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