Heartland Group Holdings Limited Annual Report 2013

Plain-text annual report

Annual Report 2013 Contents 1.0 Introducing Heartland Bank 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 9.0 Director Disclosures and Executive Remuneration 10.0 Shareholder Information 11.0 Other Information 12.0 Executives and Directory PG 4 7 8 12 16 19 20 62 64 68 70 71 1.0 Introducing Heartland Bank On 17th December 2012, we achieved our key objective of bank registration. Heartland Bank became the only New Zealand operated, controlled and managed banking group with a parent company listed on the New Zealand stock exchange. We are a bank with a rich kiwi heritage and a strong commitment to New Zealand – this is our home. We are dedicated to the success of the productive sector, small to medium enterprises, farmers and families the length of New Zealand. It is amongst these heartland communities, critical to the economic prosperity of our nation, that we want to be of service. Our name symbolises our close connection with our communities, our customers and our land. Demonstrating Our Difference We want to be known as New Zealand’s specialist bank. By delivering specialised, best-in-breed products that dominate our chosen niches, we will help our customers where it really matters. When other banks offer standard rural mortgages or business loans secured on property, we’ve developed loans secured against livestock, or against the plant and machinery assets being purchased. Thanks to our motor vehicle finance, over 16,000 New Zealanders and over 6,500 businesses purchased their own car last year. So whether it’s a retiree looking to make their savings work hard, a farmer managing the pressures of seasonal income, or a small business owner wanting easier access to their money, we offer stand-out products designed to make it easier for them. This strategy is already working for us. Over the last financial year our specialist product focus resulted in: • Our newly launched Business Call Account attracting over $115m in deposits • Invoice Finance growth of over 70% • Livestock Finance and Rural Seasonal Capital growing by 10% and 9% respectively • Motor Vehicle Finance growth of nearly 14% • Net Operating Income growth of $12m or 13% Our products and commitment to service excellence have already gained independent endorsement from financial products research company, Canstar. The Heartland Saver, Heartland Everyday Account and Heartland Business Call Account, have all been awarded the Five Star ‘Outstanding Value’ award in their category. Strong communities are the backbone of our productive economy, and locally, our people are at the heart of the communities we serve. From school sports to small businesses, from farming to artists, we are committed to strengthening our communities and developing the leaders of the future. We are Heartland Bank – proud to be different. “Heartland will continue to be New Zealand focussed and is part of a new breed of banks” PG 4 / Annual Report 2013 / Heartland New Zealand Limited Our People Heartland New Zealand Limited / Annual Report 2013 / PG 5 Supporting our Communities “ Rugby at MAGS has challenged me to not only be the best I can but through rugby it has taught me life skills of commitment, perseverance and the meaning of team work. The rugby environment has also challenged me to be a better person and continually asks me to contribute to the excellence that is demanded by all the players. It has helped me learn about being focussed at all times and how to cope with pressure.” Mount Albert Grammar School (MAGS), 1st XV “The Citizens Club is a lovely place to come. Everything is here for us, I don’t know what I’d do without it.” Mrs J Tait (patron) Tauranga Citizens Club “ Playing rugby means a great deal to our school and our community. Education and student achievement is at the forefront of the work we are doing at Tangaroa College and for the boys that are in the 1A 1st XV, the rugby programme contributes and enhances the education and opportunity for student achievement.” Ngaire Ashmore, Principal, Tangaroa College, Auckland Co-Educational Schools 1st XV Champions, 2013 “ Knowing that our money is being looked after is important to us. Feeling that we are being looked after too is a wonderful bonus.” Mr & Mrs Horan, Heartland Bank Customers PG 6 / Annual Report 2013 / Heartland New Zealand Limited 2.0 Highlights Highlights for the Year • Bank registration achieved. • Net Operating Income and lending increased across the three core areas of Business, Rural and Consumer. • Dividend policy set, interim dividend of 2.0 cents per share paid. • Final dividend of 2.5 cents per share announced. • • Investment grade credit rating affirmed. Implementation of new strategy for non-core legacy property asset portfolio. • Real Estate Credit Limited agreement terminated. • Board strengthened with new appointments. Financial year overview 30 June 2013 30 June 2012 Net Profit Before Tax Net Profit After Tax1 Total assets Net finance receivables Total equity Equity ratio $9.4m $6.9m $2504.6m $2010.4m $370.5m 14.8% $20.3m $23.6m $2,348.1m $2078.3m $374.8m 16.0% 1 As a result of the change in non-core property strategy, a one-off non-cash write down of $18m (pre-tax) was incurred, and pre-paid expenses of $6.1m were written off. Adjusted NPAT (calculated as Net Profit After Tax plus one-off non-cash expenses incurred as a result of the change in strategy) was $24.4m. Heartland New Zealand Limited / Annual Report 2013 / PG 7 3.0 Chairman and Managing Director’s Report Geoffrey Ricketts Chairman Jeffrey Greenslade Managing Director This has been a significant year for Heartland. As well as realising our key objective – to become a New Zealand owned and controlled banking group with its parent company listed on the NZX1 – we have also undertaken a significant number of strategic initiatives to consolidate and build a pathway to the future. Breakdown of financial performance • For the full year ended 30 June 2013, we announced a net profit after tax (NPAT) of $6.9m. This was in line with expectation, but down $16.7m from the $23.6m for the previous year ended 30 June 2012. The result was impacted by measures taken with the non-core property asset portfolio that we announced in June 2013 and are detailed on page 9. If this adjustment had not been made then Adjusted NPAT would have been $24.4m (Adjusted NPAT is calculated by adding back one-off non-cash expenses incurred as a result of the change in strategy to the headline result). The original forecast NPAT guidance for 2013 was $21-$24m. Net profit before tax (NPBT) was $9.4m for the full year ended 30 June 2013, down from $20.3m NPBT for the previous year ended 30 June 2012. Adjusted NPBT for the year ended 30 June 2013 was $33.7m, an increase of $13.4m over the previous year ended 30 June 2012 and illustrating the improvements in underlying business performance. Adjusted NPBT is calculated by excluding the one-off expenses of $24.3m (pre-tax) incurred as a result of the change in strategy with respect to the non-core legacy property asset portfolio (which included termination of the management agreement with Real Estate Credit Limited (RECL) announced 5 June 2013) (Change in Strategy)2. Earnings Per Share was $0.02 based on weighted average shares on issue. Balance sheet3 Heartland’s total assets increased by $156.5m or 7% over the full year ended 30 June 2013 (from $2.3bn at 30 June 2012 to $2.5bn at 30 June 2013). There was a $76.1m increase in the “core” business net finance receivables (Business, Rural and Consumer channels). However, due to a reduction in non-core assets of legacy property and retail mortgages, net finance receivables reduced in total by $67.9m (from $2.1bn at 30 June 2012 to $2.0bn at 30 June 2013). • Cash and cash equivalents and investments increased by $225.5m (from $114.0m at 30 June 2012 to $339.5m at 30 June 2013) reflecting a change to holding higher levels of liquid assets to support ongoing liquidity targets. • Borrowings, being largely retail deposits, increased by $158.1m (from $1.9bn at 30 June 2012 to $2.1bn at 30 June 2013), funding asset growth. Heartland’s Net Tangible Assets (NTA) decreased by $12.5m over the full year ended 30 June 2013 (from $343.7m at 30 June 2012 to $331.2m at 30 June 2013) due to the one-off non-cash write-down in property assets by $18m (pre-tax) on the Change in Strategy. On a per share basis NTA was $0.85 at 30 June 2013 compared to $0.88 at 30 June 2012. Net Operating Income Net Operating Income (NOI) was $106.9m for the full year ended 30 June 2013, an increase of $12m or 13% from the previous year ended 30 June 2012. The increase in NOI was attributable to lower cost of funds and improved product mix. Costs Operating costs were $70.3m for the full year ended 30 June 2013, an increase of $4.8m from the previous year ended 30 June 2012. However, operating costs for the full year PG 8 / Annual Report 2013 / Heartland New Zealand Limited 1 Heartland Bank became a registered bank on 17 December 2012, and converted to a company on 31 January 2013. The corporatisation process included a change in Heartland Bank’s name from its previous name “Heartland Building Society” to its current name “Heartland Bank Limited”. 2. For details of the Change in Strategy, see Heartland’s market announcement of 5 June 2013. 3. Heartland Trust and CBS Canterbury Charitable Trust were deconsolidated on 1 July 2012. ended 30 June 2013 include $6.1m of prepaid expenses written-off as a result of the Change in Strategy4. Adjusted operating costs (calculated by excluding expenses related to the Change in Strategy) were down $1.5m (2%) from the full year ended 30 June 2012. The operating expense ratio was 66% for the full year ended 30 June 2013, a reduction from 69% for the previous year ended 30 June 2012. The adjusted operating expense ratio (calculated by excluding the write-off of the expenses referred to above) was 60% for the full year ended 30 June 2013. Impairments and revaluations of investment properties Impaired asset expense was $22.5m for the full year ended 30 June 2013, an increase of $16.9m from the previous year ended 30 June 2012. This increase was primarily in the Non-Core Property division and included an impairment expense of $12.9m made as part of the Change in Strategy5. Impairments remained low in the core areas of Business, Rural and Consumer lending. As part of the Change in Strategy a $5.1m fair value adjustment was also made against investment properties5. Asset quality continues to improve with net impaired, restructured and past due loans over 90 days standing at $49.0m or 2.4% of net finance receivables (Net Impairment Ratio) as at 30 June 2013; down from $90.5m (or 4.4% of net finance receivables) as at 30 June 2012. The Non- Core Property book made up $31.2m of the impaired, restructured and past due loans at 30 June 2013. The Net Impairment Ratio on the core business (excluding the Non-Core Property book) was 0.9% as at 30 June 2013, compared to 1.3% as at 30 June 2012. Funding and liquidity Deposits increased from $1.6bn at 30 June 2012 to $1.8bn at 30 June 2013. This increase was driven by a positive customer reaction to the achievement of bank registration and subsequent product initiatives in retail deposit products of Heartland Bank Limited (Heartland Bank) (Heartland’s principal operating subsidiary). The liquidity of Heartland Bank was $578.0m as at 30 June 2013, which consisted of cash, liquid assets and unutilised available funding lines. This included additional liquidity held pending the $106m repayment of NZX Debt Market quoted bonds on 15 July 2013. The liquidity mix continues to evolve, with increased holdings of cash and liquid assets replacing unutilised or cancelled bank funding lines. Investment grade rating reaffirmed On 16 May 2013 Standard & Poor’s affirmed Heartland Bank’s investment grade credit rating of BBB- and as a result of its assessment of New Zealand’s economic vulnerabilities changed the outlook to ‘negative’ from ‘stable’. Business Performance – Heartland’s Core Business Divisions Business Primarily driven by lower cost of funds, NOI increased to $25.7m, up $4.7m (22%) from the previous year ended 30 June 2012. The business receivables book increased by $8.9m to $549.2m during the year ended 30 June 2013. Continued growth is expected in line with credit growth expectations. Rural NOI increased to $22.9m, up $3.7m (20%) from the previous year ended 30 June 2012. This was driven by the inclusion of a full twelve months earnings from the PGG Wrightson Finance Limited (PWF) book as well as lower cost of funds. Due to the settlement of $23.2m of recourse loans by PGG Wrightson Limited under a guarantee provided to Heartland Bank as part of the acquisition of PWF, the rural receivables book contracted from $478.6m to $456.6m during the full year ended 30 June 2013. Excluding these loans, the Rural book increased slightly over the year despite the impact of the recent drought resulting in lower demand in livestock trading. Retail & Consumer Growth in motor vehicle lending, along with lower cost of funds, resulted in an increase of NOI to $50.2m, up $5.1m (11%) from the previous year ended 30 June 2012. The Retail & Consumer receivables book was flat over the full year ended 30 June 2013, with motor vehicle receivables growth of $89.0m (14%) offset by an $88.4m (27%) reduction in the residential mortgage book. The reduction in the residential mortgage book reflects Heartland Bank’s strategy to focus on its core activities in Business, Rural and Consumer lending, replacing lower margin business with higher margin business which offers a better risk/return. As previously announced, Heartland Bank has entered into an exclusive arrangement with Kiwibank under which Heartland Bank customers can now access Kiwibank’s market leading residential mortgage products. Non-core Business Property Total legacy non-core property assets were $107.4m at 30 June 2013, a reduction of $52.7m (33%) from 30 June 2012. The non-core property assets were made up of net receivables of $49.1m and investment properties of $58.3m. The reduction included the impact of the one-off non-cash write down of $18m (pre-tax) due to the Change in Strategy. The new strategy provides Heartland with greater flexibility to manage the portfolio and to best balance an exit strategy with maximising shareholder value. Heartland is confident earnings will now normalise, and no longer be impacted by the performance of the non-core legacy property assets. Investment properties held on balance sheet increased by $2.8m during the full year ended 30 June 2013. This increase was the result of additional assets received as part of the termination of the RECL management agreement, offset by the $5.1m fair value adjustment made as part of the Change in Strategy. Non-core property assets fell a further $8.9m in July 2013 through realisations, subsequent to balance date pursuant to the Change in Strategy. 4 Specifically, the termination of the RECL management agreement as part of that Change in Strategy. 5. As part of the one-off non-cash write down in property assets by $18m (pre-tax) on the Change in Strategy. Heartland New Zealand Limited / Annual Report 2013 / PG 9 3.0 Chairman and Managing Director’s Report Continued Final Dividend The directors of Heartland have resolved to pay a final dividend for the full year ended 30 June 2013 of 2.5 cents per share. This dividend will be paid on 4 October 2013 to shareholders who were on Heartland’s register at 5.00pm on 20 September 2013 (the Record Date). This dividend will be fully imputed. The Dividend Reinvestment Plan announced on 23 April 2013 (DRP) was available, and a discount of 2.5% applied (that is, the strike price under the DRP was 97.5% of the volume weighted average sale price of Heartland shares over the five trading days following the Record Date)6. Participation in the DRP was entirely optional, and shareholders who wished to participate in the DRP for any future dividend payments made a participation election in one of the ways specified in the DRP offer document. The last date of receipt for a participation election from a shareholder who wished to participate in the DRP was 20 September 2013. The Future We have now completed the ‘start-up’ phase of our strategy and are entering a phase of ‘Business As Usual’ environment where we also complete the alignment of activity and investment with our strategy. Our strategy is simple. We want to be known as New Zealand’s specialist bank. We will continue to be dedicated to the drivers of prosperity and productivity, with a balanced focus across our key sectors of Business, Rural and Consumer. Within these sectors we will apply our agility and ability to identify niche areas in which we can lead with superior, high-income, low contestability products – products that must support the essential needs of productive New Zealanders. Our result for the full year to 30 June 2013 demonstrates that the strategic model works. We have made a good start, focusing on our key areas of expertise – processing, distribution and products – but to build on this foundation we must improve our product mix in order to realise a No.1. or No.2. position in these markets. Targeting growth in high value products will offset our expectation that credit growth will remain largely constrained. Alongside changes and enhancements in our business performance, we also plan further improvements in our operational performance by further reductions in our cost of funds and operating cost. However, we do expect this to be nominal and more relative to a cost/income ratio as the mergers of our legacy operating systems reach fruition. Profit guidance for the next financial year (ending 30 June 2014) is for forecast NPAT of $34m-$37m. Geoffrey Ricketts Chairman Jeffrey Greenslade Managing Director 20 September 2013 6. For the full details of the DRP and the Strike Price calculation, refer to Heartland’s market announcement of 23 April 2013 which included the DRP offer document prepared as at 5 April 2013. PG 10 / Annual Report 2013 / Heartland New Zealand Limited Heartland New Zealand Limited / Annual Report 2013 / PG 11 4.0 Board of Directors As at the date of this Annual Report, the directors of Heartland New Zealand Limited are as follows: Gary Leech BCom, FCA, AF Inst D, FNZTA Christopher Mace CNZM Graham Kennedy J.P., BCom, FCA, ACIS, ACIM, AF Inst D Director Director Director Gary has 40 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. Chris is an Auckland based businessman and company director with experience in the New Zealand and Australian business environments. 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. Graham has 40 years’ experience as a chartered accountant and business advisor and is now 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. Graham has also been actively involved in a number of community-based charitable organisations for many years. PG 12 / Annual Report 2013 / Heartland New Zealand Limited Geoffrey Ricketts CNZM, LLB (Hons), F Inst D Jeffrey Greenslade LLB Gregory Tomlinson AME, IoD Chairman Managing Director Director Geoff is a commercial lawyer, company director and investor with wide experience in the New Zealand and Australian business environments. He holds a number of directorships and was Chairman of Southern Cross Building Society leading up to the merger with MARAC Finance Limited and CBS Canterbury. Jeff has over 20 years’ experience as a senior banking executive, and is responsible for the strategy and operational delivery of Heartland Bank Limited. He joined MARAC Finance Limited as Chief Executive Officer in 2009, and was appointed to its Board in December of that year. Greg is a Christchurch based businessman and investor with experience in a variety of New Zealand industries. One of the original pioneers of the mussel industry in Marlborough, he has also established, and held directorships on the boards of, a number of New Zealand based businesses, including a private equity company focusing on investment opportunities within New Zealand. Heartland New Zealand Limited / Annual Report 2013 / PG 13 As at the date of this Annual Report, the Heartland Bank Limited Board includes J G Greenslade, G T Ricketts and G R Kennedy, plus the following directors who, other than M D Jonas (who is an executive director), are independent directors: Geoffrey Ricketts CNZM, LLB (Hons), F Inst D Bruce Irvine BCom, LLB, FCA, AF Inst D, FNZIM Nicola Greer MCom Chairman Chairman Director Bruce is Chairman of Heartland Bank 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. Nicola has extensive experience in the banking and finance sector, both in New Zealand and overseas. Her career to date includes senior positions at ANZ Bank (New Zealand and Australia), Citibank and Goldman Sachs International, where she worked in financial markets and asset and liability management. Geoff is a commercial lawyer, company director and investor with wide experience in the New Zealand and Australian business environments. He holds a number of directorships and was Chairman of Southern Cross Building Society leading up to the merger with MARAC Finance Limited and CBS Canterbury. 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 Bank Limited. 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 40 years’ experience as a chartered accountant and business advisor and is now 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. Graham has also been actively involved in a number of community-based charitable organisations for many years. Pictured (from left) Michael Jonas, Graham Kennedy, Richard Wilks, John Harvey, Bruce Irvine, Nicola Greer, Geoffrey Ricketts, Jeffrey Greenslade. PG 14 / Annual Report 2013 / Heartland New Zealand Limited John Harvey BCom, CA Director Michael Jonas LLB Director Richard Wilks BCom, CA Director John has considerable financial services experience and 36 years in the professional services industry, including 23 years as a partner of PricewaterhouseCoopers. Since his retirement from PricewaterhouseCoopers in 2009, John has pursued a career as an independent director of a number of companies. Michael has over 25 years’ experience as a banking and finance lawyer, having been a partner in several of New Zealand’s leading law firms (including Bell Gully and Chapman Tripp). He was appointed as Group General Counsel for Heartland New Zealand Limited upon its creation in 2011 (having held that position with predecessor entities since February 2010). Richard has extensive experience across a range of industries including the banking and finance sector. He recently retired from a career as a senior corporate banking professional, which included senior leadership roles with ANZ National Bank, Standard Chartered Bank and Citibank. As at 30 June 2013, the Directors of Heartland New Zealand Limited were as follows: Bruce Irvine Chairman (resigned 27 August 2013) Jeffrey Greenslade Managing Director Graham Kennedy Gary Leech Christopher Mace Geoff Ricketts Director Director Director Director Gregrey Tomlinson Director As at 30 June 2013, the gender composition of Heartland New Zealand Limited’s Directors and Officers was as follows: Positions Directors Officers Female 0 (0%) Male 7 (100%) 1 (12.5%) 7 (87.5%) Heartland New Zealand Limited / Annual Report 2013 / PG 15 5.0 Corporate Governance The Board and management of Heartland New Zealand Limited (the Company) 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 2013. 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 2013. 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 of Directors 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 2013, the Board met 11 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. As at 30 June 2013, the Board comprised seven directors, being a non-executive Chairman, the Managing Director and five non-executive directors.1 1 With the change in board structure on 27 August 2013, the Board now comprises six directors, being a non-executive Chairman, the Managing Director and four non-executive directors. PG 16 / Annual Report 2013 / Heartland New Zealand Limited 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 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 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. As at 30 June 2013, the Board determined that G R Kennedy, B R Irvine, G R Leech, C R Mace and G T Ricketts were the independent directors. Board Performance Assessment The Board undertakes a regular review of its own, its committees’ and individual directors’ performance. This is to ensure 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 during May and June 2013. 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 As at 30 June 2013, the members of the Audit Committee were G R Leech (Chairman), B R Irvine, G R Kennedy and C Mace.2 The role of the Audit Committee is to assist the Board in providing 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. To do this, the Committee will provide oversight of: • • • • accounting policies and professional accounting requirements internal and external audit functions all statutory regulatory requirements the internal control environment As at 30 June 2013, the Board determined that G R Leech, B R Irvine and G R Kennedy each met the criteria for being a “financial expert” in accordance with the Audit Committee’s charter. Governance and Remuneration Committee As at 30 June 2013, the members of the Governance and Remuneration Committee were G T Ricketts (Chairman), B R Irvine and G R Leech.3 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, identifying prospective directors, developing succession plans for the Board and making recommendations to the Board accordingly oversee a formal and transparent method of nominating and appointing directors to the Board oversee capital management in the Company, including the optimal capital structures and levels ensure that the Company maintains best practice corporate governance • • • • Risk Committee As at 30 June 2013, the members of the Risk Committee were E J Harvey (Chairman), G R Kennedy, C R Mace and R A Wilks.4 The Risk Committee is a committee of the Board of Heartland Bank Limited 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 strategic risks are governed by the full Board with input from all committees • ensure that all policy and decisions are made in accordance with the Group’s corporate values and guiding principles 2 With the change in board structure on 27 August 2013, the members of the Audit Committee are now G R Kennedy (Chairman), G R Leech and G T Ricketts. 3 With the change in company structure on 27 August 2013, the members of the Governance and Remuneration Committee are now G T Ricketts (Chairman), B R Irvine (who sits on the Committee but is not a member of the Heartland New Zealand Limited Board) and G R Tomlinson. 4 With the change in company structure on 27 August 2013, the members of the Risk Committee are now R A Wilks (Chairman), N J Greer, E J Harvey, G R Kennedy and C R Mace (who sits on the Committee but is not a member of the Heartland Bank Limited Board). Heartland New Zealand Limited / Annual Report 2013 / PG 17 5.0 Corporate Governance Continued 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. 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 a review in July 2013, the directors’ fees were set as follows. Board – Chair $125,000 Directors – $75,000 Audit Committee – Chair $7,500 Audit Committee – Members $7,500 Risk Committee – Chair $20,000 Risk Committee – Members $10,000 Governance and Remuneration Committee – Chair $10,000 Governance and Remuneration Committee – Members $5,000 In addition, the Chairman of Heartland Bank Limited receives $125,000 per annum and the independent directors of Heartland Bank Limited, E J Harvey, N J Greer and R A Wilks, 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. PG 18 / Annual Report 2013 / Heartland New Zealand Limited 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 2013 and the financial performance and cash flows for the year ended 30 June 2013. 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 21 to 61 for issue on 26 August 2013. For and on behalf of the Board Geoffrey Ricketts Chairman Jeffrey Greenslade Managing Director Heartland New Zealand Limited / Annual Report 2013 / PG 19 7.0 Financial Statements PG 20 / Annual Report 2013 / Heartland New Zealand Limited 26 to 61 Heartland New Zealand Limited / Annual Report 2013 / PG 21 STATEMENTS OF COMPREHENSIVE INCOMEFor the year ended 30 June 2013Jun 13 Jun 12 Jun 13 Jun 12 NOTE$000 $000 $000 $000 Interest income6206,349205,1483617Interest expense6110,895121,502- - Net interest income95,45483,6463617Operating lease income714,86115,064- - Operating lease expenses79,6879,954- - Net operating lease income5,1745,110- - Lending and credit fee income1,7601,392- -Dividends received- - 15,6051,597Other income84,4994,736170-Net operating income106,88794,88415,8111,614Selling and administration expenses970,34765,5471,2841,365Profit before impaired asset expense and income tax36,54029,33714,527249Impaired asset expense1022,5275,642- - Decrease in fair value of investment properties175,1013,900- - Operating profit8,91219,79514,527249Share of equity accounted investee's profit22504534- - Profit before income tax9,41620,32914,527249Income tax expense / (benefit)112,504(3,277)(214)(303)Profit for the year6,91223,60614,741552OthercomprehensiveincomeCOMPANYGROUPHeartland New Zealand Limited3OthercomprehensiveincomeItems that are or may be reclassified subsequently to profit or loss:Effective portion of changes in fair value of cash flow hedges, net of income tax1,056378- -Net change in available for sale reserve, net of income tax276(103)- - Items that will not be reclassified to profit or loss:Net change in defined benefit reserve, net of income tax462(435)- - Other comprehensive income / (loss) for the year, net of income tax1,794(160)- - Total comprehensive income for the year8,70623,44614,741552Earnings per share from continuing operationsBasic earnings per share132c6cn/an/aDiluted earnings per share132c6cn/an/aAll comprehensive income for the year is attributable to owners of the Group.The notes on pages 8 to 43 are an integral part of these financial statements.Heartland New Zealand Limited326 to 61 PG 22 / Annual Report 2013 / Heartland New Zealand Limited STATEMENTS OF CHANGES IN EQUITYFor the year ended 30 June 2013EmployeeAvailableDefinedShare Benefitsfor salebenefitHedgingRetainedTotalCapitalReserveReserveReserveReserveEarningsEquityNOTE$000 $000 $000 $000 $000 $000 $000 Balance at 1 July 2012192,020- 8(421)(1,010)184,201374,798Total comprehensive income for the yearProfit for the year- - - - - 6,9126,912Other comprehensive income, net of income tax- - 2764621,056- 1,794Total comprehensive income for the year- - 2764621,0566,9128,706Contributions by and distributions to ownersDividends paid14- - - - - (13,591)(13,591)Staff share ownership expense for the year- 629- - - - 629Total transactions with owners- 629- - - (13,591)(12,962)Balance at 30 June 2013192,0206292844146177,522370,542Balance at 1 July 2011137,074- 11114(1,388)160,595296,406Total comprehensive income for the yearProfit for the year- - - - - 23,60623,606Other comprehensive income, net of income tax- - (103)(435)378- (160)Total comprehensive income for the year- (103)(435)37823,60623,446Contributions by and distributions to ownersCapital raising proceeds2857,347- - - - - 57,347GROUPHeartland New Zealand Limited4Transaction costs associated with capital raising(1,402)- - - - - (1,402)Treasury shares acquired(999)- - - - - (999)Total transactions with owners54,946- - - - - 54,946Balance at 30 June 2012192,020- 8(421)(1,010)184,201374,798The notes on pages 8 to 43 are an integral part of these financial statements.Heartland New Zealand Limited426 to 61 Heartland New Zealand Limited / Annual Report 2013 / PG 23 STATEMENTS OF CHANGES IN EQUITYFor the year ended 30 June 2013EmployeeAvailableDefinedShare Benefitsfor salebenefitHedgingRetainedTotalCapitalReserveReserveReserveReserveEarningsEquityNOTE$000 $000 $000 $000 $000 $000 $000 Balance at 1 July 2012342,288-- - - 826343,114Total comprehensive income for the yearProfit for the year- - - - - 14,74114,741Total comprehensive income for the year- - - - - 14,74114,741Contributions by and distributions to ownersDividends paid14- - - - - (13,605)(13,605)Total transactions with owners- - - - (13,605)(13,605)Balance at 30 June 2013342,288- - - - 1,962344,250Balance at 1 July 2011286,343- - - - 274286,617Total comprehensive income for the yearProfit for the year- - - - - 552552Total comprehensive income for the year- - - - - 552552Contributions by and distributions to ownersCapital raising proceeds2857,347- - - - - 57,347Transaction costs associated with capital raising(1,402)- - - - - (1,402)Total transactions with owners55,945- - - - - 55,945COMPANYHeartland New Zealand Limited5Balance at 30 June 2012342,288- - - - 826343,114The notes on pages 8 to 43 are an integral part of these financial statements.Heartland New Zealand Limited526 to 61 PG 24 / Annual Report 2013 / Heartland New Zealand Limited STATEMENTS OF FINANCIAL POSITIONAs at 30 June 2013Jun 13 Jun 12 Jun 13 Jun 12 NOTE$000 $000 $000 $000 AssetsCash and cash equivalents15174,26289,6891,485469Investments16165,22324,327- - Investment properties1758,28755,504- - Finance receivables182,010,3762,078,276- - Operating lease vehicles1932,39534,550- - Current tax assets- 5,635707363Other assets2010,13315,78536317Investment in subsidiaries21- - 342,234342,343Investment in joint venture224,3203,116- - Intangible assets2322,96322,997- - Property, plant and equipment2410,28110,067- - Deferred tax assets2516,3878,14314- Total assets2,504,6272,348,089344,476343,492LiabilitiesBorrowings262,097,5531,939,489- - Current tax liabilities2,859- - - Trade and other payables2733,67333,802226378Total liabilities2,134,0851,973,291226378EquityShare capital28192,020192,020342,288342,288Retained earnings and reserves178,522182,7781,962826Total equity370,542374,798344,250343,114COMPANYGROUPHeartland New Zealand Limited6Total equity and liabilities2,504,6272,348,089344,476343,492The notes on pages 8 to 43 are an integral part of these financial statements.Heartland New Zealand Limited626 to 61 Heartland New Zealand Limited / Annual Report 2013 / PG 25 STATEMENTS OF CASH FLOWSFor the year ended 30 June 2013Jun 13 Jun 12 Jun 13 Jun 12 NOTE$000 $000 $000 $000 Cash flows from operating activitiesInterest received199,279197,1523617Dividends received- - 15,6051,597Operating lease income received11,95813,099- - Proceeds from sale of operating lease vehicles10,7107,932- - Lending, credit fees and other income received6,2596,219155- Net decrease in finance receivables32,908- - - Total cash provided from operating activities261,114224,40215,7961,614Payments to suppliers and employees61,00968,1831,1401,243Interest paid112,820121,742- - Purchase of operating lease vehicles15,61116,905- - Net increase in finance receivables- 20,547- - Taxation paid2,94623144- Total cash applied to operating activities192,386227,4001,2841,243Net cash flows from / (applied to) operating activities3168,728(2,998)14,512371Cash flows from investing activitiesSale of investment property3,194832- - Decrease in investment in subsidiaries- - 809- Total cash provided from investing activities3,194832809- Purchase of office fit-out, equipment and intangible assets2,2563,191- - Net increase in investments 130,6876,496- - Purchase of PGG Wrightson Finance Limited- 24,898- - IiittibidiiCOMPANYGROUPHeartland New Zealand Limited7Increase in investment in subsidiaries- - 70056,000Increase in investment in joint venture700- - - Purchase of investment property- 937- - Total cash applied to investing activities133,64335,52270056,000Net cash flows (applied to) / from investing activities(130,449)(34,690)109(56,000)Cash flows from financing activitiesNet increase in borrowings159,885- - - Increase in share capital- 57,347- 57,347Total cash provided from financing activities159,88557,347- 57,347Dividends paid13,591- 13,605- Purchase of treasury shares- 999- - Transaction costs associated with capital raising- 1,402- 1,402Net decrease in borrowings- 256,399- - Total cash applied to financing activities13,591258,80013,6051,402Net cash flows from / (applied to) financing activities146,294(201,453)(13,605)55,945Net increase / (decrease) in cash held84,573(239,141)1,016316Opening cash and cash equivalents89,689267,187469153Cash impact of business combinations- 61,643- - Closing cash and cash equivalents15174,26289,6891,485469The notes on pages 8 to 43 are an integral part of these financial statements.Heartland New Zealand Limited7PG 26 / Annual Report 2013 / Heartland New Zealand Limited NOTES TO THE FINANCIAL STATEMENTSFor the year ended 30 June 20131Reporting entity2Basis of preparation(a)Statement of compliance(b)Basis of measurement(c)Functional and presentation currency and rounding(d)Estimates and judgements(e)Going concern(f)Comparative information3Significant accounting policies(a)Consolidation of subsidiariesThefinancialstatementspresentedaretheconsolidatedfinancialstatementscomprisingHeartlandNewZealandLimited(Company)anditssubsidiaries and joint venture (Group). TheBankowns100%ofMARACFinanceLimited(MARAC)andPGGWrightsonFinanceLimited(PWF).TheCompanyowns100%ofHeartlandFinancialServicesLimited(HFSL)whichholdsa50%jointventureinterestinMARACJVHoldingsLimited(MJV)withtheNewZealand Automobile Association. Refer to Note 5 - Significant subsidiaries.AllentitieswithintheGroupofferfinancialservicesorarespecialpurposeentities.TheGroupoperatesandisdomiciledinNewZealand.Theregistered office address is 75 Riccarton Road, Christchurch.ThefinancialstatementshavebeenpreparedonagoingconcernbasisafterconsideringtheCompany'sandGroup’sfundingandliquidityposition.Thepreparationoffinancialstatementsrequirestheuseofmanagementjudgement,estimatesandassumptionsthateffectreportedamounts.Actualresultsmaydifferfromthesejudgements.Forfurtherinformationaboutsignificantareasofestimation,uncertaintyandcriticaljudgements that have the most significant effect on the financial statements, refer to Note 36 - Credit risk exposure.TheGroupincludesHeartlandABCPTrust1andCBSWarehouseATrust(collectivelytheTrusts),whicharespecialpurposevehiclesholding securitised loans purchased from MARAC and the Bank.ThesefinancialstatementsarepresentedinNewZealanddollarswhichistheGroup'sfunctionalcurrency.Unlessotherwiseindicated,amounts are rounded to the nearest thousand.TheCompanyandallentitieswithintheGroupareprofit-orientedentities.TheCompanyisareportingentityandanissuerforthepurposesoftheFinancialReportingAct1993anditsfinancialstatementscomplywiththatAct.Thefinancialstatementshavebeenpreparedinaccordance with the requirements of the Companies Act 1993 and the Securities Regulations 2009.Certain comparatives have been restated to comply with current year presentation.The financial statements have been prepared on the basis of historical cost, unless stated otherwise.Subsidiaries are entities that are controlled by the Group. Investments in subsidiary companies are recorded at cost by the Company.TheconsolidatedfinancialstatementsarepreparedbyconsolidatingthefinancialstatementsoftheCompanyanditssubsidiaries.Allintercompany transactions, balances and unrealised profits are eliminated on consolidation.TheCompany,throughasubsidiary,owns100%ofHeartlandBankLimited(Bank).TheBankwasformerlyknownasHeartlandBuildingSociety.HeartlandBuildingSocietywasestablishedinJanuary2011,asaresultofthemergerofCanterburyBuildingSociety(CBS)andSouthern Cross Building Society (SCBS).ThefinancialstatementshavebeenpreparedinaccordancewithGenerallyAcceptedAccountingPracticeinNewZealand(NZGAAP)andwiththerequirementsoftheFinancialReportingAct1993.TheycomplywithNewZealandequivalentstoInternationalFinancialReportingStandards(NZIFRS)andotherapplicableFinancialReportingStandards,asappropriateforprofit-orientedentities.Thefinancialstatementsalso comply with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board.TheBankacquiredPWFon31August2011,asaresultcomparativesfortheyearended30June2012onlyincludethePWFresultfromthedate of acquisition.Heartland New Zealand Limited8Heartland New Zealand Limited / Annual Report 2013 / PG 27 NOTES TO THE FINANCIAL STATEMENTSFor the year ended 30 June 20133Significant accounting policies (continued)(b)Jointly controlled entities(c)Special purpose entities(d)Interest(e)Operating lease income and expense(f)Lending and credit fee income(g)Dividend income(h)TaxIncome tax expenseCurrent taxDeferred taxDeferredtaxisrecognisedinrespectoftemporarydifferencesbetweenthecarryingamountofassetsandliabilitiesandtheamountsusedfortax purposes.Income from operating lease vehicles is apportioned over the term of the operating lease on a straight line basis.Interestontheeffectiveportionofaderivativedesignatedasacashflowhedgeisinitiallyrecognisedinthehedgingreserve.Itisreleasedtoprofit or loss at the same time as the hedged item or if the hedge relationship is subsequently deemed to be ineffective.Deferredtaxassetsandliabilitiesaremeasuredatthetaxratesthatareexpectedtoapplytotheyear(s)whentheassetsorliabilitiesgivingrisetothemarerealisedorsettled,basedonthetaxrates(andtaxlaws)thathavebeenenactedorsubstantivelyenactedbythereportingdate.ThemeasurementreflectsthetaxconsequencesthatwouldfollowfromthemannerinwhichtheGroup,atthereportingdate,recoversor settles the carrying amount of its assets and liabilities.InvestmentsinjointlycontrolledentitiesareaccountedforbytheGroupusingtheequitymethodandarerecognisedinitiallyatcost.TheconsolidatedfinancialstatementsincludetheGroup'sshareoftheincomeandexpensesandequitymovementsofequityaccountedinvestees,fromthedatethatsignificantinfluenceorjointcontrolcommencesuntilthedatethatsignificantinfluenceorjointcontrolceases.Dividends received from associates and jointly controlled entities are recorded in profit or loss.JointventuresarethoseentitiesoverwhoseactivitiestheGrouphasjointcontrol,establishedbycontractualagreementandrequiringunanimous consent for strategic financial and operating decisions.Interestincomeandexpensearerecognisedusingtheeffectiveinterestmethodinprofitorloss.Theeffectiveinterestrateisestablishedoninitialrecognitionofthefinancialassetsandliabilitiesandisnotrevisedsubsequently.Thecalculationoftheeffectiveinterestrateincludesall yield related fees and commissions paid or received that are an integral part of the effective interest rate.Lendingandcreditfeeincomethatisintegraltotheeffectiveinterestrateofafinancialassetorliabilityisincludedinthemeasurementoftheeffective interest rate. Other lending and credit fee income is recognised as the related services are rendered.Incometaxexpensefortheyearcomprisescurrentanddeferredtax.Incometaxexpenseisrecognisedinprofitorlossexcepttotheextentthatitrelatestoitemsrecogniseddirectlyinequityorothercomprehensiveincome,inwhichcaseitisrecognisedinequityorothercomprehensive income.Specialpurposeentitiesarecreatedtoaccomplishanarrowandwell-definedobjectivesuchasthesecuritisationorholdingofparticularassets,ortheexecutionofaspecificborrowingorlendingtransaction.ThefinancialstatementsofspecialpurposeentitiesareincludedintheGroup's financial statements where the substance of the relationship is that the Company controls the special purpose entity.Dividend income is recognised in profit or loss on the date that the Company's right to receive payment is established.Operatingleasevehiclesaredepreciatedonastraightlinebasisovertheirexpectedlifeafterallowingforanyresidualvalues.Theestimatedlives of operating lease vehicles vary up to five years. Vehicles held for sale are not depreciated but are tested for impairment.Currenttaxistheexpectedtaxpayableonthetaxableincomefortheyear,usingtaxratesenactedorsubstantivelyenactedatthereportingdate,andanyadjustmenttotaxpayableinrespectofpreviousyears.Currenttaxforcurrentandprioryearsisrecognisedasaliability(orasset) to the extent that it is unpaid (or refundable).Heartland New Zealand Limited9PG 28 / Annual Report 2013 / Heartland New Zealand Limited NOTES TO THE FINANCIAL STATEMENTSFor the year ended 30 June 20133Significant accounting policies (continued)(h)Tax (continued)Deferred tax (continued)(i)Share capital(j)Cash and cash equivalents(k)Investments(l)Investment properties(m)Finance receivables(n)Operating lease vehicles(o)Derivative financial instrumentsOrdinarysharesareclassifiedasequity.Incrementalcostsdirectlyattributabletotheissueofordinarysharesandshareoptionsarerecognised as a deduction from equity, net of any tax effects.Fairvaluesaresupportedbyindependentvaluationsorothersimilarexternalevidence,adjustedforchangesinmarketconditionsandthetime since the last valuation.Derivativefinancialinstrumentsarecontractsenteredintotoreducetheexposuretothevolatilityofvariablerateborrowings(cashflowhedges),ortoconvertfixedrateborrowingsorassetstovariablerates(fairvaluehedges),inordertomitigatetheGroup’sinterestraterisk.Thefinancialinstrumentsaresubjecttotheriskthatmarketvaluesmaychangesubsequenttotheiracquisition;howeversuchchangeswouldbeoffsetbycorresponding,butopposite,effectsonthevariablerateborrowingsorfixedrateborrowingsorassetsbeinghedged.Derivativesare initially valued at fair value and subsequently remeasured at fair value.Investmentpropertieshavebeenacquiredthroughtheenforcementofsecurityoverfinancereceivablesandareheldtoearnrentalincomeorforcapitalappreciation(orboth).Investmentpropertyisinitiallyrecognisedatitsfairvalue,withsubsequentchangesinfairvaluerecognisedin profit or loss.TheGroupholdsinvestmentsinlocalauthoritystock,publicsecuritiesandcorporatebonds.Investmentsheldareclassifiedasbeingavailableforsaleandarestatedatfairvaluelessimpairment,ifany.Thefairvaluesarederivedbyreferencetopublishedpricequotationsinan active market or modelled using observable market inputs.Fairvaluemovementsofderivativesthatarenotdesignatedinaqualifyingcashflowhedgerelationship,arerecognisedinprofitorloss.Fairvaluemovementsoftheeffectiveportionofaqualifyingcashflowhedgederivative,arerecogniseddirectlyinothercomprehensiveincomeandheldinthehedgingreserveinequity.Theamountrecognisedinequityistransferredtoprofitorlossinthesameyearasthehedgedcashflowaffectsprofitorloss,disclosedinthesamelineasthehedgeditem.Anyineffectiveportionofchangesinfairvalueofthederivativeisrecognisedimmediatelyinprofitorloss.Fairvaluemovementsofaderivativedesignatedasafairvaluehedgearerecogniseddirectlyinprofit or loss together with the hedged item.Financereceivablesareinitiallyrecognisedatfairvalueplusincrementaldirecttransactioncostsandaresubsequentlymeasuredatamortised cost using the effective interest method, less any impairment loss.CashandcashequivalentsconsistofcashandliquidassetsusedinthedaytodaycashmanagementoftheGroup.Cashandcashequivalents are carried at amortised cost in the Statements of Financial Position.Currentanddeferredtaxassetsandliabilitiesareoffsetonlytotheextentthattheyrelatetoincometaxesimposedbythesametaxationauthority and there is a legal right and intention to settle on a net basis and it is allowed under tax law.Deferredtaxassets,includingthoserelatedtothetaxeffectsofincometaxlossesandcreditsavailabletobecarriedforward,arerecognisedonlytotheextentthatitisprobablethatfuturetaxableprofitswillbeavailableagainstwhichthedeductibletemporarydifferencesorunusedtaxlossesandcreditscanbeutilised.Deferredtaxassetsarereviewedeachreportingdateandarereducedtotheextentthatitisnolongerprobable that the related tax benefit will be realised.Operatingleasevehiclesarestatedatcostlessaccumulateddepreciation.Profitsonthesaleofoperatingleasevehiclesareincludedaspartofoperatingleaseincome.Currentyeardepreciationandlossesonthesaleofoperatingleasevehiclesareincludedaspartofoperatinglease expenses.TheGroup'ssharecapitaldiffersfromthesharecapitaloftheCompanyasaresultofthereverseacquisitionaccountingappliedwhentheCompanywasformed.UnderNZIFRSMARAC(asubsidiaryoftheCompany)wastreatedastheacquireroftheCompany.Asaresult,theGroup's result represents a continuation of the MARAC business, and the share capital of the Group reflects this.Heartland New Zealand Limited10Heartland New Zealand Limited / Annual Report 2013 / PG 29 NOTES TO THE FINANCIAL STATEMENTSFor the year ended 30 June 20133Significant accounting policies (continued)(p)Property, plant, equipment and depreciationThe following annual rates are used in the calculation of depreciation:Buildings1.0% - 4.0%Fixtures and fittings5.5% - 36.0%Office equipment and furniture6.0% - 30.0%Computer equipment16.2% - 48.0%Motor vehicles21.0% - 25.2%(q)Intangible assets and goodwillGoodwillComputer software(r)Financial assets and liabilitiesClassificationFinancial assets and liabilities are classified in the following accounting categories:Financial assets/liabilitiesAccounting categoryCash and cash equivalentsLoans and receivablesInvestmentsAvailable for saleDue from related partiesLoans and receivablesFinance receivablesLoans and receivablesOther financial assetsLoans and receivablesBorrowings Other liabilities at amortised costOther financial liabilitiesOther liabilities at amortised costDerivativesHeld for trading (or qualifying hedges as described in Note 3(o))RecognitionDepreciationonrevaluedbuildingsischargedtoprofitorloss.Onthesubsequentsaleorretirementofarevaluedproperty,theattributablerevaluation surplus remaining in the asset revaluation reserve, net of any related deferred taxes, is transferred directly to retained earnings.Anyrevaluationincreasearisingontherevaluationoflandandbuildingsiscreditedtotheassetrevaluationreserve,excepttotheextentthatitreversesarevaluationdecreaseforthesameassetpreviouslyrecognisedasanexpenseinprofitorloss,inwhichcasetheincreaseiscreditedtoprofitorlosstotheextentofthedecreasepreviouslycharged.Adecreaseincarryingamountarisingontherevaluationoflandandbuildingsischargedasanexpensetotheextentthatitexceedsthebalance,ifany,heldintheassetrevaluationreserverelatingtoaprevious revaluation of that asset.Otheritemsofproperty,plantandequipmentarestatedatcostlessaccumulateddepreciationandimpairment.Depreciationiscalculatedonastraightlinebasistowriteoffthenetcostorotherrevaluedamountofeachassetoveritsexpectedusefullifetoitsestimatedresidualvalue.GoodwillarisingonacquisitionrepresentstheexcessofthecostoftheacquisitionovertheGroup’sinterestinthefairvalueoftheidentifiablenetassetsandcontingentliabilities.Whenthefairvalueoftheidentifiablenetassetsandcontingentliabilitiesexceedsthecostofanacquisition,theresultingdiscountisrecognisedimmediatelyinprofitorlossfortheyear.Goodwillistestedforimpairmentatleastannually,and is carried at cost less accumulated impairment losses.TheGroupinitiallyrecognisesfinancereceivables,borrowingsandsubordinatedliabilitiesonthedatethattheyareoriginated.Allotherfinancialassetsandliabilities(includingassetsandliabilitiesdesignatedatfairvaluethroughprofitorloss)areinitiallyrecognisedonthetradedate at which the Group becomes a party to the contractual provisions of the instrument.SoftwareacquiredorinternallydevelopedbytheGroupisstatedatcostlessaccumulatedamortisationandanyaccumulatedimpairmentlosses.Subsequentexpenditureonsoftwareassetsiscapitalisedonlywhenitincreasesthefutureeconomicvalueofthatasset.Amortisationofsoftwareisonastraightlinebasis,atrateswhichwillwriteoffthecostovertheirestimatedeconomiclivesofthreetofouryears. All other expenditure is expensed immediately as incurred.Landandbuildingsaremeasuredatfairvalue.Fairvalueisdeterminedonthebasisofindependentvaluationspreparedbyexternalvaluation experts, based on discounted cash flows or capitalisation of net income.Heartland New Zealand Limited11PG 30 / Annual Report 2013 / Heartland New Zealand Limited NOTES TO THE FINANCIAL STATEMENTSFor the year ended 30 June 20133Significant accounting policies (continued)(r)Financial assets and liabilities (continued)Derecognition(s)Impaired assets and past due assets(t)Provision for impairmentCollective provisioningCreditimpairmentprovisionsaremadewhereeventshaveoccurredleadingtoanexpectationofreducedfuturecashflowsfromcertainreceivables. These provisions are made in some cases against an individual loan and in other cases on a collective basis.Pastduebutnotimpairedassetsareanyassetswhichhavenotbeenoperatedbythecounterpartywithintheirkeytermsbutarenotconsidered to be impaired by the Group.RestructuredassetsareimpairedassetswheretheGroupexpectstorecoverallamountsowingalthoughtheoriginaltermshavebeenchangedduetothecounterparty'sdifficultyincomplyingwiththeoriginaltermsofthecontractandtheamendedtermsarenotcomparablewith similar new lending.TheGroupentersintotransactionswherebyittransfersassetsrecognisedonitsStatementsofFinancialPosition,butretainseitherallrisksandrewardsofthetransferredassetsoraportionofthem.Ifallorsubstantiallyallrisksandrewardsareretained,thenthetransferredassetsarenotderecognisedfromtheStatementsofFinancialPosition.Transfersofassetswiththeretentionofallorsubstantiallyallrisksandrewards include, for example, securitised assets and repurchase transactions.ImpairedassetsarethoseloansforwhichtheGrouphasevidencethatitwillincuraloss,andwillbeunabletocollectallprincipalandinterestdue according to the contractual terms of the loan. TheGroupderecognisesafinancialassetwhenthecontractualrightstothecashflowsfromtheassetexpire,orittransferstherightstoreceivethecontractualcashflowsonthefinancialassetinatransactioninwhichsubstantiallyalltherisksandrewardsofownershipofthefinancialassetaretransferred.AnyinterestintransferredfinancialassetsthatiscreatedorretainedbytheGroupisrecognisedasaseparateasset or liability.The Group derecognises a financial liability when its contractual obligations are discharged or cancelled or expire.ThetermcollectivelyimpairedassetreferstoanassetwhereaneventhasoccurredwhichpasthistoryindicatesthatthereisanincreasedpossibilitythattheGroupwillnotcollectallitsprincipalandinterestasitfallsdue.Nolosseshaveyetbeenidentifiedontheseindividualloanswithinthecollectivelyimpairedassetgrouping,andhistorywouldindicatethatonlyasmallportionoftheseloanswilleventuallynotberecovered. The Group provides fully for its expected losses on collectively impaired assets.Baddebtsprovidedforarewrittenoffagainstindividualorcollectiveprovisions.Amountsrequiredtobringtheprovisionstotheirassessedlevels are recognised in profit or loss. Any future recoveries of amounts provided for are recognised in profit or loss.Collectiveprovisionsareassessedwithreferencetoriskprofilegroupingsandhistoricallossdata.Otherjudgementalfactorsincludingeconomicandcreditcycleconsiderationsarealsotakenintoaccountindeterminingappropriatelosspropensitiestobeapplied.Thefuturecreditqualityoftheseportfoliosissubjecttouncertaintiesthatcouldcauseactualcreditlossestodiffermateriallyfromreportedloanimpairmentprovisions.Theseuncertaintiesincludethewidereconomicenvironment,interestratesandtheireffectoncustomerspending,unemployment levels, payment behaviour and bankruptcy rates.Noprovisionsareappliedtoloansthatarenewlywrittenandloansthatremainwithintheircontractualterms,exceptwheretheGroupbecomes aware of an event that might alter its view of the risk of a particular deal or group of deals.Heartland New Zealand Limited12Heartland New Zealand Limited / Annual Report 2013 / PG 31 NOTES TO THE FINANCIAL STATEMENTSFor the year ended 30 June 20133Significant accounting policies (continued)(t)Provision for impairment (continued)Individual provisioning(u)Goods and services tax (GST)(v)Provisions(w)Employee benefits(x)Defined benefit plan(y)Share schemesAdequacyofthecollectiveprovisionlevelsforeachriskgroupingismeasuredagainsthistoricallossexperienceatleastannually.Adequacyof individual provisions is assessed in respect of each loan on a material development or at least quarterly.ThecostofprovidingbenefitsfordefinedbenefitsuperannuationplansisdeterminedusingtheProjectedUnitCreditMethod.Actuarialgainsandlossesarerecognisedinfullintheyearinwhichtheyoccurbywayofamovementinthedefinedbenefitplanreserve,andarerecognisedin other comprehensive income and presented in the Statements of Changes in Equity.Revenues,expensesandassetsarerecognisednetoftheamountofGST.AstheGroupispredominantlyinvolvedinprovidingfinancialservices,onlyaproportionofGSTpaidoninputsisrecoverable.Thenon-recoverableproportionofGSTistreatedaspartofthecostofacquisition of the asset or is expensed.Annualleaveentitlementsareaccruedatamountsexpectedtobepaid.Longserviceleaveisaccruedbycalculatingtheprobablefuturevalueofentitlementsanddiscountingbacktopresentvalue.Obligationstodefinedcontributionsuperannuationschemesarerecognisedasan expense when the contribution is paid.Aprovisionisrecognisedif,asaresultofapastevent,theGrouphasapresentlegalorconstructiveobligationthatcanbeestimatedreliably,and it is probable that an outflow of economic benefits will be required to settle the obligation.The Group operates share-based compensation plans that are cash settled and equity settled. Forthecashsettledplan,theGrouprecognisesaliabilitybasedontheestimatedfairvalueoftheobligation.Thevalueofthisliabilityisrecognised in the Statement of Comprehensive Income over the relevant service period and is re-measured at each reporting date.Fortheequity-settledplan,sharebasedpaymentstoemployeesprovidingservicesaremeasuredatthefairvalueoftheequityinstrumentsatthegrantdate.Detailsregardingthedeterminationofthefairvalueofequity-settledshare-basedtransactionsaresetoutinNote33-Staffshare ownership arrangements. Thefairvaluedeterminedatthegrantdateoftheequity-settledshare-bsedpaymentsisexpensedonastraightlinebasisoverthevestingperiod,basedontheGroup'sestimateofequityinstrumentsthatwilleventuallyvest,withacorrespondingincreaseinequity.Attheendofeachreportingperiod,theGrouprevisesitsestimateofthenumberofequityinstrumentsexpectedtovest.Theimpactoftherevisionoftheoriginalestimates,ifany,isrecognisedinprofitorlosssuchthatthecumulativeexpensereflectstherevisedestimate,withacorrespondingadjustment to the equity-settled employee benefits reserve.Pastservicecostisrecognisedimmediatelytotheextentthatthebenefitsarealreadyvested,andotherwiseisamortisedonastraight-linebasisovertheaverageyearuntilthebenefitbecomesvested.Thedefinedbenefitobligationisdeductedfromthefairvalueofthedefinedbenefit plan asset to derive the defined benefit plan surplus recognised in trade receivables in the Statements of Financial Position.Specificimpairmentprovisionsaremadewhereeventshaveoccurredleadingtoanexpectationofreducedfuturecashflowsfromcertainreceivables.Forindividuallysignificantloansforwhichtheassessedriskgradeisconsidereda“potentialloss”,anindividualassessmentismade of an appropriate provision for credit impairment.Creditimpairmentsarerecognisedasthedifferencebetweenthecarryingvalueoftheloanandthediscountedvalueofmanagement’sbestestimateoffuturecashrepaymentsandproceedsfromanysecurityheld(discountedattheloan’soriginaleffectiveinterestrate).Allrelevantconsiderationsthathaveabearingontheexpectedfuturecashflowsaretakenintoaccount,includingthebusinessprospectsforthecustomer,thelikelyrealisablevalueofcollateral,theGroup’spositionrelativetootherclaimants,thereliabilityofcustomerinformationandthelikelycostanddurationofthework-outprocess.Subjectivejudgementsaremadeinthisprocess.Furthermore,judgementcanchangewithtimeasnewinformationbecomesavailableoraswork-outstrategiesevolve,resultinginrevisionstotheimpairmentprovisionasindividualdecisions are taken. Changes in judgement could have a material impact on the financial statements.IndividualprovisioninginregardstopropertydevelopmentlendingcarriesthegreatestamountofriskofamaterialadjustmenttothecarryingamountsoftheGroup'sassetswithinthenextyear.Estimatingthetimingandamountoffuturecashrepaymentsandproceedsfromtherealisationofcollateralaremanagement'smostdifficultandsubjectivejudgements.Subjectivejudgementsmadebymanagementcomprisethe time taken for new sales being achieved and the amount received, determining the timing and amount of future cash flows.Heartland New Zealand Limited13PG 32 / Annual Report 2013 / Heartland New Zealand Limited NOTES TO THE FINANCIAL STATEMENTSFor the year ended 30 June 20133Significant accounting policies (continued)(z)Borrowings(aa)Statements of Cash Flows(ab)Changes in accounting policies(ac)New standards and interpretations not yet adoptedExpectedto be initiallyapplied in yearending:There have been no material changes in accounting policies in the current year.TheStatementsofCashFlowshavebeenpreparedusingthedirectmethodmodifiedbythenettingofcertaincashflowsassociatedwithcashandcashequivalents,investments,relatedpartybalances,financereceivablesandborrowings.Nettingofcashflowsprovidesmoremeaningfuldisclosureasmanyofthecashflowsarereceivedandpaidonbehalfofcustomersandreflecttheactivitiesofthosecustomersrather than the Group.30 June 2014Effectivefor annualyearsbeginningon orafter:Anumberofnewstandards,amendmentstostandardsandinterpretationsarenotyeteffectivefortheyearended30June2013,andhavenotbeenappliedinpreparingthesefinancialstatements.Thenewstandardsidentifiedwhichmayhaveaneffectonthefinancialstatementsof the Group are:NZIFRS13FairValueMeasurement,whichdefinesfairvalue,andestablishesaframeworkformeasuringfairvalue including disclosure requirements.Standard and descriptionNZIFRS10ConsolidatedFinancialStatements,whichintroducesanewapproachtodeterminingwhichinvesteesshould be consolidated and provides a single model to be applied in the control analysis for all investees.Bankborrowingsanddepositsareinitiallyrecognisedatfairvalueincludingincrementaldirecttransactioncosts.Theyaresubsequentlymeasured at amortised cost using the effective interest method.NZIFRS9FinancialInstruments,whichspecifieshowanentityshouldclassifyandmeasurefinancialassetsandliabilities.1 January 201330 June 20141 January 2013NZ IFRS 11 Joint Arrangements, which outlines the accounting by entities that jointly control an arrangement.1 January 201330 June 2014NZIAS27SeparateFinancialStatements,whichcarriesforwardexistingaccountinganddisclosurerequirementsfor separate financial statements with minor clarifications.1 January 201430 June 2014NZ IFRS 7 Financial Instruments: Disclosures, amendment to offsetting financial assets and financial liabilities.1 January 201330 June 201430 June 20141 January 20131 January 201330 June 201430 June 2014NZIFRS12DisclosureofInterestsinOtherEntities,whichcontainsthedisclosurerequirementsforentitiesthathave interests in subsidiaries, joint arrangements, associates and/or unconsolidated structured entities.30 June 20141 January 2013NZ IAS 32 Financial Instruments: Presentation, amendment to offsetting financial assets and financial liabilities.NZIAS28InvestmentsinAssociatesandJointVentures,whichamendsIFRS5toapplytoaninvestment,oraportionofinvestmentinanassociateorjointventurethatmeetsthecriteriatobeclassifiedasheldforsaleandoncessation of significant influence or joint control, the entity does not remeasure the retained interest.1 January 2013NZIAS19EmployeeBenefits,whichrequiresactuarialgainsandlossestoberecognisedimmediatelyinothercomprehensiveincomeandtheexpectedreturnonplanassetsrecognisedinprofitorlosstobecalculatedbasedon the rate used to discount the defined benefit obligation.1 January 201330 June 2015InitialapplicationoftheabovestandardsandinterpretationsrelevanttotheGrouparenotexpectedtohaveanymaterialimpactonthefinancial statements of the Group.Heartland New Zealand Limited14Heartland New Zealand Limited / Annual Report 2013 / PG 33 NOTES TO THE FINANCIAL STATEMENTSFor the year ended 30 June 20134Segmental analysisOperating segmentsThe Group operates predominantly within New Zealand and comprises the following main operating segments:Retail and ConsumerBusinessRuralNon-core PropertyRetail &Non-coreConsumerBusinessRuralPropertyOther Total $000 $000 $000 $000 $000 $000 Jun 13 Interest income90,99151,67945,7628,7349,183206,349Interest expense46,61126,26122,9527,7677,304110,895Net interest income44,38025,41822,8109671,87995,454Net operating lease income5,15123- - - 5,174Net other income622285493,8601,4436,259Net operating income50,15325,72622,8594,8273,322106,887- - - - 1,9401,94011,6965,8646,15212,43832,25768,407Selling and administration expenses11,6965,8646,15212,43834,19770,34738,45719,86216,707(7,611)(30,875)36,540Impaired asset expense2,7703,360(195)16,592- 22,527Decrease in fair value of investment properties- - - 5,101- 5,101Operating profit / (loss)35,68716,50216,902(29,304)(30,875)8,912Share of equity accounted investee's profit- - - - 504504Profit / (loss) before income tax35,68716,50216,902(29,304)(30,371)9,416Income tax expense- - - - 2,5042,504Profit / (loss) for the year35,68716,50216,902(29,304)(32,875)6,912Total assets987,796549,177456,647107,438403,5692,504,627Total liabilities- - - - 2,134,0852,134,085Total equity- - - - 370,542370,542SegmentinformationispresentedinrespectoftheGroup'soperatingsegmentswhicharethoseusedfortheGroup'smanagementandinternal reporting structure.Allincomereceivedisfromexternalsources,exceptthosetransactionswithrelatedparties,refertoNote30-Relatedpartytransactions.Certainsellingandadministrationexpenses,suchaspremises,ITandsupportcentrecostsarenotallocatedtooperatingsegmentsandareincluded in Other.Providingspecialistfinancialservicestothefarmingsectorprimarilyofferinglivestockfinance,ruralmortgagelending,seasonalandworkingcapitalfinancing,aswellasleasingsolutions to farmers.TheGroup'soperatingsegmentsaredifferentthantheindustrycategoriesdetailedinNote37-Assetquality.Theoperatingsegmentsareprimarilycategorisedbysaleschannel,whereasNote37-Assetqualitycategorisesexposuresbasedoncreditriskconcentrations(seeNote37 - Asset quality exposure for further details).Profit before impaired asset expense and income taxFunding assets of the non-core property division.GROUPDepreciation and amortisation expenseProvidingacomprehensiverangeoffinancialservicestoNewZealandbusinessesandfamilies,includingterm,transactionalandsavingsbaseddepositaccountstogetherwithresidential mortgage lending, motor vehicle finance and asset finance.Providingtermdebt,plantandequipmentfinance,commercialmortgagelendingandworking capital solutions for small-to-medium sized New Zealand businesses.Other selling and administration expensesHeartland New Zealand Limited15PG 34 / Annual Report 2013 / Heartland New Zealand Limited NOTES TO THE FINANCIAL STATEMENTSFor the year ended 30 June 20134Segmental analysis (continued)Retail &Non-coreConsumerBusinessRuralPropertyOther Total $000 $000 $000 $000 $000 $000 Jun 12 Interest income94,60649,86741,39112,6306,654205,148Interest expense55,57228,91122,34010,3704,309121,502Net interest income39,03420,95619,0512,2602,34583,646Net operating lease income5,09713- - - 5,110Net other income92757664,1049746,128Net operating income45,05821,02619,1176,3643,31994,884- - - - 1,8301,83011,4755,2735,8376,35034,78263,717Selling and administration expenses11,4755,2735,8376,35036,61265,54733,58315,75313,28014(33,293)29,337Impaired asset expense1,9912,445689517- 5,642Decrease in fair value of investment properties- - - 3,900- 3,900Operating profit / (loss)31,59213,30812,591(4,403)(33,293)19,795Share of equity accounted investee's profit- - - - 534534Profit / (loss) before income tax31,59213,30812,591(4,403)(32,759)20,329Income tax expense- - - - (3,277)(3,277)Profit/(loss) for the year31,59213,30812,591(4,403)(29,482)23,606Total assets989,352540,228478,582160,168179,7592,348,089Total liabilities- - - - 1,973,2911,973,291Total equity- - - - 374,798374,7985Significant subsidiaries and interests in jointly controlled entitiesJun 13 Jun 12 Significant subsidiariesNature of business% held% heldHeartland Bank LimitedFinancial services100%100%and its subsidiaries:MARAC Finance LimitedFinancial services100%100%PGG Wrightson Finance LimitedFinancial services100%100%VPS Parnell LimitedInvestment property holding company100%100%VPS Properties LimitedInvestment property holding company100%100%Heartland NZ Trustee LimitedHolding company100%100%Heartland Financial Services LimitedHolding company100%100%and its jointly controlled entity:MARAC JV Holdings LimitedHolding company50%50%and its subsidiary:MARAC Insurance LimitedInsurance services50%50%GROUPDepreciation and amortisation expenseTheGroupincludesHeartlandABCPTrust1,CBSWarehouseATrustandHeartlandCashandTermPIEFund,refertoNote32-SpecialPurpose entities for more details.Profit / (loss) before impaired asset expense and income taxOther selling and administration expensesHeartland New Zealand Limited16Heartland New Zealand Limited / Annual Report 2013 / PG 35 NOTES TO THE FINANCIAL STATEMENTSFor the year ended 30 June 20136Net interest incomeJun 13 Jun 12 Jun 13 Jun 12 $000 $000 $000 $000 Interest incomeCash and cash equivalents5,7365,1493617Finance receivables197,999199,526- - Derivatives held for risk management:- Net interest income on cash flow hedges2,614473- - Total interest income206,349205,1483617Interest expenseRetail deposits94,198100,769- - Bank and securitised borrowings16,69720,733- - Total interest expense110,895121,502- - Net interest income95,45483,64636177Net operating lease incomeJun 13 Jun 12 Jun 13 Jun 12 $000 $000 $000 $000 Operating lease incomeLease income12,89813,065- - Gain on disposal of lease vehicles1,9631,999- - Total operating lease income14,86115,064- - Operating lease expenseDepreciation on lease vehicles9,0199,149- - Direct lease costs668805- - Total operating lease expenses9,6879,954- - Net operating lease income5,1745,110- - 8Other incomeJun 13 Jun 12 Jun 13 Jun 12 NOTE$000 $000 $000 $000 Rental income from investment properties3,8594,094- - Management fees30335328- - Other income305314170- Total other income4,4994,736170- COMPANYCOMPANYGROUPIncluded within the Group's interest income on finance receivables is $2,591,000 (2012: $2,674,000) on individually impaired assets.GROUPGROUPCOMPANYHeartland New Zealand Limited17PG 36 / Annual Report 2013 / Heartland New Zealand Limited NOTES TO THE FINANCIAL STATEMENTSFor the year ended 30 June 20139Selling and administration expensesJun 13 Jun 12 Jun 13 Jun 12 NOTE$000 $000 $000 $000 Personnel expenses33,44834,186- - Directors' fees726804549628Superannuation413475- - Audit fees4195766060Audit related fees10435- - Amortisation - intangible assets231,2261,075- - Depreciation - property, plant and equipment24714755- - Operating lease expense as a lessee1,6511,648- - RECL Agreement fees36(e)7,7002,200- - Legal and professional fees3,6313,714246499Other operating expenses20,31520,079429178Total selling and administration expenses70,34765,5471,2841,36510Impaired asset expenseJun 13 Jun 12 Jun 13 Jun 12 NOTE$000 $000 $000 $000 Non-securitisedIndividually impaired expense13,0986,920- - Collectively impaired expense / (recovery)9,108(1,897)- - Total non-securitised impaired asset expense22,2065,023- - SecuritisedIndividually impaired expense31- - Collectively impaired expense318618- - Total securitised impaired asset expense321619- - TotalIndividually impaired expense37(e)13,1016,921- - Collectively impaired expense / (recovery)37(e)9,426(1,279)- - Total impaired asset expense22,5275,642- - Auditrelatedfeesincludeprofessionalfeesinconnectionwithtrusteereporting,duediligence,reviewofprospectusdocumentationforvarious Group entities, accounting advice and review work completed.GROUPCOMPANYTheGrouphaschangeditsworkoutstrategywithrespecttonon-corelegacypropertyassets.Thischangehasaffectedtheperiodsoverwhichassetsareexpectedtoberealisedandthevaluesexpectedtoberealisedforthoseassets.Asaresultofthischangeanadditionalprovision of $12.9 million has been raised against finance receivables in the year ended 30 June 2013.Duringtheyearended30June2013,theGrouprecogniseddirectoperatingexpensesof$3,563,000(2012:$2,975,000)arisingfrominvestmentpropertythatgeneratedrentalincomeanddirectoperatingexpensesof$219,000(2012:$107,000)arisingfrominvestmentproperty that did not generate rental income.Included in Directors' fees are Directors' fees the Company has paid on behalf of the Bank and its subsidiaries.GROUPCOMPANYHeartland New Zealand Limited18Heartland New Zealand Limited / Annual Report 2013 / PG 37 NOTES TO THE FINANCIAL STATEMENTSFor the year ended 30 June 201311Income tax expenseJun 13 Jun 12 Jun 13 Jun 12 $000 $000 $000 $000 (a)Current income tax expense / (benefit)Current year11,6994,639(300)(303)Adjustments for prior year(193)(3,218)63- Deferred tax (benefit) / expenseOrigination and reversal of temporary differences(9,002)1,48423- Tax legislation changes- (6,182)- - Total income tax expense / (benefit)2,504(3,277)(214)(303)Reconciliation of effective tax rateProfit before income tax9,41620,32914,527249Prima facie tax at 28% 2,6365,6924,06870Plus / (less) tax effect of items not taxable / deductible614312474Adjustments for prior year(193)(3,218)63- Dividends received- - (4,369)(447)Tax legislation changes- (6,182)- - Total income tax expense / (benefit)2,504(3,277)(214)(303)(b)Tax recognised in other comprehensive incomeCash flowAvailableDefinedTotalhedgesfor salebenefitinvestmentsplan$000 $000 $000 $000 Jun 2013Other comprehensive income before tax1,4673834782,328less tax expense41110716534Total other comprehensive income, net of income tax1,0562764621,794Jun 2012Other comprehensive income before tax476(147)(463)(134)less tax expense / (benefit)98(44)(28)26Total other comprehensive income, net of income tax378(103)(435)(160)12Imputation credit accountGROUPDuringtheyearended30June2012MARACmadeasubventionpaymenttoMARACFinancialServicesLimited(itsformerparent)fortheuseoftaxlossesto31May2011.Theamountpaidwaslessthanthetaxrateof30%.AsaresulttheGrouprecognisedabenefitof$3.4million included in adjustments for prior year.On29August2011,theTaxation(TaxAdministrationandRemedialMatters)Act2011receivedRoyalAssent.ThisActcontainsaretrospectivelegislativechangeinrelationtomergersofbuildingsocieties.Theresultwasthat$6.2millionbenefitoffuturetaxdeductionswhichwerelostonthemergerofMARAC,SCBSandCBSweremadeavailabletoentitiesintheHeartlandNewZealandConsolidated(Tax)Group, and cash that would otherwise have been required to pay tax became available to the Group.GROUPAs at 30 June 2013, the imputation credit account of the Group was a credit of $1,688,000 (2012: credit of $23,000).COMPANYHeartland New Zealand Limited19PG 38 / Annual Report 2013 / Heartland New Zealand Limited NOTES TO THE FINANCIAL STATEMENTSFor the year ended 30 June 201313Earnings per share14Dividends paid15Cash and cash equivalentsJun 13 Jun 12 Jun 13 Jun 12 $000 $000 $000 $000 Cash and cash equivalents - not securitised162,67674,1101,485469Cash and cash equivalents - securitised11,58615,579- - Total cash and cash equivalents174,26289,6891,485469Cash and cash equivalents are short term funds held with New Zealand registered international banks.16InvestmentsJun 13 Jun 12 Jun 13 Jun 12 $000 $000 $000 $000 Bank deposits121,78024,327- - Public securities and corporate bonds9,162- - - Local authority stock34,281- - - Total investments165,22324,327- - 17Investment propertiesJun 13 Jun 12 Jun 13 Jun 12 $000 $000 $000 $000 Opening balance55,50434,499- - Acquisitions10,80023,584- - Additional capital expenditure2782,153- - Sales(3,194)(832)- - Decrease in fair value(5,101)(3,900)- - Closing balance58,28755,504- - COMPANYThecalculationofbasicanddilutedearningsof2cpershareat30June2013(2012:6cpershare)isbasedontheprofitfortheyearof$6,912,000 (2012: $23,606,000), and a weighted average number of shares on issue of 388,703,975 (2012: 373,879,475).GROUPCOMPANYThe Company paid dividends of $5,830,560 on 21 December 2012 and $7,774,079 on 5 April 2013 (2012: nil).GROUPAsaresultofthechangeintheGroup'sworkoutstrategywithrespecttonon-corelegacypropertyassets(seeNote10-Impairedassetexpense)a$5.1millionreductioninthefairvalueofinvestmentpropertieshasbeenrecognisedreflectingtheDirectors’viewonthecurrentmarket value of this portfolio.GROUPCOMPANYFollowingtheunwindoftheRECLAgreement(refertoNote36(e)-Creditriskexposureformoredetails),theGrouphasacquirednetinvestment properties during the year ended 30 June 2013 of $11 million.Heartland New Zealand Limited20Heartland New Zealand Limited / Annual Report 2013 / PG 39 NOTES TO THE FINANCIAL STATEMENTSFor the year ended 30 June 201318Finance receivablesJun 13 Jun 12 Jun 13 Jun 12 $000 $000 $000 $000 Non-securitisedNeither at least 90 days past due or impaired1,687,4801,711,802- - At least 90 days past due24,83750,508- - Individually impaired69,30156,805- - Restructured assets3,5669,086- - Gross finance receivables1,785,1841,828,201- - Less allowance for impairment49,78626,693- - Total non-securitised finance receivables1,735,3981,801,508- - SecuritisedNeither at least 90 days past due or impaired273,922275,985- - At least 90 days past due1,7611,496- - Individually impaired- 20- - Restructured assets- - - - Gross finance receivables275,683277,501- - Less allowance for impairment705733- - Total securitised finance receivables274,978276,768- - TotalNeither at least 90 days past due or impaired1,961,4021,987,787- - At least 90 days past due26,59852,004- - Individually impaired69,30156,825- - Restructured assets3,5669,086- - Gross finance receivables2,060,8672,105,702- - Less allowance for impairment50,49127,426- - Total finance receivables2,010,3762,078,276- - 19Operating lease vehiclesJun 13 Jun 12 Jun 13 Jun 12 $000 $000 $000 $000 CostOpening balance51,23647,230- - Additions15,61116,905- - Disposals(19,508)(12,899)- - Closing balance47,33951,236- - Accumulated depreciationOpening balance16,68614,503- - Depreciation charge for the year9,0199,149- - Disposals(10,761)(6,966)- - Closing balance14,94416,686- - Opening net book value34,55032,727- - Closing net book value32,39534,550- - Refer to Note 37 - Asset quality for further analysis of finance receivables by credit risk concentration.GROUPThefutureminimumleasepaymentsreceivableundernon-cancellableoperatingleasesnotlaterthanoneyearis$9,412,000(2012:$11,123,000), within one to five years is $8,390,000 (2012: $7,635,000) and over five years is nil (2012: $7,000).GROUPCOMPANYCOMPANYHeartland New Zealand Limited21PG 40 / Annual Report 2013 / Heartland New Zealand Limited NOTES TO THE FINANCIAL STATEMENTSFor the year ended 30 June 201320Other assetsJun 13 Jun 12 Jun 13 Jun 12 NOTE$000 $000 $000 $000 Derivative financial assets296492,122- - Trade receivables7,2863,0801614Due from related parties30- - 20194Prepayments2,19810,583- 109Total other assets10,13315,7853631721Investment in subsidiariesJun 13 Jun 12 Jun 13 Jun 12 $000 $000 $000 $000 Heartland Bank Limited- - 338,843338,843Heartland Financial Services Limited- - 3,2002,500Heartland NZ Trustee Limited- - 1911,000Total investments in subsidiaries- - 342,234342,343All subsidiary companies were incorporated in New Zealand.22Investment in joint ventureJun 13 Jun 12 Jun 13 Jun 12 $000 $000 $000 $000 Carrying amount at beginning of year3,1162,582- - Investment in joint venture700- - - Equity accounted earnings of joint venture504534- - Carrying amount at end of year4,3203,116- - Total assets of joint venture9,6106,927- - Total liabilities of joint venture3,7263,453- - Total income of joint venture3,3092,842- - Total net profit after tax of joint venture1,010769- - GROUPGROUPCOMPANYGROUPHeartlandFinancialServicesLimited(HFSL),awhollyownedsubsidiaryoftheCompany,owns50%ofMJV.MJVisjointlyownedbyHFSLand the New Zealand Automobile Association Limited.COMPANYCOMPANYHeartland New Zealand Limited22Heartland New Zealand Limited / Annual Report 2013 / PG 41 NOTES TO THE FINANCIAL STATEMENTSFor the year ended 30 June 201323Intangible assetsJun 13 Jun 12 Jun 13 Jun 12 $000 $000 $000 $000 Computer software - costOpening balance6,7486,142- - Additions1,3202,370- - Disposals(335)(1,764)- - Closing balance7,7336,748- - Computer software - accumulated amortisationOpening balance4,0384,727- - Amortisation charge for the year1,2261,075- - Disposals(335)(1,764)- - Closing balance4,9294,038- - Computer software - opening net book value2,7101,415- - Computer software - closing net book value2,8042,710- - GoodwillOpening balance20,28720,187- - Additions- 100- - Disposals(128)- - - Closing balance20,15920,287- - Total intangible assets - opening net book value22,99721,602- - Total intangible assets - closing net book value22,96322,997- - 24Property, plant and equipmentJun 13 Jun 12 Jun 13 Jun 12 $000 $000 $000 $000 CostOpening balance13,16115,191- - Additions936735- - Acquired on acquisition- 22- - Disposals(91)(2,787)- - Closing balance14,00613,161- - Accumulated depreciationOpening balance3,0945,112- - Depreciation charge for the year714755- - Disposals(83)(2,773)- - Closing balance3,7253,094- - Opening net book value10,06710,079- - Closing net book value10,28110,067- - GROUPGoodwillhasnotbeenallocatedtoindividualcashgeneratingunits,asthefutureeconomicbenefitisattributabletoallbusinessunits.TheGroup's management and Board of Directors continue to monitor goodwill at a group level.On5January2011,100%ofeachofSCBSandCBSamalgamatedtoformtheBank.Aspartofthisamalgamation$20.1millionofgoodwillwas recognised.COMPANYGROUPCOMPANYHeartland New Zealand Limited23PG 42 / Annual Report 2013 / Heartland New Zealand Limited NOTES TO THE FINANCIAL STATEMENTSFor the year ended 30 June 201325Deferred taxJun 13 Jun 12 Jun 13 Jun 12 $000 $000 $000 $000 Employee entitlements1,2321,201- - Provision for impairment13,9397,475- - Trade and other payables22515214- Investment properties2,9251,054- - Intangible assets27- - - Derivatives held for risk management- 392- - Tax assets18,34810,27414- Property, plant and equipment834877- - Intangible assets- 52- - Derivatives held for risk management18- - - Operating lease vehicles1,1091,202- - Tax liabilities1,9612,131- - Net tax assets16,3878,14314- 26BorrowingsJun 13 Jun 12 Jun 13 Jun 12 $000 $000 $000 $000 Deposits1,838,6191,625,120- - Bank borrowings- 50,010- - Securitised borrowings258,934264,359- - Total borrowings2,097,5531,939,489- - 27Trade and other payablesJun 13 Jun 12 Jun 13 Jun 12 NOTE$000 $000 $000 $000 Derivative financial liabilities29301,459- - Trade payables12,36013,734226300GST payable16,24914,014- - Due to related parties30500- - 78Employee benefits4,5344,595- - Total trade and other payables33,67333,802226378Alldeferredtaxmovementsareincludedinprofitorlossexceptforthoseinrespectoftheavailableforsaleandhedgingreserveswhicharerecognised in other comprehensive income.COMPANYGROUPGROUPCOMPANYCOMPANYGROUPBankborrowingsanddeposits(whichincludeNZDXbonds)rankequallyandareunsecured.TheGrouphassecuritisedbankfacilitiestotalling$500million,allinrelationtotheTrusts.HeartlandABCPTrust1(ABCPTrust)hasasecuritisationfacilityof$400millionmaturing5February2014andCBSWarehouseATrust(CBSTrust)hasasecuritisationfacilityof$100millionmaturing22January2014.Thefacilitiesare drawn by $259 million (2012: $264 million) as shown above.InvestorsinABCPTrustrankequallywitheachotherandaresecuredoverthesecuritisedassetsofthattrust.InvestorsinCBSTrustrankequally with each other and are secured over the securitised assets of that trust. Heartland New Zealand Limited24Heartland New Zealand Limited / Annual Report 2013 / PG 43 NOTES TO THE FINANCIAL STATEMENTSFor the year ended 30 June 201328Share capitalJun 13 Jun 12 000000Issued sharesOpening balance388,704300,000Shares issued during the year- 88,704Closing balance388,704388,70429Derivative financial instrumentsJun 13 Jun 12 Jun 13 Jun 12 NOTE$000 $000 $000 $000 Qualifying cash flow hedges -securitised567- - - Qualifying fair value hedges - non-securitised822,122- - Total derivative financial assets206492,122- - Qualifying cash flow hedges - non-securitised- 297- - Qualifying fair value hedges - securitised- 118- - Qualifying cash flow hedges - securitised301,044- - Total derivative financial liabilities27301,459- - The shares have equal voting rights, rights to dividends and distributions and do not have a par value.Securitised derivatives are held in the name of the Trusts to hedge the interest rate risk arising in the Trusts.COMPANYTheGroupusesinterestrateswapstohedgetheinterestrateriskarisingfromitscommercialpaperissuanceanditscurrentandfuturefloatingratebankdebtanddesignatesthoseswapsasqualifyingcashflowhedges.TheGroupusesinterestrateswapstohedgetheinterestrate risk arising from deposits and fixed rate mortgage loans and designates these swaps as qualifying fair value hedges.Number of sharesCOMPANYGROUPOn31August2011,theCompanyissued23,257,528newsharesat$0.52persharetoexistingshareholdersunderasharepurchaseplan,issued34,164,396newsharesat$0.65persharetounderwritersofthesharepurchaseplan,placed4,615,385newsharesat$0.65pershare 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.ThesharecapitalaboverepresentsthesharecapitaloftheCompany.ThisdiffersfromthesharecapitalreflectedintheGroup'sStatementofFinancial Position as a result of the reverse acquisition accounting. Refer to Note 3(i) for more details.DerivativesconsistofinterestrateswapsheldtomanagetheGroup'sexposuretointerestraterepricingriskonitsinterestbearingassetsand liabilities. Heartland New Zealand Limited25PG 44 / Annual Report 2013 / Heartland New Zealand Limited NOTES TO THE FINANCIAL STATEMENTSFor the year ended 30 June 201330Related party transactions(a)Transactions with related partiesJun 13 Jun 12 Jun 13 Jun 12 $000 $000 $000 $000 Transactions with related partiesDividend income from subsidiaries- - 15,6051,597Lending and credit fee income312368- - Other income335328- - Total transactions with other related parties64769615,6051,597Due from related partiesSubsidiaries- - 20194Total due from related parties- - 20194Due to related partiesSubsidiaries- - - 78MARAC Insurance Limited500- - - Total due to related parties500- - 78(b)Transactions with key management personnelJun 13 Jun 12 Jun 13 Jun 12 $000 $000 $000 $000 Deposit investments by key management personnel:Closing balance825468- - Loans to key management personnel:Closing balance- 304- - Key management personnel interest expense and compensation is as follows:Interest expense2821- - Short-term employee benefits5,9335,118549628Share-based payments718459- - Total6,6795,598549628TheCompanyholdsallsharesintheBank,HFSL,MARACandPWF,referNote5-Significantsubsidiariesandinterestsinjointlycontrolledentities.COMPANYMARACprovidedadministrativeassistancetoMARACInsuranceLimitedandreceivedinsurancecommissionfromMARACInsuranceLimited.Keymanagementpersonnel,beingdirectorsoftheCompanyandthosestaffreportingdirectlytotheChiefExecutiveOfficerandtheirimmediate relatives, have transacted with the Group during the year as follows:COMPANYGROUPMARACInsuranceLimitedandsomekeymanagementpersonnelinvestedintheBank'sdeposits.TheinvestmentsofHeartlandCashandTerm PIE Fund are detailed in Note 32 - Special purpose entities. Key management personnel investments are detailed in Note 30(b).GROUPHeartland New Zealand Limited26Heartland New Zealand Limited / Annual Report 2013 / PG 45 NOTES TO THE FINANCIAL STATEMENTSFor the year ended 30 June 201331Reconciliation of profit after tax to net cash flows from operating activitiesJun 13 Jun 12 Jun 13 Jun 12 $000 $000 $000 $000 Profit for the year6,91223,60614,741552Add / (less) non-cash items:Depreciation and amortisation expense1,9401,830- - Change in fair value of investment properties5,1013,900- - Impaired asset expense22,5275,642- - Deferred tax benefit(8,244)(2,978)(14)- Derivative financial instruments revaluation1,100(219)- - Accruals(836)529- - Total non-cash items 21,5888,704(14)- Add / (less) movements in working capital items:Other assets6,0222,239267(271)Current tax 8,494(6,785)(344)(109)Other liabilities(2,337)154(138)199Total movements in working capital items12,179(4,392)(215)(181)40,67927,91814,512371Movement in operating lease vehicles2,155(1,823)- - Movement in finance receivables25,894(29,093)- - Net cash flows from operating activities68,728(2,998)14,51237132Special purpose entitiesHeartland Cash and Term PIE Fund (PIE Fund)Jun 13 Jun 12 Jun 13 Jun 12 $000 $000 $000 $000 Deposits33,22612,347- - Heartland ABCP Trust 1 and CBS Warehouse A TrustJun 13 Jun 12 Jun 13 Jun 12 $000 $000 $000 $000 Cash and cash equivalents - securitised11,58615,579- - Finance receivables - securitised274,978276,768- - Borrowings - securitised(258,934)(264,359)- - Derivative financial asset - securitised567- - - Derivative financial liabilities - securitised(30)(1,162)- - COMPANYGROUPTheGroupcontrolstheoperationsofthePIEFund,aportfolioinvestmententitythatinvestsintheGroup'sdeposits.InvestmentsofthePIEFund are represented as follows:GROUPTheGrouphassecuritisedapoolofreceivablescomprisingresidential,commercial,andmotorvehicleloanstotheTrusts.TheGroupsubstantiallyretainsthecreditrisksandrewardsassociatedwiththesecuritisedassets,andcontinuestorecognisetheseassetsandassociatedborrowingsontheStatementsofFinancialPosition.Despitethispresentationinthefinancialstatements,theloanssoldtotheTrusts are set aside for the benefit of investors in the Trusts and are represented as follows:COMPANYGROUPNet cash flows from operating activities before movements in finance receivables and operating lease vehiclesCOMPANYHeartland New Zealand Limited27PG 46 / Annual Report 2013 / Heartland New Zealand Limited NOTES TO THE FINANCIAL STATEMENTSFor the year ended 30 June 201333Staff share ownership arrangementsHeartland Long Term Executive Share PlanInformation regarding the shares under the LTESP is as follows:Jun 13 Jun 12 Jun 13 Jun 12 SharesSharesSharesShares000000000000Opening unvested shares- - - - Number of shares granted1,607- - - Less: forfeited over life of scheme(35)- - - Less: vested over life of scheme- - - - Closing unvested shares1,572- - - Jun 13 Jun 12 Jun 13 Jun 12 $000 $000 $000 $000 Total amount recognised as an expense459480- - Heartland LTI Cash Entitlements PlanJun 13 Jun 12 Jun 13 Jun 12 $000 $000 $000 $000 Total amount recognised as an expense350- - - Liability recognised for bonus payable350- - - The assumptions utilised in the modal are as follows:Volatility (%)30%Risk free interest rate (%)3%Annual dividends per share (cents) 4.1 Expiry date30/06/2015Exercise price ($)0.72Market price ($)0.83GROUPCOMPANYTheHeartlandLTICashEntitlementsPlan(LTICEP)wasintroducedforselectedexecutivesoftheBank.UndertheLTICEP,participantsaregrantedacashentitlement.ThiscashentitlementisbasedontheamountbywhichthemarketpriceofHNZsharesatafuturedateexceedsanagreedreferenceprice(nopaymentismadeintheeventthatthemarketpriceofHNZsharesatthatfuturedateislowerthanthereferenceprice).Cashentitlementsbasedonareferencepoolof5.65millionshareswereissuedintheyearending30June2013atareference price of $0.72 per share.Anycashentitlementsarepayableontheearlierof20businessdaysafterthereleaseoftheHNZ’sfinancialresultsfortheyearended30June2015,or2November2015.ThemarketpriceofHNZsharesatthisdatewillbebasedonthevolumeweightedaveragepriceforthe20business days prior to this date.Compensationexpenseisrecognisedovertheserviceperiod,beingtheperiodfromthedatetheinstrumentisgranteduntiltheexpirydate.Grant date was 23 November 2012. Information regarding the entitlements under the LTICEP is as follows:TheHeartlandLongTermExecutiveSharePlan(theLTESP)wasintroducedintheyearended30June2013forselectedexecutivesandsenioremployeesoftheBank.UndertheLTESP,theBankingGrouplentfundstotheparticipants.ThesefundswereusedbytheparticipantstoacquiresharesofHNZ.TheHNZsharesacquiredbyparticipantsareheldontheirbehalfbyHeartlandNZTrusteeLimited,anHNZsubsidiary.IfaparticipantisstillemployedbytheBankingGroupon30June2014,thatparticipantmaybeentitledtosomeoralloftheHNZsharesheldontheirbehalf.ThenumberofHNZsharestowhichaparticipantwillbeentitledisdeterminedbyperformancehurdlesrelatingtotheperiodwhichcommenced1July2011(whichincludecorporatevaluestargetsandfinancialperformancetargets).TotheextentaparticipantisentitledtoHNZsharesheldontheirbehalf,theparticipantisgivenacashbonuswhichisappliedtowardrepaymentoftheloan.TotheextentaparticipantisnotentitledtoHNZsharesheldontheirbehalf,thosesharesareacquiredbyHeartlandNZTrusteeLimitedforapurchasepricewhichisappliedtowardrepaymentoftheloan.TheweightedaveragegrantdatefairvalueofthesharesissuedundertheLTESPwas$0.60(basedonthevolumeweightedaveragepriceofthesharesforthe20businessdaysimmediatelyprecedingthegrantdate).COMPANYGROUPCOMPANYGROUPHeartland New Zealand Limited28Heartland New Zealand Limited / Annual Report 2013 / PG 47 NOTES TO THE FINANCIAL STATEMENTSFor the year ended 30 June 201334Fair valueFinance receivablesInvestmentsOther financial assets and liabilitiesDerivative itemsBorrowingsHeld for tradingLoans and receivablesAvailablefor saleFinancialliabilities at amortisedcostTotalCarryingValueTotal Fair Value$000 $000 $000 $000 $000 $000 June 13Cash and cash equivalents- 174,262- - 174,262174,262Investments- - 165,223- 165,223165,223Finance receivables- 1,735,398- - 1,735,3981,734,792Finance receivables - securitised- 274,978- - 274,978278,540Derivative financial assets649- - - 649649Other financial assets- 7,286- - 7,2867,286Total financial assets6492,191,924165,223- 2,357,7962,360,752Borrowings- - - 1,838,6191,838,6191,841,657Borrowings - securitised- - - 258,934258,934258,934Derivative financial liabilities30- - - 3030Other financial liabilities- - - 17,39417,39417,394Total financial liabilities30- - 2,114,9472,114,9772,118,015June 12Cash and cash equivalents- 89,689- - 89,68989,689Investments- - 24,327- 24,32724,327Finance receivables- 1,801,508- - 1,801,5081,800,616Finance receivables - securitised- 276,768- - 276,768281,104Derivative financial assets2,122- - - 2,1222,122Other financial assets- 3,080- - 3,0803,080Total financial assets2,1222,171,04524,327- 2,197,4942,200,938Borrowings- - - 1,675,1301,675,1301,681,134Borrowings - securitised- - - 264,359264,359264,359Derivative financial liabilities1,459- - - 1,4591,459Other financial liabilities- - - 18,32918,32918,329Total financial liabilities1,459- - 1,957,8181,959,2771,965,281GROUPThefairvalueoftheGroup'sfinancereceivablesiscalculatedusingavaluationtechniquewhichassumescurrentmarketinterestratesforloans of a similar nature and term.The fair value of interest rate contracts is modelled using observable market inputs (Level 2 under the fair value hierarchy).Investmentsinpublicsectorsecuritiesandcorporatebondsareclassifiedasbeingavailableforsaleandarestatedatfairvaluelessimpairment,withthefairvaluebeingbasedonquotedmarketprices(Level1underthefairvaluehierarchy)ormodelledusingobservablemarket inputs (Level 2 under the fair value hierarchy).The fair value of all other financial assets and liabilities is considered equivalent to their carrying value due to their short term nature.Thecurrentaveragemarketrateusedtofairvaluefinancereceivableswithafixedinterestratewas8.58%(2012:9.06%).Financereceivableswithafloatinginterestratearedeemedtobeatcurrentmarketrates.Thecurrentamountofcreditprovisioninghasbeendeductedfromthefairvaluecalculationoffinancereceivablesasaproxyforfuturelosses.Prepaymentrateshavenotbeenfactoredintothefair value calculation as they are not deemed to be material.The following methods and assumptions were used to estimate the fair value of each class of financial asset and liability.Thefairvalueofdeposits,bankborrowingsandotherborrowingsisthepresentvalueoffuturecashflowsandisbasedonthecurrentmarketinterest rates payable by the Group for debt of similar maturities.Heartland New Zealand Limited29PG 48 / Annual Report 2013 / Heartland New Zealand Limited NOTES TO THE FINANCIAL STATEMENTSFor the year ended 30 June 201334Fair value (continued)Held for tradingLoans and receivablesAvailablefor saleFinancialliabilities at amortisedcostTotalCarryingValueTotal Fair Value$000 $000 $000 $000 $000 $000 June 13Cash and cash equivalents- 1,485- - 1,4851,485Other financial assets- 36- - 3636Total financial assets- 1,521- - 1,5211,521Other financial liabilities- - - 226226226Total financial liabilities- - - 226226226June 12Cash and cash equivalents- 469- - 469469Other financial assets- 194- - 194194Total financial assets- 663- - 663663Other financial liabilities- - - 300300300Total financial liabilities- - - 30030030035Risk management policiesRole of the Board and the Risk Committee--------TheBoard,throughitsBoardRiskCommittee(BRC)isresponsiblefortheoverallriskmanagementprocessandthedevelopmentoftheRMP.TheroleoftheBRCistoassisttheBoardtoformulateitsriskappetite,understandtheriskstheGroupfacesforeachstrategic,credit,liquidity,market(includinginterestrate),legalandgovernance,financialandtax,operationalandcapitaladequacyriskandtoensurethatallpolicyanddecisionsaremadeinaccordancewiththeGroup'scorporatevaluesandguidingprinciples.TheBRChasthefollowingresponsibilities:TooverseetheGroup’sriskprofileandreviewandapprovetheGroup’sRiskManagementFrameworkwithinthecontextoftherisk-reward strategy determined by the Board at least annually.TheGroupiscommittedtothemanagementofrisk.Theprimaryriskcategoriesarecredit,liquidity,market(includinginterestrate),operationalandcompliance.TheGroup'sriskmanagementstrategyissetbytheBoardofDirectors(Board).TheGrouphasputinplacemanagementstructuresandinformationsystemstomanagerisksincorporatedintheGroup'sRiskManagementProgramme(RMP).TheGrouphasseparatemonitoringtaskswherefeasibleandsubjectsallriskprocessestohindsightandinternalaudit,andaccountingsystemstoregular internal and external audits.To monitor the risk profile, performance, capital levels, exposures against limits and the management and control of the Group’s risks.ToreviewsignificantcorrespondencewiththeGroup’sregulators,andreceivereportsfrommanagementontheGroup’sregulatoryrelations and report any significant issues to the Board.TomonitorchangesanticipatedintheeconomicandbusinessenvironmentandotherfactorsconsideredrelevanttotheGroup’sriskprofile and capital adequacy.COMPANYTomakerecommendationsregardinghigh-levelliquidity/capital/fundingpoliciesandstrategy,includingtheuseofsecuritisationandspecial investment vehicles.ToagreeandrecommendforBoardapprovalandannualreview;asetofrisklimitsandconditionsthatapplytothetakingofrisk,asdelegatedtotheRiskCommitteebytheBoard,thatareconsistentwiththeBoard'sdeterminedriskappetite.ThisincludestheauthoritiesdelegatedbytheBoardtotheChiefExecutiveOfficer(CEO),ChiefFinancialOfficer(CFO),ChiefRiskOfficer(CRO)andanyotherofficersoftheBanktowhomtheBoardortheCommitteehavedelegatedauthority,andtoconsiderandacceptrisksbeyondmanagement’s approval discretion where deemed appropriate.Toreviewsignificantriskmanagementissuesthatareraisedinexternalorinternalauditsaswellasthelengthoftimeandactiontakento resolve such issues.To ensure an appropriate set of applicable corporate governance principles are developed, and reviewed on a regular basis.Heartland New Zealand Limited30Heartland New Zealand Limited / Annual Report 2013 / PG 49 NOTES TO THE FINANCIAL STATEMENTSFor the year ended 30 June 201335Risk management policies (continued)Audit Committee and Internal AuditAsset and Liability Committee (ALCO)-Balance sheet structure;-Non-traded interest rate risk (including the investment of capital);-Liquidity and funding; and-Capital management.Executive Risk Committee (ERC)-Operational and compliance risk-Credit risk-Strategic risk-Legal and governance risk-Financial and tax riskChartersfortheRiskandAuditCommitteeensuresuitablecrossrepresentationtoalloweffectivecommunicationpertainingtoidentifiedissueswithoversightbytheBoard.TheCROhasadirectreportinglinetotheChairmanoftheBoard.TheHeadofInternalAudithasadirectreporting line to the Chairman of the Audit Committee.Allinternalauditreportsareaddressedtothemanageroftherelevantareathatisbeingaudited.Managementcommentsareobtainedfromthe process owner(s) and are included in the report.Eachaudithasaseparateauditprogrammetailoredtotheareaofbusinessthatisbeingreviewed.Theauditprogrammesareupdatedduringeachaudittoreflectanyprocesschanges.Auditworkpapersarecompletedtoevidencethetestingperformedinaccordancewiththeauditprogramme.TheALCOcomprisestheCEO(Chair),CFO,CRO,HeadofTreasury&Strategy,Treasurer,HeadofConsumer&RetailandHeadofBusiness&Rural.TheALCOhasresponsibilityforoverseeingaspectsoftheBank'sfinancialpositionriskmanagement.ThepurposeoftheALCO is to support the BRC with specific responsibilities for decision making and oversight of risk matters in relation to:The ALCO usually meet monthly, and reports to the BRC.TheGrouphasaninternalauditfunction,theobjectiveofwhichistoprovideindependent,objectiveassuranceovertheinternalcontrolenvironmentandadditionalservicesdesignedtoaddvalueandimprovetheGroup’soperations.ItassiststheGrouptoaccomplishitsobjectivesbybringingasystematicanddisciplinedapproachtoevaluateandimprovetheeffectivenessofriskmanagement,control,andgovernanceprocesses.Internalauditisgrantedfull,freeandunfetteredaccesstoanyandalloftheorganisation’srecords,personnelandphysical properties deemed necessary to accomplish its internal audit activities.Aregularcycleoftestinghasbeenimplementedtocoverallareasofthebusiness.Itsfocusisonassessment,managementandcontrolofrisks.Theintentionistocyclethroughvariousbusinessunitsandoperationalareasonapre-setandagreedcyclerelativetoassessedrisk,lookingatthespecificinternalcontrolissuespertinenttothearea,witharequirementtomeetorexceedtheStandardsfortheProfessionalPractice of Internal Auditing of The Institute of Internal Auditors.TheBRCconsistsoffourdirectors,ofwhichatleastthreearenon-executivedirectorsandtwoareindependentdirectors.InadditiontheCEO,CROandCFOareinattendanceatmeetings.TheBRCmeetsatleastbi-monthlytoreviewidentifiedriskissues,andreportsdirectlytothe Board. A member of the BRC sits on the Audit Committee and vice versa.TheERCcomprisestheCEO(Chair),CFO,CRO,ChiefOperatingOfficer,HeadofTreasury&Strategy,HeadofConsumer&RetailandHeadofBusiness&Rural,HeadofHumanResourcesandGroupGeneralCounsel.TheERChasresponsibilityforoverseeingallriskaspectsnotconsideredbyALCO.ThepurposeofERCistosupporttheBRCwithspecificresponsibilitiesfordecisionmakingandoversightof risk matters in relation to:Theinternalauditfunctionhasdirectreportinglines,andaccountabilitytotheAuditCommitteeoftheBankandadministrativelytotheCFO.AscheduleofalloutstandinginternalcontrolissuesismaintainedandpresentedtotheAuditCommitteetoassisttheAuditCommitteetotracktheresolutionofpreviouslyidentifiedissues.Anyissuesraisedthatarecategorisedashighriskarespecificallyreviewedbyinternalauditduringafollow-upreviewoncetheissueisconsideredclosedbymanagement.Thefollow-upreviewisperformedwithaviewtoformallyclose out the issue.TheAuditCommitteefocusesonfinancialreportingandapplicationofaccountingpoliciesaspartoftheinternalcontrolandriskassessmentframework.TheAuditCommitteemonitorstheidentification,evaluationandmanagementofallsignificantrisksthroughtheGroup.Thisworkissupportedbyinternalaudit,whichprovidesanindependentassessmentofthedesign,adequacyandeffectivenessofinternalcontrols.TheAudit Committee receives regular reports from internal audit.Heartland New Zealand Limited31PG 50 / Annual Report 2013 / Heartland New Zealand Limited NOTES TO THE FINANCIAL STATEMENTSFor the year ended 30 June 201335Risk management policies (continued)Specific areas of risk managementCredit risk- Credit origination meets agreed levels of credit quality at point of approval.- Sector and geographical risks are actively managed.- Industry 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.Market riskTomanagethisrisktheBRChasbeendelegatedthetaskofoverseeingaformalcreditriskmanagementstrategy.TheBRCreviewstheGroup'screditriskexposurestoensureconsistencywiththeGroup'screditpoliciestomanageallaspectsofcreditrisk.Thecreditriskmanagement strategies ensure that:TheGrouphasadoptedadetailedCreditPolicyFrameworksupportedbyLendingStandardsprovidingcriteriaforfinanceproductswithineachbusinesssector.ThecombinationoftheCreditPolicyFrameworkandLendingStandardsguidescreditassessment,creditriskgrading,documentation standards, legal procedures and compliance with regulatory and statutory requirements.TheRiskCommitteehasauthorityfromtheBoardforapprovalofallcreditexposures.LendingauthorityhasbeenindividuallyprovidedtotheChiefRiskOfficer,fordelegationthroughthebusinessunitsunderadetailedDelegatedLendingAuthorityframework.Applicationofcreditdiscretionsinthebusinessoperationaremonitoredthroughadefinedreviewandhindsightstructure.DelegatedLendingAuthoritiesareprovidedtoindividualofficerswithduecognisanceoftheirexperienceandability.Largerandhigherriskexposuresrequireapprovalofseniormanagement, the credit risk committee and ultimately through to the CRO or the BRC.AlthoughtheGroupreliesprimarilyontheintegrityofborrowersandtheirabilitytomakecontractedrepayments,theGroupalsorequiresappropriatecollateralforloans.Thiscollateralisusuallybywayoffirstchargeovertheassetfinancedandusuallyincludespersonalguaranteesfromborrowersandbusinessowners.Becauseofthewidenatureofthecollateralheldagainstloansitisimpracticaltoprovidean accurate estimate of their fair value.Inadditiontoregularinternalauditactivityinregardstocreditstandards,theGroupemploysacomprehensiveprocessofhindsightingloansto ensure that credit policies and the quality of credit processes are maintained.TheGroup'smarketriskarisesprimarilyduetosignificantexposuretointerestraterisk,predominantlyfromraisingfundsthroughtheretailandwholesaledepositmarket,thedebtcapitalmarketsandcommittedanduncommittedbankfunding,securitisationofreceivables,andoffering loan finance products to the commercial and consumer market in New Zealand.Interestrateriskistheriskthatthevalueofassetsorliabilitieswillchangebecauseofchangesininterestratesorthatmarketinterestratesmaychangeandthusalterthemarginbetweeninterest(cid:31)earningassetsandinterest(cid:31)bearingliabilities.InterestrateriskfortheGroupreferstothe risk of loss due to holding assets and liabilities that may mature or re-price in different periods.TheGroup’sexposuretomarketriskisgovernedbyapolicyapprovedbytheBoardandmanagedbytheALCO.Thispolicysetsoutthenatureofriskwhichmaybetakenandaggregaterisklimits,andtheALCOmustconformtothis.TheobjectiveoftheALCOistoderivethemostappropriatestrategyfortheGroupintermsofthemixofassetsandliabilitiesgivenitsexpectationsofthefutureandthepotentialconsequences of interest rate movements, liquidity constraints and capital adequacy.Creditriskismanagedtoachievesustainableandsuperiorrisk-rewardperformancewhilstmaintainingexposureswithinacceptablerisk“appetite”parameters.Thisisachievedthroughthecombinationofgovernance,policies,systemsandcontrols,underpinnedbysoundcommercial judgement as described below.Creditriskistheriskoflossarisingfromthenon-performanceofacounterpartytoaninstrumentorfacility.Creditriskariseswhenfundsareextended,committed,investedorotherwiseexposedthroughcontractualarrangements,andencompassesbothonandoffbalancesheetinstruments.TheGroup’sexposuretocreditriskisgovernedbyapolicyapprovedbytheBoardandmanagedbytheERC.Thispolicysetsoutthenatureofriskwhichmaybetakenandaggregaterisklimits,andtheERCmustconformtothis.TheobjectiveoftheERCistomanagethebestriskreturn result from lending activities and avoid risk at a transactional and portfolio level inconsistent with the Groups risk appetite.Heartland New Zealand Limited32Heartland New Zealand Limited / Annual Report 2013 / PG 51 NOTES TO THE FINANCIAL STATEMENTSFor the year ended 30 June 201335Risk management policies (continued)Market risk (continued)-Monitoring maturity profiles and seeking to match the re-pricing of assets and liabilities (physical hedging);-Monitoring interest rates daily and regularly (at least monthly) reviewing interest rate exposure; and-Liquidity riskOperational risk---ThesecondlineofdefenceistheRisk&Compliancefunction,responsibleforthedesignandownershipoftheOperationalRiskPolicies.Itincorporateskeyprocessesincludingriskandcontrolassessment,scenarioanalysis,lossdatacollection,newproductapproval process, key risk indicators, notifiable events process, and the self-certification process.TheGroup’sliquidityrisksaregovernedbyaBoardapprovedliquiditystrategythatdefinespolicy,systemsandproceduresformeasuring,assessing, reporting and managing liquidity. This also includes a formal contingency plan for dealing with a liquidity crisis.Operationalriskistheriskarisingfromdaytodayoperationalactivitieswhichmayresultindirectorindirectloss.Operationalrisklossescanoccurasaresultoffraud,humanerror,missingorinadequatelydesignedprocesses,failedsystems,damagetophysicalassets,improperbehaviourorfromexternalevents.Thelossesrangefromdirectfinanciallosses,toreputationaldamage,unfavourablemediaattention,orlossofstafforclients.Examplesincludefailuretocomplywithpolicyandlegislation,humanerror,naturaldisasters,fraudandothermaliciousacts. Where appropriate, risks are mitigated by insurance.Tomanagethismarketrisk,theGroupmeasuressensitivitytointerestratechangesbyfrequentlytestingitspositionagainstvariousinterestrate change scenarios to assess potential risk exposure. The Group also manages interest rate risk by: Entering into forward rate agreements and interest rate swaps and options to hedge against movements in interest rates. Liquidityriskistheriskthatundercertainconditions,cashoutflowscanexceedcashinflowsinagivenperiod.TheGroupmaintainssufficientliquidfundstomeetitscommitmentsbasedonhistoricalandbudgetedcashflowforecasts.Managementofliquidityriskisachievedbymaintaining a prudent level of liquid assets, utilisation of securitisation vehicles and management control of the growth of the business.Thethirdlineofdefenceisaudit.InternalAuditisresponsibleforassessingcompliancewithpolicyframeworksandforprovidingindependent evaluation of the adequacy and effectiveness of the risk and control framework.TheGroup’sexposuretoOperationalriskisgovernedbyapolicyapprovedbytheBoardandmanagedbytheERC.Thispolicysetsoutthenatureofriskwhichmaybetakenandaggregaterisklimits,andtheERCmustconformtothis.TheobjectiveoftheERCistomanagetheidentificationofriskandmaintenanceofasuitablecontrolenvironmentsoresidualrisktotheGroupisconsistentwiththeGroupsriskappetite.Thefirstlineofdefenceisthebusinesslinemanagementfortheidentification,managementandmitigationoftherisksassociatedwiththeproductsandprocessesofthebusiness.Thisaccountabilityincludesregulartestingandcertificationoftheadequacyandeffectiveness of controls and compliance with the Group’s policies.TheGroup’sexposuretoliquidityriskisgovernedbyapolicyapprovedbytheBoardandmanagedbytheALCO.Thispolicysetsoutthenatureofriskwhichmaybetakenandaggregaterisklimits,andtheALCOmustconformtothis.TheobjectiveoftheALCOistoderivethemostappropriatestrategyfortheGroupintermsofthemixofassetsandliabilitiesgivenitsexpectationsoffuturecashflows,liquidityconstraints and capital adequacy.Toensureappropriateresponsibilityisallocatedforthemanagement,reportingandescalationofoperationalrisk,theGroupoperatesa“threelines of defence” model which outlines principles for the roles, responsibilities and accountabilities for operational risk management:Heartland New Zealand Limited33PG 52 / Annual Report 2013 / Heartland New Zealand Limited NOTES TO THE FINANCIAL STATEMENTSFor the year ended 30 June 201336Credit risk exposure(a)Maximum exposure to credit risk at the relevant reporting datesJun 13 Jun 12 Jun 13 Jun 12 $000 $000 $000 $000 Cash and cash equivalents174,26289,6891,485469Investments165,22324,327- - Finance receivables2,010,3762,078,276- - Derivative financial assets6492,122- - Other financial assets7,2863,08036208Total on balance sheet credit exposures2,357,7962,197,4941,521677(b)Concentration of credit risk by geographic regionJun 13 Jun 12 Jun 13 Jun 12 $000 $000 $000 $000 Auckland706,137653,5171,501483Wellington217,928120,469- - Rest of North Island548,046482,342- - Canterbury531,871584,086- - Rest of South Island369,775365,112- - 2,373,7572,205,5261,501483Provision for collectively impaired assets(15,961)(8,032)- - Due from related parties- - 20194Total on balance sheet credit exposures2,357,7962,197,4941,521677(c)Concentration of credit risk by industry sectorAgriculture499,942530,440- - Forestry and Fishing29,56535,698- - Mining19,04414,325- - Manufacturing79,91556,304- - Finance & Insurance348,166134,6301,501483Wholesale trade76,81638,669- - Retail trade155,962144,608- - Households629,854678,508- - Property and Business services320,198297,944- - Transport and storage25,26757,709- - Other Services189,028216,691- - 2,373,7572,205,5261,501483Provision for collectively impaired assets(15,961)(8,032)- - Due from related parties- - 20194Total on balance sheet credit exposures2,357,7962,197,4941,521677(d)Commitments to extend creditUndrawn facilities available to customers106,702125,492- - Conditional commitments to fund at future dates48,42838,796- - Asat30June2013therearenoundrawnlendingcommitmentstocounterpartiesforwhomdrawnbalancesareclassifiedasindividuallyimpaired (2012: nil).GROUPCOMPANYThefollowingtablerepresentsthemaximumcreditriskexposure,withouttakingaccountofanycollateralheld.Theexposuressetoutaboveare based on net carrying amounts as reported in the Statements of Financial Position.GROUPCOMPANYHeartland New Zealand Limited34Heartland New Zealand Limited / Annual Report 2013 / PG 53 NOTES TO THE FINANCIAL STATEMENTSFor the year ended 30 June 201336Credit risk exposure (continued)(e)Real Estate Credit Limited Management agreement (RECL Agreement)(f)PGG Wrightson Finance Limited guaranteed loansMARACenteredintotheRECLagreementon5January2011.Underthisarrangement,RealEstateCreditLimited(RECL)managedcertainnon-corerealestateloansofMARACfora5yearperiodending5January2016,andassumedtheriskoflossonthoseloansforthatperiod.ThepaymentobligationsofRECLwere“limitedinrecourse”toapoolofsecurityprovidedbyRECL.Thispoolofsecurityincludedan$11million5yearzerocouponbond(issuedbyWestpacNewZealandLimitedwhichisratedAA-byStandard&Poor's(Australia)PtyLimited),and other assets (initially real estate or real estate loans) with a required minimum security value of (initially) $19 million.MARACpaidRECLanupfrontfeeof$11million(whichwasbeingamortisedoverthe5yearperiodofthearrangement),andpaidanongoingmanagement fee of $200,000 per annum.On4June2013theRECLAgreementwasterminatedandRECLtransferredtoMARACtheassetschargedtosecurethecompensationpayment.AsaresultoftheRECLAgreementbeingterminated,theunamortisedportionoftheupfrontfeepaidtoRECLhasbeenwrittenoff.ThiswriteoffisreflectedintheGroup'sresultfortheyearended30June2013,refertoNote9-Sellingandadministrationexpenses.Theamountwritten off was $6.1 million.Fortheyearended30June2012,thebenefitoftheRECLagreementwasincludedinthedeterminationofthechargeandtheanalysisofriskgradings and the classification of individually impaired assets, refer to Note 37 - Asset quality.On31August2011,Heartlandacquired100%ofPGGWrightsonFinanceLimitedfromPGGWrightsonLimited(PGW).Aspartoftheacquisition,theBankandPGWenteredintoaDeedofGuaranteeandIndemnityinrelationtocertainloans(theRecourseLoans),withbookvalueonacquisitionof$30.6million.ThisarrangementprovidesHeartlandwithaguaranteefromPGWinrelationtothefuturepaymentofprincipalandinterestontheRecourseLoansforaprescribedperiodofthreeyears.Asat30June2013,totalrecourseloansof$5.7millionwere included in the Banking Group's finance receivables (2012: $28.9 million).Heartland New Zealand Limited35PG 54 / Annual Report 2013 / Heartland New Zealand Limited NOTES TO THE FINANCIAL STATEMENTSFor the year ended 30 June 201337Asset qualityCorporateRuralNon-core PropertyOtherResidentialAll Other(a)Finance receivables by credit risk concentrationRuralPropertyOtherNOTE$000 $000 $000 $000 $000 $000 Jun 13 Neither at least 90 days past due or impaired522,81517,866797,195230,283393,2431,961,402At least 90 days past due37(b)3,97511,0457,5848143,18026,598Individually impaired37(c)2,97961,6344,688- - 69,301Restructured assets6- 1,225- 2,3353,566Provision for impairment37(e)(1,706)(41,512)(5,632)(134)(1,507)(50,491)Total net finance receivables528,06949,033805,060230,963397,2512,010,376Jun 12 Neither at least 90 days past due or impaired552,74050,202713,550322,243349,0521,987,787At least 90 days past due37(b)13,01427,1678,945152,86352,004Individually impaired37(c)1,06050,8602,2752,630- 56,825Restructured assets195,5221,145- 2,4009,086Provision for impairment37(e)(2,519)(17,877)(4,401)(774)(1,855)(27,426)Total net finance receivables564,314115,874721,514324,114352,4602,078,276(b)Past due but not impairedRuralPropertyOther$000 $000 $000 $000 $000 $000 Jun 13 Less than 30 days past due7,5101796,0501,9098,67524,323At least 30 and less than 60 days past due1,390- 3,4576902,3717,908At least 60 but less than 90 days past due1431273,2632001,4345,167At least 90 days past due3,97511,0457,5848143,18026,598Total past due but not impaired13,01811,35120,3543,61315,66063,996Jun 12 Less than 30 days past due5,2953659,7241,6586,69623,738At least 30 and less than 60 days past due2,4271394,4927222,52910,309At least 60 but less than 90 days past due2,5443,4551,4012511,2088,859At least 90 days past due13,01427,1678,945152,86352,004Total past due but not impaired23,28031,12624,5622,64613,29694,910Property asset lending including non-core property.CorporateResidentialAll OtherTotalLendingtothefarmingsectorprimarilylivestock,ruralmortgagelending,seasonalandworkingcapitalfinancing,as well as leasing solutions to farmers. Includes lending to individuals and small to medium enterprises.Lendingsecuredbyafirstrankingmortgageoveraresidentialpropertyusedprimarilyforresidentialpurposeseither by the mortgagor or a tenant of the mortgagor.GROUPCorporateResidentialAll OtherTotalAll other lending that does not fall into another category.Consumer lending to individuals.GROUPThe disclosures in this note are categorised by the following credit risk concentrations:Heartland New Zealand Limited36Heartland New Zealand Limited / Annual Report 2013 / PG 55 NOTES TO THE FINANCIAL STATEMENTSFor the year ended 30 June 201337Asset quality (continued)(c)Individually impaired assetsRuralPropertyOther$000 $000 $000 $000 $000 $000 Jun 13 Opening1,06050,8602,2752,630- 56,825Additions 2,98030,9385,631133- 39,682Deletions(795)(16,740)(1,160)(1,832)- (20,527)Write offs(266)(3,424)(2,058)(931)- (6,679)Closing gross individually impaired assets2,97961,6344,688- - 69,301Less: provision for individually impairment assets1,12531,2522,153- - 34,530Total net impaired assets1,85430,3822,535- - 34,771Jun 12 Opening19551,85316,489- - 68,537Additions 2,58930,0705,0562,661- 40,376Deletions(1,837)(24,359)(13,096)(31)- (39,323)Assumed on acquisition1,871- - - - 1,871Write offs(1,758)(6,704)(6,174)- - (14,636)Closing gross individually impaired assets1,06050,8602,2752,630- 56,825Less: provision for individually impairment assets69616,9171,086695- 19,394Total net impaired assets36433,9431,1891,935- 37,431(d)Credit risk gradingThe Group classifies finance receivables as Behavioural or Judgement. Behavioural loans are classified as either not in arrears, active, arrangement, non-performing / repossession or recovery, as 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.••GROUPCorporateResidentialAll OtherTotalNon-performing/Repossession–residentialmortgageloansthataregreaterthan90dayspastdue/otherloansforwhichsecurityhasor is in the process of being repossessed.Recoveryloans–loansforwhichsecurityhasbeensoldandshortfallsarebeingsoughtfromthecustomerorwhereotherrecoveryaction is being taken.TheGroup'sreceivablesaremonitoredeitherbyaccountbehaviouroraregularassessmentoftheircreditriskgradebasedonanobjectivereview of defined risk characteristics. The portfolio risk is regularly refreshed based on current information.TheBehaviouralportfolioconsistsmainlyofconsumerandretailreceivablesandusuallyrelatestofinancingtheacquisitionofasingleasset.ConsumerloansaretypicallyintroducedbyvendorsoftheassetfinancedandaresmallerinvaluethanJudgementloans.Behaviouralloansare risk graded based on arrears status.TheJudgementportfolioconsistsmainlyofbusinessandrurallendingandincludesnon-coreproperty.Judgementloansrelatetoloanswherean ongoing and detailed working relationship with the customer has been developed.Judgementloansareindividuallyriskgradedbasedonloanstatus,financialinformation,securityanddebtservicingability.ExposuresintheJudgement portfolio are credit risk graded by an internal risk grading mechanism.IntheJudgementportfolio,grade1isthestrongestriskgradeforundoubtedriskandgrade9representsthehighestriskgradewherealossisprobable.Grade10reflectslossaccountswrittenoff.Grades2to8representascendingstepsinmanagement'sassessmentofriskofexposures. The Group typically finances new loans in risk grades 2 to 5 of the Judgement portfolio.Heartland New Zealand Limited37PG 56 / Annual Report 2013 / Heartland New Zealand Limited NOTES TO THE FINANCIAL STATEMENTSFor the year ended 30 June 201337Asset quality (continued)(d)Credit risk grading (continued)RuralPropertyOther$000 $000 $000 $000 $000 $000 Jun 13 JudgementportfolioGrade 1 - Very Strong575- - - - 575Grade 2 - Strong6,689- 8,87741- 15,607Grade 3 - Sound17,050- 64,2422,320- 83,612Grade 4 - Adequate *106,467- 153,8484,671- 264,986Grade 5 - Acceptable234,9121,979181,85119,326- 438,068Grade 6 - Monitor122,87612,29760,5602,637- 198,370Grade 7 - Substandard5,150- 12,120764- 18,034Grade 8 - Doubtful26920,924325- - 21,518Grade 9 - At risk of loss1,85024,0931,818- - 27,761Total Judgement portfolio495,83859,293483,64129,759- 1,068,531BehaviouralportfolioNot in arrears32,565- 318,094196,545381,730928,934Active197- 3,3464,5178,44416,504Arrangement45- 1,985- 6,1168,146Non-performing / Repossession5- 902- 1,3192,226Recovery- - 5712761,1491,996Total Behavioural portfolio32,812- 324,898201,338398,758957,806Provision for collectively impaired assets(581)(10,260)(3,479)(134)(1,507)(15,961)Total finance receivables528,06949,033805,060230,963397,2512,010,376Jun 12 JudgementportfolioGrade 1 - Very Strong1,280- - - - 1,280Grade 2 - Strong3,273- 12,6481,169- 17,090Grade 3 - Sound20,1376,01852,2404,564- 82,959Grade 4 - Adequate *120,77958,054134,47210,472- 323,777Grade 5 - Acceptable220,50823,388181,42117,704- 443,021Grade 6 - Monitor121,66656561,2491,835- 185,315Grade 7 - Substandard32,4107,39712,984569- 53,360Grade 8 - Doubtful4,9948,141961- - 14,096Grade 9 - At risk of loss16913,27131- - 13,471Total Judgement portfolio525,216116,834456,00636,313- 1,134,369BehaviouralportfolioNot in arrears39,887- 259,493283,301338,438921,119Active244- 2,4431,6575,6009,944Arrangement365- 4,1439728,27013,750Non-performing / Repossession81- 1,9721,9503834,386Recovery344- 772- 1,6242,740Total Behavioural portfolio40,921- 268,823287,880354,315951,939Provision for collectively impaired assets(1,823)(960)(3,315)(79)(1,855)(8,032)Total finance receivables564,314115,874721,514324,114352,4602,078,276*--CorporateResidentialAll OtherTotalIn determining the Group's risk grading, the following arrangements have been taken into consideration:TheRECLAgreement,refertoNote36(e)-Creditriskexposureformoredetails.Intheriskgradingtableabove,asat30June2012$48millionofJudgementloanshadbeentransferredfromriskgradesbelowAcceptabletoanAdequateriskgradeastheywerecovered by the RECL Agreement. The RECL Agreement was terminated on 4 June 2013.PGGWrightsonFinanceLimitedguaranteedloans,refertoNote36(f)-Creditriskexposureformoredetails.Intheriskgradingtableabove,asat30June2013$6million(2012:$29million)ofJudgementloanshavebeentransferredfromriskgradesbelowAcceptableto an Adequate risk grade as they are covered by the Deed of Guarantee and Indemnity with PGG Wrightson Limited. GROUPHeartland New Zealand Limited38Heartland New Zealand Limited / Annual Report 2013 / PG 57 NOTES TO THE FINANCIAL STATEMENTSFor the year ended 30 June 201337Asset quality (continued)(e)Provision for impairmentRuralPropertyOther$000 $000 $000 $000 $000 $000 Jun 13 Provision for individually impaired assetsOpening provision for individually impaired assets69616,9171,086695- 19,394Impairment loss for the year- charge for the year 6879,1153,036263- 13,101- RECL recovery- 9,809- - - 9,809- recoveries261135- - 162- write offs(266)(3,424)(2,058)(931)- (6,679)- effect of discounting(18)(1,166)(46)(27)- (1,257)Closing provision for individually impaired assets1,12531,2522,153- - 34,530Provision for collectively impaired assetsOpening provision for collective impaired assets1,8239603,315791,8558,032Impairment loss for the year- charge/(credit) for the year (1,244)9,090980625389,426- RECL recovery- 216- - - 216- recoveries61114- 147268- write offs(4)(7)(930)(7)(1,033)(1,981)Closing provision for collective impaired assets58110,2603,4791341,50715,961Total provision for impairment1,70641,5125,6321341,50750,491Jun 12 Provision for individually impaired assetsOpening provision for individually impaired assets13420,0475,976- - 26,157Impairment loss for the year- charge for the year *1,0013,6971,528695- 6,921- recoveries3532160- - 227- write offs(1,758)(6,704)(6,174)- - (14,636)- assumed on acquisition1,284- - - - 1,284- effect of discounting- (155)(404)- - (559)Closing provision for individually impaired assets69616,9171,086695- 19,394Provision for collectively impaired assetsOpening provision for collective impaired assets2,5011,5955,0792,03792812,140Impairment loss for the year- charge/(credit) for the year *(682)(907)(182)(1,958)2,450(1,279)- recoveries4- 231- 116351- write offs- 272(1,813)- (1,639)(3,180)Closing provision for collective impaired assets1,8239603,315791,8558,032Total provision for impairment2,51917,8774,4017741,85527,426*All OtherTotalIndeterminingthechargefortheyearended30June2012,theRECLAgreementwastakenintoconsideration,refertoNote36(e)-Creditriskexposureformoredetails.Inassessingtherequirementsforprovisions,theGroupidentifiedloansforwhichalosswasexpectedtobecoveredbytheRECLAgreementof$28.5millionasat30June2012,andtothisextenttheRECLAgreementwasfullyutilised.Theagreement covered the MARAC non-core property loans with a net book value of $94 million as at 30 June 2012.Judgementloansingrades6to8ordinarilyattractacollectiveprovisionbasedonriskgradingoverlaidwiththestrengthofsecurityposition,exceptforriskgrades6whichhavestrongsecurityandaccordinglyattractnocollectiveprovision(typicallyruralexposures).Othercollectiveprovisionsarealsomaintainedwhereconsideredappropriateagainstaclassofloansorthosewithcommonriskcharacteristics.Judgementloanswithariskgradeof1to5maybepastdueandnotattractaprovisioniftheGrouphasreviewedtheriskpositionanditisdeemedtoremain sound. Under such circumstances normally an amended credit risk grade will result.TheGroupraisesprovisionsbasedonhistoricallossexperienceforloansriskgradedingrades6to8.Loansingrade9oftheJudgementportfolio are individually assessed for impairment. GROUPCorporateResidentialForBehaviouralloans,asarrearsdriveprovisionoutcomes,thetrendinarrearsbehaviourisanindicatoroffutureprovisioningimpact.Eacharrears classification carries a provision for potential loss based on historical experience for that classification in the same portfolio.Heartland New Zealand Limited39PG 58 / Annual Report 2013 / Heartland New Zealand Limited NOTES TO THE FINANCIAL STATEMENTSFor the year ended 30 June 201338Liquidity riskContractual liquidity profile of financial assets and liabilitiesOn0-66-121-22-55+DemandMonthsMonthsYearsYearsYearsTotal$000 $000 $000 $000 $000 $000 $000 Jun 13 Cash and cash equivalents174,262- - - - - 174,262Investments11,5201,64747,88236,92379,522- 177,494Finance receivables- 562,696283,239415,549496,023448,4222,205,929Finance receivables - securitised- 55,88955,91089,52491,78965,199358,311Derivative financial assets649- - - - - 649Other financial assets- 7,286- - - - 7,286Total financial assets186,431627,518387,031541,996667,334513,6212,923,931Borrowings452,201859,386387,733119,94463,501- 1,882,765Borrowings - securitised- 4,496260,834- - - 265,330Derivative financial liabilities30- - - - - 30Other financial liabilities- 17,394- - - - 17,394Total financial liabilities452,231881,276648,567119,94463,501- 2,165,519Net financial (liabilities) / assets(265,800)(253,758)(261,536)422,052603,833513,621758,412Unrecognised loan commitments106,702- - - - - 106,702Undrawn committed bank facilities240,000- - - - - 240,000Jun 12 Cash and cash equivalents89,689- - - - - 89,689Investments- 49849899625,314- 27,306Finance receivables- 572,857336,063342,005509,685638,1072,398,717Finance receivables - securitised- 53,56854,15786,87483,887112,015390,501Derivative financial assets2,122- - - - - 2,122Other financial assets- 3,080- - - - 3,080Total financial assets91,811630,003390,718429,875618,886750,1222,911,415Borrowings237,036760,301419,224272,61949,549- 1,738,729Borrowings - securitised- 4,578192,07275,157- - 271,807Derivative financial liabilities1,459- - - - - 1,459Other financial liabilities- 18,329- - - - 18,329Total financial liabilities238,495783,208611,296347,77649,549- 2,030,324Net financial (liabilities) / assets(146,684)(153,205)(220,578)82,099569,337750,122881,091Unrecognised loan commitments125,492- - - - - 125,492Undrawn committed bank facilities335,000- - - - - 335,000Thetableshavebeenpreparedusingestimatesoftheaverageinterestrateapplicableforeachassetorliabilityclassduringthecontractualterm.ThefollowingtablesshowthecashflowsontheGroup'sfinancialliabilitiesandunrecognisedloancommitmentsonthebasisoftheirearliestpossiblecontractualmaturity.Inthefollowingtables,totalfinancialassetsdonotincludeunrecognisedloancommitmentsandtotalfinancialliabilities do not include undrawn committed bank facilities.Theundrawncommittedbankfacilitiestotalling$335.0millionareavailabletobedrawndownondemand.Totheextentdrawn,$50.0millioniscontractuallyrepayablein0-6months'time,$110.0millioniscontractuallyrepayablein6-12months'timeand$175.0millioniscontractuallyrepayable in 1-2 years' time upon facility expiry.Theundrawncommittedbankfacilitiestotalling$240.0millionwereavailabletobedrawndownondemand.Totheextentdrawn,240.0million is contractually repayable in 6-12 months' time upon facility expiry.GROUPHeartland New Zealand Limited40Heartland New Zealand Limited / Annual Report 2013 / PG 59 NOTES TO THE FINANCIAL STATEMENTSFor the year ended 30 June 201338Liquidity risk (continued)Expected maturity profile of financial assets and liabilitiesOn0-66-121-22-55+DemandMonthsMonthsYearsYearsYearsTotal$000 $000 $000 $000 $000 $000 $000 Jun 13 Cash and cash equivalents174,262- - - - - 174,262Investments11,5201,64747,88236,92379,522- 177,494Finance receivables- 520,198421,900514,305468,85461,3581,986,615Finance receivables - securitised- 81,56272,57097,60364,991776317,502Derivative financial assets649- - - - - 649Other financial assets- 7,286- - - - 7,286Total financial assets186,431610,693542,352648,831613,36762,1342,663,808Borrowings4,522342,029231,600357,000590,880474,7832,000,814Borrowings - securitised- 53,9183,5727,20321,628210,000296,321Derivative financial liabilities30- - - - - 30Other financial liabilities- 17,394- - - - 17,394Total financial liabilities4,552413,341235,172364,203612,508684,7832,314,559Net financial assets / (liabilities)181,879197,352307,180284,628859(622,649)349,249Unrecognised loan commitments106,702- - - - - 106,702Undrawn committed bank facilities240,000- - - - - 240,000Jun 12 Cash and cash equivalents89,689- - - - - 89,689Investments- 49849899625,314- 27,306Finance receivables- 579,947386,570372,340666,17956,4592,061,495Finance receivables - securitised- 67,97660,17182,716115,136- 325,999Derivative financial assets2,122- - - - - 2,122Other financial assets- 3,080- - - - 3,080Total financial assets91,811651,501447,239456,052806,62956,4592,509,691Borrowings2,370267,212226,095456,293546,244359,4431,857,657Borrowings - securitised- 4,5784,5039,08227,269265,746311,178Derivative financial liabilities1,459- - - - - 1,459Other financial liabilities- 18,329- - - - 18,329Total financial liabilities3,829290,119230,598465,375573,513625,1892,188,623Net financial assets / (liabilities)87,982361,382216,641(9,323)233,116(568,730)321,068Unrecognised loan commitments125,492- - - - - 125,492Undrawn committed bank facilities335,000- - - - - 335,000GROUPThe tables below show management's expected maturities of existing financial assets and financial liabilities. ThebelowdoesnotreflectaforwardlookingviewofhowtheGroupexpectsactualfinancialassetsandliabilitiestoperforminthefuture,asitdoes not include new lending and borrowing.Expectedmaturitiesoffinancialassetsarebasedonmanagement'sbestestimatehavingregardtocurrentmarketconditionsandpastexperience. Historical deposit reinvestment levels have been applied to borrowings. Other financial liabilities reflect contractual maturities.Heartland New Zealand Limited41PG 60 / Annual Report 2013 / Heartland New Zealand Limited NOTES TO THE FINANCIAL STATEMENTSFor the year ended 30 June 201339Interest rate riskContractual Repricing Analysis0-34-66-121-22+Non-interestMonthsMonthsMonthsYearsYearsbearingTotal$000 $000 $000 $000 $000 $000 $000 Jun 13 Financial assetsCash and cash equivalents174,262- - - - - 174,262Investments128,370- 15,5454,29117,017- 165,223Finance receivables1,206,54295,833147,126157,208128,1555341,735,398Finance receivables - securitised80,96829,68550,69967,59746,029- 274,978Other financial assets 649- - - - 7,2867,935Total financial assets1,590,791125,518213,370229,096191,2017,8202,357,796Financial liabilitiesBorrowings961,916339,250373,581111,12952,743- 1,838,619Borrowings - securitised258,934- - - - - 258,934Other financial liabilities30- - - - 17,39417,424Total financial liabilities1,220,880339,250373,581111,12952,74317,3942,114,977Effect of derivatives held for risk management179,350(18,700)(45,330)(61,200)(54,120)- - Net financial assets549,261(232,432)(205,541)56,76784,338(9,574)242,819Jun 12 Financial assetsCash and cash equivalents89,689- - - - - 89,689Investments22,149- - - 2,178- 24,327Finance receivables1,248,94598,677153,534172,003127,6427071,801,508Finance receivables - securitised89,28530,03149,89569,86837,689- 276,768Other financial assets 2,122- - - - 3,0805,202Total financial assets1,452,190128,708203,429241,871167,5093,7872,197,494Financial liabilitiesBorrowings669,815308,897396,086259,95640,376- 1,675,130Borrowings - securitised75,105189,254- - - - 264,359Other financial liabilities1,459- - - - 18,32919,788Total financial liabilities746,379498,151396,086259,95640,37618,3291,959,277Effect of derivatives held for risk management218,38742,690(43,869)(175,718)(41,490)- - Net financial assets924,198(326,753)(236,526)(193,803)85,643(14,542)238,217GROUPThemanagementofinterestrateriskagainstinterestrategaplimitsissupplementedbymonitoringthesensitivityoftheGroup'sfinancialassetsandliabilitiestovariousstandardandnonstandardinterestratescenarios.Standardscenarioswhichareconsideredonamonthlybasisincludea100basispointparallelfallorriseintheyieldcurve.Thereisnomaterialimpactonprofitorlossintermsofafairvaluechangefrommovementsinmarketinterestrates.FurthermorethereisnomaterialcashflowimpactontheStatementsofCashFlowsfroma100 basis point change in interest rates.The tables above illustrate the periods in which the cash flows from interest rate swaps are expected to occur and affect profit or loss.Theinterestrateriskprofileoffinancialassetsandliabilitiesthatfollowshasbeenpreparedonthebasisofmaturityornextrepricingdate,whichever is earlier.Heartland New Zealand Limited42Heartland New Zealand Limited / Annual Report 2013 / PG 61 NOTES TO THE FINANCIAL STATEMENTSFor the year ended 30 June 201340Concentrations of fundingJun 13 Jun 12 Jun 13 Jun 12 $000 $000 $000 $000 (a)Concentration of funding by industryFinance258,934314,369- -Households1,732,0741,518,657- -Listed bond106,545106,463- - Total borrowings2,097,5531,939,489- - (b)Concentration of funding by geographical areaAuckland409,923442,727- - Wellington304,297240,758- - Rest of North Island392,056325,091- - Canterbury725,365681,474- - Rest of South Island184,800173,787- - Overseas81,11275,652- - Total borrowings2,097,5531,939,489- - 41Contingent liabilities and commitmentsJun 13 Jun 12 Jun 13 Jun 12 $000 $000 $000 $000 Letters of credit, guarantees and performance bonds5,03313,404- - Total contingent liabilities5,03313,404- - The Group also has contingent commitments to fund at future dates as set out in Note 36(d) - Credit risk exposure.42Events after the reporting dateMaturity of NZDX listed bondCBS Trust securitisation facilityDeclaration of dividendOn26August2013,theDirectorsresolved topay afinaldividend fortheyearended30June2013of$9.7million,representing2.5centspershare. The dividend is payable on 4 October 2013.Therehavebeennoothermaterialeventsafterthereportingdatethatwouldaffecttheinterpretationofthefinancialstatementsortheperformance of the Group.On15July2013theNZDXlistedbondmaturedandwasrepaidinfullfromfundsreportedwithinCashandCashequivalentsasat30June2013.GROUPGROUPCOMPANYCOMPANYOn31July2013,theGroupcancelled$50millionoftheCBSTrustsecuritisationfacility.On15August2013,theremaining$50millionCBSTrust securitisation facility was cancelled and all of the receivables in CBS Trust were sold back to the Bank.Heartland New Zealand Limited438.0 Audit Report 61. 21 to PG 62 / Annual Report 2013 / Heartland New Zealand Limited 44Independent auditor’s reportTo the shareholdersof Heartland New Zealand LimitedReport on the companyand group financial statementsWe have audited the accompanying financial statements ofHeartland New Zealand Limited(''the company'') and the group, comprising the companyand its subsidiaries,on pages3to 43.The financial statements comprisethe statementsof financial position as at 30 June 2013,thestatements of comprehensive income,changes in equityand cash flowsfor the yearthen 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 statementsThe directorsareresponsible for the preparation of companyand 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 directorsdetermine is necessary to enable the preparation of companyand group financial statements that are free from material misstatement whether due to fraud or error.Auditor’sresponsibilityOur responsibilityisto express an opinion on thesecompanyand 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 thecompanyand group financial statements are free from material misstatement.An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the companyand 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 companyand 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 companyand group's internal control.An audit also includesevaluating 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 companyand group in relation to general accounting services. Subject to restrictions, partners and employees of our firm may also deal with the companyand group on normal terms within the ordinary course of trading activities of the business of the companyand group. These matters have not impaired our independence asauditorof the companyand group. The firm has no other relationship with, or interest in, the companyand group.21 to 61: Heartland New Zealand Limited / Annual Report 2013 / PG 63 45OpinionIn our opinion the financial statements on pages 3to 43:•comply with generally accepted accounting practice in New Zealand;•comply with International Financial Reporting Standards; •givea true and fair view of the financial position of the companyand the group as at 30June 2013and of the financial performance and cash flows of the companyandthe group for the yearthen ended.Report on other legal and regulatory requirementsIn 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 keptby Heartland New Zealand Limitedas far as appears from our examination of those records.26 August 2013Auckland9.0 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 2013. Heartland New Zealand Limited Jeffrey Kenneth Greenslade Bruce Robertson Irvine Graham Russell Kennedy Gary Richard Leech Christopher Robert Mace Geoffrey Thomas Ricketts Gregory Raymond Tomlinson (appointed 18 March 2013) Non-Independent Director Independent Director Independent Director Independent Director Independent Director Independent Director Non-Independent Director Heartland Financial Services Limited Jeffrey Kenneth Greenslade Heartland NZ Holdings Limited (formerly BSHL No.1 Limited)1 Jeffrey Kenneth Greenslade Heartland NZ Trustee Limited Jeffrey Kenneth Greenslade Bruce Robertson Irvine Heartland Bank Limited (formerly Heartland Building Society) Jeffrey Kenneth Greenslade Edward John Harvey Bruce Robertson Irvine Graham Russell Kennedy Gary Richard Leech Christopher Robert Mace Geoffrey Thomas Ricketts Michelle Anne Smith (resigned 1 February 2013) Richard Arthur Wilks (appointed 1 February 2013) MARAC Finance Limited Jeffrey Kenneth Greenslade Bruce Robertson Irvine VPS Parnell Limited Bruce Robertson Irvine Mark Stephen Mountcastle (appointed 2 November 2012) VPS Properties Limited Bruce Robertson Irvine Mark Stephen Mountcastle (appointed 2 November 2012) CBS Canterbury Limited Graham Russell Kennedy Canterbury Building Society Limited Graham Russell Kennedy Southern Cross Nominees Limited Geoffrey Thomas Ricketts Southern Cross Building and Investments Limited Geoffrey Thomas Ricketts PGG Wrightson Finance Limited Bruce Robertson Irvine Jeffrey Kenneth Greenslade 1 On 8 February 2013, BSHL No.2 Limited – BSHL No.20 Limited amalgamated to become BSHL No.1 Limited that changed its name on amalgamation to Heartland NZ Holdings Limited. PG 64 / Annual Report 2013 / Heartland New Zealand Limited 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 2013. 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 $47,437.50. 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 2013 are as follows: B R Irvine No. of Shares Class of Shares Nature of Relevant Interest Acquisition/Disposal Consideration Date of Acquisition/ Disposal 1,272 Ordinary Non-beneficial Disposal Nil 30 January 2013 J K Greenslade No. of Shares Class of Shares Nature of Relevant Interest Acquisition/Disposal Consideration Date of Acquisition/ Disposal 307,083 Ordinary Beneficial Acquisition $184,250 25 September 2012 G R Leech No. of Shares Class of Shares Nature of Relevant Interest Acquisition/Disposal Consideration Date of Acquisition/ Disposal 2,406 2,381 2,406 2,406 Ordinary Ordinary Ordinary Ordinary G R Kennedy Non-beneficial Non-beneficial Non-beneficial Non-beneficial Disposal Disposal Disposal Disposal $1,907 $1,887 $1,907 $1,907 26 June 2013 26 June 2013 26 June 2013 26 June 2013 No. of Shares Class of Shares Nature of Relevant Interest Acquisition/Disposal Consideration Date of Acquisition/ Disposal 96,000 4,054 45,946 70,949 54,000 12,025 37,975 105,000 400,000 50,000 325,000 325,000 10,000 Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary G R Tomlinson Non-beneficial Non-beneficial Non-beneficial Non-beneficial Non-beneficial Non-beneficial Non-beneficial Non-beneficial Non-beneficial Non-beneficial Non-beneficial Non-beneficial Non-beneficial Disposal Disposal Disposal Disposal Disposal Disposal Disposal Disposal $51,840 $2,270 $28,945 $48,215 $36,720 $8,778 $27,721 $77,700 Disposal - resignation as trustee Nil Disposal Disposal Disposal Acquisition $37,500 $247,000 $247,000 Nil 16 August 2012 16 August 2012 26 September 2012 07 January 2013 24 January 2013 05 March 2013 06 March 2013 11 March 2013 11 March 2013 15 March 2013 08 April 2013 08 April 2013 18 June 2013 No. of Shares Class of Shares Nature of Relevant Interest Acquisition/Disposal Consideration Date of Acquisition/ Disposal 36,695,489 Ordinary Beneficial Initial Disclosure Nil 18 March 2013 Heartland New Zealand Limited / Annual Report 2013 / PG 65 General Notice of Disclosure of Interest in the Interests Register Director Capacity Date Disclosure J K Greenslade Director of Heartland New Zealand Limited 31 August 2012 G R Kennedy G R Leech Director of Heartland New Zealand Limited Director of Heartland New Zealand Limited 5 April 2013 31 August 2012 Director and Shareholder of Brew Greenslade & Company Limited, and an indirect shareholder via Brew Greenslade Company Limited in Provisional Tax Finance Limited. Appointment as a Director of Bradford Management 2013 Limited on 14 March 2013. Director of Ashburton Implement Services Limited, Back Track Dairies Limited, Bakker Bulbs Limited, Cariboo New Zealand (2011) Limited, Clock Trustees Limited, Hooked Trustee Company Limited, Leech & Partners Trustees (2004) Limited, Leech & Partners Trustees (2007) Limited, Leech & Partners Trustees (2009) Limited, Leech & Partners Trustees (2010) Limited, Leech & Partners Trustees (2011) Limited, Leech & Partners Trustees (2012) Limited, Londale Development Limited, Lye Properties Limited, McGoldrick Trustees Limited, Northbank Irrigation Limited1, Power Turf Limited2, Radfield Trustees Limited, Sempiternal Custodians Limited, South Pacific Seed Sales (NZ) Limited, TCB Results Limited, Te Mahanga Trustee Company Limited, Webling & Stewart Limited, W.H. Collins & Co., Limited, Windermere Trustees Limited, and Woodams Properties Limited3. C R Mace G T Ricketts G R Tomlinson Director of Heartland New Zealand Limited Director of Heartland New Zealand Limited Director of Heartland New Zealand Limited 30 November 2012 Appointment as a director of The New Zealand Sock Company Limited on 25 September 2012. 3 May 2013 Appointment to the Tertiary Education Commission Board on 3 April 2013. 30 November 2012 Appointment as a Director of Shopping Centres Australasia Property Group 3 May 2013 Trustee NZ Limited on 30 October 2012. A Director of Argenta Limited, Aotearoa Assets Limited, Chippies Vineyard Limited, Doyen Investments Limited, Forte Health Limited, Impact Capital Limited, Impact Capital Management Limited, Indevin Group Limited, Indevin Supply Limited, Little Ngakuta Trust Company Limited, Lokoya Limited, Nearco Stud Limited, Ngakuta Trust Company Limited, Oceania Village Company Limited, Pelorus Finance Limited, Retirement Care (NZ) Limited, St Leonards Limited, The Homestead 2006 Limited and Tom3 Limited. R A Wilks Director of Heartland Bank Limited 3 May 2013 A Director of New Zealand Experience Limited, Rainbow’s End Theme Park Limited, Rangatira Limited and The New Zealand Guardian Trust Company Limited. 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 2013. Beneficial 879,062 454,398 481,052 172,451 12,285,439 12,285,439 36,695,489 Non-Beneficial 2,017,273 7,686,316 5,788,827 235,765 5,700,456 5,700,456 0 At 30 June 2013 J K Greenslade B R Irvine G R Kennedy G R Leech C R Mace G T Ricketts G R Tomlinson 1 Resigned 17 June 2013. 2 Resigned 26 February 2013. 3 Resigned 31 May 2013. PG 66 / Annual Report 2013 / Heartland New Zealand Limited 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 2013 was as follows. Director Remuneration B R Irvine C R Mace G T Ricketts G R Kennedy G R Leech M A Smith (retired 1 February 2013) E J Harvey G R Tomlinson (appointed 18 March 2013) R A Wilks (appointed 1 February 2013) The total remuneration paid was $726,552.29. $162,500 $ 92,500 $ 85,000 $ 92,500 $ 95,000 $ 47,384 $ 90,000 $ 21,667 $ 40,000 Remuneration and/or Other Benefits from the Company to the Executive Director The Company has made a grant to J K Greenslade under the Heartland LTI Cash Entitlements Plan. The grant date was 23 November 2012, the Reference Price was $0.7205 and the Reference Pool was 1,350,000 HNZ shares (see note 33 of the financial statements for further details on this plan). Executive directors and employees acting as directors do not receive director’s fees. The total remuneration and value of other benefits (including the grant above) of the executive director was as follows: J K Greenslade $1,390,482 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 2013 is set out in the remuneration bands detailed below. Remuneration $100,000 to $109,999 $110,000 to $119,999 $120,000 to $129,999 $130,000 to $139,999 $140,000 to $149,999 $150,000 to $159,999 $160,000 to $169,999 $170,000 to $179,999 $180,000 to $189,999 $190,000 to $199,999 $200,000 to $209,999 $220,000 to $229,999 $240,000 to $249,999 $250,000 to $259,999 $260,000 to $269,999 $280,000 to $289,999 $390,000 to $399,999 $540,000 to $549,999 $630,000 to $639,999 $650,000 to $659,999 $730,000 to $739,999 Number 8 6 14 7 10 7 2 4 1 3 2 1 2 1 1 1 2 1 1 1 1 Heartland New Zealand Limited / Annual Report 2013 / PG 67 10.0 Shareholder Information Spread of Shares Set out below are details of the spread of shareholders of the Company as at 1 August 2013. 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 1,064 2,449 1,433 2,310 506 330 8,092 650,147 6,512,552 10,856,025 53,726,289 36,190,334 280,768,628 388,703,975 0.17 1.68 2.79 13.82 9.31 72.23 100% Twenty Largest Shareholders Set out below are details of the 20 largest shareholders of the Company as at 1 August 2013. Rank Shareholder Total Shares % of Total Shareholders 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Harrogate Trustee Limited Accident Compensation Corporation Philip Maurice Carter PGG Wrightson Limited Oceania & Eastern Limited Cogent Nominees Limited Gould Holdings Limited HSBC Nominees (New Zealand) Limited Citibank Nominees (NZ) Limited Leveraged Equities Finance Limited National Nominees New Zealand Limited FNZ Custodians Limited Jarden Custodians Limited Investment Custodial Services Limited Investment Custodial Services Limited New Zealand Superannuation Fund Nominees Limited Heartland Trust New Zealand Permanent Trustees Limited Custodial Services Limited Forsyth Barr Custodians Limited 36,695,489 21,254,284 20,973,492 13,333,333 12,285,439 12,008,764 7,417,427 6,719,424 6,664,221 6,518,340 5,959,666 5,753,163 4,500,000 4,464,273 4,028,738 3,776,134 3,420,197 3,150,000 2,906,391 2,799,787 9.44 5.47 5.4 3.43 3.16 3.09 1.91 1.73 1.71 1.68 1.53 1.48 1.16 1.15 1.04 0.97 0.88 0.81 0.75 0.72 TOTAL FOR TOP 20 HOLDERS 184,628,562 47.50 PG 68 / Annual Report 2013 / Heartland New Zealand Limited Substantial Security Holders At 1 August 2013, the following security holders had given notice in accordance with the Securities Markets Act 1988 that they were substantial security holders in the Company. The number of shares shown below are as advised in the most recent substantial security holder notices to the Company and may not be their holding as at 1 August 2013. Name Number of Shares Class of Shares Accident Compensation Corporation, Nicholas Bagnall, Blair Tallott, Paul Robertshawe and Blair Cooper 23,351,310 Blair Cooper (includes ACC’s relevant interest) Blair Tallott (includes ACC’s relevant interest) Harrogate Trustee Limited and Gregory Raymond Tomlinson Philip Maurice Carter 21,113,919 21,123,239 34,510,011 20,973,492 Ordinary Ordinary Ordinary Ordinary Ordinary The total number of Heartland New Zealand Limited ordinary shares on issue as at 1 August 2013 was 388,703,975. Heartland New Zealand Limited / Annual Report 2013 / PG 69 11.0 Other Information NZX Waivers Set out below is a summary of all waivers granted to the Company by NZX Limited within, or relied on by the Company, within the 12 month period preceding the date two months before the publication of this Annual Report. The Company was granted a waiver from NZSX Listing Rule 7.6.4(b)(iii) to enable it to include its Chief Executive Officer within the participating employees under an employee share plan established for selected executives and other employees. PG 70 / Annual Report 2013 / Heartland New Zealand Limited 12.0 Executives and Directory 1 Heartland New Zealand Limited Directors Geoffrey Ricketts Jeffrey Greenslade Graham Kennedy Gary Leech Christopher Mace Gregory Tomlinson Executives Chris Flood Michael Jonas James Mitchell Mark Mountcastle Simon Owen Will Purvis Sarah Selwood Chairman Managing Director Director Director Director Director Head of Retail & Consumer Head of Strategic & Product Development Chief Operating Officer Chief Risk Officer Chief Financial Officer Head of Business & Rural Head of Human Resources Heartland Bank Limited Chairman Managing Director Director Director Director Director Director Executive Director Head of Retail & Consumer Head of Strategic & Product Development Chief Operating Officer Chief Risk Officer Chief Financial Officer Head of Business & Rural Head of Human Resources Directors Bruce Irvine Jeffrey Greenslade Nicola Greer John Harvey Graham Kennedy Geoffrey Ricketts Richard Wilks Michael Jonas Executives Chris Flood Michael Jonas James Mitchell Mark Mountcastle Simon Owen Will Purvis Sarah Selwood 1 Correct as at 20 September 2013. 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 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, Auckland 1140 T 09 367 5800 Share Registry Link Market Services Limited Level 16, Brookfields House 19 Victoria Street West, Auckland 1010 T 09 375 5998 F 09 375 5990 E enquiries@linkmarketservices.co.nz W www.linkmarketservices.co.nz Heartland New Zealand Limited / Annual Report 2013 / PG 71

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