 Bananacoast Community Credit Union Ltd Contents
Important notices 2 Chairman’s letter 4 P&N Bank 6 Our history and our future 8 Our community 9 Commitments to bcu Members 10 Timetable 11 What to do and how to vote 12 Reasons to vote for and against the Merger 14 SECTION 1 Discussion of reasons to vote for and against the Merger 15 SECTION 2 Summary and FAQs 20 SECTION 3 Key features of the Merger 26 SECTION 4 Future intentions and impact of the Merger on you 28 SECTION 5 Financial information 31 SECTION 6 Additional information 36 SECTION 7 Defined terms 40 SCHEDULE 1 Independent Expert’s Report 43 SCHEDULE 2 Comparison of product and services 127 SCHEDULE 3 Removal of fees 128 SCHEDULE 4 Comparison of bcu’s Constitution and P&N Bank’s Constitution 128 SCHEDULE 5 Board of the Continuing Entity and bcu Advisory Council 137 ANNEXURE A Notice of General Meeting 138
This is an important document and requires your immediate attention. You should read this document before deciding whether or not to vote in favour of the bcu Merger Resolution at the bcu General Meeting.
If you are in any doubt as to how to deal with this document, please consult your financial, legal, or other professional adviser, call our contact centre on 1300 228 228 on business days between 8.00am – 6.00pm (AEST), speak to bcu’s in-store teams or email [email protected].
Member Booklet 3 Chairman’s letter
Dear Member,
On behalf of the bcu Board, I am pleased Why we need to merge to provide you with this Member Booklet, Although bcu is currently in a sound financial position, there are which outlines the details you will considerable challenges ahead which may reduce bcu’s ability need to consider about the proposed to continue to provide an attractive bank offering for current Merger of bcu and P&N Bank. and new bcu Members in the future. The bcu Directors believe that greater economies of scale are required to continue to offer The bcu Board believes that the Merger will deliver attractive market competitive interest rates and fees to offset expected benefits to bcu Members. Further, it is intended to implement the profitability pressures arising from the current highly competitive, Merger and deliver the proposed benefits, in a manner that limits low growth environment. Your Directors also believe that bcu any change to bcu Members’ existing banking details. will need to invest significantly more money in staff, technology and security and in meeting its regulatory obligations over the Commitments have been made by P&N Bank to safeguard the medium term. The expected profitability pressures and level and attributes that bcu Members have told us that they highly value scale of investment believed to be required will challenge bcu’s to continue to deliver the personalised service they expect. ability to remain competitive and to offer the expected banking This includes: experience to attract and retain members.
retaining the bcu Brand; The bcu Directors are of the view that despite bcu’s historical no store closures are planned as result of the Merger; sound profitability, merging with another banking organisation at some time in the future is inevitable. The Board has conducted all bcu employees will be offered a role in the a comprehensive review of options for the future and has Continuing Entity; come to the view that failing to proactively secure this Merger an operating structure that supports local decision with P&N Bank now may lead to a different merger in the making; and future with outcomes that could be poorer for bcu Members and the community. the Continuing Entity at least maintaining the current level of investment in the mid-North Coast region. Director’s recommendation The Continuing Entity will operate as a member-owned, The bcu Board believes that P&N Bank is the right merger multi-brand banking group. This ensures our commitment partner. A merger with P&N Bank will create a member-owned to mutuality is retained. banking group with the resources to better position it to meet the medium term challenges ahead. Accordingly, the bcu Board has determined that the Merger is in the best interests of bcu Members and unanimously recommends that bcu Members vote bcu operates in a changing and in favour of the bcu Merger Resolution.1 competitive banking landscape where the costs to operate are Our recommendation is also based on a number of other important reasons: increasing. This merger would better position us to remain price bcu Members will see near term benefits including the competitive, meet future banking removal of all monthly fees from personal access accounts and regulatory obligations, and and personal loans along with the removal of a number of transaction fees on personal access accounts, greater deliver better security, technology banking convenience and further annual charitable and services for you. donations. Additionally, bcu and P&N Bank are committed to providing members with an improved and attractive bank offering over the longer term;
P&N Bank is committed to retaining the attributes that bcu Members highly value (bcu Brand, stores, local jobs and community involvement) to continue to deliver a personalised service to members;
1 Subject to there being no Superior Proposal
4 Bananacoast Community Credit Union Ltd local decision making will be supported through the Continuing Entity’s operating structure which will include Your vote is very important — bcu depends the appointment of a bcu General Manager (to be based in on you. Vote Online via ibank or the bcu Coffs Harbour) and the establishment of a bcu Advisory Connect App, in-store or use the enclosed Council. The bcu Advisory Council will be made up of Proxy Form. Details on how to vote are set out some existing bcu Directors and new members to be on page 12. appointed. Their role will include representing the voice of bcu Members and advising on priorities for local community initiatives;
bcu staff will be offeredcontinuing roles and are expected What members will receive to have access to broader career opportunities within what The Merger involves the transfer of all of bcu’s assets and will be a larger and more diverse organisation; liabilities (including all deposits and loans held by bcu Members) bcu will become part of a larger consolidated group with to P&N Bank. Each bcu Member (except the bcu Directors) will greater resources and opportunities to grow; exchange their bcu membership share for a membership share in P&N Bank and will become members of P&N Bank. the Merger between bcu and P&N Bank will bring together two member-owned organisations to form a member- Whilst you will become a member of P&N Bank, it is important owned banking group that continues to be trusted and to note that bcu Members will continue to conduct their committed to providing great service; and day-to-day banking transactions under the bcu Brand. the Independent Expert (commissioned by the bcu Board Information on currently available products can be found on to opine on the Merger) has concluded that, in the absence the bcu.com.au website. of a Superior Proposal, the Merger is in the best interests of bcu Members and the benefits being provided to bcu bcu depends on you Members are reasonable having regard to any loss of rights On behalf of the bcu Board, I would like to take this opportunity and change as to voting rights and rights to participate in the to thank you for your ongoing support. Both the bcu Board and reserves and profits of bcu.2 staff of bcu remain committed to delivering modern, accessible, There are disadvantages and risks associated with this proposed “fair go” banking and the Merger provides the best opportunity Merger, and to implementing the benefits referred to above, for achieving this aspiration in the future. We look forward to and these are outlined in further detail in section 1.2. You are embarking on the next exciting phase of our journey together. encouraged to read them. The bcu Board has considered the bcu depends on you to secure a strong and sustainable future, entirety of the Merger and believes that the advantages outweigh and I hope you will carefully consider all the information in this the disadvantages for bcu Members. Member Booklet before casting your vote in favour of the bcu Merger Resolution. Voting The Merger can only be implemented if approved by bcu Members. In order for the bcu Merger Resolution to be passed, the bcu Constitution requires that at least 25% of bcu Members who have been members for more than two years and 5% of bcu Members who have been members for more than twelve months must vote on the Merger (whether for or against). Further, of bcu Members eligible to vote3 and who actually vote, at least 75% must vote in favour of the Merger. Steve Targett | Chairman
Full details of who is eligible to vote and how to vote are set out on page 12.
2 As bcu Members are effectively swapping an interest in one mutual for an interest in another mutual rather than exchanging their interest for cash and/or marketable securities in the acquiring entity, in Grant Samuel’s view it is not possible to value a membership interest in either bcu or P&N Bank and therefore it is not relevant or meaningful to provide an opinion on whether the benefits being provided to bcu Members are “fair”.
3 bcu Members who have been members for at least twelve months at the date of the bcu General Meeting.
Member Booklet 5 P&N Bank
Dear bcu Member,
On behalf of P&N Bank, it has been a pleasure to work with bcu to explore an exciting proposed Merger between our two organisations. When we met with bcu to discuss this Merger, it became clear that we both wanted to retain what our members value most about each organisation.
With this in mind, we wish to reassure you that we are committed to preserving both organisations’ heritage, values and store networks. We will operate under a multi-brand strategy, and we are proud to confirm that our staff, whom we value, will all be offered roles in the Continuing Entity. In merging with us you will remain part of a member-owned group, with P&N Bank having been independently recognised as one of the banks most trusted by its customers in Australia.
You may be asking: why do we need to merge? Banking has changed dramatically over the past decade, with increased investment required in technology, increased regulation and industry consolidation. By combining our size and becoming a stronger organisation, we will be in a better position to compete and able About P&N Bank to retain our commitment to members and the local communities in which we operate. P&N Bank is Western Australia’s We believe that this opportunity is in the best interest of both bcu and largest, locally owned bank. P&N Bank members and will position us to leverage the best of both Operating under a member- organisations, secure a strong and sustainable future and enhance owned model, P&N Bank has products and services that will benefit bcu and P&N Bank members. origins dating back to 1969. We are confident and enthusiastic about the opportunities this Similar to bcu, the organisation’s Merger will bring to bcu and P&N Bank members and staff and purpose is to enrich the lives of its encourage you to make an informed voting decision. members and local communities. With many shared values, the P&N Bank board believes bcu is an ideal partner to assist in securing P&N Bank’s future.
Paul Gabb | Chairman Andrew Hadley | Executive Director
6 Bananacoast Community Credit Union Ltd Together, we will be stronger.
Staff 200 350 550+
Stores 21 15 36
Members 55,000 92,000+ 147,000+
Size $1.7B $4.3B $6B
bcu P&N Bank Continuing Entity
We are committing to a stronger future
Both companies are member-owned We will be able to leverage the best of The synergies and savings achieved from organisations and are committed to each organisation. bcu Members will the Merger will result in reduced costs and delivering the best possible banking benefit from improved technology, fees for bcu Members. experience for all their members. products and services and P&N Bank will be able to access bcu’s commercial lending capabilities to grow its commercial lending portfolio in Western Australia.
bcu and P&N Bank operate on either side We both have strong roots in the of Australia, which means our geographic community and shared values. As footprints do not overlap. This is a key such, we will remain committed to advantage of the Merger, as our store continuing to invest in and support the networks will not compete locally, but communities in which we operate. will remain competitive within the product and service landscape.
Member Booklet 7 Our history and our future
Almost 50 years ago, a small group of bcu is a member-owned organisation and the Merger with banana growers from the Macksville district P&N Bank allows bcu Members to continue to be part of a came together to meet community needs member-owned organisation committed to providing value-adding services and products to bcu Members. Core that weren’t being met by the commercial to this offering is our people, who continually work towards banks and formed the Nambucca Banana fostering deeper relationships with bcu Members. We now Growers’ Federation Members Credit employ approximately 200 employees across our offices and Union. In 1974 the name changed to store network and the Continuing Entity will continue to Bananacoast Community Credit Union Ltd. provide employment, training and development opportunities in the regions in which bcu operates. bcu’s decisions are guided with the interests of its communities in mind and it is committed to serve in the best interests of Historically, bcu has adapted to changing times and bcu bcu Members. Member needs by updating its brand, improving technology and introducing new products and services. Your Directors believe Our story is one of assisting bcu Members and community needs. bcu will need to invest significantly more money in its staff, Now with 21 stores across NSW and QLD, we remain committed technology and security, and in meeting its regulatory obligations to retaining and improving our store network as demonstrated over the medium term. The expected profitability pressures and through ongoing investment, such as the Coffs Central Store and level and scale of investment required will challenge bcu’s ability Head Office and the Woolgoolga store upgrade. We are proud to to remain competitive and offer the expected banking experience say that no store closures are planned as a result of the Merger. to attract and retain members.
The bcu Board is confident that the proposed Merger with P&N Bank will deliver positive benefits for bcu Members. The journey ahead is exciting. Together we are stronger.
Approximately Approximately Approximately 200 21 $1.7b 55,000 STAFF STORES TOTAL ASSETS MEMBERS
8 Bananacoast Community Credit Union Ltd Our community
bcu has proudly contributed to its local community for nearly 50 years, and our community involvement includes donating both time and money to organisations and initiatives that are important to bcu Members. The Continuing Entity will be committed to at least maintaining the current level of investment in the mid-North Coast, New South Wales region.
bcu Coffs Tri bcu has been the main sponsor of the Coffs Tri since its inception in 2013. We have welcomed thousands of participants and spectators from Coffs Harbour, surrounding regions and interstate to see the event grow significantly over the years.
Macksville Ride Around the River bcu is proud to support this event that is held in memory of legend Brian Cockbain and was launched in 2014. The event sees hundreds of cyclists traverse the beautiful Macksville and Nambucca Valley region, showcasing the best of the mid-North Coast.
Bill Ussher Scholarship bcu is proud to invest in Australia’s future leaders through our Bill Ussher Scholarship in honour of our founding Chairman. Each year up to ten students receive $2,000 to put towards their studies. With more than 220 applications from bcu Members last year, this scholarship gives a hand up to the next generation of community leaders.
bcu has also provided support to several grassroots initiatives including the Disabled Surfers Association (Coffs Coast), the Woolgoolga Longboard Club, the Macksville Show and the Salvation Army Christmas Appeal (Coffs Coast).
Member Booklet 9 Commitments to bcu Members
The Continuing Entity will honour the following commitments:
The bcu Brand will be retained No store closures as a result All employees will be offered a The bcu Brand is trusted by the bcu of the Merger role in the Continuing Entity Members and is well recognised within Thousands of bcu Members conduct Our staff have worked hard to deliver its heartland communities. their banking in a bcu store each month. excellent customer service to bcu Members, and we know having a familiar The Continuing Entity remains committed We recognise many bcu Members prefer face who recognises our members and to continuing to use the bcu Brand. speaking to someone face to face, so that’s why the Continuing Entity has no knows their situation, is important. That’s plans to close stores as a consequence why the Continuing Entity will offer all of the Merger. bcu employees a job on the Merger taking effect.
Ongoing community support No change intended to bcu Influential governance The Continuing Entity is committed to Members’ existing banking details Local decision making will be supported at least maintaining the current level of The Continuing Entity is committed to through the Continuing Entity’s investment in the mid-North Coast region. this Merger delivering benefits for bcu operating structure, which will include Members, in a way that will limit any the appointment of a bcu General change to bcu Members’ existing Manager and the establishment of a bcu banking details. Advisory Council. Their role will include representing the voice of bcu Members and advising on priorities for local community initiatives. Additionally, three current bcu Directors will be appointed to a Continuing Entity Board charged There are disadvantages and risks associated with this proposed Merger and to with looking after the best interests of all implementing the benefits referred to above and these are outlined in further members, including bcu Members. detail in section 1.2. You are encouraged to read them. The bcu Board has considered the entirety of the Merger and believes that the advantages outweigh the disadvantages for bcu Members.
10 Bananacoast Community Credit Union Ltd Timetable
Indicative timetable & key dates
bcu General Meeting Final request for APRA approval to be lodged Transfer date
22 OCT 23 OCT 24 OCT 31 OCT 1 NOV 2019 2019 2019 2019 2019
P&N Bank General Meeting APRA approval
This timetable is indicative only. The actual timetable will depend upon the time at which the conditions precedent to the Merger are satisfied or, if applicable, waived. The key conditions are summarised in Section 6.1 of this document. bcu has the right to vary the timetable set out above where required. Members will be notified of any variation to the timetable.
Member Booklet 11 What to do and how to vote
What to do and how to vote
The General Meeting will be held at 10.00am on Tuesday 22 October 2019 at C.ex Coffs, 2-6 Vernon Street, Coffs Harbour.
bcu Merger Resolution bcu Members will need to approve a resolution to approve the Merger (bcu Merger Resolution) at the bcu General Meeting in order for the Merger to proceed.
Member Participation Threshold: at least 25% of bcu Members who have been members for more than two years and 5% of bcu Pursuant to the bcu Constitution, the Members who have been members for more than twelve months following voting requirements and must vote on the Merger (whether for or against). participation thresholds must be met in order to pass the bcu Merger Resolution: Voting eligibility: Only bcu Members who have been a member for at least twelve months as at the date of the General Meeting are entitled to vote on the bcu Merger Resolution (Merger Approval Members) and, of those Merger Approval Members who actually vote, at least 75% must vote in favour of the bcu Merger Resolution.
Eligible bcu Members can vote:
Online In person Visit bcu.com.au/vote, or via the bcu connect app, Visit your local store by appointing a proxy to vote on your behalf or via bcu ibank and appoint a proxy to vote on your in accordance with your instructions. behalf in accordance with your instructions.
Proxy Form bcu General Meeting Use the Proxy Form included with this document to appoint Attend the General Meeting and vote in person or by attorney or, a proxy to vote in accordance with your instructions. in the case of corporate members, by corporate representative.
How to vote in person If you are entitled to vote and wish to do so in person, you A body corporate which is a bcu Member may appoint an should attend the bcu General Meeting to be held at 10.00am individual to act as its corporate representative. The appointment on Tuesday 22 October 2019 at C.ex Coffs, 2-6 Vernon Street, must comply with the requirements of sections 250D and 253B Coffs Harbour. of the Corporations Act. If you are attending as a corporate representative, please bring evidence of your authority. Please bring your meeting registration forms with you to facilitate admission to the meeting. A registration form for the bcu General Meeting is included with this document.
12 Bananacoast Community Credit Union Ltd How to vote electronically How to vote by Proxy Form Vote online by visiting bcu.com.au/vote, or via the Members can vote by Proxy Form: bcu connect app, or via bcu ibank. 1. In Person: by going to your local store and appointing a proxy Step 1. Enter your details (including your member number) to vote on your behalf in accordance with your instructions; or into the secure online portal and login. 2. Proxy Form: by using the Proxy Form included with this document to appoint a proxy to vote in accordance with your instructions. Your completed Proxy Form (and any Power of Attorney or a certified copy under which the proxy form is signed) must be returned in one of the following ways: Member no By email [email protected]
Login By post Bananacoast Community Credit Union Ltd, C/- Link Market Services Limited Step 2. Click on ‘Vote’ button. Review and agree to the Locked Bag A14, Sydney South NSW 1235 Australia declaration and click ‘Next’. By hand delivery Step 3. Cast your vote and confirm your proxy appointment. To your local store
By fax +61 2 9287 0309
so that it is received by no later than 10.00am on Sunday 20 October 2019, no later than 48 hours before the meeting time.
If you complete and return a Proxy Form, you may still attend the Vote meeting in person, revoke the proxy and vote at the meeting.
What if I have questions about the Merger? bcu Members are encouraged to attend member information events during the voting period to raise questions relating to the proposed Merger. Information about these events can be found at the bcu.com.au/future webpage.
If you have any further questions concerning the Merger, please consult your financial, legal, or other professional adviser, call our contact centre on 1300 228 228 on business days between Confirm proxy 8.00am – 6.00pm (AEST), speak to bcu’s in-store teams or appointment email [email protected].
Step 4. Review the information, confirm your vote and logout.
Confirm
Member Booklet 13 Reasons to vote for and against the Merger
Summary of reasons to vote in favour of the Merger The bcu Directors unanimously recommend that you vote in favour of the Merger
bcu Members will see near term benefits including the bcu staff will be offered continuing roles, enjoy employment removal of all monthly fees from personal access accounts security and greater career opportunities. and personal loans, along with the removal of a number bcu will become part of a larger group with greater of transaction fees on personal access accounts, greater resources and ability to pursue growth opportunities. The banking convenience and further charitable donations. Continuing Entity will have approximately 150,000 members Additionally bcu and P&N Bank are committed to providing and total assets of approximately $6B. members with an improved and attractive bank offering over the longer term. This will all be delivered in a manner The Merger between bcu and P&N Bank will bring together designed to limit any change to bcu Members’ existing two member-owned organisations to form a member- banking details. owned banking group that is:
The Continuing Entity is committed to retaining those • dedicated to meeting the needs of Members and their attributes that bcu Members value highly. The bcu Brand, communities; and stores and community involvement will not change as a • committed to providing great service to Members at result of the Merger. competitive price levels.
Local decision making will be supported through the The Independent Expert has concluded that, in the absence Continuing Entity’s operating structure which will include the of a Superior Proposal, the Merger is in the best interests of appointment of a bcu General Manager (to be based in Coffs bcu Members and that the benefits being provided to bcu Harbour) and the establishment of a bcu Advisory Council. Members are reasonable having regard to any loss of rights The bcu Advisory Council will be made up of some existing and change as to voting rights and rights to participate in the bcu Directors and new members to be appointed and whose reserves and profits of bcu.4 role will include representing the voice of bcu Members and advising on priorities for local community initiatives. Reasons to vote for the Merger are discussed in more detail in Section 1.1.
Although the Merger is recommended by the bcu Directors, factors that may lead you to consider voting against the Merger Resolution include:
You may disagree with the recommendation of Your Mid-North Coast representation on the board of the Directors and the conclusion of the Independent Expert. Continuing Entity in the longer term is not guaranteed. Three current bcu Directors will be appointed to the board Members of bcu will not control the Continuing Entity. of the Continuing Entity. Immediately following the Merger, bcu Members, the majority of which are located in the the board of the Continuing Entity will be comprised of mid-North Coast region, currently control bcu and have the 10 directors. ability to appoint the directors. Once the Merger occurs, bcu Members are expected to comprise approximately The Continuing Entity will be significantly larger than 37% of the Continuing Entity and will not exercise the same bcu and you may believe this would impact levels of level of control. personalised service.
The business, products and services of bcu may change. The integration of bcu and P&N Bank may not proceed While the existing suite of products and services offered by as planned. There is no guarantee that integration will be bcu will be retained after the proposed Merger, this may successful or that it will be achieved within the expected change in the future. timeframe and cost.
The Continuing Entity may be subject to disruption Reasons to vote against the Merger are discussed in more detail from competitors. in Section 1.2.
4 As bcu Members are effectively swapping an interest in one mutual for an interest in another mutual rather than exchanging their interest for cash and/or marketable securities in the acquiring entity, in Grant Samuel’s view it is not possible to value a membership interest in either bcu or P&N Bank and therefore it is not relevant or meaningful to provide an opinion on whether the benefits being provided to bcu Members are “fair”.
14 Bananacoast Community Credit Union Ltd 1. Discussion of reasons to vote for and against the Merger
1.1 Reasons to vote in favour of the Merger The more attractive and distinguishing aspects of a Merger with P&N Bank, however, are what it means for The bcu Board believes that the Merger would have the bcu and bcu Members. In overall terms, the bcu Board following advantages for bcu Members: believes the Merger will deliver attractive benefits for bcu a) The bcu Directors unanimously recommend that you Members and supports preserving those attributes that vote in favour of the Merger. bcu Members highly value (bcu Brand, stores, local jobs and community involvement). Each Director intends to vote in favour of the bcu Merger Resolution subject to there being no Superior Proposal. The advancement in technologies and capabilities with remote working practices are considered sufficient to Key strategic risks to be addressed allow the Continuing Entity to operate effectively across In reaching this conclusion, the bcu Directors carefully both the east coast and Perth. bcu currently operates explored the current and future environment and the across multiple locations. surrounding uncertainties and risks that bcu would need to navigate if bcu continued as a standalone organisation. Other strategic considerations supporting the Merger In the bcu Directors’ view, the key strategic risks to be In response to the highlighted strategic risks, the addressed include: member-owned banking industry continues to consolidate. This observation, together with its own • Maintaining an attractive bank offering for bcu Members internal insights, has led the bcu Board to form the view Current and expected technology advances, new that merging with another banking organisation at some business models and emerging competitive threats, time in the future is inevitable. are increasing customer expectations for banking products and services. Your Directors believe bcu The bcu Board views this Merger as the best option will need to invest significantly more money in staff, after carefully considering other alternatives, including technology and security and in meeting its regulatory continuing standalone or merging with another member- obligations over the medium term. The level and scale owned banking organisation (eg. credit unions, member- of investment required will challenge bcu’s ability to owned banks etc). remain competitive and offer the expected banking Finally, the bcu Board has also come to the view that experience to attract and retain members. failing to proactively secure this Merger with P&N Bank • Increasing competition and profitability pressures now may lead to a different merger in the future, with Increasing home lending competition in a low outcomes that could be poorer for bcu Members and growth setting, low interest rates, declining margins, the community. decreasing fee revenues (to meet customer The bcu Board considers the Merger is in the best expectations for lower or no fees) and increasing interests of bcu Members. compliance and regulatory expenditure are all factors collectively depressing bcu’s growth and profitability b) The Continuing Entity is committed to providing outlook. Collectively, these factors act to limit what members with an improved and attractive bank bcu can invest to improve its bank offering. offering as a result of the Merger and in a manner that limits any change to bcu Members’ existing As part of the deliberations, the bcu Directors cautiously banking details. reflected on whether bcu’s historically sound financial The Continuing Entity is committed to providing performance provides a reasonable option to navigate members with an improved and attractive bank the challenges and risks on a standalone basis and offering as a result of the Merger. concluded that it does not. Over the near term, bcu Members will benefit from P&N Bank is the right Merger partner the Merger through: The Merger is expected to reduce the uncertainties and risks to bcu compared to if it continued as a standalone credit union. A merger with P&N Bank will create a member-owned banking group with the scale and resources to better position it to meet the medium term challenges ahead.
Member Booklet 15 Immediately after the Merger, all products currently held by bcu Members will continue under their existing terms Removal of fees – the Continuing Entity is and conditions. committed to using a material portion of the cost savings from merging bcu and P&N Bank Further information on products that are currently offered (principally from consolidating to one set can be found on the bcu.com.au website. of IT systems) to remove all monthly fees The intention is to consolidate to one set of banking IT from personal access accounts and personal systems, at an appropriate time after implementation loans, along with the removal of a number of of the Merger, to realise efficiencies and cost savings transaction fees on personal access accounts. for the benefit of all Members. As part of this process Details of which fees will be removed are there may be some changes to the existing bcu product contained in Schedule 3 – Removal of fees. offering. These possible changes are unknown at present, however, any change must be completed in a manner that does not disadvantage Members in respect of the benefits and pricing of the affected product. • Greater mobile banking capabilities – initially this will include access to Apple Pay™, Google Pay™ and c) The Continuing Entity is committed to retaining those Samsung Pay and the ability to be issued digital debit attributes that bcu Members value highly to continue and credit cards instantaneously, to replace lost or to deliver a personalised service to members. stolen cards. The Continuing Entity is committed to retaining those • More convenience – following integration, the Merger attributes that bcu Members value highly including: will deliver expanded Contact Centre operating hours. • the bcu Brand; • Further charitable donations – An element of the • all current stores – there will be no store closures as a cost savings generated from the Merger will also be result of the Merger; used for further annual charitable donations. Current bcu Members will be consulted, after implementation • all current staff – all employees will be offered a role in of the Merger, on what charities they believe should the Continuing Entity; receive further support. • an operating structure that supports local decision Over the longer term the vision for the Continuing Entity making; and is to sustain an attractive bank offering that benefits all • at least maintaining the current level of investment in Members. This is planned to be delivered by leveraging the mid-North Coast region. the greater resources and financial strength of the Continuing Entity to: d) Local decision making will be supported through the Continuing Entity’s operating structure, which will • Support a pipeline of continuous investment and include the appointment of a bcu General Manager improvement (including in new technologies) to and the establishment of a bcu Advisory Council. maintain a relevant offering of banking services and products. The potential development pipeline Consideration has been given to the design of the is expected to be materially greater (in volume operating and governance model of the Continuing and complexity) than what bcu could reasonably Entity. An important principle to arise from the design contemplate delivering standalone; and is that local decision making will be supported through the Continuing Entity’s operating structure, which will • Provide value with competitive interest rates, products include the appointment of a bcu General Manager. and services. In support of this principle, a bcu Advisory Council will It is intended to implement the Merger and deliver the be created, comprising up to six local members, whose proposed benefits, in a manner that limits any change to role will include: representing the voice of the Members, bcu Members’ banking details. Changes to bcu Members’ acting as bcu ambassadors and advising on priorities for existing banking details will be avoided to the extent local community initiatives. Further information about the that this is possible. bcu Members will transition to a Advisory Council is provided in Schedule 5. new mobile banking app, offering greater features and capabilities than the current bcu app. bcu will also appoint three current bcu Directors to the Continuing Entity Board, which will initially comprise a The implementation of the Merger will create an total of ten directors. The bcu Directors to be appointed expanded product offering through both bcu and are the Chair, Stephen Targett, together with directors P&N Bank members being able to have access to Louise Clarke and Gary Humphreys. The bcu Board products that were only offered by either organisation believes that this is a fair representation given the ratio of before the Merger. Details on the enhanced product bcu to P&N Bank total assets prior to the Merger. offering are provided in Schedule 2.
16 Bananacoast Community Credit Union Ltd The appointment of the current bcu Directors to the f) bcu will become part of a larger group with Continuing Entity Board, and the establishment of the greater resources and improved ability to pursue bcu Advisory Council, are designed to ensure continuity growth opportunities. of relevant bcu Member considerations in the post-Merger period. Relativity of size bcu is currently the 18th largest member-owned banking Reassurance for this conclusion is also provided by organisation in terms of total assets. Compared to the the requirement for the whole Continuing Entity Board largest member-owned banking organisation, bcu is only to act in the best interests of all members, including 11% the size of Credit Union Australia (CUA). bcu Members. bcu also competes against the major banks, but yet is The bcu Board is of the opinion that the retention only 0.6% the size of ANZ’s retail banking business in of important bcu attributes (brand, stores, jobs and Australia (the smallest of the major banks). Not only does community involvement), supported local decision bcu compete against these major banks, it also shares the making and the ability to actively influence the same regulator and is subject to complying with nearly all governance of the Continuing Entity, are positive and the same regulatory and compliance requirements. distinguishing aspects of the Merger. Further, the bcu Board ascribes much lower confidence to these same The Continuing Entity will have approximately 150,000 aspects being delivered should bcu merge with another members and total assets of approximately $6B. organisation (and recalling that the bcu Board believes a Should the Merger be implemented, the Continuing merger with another banking organisation is inevitable). Entity would emerge as one of the strongest member- owned banks in Australia. e) bcu staff will be offered continuing roles, enjoy employment security and greater career opportunities. Combining bcu and P&N Bank and consolidating operations to a single set of systems and processes is The Continuing Entity is committed to offering secure expected to realise significant operational efficiencies employment, with all current bcu staff to be offered a and annual cost savings. The areas where material role in the Continuing Entity. efficiency gains can be realised include: The Continuing Entity is expected to be a more • Banking platforms, IT and digital and technology sustainable organisation over the longer term, compared infrastructure; to bcu if it continued as a standalone credit union, because of its greater scale and resources. • Fraud and cyber security management; and
The scale and diversity of the Continuing Entity is • Operations and human resource management. expected to create more career opportunities for staff than they currently have within bcu.
Magnified by 5x
$282B $16B ANZ Australian Retail Banking CUA
$6B $4B $2B Continuing P&N Bank bcu Entity
Member Booklet 17 Advantages that size and greater resources bring g) The Merger between bcu and P&N Bank will bring In FY 2017 the technology spend of all customer-owned together two member-owned organisations to form banking organisations increased by 12.4% and this will a member-owned banking group that continues to be only continue with the changes that lie ahead such as trusted and committed to providing great service. Open Banking and Comprehensive Credit Reporting. The recently concluded Royal Commission into Furthermore, the imperative of maintaining the Misconduct in the Banking, Superannuation and Financial security and safety of new digital technologies Services Industry highlighted some poor behavioural cannot be understated. practices amongst the major banks. A contributor to these failures was the short term pursuit of maximising A significant ongoing investment is required to continue shareholder value versus acting in customers’ interests. to provide bcu Members with digital banking services Ultimately the findings from the Royal Commission have and other new technologies that are contemporary, directly contributed to a significant fall in the level of trust competitive and safe. The cost savings to be realised across the whole banking industry. from the Merger will support funding increased investment in technology capabilities. P&N Bank has been independently recognised as one of the banks most trusted by its customers in Australia The high costs of maintaining the increasing number of with a net promoter score (a measure of how likely banking laws, rules and regulations has a larger impact a customer is to recommend their bank) of greater on smaller banking organisations such as bcu than than 40. To place this score in context, the major banks compared to larger banking organisations. currently have a negative score and P&N Bank’s score is The Continuing Entity’s larger resource base will almost double that of the average score of all Australian distribute the effort and cost of compliance and corporate banks, excluding the major banks. regulatory requirements, which is expected to lessen h) The Independent Expert has concluded that, in the the total spend on these matters on a per member basis. absence of a Superior Proposal, the Merger is in the The Continuing Entity will be geographically diverse with best interests of bcu Members and the benefits being significant loan and deposit portfolios located on the east provided to bcu Members are reasonable having regard and west coasts of Australia. This diversity is expected to any loss of rights and change as to voting rights and 5 to provide some benefit to lessen risks associated with rights to participate in the reserves and profits of bcu. earnings volatility and portfolio concentration. Grant Samuel is an experienced provider of Independent Overall, the size, profits and diversity of the Continuing Expert Reports (IERs) in Australia and New Zealand. Grant Entity provide an enhanced platform to deliver members Samuel has extensive experience in the preparation of greater access and convenience to their banking IERs in relation to merger and similar transactions and in products and services and to be able to offer competitive providing advice to mutual organisations. bcu engaged interest rates. Grant Samuel to provide its opinion on the Merger. In Grant Samuel’s opinion, the advantages of the Merger Near term growth opportunities outweigh the disadvantages and bcu Members are likely The bcu and P&N Bank brands will respectively have to be better off if the Merger proceeds. Accordingly, in greater near term growth opportunities presented by the absence of a Superior Proposal: the Merger and notably: • the Merger is in the best interests of bcu Members; and • bcu – Deploying P&N Bank’s greater digital banking capabilities and additional products. • the benefits being provided to bcu Members are reasonable having regard to any loss of rights and • P&N Bank – Leveraging bcu’s existing capabilities and change as to voting rights and rights to participate in systems to develop and execute a strategy to offer a the reserves and profits of bcu.6 commercial and specialist property portfolio in Western Australia. A copy of the IER is set out in full at Schedule 1. The bcu IER is also available to view in full online at bcu.com.au/vote.
5 As bcu Members are effectively swapping an interest in one mutual for an interest in another mutual rather than exchanging their interest for cash and/or marketable securities in the acquiring entity, in Grant Samuel’s view it is not possible to value a membership interest in either bcu or P&N Bank and therefore it is not relevant or meaningful to provide an opinion on whether the benefits being provided to bcu Members are “fair”.
6 As bcu Members are effectively swapping an interest in one mutual for an interest in another mutual rather than exchanging their interest for cash and/or marketable securities in the acquiring entity, in Grant Samuel’s view it is not possible to value a membership interest in either bcu or P&N Bank and therefore it is not relevant or meaningful to provide an opinion on whether the benefits being provided to bcu Members are “fair”.
18 Bananacoast Community Credit Union Ltd 1.2 Possible reasons not to vote in favour f) The integration of bcu and P&N Bank may not proceed of the Merger as planned. The following are some of the possible reasons not to vote There is a risk that integration of bcu and P&N Bank may in favour of the Merger. not be completed successfully. Integration risks include possible differences in management culture, loss of key a) You may disagree with the recommendation of Your personnel, loss of bcu Members and complications in Directors and the conclusion of the Independent Expert. integrating separate core banking platforms. There is no You may hold a different view to the bcu Directors and guarantee that integration will be successful or that it will the Independent Expert and believe that the benefits of be achieved within the expected timeframe and cost. The the Merger, including an enhanced product and service Continuing Entity is committed to the timely completion offering, are inadequate and do not outweigh of the integration of bcu and P&N Bank, but there the disadvantages. remains a risk that unforeseen issues and difficulties may arise that may result in the expected integration benefits b) bcu Members will not control the Continuing Entity. for bcu Members, such as fee reductions and continuous bcu Members, a majority of whom are located in the investment and development in technology not being mid-North coast region, currently control bcu and realised in full, or being delayed. have the ability to appoint the bcu Directors. Once the g) The Continuing Entity may be subject to disruption Merger occurs, bcu Members are expected to comprise from competitors. approximately 37% of the membership of the Continuing Entity, which means they will not control the Continuing Mergers and acquisitions can play a significant part in an Entity. Because they will not retain the ability to appoint organisation’s strategy and can trigger a response from a majority of the board, their control over the Continuing competitors. In the lead up to the Merger being finalised, Entity and bcu’s future will be significantly less than what and during the integration period, the Continuing Entity it is today. may be subject to competitors executing in-market strategies with the intention of enticing bcu Members Because of this, bcu Members’ continuing control to their financial institution, resulting in a diminished over the use of the bcu Brand, the availability of local membership base and risk to achieving the Merger stores, employment of staff and the level of investment benefits. Competitors may also target staff during this in the communities in which bcu operates cannot be period, potentially leading to a loss of valued talent. guaranteed over the long term.
c) The business, products and services of bcu may change.
While the existing suite of products and services offered by bcu will be retained after the proposed Merger, this The bcu Board has considered the entirety of may change in the future. the Merger and believes that the advantages significantly outweigh the disadvantages for d) Mid-North Coast representation on the board of the bcu Members arising from the Merger. Continuing Entity in the longer term is not guaranteed.
Three current bcu Directors will be appointed to the board of the Continuing Entity. Immediately following the Merger, the board of the Continuing Entity will be comprised of ten directors. Each of the bcu appointed directors will stand for re-election in either the 2020, 2021 or 2022 calendar years.
e) The Continuing Entity will be significantly larger than bcu and you may believe this would impact levels of personalised service.
bcu understands that many existing bcu Members choose to bank with bcu due to the more personalised service they receive, and there may be concerns that these service levels reduce or negatively change within the larger Continuing Entity.
Member Booklet 19 2. Summary and FAQs
This document contains detailed information to enrich the lives of its members and local communities, regarding the Merger. The following section just like bcu. Some general background information about provides summary answers to some questions P&N Bank is provided on page 6 of this document. Financial you may have and will assist you to locate information about P&N Bank is included in section 5.1. further detailed information in this document. Further information about P&N Bank is also available on its website pnbank.com.au. The Merger at a glance Please refer to page 6 and section 5.1 for 2.1 What is the Merger? further information. Bananacoast Community Credit Union Ltd ABN 50 087 649 750 (bcu) is proposing to conduct a voluntary transfer of 2.4 What are the reasons for the Merger? all of its business, assets and members to Police & Nurses Although bcu is currently in a strong and sound financial Ltd ABN 69 087 651 876 (P&N Bank) under the Financial position, there are considerable challenges ahead which may Sector (Transfer and Restructure) Act 1999 (Cth) (Transfer reduce bcu’s ability to continue to provide an attractive bank Act) and the Financial Sector (Business Transfer and Group offering for current and new bcu Members. Your Directors Restructure) Determination No. 2 of 2017 (Cth) (Transfer believe bcu will need to invest significantly more money in Rules)(Merger). staff, technology and security and in meeting its regulatory If the Merger is implemented bcu Members (except the bcu obligations over the medium term. The expected profitability Directors) will cease to be bcu Members and will be deemed pressures and level and scale of investment required will to have become members of the Continuing Entity on the challenge bcu’s ability to remain competitive and offer the earliest date when they became bcu Members (being a expected banking experience to attract and retain members. membership held continuously up to the time of the Merger). Your Directors believe that bcu does not currently have the size or scale to independently fund these investments. P&N Bank is not making any monetary payments to bcu or the bcu Members for the transfer of the bcu business and The bcu Directors are of the view that despite bcu’s there will be no surplus funds distributed to bcu Members. historical sound profitability, merging with another banking organisation at some time in the future is inevitable. The Please refer to sections 3.1 and 6.2 for further information. Board has conducted a comprehensive review of options for the future and has come to the view that failing to proactively secure this Merger with P&N Bank now may lead 2.2 What will happen to bcu if the Merger proceeds? to a different merger in the future with outcomes that could All of bcu’s assets and liabilities (including all deposits be poorer for bcu Members and the community. and loans held by bcu Members) will be transferred to P&N Bank. P&N Bank intends to retain and grow the Please refer to page 15 for further information. bcu Brand. As is customary for mergers of authorised deposit-taking 2.5 What are the key conditions to the Merger? institutions, following the Merger: The Merger will only proceed if: a) bcu will be a ‘shell’ company without any assets and a) the bcu Members pass a resolution to approve the with the bcu Directors as its only members; Merger (bcu Merger Resolution) by the Member b) bcu’s Australian Financial Services Licence (AFSL) Approval Majority, and with the Member Participation Australian Credit Licence (ACL) and banking authority Threshold, at the bcu General Meeting; under the Banking Act 1959 (Cth)(Banking Act) will be b) the P&N Bank Merger Resolution is approved; cancelled; and c) the Regulatory Approvals are received; c) bcu will be deregistered as a company. d) the Brand Approval is received; e) P&N Bank obtains an amendment to its AFSL to allow it Please refer to section 6.8 for further information. to operate retirement savings accounts; and f) certain other conditions are met or waived. 2.3 Who is P&N Bank? Please refer to sections 3.5 and 6.1 for further P&N Bank is Western Australia’s largest, customer-owned information about the conditions to the Merger. bank. P&N Bank’s origins go back to 1969 and its purpose is
20 Bananacoast Community Credit Union Ltd 2.6 In what circumstances will the Merger If it becomes apparent prior to or at the General Meeting not proceed? that the Member Participation Threshold may not be met, bcu may adjourn or postpone the General Meeting to a The Merger will not proceed if: later time when the Member Participation Threshold can a) the conditions in the Merger Implementation Agreement be satisfied or may decide not to proceed with the Merger. are not satisfied or waived; or
b) the Merger Implementation Agreement is terminated. 2.9 What do the bcu Directors recommend?
Depending on the circumstances, a break fee may The bcu Directors believe that the Merger is important be payable by either bcu or P&N Bank if the Merger to all bcu Members and urge you to vote on the bcu does not proceed. Merger Resolution.
Please refer to sections 3.5 and 6.1 for further information about the conditions to the Merger and section 6.1 for The bcu Directors unanimously recommend further information about the termination and break fee that you vote in favour of the bcu Merger provisions in the Merger Implementation Agreement. Resolution subject to there being no Superior Proposal. Please refer to sections 3.5 and 6.1 for further information.
2.7 What are the voting requirements for the bcu bcu depends on you to secure a strong and sustainable Merger Resolution? future, and the bcu Directors hope you will carefully consider all the information in this Member Booklet before Pursuant to the bcu Constitution in order for the bcu casting your vote in favour of the bcu Merger Resolution. Merger Resolution to be passed: Full details of who is eligible to vote and how to vote a) Member Participation Threshold: at least 25% of bcu Members who have been members for more than two are set out on page 12. years and 5% of bcu Members who have been members for more than twelve months must vote on the Merger 2.10 What are the prospects of receiving a (whether for or against); and Superior Proposal? b) Member Approval Majority: only bcu Members who Since the Merger was first announced on 13 December have been a member of bcu for at least twelve months 2018, no Superior Proposal has emerged. (as at the date of the General Meeting) are entitled to vote on the bcu Merger Resolution and of those bcu bcu and P&N Bank have each agreed to certain exclusivity Members eligible to vote and who actually vote, at least and break fee provisions which are summarised in section 6.1. 75% must vote in favour of the Merger. Please refer to section 6.1 for further information. Full details of who is eligible to vote and how to vote are set out on page 12. 2.11 What does the Independent Expert recommend?
2.8 What will happen if the Member Participation The Independent Expert has concluded that, in the absence of a Superior Proposal: Threshold is not met? a) the Merger is in the best interests of bcu Members; and If the Member Participation Threshold is not met then the bcu Merger Resolution cannot be passed (even if 75% or b) the benefits being provided to bcu Members are more of the votes cast by eligible members are in favour). reasonable having regard to any loss of rights and changes as to voting rights and rights to participate in the reserves and profits of bcu.7
Please refer to section 3.4 for further information.
7 As bcu Members are effectively swapping an interest in one mutual for an interest in another mutual rather than exchanging their interest for cash and/or marketable securities in the acquiring entity, in Grant Samuel’s view it is not possible to value a membership interest in either bcu or P&N Bank and therefore it is not relevant or meaningful to provide an opinion on whether the benefits being provided to bcu Members are “fair”.
Member Booklet 21 2.12 What are the reasons to vote in favour of 2.13 What are the possible reasons not to vote in the Merger? favour of the Merger?
The reasons to vote in favour of the Merger include: The possible reasons not to vote in favour of the a) the bcu Directors unanimously recommend that you Merger include: vote in favour of the Merger; a) you may disagree with the recommendation of Your Directors and the conclusion of the Independent Expert; b) the Continuing Entity is committed to providing members with an improved and attractive bank offering b) bcu Members will not control the Continuing Entity; as a result of the Merger and in a manner that limits any c) the business, products and services of bcu may change; change to bcu Members’ existing banking details; d) Mid-North Coast representation on the board of the c) the Continuing Entity is committed to retaining those Continuing Entity in the longer term is not guaranteed; attributes that bcu Members value highly (bcu Brand, stores, local jobs and community involvement) to e) the Continuing Entity will be significantly larger than continue to deliver a personalised service to members; the current bcu and you may believe this would impact levels of personalised service; d) local decision making will be supported through the Continuing Entity’s operating structure, which will f) the integration of bcu and P&N Bank may not proceed include the appointment of a bcu General Manager as planned; and and the establishment of a bcu Advisory Council; g) the Continuing Entity may be subject to disruption e) bcu staff will be offered continuing roles, enjoy from competitors. employment security and greater career opportunities; The bcu Board has considered the entirety of the Merger f) bcu will become part of a larger group with greater and believes that the advantages significantly outweigh the resources and improved ability to pursue growth disadvantages for bcu Members arising from the Merger. opportunities; Further information about the possible reasons not to g) the Merger between bcu and P&N Bank will bring vote in favour of the Merger are set out in section 1.2 together two member-owned organisations to form of this document. a member-owned banking group that continues to be trusted and committed to providing great service; and
h) the Independent Expert has concluded that, in the 2.14 What should I do? absence of a Superior Proposal, the Merger is in the The bcu Directors believe that the Merger is important best interests of bcu Members and the benefits being to all bcu Members and urge you to vote on the bcu provided to bcu Members are reasonable having regard Merger Resolution. to any loss of rights and change as to voting rights and rights to participate in the reserves and profits of bcu.8 Eligible bcu Members can vote: a) by attending the General Meeting at 10.00am on Tuesday 22 October 2019 at C.ex Coffs, The bcu Board has considered the entirety of 2-6 Vernon Street, Coffs Harbour and voting the Merger and believes that the advantages in person or by attorney or, in the case of significantly outweigh the disadvantages for corporate members, by corporate representative; bcu Members arising from the Merger. b) by going online at bcu.com.au/vote, or via the bcu connect app, or via bcu ibank, and appoint a proxy to vote on your behalf in accordance with Further information about the reasons to vote in favour your instructions; of the Merger are set out in section 1.1 of this document. c) in person at your local store by appointing a proxy to vote on your behalf in accordance with your instructions; or
d) by using the Proxy Form included with this document to appoint a proxy to vote in accordance with your instructions.
Full details of who is eligible to vote and how to vote are set out on page 12.
8 As bcu Members are effectively swapping an interest in one mutual for an interest in another mutual rather than exchanging their interest for cash and/or marketable securities in the acquiring entity, in Grant Samuel’s view it is not possible to value a membership interest in either bcu or P&N Bank and therefore it is not relevant or meaningful to provide an opinion on whether the benefits being provided to bcu Members are “fair”.
22 Bananacoast Community Credit Union Ltd Impact of the Merger on you 2.18 What is the impact of the Merger on bcu’s staff? bcu is proud to confirm that our staff will all be offered roles 2.15 What will happen to my bcu Share if the in the Continuing Entity. Merger proceeds? A limited number of bcu staff may be eligible to receive bcu Members (except the bcu Directors) will cease to retention or other payments. be bcu Members and will be deemed to have become members of the Continuing Entity on the earliest date Please refer to section 6.7 for further information. when they became bcu Members (being a membership held continuously up to the time of the Merger). 2.19 What impact will my products, fees and charges Please refer to section 6.2 for a detailed explanation be if the Merger proceeds? of how this process will be legally effected. It is intended that bcu Members and P&N Bank Members will:
2.16 Can I continue to be a bcu Member if the a) not be disadvantaged with respect to the benefits and Merger proceeds? pricing associated with any products and services held by them at the time of the Merger; and No. If the Merger is implemented: b) will have access to a broader range of products, services a) all of bcu’s assets and liabilities (including all deposits and channels after the Merger. and loans held by bcu Members) will be transferred to P&N Bank; and The Merger will create an expanded product offering through both bcu and P&N Bank members being able to b) bcu Members (except the bcu Directors) will cease to have access to products that were only offered by either be bcu Members and will be deemed to have become organisation before the Merger. Details on the enhanced members of the Continuing Entity on the earliest date product offering is provided in Schedule 2. when they became bcu Members (being a membership held continuously up to the time of the Merger). Immediately after the Merger, all products currently held by bcu Members will continue under their existing terms and P&N Bank intends to retain and grow the bcu brand and to conditions. Information on currently available products can continue to operate and grow bcu as a trading division of be found on the bcu.com.au website. The Continuing Entity the Continuing Entity. Although bcu Members will become will remove monthly fees from personal access accounts a member of P&N Bank, bcu Members will continue to and personal loans along with the removal of a number of conduct their day-to-day banking transactions under the transaction fees on personal access accounts. bcu Brand.
As is customary for mergers of authorised deposit-taking Please refer to section 4.2 for further information. institutions, following the Merger:
a) bcu will be a ‘shell’ company without any assets and 2.20 What are the taxation implications of the with the bcu Directors as its only members; and Merger for me? b) bcu’s AFSL, ACL and banking authority will be bcu Members and P&N Bank Members should seek their cancelled; and own independent advice about their specific circumstances. c) bcu will be deregistered as a company. The Commissioner for Taxation has issued Interpretive Decision 2004/88 which confirms that if the transfer of the Please refer to sections 3.1 and 6.2 for further information. credit union business is performed in accordance with the Transfer Act, the receiving body is taken to have acquired 2.17 What will happen to bcu business if the a Capital Gains Tax (CGT) asset for an amount equal to its indexed cost base at the effective date of transfer, for the Merger proceeds? purposes of Part 3-1 of the Income Tax Assessment Act P&N Bank will manage the bcu business and the Continuing 1997 (ITAA 1997). Entity after completion of the Merger. This means that the capital proceeds received by the bcu Members will equal the indexed cost base resulting in no Further information about P&N Bank’s future intentions capital gain. This essentially effects a rollover which results for the bcu business is included in section 4.6. in no relevant tax effects.
Please refer to section 4.3 for further information.
Member Booklet 23 Voting To Approve The Merger 2.24 How do I vote? Eligible bcu Members can vote: 2.21 When and where will the General Meeting a) by attending the General Meeting at 10.00am be held? on Tuesday 22 October 2019 at C.ex Coffs, The bcu General Meeting will be held at 10.00am on 2-6 Vernon Street, Coffs Harbour and voting Tuesday 22 October 2019 at C.ex Coffs, 2-6 Vernon Street, in person or by attorney or, in the case of Coffs Harbour. corporate members, by corporate representative; b) by going online at bcu.com.au/vote, or via the 2.22 What vote is required to pass the bcu bcu connect app, or via bcu ibank, and appoint Merger Resolution? a proxy to vote on your behalf in accordance with your instructions; Pursuant to the bcu Constitution in order for the bcu Merger Resolution to be passed: c) in person at your local store by appointing a proxy to vote on your behalf in accordance with your a) Member Participation Threshold: at least 25% of bcu instructions; or Members who have been members for more than two years and 5% of bcu Members who have been Members d) by using the Proxy Form included with this document for more than twelve months must vote on the Merger to appoint a proxy to vote in accordance with (whether for or against); and your instructions.
b) Member Approval Majority: only bcu Members who have Full details of who is eligible to vote and how to vote been a member of bcu for at least twelve months (as at are set out on page 12. the date of the General Meeting) are entitled to vote on the bcu Merger Resolution and of those bcu Members eligible to vote and who actually vote, at least 75% must 2.25 Can I change my proxy vote? vote in favour of the Merger. Yes. If you lodge a proxy vote and later change your Full details of who is eligible to vote and how to vote mind about how you wish to vote, you can lodge a are set out on page 12. replacement Proxy Form and, provided it is duly completed and received no later than 48 hours before the time of the General Meeting: 2.23 Should I vote? • the latest valid Proxy Form received by bcu will be Voting is not compulsory. However, the bcu Directors counted; and believe that the Merger is important to all bcu Members • any earlier vote (or votes) will be disregarded. and urge you to vote on the bcu Merger Resolution. Additionally, if you complete and return a Proxy Form, you may still attend the General Meeting in person, revoke the The bcu Directors unanimously proxy and vote at the meeting. recommend that you vote in favour of the bcu Merger Resolution subject to 2.26 What happens if I do not vote, or I vote against there being no Superior Proposal. the Merger? The Merger may not be approved at the bcu General Meeting because: bcu depends on you to secure a strong and sustainable future, and the bcu Directors hope you will carefully a) the Member Participation Threshold; or consider all the information in this Member Booklet before b) the Member Approval Majority, is not met. casting your vote in favour of the Merger Resolution. If this occurs the Merger will not proceed and you will not Full details of who is eligible to vote and how to vote become a P&N Bank Member but instead continue to be a are set out on page 12. bcu Member. However, if the Merger proceeds, bcu Members (except the bcu Directors) will cease to be bcu Members and will be deemed to have become members of the Continuing Entity on the earliest date when they became bcu Members (being a membership held continuously up to the time of the Merger). This is so even if you did not vote at all or you voted against the Merger.
Please refer to section 6.2 for further information.
24 Bananacoast Community Credit Union Ltd 2.27 What happens if the Merger is not approved at the bcu General Meeting? If the Merger does not proceed, bcu Members will retain their bcu memberships, bcu will continue to operate as it has in the past, and bcu Members will not become P&N Bank Members.
The bcu Directors are of the view that despite bcu’s historical sound profitability, merging with another banking organisation at some time in the future is inevitable. The Board has conducted a comprehensive review of options for the future and following that review has come to the view that failing to proactively secure this Merger with P&N Bank now may lead to a different merger in the future with outcomes that could be poorer for bcu Members and the community.
Please refer to section 3.8 for further information.
Further questions
2.28 What if I have other questions? bcu Members are encouraged to attend member information events during the voting period and to raise questions relating to the proposed Merger. Information about these events can be found at the bcu.com.au/future webpage.
If you have any further questions concerning the Merger, please consult your financial, legal, or other professional adviser, call our contact centre on 1300 228 228 on business days between 8.00am – 6.00pm (AEST), speak to bcu’s in-store teams or email [email protected].
Member Booklet 25 3. Key features of the Merger
3.1 Overview of the Merger 3.2 Timing The Merger will involve a total transfer of the business of The Merger is subject to the satisfaction or waiver of various bcu to P&N Bank under the Transfer Act. conditions (as applicable), as summarised in section 3.5 and 6.1 below. If the Merger proceeds, on the Merger Date: If those conditions are satisfied or waived, the Merger is a) all of the assets and liabilities of bcu become assets and expected to take place on 1 November 2019 or such later liabilities of P&N Bank (including all deposits and loans date approved by APRA. held by bcu Members); b) the duties, obligations, immunities, rights and privileges 3.3 Directors’ recommendation that currently apply to bcu transfer to P&N Bank; and
c) bcu Members (except the bcu Directors) will cease to be The Directors unanimously recommend bcu Members and will become members of P&N Bank that you vote in favour of the bcu Merger and will be deemed to have become members of Resolution subject to there being no the Continuing Entity on the earliest date when they Superior Proposal. become bcu Members (being a membership held continuously up to the time of the Merger).
This merger process is different from the process that is typically used in a merger, where the acquiring company 3.4 Independent Expert’s conclusion acquires all of the shares in the target company, in Grant Samuel (Independent Expert) prepared an exchange for a new issue of shares in the acquiring independent expert’s report dated 20th August 2019 in company and/or cash. These mergers involve the target relation to the Merger (bcu IER). company becoming a wholly owned subsidiary of the acquiring company, and target shareholders becoming In the Independent Expert’s opinion, the advantages of the shareholders in the acquiring company. Merger outweigh the disadvantages and bcu Members are likely to be better off if the Merger proceeds. Consequently, However, here, bcu’s entire business is being transferred the Independent Expert, has concluded that, in the absence under special statutory powers in the Transfer Act which are of a Superior Proposal: designed to facilitate mergers of authorised deposit-taking institutions (ADIs), and bcu will not become a subsidiary of a) the Merger is in the best interests of bcu Members; and P&N Bank and P&N Bank will not acquire any existing bcu b) the benefits being provided to bcu Members are Shares from bcu Members. Instead, following the Merger, reasonable having regard to any loss of rights and bcu’s AFSL, ACL and banking authority under the Banking change as to voting rights and rights to participate Act will be cancelled and bcu will be deregistered as a in the reserves and profits of bcu.9 company. There will be no surplus funds distributed to bcu Members. A copy of the IER is set out in full at Schedule 1. The bcu IER is also available to view in full online at The proposed Merger will not trigger a demutualisation bcu.com.au/vote. under Part 5 of Schedule 4 of the Corporations Act. 3.5 Conditions Further information about the effects of the Merger on the rights and liabilities of bcu Members is set out bcu and P&N Bank have entered into a Merger in section 4.1 and the treatment of bcu memberships Implementation Agreement which sets out the terms and and shares is set out in section 6.2. conditions on which bcu and P&N Bank have agreed to seek members’ consent to the Merger and, if agreed by members and APRA, and the other conditions are met or waived, to implement the Merger.
It provides that the Merger is conditional on a number of ‘positive’ and ‘negative’ conditions being met.
9 As bcu Members are effectively swapping an interest in one mutual for an interest in another mutual rather than exchanging their interest for cash and/or marketable securities in the acquiring entity, in Grant Samuel’s view it is not possible to value a membership interest in either bcu or P&N Bank and therefore it is not relevant or meaningful to provide an opinion on whether the benefits being provided to bcu Members are “fair”.
26 Bananacoast Community Credit Union Ltd The key positive conditions which must be satisfied or 3.7 Break Fee waived in order for the Merger to proceed are: Under the Merger Implementation Agreement either a) bcu Merger Resolution: the bcu Members approving bcu or P&N Bank may be obliged to pay a Break Fee to the bcu Merger Resolution; the other party if the Merger does not proceed in certain circumstances. This is designed to compensate the other b) P&N Bank Merger Resolution: approval of the non-faulting party’s costs associated with pursuing the P&N Bank Merger Resolution; Merger. The Break Fee is $900,000. c) Regulatory Approvals: all Regulatory Approvals are received; Further details about the Break Fee are set out in section 6.1. d) Brand Approval: P&N Bank having consent to use the brand “bcu” on terms acceptable to bcu and P&N Bank (acting reasonably); 3.8 What if the Merger doesn’t proceed? e) Regulatory Conditions: any regulatory conditions If the Merger does not proceed, bcu will continue to imposed by APRA or the Commonwealth Treasurer that operate as it has in the past. are required to be satisfied prior to implementing the Merger are satisfied; and The bcu Directors are of the view that despite bcu’s historical sound profitability, merging with another banking f) P&N Bank RSA: P&N Bank obtaining an amendment organisation at some time in the future is inevitable. The to its existing AFSL to authorise P&N Bank to operate bcu Board has conducted a comprehensive review of retirement savings accounts. options for the future and has come to the view that failing In addition to these positive conditions, the Merger to proactively secure this Merger with P&N Bank now, may Implementation Agreement provides that the Merger is lead to a different merger in the future and with outcomes also conditional on certain negative conditions continuing that could be poorer for bcu Members and the community. to apply at the date of the Merger, namely: For the reasons explained in this Member Booklet, the bcu g) No prescribed occurrences: certain ‘prescribed Board believes the Merger would be mutually beneficial to occurrences’ not having occurred in respect of either bcu and P&N Bank and that it is in the best interests of bcu bcu or P&N Bank; and Members and bcu for the Merger to proceed.
h) No breach of warranties. 3.9 Further information Further details about these conditions are set out in bcu Members are encouraged to attend member section 6.1. information events during the voting period and to raise questions relating to the proposed Merger. Information about these events can be found at the 3.6 Exclusivity bcu.com.au/future webpage.
bcu and P&N Bank have each agreed under the Merger If you have any further questions concerning the Merger, Implementation Agreement to comply with certain please consult your financial, legal, or other professional restrictions in relation to soliciting alternative proposals or adviser, call our contact centre on 1300 228 228 on competing transactions with third parties, and responding business days between 8.00am – 6.00pm (AEST), speak to approaches by third parties. to bcu’s in-store teams or email [email protected].
Further details about these arrangements are set out in section 6.1.
Member Booklet 27 4. Future intentions and impact of the Merger on you
4.1 Effect of the Merger on the Rights and Liabilities The Continuing Entity will remove all monthly fees from of bcu Members personal access accounts and personal loans, along with the removal of a number of transaction fees on personal Each bcu Member currently holds one bcu Share with the access accounts. All other existing fees and charges will rights described in this section and has certain rights under remain the same. the bcu Constitution and Corporations Act. These rights include the right to: 4.3 Taxation implications a) attend and vote at bcu Members’ meetings (unless the bcu Members and P&N Bank Members should seek their bcu Member is a minor); and own independent advice about their specific circumstances.
b) appoint and remove bcu Directors. The Commissioner for Taxation has issued Interpretive If the Merger proceeds bcu Members (except the bcu Decision 2004/88 which confirms that if the transfer of the Directors) will cease to be bcu Members and will be credit union business is performed in accordance with the deemed to have become members of the Continuing Transfer Act, the receiving body is taken to have acquired Entity on the earliest date when they became bcu Members a Capital Gains Tax (CGT) asset for an amount equal to its (being a membership held continuously up to the time indexed cost base at the effective date of transfer, for the of the Merger). Please refer to section 6.2 for a detailed purposes of Part 3-1 of the Income Tax Assessment Act explanation of how this process will be legally effected. 1997 (ITAA 1997).
P&N Bank Members have certain rights under the This means that the capital proceeds received by the bcu P&N Bank Constitution (which will be the constitution of Members will equal the indexed cost base resulting in no the Continuing Entity) and Corporations Act. However, capital gain. This essentially effects a rollover which results generally speaking, the rights and liabilities of P&N Bank in no relevant tax effects. Members under the P&N Bank Constitution are substantially the same as the rights and liabilities of bcu Members. 4.4 Board and management of the Continuing Entity If the Merger is approved, the board of the Continuing Entity A comparison of bcu’s and P&N Bank’s constitutions is will comprise a maximum of ten directors, with six directors set out in Schedule 4. from P&N Bank, 3 bcu Directors and the CEO.
The current Chair of P&N Bank, Paul Gabb, will continue 4.2 Impact on product, fees and charges as the Chair of the Continuing Entity from the transfer date Following the Merger, P&N Bank would use its systems, until the end of the 2020 Annual General Meeting when digital banking technology and capabilities for the benefit he will retire as a director of the Continuing Entity. bcu’s of members. Upon conversion of bcu’s banking system current chairman, Stephen Targett will become the Deputy into the P&N Bank banking system, bcu Members will have Chair of the Continuing Entity from the Merger Date. access to the full range of services provided by P&N Bank. The CEO of P&N Bank, Andrew Hadley, will be CEO of the It is intended that bcu Members and P&N Bank Members will: Continuing Entity following the Merger.
a) not be disadvantaged with respect to the benefits and Further information about: pricing associated with any products and services held a) the board of the Continuing Entity; and by them at the time of the Merger; and b) the current bcu Directors and P&N Bank directors who b) will have access to a broader range of products, services will not be directors of the Continuing Entity, is provided and channels after the Merger. in Schedule 5. The Merger will create an expanded product offering Should the Merger proceed, the P&N Bank Board will through both bcu and P&N Bank members being able to comprise of ten directors whose respective terms of office have access to products that were only offered by either finish either at the end of the Annual General Meeting of organisation before the Merger. Details on the enhanced P&N Bank at which time the financial report for the financial product offering are provided in Schedule 2. year identified in the third column of the following table is Immediately after the Merger, all products currently held by laid before the meeting, or in the case of Andrew Hadley bcu Members will continue under their existing terms and in accordance with the terms of his employment contract. conditions. Information on currently available products can Their director classification for the purposes of the P&N be found on the bcu.com.au website. Bank constitution is set out in the last column.
28 Bananacoast Community Credit Union Ltd Director Board P&N Bank AGM at Board appointed which term ends or Member elected
Paul Marshall Gabb P&N Bank 2020 Member elected
Kellie Louise Properjohn P&N Bank 2020 Member elected
Gary Humphreys bcu 2020 Member elected
Edwin Roy Bradley P&N Bank 2021 Board appointed
Alan Craig Philp P&N Bank 2021 Member elected
Louise Clarke bcu 2021 Member elected
Julie Ann Elliott P&N Bank 2022 Board appointed
Trevor Joel Hunt P&N Bank 2022 Member elected
Stephen Targett bcu 2022 Board appointed
Andrew Douglas Hadley, P&N Bank In accordance with CEO contract Board appointed CEO and Executive Director
All directors will face re-election or re-appointment by the 2022 Annual General Meeting.
4.5 Advisory Councils As set out above, consideration has been given to the possess the skill sets, regional connections and experience design of the operating and governance model of the that are required to support the performance of the Continuing Entity. An important principle to arise from designated roles of the bcu Advisory Council. the design is that local decision making will be supported through the Continuing Entity’s operating structure, which Further information about the bcu Advisory Council will include the appointment of a bcu General Manager and is provided in Schedule 5. the establishment of a bcu Advisory Council. The role of the bcu Advisory Council will include: representing the voice of the members, acting as bcu ambassadors and advising on 4.6 Intentions of P&N Bank for the future priorities for local community initiatives. The directors of P&N Bank have provided the following The bcu Advisory Council will comprise up to six member statement setting out their intentions in relation to the representatives and with the majority to reside in the future management of the bcu business: mid-North Coast region. a) Future directions
The following current bcu Directors, from the Coffs Coast The business of bcu will be integrated into P&N Bank’s region, have agreed to become representative members of business operations as at the proposed transfer date of 1 the bcu Advisory Council: November 2019. The required integration/rationalisation • Geoffrey Hardaker; and of core banking systems, risk management systems, products and transactional services and corporate • Sinclair Black. policies will occur progressively in the months following. Their involvement brings an important connection to the It is expected to be completed by 31 December 2020. history of bcu to the bcu Advisory Council, as well as their b) Products and services deep regional expertise and knowledge.
Upon the Merger becoming effective, an appropriate Please refer to section 4.2 above for further process will be conducted to identify and invite other bcu information about the impact of the Merger on Members to become representative members of the bcu Products and Services. Advisory Council. These new representative members will
Member Booklet 29 c) Member transactions Position Name P&N Bank and bcu use different banking systems. The transition of the bcu operations onto the P&N Bank Chief Operating Officer (COO) Jill Marks system is proposed for mid-2020. Members of P&N Bank will not be affected by that transition and we are Chief Information Officer (CIO) Erik Fenna committed to avoiding any changes to bcu members’ General Manager (GM) – bcu Mike Ribbens banking details. If there are some changes that cannot be avoided, detailed advice will be issued to all members GM – P&N Bank Anna Pearce well before the changeover. GM – People & Culture Mark Smith A comprehensive communications process will precede any changes and all efforts will be made to minimise GM – Specialist Lending Mark Atwood impact to members.
d) Brand GM – Strategy & Corp Development Kim Radalj
P&N Bank will retain its current brand following the Merger. GM – Customer Propositions & Insights Richard York
P&N Bank proposes to also retain the current bcu Brand, A process of consultation with all other current staff of with a commitment to grow the brand in its selected P&N Bank and bcu will be undertaken prior to the markets and geographies. Merger Date.
e) Stores and staff f) Registered office
Both bcu and P&N Bank will maintain their staff, offices The administrative headquarters and registered office and store networks on opposite coasts. will reside at P&N Bank’s location in Perth. bcu’s offices The CEO of P&N Bank, Andrew Hadley, will continue as in Brisbane and Coffs Harbour will be maintained as the CEO of the Continuing Entity following the Merger. important organisational hubs. Whilst every effort has been made by P&N Bank to find g) Capital management a role for the current CEO of bcu, Alan Butler, a suitable position has not been agreed. Should the Merger The Capital Management Plan currently in place at proceed, his current role becomes redundant and Alan P&N Bank will be retained. has indicated his preference is to leave the organisation. The Continuing Entity will maintain an appropriate level At the Merger Date, all other current staff of bcu of capital commensurate with the level and extent of will become employees of P&N Bank on salary and risks to which it is exposed from its activities. The purpose conditions at least equal to their overall arrangements of capital is to absorb losses from loans, investments with bcu, including preservation of leave entitlements. and general operations. Capital also functions as a cushion against credit risk, liquidity risk, interest rate risk, The roles of all other existing P&N Bank and bcu operational risk and other risks. senior executives will be restructured from the Merger Date. This restructure will undertake a re-allocation h) Shared vision of responsibilities. However senior executives of both Looking to the future, P&N Bank and bcu both believe P&N Bank and bcu will be offered roles in the Continuing that they will be stronger together and share a vision Entity, although these roles may be different. to become a more diversified financial institution that The proposed executive team of the Continuing Entity will leverage its collective scale, reach and capability at the Merger Date is outlined below. Importantly, for to deliver more competitive and innovative banking bcu Members, a new position has been created, General solutions that create even greater value for all members. Manager bcu, who will be located in the Coffs Harbour With the traditional banking model under intense office and whose focus is to lead the local team to deliver pressure, the multi-branded model established by this an attractive bank offering to bcu Members. Merger could in the future be attractive to other credit unions and mutual banks facing into the same industry Position Name headwinds. This Merger would therefore position the Continuing Entity strategically to play an influential role Chief Executive Officer (CEO) Andrew Hadley in expanding the relevance of member-owned banking across Australia both now and in the future. General Counsel & Company Secretary Jackie Donald & Jennifer Handz An element of the cost savings generated from the Merger will also be used for further annual charitable Chief Financial Officer (CFO) Patrick Jodas donations. The bcu Members will be consulted, after implementation of the Merger, on what charities they Chief Risk Officer (CRO) Brendon Comrie believe should receive further support.
30 Bananacoast Community Credit Union Ltd 5. Financial information
5.1 Financial information about bcu and P&N Bank a) Financial information
The tables below show both P&N Bank and bcu as at 30 June 2017, 30 June 2018 and 31 December 2018 (unaudited).
Statement of profit or loss 30/06/2017 30/06/2018 31/12/2018 (Audited) (Audited) (Unaudited 6 months)
bcu P&N Bank bcu P&N Bank bcu P&N Bank ($’000) ($’000) ($’000) ($’000) ($’000) ($’000)
Interest revenue 73,201 149,412 77,504 153,738 37,922 80,450
Interest expense (28,738) (81,281) (30,473) (81,380) (14,612) (43,331)
Net interest income 44,463 68,131 47,031 72,358 23,310 37,119
Other income 9,437 19,339 9,956 18,508 4,474 7,681
Impairment loss on loans (2,591) (3,555) (1,381) (3,287) 254 (192)
Other expenses (37,695) (70,248) (39,784) (70,796) (21,714) (36,049)
Profit before income tax 13,614 13,667 15,822 16,783 6,324 8,559
Income tax expense (4,500) (2,648) (5,127) (4,680) (2,020) (2,567)
Non-controlling interests - 40 - 18 - (37)
Net profit after income tax 9,114 11,059 10,695 12,121 4,304 5,955
• bcu Profit for the second half of the year will be stronger than the results disclosed above with full year Net Profit after Income Tax expected to be approximately $11m.
Member Booklet 31 Statement of financial position 30/06/2017 30/06/2018 31/12/2018 (Audited) (Audited) (Unaudited 6 months)
bcu P&N Bank bcu P&N Bank bcu P&N Bank ($’000) ($’000) ($’000) ($’000) ($’000) ($’000)
Assets
Cash and cash equivalents 156,224 134,011 183,920 141,244 153,603 170,787
Financial assets held to maturity 73,667 394,768 79,498 397,972 125,901 422,003
Other financial assets 1,813 23,469 1,813 1,234 1,816 1,315
Available for sale investments - 8,625 - 8,625 - 8,625
Derivative assets held for hedging purposes - 318 - 112 - 81
Loans and advances to members 1,400,219 3,374,848 1,414,225 3,551,253 1,393,322 3,578,957
Property, plant and equipment 10,158 6,926 10,142 4,956 10,677 5,721
Intangible assets 51 7,905 694 7,511 810 7,151
Deferred tax assets 5,096 - 4,747 2,065 4,747 1,536
Other assets 3,234 34,622 5,334 34,238 5,222 45,219
Total assets 1,650,462 3,985,492 1,700,373 4,149,210 1,696,098 4,241,395
Liabilities
Borrowings 25,543 835,743 - 864,575 - 808,076
Deposits 1,479,735 2,837,251 1,543,420 2,970,662 1,542,584 3,114,827
Liabilities associated with assets held for sale - 16,097 - - - -
Derivative liabilities - 762 - 206 - -
Other payables 12,425 16,975 15,370 20,277 8,018 23,730
Income tax payable 1,700 346 (23) 3,398 (579) 3,306
Provisions 2,622 3,815 2,474 4,277 2,638 4,333
Deferred tax liability - 1,010 - - -
Total liabilities 1,522,025 3,711,999 1,561,241 3,863,395 1,552,661 3,954,272
Net assets 128,437 273,493 139,132 285,815 143,437 287,123
Equity
Reserves 40,617 223,091 40,638 223,382 40,647 223,382
Cash flow hedge reserve - - - (40) - (12)
Retained earnings 87,820 49,795 98,494 61,884 102,790 63,127
Non-controlling interests - 607 - 589 - 626
Total equity 128,437 273,493 139,132 285,815 143,437 287,123
32 Bananacoast Community Credit Union Ltd Key ratios 30/06/2017 30/06/2018 31/12/2018 (Audited) (Audited) (Unaudited 6 months)
bcu P&N Bank bcu P&N Bank bcu P&N Bank ($’000) ($’000) ($’000) ($’000) ($’000) ($’000)
Capital adequacy 13.8% 14.54% 14.80% 15.44% 15.20% 15.26%
Liquidity
High quality liquid assets ratio 13.90% 13.17% 15.4% 13.9% 16.62% 15.15%
Asset quality
Delinquent loans / total loans 1.03% 1.10% 0.68% 1.02% 0.55% 1.19%
Specific provision / total loans 0.23% 0.20% 0.19% 0.13% 0.10% 0.08%
Operating ratios
Margin (net interest income / avg assets) 2.80% 1.81% 2.81% 1.82% 2.75% 1.69%
Return on average assets after tax 0.57% 0.25% 0.64% 0.3% 0.51% 0.3%
Operating expenses / operating income 69.9% 80.3% 69.8% 77.91% 78.15% 80.47%
Non-interest income / total income 17.5% 22.1% 17.5% 20% 16.1% 17%
b) Material change in bcu’s financial position since the c) Material change in P&N Bank’s financial position since date of the last balance sheet as at 30 June 2018 30 June 2018
Except as set out elsewhere in this Member Booklet, the There have been no material changes to P&N Bank’s material changes in bcu’s financial position since 30 June financial position since 30 June 2018. 2018, the date of bcu’s last published financial statement, are as follows:
• Loans and advances have reduced by approximately $22 million, as a result of:
-- A decision made during the 2017 financial year to reduce exposure to inner Brisbane high-density residential property development loans and the consequential run-off of this portfolio; and
-- Reduced home lending activity across the regions stemming from regulatory restrictions in respect of investor housing loans.
• Deposits have reduced by approximately $24 million in order to match the lower lending growth. The reduction in deposits supports maintaining bcu’s optimal liquidity range and its current net interest margin.
• Retained earnings (and Total Equity) is expected to improve by approximately $11 million of net profits after tax by 30 June 2019, save for the costs of executing the Merger. The key drivers of this expected profit result are a steady net interest margin, lower impairment loan charges and contained growth in operating expenses.
Member Booklet 33 5.2 Financial information about the Continuing Entity The following tables combine the financial position of the bcu and P&N Bank based on audited financial reports for each institution as at 30 June 2018.
Combined consolidated statement of profit or loss
As at 30 June 2018
bcu P&N Bank Continuing Entity ($’000) ($’000) ($’000)
Net interest income 47,031 72,358 119,389
Other income 9,956 18,508 28,464
Impairment loss on loans (1,381) (3,287) (4,668)
Other expenses (39,784) (70,796) (110,580)
Profit before income tax 15,822 16,783 32,605
Income tax expense (5,127) (4,680) (9,807)
Non-controlling interests - 18 18
Profit for the year 10,695 12,121 22,816
34 Bananacoast Community Credit Union Ltd Combined consolidated statement of financial position
As at 30 June 2018
bcu P&N Bank Continuing Entity ($’000) ($’000) ($’000)
Assets
Cash and cash equivalents 183,920 141,244 325,164
Financial assets held to maturity 79,498 397,972 477,470
Other financial assets 1,813 8,737 10,550
Loans and advances 1,414,225 3,551,253 4,965,478
Property, plant and equipment 10,142 4,956 15,098
Intangible assets 694 7,511 8,205
Deferred tax assets 4,747 2,065 6,812
Other assets 5,334 35,472 40,806
Total assets 1,700,373 4,149,210 5,849,583
Liabilities
Borrowings - 864,575 864,575
Deposits 1,543,420 2,970,662 4,514,082
Derivative liabilities - 206 206
Other payables 15,370 20,277 35,647
Income tax payable (23) 3,398 3,375
Provisions 2,474 4,277 6,751
Total liabilities 1,561,241 3,863,395 5,424,636
Net assets 139,132 285,815 424,947
Equity
Reserves 40,638 223,342 263,980
Retained earnings 98,494 61,884 160,378
Non-controlling interests - 589 589
Total equity 139,132 285,815 424,947
Capital adequacy ratio 14.8% 15.4% 15.2%
Member Booklet 35 6. Additional information
6.1 Summary of Merger Implementation Agreement Failure of conditions precedent If a condition fails or the Merger is not effective by 31 March bcu and P&N Bank have entered into a Merger 202010, the parties must consult on alternative means to Implementation Agreement setting out the terms and effect the Merger and an extension of time. If agreement conditions on which bcu and P&N Bank have agreed to cannot be reached in 5 Business Days: seek members’ consent to the Merger and, if agreed by members and APRA, and the other conditions are met or a) either party may terminate the agreement; or waived, to implement the Merger. b) the party with the benefit of the condition may elect Some of the key terms of the Merger Implementation to waive the condition or terminate the Merger Agreement are summarised below. Implementation Agreement.
Conditions precedent Exclusivity arrangements The Merger is conditional on a number of ‘positive’ and bcu and P&N Bank have each agreed to comply with certain ‘negative’ conditions being met or waived. restrictions in relation to soliciting alternative proposals or competing transactions with third parties, and responding The key positive conditions are: to approaches by third parties. These restrictions apply a) bcu Merger Resolution: the bcu Members approving until 31 March 202011 or until the Merger Implementation the bcu Merger Resolution in accordance with the bcu Agreement is terminated. Constitution; Break Fee b) P&N Bank Merger Resolution: approval of the P&N Bank Reflecting the investment by both parties to seek members’ Merger Resolution at the P&N Bank General Meeting; consent for the Merger, a break fee of $900,000 will be c) Regulatory approvals: all Regulatory Approvals payable by: are received; a) bcu to P&N Bank if: d) Brand Approval: the Brand Approval being received i) bcu changes its recommendation or voting intention on terms acceptable to bcu and P&N Bank or otherwise issues a public statement that there is no (acting reasonably); longer support for the Merger by: e) Regulatory Conditions: any regulatory conditions • at least half of the bcu Board; or imposed by APRA or the Commonwealth Treasurer that are required to be satisfied prior to implementing the • any bcu Director, and bcu terminates the Merger Merger are satisfied; Implementation Agreement; or
f) P&N Bank RSA: P&N Bank obtaining an amendment to • any bcu Director in circumstances where its AFSL to authorise P&N Bank to provide retirement P&N Bank’s Board either approves the Merger savings accounts. (because no P&N Bank General Meeting is convened) or otherwise continues to recommend The Merger is also conditional on certain negative conditions and support the Merger and Adoption does not continuing to apply at the date of the Merger, namely: occur; or g) No prescribed occurrences: certain ‘prescribed ii) bcu supports or recommends a Superior Proposal; or occurrences’ not having occurred in respect of either bcu or P&N Bank, such as neither entity has become iii) P&N Bank validly terminates the Merger insolvent or has made a material change to the way Implementation Agreement because of a material it conducts business or to its assets and liabilities breach by bcu; and or capital structure since it entered into the Merger Implementation Agreement; and
h) No breach of warranties: the warranties and representations provided by bcu and P&N Bank continue to be true and correct in all material respects as at 8:00 am on the Merger Date.
10 Or such other date agreed in writing between bcu and P&N Bank.
11 Or such other date agreed in writing between bcu and P&N Bank.
36 Bananacoast Community Credit Union Ltd b) P&N Bank to bcu if: b) All bcu Members, including the bcu Directors but excluding any members as otherwise set out below, will i) P&N Bank changes its recommendation or voting become P&N Bank Members. Except as set out below, intention or otherwise issues a public statement that bcu Members who become members of P&N Bank in there is no longer support for the Merger by: a particular capacity will be deemed to have become • at least half of the P&N Bank Board; or members of P&N Bank in that capacity on the earliest date when they became members of bcu in that • any P&N Bank Director, and P&N Bank terminates capacity (being a membership held continuously up to the Merger Implementation Agreement; or the time of the Merger). • any P&N Bank Director in circumstances where all c) A bcu Member who holds a bcu Share which was the bcu Board continues to recommend and support issued for: the Merger and Adoption does not occur; or i) $10 and has been fully paid will be deemed to have ii) P&N Bank supports or recommends a Superior been issued a P&N Bank Share, issued at $10 fully paid; Proposal; or ii) $10 and which was partly paid will be deemed to iii) bcu validly terminates the Merger Implementation have been issued a P&N Bank Share, issued at $10 and Agreement because of a material breach by partly paid to the same amount that was paid on the P&N Bank. bcu Share. The remaining issue price will be payable No break fee is payable by either party if the Merger in accordance with the P&N Bank Constitution; and a Implementation Agreement is implemented. subscription price that exceeds $10, will be deemed to hold a P&N Bank Share issued at $10 paid to: Termination • $10 or; The Merger Implementation Agreement automatically terminates if: • the amount paid on the bcu share (whichever is less). a) the bcu Merger Resolution or the P&N Bank Merger Resolution is not approved or APRA refuses to approve If the amount actually paid for such a share exceeds $10, the Merger; or the member will receive a refund equal to the difference. If a bcu Member already holds a P&N Bank Share (ie is a b) both the bcu Merger Resolution and the P&N Bank member of both companies) in a particular capacity, that Merger Resolution are approved; or bcu Member will continue to be a P&N Bank Member and c) at least half of the bcu Board or half of the P&N Bank will not be deemed to hold an additional member share in Board no longer support the Merger. P&N Bank in that capacity. In respect of any bcu member shares cancelled in these circumstances, the bcu Member Either party may also terminate the Merger Implementation will receive a refund of the amount paid on the bcu Share (if Agreement if certain circumstances occur including the any) and P&N Bank will recognise the length of membership Merger not being implemented by 31 March 202012, a from either bcu or P&N Bank in that capacity, whichever is material breach of the agreement by the other party or the longest. a majority of the other party’s Board recommending or supporting a Superior Proposal. 6.3 APRA approval 6.2 bcu membership and shares In accordance with section 8 of the Transfer Act, the Merger must be approved by APRA in order to become effective. If the Merger is approved at the General Meeting then when APRA’s approval may impose conditions which need to be it takes effect: complied with before or after the Merger takes effect. a) All bcu Members (except the bcu Directors), cease to be If the bcu Merger Resolution put to this meeting is passed members of bcu and all of their redeemable preference and the other conditions to the Merger are satisfied, bcu shares in bcu are cancelled. The bcu Directors will remain and P&N Bank intend to confirm to APRA that this has bcu Members until bcu is deregistered as a company. occurred and APRA will then determine whether or not to approve the Merger.
12 Or such other date agreed in writing between bcu and P&N Bank.
Member Booklet 37 6.4 Section 20 Statement 6.6 AGM Extension To facilitate the implementation of the Merger, bcu and ASIC has granted bcu an extension to the deadline P&N Bank have, in accordance with section 20 of the to hold its 2019 Annual General Meeting (AGM) to Transfer Act, requested APRA approve a written statement 28 February 2020. specifying, or specifying a mechanism for determining, bcu will make the Financial Report, Directors’ Report and things that are to happen, or that are taken to be the case, the Auditor’s Report for the period ending 30 June 2019 in relation to assets and liabilities that are to be transferred, (2019 Annual Report) available to bcu Members at least or in relation to the transfer of business that is to be effected 2 weeks prior to the General Meeting on 22 October 2019. (Section 20 Statement). This includes: In addition, at the General Meeting, and before bcu a) confirming the treatment of bcu memberships and Members vote on the bcu Merger Resolution: shares as discussed in section 6.2; and • the 2019 Annual Report will be considered; and b) appointment of the bcu Directors to the P&N Bank Board, • bcu Members will be allowed a reasonable including designation of such directors as ‘member opportunity to: elected directors’ or ‘board appointed directors’ and confirmation of the timing of the rotation and retirement -- ask questions or make comments about the 2019 of the P&N Bank Board directors after the Merger as Annual Report and the management of bcu; and further discussed in section 4.4 and Schedule 5. -- ask questions of the Auditor or its representatives relevant to the conduct of the audit, preparation 6.5 Continued use of bcu Brand by the and content of the Auditor’s Report, the accounting Continuing Entity policies adopted by bcu in relation to the preparation As set out in section 4.5 above, P&N Bank intends to of the financial statements and the independence of retain and grow the bcu Brand in its selected markets and the Auditor in relation to the conduct of the audit. geographies following the Merger. bcu Members may also submit written questions to the Use of the term ‘credit union’ (and any word or expression Auditor by no later than 24 hours prior to the General that is of like import, either alone or with other words or Meeting in one of the following ways: symbols) is restricted under the Banking Act and parties • by email: to [email protected] wishing to use such terms in their name must obtain APRA’s consent to do so. • by post: to Returning Officer at PO Box 1563, Coffs Harbour, NSW 2450 or P&N Bank can, and intends to use the brand “bcu” (as it is used by bcu in an acronym form at the date • by fax: to Returning Officer on (02) 6690 3772. of the Merger Implementation Agreement) after the The Auditor will respond to any written questions submitted implementation of the Merger as a trading name or in the manner described above during the General Meeting. division of the Continuing Entity. If the Merger is not approved at the General Meeting, the bcu has also had extensive discussions with APRA in AGM will be convened in the usual way by 28 February relation to the Continuing Entity continuing to use the 2020 and bcu will call for director nominations after the name ‘Bananacoast Community Credit Union’ in full as a General Meeting on 22 October 2019 when the future trading name following the Merger. Whilst bcu does not direction of bcu is clearer. expect to receive such consent from APRA prior to the implementation of the Merger, it is not aware of any reason If you have any questions in relation to the AGM why the consent will not be granted by APRA in due course. Extension, you should call bcu on 1300 228 228 on business days between 8.00am – 6.00pm (AEST) or email [email protected].
38 Bananacoast Community Credit Union Ltd 6.7 Interests of bcu Officers and other stakeholders 6.9 Role of the bcu Board after the Merger in the Merger The bcu Board has given assurances to APRA that, if the If the Merger proceeds, each bcu Officer (including bcu Merger proceeds, it will ensure that bcu is de-registered, Directors) will become a P&N Bank Member. all bcu funds are transferred to P&N Bank and that it will prepare, sign-off and lodge financial statements for bcu Current Chairman of bcu, Stephen Targett, will become to the extent required by law. the Deputy Chair of the Continuing Entity and Louise Clarke and Gary Humphreys will become directors of the 6.10 Other Continuing Entity and will be entitled to director’s fees on the same terms and conditions as the current Except as set out in this Member Booklet, so far as the bcu P&N Bank directors. Directors are aware, there is no other information that is material to the making of a decision by a bcu Member Geoffrey Hardaker and Sinclair Black will become member whether or not to approve the Merger, being information representatives on the bcu Advisory Council. They will be that is within the knowledge of the bcu Directors and has entitled to receive a fee for their services of $10,000 per not previously been disclosed to bcu Members. annum. The P&N Bank Board has discretion to increase the fee for services in circumstances where the time and effort involved by the member representatives is greater than originally expected.
Five members of staff that are important to the success of the Merger and subsequent integration, are eligible to receive a retention payment, provided that they remain employed for a minimum of three or six months (as the case may be) after the effective date of the Merger. The aggregate of the five proposed payments is approximately $175,000 and any payments are subject to acceptable performance and conduct considerations.
The bcu Chief Executive Officer Alan Butler will receive a payment equivalent to twelve months of salary, consistent with the terms of his employment contract, which also includes a nine month restraint on being able to be employed within financial services.
Other than as disclosed elsewhere in this document, no Officers of bcu or P&N Bank have any interest (financial or otherwise) in the proposed transfer of the bcu business.
6.8 Deregistration of bcu after the Merger After the Merger bcu will be a ‘shell’ company without any assets and with the bcu Directors as its only members, bcu’s AFSL, ACL and banking authority will be cancelled and bcu will be deregistered as a company.
There will be no surplus funds distributed to bcu Members.
Member Booklet 39 7. Defined terms
In this document:
$ or AUD means Australian Dollars. Break Fee means a fee of $900,000 which may be payable by bcu to P&N Bank, or P&N Bank to bcu, in the circumstances 2019 Annual Report means the Financial Report, specified in the Merger Implementation Agreement, as Directors’ Report and the Auditor’s Report for the period summarised in section 6.1. ending 30 June 2019. Business Day means a day that is not a Saturday, Sunday, bank ACL means Australian Credit Licence. holiday or public holiday in Perth, Western Australia.
ADI means authorised deposit-taking institution. Certificate of Transfer means the certificate to be issued by APRA under section 18 of the Transfer Act which states that the Adoption means the passage of both the bcu Merger Resolution Merger is to take effect. and the P&N Bank Merger Resolution. Competing Proposal means proposed transaction or AFSL means Australian Financial Services Licence. arrangement, which, if implemented substantially in AGM means annual general meeting. accordance with its terms, would result in a third party (either directly or indirectly): APRA means the Australian Prudential Regulation Authority. a) acquiring or having a right to acquire, or obtaining an ASIC means the Australian Securities and Investments Commission. economic interest in all or a substantial part of the business, assets or undertakings of either the bcu Group or P&N Bank bcu means Bananacoast Community Credit Union Ltd Group (as the case may be); ABN 50 087 649 750. b) acquiring control of either bcu or P&N Bank (as the case may bcu Board means the board of bcu Directors. be); or c) acquiring a Relevant Interest in either the bcu Shares or bcu Brand means the ‘bcu’ brand as it is used in acronym form as P&N Bank Shares (as the case may be), as a result of which the at the date of the Merger Implementation Agreement. third party, together with any associates, will have Relevant Interests in more than 50% of either bcu Shares or P&N Bank bcu Constitution means the constitution of bcu initially adopted Shares in aggregate (as the case may be), but does not include on 27 May 2002 and as amended. the Merger. bcu Directors or Your Directors means the directors of bcu. Continuing Entity means P&N Bank after the completion of bcu General Meeting means the meeting of bcu Members to be the Merger. convened by bcu to consider the bcu Merger Resolution. Corporations Act means the Corporations Act 2001 (Cth). bcu Group means bcu and each of its subsidiaries. Financial Sector (Shareholding) Act means the Financial Sector bcu Member Register means the register of members of bcu (Shareholding) Act 1999 (Cth). maintained by or on behalf of bcu in accordance with clause Grant Samuel means Grant Samuel & Associates Pty Limited 168(1) of the Corporations Act. ABN 28 050 036 372. bcu Member means a person who is registered in the bcu Independent Expert means Grant Samuel. Member Register as a holder of a bcu Share. IER means independent expert’s report. bcu Merger Resolution means the resolution to adopt the Merger to be put to bcu Members at the bcu General Meeting. Member Participation Threshold means the number of Merger Approval Members who are required by the bcu Constitution to bcu Share means a redeemable preference share issued by bcu. vote (whether for or against) on the bcu Merger Resolution in Brand Approval means consent by APRA for P&N Bank to order to pass the bcu Merger Resolution being: continue to use the brand “bcu” (as it is used by bcu in an a) at least 25% of bcu Members who have been bcu Members for acronym form as at the date of the Merger Implementation at least 24 months; and Agreement) after implementation of the Merger. b) at least 5% of Merger Approval Members.
40 Bananacoast Community Credit Union Ltd Member Approval Majority means the number of Merger Pre-Meeting Regulatory Approvals means the consent of the Approval Members who are required to vote in favour of the bcu Commonwealth Treasurer (or APRA if the giving of such consent Merger Resolution in order to pass the bcu Merger Resolution, has been delegated) under section 63(1) of the Banking Act and being 75% of Merger Approval Members. under section 13A of the Financial Sector (Shareholdings) Act 1998 (Cth). Merger means the merger of P&N Bank and bcu in accordance with the Transfer Act, Transfer Rules, Banking Proxy Form means the proxy form for the bcu General Meeting Act and bcu Constitution. accompanying this document.
Merger Approval Members means bcu Members who have Regulatory Approvals means the Pre-Meeting Regulatory been a bcu Member for at least twelve months as at the date Approvals and the Post-Meeting Regulatory Approvals. of the bcu General Meeting and who are entitled to vote on the bcu Merger Resolution. Relevant Interest has the meaning given in the Corporations Act.
Merger Date means the time and date on which the Certificate of Section 20 Statement means a written statement prepared by Transfer comes into force to give legal effect to the Merger. bcu and P&N Bank and approved by APRA under section 20 of the Transfer Act which specifies, or specifies a mechanism Merger Implementation Agreement means the Merger for determining, things that are to happen, or that are taken Implementation Agreement entered into between bcu, and to be the case, in relation to assets and liabilities that are to be P&N Bank. transferred, or the transfer of the business that is to be effected in implementing the Merger. P&N Bank means Police & Nurses Ltd ABN 69 087 651 876. Superior Proposal means a bona fide Competing Proposal which: P&N Bank Board means the board of directors of P&N Bank. a) in the case of a Competing Proposal for bcu, in the P&N Bank Constitution means the constitution of P&N Bank. determination of the bcu Board; and b) in the case of a Competing Proposal for P&N Bank, in the P&N Bank General Meeting means the meeting of P&N Bank determination of the P&N Bank Board, acting in order to Members to be convened by P&N Bank to consider the P&N Bank satisfy what they consider to be their fiduciary or statutory Merger Resolutions. duties, and after receiving advice from their external legal and external financial advisors, would, if it is completed, be more P&N Bank Group means P&N Bank and each of its subsidiaries. favourable to their members (as a whole) than the Merger. P&N Bank Members means each member of P&N Bank registered Transfer Act means the Financial Sector (Transfer and in the P&N Bank Register as a holder of P&N Bank Shares. Restructure) Act 1999 (Cth). P&N Bank Merger Resolution means the resolutions to be put to Transfer Rules means the Financial Sector (Business Transfer and P&N Bank Members to approve the Merger. Group Restructure) Determination No. 2 of 2017 (Cth). P&N Bank Register means the register of members of P&N Bank maintained by or on behalf of P&N Bank in accordance with clause 168(1) of the Corporations Act.
P&N Bank Share means an issued share in P&N Bank.
Post-Meeting Regulatory Approvals means: a) approval by APRA of the Section 20 Statement; b) approval of the Merger by APRA under section 11 of the Transfer Act; c) the issue by APRA of the certificate issued by APRA under section 18 of the Transfer Act to give effect to the Merger.
Member Booklet 41 42 Bananacoast Community Credit Union Ltd Schedule 1. Independent Expert’s Report
Member Booklet 43
20 August 2019
The Directors Bananacoast Community Credit Union Ltd 69 Park Beach Road Coffs Harbour NSW 2450
Dear Directors
Merger with P&N Bank
1 Introduction On 13 December 2018, Bananacoast Community Credit Union Ltd (“bcu”) announced a proposed merger with Police & Nurses Limited (“P&N Bank”). bcu and P&N Bank entered into a Merger Implementation Agreement (“MIA”) on 1 April 2019 under which bcu will merge with P&N Bank by way of a voluntary transfer of all of bcu’s business, assets1 and members to P&N Bank in accordance with the Financial Sector (Transfer and Restructure) Act 1999 (Cth) (“Transfer Act”) and the Financial Sector (Business Transfer and Group Restructure) Determination No. 2 of 2017 (Cth) (“Transfer Rules”) (the “Merger”). If the Merger is completed: . bcu members (except the bcu directors2) will have their redeemable preference shares cancelled and will cease to be members of bcu; and . each bcu member (including the bcu directors but excluding those bcu members who are already members of P&N Bank3) will be deemed to:
• have become a member of P&N Bank on the earliest date that they became a bcu member (being membership held continuously up to the time of the Merger); and
• hold one P&N Bank member share, credited as paid up to the amount paid up on the corresponding bcu redeemable preference share4. Any unpaid issue price will be payable in accordance with the P&N Bank Constitution. bcu members who are already P&N Bank members will continue to be P&N Bank members and P&N Bank will recognise the length of membership from either bcu or P&N Bank, whichever is longer. Following the Merger, bcu’s Australian Financial Services Licence, Australian Credit Licence and its banking authority under the Banking Act 1959 (Cth) will be cancelled and bcu will be deregistered as a company. There will be no surplus funds distributed to bcu members. To facilitate the Merger, bcu will convene a general meeting of bcu members to consider a resolution to approve the merger of bcu and P&N Bank under the Transfer Act and the Transfer Rules. The general meeting is expected to be held on 22 October 2019.
______1 All of the assets and liabilities of bcu including bcu’s reserves and all deposits and loans held by bcu members. 2 The bcu directors will remain bcu members until the deregistration of the company. 3 In which case bcu will refund the amount paid up on that member’s bcu redeemable preference share. 4 Assuming that all bcu redeemable preference shares have an issue price of $10. If the amount paid for a redeemable preference share exceeds $10, the bcu member will receive a refund equal to the difference.
GRANT SAMUEL & ASSOCIATES PTY LIMITED ABN 28 050 036 372 AFS Licence No 240985 Level 19 Governor Macquarie Tower, 1 Farrer Place Sydney NSW 2000 GPO BOX 4301 SYDNEY NSW 2001 T +61 2 9324 4211 F +61 2 9324 4301 GRANTSAMUEL.COM.AU
44 Bananacoast Community Credit Union Ltd
Under the MIA, it is intended that: . the current brands of bcu and P&N Bank will be retained, and an umbrella brand may be adopted in the future to create a model for further industry consolidation; . neither the bcu members nor the P&N Bank members are intended to be disadvantaged with respect to the benefits and pricing associated with any products or services held by a member on completion of the Merger. All P&N Bank members (including P&N Bank members who were previously bcu members) will have access to a broader range of products, services and channels; . P&N Bank will continue to spend, at a minimum, the current annual investment by bcu in the mid North Coast region (including but not limited to costs of staff, service providers and sponsorship) at the date of the MIA, adjusted for the consumer price index each year; . the head office of P&N Bank will be located in Perth, and the head offices of bcu in Coffs Harbour and Brisbane will be retained as organisational hubs for the bcu business of P&N Bank. No bcu or P&N Bank locations will be closed as a result of the Merger; . all bcu employees will be offered a role in the Continuing Entity5 and no bcu or P&N Bank employee will be forced to take a redundancy as a result of the Merger:
• the terms and conditions of employment (including any accrued entitlement to employee benefits) of each bcu employee transferred to P&N Bank and each P&N Bank employee on completion of the Merger will continue to apply after completion of the Merger; and
• each current executive will have the opportunity to nominate for any position they currently hold which is substantially the same in both bcu and P&N or any other position they deem themselves to be suitably qualified for, and the selection process will be transparent, fair and based on merit; . the P&N Board will comprise a maximum of 10 directors. Initially, the P&N Board will consist of: • six current P&N Bank directors (including the current P&N Bank Chairman, although it is intended that he will retire as a director of P&N Bank at the 2020 Annual General Meeting);
• three current bcu directors (including the current bcu Chairman, who will be appointed as the Deputy Chairman of P&N Bank). At least one director must represent the bcu Mid North Coast, New South Wales region; and
• P&N Bank’s Chief Executive Officer (“CEO”), who will remain CEO of P&N Bank and continue as a director of P&N Bank; . a general manager of the bcu business and a general manager of the P&N Bank business will be appointed to oversee each of the businesses and report directly to the CEO; and . an Advisory Council will be established for each of the bcu and P&N Bank businesses responsible for representing the interests of members, acting as brand ambassadors and advising on priorities for local community initiatives. The bcu Advisory Council will initially comprise up to six member representatives, the majority of which must reside in the Coffs Coast region. It will initially include two current bcu directors who will not be appointed as directors of the Continuing Entity. An appropriate process to identify and invite other bcu members to become representative members of the bcu Advisory Council will be conducted after the Merger is completed. The bcu Board has unanimously recommended that bcu members vote in favour of the Merger in the absence of a superior proposal. The directors of bcu have engaged Grant Samuel & Associates Pty Limited (“Grant Samuel”) to prepare an independent expert’s report setting out whether, in its opinion, the Merger is in the best interests of bcu members and the benefits being provided to bcu members are fair and reasonable having regard to any loss of rights and change as to voting rights and rights to participate in the reserves and profits of bcu. A ______5 P&N Bank after completion of the Merger (i.e. after the transfer of bcu’s business, assets and members to P&N Bank).
2
Member Booklet 45
copy of the report (including this letter) will accompany the Member Booklet to be sent to members by bcu. This letter contains a summary of Grant Samuel’s opinion and main conclusions.
2 Opinion In Grant Samuel’s opinion, the advantages of the Merger outweigh the disadvantages and bcu members are likely to be better off if the Merger proceeds. Accordingly, in the absence of a superior proposal: . the Merger is in the best interests of bcu members; and . the benefits being provided to bcu members are reasonable having regard to any loss of rights and change as to voting rights and rights to participate in the reserves and profits of bcu. As bcu members are effectively swapping an interest in one mutual for an interest in another mutual rather than exchanging their interest for cash and/or marketable securities in the acquiring entity, it is not possible to value a membership interest in either bcu or P&N Bank and therefore it is not relevant or meaningful to provide an opinion on whether the benefits being provided to members are “fair”.
3 Key Conclusions . bcu is facing a challenging external environment The Australian banking sector is dominated by the major banks, which have an estimated 80% market share. At 31 December 2018, there were 70 mutual ADIs (including mutual banks, credit unions and building societies) which collectively had a market share of around 3-4%. Market conditions are extremely competitive, driven by new entrants and business models, and an extended period of low loan growth and low interest rates, which has intensified more recently due to weakness in housing prices and tighter lending policies (albeit there has subsequently been some relaxation of these policies). The consequent challenges for smaller mutual ADIs, such as bcu, are exacerbated by:
• increasing regulation and its impact on lending growth, capital requirements and compliance costs; and
• the requirement for ongoing, significant investment in technology and innovation to maintain an attractive and competitive banking offer that meets increasing customer expectations for banking products and services. In addition to a difficult external environment, mutual ADIs, including bcu, are dealing with a declining and ageing member base, a high cost base (reflecting their sub-scale operations) and lack of an attractive digital offering. As a result, it is increasingly difficult for mutual ADIs to provide a relevant proposition to members and attract a younger generation of members. While members of mutual ADIs consistently report high levels of member satisfaction, indicating that there is a role for mutual ADIs in the Australian banking sector, scale is critical for mutual ADIs to remain relevant and competitive over the long term. . While bcu’s business should be sustainable in the medium term, it will face increasing pressures on a stand-alone basis bcu’s business should be sustainable in the medium term given its track record of profitable growth and its relatively conservative target operating parameters. However, it is facing increasing challenges and pressures on a stand-alone basis. In particular, bcu’s lack of scale and the requirement for ongoing investment in regulatory and mandatory technological change has meant that it does not have the necessary resources (staff and funding) required to develop and maintain an attractive digital offering. This constraint is ultimately
3
46 Bananacoast Community Credit Union Ltd
expected to reduce bcu’s future competitiveness and capacity to attract and retain members, particularly the younger generation, which is required to sustain the business over the long term. . The bcu Board has recognised bcu’s position and has undertaken a process to consider alternatives The bcu Board has recognised that the status quo is not sustainable in the long term, and believes it is clear that bcu does not have the scale, on its own, to access the resources required to invest in enhancing its capabilities to enable it to maintain a relevant member proposition. After conducting a review of the alternatives, the bcu Board concluded that merging with another banking organisation at some time in the future was inevitable and that a merger with a suitable mutual banking organisation to access the resources required was the most appropriate option to address the strategic challenges and risks. Furthermore, proactively seeking to execute a merger now enables bcu to select the most appropriate partner for bcu members and its communities. Waiting until it must act could ultimately lead to a different merger in the future and an inferior outcome for bcu and its members. . A merger with P&N Bank is an attractive proposition If the Merger is implemented, bcu will become part of a stronger and larger mutual ADI that is more capable of competing in the current market and more resilient to future strategic risks than bcu as a stand-alone entity. The Merger will provide bcu’s business with access to the resources necessary to deliver digital capabilities to improve the proposition to existing members and attract new members (particularly younger members). These resources include P&N Bank’s current technology (that will be able to be leveraged to deliver more efficient services for bcu members) as well as its digital offerings (that will enable provision of an attractive banking offer for bcu members), financial capacity (P&N Bank currently spends around $8-9 million per annum on IT) and its large and experienced IT team. Importantly, given the separate geographical footprint of the two entities, there will be minimal organisational issues. bcu and P&N Bank have put considerable effort into developing an operating and governance model for the Continuing Entity which retains the bcu attributes that members value highly – its brand, staff and stores, local decision making, and commitment to the local community. There will also be some Board continuity (with three current bcu directors to join the P&N Bank Board) and an Advisory Council (of up to six bcu member representatives), both of which are required to include local representation. There are expected to be significant cost savings of over $5 million per annum (before tax), primarily from consolidating operations into a single set of systems and processes. These cost savings are expected to be achieved over a period of three years from completion of the Merger. There is also the potential for the Merger to deliver organic growth from deploying P&N Bank’s digital banking capabilities to target new home loan growth in bcu’s geographical markets and leveraging bcu’s capabilities and systems to provide a commercial and specialist property banking offer in Western Australia. While the quantum of any additional revenue has not been disclosed, it could add materially to the estimated cost savings. The Merger may also provide opportunities for future inorganic growth through the potential for mergers with other mutual ADIs (although there is no certainty that such opportunities will eventuate). . The Merger provides benefits for bcu members both as banking customers and as P&N Bank members Immediately following the Merger, there will be no change to products and no intended change to the banking details of existing bcu members. To the extent that changes are unavoidable, they will be designed to limit change and will be preceded by a communication process. Some bcu members will
4
Member Booklet 47
specifically benefit from the cost savings expected to be achieved through a commitment to use a portion of these cost savings to remove monthly fees from personal access accounts and personal loans and certain transaction fees on personal access accounts. bcu members are also expected to be able to access an enhanced range of products, services and distribution channels, including:
• greater mobile banking capabilities. This will include access to all three digital wallets6 and the ability to issue instant digital cards to replace lost or stolen cards. Following conversion of bcu’s banking system to P&N Bank’s banking system, bcu members will have access to the full range of services provided by P&N Bank, including a new mobile banking app with greater features and capabilities; and
• enhanced services, with longer contact centre operating hours and access to a store and branch network across the east and west coasts of Australia. As members of P&N Bank, bcu members will be customers of a more robust banking business while remaining members of a mutual committed to community involvement and service to members. In a post Royal Commission environment characterised by the erosion of trust (primarily in the major banks), bcu members will benefit from ongoing alignment of the interests of members and customers and being part of a mutual ADI that has been recognised as one of the banks that is most trusted by its customers in Australia. . The Merger does involve some disadvantages and risks. However, in Grant Samuel’s opinion, they are outweighed by the benefits of the Merger By voting in favour of the Merger, bcu members will forgo the opportunity to benefit from an alternative proposal, such as a demutualisation (accompanied by a sale of the company to a third party or a sharemarket listing) or a voluntary winding up, that could crystallise value for bcu members. However, a demutualisation would only be possible if the bcu Board was to make the decision to put a demutualisation or similar transaction to bcu members for their approval. This is not consistent with the views of the bcu Board, which believes that a mutual structure provides the basis for a superior banking offer and is committed to the mutual structure provided that it can continue to deliver benefits to members. Furthermore, a demutualisation would only reward current members and would ignore the past members who have contributed over the course of many years to the accumulation of reserves. Based on precedent transactions, the value realised through a demutualisation and sale could be in the order of $3,100-3,500 per member (but would be less if bcu demutualised and listed). Moreover, access to this value could come at a cost to bcu members, particularly through the loss of the advantages of being part of a mutual organisation that is operated for the benefit of members rather than generating a return for shareholders/owners. A voluntary winding up of bcu would require 5% of bcu members to requisition a meeting and 75% of members who vote to approve the winding up. It would not make economic sense for bcu members to seek to voluntarily wind up bcu as the amount received by members would be less than that received under a demutualisation and sale and a winding up would result in bcu members giving up all of the benefits of the mutual banking arrangements between bcu and its members (which is the very reason that they are members of bcu in the first place). Importantly, if the Merger is implemented, the Continuing Entity will retain the ability to merge with other mutual ADIs (and will arguably be in a better position than bcu on a stand-alone basis because the Continuing Entity will have more scope to be the “acquirer” rather than the “target”) or become an Alliance Bank in partnership with Bendigo and Adelaide Bank Limited.
______6 A digital wallet is an app that stores credit or debit card information. It can be used to make contactless payments using a smartphone as well as for online shopping.
5
48 Bananacoast Community Credit Union Ltd
There will be changes to the rights of bcu members, particularly the right to participate in bcu’s reserves on a winding up or demutualisation. In reality, the entitlement to participate in bcu’s reserves is a contingent right (i.e. it is only of value in the event that bcu is wound up or demutualises, both of which are considered unlikely). In any event, to the extent that these changes may be considered a disadvantage, they are mitigated by the right that bcu members will have as members of P&N Bank to participate in the distribution of the Continuing Entity’s surplus and profits on a winding up or demutualisation of the Continuing Entity. Voting participation and eligibility on a transfer of business or demutualisation resolution, quorums and director nomination rights as a P&N Bank member are different to those as a bcu member. However, the changes largely reflect the size of P&N Bank (and the Continuing Entity) compared to bcu and are not considered to be material in the context of the Merger. There will also be transaction and implementation costs. bcu’s transaction costs, while immaterial in the context of the Merger, are material to bcu and will be incurred by bcu on a stand-alone basis if the Merger does not proceed. The main risks of the Merger are implementation risks. There will be a risk that the integration of the bcu and P&N Bank businesses takes longer or costs more than is expected (particularly as it is necessary to integrate the banking systems) and any delay in integration is likely to delay the provision of benefits to members. While there is a plan in place to minimise integration risks, it is not possible to eliminate them entirely. There will also be ongoing execution risks associated with successfully implementing the governance and operating model, having group executives geographically spread across the east and west coasts of Australia and managing cultural/organisational differences. Despite the operating and governance model, bcu members will also be exposed to the activities of P&N Bank (including its financial planning business, specialised property activities and reverse mortgage portfolio).
4 Other Matters This report is general financial product advice only and has been prepared without taking into account the objectives, financial situation or needs of individual bcu members. Accordingly, before acting in relation to the Merger, members should consider the appropriateness of the advice having regard to their own objectives, financial situation or needs. Members should read the Member Booklet issued by bcu in relation to the Merger. Grant Samuel has not been engaged to provide a recommendation to members in relation to the Merger, the responsibility for which lies with the directors of bcu. In any event, the decision whether to vote for or against the Merger is a matter for individual members based on their personal circumstances and the nature of their relationship with bcu, including the products and services they use and the importance they place on these products and services as well as their expectations of the benefits of being a member of P&N Bank. Members who are in doubt as to the action they should take in relation to the Merger should consult their own professional adviser. Grant Samuel has prepared a Financial Services Guide as required by the Corporations Act. The Financial Services Guide is included at the beginning of the full report. This letter is a summary of Grant Samuel’s opinion. The full report from which this summary has been extracted is attached and should be read in conjunction with this summary. The opinion is made as at the date of this letter and reflects circumstances and conditions as at that date.
Yours faithfully GRANT SAMUEL & ASSOCIATES PTY LIMITED
6
Member Booklet 49
FINANCIAL SERVICES GUIDE AND INDEPENDENT EXPERT’S REPORT IN RELATION TO A MERGER WITH POLICE & NURSES LIMITED
GRANT SAMUEL & ASSOCIATES PTY LIMITED ABN 28 050 036 372
20 AUGUST 2019
50 Bananacoast Community Credit Union Ltd
FINANCIAL SERVICES GUIDE
Grant Samuel & Associates Pty Limited (“Grant Samuel”) holds Australian Financial Services Licence No. 240985 authorising it to provide financial product advice on securities and interests in managed investments schemes to wholesale and retail clients. The Corporations Act, 2001 (Cth) requires Grant Samuel to provide this Financial Services Guide (“FSG”) in connection with its provision of an independent expert’s report (“Report”) which is included in a document (“Disclosure Document”) provided to members by the company or other entity (“Entity”) for which Grant Samuel prepares the Report. Grant Samuel does not accept instructions from retail clients. Grant Samuel provides no financial services directly to retail clients and receives no remuneration from retail clients for financial services. Grant Samuel does not provide any personal retail financial product advice to retail investors nor does it provide market-related advice to retail investors. When providing Reports, Grant Samuel’s client is the Entity to which it provides the Report. Grant Samuel receives its remuneration from the Entity. In respect of the Report for Bananacoast Community Credit Union Ltd in relation to its merger with Police & Nurses Limited (“the bcu Report”), Grant Samuel will receive a fixed fee of $285,000 plus reimbursement of out-of-pocket expenses for the preparation of the Report (as stated in Section 8.3 of the bcu Report). No related body corporate of Grant Samuel, or any of the directors or employees of Grant Samuel or of any of those related bodies or any associate receives any remuneration or other benefit attributable to the preparation and provision of the bcu Report. Grant Samuel is required to be independent of the Entity in order to provide a Report. The guidelines for independence in the preparation of Reports are set out in Regulatory Guide 112 issued by the Australian Securities & Investments Commission on 30 March 2011. The following information in relation to the independence of Grant Samuel is stated in Section 8.3 of the bcu Report: “Grant Samuel and its related entities do not have at the date of this report, and have not had within the previous two years, any business or professional relationship with bcu or P&N Bank or any financial or other interest that could reasonably be regarded as capable of affecting its ability to provide an unbiased opinion in relation to the Merger. Grant Samuel had no part in the formulation of the Merger. Its only role has been the preparation of this report. Grant Samuel will receive a fixed fee of $285,000 for the preparation of this report. This fee is not contingent on the conclusions reached or the outcome of the Merger. Grant Samuel’s out-of-pocket expenses in relation to the preparation of the report will be reimbursed. Grant Samuel will receive no other benefit for the preparation of this report. Grant Samuel considers itself to be independent in terms of Regulatory Guide 112 issued by ASIC on 30 March 2011.” Grant Samuel has internal complaints-handling mechanisms and is a member of the Australian Financial Complaints Authority, No. 11929. If you have any concerns regarding the bcu Report, please contact the Compliance Officer in writing at Level 19, Governor Macquarie Tower, 1 Farrer Place, Sydney NSW 2000. If you are not satisfied with how we respond, you may contact the Australian Financial Complaints Authority at GPO Box 3 Melbourne VIC 3001 or 1800 931 678. This service is provided free of charge. Grant Samuel holds professional indemnity insurance which satisfies the compensation requirements of the Corporations Act, 2001 (Cth). Grant Samuel is only responsible for the bcu Report and this FSG. Complaints or questions about the Disclosure Document should not be directed to Grant Samuel which is not responsible for that document. Grant Samuel will not respond in any way that might involve any provision of financial product advice to any retail investor.
GRANT SAMUEL & ASSOCIATES PTY LIMITED ABN 28 050 036 372 AFS Licence No 240985 Level 19 Governor Macquarie Tower, 1 Farrer Place Sydney NSW 2000 GPO BOX 4301 SYDNEY NSW 2001 T +61 2 9324 4211 F +61 2 9324 4301 GRANTSAMUEL.COM.AU
Member Booklet 51
TABLE OF CONTENTS
1 Details of the Merger ______1
2 Scope of the Report ______4
3 Overview of the Australian Lending Market ______11 3.1 Lending Market ______11 3.2 Regulation ______13 3.3 Market Conditions and Outlook ______15
4 Profile of bcu ______18 4.1 Background ______18 4.2 Structure and Governance ______18 4.3 Membership and Member Rights ______19 4.4 Business Operations and Strategy ______20 4.5 Financial Performance ______24 4.6 Financial Position ______26
5 Profile of P&N Bank ______28 5.1 Background ______28 5.2 Structure and Governance ______28 5.3 Membership and Member Rights ______29 5.4 Business Operations and Strategy ______31 5.5 Financial Performance ______35 5.6 Financial Position ______37
6 Impact of the Merger ______40 6.1 Structure and Governance ______40 6.2 Membership and Member Rights ______42 6.3 Business Operations and Strategy ______43 6.4 Financial Impact ______45
7 Evaluation of the Merger ______48 7.1 Summary and Conclusions ______48 7.2 Background ______50 7.3 Advantages and Benefits of the Merger ______51 7.4 Disadvantages of the Merger ______57 7.5 Risks of the Merger ______67 7.6 Other Considerations ______69 7.7 Member Decision ______70
8 Qualifications, Declarations and Consents ______71
52 Bananacoast Community Credit Union Ltd
THIS PAGE HAS BEEN LEFT BLANK INTENTIONALLY
Member Booklet 53
1 Details of the Merger On 13 December 2018, Bananacoast Community Credit Union Ltd (“bcu”) announced a proposed merger with Police & Nurses Limited (“P&N Bank”). bcu and P&N Bank entered into a Merger Implementation Agreement (“MIA”) on 1 April 2019 under which bcu will merge with P&N Bank by way of a voluntary transfer of all of bcu’s business, assets1 and members to P&N Bank in accordance with the Financial Sector (Transfer and Restructure) Act 1999 (Cth) (“Transfer Act”) and the Financial Sector (Business Transfer and Group Restructure) Determination No. 2 of 2017 (Cth) (“Transfer Rules”) (the “Merger”). If the Merger is implemented: . bcu members (except the bcu directors2) will have their redeemable preference shares cancelled and will cease to be members of bcu; and . each bcu member (including the bcu directors but excluding those bcu members who are already members of P&N Bank3) will be deemed to:
• have become a member of P&N Bank on the earliest date that they became a bcu member (being membership held continuously up to the time of the Merger); and
• hold one P&N Bank member share, credited as paid up to the amount paid up on the corresponding bcu redeemable preference share4. Any unpaid issue price will be payable in accordance with the P&N Bank Constitution. bcu members who are already P&N Bank members will continue to be P&N Bank members and P&N Bank will recognise the length of membership from either bcu or P&N Bank, whichever is longer. Following the Merger, bcu’s Australian Financial Services Licence (“AFSL”), Australian Credit Licence (“ACL”) and its banking authority under the Banking Act 1959 (Cth) (“Banking Act”) will be cancelled and bcu will be deregistered as a company. There will be no surplus funds distributed to bcu members. To facilitate the Merger, bcu will convene a general meeting of bcu members to consider a resolution to approve the merger of bcu and P&N Bank under the Transfer Act and the Transfer Rules (the “Merger Resolution”). The general meeting is expected to be held on 22 October 2019. Other elements of the Merger include: . bcu and P&N Bank have agreed to certain exclusivity restrictions for the period up to 31 March 20205 (the “exclusivity period”) including no-shop, no-talk and no due diligence provisions. The no-talk and no due diligence provisions do not apply to the extent that they restrict bcu or P&N Bank from undertaking any action with respect to a competing proposal provided that the relevant board has determined, in good faith and to satisfy its fiduciary or statutory duties, that not undertaking that act may involve a breach of the fiduciary or statutory duties owed by any director; . during the exclusivity period, bcu and P&N Bank must notify the other party if it receives an approach by any person proposing a competing proposal, including details of the party making the proposal, the terms of the proposal and any material updates to the proposal (except to the extent that to do so may constitute a breach of the fiduciary or statutory duties of any director);
______1 All of the assets and liabilities of bcu including bcu’s reserves and all deposits and loans held by bcu members. 2 The bcu directors will remain bcu members until the deregistration of the company. 3 In which case bcu will refund the amount paid up on that member’s bcu redeemable preference share. 4 Assuming that all bcu redeemable preference shares have an issue price of $10. If the amount paid for a redeemable preference share exceeds $10, the bcu member will receive a refund equal to the difference. 5 Or such other date agreed in writing between bcu and P&N Bank.
1
54 Bananacoast Community Credit Union Ltd
. bcu and P&N Bank must use reasonable endeavours to procure that none of its directors recommend a competing proposal unless they have provided the other party with the material terms and conditions of the competing proposal and given the other party the opportunity to provide a counter proposal that is more favourable as a whole to their members than the terms of the competing proposal. If the directors determine, acting in good faith, that the terms and conditions of the counter proposal taken as a whole are more favourable to their members than the competing proposal, bcu and P&N Bank must use reasonable endeavours to implement the counter proposal and procure that each of their directors make a public statement supporting the counter proposal and recommend the counter proposal to their members; and . bcu must pay P&N Bank a break fee of $900,000 if: • during the exclusivity period, there is a failure to recommend the Merger, a withdrawal of the recommendation or voting intention, an adverse change or qualification of the recommendation or voting intention or a public statement indicating there is no longer support for the Merger by: - at least half of the bcu Board; - any one or more bcu directors, and bcu terminates the MIA; or - any one or more bcu directors, in circumstances where the P&N Bank Board continues to recommend and support the Merger but the Merger Resolution and P&N Bank’s approval of the Merger are not passed;
• a majority of the bcu Board supports or recommends a superior proposal for bcu; or
• P&N Bank terminates the MIA as a result of a material breach by bcu. P&N Bank must pay bcu a break fee of $900,000 in the reverse circumstances. The Merger is subject to a number of conditions that are set out in Section 6.1 of the Member Booklet. In summary, the key conditions include: . receipt of all regulatory approvals and consents, including from: • the Commonwealth Treasurer (“Treasurer”) (or the Australian Prudential Regulation Authority (“APRA”) if the giving of such consent has been delegated) under Section 63(1) of the Banking Act and Section 13A of the Financial Services (Shareholdings) Act 1998 (Cth) (“Financial Services (Shareholdings) Act”); and
• APRA: - of any statement under Section 20 of the Transfer Act (the “Section 20 Statement”)6; - of the Merger under Section 11 of the Transfer Act; - issuing the Certificate of Transfer under Section 18 of the Transfer Act; and - in relation to P&N Bank continuing to use the “bcu” brand (as it is used by bcu in an acronym form) on terms acceptable to bcu and P&N Bank; . satisfaction of any conditions imposed by APRA or the Treasurer in relation to the Merger; . P&N Bank obtaining an amendment to its AFSL to authorise P&N Bank to provide retirement savings accounts; . an independent expert issuing a report which concludes that the Merger is in the best interests of bcu members and the benefits being provided to bcu members are fair and reasonable having regard to
______6 The Section 20 Statement specifies things that are to happen, or that are taken to be the case, in relation to the assets and liabilities that are to be transferred, or in relation to the transfer of the business that is to be effected in completing the Merger (see Section 6.4 of the Member Booklet for more details).
2
Member Booklet 55
any loss of rights and change as to voting rights and rights to participate in the reserves and profits of bcu; . the relevant bcu members approve the Merger Resolution by the necessary majorities, and with the necessary bcu member participation required under the Transfer Rules and bcu’s Constitution; and . P&N Bank members approve the Merger. The bcu Board has unanimously recommended that bcu members vote in favour of the Merger in the absence of a superior proposal.
3
56 Bananacoast Community Credit Union Ltd
2 Scope of the Report
2.1 Purpose of the Report The MIA requires that the relevant bcu members approve the Merger Resolution by the majorities, and with the bcu member participation, required under the Transfer Rules and the bcu Constitution. The Merger is to be implemented by way of a voluntary transfer of business under the Transfer Act. Rule 12 of the Transfer Rules prescribes that a transfer will be adequately adopted for the purposes of Section 13 of the Transfer Act if it is approved by: . 75% of votes cast by members (if the constitution of the body provides for only one vote per member); or . 75% of members voting (if the constitution of the body does not provide for only one vote per member), (either in person or by proxy) on the resolution to adopt the transfer at a general meeting of members. Clause 7.39(b) of the bcu Constitution requires that, in addition to the requirements of the Corporations Act in relation to special resolutions, a resolution relating to the transfer of business for all or part of its assets shall be deemed not to have been carried unless at least 25% of bcu members who have been members for at least 24 months vote on the resolution (either in person or by proxy) at a general meeting of bcu members. The Merger will not trigger a demutualisation under Part 5 of Schedule 4 of the Corporations Act. However, Grant Samuel has been advised that the Merger Resolution will be a “Demutualisation Resolution” under Schedule 5 to the bcu Constitution and, in accordance with clauses 3(e) and 3(f) of Schedule 5 to the bcu Constitution and clause 7.38 of the bcu Constitution, only members who have been members of bcu for at least 12 months (“eligible members”) are entitled to vote on the Merger Resolution and it will only be passed if: . at least 5% of members who have been members for at least 12 months vote on the Merger Resolution; . at least 25% of members who have been members for at least 24 months vote on the Merger Resolution; and . at least 75% of the votes cast by eligible members approve the Merger Resolution. Consequently, the bcu Constitution effectively applies two separate thresholds which must be met: . voting eligibility and majority: only members who have been members of bcu for at least 12 months will be eligible to vote on the Merger Resolution and, of those members who actually vote, 75% must vote in favour of the Merger Resolution; and . participation threshold: even if the voting majority above is met, the Merger Resolution will only be passed for the purposes of the bcu Constitution if:
• at least 5% of members who have been members for at least 12 months; and
• at least 25% of members who have been members for at least 24 months, actually vote on the Merger Resolution (whether for or against)7. Although there is no requirement in the present circumstances for an independent expert’s report pursuant to the Transfer Act, the Transfer Rules, the Corporations Act or the bcu Constitution, the directors
______7 Although if the requirement that at least 25% of members who have been members for at least 24 months vote is met, the requirement that at least 5% of members who have been members for at least 12 months vote will, by definition, also be met.
4
Member Booklet 57
of bcu have engaged Grant Samuel & Associates Pty Limited (“Grant Samuel”) to prepare an independent expert’s report setting out whether, in its opinion: . the Merger is in the best interests of bcu members; and . the benefits being provided to bcu members are fair and reasonable having regard to any loss of rights and change as to voting rights and rights to participate in the reserves and profits of bcu. A copy of the report will accompany the Member Booklet to be sent to members by bcu. This report is general financial product advice only and has been prepared without taking into account the objectives, financial situation or needs of individual bcu members. Accordingly, before acting in relation to the Merger, members should consider the appropriateness of the advice having regard to their own objectives, financial situation or needs. Members should read the Member Booklet issued by bcu in relation to the Merger. Voting for or against the Merger is a matter for individual members based on their personal circumstances and the nature of their relationship with bcu, including the products and services they use and the importance they place on these products and services as well as their expectations of the benefits of being a member of P&N Bank. Members who are in doubt as to the action they should take in relation to the Merger should consult their own professional adviser.
2.2 Basis of Evaluation Regulatory Guidelines The Australian Securities and Investments Commission (“ASIC”) has issued Regulatory Guide 111 which establishes guidelines in respect of independent expert’s reports. ASIC Regulatory Guide 111 differentiates between the analysis required for “control” transactions (essentially, where one party acquires more than 20% of another party) and other transactions. In the context of control transactions (whether by takeover bid, scheme of arrangement, the issue of securities, selective capital reduction or buyback), the expert is required to distinguish between “fair” and “reasonable”. Fairness involves a comparison of full underlying value (including a premium for control) of the target entity and the value of the consideration offered. A “fair” transaction will always be “reasonable” but a “reasonable” transaction will not necessarily be “fair”. Reasonableness involves an analysis of other factors that members might consider prior to deciding to vote in favour or against a transaction. This may involve factors such as the likelihood of an alternative offer and alternative transactions that could realise value. A transaction could be considered “reasonable” if there were valid reasons to vote in favour of it notwithstanding that it was not “fair”. There is no legal definition of the expression “in the best interests”. However, Regulatory Guide 111 provides guidance that control transactions that are “fair and reasonable” or “not fair but reasonable” will be in the best interests of members. For most other transactions, the expert is to weigh up the advantages and disadvantages of the proposal for members. This involves a judgement on the part of the expert as to the overall commercial effect of the proposal, the circumstances that have led to the proposal and the alternatives available. The expert must weigh up the advantages and disadvantages of the proposal and form an overall view as to whether the members are likely to be better off if the proposal is implemented than if it is not. If the advantages outweigh the disadvantages, the transaction will be in the best interests of members. Best Interests Opinion It could be argued that the Merger is a control transaction as bcu’s business is transferred to P&N Bank. Under this approach, “fair” and “reasonable” would need to be examined separately. Grant Samuel has considered whether using the “fair” and “reasonable” tests applicable to a control transaction is
5
58 Bananacoast Community Credit Union Ltd
appropriate in the case of the Merger. However, as bcu members are effectively swapping an interest in one mutual (bcu) for an interest in another mutual (P&N Bank) rather than exchanging their interest for cash and/or marketable scrip in the acquiring entity (and giving up the benefits of their existing membership8), Grant Samuel considers that the application of a “fairness” test is not meaningful and potentially misleading: . a membership interest in a mutual such as bcu has no current realisable value (other than repayment of the issue price of $10 (to the extent that this has been paid up) on ceasing to be a member). Customers must be members and any “value” is attributed to being an active customer. Membership of bcu can cease or be cancelled on repayment of the issue price of $10 (to the extent that that this amount has been paid up) if a member is not an active customer (e.g. if a customer repays their loan in full and requests that their membership cease or if a customer’s only account is a dormant deposit account9). In these circumstances, members are not entitled to any other “value”. Past members have no entitlement to any “value”, despite contributing to bcu’s profits and reserves while members. Similarly, a membership interest in P&N Bank has no current realisable value in the conventional sense; . any underlying “value” within the entity is not able to be accessed by members unless bcu is wound up (voluntarily or involuntarily) or the bcu Board takes action to change the status of bcu (e.g. by way of demutualisation) and the necessary majority of members approve this change. Neither of these actions is currently contemplated. Similar issues apply to P&N Bank which plans to remain a mutual entity. In this sense, any “value” in either entity is contingent in nature. In addition, bcu members are not giving up contingent value (e.g. for a cash payment) but instead are exchanging the contingent value in bcu for contingent value in P&N Bank (albeit that the quantum, basis of distribution and other terms and conditions of these rights may be different). The existing rights of bcu members therefore cannot be “valued” in any meaningful sense (there is no “market value”) and cannot be compared directly with the “value” of rights as members of P&N Bank; and . the real value of membership is in the products, services and other benefits made available to members which will vary from member to member depending on the extent to which members choose to utilise the products and services and take advantage of the benefits offered. This applies to membership of both bcu and P&N Bank. Consequently, in Grant Samuel’s view, even if the Merger is a control transaction, it is not possible to form a view on whether the Merger is “fair” (as that term is defined under ASIC’s Regulatory Guides). As a result, Grant Samuel has evaluated the Merger for the purposes of the “best interests” opinion by assessing the overall impact on the members of bcu and has formed a judgement as to whether the expected benefits outweigh any disadvantages and risks that might result. To the extent possible, Grant Samuel has compared quantifiable benefits with quantifiable disadvantages. However, many of the potential benefits and disadvantages are by their very nature difficult, or even impossible, to quantify or verify. In this context, the overall conclusion as to whether the advantages of the Merger outweigh the disadvantages is to a large extent subjective. In forming its opinion as to whether the advantages of the Merger outweigh the disadvantages, Grant Samuel has considered the following: . the business and financial prospects for bcu as a stand-alone entity and the impact of the Merger on these prospects;
______8 In these situations, the acquiring entity will typically have a single objective of maximising returns to shareholders and will have no mandate to provide ongoing benefits to members as customers (or to return value to members as customers). 9 A dormant deposit account is one on which there has been no transactions for at least one year.
6
Member Booklet 59
. the effects of the Merger on bcu members (e.g. products and services offered); . the current rights of bcu members and their rights as P&N Bank members; . the contingent value attributable to bcu members and the circumstances in which this value could be accessed; . the impact of the Merger on the ability of bcu to enter into alternative transactions that might realise value for bcu members; . any other advantages and benefits arising from the Merger; and . the costs, disadvantages and risks of the Merger. If the advantages outweigh the disadvantages, the Merger will be in the best interests of members. Fair and Reasonable Opinion There is no regulatory requirement for the “fair and reasonable” opinion in relation to the benefits being provided to bcu members. The requirement for the opinion is contained in Schedule 5 to the bcu Constitution, which sets out the procedure for dealing with a proposed demutualisation of bcu. Although the provisions of Schedule 5 do not apply to the Merger, it would be expected that the same interpretation of “fair and reasonable” would apply to the opinion in relation to the benefits being provided to bcu members. No definition of the expression “fair and reasonable” is provided in the bcu Constitution. As discussed above, “fair” and “reasonable” are, for regulatory purposes, regarded as two separate tests, where “fairness” involves a comparison of the value of the target company to the value of the consideration offered and “reasonableness” relates to other qualitative factors that members should consider before deciding to vote for or against a transaction. Application of Regulatory Guide 111 requires that this interpretation of “fair and reasonable” apply in bcu’s case. However, for the reasons explained above, in Grant Samuel’s view, it is not possible to form a view on whether the benefits being provided to members are “fair” (as that term is defined under ASIC’s Regulatory Guides) and, as a result, Grant Samuel has only considered whether the benefits being provided to members are “reasonable”. For the purposes of this analysis, Grant Samuel has assessed whether the advantages of the benefits being provided to bcu members outweigh the disadvantages. If the advantages outweigh the disadvantages, the benefits being provided to bcu members will be “reasonable”. This is the same test used in forming a view on whether the Merger is in the best interests of bcu members and requires that the same factors be addressed.
2.3 Sources of Information The following information was utilised and relied upon, without independent verification, in preparing this report: Publicly Available Information . Member Booklet (including earlier drafts); . P&N Bank Member Information Document (including earlier drafts); . summarised annual reports of bcu for the four years ended 30 June 2018; . detailed annual report of bcu for the year ended 30 June 2018; . bcu Constitution; . annual reports for P&N Bank for the four years ended 30 June 2018; . P&N Bank Constitution;
7
60 Bananacoast Community Credit Union Ltd
. press releases and media presentation material by bcu and P&N Bank including information available on their websites; and . recent press articles and other research on bcu, P&N Bank and the mutual and Australian banking sectors. Non Public Information provided by bcu . MIA between bcu and P&N Bank dated 1 April 2019; . draft Section 20 Statement prepared by bcu and P&N Bank; . financial performance for bcu for the six months ended 31 December 2018 and financial position of bcu at 31 December 2018; . FY1910 budget and FY20-FY21 forecasts for bcu prepared by bcu management; . the combined bcu and P&N Bank (i.e. P&N Bank after completion of the Merger or the “Continuing Entity”) financial model for FY19 to FY21; . due diligence reports on P&N Bank and the Merger prepared by bcu’s financial, legal and accounting advisers; and . other confidential documents, board papers, presentations and working papers. Non Public Information provided by P&N Bank . financial performance for P&N Bank for the six months ended 31 December 2018 and financial position of P&N Bank at 31 December 2018; . FY19 budget and FY20-FY21 forecasts for P&N Bank prepared by P&N Bank management; and . other confidential documents, board papers, presentations and working papers. In preparing this report, representatives of Grant Samuel held discussions with, and obtained information from, senior management of bcu and its advisers and senior management of P&N Bank. Grant Samuel was also provided with access to P&N Bank’s data room and limited access to bcu’s data room.
2.4 Limitations and Reliance on Information Grant Samuel believes that its opinion must be considered as a whole and that selecting portions of the analysis or factors considered by it, without considering all factors and analyses together, could create a misleading view of the process employed and the conclusions reached. Any attempt to do so could lead to undue emphasis on a particular factor or analysis. The preparation of an opinion is a complex process and is not necessarily susceptible to partial analysis or summary. Grant Samuel’s opinion is based on economic, business trading, financial and other conditions and expectations prevailing at the date of this report. These conditions can change significantly over relatively short periods of time. If they did change materially, subsequent to the date of this report, the opinion could be different in these changed circumstances. This report is also based upon financial and other information provided by bcu and its advisers and P&N Bank. Grant Samuel has considered and relied upon this information. bcu has represented in writing to Grant Samuel that to its knowledge the information provided by it was then, and is now, complete and not incorrect or misleading in any material respect. Grant Samuel has no reason to believe that any material facts have been withheld.
______10 FYXX is the year end 30 June 20XX (e.g. FY19 is the year end 30 June 2019).
8
Member Booklet 61
The information provided to Grant Samuel has been evaluated through analysis, inquiry and review to the extent that it considers necessary or appropriate for the purposes of forming an opinion as to whether the Merger is in the best interests of bcu members and whether the benefits being provided to bcu members are fair and reasonable having regard to any loss of rights and change as to voting rights and rights to participate in the reserves and profits of bcu. However, Grant Samuel does not warrant that its inquiries have identified or verified all of the matters that an audit, extensive examination or “due diligence” investigation might disclose. While Grant Samuel has made what it considers to be appropriate inquiries for the purposes of forming its opinion, “due diligence” of the type undertaken by companies and their advisers in relation to, for example, prospectuses or profit forecasts, is beyond the scope of an independent expert. While Grant Samuel has had access to the due diligence reports on P&N Bank and the Merger prepared by bcu’s financial, accounting and legal advisers, the due diligence reports on bcu prepared by P&N Bank’s accounting and legal advisers have not been provided to Grant Samuel and Grant Samuel is not in a position, nor is it practicable, to undertake its own “due diligence” investigation of the type undertaken by accountants, lawyers or other advisers. Accordingly, this report and the opinions expressed in it should be considered more in the nature of an overall review of the anticipated commercial and financial implications rather than a comprehensive audit or investigation of detailed matters. An important part of the information used in forming an opinion of the kind expressed in this report is the opinions and judgement of management. This type of information was also evaluated through analysis, inquiry and review to the extent practical. However, such information is often not capable of external verification or validation. Preparation of this report does not imply that Grant Samuel has audited in any way the management accounts or other records of bcu or P&N Bank. It is understood that the accounting information that was provided was prepared in accordance with generally accepted accounting principles and in a manner consistent with the method of accounting in previous years (except where noted). The information provided to Grant Samuel included: . bcu’s FY19 budget prepared by bcu management and adopted by the directors of bcu; . bcu’s FY20-FY21 forecasts prepared by bcu management; . P&N Bank’s FY19 budget prepared by P&N Bank management and adopted by the directors of P&N Bank; . P&N Bank’s FY20-FY21 forecasts prepared by P&N Bank management; and . FY19-FY21 pro forma financial information for the Continuing Entity, together, the “forward looking information”. Grant Samuel has had regard to the forward looking information in undertaking its analysis but has not relied upon it in forming its opinions. Given the nature of the transaction, the forward looking information is not the fundamental basis for assessing the Merger. Rather, other factors such as the implications for bcu’s business and its members are more important. In forming its opinion, Grant Samuel has also assumed that: . matters such as title, compliance with laws and regulations and contracts in place are in good standing and will remain so and that there are no material legal proceedings, other than as publicly disclosed; . the assessments by bcu and its advisers with regard to legal, regulatory, tax and accounting matters relating to the Merger are accurate and complete;
9
62 Bananacoast Community Credit Union Ltd
. the information set out in the Member Booklet sent by bcu to its members is complete, accurate and fairly presented in all material respects; . the publicly available information relied on by Grant Samuel in its analysis was accurate and not misleading; . the Merger will be implemented in accordance with its terms; and . the legal mechanisms to implement the Merger are correct and will be effective. To the extent that there are legal issues relating to assets, properties, or business interests or issues relating to compliance with applicable laws, regulations, and policies, Grant Samuel assumes no responsibility and offers no legal opinion or interpretation on any issue.
10
Member Booklet 63
3 Overview of the Australian Lending Market
3.1 Lending Market Size Total gross loans and advances for all Authorised Deposit-taking Institutions (“ADIs”) in Australia has grown from approximately $2.0 trillion in December 2008 to $3.3 trillion in December 2018, representing average growth of 5.3% per annum over the past 10 years:
AUSTRALIAN ADI BANKING SECTOR – GROSS LOANS AND ADVANCES 2009 TO 2018
4.0 10.0%
3.0 7.5%
2.0 5.0% $ trillions
1.0 2.5%
0.0 0.0% 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Year ended 31 December Housing loans Other loans Growth in gross loans and advances
APRA Quarterly Authorised Deposit-taking Institution Performance Statistics, December 2018 (released 20 March 2019) Housing loans are the largest credit exposure in the Australian banking system, representing around 60% of gross loans and advances. Over the past 10 years, the value of all housing loans financed by ADIs has grown from approximately $1.0 trillion to $2.0 trillion, representing average growth of 6.9% per annum. Growth in the value of housing loans has been driven by a growing population, stable and low unemployment and historically low interest rates, which has resulted in an increase in the volume and size of housing loans, across both owner occupiers and investors (although over the period from 2015 to 2018, regulatory policies slowed investor loan growth11). More recently (in 2018 and 2019), growth in the value of housing loans has been more moderate, reflecting tighter lending criteria from the banks (following the Final Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (“Royal Commission”) released in February 2019), a lift in variable mortgage interest rates and falling house prices. The chart above shows gross loans and advances for ADIs. It excludes loans and advances provided by other participants in the Australian lending market (albeit their contribution to the lending market is currently relatively minor) such as:
______11 APRA introduced restrictions for ADIs on interest-only loans (from December 2014, lifted in April 2018) and investor loans (March 2017, lifted in January 2019) to address concerns in relation to increasing housing prices, high and rising household indebtedness, subdued household income growth, historically low interest rates and strong competitive pressures.
11
64 Bananacoast Community Credit Union Ltd
. traditional non-ADI financial institutions, primarily finance companies (including general financiers and pastoral finance companies)12, securitisers13 (such as Bluestone Mortgages Australia, Firstmac, Pepper Group, Resimac Group, LaTrobe Financial Services, Liberty Financial) and money market corporations14. Traditional non-ADI financial institutions had total assets of approximately $350 billion at 31 December 201815; and . financial technology (“fintech”) businesses operating in lending markets. These fintechs generally engage in peer to peer lending or crowdfunding and operate in niche markets such as personal loans (e.g. MoneyPlace, Society One) and small-to-medium sized enterprise (“SME”) loans (e.g. Moula Money, Judo Capital, OnDeck Australia), but participants are also starting to operate in the home loan market (e.g. Tic:Toc, a start-up that launched in early 2019). It has been estimated that the alternative finance market raised US$1.15 billion (approximately $1.6 billion) in 201716 . Participants The Australian ADI banking sector is dominated by the major banks17, which held around 80% of gross loans and advances and deposits at 31 December 2018:
AUSTRALIAN ADI BANKING SECTOR – MARKET SHARE AT 31 DECEMBER 2018 GROSS LOANS AND ADVANCES DEPOSITS
3% 4% 10% 10%
7% 7%
80% 79%
Major banks Other domestic banks Foreign banks Mutual ADIs
APRA Quarterly Authorised Deposit-taking Institution Performance, December 2018 (released 20 March 2019) Mutual ADIs collectively represent only around 3-4% of the Australian banking sector (based on either gross loans and advances or deposits). While mutual ADIs have a larger share of the housing loan market at 4.5%, this is at the expense of the foreign banks (that tend to focus on specific market segments) as the major banks’ share of the housing loan market is approximately 84%.
______12 Finance companies provide loans to households and SMEs and raise funds from the wholesale markets and retail investors (through debentures and unsecured notes). 13 Securitisers are special purpose vehicles that issue securities backed by pools of assets (e.g. residential-mortgage backed securities). The securities are usually credit enhanced (e.g. through the use of guarantees from third parties). 14 Money market corporations operate primarily in wholesale markets, borrowings from, and lending to, large corporations and government agencies (as well as providing other services). 15 Source: Reserve Bank of Australia Statistical Tables, Assets and Liabilities, Assets of Financial Institutions (B1). 16 Source: The 3rd Asia Pacific Region Alternative Finance Industry Report, November 2018. 17 The major banks are Commonwealth Bank of Australia (“CBA”), Westpac Banking Corporation (WBC”), Australia and New Zealand Banking Group Limited (“ANZ”) and National Australia Bank Limited (“NAB”).
12
Member Booklet 65
The charts above exclude loans and advances provided by traditional non-ADI financial institutions and fintech businesses. Tighter regulation of ADIs over recent years has contributed to some lending activities migrating to less regulated non-ADI lenders. However, lending by the traditional non-ADI sector has remained steady at around 7.5% of the financial system18, with limited growth over the past 10 years (0.5% per annum) largely as a result of the significant decline in lending by securitisers following the global financial crisis. The market share of fintechs is extremely small, but has shown very high growth rates of more than 150% on average per annum since they entered the Australian finance system in 2013. At 31 December 2018, the mutual ADI sector comprised 70 entities ranging in size from $15.6 billion to less than $150 million in total assets. The top 10 mutual ADIs represented approximately 68% of the total mutual ADI sector (based on total assets). Despite their relatively small market share, over the 12 months ended 31 December 2018, mutual ADIs grew at more than double the rate of the major banks in their key markets of housing loans and deposits:
AUSTRALIAN BANKING SECTOR – GROWTH 12 MONTHS ENDED 31 DECEMBER 2018
ALL ADIs MAJOR BANKS MUTUAL ADIs Housing loans 4.5% 3.7% 8.1% Gross loans and advances 5.2% 4.6% 7.6% Deposits 3.2% 2.1% 6.0% APRA Quarterly Authorised Deposit-taking Institution Performance Statistics, December 2018 (released 20 March 2019) Other participants in the Australian banking sector are neobanks such as Volt Bank Limited (“Volt Bank”), Xinja Holdings Limited (“Xinja”) and 86 400 Holdings Pty Ltd (“86 400”). Neobanks operate only via digital platforms and are in the start-up phase in Australia (but are much more established in the United Kingdom, the United States and Europe). Volt Bank received a full banking licence in January 2019 (i.e. it is an ADI) and expects to launch during 2019. Xinja was granted a restricted banking licence in December 2018 and is in the process of applying for a full banking licence. 86 400 is also in the process of applying for a full banking licence and expects to launch in 2019.
3.2 Regulation The ADI sector of the Australian lending market is heavily regulated. APRA is the prudential regulator of the Australia financial services industry. It is responsible for overseeing the prudential framework under which ADIs must operate including, in particular, licencing and minimum capital requirements, capital adequacy, liquidity and credit quality. The capital adequacy requirements aim to ensure that ADIs maintain adequate eligible capital to act as a buffer against the risks associated with their activities (calculated on the basis of risk weighted assets, including allowances for securitisation, market risk and operational risk). Liquidity coverage ratios require Australian ADIs to hold sufficient liquid assets to meet 30 day net cash outflows projected under an APRA- prescribed stress scenario (designed to switch funding to more stable sources and increase holdings of liquid assets). More recent regulatory measures have focused on the stability of the financial system and have included: . the imposing, and then lifting, of restrictions for ADIs on interest-only loans (December 2014 to April 2018) and investor loans (March 2017 to January 2019); . an APRA review of capital and risk across ADIs that has resulted in proposed increased capital requirements (primarily for the major banks), including:
______18 Source: Reserve Bank of Australia Statistical Tables, Assets and Liabilities, Assets of Financial Institutions (B1), December 2018.
13
66 Bananacoast Community Credit Union Ltd
• a requirement for the major banks to meet a higher minimum capital requirement (approximately 150 basis points) compared to a lower increase of 50 basis points for ADIs using the standardised approach to risk weighted assets (to be implemented by 2020);
• a risk weighted asset floor for banks using the internal-ratings based approach (proposed implementation January 2021), which will result in the major banks applying a mandatory minimum risk weighting to their loan portfolios and requiring them to increase their capital position to support their lower risk-weighted loans; and
• further proposed charges (an additional 3% of capital) to make domestic systematically important ADIs (i.e. the major banks) “unquestionably strong” by 1 January 2024 (with an overall target of 4-5% additional capital over the long term); . an increased focus on values, culture and accountability, particularly following the APRA Prudential Inquiry into CBA and the release of the Royal Commission Final Report in February 2019, although regulatory changes did commence earlier. Examples of these changes include:
• the Banking Executive Accountability Regime (“BEAR”), designed to improve the operating culture of ADIs and increase transparency and accountability across the banking sector. BEAR has applied to the major banks since July 2018 and applies to all other ADIs (including mutual ADIs) from July 2019; and
• prioritising existing responsible lending obligations. ASIC’s Consultation Paper 309 Update to RG 209: Credit licensing: Responsible lending conduct (released on 14 February 2019, comments closed on 20 May 2019) sought feedback on ASIC’s proposals for updating guidance in this area. While the Royal Commission was focussed on the behaviour of banks only, alterations to Regulatory Guide 209 will apply to all providers of consumer credit in Australia; and . an increased focus on information security management. In late 2018, APRA released a new prudential standard CPS 234 Information Security, which sets out mandatory requirements for information security management for APRA regulated entities. The standard aims to strengthen the resilience of APRA regulated entities against information security incidents (including cyber-attacks) and their ability to respond swiftly and effectively in the event of a breach. Following release of the Report on Reforms for Cooperatives, Mutuals and Member Owned Firms (the “Hammond Report”) in July 2017 and the Federal Government’s acceptance of all recommendations in the report, a number of positive legislative changes have been implemented (or proposed) for mutual ADIs which will: . reduce the risk of mutual ADIs losing their mutual status when raising capital (by amending the definition of a mutual entity and removing uncertainty in determining when a mutual entity triggers the demutualisation provisions in the Corporations Act); and . remove certain capital restrictions on mutual ADIs, allowing mutual ADIs to raise Tier 1 capital through the issue of special capital instruments (mutual capital interests) so that they are no longer reliant on retained earnings to meet their prudential capital requirements. This change puts mutual ADIs on a more equal footing with listed ADIs, giving them greater access to capital to grow and increasing competition the in banking sector. Non-ADI financial institutions are not subject to the same level of regulation as ADIs. Australian regulators appear to be supportive of fintechs (e.g. the ASIC Innovation hub which is designed to assist Australian fintech start ups with consultation in relation to regulatory compliance and the release of Regulatory Guide 257 Testing fintech products and services without holding an AFS or credit licence, which establishes a licence exemption enabling fintechs to test their products without the need for required licences (i.e. AFSL, ACL)). However, legislation passed in early 2018 does require larger non-ADI lenders to regularly disclose the scale of their lending activity to APRA and also provides APRA with powers to impose rules on non-ADIs if their activities are judged to pose a material threat to financial stability.
14
Member Booklet 67
3.3 Market Conditions and Outlook Market Conditions Market conditions in the Australian banking sector are very competitive, driven by: . the continuing low loan growth and low interest rate environment putting ongoing pressure on net interest margins and cost to income ratios. Over the past 12-18 months, these conditions have intensified due to:
• weakness in housing prices, particularly in the Sydney and Melbourne capital city markets. While the pace of decline in house prices has slowed, the geographic spread has widened to other housing markets; and
• rising wholesale funding costs; . increasing and changing regulatory requirements and their impact on lending growth, capital requirements and compliance costs. There is concern that tighter lending policies (albeit there has subsequently been some relaxation of these policies) and improved ethical behaviour from a greater focus on responsible lending laws has resulted in delays to the approval process, an increase in the cost of loans and lower loan capacity and volumes; . constant and rapid change and the substantial and ongoing investment required in technology and innovation to keep up with digital transformation to meet evolving customer preferences. Recent new developments in this area that ADIs will need to incorporate into their offerings to remain competitive include:
• the New Payments Platform (“NPP”) open access infrastructure for fast (i.e. simply addressed, real time, 24/7) payments in Australia which was developed via industry collaboration and launched in February 2018. While the NPP infrastructure supports the independent development of “overlay” services to offer innovative payment services to end-users, the only application offered to date is OSKO (“Osko”) (built by the BPAY Group), which allows payments to be sent and received in real time using bank account details or PayID (which allows customers to link their bank account details to their mobile number, email address, Australian Business Number (“ABN”) or organisation name);
• Open Banking, which will provide accredited third parties with access to specific forms of customer banking data given the appropriate customer authorisation. The major banks are required to be Open Banking compliant by July 2019 with all other ADIs (including mutual ADIs) complaint by July 2020; and
• Comprehensive Credit Reporting (“CCR”), which became mandatory in July 2018 (to be phased in by July 2019) and changes the type of consumer credit information that can be collected by credit bureaus and used by credit providers when making a lending decision. Under CCR, positive data is able to be included in credit reports; and . increasing relevance of traditional non-ADI financial institutions, fintechs and digital banks. Growth in residential mortgage lending by non-ADI financial institutions remains high and well above that of ADIs (albeit from a low base and partly because higher interest rates being charged by banks for investor and interest only loans have made non-ADI financial institutions more competitive). Barriers to entry are decreasing, with APRA issuing restricted ADI licences to digital banks and requiring a lower amount of capital to use the term “bank”. Fintechs are capitalising on their focus on the customer experience. This intense competition in the Australian banking sector has been exacerbated by: . the decline in trust in the financial services industry generally following the release of the Royal Commission Final Report (albeit the focus has been on the major banks); and
15
68 Bananacoast Community Credit Union Ltd
. up until mid-May 2019, the potential for changes in government policy/regulation after the Federal election, although these concerns have abated following the return of the Coalition government. Outlook for Mutual ADIs In this increasingly competitive environment, many mutual ADIs are also dealing with: . stagnant or declining membership and an ageing membership base, in part due to the majority of mutual ADIs having a regional focus; . a predominantly retail deposit funding base and limited access to alternative funding sources. While mutual ADIs can now raise Tier 1 capital through mutual capital instruments, these instruments are new and untested and require an independent legal opinion on eligibility and other matters and the prior approval of APRA; . increased capital and liquidity requirements from the implementation of Basel III and the associated compliance and administration impact; . determining their technological strategy and where to deploy their limited resources; and . deteriorating profitability and high cost bases. The average cost to income ratio for mutual ADIs outside of the top 10 is around 83%, reflecting their commitment to provide a high quality of service to members (e.g. branch structure and staffing levels). The top 10 mutual ADIs are more cost efficient (with cost to income ratios of around 72%) but are still much less efficient than the major banks (at around 42%). This combination of factors creates challenges for mutual ADIs as they seek to deliver a relevant proposition to members. The overriding challenge is to achieve sustainable growth and profitability while continuing to operate as member owned and community based organisations, providing high levels of service to customers. In an attempt to counteract these issues, almost one third (21 out of a total of 70 at 31 December 2018) of mutual ADIs had converted from building societies and credit unions to mutual banks19 to take advantage of the perceived security and strength associated with including the word “bank” in their name and to attract a younger generation of members (who do not understand the concept of building societies and credit unions). Mutual banks differentiate themselves from the major banks and regional banks by remaining customer owned and focused on delivering value to their customers. While there is a general belief that conversion to mutual bank status has had a positive impact, it is difficult to measure this in isolation from other factors. There have been some recent positive outcomes for mutual ADIs: . the Federal government and regulatory bodies appear to be supportive of a sustainable competitive alternative to the major banks (e.g. recent regulatory changes to enable access to alternative funding vehicles); . the Productivity Commission Review into Competition in the Australian Financial System (released in June 2018) has recommended regulatory change to improve the ability of small ADIs (including mutual ADIs) to compete with the major banks; . negative impacts for the major banks from the Royal Commission provide an opportunity for the mutual ADI sector and its focus on customer and trust (although the erosion of trust has had an impact across the sector e.g. BEAR applies to all ADIs); and
______19 Since 2010, mutual ADIs with Tier 1 capital of at least $50 million have been able to apply to APRA to present themselves as a bank.
16
Member Booklet 69
. the shift to Open Banking and the introduction of CCR should also provide an opportunity for mutual ADIs (and non-ADI financial institutions) to capture a greater share of lending from the major banks as customers place greater emphasis on trust, transparency, affordability, convenience and choice. However, scale is becoming increasingly critical to remain competitive and deliver value to members. The majority of mutual ADIs are sub-scale. There has been a substantial decline in the number of mutual ADIs over the past five years, with the number falling from 100 in December 2013 to 70 in December 2018. The reduction in the number of mutual ADIs is predominantly a result of mergers. Mergers provide economies of scale and enable investment in technology to enhance the customer experience. The rate of consolidation in the mutual ADI sector had been increasing, from three in FY15, to seven in FY16 and nine in FY17. Although only five mergers were completed in FY18, Grant Samuel is aware of a further five mutual ADI mergers that have been proposed or completed in the first nine months of FY19. The disparity between the major banks, other domestic banks and mutual ADIs, as well as between the largest and other mutual ADIs, for selected key parameters, is illustrated in the table below:
AUSTRALIAN BANKING SECTOR – KEY PARAMETERS 2018 FINANCIAL YEAR
OTHER MUTUAL ADIs MAJOR BANKS DOMESTIC 21 21 BANKS20 TOP 10 BALANCE OVERALL Loan growth 3.1% 4.1% 6.6% 5.7% 6.3% Net interest margin 2.00% 1.87% 1.95% 2.23% 2.04% Cost to income ratio 42.2% 58.3% 72.0% 83.4% 76.4% Cash earnings $29.5 billion $1.3 billion $333.6 million $118.8 million $452.4 million Average cash earnings $7.4 billion $222.9 million $33.4 million $3.1 million $9.4 million Return on equity 12.5% 8.8% 6.0% 3.8% 5.2% Loan to deposit ratio 131.9% 124.2% 111.6% 91.5% 104.5% Capital adequacy ratio 14.8% 13.8% 16.1% 16.9% 16.4% PwC Major Banks Analysis, November 2018, KPMG Mutuals Industry Review 2018, company annual reports While consistently high levels of member satisfaction (in excess of 90%) indicate there is a role for mutual ADIs in the Australian banking sector, the table above clearly shows that scale is critical for mutual ADIs to remain sustainable, relevant and competitive over the long term.
______20 The other domestic banks included in this analysis are Bendigo & Adelaide Bank, Suncorp Bank, Bank of Queensland, ME Bank, MyState and Auswide Bank. 21 Based on an analysis of 48 mutual ADIs, representing over 90% of the mutual ADI sector by total assets and profit before tax.
17
70 Bananacoast Community Credit Union Ltd
4 Profile of bcu
4.1 Background bcu is an Australian ADI regulated by APRA. It was established by a group of banana growers on the New South Wales North Coast in 1970, as The Nambucca Banana Growers’ Federation Members Credit Union, to lend money to other Banana Growers’ Federation members in the region. At 30 June 1971, it had 58 members and assets of $6,809. It initially had a common bond of Banana Growers’ Federation members in Nambucca, although this was subsequently extended to cover Banana Growers’ Federation members in other regions along the New South Wales Coast and, in 1975, to residents of those regions, at which time it changed its name to Bananacoast Community Credit Union Ltd. In 2003, it extended its bond area north to the Noosa River in Queensland. The bond was subsequently removed, and bcu now has an open membership. While the majority of its growth has been organic, bcu has also grown through mergers with other credit unions. In 1985, it merged with Mid North Coast Credit Union (at the request of regulatory authorities due to financial difficulty) and in 2005, it merged with Big River Credit Union. Today, bcu has almost 55,000 members, an asset base of $1.7 billion and 21 stores extending from the Sunshine Coast in Queensland to Port Macquarie on the New South Wales North Coast. It remains a mutual, member based organisation, focused on local community banking and committed to its original purpose of providing a local alternative to the big banks, delivering leading products and services that meet members’ needs and reinvesting in the local community though a range of sponsorships and donations.
4.2 Structure and Governance Structure bcu is an Australian public company limited by shares and is owned by its members. bcu’s corporate structure is summarised below:
bcu – CORPORATE STRUCTURE
bcu MEMBERS
100%
bcu (PUBLIC COMPANY LIMITED BY SHARES)
100%
LOAN SECURITISATION SPECIAL PURPOSE VEHICLE (ARIERA TRUST 2018 SERIES NO. 1)
bcu Governance bcu is overseen by a Board consisting of six non-executive directors. Under its Constitution, bcu’s Board must comprise no less than five directors. Each director holds one bcu redeemable preference share. bcu has three Board committees (covering risk, governance and audit) to assist it in carrying out its responsibilities.
18
Member Booklet 71
Operational management is provided by the Chief Executive Officer (“CEO”) and nine senior executives responsible for governance and risk, credit, operations, company secretarial, sales and service, marketing, finance, human resources and products. bcu has approximately 211 employees (199 full time equivalent employees).
4.3 Membership and Member Rights Membership bcu has an open membership. Any person is eligible for membership of bcu in accordance with bcu’s Constitution. Customers (other than other member owned ADIs) must be members. bcu issues members with redeemable preference shares, and can issue only one redeemable preference share to any person, at an issue price of $10 per share. Redeemable preference shares may be issued as wholly paid or partly paid. In the case of minors, redeemable preference shares are issued as partly paid to $2. More recently (and in line with other mutual ADIs), bcu has issued redeemable preference shares on which the payment of the issue price has been deferred (i.e. the shares are paid up to nil). Under its Constitution, bcu is also able to issue other types of shares, being Tier 1 shares22, redeemable capital preference shares23 and bonus shares24. bcu has never issued any Tier 1 shares or redeemable capital preference shares. It is understood that bcu has historically issued bonus shares, but these shares have subsequently been cancelled. Membership increased in FY16 and FY17, but has subsequently been in decline. The reasons for the increase and the decline are unclear, although bcu has indicated that the increase may have in part been due to the introduction of Scoot Super Saver bank accounts for children. The decline in FY18 and YTD25 FY19 may reflect the impact of legal actions involving the former bcu CEO. As a result, the current number of members is not materially different to the number of members at June 2016:
bcu - MEMBERSHIP
AT 30 JUNE AT 31 MARCH 2015 2016 2017 2018 2019 Opening members 53,187 53,228 54,957 56,570 55,817 New members 5,262 5,953 6,291 6,341 4,037 Redeemed members (5,221) (4,224) (4,678) (7,094) (5,384) Closing members 53,228 54,957 56,570 55,817 54,470 bcu Over the last 4¾ years, membership growth has averaged only 0.5% per year. The number of members who have redeemed their redeemable preference share (effectively as a result of no longer being a ______22 Tier 1 shares have no right to vote, the right to participate in dividends, an entitlement to repayment of paid up capital and any dividend accrued in the event of a winding up but no entitlement to share in any surplus assets or profits. They rank behind redeemable preference shares for repayment of capital on a winding up and may be redeemed at the option of the holder or bcu in accordance with their terms of issue. 23 Redeemable capital preference shares have a minimum term of five years and can only be issued to members (with a maximum 10% holding by any one member). They have no right to vote, the right to non-cumulative preferential dividends (except over Tier 1 share dividends), an entitlement to repayment of paid up capital and any dividend accrued in the event of a winding up but no entitlement to share in any surplus assets or profits. They rank behind all creditors including depositors and redeemable preference shares for repayment of capital and the amount of any dividend due but not paid. They are transferable and may be redeemed at the option of the holder or bcu in accordance with their terms of issue. 24 The payment of any dividend can be satisfied wholly or partly by the issue of bonus shares. Bonus shares have an issue price of $1 and are issued fully paid. They have no voting rights and no entitlement to distribution of income or capital on a winding up or otherwise. They are not transferrable but are transmissible and are redeemable in certain circumstances. 25 YTD is year to date.
19
72 Bananacoast Community Credit Union Ltd
customer) has generally been increasing, and in FY18 and YTD FY19, the number of new members has not been sufficient to offset the redeemed members (at 75-90% of redeemed members). This may in part reflect bcu’s demographics, with more than 60% of members over 55 years of age. bcu has not retained historical records of the number of active members but has estimated that approximately 3,800 current members are dormant members. As a result, active members represent around 93% of total members. Member Rights The rights and obligations of bcu members, as set out in the bcu Constitution, are summarised below: bcu – MEMBER RIGHTS AND OBLIGATIONS
RIGHT/OBLIGATION COMMENT Quorum 10 members entitled to vote on a resolution at the meeting (present in person or by proxy) Two members must nominate a candidate A minimum of five directors Appointment of directors All directors are elected by members (other than casual vacancies which are appointed by the directors but must be elected by members at the next Annual General Meeting (“AGM”) One vote per member (other than a minor) Voting Entitlement to vote by proxy Dividends No entitlement to dividends At request of member Redemption Entitled to repayment of issue price ($10) (to the extent that this has been paid up) Termination/cessation of On expulsion, cancellation for a dormant account26, redemption, bankruptcy, winding up or membership death Transfer Shares are not transferable Transmission On bankrupcy, winding up or death Liability limited to unpaid amount on share Entitled to repayment of issue price ($10) (to the extent that this has been paid up) Participation in winding up Equal entitlement to any surplus assets On voluntary winding up, members may resolve to transfer any surplus to any company with a mutual structure Special resolution (at least 75% of members) where at least 25% of members who have been Transfer of business members for at least 24 months vote Participation on demutualisation Must have been a member for at least 12 months (“eligible members”)27 Unless recommended by the directors, demutualisation resolution cannot be put to members if the same or a substantially similar resolution was put and not passed at a Requirements for demutualisation meeting held within the prior three years Special resolution (at least 75% of eligible members) where at least 5% of eligible members vote and at least 25% of members who have been members for at least 24 months vote27 bcu Constitution
4.4 Business Operations and Strategy Business Operations bcu provides the following retail banking products and services: . deposit products:
______26 bcu may cancel a member’s share if a member’s only account with bcu is a dormant account. 27 Or for any proposal that is deemed to be a “Demutualisation Resolution” (even if there is no demutualisation under the Corporations Act).
20
Member Booklet 73
• transaction and savings accounts (personal and business), including products for children 0-12 years (combined transaction and savings account with bonus interest rate) and students 13-24 years (online savings account with high bonus interest rate);
• term deposits (including farm management deposits for primary producers); and
• retirement savings accounts (“RSAs”), a low cost, capital guaranteed investment product for superannuation and retirement savings; and . lending products: • home loans (owner occupied and investment);
• commercial loans (SME and property finance); and
• personal loans (secured, unsecured, car) and credit cards. The composition of bcu’s loan book (by type of loan and geography) is illustrated below:
bcu – COMPOSITION OF GROSS LOANS AND ADVANCES AT 30 JUNE 2018 LOAN TYPE GEOGRAPHY
3% 5% 16% 22%
73% 81%
Housing Commercial Personal New South Wales Queensland Other
bcu Although the majority of bcu’s loan book comprises housing loans in New South Wales, there is some diversification provided by the substantial commercial loan book (16% of gross loans and advances at 30 June 2018) and its presence in South East Queensland (22% of gross loans and advances at 30 June 2018). Approximately 25% of housing loan settlements in FY18 were sourced from mortgage brokers (with the balance originated in stores). Mortgage brokers primarily look to bcu for niche lending (e.g. high loan-to- value ratio, self-managed super fund and commercial lending). bcu collaborated with one of the original sponsors of the NPP, Australian Settlements Limited, to adopt Osko (the payments platform that allows payments to be sent and received in real time using bank account details or PayID) when it launched in February 2018.
21
74 Bananacoast Community Credit Union Ltd
bcu also has arrangements in place with third parties to provide to its members: . insurance products: • general insurance (home and contents, landlord, motor, caravan and trailer, boat28), travel insurance29 and consumer credit insurance issued by Allianz Australia Insurance Limited (“Allianz”);
• life insurance (Ezicover) issued by Zurich Australia Limited (“Zurich”); and
• lenders’ mortgage insurance issued by Genworth Mortgage Insurance Australia Limited and QBE Insurance (Australia) Limited (“QBE”); and . foreign exchange services: • foreign currency, where bcu acts as a distributor for the Foreign Currency Notes service, which is provided by Travelex Limited (“Travelex”);
• outward international transfers, where bcu uses AMEX to facilitate transfer of funds between bcu customers and overseas banks; and
• inward international transfers, where bcu uses an intermediary Australian bank (Westpac, ANZ, CBA or NAB) to facilitate transfer of funds between the overseas bank and bcu via Australian Settlements Limited. bcu’s distribution system includes: . a network of 21 stores, with 19 on the New South Wales North Coast and two in South East Queensland (South Brisbane and Maroochydore); . a contact centre (operating from 9.00am to 5.00pm, Monday to Friday AEST30); . access to almost 2,700 ATMs across Australia through an agreement that provides members with unlimited fee-free access to Westpac, St George, Bank SA and Coastline ATMs across Australia in addition to 49 bcu ATMs in its local regions31; and . digital platforms including telephone and internet banking, a mobile phone app (bcu Connect App), and ActivePay (a wristband that allows bcu members to tap and go without having to carry a card). bcu’s banking system and internet banking platform are provided under a long term arrangement with Ultradata Australia Pty Ltd (“Ultradata”) through its Ultracs software. It has a head office co-located with its Coffs Harbour store, and it also has a corporate office in Brisbane. bcu has received a number of awards in recent years including Money Magazine's Credit Union of the Year Award in 2016, recognition by Mozo, Canstar and Money Magazine for a number of its product developments in 2017 and Money Magazine’s Best of the Best Gold Award 2019 for Best Kids Savings Account – Non-Bank category. Community Involvement bcu has a commitment to ensure that profits are channelled back into the local community and is one of the largest overall donors to local charities, clubs and organisations across its main regions of Port Macquarie, Coffs Coast, Clarence Valley, Northern Rivers and the Sunshine Coast. It supports a variety of
______28 In relation to boat insurance, bcu is an agent of Club Marine Limited, an agent of Allianz and a member of the Allianz Group. 29 In relation to travel insurance, bcu arranges this insurance as agent for Allianz. Allianz travel insurance is issued and managed by AWP Australia Pty Ltd trading as Allianz Global Assistance, a member of the Allianz Group. 30 AEST is Australian Eastern Standard Time. 31 Although bcu members also have fee-free withdrawal access to CBA, NAB and ANZ ATMs across Australia following the removal of ATM fees by the major banks.
22
Member Booklet 75
events, programs and charities on a local and national scale, through a range of youth, sports and community focussed initiatives, including: . sponsorship of: • a number of local events including the bcu Coffs Tri (main sponsor since its inception in 2013), Ride Around the River (major sponsor of annual cycling event) and Scoot for Schools Cup (to encourage primary school students to do something active in their local community and give their schools a chance to win sporting equipment); and
• the bcu Brand Ambassador program, which offers support to young local individuals who wish to excel in their passions; . the Bill Ussher Scholarship, an annual award of $2,000 scholarships to 5-10 student members of bcu (aged 13+ years) and studying full-time at high school, TAFE or university to assist with their education expenses; and . the member 2 member program, where bcu businesses offer discounts, special deals and bonuses to all bcu members. In return, these bcu businesses are promoted to bcu members through bcu stores and online, giving them the opportunity to reach a wider audience, build repeat business and loyalty and attract new customers. Strategy bcu is committed to providing member-focused solutions to banking problems and keeping members’ interests at the core of its business. Its strategy as a stand-alone entity was most recently considered in early 2018. At this time, in the short term, its focus was to: . simplify its current product offer and continue to develop products in response to member needs and to support growth in key markets; . streamline and automate its online loan application and assessment process and deliver mobile banking initiatives to extend/improve the mobile banking experience for members; . emphasise staff training (core products knowledge, technical skills and sales and service skills) and accreditation (with formal accreditation programs for Store Ambassadors and Personal Lenders) and continue the store visitation program (implemented in January 2018) with the aim of identifying areas of improvement and providing tailored support to staff and management; . concentrate its marketing initiatives on digital improvements, brand and data (integrity, using technology to drive segmentation and marketing, predictive analytics, machine learning); and . increase its social media presence (grow Facebook and Instagram followers, establish a Youtube channel, enhance its Linkedin profile). More recent Board strategy discussions have focused on the strategic risks and challenges that bcu faces in continuing to provide an attractive banking offer for members. The bcu directors formed the view that bcu does not have the scale as a stand-alone entity to fund the investment required to mitigate these risks. The directors concluded that a merger with another mutual ADI was the most appropriate option to address the strategic challenges and risks. Since mid-2018, bcu’s strategy has focused on the process of identifying an appropriate merger partner, undertaking due diligence and agreeing the terms of the Merger.
23
76 Bananacoast Community Credit Union Ltd
4.5 Financial Performance The historical financial performance of bcu for the four years ended 30 June 2018 and the six months ended 31 December 2018 is summarised below:
bcu - FINANCIAL PERFORMANCE ($ MILLIONS)
YEAR ENDED 30 JUNE SIX MONTHS TO 31 DEC.
2015 2016 2017 2018 2018 ACTUAL ACTUAL ACTUAL ACTUAL ACTUAL32 Net interest income 37.0 41.9 44.5 47.0 23.3 Other income 8.7 9.4 9.4 10.0 4.5 Net operating income 45.7 51.3 53.9 57.0 27.8 Operating expenses (34.2) (36.3) (37.7) (39.8) (21.7) Impairment loss (0.7) (2.4) (2.6) (1.4) 0.2 Profit before tax 10.8 12.6 13.6 15.8 6.3 Tax expense (3.1) (3.8) (4.5) (5.1) (2.0) Profit after tax 7.7 8.8 9.1 10.7 4.3 Capital expenditure 0.7 0.8 0.3 1.6 1.3 STATISTICS Net interest margin 2.60% 2.83% 2.80% 2.81% 2.75% Cost to income ratio33 74.9% 70.9% 69.9% 69.8% 78.2% Impairment loss to loans and advances 0.06% 0.18% 0.19% 0.10% nmc34 Reported profit after tax margin 16.8% 17.1% 16.9% 18.8% 15.5% Return on assets35 0.75% 0.84% 0.86% 0.94% nc36 Return on equity 7.3% 7.7% 7.4% 8.0% nc Growth in net operating income +7.9% +12.0% +5.3% +5.7% nc Growth in reported profit after tax +70.1% +14.1% +4.1% +17.3% nc bcu and Grant Samuel analysis bcu has generated an increase in net profit after tax over the past four years, driven by growth in interest bearing assets while maintaining its net interest margin and limiting operational expenditure. Net profit before tax has grown at an average rate of 24% per annum over the past four years (and at almost 12% per annum over the past three years). The substantial growth achieved in FY15 was primarily the result of flat operating expenses (which resulted in a substantial decline in the cost to income ratio), in particular a reduction in occupancy expenses following termination of leases relating to bcu’s store network. Growth in FY16 came from a combination of strong loan growth and an increase in the net interest margin due to a change in the mix of lending products and a reduction in the size and mix of the funding pool, resulting in a further reduction in the cost to income ratio. The net interest margin and the cost to income ratio have remained relatively stable over the period from FY16 to FY18. Calculation of some ratios (i.e. net interest margin and cost to income ratio) has been impacted by changes to the classification of certain expense items that were previously netted against income but in FY17 and FY18 were classified as costs or costs that are being deferred in line with accounting policies.
______32 bcu’s financial performance for the six months ended 31 December 2018 is unaudited. 33 Cost to income ratio is calculated as operating expenses divided by net operating income. 34 nmc = not a meaningful calculation. 35 Return on assets is calculated as net profit before tax divided by average total assets. 36 nc = not calculated.
24
Member Booklet 77
Factors to consider in assessing bcu’s financial performance include: . the relatively high net interest margin reflects the impact of bcu’s substantial commercial loan portfolio which generates higher yields than its housing loan portfolio; . other income, while generally increasing over the past four years, has fallen from 19% of net operating income in FY15 to 17% in FY18. Other income is primarily banking fee income ($4.5 million in FY18) and mortgage servicing income ($5.0 million in FY18). Transactional banking fees have been relatively flat over the past four years despite growth in loans and deposits as bcu has passed additional benefits to members; . operating expenses have increased at an average rate of 3.4% per annum over the past four years. Around 45% of operating expenses are employment related, with fees and commission expenses37, technology and communications and occupancy being the other major costs. Increases in operating expenses have been incurred in product development and achieving the optimum product mix, improving systems, processes and distribution channels for bcu’s products, adapting to changes from advancements in technology and meeting regulatory requirements. The $2.1 million increase in operating expenses in FY18 was in part due to an increase in professional fees associated with addressing queries from regulators and defending and bringing legal actions on behalf of bcu. Employment related expenses have only increased at an average rate of 1.7% per annum over the past four years, reflecting a slight reduction in the average number of employees combined with minimal increases in salaries over this period (albeit employee numbers have increased by over 20% in the last 18 months as bcu has invested substantially in its digital, IT, projects and other back office teams following a change in CEO in October 2017); . impairment losses have been low at less than 0.2% of loans and advances (including provisions for business loans). The decline in the ratio in FY18 was the result of a decrease in the provision prescribed for regulatory purposes which more than offset additional specific provision38 while the collective provision39 was unchanged; and . return on assets and return on equity have been relatively consistent over the past four years at around 0.8-0.9% and 7-8% respectively. bcu’s performance declined in 1HY1940, although this was primarily a result of incurring costs associated with the Merger (which resulted in the cost to income ratio increasing from 69.8% to 78.2%). bcu has contained growth in non-Merger related operating expenses over the half year period. There was also a deterioration in the net interest margin (from 2.84% to 2.75%), as lending to high yielding self-managed super funds and property development was limited for regulatory and strategic positioning purposes respectively. The positive impairment loss represents recovery of a doubtful debt provision after selling the repossessed asset. bcu’s FY19 financial performance is not available at the date of this report. However: . bcu expects the second half of FY19 to be stronger than 1HY19, with net profit after tax of approximately $11 million forecast for FY19; and . bcu will make the FY19 financial performance available to bcu members at least two weeks prior to the general meeting to consider the Merger Resolution and bcu members will be given the opportunity to consider and ask questions in relation to the FY19 financial performance.
______37 Fees and commission expenses relate to the arrangements with mortgage brokers to assist with the distribution of loan products. These costs increased considerably in FY17 and FY18 as a greater proportion of loans were sourced from mortgage brokers. 38 The specific provision is recognised for loans that have defaulted. 39 The collective provision is recognised on an expected basis for defaults that have not yet been reported or identified and for general deterioration in the loan portfolio. 40 1HY19 is the six months ended 31 December 2018.
25
78 Bananacoast Community Credit Union Ltd
bcu has historically spent very little on capital expenditure (plant and equipment and computer software), investing a total of $4.7 million over the past 4½ years and around $1 million per annum on average. This in part reflects its limited capacity for investment as well as its policy to expense, rather than capitalise, certain technology expenditure as it is incurred (approximately 35% of the annual spend is expensed). Approximately 50% of bcu’s annual investment spend is for business as usual expenditure (rather than innovation). Over half of the total capital expenditure over the past 4½ years was spent in FY18 and 1HY19 following the change in CEO, as the current CEO and management have focused on investing in new technology (NPP, ActivePay and an improved version of the bcu Connect App). In 1HY19, bcu invested in fit out for its new Coffs Harbour head office. Overall, while bcu has achieved growth in its performance over the past four years, this has largely been achieved by being focused on the short term rather than the long term, as well as not investing in key areas such as wages and digital/information technology (“IT”). Although there has been a change in focus and an improvement in financial performance in FY18 following the change in CEO, bcu is expecting only a steady performance in FY19.
4.6 Financial Position The financial position of bcu at 30 June 2015 to 2018 and at 31 December 2018 is summarised below:
bcu - FINANCIAL POSITION ($ MILLIONS)
AT 30 JUNE AT 31 DEC. 2015 2016 2017 2018 2018 ACTUAL ACTUAL ACTUAL ACTUAL ACTUAL41 Cash and financial assets 239.0 197.1 231.7 265.2 279.5 Loans and advances 1,204.7 1,306.5 1,400.2 1,414.2 1,393.3 Property, plant and equipment 10.1 11.1 10.2 10.1 10.7 Intangible assets 0.4 0.2 0.1 0.7 0.8 Other assets 8.5 8.2 8.3 10.1 11.8 Total assets 1,462.6 1,523.1 1,650.5 1,700.4 1,696.1 Deposits (1,304.5) (1,360.9) (1,479.7) (1,543.4) (1,542.6) Borrowings (35.5) (29.8) (25.5) - - Other liabilities (13.4) (13.1) (16.7) (17.9) (10.1) Total liabilities (1,353.4) (1,403.8) (1,522.0) (1,561.2) (1,552.7)
Net assets 109.2 119.3 128.4 139.1 143.4 STATISTICS Growth in loans and advances +4.1% +8.4% +7.2% +1.0% -1.5% Growth in total assets +3.1% +4.1% +8.4% +3.0% -0.3% Growth in deposits +3.2% +4.3% +8.7% +4.3% -0.1% Loan to deposit ratio 92.4% 96.0% 94.6% 91.6% 90.3% Growth in net assets +7.6% +9.3% +7.6% +8.3% +3.1% Capital adequacy ratio 13.4% 13.3% 13.8% 14.8% 15.2% bcu and Grant Samuel analysis At 31 December 2018, bcu had total loans and advances of $1.4 billion. Growth in loans and advances has been mixed, exceeding system growth in FY16 and FY17, but falling below system growth in FY15, FY18 and 1HY1942. Home loans represent approximately 80% of the total loan portfolio by value. Growth in loans and advances in FY18 was impacted by a decline in business and personal loans. Housing loans grew by
______41 bcu’s financial position at 31 December 2018 is unaudited. 42 System growth (i.e. growth across all ADIs) for loans and advances was 7.9% in FY15, 4.9% in FY16, 4.8% in FY17, 4.0% in FY18 and 2.7% in 1HY19.
26
Member Booklet 79
2.6% in FY18 (compared to system growth of 4.1%). The $21 million decline in loans and advances in 1HY19 reflects reduced home lending activity across bcu’s geographical regions (from regulatory restrictions on investor loans) as well as the decision made during FY17 to reduce exposure to inner Brisbane high-density residential property development loans and the run-off of this portfolio. Average annual growth in loans and advances over the past 4½ years has been below system growth at 4.2% (compared to average annual system growth of 5.4%). bcu is currently funded entirely by retail deposits, having elected to repay its $5.5 million of subordinated debt in FY16 to move to funding on more favourable terms and capital treatment and buying back the $25.5 million of loans and advances in the Trinity Mortgage Origination Trust in FY18 (and transferring them to Ariera Trust 2018 Series No.143). Growth in deposits has generally exceeded system growth (except in FY15 and 1HY19)44. Deposits were flat in 1HY19 (relative to FY18) due to a business decision to hold surplus liquidity (which has been reduced subsequent to 31 December 2018). Average annual growth in deposits over the past 4½ years has been 4.5%, consistent with average annual system growth of 4.4%. Property, plant and equipment includes land and buildings which, at 31 December 2018, had a book value of $9.0 million. Intangible assets represents bcu’s investment in computer software (in addition to IT costs that are expensed). Capitalised computer software costs are amortised over three years. bcu is well capitalised with a total capital adequacy ratio well in excess of APRA’s minimum prudential capital requirement of 8%. Its Common Equity Tier 1 (“CET1”) ratio at 31 December 2018 was 14.1%, which is also well above APRA’s “unquestionably strong” benchmark CET1 ratio of 10.5% that bcu is required to meet by January 2020. bcu’s financial position at 30 June 2019 is not available at the date of this report. However, bcu will make the 30 June 2019 financial position available to bcu members at least two weeks prior to the general meeting to consider the Merger Resolution and bcu members will be given the opportunity to consider and ask questions in relation to the 30 June 2019 financial position.
______43 As bcu retains substantially all the risks and rewards of ownership of the relevant loans and advances in the Ariera Trust 2018 Series No. 1, bcu continues to recognise the transferred assets within loans and advances and the transfer is accounted for as a secured financing transaction. The Ariera Trust 2018 Series No. 1 has been established to support the ongoing liquidity management at bcu. 44 System growth for deposits was 6.2% in FY15, 3.7% in FY16, 6.0% in FY17, 1.5% in FY18 and 2.2% in 1HY19.
27
80 Bananacoast Community Credit Union Ltd
5 Profile of P&N Bank
5.1 Background P&N Bank is an Australian ADI regulated by APRA. It was established in Western Australia in 1990 as Police & Nurses Credit Society Limited (“P&N Credit Society”) following the merger of the Western Australian Police Union Cooperative Credit Union Society Ltd (which had been established in 1969 and merged with the MTT Salaried Officers Association Credit Union in 1981) and the Western Australia Nurses Credit Society Ltd (established in 1972). Membership initially had a common bond of Western Australian police (which was extended to members of the army, air force and navy following the merger with the MTT Salaried Officers Association Credit Union) and Western Australian nurses. This bond was subsequently extended to those employed in (or retired from) the wider healthcare, education and government sectors. While this common bond remains in P&N Bank’s Constitution, membership is no longer limited to these categories and P&N Bank essentially has an open membership. In 2001, P&N Credit Society merged with Energy Credit Union Limited, which was itself the amalgamation of a number of smaller Western Australian credit unions (including ABC Credit Union (WA) Limited, Australian Manufacturing Workers Credit Union Limited and WA Fire Brigades Employees Credit Union Society Limited). In March 2013, after obtaining regulatory and member approval, P&N Credit Society became a mutual bank, Police & Nurses Limited (trading as “P&N Bank”). Today, P&N Bank is the only locally domiciled mutual ADI in Western Australia. It has almost 95,500 members, an asset base of $4.2 billion and 15 branches (plus a contact centre in Perth’s CBD45). P&N Bank's purpose is to enrich the lives of its members by providing them with a superior banking experience and supporting their local communities.
5.2 Structure and Governance Structure P&N Bank is an Australian public company limited by shares and is owned by its members. P&N Bank’s simplified corporate structure (excluding dormant companies and companies in the process of being wound up) is summarised below: P&N BANK – SIMPLIFIED CORPORATE STRUCTURE
P&N BANK MEMBERS
100%
P&N BANK (PUBLIC COMPANY LIMITED BY SHARES)
65% 100% 100%
LOAN SECURITISATION P&N FINANCIAL PROPERTY DEVELOPMENT TRUST MANAGER AND PLANNING SUBSIDIARIES SPECIAL PURPOSE VEHICLES
P&N Bank ______45 CBD means Central Business District.
28
Member Booklet 81
P&N Bank holds a controlling 65% interest in Police & Nurses Financial Planning Pty Ltd (“P&N Financial Planning”), with the remaining 35% interest owned by Bridges Financial Services Pty Ltd (“Bridges”) (part of Australian Securities Exchange-listed IOOF Holdings Limited). P&N Bank and Bridges jointly acquired P&N Financial Planning in 2002, and the relationship between the shareholders is governed by a shareholders’ agreement. The majority of P&N Bank’s property investments are in the process of being wound up and sold, consistent with P&N Bank’s decision to exit non-core businesses. The only remaining operating subsidiary is P&N Landreach Pty Ltd, an entity used to hold the land and property assets acquired for development and sale. P&N Management Pty Ltd is a wholly owned subsidiary of P&N Bank that is the trust manager of securitisation special purpose vehicles for loans originated from P&N Bank. At 31 December 2018, securitised loans under management by P&N Bank amounted to $1.2 billion and are held through five trusts. Each of the trusts is consolidated. Governance P&N Bank is overseen by a Board consisting of nine directors, eight non-executive directors and one executive director (the CEO, Mr Andrew Hadley). Under its Constitution, P&N Bank’s Board can comprise a maximum of 10 directors, being no more than six member elected directors (provided that the Board always comprises a majority of member elected directors), no more than three board appointed directors and, if the Board determines, the P&N Bank CEO. Each director must be a member and hold one P&N Bank member share. P&N Bank has three Board committees (covering audit, risk, and Board governance and remuneration) to assist it in carrying out its responsibilities. It also has a Nominations Committee to assist in conducting “fit and proper” assessments of re-nominating directors and candidates nominating for election as a director. None of the three members of the Nominations Committee are employees of P&N Bank. Operational management is provided by the CEO and seven senior executives responsible for finance, risk, people & culture, member experience, IT, strategy & development and business transformation. P&N Bank has approximately 350 employees.
5.3 Membership and Member Rights Membership P&N Bank has an open and voluntary membership within a common bond. Although the common bond set out in P&N Bank’s Constitution refers to police officers, nurses, persons employed in the health industry, teachers and prison officers, it also has a catch-all provision covering “any individual who intends to contribute to and benefit from membership” of P&N Bank. The common bond also extends to members of another ADI that transfers its business and members to P&N Bank under the Transfer Act. Although P&N Bank is effectively no longer a bonded credit union, approximately one third of members are from the police, heath, corrective services, defence, education and government sectors. P&N Bank can only issue member shares and mutual equity interests46. Mutual equity interests carry no voting rights, but may be entitled to payment of dividends. P&N Bank has not issued any mutual equity interests to date. Customers (other than other ADIs and minors) must be members. P&N Bank can issue only one member share to any person, in return for payment of the issue price of $10. Member shares may be issued as
______46 Mutual equity interests are equity interests which may be issued by P&N Bank to subscribers where such instruments have been issued to qualify as regulatory capital in accordance with Prudential Standard APS 111 “Capital Adequacy: Measurement of Capital” as published by APRA.
29
82 Bananacoast Community Credit Union Ltd
wholly paid or partly paid. More recently (and in line with other mutual ADIs), P&N Bank has issued member shares on which the payment of the issue price has been deferred (i.e. the shares are paid up to nil). Membership has grown steadily over the past 4¾ years, reflecting P&N Bank’s focus on providing a superior banking experience, in particular its focus on digital and attracting a younger generation of members:
P&N BANK - MEMBERSHIP
AT 30 JUNE AT 31 MARCH 2015 2016 2017 2018 2019 Opening members 75,710 78,693 83,138 88,192 92,107 New members 6,352 7,585 7,875 7,218 5,783 Redeemed members (3,369) (3,140) (2,821) (3,303) (2,437) Closing members 78,693 83,138 88,192 92,107 95,453 P&N Bank Over the last 4¾ years, membership growth has averaged 5.0% per year. While the number of members who have redeemed their member share (effectively as a result of no longer being a customer) has been declining, it increased in FY18 and in the nine months ended 31 March 2019 (on an annualised basis), although only back to the FY15 level and as a result of one off member remediation measures. The number of new members each year has more than offset the redeemed members (at 190-280% of redeemed members). P&N Bank’s product and service offering has attracted a younger demographic. Approximately 20% of P&N Bank’s customers are 25 years old or younger (with 46% in the 26-54 years age group and 34% 55 years and older). At 31 March 2019, P&N Bank had 95,891 customers. P&N Bank has a greater number of customers than members as there are some customers who hold an account but who do not hold a member share (e.g. children who hold a “way cool saver” are customers but do not hold a member share). Member Rights The rights and obligations of P&N Bank members, as set out in the P&N Bank Constitution, are summarised below:
P&N BANK – MEMBER RIGHTS AND OBLIGATIONS
RIGHT/OBLIGATION COMMENT 25 members present in person or 50% of members eligible to attend and vote if less than 50 Quorum members are eligible to attend and vote at a meeting Four members who have been members for 12 months or more have the right to nominate a candidate Nominations Committee determines whether person becomes a candidate (based on “fit Appointment of directors and proper” assessment) No more than six member elected directors (out of a maximum of 10, with up to three appointed by the Board plus, if the Board determines, the CEO), provided that there is always a majority of member elected directors One vote per member (other than a minor) Voting Entitlement to vote by proxy (where vote is by poll) Right to participate in any dividend only if approved at general meeting of members Dividends Each member share has equal right to participate in dividends with every other member share At request of member Redemption Entitled to repayment of issue price ($10) less any amount unpaid on the member share On redemption (at member’s request or by P&N Bank if accounts are dormant/member is Termination/cessation of inactive or on Board resolution), forfeiture or surrender membership On death, bankruptcy or mental incapacity of member
30
Member Booklet 83
P&N BANK – MEMBER RIGHTS AND OBLIGATIONS (CONT)
RIGHT/OBLIGATION COMMENT Transfer Member shares are not transferable On death (to a personal representative or a person entitled), bankruptcy (to trustee of the Transmission bankrupt member’s estate) or mental incapacity (to a person entitled) of member Liability limited to unpaid amount on member share Participation in winding up Repayment of issue price ($10) less any amount unpaid on the member share Each member share has equal entitlement to any surplus assets Participation on demutualisation Must have been a member for not less than two years Requirements for demutualisation Special resolution (75%) where at least 25% of members vote (by postal ballot) P&N Bank Constitution While P&N Bank’s Constitution does give holders of member shares the right to participate in any dividend that P&N Bank pays, as far as P&N Bank management is aware, no dividends have ever been paid by P&N Bank.
5.4 Business Operations and Strategy Business Operations P&N Bank provides the following products and services: . retail banking, including: • deposit products: - transaction and savings accounts, including products for children 0-15 years (savings account that earns interest on balances up to $5,000), students 16-25 years (transaction account with unlimited free transactions) and a retirement account for over 55 year olds (with a competitive interest rate, card access and optional &Retirement and Rewards products); and - term deposits; and
• lending products: - home loans (owner occupied, investment and interest only); - personal loans (secured, unsecured, car) and credit cards; and - commercial (property finance) loans47; and . financial planning services through P&N Financial Planning. P&N Financial Planning has approximately 1,100 clients and $400 million of funds under advice.
______47 Although this business is in the process of being wound down.
31
84 Bananacoast Community Credit Union Ltd
The composition of P&N Bank’s loan book (by type of loan and geography) is illustrated below:
P&N BANK – COMPOSITION OF GROSS LOANS AND ADVANCES AT 30 JUNE 2018 LOAN TYPE GEOGRAPHY
2% 2% <10%
96% >90%
Housing Commercial Personal Western Australia Other
P&N Bank (note that composition of loan book by geography is based on estimates provided by P&N Bank management) P&N Bank’s loan book is concentrated in housing loans in Western Australia (and within Western Australia, management estimates that more than 90% of loans are in the Perth region). P&N Bank management estimates that P&N Bank has a share of approximately 1-3% of the Western Australian home loan market and, consequently, has considerable organic growth potential in addition to any inorganic growth opportunities. P&N Bank has a significant reliance on mortgage brokers, with approximately 50% of housing loan settlements in FY18 sourced from mortgage brokers. Mobile bankers and branches were each responsible for 25% of housing loan origination. P&N Bank has invested heavily across its business to improve the member experience, delivering technological advances in the areas of: . digital capability (to offer members the best possible online and mobile experience); and . operational robotic processes (that save staff time allowing them to focus on more value adding interactions with members). In FY16, P&N Bank was one of the first banks in Australia to offer members the convenience of all three digital wallets (Apple PayTM, Samsung Pay and Google PayTM)48. In FY18, it was one of the first banks to adopt NPP technology to enable members to make and receive instant payments (via Osko and PayID) and was the first bank in Australia to offer an instant digital card for new debit cards and instant replacement of a lost or stolen debit or credit card. P&N Bank is continuing to develop banking solutions to remove more of the “pain points” that come with outdated banking technologies. It also has arrangements in place with third parties to provide to its members: . insurance products: • general insurance (home and contents, car, travel, loan protection, boat, caravan, motorcycle) issued by QBE; and
______48 A digital wallet is an app that stores credit card or debit card information. It can be used to make contactless payments using a smartphone as well as for online shopping.
32
Member Booklet 85
• life insurance (Ezicover) issued by Zurich; and . international payments services: • foreign currency, where Travelex supplies foreign cash and arranges for the issue of traveller’s cheques on behalf of American Express Travel Related Services Company Inc;
• international transfers, which are provided by Western Union Business Solutions (Australia) Pty Ltd, an operating division of the Western Union Company (“Western Union”); and
• Mastercard cash passport (a multi-currency debit card), which is arranged by Mastercard Prepaid Management Services Australia Pty Ltd in conjunction with the issuer, Heritage Bank Limited. P&N Bank’s distribution system includes: . a network of 15 branches, 13 of which are located in the city of Perth, covering the region from Rockingham (40 kilometres south west of the Perth CBD) to Mindarie (36 kilometres north of the Perth CBD) with one branch in each of Bunbury and Mandurah; . a contact centre in Perth (operating from 8.00am to 6.00pm Monday to Friday and 9.00am to 5.00pm Saturday WST49); . a team of seven mobile home loan specialists covering the central, northern, southern and eastern suburbs of Perth; and . digital platforms including online web chat (which is available from 8.00am to 6.00pm Monday to Friday WST) online banking, a mobile banking app, all three digital wallets and instant digital cards. P&N Bank’s banking system and internet banking platform are provided under a long term arrangement with Data Action Pty Ltd (“Data Action”). It has a head office located in Perth. P&N Bank is progressively winding down its non-core businesses. The Jacaranda Gardens Retirement Village was sold in May 2018. “The Enclave” at Eagle Bay joint venture was dissolved in June 2018. P&N Bank’s only remaining material property asset is a receivable from Pindan Capital Two Rocks Pty Ltd as trustee for the Pindan Capital Two Rocks Trust (“Pindan Group”) (see Section 5.6 for details). P&N Bank has won a number of awards, including the Australian Banking + Finance Lending Award for Best Mutual in 2017 and 2018. Most recently, it has been awarded the 2018/19 AIM WA Pinnacle Curtin University Innovation Excellence Award, a Canstar 2019 Innovation Excellence Award (for its instant digital cards) and one of nine 2019 Mozo Experts Choice Awards for Best Banking App. It also achieves strong results for member satisfaction and advocacy, generally ranking in the top five banks in the Roy Morgan Best Bank Customer Satisfaction Monitor over the past four years. At April 2019, P&N Bank had a net promoter score of +56, which is particularly high for the banking category and demonstrates high member advocacy. Community Involvement Community support is an essential part of P&N Bank’s member proposition. Its key areas of involvement are: . community partnerships in the areas of: • mental health, through Lifeline WA (suicide prevention and crisis support); and
• youth/children, through The Fathering Project (the importance of fathers in a child’s life and how fathers can connect with and encourage their children) and Variety WA (sick, disadvantaged and special needs children). P&N Bank provides funding and other assistance to these organisations; ______49 WST is Western Standard Time, which is two hours behind AEST.
33
86 Bananacoast Community Credit Union Ltd
. sponsorship programs, where P&N Bank supports a number of community groups and organisations including the Nine News WA Police Excellence Awards, the WA Nursing & Midwifery Excellence Awards and Crime Stoppers WA. P&N Bank is also an official membership partner of the Perth Wildcats basketball team; . Helping &ands program, which provides assistance to individuals, families and not-for-profit groups nominated by members as needing support; and . Flourish @ work, a volunteer program that allows staff to be involved in community work and support causes that are important to them. Strategy P&N Bank’s FY15-FY19 strategy is centred around its purpose, vision and values:
PURPOSE VISION VALUES
To enrich the lives of members To be recognised as the Western Focus on members and their communities Australian challenger brand in retail Improve and learn financial services, doubling the size Trust and collaborate of the business by 2020
P&N Bank aims to achieve these goals by delivering on its member value proposition – the reason why people should bank with P&N Bank and what sets it apart from its competitors in terms of: . people – providing a unique support model that delivers the members’ voice and true relationship banking; . product – products designed to offer choice, flexibility, simplicity and reward for loyalty; . place – physical and online destinations that are more like meeting places than traditional banking branches; and . presence – identifying ways to make the community stronger through donations, volunteering and the championing of important causes. P&N Bank is in the final year of its five year strategic plan that commenced in FY15 and focused on three strategic themes, building member value, improving organisational effectiveness and partnering for growth. FY16 saw a brand refresh (“The Power of &”) and the roll out of new and improved products, public website and community platform. It also focused considerable effort on building an efficient and scalable lending origination capability. P&N Bank expects to continue to invest in its digital platforms as customer expectations and needs change. With these foundations in place, P&N Bank then re-focused its strategy on the member experience and delivering on its core purpose to enrich the lives of members and their communities. Five key strategic themes were developed to deliver a differentiated experience and meet members’ expectations of a modern banking experience: . mobile-first banking. An improved digital self-serve capability was executed in partnership with P&N Bank’s key technology partners, Data Action and Cuscal Limited (“Cuscal”). Major outcomes included the release of mobile payment wallets (delivered in partnership with Cuscal) and Australia’s first instant digital cards (delivered in partnership with Data Action); . grow deep relationships. P&N Bank has invested in its ability to acquire new members, identify and fix “pain points” and provide a more tailored and personalised experience for its members to build loyal members who see P&N Bank as their primary financial institution; . digital end-to-end. A key focus has been to streamline the application process for financial service products such as basic deposit accounts and consumer finance products, which are increasingly being
34
Member Booklet 87
sold online. This has included investing in robotic process automation, which reduces the need for manual work, reduces risk and improves the member experience through faster turnaround times; . optimise its economics. This stream has focused on P&N Bank’s transaction banking and payments capability and the shift to CCR, with a view to improving its return on assets in light of capital constraints and while continuing to deliver on its regulatory obligations; and . build collaboration platforms. P&N Bank has improved its internal and external collaboration capabilities to bring differentiated experiences to its members. Internally, it has invested in technology platforms to support new ways of working. Externally, it is increasingly focused on open banking and the opportunities this brings to help members through improved insights into their financial wellbeing.
5.5 Financial Performance The historical financial performance of P&N Bank for the four years ended 30 June 2018 and the six months ended 31 December 2018 is summarised below50:
P&N BANK - FINANCIAL PERFORMANCE ($ MILLIONS)
YEAR ENDED 30 JUNE SIX MONTHS TO 31 DEC.
2015 2016 2017 2018 2018 ACTUAL ACTUAL ACTUAL ACTUAL ACTUAL51 Net interest income 64.6 69.1 65.6 68.1 34.4 Other bank income 14.9 16.0 17.7 19.8 8.9 Bank net operating income 79.5 85.0 83.3 87.9 43.3 Bank operating expenses (64.1) (67.6) (64.4) (67.6) (34.9) Impairment loss (2.3) (3.0) (3.6) (3.3) - Bank profit before tax 13.1 14.5 15.4 17.0 8.4 Bank tax expense (2.9) (3.9) (4.3) (4.8) (2.5) Bank profit after tax 10.2 10.6 11.1 12.2 5.9 Other activities (net of tax and non-controlling (0.9) (2.0) - (0.1) 0.1 interest) Profit after tax attributable to members 9.3 8.5 11.1 12.1 6.0 Capital expenditure 5.0 3.7 4.5 2.8 1.0 STATISTICS Net interest margin 2.18% 2.06% 1.81% 1.82% 1.69% Bank cost to income ratio 80.6% 79.5% 77.3% 77.0% 80.6% Impairment loss to loans and advances 0.09% 0.09% 0.11% 0.09% 0.00% Bank profit after tax margin 12.8% 12.4% 13.3% 13.8% 13.7% Bank return on assets 0.45% 0.43% 0.40% 0.42% nc Bank return on equity 4.3% 4.2% 4.2% 4.4% nc Growth in net operating income +5.3% +7.0% -2.0% +5.5% nc Growth in bank profit after tax +14.7% +3.7% +5.0% +9.6% nc P&N Bank and Grant Samuel analysis Bank operating performance excludes P&N Bank’s financial planning and specialised property activities. The specialised property activities have been loss making over the past 4½ years and while their overall contribution to P&N Bank’s consolidated performance has been minimal (particularly post FY16, as P&N
______50 P&N Bank’s FY19 financial performance is not available at the date of this report. 51 P&N Bank’s financial performance for the six months ended 31 December 2018 is unaudited.
35
88 Bananacoast Community Credit Union Ltd
Bank has wound down its specialised property activities), they distort the underlying performance of P&N Bank’s banking operations. P&N Bank has reported steady growth in underlying bank profitability over past four years despite a relatively flat Western Australian housing market. The higher growth in bank net profit after tax in FY15 reflected material tax offsets (reducing the effective tax rate in FY15 to 22%). FY15 and FY16 were the initial years of a five year strategic plan under which P&N Bank focused on investing across its business, including a brand refresh. P&N Bank has subsequently shifted its focus to identifying opportunities to create scalability and growth. Bank net profit before tax has grown at an average rate of 9% per annum over the past four years. Calculation of some ratios (i.e. net interest margin and cost to income ratio) and FY17 growth rates has been impacted by changes to the classification of income and expenses relating to securitised loans which has resulted in a reduction in net interest income and operating expenses and an increase in other income in FY17 and FY18 (relative to prior years). This change is largely responsible for the decline in net interest margin and the bank cost to income ratio as well as the fall in net operating income in FY17. Factors to consider in assessing P&N Bank’s financial performance include: . there has been a consistent tightening in the net interest margin over the period from FY15 to FY17 (even allowing for the change in treatment of securitised loans in FY17, with the restated FY16 net interest margin at 2.01%), although it has stabilised in FY18. P&N Bank’s lower net interest margin relative to bcu reflects the impact of securitisation funding (which represents around 11% of total funding), as well as larger retail term lending and its concentration on lower return (i.e. lower risk) housing loans; . while other income has increased over the past four years and represents an increasing proportion of net operating income (19% in FY15 to 23% in FY18), this is primarily a result of the change in treatment of, and growing fee income from, securitised loans. Other income is primarily other fees and commissions (which includes financial services fees, securitisation servicing fees and insurance commissions) ($13.8 million in FY18) and transactional banking fees ($2.6 million in FY18). Transactional banking fees and commissions have generally declined over the past four years as P&N Bank has removed or reduced certain financial services fees; . operating expenses have increased at an average rate of 2.3% per annum over the past four years. Around 45% of operating expenses are employment related, with fees and commission expenses, technology and communications and occupancy being the other major costs. Employment related expenses have increased at an average rate of 2.3% per annum over the past four years (consistent with the average annual increase in total operating expenses), but the majority of this increase was in FY15, with employment related expenses relatively flat over the past three years (average annual increase of only 0.8%) as P&N Bank has focused on controlling costs. This has resulted in a steady decline in the bank cost to income ratio over the past four years. P&N Bank’s bank cost to income ratio is considerably higher than bcu’s cost to income ratio (by around 7 percentage points). Management of P&N Bank has indicated that this reflects its investment in the business as part of its strategic plan and it has acknowledged that the business is “cost heavy” (particularly taking into account P&N Bank’s 15 branches relative to bcu’s 21 stores) as well as its policy to expense a significant proportion of its innovation expenditure and amortise its capitalised investment spend over a period of three years; . impairment losses have generally been very low, at or around 0.1% of loans and advances (and lower than impairment losses for bcu at around 0.2%) reflecting P&N Bank’s concentration in housing loans; and . bank return on assets and bank return on equity have been relatively consistent over the past four years at around 0.4% and 4% respectively (albeit at around half the level of bcu’s return on assets and return on equity).
36
Member Booklet 89
Subsequent to 30 June 2018, P&N Bank entered into a new 10 year leasing arrangement for its head office in Perth with a total commitment (over the 10 year period) of approximately $24.1 million. P&N Bank’s bank performance declined in 1HY19, although, similar to bcu, this was primarily a result of incurring costs associated with the Merger (which resulted in the cost to income ratio increasing from 77.0% to 80.6%). There was also a deterioration in the net interest margin (from 1.82% to 1.69%), reflecting increased competition as well as the launch of P&N Bank’s &Intro home loan at a 3.55% interest rate (compared to the basic home loan interest rate of 3.99%). As a result of its lower net interest margin and higher bank cost to income ratio, P&N Bank’s bank net profit after tax has been, on average, around 20% higher than bcu’s net profit after tax, despite being 2.5 times the size of bcu (based on total bank assets). After allowing for the losses from P&N Bank’s other activities (in particular, its specialised property activities that are in the process of being wound down), the difference has been lower although this is not as relevant in more recent years. P&N Bank has invested considerably more in capital expenditure (on plant and equipment and computer software) than bcu, spending a total of $17.0 million over the past 4½ years and $3.8 million per annum on average (not far below bcu’s total capital expenditure over the past 4½ years of $4.7 million). Over the past 2-3 years, this expenditure has included significant investment in P&N Bank’s digital footprint as well as regulatory projects. In 1HY19, P&N Bank has invested in fit out for its new head office, including an upgrade of its core infrastructure. P&N Bank’s annual IT budget (capitalised and expensed) is approximately $8-9 million (including staff costs), $2 million of which is spent on digital projects.
5.6 Financial Position The financial position of P&N Bank at 30 June 2015 to 2018 and at 31 December 2018 is summarised below52:
P&N BANK - FINANCIAL POSITION ($ MILLIONS)
AT 30 JUNE AT 31 DEC. 2015 2016 2017 2018 2018 ACTUAL ACTUAL ACTUAL ACTUAL ACTUAL53 Cash and financial assets54 354.7 550.3 585.5 575.3 630.7 Loans and advances 2,616.1 3,164.0 3,374.8 3,551.3 3,587.2 Property, plant and equipment 7.4 7.1 6.9 4.9 5.7 Intangible assets 8.4 7.3 6.3 5.9 5.7 Other assets 21.3 13.1 10.8 9.6 18.0 Total bank assets 3,007.9 3,741.7 3,984.4 4,147.1 4,247.3 Deposits (2,388.8) (2,702.4) (2,838.9) (2,971.2) (3,115.5) Borrowings55 (336.9) (754.0) (853.1) (864.5) (816.8) Other liabilities (34.4) (26.4) (20.5) (27.1) (24.8) Total bank liabilities (2,760.1) (3,482.8) (3,712.5) (3,862.8) 3,957.1
Bank net assets 247.7 258.8 271.9 284.2 290.2 Net assets of other activities (net of non- 3.1 1.1 1.0 1.0 (3.7) controlling interest) Members’ funds 250.8 259.9 272.9 285.2 286.5
______52 P&N Bank’s financial position at 30 June 2019 is not available at the date of this report. 53 P&N Bank’s financial position at 31 December 2018 is unaudited. 54 Includes amounts due from securitisation facilities. 55 Includes amounts due to securitisation facilities.
37
90 Bananacoast Community Credit Union Ltd
P&N BANK - FINANCIAL POSITION ($ MILLIONS) (CONT)
AT 30 JUNE AT 31 DEC. 2015 2016 2017 2018 2018 ACTUAL ACTUAL ACTUAL ACTUAL ACTUAL53 STATISTICS Growth in loans and advances +6.8% +20.9% +6.7% +5.2% +1.0% Growth in total bank assets +5.9% +24.4% +6.5% +4.1% +2.4% Growth in deposits +4.1% +13.1% +5.1% +4.7% +4.9% Loan to deposit ratio 109.5% 117.1% 118.9% 119.5% 115.1% Growth in bank net assets +7.4% +4.5% +5.0% +4.6% +2.1% Capital adequacy ratio 15.5% 14.4% 14.5% 15.4% 15.3% P&N Bank and Grant Samuel analysis Bank net assets excludes P&N Bank’s financial planning and specialised property activities (other than including investments in controlled entities at cost as part of other assets ($2.8 million at 31 December 2018)). These other activities are immaterial in the context of P&N’s consolidated financial position (particularly from FY16, as P&N Bank has wound down its specialised property activities). At 31 December 2018, P&N Bank had total loans and advances of $3.6 billion (including securitised loans of $1.2 billion). Growth in loans and advances has generally exceeded system growth, particularly in FY16 (when system growth was 4.9% compared to P&N Bank’s growth of 20.9%, achieved in a flat Western Australian market and making P&N Bank the fastest growing mutual ADI in Australia in FY16). Average annual growth in loans and advances over the past 4½ years has been well above system growth at 8.8% (compared to average annual system growth of 5.4%), albeit the majority of this outperformance was achieved in FY16. Growth in loans and advances was below system growth in 1HY19. Home loans represent more than 95% of the total loan portfolio by value, and there has been a declining trend in business and personal lending post FY15. Growth in housing loans has also generally exceeded system growth, with average annual growth in housing loans over the past 4½ years of 9.3%, well above average annual system growth of 5.5%. Retail deposits represent approximately 80% of total funding, having fallen from around 88% of total funding over the past 4½ years as P&N Bank has sought to diversify its funding sources by doubling its securitisation facilities and introducing, and increasing its exposure to unsecured borrowings. Growth in deposits has been mixed, exceeding system growth in FY16, FY18 and 1HY19, but falling below system growth in FY15 and FY17. Average annual growth in deposits over the past 4½ years has been 7.0%, above average annual system growth of 4.4%. P&N Bank has a BBB investment grade long term credit rating from Standard & Poor’s Ratings Services. The majority of property, plant and equipment is leasehold improvements. P&N Bank does not own any land or buildings. Intangible assets represents P&N Bank’s investment in computer software (in addition to IT costs that are expensed). Capitalised computer software costs are amortised over 3-10 years. The reduction in net assets of other activities (net of non-controlling interest) over the past 4½ years (to a meet liability at 31 December 2018) reflects the winding down of P&N Bank’s specialised property activities. Jacaranda Gardens Retirement Village was sold in May 2018. “The Enclave” at Eagle Bay joint venture was dissolved in June 2018 and P&N Bank assumed control of the two unsold lots valued at $1.2 million which have been actively marketed for sale and one of these lots sold in 1HY19. The only remaining material property asset is a $27.8 million receivable from the Pindan Group which, during 1HY19, was restructured as a three year debtor facility agreement, with a $10 million repayment due in 2019, future payments due based on future lot sales and any residual debt to be fully repaid in 2021. The debtor facility is secured by a registered mortgage over the property development and a guarantee from a shareholder in the Pindan Group and is based on a commercial interest rate. Net liabilities of other activities at 31
38
Member Booklet 91
December 2018 includes $1.5 million of goodwill in relation to the acquisition of P&N Financial Planning. Non-controlling interest represents Bridges’ 35% interest in P&N Financial Planning. P&N Bank is well capitalised with a capital adequacy ratio well in excess of APRA’s minimum prudential capital requirement of 8%. Its Common Equity Tier 1 (“CET1”) ratio at 31 December 2018 was 14.9%, which is also well above APRA’s “unquestionably strong” benchmark CET1 ratio of 10.5% that P&N Bank is required to meet by January 2020.
39
92 Bananacoast Community Credit Union Ltd
6 Impact of the Merger
6.1 Structure and Governance Structure The corporate structure of the Continuing Entity (i.e. P&N Bank if the Merger is completed) is set out below:
CONTINUING ENTITY – CORPORATE STRUCTURE
P&N BANK MEMBERS (INCLUDING FORMER bcu MEMBERS)
100%
This company will own P&N BANK all the assets and (PUBLIC COMPANY liabilities of P&N Bank LIMITED BY SHARES) and all the assets and liabilities of bcu
65% 100% 100%
LOAN SECURITISATION P&N FINANCIAL PROPERTY DEVELOPMENT TRUST MANAGER AND PLANNING SUBSIDIARIES SPECIAL PURPOSE VEHICLES
P&N Bank, Member Booklet If the Merger is completed: . all of bcu’s business, assets and liabilities, including bcu’s reserves and all deposits and loans held by bcu members will be transferred to P&N Bank; . bcu members56 will have their redeemable preference shares cancelled and will cease to be members of bcu; . each bcu member57 will be deemed to: • have become a member of P&N Bank on the earliest date that they became a bcu member (being membership held continuously up to the time of the Merger); and
• hold one P&N Bank member share, credited as paid up to the amount paid up on the corresponding bcu redeemable preference share58. Any unpaid issue price will be payable in accordance with the P&N Bank Constitution. bcu members who are already P&N Bank members will continue to be P&N Bank members and P&N Bank will recognise the length of membership from either bcu or P&N Bank, whichever is longer; and . bcu’s AFSL, ACL and its banking authority under the Banking Act will be cancelled and bcu will be deregistered as a company.
______56 Except the bcu directors, who will remain bcu members until the deregistration of the company. 57 Excluding those bcu members who are already members of P&N Bank, in which case bcu will refund the amount paid up on that member’s redeemable preference share. 58 Assuming that all bcu redeemable preference shares have an issue price of $10. If the amount paid for a redeemable preference share exceeds $10, the bcu member will receive a refund equal to the difference.
40
Member Booklet 93
bcu members will no longer have a direct interest in bcu in the form of bcu redeemable preference shares but will have an interest in bcu’s business (as well as P&N Bank’s business) through being a P&N Bank member and holding a P&N Bank member share (along with all other P&N Bank members). Governance If the Merger is completed: . the P&N Bank Board will comprise a maximum of 10 directors, including: • six current P&N Bank directors (including the current P&N Bank Chairman). It is expected that these directors will be Mr Paul Gabb, Mr Ed Bradley, Ms Julie Elliott, Ms Kellie Properjohn, Mr Alan Philp and Mr Trevor Hunt. Mr Gabb, Ms Properjohn, Mr Philp and Mr Hunt will be member elected directors and Mr Bradley and Ms Elliott will be Board appointed directors;
• three current bcu directors (including the current bcu Chairman). At least one director must represent the bcu Mid North Coast, New South Wales region. It is expected that these directors will be Mr Stephen Targett, Ms Louise Clarke and Mr Gary Humphreys. Ms Clarke and Mr Humphreys will be member elected directors and Mr Targett will be a Board elected director; and
• P&N Bank’s CEO, Mr Andrew Hadley. Two of P&N Bank’s current directors, Mr Stephen Melville and Mr Eric Smith, and three of bcu’s current directors, Mr Geoffrey Hardaker, Mr Sinclair Black and Mr Michael Gould, will not be on the P&N Bank Board. Each director will have a term of office that expires at either the P&N Bank AGM to be held in 2020 or the P&N Bank AGMs to be held in 2021 and 2022. There will be no change to the P&N Bank Board committees (covering audit, risk and Board governance and remuneration) or the Nominations Committee; . the current chairman of P&N Bank, Mr Paul Gabb, will remain as chairman of P&N Bank (although it is intended that Mr Gabb will retire as a director of P&N Bank at the 2020 AGM) and the current Chairman of bcu, Mr Stephen Targett, will be appointed as the Deputy Chairman of P&N Bank; . P&N Bank’s CEO, Mr Andrew Hadley, will remain CEO of P&N Bank; . a general manager of the bcu business and a general manager of the P&N Bank business will be appointed to oversee each of the businesses and report directly to the CEO; and . an Advisory Council will be established for each of the bcu and P&N Bank businesses responsible for: • advising on the needs and priorities of service delivery to customers;
• observing and providing feedback on the financial and non-financial performance of the brand;
• assisting in developing links with local employers and communities;
• providing feedback on product development;
• acting as ambassadors to grow and promote the brand;
• advising on local economic conditions and impacts on business growth;
• advising on the local competitor landscape and activities;
• providing direct member feedback on service delivery and marketing strategy;
• using local connections for introductions to staff;
• advising on priorities for local community initiatives and sponsorships; and
• providing input into strategic and business planning processes.
41
94 Bananacoast Community Credit Union Ltd
The bcu Advisory Council will initially comprise up to six member representatives, the majority of which must reside in the Coffs Coast region. Current bcu directors, Mr Geoffrey Hardaker and Mr Sinclair Black (who will not be appointed as directors of P&N Bank), from the Coffs Coast region, have agreed to become representative members of the bcu Advisory Council. An appropriate process to identify and invite other bcu members to become representative members of the bcu Advisory Council will be conducted after the Merger is completed. The P&N Bank CEO will be a non-member attendee of the bcu Advisory Council. The bcu Advisory Council is designed to give bcu members a voice on key matters relating to the needs and priorities of service delivery and priorities for local community initiatives, across the bcu regions. Similarly, the P&N Bank Advisory Council will initially comprise up to six representative members (including current P&N Bank directors who will not be P&N Bank directors after the Merger is completed) with the P&N Bank CEO as a non-member attendee.
6.2 Membership and Member Rights Membership There is very limited overlap between members of bcu and members of P&N Bank. bcu and P&N Bank have estimated that there are only around 10 members of both mutual ADIs. As a result, if the Merger is completed, the total number of P&N Bank members will increase to almost 150,000 located across the east and west coasts of Australia. Member Rights The rights and obligations of P&N Bank members are set out in Section 5.3 of this report. While there are some differences to the rights and obligations of bcu members under the bcu Constitution, the key rights in relation to voting, redemption, termination/cessation of membership, transfer, transmission and participation in a winding up are similar. The key differences for bcu members are summarised below:
P&N BANK VS bcu – KEY DIFFERENCES IN MEMBER RIGHTS AND OBLIGATIONS
RIGHT/OBLIGATION P&N BANK bcu 25 members present in person or 50% of 10 members entitled to vote on a resolution members eligible to attend and vote if less at the meeting (present in person or by Quorum than 50 members are eligible to attend and proxy) vote at a meeting Four members who have been members for Two members must nominate a candidate 12 months or more have the right to All directors are elected by members (other nominate a candidate than casual vacancies which are appointed Nominations Committee determines by the directors but must be elected by Appointment of directors whether person becomes a candidate members at the next AGM) (based on “fit and proper” assessment) No more than six member elected directors (out of a maximum of 10) Right to participate in any dividend only if No entitlement to dividends approved at general meeting of members59 Dividends Each member share has equal right to participate in dividends with every other member share On voluntary winding up, members may Participation in winding up resolve to transfer any surplus to any company with a mutual structure No voting eligibility restriction At least 25% of members who have been Transfer of business members for at least 24 months vote
______59 Although as far as P&N Bank management is aware, no dividends have ever been paid by P&N Bank.
42
Member Booklet 95
P&N BANK VS bcu – KEY DIFFERENCES IN MEMBER RIGHTS AND OBLIGATIONS (CONT)
RIGHT/OBLIGATION P&N BANK bcu Must have been a member for not less than Must have been a member for at least 12 Participation on demutualisation two years months (“eligible members”) Special resolution (75%) where at least 25% Unless recommended by the directors, of members vote (by postal ballot) demutualisation resolution cannot be put to members if the same or a substantially similar resolution was put and not passed at a meeting held within the prior three Requirements for demutualisation years Special resolution (at least 75% of eligible members) where at least 5% of eligible members vote and at least 25% of members who have been members for at least 24 months vote P&N Bank Constitution and bcu Constitution
6.3 Business Operations and Strategy Business Operations The principal activities of the Combined Entity will focus on providing financial services to retail consumers and SMEs. If the Merger is completed, it is intended that the current brands of bcu and P&N Bank will be retained, and an umbrella brand may be adopted in the future to create a model for further industry consolidation. Neither bcu members nor P&N Bank members are intended to be disadvantaged with respect to the benefits and pricing associated with any products or services held by a member on completion of the Merger. P&N Bank will continue to offer its existing suite of products and services (set out in Section 5.4 of this report) as well as offering (at least initially) the products and services currently provided by bcu (set out in Section 4.4 of this report). Ultimately, it is expected that all P&N Bank members (including P&N Bank members who were previously bcu members) will have access to a broader range of products, services and distribution channels, including: . deposit products (including RSAs) and lending products (home, business and personal loans); . financial planning services; . arrangements with third parties to provide general and life insurance and foreign exchange/ international payments services; and . a distribution network comprising: • 36 locations (bcu stores and P&N Bank branches):
• access to contact centres operating from 9.00am to 8.00pm Monday to Friday and 11.00am to 7.00pm Saturday AEST; and
• enhanced digital capability (online banking, mobile banking app, digital wallets, instant digital cards and ActivePay). bcu members will also retain fee-free access to Coastline ATMs and 49 bcu ATMs in bcu’s local regions. P&N Bank branches will not be able to sell bcu products and bcu stores will not be able to sell P&N Bank products but all locations will be able to service bcu and P&N Bank customers.
43
96 Bananacoast Community Credit Union Ltd
The Continuing Entity will have a more diversified loan portfolio, by both type of loan and geography: CONTINUING ENTITY – PRO FORMA COMPOSITION OF GROSS LOANS AND ADVANCES AT 30 JUNE 2018 LOAN TYPE GEOGRAPHY
6% 2% 9% 6%
21%
64%
92%
Western Australia New South Wales Housing Commercial Personal Queensland Other P&N Bank and bcu The Continuing Entity’s commitment to community support will continue. Under the MIA, P&N Bank has committed to spend, at a minimum, the annual investment by bcu in the mid North Coast region (including but not limited to costs of staff, service providers and sponsorship) at the date of the MIA, adjusted for the consumer price index (“CPI”) each year and part of the cost savings from the Merger are expected to be used for further annual charitable donations, with bcu members to be consulted on which charities should receive further support. The head office of P&N Bank will be located in Perth, and the head offices of bcu in Coffs Harbour and Brisbane will be retained as organisational hubs for the bcu business of the Continuing Entity. No bcu stores or P&N Bank branches will be closed as a result of the Merger. No bcu or P&N Bank employee will be forced to take a redundancy as a result of the Merger: . the terms and conditions of employment (including any accrued entitlement to employee benefits) of each bcu employee transferred to P&N Bank and each P&N Bank employee at completion of the Merger will continue to apply after completion of the Merger; and . the roles of P&N Bank and bcu senior executives will be restructured on completion of the Merger. Each current executive will have the opportunity to nominate for any position they currently hold which is substantially the same in both bcu and P&N Bank or any other position they deem themselves to be suitably qualified for, and the selection process will be transparent, fair and based on merit. The proposed executive team for the Continuing Entity is set out in Section 4.6(e) of the Member Booklet. A suitable position has not been able to be agreed for the current bcu CEO, Mr Alan Butler, and he has indicated that his preference is to leave the Continuing Entity if the Merger is implemented. Strategy P&N Bank’s strategy is set out in Section 5.4 of this report. The Merger is consistent with P&N Bank’s vision to be recognised as the Western Australian challenger brand in retail financial services, doubling the size of the business by 2020. It is expected that P&N Bank will continue with its current strategy if the Merger is implemented.
44
Member Booklet 97
The Merger is intended to create a multi-brand ADI with an overarching group structure that operates to benefit and grow the current brands of each of bcu and P&N Bank, at the same time divesting decision making authority and autonomy to the respective brands within an agreed framework. For example: . the Continuing Entity will maintain separate brands (bcu and P&N Bank) that will compete in the market, with the brand general managers responsible for design and delivery of the customer value proposition; . all distribution channels will be available seamlessly to all customers (although the brands will not be able to sell the other’s products through branded distribution channels); . each brand will retain its front line presence (no jobs will be lost other than through natural attrition); . there will be one common virtual contact centre platform; . each brand will maintain separate business operations in areas where an extensive knowledge of the market and customers or a non-transmittable know-how is required; . each brand will retain its own digital distribution channels, but these will be operated by the same back- end technology platform and there will be continuous investment in digital capabilities for both brands; . there will be single common online banking systems and operating systems where possible (i.e. except where operating systems are not able to be migrated as it would result in a negative impact on customers, members or the running of the business); and . all group support functions (human resources, technology, risk and compliance, property, legal/company secretary, data and market intelligence, strategy and development) will be consolidated and the Continuing Entity will shift to a virtual team model (allowing group executives to remain in their current locations). This operating model recognises that the Merger is the first step in creating a model that may appeal to other mutual ADIs considering their future, providing the opportunity for further inorganic growth and creating a member-focused mutual ADI with the scale to compete effectively with other participants in the Australian banking sector. 6.4 Financial Impact Impact on Financial Performance The Continuing Entity pro forma financial performance for FY18 is set out in Section 5.2 of the Member Booklet. It has been prepared on the basis that the Merger was completed on 1 July 2017. The Continuing Entity pro forma financial performance for 1HY19 is not set out in the Member Booklet. To provide an indication of the Continuing Entity’s financial performance for 1HY19, Grant Samuel has prepared the 1HY19 pro forma financial performance. The Continuing Entity pro forma financial performance is summarised below: CONTINUING ENTITY – PRO FORMA FINANCIAL PERFORMANCE ($ MILLIONS)
YEAR ENDED SIX MONTHS TO
30 JUNE 2018 31 DEC. 2018 Net interest income 115.1 57.7 Other income 29.8 13.4 Bank net operating income 144.9 71.1 Bank operating expenses (107.4) (56.6) Impairment loss (4.7) 0.3 Bank profit before tax 32.8 14.8 Bank tax expense (9.9) (4.6) Bank profit after tax 22.9 10.2 Other activities (net of tax and non-controlling interest) (0.1) 0.1 Profit after tax attributable to members 22.8 10.3
45
98 Bananacoast Community Credit Union Ltd
CONTINUING ENTITY – PRO FORMA FINANCIAL PERFORMANCE ($ MILLIONS) (CONT)
YEAR ENDED SIX MONTHS TO
30 JUNE 2018 31 DEC. 2018 STATISTICS Net interest margin 2.10% nc Bank cost to income ratio 74.2% 79.6% Impairment loss to loans and advances 0.09% nmc Bank profit after tax margin 15.8% 14.4% Bank return on assets 0.40% nc Bank return on equity 5.5% nc bcu, P&N Bank and Grant Samuel analysis The Continuing Entity pro forma financial performance represents the aggregation of bcu’s FY18 and 1HY19 financial performance (see Section 4.5) and P&N Bank’s FY18 and 1HY19 financial performance (see Section 5.5). While it is expected that: . consolidating the operations of bcu and P&N Bank into a single set of systems and processes is expected to realise significant operational synergies equating to over $5 million in annual cost savings (see Section 7.3.1(v)); and . P&N Bank has committed to use a material portion of the cost savings to: • remove banking fees on certain products for P&N Bank members (including former bcu members) (see Section 7.3.2(ii));
• pay higher interest rates on certain P&N Bank transaction and savings accounts; and
• make further annual charitable donations, with bcu members to be consulted on which charities should receive further support (see Section 7.3.1(iv)), the Continuing Entity pro forma financial performance does not reflect these cost savings and other initiatives. It also does not reflect any revenue from organic growth opportunities (see Section 7.3.1(vi)) or any transaction or integration costs expected to be incurred by bcu, P&N Bank and the Continuing Entity (see Section 7.4.3). The Continuing Entity pro forma financial performance for FY18 in the table above differs from that shown in Section 5.2 of the Member Booklet as it shows P&N Bank’s non-banking income and expenses (i.e. financial planning and specialised property activities) separately as a single profit after tax figure from other activities (consistent with the presentation of P&N Bank’s financial performance in Section 5.5). The impact on pro forma profit after tax for FY18 and 1HY19 is immaterial. The Continuing Entity pro forma financial performance shows a deterioration in the key statistics (i.e. lower net interest margin, higher bank cost to income ratio, lower bank profit after tax margin and lower bank return on assets and return on equity) relative to bcu on a stand-alone basis, reflecting the impact of P&N Bank’s bank operations on the Continuing Entity. However, it would be expected that these statistics would improve back to levels similar to those achieved by bcu on a stand-alone basis (other than bank return on assets and bank return on equity) if the cost savings and revenue from the organic growth opportunities eventuate. As the Merger is expected to be completed in November 201960, the Merger will have no impact on the financial performance of bcu or P&N Bank in FY19. The impact of the Merger on P&N Bank’s FY20 earnings will be material as bcu will have been merged with P&N Bank for approximately eight months. P&N Bank will also incur transaction and integration costs. FY21 will be the first full year of operation of the Continuing Entity.
______60 Subject to the conditions precedent to the Merger being satisfied or, if applicable, waived. See Section 7.6.3.
46
Member Booklet 99
Impact on Financial Position The Continuing Entity pro forma financial position at 30 June 2018 is set out in Section 5.2 of the Member Booklet. It has been prepared on the basis that the Merger was completed on 30 June 2018. The Continuing Entity pro forma financial position at 31 December 2018 is not set out in the Member Booklet. To provide an indication of the Continuing Entity’s financial position at 31 December 2018, Grant Samuel has prepared the 31 December 23018 pro forma financial position (prepared on the basis that the Merger was completed on 31 December 2018). The Continuing Entity pro forma financial position is summarised below:
CONTINUING ENTITY – PRO FORMA FINANCIAL POSITION ($ MILLIONS)
AT AT 30 JUNE 31 DECEMBER 2018 2018 Cash and financial assets 840.5 910.2 Loans and advances 4,965.5 4,980.5 Property, plant and equipment 15.1 16.3 Intangible assets 6.6 6.5 Other assets 19.7 29.9 Total bank assets 5,847.4 5,943.4 Deposits (4,514.6) (4,658.1) Borrowings (864.5) (816.8) Other liabilities (44.9) (34.9) Total bank liabilities (5,424.1) (5,509.8)
Bank net assets 423.4 433.6 Net assets of other activities (net of non-controlling interest) 1.0 (3.7) Members’ funds 424.4 429.9 STATISTICS Growth in loans and advances +4.0% +0.3% Growth in total bank assets +3.8% +1.6% Growth in deposits +4.5% +3.2% Loan to deposit ratio 110.0% 106.9% Growth in bank net assets +5.8% +2.4% Capital adequacy ratio 15.2% nc Member Booklet and Grant Samuel analysis The Continuing Entity pro forma financial position represents the aggregation of bcu’s financial position at 30 June 2018 and 31 December 2018 (see Section 4.6) and P&N Bank’s financial position at 30 June 2018 and 31 December 2018 (see Section 5.6). It reflects the transfer of bcu’s assets and liabilities to P&N Bank but does not reflect transaction costs associated with the Merger. The Continuing Entity pro forma financial position at 30 June 2018 in the table above differs from that shown in Section 5.2 of the Member Booklet as it shows P&N Bank’s non-banking assets and liabilities (i.e. financial planning and specialised property activities) separately as a single net assets figure (consistent with the presentation of P&N Bank’s financial position in Section 5.6). The impact on pro forma total assets at 30 June 2018 is immaterial. The pro forma financial position at 31 December 2018 shows that the Continuing Entity will have: . total bank assets of $5.9 billion and bank net assets of $434 million; and . a diversified funding structure, with retail deposits representing approximately 85% of total funding. At 30 June 2018, the pro forma capital adequacy ratio for the Continuing Entity was well above APRA’s minimum prudential requirements and benchmarks and above the internal limit imposed by the P&N Bank board.
47
100 Bananacoast Community Credit Union Ltd
7 Evaluation of the Merger
7.1 Summary and Conclusions bcu is facing a challenging external environment. Market conditions, particularly for home loans, are extremely competitive, driven by new entrants and business models, and an extended period of low loan growth and low interest rates, which has intensified more recently due to weakness in housing prices and tighter lending policies. The consequent challenges for smaller mutual ADIs, such as bcu, are exacerbated by increasing regulation and the requirement to make ongoing investments in technology and innovation to maintain an attractive and competitive banking offer that meets the increasing expectations of customers. While bcu’s business should be sustainable in the medium term, it will face increasing pressures on a stand- alone basis. In particular, bcu’s lack of scale and the requirement for ongoing investment in regulatory and mandatory technological change has meant that it does not have the necessary resources (staff and funding) required to develop and maintain an attractive banking offer (including digital). This constraint is ultimately expected to reduce bcu’s future competitiveness and capacity to attract and retain members, particularly the younger generation, which is required to sustain the business over the long term. The bcu Board has recognised that bcu does not have the scale, on its own, to access the resources required to invest in enhancing its capabilities to enable it to maintain a relevant member proposition. After reviewing the alternatives, the bcu Board concluded that merging with another banking organisation at some time in the future was inevitable and that a merger with a suitable mutual banking organisation to access the resources required was the most appropriate option to address the strategic challenges and risks. The Merger is an attractive proposition. bcu will become part of a stronger and larger mutual ADI that is more capable of competing in the current market and more resilient to future strategic risks than bcu as a stand-alone entity. It will provide bcu’s business with access to the resources necessary to deliver digital capabilities to improve the proposition to existing members and attract new members (particularly younger demographics). bcu and P&N Bank have put considerable effort into developing an operating and governance model which retains the bcu attributes that members value highly – its brand, staff and stores, local decision making, and commitment to the local community – which is possible because of the separate geographical footprints of the two entities. There will also be some Board continuity and an Advisory Council, both of which are required to include local representation. There are expected to be significant cost savings, primarily from consolidating operations into a single set of systems and processes, as well as the potential for organic growth from deploying P&N Bank’s digital banking capabilities to target new home loan growth in bcu’s geographical markets and leveraging bcu’s capabilities and systems to provide a commercial and specialist property banking offer in Western Australia. The Merger may also provide opportunities for future inorganic growth through the potential for mergers with other mutual ADIs (although there is no certainty that such opportunities will eventuate). The Merger has benefits for bcu members both as banking customers and as members of P&N Bank (the Continuing Entity). Immediately following the Merger, there will be no change to products and no intended change to the banking details of existing bcu members (with any unavoidable change communicated well in advance). Some bcu members will specifically benefit from the cost savings expected to be achieved as a result of the Merger through a commitment to remove banking fees from certain products. Expected cost savings will also be used provide further community support. bcu’s members should be able to access an enhanced range of products, services and distribution channels, including greater mobile banking capabilities (all three digital wallets and instant digital cards). Following conversion of bcu’s banking system to P&N Bank’s banking system, bcu members will have access to the full range of services provided by P&N Bank, including a new mobile banking app with greater features and capabilities. Services will also be enhanced, with longer contact centre operating hours and access to a store and branch network across the
48
Member Booklet 101
east and west coasts of Australia. As members of P&N Bank, bcu members will be customers of a more robust banking business while remaining members of a mutual committed to community involvement and service to members. There are disadvantages, although most have mitigating factors: . by voting in favour of the Merger, bcu members will forgo the opportunity to benefit from an alternative proposal such as a demutualisation (accompanied by a sale of the company to a third party or a sharemarket listing) or a voluntary winding up, that could crystalise value for bcu members. However, a demutualisation would only be possible if the bcu Board was to make the decision to put a demutualisation or similar transaction to bcu members for their approval, which is considered unlikely. If bcu members wanted bcu to be wound up as an alternative to the Merger, they have had ample opportunity since announcement of the Merger to communicate this to the bcu Board and this has not been the case. Furthermore, the Merger does not prevent other alternatives such as future mergers with other mutual ADIs or becoming an Alliance Bank in partnership with Bendigo and Adelaide Bank Limited (“Bendigo and Adelaide Bank”); . there will be changes to the rights of bcu members, particularly the right to participate in bcu’s reserves on a winding up or demutualisation. In reality, the entitlement to participate in bcu’s reserves is a contingent right (i.e. it is only of value in the event that bcu is wound up or demutualises, both of which are considered unlikely). In any event, to the extent that these changes may be considered a disadvantage, they are mitigated by the right that bcu members will have as members of P&N Bank to participate in the distribution of the Continuing Entity’s surplus and profits on a winding up or demutualisation of the Continuing Entity; and . there will be transaction and implementation costs. bcu’s transaction costs, while immaterial in the context of the Merger, are material to bcu and will be incurred by bcu on a stand-alone basis if the Merger does not proceed. The main risks of the Merger are implementation risks. There will be a risk that the integration of bcu and P&N Bank takes longer or costs more than is expected and any delay in integration is likely to delay the provision of benefits to members. While there is a plan in place to minimise integration risks, it is not possible to eliminate them entirely. There will also be ongoing execution risks associated with successfully implementing the governance and operating model, having group executives geographically spread across the east and west coasts of Australia and managing cultural/organisational differences. Despite the operating and governance model, bcu members will also be exposed to the activities of P&N Bank (including its financial planning business, specialised property activities and reverse mortgage portfolio). The Merger is mutually beneficial for bcu and P&N Bank. bcu requires scale and access to resources to remain relevant and competitive, and P&N Bank has a vision to double the size of its business by 2020. Each business also has something to offer the other through the cross selling of complementary products and distribution channels. By acting now, bcu is able to have some influence over its future (at the very least through merging with a partner of its choice). As a stand-alone entity, bcu’s ability to influence its future is likely to diminish over time given its position and current market conditions. In Grant Samuel’s opinion, the advantages of the Merger outweigh the disadvantages and bcu members are likely to be better off if the Merger proceeds. Accordingly, in the absence of a superior proposal: . the Merger is in the best interests of bcu members; and . the benefits being provided to bcu members are reasonable having regard to any loss of rights and change as to voting rights and rights to participate in the reserves and profits of bcu. As bcu members are effectively swapping an interest in one mutual for an interest in another mutual rather than exchanging their interest for cash and/or marketable securities in the acquiring entity, it is not
49
102 Bananacoast Community Credit Union Ltd
possible to value a membership interest in either bcu or P&N Bank and therefore it is not meaningful to provide an opinion on whether the benefits being provided to members are “fair”.
7.2 Background The Australian banking sector is dominated by the major banks, which have an estimated 80% market share. At 31 December 2018, there were 70 mutual ADIs (including mutual banks, credit unions and building societies), which collectively had a market share of around 3-4%. Market conditions, particularly for home loans, are extremely competitive, driven by new entrants and business models, and an extended period of low loan growth and low interest rates, which has intensified more recently due to weakness in housing prices and tighter lending policies (subsequent to the Royal Commission). These conditions have put pressure on net interest margins and cost to income ratios. The consequent challenges for smaller ADIs, such as bcu, are exacerbated by increasing regulation and its impact on lending growth, capital requirements and compliance costs and the requirement for significant, ongoing investment in technology and innovation to maintain an attractive and competitive offering that meets increasing customer expectations for banking products and services. In addition to a challenging external environment, mutual ADIs, including bcu, are dealing with a declining and ageing member base, a high cost base (reflecting their sub-scale operations) and lack of an attractive digital offering. As a result, it is increasingly difficult for many smaller mutual ADIs to provide a relevant proposition to members and attract a younger generation of members. While members of mutual ADIs consistently report high levels of member satisfaction, indicating that there is a role for mutual ADIs in the Australian banking sector, scale is critical for mutual ADIs to remain relevant and competitive over the long term. bcu’s business should be sustainable in the medium term given its track record of profitable growth (albeit this has largely been achieved through a focus on the short term as well as not investing in key areas such as wages and digital/IT) and its relatively conservative target operating parameters (e.g. a reduction in the Board approved required return on assets would free up capital to fund investment in technology and innovation). However, it is facing increasing challenges and pressures on a stand-alone basis and it will be difficult for bcu to remain sustainable at its current size over the long term. In particular, bcu’s lack of scale and the requirement for ongoing investment in regulatory and mandatory technological change has meant that it does not have the necessary resources (staff and funding) required to develop and maintain an attractive digital offering. This constraint is ultimately expected to reduce bcu’s future competitiveness and capacity to attract and retain members, particularly the younger generation, which is required to sustain the business over the long term. The bcu Board has recognised that the status quo is not sustainable in the long term, and believes it is clear that bcu does not have the scale, on its own, to access the resources required to invest in enhancing its capabilities to enable it to maintain a relevant member proposition. After conducting a review of the alternatives, the bcu Board concluded that merging with another banking organisation at some time in the future was inevitable and that a merger with a suitable mutual banking organisation to access the resources required was the most appropriate option to address the strategic challenges and risks. Furthermore, proactively seeking to execute a merger now enables bcu to select the right partner for bcu members and its communities. Waiting until it must act could ultimately lead to a different merger in the future and an inferior outcome for bcu and its members. Prior to entering into the MIA, the bcu Board considered a number of potential member owned banking organisation merger partners, formed the view than P&N Bank was the most appropriate merger partner and undertook a due diligence process on P&N Bank. Based on this process, the Board decided unanimously to recommend the Merger to bcu members.
50
Member Booklet 103
7.3 Advantages and Benefits of the Merger The advantages and benefits of the Merger for bcu and for bcu members (both as banking customers and as P&N members) are set out below.
7.3.1 Impact on bcu While bcu has achieved growth in its performance over recent years, its size restricts its ability to invest in the products, services and new technologies required to provide a relevant banking offer to bcu members and to attract new members, particularly the younger generation. The Merger will provide bcu’s business with access to scale and the resources necessary to grow and to better meet the needs of bcu members. The advantages and benefits of the Merger for bcu’s business are discussed in more detail below. (i) Scale The Merger will secure a sustainable long term future for bcu. If the Merger is implemented, bcu will become part of a stronger and larger mutual ADI that is more capable of competing in the current market and more resilient to future strategic risks than bcu as a stand-alone entity. The Continuing Entity will be one of the top 10 mutual ADIs. At 30 June 2018, P&N Bank was the tenth largest mutual ADI (based on total assets), with total bank assets of $4.1 billion and 92,107 members. The Continuing Entity would have been the eighth largest mutual ADI (at 30 June 2018), with pro forma total bank assets of $5.8 billion and almost 148,000 members. The scale of the Continuing Entity should: . provide geographical diversification (with significant loan and deposit portfolios on the east and west coasts of Australia) which should lower the risks associated with earnings volatility and portfolio concentration; . allow it to leverage its largely fixed cost base, in particular, compliance and regulatory costs, enabling it to operate more efficiently and reducing the total cost on a per member basis; and . better position the bcu and P&N Bank businesses to compete through an enhanced platform that provides members with greater access to services, convenience and more attractive products and services. (ii) Access to Resources The Merger will provide bcu’s business with access to the resources necessary to deliver digital capabilities to improve the proposition to existing members and attract new members (particularly younger demographics) and enable the bcu business to remain competitive over the medium term. These resources include: . P&N Bank’s current technology (including modern back-office technology and systems) that will deliver more efficient services for bcu members as well as its digital offerings (including digital wallets and instant credit cards) that will enable the provision of an attractive banking offer for bcu members; . financial capacity. P&N Bank currently spends around $8-9 million per annum on IT, of which $2 million is spent on digital projects. It is constantly updating and innovating to meet the changing expectations and needs of customers. P&N’s annual IT budget is well excess of bcu’s annual IT expenditure, and bcu does not have the financial capacity to match this level of expenditure; and . a large and experienced IT team. P&N Bank has 20 IT staff and a further four focused on digital products with significant experience in digital/IT projects that will be able to be leveraged across bcu’s business. In contrast, bcu has a relatively small existing IT team which does not have the depth of experience to pursue innovative digital and IT projects.
51
104 Bananacoast Community Credit Union Ltd
A stand-alone digital strategy would require a substantial investment and would be a prohibitively expensive and risky undertaking for bcu. As part of the Continuing Entity, an equivalent or better digital strategy should be able to be implemented for bcu members more quickly, at significantly lower cost and with lower risk. (iii) Minimal Organisation Issues bcu and P&N Bank have put considerable effort into developing an operating and governance model for the Continuing Entity which secures attributes that bcu members value highly over the medium term. Under this agreed operating and governance model, and because the geographical footprints of bcu and P&N Bank do not overlap, the Merger has minimal impact on bcu’s organisational structure. In particular: . the bcu brand, which is respected and trusted in bcu’s local communities and has high member engagement, will be maintained; . there will be no store closures; . all bcu employees will be offered a role in the Continuing Entity and there will be no forced redundancies of staff from bcu directly as a result of the Merger. There will also be increased job security and better opportunities for bcu staff in a larger business; . the bcu business will have the authority and autonomy to make key local decisions (e.g. lending, marketing, recruitment etc), within the broader group framework; . a general manager of the bcu business will be appointed to oversee the bcu business and will report to P&N Bank’s CEO; and . three of the six current directors of bcu will join the P&N Bank Board (along with seven of the eight current directors of P&N Bank, including the P&N Bank CEO) and at least one director will represent the Mid North Coast, New South Wales region, ensuring some continuity and local representation at Board level as well as influence over the governance of the Continuing Entity. The bcu Board believes that three bcu directors is fair representation given bcu’s contribution to the Continuing Entity’s total assets (i.e. bcu contributes approximately 30% to the Continuing Entity’s pro forma total bank assets at 31 December 2018). While P&N Bank’s Chairman will remain as chairman of P&N Bank, bcu’s Chairman will be appointed Deputy Chairman of P&N Bank and the Chairman will retire at the 2020 AGM. In addition, an Advisory Council will be established for the bcu business. The bcu Advisory Council will comprise up to six members, with the majority residing in the Coffs Coast region, and will be responsible for representing members interests, acting as bcu ambassadors and advising on priorities for local community initiatives (see Section 6.1 for more details on the Advisory Council). An inability to agree these types of issues is often cited as the main reason why mergers of mutual organisations are not able to be completed. (iv) Continued Community Involvement As mutual organisations, both bcu and P&N Bank have long histories of involvement with the communities in which they operate. bcu focuses its community support into its local community and is one of the largest donors to charities, clubs and organisations across its main regions of Port Macquarie, Coffs Coast, Clarence Valley, Northern Rivers and the Sunshine Coast. P&N Bank’s community support is focused on organisations operating in Perth and Western Australia. If the Merger is completed, P&N Bank has committed to spend, at a minimum, the current annual investment by bcu in the mid North Coast region (CPI adjusted in future years) and has stated that it will provide further annual charitable donations, with bcu members to be consulted on which charities should receive further support.
52
Member Booklet 105
(v) Cost Savings bcu and P&N together undertook a detailed analysis of the potential to realise cost savings through combining their businesses. On the basis of this analysis, the Merger is estimated to generate over $5 million of annual pre-tax cost savings, which are expected to be achieved progressively over a period of three years from completion of the Merger. The savings primarily come from consolidating operations into a single set of systems and processes (e.g. a common banking platform and IT, digital and technology infrastructure to support both brands, fraud and cyber security management and consolidation of operations and human resource management) and employees (only through natural attrition and voluntary redundancy). The estimated cost to achieve these savings is $5 million (to be incurred over the period to 31 December 2020). The quantum of the estimated cost savings is significant having regard to both bcu’s and the Continuing Entity’s financial performance, representing: . more than 12% of bcu’s FY18 operating cost base and almost 50% of bcu’s FY18 net profit after tax; and . around 5% of the Continuing Entity’s FY18 pro forma operating cost base and around 20% of the Continuing Entity’s FY18 pro forma net profit after tax. bcu members will benefit from these cost savings through: . specifically, P&N Bank’s commitment to apply a portion of the cost savings to remove monthly fees from personal access accounts and personal loans and certain transaction fees on personal access accounts; and . more generally, the Continuing Entity having greater capacity to invest in the business to deliver products and services that meet the needs and expectations of existing members and attract new members. The Continuing Entity will also use some of the cost savings expected to be achieved as a result of the Merger to provide further annual charitable donations. (vi) Organic Growth Opportunities The Continuing Entity should have organic growth opportunities in the short term through: . deploying P&N Bank’s digital banking capabilities to target new home loan growth opportunities in bcu’s geographical markets; and . leveraging bcu’s capabilities and systems to develop and execute a strategy to provide a commercial and specialist property banking offer in Western Australia. P&N Bank’s banking system has considerable capacity (up to one 1 million customers) and there are no practical limitations on the scalability of its digital platforms (within reason). bcu and P&N Bank have not disclosed the additional revenue possibly available, but it could add materially to the estimated cost savings (see paragraph (v) above). (vii) Future Inorganic Growth In addition to organic growth potential, the Merger may provide opportunities for future inorganic growth through the potential for mergers with other mutual ADIs, further increasing the scale of the Continuing Entity and providing the ability to generate additional benefits to all existing and new members over the longer term. At 30 June 2018 there were 71 mutual ADIs in Australia which collectively held $113 billion in total assets. Excluding the 10 largest mutual ADIs, which arguably have sufficient scale to remain independent, the remaining smaller mutual ADIs had around $38 billion in total assets.
53
106 Bananacoast Community Credit Union Ltd
As P&N Bank is the only locally domiciled mutual ADI in Western Australia, its logical expansion opportunity is to the eastern states of Australia. The membership and total assets of selected northern New South Wales and south east Queensland-based mutual ADIs (which are likely to be the potential candidates for some form of merger with the Continuing Entity) are set out below:
SELECTED NORTHERN NEW SOUTH WALES AND SOUTH EAST QUEENSLAND-BASED MUTUAL ADIS
TOTAL ASSETS AT 30 JUNE 2018 LOCATION MEMBERS ($ MILLIONS) Top 10 Credit Union Australia East Coast of Australia 473,310 15,617.9 Newcastle Permanent Building Society Mid Coast of New South Wales >325,000 10,716.1 Heritage Bank South East Queensland np61 9,524.4 Greater Bank North Coast of New South Wales >250,000 6,711.2 Other Queensland Country Credit Union62 Regional and South East Queensland ~95,000 2,167.5 Regional Australia Bank63 Regional New South Wales 60,000 1,403.9 Unity Bank64 Central West and Northern New South Wales np 1,090.5 QBANK Brisbane np 839.7 Summerland Credit Union Northern New South Wales np 689.2 Holiday Coast Credit Union63 Mid North Coast of New South Wales 25,000 607.7 Southern Cross Credit Union Northern New South Wales np 522.0 Warwick Credit Union65 South East Queensland 10,000 277.7 KPMG Mutuals Industry Review 2018, company annual reports and websites There is clearly the opportunity to significantly increase the scale of the Continuing Entity through merging with other northern New South Wales and south east Queensland-based mutual ADIs. The selected mutual ADIs in the table above (other than those in the top 10 mutual ADIs) had more than $7.5 billion in total assets at 30 June 2018. While the operating and governance model that would apply to future mergers may be attractive to some of these mutual ADIs, there may be some impediments that could prevent or delay such mergers: . there will be a minimum size below which a merger is not practicable as the costs of merging will outweigh the benefits; and . any merger could only proceed on a co-operative “agreed” basis (i.e. it is not possible for a “hostile” merger to succeed). These mutual ADIs may not be responsive to a merger proposal from the Continuing Entity in the short to medium term, although this position could change if their performance deteriorates and/or there is positive feedback about the Merger.
7.3.2 Impact on bcu Members as Banking Customers (i) No Change to Banking Products of Existing bcu Members There will be no change to products and no intended change to the banking details of existing bcu members immediately following completion of the Merger.
______61 np = not published. 62 Queensland Country Credit Union merged with Queenslanders Credit Union effective from April 2018. 63 Regional Australia Bank merged with Holiday Coast Credit Union effective from 1 July 2019. The merged group has total assets of around $2 billion and 85,000 members. 64 Unity Bank merged with Central Coast Credit Union effective from December 2018. Central Coast Credit Union’s total assets at 30 June 2018 of $39.6 million are not included in total assets in the table. 65 Warwick Credit Union merged with Gympie Credit Union effective from February 2019. Gympie Credit Union’s total assets at 30 June 2018 of approximately $12 million and its more than 1,400 members are not included in total assets in the table.
54
Member Booklet 107
The MIA specifically states that it is not intended that bcu members will be disadvantaged with respect to the benefits and pricing associated with any products and services held by them at the time of the Merger. However, while bcu is committed to avoiding any changes to the banking details of bcu members, there may be changes that cannot be avoided as a result of transitioning bcu’s banking system to P&N Bank’s banking system (during 2020). Any unavoidable change will be communicated to bcu members well in advance. New products and services will be introduced for bcu members in the short to medium term, with the objective of better meeting the needs and expectations of members. (ii) Removal of Fees P&N Bank has committed to use a portion of the expected cost savings from the Merger to remove monthly fees from personal access accounts and personal loans and certain transaction fees on personal access accounts. It is expected that all other existing fees and charges will remain the same. Removal of these monthly fees and transaction fees is, collectively, a meaningful benefit for those bcu members who pay these fees. (iii) Enhanced Range of Products, Services and Distribution Channels bcu members are expected to be able to access an enhanced range of products, services and distribution channels. Following completion of the Merger, P&N Bank will share its systems and digital banking technology and capabilities, giving bcu members access to: . greater mobile banking capabilities. This will include: • access to all three digital wallets (which is a key driver to attract a younger generation of members) and;
• the ability to be issued with instant digital debit and credit cards to replace lost or stolen cards (an innovative service that is not offered by other ADIs). On conversion of bcu’s banking system to P&N Bank’s banking system, bcu members will have access to the full range of services provided by P&N Bank, including a new mobile banking app that will offer greater features and capabilities than the current bcu app; and . enhanced services, particularly in terms of distribution, improving the level of service provided to bcu members, including:
• extended contact centre operating hours (9.00am to 8.00pm Monday to Friday and 7.00am to 3.00pm Saturday AEST compared to the current 9.00am to 5.00pm Monday to Friday AEST) as a result of operating contact centres on the east and west coasts of Australia; and
• access to a store and branch network across the east and west coasts of Australia. The number of locations will increase from 21 to 36 (albeit these additional locations are in Perth, Bunbury and Mandurah and P&N Bank branches will not be able to sell bcu products). bcu members will also retain their existing access to Coastline ATMs and 49 bcu ATMs in bcu’s local regions (as well as fee-free withdrawal access at over 6,000 major bank ATMs across Australia following the removal of ATM fees by the major banks). Access to extended contact centre operating hours and a more extensive store and branch network are expected to be available to bcu members relatively quickly after completion of the Merger. Over the longer term, the increased scale and financial capacity of the Continuing Entity is expected to support continuous investment and improvement in products and services (including new technologies) to maintain a relevant offer of banking products and services. This investment is materially greater (in terms of volume, complexity and cost) than bcu could deliver on a stand-alone basis.
55
108 Bananacoast Community Credit Union Ltd
7.3.3 Impact on bcu Members as Members of P&N Bank (i) More Robust Banking Business As members of P&N Bank, bcu members will be members and customers of a more robust banking business. bcu members will gain access to an enhanced range of products, services and distribution channels that should improve customer retention and help to win new customers. The ability to utilise P&N Bank’s digital banking capabilities should enable the bcu business to target new home loan growth opportunities in bcu’s geographical markets and utilisation of bcu’s SME capabilities and systems should enable P&N Bank to provide a commercial and specialist property banking offer in Western Australia. There may also be further opportunities for future inorganic growth. The increase in scale as part of the Continuing Entity will allow the bcu business to operate more efficiently and should improve its ability to provide a relevant and competitive banking offer that meets the needs and expectations of bcu members over the long term. (ii) Ongoing Membership of a Mutual Based on the findings of recent market research focus groups, bcu members (particularly older members) value the mutual structure. As P&N Bank members, bcu members will remain members of a member owned and member-focused organisation committed to mutuality. (iii) Cultural Alignment Both bcu and P&N Bank have similar values based on their mutual heritage. Both organisations are member-focused and community-minded. bcu’s cultural values are one of the reasons bcu members choose bcu. The alignment of bcu’s cultural values with those of P&N Bank is a benefit of the Merger for bcu members as the commitment to keep members’ interests at the core of its business will continue. In a post Royal Commission environment characterised by the erosion of trust (primarily in the major banks), bcu members will benefit from: . ongoing alignment of the interests of members and customers; and . being part of a mutual ADI that has been recognised as one of the banks that is most trusted by its customers in Australia. (iv) Recognition of bcu Years of Tenure If the Merger is completed, the P&N Bank membership deemed to be granted to a bcu member will recognise the bcu member’s years of tenure. bcu members who are already P&N Bank members but have longer tenure as a bcu member will have their existing P&N Bank membership adjusted to reflect their longer tenure as a bcu member. While the only real benefit of recognition of tenure is the right that tenure provides to participate in certain decisions relating to the Continuing Entity (i.e. the right to nominate a director of P&N Bank is only available to those who have been members for 12 months or more and the right to participate in a demutualisation of the Continuing Entity is only available to those who have been members for not less than two years), many members of mutual ADIs are proud of their years of tenure and regard it as qualitatively important. Anecdotal evidence suggests that members in the bcu heartland regions (including Macksville, Nambucca Heads, Coffs Harbour, Dorrigo and Bellingen) are very proud of being bcu members and the tenure of their membership. Over 18,000 members have been bcu members for more than 20 years (and are concentrated in these heartland regions).
56
Member Booklet 109
7.4 Disadvantages of the Merger
7.4.1 Loss of Opportunity to Benefit from an Alternative Transaction Introduction If the Merger is completed, bcu members will forgo the opportunity to benefit from certain possible future alternative transactions. The most likely alternatives are a demutualisation (which could result in the release of reserves to bcu members), a voluntary winding up of the company, an arrangement with a non- mutual ADI or a proposal from another mutual ADI. These alternatives are considered below. As set out in Section 2 of this report, a membership interest in a mutual such as bcu has no current realisable value (other than repayment of the issue price of $10 (to the extent that this has been paid up) on ceasing to be a member). Any underlying “value” within the entity is not able to be accessed by members unless bcu is wound up or the bcu Board takes action to change the status of bcu and the necessary majority of members approve this change. Neither of these actions is currently contemplated. As a result, these alternatives are hypothetical. Analysis of the potential alternatives is included only to provide context for bcu members. The analysis in no way represents any kind of warranty or guarantee (express or implied) as to the likelihood of an alternative proposal or the value that might be realised. (i) Demutualisation and Sale A demutualisation and sale of bcu to a shareholder-based entity (listed or private) could crystallise value for members. However, such an outcome would only be possible if the bcu Board was to make the decision to put a demutualisation or similar transaction to bcu members for their approval. This is not consistent with the views of the bcu Board, which believes that the mutual structure provides the basis for a superior banking offer and is committed to the mutual structure provided that it can continue to deliver benefits to members. Furthermore, bcu’s reserves have been accumulated from current and past members and are held for the benefit of current and future members. A demutualisation would only reward current members and would ignore the past members who have contributed over the course of many years to the accumulation of reserves. bcu members (particularly older members) also value the mutual structure. Without the support of the requisite majority of bcu members (i.e. approval by 75% of eligible members where at least 5% of eligible members vote and at least 25% of members who have been members for at least 24 months vote66), a demutualisation and sale would not proceed. There have been a number of transactions involving the demutualisation and sale of mutual ADIs. The key parameters of relevant transactions are summarised below:
COMPARABLE TRANSACTIONS INVOLVING MUTUAL ADIS
CONSIDERATION MULTIPLE OF DATE MUTUAL ADI ACQUIRER TOTAL PER ADJUSTED ($ MILLIONS) MEMBER NTA Sep 18 Maleny Credit Union Firstmac 5.0 $1,249 1.3 Dec 15 Your Credit Union Auswide Bank 30.4-31.8 $7,424-7,779 1.2-1.4 Oct 08 My State Financial Credit Union Tasmanian Perpetual Trustees 122.8-170.6 $1,026-1,425 1.1-1.5 Aug 05 StateWest Credit Society Home Building Society 143.4-207.2 $2,241-3,237 2.2-3.3 Grant Samuel analysis
______66 Where an eligible member is one who has been a member for at least 12 months.
57
110 Bananacoast Community Credit Union Ltd
In analysing these parameters: . more weight should be placed on the two more recent transactions. The acquisitions of My State Financial Credit Union of Tasmania Limited (“My State Financial Credit Union”) by Tasmanian Perpetual Trustees Limited (“Tasmanian Perpetual Trustees”) and StateWest Credit Society Limited (“StateWest Credit Society”) by Home Building Society Limited (“Home Building Society”) took place more than 10 years ago under different regulatory and economic conditions; . each of the transactions, other than the acquisition of MCU Ltd (“Maleny Credit Union”) by Firstmac Holdings Limited (“Firstmac”), involved consideration consisting of listed scrip or listed scrip and cash. The ranges shown in the table reflect the relevant share prices on the date of announcement and on the date of the scheme booklet; . the focus is on net tangible assets (“NTA”) multiples rather than earnings multiples. Invariably in these types of transactions, the earnings multiples are very high, reflecting the significant synergies expected to be achieved; and . NTA has been adjusted for surplus capital in excess of a specified percentage67 of risk weighted assets to reflect additional capital held in the mutual ADI above a target regulatory requirement (representing the APRA minimum requirement for all ADIs (at the time) plus an assumed mutual ADI buffer). Each of the mutual ADIs above had capital adequacy ratios in excess of this target regulatory requirement at the time of their respective mergers, in part reflecting their mutual status and their inability to distribute profits. This additional capital is not required to be held in the business and has therefore been treated as a surplus asset. A demutualisation of bcu is unlikely to deliver as significant a value to members on an individual basis as the value realised in the December 2015 demutualisation of Your Credit Union. Applying a multiple of 1.2-1.4 times NTA to bcu’s adjusted NTA gives an indicative value per member in the order of $3,100-3,500:
bcu – INDICATIVE VALUE PER MEMBER
AT 31 DECEMBER 2018 REFERENCE LOW HIGH Net assets attributable to members ($ millions) Section 4.6 143.4 143.4 Intangible assets ($ millions) Section 4.6 (0.8) (0.8) NTA ($ millions) 142.6 142.6 Less: surplus capital68 ($ millions) footnote 68 (16.2) (16.2) Adjusted NTA ($ millions) 126.4 126.4 NTA multiple 1.2 1.4 Business value ($ millions) 151.7 177.0 Add: surplus capital ($ millions) footnote 68 16.2 16.2 Equity value ($ millions) 167.9 193.2 Number of members (31 March 2019) Section 4.3 54,470 54,470 Indicative value per bcu member $3,082 $3,547
By way of comparison, the indicative value per bcu member equates to 4-4½ months’ interest on a $250,000 home loan (assuming the bcu Owner Occupied Variable interest rate of 3.85% in August 2019). Moreover, access to this value could come at a cost to bcu members, particularly through the loss of the benefits of being part of a mutual organisation that is operated for the benefit of members rather than ______67 12% in the case of StateWest Credit Society, My State Financial Credit Union and Your Credit Union and 14% in the case of Maleny Credit Union. The higher percentage for Maleny Credit Union reflects the increase in regulatory capital required by APRA in recent years. 68 Surplus capital of $16.2 million = total capital at 31 December 2018 of $144.5 million – (risk weighted assets at 31 December 2018 of $950.7 million x target capital adequacy ratio of say, 13.5%).
58
Member Booklet 111
generating a return for shareholders/owners (e.g. less favourable rates on banking products, lower levels of customer service and higher fees and charges). bcu members would need to take into account the loss of these mutual benefits, not all of which are quantifiable, on an ongoing basis, when considering the value they might receive in a demutualisation and sale of bcu. (ii) Demutualisation and initial public offer (“IPO”) A demutualisation and IPO does not require a third party to make a competing offer but it would require the bcu Board to make the decision to put such a transaction to bcu members. The same considerations would apply as in the demutualisation and sale scenario set out above except that: . bcu members would become shareholders in a listed entity and would potentially be entitled to receive dividends; . there would not be an immediate cash payment unless bcu members sold their shares on market; and . shares would trade on a portfolio basis (i.e. trading prices would not incorporate a premium for control), which would be expected to be below the control value realised in a 100% sale. In any event, it is arguable that bcu has insufficient scale to be viable as a listed entity on a stand-alone basis. Outside of the major banks and the regional banks there are only three listed ADIs: . MyState Limited (“MyState”), a diversified financial products and services group (incorporating MyState Bank and The Rock) with a market capitalisation of $415 million and NTA of $236.4 million. MyState reported a profit of $31.5 million in FY18; . Auswide Bank Limited (“Auswide Bank”), which has a market capitalisation of $230 million and NTA of $189.0 million. Auswide Bank reported a profit of $17.9 million in FY18; and . BNK Banking Corporation Limited (“BNK Banking”) (formerly Goldfields Money Limited), which has a market capitalisation of $45 million and NTA of $55.6 million. BNK Banking reported a loss of $0.4 million in FY18 (although underlying profit was $0.5 million). BNK Banking is a diversified financial services company following its acquisition of Finsure in September 2018, offering banking and mortgage broking aggregation services. MyState and Auswide Bank are larger and significantly more profitable than bcu. BNK Banking is considerably smaller than bcu. Prior to the acquisition of Finsure, and an earlier (October 2017) hostile (and ultimately unsuccessful) offer from Firstmac, BNK Banking had not been able to materially increase its value since listing in May 2012 (its share price prior to the initial offer from Firstmac was $1.00, the same as its share price on listing). Most small mutual ADIs that have demutualised and undertaken an IPO have subsequently been acquired by other listed ADIs. These ADIs have included Mackay Permanent Building Society Limited (acquired by Wide Bay Australia Limited, now Auswide Bank), Home Building Society (acquired by Bank of Queensland Limited (“Bank of Queensland”)), Pioneer Permanent Building Society Limited (acquired by Bank of Queensland) and The Rock Building Society Limited (acquired by MyState Bank). Each of these ADIs, other than Home Building Society, was smaller than bcu. However, these acquisitions have enabled shareholders to receive a control value for their shares. (iii) Voluntary Winding Up or Payment of Dividends A possible alternative transaction would be to voluntarily wind up bcu and distribute any remaining surplus to bcu members. A voluntary wind up would require that: . the bcu directors make a declaration of solvency, confirming that bcu will be able to pay all of its existing debts within 12 months of beginning the winding up process; . bcu members approve a special resolution to wind up bcu (i.e. 75% of votes cast are in favour of winding up bcu). The meeting at which this special resolution would be put to bcu members could be
59
112 Bananacoast Community Credit Union Ltd
called at the direction of the bcu Board or if 5% of bcu members (2,724 members based on the number of members at 31 March 2019) requisition such a meeting; and . bcu ceases operating and a liquidator be appointed to sell bcu’s assets, pay all of its outstanding debts and manage the distribution of any surplus. In this situation, bcu members would be likely to receive considerably less than the amount that would be received under a demutualisation and sale as any remaining surplus would be impacted by: . no value being attributed to intangible assets; . realisation of assets on a wind up basis; and . the time and cost involved in realisation. The costs would include liquidator costs, staff redundancies, lease termination costs, etc. In any event, in Grant Samuel’s view, it is unlikely that the bcu directors would propose that bcu be voluntarily wound up. It would not make economic sense for bcu members to seek to wind up bcu as a winding up would result in bcu members giving up all of the benefits of the mutual banking arrangements between bcu and its members (which is the very reason that they are members of bcu in the first place). Similarly, it would also be possible for bcu members to requisition a meeting and approve a special resolution to change bcu’s Constitution to enable bcu to pay dividends as a means of unlocking value for bcu members. Assuming a prudential regulatory capital requirement (including mutual ADI buffer) of 13.5%, bcu would have had surplus capital of around $16 million at 31 December 2018, or just under $300 per bcu member, which could be distributed as a single dividend or over a period of time. However payment of dividends by bcu: . is inconsistent with the principles of mutuality; . would result in bcu members receiving significantly less than the amount that would be received under a demutualisation and sale and less than the amount that might be received on a voluntary winding up because of the requirement that bcu retain a minimum level of capital to meet regulatory requirements; . could potentially result in loss of bcu’s mutual status (i.e. an unintended demutualisation) under ASIC Regulatory Guide 147 if paid out as a single dividend; and . has the potential to lead to bcu breaching its minimum capital requirements and/or becoming insolvent if conditions change after a dividend was paid as a single amount. If bcu members wanted bcu to be wound up or to change the bcu Constitution to enable the payment of dividends as an alternative to the Merger, they have had ample opportunity since announcement of the Merger to communicate this to the bcu Board and this has not been the case. (iv) Arrangement with a Non-Mutual ADI An alternative to demutualisation and sale/IPO would be for bcu to join Alliance Bank. Alliance Bank is a joint initiative between Bendigo and Adelaide Bank and its initial Alliance partners, AWA Mutual Limited, BDCU Limited, CIRCLE Mutual Limited and SERVICE ONE Mutual Limited, which was formed in March 2015 to create Australia’s first social enterprise bank network. A fifth partner, NOVA Mutual Limited, joined in May 2018. The Alliance partners collectively have over 40,000 members and 23 service centres. Alliance partners enter into an Alliance Agreement69 with Bendigo and Adelaide Bank under which: . each Alliance Bank partner continues to exist and be wholly owned by its members with its own business strategy, branches, brand, staff and board, continues to make decisions about product
______69 An Alliance Agreement has an initial term of five years with options to renew for further five year terms.
60
Member Booklet 113
delivery, pricing and credit, retains all of its capital (without the need to meet regulatory prudential requirements) and is responsible for member benefits and community support programs; and . Bendigo and Adelaide Bank is responsible for APRA interface and management, regulatory licences and compliance, banking systems and digital technology, process administration, provision of white- labelled retail banking products and other products agreed with the Alliance Bank partners (i.e. they use Bendigo and Adelaide Bank’s ADI licence, all deposits and loans sit on Bendigo and Adelaide Bank’s balance sheet, Bendigo and Adelaide Bank bears the credit risk and all APRA obligations are transferred to Bendigo and Adelaide Bank). Margins, fees and commissions are predominantly shared on a 50/50 basis between the Alliance Bank partner and Bendigo and Adelaide Bank, although partners earn revenue on loans and deposits. Alliance Bank aims to achieve the scale and efficiencies required to remain sustainable as an independent, member owned mutual financial service provider over the long term, allowing the Alliance partner to use its capital to grow and develop its business around its members and its community purpose. The Alliance Bank model has a number of advantages and disadvantages or challenges:
ADVANTAGES DISADVANTAGES/CHALLENGES
• retain independence • no longer able to use the term “credit union” and lack of understanding of the model • remain 100% member owned change in business model to earning revenue on loans and • maintain brand • deposits and sharing revenue stream with Bendigo and • retain staff, management and board Adelaide Bank • continue to control business strategy, profitability • continued exposure to interest rate risk (although mitigated parameters and operations by maximising growth of both loans and deposits and • use capital to grow and develop business and address managing the portfolio mix) community need • success requires growth of business and managing ongoing • able to provide members a full service banking offer costs • technology, compliance and back office processing costs • maximising benefits of the model requires change from borne by Bendigo and Adelaide Bank (saving cost and time) compliance focus to development and growth focus • both loans and deposits become revenue earning products • regulatory risk replaced by partner risk (risks of the alliance itself and Bendigo and Adelaide Bank as partner)
Becoming an Alliance partner generally requires at least one membership vote to effect the partial transfer of the mutual ADI’s business to Bendigo and Adelaide Bank, where 25% of members must vote and at least 75% of members who vote must vote in favour of the proposal. In bcu’s case, becoming an Alliance partner would be a “Demutualisation Resolution” under Schedule 5 to the bcu Constitution and would only be passed if at least 5% of members who have been members for at least 12 months vote on the resolution, at least 25% of members who have been members for at least 24 months vote on the resolution and at least 75% of the votes cast by those members approve the resolution (i.e. the same requirement as for the Merger). While becoming an Alliance partner was a lengthy and expensive process for the original partners, it was expected that it would be a much simpler process for new partners. However, the appeal of the Alliance partner model to date has been to small credit unions and the cost involved in becoming an Alliance partner (even now) has meant that not very many have done so. For example, prior to being acquired by Firstmac, Maleny Credit Union had identified the Alliance Bank model as the best option to enable it to meet APRA guidelines. It spent approximately $0.3 million conducting preparatory work required to merge their systems, but over time it became clear that the cost would likely exceed $1.5 million and was too expensive for Maleny Credit Union to proceed (even though there would have been ongoing cost savings subsequent to becoming an Alliance partner).
61
114 Bananacoast Community Credit Union Ltd
The Alliance partner model was considered by the bcu Board as part of its process but was discounted on the basis of cost, the impact on staff (in terms of redundancies) and because it limited bcu’s future strategic options (relative to the Merger). (v) Merger with An Alternative Mutual ADI A more likely alternative transaction would be for bcu to merge with another mutual ADI, for example, in the same geographic region. However, while a merger with another mutual ADI would increase bcu’s scale, whether this additional scale would be sufficient to make a difference would depend on the size of the merger partner. A smaller merger partner (e.g. the northern New South Wales-based Summerland Credit Union or Southern Cross Credit Union) would probably have limited impact as bcu would still not have the scale to secure its future sustainability. A larger merger partner (e.g. Heritage Bank or Greater Bank) would result in a loss of the bcu brand and local jobs as bcu would be the “target”. The bcu Board underwent a detailed process that culminated in identifying P&N Bank as the most appropriate merger partner. The particular appeal of P&N Bank lies in: . the agreed operating and governance model, which retains the bcu attributes that members value highly; . its digital capabilities (current technology and digital offerings, financial capacity to invest in technology and innovation and large and experienced IT team); and . its geographical separation from bcu, which creates a point of differentiation that removes many of the disadvantages often associated with merging with a larger merger partner. Other mutual ADIs are unlikely to be able to offer this combination of features. It is not possible to know whether there may be an alternative proposal that is superior to the Merger, either before the meeting to approve the Merger or at some time in the future. If a superior proposal did emerge prior to the meeting to approve the Merger, the bcu directors could consider it on its merits and could reconsider their recommendation in relation to the Merger. Conclusion Weighing the advantages and disadvantages of the Merger against the advantages and disadvantages of a possible demutualisation or possible voluntary winding up in the future is not straightforward, not least because each alternative involves consideration of a number of factors that cannot be quantified. Ultimately, such an assessment will depend on the individual views of bcu members and the relative importance they attach to the various aspects of their relationship with bcu. In contrast, if the Merger is completed, the ability to merge with other mutual ADIs will be retained (and the Continuing Entity will arguably be in a better position than bcu on a stand-alone basis because as part of the Continuing Entity, it has more scope to be the “acquirer” rather than the “target”) or become an Alliance Bank in partnership with Bendigo and Adelaide Bank. In deciding to enter into the MIA, the bcu Board considered bcu’s market and competitive position as a stand-alone business and the potential alternatives and undertook a due diligence process on P&N Bank. Based on this process, the Board decided to recommend the Merger to bcu members. However, bcu members could choose to vote against the Merger, in the expectation that bcu would be better off on a stand-alone basis or that an alternative, superior proposal might emerge. In Grant Samuel’s view, however, bcu members would, ultimately, be worse off if the Merger did not proceed and bcu continued as a stand-alone company. bcu’s business would not benefit from the scale and access to resources necessary to grow and to better meet the needs and expectations of bcu members.
62
Member Booklet 115
7.4.2 Loss of, or Changes to, Rights If the Merger is completed, bcu members will no longer have a direct interest in bcu but will continue to have an interest in bcu’s business (as well as P&N Bank’s business) through their P&N Bank membership. bcu members will give up their rights as holders of bcu redeemable preference shares in return for rights as P&N Bank members and holders of P&N Bank member shares (unless a bcu member is already an P&N Bank member). As a result, bcu members will have a different set of rights and liabilities. bcu members will no longer have direct influence over the governance of bcu, although as members of P&N Bank they will have some influence over the governance of P&N Bank. However, there will be changes to some of the rights of bcu members which could be considered to be disadvantageous. In particular, there will be changes to their right to participate in bcu’s reserves on a winding up or demutualisation, the right to vote on resolutions for a transfer of business or a demutualisation, the requirements for a quorum and the right to nominate candidates to be appointed as directors. The impact of these changes on bcu members is discussed below. (i) Participation in Reserves If the Merger is completed, there will be changes to the rights of bcu members to participate in bcu’s reserves. Under the bcu Constitution, bcu members are entitled to participate in bcu’s reserves in two situations: . on a winding up of bcu, bcu members are entitled to repayment of the issue price of their redeemable preference share ($10, to the extent that this had been paid up) and to equal participation in any surplus; and . on a demutualisation of bcu, bcu members who have been members for at least 12 months are entitled to participate in the distribution of bcu’s profits and reserves. If the Merger is completed, bcu members (as members of P&N Bank) will: . forgo the right to participate in any surplus on a winding up of bcu (on an equal basis with all other bcu members) and the right to resolve to transfer any surplus to a company with a mutual structure, but will be entitled to participate in any surplus on a winding up of P&N Bank (on an equal basis with all other P&N Bank members); and . forgo the right to participate in the distribution of bcu’s profits and reserves on a demutualisation of bcu, but will be entitled to participate in the distribution of P&N Bank’s surplus and profits on a demutualisation of P&N Bank (which will include bcu’s profits and reserves), provided that they have been a P&N Bank member for not less than two years (although the basis on which any entitlement is allocated will depend on the terms of the proposal). Participation in bcu’s reserves through a winding up (of either bcu or P&N Bank as the Continuing Entity) is unlikely in the sense that: . a voluntary winding up would require 5% of bcu members to requisition a meeting and 75% of members who vote to approve the winding up. If bcu members were to oppose the voluntary winding up, it would not occur. It would not make economic sense for bcu members to seek to voluntarily wind up bcu; . in the event of an involuntary winding up of bcu, it would be unlikely that there would be any material surplus to distribute to members; and . P&N Bank (as the Continuing Entity) would be likely to be wound up only if the business ceased to be financially viable. P&N Bank is, and the Continuing Entity will be, financially sound and based on its current financial position and the regulated environment in which it operates, it would be extremely unlikely for its financial position to deteriorate such that a winding up would be necessary.
63
116 Bananacoast Community Credit Union Ltd
Participation in bcu’s reserves through a demutualisation requires the bcu Board to take action to change the status of bcu and for the necessary majority of bcu members to approve this change (i.e. approval by 75% of members who have been members for at least 12 months where at least 5% of members who have been members for at least 12 months vote and at least 25% of members who have been members for at least 24 months vote). If members were to oppose this change in status, it would not occur. P&N Bank (and therefore the Continuing Entity) is committed to the mutual structure and has no current intention to demutualise. Mutuality is embedded in P&N Bank’s history and its culture and its long term strategy assumes that it remains a mutual. While a future P&N Bank Board could arrive at a different conclusion in relation to P&N Bank’s structure in different circumstances and in a different market environment, in the event of a demutualisation of the Continuing Entity, bcu members would be entitled to participate in the Continuing Entity’s surplus and profits (which will include bcu reserves) on a demutualisation of the Continuing Entity as a P&N Bank member. In this sense, the entitlement to participate in bcu’s reserves is only a contingent right. As a result, except in the unlikely circumstance of a winding up or demutualisation, bcu members are not disadvantaged by any change to their rights. In any event, to the extent that this change to the rights of bcu members may be regarded as a disadvantage of the Merger, this has been mitigated by the right that bcu members will have as members of P&N Bank to participate in the distribution of the Continuing Entity’s surplus and profits on a winding up or demutualisation of the Continuing Entity (in the case of a demutualisation, provided that they have been a P&N Bank member for not less than two years). In this regard: . on a winding up, bcu members will participate in the Continuing Entity’s surplus and profits on an equal basis with other P&N Bank members. The quantum of any distribution of the Continuing Entity’s surplus and profits to bcu members (as members of P&N Bank) could be greater or less than the quantum of any distribution of bcu reserves to bcu members on a per member basis. By way of example, NTA per member is as follows:
NTA PER MEMBER
PRO FORMA bcu P&N BANK CONTINUING ENTITY NTA at 31 December 2018 ($ millions) 142.6 279.4 422.0 Number of members at 31 March 2019 54,470 95,453 149,923 NTA per member $2,618 $2,927 $2,815
Based on NTA at 31 December 2018 and the number of members at 31 March 2019, bcu members would be slightly better off (by $197 per member) in the event of a winding up of the Continuing Entity (relative to their position in a winding up of bcu at the same point in time, assuming that the assets and liabilities of each entity were realised at book value); . the basis on which any entitlement is allocated on a demutualisation will depend on the terms of the proposal and bcu members (as P&N Bank members) would have the right to vote on any such proposal. Assuming that the Continuing Entity was valued at the same NTA multiple as bcu (see Section 7.4.1(i)), the indicative pro forma value per member would be in the order of $3,300-3,800 (around 8% higher than the indicative value per member on a demutualisation of bcu):
64
Member Booklet 117
CONTINUING ENTITY – PRO FORMA INDICATIVE VALUE PER MEMBER
AT 31 DECEMBER 2018 REFERENCE LOW HIGH Pro forma net assets attributable to members ($ millions)70 Section 6.4 429.9 429.9 Pro forma intangible assets ($ millions) Section 6.4 (8.0)71 (8.0) Pro forma NTA ($ millions) 421.9 421.9 Less: pro forma surplus capital72 ($ millions) footnote 72 (47.1) (47.1) Pro forma adjusted NTA ($ millions) 374.8 374.8 NTA multiple 1.2 1.4 Business value ($ millions) 449.8 524.7 Add: pro forma surplus capital ($ millions) footnote 72 47.1 47.1 Equity value ($ millions) 496.9 571.8 Number of members (at 31 March 2019) Section 6.2 149,923 149,923 Indicative value per Continuing Entity member $3,314 $3,814 . there will be continuity of membership for bcu members as a P&N Bank member (i.e. their years of bcu membership will treated as years of P&N Bank membership) for the purposes of meeting the requirement of being a P&N Bank member for not less than two years (instead of at least 12 months under the bcu Constitution). (ii) Voting Participation and Eligibility on Transfer of Business or Demutualisation If the Merger is completed, there will be changes to the eligibility of bcu members to vote on any transfer of business or demutualisation proposal. Under the bcu Constitution: . any transfer of business proposal must be approved by a special resolution (i.e. at least 75% of those voting either in person or by proxy) where at least 25% of members who have been members for at least 24 months vote; and . a demutualisation resolution can only be put to members once every three years (unless recommended by the directors) and requires that:
• at least 25% of bcu members who have been members for at least 24 months vote and at least 5% of bcu members who have been members for at least 12 months vote; and
• only bcu members who have been members for at least 12 months are entitled to vote, and of these members, at least 75% must vote in favour of the resolution. If the Merger is completed any transfer of business or demutualisation proposal will still require a special resolution of P&N Bank members (including bcu members), however there will be either no, or lower, participation and eligibility to vote requirements: . there will be no requirement that at least 25% of P&N Bank members who have been members for at least 24 months vote on a transfer of business proposal; and . a demutualisation proposal will be able to be put to members at any time and will only have a 25% member participation threshold (i.e. at least 25% of members must vote on the proposal). As a result, P&N Bank members will be entitled to vote on a demutualisation resolution even if they are not entitled to participate in the demutualisation proposal because they have been members for less than two years. ______70 Includes P&N Bank’s 65% interest in P&N Financial Planning which has not been separately valued on the basis that it is immaterial in the context of the overall pro forma indicative value of the Continuing Entity. 71 Includes goodwill in relation to P&N Financial Planning of $1.5 million (which is included in net assets of other activities in the table in Section 6.4). 72 Surplus capital of $47.1 million = combined total capital at 31 December 2018 of $413.1 million – (combined risk weighted assets at 31 December 2018 of $2,711.2 million x target capital adequacy ratio of say, 13.5%).
65
118 Bananacoast Community Credit Union Ltd
As a result of these lower participation and eligibility hurdles, there will be a risk that in the event that a transfer of business or demutualisation resolution is put to members, proponents or dissidents of the proposal could become members of P&N Bank and vote on the proposal, potentially distorting the outcome such that the outcome does not reflect the views of long standing members. These changes to voting participation and eligibility are not considered to be material in the context of the Merger. The basic requirement for a special resolution (i.e. support from the vast majority of members) for a transfer of business or a demutualisation is retained and the size of the Continuing Entity relative to the size of bcu means that a significantly greater number of members would need to vote in favour of any transfer of business or demutualisation proposal for it to succeed (assuming similar levels of voting participation by members), reducing the impact of groups of members with vested interests. Based on the number of members at 31 March 2019 and assuming 100% voting participation, a special resolution would require 40,853 bcu members to vote in favour, whereas the Continuing Entity would require 112,442 members to vote in favour (i.e. almost three times as many members). The additional protections incorporated into the bcu Constitution are more relevant to mutuals with smaller memberships, where relatively small changes in membership levels can have a greater impact on voting outcomes. (iii) Quorums and Director Nomination Rights If the Merger is completed: . the number of members required for a quorum at meetings of members will increase from 10 to 25 (generally); and . bcu members will no longer have a right to nominate or vote in relation to the appointment of bcu directors. As P&N Bank members, bcu members will have a right to nominate and vote in relation to the appointment of P&N Bank directors although these rights are different to the rights they have as bcu members: • four members who have been members for 12 months or more have the right to nominate a candidate to be a P&N Bank director (compared to two members required to nominate a candidate to be a bcu director); • the Nominations Committee determines whether a person becomes a candidate (based on a “fit and proper” assessment); and • no more than six directors are elected by members (out of a maximum of 10), with up to three appointed by the P&N Bank Board plus, if the P&N Bank Board determines, the CEO (compared to all bcu directors being appointed by members73). These changes to the requirements for a quorum and director nomination rights are not considered to be material in the context of the Merger. The basic requirement for a quorum and the basis right to nominate directors is retained and the additional requirements are not overwhelming. The P&N Bank requirements for a quorum and director nomination rights reflect the size of P&N Bank compared to bcu (95,453 P&N Bank members compared to 54,470 bcu members at 31 March 2019) and a desire to avoid small minorities of members influencing the ability to hold meetings of members and the composition of the P&N Bank Board (particularly in circumstances where there are generally very low levels of voting participation by members in relation to most matters).
7.4.3 Transaction and Implementation Costs bcu’s transaction costs related to the Merger are estimated to total approximately $1 million. These costs include adviser, legal, accounting, expert, communication and other consultant fees and printing, postage and meeting costs. bcu and P&N Bank have estimated that a further $5 million of integration costs will be incurred over the period to 31 December 2020, primarily in the areas of IT (implementation and migration
______73 Other than casual vacancies which are appointed by the directors but must be elected by the members at the next AGM.
66
Member Booklet 119
costs), people (integrating culture, voluntary redundancy74 and retention payments75) and integrating risk and compliance policies and procedures and products and standardising product terms and conditions. These costs are predominantly one off and are not material in the context of the Continuing Entity’s net assets (estimated transaction costs are 0.2% of pro forma Continuing Entity net assets and estimated total transaction and implementation costs are 1.4% of Continuing Entity net assets). However, the transaction costs are material in the context of bcu’s annual profit (around 9% of net profit after tax) and will be incurred by bcu on a stand-alone basis if the Merger does not proceed. In certain circumstances, bcu will also be liable to pay P&N Bank a $900,000 break fee (although not if member approval is not obtained). On the other hand, there are also certain circumstances in which P&N Bank will be liable to pay bcu a $900,000 million break fee.
7.5 Risks of the Merger
7.5.1 Implementation Risks The Merger will involve a number of implementation risks that bcu members should take into account: . there will be a risk that the integration of the bcu and P&N Bank businesses takes longer or costs more than is expected due to unforeseen issues, particularly as it is necessary to integrate the banking systems. The Continuing Entity will have a broader range of operations and will, as a result, be more complex and more difficult to manage than bcu on a stand-alone basis. Any delay in integration is likely to delay the provision of benefits to bcu members. Integration planning is governed by the joint steering committee, which has been in place since the MIA was signed. Detailed planning commenced in June 2019 with the aim of minimising or avoiding integration risks. However, such risks cannot be entirely eliminated; . there will be ongoing execution risk associated with: • successfully implementing the operating and governance model, in particular managing the multi-brand strategy and determining at which level certain decisions will occur (i.e. at the centralised group level versus the brand level). Some decision making will be straightforward, but for other decisions there will be less clarity as to who is (or should be) responsible. Getting the right balance between brand autonomy and central co-ordination to achieve cost savings will be key to successful integration;
• having group executives geographically spread across the east and west coasts of Australia in terms of inclusion (being informed and kept up to date, working as a cohesive group), operating in different time zones and managing travel costs; and
• cultural/organisational differences such as relative staffing levels, remuneration etc; . despite the operating and governance model, bcu members (as P&N Bank members) will be exposed to the activities of P&N Bank, which include its financial planning business, specialised property activities (which although in the process of being wound down, could result in the write down or write off of its only material asset, the receivable from the Pindan Group) and reverse mortgage portfolio; and
______74 Including the payment to be received by the current bcu CEO, Mr Alan Butler, who will receive a payment equivalent to 12 months of salary, consistent with the terms of his employment contract, which also includes a nine month restraint on being able to be employed within the financial services industry. 75 Includes payments to five members of bcu staff that are important to the success of the Merger and subsequent integration who are eligible to receive retention payments totalling approximately $175,000 subject to meeting certain employment, performance and conduct requirements.
67
120 Bananacoast Community Credit Union Ltd
. while the Merger will provide access to organic growth opportunities through P&N Bank’s digital capabilities being deployed to target new home loan growth opportunities in bcu’s geographical markets and P&N Bank utilising bcu’s expertise to offer commercial and specialist property loans in Western Australia, there is no guarantee that the expected revenue from these types of activities will eventuate. Furthermore, inorganic growth will be required for P&N Bank to achieve its targeted scale (to double the size of the business by 2020). There is no certainty that such opportunities will eventuate.
7.5.2 Less Influence over Governance bcu members will, collectively, have less influence over the governance of P&N Bank and therefore over the future of bcu’s business. While bcu members will have rights in relation to the nomination and appointment directors, as bcu members collectively represent only 38% of P&N Bank members, they will not have the ability to pass resolutions relating to the appointment of up to six member appointed directors (and, in any event, there will also be up to three directors appointed by the P&N Bank Board). As a result, there is a risk that: . the directors representing the bcu Mid North Coast, New South Wales region on the P&N Bank Board (Mr Gary Humphreys and Ms Louise Clarke) do not remain on the P&N Bank Board in the longer term (i.e. once their initial terms expire at the AGMs held in 2020 and 2021 respectively); and . while the governance and operating model is designed to preserve and safeguard the attributes of a stand-alone bcu that its members value such as its brand, staff and stores, local decision making (supported by the bcu Advisory Council) and its commitment to the local community, the P&N Bank Board could change this model at some future date. While these outcomes are possible, they are inconsistent with the basis on which the Merger has been negotiated and would be detrimental to P&N Bank’s ability to achieve future inorganic growth through attracting other mutual ADIs to the governance and operating structure.
7.5.3 Future Changes to bcu’s Business There is a risk that the business, products and services offered by the bcu business may change over time. There are some differences in terms of pricing and features between bcu and P&N Bank products. However: . under the operating and governance model, bcu management will retain the discretion to price selected bcu core products differently to comparable P&N Bank products; and . any future changes to products and services are expected to be consistent with P&N Bank’s commitment to providing members with an improved and attractive banking offer. It is also possible that there may be unavoidable changes to the banking details of bcu members as a result of transitioning bcu’s banking system to P&N Bank’s banking system (during 2020). While this may inconvenience bcu members, the Continuing Entity will undertake a communication process well before any change and will aim to minimise the impact on bcu members.
7.5.4 General Insurance Products Held by bcu Members bcu members hold general insurance policies issued by Allianz under an exclusive arrangement that operates on a rolling basis and has a standard notice period for termination. It is expected that these insurance policies will continue until a single general insurance provider is selected for the Continuing Entity. If Allianz is not the general insurer selected for the Continuing Entity, there is a risk that bcu members renewing their general insurance policies will be asked to pay a higher premium for equivalent insurance
68
Member Booklet 121
cover. However, bcu members will not be obliged to continue their general insurance policies (i.e. they can obtain quotes and take out policies from other general insurance providers).
7.5.5 Potential Loss of Customers There is the potential for the bcu business to lose existing customers who are not in favour of the Merger. If a significant number of customers was lost, this could have an impact on the Continuing Entity’s profitability and the reserves available for reinvestment. However, the feedback on the Merger from bcu members to date has been generally favourable and a material loss of existing customers is considered unlikely. In addition, the ability to offer bcu customers greater mobile banking capabilities (all three digital wallets and instant digital cards as well as a new mobile banking app with greater features and capabilities) should attract new customers to more than offset any loss of existing customers.
7.5.6 Potential Loss of Key Employees bcu has a number of key employees whose experience and expertise are important to the ongoing operation of the business. Any loss of these key employees may have an adverse impact on the integration and performance of the bcu business. However: . all bcu employees will be offered a role in the Continuing Entity and there will be no forced redundancies of staff from bcu directly as a result of the Merger; and . certain key bcu employees will be paid retention bonuses if they remain employed by the Continuing Entity for certain minimum period (three or six months) after completion of the Merger and meet certain performance and conduct criteria.
7.6 Other Considerations
7.6.1 Taxation Consequences There are not expected to be any tax consequences for bcu members from: . cancellation of their bcu redeemable preference shares; . becoming P&N Bank members; or . holding P&N Bank member shares, as a result of the Merger. Further details on the taxation consequences of the Merger for bcu members are set out in Section 4.3 of the Member Booklet. If in any doubt, bcu members should consult their own professional adviser.
7.6.2 Minimum Voting Threshold The bcu Constitution provides that: . only members who have been members of bcu for at least 12 months will be eligible to vote on the Merger Resolution (and at least 75% of those eligible members who do vote must vote in favour of the Merger Resolution); and . even if the voting majority above is met, the Merger Resolution will only be passed for the purposes of the bcu Constitution if:
• at least 5% of members who have been members for at least 12 months; and
69
122 Bananacoast Community Credit Union Ltd
• at least 25% of members who have been members for at least 24 months, actually vote on the Merger Resolution (whether for or against). If the requirement that at least 25% of members who have been members for at least 24 months vote is met, the requirement that at least 5% of members who have been members for at least 12 months vote will, by definition, also be met. However, the minimum turn out requirement is a more demanding voting threshold than is usually required to approve a transaction and means that (based on the number and tenure of members at 31 March 2019), at least 10,613 bcu members who have been members for at least 24 months must vote on the Merger Resolution. There is a risk that this minimum threshold will not be met. If the 25% threshold is not met, the Merger Resolution will not be able to be approved (even if at least 75% of those bcu members who do vote, vote in favour of the Merger Resolution) and the Merger will not proceed. bcu has put in place a member engagement plan (with assistance from an external third party) to raise awareness of the Merger and to encourage bcu members to vote through use of staff, instore marketing (flyers, posters), digital assets (website, landing page, ibank, bcu app, bcu news), direct marketing and social media campaigns (e.g. wavelength blog) and local store and community forums.
7.6.3 Conditions Precedent The Merger is subject to a number of conditions precedent that cannot be waived (in addition to bcu member approval of the Merger), including: . P&N Bank member approval of the Merger; and . certain regulatory approvals from APRA under the Transfer Act and the Transfer Rules, which have not been received at the date of this report. The meeting at which P&N Bank members will consider the Merger is scheduled to be held on 23 October 2019, the day following the general meeting at which bcu members will vote on the Merger. While there can be no certainty that P&N Bank members will approve the Merger, the directors of P&N Bank have unanimously recommended that P&N Bank members vote in favour of the resolution to approve the Merger. Certain of the regulatory approvals from APRA under the Transfer Act and the Transfer Rules will only be received after the meeting of bcu members to consider the Merger Resolution has been held, which creates uncertainty about the outcome of the Merger. However, these approvals are largely procedural and the likelihood of them not being received is considered to be very low.
7.7 Member Decision Grant Samuel has been engaged to prepare an independent expert’s report setting out whether, in its opinion, the Merger is in the best interests of members and the benefits being provided to members are fair and reasonable having regard to any loss of rights and change as to voting rights and rights to participate in the reserves and profits of bcu, and to state reasons for those opinions. Grant Samuel has not been engaged to provide a recommendation to members in relation to the Merger, the responsibility for which lies with the directors of bcu. In any event, the decision whether to vote for or against the Merger is a matter for individual members based on their personal circumstances and the nature of their relationship with bcu, including the products and services they use and the importance they place on these products and services as well as their expectations of the benefits of being a member of P&N Bank. Members who are in doubt as to the action they should take in relation to the Merger should consult their own professional adviser.
70
Member Booklet 123
8 Qualifications, Declarations and Consents
8.1 Qualifications The Grant Samuel group of companies provide corporate advisory services in relation to mergers and acquisitions, capital raisings, debt raisings, corporate restructurings and financial matters generally. The primary activity of Grant Samuel & Associates Pty Limited is the preparation of corporate and business valuations and the provision of independent expert’s reports in connection with mergers and acquisitions, takeovers and capital reconstructions. Since inception in 1988, Grant Samuel and its related companies have prepared more than 560 public independent expert and appraisal reports. The persons responsible for preparing this report on behalf of Grant Samuel are Jaye Gardner BCom LLB (Hons) CA SF Fin GAICD and Stephen Wilson MCom (Hons) CA SF Fin. Each has a significant number of years of experience in relevant corporate advisory matters. Each of the above persons is a representative of Grant Samuel pursuant to its AFSL under Part 7.6 of the Corporations Act.
8.2 Disclaimers It is not intended that this report should be used or relied upon for any purpose other than as an expression of Grant Samuel’s opinion as to whether the Merger is in the best interests of members and whether the benefits being provided to members are fair and reasonable having regard to any loss of rights and change as to voting rights and rights to participate in the reserves and profits of bcu. Grant Samuel expressly disclaims any liability to any bcu member who relies or purports to rely on the report for any other purpose and to any other party who relies or purports to rely on the report for any purpose whatsoever. Grant Samuel has had no involvement in the preparation of the Member Booklet issued by bcu and has not verified or approved any of the contents of the Member Booklet. Grant Samuel does not accept any responsibility for the contents of the Member Booklet (except for this report). Grant Samuel has had no involvement in bcu’s due diligence investigation in relation to the Member Booklet and does not accept any responsibility for the completeness or reliability of the process which is the responsibility of bcu.
8.3 Independence Grant Samuel and its related entities do not have at the date of this report, and have not had within the previous two years, any business or professional relationship with bcu or P&N Bank or any financial or other interest that could reasonably be regarded as capable of affecting its ability to provide an unbiased opinion in relation to the Merger. Grant Samuel had no part in the formulation of the Merger. Its only role has been the preparation of this report. Grant Samuel will receive a fixed fee of $285,000 for the preparation of this report. This fee is not contingent on the conclusions reached or the outcome of the Merger. Grant Samuel’s out-of-pocket expenses in relation to the preparation of the report will be reimbursed. Grant Samuel will receive no other benefit for the preparation of this report. Grant Samuel considers itself to be independent in terms of Regulatory Guide 112 issued by ASIC on 30 March 2011.
71
124 Bananacoast Community Credit Union Ltd
8.4 Declarations bcu has agreed that it will indemnify Grant Samuel and its employees and officers in respect of any liability suffered or incurred as a result of or in connection with the preparation of the report. This indemnity will not apply in respect of the proportion of any liability found by a court to be primarily caused by any conduct involving negligence or wilful misconduct by Grant Samuel. bcu has also agreed to indemnify Grant Samuel and its employees and officers for time spent and reasonable legal costs and expenses incurred in relation to any inquiry or proceeding initiated by any person. Any claims by bcu are limited to an amount equal to the fees paid to Grant Samuel. Where Grant Samuel or its employees and officers are found to have been negligent or engaged in wilful misconduct Grant Samuel shall bear the proportion of such costs caused by its action. Advance drafts of this report were provided to bcu and its advisers. Advance drafts of this report were also provided to P&N Bank in accordance with bcu’s obligations under the MIA. Certain changes were made to the drafting of the report as a result of the circulation of the draft report. There was no alteration to the methodology, evaluation or conclusions as a result of issuing the drafts.
8.5 Consents Grant Samuel consents to the issuing of this report in the form and context in which it is to be included in the Member Booklet to be sent to members of bcu. Neither the whole nor any part of this report nor any reference thereto may be included in any other document without the prior written consent of Grant Samuel as to the form and context in which it appears.
8.6 Other The accompanying letter dated 20 August 2019 forms part of this report. Grant Samuel has prepared a Financial Services Guide as required by the Corporations Act. The Financial Services Guide is set out at the beginning of this report.
GRANT SAMUEL & ASSOCIATES PTY LIMITED 20 August 2019
72
Member Booklet 125 126 Bananacoast Community Credit Union Ltd Schedule 2. Comparison of product and services
Comparison of Products and Services P&N Bank bcu
Savings Accounts Yes Yes
Retirement Savings Accounts No Yes
Term Deposits Yes Yes
Loan Accounts Yes Yes
Reverse Mortgage Yes No
Credit Cards Yes Yes
Electronic or Paper Electronic or Paper Statements Monthly to Half Yearly Monthly to Half Yearly
Account Access & Transaction Types P&N Bank bcu
Internet Banking
Mobile App
Telephone Banking
ATM/EFTPOS
Bpay
NPP/OSKO
Future Payments
Direct Debits & Credits
Eftpos Card
Visa Debit Card
Cheque Books
Counter Cheques
Foreign Currency Travelex Travelex
Apple/Android Pay
Bank @ Post
AMEX & Australian International Payments Western Union Settlements Limited
Bank Feeds MYOB & Xero
Insurance Services (offered through third party provider) QBE Insurance Allianz
• General Insurance – Domestic
• Consumer Credit Insurance
• Mortgage Loan Protection Insurance
Police & Nurses Financial Financial Planning Service (offered through third party provider) Planning Pty Ltd
Member Booklet 127 Schedule 3. Removal of fees
The following fees are proposed to be removed as a result of the Merger:
Personal Access Account monthly fees Direct debit
Personal Loan monthly fees Internet banking – BPAY / ext transfer
Staff assist withdrawal / deposit / transfers / future payment bcu atm withdrawal
Staff assist BPAY / Bill Payment services bcu atm balance enquiry
eftpos transactions bcu atm declined transactions
Declined eftpos transactions Sweep transaction
Cheques drawn against your bcu account
Schedule 4. Comparison of bcu’s Constitution and P&N Bank’s Constitution
Summary of material differences between the constitutions
Type of Compa ny and Mutuality
bcu Constitution P&N Bank Constitution
Type
Public company limited by shares. Public company limited by shares.
Mutuality
No equivalent to the Principles of Mutuality. The Principles of Mutuality are contained in the Preamble and most are enforced via the Demutualisation Approval Procedure Rules Preamble and Appendix 6.
Any resolution modifying or repealing the constitution which affects most of the Principles of Mutuality must also be approved by at least 25% of all P&N Bank members in writing either before or within three months after the resolution is passed Rule 1.6.
128 Bananacoast Community Credit Union Ltd bcu Constitution P&N Bank Constitution
Demutualisation protection
Schedule 5 Appendix 6
Schedule 5 applies to a resolution: Appendix 6 applies to the following situations:
1. That will or may result in: 1. A modification or repeal of the P&N Bank Constitution where a) bcu ceasing to be an ADI that can use the terms ‘Credit the effect of the modification or repeal: Union’, ‘Credit Society’ or ‘Credit Co-operative’; a) varies terms of issue or rights / restrictions attached to shares b) bcu transferring its business under the Financial Sector so that they are inconsistent with the Principles of Mutuality; (Transfer and Restructure) Act 1999 (Cth) to an entity b) enables P&N Bank to issue shares where the terms of that is not an ADI that can use the terms ‘Credit union’, issue or rights / restrictions attached to those shares are Credit Society or ‘Credit Co-operative’; inconsistent with the Principles of Mutuality; c) bcu’s shares becoming transferable / saleable c) varies rights, obligations or restrictions attaching to or assignable other than as provided in the bcu membership so that they are inconsistent with the Constitution; or Principles of Mutuality; d) a right to vote attaching to any share other than a d) enables P&N Bank to admit P&N Bank members where the Redeemable Preference Share. rights, obligations or restrictions attaching to membership are inconsistent with the Principles of Mutuality; or e) is that the P&N Bank Constitution is otherwise inconsistent with the Principles of Mutuality.
2. Where, other than a transfer of business to an ADI that 2. P&N Bank proposes: can use the terms ‘Credit Union’, ‘Credit Society’ or ‘Credit a) to issue shares where the terms of issue or rights / Co-operative’, consent of the Treasurer is required in restrictions attached to the shares are inconsistent with the relation to the resolution under the section 63 of the Principles of Mutuality; Banking Act 1959 or section 11 of the Financial Sector b) to issue securities that confer a right or obligation to (Shareholdings) Act 1998. subscribe for shares where the terms of issue or rights / restrictions attached to the shares are inconsistent with the Principles of Mutuality; or c) to admit P&N Bank Members with rights, obligations or restrictions attaching to membership inconsistent with the Principles of Mutuality.
3. The effect of which is to modify or repeal any clause of 3. P&N Bank proposes a reduction of capital, scheme / deed Schedule 5 (demutualisation protection). of arrangement, transfer of business or any other form of restructure, where after completion: a) P&N Bank no longer complies with the Principles of Mutuality; b) one person, other than a person entitled to use the term ‘member-owned bank’, ‘credit union’, ‘credit society’ or ‘credit co-operative’, holds more than 90% of the shares in P&N Bank (other than shares fitting the description of ‘additional shares’ in the Principles of Mutuality); c) a group of associates, other than a group all of the members which are entitled to use the term ‘member- owned bank’, ‘credit union’, ‘credit society’ or ‘credit co- operative’, between them hold more than 90% of the shares in P&N Bank (other than shares fitting the description of ‘additional shares’ in the Principles of Mutuality); d) a person not entitled to use the term ‘member-owned bank’, ‘credit union’, ‘credit society’ or ‘credit co-operative’ has a legal or equitable interest in more than 20% of P&N Bank’s gross assets as disclosed in the latest report to APRA as at the time of transfer;
Member Booklet 129 bcu Constitution P&N Bank Constitution
e) a group of associates, other than a group all of the members of which are entitled to use the term ‘member-owned bank’, ‘credit union’, ‘credit society’ or ‘credit co-operative’ in their name, between then have a legal or equitable interest in more than 20% of the company’s gross assets as disclosed in the latest report to APRA as at the time of transfer; or f) the successor to P&N Bank’s business is not entitled to use the term ‘member-owned bank’, ‘credit union’, ‘credit society’ or ‘credit co-operative’.
4. The effect of which is to modify or repeal the bcu 4. The company proposes to modify or repeal: Constitution where the effect is to modify, exclude a) any clauses of Appendix 6; or restrict the operation of any clause of Schedule 5. b) any of the Principles of Mutuality; or No power for ASIC to declare that these provisions c) the P&N Bank Constitution, where the effect is to modify, cease to apply. exclude or restrict the operation of Appendix 6. ASIC has power to determine that the Appendix ceases to have effect.
Voting on a demutualisation resolution
Schedule 5, clause 3(e) and (f) and clauses 7.37 and 7.38 Rule A6-4
Member Participation Threshold: at least 25% of bcu Before convening a meeting to pass a resolution to amend the Members who have been bcu Members for more than two P&N Bank Constitution or issuing shares or otherwise taking years and 5% of bcu Members who have been bcu Members action that falls within the demutualisation protections, P&N Bank for more than twelve months must vote on the Merger must hold a postal ballot by sending a disclosure booklet and (whether for or against). ballot paper to P&N Bank members.
Voting eligibility: Only bcu Members who have been a bcu In the ballot, not less than 25% of P&N Bank members in Member for at least twelve months as at the date of the each class of member must actually vote, and not less than general meeting are entitled to vote on the resolution and, of 75% of members in each class who have voted must approve those members who actually vote, at least 75% must vote in the resolution. If passed, P&N Bank may then convene the favour of the resolution. meeting to consider the resolution, issue the shares or take the other action. No requirement for a prior postal ballot.
Common bond
No equivalent – any person is eligible for membership A person must have a common bond to be eligible to be a Clause 2.1. P&N Bank member Rule 3.1(1)(b).
Appendix 2 For natural persons: a) a serving police officer; b) a registered nurse; c) employed in the health industry; d) employed as a teacher; e) a serving prison officer; f) an individual that intends to contribute to and benefit from membership of P&N Bank; g) a member of another ADI that transferred its business and members to P&N Bank under the Financial Sector (Transfer and Restructure) Act 1999 (Cth); or h) a retired person of the above categories.
130 Bananacoast Community Credit Union Ltd bcu Constitution P&N Bank Constitution
A body corporate may be a P&N Bank member, including the holder of a mutual equity interest and a body corporate member of another ADI that transferred its business and members to P&N Bank under the Financial Sector (Transfer and Restructure) Act 1999 (Cth).
Limit on powers
Clause 21.1 Rule 2.2
Must not provide financial accommodation to or accept Can only accept deposits from, or provide financial deposits of money from a person who is not a bcu Member. accommodation to, P&N Bank members with the exception of: This does not prevent the Company otherwise investing its funds or from accepting deposits of money from a a) bodies with no power to acquire, or prevented by law from non-member, in accordance with applicable laws and acquiring, P&N Bank’s shares; prudential standards. b) ADIs; and c) a person or class of persons as determined by the Board from time to time.
Shares
Classes
Clauses 1, 2.8, 2.12 and 16.6, and Schedules 4 and 6 Rule 5.1 bcu must issue redeemable preference shares to May only issue Member shares and Mutual Equity Interests bcu Members. [no Mutual Equity Interests on issue].
It may issue other classes of shares, including redeemable capital preference shares, Tier 1 shares and Bonus Shares. [There are no such shares on issue – all Bonus Shares were redeemed in 2017].
Member Rights & Liabilities
Who can hold shares?
Clauses 2.2 and 2.3 Rules 5.3 and 3.3
A person may hold additional redeemable preference P&N Bank may only issue one member share to any person, shares on trust for any other person or an unincorporated but may issue additional member shares to a trustee for an association, as external administrator of a corporation or in unincorporated association. Joint members can also hold any other capacity required by law as well has holding a shares in their own capacity and as joint members. share in their own right.
Delegation of power to admit members
Clause 2.6 Rule 3.2
The bcu Directors may delegate their power to admit bcu The directors may delegate their power to admit P&N Bank Members, but must not authorise further delegation of members, and may authorise further delegation of that power. that power.
Member Booklet 131 bcu Constitution P&N Bank Constitution
Members who are minors
Clause 2.5.4 and 2.9 The constitution makes no distinction between the liability of minors and other P&N Bank members. Minors are required to acquire one $10 redeemable preference share partly paid to $2. On the transfer date, minors who are members of bcu will be deemed to have been issued a P&N Bank member share but the On becoming an adult, the person must immediately pay any obligation to pay the balance of the subscription price will only amount which is then unpaid. arise if a call is made by P&N Bank’s Board from time to time.
Charge on redeemable preference shares and deposits etc
Clause 5.5 No equivalent provision.
bcu has a charge on a bcu Member’s redeemable preference shares, credit balances of deposits and any interest, bonus or rebate payable to the member, provided it advised the member when they took up their redeemable preference shares or placed money on deposit and at least once a year after that.
Termination of membership for dormancy
Clauses 4.8 and 4.9 Rule 4.4(2)
bcu may classify a bcu Member’s deposit account as a Deposit account may be declared dormant if there are no dormant account if there have been no transactions for at least transactions for one year and 28 days’ prior notice is given to the one year. Membership may be cancelled if the bcu Member’s P&N Bank member. only account is a dormant account. A P&N Bank member can be classified as inactive if:
a) the member has not had any deposit or other account open with P&N Bank for a continuous period of twelve months; and b) P&N Bank has not received payments or remuneration (including commissions) which are directly attributable to the member using products or services supplied by, or made available through, P&N Bank, and at least 28 days’ notice is given to the member.
Member shares may be redeemed if the P&N Bank member is inactive, but has a right to have their deposit account reinstated.
The Board may delegate its powers to a committee of directors, a director or an officer but they must not further delegate the power.
No equivalent provision. Rule 4.4(1)
Termination for dormancy does not apply to retirement savings accounts, first home saver accounts or any other account if applicable legislation provides otherwise.
132 Bananacoast Community Credit Union Ltd bcu Constitution P&N Bank Constitution
Termination of membership by the Board
Clauses 4.2 and 4.3 Rule 4.3(1)
The directors may expel a bcu Member if they have Similar powers of termination plus: failed to discharge their obligations to bcu, are guilty of conduct detrimental to bcu or obtained membership by If a P&N Bank member holds more than one member share in the misrepresentation or mistake, in which case their shares same legal capacity, the board may redeem the additional share. are cancelled. 14 days notice must be given to the P&N Bank member, and they have a right to be heard by the Board.
A bcu Member has a right of appeal. Rule 4.3(7)
P&N Bank may redeem a member’s member share without notice where:
a) the member is in default of any payment obligations to P&N Bank for a continuous period exceeding 90 days; or b) P&N Bank has written off or accepted a compromise in respect of monies owing and there have been no transactions on any account of the member for 90 days.
Termination of membership at Member’s request
Clause 5.2 Rule 4.2
The bcu Member must repay all outstanding financial The P&N Bank member must withdraw all deposits and repay all accommodation and discharged all other obligations to bcu. financial accommodation. bcu may only redeem redeemable preference shares on No equivalent provisos on the redemption of member shares on request by a bcu Member, if these additional provisos are met: request of the P&N Bank member. a) redemption is out of bcu’s profits; b) the redemption is permitted by APRA; and c) the redemption will not result in bcu breaching any capital adequacy requirements.
Dividends
Clause 16.8.1 Rule 7.1 and Appendix 3, Rule A3-4
A dividend must not be paid on redeemable preference shares. The Board may determine that the company pay a dividend on member shares, but only if the general meeting approves the recommended dividend. The general meeting may only approve a dividend at a rate that does not exceed 50% of the company’s after tax profit for the financial year to which the dividend relates.
Winding up
Clause 19 Rule A3-5 Appendix 3
Subject to any preferred or other rights or restrictions After repayment of the subscription price paid up for any member attaching to shares, bcu Members are entitled to participate share; the remaining surplus is divided equally with respect to equally and without regard to the number of shares held by every member share. Any such amount can be offset against each member in any surplus. In a voluntary winding up, bcu any amount unpaid on a member share or against any amount members may resolve to transfer any surplus to any company payable by the member to P&N Bank. with a mutual structure (determined by reference to any current policy of APRA or ASIC).
Member Booklet 133 bcu Constitution P&N Bank Constitution
On a winding up, a bcu member’s liability is limited to the No equivalent provision. amount unpaid in relation to the member’s contractual obligations with bcu, and the liability of a holder of Statutory Redeemable Preference Shares (being all withdrawable shares on issue immediately before 1 July 1999 and which became redeemable preference shares) is limited to the amount unpaid in relation to those shares.
General Meetings
Adjourned meetings
Clause 7.12 Clause 11.2
The chair may adjourn the meeting in their discretion, and The chair may adjourn the meeting with the consent of an must adjourn if directed by the meeting. ordinary resolution of the meeting, and must adjourn if directed by ordinary resolution of the meeting.
Clause 7.15 Rule 11.2
If the meeting is adjourned by more than 21 days, at least 3 If the meeting is adjourned for one month or more notice of clear days’ notice of the adjourned meeting must be given to the adjourned meeting must be given to each member. each member.
Quorum
Clauses 7.4 and 7.5 Rule 11.3
10 members entitled to vote. Includes proxies held by the 25 members present in person, or if less than 50 members chairperson where the number of members present in person are eligible to attend and vote, then 50% of that number. is 10 or less.
Chair
Clauses 7.8 and 7.9 Clause 11.3(3)
If the chair or deputy chair is not present within the stated If the chair or deputy chair is not present within the stated time or time or declines to act, the directors present may elect a declines to act, the members must elect an individual present to chairperson, and failing that, the members may elect one of act as chair of the meeting, the directors, or failing that, one of the members as chair of the meeting.
Standing orders
Clauses 7.16 to 7.24 Rule 11.3(4) and Appendix 4
Some relevant provisions but not identical to P&N Bank. Standing orders for the conduct of general meetings are set out in Appendix 4.
Voting rights
Clause 8.3 Appendix 3, A3-3(2)
On a show of hands or on a poll, any member present either On a show of hands, each holder of member shares has personally or by proxy has one vote, regardless of the number one vote. of shares held. On a poll, each holder of member shares has one vote for every member share they hold.
134 Bananacoast Community Credit Union Ltd bcu Constitution P&N Bank Constitution
Proxies
Clause 8.11 Rule 12.5(3)
A proxy can vote on a show of hands. A proxy cannot vote on a show of hands.
Clause 8.11 No equivalent.
Only the chairperson of the meeting can act as proxy for more than ten members.
Show of hands
Clause 7.26 Rules 12.1(1) and 12.5(4)
Resolutions are decided on a show of hands unless a poll Resolutions are decided on a show of hands unless a poll is is demanded. demanded. If the chair is appointed a proxy and directed how to vote, the chair must demand a poll.
Voting by joint members
Clause 8.5 Rule 3.3(3)
If two or more joint members purport to vote, only the vote of Only the joint member who is named first in the register is the joint member who appears first in the register is accepted. entitled to vote.
Direct voting
No provision for direct voting. Rule 12.7
The directors may decide to permit and regulate direct voting for any general meeting or class meeting.
Directors
Number
Clauses 9.1 and 9.3 Rule 13.1
Minimum of five or such higher number determined by the Maximum of 10. bcu Board. There is no maximum unless set by a resolution of a general meeting.
Board composition – elected and appointed
Clauses 9.4, 9.6 to 9.14 and Schedule 2 Rules 13.1, 13.4 and 13.5 and Appendix 5
There are no special categories of directors. The Board comprises no more than six member elected directors; no more than three Board appointed directors and, if so determined by the Board, the CEO.
An election for directors is held at each annual general Member elected directors generally have a term ending at the meeting in accordance with Schedule 2 (see below). end of the third annual general meeting at which the director was elected. However, if the number of directors elected at a meeting is more than two, the two with the most votes retire at the end of the third annual general meeting, and the remainder ends at the end of earlier annual general meetings where less than two member elected directors are due to retire.
Member Booklet 135 bcu Constitution P&N Bank Constitution
At each annual general meeting, the number of directors The term of office of Board appointed directors is three years. nearest to but not less than one-third of the directors must The Board may only appoint such a director if it considers the retire from office. In any event, a director must retire at the person has skills, experience or expertise not otherwise available third annual general meeting since their last election. to the Board.
The Board can also appoint directors (subject to the cap) to fill The term of office of director filling a vacancy arising other than casual vacancies or as an addition to the Board, but their term because the director’s term has ended ends at the end of the of office expires at the end of the next annual general meeting next AGM unless the general meeting approve that it expires (AGM), unless elected. at the end of the term of the director who caused the casual vacancy. If the person is appointed as an additional director because the number of member elected directors is less than six, their office ends at the next annual general meeting.
Eligibility to be a Director
The following persons are ineligible to be bcu Directors: The following persons are ineligible to be directors:
Clause 9.3.2 Rule 13.2
A person who is not a bcu Member and is not a representative No equivalent – only P&N Bank members may be directors, not of a body corporate or unincorporated association that is a representatives of corporate members. bcu Member.
Clause 9.3.4 No equivalent.
Employees (unless an executive director under clause 12.24).
Clause 9.3.9 No equivalent.
A person who has been a senior manager within three years of nomination.
No equivalent. Rule 13.2(e)
In the case of a member elected director, has been a P&N Bank member continuously for at least twelve months prior to nomination.
Election process
Schedule 2 Appendix 5
Ballot held at the AGM, unless there are fewer candidates than Postal or electronic ballot before the AGM with the results positions, in which case the directors are elected by separate announced at the AGM. resolutions at the AGM.
Nominations open at least 77 days before the AGM and close Nominations open at least 56 days before the AGM and close on a date determined by the Board which is between 14 and at least 35 days before the AGM. Four P&N Bank members must 56 days before the AGM. Two bcu Members must nominate nominate the candidate. the candidate.
Nominations are reviewed for eligibility by the Returning Nominations are reviewed for eligibility by a Nominations Officer appointed by the Board (who must not be a director Committee, which comprises not less than three persons, where or candidate). the majority are independent, none are employees of P&N Bank and none are directors being nominated.
136 Bananacoast Community Credit Union Ltd Schedule 5. Board of the Continuing Entity and bcu Advisory Council
Board of the Continuing Entity bcu Advisory Council The board of the Continuing Entity at Tuesday 22 October As set out in the Merger Implementation Agreement, bcu and 2019 will comprise: P&N Bank have agreed that, subject to implementation of the Merger, P&N Bank will establish an Advisory Council for each of • Paul Gabb, Chair the P&N Bank and bcu businesses following the Merger. • Stephen Targett, Deputy Chair The bcu Advisory Council will comprise up to six member • Andrew Hadley, Director and CEO representatives and with the majority to reside in the Coffs Coast • Louise Clark, Director region. The following current bcu Directors, from the Coffs Coast • Gary Humphreys, Director region, have agreed to become representative members of the • Edwin Bradley, Director bcu Advisory Council:
• Julie Elliot, Director • Geoffrey Hardaker • Kellie Properjohn, Director • Sinclair Black • Alan Philp, Director Their involvement brings an important connection to the history • Trevor Hunt, Director of bcu to the bcu Advisory Council as well as their deep regional The current bcu Directors listed below will not be directors expertise and knowledge. of the Continuing Entity: Upon the Merger becoming effective, an appropriate process • Geoffrey Hardaker will be conducted to identify and invite other bcu Members to become representative members of the bcu Advisory Council. • Sinclair Black These new representative members will possess the skill sets, • Michael Gould regional connections and experience that are required to support the performance of the designated roles of the bcu The current directors of P&N Bank listed below will not be Advisory Council. directors of the Continuing Entity: Unless otherwise agreed, the Advisory Councils will have the • Stephen Melville following responsibilities: • Eric Smith a) advise on the needs and priorities of service delivery to customers; b) observe and provide feedback on the financial and non-financial performance of the brand; c) assist in developing links with local employers and communities; d) provide feedback on product development; e) act in an ambassadorial capacity to grow and promote the brand; f) advise on local economic conditions and impacts on business growth; g) advise on local competitor landscape and activities; h) provide direct voice of the member feedback on service delivery and marketing strategy; i) use local connections for introductions to staff; j) advise on priorities for local community initiatives and sponsorships; and k) provide input into strategic and business planning processes.
Member Booklet 137 Annexure A. Notice of General Meeting
Notice of General Meeting Important notes: Bananacoast Community Credit Union Ltd ABN 50 087 649 750 Annual Report Notice is given that a General Meeting of the members of bcu will make the Financial Report, Directors’ Report and the Bananacoast Community Credit Union Ltd will be held on Auditor’s Report for the period ending 30 June 2019 (2019 Tuesday 22 October 2019 at C.ex Coffs, 2-6 Vernon Street, Annual Report) available to bcu Members at least 2 weeks prior Coffs Harbour commencing at 10.00am. to the General Meeting on Tuesday 22 October 2019.
To enable you to make an informed voting decision, the Copies of the 2019 Annual Report will also be available on the Member Booklet that accompanies and forms part of this bcu website (bcu.com.au) and in bcu stores. Alternatively you Notice of General Meeting provides further information on can request a copy of the 2019 Annual Report in one of the the Merger. Terms used in this Notice of General Meeting have following ways: the same meaning as the defined terms in section 7 of the • by email: to [email protected] Member Booklet. • by post: to Returning Officer at PO Box 1563, Coffs Harbour, NSW 2450 or Agenda • by fax: to Returning Officer on (02) 6690 3772. Ordinary Business
1. Credit Union Prayer bcu Members will be allowed an opportunity to: 2. Welcome to members and guests • ask questions or make comments about the 2019 Annual 3. Apologies Report and the management of bcu; and 4. To receive and consider bcu’s Financial Report, • ask questions of the Auditor or its representatives, relevant the Directors’ Report and the Auditor’s Report for to the conduct of the audit, preparation and content of the the financial year ended 30 June 2019. Auditors’ Report, the accounting policies adopted by bcu in relation to the preparation of the financial statements and Special Business the independence of the Auditor in relation to the conduct 5. Special Resolution: Approval of Merger with of the audit. Police & Nurses Limited bcu Members may also submit written questions to the Auditor To consider, and if thought fit, pass the following by no later than 24 hours prior to the General Meeting through resolution as a special resolution: one of the ways mentioned above. That, the bcu Members approve the proposed total The Auditor will respond to any written questions submitted in voluntary transfer of the business of Bananacoast the manner described above during the General Meeting. Community Credit Union Ltd ABN 50 087 649 750 to Police & Nurses Limited ABN 69 087 651 876 and that, subject to approval by APRA, the bcu Board is authorised to implement the transfer.
All of the bcu Directors recommend that you vote for the Special Resolution.
By order of the board Ciara Gilleece – Company Secretary
138 Bananacoast Community Credit Union Ltd Voting on the Merger Resolution How to vote electronically Eligible bcu Members can vote: Vote online by visiting bcu.com.au/vote, or via the bcu connect app, or via bcu ibank. 1. by attending the meeting and voting in person or by attorney or, in the case of corporate members, by Step 1. Enter your details (including your member number) corporate representative; into the secure online portal and login. 2. by going online at bcu.com.au/vote, or via the bcu connect app, or via bcu ibank, and appoint a proxy to vote on your behalf in accordance with your instructions; 3. in person at your local store by appointing a proxy to vote on
your behalf in accordance with your instructions; or Member no 4. by using the Proxy Form included with this document to appoint a proxy to vote in accordance with your instructions.
The following voting requirements and participation thresholds Login must be met in order to pass the resolution:
Member Participation Threshold: at least 25% of bcu Members Step 2. Click on ‘Vote’ button. Review and agree to the who have been members for more than two years and 5% of bcu declaration and click ‘Next’. Members who have been members for more than twelve months must vote on the Merger (whether for or against). Step 3. Cast your vote and confirm your proxy appointment.
Voting eligibility: Only bcu Members who have been a member for at least twelve months as at the date of the General Meeting are entitled to vote on the bcu Merger Resolution (Merger Approval Members) and, of those Merger Approval Members who actually vote, at least 75% must vote in favour of the bcu Merger Resolution.
How to vote in person Vote If you are entitled to vote and wish to do so in person, you should attend the bcu General Meeting to be held at 10.00am on Tuesday 22 October 2019 at C.ex Coffs, 2-6 Vernon Street, Coffs Harbour.
Members are requested to arrive by 9:30am for registration.
Please bring your meeting registration forms with you to facilitate admission to the meeting. A registration form for the bcu General Meeting is included with this document. Confirm proxy A body corporate which is a bcu Member may appoint an appointment individual to act as its corporate representative. The appointment must comply with the requirements of sections 250D and 253B of the Corporations Act. If you are attending as a corporate representative, please bring evidence of your authority. Step 4. Review the information, confirm your vote and logout.
Confirm
Member Booklet 139 How to vote by Proxy Form Appointing your proxy Members can vote by Proxy Form: A bcu Member entitled to attend and vote is entitled to appoint a proxy. Each proxy will have the right to vote on a poll and also to 1. In Person: by going to your local store and appointing a proxy speak at the General Meeting. to vote on your behalf in accordance with your instructions; or 2. Proxy Form: by using the Proxy Form included with this A proxy need not be a bcu Member. document to appoint a proxy to vote in accordance with If a proxy is not directed how to vote on an item of business, the your instructions. proxy may vote or abstain from voting, as that person thinks fit. Your completed Proxy Form (and any Power of Attorney or a certified copy under which the proxy form is signed) must be If a proxy is instructed to abstain from voting on an item of returned in one of the following ways: business, that person is directed not to vote on the member’s behalf on the poll, and the bcu Share the subject of the By email proxy appointment will not be counted in computing the [email protected] required majority.
By post Members who direct their proxy how to vote but do not Bananacoast Community Credit Union Ltd, nominate the identity of their proxy will be taken to have C/- Link Market Services Limited appointed the chairman of the meeting as their proxy to vote on Locked Bag A14, Sydney South NSW 1235 Australia their behalf. If a proxy is nominated but the nominated proxy does not attend the meeting, the chairman of the meeting will act in By hand delivery place of the nominated proxy and vote in accordance with any To your local store instructions. Proxy appointments in favour of the chairman of By fax the General Meeting, the company secretary of bcu or any +61 2 9287 0309 Director which do not contain a direction will be used to vote in favour of the resolution (or otherwise in accordance with the so that it is received by no later than 10.00am on Sunday 20 Board’s recommendation). October 2019, no later than 48 hours before the meeting time. Proxy appointments received after this time will be invalid. A vote given in accordance with the terms of a proxy is valid despite the revocation of the proxy, unless notice in writing of the revocation has been received by 10.00am on Sunday 20 October 2019.
If you complete and return a Proxy Form, you may still attend the meeting in person, revoke the proxy and vote at the meeting.
140 Bananacoast Community Credit Union Ltd APRA approval In accordance with section 8 of the Transfer Act, the Merger must be approved by APRA in order to become effective. APRA’s approval may impose conditions which need to be complied with before or after the Merger takes effect.
If the resolution put to this meeting is passed by the requisite majorities and the other conditions precedent to the Merger are satisfied, bcu and P&N Bank intend to confirm to APRA that this has occurred and APRA will then determine whether or not to approve the Merger.
Member Booklet 141 142 Bananacoast Community Credit Union Ltd Member Booklet 143 Contact us If you are in any doubt as to how to deal with this document, please consult your financial, legal, or other professional adviser or contact us:
Call 1300 228 228 Email [email protected] See us in-store Visit bcu.com.au/future Monday – Friday 8.00am – 6.00pm (AEST)
144 Bananacoast Community Credit Union Ltd