Heartland Group Holdings Limited
Annual Report 2012

Plain-text annual report

Annual Report To 30 JuNe 2012 Investing in New Zealand. That’s what we do. TABLE OF CONTENTS 1.0 IntroducIng Heartland 2.0 HIgHlIgHtS 3.0 cHaIrman and managIng dIrector’S rePort 4.0 Board of dIrectorS 5.0 corPorate governance 6.0 dIrectorS’ reSPonSIBIlIty Statement 7.0 fInancIal StatementS 8.0 audIt rePort Page 1 6 7 10 12 15 16 57 9.0 dIrector dIScloSureS and executIve remuneratIon 59 10.0 SHareHolder InformatIon 11.0 otHer InformatIon 12.0 dIrectory 63 64 65 1.0 IntroducIng Heartland Heartland was formed in January 2011 through the merger of three trusted New Zealand brands, CBS Canterbury, MARAC and Southern Cross Building Society. In August 2011 we welcomed PGG Wrightson Finance (PWF) into the Heartland fold. Our Retail and Business divisions now display the fresh white and green of the Heartland brand, while we continue to use the familiar PWF and MARAC brands in some areas of the business. HeARTlANd’s vIsIoN With roots stretching back to 1875, Heartland has a proud history of helping New Zealanders to succeed. Our vision is to drive prosperity for small-to-medium sized businesses, farms and families in heartland communities. Heartland at a Glance Heritage Heartland’s roots stretch back to 1875. NZX Main Board listed2 Heartland is an NZX50 listed company. Investment Grade Rating Heartland Building Society, the principal operating subsidiary of Heartland New Zealand Limited, has an investment grade credit rating of BBB- (Outlook Stable) from Standard & Poor’s. Banking on Heartland Heartland Building Society’s near-term goal is to become a bank1 providing finance solutions to heartlanders. lending diversity All of Heartland Building Society’s is on New Zealand based assets, and is spread across the country and over many sectors. lending Funding diversity Heartland Building Society deposits, committed bank programmes and an NZX Debt Market listed bond. is funded through retail facilities, securitisation Nationwide Footprint Heartland has a wide network of branches and offices throughout New Zealand. 1 2 Neither Heartland New Zealand Limited nor Heartland Building Society is a registered bank. Heartland New Zealand Limited is listed on the NZX Main Board. The NZX Main Board is a registered market operated by NZX Limited, a registered exchange, regulated under the Securities Markets Act 1988. hEArTLANd NEw zEALANd LIMITEd ANNuAL rEpOrT 2012 | 1 1.0 INTrOduCINg hEArTLANd continued suPReMe AWARd Heartland Building society’s award-winning Hamilton branch team from left to right: Stephanie Poynton, Branch Manager Melissa Rose, Diana Vaughan-Williams and Gayle Orr. service the Heartland Way We were extremely proud when our customer-first approach was recognised by the Hamilton Central Business Association. The association awarded Heartland Building Society’s Hamilton branch the coveted Service Excellence Award 2012 and the Supreme Award – Business of the Year 2012. Heartland is a people business, focused on providing exceptional service by locals who know and are part of the community. We strive to recognise and understand the needs of each of our customers and provide them with the best financial solution to suit their needs. Winning these awards is testament to Heartland’s customer-first approach and the outstanding effort of our Hamilton team led by Branch Manager, Melissa Rose. 2 | INTrOduCINg hEArTLANd supporting our Communities Heartland supports a number of local events and initiatives in the communities in which we operate. We have always been committed to local communities and New Zealand as a whole and that commitment will continue and grow in the future. Below are a few examples. MId CANTeRBuRy NeTBAll CeNTRe – AsHBuRToN Since the 1920s, the Mid Canterbury Netball Centre has been a hub of the Ashburton community. Responsible for the development of netball in the Mid Canterbury area, the Centre makes the sport accessible to more than 1,300 players of all ages and abilities. Heartland has supported the Centre since 2004 (previously through CBS Canterbury). Our contribution helps provide and maintain the amenities the Centre offers. We are proud to be associated with such an integral part of Ashburton. “Most of Mid Canterbury Netball is run on the goodwill of members and volunteers. The contribution Heartland makes goes a long way towards ensuring we can continue offering the same great facilities and coaching to players, umpires, and administrators at all levels, and makes what we do so rewarding.” – Rosemary Adlam, President THe CHAMPIoN CeNTRe – CHRIsTCHuRCH The Champion Centre is committed to providing high quality family-based early intervention services for children with developmental delays. The Centre runs a ‘Learning Through Music’ programme, which encourages children to use music as a communication tool, building self-esteem and reinforcing the feeling of inclusion. Heartland is very pleased to have been able to support this great programme that helps many of the 200 children and families who use the Centre every year. “The support that Heartland has given the Centre has been fantastic. They recognise that all children in New Zealand should experience the opportunity to learn their full potential – no matter what. Their belief in the Centre and their generosity are greatly appreciated.” – Dr Susan Foster-Cohen, Director hEArTLANd NEw zEALANd LIMITEd ANNuAL rEpOrT 2012 | 3 1.0 INTrOduCINg hEArTLANd continued MulTIPle sCleRosIs soCIeTy – AuCklANd Multiple Sclerosis (MS) is a chronic disease of the central nervous system, and affects 1 in 1,000 New Zealanders. The MS Society of Auckland wanted to launch a new neuro-physiotherapy assessment programme to help people manage their symptoms and be inspired to be more in control of their health, and Heartland was able to help. Heartland’s donation provided the funding for the programme and as a direct result, 24 people diagnosed with MS were able to develop firm plans to move forward and live their lives to their true potential. “Your funding made a huge difference. Thank you for being so willing to help with this important programme, we are very grateful indeed and the feedback we’ve received has been fantastic.” – Gary MacMahon, General Manager BoWls MATuA – TAuRANGA Bowls Matua has been part of the Tauranga community for nearly 50 years. Providing a friendly atmosphere for members, visitors, local students and tourists, the Club prides itself on making bowls accessible to all, and provides additional support for members with its active social calendar. Heartland’s involvement enables the running of two club greens and tournaments. “The generosity of Heartland enables us to provide a top-class facility to everyone who visits the Club. Bowls is obviously very important to us, and without Heartland’s support it would be a lot more difficult for us to offer this great, fun, sporting and leisure pursuit to the community.” – Mike Boyce, Club President 4 | INTrOduCINg hEArTLANd Heartland is proud to sponsor community events throughout New Zealand Ashburton schools Music Festival katikati Croquet Club Rotary Club of Christchurch Christ’s College Maadi Cup Rowing Programme Rangiora Golf Club Ashburton Arts society Bowls Matua Methven A&P Association Zonta Club of Ashburton Cancer society Relay for life Bowls Tauranga south Club Hillary Institute st Heliers Bowling Club Glendowie Bowling Club kapiti Coast Bowling Centre Waiheke Island Bridge Club Papakura Bowling Club Mid Canterbury Netball Centre Marlborough A&P show Ashburton Community Pool NZ sheep dog Trial Association Bay of Plenty Hunting & Fishing Competition Wellington employers’ Chamber of Commerce Canterbury education services Annual schools Breakfast The Champion Centre ‘learning Through Music’ st Bathans Collie Club Heartland Festival of Brass Multiple sclerosis society Auckland Mid Canterbury Tennis Takapuna Bowling Club Howick Bowling Club Wynrs New Zealand Mission Bay Women’s Bowling Club Hereworth school Rotorua Friends of Hospice Wanaka Collie Club Ashburton Charity Golf Classic Ashburton Golf Club Combined Northern district Probus Golf Tournament Milford Bowling Club Mid Canterbury Bowling umpires Tournament Mayfield district lions Ashburton County veteran Golf Association lowburn Collie Club Mid Canterbury Hockey hEArTLANd NEw zEALANd LIMITEd ANNuAL rEpOrT 2012 | 5 2.0 hIghLIghTS The Annual Report for the year ended 30 June 2012 outlines the financial performance of Heartland New Zealand Limited (Heartland or the Company) for the 2012 financial year. It is intended to help investors and analysts to better understand the operations of the Company3, and to assess its performance and prospects. Heartland’s achievements and positive financial result for the year ending 30 June 2012 were the culmination of careful planning and strategic positioning of the business, and provide an insight into Heartland’s capabilities moving forward. Key achievements for the year ending 30 June 2012 include: • meeting our financial targets and posting a net profit after tax of $23.6m • completing the integration of the merging entities • • • successfully rebranding the Retail and Business divisions to Heartland acquiring PGG Wrightson Finance Limited (PWF) supported by a successful capital raising Heartland Building Society’s investment grade credit rating being reaffirmed, and its outlook improved to ‘stable’. Financial year overview 30 June 2012 30 June 2011 Net Profit Before Tax Net Profit After Tax Total assets Net finance receivables Total equity Equity ratio $20.3m $23.6m $2,348.1m $2,078.3m $374.8m 16.0% $11.6m $7.1m $2,118.0m $1,707.3m $296.4m 14.0% 3 The financial statements presented are the consolidated financial statements comprising Heartland and its subsidiaries. 6 | hIghLIghTS – ChAIrMAN ANd MANAgINg dIrECTOr’S rEpOrT 3.0 ChAIrMAN ANd MANAgINg dIrECTOr’S rEpOrT In our first full year as a merged entity, Heartland posted a Net Profit After Tax of $23.6m, including one-off tax benefits of $9.6m, up from $7.1m in the previous year to 30 June 2011. Net Profit Before Tax (NPBT), which excludes the one-off tax benefits, was $20.3m for the full year ended 30 June 2012, up $8.7m from $11.6m for the previous year ended 30 June 2011. $14.7m of NPBT was delivered in the second half of the year, up from $5.6m in the first half, an increase of $9.1m or 163%. The improvement in the second half of the year was driven by improved margins and reduced costs, a trend we expect to continue. Earnings Per Share was $0.06 calculated on weighted average shares. Heartland’s balance sheet strengthened during the period. Net finance receivables were $2,078.3m at 30 June 2012 compared to $1,707.3m at 30 June 2011. The increase was largely due to the acquisition of PGG Wrightson Finance Limited (PWF) on 31 August 2011. Net finance receivables remained relatively unchanged from their 31 December 2011 level of $2,075.2m, as “core” asset growth in the Business, Rural and Consumer divisions was offset by reductions in Non-Core Property and Retail (where the mortgage book declined), in what remains a competitive environment. Cash and cash equivalents reduced from $267.2m at 30 June 2011 to $89.7m at 30 June 2012, as excess liquidity held in the lead-up to the expiry of the Crown guarantee (31 December 2011) was utilised as planned. Borrowings increased from $1,787.5m at 30 June 2011 to $1,939.5m at 30 June 2012, due to the acquisition of PWF and the assumption of $408.8m of deposit obligations by Heartland. This was offset by the reduction in liquidity and repayment of the $92.3m PWF Bond. Total equity increased by $78.4m to $374.8m as at 30 June 2012 due largely to a capital raising associated with the PWF acquisition in the period that raised a net $55.9m, combined with the profitability noted above. The equity ratio was 16%, up from 14% at 30 June 2011. Net Tangible Assets (NTA) increased from $270.1m to $343.7m (following the capital raising and PWF acquisition) – on a per share basis NTA was $0.88 at 30 June 2012 compared to $0.90 at 30 June 2011. Net operating Income (NOI) increased to $94.9m in the year ended 30 June 2012, up from $70.5m in the preceding year ended 30 June 2011. The increase in NOI was mostly attributable to the acquisition of PWF on 31 August 2011 and lower cost of funds, both through lower funding margins and a reduction in surplus liquidity held. NOI increased by $5.1m to $50.0m in the last six months of the financial year compared to the first six months of the financial year. operating costs increased by $19.9m to $65.5m for the year ended 30 June 2012 compared to the prior year ended 30 June 2011. This is due to six months of MARAC costs and six months of Heartland costs being included for the year ended 30 June 2011, whereas 12 months of Heartland costs and 10 months of PWF costs are included for the year ended 30 June 2012. Notwithstanding this, operational efficiency improved, with average operating expenses as a percentage of NOI reducing from 80% in the six months through to 31 December 2011, to 60% for the six months through to 30 June 2012. This was delivered both through cost reductions and improvements in NOI. We will continue our focus on minimising fixed costs as we enter the 2012-2013 financial year. Impaired asset expense was $5.6m for the year ended 30 June 2012, down from $13.3m for the year ended 30 June 2011, due to the continued benefit of the Real Estate Credit Limited (RECL)4 management contract and improvement in the quality of the core book, in particular the Business book. The RECL Agreement was regarded as fully utilised as at 30 June 2012 – the future value of expected claims has reached the $30.0m limit. Investment properties held on balance sheet increased by $21.0m to $55.5m during the year as Heartland sought to improve its security position. A $3.9m decrease in the fair value of these investment properties occurred as at 30 June 2012. Net impaired, restructured and past due loans over 90 days were $90.5m, which was 4.4% of net finance receivables as at 30 June 2012 – down from $100.7m or 5.9% as at 30 June 2011. The level of impaired, restructured and past due loans is largely due to the legacy non-core property books and will continue to reduce as a percentage of total assets as lending in the core business grows and the non-core book runs down. The net impairment ratio of the core business was relatively consistent with the prior year at 1.3% as at 30 June 2012, compared to 1.2% as at 30 June 2011. Heartland benefited from one-off tax benefits of $9.6m in the 2012 financial year. A law change resulted in a one-off deferred tax benefit of $6.2m as previously advised, and a $3.4m gain resulting from utilising historic tax losses of MARAC Financial Services Limited. Heartland expects taxation to be normalised in the 2012-2013 financial year. Heartland Building Society’s (HBS – Heartland’s principal operating subsidiary) liquidity was $448.5m as at 30 June 2012, which consisted of cash, liquid assets and unutilised available funding lines. This was $152.6m more than the minimum level of liquidity required under HBS’s Trust Deed. 4 Real Estate Credit Limited (RECL) is a subsidiary of Pyne Gould Corporation Limited and manages the MARAC (a subsidiary of Heartland) non-core property loan assets which have the benefit of the RECL management contract. The security held for the obligations under the RECL management contract includes an AA- rated bond, specific security over five properties, and an undertaking that RECL complies with its obligation to maintain the pool of security to a required minimum value. hEArTLANd NEw zEALANd LIMITEd ANNuAL rEpOrT 2012 | 7 3.0 ChAIrMAN ANd MANAgINg dIrECTOr’S rEpOrT continued On 6 December 2011, Standard & Poor’s affirmed HBS’s investment grade credit rating of BBB- and improved the ratings outlook to ‘stable’. The investment grade rating underpins the strength and strategy of Heartland. Business Performance – Heartland’s Core Business divisions Heartland’s core business is divided into three divisions – Business, Rural and Retail & Consumer, which reflect the major drivers of the New Zealand economy. We aim to deliver a relationship-based service model to local communities, providing general lending but with an emphasis on products that either we specialise in or are ‘best in category’. These products currently include motor vehicle finance, livestock finance, invoice finance, business overdrafts, asset finance, insurance and deposits. Business The Business division supports the working capital, plant and machinery, and general funding requirements of small-to-medium sized businesses with turnover between $1.0m and $20.0m. During the year, we commissioned an independent research firm to have our customers rate our service. Pleasingly, our relationship-based service model rated very highly, with the division’s Relationship Managers achieving an average customer service rating of 94% across a range of performance attributes. The receivables book grew by $63.9m to $540.2m at 30 June 2012. NOI also increased by $3.7m to $21.0m from the prior year. Heartland’s market share is less than 1% of the market, so there is good scope for customer growth by increasing the penetration of specialised, higher-yield products. Rural The Rural division provides farmers with livestock finance, working capital and farm lending. Distribution is both direct and through a relationship with PGG Wrightson (PGW), a leading provider to New Zealand’s agricultural sector. PWF, now a division of Heartland, was acquired from PGW in August 2011. PWF was an important acquisition for Heartland and brought significant impetus to our rural strategy and further diversity to our asset base. to $478.6m during in net receivables growth The acquisition resulted of $402.6m the year ended 30 June 2012. However, underlying growth was flat outside of the acquisition due to debt reduction in the sector and favourable growing conditions limiting demand for livestock finance. The Rural division is well positioned for future growth, with new livestock finance products and processes having been introduced towards the end of the financial year. Retail & Consumer Retail & Consumer is managed as one division due to the similarity of customer profile – middle New Zealand families. Retail focuses on providing deposit products and residential lending. Consumer offers vehicle and equipment finance and insurance through relationships with leading distributors such as The New Zealand Automobile Association (AA), Holden, Nissan, Suzuki and Case IH, and through authorised-dealer networks. During the first half of the year, Heartland successfully transitioned through the expiry of the Crown guarantee and the Heartland brand was rolled out across the Retail network in the second half of the financial year. Overall, this division’s receivables book fell by $47.6m to $954.8m during the year ended 30 June 2012, however NOI increased by $4.4m from the year prior to $45.1m. The mortgage book (primarily residential) was impacted by a competitive market and reduced by $68.4m, but was offset by growth in Consumer lending of $20.8m. A focus on motor vehicle finance and an expansion into new communities will underpin growth in Consumer lending and deposit products in the 2012-2013 financial year. Non-Core Business – Property The non-core property portfolio is segregated and under a managed plan to run off. Total non-core property assets were $160.2m at 30 June 2012, a reduction of $26.9m from 30 June 2011. Some investment properties were acquired as a result of enforcement to improve our security position and the market remains difficult. Non-core property was made up of net receivables of $104.7m and investment properties of $55.5m. RECL4 manages the ex-MARAC non-core property. As noted earlier, the RECL Agreement was regarded as fully utilised as at 30 June 2012 – the future value of expected claims has reached the $30.0m limit. strategic Priorities Our key objective is ultimately to create a New Zealand owned and controlled banking group with Heartland, the parent company, listed on the NZX Main Board. HBS has engaged with the Reserve Bank of New Zealand (RBNZ) regarding its application for registered bank status. Certain necessary intermediate steps have been completed and the formal determination process has now begun. The process is ongoing and the information exchanged, and 8 | ChAIrMAN ANd MANAgINg dIrECTOr’S rEpOrT discussions held, between the RBNZ and HBS in the course of the process are confidential. We expect that a decision will be available in November 2012. We emphasise that timing to the end of the process remains uncertain, and the outcome remains unknown. is Another key priority for Heartland to deliver acceptable and sustainable earnings moving forward. Subject to meeting profit targets and regulatory capital requirements, we intend to become a regular dividend payer. Our Dividend Policy will be outlined at the Heartland Annual General Meeting (AGM) being held in Ashburton on 30 November 2012. No dividend was paid or is to be paid by Heartland in, or in respect of, the 30 June 2012 financial year. Profit guidance for the year ending 30 June 2013 will also be provided at the Heartland AGM. Whilst trading conditions remain challenging given economic conditions generally, performance for the second half of the 2011-2012 financial year is perhaps the best guide (at present) for the 2012-2013 financial year. Heartland established on the New Zealand landscape We will continue to build on our heritage and reputation as being 100% for New Zealand and being a people-focused business that provides exceptional service. Bruce Irvine Chairman Jeffrey Greenslade Managing Director 24 September 2012 hEArTLANd NEw zEALANd LIMITEd ANNuAL rEpOrT 2012 | 9 4.0 BOArd OF dIrECTOrS Jeffrey Greenslade llB Managing director Jeff has over 20 years’ experience as a senior banking executive, and is responsible for the strategy and operational delivery of Heartland Building Society. He joined MARAC Finance Limited as Chief Executive Officer in 2009, and was appointed to its Board in December of that year. Graham kennedy J.P., Bcom, fca, acIS, acIm, af Inst d director Graham has 39 years’ experience as a chartered accountant, and is an independent professional director and Chairman of a number of private companies. Graham was a director of CBS Canterbury for 24 years, holding the position of Chairman from 2002- 2008. Bruce Irvine Bcom, llB, fca, af Inst d, fnZIm Chairman Bruce is Chairman of Heartland New Zealand Limited. He is a chartered accountant and was admitted into the Christchurch partnership of Deloitte in 1988. He was Managing Partner from 1995 to 2007 before his retirement from Deloitte in May 2008 to pursue his career as an independent director. Bruce is also Chairman of Christchurch City Holdings Limited, and a director of several public and private companies. Christopher Mace cnZm director Chris is an Auckland based businessman, company director and investor with experience in the New Zealand and Australian business environment. He holds a number of directorships and was a director of Southern Cross Building Society leading up to the merger with MARAC Finance Limited and CBS Canterbury. Geoffrey Ricketts llB (Hons), f Inst d director Geoff is a commercial lawyer, company director and investor with wide experience in the New Zealand and Australian business environment. He was Chairman of Southern Cross Building Society leading up to the merger with MARAC Finance Limited and CBS Canterbury. Gary leech Bcom, fca, af Inst d, fnZta director Gary has 38 years’ experience as a chartered accountant, and was the Chairman of the Board of CBS Canterbury leading up to the merger with MARAC Finance Limited and Southern Cross Building Society. Gary is a Fellow of The Institute of Chartered Accountants, an Accredited Fellow of the Institute of Directors and a Fellow of the New Zealand Trustees Association. Resigned directors Bryan Mogridge (resigned 28 October 2011) 10 | BOArd OF dIrECTOrS The Heartland Building Society Board includes all of the directors of Heartland New Zealand Limited plus the following independent directors. John Harvey Bcom, ca Independent director John has considerable financial services experience and 35 years’ experience in the professional services industry, including 23 years as a partner of PricewaterhouseCoopers. John was appointed to the MARAC Finance Limited Board in 2010 and subsequently joined the Heartland Building Society Board upon its creation. Michelle smith mcom, ca – nZIca and IcaeW Independent director Michelle is a professional director who has over 20 years’ experience working within the financial services industry. Michelle was appointed to the MARAC Finance Limited Board in 2010 and subsequently joined the Heartland Building Society Board upon its creation. hEArTLANd NEw zEALANd LIMITEd ANNuAL rEpOrT 2012 | 11 5.0 COrpOrATE gOvErNANCE The Board and management of Heartland New Zealand Limited are committed to ensuring that the Company maintains corporate governance practices in line with current best practice. The Board has established policies and protocols which comply with the corporate governance requirements of the NZSX Listing Rules and which are consistent with the principles contained in the NZX Corporate Governance Best Practice Code. This governance statement outlines the main corporate governance practices applied by the Company as at 30 June 2012. During the year the Board reviewed and assessed the Company’s governance structure to confirm that its governance practices are consistent with best practice. The Board considers it has complied with the NZX Corporate Governance Best Practice Code for the year ended 30 June 2012. This section of the Annual Report reflects the requirements of the New Zealand Securities Commission’s Governance Principles and Guidelines. The Company’s Constitution, and Board and Committee charters are available on the Company’s website www.heartland.co.nz. Principle 1 – ethical standards The Company expects its directors and staff to act honestly and in good faith, and in the best interests of the Company at all times. They must act with the care, diligence and skill expected of a director or staff member of a company that has shares that are publicly traded on the NZX Main Board and has subsidiaries that issue securities and accept funds from the general public. Directors and staff are required to act honestly and fairly in all dealings with the Company’s shareholders, customers, investors and service providers. Each director and staff member has an obligation, at all times, to comply with the spirit as well as the letter of the law, to comply with the principles of the Company’s Code of Conduct, the Directors’ Code of Conduct and the Company’s Constitution, and to exhibit a high standard of ethical behaviour. The Company’s Code of Conduct covers, among other things: • • • receipt and use of Company assets and property receipt and use of Company information conflicts of interest. All directors and officers of the Company are required to obtain consent before buying or selling shares in the Company and to certify that their decision to buy or sell shares has not been made on the basis of inside information. The Company’s Code of Conduct and Directors’ Code of Conduct are available on the Company’s website www.heartland.co.nz. Principle 2 – Board Composition and Performance Role of the Board The Board is responsible for corporate governance and the Company’s overall direction. The Board establishes objectives, strategies and an overall policy framework within which the business is conducted. Day-to-day management is delegated to the Chief Executive Officer. The Board regularly monitors and reviews management’s performance in carrying out their delegated duties. The Board schedules monthly meetings. In the year ended 30 June 2012, the Board met 10 times. Board Membership, size and Composition The NZSX Listing Rules provide that the number of directors must not be fewer than three. Subject to this limitation, the size of the Board is determined from time to time by the Board. The Board currently comprises six directors, being a non- executive Chairman, the Managing Director and four non- executive directors. A director is appointed by ordinary resolution of the shareholders, although the Board may fill a casual vacancy, in which case the appointed director retires at the next Annual General Meeting but is eligible for re-election. Nominations for election as a director may be made by shareholders up until a closing date, which must not be more than two months before the date of the Annual General Meeting. Independence of directors A director is considered to be independent if that director is not an executive of the Company and if the director has no direct or indirect interest or relationship that could reasonably influence, in a material way, the director’s decisions in relation to the Company. The Board has determined that B R Irvine, G R Kennedy, G R Leech, C R Mace and G T Ricketts are independent directors. Board Performance Assessment The Board undertakes a regular review of its own, its committees’ and individual directors’ performance. This is to ensure that it has the right composition and appropriate skills, qualifications, experience and background to effectively govern the Company and monitor the Company’s performance in the interests of shareholders. The last review was undertaken in April 2012. 12 | COrpOrATE gOvErNANCE Principle 3 – Board Committees Board Committees The Board has three permanently constituted committees to assist the Board by working with management in specific areas of responsibility and then reporting their findings and recommendations back to the Board. Each of these committees has terms of reference which set out the committee’s objectives, membership, procedures and responsibilities. Details are available on the Company’s website www.heartland.co.nz. Other ad hoc Board committees are established for specific purposes from time to time. Audit Committee The members of the Audit Committee are G R Leech (Chairman), B R Irvine, G R Kennedy and C R Mace. The role of the Audit Committee is to assist the Board in providing an objective, non-executive review of the effectiveness of the external reporting of financial information, and the internal control environment of the Group, including obtaining an understanding of the tax and financial risks which the Company faces. • • • oversee a nominating and appointing directors to the Board formal and transparent method of oversee capital management including the optimal capital structures and levels in the Company, ensure that the Company maintains best practice corporate governance. Risk Committee The members of the Risk Committee are E J Harvey (Chairman), G R Kennedy, C R Mace and M A Smith. The Risk Committee is a committee of the Board of Heartland Building Society which also operates for the benefit of Heartland New Zealand Limited. The purpose of the Risk Committee is to assist the Board to: • • formulate its risk appetite, at least annually understand and monitor the risks faced for each of the following types of risks: credit, liquidity, market, insurance, operational, regulatory and reputational, excepting: – tax and financial risks, which are covered by the Audit Committee To do this, the Audit Committee will provide oversight of: – strategic risks, which are governed by the full Board • • • • accounting policies and professional accounting requirements internal and external audit functions all statutory regulatory requirements the internal control environment. The Board has determined that B R Irvine, G R Kennedy and G R Leech each meet the criteria for being a “financial expert” in accordance with the Audit Committee’s charter. Governance and Remuneration Committee The members of the Governance and Remuneration Committee are G T Ricketts (Chairman), B R Irvine and G R Leech. The role of the Governance and Remuneration Committee is to: • • • oversee a formal and transparent method of recommending director remuneration to shareholders assist the Board in establishing remuneration policies and practices for the Company and in discharging its responsibilities for reviewing and setting the remuneration of the Managing Director and Chief Executive Officer of Heartland New Zealand Limited and senior executives assist the Board in reviewing the Board’s composition and the competencies required of prospective directors, directors, developing succession plans for the Board and making recommendations to the Board accordingly prospective identifying with input from all committees • ensure that all policy and decisions are made in accordance with the Group’s corporate values and guiding principles. Principle 4 – Reporting and disclosures The Board is committed to ensuring the highest standards are maintained in financial reporting and disclosure of all relevant information. The Audit Committee oversees the quality and timeliness of all financial reports, including all prospectuses issued by the Company or any of its subsidiaries. The Chief Executive Officer and Chief Financial Officer are required to certify to the Audit Committee that the financial statements of the Company and its subsidiaries present a true and fair view of the Company and comply with all relevant accounting standards. Principle 5 – Remuneration Total remuneration available to non-executive directors is determined by shareholders. The current aggregate approved amount is $917,500. Following the listing of the Company in January 2011, the directors’ fees were set as follows. Board Audit Committee Chair Directors Chair Members $150,000 $75,000 $15,000 $7,500 hEArTLANd NEw zEALANd LIMITEd ANNuAL rEpOrT 2012 | 13 5.0 COrpOrATE gOvErNANCE continued Risk Committee Chair Members Governance and Remuneration Committee Chair Members $20,000 $10,000 $10,000 $5,000 In addition, the independent directors of Heartland Building Society, E J Harvey and M A Smith, each receive fees of $70,000 per annum. The Company’s policy is to pay directors’ fees in cash. There is no requirement for directors to take a portion of their remuneration in shares and there is no requirement for directors to hold shares in the Company. senior executive Remuneration The objective is to provide competitive remuneration that aligns executives’ remuneration with shareholder value and rewards the executives’ achievement of the Company’s strategies and business plans. All senior executives receive a base salary and are also on short-term and long-term incentive plans under which they are rewarded for achieving key performance and operating results. Principle 6 – Risk Management The Board ensures that the Company has processes in place to identify and manage risk in the business. The three main types of risk identified are operational, business and market risks. Specific risk management strategies have been developed for each of these areas. The Risk Committee of the Board oversees the risk management strategy. The Company also has in place insurance cover for insurable liability and general business risk. Principle 7 – Auditors The Audit Committee is responsible for overseeing the external, independent audit of the Company’s financial statements. The Audit Committee ensures that the level of non-audit work undertaken by the auditors does not jeopardise their independence. The Company also has an internal audit function, which is independent of the external auditors. The Audit Committee approves the annual audit programme, which is developed in consultation with management of the Company. Principle 8 – shareholder Relations The Board is committed to maintaining a full and open dialogue with all shareholders. 14 | COrpOrATE gOvErNANCE – dIrECTOrS’ rESpONSIBILITy STATEMENT 6.0 dIrECTOrS’ rESpONSIBILITy STATEMENT The directors are responsible for ensuring that the financial statements give a true and fair view of the financial position of Heartland New Zealand Limited (Company) and its subsidiaries (Group) as at 30 June 2012 and the financial performance and cash flows for the year ended 30 June 2012. The directors consider that the financial statements of the Group and the Company have been prepared using appropriate accounting policies consistently applied and supported by reasonable judgements and estimates and that all the relevant financial reporting and accounting standards have been followed. The directors believe that proper accounting records have been kept which enable, with reasonable accuracy, the determination of the financial position of the Group and facilitate compliance of the financial statements with the Financial Reporting Act 1993. The Board of Directors (Board) of Heartland New Zealand Limited authorised the financial statements set out on pages 17 to 56 for issue on 28 August 2012. For and on behalf of the Board Bruce Irvine Jeffrey Greenslade hEArTLANd NEw zEALANd LIMITEd ANNuAL rEpOrT 2012 | 15 7.0 FINANCIAL STATEMENTS For the year ended 30 June 2012 explanatory Foreword The financial statements presented are those of Heartland New Zealand Limited (Company) and its subsidiaries (Group). On 7 January 2011, the Group was formed through the business combination of CBS Canterbury (CBS), Southern Cross Building Society (SCBS), MARAC Finance Limited (MARAC) and Heartland Financial Services Limited (previously Combined Operations Limited). On 31 August 2011, the Group acquired PGG Wrightson Finance Limited (PWF). From a legal perspective MARAC is a subsidiary of the Company (through Heartland Building Society). Under New Zealand equivalents to International Financial Reporting Standards (NZ IFRS) MARAC is treated as the acquirer of CBS and SCBS. The effect of this is that the financial statements represent a continuation of the MARAC business. As described in Note 1, the Group’s comparative year results include the operations of MARAC from 1 July 2010 to 6 January 2011 and the results of the new Group from 7 January 2011 to 30 June 2011. The year ended 30 June 2012 includes the Group results from 1 July 2011 onwards and PWF’s result from 31 August 2011. 16 | FINANCIAL STATEMENTS STATEMENTS OF COMprEhENSIvE INCOME STATEMENTS OF COMPREHENSIVE INCOME For the year ended 30 June 2012 For the year ended 30 June 2012 GROUP COMPANY NOTE Jun 12 $000 Jun 11 $000 Jun 12 $000 Jun 11 $000 6 6 7 7 15 8 32(a)(ii) 15 20 9 Interest income Interest expense Net interest income Operating lease income Operating lease expenses Net operating lease income Lending and credit fee income Dividends received Other income Net operating income Selling and administration expenses Profit before impaired asset expense and income tax Impaired asset expense Decrease in fair value of investment properties Operating profit Share of equity accounted investee's profit Profit before income tax Income tax (benefit) / expense Profit for the year Other comprehensive income Cash flow hedges: Effective portion of changes in fair value, net of income tax Reserves: Net change in available for sale reserve, net of income tax Net change in defined benefit reserve, net of income tax Other comprehensive (loss) / income for the year, net of income tax 205,148 121,502 83,646 161,299 99,705 61,594 15,064 9,954 5,110 1,798 - 4,330 94,884 65,547 29,337 5,642 3,900 19,795 534 20,329 (3,277) 23,606 18,073 11,130 6,943 1,236 - 718 70,491 45,674 24,817 13,298 - 11,519 82 11,601 4,458 7,143 378 596 (103) (435) (160) 111 14 721 17 - 17 - - - - 1,597 - 1,614 1,365 249 - - 249 - 249 (303) 552 - - - - 2 - 2 - - - - 866 - 868 848 20 - - 20 - 20 (254) 274 - - - - Total comprehensive income for the year 23,446 7,864 552 274 Earnings per share from continuing operations Basic earnings per share Diluted earnings per share 11 11 6c 6c 5c 5c n/a n/a n/a n/a All comprehensive income for the year is attributable to owners of the Group. The notes on pages 22 to 56 are an integral part of these financial statements. Heartland New Zealand Limited 4 hEArTLANd NEw zEALANd LIMITEd ANNuAL rEpOrT 2012 | 17 STATEMENTS OF ChANgES IN EQuITy STATEMENTS OF CHANGES IN EQUITY For the year ended 30 June 2012 For the year ended 30 June 2012 Share Capital $000 Available for sale Reserve $000 Defined benefit Reserve $000 NOTE Hedging Reserve $000 Retained Earnings $000 Total Equity $000 Jun 12 - GROUP Balance at 1 July 2011 137,074 111 14 (1,388) 160,595 296,406 Total comprehensive income for the year Profit for the year Other comprehensive income, net of income tax Total comprehensive income for the year Contributions by and distributions to owners Capital raising proceeds 27 Transaction costs associated with capital raising Own shares acquired 37 Total transactions with owners Balance at 30 June 2012 Jun 11 - GROUP 57,347 (1,402) (999) 54,946 192,020 Balance at 1 July 2010 55,000 Total comprehensive income for the year Profit for the year Other comprehensive income, net of income tax Total comprehensive income for the year - - - Contributions by and distributions to owners Issue of share capital Total transactions with owners 27 82,074 82,074 - - - - (103) (103) - (435) (435) - 378 378 23,606 - 23,606 23,606 (160) 23,446 57,347 (1,402) (999) 54,946 - - - - 8 - - 111 111 - - - - - - - - - - - - - (421) (1,010) 184,201 374,798 - (1,984) 153,452 206,468 - 14 14 - - - 596 596 - - 7,143 - 7,143 7,143 721 7,864 - - 82,074 82,074 Balance at 30 June 2011 137,074 111 14 (1,388) 160,595 296,406 The notes on pages 22 to 56 are an integral part of these financial statements. 18 | FINANCIAL STATEMENTS Heartland New Zealand Limited 5 STATEMENTS OF CHANGES IN EQUITY (continued) For the year ended 30 June 2012 Share Capital $000 Available for sale Reserve $000 Defined benefit Reserve $000 NOTE Hedging Reserve $000 Retained Earnings $000 Total Equity $000 Jun 12 - COMPANY Balance at 1 July 2011 286,343 Total comprehensive income for the year Profit for the year Total comprehensive income for the year Contributions by and distributions to owners Capital raising proceeds 27 Transaction costs associated with capital raising Total transactions with owners Balance at 30 June 2012 Jun 11 - COMPANY Balance at 1 July 2010 Total comprehensive income for the year Profit for the year Total comprehensive income for the year Contributions by and distributions to owners Issue of share capital 27 Total transactions with owners Balance at 30 June 2011 - - 57,347 (1,402) 55,945 342,288 - - - 286,343 286,343 286,343 - - - - - - - - - - - - - The notes on pages 22 to 56 are an integral part of these financial statements. - - - - - - - - - - - - - - - - - - - - - - - - - - 274 286,617 552 552 552 552 - - - 57,347 (1,402) 55,945 826 343,114 - - 274 274 274 274 - - 286,343 286,343 274 286,617 Heartland New Zealand Limited 6 hEArTLANd NEw zEALANd LIMITEd ANNuAL rEpOrT 2012 | 19 STATEMENTS OF FINANCIAL pOSITION STATEMENTS OF FINANCIAL POSITION As at 30 June 2012 As at 30 June 2012 Assets Cash and cash equivalents Investments Investment properties Finance receivables Operating lease vehicles Current tax assets Other assets Investment in subsidiaries Investment in joint venture Intangible assets Property, plant and equipment Deferred tax assets Total assets Liabilities Borrowings Current tax liabilities Trade and other payables Total liabilities Equity Share capital Retained earnings and reserves Total equity Total equity and liabilities GROUP COMPANY NOTE Jun 12 $000 Jun 11 $000 Jun 12 $000 Jun 11 $000 13 14 15 16 17 18 19 20 21 22 23 24 25 27 89,689 24,327 55,504 2,078,276 34,550 5,635 15,785 - 3,116 22,997 10,067 8,143 2,348,089 267,187 17,831 34,499 1,707,311 32,727 - 19,429 - 2,582 21,602 10,079 4,703 2,117,950 469 - - - - 363 317 342,343 - - - - 343,492 153 - - - - 254 32 286,343 - - - - 286,782 1,939,489 - 33,802 1,973,291 1,787,524 1,956 32,064 1,821,544 - - 378 378 - - 165 165 192,020 182,778 374,798 137,074 159,332 296,406 342,288 826 343,114 286,343 274 286,617 2,348,089 2,117,950 343,492 286,782 The notes on pages 22 to 56 are an integral part of these financial statements. 20 | FINANCIAL STATEMENTS Heartland New Zealand Limited 7 STATEMENTS OF CASh FLOwS STATEMENTS OF CASH FLOWS For the year ended 30 June 2012 For the year ended 30 June 2012 GROUP COMPANY NOTE Jun 12 $000 Jun 11 $000 Jun 12 $000 Jun 11 $000 Cash flows from operating activities Interest received Dividends received Operating lease income received Proceeds from sale of operating lease vehicles Lending, credit fees and other income received Total cash provided from operating activities Payments to suppliers and employees Interest paid Purchase of operating lease vehicles Net increase in finance receivables Taxation paid Total cash applied to operating activities 197,152 - 13,099 7,932 6,219 224,402 68,183 121,742 16,905 20,547 23 227,400 152,013 - 14,367 15,384 4,279 186,043 55,052 91,266 18,201 19,417 - 183,936 Net cash flows (applied to) / from operating activities 12 (2,998) 2,107 Cash flows from investing activities Sale of investment property Proceeds from sale of investments Proceeds from sale of finance receivables to related party Total cash provided from investing activities Purchase of office fit-out, equipment and intangible assets Purchase of subsidiary Investment in subsidiaries Purchase of investments Purchase of investment property Total cash applied to investing activities 36 832 - - 832 3,191 24,898 - 6,496 937 35,522 - 3,709 39,764 43,473 1,831 - - - 21,140 22,971 17 1,597 - - - 1,614 1,243 - - - - 1,243 371 - - - - - - 56,000 - - 56,000 Net cash flows (applied to) / from investing activities (34,690) 20,502 (56,000) Cash flows from financing activities Increase in share capital Total cash provided from financing activities Repurchase of own shares Transaction costs associated with capital raising Net decrease in borrowings Total cash applied to financing activities 57,347 57,347 999 1,402 256,399 258,800 - - 57,347 57,347 - - 48,954 48,954 - 1,402 - 1,402 Net cash flows (applied to) / from financing activities (201,453) (48,954) 55,945 2 866 - - - 868 715 - - - - 715 153 - - - - - - - - - - - - - - - - - - Net (decrease) / increase in cash held Opening cash and cash equivalents Cash impact of business combinations Closing cash and cash equivalents (239,141) 267,187 61,643 89,689 (26,345) 86,406 207,126 267,187 316 153 - 469 153 - - 153 36 13 The notes on pages 22 to 56 are an integral part of these financial statements. Heartland New Zealand Limited 8 hEArTLANd NEw zEALANd LIMITEd ANNuAL rEpOrT 2012 | 21 NOTES TO ThE FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 June 2012 For the year ended 30 June 2012 1 Reporting entity The financial statements presented are the consolidated financial statements comprising Heartland New Zealand Limited (Company) and its subsidiaries and joint venture (Group). The Group was formed following a series of transactions during the period from 5 to 7 January 2011. The Company, through its subsidiaries, owns 100% of Heartland Building Society (Society) and 100% of Heartland Financial Services Limited (HFSL). The Society owns 100% of MARAC Finance Limited (MARAC) and PGG Wrightson Finance Limited (PWF). Heartland Financial Services Limited holds a 50% joint venture interest in MARAC JV Holdings Limited (MJV) with the New Zealand Automobile Association. Refer to Note 5 - Significant subsidiaries. On 5 January 2011:  All of the assets and liabilities of CBS Canterbury (CBS), Southern Cross Building Society (SCBS) (net of the shares held by SCBS in CBS), CBS Warehouse A Trust were amalgamated to form the Society.  The borrowings of MARAC were transferred to the Society.  The shares in MARAC were transferred to the Society from MARAC Financial Services Limited to form the Group. On 7 January 2011:  The Society and the assets and liabilities of Heartland Trust (previously known as Southern Cross Building Society Charitable Trust) and CBS Canterbury Charitable Trust were amalgamated into the Group. On 31 August 2011:  The Society acquired 100% of PGG Wrightson Finance Limited (PWF) from PGG Wrightson Limited (PGW), refer to Note 36 - Business combinations for more information. From a legal perspective MARAC is a subsidiary of the Company. Under New Zealand equivalents to International Financial Reporting Standards (NZ IFRS) the series of transactions described above is treated as a reverse acquisition and MARAC is treated as the acquirer of CBS and SCBS. As a result, the business combination is accounted for as if MARAC acquired 100% of the Company with the Company owning 72.21% of the Society through its subsidiaries. As a result the financial statements represent a continuation of the MARAC business. Comparatives presented for the year ended 30 June 2011 reflect the total comprehensive income of the MARAC Group from 1 July 2010 to 6 January 2011 and the results of the Group from 7 January 2011 to 30 June 2011. From 1 July 2011 onwards the result reflects the Group. The MARAC Group comprises MARAC, Heartland ABCP Trust 1 (previously known as MARAC ABCP Trust 1), MARAC Retirement Bonds Superannuation Fund and Heartland PIE Fund (previously known as MARAC PIE Fund). The Group wound up MARAC Retirement Bonds Superannuation Fund with effect from 31 October 2010. The Group includes Heartland ABCP Trust 1 and CBS Warehouse A Trust collectively known as the Trusts. The assets securitised into the Trusts continue to be recognised in the Group's financial statements. The Group includes Heartland Trust and the CBS Canterbury Charitable Trust. All entities within the Group offer financial services. The Group operates and is domiciled in New Zealand. The registered office address is 75 Riccarton Road, Christchurch. 2 Basis of preparation (a) (b) (c) Statement of compliance The financial statements have been prepared in accordance with Generally Accepted Accounting Practice in New Zealand (NZ GAAP) and with the requirements of the Financial Reporting Act 1993. They comply with New Zealand equivalents to International Financial Reporting Standards (NZ IFRS) and other applicable Financial Reporting Standards, as appropriate for profit-oriented entities. The financial statements also comply with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board. The Company and all entities within the Group are profit-oriented entities, except for the Heartland Trust and the CBS Canterbury Charitable Trust. The Company is a reporting entity and an issuer for the purposes of the Financial Reporting Act 1993 and its financial statements comply with that Act. The financial statements have been prepared in accordance with the requirements of the Companies Act 1993 and the Securities Regulations 2009. Basis of measurement The financial statements have been prepared on the basis of historical cost, unless stated otherwise. Functional and presentation currency These financial statements are presented in New Zealand dollars which is the Group's functional currency. Unless otherwise indicated, amounts are rounded to the nearest thousand. 22 | FINANCIAL STATEMENTS Heartland New Zealand Limited 9 NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 June 2012 2 Basis of preparation (continued) (d) (e) (f) 3 (a) Estimates and judgements The preparation of financial statements requires the use of management judgement, estimates and assumptions that effect reported amounts. Actual results may differ from these judgements. For further information about significant areas of estimation, uncertainty and critical judgements that have the most significant effect on the financial statements, refer to Note 32 - Credit risk exposure. Going concern The financial statements have been prepared on a going concern basis after considering the Company's and Group’s funding and liquidity position. Comparative information Certain comparatives have been restated to comply with current year presentation. Significant accounting policies Consolidation of subsidiaries Subsidiaries are entities that are controlled by the Group. Investments in subsidiary companies are recorded at cost by the Company. The consolidated financial statements are prepared by consolidating the financial statements of the Company and its subsidiaries. All intercompany transactions, balances and unrealised profits are eliminated on consolidation. (b) Jointly controlled entities Joint ventures are those entities over whose activities the Group has joint control, established by contractual agreement and requiring unanimous consent for strategic financial and operating decisions. Investments in jointly controlled entities are accounted for by the Group using the equity method and are recognised initially the income and expenses and equity at cost. The consolidated financial statements include the Group's share of movements of equity accounted investees, from the date that significant influence or joint control commences until the date that significant influence or joint control ceases. Dividends received from associates and jointly controlled entities are recorded in comprehensive income. (c) (d) Special purpose entities Special purpose entities are created to accomplish a narrow and well-defined objective such as the securitisation or holding of particular assets, or the execution of a specific borrowing or lending transaction. The financial statements of special purpose entities are included in the Group's financial statements where the substance of the relationship is that the Company controls the special purpose entity. Interest Interest income and expense are recognised using the effective interest method in comprehensive income. The effective interest rate is established on initial recognition of the financial assets and liabilities and is not revised subsequently. The calculation of the effective interest rate includes all yield related fees and commissions paid or received that are an integral part of the effective interest rate. Interest on the effective portion of a derivative designated as a cash flow hedge is initially recognised in the hedging reserve. It is released to comprehensive income at the same time as the hedged item or if the hedge relationship is subsequently deemed to be ineffective. (e) Operating lease income and expense Income from operating lease vehicles is apportioned over the term of the operating lease on a straight line basis. Operating lease vehicles are depreciated on a straight line basis over their expected life after allowing for any residual values. The estimated lives of operating lease vehicles vary up to five years. Vehicles held for sale are not depreciated but are tested for impairment. Lending and credit fee income Lending and credit fee income that is integral to the effective interest rate of a financial asset or liability is included in the measurement of the effective interest rate. Other lending and credit fee income is recognised as the related services are rendered. Dividend income Dividend income is recognised in comprehensive income on the date that the Company's right to receive payment is established. (f) (g) Heartland New Zealand Limited 10 hEArTLANd NEw zEALANd LIMITEd ANNuAL rEpOrT 2012 | 23 NOTES TO ThE FINANCIAL STATEMENTS continued NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 June 2012 For the year ended 30 June 2012 3 Significant accounting policies (continued) (h) Tax Income tax expense Income tax expense for the year comprises current and deferred tax. Income tax expense is recognised in comprehensive income except to the extent that it relates to items recognised directly in other comprehensive income, in which case it is recognised in other comprehensive income. Current tax Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Current tax for current and prior years is recognised as a liability (or asset) to the extent that it is unpaid (or refundable). Deferred tax Deferred tax is recognised in respect of temporary differences between the financial reporting carrying amount of assets and liabilities and the amounts used for tax purposes. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the year(s) when the asset or liability giving rise to them are realised or settled, based on the tax rates (and tax laws) that have been enacted or substantively enacted by the reporting date. The measurement reflects the tax consequences that would follow from the manner in which the Group, at the reporting date, recovers or settles the carrying amount of its assets and liabilities. Deferred tax assets, including those related to the tax effects of income tax losses and credits available to be carried forward, are recognised only to the extent that it is probable that future taxable profits will be available against which the deductible temporary differences or unused tax losses and credits can be utilised. Deferred tax assets are reviewed each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised. Current and deferred tax assets and liabilities are offset only to the extent that they relate to income taxes imposed by the same taxation authority and there is a legal right and intention to settle on a net basis and it is allowed under tax law. Share capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares and share options are recognised as a deduction from equity, net of any tax effects. Cash and cash equivalents Cash and cash equivalents consist of cash and liquid assets used in the day to day cash management of the Group. Cash and cash equivalents are carried at amortised cost in the Statements of Financial Position. Investments The Group holds investments in local authority stock, public securities and corporate bonds. Investments held are classified as being available for sale and are stated at fair value less impairment, if any. The fair values are derived by reference to published price quotations in an active market. Investment properties Investment properties have been acquired through the enforcement of security over finance receivables and are held to earn rental Investment property is initially recognised at its fair value, with income or for capital appreciation (or both). subsequent changes in fair value recognised in comprehensive income. Fair values are supported by independent valuations or other similar external evidence, adjusted for changes in market conditions and the time since the last valuation. Finance receivables Finance receivables are initially recognised at fair value plus incremental direct transaction costs and are subsequently measured at amortised cost using the effective interest method, less any impairment loss. Operating lease vehicles Operating lease vehicles are stated at cost less accumulated depreciation. Profits on the sale of operating lease vehicles are included as part of operating lease income. Current year depreciation and losses on the sale of operating lease vehicles are included as part of operating lease expenses. Derivative financial instruments Derivative financial instruments are contracts entered into to reduce the exposure to the volatility of variable rate borrowings (cash flow hedges), or to convert fixed rate borrowings or assets to variable rates (fair value hedges), in order to mitigate the Group’s interest rate risk. The financial instruments are subject to the risk that market values may change subsequent to their acquisition; however such changes would be offset by corresponding, but opposite, effects on the variable rate borrowings or fixed rate borrowings or assets being hedged. Derivatives are initially valued at fair value and subsequently remeasured at fair value. (i) (j) (k) (l) (m) (n) (o) 24 | FINANCIAL STATEMENTS Heartland New Zealand Limited 11 NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 June 2012 3 Significant accounting policies (continued) (o) Derivative financial instruments (continued) Fair value movements of derivatives that are not designated in a qualifying cash flow hedge relationship, are recognised in comprehensive income. Fair value movements of the effective portion of a qualifying cash flow hedge derivative, are recognised directly in other comprehensive income and held in the hedging reserve in equity. The amount recognised in equity is transferred to comprehensive income in the same year as the hedged cash flow affects comprehensive income, disclosed in the same line as the hedged item. Any ineffective portion of changes in fair value of the derivative is recognised immediately in comprehensive income. Fair value movements of a derivative designated as a fair value hedge are recognised directly in comprehensive income together with the hedged item. (p) Property, plant, equipment and depreciation Land and buildings are measured at fair value. Fair value is determined on the basis of independent valuations prepared by external valuation experts, based on discounted cash flows or capitalisation of net income. that Any revaluation increase arising on the revaluation of land and buildings is credited to the asset revaluation reserve, except to the extent it reverses a revaluation decrease for the same asset previously recognised as an expense in comprehensive income, in which case the increase is credited to comprehensive income to the extent of the decrease previously charged. A decrease in carrying amount arising on the revaluation of land and buildings is charged as an expense to the extent that it exceeds the balance, if any, held in the asset revaluation reserve relating to a previous revaluation of that asset. Depreciation on revalued buildings is charged to comprehensive income. On the subsequent sale or retirement of a revalued property, the attributable revaluation surplus remaining in the asset revaluation reserve, net of any related deferred taxes, is transferred directly to retained earnings. items of property, plant and equipment are stated at cost Other less accumulated depreciation and impairment. Depreciation is calculated on a straight line basis to write off the net cost or other revalued amount of each asset over its expected useful life to its estimated residual value. The following annual rates are used in the calculation of depreciation: 1.0% - 4.0% 5.5% - 36.0% 6.0% - 30.0% 16.2% - 48.0% 21.0% - 25.2% Buildings Fixtures and fittings Office equipment and furniture Computer equipment Motor vehicles (q) Financial assets and liabilities Classification Financial assets and liabilities are classified in the following accounting categories: Financial assets/liabilities Cash and cash equivalents Investments Due from related parties Finance receivables Other financial assets Borrowings Other financial liabilities Derivatives Accounting category Loans and receivables Available for sale Loans and receivables Loans and receivables Loans and receivables Other liabilities at amortised cost Other liabilities at amortised cost Held for trading (or qualifying hedges as described in Note 3(o)) Recognition they are The Group initially recognises finance receivables, borrowings and subordinated liabilities on the date that originated. All other financial assets and liabilities (including assets and liabilities designated at fair value through comprehensive income) are initially recognised on the trade date at which the Group becomes a party to the contractual provisions of the instrument. Derecognition The Group derecognises a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in transferred financial assets that is created or retained by the Group is recognised as a separate asset or liability. The Group derecognises a financial liability when its contractual obligations are discharged or cancelled or expire. The Group enters into transactions whereby it transfers assets recognised on its Statements of Financial Position, but retains either all risks and rewards of the transferred assets or a portion of them. If all or substantially all risks and rewards are retained, then the transferred assets are not derecognised from the Statements of Financial Position. Transfers of assets with the retention of all or substantially all risks and rewards include, for example, securitised assets and repurchase transactions. Heartland New Zealand Limited 12 hEArTLANd NEw zEALANd LIMITEd ANNuAL rEpOrT 2012 | 25 NOTES TO ThE FINANCIAL STATEMENTS continued NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 June 2012 For the year ended 30 June 2012 3 (r) Significant accounting policies (continued) Impaired assets and past due assets Impaired assets are those loans for which the Group has evidence that it will incur a loss, and will be unable to collect all principal and interest due according to the contractual terms of the loan. The term collectively impaired asset refers to an asset where an event has occurred which past history indicates that there is an increased possibility that the Group will not collect all its principal and interest as it falls due. No losses have yet been identified on these individual loans within the collectively impaired asset grouping, and history would indicate that only a small portion of these loans will eventually not be recovered. The Group provides fully for its expected losses. Restructured assets are assets where the Group expects to recover all amounts owing although the original terms have been changed due to the counterparty's difficulty in complying with the original terms of the contract and the amended terms In order to be classified as a restructured asset, following restructuring, the are not comparable with similar new lending. return under the revised terms is expected to be equal to or greater than the Group's average cost of funds, or a loss is not otherwise expected to be incurred. Past due but not impaired assets are any assets which have not been operated by the counterparty within their key terms but are not considered to be impaired by the Group. Bad debts provided for are written off against individual or collective provisions. Amounts required to bring the provisions to their assessed levels are recognised in comprehensive income. Any future recoveries of amounts provided for are taken to comprehensive income. For further information about credit impairment provisioning refer to Note 32 - Credit risk exposure. (s) Goods and services tax (GST) Revenues, expenses and assets are recognised net of the amount of GST. As the Group is predominantly involved in providing financial services, only a proportion of GST paid on inputs is recoverable. The non-recoverable proportion of GST is treated as part of the cost of acquisition of the asset or is expensed. (t) Intangible assets and goodwill Goodwill Goodwill arising on acquisition represents the excess of the cost of the acquisition over the Group’s interest in the fair value of the identifiable net assets and contingent liabilities. When the fair value of the identifiable net assets and contingent liabilities exceeds the cost of an acquisition, the resulting discount is recognised immediately in comprehensive income for the year. Goodwill is tested for impairment at least annually, and is carried at cost less accumulated impairment losses. Computer software less accumulated amortisation and any Software acquired or internally developed by the Group is stated at cost accumulated impairment losses. Subsequent expenditure on software assets is capitalised only when it increases the future economic value of that asset. Amortisation of software is on a straight line basis, at rates which will write off the cost over their estimated economic lives of three to four years. All other expenditure is expensed immediately as required. (u) (v) (w) Provisions A provision is recognised if, as a result of a past event, the Group has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Employee benefits Annual leave entitlements are accrued at amounts expected to be paid. Long service leave is accrued by calculating the probable future value of entitlements and discounting back to present value. Obligations to defined contribution superannuation schemes are recognised as an expense when the contribution is paid. Defined benefit plan The cost of providing benefits for defined benefit superannuation plans is determined using the Projected Unit Credit Method. Actuarial gains and losses are recognised in full in the year in which they occur by way of a movement in the defined benefit plan reserve, and are presented in the Statements of Changes in Equity. Past service cost is recognised immediately to the extent that the benefits are already vested, and otherwise is amortised on a straight-line basis over the average year until the benefit becomes vested. The defined benefit obligation is deducted from the fair value of to derive the defined benefit plan surplus recognised in trade receivables in the Statements of Financial Position. the defined benefit plan asset (x) Borrowings Bank borrowings and deposits are initially recognised at fair value including incremental direct transaction costs. They are subsequently measured at amortised cost using the effective interest method. 26 | FINANCIAL STATEMENTS Heartland New Zealand Limited 13 NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 June 2012 3 Significant accounting policies (continued) (y) (z) Statements of Cash Flows The Statements of Cash Flows have been prepared using the direct method modified by the netting of certain cash flows associated with cash and cash equivalents, finance receivables and borrowings. Netting of cash flows provides more meaningful disclosure as many of the cash flows are received and paid on behalf of customers and reflect the activities of those customers rather than the Group. investments, related party balances, Share schemes The Group provides benefits to staff in the form of share based payments, whereby staff provide services in exchange for shares. Currently in place is a discretionary share scheme and an executive share scheme, refer to Note 37 - Staff share ownership arrangements. Under both of these schemes Heartland New Zealand Limited and the previous ultimate parent, Pyne Gould Corporation Limited undertake to transfer a specific number of its shares to various key staff at a specified future date on that staff member achieving certain criteria. The shares are issued at a price agreed by the directors and held in trust until all the conditions are satisfied. The expected benefit is expensed over the years over which any conditions are required to be met. (aa) New standards and interpretations not yet adopted A number of new standards, amendments to standards and interpretations are not yet effective for the year ended 30 June 2012, and have not been applied in preparing these financial statements. The new standards identified which may have an effect on the financial statements of the Group are: Standard and description Effective for annual years beginning on or after: Expected to be initially applied in year ending: NZ IAS 12 Income Taxes, which introduces a presumption that an investment property is recovered entirely through sale. 1 January 2012 30 June 2013 NZ IAS 1 Presentation of Financial Statements, which requires an entity to present separately the items of other comprehensive income that would be reclassified to comprehensive income in the future if certain conditions are met. 1 July 2012 30 June 2013 NZ IFRS 10 Consolidated Financial Statements, which introduces a new approach to determining which investees should be consolidated and provides a single model to be applied in the control analysis for all investees. 1 January 2013 30 June 2014 NZ IFRS 13 Fair Value Measurement, which defines fair value, and establishes a framework for measuring fair value including disclosure requirements. 1 January 2013 30 June 2014 NZ IFRS 12 Disclosure of Interests in Other Entities, which contains the disclosure requirements for entities that have interests in subsidiaries, joint arrangements, associates and/or unconsolidated structured entities. 1 January 2013 30 June 2014 NZ IFRS 9 Financial financial assets and liabilities. Instruments, which specifies how an entity should classify and measure 1 January 2013 30 June 2014 NZ IAS 27 Separate Financial Statements, which carries forward existing accounting and disclosure requirements for separate financial statements with minor clarifications. 1 January 2013 30 June 2014 NZ IFRS 7 Financial financial liabilities. Instruments: Disclosures, amendment to offsetting financial assets and NZ IAS 28 Investments in Associates and Joint Ventures, which amends IFRS 5 to apply to an investment, or a portion of investment in an associate or joint venture that meets the criteria to be classified as held for sale and on cessation of significant influence or joint control, the entity does not remeasure the retained interest. NZ IAS 32 Financial financial liabilities. Instruments: Presentation, amendment to offsetting financial assets and NZ IAS 19 Employee Benefits, which requires actuarial gains and losses to be recognised immediately in other comprehensive income and the expected return on plan assets recognised in comprehensive income to be calculated based on the rate used to discount the defined benefit obligation. 1 January 2013 30 June 2014 1 January 2013 30 June 2014 1 January 2014 30 June 2015 1 January 2015 30 June 2016 Initial application of the above standards and interpretations relevant to the Group are not expected to have any material impact on the financial statements of the Group. (ab) Changes in accounting policies There have been no material changes in accounting policies in the current year. Heartland New Zealand Limited 14 hEArTLANd NEw zEALANd LIMITEd ANNuAL rEpOrT 2012 | 27 NOTES TO ThE FINANCIAL STATEMENTS continued NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 June 2012 For the year ended 30 June 2012 4 Segmental analysis Segment information is presented in respect of the Group's operating segments which are those used for the Group's management and internal reporting structure. During the year ended 30 June 2012, the operating segments were restructured to amalgamate Retail and Consumer into one segment. The comparative year has been restated to align with the new operating segments. All income received is from external sources, except those transactions with related parties, refer to Note 29 - Related party transactions. Certain selling and administration expenses, such as premises, IT and support centre costs are not allocated to operating segments and are included in Other. Operating segments The Group operates predominantly within New Zealand and comprises the following main operating segments: Retail and Consumer Business Rural Non-core Property financial services to New Zealand families, transactional and savings based deposit accounts together with Providing a comprehensive range of including term, residential mortgage lending and motor vehicle finance. Providing term debt, plant and equipment finance, commercial mortgage lending and working capital solutions for small-to-medium sized New Zealand businesses. financial services to the farming sector primarily offering livestock, rural Specialist mortgage lending, seasonal and working capital financing, as well as leasing solutions to farmers. Funding assets in the non-core property division of MARAC and the Society. The Group's operating segments are different than the industry categories detailed in Note 32 - Credit risk exposure. The operating segments are primarily categorised by security type, whereas Note 32 - Credit risk exposure categorises exposures based on credit risk concentrations (refer to Note 32 for further details). Jun 12 Interest income Interest expense Net interest income Net operating lease income Net other income Net operating income Depreciation and amortisation expense Other selling and administration expenses Selling and administration expenses Profit / (loss) before impaired asset expense and income tax Impaired asset expense Decrease in fair value of investment properties Operating profit / (loss) Share of equity accounted investee's profit Profit / (loss) before income tax Income tax expense Profit / (loss) for the year Total assets Total liabilities Total equity GROUP Retail & Consumer Business $000 $000 94,606 55,572 39,034 5,097 927 45,058 49,867 28,911 20,956 13 57 21,026 Rural $000 41,391 22,340 19,051 - 66 19,117 - - - 11,475 11,475 5,273 5,273 5,837 5,837 Non-core Property $000 12,630 10,370 2,260 - 4,104 6,364 - 6,350 6,350 Other $000 6,654 4,309 2,345 - 974 3,319 1,830 Total $000 205,148 121,502 83,646 5,110 6,128 94,884 1,830 34,782 63,717 36,612 65,547 33,583 15,753 13,280 14 (33,293) 29,337 1,991 - 31,592 - 31,592 - 31,592 2,445 - 13,308 - 13,308 - 13,308 689 - 12,591 - 12,591 - 12,591 517 3,900 (4,403) - (4,403) - (4,403) - - (33,293) 534 (32,759) (3,277) (29,482) 5,642 3,900 19,795 534 20,329 (3,277) 23,606 989,352 - - 540,228 - - 478,582 - - 160,168 - - 179,759 1,973,291 374,798 2,348,089 1,973,291 374,798 28 | FINANCIAL STATEMENTS Heartland New Zealand Limited 15 NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 June 2012 4 Segmental analysis (continued) Jun 11 Interest income Interest expense Net interest income Net operating lease income Net other income Net operating income Depreciation and amortisation expense Other selling and administration expenses Selling and administration expenses Profit before impaired asset expense and income tax Impaired asset expense Operating profit / (loss) Share of equity accounted investee's profit Profit / (loss) before income tax Income tax expense Profit/(loss) for the year Total assets Total liabilities Total equity Retail & Consumer Business $000 $000 90,280 56,972 33,308 6,823 543 40,674 39,178 22,040 17,138 120 21 17,279 - - 8,996 8,996 3,983 3,983 31,678 13,296 2,829 28,849 - 28,849 - 28,849 7,195 6,101 - 6,101 - 6,101 GROUP Rural $000 4,242 2,599 1,643 - - 1,643 - 1,048 1,048 595 510 85 - 85 - 85 Non-core Property $000 Other $000 Total $000 19,805 10,637 9,168 - 542 9,710 - 1,986 1,986 7,794 7,457 337 - 848 1,185 1,482 161,299 99,705 61,594 6,943 1,954 70,491 1,482 28,179 44,192 29,661 45,674 7,724 (28,476) 24,817 2,764 4,960 - 4,960 - 4,960 - (28,476) 82 (28,394) 4,458 (32,852) 13,298 11,519 82 11,601 4,458 7,143 1,035,118 - - 476,367 - - 75,961 - - 187,091 - - 343,413 1,821,544 296,406 2,117,950 1,821,544 296,406 5 Significant subsidiaries and interests in jointly controlled entities Significant subsidiaries Heartland Building Society and its subsidiaries: MARAC Finance Limited PGG Wrightson Finance Limited VPS Parnell Limited VPS Properties Limited Heartland Financial Services Limited and its jointly controlled entity: MARAC JV Holdings Limited and its subsidiary: MARAC Insurance Limited Nature of business Financial services Financial services Financial services Investment property holding company Investment property holding company Holding company Holding company Insurance services Jun 12 % held Jun 11 % held 100% 100% 100% 100% 100% 100% 100% 50% 50% 100% 0% 100% 100% 100% 50% 50% On 31 August 2011 the Group acquired 100% of the shares in PWF, an entity specialising in the provision of financial services to the rural sector, refer to Note 36 - Business Combinations for more details. The Group includes Heartland ABCP Trust 1, CBS Warehouse A Trust, Heartland PIE Fund, Heartland Trust and CBS Charitable Trust, refer to Note 28 - Special Purpose entities for more details. Heartland New Zealand Limited 16 hEArTLANd NEw zEALANd LIMITEd ANNuAL rEpOrT 2012 | 29 NOTES TO ThE FINANCIAL STATEMENTS continued NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 June 2012 For the year ended 30 June 2012 6 Net interest income Interest income Cash and cash equivalents Finance receivables Derivatives held for risk management: - Net interest income on cash flow hedges Total interest income Interest expense Retail deposits and debenture stock Bank and securitised borrowings Derivatives held for risk management: - Net interest expense on cash flow hedges Total interest expense GROUP COMPANY Jun 12 $000 Jun 11 $000 Jun 12 $000 Jun 11 $000 5,149 199,526 6,772 154,527 473 205,148 - 161,299 100,769 20,733 - 121,502 78,327 21,332 46 99,705 17 - - 17 - - - - 2 - - 2 - - - - 2 Net interest income 83,646 61,594 17 Included within the Group's interest income on finance receivables is $2,674,000 (June 2011: $5,902,000) on individually impaired assets. 7 Net operating lease income Operating lease income Lease income Gain on disposal of lease vehicles Total operating lease income Operating lease expense Depreciation on lease vehicles Direct lease costs Total operating lease expenses Net operating lease income 8 Selling and administration expenses Personnel expenses Directors' fees Superannuation Audit fees Audit related fees Amortisation - intangible assets Depreciation - property, plant and equipment Operating lease expense as a lessee Legal and professional fees Other operating expenses Total selling and administration expenses GROUP COMPANY Jun 12 $000 Jun 11 $000 Jun 12 $000 Jun 11 $000 13,065 1,999 15,064 9,149 805 9,954 5,110 14,277 3,796 18,073 10,490 640 11,130 6,943 - - - - - - - - - - - - - - GROUP COMPANY Jun 12 $000 Jun 11 $000 Jun 12 $000 Jun 11 $000 NOTE 21 22 34,186 804 475 576 35 1,075 755 1,648 5,914 20,079 65,547 21,747 497 302 416 87 978 504 1,277 6,781 13,085 45,674 - 628 - 60 - - - - 499 178 1,365 - 497 - 77 - - - - 130 144 848 Audit related fees include professional fees in connection with trustee reporting, due diligence, review of prospectus documentation for various Group entities, accounting advice and review work completed. Included in Directors' fees are Directors' fees the Company has paid on behalf of Heartland Building Society and its subsidiaries. Directors' fees for the Group were paid for by the previous ultimate parent, Pyne Gould Corporation up until 7 January 2011. 30 | FINANCIAL STATEMENTS Heartland New Zealand Limited 17 NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 June 2012 9 Income tax expense Current income tax expense / (benefit) Current year Adjustments for prior year Deferred tax (benefit) / expense Origination and reversal of temporary differences Tax legislation changes Total income tax (benefit) / expense Reconciliation of effective tax rate Profit before income tax Prima facie tax at 28% (2011: 30%) Plus / (less) tax effect of items not taxable / deductible Adjustments for prior year Dividends received Tax legislation changes Total income tax (benefit) / expense GROUP COMPANY Jun 12 $000 Jun 11 $000 Jun 12 $000 Jun 11 $000 4,639 (3,218) 1,882 - 1,484 (6,182) (3,277) 2,278 298 4,458 20,329 11,601 5,692 431 (3,218) - (6,182) (3,277) 3,480 680 - - 298 4,458 (303) - - - (303) 249 70 74 - (447) - (303) (254) - - - (254) 20 6 (18) - (242) - (254) In May 2010, legislation was passed to reduce the New Zealand corporate tax rate from 30% to 28%, effective for the 2012 income tax year. The tax effect in the prior year of $298,000 is the impact on the value of deferred tax assets and liabilities as a result of the reduction in the corporate tax rate for the financial year commencing 1 July 2011. On 29 August 2011, the Taxation (Tax Administration and Remedial Matters) Act 2011 received Royal Assent. This Act contains a retrospective legislative change in relation to mergers of building societies. The result is that the $6.2 million benefit of future tax deductions which were lost on the merger of MARAC, SCBS and CBS are now available to entities in the Heartland New Zealand Consolidated (Tax) Group, and cash that would otherwise have been required to pay tax will now be available to the Group. During the year MARAC made a subvention payment to MARAC Financial Services Limited (its former parent) for the use of tax losses to 31 May 2011. The amount paid was less than the tax rate of 30%. As a result the Group recognised a benefit of $3.4 million included in adjustments for prior year. Tax recognised in other comprehensive income Jun 12 Tax expense / (benefit) $000 GROUP Net of tax Before tax Jun 11 Tax expense Net of tax $000 $000 $000 $000 98 (44) (28) 26 378 (103) (435) (160) 851 159 20 1,030 255 48 6 309 596 111 14 721 Before tax $000 476 (147) (463) (134) GROUP COMPANY Jun 12 $000 - - 23 23 Jun 11 $000 33,515 (33,507) (8) - Jun 12 $000 Jun 11 $000 - - - - - - - - Cash flow hedges Available for sale investments Defined benefit plan 10 Imputation credit account Balance at beginning of year Imputation credits forfeited on shareholding change Tax paid net of refunds Balance at end of year Heartland New Zealand Limited 18 hEArTLANd NEw zEALANd LIMITEd ANNuAL rEpOrT 2012 | 31 NOTES TO ThE FINANCIAL STATEMENTS continued NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 June 2012 For the year ended 30 June 2012 11 Earnings per share The calculation of basic and diluted earnings of 6c per share at 30 June 2012 (2011: 5c per share) is based on the profit for the year of $23,606,000 (2011: $7,143,000), and a weighted average number of shares on issue of 373,879,475 (2011: 144,201,000). The earnings per share calculated based on the closing number of shares (refer Note 27 - Share capital) rather than the weighted average number of shares, results in basic and diluted earnings per share of 6c at 30 June 2012 (2011: 2c). 12 Reconciliation of profit after tax to net cash flows from operating activities GROUP COMPANY Jun 12 $000 Jun 11 $000 Jun 12 $000 Jun 11 $000 Profit for the year 23,606 7,143 552 274 Add / (less) non-cash items: Depreciation and amortisation expense Change in fair value of investment properties Impaired asset expense Deferred tax (benefit) / expense Derivative financial instruments revaluation Accruals Total non-cash items Add / (less) movements in working capital items: Other assets Current tax Other liabilities Total movements in working capital items Net cash flows from operating activities before movements in finance receivables and operating lease vehicles Movement in operating lease vehicles Movement in finance receivables Net cash flows from operating activities 13 Cash and cash equivalents Cash and cash equivalents Cash and cash equivalents - securitised Total cash and cash equivalents 1,830 3,900 5,642 (2,978) (219) 529 8,704 2,239 (6,785) 154 (4,392) 1,482 - 13,298 2,897 5,419 1,567 24,663 (10,186) 1,479 (2,009) (10,716) 27,918 21,090 (1,823) (29,093) (2,998) 10,168 (29,151) 2,107 - - - - - - - (271) (109) 199 (181) 371 - - 371 - - - - - - - (32) (254) 165 (121) 153 - - 153 GROUP COMPANY Jun 12 $000 Jun 11 $000 Jun 12 $000 Jun 11 $000 74,110 15,579 89,689 251,357 15,830 267,187 469 - 469 153 - 153 Cash and cash equivalents are short term funds held with New Zealand registered international banks. 14 Investments Public securities and corporate bonds Local authority stock Total investments 15 Investment properties Opening balance Acquisitions Additional capital expenditure Sales Decrease in fair value Closing balance 32 | FINANCIAL STATEMENTS Heartland New Zealand Limited GROUP COMPANY Jun 12 $000 24,327 - 24,327 Jun 11 $000 16,833 998 17,831 Jun 12 $000 - - - Jun 11 $000 - - - GROUP COMPANY Jun 12 $000 34,499 23,584 2,153 (832) (3,900) 55,504 Jun 11 $000 - 34,499 - - - 34,499 Jun 12 $000 - - - - - - Jun 11 $000 - - - - - - 19 NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 June 2012 15 Investment properties (continued) From 31 December 2010, the Group (through VPS Properties Limited and VPS Parnell Limited) began acquiring investment properties as a result of enforcement of security over finance receivables. The acquisitions by VPS Properties Limited and VPS Parnell Limited were funded by advances from the Society and MARAC to those acquiring entities. These advances are covered by the RECL management agreement. Refer to Note 29 - Related party transactions for further detail. The carrying amount of investment properties at 30 June 2012 is the fair value based on independent valuations and current sale and purchase agreements. Valuations have been obtained from the following independent valuers who hold recognised professional qualifications: Name of valuer Bayleys Valuations Limited Bayleys Valuations Limited Sheldon & Partners Limited Gribble Churchton Taylor Limited Telfer Young (Hawkes Bay) Limited Date of valuation 01 Jun 12 12 Jul 12 19 Jun 12 21 Jun 12 29 Jun 12 During the year ended 30 June 2012, the Group recognised rental income of $4,094,000 (2011: $542,000) included in other income, direct operating expenses of $2,975,000 (2011: $198,000) arising from investment property that generated rental income and direct operating expenses of $107,000 (2011: nil) arising from investment property that did not generate rental income. 16 Finance receivables Non-securitised Gross finance receivables Less allowance for impairment Total non-securitised finance receivables Securitised Gross finance receivables Less allowance for impairment Total securitised finance receivables Total finance receivables GROUP COMPANY Jun 12 $000 Jun 11 $000 Jun 12 $000 Jun 11 $000 1,828,201 26,693 1,801,508 1,535,183 37,565 1,497,618 277,501 733 276,768 210,425 732 209,693 2,078,276 1,707,311 - - - - - - - - - - - - - - Refer to Note 36 - Business Combinations for information about the acquisition of finance receivables. 17 Operating lease vehicles Cost Opening balance Additions Disposals Closing balance Accumulated depreciation Opening balance Depreciation charge for the year Disposals Closing balance Opening net book value Closing net book value GROUP COMPANY Jun 12 $000 Jun 11 $000 Jun 12 $000 Jun 11 $000 47,230 16,905 (12,899) 51,236 14,503 9,149 (6,966) 16,686 32,727 34,550 60,264 11,910 (24,944) 47,230 17,369 10,490 (13,356) 14,503 42,895 32,727 - - - - - - - - - - - - - - - - - - - - The future minimum lease payments under non-cancellable operating leases not later than one year is $11,123,000 (2011: $10,478,000), within one to five years is $7,635,000 (2011: $9,011,000) and over five years is $7,000 (2011: nil). Heartland New Zealand Limited 20 hEArTLANd NEw zEALANd LIMITEd ANNuAL rEpOrT 2012 | 33 NOTES TO ThE FINANCIAL STATEMENTS continued NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 June 2012 For the year ended 30 June 2012 18 Other assets Derivative financial assets Trade receivables Due from related parties GST receivable Prepayments Total other assets 19 Investment in subsidiaries Heartland Building Society Heartland Financial Services Limited Total investments in subsidiaries NOTE 26 29 GROUP COMPANY Jun 12 $000 2,122 3,080 - - 10,583 15,785 Jun 11 $000 3,048 3,260 - - 13,121 19,429 Jun 12 $000 Jun 11 $000 - - 194 14 109 317 - - - 11 21 32 GROUP COMPANY Jun 12 $000 - - - Jun 11 $000 - - - Jun 12 $000 339,843 2,500 342,343 Jun 11 $000 283,843 2,500 286,343 All subsidiary companies were incorporated in New Zealand. Refer to Note 1 - Reporting entity and Note 27 - Share capital for more information. 20 Investment in joint venture GROUP COMPANY Carrying amount at beginning of year Investment in joint venture Equity accounted earnings of joint venture Carrying amount at end of year Total assets of joint venture Total liabilities of joint venture Total income of joint venture Total net profit after tax of joint venture Jun 12 $000 2,582 - 534 3,116 6,927 3,453 2,842 769 Jun 11 $000 - 2,500 82 2,582 5,934 3,538 882 348 Jun 12 $000 - - - - - - - - Jun 11 $000 - - - - - - - - On 7 January 2011 Heartland Financial Services Limited (HFSL), a wholly owned subsidiary of the Company, acquired 50% of MJV for $2.5 million. MJV is jointly owned by HFSL and the New Zealand Automobile Association Limited. Since 7 January 2011, the Group has equity accounted its investment in MJV to recognise a 50% share of the consolidated MJV profits or losses and reserve movements. MJV earnings prior to 7 January 2011 are attributable to the previous ultimate parent, Pyne Gould Corporation (PGC). 21 Intangible assets and goodwill Cost Opening balance 1 July 2010 Additions Acquired on amalgamation Closing balance 30 June 2011 Opening balance 1 July 2011 Additions Disposals Closing balance 30 June 2012 Computer Software $000 GROUP Goodwill / Trademark $000 Computer Software $000 Total $000 COMPANY Goodwill / Trademark $000 Total $000 3,722 1,337 1,083 6,142 6,142 2,370 (1,764) 6,748 - 46 20,141 20,187 20,187 100 - 20,287 3,722 1,383 21,224 26,329 26,329 2,470 (1,764) 27,035 - - - - - - - - - - - - - - - - - - - - - - - - 34 | FINANCIAL STATEMENTS Heartland New Zealand Limited 21 NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 June 2012 21 Intangible assets and goodwill (continued) Accumulated amortisation Opening balance 1 July 2010 Amortisation charge for the year Acquired on amalgamation Closing balance 30 June 2011 Opening balance 1 July 2011 Amortisation charge for the year Disposals Closing balance 30 June 2012 Opening net book value Closing net book value Computer Software $000 GROUP Goodwill / Trademark $000 2,821 978 928 4,727 4,727 1,075 (1,764) 4,038 - - - - - - - - Total $000 2,821 978 928 4,727 4,727 1,075 (1,764) 4,038 1,415 2,710 20,187 20,287 21,602 22,997 Computer Software $000 COMPANY Goodwill / Trademark $000 Total $000 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - On 5 January 2011, 100% of each of SCBS and CBS amalgamated to form the Society, refer to Note 36 - Business Combinations. As part of this amalgamation $20.1 million of goodwill was recognised. Goodwill of $20.1 million has not been allocated to individual cash generating units, as the future economic benefit is attributable to all business units. The Group's management and board continue to monitor goodwill at a group level. 22 Property, plant and equipment Cost Opening balance Additions Acquired on acquisition Acquired on amalgamation Disposals Closing balance Accumulated depreciation Opening balance Depreciation charge for the year Acquired on amalgamation Disposals Closing balance Opening net book value Closing net book value GROUP COMPANY Jun 12 $000 Jun 11 $000 Jun 12 $000 Jun 11 $000 15,191 735 22 - (2,787) 13,161 5,112 755 - (2,773) 3,094 10,079 10,067 4,284 448 - 10,470 (11) 15,191 3,764 504 855 (11) 5,112 520 10,079 - - - - - - - - - - - - - - - - - - - - - - - - - - 23 Deferred tax GROUP COMPANY Property, plant and equipment Employee entitlements Finance receivables Trade and other payables Investment properties Derivatives held for risk management Tax assets Property, plant and equipment Intangible assets Operating lease vehicles Tax liabilities Net tax assets Jun 12 $000 - 1,201 7,475 152 1,054 392 10,274 877 52 1,202 2,131 8,143 Jun 11 $000 67 584 4,984 145 - 527 6,307 - 67 1,537 1,604 4,703 Jun 12 $000 - - - - - - - - - - - - Jun 11 $000 - - - - - - - - - - - - The corporate tax rate changed from 30% to 28% effective 1 July 2011. The tax effect on the temporary differences reported above, that did not reverse prior to this change in tax rate, was a decrease in the Group's deferred tax asset of $336,000 in June 2011. Heartland New Zealand Limited 22 hEArTLANd NEw zEALANd LIMITEd ANNuAL rEpOrT 2012 | 35 NOTES TO ThE FINANCIAL STATEMENTS continued NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 June 2012 For the year ended 30 June 2012 23 Deferred tax (continued) All deferred tax movements are included in profit or loss except for those in respect of the available for sale and hedging reserves which are recognised in other comprehensive income. 24 Borrowings Bank borrowings sourced from New Zealand Deposits sourced from New Zealand Deposits sourced from overseas Securitised borrowings sourced from New Zealand Total borrowings GROUP COMPANY Jun 12 $000 50,010 1,549,468 75,652 264,359 1,939,489 Jun 11 $000 - 1,532,468 60,779 194,277 1,787,524 Jun 12 $000 - - - - - Jun 11 $000 - - - - - The Group has bank facilities totalling $650.0 million (2011: $475.0 million). Prior to the amalgamation, there was no significant concentration of deposits from any region. As at 30 June 2012, 42% (2011: 37%) of deposits are from the Canterbury region. Bank borrowings and deposits (which include NZDX bonds) rank equally and are unsecured. Deposits are issued in terms of a Master Trust Deed, Supplemental Trust Deed (Accounts) and Supplemental Trust Deed (Bonds) each dated 29 October 2010 and a Supplemental Trust Deed dated 14 December 2010 (collectively the Trust Deeds), all with Trustee Executors Limited as trustee in respect of deposits. The Group has securitisation facilities in relation to the Trusts totalling $450.0 million. On 27 February 2012, the Group entered into an agreement with its securitisation facility provider to extend the maturity date of Heartland ABCP Trust 1 $300 million securitisation facility to 6 February 2013. On 19 December 2011, the Group entered into an agreement to increase CBS Warehouse A Trust securitisation facility by $100 million to $175 million. $25 million of this increase matured on 1 April 2012. The maturity date of the remaining $150 million CBS Warehouse A Trust securitisation facility is 22 July 2013. Investors in Heartland ABCP Trust 1 rank equally with each other and are secured over the securitised assets of that Trust. Investors in CBS Warehouse A Trust Securitisation rank equally with each other and are secured over the securitised assets of that Trust. 25 Trade and other payables GROUP COMPANY Derivative financial liabilities Trade payables GST payable Due to related parties Employee benefits Total trade and other payables NOTE 26 29 Jun 12 $000 1,459 13,734 14,014 - 4,595 33,802 Jun 11 $000 Jun 12 $000 Jun 11 $000 2,444 13,173 13,780 104 2,563 32,064 - 300 - 78 - 378 - 165 - - - 165 26 Derivative financial instruments GROUP COMPANY Qualifying fair value hedges - non-securitised Total derivative financial assets Qualifying fair value hedges - non-securitised Qualifying fair value hedges - securitised Qualifying cash flow hedges - securitised Total derivative financial liabilities Jun 12 $000 2,122 2,122 297 118 1,044 1,459 Jun 11 $000 3,048 3,048 979 148 1,317 2,444 Jun 12 $000 - - Jun 11 $000 - - - - - - - - - - Derivatives consist of interest rate swaps held to manage the Group's exposure to interest rate repricing risk on its interest bearing assets and liabilities. The Group uses interest rate swaps to hedge the interest rate risk arising from its commercial paper issuance and its current and future floating rate bank debt and designates those swaps as qualifying cash flow hedges. The Group uses interest rate swaps to hedge the interest rate risk arising from deposits and fixed rate mortgage loans and designates these swaps as qualifying fair value hedges. Securitised derivatives are held in the name of the Trusts to hedge the interest rate risk arising in the Trusts. 36 | FINANCIAL STATEMENTS Heartland New Zealand Limited 23 NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 June 2012 27 Share capital The share capital reflected in the following note represents the share capital of the Company. This differs from the share capital reflected in the Group Statement of Financial Position as a result of the reverse acquisition accounting applied, refer Note 1 - Reporting Entity. Issued shares Opening balance Shares issued during the year Closing balance COMPANY Jun 12 Jun 11 Number of shares 000 000 300,000 88,704 388,704 - 300,000 300,000     On 5 January 2011: MARAC Financial Services Limited (MFSL) exchanged its shareholding in MARAC and its investment in MARAC JV Holdings Limited for shares in the Company. The Company issued further shares to MFSL so that its total shares after that issue were 216,630,283 fully paid ordinary shares. On 7 January 2011: The Company issued 39,128,321 fully paid ordinary shares to former CBS shareholders in exchange for all of the assets and engagements of CBS. The Company issued 44,241,396 fully paid ordinary shares to former SCBS shareholders in exchange for all of the assets and engagements of SCBS. On 30 May 2011, the Company's ultimate parent, PGC distributed directly to PGC shareholders its 72.21% stake in the Company. On 31 August 2011, the Company issued 23,257,528 new shares at $0.52 per share to existing shareholders under a share purchase plan, issued 34,164,396 new shares at $0.65 per share to underwriters of the share purchase plan, placed 4,615,385 new shares at $0.65 per share and placed 26,666,666 new shares at $0.75 per share to institutions and investors. The total new capital raised was $57,346,857. The shares have equal voting rights, rights to dividends and distributions and do not have a par value. 28 Special purpose entities Heartland PIE Fund The Group controls the operations of Heartland PIE Fund, a portfolio investment entity that invests in the Group's deposits. Investments of Heartland PIE Fund are represented as follows: Deposits sourced from New Zealand GROUP COMPANY Jun 12 $000 Jun 11 $000 Jun 12 $000 Jun 11 $000 12,347 6,517 - - Heartland ABCP Trust 1 and CBS Warehouse A Trust Securitisation The Group has securitised a pool of receivables comprising residential, commercial, and motor vehicle loans to the Trusts. The Group substantially retains the credit risks and rewards associated with the securitised assets, and continues to recognise these assets and associated borrowings on the Statements of Financial Position. Despite this presentation in the financial statements, the loans sold to the Trusts are set aside for the benefit of investors in the Trusts and are represented as follows: Cash and cash equivalents - Securitised Finance receivables - Securitised Borrowings - Securitised GROUP COMPANY Jun 12 $000 15,579 276,768 (264,359) Jun 11 $000 15,830 209,693 (194,277) Jun 12 $000 Jun 11 $000 - - - - - - Heartland Trust and CBS Canterbury Charitable Trust (Charitable Trusts) The directors of the Company are trustees of the Charitable Trusts, therefore the results of the Charitable Trusts have been included in the Group. The Trusts' beneficiary funds are represented as follows: Trade and other payables 731 746 - - Heartland New Zealand Limited 24 hEArTLANd NEw zEALANd LIMITEd ANNuAL rEpOrT 2012 | 37 NOTES TO ThE FINANCIAL STATEMENTS continued NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 June 2012 For the year ended 30 June 2012 29 Related party transactions The Company holds all shares in the Society, HFSL, MARAC and PWF, refer Note 5 - Significant subsidiaries and interests in jointly controlled entities. Former related parties Until 5 January 2011 the immediate parent of MARAC was MARAC Financial Services Limited (MFSL). MFSL's ultimate parent is Pyne Gould Corporation Limited (PGC). On 30 May 2011, PGC distributed directly to PGC shareholders its 72.21% stake in HNZ. As a result from 30 May 2011, PGC and its subsidiaries (including Real Estate Credit Limited) are no longer related parties of the Group, however material transactions in respect of these former related parties are disclosed below. (a) Transactions with former related parties Real Estate Credit Limited (RECL) Management agreement On 5 January 2011, MARAC entered into a management agreement with RECL. The agreement (as previously amended) was further amended on 19 October 2011. Under this arrangement, RECL manages certain non-core real estate loans (not previously sold in September 2009) of MARAC for a 5 year period (ending 5 January 2016), and assumes the risk of loss on those loans for that period. Any payment by RECL to MARAC in respect of that loss is due at the end of the 5 year period (with some limited right on the part of MARAC to earlier payment). The maximum amount payable by RECL in respect of loss (including interest accruing on loss payments until the due date for payment) is limited to $30 million. The payment obligations of RECL are “limited in recourse” to a pool of security provided by RECL. This pool of security includes an $11 million 5 year zero coupon bond (issued by Westpac New Zealand Limited which is rated AA- by Standard & Poor's (Australia) Pty Limited), and other assets (initially real estate or real estate loans) with a required minimum security value of (initially) $19 million. PGC will be obliged to top up the security pool to the extent that the security value of other assets is less than the minimum required. MARAC paid RECL an upfront fee of $11 million (which will be amortised over the 5 year period of the arrangement), and will pay an ongoing management fee of $200,000 per annum for the 5 year period. The benefit of this management agreement is included in the determination of the charge and the analysis of risk gradings and the classification of individually impaired assets as at 30 June 2012. In September 2011, RECL paid $1.5 million cash for claims to MARAC. This payment reduced the required minimum security value of other assets to $17.5 million. From 31 December 2010, the Group (through VPS Properties Limited and VPS Parnell Limited) began acquiring investment properties as a result of enforcement of security over finance receivables. The acquisitions by VPS Properties Limited and VPS Parnell Limited were funded by advances from the Society and MARAC to those acquiring entities. These advances are covered by the RECL management agreement. (b) Transactions with related parties MARAC provided administration services to RECL, MARAC Insurance Limited and Heartland PIE Fund and received insurance commission from MARAC Insurance Limited. MARAC Insurance Limited and some key management personnel invested in the Society's deposits. The investment of Heartland PIE Fund is detailed in Note 28. Key management personnel investments are detailed in Note 29(c). All transactions were conducted on normal commercial terms and conditions. 38 | FINANCIAL STATEMENTS Heartland New Zealand Limited 25 NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 June 2012 29 Related party transactions (continued) (b) Transactions with related parties (continued) Material related party transactions Previous parent - MFSL Interest income Previous ultimate parent - PGC Selling and administration expenses Other related parties Lending and credit fee income Other income Interest expense Selling and administration expenses Total transactions with other related parties Due from other related parties Due to other related parties Total due from related entities Total due to related entities (c) Transactions with key management personnel GROUP COMPANY Jun 12 $000 Jun 11 $000 Jun 12 $000 Jun 11 $000 - - 368 328 - - 696 - - - - 2,976 (2,494) 481 207 (130) (1,000) (442) - 104 - 104 - - - - - - - 194 78 194 78 - - - - - - - - - - - Key management personnel, being directors of the Company and those staff reporting directly to the Chief Executive Officer and their immediate relatives, have transacted with the Group during the year as follows: GROUP COMPANY Jun 12 $000 Jun 11 $000 Jun 12 $000 Jun 11 $000 Deposit investments by key management personnel: Maximum balance Closing balance Loans to key management personnel: Closing balance 777 468 304 Key management personnel interest expense and compensation is as follows: Interest expense Short-term employee benefits Share-based payments Total 21 5,118 91 5,230 409 385 304 20 2,353 287 2,660 - - - - 548 - 548 - - - - 322 - 322 30 Fair value The following methods and assumptions were used to estimate the fair value of each class of financial asset and liability. Finance receivables The fair value of the Group's finance receivables is calculated using a valuation technique which assumes current market interest rates for loans of a similar nature and term. The current market rate used to fair value finance receivables with a fixed interest rate is 9.06% (2011: 9.51%). Finance receivables with a floating interest rate are deemed to be at current market rates. The current amount of credit provisioning has been deducted from the fair value calculation of finance receivables as a proxy for future losses. Prepayment rates have not been factored into the fair value calculation as they are not deemed to be material. Investments Investments in public securities and corporate bonds are classified as being available for sale and are stated at fair value less impairment, with the fair value being based on quoted market prices. (Level 1 under the fair value hierarchy). Other financial assets and liabilities The fair value of all other financial assets and liabilities is considered equivalent to their carrying value due to their short term nature. Heartland New Zealand Limited 26 hEArTLANd NEw zEALANd LIMITEd ANNuAL rEpOrT 2012 | 39 NOTES TO ThE FINANCIAL STATEMENTS continued NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 June 2012 For the year ended 30 June 2012 30 Fair value (continued) Derivative items The fair value of interest rate contracts is modelled using observable market inputs (Level 2 under the fair value hierarchy). Borrowings The fair value of deposits, bank borrowings and other borrowings is the present value of future cash flows and is based on the current market interest rates payable by the Group for debt of similar maturities. Held for trading Loans and receivables Available for sale $000 $000 $000 Financial liabilities at amortised cost $000 Total Carrying Value Total Fair Value $000 $000 GROUP - Jun 12 Cash and cash equivalents Investments Finance receivables Finance receivables - securitised Derivative financial assets Other financial assets Total financial assets Borrowings Borrowings - securitised Derivative financial liabilities Other financial liabilities Total financial liabilities GROUP - Jun 11 Cash and cash equivalents Investments Finance receivables Finance receivables - securitised Derivative financial assets Other financial assets Total financial assets Borrowings Borrowings - securitised Derivative financial liabilities Other financial liabilities Total financial liabilities COMPANY - Jun 12 Cash and cash equivalents Other financial assets Total financial assets Other financial liabilities Total financial liabilities COMPANY - Jun 11 Cash and cash equivalents Other financial assets Total financial assets Other financial liabilities Total financial liabilities 89,689 - - - - 1,801,508 276,768 - - 2,122 3,080 - 2,171,045 2,122 - 24,327 - - - - 24,327 - - - - - - - - - 1,459 - 1,459 - - - - - - 1,675,130 264,359 - - - - 18,329 - 1,957,818 267,187 - - - - 1,497,618 209,693 - - 3,048 3,260 - 1,977,758 3,048 - 17,831 - - - - 17,831 - - - - - - - - - 2,444 - 2,444 - - - - - - - - - - - - - - - 469 194 663 - - 153 11 164 - - - 1,593,247 194,277 - - - - 15,840 - 1,803,364 - - - - - - - - - - - - - 300 300 - - - 165 165 40 | FINANCIAL STATEMENTS Heartland New Zealand Limited 89,689 24,327 1,801,508 276,768 2,122 3,080 2,197,494 1,675,130 264,359 1,459 18,329 1,959,277 267,187 17,831 1,497,618 209,693 3,048 3,260 1,998,637 1,593,247 194,277 2,444 15,840 1,805,808 89,689 24,327 1,800,616 281,104 2,122 3,080 2,200,938 1,681,134 264,359 1,459 18,329 1,965,281 267,187 17,831 1,511,777 215,743 3,048 3,260 2,018,846 1,598,815 194,277 2,444 15,840 1,811,376 469 194 663 300 300 153 11 164 165 165 469 194 663 300 300 153 11 164 165 165 27 NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 June 2012 31 Risk management policies The Group is committed to the management of risk. The primary risk categories are credit, liquidity, interest rate and operational. The Group's risk management strategy is set by the Board of Directors (Board). The Group has put in place management structures and information systems to manage risks incorporated in the Group's Risk Management Programme (RMP). The Group has separate monitoring tasks where feasible and subjects risk processes to hindsight and internal audit, and accounting systems to regular internal and external audits. Management of capital The Group's capital includes share capital, reserves and retained earnings. The Group's policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business. The Group has minimum capital requirements which it is required to maintain in accordance with its Trust Deeds, borrowing facilities and the Deposit Takers (Credit Ratings, Capital Ratios, and Related Party Exposures) Regulations 2010. The Group maintains an appropriate buffer above these ratios and reports these to its Board monthly. Throughout the year, the Group has complied with all of these externally imposed requirements. 32 Credit risk exposure Credit risk management framework Credit risk is the risk of financial loss to the Group caused by the failure of a customer to meet their contractual obligations that arise from the Group’s lending activities. Credit risk carries the greatest risk of resulting in a material adjustment to the carrying amounts of the Group's assets within the next financial year. To manage this risk the Risk Committee, a committee of the Board, has been delegated the task of overseeing a formal credit risk management strategy. The Risk Committee reviews the Group's credit risk exposures and has wide ranging credit policies to manage all aspects of credit risk. Reviewing and assessing credit risk The credit risk management strategies ensure that: - Credit origination meets agreed levels of credit quality at point of approval. - Sector and geographical risks are actively managed. - Industry and product concentrations are actively monitored. - Maximum total exposure to any one debtor is actively managed. - Changes to credit risk are actively monitored with regular credit reviews. Lending standards and processes The Group has adopted a detailed Credit Policy Framework supported by Lending Standards providing criteria for finance products within each business sector. The combination of the Credit Policy Framework and Lending Standards guides credit assessment, credit risk grading, documentation standards, legal procedures and compliance with regulatory and statutory requirements. The Risk Committee has authority from the Board for approval of all credit exposures. Lending authority has been individually for delegation through the business units under a detailed Delegated Lending Authority provided to the Chief Risk Officer, framework. Application of credit discretions in the business operation are monitored through a defined review and hindsight structure. Delegated Lending Authorities are provided to individual officers with due cognisance of their experience and ability. Larger and higher risk exposures require approval of senior management, ultimately through to the Chief Risk Officer or the Risk Committee. Collateral requirements Although the Group relies primarily on the integrity of borrowers and their ability to make contracted repayments, the Group also requires appropriate collateral for loans. This collateral is usually by way of first charge over the asset financed and usually includes personal guarantees from borrowers and business owners. Because of the wide nature of the collateral held against loans it is impracticable to provide an accurate estimate of their fair value. Heartland New Zealand Limited 28 hEArTLANd NEw zEALANd LIMITEd ANNuAL rEpOrT 2012 | 41 NOTES TO ThE FINANCIAL STATEMENTS continued NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 June 2012 For the year ended 30 June 2012 32 Credit risk exposure (continued) Credit risk grading The Group's receivables are monitored either by account behaviour or a regular assessment of their credit risk grade based on an objective review of defined risk characteristics. The portfolio risk is regularly refreshed based on current information. The Group classifies finance receivables as Behavioural or Judgement. The Behavioural portfolio consists mainly of consumer and retail receivables and usually relates to financing the acquisition of a single asset. These loans are typically introduced by vendors of the asset financed and are smaller in value than Judgement loans. Behavioural loans are risk graded based on arrears status. The Judgement portfolio consists mainly of business and rural lending and includes non-core property. Judgement loans relate to loans where an ongoing and detailed working relationship with the customer has been developed. Judgement loans are individually risk graded based on loan status, financial information, security and debt servicing ability. Exposures in the Judgement portfolio are credit risk graded by an internal risk grading mechanism. Previously, the risk grading mechanism used a credit risk grade scale of 1 to 7 and classified loans as Transactional or Relationship. During the year, the risk grades have been revised to a more comprehensive 10 point scale model which better represents the Group's risk profile. In the Judgement portfolio, grade 1 is the strongest risk grade for undoubted risk and grade 9 represents the highest risk grade where a loss is probable. Grade 10 reflects loss accounts written off. Grades 2 to 8 represent ascending steps in management's assessment of risk of exposures. The Group typically finances new loans in risk grades 2 to 5 of the Judgement portfolio. The Group raises provisions based on historical loss experience for loans risk graded in grades 6 to 8. Loans in grade 9 of the Judgement portfolio are individually assessed for impairment. (a) Credit impairment provisioning Credit impairment provisions are made where events have occurred leading to an expectation of reduced future cash flows from certain receivables. These provisions are made in some cases against an individual loan and in other cases on a collective basis. Collective provisioning Collective provisions are assessed with reference to risk profile groupings and historical loss data. Other judgemental factors including economic and credit cycle considerations are also taken into account in determining appropriate loss propensities to be applied. The future credit quality of these portfolios is subject to uncertainties that could cause actual credit losses to differ materially from reported loan impairment provisions. These uncertainties include the wider economic environment, interest rates and their effect on customer spending, unemployment levels, payment behaviour and bankruptcy rates. For Behavioural loans, as arrears drive provision outcomes, the trend in arrears behaviour is an indicator of future provisioning impact. Behavioural loans are classified as either not in arrears, active, arrangement, repossession or recovery. Each arrears classification carries a provision for potential loss based on historical experience for that classification in the same portfolio. Retail mortgages currently carry no provision based on historical loss experience, however a general collective provision is held against this group of loans. The categories are described below: Active – loans for which the arrears category has reached 5 days overdue.  Arrangement – 5 to 34 days overdue accounts for which arrangements have or are in the process of being made for arrears to be repaid. Non-performing / Repossession – residential mortgage loans that are greater than 90 days past due / other loans for which security has or is in the process of being repossessed.  Recovery loans – loans for which security has been sold and shortfalls are being sought from the customer or where other recovery action is being taken. Judgement loans in grades 6 to 8 ordinarily attract a collective provision based on risk grading overlaid with the strength of security position, except for risk grades 6 which have strong security and accordingly attract no collective provision (typically Rural exposures). Other collective provisions are also maintained where considered appropriate against a class of loans or those with common risk characteristics. Judgement loans with a risk grade of 1 to 5 may be past due and not attract a provision if the Group has reviewed the risk position and it is deemed to remain sound. Under such circumstances normally an amended credit risk grade will result. No provision is applied to loans that are newly written and loans that remain within their contractual terms, except where the Group becomes aware of an event that might alter its view of the risk of a particular deal or group of deals. 42 | FINANCIAL STATEMENTS Heartland New Zealand Limited 29 NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 June 2012 32 Credit risk exposure (continued) (a) Credit impairment provisioning (continued) Individual provisioning Specific impairment provisions are made where events have occurred leading to an expectation of reduced future cash flows from certain receivables. For individually significant loans for which the assessed risk grade is considered a “potential loss”, an individual assessment is made of an appropriate provision for credit impairment. impairments are recognised as the difference between the carrying value of Credit the loan and the discounted value of management’s best estimate of future cash repayments and proceeds from any security held (discounted at the loan’s original effective interest rate). All relevant considerations that have a bearing on the expected future cash flows are taken into account, including the business prospects for the customer, the likely realisable value of collateral, the Group’s position relative to other claimants, the reliability of customer information and the likely cost and duration of the work-out process. Subjective judgements are made in this process. Furthermore, judgement can change with time as new information becomes available or as work-out strategies evolve, resulting in revisions to the impairment provision as individual decisions are taken. Changes in judgement could have a material impact on the financial statements. Individual provisioning in regards to property development lending creates the greatest amount of risk resulting in the possibility of a material adjustment to the carrying amounts of the Group's assets within the next year. Estimating the timing and amount of future cash repayments and proceeds from the realisation of collateral are management's most difficult and subjective judgements. Reduced demand in the current environment has meant that value is difficult to determine. Subjective judgements made by management comprise the time taken for new sales being achieved and the amount received, determining the timing and amount of future cash flows. Because of the wide nature of the collateral held, and the subjective judgements in determining future cash flows on each individually impaired loan, it is impracticable to provide management's assumptions in regards to property receivables as a whole. Bad debts Bad debts provided for are written off against individual or collective provisions. Amounts required to bring the provisions to their assessed levels are recognised in comprehensive income. Any future recoveries of amounts provided for are taken to comprehensive income. Concentration of credit risk During the year ended 30 June 2012 the Group has amended disclosure in respect of credit risk concentrations to better reflect the risk characteristics of the Group. The Group has the following risk concentrations: Rural Property Corporate Residential Consumer Lending to the farming sector primarily offering livestock, rural mortgage lending, seasonal and working capital financing, as well as leasing solutions to farmers. Non-core property assets of MARAC and the Parent. All other business lending. A loan secured by a first ranking mortgage over a residential property used primarily for residential purposes either by the mortgagor or a tenant of the mortgagor. All other loans to individuals. Verification In addition to regular internal audit activity in regards to credit standards, the Group employs a comprehensive process of hindsighting loans to ensure that credit policies and the quality of credit processes are maintained. Disclosures in this credit risk exposure note represent the Group's maximum exposure to credit risk. Heartland New Zealand Limited 30 hEArTLANd NEw zEALANd LIMITEd ANNuAL rEpOrT 2012 | 43 NOTES TO ThE FINANCIAL STATEMENTS continued NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 June 2012 For the year ended 30 June 2012 32 Credit risk exposure (continued) (a) Credit impairment provisioning (continued) (i) Provision for impaired assets GROUP Provision for individually impaired assets Opening individual impairment Impairment loss for the year - charge for the year - recoveries - write offs - assumed on acquisition - assumed on amalgamation - effect of discounting Closing individual impairment Provision for collectively impaired assets Opening collective impairment Impairment loss for the year - (credit)/charge for the year * - recoveries - assumed on amalgamation - write offs Closing collective impairment Non-securitised Jun 12 $000 Jun 11 $000 Securitised Total Jun 12 $000 Jun 11 $000 Jun 12 $000 Jun 11 $000 26,149 17,465 6,920 227 (14,636) 1,284 - (559) 19,385 20,223 117 (19,844) - 10,049 (1,861) 26,149 8 1 - - - - - 9 366 26,157 17,831 93 - (451) - - - 8 6,921 227 (14,636) 1,284 - (559) 19,394 20,316 117 (20,295) - 10,049 (1,861) 26,157 11,416 11,765 724 752 12,140 12,517 (1,897) 322 - (2,533) 7,308 (7,548) 264 12,927 (5,992) 11,416 618 29 - (647) 724 530 36 - (594) 724 (1,279) 351 - (3,180) 8,032 (7,018) 300 12,927 (6,586) 12,140 Total provision for impairment 26,693 37,565 733 732 27,426 38,297 Rural $000 Property Corporate Residential Consumer $000 $000 $000 $000 Total $000 GROUP - Jun 12 Provision for individually impaired assets Opening individual impairment Impairment loss for the year - charge for the year - recoveries - write offs - assumed on acquisition - effect of discounting Closing individual impairment Provision for collectively impaired assets Opening collective impairment Impairment loss for the year - charge/(credit) for the year * - recoveries - write offs Closing collective impairment - 20,047 5,945 - 165 26,157 709 35 (1,664) 1,284 - 364 3,697 32 (6,704) - (155) 16,917 1,700 160 (6,113) - (404) 1,288 695 - - - - 695 120 - (155) - - 130 6,921 227 (14,636) 1,284 (559) 19,394 500 1,595 6,081 2,037 1,927 12,140 78 - - 578 (907) - 272 960 (419) 177 (1,767) 4,072 (2,011) - - 26 1,980 174 (1,685) 2,396 (1,279) 351 (3,180) 8,032 Total provision for impairment 942 17,877 5,360 721 2,526 27,426 * In determining the charge for the year, the RECL management agreement has been taken into consideration, refer to Note 29 - Related party transactions and Note 15 - Investment properties for more details. In assessing the requirements for provisions, the Group has identified loans for which a loss is expected to be covered by the management agreement of $28.5 million as at 30 June 2012 (June 2011: $11.8 million). Claims of $28.5 million are expected to be made under the RECL Management Agreement in relation to these losses, and to this extent, the RECL Management Agreement would be fully utilised. The agreement covers the MARAC non-core property loans with a net book value of $94 million as at 30 June 2012 (June 2011: $121 million). 44 | FINANCIAL STATEMENTS Heartland New Zealand Limited 31 NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 June 2012 32 Credit risk exposure (continued) (a) Credit impairment provisioning (continued) (i) Provision for impaired assets (continued) Rural $000 Property Corporate Residential Consumer $000 $000 $000 $000 Total $000 GROUP - Jun 11 Provision for individually impaired assets Opening individual impairment Impairment loss for the year - charge for the year - recoveries - write offs - assumed on amalgamation - effect of discounting Closing individual impairment Provision for collectively impaired assets Opening collective impairment Impairment loss for the year - charge/(credit) for the year - recoveries - assumed on amalgamation - write offs Closing collective impairment - - - - - - - - 8,712 9,112 13,182 117 (11,404) 10,049 (609) 20,047 6,976 - (8,891) - (1,252) 5,945 4,463 3,881 - - - - - - - - 7 17,831 158 - - - - 165 20,316 117 (20,295) 10,049 (1,861) 26,157 4,173 12,517 500 - - - 500 (12,260) 3 12,649 (3,260) 1,595 3,039 297 278 (1,414) 6,081 2,037 - - - 2,037 (334) - - (1,912) 1,927 (7,018) 300 12,927 (6,586) 12,140 Total provision for impairment 500 21,642 12,026 2,037 2,092 38,297 (ii) Impaired asset expense Non-securitised Securitised Total Jun 2012 $000 Jun 2011 Jun 2012 $000 $000 Jun 2011 Jun 2012 $000 $000 Jun 2011 $000 GROUP Individually impaired assets expense Collectively impaired assets (recovery)/expense Total impaired asset expense 6,920 (1,897) 5,023 20,223 (7,548) 12,675 1 618 619 93 530 623 6,921 (1,279) 5,642 20,316 (7,018) 13,298 (iii) Individually impaired assets Non-securitised Securitised Total Jun 2012 $000 Jun 2011 Jun 2012 $000 $000 Jun 2011 Jun 2012 $000 $000 Jun 2011 $000 GROUP Opening Additions Deletions Assumed on acquisition Assumed on amalgamation Closing gross individually impaired assets 68,523 40,370 (53,959) 1,871 - 56,805 42,102 49,434 (52,927) - 29,914 68,523 14 6 - - - 20 545 51 (582) - - 14 68,537 40,376 (53,959) 1,871 - 56,825 42,647 49,485 (53,509) - 29,914 68,537 Heartland New Zealand Limited 32 hEArTLANd NEw zEALANd LIMITEd ANNuAL rEpOrT 2012 | 45 Total $000 68,537 40,376 (53,959) 1,871 56,825 42,647 49,485 (53,509) 29,914 68,537 Total $000 9,086 NOTES TO ThE FINANCIAL STATEMENTS continued NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 June 2012 For the year ended 30 June 2012 32 Credit risk exposure (continued) (a) Credit impairment provisioning (continued) Individually impaired assets (continued) (iii) GROUP - Jun 12 Opening Additions Deletions Assumed on acquisition Closing gross individually impaired assets GROUP - Jun 11 Opening Additions Deletions Assumed on amalgamation Closing gross individually impaired assets (iv) Restructured assets Rural $000 - 625 (1,935) 1,871 561 Property Corporate Residential Consumer $000 $000 $000 $000 51,853 31,672 (32,665) - 50,860 16,426 5,234 (19,049) - 2,611 - 2,661 (31) - 2,630 - - - - - 19,165 39,794 (37,020) 29,914 51,853 23,467 9,433 (16,474) - 16,426 - - - - - 258 184 (279) - 163 15 258 (15) - 258 Non-securitised Securitised Total Jun 2012 $000 Jun 2011 Jun 2012 $000 $000 Jun 2011 Jun 2012 $000 $000 Jun 2011 $000 GROUP - Restructured assets 9,086 3,249 - - 9,086 3,249 GROUP - Jun 12 Restructured assets GROUP - Jun 11 Restructured assets (v) Past due but not impaired Rural $000 - - Property Corporate Residential Consumer $000 $000 $000 $000 5,522 1,127 - 769 - - 2,437 2,480 3,249 Non-securitised Securitised Total Jun 2012 $000 Jun 2011 Jun 2012 $000 $000 Jun 2011 Jun 2012 $000 $000 Jun 2011 $000 GROUP Less than 30 days past due At least 30 and less than 60 days past due At least 60 but less than 90 days past due At least 90 days past due Total past due but not impaired 20,258 8,699 8,342 50,508 87,807 23,899 27,763 15,405 65,739 132,806 3,480 1,610 517 1,496 7,103 2,678 1,614 306 1,459 6,057 23,738 10,309 8,859 52,004 94,910 26,577 29,377 15,711 67,198 138,863 GROUP - Jun 12 Less than 30 days past due At least 30 and less than 60 days past due At least 60 but less than 90 days past due At least 90 days past due Total past due but not impaired GROUP - Jun 11 Less than 30 days past due At least 30 and less than 60 days past due At least 60 but less than 90 days past due At least 90 days past due Total past due but not impaired Rural $000 1,132 1,524 2,300 2,537 7,493 - - - - - Property Corporate Residential Consumer $000 $000 $000 $000 365 139 3,455 27,167 31,126 9,069 18,515 6,331 48,242 82,157 8,696 4,480 1,559 12,376 27,111 5,255 7,592 7,837 14,515 35,199 1,658 722 251 15 2,646 1,093 599 501 1,068 3,261 11,887 3,444 1,294 9,909 26,534 11,160 2,671 1,042 3,373 18,246 Total $000 23,738 10,309 8,859 52,004 94,910 26,577 29,377 15,711 67,198 138,863 46 | FINANCIAL STATEMENTS Heartland New Zealand Limited 33 NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 June 2012 32 Credit risk exposure (continued) (b) Concentrations of credit risk (i) By individual counterparties Non-securitised Securitised Total Jun 2012 Jun 2011 Jun 2012 Jun 2011 Jun 2012 Jun 2011 Number of counterparties Number of counterparties Number of counterparties Cash and cash equivalents - Individual credit exposures over 10% (as a % of equity): GROUP 10% - 19% 20% - 29% 1 - 2 2 - - - - 1 - 2 2 Short term funds held with New Zealand registered international banks. (ii) By industry Non-securitised Securitised Total Jun 2012 $000 Jun 2011 Jun 2012 $000 $000 Jun 2011 Jun 2012 $000 $000 Jun 2011 $000 GROUP Agriculture Mining Manufacturing Electricity, Gas, Water and Waste Services Construction Wholesale Trade Retail Trade Accommodation & Food Services Transport, Postal and Warehousing Individuals Financial and Insurance Services Rental, Hiring and Real Estate Services Professional, Scientific and Technical Services Administrative and Support Services Public Administration and Safety Education and Training Health Care and Social Assistance Arts and Recreation Services Information, Media and Telecommunications Other Services Total finance receivables 382,277 16,003 71,199 4,463 153,990 41,873 115,801 28,523 87,724 571,815 26,818 189,754 23,053 1,615 551 12,774 3,157 16,253 10,016 43,849 1,801,508 147,051 10,936 58,836 3,644 196,348 56,205 110,028 19,616 96,021 500,023 35,948 140,956 32,158 277 3,973 9,443 9,779 9,950 - 56,426 1,497,618 301 19 233 16 445 384 1,299 104 486 266,677 195 5,389 608 - - 73 - 20 - 519 276,768 930 12 1,002 84 860 53 945 19 1,278 202,188 500 842 340 - 91 192 87 22 - 248 209,693 382,578 16,022 71,432 4,479 154,435 42,257 117,100 28,627 88,210 838,492 27,013 195,143 23,661 1,615 551 12,847 3,157 16,273 10,016 44,368 2,078,276 147,981 10,948 59,838 3,728 197,208 56,258 110,973 19,635 97,299 702,211 36,448 141,798 32,498 277 4,064 9,635 9,866 9,972 - 56,674 1,707,311 (iii) By geographic region GROUP Auckland Wellington Rest of North Island Canterbury Rest of South Island Total finance receivables Non-securitised Securitised Total Jun 2012 $000 Jun 2011 Jun 2012 $000 $000 Jun 2011 Jun 2012 $000 $000 Jun 2011 $000 461,766 83,413 422,048 489,121 345,160 1,801,508 449,556 88,016 347,530 471,567 140,949 1,497,618 86,685 18,378 58,239 94,727 18,739 276,768 72,161 16,212 49,463 56,613 15,244 209,693 548,451 101,791 480,287 583,848 363,899 2,078,276 521,717 104,228 396,993 528,180 156,193 1,707,311 Heartland New Zealand Limited 34 hEArTLANd NEw zEALANd LIMITEd ANNuAL rEpOrT 2012 | 47 NOTES TO ThE FINANCIAL STATEMENTS continued NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 June 2012 For the year ended 30 June 2012 32 Credit risk exposure (continued) (c) Maximum exposure to credit risk by internal risk grading GROUP Judgement portfolio Grade 1 - Very Strong Grade 2 - Strong Grade 3 - Sound Grade 4 - Adequate * Grade 5 - Acceptable Grade 6 - Monitor Grade 7 - Substandard Grade 8 - Doubtful Grade 9 - At risk of loss Total Judgement portfolio Behavioural portfolio Not in arrears Active Arrangement Non-performing / Repossession Recovery Total Behavioural portfolio Non-securitised Securitised Total Jun 2012 $000 Jun 2011 Jun 2012 $000 $000 Jun 2011 Jun 2012 $000 $000 Jun 2011 $000 1,280 17,090 82,381 322,767 436,570 183,756 50,874 13,906 13,471 1,122,095 658,686 6,789 8,549 3,499 1,890 679,413 2,985 25,351 95,350 186,092 238,665 92,420 45,410 8,772 35,163 730,208 750,476 6,387 5,952 3,165 1,430 767,410 - - 578 1,010 5,483 58 - 5 - 7,134 - 13 - 783 2,899 849 144 6 - 4,694 1,280 17,090 82,959 323,777 442,053 183,814 50,874 13,911 13,471 1,129,229 262,095 2,788 4,173 435 143 269,634 199,476 2,675 2,073 563 212 204,999 920,781 9,577 12,722 3,934 2,033 949,047 2,985 25,364 95,350 186,875 241,564 93,269 45,554 8,778 35,163 734,902 949,952 9,062 8,025 3,728 1,642 972,409 Total maximum exposure to credit risk 1,801,508 1,497,618 276,768 209,693 2,078,276 1,707,311 * In determining the Group's risk grading, the following arrangements have been taken into consideration: The RECL management agreement, refer to Note 29 - Related party transactions and Note 15 - Investment properties for more details. In the risk grading table above, as at 30 June 2012 $48 million (June 2011: $51 million) of Judgement loans have been transferred from risk grades below Acceptable to an Adequate risk grade as they are covered by the RECL management agreement. In assessing the requirements for provisions, the Group has identified loans for which a loss is expected to be covered by the management agreement of $28.5 million as at 30 June 2012 (June 2011: $11.8 million). Claims of $28.5 million are expected to be made under the RECL Management Agreement in relation to these losses, and to this extent, the RECL Management Agreement would be fully utilised. The agreement covers the MARAC non-core property loans with a net book value of $94 million as at 30 June 2012 (June 2011: $121 million). PGG Wrightson Finance Limited guaranteed loans, refer to Note 36 - Business Combinations. In the risk grading table above, as at 30 June 2012 $29 million of Judgement loans have been transferred from risk grades below Acceptable to an Adequate risk grade as they are covered by the Deed of Guarantee and Indemnity with PGG Wrightson Limited. Subsequent to balance date, $6.7 million of loans covered under this Deed were recovered and PGG Wrightson Limited was released from their guarantee in respect of those loans. At balance date, PGG Wrightson Limited had been put on notice that it will be required to reacquire approximately $3.5 million of loans covered under this Deed. Subsequent to balance date, Heartland advised PGG Wrightson Limited that it may require it to reacquire approximately a further $8.3 million of loans covered under this Deed. 48 | FINANCIAL STATEMENTS Heartland New Zealand Limited 35 NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 June 2012 32 Credit risk exposure (continued) (c) Maximum exposure to credit risk by internal risk grading (continued) GROUP - Jun 12 Judgement portfolio Grade 1 - Very Strong Grade 2 - Strong Grade 3 - Sound Grade 4 - Adequate * Grade 5 - Acceptable Grade 6 - Monitor Grade 7 - Substandard Grade 8 - Doubtful Grade 9 - At risk of loss Total Judgement portfolio Behavioural portfolio Not in arrears Active Arrangement Non-performing / Repossession Recovery Total Behavioural portfolio Rural $000 1,277 2,941 15,578 67,231 126,011 62,315 22,201 2,956 - 300,510 - - - - - - Property Corporate Residential Consumer $000 $000 $000 $000 - - 6,018 58,054 22,445 564 7,379 8,141 13,271 115,872 - 12,537 51,348 140,861 192,300 61,868 13,920 1,234 170 474,238 - 1,169 4,564 10,472 17,704 1,821 517 - - 36,247 - - - - - - 272,111 2,127 3,269 737 1,738 279,982 282,952 1,657 964 1,950 - 287,523 3 443 5,451 47,159 83,593 57,246 6,857 1,580 30 202,362 365,718 5,793 8,489 1,247 295 381,542 Total $000 1,280 17,090 82,959 323,777 442,053 183,814 50,874 13,911 13,471 1,129,229 920,781 9,577 12,722 3,934 2,033 949,047 Total maximum exposure to credit risk 300,510 115,872 754,220 323,770 583,904 2,078,276 GROUP - Jun 11 Judgement portfolio Grade 1 - Very Strong Grade 2 - Strong Grade 3 - Sound Grade 4 - Adequate * Grade 5 - Acceptable Grade 6 - Monitor Grade 7 - Substandard Grade 8 - Doubtful Grade 9 - At risk of loss Total Judgement portfolio Behavioural portfolio Not in arrears Active Arrangement Non-performing / Repossession Recovery Total Behavioural portfolio 2,985 - 5,317 11,608 11,936 16,884 4,014 - - 52,744 - - 19,862 52,802 40,569 2,830 9,812 7,083 25,607 158,565 - 23,425 60,370 110,603 151,111 60,138 25,220 1,617 9,556 442,040 - 550 5,432 4,958 23,654 4,067 - - - 38,661 - 1,389 4,369 6,904 14,294 9,350 6,508 78 - 42,892 - - - - - - - - - - - - 266,375 2,055 2,365 1,050 828 272,673 326,311 1,063 1,102 1,077 - 329,553 357,266 5,944 4,558 1,601 814 370,183 2,985 25,364 95,350 186,875 241,564 93,269 45,554 8,778 35,163 734,902 949,952 9,062 8,025 3,728 1,642 972,409 Total maximum exposure to credit risk 52,744 158,565 714,713 368,214 413,075 1,707,311 Heartland New Zealand Limited 36 hEArTLANd NEw zEALANd LIMITEd ANNuAL rEpOrT 2012 | 49 NOTES TO ThE FINANCIAL STATEMENTS continued NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 June 2012 For the year ended 30 June 2012 32 Credit risk exposure (continued) (d) Commitments to extend credit GROUP Undrawn facilities available to customers Conditional commitments to fund at future dates 33 Liquidity risk Non-securitised Securitised Total Jun 2012 $000 Jun 2011 Jun 2012 $000 $000 Jun 2011 Jun 2012 $000 $000 Jun 2011 $000 125,492 74,099 - 49 125,492 74,148 38,796 19,199 - - 38,796 19,199 Liquidity risk is the risk that the Group may encounter difficulty in raising funds at short notice to meet its commitments and arises from any mismatch of the maturity of financial assets and liabilities. Responsibility for liquidity management is delegated to the Asset and Liability Committee (ALCO), with the Risk Committee providing oversight. The Group manages liquidity and funding risk by: - weekly liquidity reporting and scenario analysis to quantify the Group's current and forecast position. - maintaining a diverse and stable funding base. - retaining borrowing facilities committed to the Group by registered banks. - holding a portfolio of liquid assets. - ensuring the liquidity management framework is compliant with local regulatory requirements. The following tables show the cash flows on the Group's financial liabilities and unrecognised loan commitments on the basis of their earliest possible contractual maturity. In the following tables, total financial assets do not include unrecognised loan commitments and total financial liabilities do not include undrawn committed bank facilities. The tables include estimates as to the average interest rate applicable for each asset or liability class during the contractual term. Contractual liquidity profile of financial assets and liabilities On Demand $000 0-6 Months $000 6-12 Months $000 1-2 Years $000 2-5 Years $000 5+ Years $000 Total $000 GROUP - Jun 12 Financial assets Cash and cash equivalents Investments Finance receivables Finance receivables - securitised Derivative financial assets Other financial assets Total financial assets Financial liabilities Borrowings Borrowings - securitised Derivative financial liabilities Other financial liabilities Total financial liabilities 89,689 - - - 498 - 572,857 - 53,568 2,122 - - - - 3,080 390,718 630,003 - - - 89,689 498 996 25,314 - 27,306 2,398,717 336,063 342,005 509,685 638,107 390,501 54,157 86,874 83,887 112,015 - - - 2,122 - - - 3,080 2,911,415 429,875 618,886 750,122 91,811 237,036 760,301 - 4,578 1,459 - - - - 18,329 611,296 783,208 419,224 272,619 49,549 - 1,738,729 192,072 75,157 - - 271,807 - - - 1,459 - - - 18,329 2,030,324 347,776 238,495 49,549 - Net financial (liabilities) / assets (146,684) (153,205) (220,578) 82,099 569,337 750,122 881,091 Unrecognised loan commitments Undrawn committed bank facilities 125,492 335,000 - - - - - - - - - - 125,492 335,000 The undrawn committed bank facilities totalling $335.0 million are available to be drawn down on demand. To the extent drawn, $50.0 million is contractually repayable in 0-6 months' time, $110.0 million is contractually repayable in 6-12 months' time and $175.0 million is contractually repayable in 1-2 years' time upon facility expiry. 50 | FINANCIAL STATEMENTS Heartland New Zealand Limited 37 NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 June 2012 33 Liquidity risk (continued) Contractual liquidity profile of financial assets and liabilities (continued) On Demand $000 0-6 Months $000 6-12 Months $000 1-2 Years $000 2-5 Years $000 5+ Years $000 Total $000 GROUP - Jun 11 Financial assets Cash and cash equivalents Investments Finance receivables Finance receivables - securitised Derivative financial assets Other financial assets Total financial assets Financial liabilities Borrowings Borrowings - securitised Derivative financial liabilities Other financial liabilities Total financial liabilities 77,773 189,679 - 7,036 - 433,361 - 49,601 3,048 - - - - 3,260 261,691 682,937 - 1,327 621 10,556 1,038 215,885 335,376 517,824 767,084 44,479 72,866 64,606 49,456 - - - 267,452 20,578 2,269,530 281,008 - - - 3,048 - - - 3,260 2,844,876 817,578 592,986 408,863 80,821 166,262 948,688 - 3,632 2,444 - - - - 15,841 494,114 968,161 319,267 79,118 135,550 1,990 1,650,875 174,847 682 20,056 - 199,217 - - - 2,444 - - - 15,841 1,868,377 155,606 168,706 79,800 1,990 Net financial (liabilities) / assets (87,885) (285,224) (232,423) 329,063 437,380 815,588 976,499 Unrecognised loan commitments Undrawn committed bank facilities 74,148 280,000 - - - - - - - - - - 74,148 280,000 The undrawn committed bank facilities totalling $280 million are available to be drawn down on demand. To the extent drawn, $25.0 million is contractually repayable in 6-12 months' time, $155.0 million is contractually repayable in 1-2 years' time and $100.0 million is contractually repayable upon facility expiry. Expected maturity profile of financial assets and liabilities On Demand $000 0-6 Months $000 6-12 Months $000 1-2 Years $000 2-5 Years $000 5+ Years $000 Total $000 GROUP - Jun 12 Financial assets Cash and cash equivalents Investments Finance receivables Finance receivables - securitised Derivative financial asset Other financial assets Total financial assets Financial liabilities Borrowings Borrowings - securitised Derivative financial liabilities Other financial liabilities Total financial liabilities 89,689 - - - 498 - 579,947 - 67,976 2,122 - - - - 3,080 447,239 651,501 - - - 89,689 498 996 25,314 - 27,306 2,061,495 386,570 372,340 666,179 56,459 60,171 82,716 115,136 - 325,999 - - - 2,122 - - - 3,080 2,509,691 456,052 806,629 91,811 56,459 2,370 267,212 - 4,578 1,459 - - - - 18,329 230,598 290,119 226,095 456,293 546,244 359,443 4,503 9,082 27,269 265,746 1,857,657 311,178 - - - 1,459 - - - 18,329 2,188,623 573,513 625,189 465,375 3,829 Net financial assets / (liabilities) 87,982 361,382 216,641 (9,323) 233,116 (568,730) 321,068 Unrecognised loan commitments Undrawn committed bank facilities 125,492 335,000 - - - - - - - - - - 125,492 335,000 Heartland New Zealand Limited 38 hEArTLANd NEw zEALANd LIMITEd ANNuAL rEpOrT 2012 | 51 NOTES TO ThE FINANCIAL STATEMENTS continued NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 June 2012 For the year ended 30 June 2012 33 Liquidity risk (continued) Expected maturity profile of financial assets and liabilities (continued) On Demand $000 0-6 Months $000 6-12 Months $000 1-2 Years $000 2-5 Years $000 5+ Years $000 Total $000 GROUP - Jun 11 Financial assets Cash and cash equivalents Investments Finance receivables Finance receivables - securitised Derivative financial assets Other financial assets Total financial assets Financial liabilities Borrowings Borrowings - securitised Derivative financial liabilities Other financial liabilities Total financial liabilities 77,773 189,679 - 7,036 - 396,687 - 62,667 3,048 - - - - 3,260 354,280 659,329 - - - 267,452 - 1,327 621 10,556 1,038 20,578 303,218 383,950 716,916 - 1,800,771 49,735 69,475 70,192 - 252,069 - - - 3,048 - - - 3,260 2,347,178 454,046 797,664 80,821 1,038 - 267,635 - 3,632 2,444 - - - - 15,841 370,246 287,108 195,399 307,165 505,886 515,471 1,791,556 174,847 682 20,056 - 199,217 - - - 2,444 - - - 15,841 2,009,058 515,471 307,847 525,942 2,444 Net financial assets / (liabilities) 78,377 372,221 (15,966) 146,199 271,722 (514,433) 338,120 Unrecognised loan commitments Undrawn committed bank facilities 74,148 280,000 - - - - - - - - - - 74,148 280,000 The tables above show management's expected maturities of existing financial assets and financial liabilities. Expected maturities of financial assets are based on management's best estimate having regard to current market conditions and past experience. Historical deposit and debenture reinvestment levels have been applied to deposit and debenture borrowings. Other financial liabilities reflect contractual maturities. The above does not reflect a forward looking view of how the Group expects actual financial assets and liabilities to perform in the future, as it does not include new lending and borrowing. 34 Interest rate risk Interest rate risk is the risk that market interest rates will change and impact on the Group’s financial results by affecting the margin between interest earning assets and interest bearing liabilities. The Group monitors market interest rates on a daily basis and regularly reviews interest rate exposure. Interest rate risk is mitigated by management’s frequent monitoring of the interest rate repricing profiles of borrowings and finance receivables, and where appropriate, the establishment of derivative instruments. Contractual Repricing Analysis The interest rate risk profile of financial assets and liabilities that follows has been prepared on the basis of maturity or next repricing date, whichever is earlier. 52 | FINANCIAL STATEMENTS Heartland New Zealand Limited 39 NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 June 2012 34 Interest rate risk (continued) GROUP - Jun 12 Financial assets Cash and cash equivalents Investments Finance receivables Finance receivables - securitised Other financial assets Total financial assets Financial liabilities Borrowings Borrowings - securitised Other financial liabilities Total financial liabilities Effective Int Rate % 0-6 Months $000 6-12 Months $000 1-2 Years $000 2-5 Years $000 5+ Years $000 Total $000 2.71% 4.09% 9.53% 9.57% - 5.78% 3.47% - 89,689 22,149 1,347,697 119,316 5,202 1,584,053 - - 153,606 49,895 - 203,501 - - 172,143 69,868 - 242,011 - 2,178 128,062 37,689 - 167,929 978,712 264,359 19,788 1,262,859 396,086 - - 396,086 259,956 - - 259,956 40,376 - - 40,376 - - - - - - - - - - - - 89,689 24,327 1,801,508 276,768 5,202 2,197,494 1,675,130 264,359 19,788 1,959,277 - 238,217 Effect of derivatives held for risk management Net financial assets 261,077 582,271 (43,869) (236,454) (175,718) (193,663) (41,490) 86,063 GROUP - Jun 11 Financial assets Cash and cash equivalents Investments Finance receivables Finance receivables - securitised Other financial assets Total financial assets Financial liabilities Borrowings Borrowings - securitised Other financial liabilities Total financial liabilities 3.52% 6.15% 9.20% 10.65% - 267,187 6,795 908,566 66,582 6,308 1,255,438 - 987 180,405 38,366 - 219,758 - - 230,015 59,700 - 289,715 - 9,013 178,632 45,045 - 232,690 - 1,036 - - - 1,036 267,187 17,831 1,497,618 209,693 6,308 1,998,637 5.89% 3.75% - 1,101,545 194,277 18,284 1,314,106 299,036 - - 299,036 61,623 - - 61,623 131,043 - - 131,043 - - - - 1,593,247 194,277 18,284 1,805,808 Effect of derivatives held for risk management Net financial assets 150,984 92,316 (77,519) (156,797) (90,435) 137,657 16,970 118,617 - 1,036 - 192,829 The tables above illustrate the periods in which the cash flows from interest rate swaps are expected to occur and affect comprehensive income. The management of interest rate risk against interest rate gap limits is supplemented by monitoring the sensitivity of the Group's financial assets and liabilities to various standard and non standard interest rate scenarios. Standard scenarios which are considered on a monthly basis include a 100 basis point parallel fall or rise in the yield curve. There is no material impact on comprehensive income in terms of a fair value change from movements in market interest rates. Furthermore there is no material cash flow impact on the Statements of Cash Flows from a 100 basis point change in interest rates. GROUP COMPANY Jun 12 $000 Jun 11 $000 Jun 12 $000 Jun 11 $000 35 Contingent liabilities and commitments Letters of credit, guarantees and performance bonds Total contingent liabilities 13,404 13,404 6,968 6,968 - - The Group also has contingent commitments to fund at future dates as set out in Note 32(d) - Credit risk exposure. Heartland New Zealand Limited - - 40 hEArTLANd NEw zEALANd LIMITEd ANNuAL rEpOrT 2012 | 53 NOTES TO ThE FINANCIAL STATEMENTS continued NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 June 2012 For the year ended 30 June 2012 36 Business Combinations (a) Heartland Building Society merger On 5 January 2011, the Society acquired the assets and engagements of SCBS and CBS and all of the shares in MARAC. As part of this process:    MFSL exchanged its shareholding in MARAC and its investment in MJV for shares in the Company. The agreed consideration of $206,769,000 converted to the issue of 3.94 fully paid shares in the Company in exchange for each MARAC share. The Society, a wholly owned subsidiary of the assets and engagements of SCBS and CBS for the total agreed consideration of $79,574,000 converted to the issue of fully paid shares in the Society. The Society acquired all of the shares in MARAC through the Company transferring its shareholding in MARAC to the Society (through its subsidiaries as intermediate holders). the Company (through its subsidiaries), acquired all of On 7 January 2011, the Company issued shares to former CBS and SCBS shareholders (refer Note 27 for more details) and CBS and SCBS were amalgamated into the Group. Fair value of consideration transferred at acquisition date Shares issued, at fair value * Consideration transferred GROUP 07-Jan-11 $000 79,574 79,574 * Shares issued at fair value exclude the fair value of MFSL's investment in MJV of $2.5 million which was also exchanged for shares in the Company. Identifiable assets acquired and liabilities assumed Assets Cash and cash equivalents Investments Finance receivables Other assets Intangible assets Total assets Liabilities Borrowings Other liabilities Contingent liabilities Total liabilities Total net identifiable assets Total consideration transferred Fair value of identifiable net assets Goodwill Fair value 07-Jan-11 $000 207,126 21,540 669,689 12,075 155 910,585 841,335 9,817 - 851,152 59,433 79,574 59,433 20,141 Goodwill on acquisition of $20.1 million has arisen due to expected benefits of the newly formed financial services group. The Society has the benefits of scale and scope and is expected to be value enhancing for all shareholders and offers a better outcome than could be expected as standalone entities. Goodwill of $20.1 million has not been allocated to individual cash generating units, as the future economic benefit attributable to all business units. The Group's management and board continue to monitor goodwill at a total level. is 54 | FINANCIAL STATEMENTS Heartland New Zealand Limited 41 NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 June 2012 36 Business Combinations (continued) (b) Purchase of PGG Wrightson Finance Limited On 31 August 2011, the Society acquired 100% of PWF from PGW. PWF offers a wide range of financial services, specialising in the rural sector. The purchase price was $98.0 million being an amount equal to the net tangible assets of PWF, adjusted to take account of certain agreed items. In consideration:  PGW retained certain loans, most of which were impaired (excluded loans). PWF transferred these excluded loans to a special purpose vehicle (SPV) established by PGW. This resulted in a debt being owed by the SPV back to PWF of $73.1 million.  The Society paid PGW cash of $24.9 million. Contemporaneously, the Company issued $10.0 million of Heartland New Zealand Limited (HNZ) shares to PGW. On 31 August 2011, immediately prior to settlement, $52.7 million of loans not previously recorded in the accounts of PWF that were subject to a risk sharing agreement between PWF and ASB Bank were purchased by PWF for cash. Of these loans $37.3 million form part of the finance receivables purchased by Heartland and $15.4 million were excluded loans transferred to the SPV. Fair value of consideration transferred at acquisition date Excluded loans and deferred tax Cash paid Consideration transferred Identifiable assets acquired and liabilities assumed Assets Cash and cash equivalents Finance receivables * Other assets Total assets Liabilities Due to related parties ** Other liabilities Contingent liabilities Total liabilities Total net identifiable assets Total consideration transferred Fair value of identifiable net assets Goodwill GROUP 31-Aug-11 $000's 73,115 24,898 98,013 Fair value 31-Aug-11 $000's 61,643 371,627 1,346 434,616 335,703 900 - 336,603 98,013 98,013 98,013 - * Prior to the final settlement on 31 August 2011 the Group purchased a $29 million loan from PWF for cash, bringing the total receivables acquired to $401 million. ** Due to related parties consists of PWF's borrowings acquired of $408.8 million which were transferred to become deposits in the Parent on 31 August 2011, offset by $73.1 million excluded loans and deferred tax. As part of the acquisition, the Society and PGW entered into a Deed of Guarantee and Indemnity in relation to the Recourse Loans, with book value on acquisition of $30.6 million. This arrangement provides the Society with a guarantee from PGW in relation to the future payment of principal and interest on the Recourse Loans for a prescribed period of three years. As at 30 June 2012, total recourse loans of $28.9 million are included in the Group's finance receivables. Transactions separate from the acquisition The Group incurred acquisition-related costs of $0.8 million in the year to 30 June 2011 and $0.2 million in the year ended 30 June 2012, relating to external legal fees and due diligence costs. These costs are included in selling and administration expenses. Heartland New Zealand Limited 42 hEArTLANd NEw zEALANd LIMITEd ANNuAL rEpOrT 2012 | 55 NOTES TO ThE FINANCIAL STATEMENTS continued NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 June 2012 For the year ended 30 June 2012 37 Staff share ownership arrangements Discretionary share scheme At 30 June 2010, the trustees held 60,009 shares in PGC on behalf of certain senior MARAC staff. The trustees participated in the PGC dividend reinvestment plan in December 2010, resulting in an allotment of a further 2,160 shares. A total of 9,661 PGC shares were transferred to staff during the year ended 30 June 2011. In May 2011 38,436 PGC shares were exchanged for 14,072 HNZ shares. A total of 14,072 PGC shares and 14,072 HNZ shares were transferred to staff in the year ended 30 June 2012. At 30 June 2012 the trustees held no shares in PGC or HNZ for these senior staff members. In August 2011, the Heartland New Zealand Limited employee share plan was established and it acquired $1.0 million of HNZ shares. The terms and conditions of the employee share plan have yet to be determined by the Board. Executive share scheme In January 2011, the PGC executive share plan was established, resulting in an allotment of 803,999 PGC shares to certain senior MARAC staff. A total of 402,000 PGC shares were transferred to executives during the year ended June 2011. In May 2011 294,263 PGC shares were cancelled in exchange for 107,736 HNZ shares. A total of 107,736 PGC shares and 107,736 HNZ shares were transferred to executives during the six months ended 31 December 2011. At 30 June 2012 the trustees held no shares in PGC or HNZ for these executives. The total expense recognised in the year was $115,346 (2011: $464,072). Additionally, in January 2011 certain key executives of the Group who were previously employed by PGC also participated in the PGC Executive Share scheme, resulting in an allotment of 3,574,999 PGC shares. A total of 1,787,500 PGC shares were transferred to executives during the year ended 30 June 2011. In May 2011 1,308,449 PGC shares were cancelled in exchange for 479,050 HNZ shares. A total of 479,050 PGC shares and 479,050 HNZ shares were transferred to executives during the year ended 30 June 2012. At 30 June 2012 the trustees held no shares in PGC or HNZ for these executives. No expense is recognised in relation to these shares as the cost was borne by PGC. 38 Events after the reporting date There have been no material events after the reporting date that would affect the interpretation of the financial statements or the performance of the Group. 56 | FINANCIAL STATEMENTS – AudIT rEpOrT Heartland New Zealand Limited 43 8.0 AudIT rEpOrT Independent auditor’s report To the shareholders of Heartland New Zealand Limited Report on the company and group financial statements We have audited the accompanying financial statements of Heartland New Zealand Limited (the “company”) and the group, comprising the company and its subsidiaries, on pages 17 to 56. The financial statements comprise the statements of financial position as at 30 June 2012, the statements of comprehensive income, changes in equity and cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information, for both the company and the group. Directors' responsibility for the company and group financial statements The directors are responsible for the preparation of company and group financial statements in accordance with generally accepted accounting practice in New Zealand and International Financial Reporting Standards that give a true and fair view of the matters to which they relate, and for such internal control as the directors determine is necessary to enable the preparation of company and group financial statements that are free from material misstatement whether due to fraud or error. Auditor’s responsibility Our responsibility is to express an opinion on these company and group financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing (New Zealand). Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the company and group financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the company and group financial statements. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the company and group’s preparation of the financial statements that give a true and fair view of the matters to which they relate in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company and group's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates, as well as evaluating the presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Our firm has also provided other services to the company and group in relation to general accounting services. Subject to certain restrictions, partners and employees of our firm may also deal with the company and group on normal terms within the ordinary course of trading activities of the business of the company and group. These matters have not impaired our independence as auditor of the company and group. The firm has no other relationship with, or interest in, the company and group. 44 hEArTLANd NEw zEALANd LIMITEd ANNuAL rEpOrT 2012 | 57 8.0 AudIT rEpOrT continued Opinion In our opinion the financial statements on pages 17 to 56:    comply with generally accepted accounting practice in New Zealand; comply with International Financial Reporting Standards; give a true and fair view of the financial position of the company and the group as at 30 June 2012 and of the financial performance and cash flows of the company and the group for the year then ended. Report on other legal and regulatory requirements In accordance with the requirements of sections 16(1)(d) and 16(1)(e) of the Financial Reporting Act 1993, we report that:   we have obtained all the information and explanations that we have required; and in our opinion, proper accounting records have been kept by Heartland New Zealand Limited as far as appears from our examination of those records. 28 August 2012 Auckland 58 | AudIT rEpOrT – dIrECTOr dISCLOSurES ANd ExECuTIvE rEMuNErATION 45 9.0 dIrECTOr dISCLOSurES ANd ExECuTIvE rEMuNErATION directors The following persons were directors of the Company and the Company’s subsidiaries during the year ended 30 June 2012. Heartland New Zealand limited J K Greenslade B R Irvine G R Kennedy G R Leech C R Mace B W Mogridge (resigned 28 October 2011) G T Ricketts Non-Independent Director Independent Director Independent Director Independent Director Independent Director Non-Independent Director Independent Director Heartland Financial services limited J K Greenslade BsHl No. 1 limited – BsHl No. 20 limited J K Greenslade Heartland NZ Trustee limited J K Greenslade (appointed 26 July 2011) B R Irvine (appointed 26 July 2011) Heartland Building society J K Greenslade E J Harvey B R Irvine G R Kennedy G R Leech C R Mace B W Mogridge (resigned 28 October 2011) G T Ricketts M A Smith MARAC Finance limited J K Greenslade B R Irvine vPs Parnell limited B R Irvine J K Greenslade (resigned 12 July 2011) vPs Properties limited B R Irvine J K Greenslade (resigned 12 July 2011) CBs Canterbury limited G R Kennedy Canterbury Building society limited G R Kennedy southern Cross Nominees limited G T Ricketts southern Cross Building and Investments limited G T Ricketts PGG Wrightson Finance limited B R Irvine (appointed 31 August 2011) J K Greenslade (appointed 31 August 2011) Interests Register The following are the entries in the Interests Register of the Company and the Company’s subsidiaries made during the year ended 30 June 2012. Indemnification and Insurance of directors The Company has given indemnities to, and has effected insurance for, directors of the Company and the Company’s subsidiaries to indemnify and insure them in respect of any liability for, or costs incurred in relation to, any act or omission in their capacity as directors, to the extent permitted by the Companies Act 1993. The cost of the insurance premiums to the Company and the Company’s subsidiaries for the year was $63,480.80. hEArTLANd NEw zEALANd LIMITEd ANNuAL rEpOrT 2012 | 59 9.0 dIrECTOr dISCLOSurES ANd ExECuTIvE rEMuNErATION continued share dealings by directors Details of individual directors’ share dealings as entered in the Interests Register of the Company under Section 148(2) of the Companies Act 1993 during the year ended 30 June 2012 are as follows. B R Irvine No. of shares Class of shares Nature of Relevant Interest Acquisition/ disposal Consideration date of Acquisition/ disposal 4,023,012 Ordinary Non-beneficial 1,677,444 Ordinary Non-beneficial 28,736 Ordinary Beneficial 1,985,860 Ordinary Non-beneficial Ordinary Ordinary Ordinary Ordinary Non-beneficial Non-beneficial Non-beneficial Non-beneficial Acquisition Acquisition Acquisition Acquisition Acquisition Disposal Disposal Disposal Nil Nil $15,000 29 July 2011 August 2011 31 August 2011 $999,872 October – December 2011 Nil Nil Nil Nil 8 March 2012 8 March 2012 8 March 2012 8 March 2012 14,072 1,460 5,707 5,633 C R Mace No. of shares Class of shares Nature of Relevant Interest Acquisition/ disposal Consideration date of Acquisition/ disposal 4,023,012 Ordinary Non-beneficial 1,677,444 Ordinary Non-beneficial 28,736 Ordinary Beneficial Acquisition Acquisition Acquisition Nil Nil $15,000 29 July 2011 August 2011 31 August 2011 G R kennedy No. of shares Class of shares Nature of Relevant Interest Acquisition/ disposal Consideration date of Acquisition/ disposal 4,023,012 Ordinary Non-beneficial 1,677,444 Ordinary Non-beneficial 28,736 28,736 Ordinary Ordinary Beneficial Beneficial 100,000 Ordinary Non-beneficial 148,560 Ordinary Non-beneficial 100,000 Ordinary Non-beneficial 59,242 40,758 50,000 Ordinary Ordinary Ordinary Non-beneficial Non-beneficial Non-beneficial Acquisition Acquisition Acquisition Acquisition Disposal Disposal Disposal Disposal Disposal Disposal Nil Nil $15,000 $15,000 $50,000 $71,808 $47,000 $29,810 $28,068 $25,605 29 July 2011 August 2011 31 August 2011 31 August 2011 22 November 2011 5 December 2011 – 4 January 2012 21 December 2011 9 February 2012 12 April 2012 27 June 2012 G R leech No. of shares 28,736 Class of shares Ordinary Nature of Relevant Interest Acquisition/ disposal Consideration date of Acquisition/ disposal Beneficial Acquisition $15,000 31 August 2011 60 | dIrECTOr dISCLOSurES ANd ExECuTIvE rEMuNErATION G T Ricketts No. of shares Class of shares Nature of Relevant Interest Acquisition/ disposal Consideration date of Acquisition/ disposal 4,023,012 Ordinary Non-beneficial 1,677,444 Ordinary Non-beneficial 28,736 Ordinary Beneficial Acquisition Acquisition Acquisition Nil Nil $15,000 29 July 2011 August 2011 31 August 2011 J k Greenslade No. of shares 28,736 Class of shares Ordinary Nature of Relevant Interest Acquisition/ disposal Consideration date of Acquisition/ disposal 1,985,860 Ordinary Non-beneficial Beneficial Acquisition Acquisition $15,000 31 August 2011 $999,872 October – December 2011 30,017 Ordinary Non-beneficial Disposal Nil 7 February 2012 General Notice of disclosure of Interest in the Interests Register E J Harvey in his capacity as a director of Heartland Building Society (being a subsidiary of Heartland New Zealand Limited) made the following entry. Appointment as a director of Ballance Agri-Nutrients Limited on 1 February 2012. directors’ Relevant Interests Set out in the table below are the Heartland New Zealand Limited shares in which each director of the Company had a relevant interest as at 30 June 2012. At 30 June 2012 J K Greenslade B R Irvine G R Kennedy G R Leech C R Mace G T Ricketts Beneficial 571,979 93,236 449,496 172,451 12,285,439 12,285,439 Non-Beneficial 2,017,003 7,687,588 7,285,618 245,264 5,700,456 5,700,456 hEArTLANd NEw zEALANd LIMITEd ANNuAL rEpOrT 2012 | 61 9.0 dIrECTOr dISCLOSurES ANd ExECuTIvE rEMuNErATION continued directors’ Remuneration The total remuneration received by each director who held office in the Company and the Company’s subsidiaries during the year ended 30 June 2012 was as follows. director B R Irvine B W Mogridge (retired on 28 October 2011) C R Mace E J Harvey G R Kennedy G R Leech G T Ricketts M A Smith Remuneration $162,500 $30,000 $88,125 $90,000 $92,500 $95,000 $85,000 $80,000 The total remuneration paid was $723,125. Executive directors and employees acting as directors do not receive directors’ fees. The total remuneration of the executive director was as follows. J K Greenslade $1,158,739 executive Remuneration The number of employees of the Company and the Company’s subsidiaries (including former employees), other than directors, who received remuneration, including non-cash benefits, in excess of $100,000 for the year ended 30 June 2012 is set out in the remuneration bands detailed below. Remuneration $100,000 to $110,000 $110,000 to $120,000 $120,000 to $130,000 $130,000 to $140,000 $140,000 to $150,000 $150,000 to $160,000 $160,000 to $170,000 $170,000 to $180,000 $180,000 to $190,000 $190,000 to $200,000 $200,000 to $210,000 $210,000 to $220,000 $230,000 to $240,000 $240,000 to $250,000 $250,000 to $260,000 $270,000 to $280,000 $320,000 to $330,000 $340,000 to $350,000 $360,000 to $370,000 $390,000 to $400,000 $450,000 to $460,000 $490,000 to $500,000 $510,000 to $520,000 $600,000 to $610,000 Number 7 14 11 9 7 3 4 3 2 3 1 3 2 1 1 1 1 1 1 1 1 1 2 1 62 | dIrECTOr dISCLOSurES ANd ExECuTIvE rEMuNErATION – ShArEhOLdEr INFOrMATION 10.0 ShArEhOLdEr INFOrMATION spread of shares Set out in the table below are details of the spread of shareholders of the Company as at 14 August 2012. size of Holding 1–1,000 shares 1,001–5,000 shares 5,001–10,000 shares 10,001–50,000 shares 50,001–100,000 shares 100,001 shares and over ToTAl Number of shareholders Total Number of shares % of Issued shares 1,077 2,341 1,329 2,152 475 327 7,701 645,278 6,029,517 9,810,590 49,295,635 33,348,064 289,574,891 388,703,975 0.166 1.551 2.524 12.682 8.579 74.498 100.000 Twenty largest shareholders Set out below are details of the 20 largest shareholders of the Company as at 14 August 2012. Rank shareholder Harrogate Trustee Limited 1 Accident Compensation Corporation 2 Philip Maurice Carter 3 PGG Wrightson Limited 4 Oceania & Eastern Limited 5 HSBC Nominees (New Zealand) Limited 6 Gould Holdings Limited 7 AMP Investment Strategic Equity Growth Trust Fund 8 National Nominees New Zealand Limited 9 Citibank Nominees (NZ) Limited 10 Heartland Trust 11 FNZ Custodians Limited 12 Jarden Custodians Limited 13 New Zealand Superannuation Fund Nominees Limited 14 Leveraged Equities Finance Limited 15 NZGT Nominees Limited 16 Loris Equities Limited 17 Forsyth Barr Custodians Limited 18 ASB Nominees Limited 19 20 Maxima Investments Limited ToTAl FoR TWeNTy lARGesT sHAReHoldeRs Total shares % of Issued shares 36,360,011 28,563,832 20,973,492 13,333,333 12,285,439 8,225,145 7,417,427 7,310,410 6,640,511 6,328,545 5,365,007 4,687,715 4,500,000 3,776,134 3,094,818 3,093,345 2,946,535 2,892,089 2,321,006 2,066,118 182,180,912 9.354 7.348 5.396 3.430 3.161 2.116 1.908 1.881 1.708 1.628 1.380 1.206 1.158 0.971 0.796 0.796 0.758 0.744 0.597 0.532 46.869 substantial security Holders Set out below are the names and shareholdings of the Substantial Security Holders in the Company as at 14 August 2012. Name Accident Compensation Corporation, Nicholas Bagnall, Blair Tallott, Paul Robertshawe and Ian Graham Blair Cooper (includes ACC’s relevant interest) Blair Tallott (includes ACC’s relevant interest) Harrogate Trustee Limited and Greg Raymond Tomlinson Philip Maurice Carter Number of shares 27,253,564 28,998,690 29,008,010 34,510,011 20,973,492 Class of shares Ordinary Ordinary Ordinary Ordinary Ordinary The total number of Heartland New Zealand Limited ordinary shares on issue as at 14 August 2012 was 388,703,975. hEArTLANd NEw zEALANd LIMITEd ANNuAL rEpOrT 2012 | 63 11.0 OThEr INFOrMATION NZX Waivers Set out below is a summary of all waivers granted to the Company by NZX Limited, or relied on by the Company, within the 12 month period preceding the date two months before the publication of this Annual Report. PWF Acquisition – June 2011 The Company was granted a waiver from the requirement in NZSX Listing Rule 9.2.1 to obtain shareholder approval to enter into certain transactions in connection with the proposed acquisition by Heartland Building Society (HBS) from PGG Wrightson Limited (PGW) of all of the shares in PGG Wrightson Finance Limited (PWF). Capital Raising – July 2011 The Company was granted a waiver from NZSX Listing Rule 7.3.5(b) to enable it to proceed with a placement of shares to each of PGC ($10 million in value) and PGW ($10 million in value), in connection with the proposed acquisition by HBS from PGW of PWF. donations Donations of $45,000 were made during the year ended 30 June 2012 by the Group via the Heartland Trust, from which donations were made to various organisations. 64 | OThEr INFOrMATION – dIrECTOry 12.0 dIrECTOry Heartland New Zealand limited Heartland Building society Chairman directors Bruce Irvine Jeffrey Greenslade Managing Director Director Graham Kennedy Director Gary Leech Christopher Mace Director Director Geoffrey Ricketts Head of Retail & Consumer General Counsel Head of Business and Operations executives Chris Flood Michael Jonas James Mitchell Mark Mountcastle Chief Risk Officer Simon Owen Will Purvis Sarah Selwood Craig Stephen Chief Financial Officer Head of Rural Head of Human Resources Head of Treasury and Strategy Registered office 75 Riccarton Road Riccarton Christchurch 8011 PO Box 8623 Riccarton Christchurch 8440 T 0508 432 785 E info@heartland.co.nz W www.heartland.co.nz Chairman directors Bruce Irvine Jeffrey Greenslade Managing Director Director John Harvey Director Graham Kennedy Gary Leech Director Christopher Mace Director Director Geoffrey Ricketts Director Michelle Smith Head of Retail & Consumer General Counsel Head of Business and Operations executives Chris Flood Michael Jonas James Mitchell Mark Mountcastle Chief Risk Officer Simon Owen Will Purvis Sarah Selwood Craig Stephen Chief Financial Officer Head of Rural Head of Human Resources Head of Treasury and Strategy Registered office 75 Riccarton Road Riccarton Christchurch 8011 PO Box 8623 Riccarton Christchurch 8440 T 0508 432 785 E info@heartland.co.nz W www.heartland.co.nz Auditors kPMG KPMG Centre 18 Viaduct Harbour Avenue Auckland 1140 T 09 367 5800 share Registry link Market services limited 138 Tancred Street Ashburton 7740 T 03 308 8887 F 03 308 1311 E enquiries@linkmarketservices.com W www.linkmarketservices.com hEArTLANd NEw zEALANd LIMITEd ANNuAL rEpOrT 2012 | 65 www.heartland.co.nz © Heartland new Zealand limited 2012 

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