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
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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 Limited3 26 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 Limited4 26 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 Limited5 26 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 Limited6 26 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 Limited7 PG 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 Limited8 Heartland 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 Limited9 PG 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 Limited10 Heartland 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 Limited11 PG 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 Limited12 Heartland 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 Limited13 PG 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 Limited14 Heartland 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 Limited15 PG 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 Limited16 Heartland 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 Limited17 PG 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 Limited18 Heartland 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 Limited19 PG 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 Limited20 Heartland 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 Limited21 PG 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 Limited22 Heartland 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 Limited23 PG 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 Limited24 Heartland 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 Limited25 PG 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 Limited26 Heartland 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 Limited27 PG 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 Limited28 Heartland 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 Limited29 PG 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 Limited30 Heartland 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 Limited31 PG 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 Limited32 Heartland 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 Limited33 PG 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 Limited34 Heartland 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 Limited35 PG 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 Limited36 Heartland 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 Limited37 PG 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 Limited38 Heartland 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 Limited39 PG 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 Limited40 Heartland 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 Limited41 PG 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 Limited42 Heartland 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 Limited43 8.0 Audit Report
61.
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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 2013Auckland 9.0
Director
Disclosures
and Executive
Remuneration
Directors
The following persons were directors of the Company and the Company’s subsidiaries during
the year ended 30 June 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