Heartland Group Holdings Limited
Annual Report 2015

Plain-text annual report

landHeart Annual Report 2015 2 Heartland New Zealand Limited - Annual Report 2015 Contents www.heartland.co.nz 3 Heartland’s Performance Heartland at a Glance in FY2015 Chairman and Managing Director’s Report Pūrongo a te Toihau me te Tumu Whakahaere Our Company Board of Directors Heartland Supporting Communities Corporate Governance Financial Performance Directors’ Responsibility Statement Financial Statements Auditor’s Report Disclosures Director Disclosures Executive Remuneration Shareholder Information Other Information Directory 4 8 14 20 24 26 30 31 68 70 78 79 81 82 This Annual Report is signed on behalf of the Board of Heartland New Zealand Limited (Heartland) by Geoffrey Ricketts, Chairman, and Jeffrey Greenslade, Managing Director. Geoffrey Ricketts Chairman 22 September 2015 Jeffrey Greenslade Managing Director 22 September 2015 4 Heartland New Zealand Limited - Annual Report 2015 Heartland at a Glance in FY2015 Heartland at a Glance in FY2015 www.heartland.co.nz 5 4.5 4.5 4 Heartland at a Glance in FY2015 Members of the Heartland Team. 4.5 4 3.5 3 2.5 2 1.5 s t n e C s t n e C 3 2.5 3.5 2.5 4 Heartland Business Call Account 3.5 awarded 3 FIVE STARS 2 by independent financial research company Canstar 1 s t n e C 1.5 1.5 2 1 0.5 Return on equity of 10.4% 9.0% for FY2014 0 Dividends 2013 2013 Special Interim 2014 Special Interim Final 2013 Interim Final staff 0 1 0.5 We employ 0.5 0 372 Special in New Zealand and Australia 4.5 2014 2015 4 2014 3.5 Final s t n e C 3 2.5 2 1.5 1 0.5 0 2015 2015 2013 2014 2015 Special Interim Final Total dividend of 7.5c Total Shareholder Return on FY2014 25% 31.8% $48.2M Net profit after tax For FY2015 +34% on FY2014 Earnings per share of 10c 9c for FY2014 64.9% Since listing to 30 June 2015 Heartland Bank Credit Rating BBB (outlook stable) 6 Heartland New Zealand Limited - Annual Report 2015 Open for Business Open for Business www.heartland.co.nz 7 Open for Business We are transforming the way small businesses can access much needed capital Small businesses are the lifeblood of the New Zealand economy, but their ability to access finance to grow their business can often be a complex and time-consuming process. We thought this wasn’t good enough, so we’ve launched an online application process for small business loans. It’s fast, easy and convenient, and you get a decision in days, not weeks or months. openforbusiness.co.nz 8 Heartland New Zealand Limited - Annual Report 2015 Chairman & Managing Director’s Report Chairman & Managing Director’s Report www.heartland.co.nz 9 Chairman & Managing Director’s Report Geoffrey Ricketts Chairman Jeffrey Greenslade Managing Director It is a pleasure to report that this financial year has been one of strong asset growth, increased profitability and achievement of key milestones for Heartland New Zealand Limited (Heartland). Our three core business divisions, Households, Business and Rural all performed well, resulting in a net profit after tax (NPAT) of $48.2m, an increase of 34% on the previous financial year. A return on equity (ROE) of 10.4%, up from 9.0% for the previous financial year, was achieved. In Heartland’s view, the Reserve Bank of New Zealand’s decision to reduce Heartland Bank’s regulatory capital requirements during the financial year was a further endorsement. This reduction brought Heartland Bank’s regulatory capital requirements into line with those of the other New Zealand banks. In addition to Heartland’s strong financial performance, endorsement of its strategy and business position was received through an upgrade to the credit rating for Heartland Bank Limited (Heartland Bank) to BBB (Outlook Stable) from Fitch Ratings. Heartland’s net tangible assets (NTA) increased by $20.4m over the year ending 30 June 2015 (from $399.9m at 30 June 2014 to $420.3m at 30 June 2015). On a per share basis NTA was $0.89 at 30 June 2015 compared to $0.86 at 30 June 2014. Strong Business Performance Strong performance was achieved across all of our core business units, with net finance receivables increasing by 10% in the financial year. Our focus remains on offering market-leading, specialist products to areas of the market that are under-serviced by the major banks and leveraging our intermediated distribution channels where possible to achieve greater scale. Households The Households division comprises the core Consumer and Reverse Mortgage books (together with the non- core residential mortgage book). Net receivables in the Households division increased by 4.5% to $1.58bn during the financial year. The Consumer book continued to perform strongly through our intermediated motor vehicle finance product. We also launched a new personal loan product in the second half of the financial year under the ‘i-finance’ brand. There has been a steady uptake of the product, with an advertising campaign targeting customers who have an existing personal loan with another lender but are moving from an interest-free period to an interest-bearing period (which is typical with consumer finance deals at the major retailers). Growth also came through in the Reverse Mortgage book in the second half of the financial year, with product awareness continuing to increase through advertising and heightened media interest in reverse mortgages, particularly in New Zealand. In Australia, growth in the Reverse Mortgage book was driven through targeted expansion of the broker distribution network. The Reverse Mortgage book in Australia and New Zealand grew $6.1m (excluding foreign exchange movements) in the second half of the financial year. Business The Business division performed well during the period, with strong asset growth driving an increase in Net Operating Income, up $5.1m from the previous financial year and net receivables increasing by 18% to $792.0m. The Business banking team has retained its focus on providing multiple products to customers (for example, working capital finance and asset finance) through a single relationship manager, improving our responsiveness to customer needs. Our intermediated strategy continues to ensure we are positioned at the point of sale for asset purchases by small-to-medium enterprises (SMEs). Growth in the Business division was also driven by Heartland Bank lending through Harmoney’s peer-to-peer platform. Financial Performance at a Glance 12 months to June 2015 (NZ $m) 12 months to June 2014 (NZ $m) Change % 134.4 10.5 144.9 68.4 76.5 12.1 - 64.4 16.2 48.2 109.1 23% 13.5 -22% 122.6 64.7 18% 6% 57.9 32% 5.9 105% 1.2 -100% 50.8 27% 14.8 9% 36.0 34% Net interest income Net other income Net operating income* Expenses Profit before impairments and tax Impaired asset expense Decrease in fair value of investment properties Net profit before tax Tax Net profit after tax (reported) * Net operating income includes share of MARAC Insurance profit Net Finance Receivables As at 30 June 2015 $2,862m 2m 488m 792m $2,607m 16m 410m 669m 1,512m 1,580m $2,010m 49m 457m 658m 846m m $ 30 June 2013 30 June 2014 30 June 2015 Households Business Rural Non-Core Property 10 Heartland New Zealand Limited - Annual Report 2015 Chairman & Managing Director’s Report Chairman & Managing Director’s Report www.heartland.co.nz 11 Rural A Focus on Technology Looking Ahead Heartland expects underlying asset growth to continue, particularly in the Households division with the execution of our Consumer strategy and maintenance of the growth momentum in the Reverse Mortgage book. SMEs will also be a key growth area, including through the application of an online strategy to enhance our distribution and processing capability. Acquisitions will remain a part of Heartland’s growth strategy, provided that the opportunity meets Heartland’s financial criteria and includes a compelling distribution capability or offers innovative technology. Heartland has previously announced its NPAT guidance for the next financial year of $51m to $55m. This guidance range does not allow for the impact of any capital management initiatives. We are confident that Heartland is well placed to meet this guidance based on our strategy to both maximise existing strengths and efficiencies in our core business as well as exploring new growth opportunities. Geoffrey Ricketts Chairman Jeffrey Greenslade Managing Director The global banking sector has been described as an industry that is ripe for disruption. This is being demonstrated through the significant recent developments in financial technology, most notably in the United States and United Kingdom. It is only a matter of time before this technology race will play out in a significant way in New Zealand. During the financial year, Heartland acquired a strategic 10% shareholding in New Zealand’s first peer-to-peer lender, Harmoney Corp Limited (Harmoney). Harmoney is operating in the Consumer lending market, providing an alternative personal loan offering to the major banks and finance companies. Licences have recently been granted to a number of other peer-to-peer platforms by the Financial Markets Authority and we anticipate that online loan origination will become a target for other lenders, particularly for Consumer lending. The focus for Heartland moving forward will be on opportunities that enhance distribution or processing capability in both the Consumer and SME markets. Based on the recent off-shore developments in new financial technology and strong growth in online lending platforms, we believe the development of innovative, low cost technology will allow greater reach into these markets and enable lower servicing costs. Our strategy is to be a part of this wave of new technology in niche areas that are under-serviced by the major banks in New Zealand. Final Dividend The Board resolved to pay a fully imputed final dividend of 4.5 cents per share on 2 October 2015 to shareholders on Heartland’s register as at 5.00pm on 18 September 2015. This brings the total dividend pay out in relation to the 2015 financial year to 7.5 cents per share. The Dividend Reinvestment Plan (DRP) was available and a discount of 1% was applied. The last date of receipt for a participation election from a shareholder who wished to participate in the DRP was 18 September 2015. For further information on the DRP, please refer to the Dividend Reinvestment Plan Offer Document dated 12 December 2014. Rural net receivables grew strongly during the financial year, increasing by 19% to $487.7m. Early settlements were significantly lower during the financial year as the Rural division completed the exit of loans that were either higher risk or were in areas that overlapped with the major banks. Given heightened market interest in the dairy sector in New Zealand, Heartland advised the market that its exposure to dairy is $218.0m which equates to 7.6% of its total lending book. The average loan to value ratio (LVR) for Heartland’s dairy exposures is 61%. However, it is important to note that LVRs are only one of the indicators of loan quality. Heartland expects a continuation of lower than historical higher milk pay-out levels, followed by a slow recovery. This will lead to an increase in farmers making operating losses. Heartland is well positioned to provide support for its dairy customers in the forthcoming year. Non-core assets The non-core residential mortgage book continued to be wound down during the financial year as part of Heartland’s strategy to realign its product mix towards products where it can achieve market leadership and a better risk/return. The reduction of Heartland’s legacy non-core property assets also continued during the financial year, reducing by 34% to $27.0m. Heartland does not expect future earnings to be impacted by the future realisation of these assets. Deposit Funding Deposits continue to be Heartland’s primary source of funding, with excellent performance being achieved in the financial year to support our asset growth. Deposits grew by $361m or 21% during the financial year and a similar level of growth is expected in the coming financial year with a balance of call and term funding. Capital Heartland Bank’s capital ratios reduced over the financial year, largely due to asset growth. Heartland has previously announced its intention for Heartland Bank to complete an issue of Tier 2 capital issue in the coming year, provided that market conditions remain favourable. An issue of Tier 2 capital could (in the absence of any other use) allow Heartland to return capital by way of a share buy back which would have a positive impact on ROE and earnings per share (EPS). Net profit after tax 12 months to 30 June 2015 $48.2m 34% from FY2014 Net operating income 12 months to 30 June 2015 $144.7m 18% from FY2014 Net finance receivables As at 30 June 2015 $2.9bn 10% from FY2014 Growth in deposits 12 months to 30 June 2015 $361m21% from FY2014 12 Heartland New Zealand Limited - Annual Report 2015 Being where the customer is Being where the customer is www.heartland.co.nz 13 Being where the customer is The way people access their bank is changing rapidly On average we visit a branch only once or twice a year, but interact with our bank more than 200 times – mainly online or by phone. The days of expecting customers to come to us are long gone. Now it’s all about going out to them – at a time and place that suits them. We will harness the scaling power of technology and build on our strong intermediated relationships (including dealers, brokers and partners) to give us market reach well beyond our size. 14 14 Heartland New Zealand Limited - Annual Report 2015 Heartland New Zealand Limited - Annual Report 2015 Pūrongo a te Toihau me te Tumu Whakahaere Pūrongo a te Toihau me te Tumu Whakahaere www.heartland.co.nz www.heartland.co.nz 15 15 Pūrongo a te Toihau me te Tumu Whakahaere (Chairman & Managing Director’s Report) Pakihi Whai Hua Rāngai Ahuwhenua I tino whai hua ā mātou rāngai matua, arā, 10% te pikinga o te pūtea toopu i te tau pūtea nei. Ko te aronga nui tonu, he kōkiri ratonga hōu, ratonga arahi mākete hoki ki ngā wāhi o te mākete kāore e tino torohia ana e ngā whare tahua nui, otirā, he whakaū i ngā ara tohatoha ki ngā wāhi e tika ana, kia whanake ake ai te toopuranga pūtea. Rāngai Whare Kei te Rāngai Whare te puka kaihoko me te puka takahuri mōkete, he puka iho matua ērā (tae atu hoki ki te puka mātāmuri mō te mōkete whare noho). E 4.5% te pikinga o te pūtea toopu a te Rāngai Whare, arā, ki te $1.58bn i te tau pūtea nei. I whai hua tonu te puka kaihoko mā roto mai i te angitū o tā mātou kaupapa tuku pūtea mō te hoko waka. I whakarewahia hoki he kaupapa pūtea taurewa-a-tangata i te wāhanga tuarua o te tau pūtea i raro i te kaupapa ‘i-finance’. E pai ana te honohono haere a te tangata ki taua kaupapa, he hua pea o te whakatairanga i te kaupapa ki te hunga, he pūtea taurewa kē tā rātou ki tētahi atu whare tahua, engari, kei te paheko i te whakaritenga hua moni kore ki te whakaritenga utu hua moni (he āhuatanga motuhake tonu tēnei i roto i te nuinga o ngā umanga hokohoko nui) I kitea hoki he whanaketanga i roto i te puka takahuri mōkete i te wāhanga tuarua o te tau pūtea nei, nā te whakatairanga kaupapa me te aro nui o te hunga pāpāho ki te takahuri mōkete i pēnei ai, inā rā hoki, i Aotearoa nei. I Ahitereiria, nā te whakapau kaha ki te whakawhānui i ngā āhuatanga o te puka takahuri mōkete ki waenganui i te pūnaha kaihokohoko i whanake ai. E $6.1m (hāunga ngā whitinga pūtea o tāwāhi) te whanaketanga o te puka takahuri mōkete i Ahitereiria me Aotearoa i te wāhanga tuarua o tēnei tau pūtea. I tipu hoki te toopuranga pūtea o te Rāngai Ahuwhenua i tēnei tau pūtea, 19% te pikinga, arā, ki te $487.7m. I tino heke te whakataunga wawe o ngā pūtea taurewa i tēnei tau pūtea, i te mea, i te aro te Rāngai Ahuwhenua ki te whakatutuki i ngā pūtea taurewa mōrea nui, pūtea taurewa rānei i inaki atu rā ki ngā Whare Tahua matua. Kua piki te aronui o te mākete ki te rāngai ahuwhenua ki roto o Aotearoa nei, nā konā anō hoki te whakamārama a Heartland ki te mākete, e $218.0m te uara o tā mātou whai wāhi ki taua rāngai, ara, 7.6% o te katoa o tā mātou puka pūtea taurewa. Ko te toharite o te uara pūtea taurewa (LVR) a Heartland ki roto i te rāngai ahuwhenua, ko te 61%. Hēoi, kia maumahara rā, ko ngā LVR nei, he tohu noa iho o te kounga o te pūtea taurewa. E whakapae ana a Heartland, ka paku heke tonu te uara o te miraka, kātahi ka āta piki anō ai. Mā reira, ka kirihaunga te toopuranga pūtea-a-tau a ētahi kaiahuwhenua, engari, ko Heartland te taumata okiokinga mō ana kiritaki ahuwhenua, hei te tau e tū mai nei. Rawa Mātāmuri I te tau pūtea nei, i haere tonu ai tā matou whakawhāiti iho i te puka mōkete mātāmuri mō ngā whare ehara i te whare noho. He wāhanga tēnei o te rautaki a Heartland hei āta whakatikatika i ana ratonga kia hāngai pū ai ki te hiahia kia tū mātou hei kaiarahi mākete, otirā, kia nui ake ai ngā hua ka puta i tā mātou mahi. I tēnei tau pūtea anō hoki, i haere tonu ai tā Heartland whakawhāiti i ana rawa whare mātāmuri, arā, e 34% te whakawhāititanga iho, ki te $27.0m. Ko te whakapae a Heartland, e kore tā mātou whakatoopu pūtea a ngā tau e tū mai nei, e pīoioi i te whakapūmautanga o aua rawa. Pūtea Tāpui Ko ngā pūtea tāpui tonu te tūāpapa moni a Heartland, me te aha, inā te pai o te tipuranga mai o tērā momo pūtea hei taunaki ake i te tipuranga mai o ā mātou rawa. E $357m, arā 20%, te tipuranga mai o ngā pūtea tāpui i tēnei tau pūtea, ā, ko te whakapae ia kia pērā anō hoki te kaha o te tipu mai hei tēnei tau pūtea, ko te moni penaroa hei kauhanganuitanga. Haupū Rawa I heke iho ngā tatauranga toharite haupū rawa a Heartland i te tau pūtea nei, ko te take mātuatua i pērā ai, nā te kaha tipu mai o ngā rawa. Kua puta kē mai te whakatau a Heartland kia tutuki i te Whare Tahua o Heartland Bank he taumata tuarua mō te toha haupū rawa hei te tau pūtea e tū mai nei, mēnā ka tau tonu ngā mākete. Ki te eke ki te taumata tuarua haupū rawa (i te tamōnga o ētahi atu hua) ka wātea a Heartland ki te hoko hea hei whakaū i te mana o ngā rawa, ā, ko ngā ROE me ngā EPS ka whai hua i tērā. Geoffrey Ricketts Chairman / Toihau Jeffrey Greenslade Managing Director / Tumu Whakahaere Rāngai Pakihi Harikoa ana a Heartland New Zealand Limited (Heartland) i te kaha piki o ngā rawa, o te pūtea, tae atu ki te whakatutukitanga o ngā whāinga matua i roto i tēnei tau pūtea. I whai hua ā mātou rāngai matua e toru, arā, ngā whare, ngā pakihi me te ahuwhenua, ā, ko te toopuranga pūtea i muri i te tāke (NPAT) ko te $48.2m, 34% te pikinga i tērā tau pūtea. Ko tētahi atu whāinga i tutuki, ko te pikinga o te uara o te haupū rawa ki te 10.4%, he pikinga 9.0% i tērā tau pūtea. Heartland anō hoki, ko te whakatau a te Pūtea Matua o Aotearoa kia whakamāmāhia ngā whakaritenga haupū rawa a Heartland Bank i tēnei tau pūtea, tētahi atu tohu tautoko. Nā tērā whakamāmātanga, i hāngai pū ai ngā whakaritenga haupū rawa a Heartland Bank ki ngā whakaritenga haupū rawa a ērā atu whare tahua o Aotearoa. Tāpiri atu ki tō Heartland angitū-a-pūtea, i whai tautoko tā mātou rautaki me tō mātou tūranga pakihi, i te whakapikinga a Fitch Ratings i te mana pūtea toitū o Heartland Bank Limited (Heartland Bank) ki te taumata BBB (E pūmau ana). Hei tā $20.4m te pikinga o te uara o ngā rawa papatupu (NTA) a Heartland i te tau i mutu ai i te 30 Pipiri 2015 (arā I te $399.9m i te 30 Pipiri 2014 ki te $420.3m i te 30 Pipiri 2015). Ā-hea nei, ko te NTA i te 30 Pipiri 2015, ko te $0.89, i te 30 Pipiri 2014 e $0.86 kē te uara. Pai ana te mahi a te Rāngai Pakihi i tēnei tau pūtea. Nā te kaha o te tipu o ngā rawa, i piki ai te nui o tana pūtea whakahaere, arā, e $5.1m te pikinga i tērā tau pūtea, e 18% hoki te pikinga o tana pūtea toopu ki te $792.0m. E pūmau tonu ana te kapa Rāngai Pakihi ki te hāpai i āna ratonga maha (pēnei i te pūtea taurewa, rawa taurewa, utu taurewa) ki ngā kiritaki, mā roto mai i te whakatū kaiawhina motuhake ki tēnā, ki tēnā, ki tēnā, ā, mā reira ka pai ake tā mātou whakatutuki i ngā hiahia o te kiritaki. Ko tā mātou whāinga mātāwaenga te kaiarahi i a mātou kia tutuki tonu i a mātou he tūranga, ka hoko rawa ana ngā SMEs. I tipu hoki te wāhanga Rāngai Pakihi i te tuku pūtea a Heartland Bank mā roto mai i te tūāpapa hoa rite a Harmoney. 16 Heartland New Zealand Limited - Annual Report 2015 Pūrongo a te Toihau me te Tumu Whakahaere www.heartland.co.nz 17 Te aro ki te Hangarau Tirohanga Whakamua E whakapae ana a Heartland, ka tipu tonu ngā rawa, inā rā hoki, i roto i te Rāngai Whare mā runga i te tuarā o tā mātou rautaki kaihoko me te penapena tonu i ngā kākano e pihi ake ana i te pārekereke o te Puka Takahuri Mōkete. Ko te tipuranga mai o ngā SMEs tētahi pou angitū, arā, ko te rautaki-a-ipurangi tērā hei whakawhānui i te torotoro haere o ā mātou ratonga me ngā āheinga o aua ratonga rā. Ko te hoko rawa hoki tētahi pou o te rautaki whakatipu a Heartland, engari, me hāngai pū taua rawa ki ngā whakaritenga pūtea a Heartland, me whai ara tohatoha, me whai hangarau auaha hoki rānei. Kua puta kē i a Heartland tana heitara NPAT mō te tau pūtea e tū nei, arā, mai i te $51m ki te $55m. Kāore tēnei heitara i te tauawhi i ngā kaupapa whakatoopu rawa. E whakapono pū ana mātou, kei te wāhi tika a Heartland e tutuki ai taua heitara, mā te ū ki te rautaki whakapūmau kaupapa mahi whai kaha i roto i ā mātou rāngai matua, tae atu rā hoki ki te taunahatanga o ētahi kaupapa whakatipu rawa hōu. Geoffrey Ricketts Chairman / Toihau Jeffrey Greenslade Managing Director / Tumu Whakahaere E kiia ana te rāngai whare tahua o te ao, he rāngai e rite ana mō ngā pokenga o anamata. Kei te kitea te tūturutanga o tēnei kōrero i roto i te whanaketanga o ngā hangarau whakahaere pūtea, matua rā i Amerika me Uropi. Taro ake nei ka tau mai te whakataetae whakawhanake hangarau me tērā mana nui ki roto o Aotearoa nei. I te tau pūtea nei, i riro ai i a Heartland ngā hea 10% o te umanga tūāpapa hoa rite tuatahi o tēnei whenua, arā, o Harmoney Corp Limited (Harmoney). Kei te mākete pūtea taurewa ki ngā kaihoko a Harmoney e mahi ana, ā, he ratonga anō rātou i tua atu i ngā whare tahua matua me ngā pakihi taurewa, e tuku pūtea taurewa ana ki ngā kaihoko. Kātahi anō ētahi tūāpapa hoa rite ka whakawhiwhia ki wā rātou raihana e te Mana Mākete Hokohoko, ā, hei tā mātou, ko te ipurangi te huarahi ka aruaruhia e ētahi atu ratonga tuku pūtea taurewa, inā rā hoki, ngā ratonga e tuku pūtea taurewa ana ki nga kaihoko. Ko te aronga o Heartland i roto i tana kauneke whakamua, kia aruaru i ngā ara e whānui ake ai te torotoro, e pakari ake ai rānei ngā āheinga i roto i ngā mākete kaihoko, SME hoki. Mēnā ka mātaitia ngā hangarau tuku pūtea hōu kua hua ake i tāwāhi me te tino tipuranga mai o ngā tūāpapa tuku pūtea taurewa i runga ipurangi, ka kitea te pūtake o tō mātou whakapono, mā te hanga hangarau auaha, māmā hoki te utu ka whānui ake tā tatou torotoro haere ki aua mākete, engari, ka māmā ake te utu mō ā tātou ratonga. Ko te rāutaki ia, kia whai wāhi nui tātou ki te ao hangarau e whati mai nei ki tēnei whenua, mā te aronui ki ngā momo rāngai motuhake, kāore nei i te tino aronuihia e ngā whare tahua matua o Aotearoa nei. Pūtea Toha Ko te whakatau a te Poari, kia utua te 4.5 hēneti mō ia hea, i te 2 October 2015 ki ngā kaipupuri i runga i te rārangi ingoa a Heartland i te 5.00pm i te 18 Māhuru 2015. Heipuhia ake, ko te katoa o te utu ka utua i tēnei tau pūtea 2015, ko te 7.5 mō ia hea. I reira te Mahere Whakangao Utu Hea (DRP) hei whirinakihanga, ā, 1% te rahi o te uara i poroa hei oranga. Ko te 18 Māhuru 2015 te rā whakamutunga i taea ai e tētahi kaipupuri hea te whirinaki ki te DRP. Mō ētahi atu taipitopito e pā ana ki te DRP, tirohia te pūrongo mō te Mahere Whakangao Utu Hea, 12 Hakihea 2014. We wish to thank Scotty Morrison for providing this Māori translation of the Chairman and Managing Director’s Report. Heartland Staff Mark de Ree and Lydia Zulkifli. 18 Heartland New Zealand Limited - Annual Report 2015 Fresh thinking Fresh thinking www.heartland.co.nz 19 Fresh thinking Our market-leading products are designed for changing New Zealand lifestyles Traditional banking products haven’t really changed for decades. But lifestyles certainly have, and customers today are looking for something different: innovative products that genuinely serve their needs, not the bank’s. Take retirement for example, once considered the ‘twilight’ years, but now for many a time of exploration, travel and adventure. Heartland’s Home Equity Loan is the market leader in seniors finance, enabling retired New Zealanders to unlock wealth tied up in their homes to fund the lifestyle they really want. 20 Heartland New Zealand Limited - Annual Report 2015 The Board of Directors - Heartland New Zealand Limited The Board of Directors - Heartland New Zealand Limited www.heartland.co.nz 21 Setting the standard As at the date of this Annual Report, the directors of Heartland New Zealand Limited are as follows: Jeffrey Greenslade Jane Taylor Christopher Mace Graham Kennedy Gregory Tomlinson Geoffrey Ricketts LLB Managing Director – Appointed 30 September 2010 LLB (Hons), LLM, Dip Acc, CA, CF Inst D Director – Appointed 10 December 2014 CNZM, CM Inst D Director – Appointed 30 September 2010 J.P., BCom, FCA, ACIS, ACIM, CF Inst D Director – Appointed 30 September 2010 AME Director – Appointed 18 March 2013 Jeff has over 20 years’ experience as a senior banking executive, including with the ANZ National Banking Group, where he last held the position of Managing Director of Corporate and Commercial Banking for ANZ National Bank. From February 2006 until February 2008 he spent time on the board of UDC Finance Limited. Jeff has also held a number of senior positions in the Institutional and Capital Markets areas of The National Bank of New Zealand and its subsidiary, Southpac. Jeff is responsible for the strategy and operational management of Heartland. He is also CEO of Heartland Bank. He joined the Heartland Group as Chief Executive Officer of MARAC Finance Limited in 2009. Jane is a professional director, following a 30 year career in law, accountancy and finance. Her current governance appointments include Silver Fern Farms Limited (where she chairs the Audit Risk and Mitigation Committee), Landcare Research New Zealand Limited (Chair), Radio New Zealand Limited, Hirepool Group Limited and OTPP New Zealand Forest Investments Limited. She is also a board member of the XRB (External Reporting Board) and chairs the Queenstown Airport Noise Liaison Committee. Chris is an Auckland based businessman and company director with experience in the New Zealand and Australian business environments. He is Chairman of the Crown Research Institute, the National Institute of Water and Atmospheric Research (NIWA), a Commissioner of the Tertiary Education Commission and a director of a number of companies. Chris was a director of Southern Cross Building Society leading up to the merger to form Heartland Bank. Chris is a lifetime member of the Sir Peter Blake Trust and was instrumental in establishing the Trust in 2004. He is a passionate supporter of education, science and research as well as a keen supporter of the Arts. He received a CNZM for services to Antarctica and the community and was named 2012 Maori Business Leader of the Year. Graham has over 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 providing him with governance experience across a diverse range of business sectors including property, tourism, agribusiness, transport, construction and professional services. Graham is also actively involved, at a governance level, in a variety of community-based charitable organisations. Greg is a Christchurch based businessman and investor with 40 years’ experience owning, managing and building businesses. An early pioneer of the mussel industry of Marlborough he has established Impact Capital with active investments in the aged care, animal pharmaceutical, finance and wine sectors. Greg and his wife Jill support a variety of charities in New Zealand and abroad. CNZM, LLB (Hons), F Inst D Chairman – Appointed 30 September 2010 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, including Chairman of Todd Corporation, Chairman of Vero New Zealand Limited, and a director of ASX listed company Suncorp Group Limited. Geoff was Chairman of Southern Cross Building Society leading up to the merger to form Heartland Bank. Geoff chairs The University of Auckland Foundation and is a strong supporter of community and philanthropic activities, particularly in relation to the arts and education in New Zealand. 22 Heartland New Zealand Limited - Annual Report 2015 The Board of Directors - Heartland Bank Limited www.heartland.co.nz 23 As at the date of this Annual Report, the Heartland Bank Board includes J K Greenslade, G T Ricketts and G R Kennedy, plus the following directors who are independent directors: Bruce Irvine BCom, LLB, FCA, CF Inst D, FNZIM Chairman – Appointed 31 January 2013 Nicola Greer MCom Director – Appointed 26 July 2013 Bruce 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, including House of Travel Holdings Limited, Market Gardeners Limited, PGG Wrightson Limited, Scenic Hotels Limited and Skope Industries Limited. Bruce is involved in a voluntary capacity as a trustee of the Christchurch Symphony Orchestra. 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. John Harvey Richard Wilks BCom, CA Director – Appointed 31 January 2013 BCom, CA Director – Appointed 1 February 2013 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, including Port Otago Limited, Ballance Agri-Nutrients Limited, NZX listed DNZ Property Fund Limited and NZX/ASX listed Kathmandu Holdings Limited. He is also chairman of NZ Opera Limited. 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 Chief Credit Officer and Chief Risk Officer with ANZ National Bank and executive roles with Standard Chartered Bank, Citibank Australia, Westpac Trust Australia and Citibank New Zealand. Richard is currently a director of a number of companies including Rainbow’s End Theme Park Limited, Rangatira Limited and the Maxwell Farms group of companies. Heartland Staff Michael Drumm and Sarah Smith. 24 Heartland New Zealand Limited - Annual Report 2015 Heartland Supporting Communities Heartland Supporting Communities www.heartland.co.nz 25 Heartland Supporting Communities We offer help and support to a wide variety of groups and organisations across New Zealand. Whether making a difference at an individual, local, regional or national level, we know how important our support is to our communities and we are incredibly proud of the difference we make. Special Children’s Christmas Party Heartland has always been committed to supporting and investing in Kiwis, helping them grasp opportunities and realise their dreams, but Christmas always adds an extra incentive to make a difference. Young Auctioneers Heartland is honoured to sponsor the Young Auctioneers Competition at the prestigious Canterbury A&P Show. A vocation that many people are familiar with – but few would consider – demands a unique skill set that includes a keen eye, quick thinking and sharp wit. However, the training grounds and opportunities for the young up-and-coming auctioneers are limited. “It was a huge thrill to win this competition. It’s so valuable to the industry, giving young auctioneers the chance to stand up and be counted amongst their peers.” Heartland Young Auctioneer winner 2014, Cam Bray The Young Auctioneers competition runs over two days and puts competitors – who must be aged under 30 – through their paces on all aspects of auctioneering including knowledge, style and personal presentation. In return they are provided with guidance and feedback from an experienced judging panel and given tips on how to polish their performance. After three years, the competition is going from strength to strength with both the number and standards of entrants steadily rising, showing this important component of New Zealand’s livestock industry is still very much in demand. “Supporting an event like this is a great opportunity to give something back to the community.” Every year over 7,000 children suffering from life-threatening illnesses, physical or intellectual impairment, domestic violence or living in underprivileged circumstances, are given the chance to experience Christmas at a number of Special Children’s Christmas Parties that take place in several cities across the country. For Heartland, support for this cause goes a lot deeper than simply a financial donation as many of our staff get involved too. Handing out gifts, painting faces or blowing up balloons, Heartland staff roll Heartland staff member “I never really thought I would have the chance to properly showcase my photos but I always imagined it would be a special thing to do.” Tauranga resident and photographic historian, Alf Rendell up their sleeves and see first-hand how these simple, fun things can make such a huge difference, building memories that will stay with the children and their families for years to come. Alf Rendell Community is very important to Heartland. Where the majority of our support is provided to groups and organisations, sometimes we meet very special individuals who have made a real difference but could do with a bit of assistance themselves. 97-year-old Alf Rendell from Tauranga has been photographing the local area for over 80 years and, despite building up an enviable collection of photographs cataloguing how the region has changed over the years, he had never fulfilled his life-long ambition of hosting his own exhibition. For a man that has given the community so much – he’s also a volunteer involved in transforming a disused quarry into a world class park – local Heartland Bank branch manager Deborah Lee thought it was his turn to get something back. Early in 2015 and running for a total of five weeks, Heartland helped Alf to host a dedicated exhibition showing over 40 of his original prints. Scholarships The ability to open up opportunities and change lives for the better is never more apparent than during the school years. Heartland is involved with a number of organisations, clubs and schools who are dedicated to helping children unlock and deliver their true potential. Whether it is on a rugby field, performing arts or through gaining entry to a level of education that would “It’s not just about the opportunity of getting into a top school. Scholarships also give these kids a sense of value, focus and responsibility.” King’s College Head of Admissions, Graeme Syms otherwise not be available, Heartland’s support has helped a number of children access and remain in a range of activities and educational scholarships. For three high-achieving year 9 boys, this was an education at King’s College Auckland. King’s College matches outstanding educational opportunities with a dedication to promoting excellence in the arts, culture and sports. It is the only private school represented in division one of the national kapa haka competition as well as being the only private school to offer Te Reo Māori from year 9 through to year 13. Heartland hopes to extend support to include a female student in the coming school year. 26 Heartland New Zealand Limited - Annual Report 2015 Corporate Governance Corporate Governance www.heartland.co.nz 27 Corporate Governance Codes of Conduct The Company’s Code of Conduct and Directors’ Code of Conduct set out the ethical and behavioural standards expected of the Company’s directors and employees. The Codes of Conduct are available on the Company’s website. Securities Trading Policy The Board continually considers whether any matters under consideration are likely to materially influence the Company’s share price and therefore whether additional trading restrictions should be imposed on directors and senior employees of the Company. All directors and senior employees 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. Principle 2 – Board Composition and Performance There is a balance of independence, skills, knowledge, experience and perspectives among directors to ensure an effective Board. Role of the Board The Board of Directors is responsible for corporate governance and setting the Company’s overall strategic direction. The Board charter regulates Board procedure and describes the Board’s role and responsibilities in detail. 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 (and, in the case of risk management, to the Chief Risk Officer). The Board regularly monitors and reviews management’s performance in carrying out their delegated duties. The Board schedules monthly meetings at which it receives regular briefings on key strategic and operational issues from management. 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 NZX Main Board 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 2015. 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 2015. This section of the Annual Report reflects the Company’s compliance with the requirements of the Financial Markets Authority Corporate Governance in New Zealand 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 Directors set high standards of ethical behaviour, model this behaviour, and hold management accountable for delivering these standards throughout the organisation. 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. Board Audit and Risk Committee Governance and Remuneration Committee Board Processes The Board held 11 meetings during the year ended 30 June 2015. The table shows attendance by the director at the Board and committee meetings. At the Company’s Annual Meeting held on 31 October 2014, all of the then-serving directors attended the meeting. Eligible to Attend Attended Eligible to Attend Attended Eligible to Attend Attended J K Greenslade G R Kennedy C R Mace G T Ricketts D J Taylor G R Tomlinson 11 11 11 11 6 11 11 11 11 11 6 11 - 5 - 5 2 - - 5 - 5 2 - - - - 2 - 2 - - - 2 - 2 Board Membership, Size and Composition Principle 3 – Board Committees The NZX Main Board 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 2015, the Board comprised six directors, being an independent Chairman, the Managing Director and four non- executive directors. The Board encourages rigorous discussion and analysis when making decisions. The current Board comprises directors with a mix of qualifications and skills who hold diverse business, governance and industry experience. Nomination and Appointment of Directors Procedures for the appointment and removal of directors are governed by the Company’s constitution. 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 2015, the Board determined that G R Kennedy, C R Mace, G T Ricketts and D J Taylor 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 Board uses committees where this enhances effectiveness in key areas while still retaining Board responsibility. Board Committees The Board has two 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 a charter which set out the committee’s objectives, membership, procedures and responsibilities. A committee does not take action or make decisions on behalf of the Board unless specifically mandated. The committee charters 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 and Risk Committee Membership is restricted to non-executive directors, with at least three members, the majority of whom must be independent. As at 30 June 2015, the members of the Audit and Risk Committee were G R Kennedy (Chairman), G T Ricketts and D J Taylor. The role of the Audit and Risk Committee is to advise and provide assurance to the Board in order to enable the Board to discharge its responsibilities in relation to the oversight of: •  The integrity of financial control, financial management and external financial reporting. •  Risk management and internal control. • The internal audit function. • The independent audit process. As at 30 June 2015, the Board determined that all committee members had a recognised form of financial expertise in accordance with the Audit and Risk Committee’s charter. 28 Heartland New Zealand Limited - Annual Report 2015 Corporate Governance Corporate Governance www.heartland.co.nz 29 Governance and Remuneration Committee Principle 4 – Reporting and Disclosures Principle 5 – Remuneration The Board demands integrity in both financial reporting and in the timeliness and balance of corporate disclosures. The remuneration of directors and executives is transparent, fair and reasonable. The Committee is required to comprise of at least three directors, the majority of whom must be independent. It is also a requirement that one member be a director of Heartland Bank Limited (Heartland Bank) to ensure the flow of relevant information between the Company and Heartland Bank. As at 30 June 2015, the members of the Governance and Remuneration Committee were G T Ricketts (Chairman) and G R Tomlinson and B R Irvine (in an ex-officio capacity). The role of the Governance and Remuneration Committee is to advise and provide assurance to the Board in order to enable the Board to discharge its responsibilities in relation to: • Corporate governance matters. •  Remuneration of the directors, Chief Executive Officer and senior executives and remuneration policies generally. •  Director and senior executive appointments, Board composition and succession planning. • Capital management. The gender composition of Directors and Officers was as follows: The Board is committed to ensuring the highest standards are maintained in financial reporting and disclosure of all relevant information. The Audit and Risk Committee oversees the quality and timeliness of all financial reports, including all disclosure documents issued by the Company or any of its subsidiaries. The Chief Executive Officer and Chief Financial Officer are required to certify to the Audit and Risk 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. As at 30 June 2015 As at 30 June 2014 Positions Female Male Female Male Heartland New Zealand Limited Directors 1 (16.6%) 5 (83.3%) 0 (0%) 6 (100%) Heartland Bank Limited Directors 1 (12.5%) 7 (87.5%) 1 (12.5%) 7 (87.5%) Officers 3 (33.3%) 6 (66.7%) 2 (22%) 7 (78%) “Officers” include J K Greenslade and all persons who report directly to him in an executive capacity. Non-Executive Directors’ Remuneration Total remuneration available to non-executive directors of the Company and its subsidiaries is determined by shareholders. The current aggregate approved amount by shareholders is $1,000,000 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. However, as at 30 June 2015 all directors held shares in the Company (see the “Directors’ Disclosures” section of this Report for further details). 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 eligible to participate in 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 has a sound understanding of the key risks faced by the business. The Board regularly verifies that the Company has appropriate processes that identify and manage potential and relevant risks. The Board ensures that the Company has a Risk Management Programme in place which identifies, manages and communicates the key risks that may impact the Company’s business. Specific risk management strategies have been developed for each of the key risks identified. The Audit and Risk Committee of the Board oversees the risk management programme and strategy. The Company also has in place insurance cover for insurable liability and general business risk. Principle 7 – Auditors The Board ensures the quality and independence of the external audit process. The Audit and Risk Committee is responsible for overseeing the external, independent audit of the Company’s financial statements. The Audit and Risk Committee ensures that the level of non-audit work undertaken by the auditors does not jeopardise their independence. The Company’s External Auditor Independence Policy provides guidelines to ensure that non-audit related services do not conflict with the independent role of the external auditor, and the Audit and Risk Committee ensures that non-audit work undertaken by the auditors is in accordance with that Policy. That Policy also sets out guidelines in relation to the tenure and re-appointment of the external auditor, which the Audit and Risk Committee ensures are complied with. Refer to Heartland’s website for a copy of the External Auditor Independence Policy. The external auditor monitors its independence and reports to the Audit and Risk Committee bi-annually to confirm that it has remained independent in the previous six months, in accordance with the Company’s External Auditor Independence Policy and the external auditor’s policies and professional requirements. There have been no threats to auditor independence identified during the year ended 30 June 2015. The Company also has an internal audit function which is independent of the external auditors. The Audit and Risk Committee approves the annual internal audit programme, which is developed in consultation with management of the Company. Principle 8 – Shareholder Relations The Board fosters constructive relationships with shareholders that encourage them to engage with the Company. The Board is committed to maintaining a full and open dialogue with all shareholders and keeps shareholders informed through: • Periodic and continuous disclosure to NZX. • Information provided to analysts and media during briefings. • The Annual Meeting at which shareholders’ questions are responded to. • Annual and half year reports. The Board encourages full participation of shareholders at the Annual Meeting to ensure a high level of accountability. The Company’s external auditor also attends the Annual Meeting and is available to answer questions relating to the external audit. Principle 9 – Stakeholder Interests The Board respects the interests of stakeholders within the context of the Company’s ownership type and its fundamental purpose. The Company has a wide range of stakeholders and aims to manage its business in a way which builds sustainable value and produces positive outcomes for stakeholders. As a listed entity with a subsidiary which is a registered bank, the Company is cognisant of its responsibility to respect and balance its stakeholder interests (including customers, staff, regulators and shareholders). 30 Heartland New Zealand Limited - Annual Report 2015 Financial Statements For The Year Ended 30 June 2015 Financial Statements For The Year Ended 30 June 2015 www.heartland.co.nz 31 DIRECTORS' RESPONSIBILITY STATEMENT For the year ended 30 June 2015 STATEMENT OF COMPREHENSIVE INCOME For the year ended 30 June 2015 The directors are responsible for presenting financial statements for each financial year that give a true and fair view of the financial position of Heartland New Zealand Limited (Company), its subsidiaries (Group) and of the financial performance and cash flows for that period. The directors consider the financial statements of the Group have been prepared using appropriate accounting policies that have been consistently applied and supported by reasonable judgements and estimates, and that all 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 2013. The directors consider that they have taken adequate steps to safeguard the assets of the Group and to prevent and detect fraud and other irregularities. The Board of Directors (Board) of Heartland New Zealand Limited approved and authorised the financial statements for the year ended 30 June 2015 set out on pages 3 to 39 for issue on 18 August 2015. 31 to 67 for issue on 18 August 2015. For and on behalf of the Board Director Director Interest income Interest expense Net interest income Operating lease income Operating lease expenses Net operating lease income Lending and credit fee income Other income Net operating income Selling and administration expenses Profit before impaired asset expense and income tax Impaired asset expense Decrease in fair value of investment properties Operating profit Share of joint arrangement profit Profit before income tax Income tax expense Profit for the year Other comprehensive income Items 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 tax Movement in available for sale reserve, net of income tax Movement in foreign currency translation reserve, net of income tax Items that will not be reclassified to profit or loss: Movement in defined benefit reserve, net of income tax Other comprehensive income for the year, net of income tax Total comprehensive income for the year Earnings per share from continuing operations Basic earnings per share Diluted earnings per share Total comprehensive income for the year is attributable to owners of the Group. The notes on pages 8 to 39 are an integral part of these financial statements. The notes on pages 36 to 67 are an integral part of these financial statements. NOTE Jun 15 Jun 14 $000 $000 2 2 3 3 4 5 6 10 25 7 260,468 126,041 134,427 210,297 101,221 109,076 10,350 7,087 3,263 3,077 3,940 13,348 7,709 5,639 2,469 4,971 144,707 122,155 68,403 76,304 64,739 57,416 12,105 - 5,895 1,203 64,199 50,318 137 486 64,336 50,804 16,173 48,163 14,765 36,039 (2,709) 1,111 898 2,136 (12) 95 50 3 375 1,197 48,538 37,236 8 8 10c 10c 9c 9c 2 3 32 Heartland New Zealand Limited - Annual Report 2015 Financial Statements For The Year Ended 30 June 2015 Financial Statements For The Year Ended 30 June 2015 www.heartland.co.nz 33 STATEMENT OF CHANGES IN EQUITY For the year ended 30 June 2015 STATEMENT OF FINANCIAL POSITION As at 30 June 2015 Treasury Employee Currency Available Defined Foreign Share Shares BenefitsTranslation for sale NOTE Capital Reserve Reserve $000 $000 $000 benefit Hedging Retained Reserve Reserve Reserve Reserve Earnings $000 $000 $000 $000 $000 Total Equity $000 Balance at 1 July 2014 406,142 (926) 1,476 95 272 44 1,157 44,362 452,622 Total comprehensive income/(loss) for the year Profit for the year Other comprehensive income / (loss), net of income tax Total comprehensive income/(loss) for the year Contributions by and distributions to owners Dividends paid 14 Dividend reinvestment plan Share based payments 14 26 Shares vested Treasury shares sold Total transactions with owners - - - - 7,621 - 138 16 7,775 - - - - - - 629 25 654 - - - - - 2,136 2,136 898 898 - - 1,491 (767) - 724 - - - - - - - - - - - - - 50 50 - - - - - - - 48,163 48,163 (2,709) - 375 (2,709) 48,163 48,538 - - - - - - (30,188) - - (30,188) 7,621 1,491 - - - 41 (30,188) (21,035) Balance at 30 June 2015 413,917 (272) 2,200 2,231 1,170 94 (1,552) 62,337 480,125 Balance at 1 July 2013 193,020 (1,000) 629 - 284 41 46 177,522 370,542 Total comprehensive income/(loss) for the year Profit for the year Other comprehensive income / (loss), net of income tax Total comprehensive income/(loss) for the year Contributions by and distributions to owners Effect of amalgamation Dividends paid Dividend reinvestment plan Issue of share capital Transaction costs associated with capital raising Shares vested Share based payments Total transactions with owners 14 14 26 - - - 149,269 - 7,321 57,840 (1,322) 14 - 213,122 - - - - - - - - 74 - 74 - - - - - - - - (88) 935 847 - 95 95 - - - - - - - - - (12) (12) - - - - - - - - - 3 3 - - - - - - - - - 36,039 36,039 1,111 - 1,197 1,111 36,039 37,236 - (149,269) - - - - - - - (19,930) (19,930) - - - - - 7,321 57,840 (1,322) - 935 - (169,199) 44,844 Balance at 30 June 2014 406,142 (926) 1,476 95 272 44 1,157 44,362 452,622 The notes on pages 8 to 39 are an integral part of these financial statements. The notes on pages 36 to 67 are an integral part of these financial statements. Assets Cash and cash equivalents Investments Investment properties Finance receivables Operating lease vehicles Current tax assets Other assets Investment in joint arrangement Intangible assets Deferred tax assets Total assets Liabilities Borrowings Current tax liabilities Trade and other payables Total liabilities Equity Share capital Retained earnings and reserves Total equity Total equity and liabilities The notes on pages 8 to 39 are an integral part of these financial statements. The notes on pages 36 to 67 are an integral part of these financial statements. NOTE 9 10 11 12 7(b) 15(a) 25 15(b) 7(c) Jun 15 Jun 14 $000 $000 37,012 329,338 24,513 2,862,070 29,998 - 12,119 4,383 51,119 8,707 37,344 238,859 24,888 2,607,393 31,295 1,558 18,597 4,246 47,421 5,287 3,359,259 3,016,888 13 7(b) 15(c) 2,825,245 2,524,460 7,869 46,020 431 39,375 2,879,134 2,564,266 14 413,645 405,216 66,480 47,406 480,125 452,622 3,359,259 3,016,888 4 5 34 Heartland New Zealand Limited - Annual Report 2015 Financial Statements For The Year Ended 30 June 2015 Financial Statements For The Year Ended 30 June 2015 www.heartland.co.nz 35 STATEMENT OF CASH FLOWS CONTINUED For the year ended 30 June 2015 Reconciliation of profit after tax to net cash flows from operating activities Profit for the year Add / (less) non-cash items included in net profit before taxation: Depreciation and amortisation expense Depreciation on lease vehicles Change in fair value of investment properties Capitalised interest Impaired asset expense Total non-cash items Add / (less) movements in operating assets and liabilities: Finance receivables Operating lease vehicles Other assets (Gain) / loss on disposal of property, plant and equipment and intangibles Current tax Derivative financial instruments revaluation Deferred tax (benefit) / expense Deposits Other liabilities Total movements in operating assets and liabilities Net cash flows from operating activities The notes on pages 8 to 39 are an integral part of these financial statements. The notes on pages 36 to 67 are an integral part of these financial statements. Jun 15 $000 Jun 14 $000 48,163 36,039 2,010 6,375 - (2,045) 12,105 18,445 (275,274) (5,078) 2,997 (98) 8,996 1,326 2,142 7,060 1,203 - 5,895 16,300 96,815 (5,960) 804 56 (3,986) 91 (3,420) 11,100 362,590 (97,646) 3,130 95,169 2,153 3,427 161,777 55,766 STATEMENT OF CASH FLOWS For the year ended 30 June 2015 Cash flows from operating activities Interest received Operating lease income received Lending, credit fees and other income received Operating inflows Payments to suppliers and employees Interest paid Taxation paid Operating outflows Jun 15 $000 Jun 14 $000 243,729 8,951 7,017 259,697 60,346 126,179 9,956 196,481 193,519 12,086 7,440 213,045 59,687 101,675 8,033 169,395 Net cash flows from operating activities before changes in operating assets and liabilities 63,216 43,650 Proceeds from sale of operating lease vehicles Purchase of operating lease vehicles Net movement in finance receivables Net movement in deposits Net cash flows from operating activities Cash flows from investing activities Net proceeds from sale of investment properties Proceeds from sale of office fit-out, equipment and intangible assets Dividend received from joint venture Total cash provided from investing activities Purchase of office fit-out, equipment and intangible assets Net increase in investments Purchase of subsidiaries Total cash applied to investing activities Net cash flows applied to investing activities Cash flows from financing activities Increase in share capital Total cash provided from financing activities Dividends paid Transaction costs associated with capital raising Net decrease in wholesale funding Total cash applied to financing activities Net cash flows applied to financing activities Net decrease in cash held Opening cash and cash equivalents Cash impact of business combinations Closing cash and cash equivalents The notes on pages 8 to 39 are an integral part of these financial statements. The notes on pages 36 to 67 are an integral part of these financial statements. 7,386 9,086 (11,544) (12,954) (259,871) 362,590 113,630 (97,646) 161,777 55,766 9,375 4,885 - 14,260 6,344 89,581 - 95,925 42,244 19 560 42,823 432 73,648 48,300 122,380 (81,665) (79,557) - - 20,000 20,000 22,567 - 57,877 80,444 12,609 1,322 123,023 136,954 (80,444) (116,954) (332) 37,344 - 37,012 (140,745) 174,262 3,827 37,344 6 7 36 Heartland New Zealand Limited - Annual Report 2015 Financial Statements For The Year Ended 30 June 2015 Financial Statements For The Year Ended 30 June 2015 www.heartland.co.nz 37 NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 June 2015 Notes Basis of Reporting Performance 1 Segmental analysis 2 3 4 5 6 7 8 Net interest income Net operating lease income Other income Selling and administration expenses Impaired asset expense Taxation Earnings per share Financial position Investments 9 10 Investment properties 11 Finance receivables 12 Operating lease vehicles 13 Borrowings 14 Share capital and dividends paid 15 Other balance sheet items 16 Fair value Risk management 17 Risk management policies 18 Credit risk exposure 19 Asset quality 20 21 Liquidity risk Interest rate risk 22 Concentrations of funding Other disclosures 23 Significant subsidiaries and interests in joint arrangements 24 Structured entities 25 Joint arrangements 26 Staff share ownership arrangements 27 Contingent liabilities and commitments 28 Application of new and revised accounting standards 29 Events after the reporting date NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 June 2015 Basis of reporting Reporting entity Heartland New Zealand Limited is a listed public company incorporated in New Zealand under the Companies Act 1993 and is a FMC reporting entity for the purposes of the Financial Reporting Act 2013 and Financial Markets Conduct Act 2013. The financial statements presented are the consolidated financial statements comprising Heartland New Zealand Limited (Heartland), its subsidiaries and joint arrangements. All entities within the Group offer financial services or are special purpose entities. On 1 April 2014, the Company, through its subsidiary Heartland HER Holdings Limited, acquired New Sentinel Limited and Australian Seniors Finance Pty Limited (collectively the HHHL Group). Comparatives presented include the results of HHHL Group operations for only three months of the prior year. Basis of preparation The financial statements have been prepared in accordance with Generally Accepted Accounting Practice in New Zealand (NZ GAAP) and with the requirements of the Financial Reporting Act 2013. They comply with New Zealand equivalents to International Financial Reporting Standards (NZ IFRS) and other applicable Financial Reporting Standards, as appropriate for profit-oriented entities. The financial statements also comply with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board. The financial statements are presented in New Zealand dollars which is the Company's functional and the Group's presentation currency. Unless otherwise indicated, amounts are rounded to the nearest thousand. The accounting policies adopted have been applied consistently throughout the periods presented in these financial statements. Certain comparative information has been restated to comply with the current year presentation. The financial statements have been prepared on the basis of historical cost, except for financial instruments, land and buildings and investment properties, which are measured at their fair values as identified in the accounting policies set out in the accompanying notes. The financial statements have been prepared on a going concern basis after considering the Group’s funding and liquidity position. Financial assets and liabilities The Group initially recognises finance receivables, borrowings and subordinated liabilities on the date that they are originated. All other financial assets and liabilities (including assets and liabilities designated at fair value through profit or loss) are initially recognised on the trade date at which the Group becomes a party to the contractual provisions of the instrument. The Group derecognises a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in transferred financial assets that is created or retained by the Group is recognised as a separate asset or liability. The Group derecognises a financial liability when its contractual obligations are discharged or cancelled or expire. The Group enters into transactions whereby it transfers assets recognised on its Statement of Financial Position, but retains either all risks and rewards of the transferred assets or a portion of them. If all or substantially all risks and rewards are retained, then the transferred assets are not derecognised from the Statement of Financial Position. Transfers of assets with the retention of all or substantially all risks and rewards include, for example, securitised assets and repurchase transactions. Principles of consolidation The consolidated financial statements of Heartland incorporate the assets, liabilities and results of all controlled entities. Controlled entities are all entities in which Heartland is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Intercompany transactions, balances and any unrealised income and expense (except for foreign currency transaction gains or losses) between controlled entities are eliminated. The assets and liabilities of entities whose functional currency is not the New Zealand dollar, are translated at the exchange rates ruling at balance date. Revenue and expense items are translated at the spot rate at the transaction date or a rate approximating that rate. Exchange differences are taken to the foreign currency translation reserve. Estimates and judgements The preparation of the Group's financial statements requires the use of estimates and judgement. This note provides an overview of the areas that involved a higher degree of judgement or complexity. Detailed information about each of these estimates and judgements is included in the relevant notes together with the basis of calculation for each affected item in the financial statements.  Provisions for impairment - The effect of credit risk is quantified based on management's best estimate of future cash repayments and proceeds from any security held or by reference to risk profile groupings and historical loss data. Refer to Note 19(e) for further details.  Goodwill - Determining the fair value of assets and liabilities of acquired businesses requires the exercise of management judgement. The carrying value of goodwill is tested annually for impairment, refer to Note 15(b)(ii). The estimates and judgements used in the preparation of the Groups financial statements are continually evaluated. They are based on historical experience and other factors, including expectations of future events that may have a financial impact on the entity. 8 9 38 Heartland New Zealand Limited - Annual Report 2015 Financial Statements For The Year Ended 30 June 2015 Financial Statements For The Year Ended 30 June 2015 www.heartland.co.nz 39 NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 June 2015 Performance 1 Segmental analysis Segment information is presented in respect of the Group's operating segments which are those used for the Group's management and internal reporting structure. All income received is from external sources, except those transactions with related parties. Refer to Note 15(d) - Related party transactions for further details. Certain selling and administration expenses, such as premises, IT and support centre costs are not allocated to operating segments and are included in Administration and Support (Admin & Support). Operating segments The Group operates predominantly within New Zealand and comprises the following main operating segments: Households Providing a comprehensive range of financial services to New Zealand businesses and families, including transactional accounts together with mortgage lending (residential and home equity release), Business Rural motor vehicle finance and asset finance. Providing term debt, plant and equipment finance, commercial mortgage lending and working capital solutions for small-to-medium sized New Zealand businesses. Providing specialist financial services to the farming sector primarily offering livestock finance, rural mortgage lending, seasonal and working capital financing, as well as leasing solutions to farmers. Non-core Property Funding assets of the non-core property division. The Group's operating segments are different than the industry categories detailed in Note 19 - Asset quality. The operating segments are primarily categorised by sales channel, whereas Note 19 - Asset quality categorises exposures based on credit risk concentrations. During the year ended 30 June 2015, a business unit previously reported in the Households segment was moved to the Business segment. Comparative segment information has been restated to be consistent with the current reporting period. Jun 15 Interest income Interest expense Net interest income / (expense) Net operating lease income Net other income Net operating income Depreciation and amortisation expense Other selling and administration expenses Selling and administration expenses Profit / (loss) before impaired asset expense and income tax Impaired asset expense / (benefit) Operating profit / (loss) Share of joint arrangement profit Profit / (loss) before income tax Income tax expense Profit / (loss) for the year Total assets Total liabilities Total equity Households Business $000 $000 134,193 64,299 69,894 3,263 2,560 75,717 - 20,071 20,071 70,258 29,931 40,327 - 1,639 41,966 - 6,207 6,207 Rural $000 41,380 17,496 23,884 - 135 24,019 - 4,878 4,878 Non-core Property $000 Admin & Support $000 779 1,569 (790) - 1,478 688 - 1,273 1,273 13,858 12,746 1,112 - 1,205 2,317 2,010 33,964 35,974 Total $000 260,468 126,041 134,427 3,263 7,017 144,707 2,010 66,393 68,403 55,646 35,759 19,141 (585) (33,657) 76,304 5,465 50,181 6,467 29,292 510 18,631 - - - 50,181 29,292 18,631 (337) (248) - (248) - (33,657) 137 (33,520) - - - - 16,173 50,181 29,292 18,631 (248) (49,693) 1,609,887 791,984 487,673 27,038 442,677 - - - - - - - - 2,879,134 480,125 12,105 64,199 137 64,336 16,173 48,163 3,359,259 2,879,134 480,125 NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 June 2015 1 Segmental analysis (continued) Jun 14 Interest income Interest expense Net interest income / (expense) Net operating lease income Net other income Net operating income Depreciation and amortisation expense Other selling and administration expenses Selling and administration expenses Profit / (loss) before impaired asset expense and income tax Households Business $000 $000 Rural $000 Non-core Property $000 Admin & Support $000 92,247 41,264 50,983 5,639 2,000 58,622 - 11,947 11,947 62,686 26,302 36,384 - 435 39,666 16,865 22,801 - 68 36,819 22,869 - 5,983 5,983 - 5,409 5,409 2,977 4,426 (1,449) - 3,822 2,373 - 4,000 4,000 12,721 12,364 357 - 1,115 1,472 2,142 35,258 37,400 Total $000 210,297 101,221 109,076 5,639 7,440 122,155 2,142 62,597 64,739 46,675 30,836 17,460 (1,627) (35,928) 57,416 Impaired asset expense / (benefit) Decrease in fair value of investment properties Operating profit / (loss) 648 - 5,535 - 963 - 46,027 25,301 16,497 (1,251) 1,203 (1,579) - - (35,928) Share of joint arrangement profit Profit / (loss) before income tax - - - - 486 46,027 25,301 16,497 (1,579) (35,442) 5,895 1,203 50,318 486 50,804 14,765 36,039 - - - - 14,765 46,027 25,301 16,497 (1,579) (50,207) 1,543,248 669,264 410,219 40,846 353,311 - - - - - - - - 2,564,266 452,622 3,016,888 2,564,266 452,622 Income tax expense Profit / (loss) for the year Total assets Total liabilities Total equity 2 Net interest income Interest income and expense is recognised in the profit or loss using the effective interest method. The effective interest rate is established on initial recognition of the financial assets and liabilities and is not revised subsequently. The calculation of the effective interest rate includes all yield related fees and commissions paid or received that are an integral part of the effective interest rate. Interest on the effective portion of a derivative designated as a cash flow hedge is initially recognised in the hedging reserve. It is released to the profit or loss at the same time as the hedged item or if the hedge relationship is subsequently deemed to be ineffective. Interest income Cash and cash equivalents Investments Finance receivables Total interest income Interest expense Retail deposits Bank and securitised borrowings 1 Net interest expense on derivative financial instruments Total interest expense Net interest income Jun 15 $000 Jun 14 $000 2,458 9,919 248,091 260,468 82,526 43,294 221 3,559 9,189 197,549 210,297 79,430 20,932 859 126,041 101,221 134,427 109,076 Included within the Group's interest income on finance receivables is $1,157,000 (2014: $2,665,000) on individually impaired assets. 1 Bank and securitised borrowings interest expense increased $22.4 million during the year ended 30 June 2015. This was due to comparatives only including HHHL Group results for three months of the prior year. 10 11 40 Heartland New Zealand Limited - Annual Report 2015 Financial Statements For The Year Ended 30 June 2015 Financial Statements For The Year Ended 30 June 2015 www.heartland.co.nz 41 NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 June 2015 NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 June 2015 3 Net operating lease income 6 Impaired asset expense Rental income from operating leases is recognised on a straight-line basis over the term of the relevant lease. Initial direct costs incurred in negotiating and arranging an operating lease are added to the carrying amount of the leased asset and recognised on a straight-line basis over the lease term. Profits on the sale of operating lease vehicles are included as part of operating lease income. Current year depreciation and losses on the sale of operating lease vehicles are included as part of operating lease expenses. Operating lease income Lease income Gain on disposal of lease vehicles Total operating lease income Operating lease expense Depreciation on lease vehicles Direct lease costs Total operating lease expenses Net operating lease income 4 Other income Jun 15 $000 Jun 14 $000 9,430 920 10,350 6,375 712 7,087 11,256 2,092 13,348 7,060 649 7,709 3,263 5,639 Non-securitised Individually impaired expense Collectively impaired expense / (recovery) Total non-securitised impaired asset expense Securitised Individually impaired expense Collectively impaired expense Total securitised impaired asset expense Total Individually impaired expense Collectively impaired expense / (recovery) Total impaired asset expense 7 Taxation (a) Income tax expense NOTE Jun 15 $000 7,153 4,051 11,204 53 848 901 Jun 14 $000 11,851 (6,536) 5,315 - 580 580 19(e) 19(e) 7,206 4,899 12,105 11,851 (5,956) 5,895 Rental income from investment properties is recognised on a straight-line basis over the term of the relevant lease. Other items of income are recognised at the fair value of the consideration received or receivable, net of the amount of goods and services tax levied. Income tax expense for the year comprises current tax and movements in deferred tax balances. Income tax expense is recognised in profit or loss except to the extent that it relates to items recognised directly in other comprehensive income, in which case it is recognised in equity or other comprehensive income. Rental income from investment properties Management fees Other income Total other income 5 Selling and administration expenses Personnel expenses Directors' fees Superannuation Audit and review of financial statements Other assurance services paid to auditor 1 Other fees paid to auditor 2 Depreciation - property, plant and equipment Amortisation - intangible assets Operating lease expense as a lessee Legal and professional fees Other operating expenses Total selling and administration expenses NOTE 15(d) Jun 15 $000 1,478 500 1,962 3,940 Jun 14 $000 4,027 374 570 4,971 Jun 15 $000 39,619 Jun 14 $000 35,180 917 782 431 23 125 777 1,233 2,001 2,318 20,177 68,403 882 585 430 18 193 801 1,341 1,654 4,434 19,221 64,739 1 Other assurance services paid to auditor comprise of reporting on trust deed requirements. 2 Other fees paid to auditor include professional fees in connection with RBNZ reporting and other regulatory compliance, accounting advice, internal audit and review work completed. Income tax recognised in profit or loss Current tax Current year Adjustments for prior year Deferred tax Current year Adjustments for prior year Income tax expense recognised in profit or loss Income tax recognised in other comprehensive income Current tax Fair value movements of available for sale investments Deferred tax Defined benefit plan Fair value movements of cash flow hedges Income tax (benefit) / expense recognised in other comprehensive income Reconciliation of effective tax rate Profit before income tax Prima facie tax at 28% Higher tax rate for overseas jurisdiction Plus/ (minus) tax effect of items not taxable / deductible Adjustments for prior year Utilisation of unrecognised tax losses Total income tax expense Jun 15 $000 Jun 14 $000 18,755 (195) 3,746 351 (2,209) (178) 16,173 10,989 (321) 14,765 349 (5) 19 (1,052) (684) 1 431 427 64,336 50,804 18,014 14,225 92 (141) (283) (1,509) 16,173 21 489 30 - 14,765 12 13 42 Heartland New Zealand Limited - Annual Report 2015 Financial Statements For The Year Ended 30 June 2015 Financial Statements For The Year Ended 30 June 2015 www.heartland.co.nz 43 NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 June 2015 7 Taxation (continued) (b) Current tax Current tax is the expected tax receivable or payable on the taxable income for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to the tax receivable or payable in respect of previous years. Current tax for current and prior years is recognised as a liability (or asset) to the extent that it is unpaid (or refundable). (c) Deferred tax assets The Group has recognised deferred tax assets, including those relating to the tax effects of income tax losses and credits available to be carried forward, to the extent that there are sufficient taxable temporary differences (deferred tax liabilities) relating to the same taxation authority and the same subsidiary against which the unused tax losses can be utilised. Deferred tax assets comprise of the following temporary differences: Employee entitlements Provision for impairment Investment properties Intangibles and property, plant and equipment Operating lease vehicles Other temporary differences Total deferred tax assets Opening balance of deferred tax assets Movement recognised in profit or loss Movement recognised in other comprehensive income Closing balance of deferred tax assets (d) Goods and services tax (GST) Jun 15 $000 Jun 14 $000 1,229 1,619 6,633 4,404 1,473 1,740 (399) (853) (1,543) (1,397) 1,314 (226) 8,707 5,287 5,287 2,387 1,033 8,707 16,387 (10,668) (432) 5,287 Revenues, expenses and assets are recognised net of the amount of GST. As the Group is predominantly involved in providing financial services, only a proportion of GST paid on inputs is recoverable. The non-recoverable proportion of GST is treated as part of the cost of acquisition of the asset or is expensed. (e) Imputation credit account Imputation credit account 8 Earnings per share Jun 15 $000 3,484 Jun 14 $000 (1,471) The calculation of basic and diluted earnings of 10c per share at 30 June 2015 (2014: 9c per share) is based on the profit for the year of $48,163,000 (2014: $36,039,000), and a weighted average number of shares on issue of 466,643,607 (2014: 411,753,442). NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 June 2015 Financial position 9 Investments The Group holds investments in bank bonds and floating rate notes, local authority stock, public securities, corporate bonds and equity investments. Equity investments are classified as being fair valued through profit or loss and the fair value is based on unobservable inputs. All other investments held are classified as being available for sale and are stated at fair value less impairment, if any. The fair values are derived by reference to published price quotations in an active market or modelled using observable market inputs. Bank bonds and floating rate notes Local authority stock Public securities and corporate bonds Equity investments Total investments Jun 15 $000 Jun 14 $000 244,505 143,063 46,839 31,275 6,719 36,982 58,814 - 329,338 238,859 During the year ended 30 June 2015 Heartland acquired an interest of 11% in Harmoney Corp Limited and an interest of 12% in Ora HQ Limited. 10 Investment properties Investment properties have been acquired through the enforcement of security over finance receivables and are held to earn rental income or for capital appreciation (or both). Investment properties are initially recorded at fair value, with subsequent changes in fair value recognised in profit or loss. Fair values are determined by qualified independent valuers or other similar external evidence, adjusted for changes in market conditions and the time since the last valuation. Opening balance Acquisitions Additional capital expenditure Sales Decrease in fair value of investment properties Closing balance Jun 15 $000 24,888 9,000 - (9,375) - 24,513 Jun 14 $000 58,287 9,746 302 (42,244) (1,203) 24,888 14 15 44 Heartland New Zealand Limited - Annual Report 2015 Financial Statements For The Year Ended 30 June 2015 Financial Statements For The Year Ended 30 June 2015 www.heartland.co.nz 45 NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 June 2015 NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 June 2015 11 Finance receivables 12 Operating lease vehicles Finance receivables are initially recognised at fair value plus incremental direct transaction costs and are subsequently measured at amortised Operating lease vehicles are stated at cost less accumulated depreciation. cost using the effective interest method, less any impairment loss. Past due but not impaired assets are any assets which have not been operated by the counterparty within their key terms but are not considered to be impaired by the Group. Individually impaired assets are those loans for which the Group has evidence that it will incur a loss, and will be unable to collect all principal and interest due according to the contractual terms of the loan. Restructured assets are impaired assets where the Group expects to recover all amounts owing, although the original terms have been changed due to the counterparty's difficulty in complying with the original terms of the contract and the amended terms are not comparable with similar new lending. Credit impairment provisions are made where events have occurred leading to an expectation of reduced future cash flows from certain receivables. These provisions are made in some cases against an individual loan and in other cases on a collective basis. When all appropriate collection and legal action has been performed and the loan is known to be uncollectible, it is written off against the related provision for impairment. Non-securitised Neither at least 90 days past due or impaired At least 90 days past due Individually impaired Restructured assets Gross finance receivables Less provision for impairment Less fair value adjustment for present value of future losses1 Total non-securitised finance receivables Securitised Neither at least 90 days past due or impaired At least 90 days past due Individually impaired Gross finance receivables Less provision for impairment Total securitised finance receivables Total Neither at least 90 days past due or impaired At least 90 days past due Individually impaired Restructured assets Gross finance receivables Less provision for impairment Less fair value adjustment for present value of future losses1 Total finance receivables NOTE Jun 15 $000 Jun 14 $000 2,552,302 2,321,630 33,459 25,567 3,881 32,969 27,617 4,064 2,615,209 2,386,280 24,511 6,242 15,725 8,000 2,584,456 2,362,555 276,944 1,516 55 244,409 1,065 - 278,515 245,474 901 636 277,614 244,838 2,829,246 2,566,039 34,975 25,622 3,881 34,034 27,617 4,064 2,893,724 2,631,754 25,412 6,242 16,361 8,000 2,862,070 2,607,393 19(b) 19(c) 19(a) 19(e) 19(a) 1 A fair value adjustment of $8m for the present value of future losses was recognised on acquisition of HHHL Group. This fair value adjustment is amortised over the estimated lifetime of the finance receivables acquired. Operating lease vehicles are depreciated on a straight line basis over their expected life after allowing for any residual values. The estimated lives of operating lease vehicles vary up to five years. Vehicles held for sale are not depreciated but are tested for impairment. Cost Opening balance Additions Disposals Closing balance Accumulated depreciation Opening balance Depreciation charge for the year Disposals Closing balance Opening net book value Closing net book value Jun 15 $000 43,595 11,544 Jun 14 $000 47,339 12,954 (12,953) (16,698) 42,186 43,595 12,300 6,375 (6,487) 12,188 31,295 29,998 14,944 7,060 (9,704) 12,300 32,395 31,295 The future minimum lease payments receivable under non-cancellable operating leases not later than one year is $7,961,000 (2014: $8,610,000), within one to five years is $6,225,000 (2014: $7,816,000) and over five years is nil (2014: nil). 13 Borrowings Bank borrowings and deposits are initially recognised at fair value including incremental direct transaction costs. They are subsequently measured at amortised cost using the effective interest method. Deposits Subordinated bond Bank borrowings Securitised borrowings Total borrowings Jun 15 $000 Jun 14 $000 2,097,458 1,736,751 3,378 465,779 258,630 3,378 555,708 228,623 2,825,245 2,524,460 Deposits rank equally and are unsecured. The Subordinated bonds rank below all other general liabilities of the Group. Securitised borrowings held by investors in Heartland ABCP Trust 1 (ABCP Trust) rank equally with each other and are secured over the securitised assets of that trust. The Group has securitised bank facilities of $350 million (2014: $400 million) in relation to the ABCP Trust, which matures on 3 February 2016. The Group has a New Zealand and Australian bank facility provided by Commonwealth Bank of Australia (CBA) totalling $466 million in relation to HHHL Group (CBA bank facility). The CBA bank facility is secured over assets of HHHL Group and has a maturity date of 30 September 2019. Capacity for new Australian drawings is available for two years, based on scheduled repayments achieved by the Group. ASF Group (comprising ASF, ASF Settlement Trust and Seniors Warehouse Trust) has also provided a cross-guarantee to CBA for bank loans to other members of ASF Refer to Note 19 - Asset quality for further analysis of finance receivables by credit risk concentration. Group. Finance lease receivables Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. Amounts due from finance leases are recognised as finance receivables at the amount of the Group's net investment in the leases. The table below provides an analysis of finance lease receivables for leases of certain property and equipment in which the Group is the lessor. The banking agreements include covenants for the provision of information, attainment of minimum financial ratios and equity, compliance with specified procedures and certification of due performance by ASF Group. Gross finance lease receivables Less than 1 year Between 1 and 5 years More than 5 years Total gross finance lease receivables Less unearned finance income Less provision for impairment Net finance lease receivables Jun 15 $000 Jun 14 $000 32,484 66,835 68 36,420 66,184 66 99,387 102,670 14,315 170 84,902 14,681 87 87,902 16 17 46 Heartland New Zealand Limited - Annual Report 2015 Financial Statements For The Year Ended 30 June 2015 Financial Statements For The Year Ended 30 June 2015 www.heartland.co.nz 47 NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 June 2015 NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 June 2015 14 Share capital and dividends paid (b) Intangible assets and goodwill (continued) Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares and share options are recognised (ii) Goodwill as a deduction from equity, net of any tax effects. Number of shares issued and authorised Issued shares Opening balance Shares issued during the year Dividend reinvestment plan Closing balance The shares have equal voting rights, rights to dividends and distributions and do not have a par value. Jun 15 Jun 14 Number of shares Number of shares 000 000 463,266 388,704 - 6,624 65,900 8,662 469,890 463,266 Goodwill arising on acquisition represents the excess of the cost of the acquisition over the Group’s interest in the fair value of the identifiable net assets. Goodwill that has an indefinite useful life is not subject to amortisation and is tested for impairment annually. Goodwill is carried at cost less accumulated impairment losses. Goodwill Jun 15 $000 45,143 Jun 14 $000 45,143 On 1 April 2014, as part of the acquisition of HHHL Group $25.0 million of goodwill was recognised. Goodwill was tested for impairment as at 30 June 2015. In assessing impairment, an internal valuation model was developed to indicate the value of the business. This value was compared to the net assets of the Group. There was no indication of impairment and no impairment losses have been recognised against the carrying amount of goodwill for the year ended 30 June 2015 (30 June 2014: nil). The Group’s management and Board of Directors have assessed that goodwill should be allocated to the Group as a cash-generating unit, as this is the cash generating unit at which goodwill is assessed for impairment and to which any future economic benefit will arise. Dividends paid (c) Trade and other payables The Group paid total dividends of $30,222,744 ($0.06 per share) (2014: $19,958,000 ($0.05 per share)). Derivative financial liabilities consist of interest rate swaps held to manage the Group's exposure to interest rate repricing risk arising from fixed Under dividend reinvestment plans, the Group issued 3,680,052 new shares at $1.015 per share on 3 October 2014 and 2,943,636 new shares rate mortgage loans. at $1.320 per share on 7 April 2015. 15 Other balance sheet items (a) Other assets Derivative financial assets consist of interest rate swaps and foreign exchange options. Interest rate swaps are held to manage the Group's exposure to interest rate repricing risk arising from deposits, commercial paper issuance, current and future floating rate bank debt and investments. Foreign exchange options are used to manage the Group's exposure to foreign exchange rate risk. Property, plant and equipment are stated at cost less accumulated depreciation and impairment. Depreciation is calculated on a straight line basis to write off the net cost or other revalued amount of each asset over its expected useful life to its estimated residual value. Annual leave entitlements are accrued at amounts expected to be paid. Long service leave is accrued by calculating the probable future value of entitlements and discounting back to present value. Obligations to defined contribution superannuation schemes are recognised as an expense when the contribution is paid. Derivative financial liabilities Trade payables GST payable Due to related parties Employee benefits Total trade and other payables (d) Related party transactions NOTE 15(d) Jun 15 $000 6,407 14,808 16,571 2,448 5,786 46,020 Jun 14 $000 4,180 12,849 15,749 500 6,097 39,375 The Group provided administrative assistance to MARAC Insurance Limited (MARAC Insurance) and received insurance commission from MARAC Insurance. MARAC Insurance, Heartland Cash and Term PIE Fund and some key management personnel invested in Heartland Bank Limited's deposits. Jun 15 $000 59 5,546 1,092 5,422 Jun 14 $000 1,867 6,134 1,023 9,573 12,119 18,597 The investments of Heartland Cash and Term PIE Fund are detailed in Note 24 - Structured entities. Derivative financial assets Trade receivables Prepayments Property, plant and equipment Total other assets (b) Intangible assets and goodwill (i) Intangible assets with definite useful lives Software acquired or internally developed by the Group is stated at cost less accumulated amortisation and any accumulated impairment losses. Subsequent expenditure on software assets is capitalised only when it increases the future economic value of that asset. Amortisation of software is on a straight line basis, at rates which will write off the cost over their estimated economic lives. All other expenditure is expensed immediately as incurred. Computer Software Cost Jun 15 Jun 14 $000 5,976 $000 2,278 Transactions with related parties MARAC Insurance Limited Interest expense Lending and credit fee income Other income Total transactions with other related parties Due to related parties MARAC Insurance Limited Total due to related parties Jun 15 $000 Jun 14 $000 (31) 625 500 1,094 2,448 2,448 (21) 300 374 653 500 500 18 19 48 Heartland New Zealand Limited - Annual Report 2015 Financial Statements For The Year Ended 30 June 2015 Financial Statements For The Year Ended 30 June 2015 www.heartland.co.nz 49 NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 June 2015 (d) Related party transactions (continued) Transactions with key management personnel Key management personnel, being directors of Heartland and those Executives reporting directly to the Chief Executive Officer and their immediate relatives, have transacted with the Group during the year as follows: Transactions with key management personnel Interest income Interest expense Key management personnel compensation: Short-term employee benefits Share-based payment expense Total transactions with key management personnel Due (to) / from key management personnel Finance receivables Borrowings - deposits Total due to key management personnel 16 Fair value Jun 15 $000 Jun 14 $000 68 (573) 55 (281) (6,690) (2,693) (9,888) 1,391 (14,386) (12,995) (7,304) (907) (8,437) 709 (5,998) (5,289) The fair values of financial assets and financial liabilities that are traded in active markets are based on quoted market prices or dealer price quotations. For all other financial instruments, the Group determines fair value using other valuation techniques. NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 June 2015 16 Fair value (continued) The following table analyses financial instruments measured at fair value at the reporting date by the level in the fair value hierarchy into which each fair value measurement is categorised. The amounts are based on the values recognised in the Statement of Financial Position. June 15 Assets Investments Derivative assets held for risk management Total Liabilities Derivative liabilities held for risk management Total June 14 Assets Investments Derivative assets held for risk management Total Liabilities Derivative liabilities held for risk management Total Level 1 $000 Level 2 $000 Level 3 $000 Total $000 311,815 10,804 6,719 329,338 - 59 - 59 311,815 10,863 6,719 329,397 - - 6,407 6,407 198,385 - 198,385 40,474 1,867 42,341 - - 4,180 4,180 - - - - - - - 6,407 6,407 238,859 1,867 240,726 4,180 4,180 The Group measures fair values using the following fair value hierarchy, which reflects the significance of the inputs used in making the There have been no transfers between Level 1 and Level 2 of the fair value hierarchy. measurements. - - - Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2: Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices). Level 3: Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs). The Group recognises transfers between levels of the fair value hierarchy as of the end of the reporting period during which the change has occurred. (a) Financial instruments measured at fair value The following methods and assumptions were used to estimate the fair value of each class of financial asset and liability measured at fair value on a recurring basis in the Statement of Financial Position. Investments Investments in public sector securities and corporate bonds are classified as being available for sale and are stated at fair value less impairment, (b) Financial instruments not measured at fair value The following methods and assumptions were used to estimate the fair value of each class of financial assets and liabilities not recognised at fair value but for which fair value is calculated for disclosure purposes under level 2 or 3 of the fair value hierarchy. Cash and cash equivalents and other financial assets and liabilities The fair value of all cash and cash equivalents and other financial assets and liabilities is considered equivalent to their carrying value due to their short term nature. Finance receivables The fair value of the Group's finance receivables is calculated using a valuation technique which assumes the Group's current weighted average lending rates for loans of a similar nature and term. The current weighted average lending rate used to fair value finance receivables with a fixed interest rate was 8.95% (2014: 8.99%). Finance receivables with a floating interest rate are deemed to be at current market rates. The current amount of credit provisioning has been deducted from the fair value calculation of finance receivables as a proxy for future losses. Prepayment rates have not been factored into the fair value with the fair value being based on quoted market prices (Level 1 under the fair value hierarchy) or modelled using observable market inputs calculation as they are not deemed to be material. (Level 2 under the fair value hierarchy). Refer to Note 9 - Investments for more details. Investments valued under level 2 of the fair value hierarchy are valued either based on quoted market prices or dealer quotes for similar instruments, or discounted cash flows analysis. Investments in unlisted equity securities are classified as being fair valued through profit or loss and are valued under Level 3 of the fair value hierarchy, with the fair value being based on unobservable inputs. Derivative items Interest rate swaps are classified as held for trading and are recognised in the financial statements at fair value. Derivatives are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at their fair value. Fair values are determined on the basis of discounted cash flow analysis using observable market prices and adjustments for counterparty credit spreads. (Level 2 under the fair value hierarchy). 20 21 50 Heartland New Zealand Limited - Annual Report 2015 Financial Statements For The Year Ended 30 June 2015 Financial Statements For The Year Ended 30 June 2015 www.heartland.co.nz 51 NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 June 2015 16 Fair value (continued) (b) Financial instruments not measured at fair value (continued) Borrowings The fair value of deposits, bank borrowings and other borrowings is the present value of future cash flows and is based on the current market interest rates payable by the Group for debt of similar maturities. The current market rate used to fair value borrowings for the Group is 4.32% (2014: 4.64%). Other financial assets and financial liabilities The Group has not disclosed the fair values for financial instruments such as short-term trade receivables and payables, because their carrying amounts are a reasonable approximation of fair values. The following table sets out the fair values of financial instruments not measured at fair value and analyses them by the level in the fair value hierarchy into which each fair value measurement is categorised. June 15 Assets Cash and cash equivalents Finance receivables Finance receivables - securitised Other financial assets Total financial assets Liabilities Borrowings Borrowings - securitised Other financial liabilities Total financial liabilities June 14 Assets Cash and cash equivalents Finance receivables Finance receivables - securitised Other financial assets Total financial assets Liabilities Borrowings Borrowings - securitised Other financial liabilities Total financial liabilities Level 1 Level 2 Level 3 $000 $000 $000 Total Fair Value $000 Total Carrying Value $000 37,012 - - - 37,012 - - - - - - 37,012 37,012 2,582,776 2,582,776 2,584,456 279,491 5,546 279,491 5,546 277,614 5,546 2,867,813 2,904,825 2,904,628 - - - - 2,576,425 258,630 2,448 - - 20,594 2,576,425 2,566,615 258,630 23,042 258,630 23,042 2,837,503 20,594 2,858,097 2,848,287 37,344 - - - 37,344 - - - - - - 37,344 37,344 2,357,824 2,357,824 2,362,555 246,674 6,134 246,674 6,134 244,838 6,134 2,610,632 2,647,976 2,650,871 - - - - 2,297,381 228,887 5,420 - - 14,026 2,297,381 2,295,837 228,887 19,446 228,623 19,446 2,531,688 14,026 2,545,714 2,543,906 NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 June 2015 16 Fair value (continued) (c) Classification of financial instruments The following tables summarise the categories of financial instruments and the carrying value and fair value of all financial instruments of the Group: June 2015 Cash and cash equivalents Investments Finance receivables Finance receivables - securitised Derivative financial assets Other financial assets Total financial assets Borrowings Borrowings - securitised Derivative financial liabilities Other financial liabilities Total financial liabilities June 2014 Cash and cash equivalents Investments Finance receivables Finance receivables - securitised Derivative financial assets Other financial assets Total financial assets Borrowings Borrowings - securitised Derivative financial liabilities Other financial liabilities Total financial liabilities Held for trading Loans and receivables Available for sale $000 $000 $000 Financial liabilities at amortised cost $000 Total Carrying Value Total Fair Value $000 $000 - 37,012 - 6,719 - 322,619 - - 59 - 2,584,456 277,614 - 5,546 - - - - 6,778 2,904,628 322,619 - - - - - - - 37,012 329,338 37,012 329,338 2,584,456 2,582,776 277,614 279,491 59 5,546 59 5,546 3,234,025 3,234,222 - - - - - 37,344 - - - - - - - 238,859 - - 6,407 - 6,407 - - - - 2,362,555 244,838 1,867 - - 6,134 - - - - 1,867 2,650,871 238,859 2,566,615 2,566,615 2,576,425 258,630 258,630 258,630 - 23,042 6,407 23,042 6,407 23,042 2,848,287 2,854,694 2,864,504 - - - - - - - 37,344 238,859 37,344 238,859 2,362,555 2,357,824 244,838 246,674 1,867 6,134 1,867 6,134 2,891,597 2,888,702 - - 4,180 - 4,180 - - - - - - - - - - 2,295,837 2,295,837 2,297,381 228,623 228,623 228,887 - 19,446 4,180 19,446 4,180 19,446 2,543,906 2,548,086 2,549,894 22 23 52 Heartland New Zealand Limited - Annual Report 2015 Financial Statements For The Year Ended 30 June 2015 Financial Statements For The Year Ended 30 June 2015 www.heartland.co.nz 53 NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 June 2015 Risk management 17 Risk management policies The Group is committed to the management of risk and operates an Enterprise Risk Management Program (RMP) across four primary risk domains; credit, liquidity, market (including interest rate), and operational & compliance. The Group's risk management strategy is set by the Board of Directors (Board). The Group has put in place management structures and information systems to manage risks incorporated in the RMP. The Group has separate monitoring tasks where feasible and subjects all risk processes to hindsight and internal audit, and accounting systems to regular internal and external audits. The Audit and Risk Committee has been appointed by the Board to advise and provide assurance to the Board in relation to the oversight of: The integrity of financial control, financial management and external financial reporting of the Group. Risk management and internal control. The internal audit function and the internal audit process. - - - The Audit and Risk Committee are responsible for the risk management of the overall Group. Risks in Heartland Bank Limited (the Bank), the largest operating subsidiary are managed by the Bank's Board Risk Committee. Role of the Board and the Board Risk Committee The Bank's Board Risk Committee (BRC) is responsible for the overall risk management process and the development of the RMP. The role of the BRC is to assist the Board of Directors of the Bank (Bank's Board) to formulate its risk appetite, understand the risks the Bank faces and to ensure that all policy and decisions are made in accordance with the Bank's corporate values and guiding principles. The BRC has the following responsibilities: - - - - - - - - To oversee the Bank's risk profile and review and approve the Bank's RMP within the context of the risk-reward strategy determined by the Bank's Board at least annually. To make recommendations regarding high-level liquidity / capital / funding policies and strategy, including the use of securitisation and special investment vehicles. To agree and recommend for the Bank Board's approval and annual review; a set of risk limits and conditions that apply to the taking of risk, as delegated to the Risk Committee by the Bank's Board, that are consistent with the Bank Board's determined risk appetite. This includes the authorities delegated by the Board to the Chief Executive Officer (CEO), Chief Financial Officer (CFO), Chief Risk Officer (CRO) and any other officers of the Bank to whom the Board or the Committee have delegated authority, and to consider and accept risks beyond management’s approval discretion where deemed appropriate. To monitor the risk profile, performance, capital levels, exposures against limits and the management and control of the Bank's risks. To review significant correspondence with the Bank's regulators, and receive reports from management on the Bank's regulatory relations and report any significant issues to the Bank's Board. To monitor changes anticipated in the economic and business environment and other factors considered relevant to the Bank's risk profile and capital adequacy. To review significant risk management issues that are raised in external or internal audits as well as the length of time and action taken to resolve such issues. To ensure an appropriate set of applicable corporate governance principles are developed, and reviewed on a regular basis. The BRC consists of four Bank directors, of which at least three are non-executive directors and two are independent directors. In addition the CEO, CRO and CFO may attend meetings. The BRC meets at least bi-monthly to review identified risk issues, and reports directly to the Bank's Board. A member of the BRC sits on the Audit Committee and vice versa. Audit Committee and Internal Audit The Group has an internal audit function, the objective of which is to provide independent, objective assurance over the internal control environment and additional services designed to add value and improve the Group’s operations. It assists the Group to accomplish its objectives by bringing a systematic and disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes. Internal audit is granted full, free and unfettered access to any and all of the organisation’s records, personnel and physical properties deemed necessary to accomplish its internal audit activities. A regular cycle of testing has been implemented to cover all areas of the business. Its focus is on assessment, management and control of risks. The intention is to cycle through various business units and operational areas on a pre-set and agreed cycle relative to assessed risk, looking at the specific internal control issues pertinent to the area, with a requirement to meet or exceed the Standards for the Professional Practice of Internal Auditing of The Institute of Internal Auditors. Each audit has a separate audit programme tailored to the area of business that is being reviewed. The audit programmes are updated during each audit to reflect any process changes. Audit work papers are completed to evidence the testing performed in accordance with the audit programme. All internal audit reports are addressed to the manager of the relevant area that is being audited. Management comments are obtained from the process owner(s) and are included in the report. The internal audit function has direct reporting lines, and accountability to the Audit Committee of the Bank, the Audit and Risk Committee of Heartland (collectively the Audit Committees) and administratively to the CFO. A schedule of all outstanding internal control issues is maintained and presented to the Audit Committees to assist the Audit Committees to track the resolution of previously identified issues. Any issues raised that are categorised as high risk are specifically reviewed by internal audit during a follow-up review once the issue is considered closed by management. The follow-up review is performed with a view to formally close out the issue. NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 June 2015 17 Risk management policies (continued) Audit Committee and Internal Audit (continued) The Audit Committees focus on financial reporting and application of accounting policies as part of the internal control and risk assessment framework. The Audit Committees monitor the identification, evaluation and management of all significant risks through the Group. This work is supported by internal audit, which provides an independent assessment of the design, adequacy and effectiveness of internal controls. The Audit Committees receive regular reports from internal audit. Charters for the Audit and Risk Committee ensure suitable cross representation to allow effective communication pertaining to identified issues with oversight by the Board. The CRO has a direct reporting line to the Chairman of the Board. The Head of Internal Audit has a direct reporting line to the Chairman of the Audit and Risk Committee. Bank's Asset and Liability Committee (ALCO) The ALCO comprises the CEO (Chair), CFO, CRO, Treasurer, Head of Consumer & Retail, Head of Rural and Head of Business. The ALCO has responsibility for overseeing aspects of the Group's financial position risk management. The purpose of the ALCO is to support the BRC with specific responsibilities for decision making and oversight of risk matters in relation to: - Market risk (including non-traded interest rate risk and the investment of capital) - Liquidity risk (including funding) - Foreign exchange rate risk - Balance sheet structure - Capital management The ALCO usually meet monthly, and reports to the BRC. Bank's Executive Risk Committee (ERC) The ERC comprises the CEO (Chair), CFO, CRO, Chief Operating Officer, Head of Consumer & Retail, Head of Rural, Head of Business, Head of Human Resources and Group General Counsel. The ERC has responsibility for overseeing all risk aspects not considered by ALCO. The purpose of ERC is to support the BRC with specific responsibilities for decision making and oversight of the following risk categories: - Operational and compliance risk - Credit risk - Strategic risk - Legal and governance risk - Business risk Operational & compliance risk Operational & compliance risk is the risk arising from day to day operational activities in the execution of the Group's strategy which may result in direct or indirect loss. Operational & compliance risk losses can occur as a result of fraud, human error, missing or inadequately designed processes, failed systems, damage to physical assets, improper behaviour or from external events. The losses range from direct financial losses, to reputational damage, unfavourable media attention, or loss of staff or clients. Examples include failure to comply with policy and legislation, human error, natural disasters, fraud and other malicious acts. Where appropriate, risks are mitigated by insurance. To ensure appropriate responsibility is allocated for the management, reporting and escalation of operational & compliance risk, the Group operates a “three lines of defence” model which outlines principles for the roles, responsibilities and accountabilities for operational & compliance risk management: The first line of defence is the business line management for the identification, management and mitigation of the risks associated with the products and processes of the business. This accountability includes regular testing and certification of the adequacy and effectiveness of controls and compliance with the Group’s policies. The second line of defence is the Risk & Compliance function, responsible for the design and ownership of the operational & compliance Risk Policies. It incorporates key processes including Risk and Control Self-Assessment (RCSA), incident management, independent evaluation of the adequacy and effectiveness of the internal control framework, and the self-certification process. The third line of defence is audit. is responsible for assessing compliance with policy frameworks and for providing Internal Audit - - - independent evaluation of the adequacy and effectiveness of the risk and control framework. The Group’s exposure to operational & compliance risk is governed by a policy approved by the Board and managed by the ERC. This policy sets out the nature of risk which may be taken and aggregate risk limits, and the ERC must conform to this. The objective of the ERC is to manage the identification of operational & compliance risk and maintenance of a suitable internal control environment so residual risk to the Group is consistent with the Groups risk appetite. Foreign exchange rate risk Foreign exchange risk is the risk that the Group’s earnings and shareholder equity position are adversely impacted from changes in foreign exchange rates. The Group has exposure to foreign exchange translation risks through its wholly owned subsidiary, ASF (which has a functional currency of Australian dollars), in the forms of profit translation risk and balance sheet translation risk. Profit translation risk is the risk that deviations in exchange rates have a significant impact on the reported profit. Balance sheet translation risk is the risk that whilst the foreign currency value of the net investment in a subsidiary may not have changed, when translated back to the New Zealand dollars (NZD), the NZD value has changed materially due to movements in the exchange rates. The foreign exchange revaluation gains and losses are booked to the Foreign currency translation reserve. Substantial foreign exchange rate movements in any given year may have a impact on other comprehensive income. The Group manages this risk by setting and approving the foreign exchange rate for the upcoming financial year and entering into hedging contracts to manage the foreign exchange translation risks. 24 25 54 Heartland New Zealand Limited - Annual Report 2015 Financial Statements For The Year Ended 30 June 2015 Financial Statements For The Year Ended 30 June 2015 www.heartland.co.nz 55 NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 June 2015 NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 June 2015 18 Credit risk exposure 18 Credit risk exposure (continued) Credit risk is the risk that a borrower will default on any type of debt by failing to make payments which it is obligated to do so. The risk is primarily (b) Concentration of credit risk by geographic region that of the lender and includes loss of principal and interest, disruption to cash flows and increased collection costs. Credit risk is managed to achieve sustainable and superior risk-reward performance whilst maintaining exposures within acceptable risk “appetite” parameters. This is achieved through the combination of governance, policies, systems and controls, underpinned by sound commercial judgement as described below. To manage this risk the BRC has been delegated the task of overseeing a formal credit risk management strategy. The BRC reviews the Group's credit risk exposures to ensure consistency with the Group's credit policies to manage all aspects of credit risk. The credit risk management strategies ensure that: - Credit origination meets agreed levels of credit quality at point of approval. - Sector and geographical risks are actively managed. - Industry 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. The Group has adopted a detailed Credit Policy Framework supported by Lending Standards providing criteria for finance products within each business sector. The combination of the Credit Policy Framework and Lending Standards guides credit assessment, credit risk grading, documentation standards, legal procedures and compliance with regulatory and statutory requirements. The BRC has authority from the Board for approval of all credit exposures. Lending authority has been individually provided to the Group's Credit New Zealand: Auckland Wellington Rest of North Island Canterbury Rest of South Island Australia: Queensland New South Wales Victoria Western Australia South Australia Rest of Australia Rest of the world 1 Committee, for delegation through the business units under a detailed Delegated Lending Authority framework. Application of credit discretions in Provision for collectively impaired assets the business operation are monitored through a defined review and hindsight structure. Delegated Lending Authorities are provided to individual Less acquisition fair value adjustment for present value of future losses officers with due cognisance of their experience and ability. Larger and higher risk exposures require approval of senior management, the Credit Total on balance sheet credit exposures Jun 15 $000 Jun 14 $000 830,027 206,818 788,904 494,848 424,828 117,867 182,032 83,213 17,396 18,169 11,048 75,318 725,318 196,992 668,629 482,159 380,814 115,936 171,765 79,041 14,456 16,951 10,311 44,224 3,250,468 2,906,596 (10,201) (6,242) (6,999) (8,000) 3,234,025 2,891,597 1 These overseas assets are not Finance Receivables, they are Investments. These assets represent NZD-denominated investments in AA+ and higher rated securities issued by offshore supranational agencies ("Kauri Bonds"). (c) Concentration of credit risk by industry sector Risk Committee and ultimately through to the BRC. In addition to regular internal audit activity in regards to credit standards, the Group employs a comprehensive process of hind sighting loans to ensure that credit policies and the quality of credit processes are maintained. Home equity loans and negative equity risk Home equity release loans are a form of mortgage lending targeted toward the seniors market. These loans differ to conventional mortgages in that they typically are not repaid until the borrower ceases to reside in the property. Further, interest is not required to be paid, it is capitalised with the loan balance and is repayable on termination of the loan. As such, there are no incoming cash flows and therefore no default risk to manage during the term of the loan. Credit risk becomes 'negative equity' risk through the promise to customers that they can reside in their property for 'as long as they wish' and repayment of their loan is limited to the net sale proceeds of their property. The Group's exposure to negative equity risk is managed by Credit Risk Policy in conjunction with associated lending standards specific for this product. (a) Maximum exposure to credit risk at the relevant reporting dates The following table represents the maximum credit risk exposure, without taking account of any collateral held. The exposures set out above are based on net carrying amounts as reported in the Statement of Financial Position. Agriculture Forestry and Fishing Mining Manufacturing Finance & Insurance Wholesale trade Retail trade Households Property and Business services Transport and storage Other Services Cash and cash equivalents Investments Finance receivables Derivative financial assets Other financial assets Total on balance sheet credit exposures Jun 15 $000 37,012 329,338 Jun 14 $000 37,344 238,859 2,862,070 2,607,393 59 5,546 1,867 6,134 3,234,025 2,891,597 Provision for collectively impaired assets Less acquisition fair value adjustment for present value of future losses Total on balance sheet credit exposures (d) Commitments to extend credit Undrawn facilities available to customers Conditional commitments to fund at future dates Jun 15 $000 Jun 14 $000 537,286 469,020 35,126 14,105 93,779 377,318 82,665 193,862 22,301 11,148 77,321 291,223 80,884 171,019 1,397,003 1,313,877 396,939 20,068 102,317 330,860 15,873 123,070 3,250,468 2,906,596 (10,201) (6,242) (6,999) (8,000) 3,234,025 2,891,597 116,217 108,037 114,004 95,780 As at 30 June 2015 there are no undrawn lending commitments to counterparties for whom drawn balances are classified as individually impaired (2014: nil). 26 27 56 Heartland New Zealand Limited - Annual Report 2015 Financial Statements For The Year Ended 30 June 2015 Financial Statements For The Year Ended 30 June 2015 www.heartland.co.nz 57 NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 June 2015 19 Asset quality The disclosures in this note are categorised by the following credit risk concentrations: Corporate Rural Property Other Residential Lending to the farming sector primarily livestock, rural mortgage lending, seasonal and working capital financing, as well as leasing solutions to farmers. Includes lending to individuals and small to medium enterprises. Property asset lending including non-core property. All other lending that does not fall into another category. Lending secured by a first ranking mortgage over a residential property used primarily for residential purposes either by the mortgagor or a tenant of the mortgagor. All Other Consumer lending to individuals. (a) Finance receivables by credit risk concentration Jun 15 Neither at least 90 days past due nor impaired At least 90 days past due Individually impaired Restructured assets Fair value adjustment for present value of future losses Provision for impairment Total net finance receivables Jun 14 Neither at least 90 days past due nor impaired At least 90 days past due Individually impaired Restructured assets Fair value adjustment for present value of future losses Provision for impairment Total net finance receivables NOTE 19(b) 19(c) 11 19(e) 19(b) 19(c) 11 19(e) Corporate Rural $000 Property $000 Other $000 Residential All Other Total $000 $000 $000 553,739 17,904 1,562 43 - - 884,942 837,063 553,502 2,829,246 286 6,854 - - 13,384 16,982 1,024 655 224 - 2,746 - 2,814 34,975 25,622 3,881 - (6,242) - (6,242) (2,173) (4,614) (14,368) (1,763) (2,494) (25,412) 571,075 2,526 901,964 829,937 556,568 2,862,070 480,596 9,433 2,818 5 - 2,007 2,599 17,090 - - 774,527 19,917 7,709 1,175 869,701 439,208 2,566,039 463 - - 1,622 - 2,884 34,034 27,617 4,064 - (8,000) - (8,000) (2,114) (5,744) (7,275) (57) (1,171) (16,361) 490,738 15,952 796,053 862,107 442,543 2,607,393 (b) Past due but not impaired Jun 15 Less than 30 days past due At least 30 and less than 60 days past due At least 60 but less than 90 days past due At least 90 days past due Total past due but not impaired Jun 14 Less than 30 days past due At least 30 and less than 60 days past due At least 60 but less than 90 days past due At least 90 days past due Total past due but not impaired 7,338 3,752 416 17,904 29,410 4,221 5,509 3,791 9,433 22,954 - - - 286 286 - - - 2,599 2,599 9,185 3,434 4,099 13,384 30,102 8,604 3,047 3,534 19,917 35,102 2,877 14,700 491 532 655 3,984 1,789 2,746 4,555 23,219 1,064 313 114 463 7,826 2,362 1,176 1,622 1,954 12,986 34,100 11,661 6,836 34,975 87,572 21,715 11,231 8,615 34,034 75,595 NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 June 2015 19 Asset quality (continued) (c) Individually impaired assets Jun 15 Opening Additions Deletions Write offs Closing gross individually impaired assets Less: provision for individually impaired assets Total net impaired assets Jun 14 Opening Additions Deletions Write offs Closing gross individually impaired assets Less: provision for individually impaired assets Total net impaired assets (d) Credit risk grading Corporate Rural $000 Property $000 Other $000 Residential All Other Total $000 $000 $000 2,818 1,072 (1,651) (677) 1,562 817 745 2,979 4,150 (3,027) (1,284) 2,818 1,531 1,287 17,090 700 7,709 32,707 (10,375) (23,117) (561) 6,854 3,258 3,596 61,634 18,122 (30,361) (32,305) 17,090 3,739 13,351 (317) 16,982 11,136 5,846 4,688 8,160 (3,470) (1,669) 7,709 4,092 3,617 - 227 (3) - 224 - 224 - - - - - - - - - - - - - - - - - - - - - 27,617 34,706 (35,146) (1,555) 25,622 15,211 10,411 69,301 30,432 (36,858) (35,258) 27,617 9,362 18,255 The Group's receivables are monitored either by account behaviour or a regular assessment of their credit risk grade based on an objective review of defined risk characteristics. The portfolio risk is regularly refreshed based on current information. The Group classifies finance receivables as Behavioural or Judgement. The Behavioural portfolio consists of consumer, retail and home equity release receivables and usually relates to financing of or the acquisition of a single asset. Consumer loans are typically introduced by vendors of the asset financed and are smaller in value than Judgement loans. Consumer and Retail loans are risk graded based on arrears status. 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. Non-performing / Repossession – residential mortgage loans that are greater than 90 days past due / other loans for which security has or is in the process of being repossessed. Recovery loans – loans for which security has been sold and shortfalls are being sought from the customer or where other recovery action is being taken. The Group also lends funds on it's home equity release product which is considered behavioural but has no arrears characteristics. These loans are assessed on origination against a pre-determined criteria supported by an actuarial assessment of future losses. The assumptions embedded in that assessment are reviewed annually against actual experience. The Judgement portfolio consists mainly of Business and Rural lending. Judgement loans relate to loans where an on-going and detailed working relationship with the customer has been developed. Judgement loans are individually risk graded based on loan status, financial information, security and debt servicing ability. Exposures in the Judgement portfolio are credit risk graded by an internal risk grading mechanism. In the Judgement portfolio, grade 1 is the strongest risk grade for undoubted risk and grade 9 represents the weakest risk grade where a loss is probable. Grade 10 reflects loss accounts written off. Grades 2 to 8 represent ascending steps in management's assessment of risk of exposures. The Group typically finances new loans in risk grades 2 to 5 of the Judgement portfolio. 28 29 58 Heartland New Zealand Limited - Annual Report 2015 Financial Statements For The Year Ended 30 June 2015 Financial Statements For The Year Ended 30 June 2015 www.heartland.co.nz 59 NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 June 2015 19 Asset quality (continued) (d) Credit risk grading (continued) Corporate Rural $000 Property $000 Other $000 Residential All Other Total $000 $000 $000 Jun 15 Judgement portfolio Grade 1 - Very Strong Grade 2 - Strong Grade 3 - Sound Grade 4 - Adequate Grade 5 - Acceptable Grade 6 - Monitor Grade 7 - Substandard Grade 8 - Doubtful Grade 9 - At risk of loss 533 8,019 17,363 101,029 343,645 49,276 3,484 761 - - - - - - 286 - 3,596 - - - 30,113 52,022 160,527 259,241 50,162 11,453 157 7,082 2,480 463 3,791 5,315 125 - - - Total Judgement portfolio 524,110 3,882 570,757 12,174 - - - - - - - - - - 533 40,612 69,848 265,347 608,201 99,849 14,937 4,514 7,082 1,110,923 Behavioural portfolio Not in arrears Active Arrangement Non-performing / Repossession Recovery Total Behavioural portfolio Provision for collectively impaired assets Fair value adjustment for present value of future losses 47,208 415 443 201 54 48,321 (1,356) - - - - - - - 324,995 821,357 530,204 1,723,764 4,526 2,776 1,266 876 2,721 1,690 - - 13,535 10,946 1,620 2,757 21,197 15,855 3,087 3,687 334,439 825,768 559,062 1,767,590 (1,356) (3,232) - - (1,763) (6,242) (2,494) - (10,201) (6,242) Total finance receivables 571,075 2,526 901,964 829,937 556,568 2,862,070 Jun 14 Judgement portfolio Grade 1 - Very Strong Grade 2 - Strong Grade 3 - Sound Grade 4 - Adequate Grade 5 - Acceptable Grade 6 - Monitor Grade 7 - Substandard Grade 8 - Doubtful Grade 9 - At risk of loss 616 3,303 17,888 63,785 305,781 54,757 3,897 722 58 - - - - 3,837 440 - 12,798 882 - - 25,331 35,420 145,774 209,825 59,071 10,936 - 2,472 865 1,157 5,038 13,193 1,508 - - - Total Judgement portfolio 450,807 17,957 488,829 21,761 - - - - - - - - - - 616 29,499 54,465 214,597 532,636 115,776 14,833 13,520 3,412 979,354 Behavioural portfolio Not in arrears Active Arrangement Non-performing / Repossession Recovery Total Behavioural portfolio Provision for collectively impaired assets Fair value adjustment for present value of future losses 40,142 238 96 38 - 40,514 (583) - - - - - - - 305,736 844,967 427,279 1,618,124 1,816 1,554 556 745 3,009 151 - 276 8,054 5,770 1,519 1,092 13,117 7,571 2,113 2,113 310,407 848,403 443,714 1,643,038 (2,005) (3,183) - - (57) (8,000) (1,171) - (6,999) (8,000) Total finance receivables 490,738 15,952 796,053 862,107 442,543 2,607,393 NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 June 2015 19 Asset quality (continued) (e) Provision for impairment Credit impairment provisions are made where events have occurred leading to an expectation of reduced future cash flows from certain receivables. These provisions are made in some cases against an individual loan and in other cases on a collective basis. Bad debts provided for are written off against individual or collective provisions. Amounts required to bring the provisions to their assessed levels are recognised in profit or loss. Any future recoveries of amounts provided for are recognised in profit or loss. Collective provisioning The term collectively impaired asset refers to an asset where an event has occurred of which past history indicates that there is an increased possibility that the Group will not collect all its principal and interest as it falls due. No losses have yet been identified on these individual loans within the collectively impaired asset grouping, and history would indicate that only a small portion of these loans will eventually not be recovered. The Group provides fully for its expected losses on collectively impaired assets. Collective provisions are assessed with reference to risk profile groupings and historical loss data. Other judgemental factors including economic and credit cycle considerations are also taken into account in determining appropriate loss propensities to be applied. The future credit quality of these portfolios is subject to uncertainties that could cause actual credit losses to differ materially from reported loan impairment provisions. These uncertainties include the wider economic environment, interest rates and their effect on customer spending, unemployment levels, payment behaviour and bankruptcy rates. No provisions are applied to loans that are newly written and loans that remain within their contractual terms, except where the Group becomes aware of an event that might alter its view of the risk of a particular deal or group of deals. Individual provisioning Specific impairment provisions are made where events have occurred leading to an expectation of reduced future cash flows from certain receivables. For individually significant loans for which the assessed risk grade is considered a “potential loss”, an individual assessment is made of an appropriate provision for credit impairment. Credit impairments are recognised as the difference between the carrying value of the loan and the discounted value of management’s best estimate of future cash repayments and proceeds from any security held (discounted at the loan’s original effective interest rate). All relevant considerations that have a bearing on the expected future cash flows are taken into account, including the business prospects for the customer, the likely realisable value of collateral, the Group’s position relative to other claimants, the reliability of customer information and the likely cost and duration of the work-out process. Subjective judgements are made in this process. Furthermore, judgement can change with time as new information becomes available or as work-out strategies evolve, resulting in revisions to the impairment provision as individual decisions are taken. Changes in judgement could have a material impact on the financial statements. Adequacy of the collective provision levels for each risk grouping is measured against historical loss experience at least annually. Adequacy of individual provisions is assessed in respect of each loan on a material development or at least quarterly. For Behavioural loans, excluding home equity release loans, arrears drive provision outcomes. Each arrears classification carries a provision for potential loss based on historical experience for that classification in the same portfolio. 30 31 60 Heartland New Zealand Limited - Annual Report 2015 Financial Statements For The Year Ended 30 June 2015 Financial Statements For The Year Ended 30 June 2015 www.heartland.co.nz 61 NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 June 2015 19 Asset quality (continued) (e) Provision for impairment (continued) Corporate Rural $000 Property $000 Other $000 Residential All Other Total $000 $000 $000 Jun 15 Provision for individually impaired assets Opening provision for individually impaired assets 1,531 3,739 4,092 Impairment loss for the year - (credit) / charge for the year - recoveries - write offs - effect of discounting Closing provision for individually impaired assets Provision for collectively impaired assets (35) - (677) (2) 817 349 - (561) (269) 6,892 669 (317) (200) 3,258 11,136 - - - - - - - - - - - - 9,362 7,206 669 (1,555) (471) 15,211 Opening provision for collectively impaired assets 583 2,005 3,183 57 1,171 6,999 Impairment loss for the year - charge / (credit) for the year - recoveries - write offs Closing provision for collectively impaired assets 775 - (2) 1,356 (691) 42 - 1,356 537 168 (656) 3,232 1,706 - - 1,763 2,572 3 (1,252) 2,494 4,899 213 (1,910) 10,201 Total provision for impairment 2,173 4,614 14,368 1,763 2,494 25,412 Jun 14 Provision for individually impaired assets Opening provision for individually impaired assets 1,125 31,252 2,153 Impairment loss for the year - charge for the year - recoveries - write offs - effect of discounting Closing provision for individually impaired assets Provision for collectively impaired assets 1,714 - 6,247 4 (1,284) (32,305) (24) 1,531 (1,459) 3,739 3,890 2 (1,669) (284) 4,092 - - - - - - - - - - - - 34,530 11,851 6 (35,258) (1,767) 9,362 Opening provision for collectively impaired assets 581 10,260 3,479 134 1,507 15,961 Impairment loss for the year - charge / (credit) for the year - recoveries - write offs Closing provision for collectively impaired assets 62 4 (64) 583 (7,497) 2 (760) 2,005 559 189 (1,044) 3,183 Total provision for impairment 2,114 5,744 7,275 (77) - - 57 57 997 59 (1,392) 1,171 (5,956) 254 (3,260) 6,999 1,171 16,361 20 Liquidity risk Liquidity risk is the risk that the Group is unable to meet its payment obligations as they fall due. The timing mismatch of cash flows and the related liquidity risk is inherent in all banking operations and is closely monitored by the Group. Management of liquidity risk is designed to ensure that the Group has the ability to generate or obtain sufficient cash in a timely manner and at a reasonable price to meet its financial commitments on a daily basis. The Group’s exposure to liquidity risk is governed by a policy approved by the Board and managed by the ALCO. This policy sets out the nature of risk which may be taken and aggregate risk limits, and the ALCO must conform to this. The objective of the ALCO is to derive the most NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 June 2015 20 Liquidity risk (continued) Contractual liquidity profile of financial assets and liabilities The following tables present the Group's financial assets and liabilities by relevant maturity groupings based upon contractual maturity date. The amounts disclosed in the tables represent undiscounted future principal and interest cash flows. As a result, the amounts in the tables below may differ to the amounts reported on the balance sheet. The contractual cash flows presented below may differ significantly from actual amounts as a result of future actions of the Group and its counterparties, such as early repayments or refinancing of term loans. Deposits and other public borrowings include customer savings deposits and transactional accounts, which are at call. History demonstrates that such accounts provide a stable source of long term funding for the Group. It should be noted that the Group does not manage its liquidity risk on the basis of the information below. On 0-6 6-12 Demand Months Months $000 $000 $000 1-2 Years $000 2-5 Years $000 5+ Years $000 Total $000 Jun 15 Cash and cash equivalents 37,012 - - - - Investments Finance receivables Finance receivables - securitised Derivative financial assets Other financial assets Total financial assets Borrowings Borrowings - securitised Derivative financial liabilities Other financial liabilities Total financial liabilities - - - - - 27,039 544,745 87,168 59 5,546 47,376 334,438 68,824 - - 35,801 501,222 92,675 - - 237,409 841,869 66,949 - - - 19,852 37,012 367,477 3,291,828 5,514,102 - - - 315,616 59 5,546 37,012 664,557 450,638 629,698 1,146,227 3,311,680 6,239,812 746,637 1,187,234 - - 1,695 5,215 6,407 20,594 424,928 260,964 - 267 130,242 137,587 - - 522 - - - 748,332 1,219,450 686,159 130,764 137,587 - - - - - 2,626,628 266,179 6,407 23,078 2,922,292 Net financial (liabilities) / assets (711,320) (554,893) (235,521) 498,934 1,008,640 3,311,680 3,317,520 Unrecognised loan commitments Undrawn committed bank facilities 116,217 130,188 - - - - - - - - - - 116,217 130,188 Undrawn committed bank facilities of $90.0 million (2014: $170.0 million) were available to be drawn down on demand. To the extent drawn, $90.0 million is contractually repayable in 6-12 months' time upon facility expiry. The remaining undrawn committed bank facilities of $40.2 million (2014: $3.8 million) were available to ASF Group to fund new home equity release finance receivables. Jun 14 Cash and cash equivalents Investments Finance receivables Finance receivables - securitised Derivative financial assets Other financial assets Total financial assets Borrowings Borrowings - securitised Derivative financial liabilities Other financial liabilities Total financial liabilities - - - - - 4,382 403,974 60,833 1,867 6,134 62,301 250,028 55,235 - - 80,564 374,431 90,552 - - 37,344 262,872 81,878 20,837 726,524 2,938,811 4,693,768 83,911 - - 30 - - 290,561 1,867 6,134 50,254 477,190 367,564 545,547 892,313 2,959,678 5,292,546 615,862 737,055 4,765 126 6,183 306,974 230,984 92 - 101,548 148,395 567,509 2,477,343 - 179 - - 521 - - 235,749 3,262 - 4,180 19,446 748,129 538,050 101,727 148,916 570,771 2,736,718 37,344 12,910 - - - - - - 13,263 629,125 Net financial (liabilities) / assets (578,871) (270,939) (170,486) 443,820 743,397 2,388,907 2,555,828 Unrecognised loan commitments Undrawn committed bank facilities 114,004 173,800 - - - - - - - - - - 114,004 173,800 appropriate strategy for the Group in terms of the mix of assets and liabilities given its expectations of future cash flows, liquidity constraints and The undrawn committed bank facilities totalling $170.0 million were available to be drawn down on demand. To the extent drawn, $170.0 million is capital adequacy. The Group employs asset and liability cash flow modelling to determine appropriate liquidity and funding strategies. contractually repayable in 6-12 months' time upon facility expiry. The remaining undrawn committed bank facilities of $3.8 million were available to The Group holds the following financial assets for the purpose of managing liquidity risk: ASF Group to fund new home equity release finance receivables. Cash and cash equivalents Investments Undrawn committed bank facilities Total liquidity Jun 15 $000 37,012 322,619 130,188 489,819 Jun 14 $000 37,344 238,859 173,800 450,003 The Group has securitised bank facilities of $350 million (2014: $400 million) in relation to the ABCP Trust, which matures on 3 February 2016 and CBA bank facilities of $507 million (2014: $560 million) in relation to the ASF Group maturing on 30 September 2019. 32 33 62 Heartland New Zealand Limited - Annual Report 2015 Financial Statements For The Year Ended 30 June 2015 Financial Statements For The Year Ended 30 June 2015 www.heartland.co.nz 63 NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 June 2015 NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 June 2015 21 Interest rate risk 22 Concentrations of funding The Group's market risk arises primarily due to significant exposure to interest rate risk, predominantly from raising funds through the retail and wholesale deposit market, the debt capital markets and committed and uncommitted bank funding, securitisation of receivables, and offering loan finance products to the commercial and consumer market in New Zealand and Australia. Interest rate risk is the risk that the value of assets or liabilities will change because of changes in interest rates or that market interest rates may change and thus alter the margin between interest earning assets and interest bearing liabilities. Interest rate risk for the Group refers to the risk of loss due to holding assets and liabilities that may mature or re-price in different periods. ‐ ‐ The Group’s exposure to market risk is governed by a policy approved by the Board and managed by the ALCO. This policy sets out the nature of risk which may be taken and aggregate risk limits, and the ALCO must conform to this. The objective of the ALCO is to derive the most appropriate strategy for the Group in terms of the mix of assets and liabilities given its expectations of the future and the potential consequences of interest rate movements, liquidity constraints and capital adequacy. To manage this market risk, the Group measures sensitivity to interest rate changes by frequently testing its position against various interest rate Monitoring maturity profiles and seeking to match the re-pricing of assets and liabilities (physical hedging); change scenarios to assess potential risk exposure. The Group also manages interest rate risk by: • • • Monitoring interest rates daily and regularly (at least monthly) reviewing interest rate exposure; and Entering into forward rate agreements and interest rate swaps and options to hedge against movements in interest rates. (a) Concentration of funding by industry Finance Other Total borrowings (b) Concentration of funding by geographical area Auckland Wellington Rest of North Island Canterbury Rest of South Island Overseas 1 Total borrowings Jun 15 $000 Jun 14 $000 790,137 818,543 2,035,108 1,705,917 2,825,245 2,524,460 441,921 384,344 472,167 772,689 206,563 547,561 453,168 202,829 376,495 687,168 168,442 636,358 2,825,245 2,524,460 Contractual Repricing Analysis 1 Included in Overseas funding is the CBA bank facility totalling $466 million, refer to Note 13 - Borrowings for more information. The interest rate risk profile of financial assets and liabilities that follows has been prepared on the basis of maturity or next repricing date, Other Disclosures whichever is earlier. Jun 15 Cash and cash equivalents Investments Finance receivables Finance receivables - securitised Other financial assets Total financial assets Borrowings Borrowings - securitised Other financial liabilities Total financial liabilities Effect of derivatives held for risk management 0-3 3-6 6-12 Months Months Months $000 $000 $000 1-2 Years $000 2+ Non-interest Years $000 bearing $000 Total $000 36,928 137,742 1,962,329 40,193 59 - - - - 1,938 87,889 35,548 25,797 149,239 60,778 14,410 204,142 83,434 142,732 180,427 57,661 - - - - 2,177,251 125,375 235,814 301,986 380,820 1,529,593 375,635 411,061 119,351 130,975 258,630 8,102 - - - 250 - 503 - - 1,796,325 375,635 411,311 119,854 130,975 84 6,719 430 37,012 329,338 2,584,456 - 277,614 5,546 12,779 5,605 3,234,025 - - 20,594 20,594 2,566,615 258,630 29,449 2,854,694 250,699 (25,355) (46,365) (88,039) (90,940) - - 23 Significant subsidiaries and interests in joint arrangements As at 30 June 2015 the Group includes the following controlled entities. Significant subsidiaries / Joint arrangements Heartland Bank Limited (Bank) VPS Properties Limited Heartland HER Holdings Limited (HHHL) 1 New Sentinel Limited (NSL) 1 Australian Seniors Finance Pty Limited (ASF) 1 MARAC Insurance Limited 2 Country of Nature incorporation of business and place of business New Zealand Financial services New Zealand Investment property holding company New Zealand Holding company New Zealand Financial services Australia Financial services New Zealand Insurance services Proportion of ownership interest and voting power held Jun 15 Jun 14 100% 100% 100% 100% 100% 50% 100% 100% 100% 100% 100% 50% 1 On 13 February 2014 Heartland HER Holdings Limited was incorporated. On 1 April 2014 Heartland acquired New Sentinel Limited and Australian Seniors Finance Pty Limited from Seniors Money International Limited. 2 On 17 July 2015, MARAC Insurance Limited was acquired in full. Refer to Note 29 - Events after reporting date. Net financial assets/(liabilities) 631,625 (275,615) (221,862) 94,093 158,905 (7,815) 379,331 24 Structured entities Jun 14 Cash and cash equivalents Investments Finance receivables Finance receivables - securitised Other financial assets Total financial assets Borrowings Borrowings - securitised Other financial liabilities Total financial liabilities Effect of derivatives held for risk management 37,004 126,585 1,781,120 43,043 1,867 - - - - 2,039 83,718 30,518 29,379 137,484 51,819 32,608 182,307 71,827 48,248 175,355 47,631 - - - - 1,989,619 116,275 218,682 286,742 271,234 1,556,658 328,448 282,156 66,726 61,849 228,623 4,680 - - - - - - - - 1,789,961 328,448 282,156 66,726 61,849 340 - 37,344 238,859 2,571 2,362,555 - 244,838 6,134 9,045 8,001 2,891,597 - - 18,946 18,946 2,295,837 228,623 23,626 2,548,086 252,411 (22,550) (40,925) (64,025) (124,911) - - Deposits A structured entity is one which has been designed such that voting or similar rights are not the dominant factor in deciding who controls the entity. Structured entities are created to accomplish a narrow and well-defined objective such as the securitisation or holding of particular assets, or the execution of a specific borrowing or lending transaction. Structured entities are consolidated where the substance of the relationship is that the Group controls the structured entity. (a) Heartland Cash and Term PIE Fund The Group controls the operations of Heartland Cash and Term PIE Fund (Heartland PIE Fund). Heartland PIE Fund is a portfolio investment entity that invests in the Bank's deposits. Investments of Heartland PIE Fund are represented as follows: Jun 15 $000 45,110 Jun 14 $000 38,819 Net financial assets/(liabilities) 452,069 (234,723) (104,399) 155,991 84,474 (9,901) 343,511 The tables above illustrate the periods in which the cash flows from interest rate swaps are expected to occur and affect profit or loss. The management of interest rate risk against interest rate gap limits is supplemented by monitoring the sensitivity of the Group's financial assets and liabilities to various standard and non standard interest rate scenarios. Standard scenarios which are considered on a monthly basis include a 100 basis point parallel fall or rise in the yield curve. There is no material impact on profit or loss in terms of a fair value change from movements in market interest rates. Furthermore there is no material cash flow impact on the Statement of Cash Flows from a 100 basis point change in interest rates. 34 35 64 Heartland New Zealand Limited - Annual Report 2015 Financial Statements For The Year Ended 30 June 2015 Financial Statements For The Year Ended 30 June 2015 www.heartland.co.nz 65 NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 June 2015 24 Structured entities (continued) (b) ABCP Trust The Group has securitised a pool of receivables comprising commercial and motor vehicle loans to the ABCP Trust. The Group substantially retains the credit risks and rewards associated with the securitised assets, and continues to recognise these assets and associated borrowings on the Statement of Financial Position. Despite this presentation in the financial statements, the loans sold to the Trusts are set aside for the benefit of investors in the Trusts. The securitised balances are represented as follows: Cash and cash equivalents - securitised Finance receivables - securitised Borrowings - securitised Derivative financial asset - securitised Derivative financial liabilities - securitised NOTE 11 13 Jun 15 Jun 14 $000 5,553 $000 5,421 277,614 244,838 (258,630) (228,623) 59 (1,995) 1,768 - (c) Seniors Warehouse Trust (SW Trust) and ASF Settlement Trust (ASF Trust) SW Trust and ASF Trust form part of ASF's home equity release business. They were both set up by ASF, as asset holding entities. The Trustee for both Trusts is ASF Custodians Pty Limited and the Trust Manager is ASF. The balances of SW Trust and ASF Trust are represented as follows: Cash and cash equivalents Finance receivables - Home equity release loans Borrowings - CBA Derivative financial liabilities 25 Joint arrangements Jun 15 Jun 14 $000 1,207 $000 846 424,445 405,523 (372,333) (364,335) (3,608) (4,147) At 30 June 2015, the Group owned 50% of MARAC Insurance Limited through Marac JV Holdings Limited. The Group determined that this joint arrangement was a joint venture. A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the joint arrangement. Investments in joint ventures are accounted for by the Group using the equity method and are recognised initially at cost. The consolidated financial statements include the Group's share of the income and expenses and equity movements of equity accounted investees, from the date that significant influence or joint control commences until the date that significant influence or joint control ceases. Carrying amount at beginning of year Dividends received from joint venture Share of joint arrangement profit Carrying amount at end of year Total comprehensive income from joint venture Jun 15 Jun 14 $000 4,246 - 137 4,383 $000 4,320 (560) 486 4,246 949 972 On 17 July 2015, the Group acquired the remaining 50% of MARAC Insurance Limited. During the year ended 30 June 2015 the Group has recognised a provision for the write down of the carrying value of MARAC Insurance Limited of $339,000. This write down is reflected in the share of joint arrangement profit above. 26 Staff share ownership arrangements The Group operates share-based compensation plans that are cash settled and equity settled. NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 June 2015 26 Staff share ownership arrangements (continued) In relation to the staff share ownership arrangements, the Group has recognised the following: Equity settled Total amount recognised in equity Cash settled Total amount recognised as an expense Liability recognised Jun 15 $000 Jun 14 $000 1,491 678 1,555 - 326 676 The following share-based compensation plans were in place during the year for selected senior employees of the Group: (a) Equity settled Heartland LTI Net Share Settled Plan (LNSSP) The LNSSP has been allotted under three tranches. Under the LNSSP participants are granted an option to acquire shares in Heartland. The number of shares granted upon exercise of the options is based on the difference between the market price of the shares on the exercise date and the reference price. The options are subject to the option holders continued employment with the Group. 2015 tranche - Special Grant Optionholders of the 2015 tranche - special grant will be able to exercise the options in the period beginning on the date the market price of Heartland ordinary shares is equal to $1.50 and ending on 1 July 2017. Market price is calculated based on the volume weighted average price of a Heartland share on the NZX Main Board for the 10 business days immediately before (but excluding) the exercise date for those options. The reference price is the amount (if any) by which the market price of Heartland ordinary shares at the time of exercise exceeds $1.00 (based on a volume weighted average price of Heartland ordinary shares for the prior 20 business days), plus the aggregate amount of cash dividends (cents per Heartland ordinary share) paid by Heartland in the period from 1 April 2015 until and including the date the options are exercised. However, for the purpose of calculating the settlement amount, the market price of Heartland ordinary shares is capped at $1.50 and any increase above this amount shall be disregarded. 2013 and 2014 tranches Optionholders of the 2013 and 2014 tranches will be able to exercise the options between September 2015 to 1 July 2017 and September 2016 to 1 July 2018 respectively. The reference price is the amount (if any) by which the market price (based on a volume weighted average price of Heartland ordinary shares for the prior 20 business days) of Heartland ordinary shares at the time of exercise exceeds an opening price. This opening price is a 5% premium over the volume weighted average price of Heartland ordinary shares for the 20 business days following 26 August 2013 for the 2013 tranche and 25 August 2014 for the 2014 tranche, less cash dividends paid after issue of the options. Grant date Number of shares granted Option valuation at grant date Total value at grant date June 2015 Opening unvested options outstanding / exercisable 1 July 2014 Number of options granted: Less: options forfeited Closing unvested options outstanding / exercisable 30 June 2015 2015 2014 2013 Tranche Tranche Tranche 1/04/2015 28/08/2014 26/08/2013 5,208 0.09 8,954 0.20 5,136 0.21 467 1,755 1,099 - 5,208 - 5,208 - 8,954 (383) 8,571 - - - - - - - - 5,005 - (125) 4,880 - 5,136 (131) 5,005 For the cash settled plans, the Group recognises a liability based on the estimated fair value of the obligation. The value of this liability is recognised in profit or loss over the relevant service period and is re-measured at each reporting date. June 2014 For equity settled plans, share based payments to employees providing services are measured at the fair value of the equity instruments at the grant date. The fair value determined at the grant date of the equity settled share-based payments is expensed on a straight line basis over the vesting period, based on the Group's estimate of equity instruments that will eventually vest, with a corresponding increase in equity. At the end of each reporting period, the Group revises its estimate of the number of equity instruments expected to vest. The impact of the revision of the original estimates, if any, is recognised in profit or loss such that the cumulative expense reflects the revised estimate, with a corresponding adjustment to the equity-settled employee benefits reserve. Opening unvested options outstanding / exercisable 1 July 2013 Number of options granted: Less: options forfeited Closing unvested options outstanding / exercisable 30 June 2014 36 37 66 Heartland New Zealand Limited - Annual Report 2015 Financial Statements For The Year Ended 30 June 2015 Financial Statements For The Year Ended 30 June 2015 www.heartland.co.nz 67 NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 June 2015 26 Staff share ownership arrangements (continued) (a) Equity settled (continued) The fair value at grant date of these options has been measured using the Black Scholes option pricing model. As the exercise price is reduced by dividends paid between the grant date and the exercise date, the model has been adjusted to reflect this. Information regarding the calculation of the fair value under the LNSSP is as follows: Volatility Risk free interest rate Estimated option life (years) Expiry date Exercise price ($) Market price at grant date($) 2015 2014 2013 Tranche Tranche Tranche 20.1% 3.1% 20.0% 4.0% 25.0% 3.4% 3.3 3.9 3.9 30/06/2018 30/06/2018 30/06/2017 1.00 1.28 0.99 0.95 0.89 0.87 The volatility is calculated based on the historical movement in Heartland's ordinary shares. Heartland LTI Cash Entitlements Plan (LCEP) Under the LCEP, participants were granted a cash entitlement. This cash entitlement is based on the amount by which the market price of Heartland shares at a future date exceeds an agreed reference price (no payment is made in the event that the market price of Heartland shares at that future date is lower than the reference price). Cash entitlements based on a reference pool of 5.65 million shares were issued in the year ending 30 June 2013 at a reference price of $0.72 per share. The cash entitlements plan was closed during the year at a share price of $1.20. (b) Cash settled Heartland Long Term Executive Share Plan (LTESP) The LTESP was introduced in the year ended 30 June 2013 and concluded during the year ended 30 June 2015 with all of the shares under the LTESP vesting. Under the LTESP, the Group lent funds to the participants. These funds were used by the participants to acquire Heartland shares, which were held on the participants behalf. Participants that were still employed by the Group on 30 June 2015 were entitled to some or all of the Heartland shares held on their behalf. To the extent a participant was entitled to the shares held on their behalf, the participant was given a cash bonus which was applied toward repayment of the loan. To the extent a participant was not entitled to the shares held on their behalf, those shares were acquired by Heartland NZ Trustee Limited for a purchase price which was applied toward repayment of the loan. 27 Contingent liabilities and commitments Letters of credit, guarantees and performance bonds Total contingent liabilities Undrawn facilities available to customers Conditional commitments to fund at future dates Total commitments Jun 15 $000 14,844 14,844 116,217 108,037 224,254 Jun 14 $000 6,329 6,329 114,004 95,780 209,784 NOTES TO THE FINANCIAL STATEMENTS For the year ended 30 June 2015 28 Application of new and revised accounting standards (a) New standards and interpretations adopted The following new standards and amendments to standards have been adopted from 1 July 2014 in the preparation of these financial statements: NZ IAS 32 Financial Instruments: Presentation Clarifies certain aspects of offsetting financial assets and liabilities because of diversity in the application of the requirements of offsetting. Its adoption did not have a material impact on the financial statements. (b) New standards and interpretations not yet adopted A number of new standards, amendments to standards and interpretations are not yet effective for the year ended 30 June 2015, and have not been applied in preparing these financial statements. The new standards identified which may have an effect on the financial statements of the Group are: Standard and description Effective for annual years beginning on or after: Expected to be initially applied in year ending: NZ IFRS 9 Financial Instruments , which specifies how an entity should classify and measure financial assets and 1 January 30 June liabilities. 2018 2019 NZ IFRS 9 Financial Instruments (2013) , which provides a principles-based approach to hedge accounting and 1 January 30 June aligns hedge accounting closely with risk management. 2018 2019 The full impact of NZ IFRS 9 is yet to be assessed. 29 Events after the reporting date On 17 July 2015, the Group acquired the remaining 50% of MARAC Insurance Limited. During the year ended 30 June 2015 the Group has recognised a provision for the write down of the carrying value of MARAC Insurance Limited of $339,000. Going forward MARAC Insurance's results will be consolidated and will form part of the Group. There have been no other material events after the reporting date that would affect the interpretation of the financial statements or the performance of the Group. 38 39 68 Heartland New Zealand Limited - Annual Report 2015 Independent Auditor’s Report Independent Auditor’s Report www.heartland.co.nz 69 70 Heartland New Zealand Limited - Annual Report 2015 Director Disclosures Director Disclosures www.heartland.co.nz 71 Director Disclosures Directors The following persons were directors of the Company and the Company’s subsidiaries during the year ended 30 June 2015. Company Directors Company Directors Heartland New Zealand Limited Jeffrey Kenneth Greenslade Non-Independent Director Heartland HER Holdings Limited Laura Anne Byrne (appointed 13 May 2015) Graham Russell Kennedy Independent Director Gary Richard Leech Independent Director (resigned 31 October 2014) Christopher Robert Mace Independent Director Geoffrey Thomas Ricketts Independent Director Deborah Jane Taylor Independent Director (appointed 10 December 2014) Gregory Raymond Tomlinson Non-Independent Director ASF Custodians Pty Limited Julie Marie Campbell-Bode (appointed 4 May 2015) Christopher Patrick Francis Flood (appointed 15 December 2014, resigned 4 May 2015) Richard Udovenya Vaughan Keith Underwood (resigned 27 February 2015) Australian Seniors Finance Pty Limited Julie Marie Campbell-Bode Richard Udovenya Vaughan Keith Underwood (resigned 27 February 2015) Christopher Patrick Francis Flood (appointed 15 December 2014, resigned 4 May 2015) Canterbury Building Society Limited Jeffrey Kenneth Greenslade Bruce Robertson Irvine HBL Australian Investments Limited Julie Marie Campbell-Bode Heartland Bank Limited Jeffrey Kenneth Greenslade Christopher Patrick Francis Flood Nicola Jean Greer Edward John Harvey Bruce Robertson Irvine Michael Danton Jonas Graham Russell Kennedy Geoffrey Thomas Ricketts Richard Arthur Wilks Heartland Financial Services Limited Jeffrey Kenneth Greenslade Christopher David Andrew Cowell (appointed 13 May 2015) Christopher Patrick Francis Flood (resigned 13 May 2015) Jeffrey Kenneth Greenslade Michael Danton Jonas Geoffrey Thomas Ricketts (resigned 13 May 2015) Gregory Raymond Tomlinson (resigned 13 May 2015) Heartland NZ Holdings Limited Jeffrey Kenneth Greenslade Heartland NZ Trustee Limited Jeffrey Kenneth Greenslade Bruce Robertson Irvine Heartland PIE Fund Limited Jeffrey Kenneth Greenslade Heartland Seniors Finance Pty Limited Julie Marie Campbell-Bode Bruce Robertson Irvine New Sentinel Limited Christopher Patrick Francis Flood (appointed 31 October 2014) Brett Stephen Wilson (resigned 31 October 2014) Vaughan Keith Underwood (resigned 27 February 2015) Sentinel Custodians Limited Garry Dean Bishop Vaughan Keith Underwood (resigned on 27 February 2015) Christopher Patrick Francis Flood (appointed 27 February 2015) Seniors Finance Custodians Pty Limited Julie Marie Campbell-Bode (appointed 4 May 2015) Christopher Patrick Francis Flood (resigned 4 May 2015) Richard Udovenya Seniors Finance Pty Limited Julie Marie Campbell-Bode Richard Udovenya Christopher Patrick Francis Flood (resigned 4 May 2015) VPS Parnell Limited1 Michael Danton Jonas VPS Properties Limited Michael Danton Jonas Mark Stephen Mountcastle (resigned 28 November 2014) Mark Stephen Mountcastle (resigned 28 November 2014) 1 VPS Parnell Limited was amalgamated into VPS Properties Limited on 22 December 2014 72 Heartland New Zealand Limited - Annual Report 2015 Director Disclosures Director Disclosures www.heartland.co.nz 73 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 2015. 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 ended 30 June 2015 was $52,612.50. 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 2015 are as follows (all dealings are in ordinary shares unless otherwise specified): J K Greenslade No. of Shares Nature of Relevant Interest 145,903 15,277 50,000 145,903 Transfer of legal title under the Heartland New Zealand Limited 2012 Long Term Executive Share Plan Transfer of beneficial interest under the Heartland New Zealand Limited 2012 Long Term Executive Share Plan - shares forfeited back to Heartland NZ Trustee Limited Disposal Transfer of shares as part of FY2014 employee remuneration Acquisition Transfer of legal title under the Heartland New Zealand Limited 2012 Long Term Executive Share Plan Acquisition Acquisition/ Disposal Acquisition Consideration Nil Nil Nil Nil Date of Acquisition/ Disposal 1 September 2014 2 September 2014 1 September 2014 30 June 2015 G R Kennedy No. of Shares Nature of Relevant Interest 82,470 16,838 Allotment of shares under dividend reinvestment plan as trustee of the Heartland Trust Distribution of assets by the trustees of the Archford Trust to the beneficiaries of the Archford Trust Acquisition/ Disposal Consideration Date of Acquisition/ Disposal Acquisition $108,860 2 April 2015 Disposal Nil 30 June 2015 G R Leech (Resigned 31 October 2014) No. of Shares Nature of Relevant Interest 176,740 13,400 Off market transfer of shares by GR & AM Leech (as trustees of the GR & AM Leech Family Trust) to Investment Custodial Services Ltd (as custodian for the GR & AM Leech Family Trust) Off market transfer of shares by Robert Lindsay Aitken and Gary Richard Leech (as trustees of the RL & EJ Aitken Family Trust) to FNZ Custodians Ltd (as custodian for the RL & EJ Aitken Family Trust) C R Mace No. of Shares Nature of Relevant Interest 82,470 Allotment of shares under dividend reinvestment plan as trustee of the Heartland Trust G T Ricketts No. of Shares Nature of Relevant Interest 82,470 Allotment of shares under dividend reinvestment plan as trustee of the Heartland Trust D J Taylor No. of Shares Nature of Relevant Interest Acquisition/ Disposal Consideration Date of Acquisition/ Disposal Disposal Nil 24 March 2015 Disposal Nil 26 March 2015 Acquisition/ Disposal Consideration Date of Acquisition/ Disposal Acquisition $108,860 2 April 2015 Acquisition/ Disposal Consideration Date of Acquisition/ Disposal Acquisition $108,860 2 April 2015 Acquisition/ Disposal Consideration Date of Acquisition/ Disposal 50,000 On-market purchase of shares Acquisition $51,500 10 December 2014 G R Tomlinson No. of Shares Nature of Relevant Interest Acquisition/ Disposal Consideration Date of Acquisition/ Disposal 3,846,000 Off-market purchase by Harrogate Trustee Limited Acquisition $4,999,800 7 May 2015 74 Heartland New Zealand Limited - Annual Report 2015 Director Disclosures Director Disclosures www.heartland.co.nz 75 General Notice of Disclosure of Interest in the Interests Register Details of directors’ general disclosures entered in the relevant interests register under Section 140 of the Companies Act 1993 during the year ended 30 June 2015 are as follows: Radio New Zealand Limited Silver Fern Farms Limited Silver Fern Farms Beef Limited Director Director Director Silver Fern Farms Venison Limited Director Heartland New Zealand Limited G R Kennedy Bradford Management 2013 Limited Director (resigned on 28 October 2014) Trevor Wilson Charities Limited Director Trevor Wilson Charities (No 2) Limited Director NZ Express Transport (2006) Limited Director Rural Transport Limited Director D J Taylor Forestry Equities Management Limited Director and Shareholder Tassenberg Limited Director and Shareholder Taylor Partners Limited Shareholder (resigned 28 January 2015) Details of directors’ general disclosures entered in the relevant interest register under Section 140 of the Companies Act 1993 prior to 1 July 2014, can be found in earlier Annual Reports. Specific Disclosures of Interest in the Interests Register There were no specific disclosures of interests in transactions entered into by the Company or its subsidiaries during the period 1 July 2014 to 30 June 2015. (resigned as a Director 27 January 2015) Information Used by Directors HGL New Zealand Limited Hirepool Group Limited Director Director Landcare Research New Zealand Limited Director No director of the Company or its subsidiaries disclosed use of information received in his or her capacity as a director that would not otherwise be available to that director. Petra Forestry Limited Petra Securities Limited Shareholder (resigned 28 January 2015) Shareholder (resigned 28 January 2015) Directors’ Relevant Interests Set out in the table below are the Heartland New Zealand Limited shares, and options which are convertible into shares, in which each director of the Company had a relevant interest as at 30 June 2015. Number of Ordinary Shares – Beneficial Number of Ordinary Shares – Non-Beneficial Number of Options G R Leech (Resigned 31 October 2014) C R Mace 5,937,204 D J Taylor (Appointed 10 December 2014) Director J K Greenslade G R Kennedy G R Leech (Resigned 31 October 2014) C R Mace G T Ricketts D J Taylor G R Tomlinson 918,074 481,052 176,740 12,289,728 12,289,728 50,000 48,224,352 572,090 5,807,897 240,054 5,797,897 5,797,897 Nil Nil Nil Nil Nil Nil Nil Nil Directors’ Remuneration The current total directors’ fee pool for the non-executive directors of the Company and its subsidiaries approved by shareholders at the Annual Shareholder Meeting held on 31 October 2014 is $1,000,000 per annum. The total remuneration received by each non-executive director who held office in the Company and the Company’s subsidiaries during the year ended 30 June 2015 was as follows. Heartland New Zealand Limited Board/Committee 2 Board Audit and Risk Committee Governance and Remuneration Committee Heartland Bank Limited Board/Committee Board Audit Committee Risk Committee Chairman $125,000 $7,500 $10,000 Chairman $125,000 $15,000 $20,000 Member $75,000 $7,500 $5,000 Member $70,000 $7,500 $10,000 The total remuneration and value of other benefits 3 received by each non-executive director who held office in the Company and its subsidiaries during the year ended 30 June 2015 was as follows: Director G T Ricketts N J Greer E J Harvey B R Irvine G R Kennedy G R Tomlinson R A Wilks Total Remuneration $142,500 $80,000 $95,000 $137,500 $92,500 $27,500 $85,000 $46,222 $80,000 $90,000 $876,222 Richard Udovenya received A$30,000 per annum in his capacity as an independent director of Australian Seniors Finance Pty Limited from 1 July 2014 to 30 June 2015. Directors’ fees exclude GST where appropriate. In addition, directors are entitled to be reimbursed for costs associated with carrying out their duties. 2 Where a director sits on both the Heartland New Zealand Limited and Heartland Bank Limited Boards, the director receives the single highest applicable fee. 3 In addition to these amounts Heartland New Zealand Limited meets costs incurred by directors, which are incidental to the performance of their duties. This includes providing directors with telephone concessions and paying the cost of directors’ travel. As these costs are incurred by Heartland New Zealand Limited to enable directors to perform their duties, no value is attributable to them as benefits to directors for the purposes of the above table. 76 Heartland New Zealand Limited - Annual Report 2015 Director Disclosures Director Disclosures www.heartland.co.nz 77 Remuneration and/or Other Benefits from the Company and its subsidiaries to Executive Directors The remuneration for the Executive Directors includes a fixed remuneration component and a variable remuneration component comprising short-term incentives (cash and/or shares) and/or long- term incentives (cash settled or share settled options). Long-term incentives are offered to selected employees (including the Executive Directors in their capacity as employees) in order to: Share Settled Options Plan • The Reference Price is $1.00. Under the Share Settled Options Plan (Options Plan) selected employees were granted net share settled options (Options), being a right (the exercise of which is contingent and dependent on certain factors, including continued employment by the Heartland group and the market value of Heartland’s shares) to receive in the future Heartland shares as incentive based remuneration. The key terms of the Options Plan are: •  The Options are linked to a three year service period beginning •  For the purposes of calculating the settlement amount, the market price of Heartland shares is capped at $1.50 and any increase above this amount is disregarded. •  Participants are prohibited from disposing of any Heartland shares allotted on exercise of the Options until 1 July 2020, except with the prior approval of the Governance, Capital and Remuneration Committee of the Heartland board. •  Incentivise and motivate participants to continue in employment with the Heartland group for the applicable service period; on the first day of the financial year in which the options are granted. J K Greenslade (Chief Executive Officer) •  Incentivise and motivate participants to exercise long-term thinking to contribute to the long-term success of the Heartland group; and •  Align the interests of participants with those of Heartland and its shareholders. Further information on the long-term incentive plans is set out below. LTI Cash Entitlements Plan Under the LTI Cash Entitlements Plan (Plan) selected employees were granted an entitlement, being a right (which is contingent and dependent on certain factors, including continued employment by the Heartland group and the value of Heartland’s shares) to receive in the future a lump sum cash payment as incentive based remuneration. •  The employee can exercise their Options at any time during a specified exercise period which generally commences 20 business days after Heartland’s annual results announcement for the last financial year of the service period and ends two years later. •  The reference price of each Option is an amount equal to 5% over the VWAP of Heartland shares on the NZX over 20 business days immediately following the reference date (Reference Price). •  When Options are exercised, a settlement amount is calculated. The settlement amount is the amount by which (as multiplied by the number of Options): -  The VWAP of Heartland shares on NZX over 20 business days immediately preceding the exercise date (Market Price), The key terms of the Plan are: exceeds •  The entitlements are linked to a service period beginning 1 July 2012 and ending 1 July 2015. •  The settlement date is 20 business days after Heartland’s annual results announcement for the financial year ended 30 June 2015. •  The settlement amount is the amount by which (as multiplied by the number of shares in the participant’s reference pool) the volume weighted average price (VWAP) of Heartland’s shares over the 20 business days immediately preceding the settlement date exceeded the reference price (being $0.7205). In January 2015, the Board determined to settle the Plan prior to the settlement date as the rise in Heartland’s share price had materially exceeded performance of the NZX benchmark and the Plan would therefore materially exceed cost expectations if the appreciating trend in Heartland’s share price continued. The entitlements were settled on 16 January 2015 based on a notional settlement share price of $1.20. It is not intended that further grants be made under the Plan. Refer to Note 26 of the financial statements for further information in relation to the Plan. -  the Reference Price, less the aggregate amount of cash dividends (cents per share) paid by Heartland in the period from the date those Options were granted until and including the exercise date for those Options. •  The employee receives Heartland shares having an aggregate Market Price equal to the settlement amount. Refer to Note 26 of the financial statements for further information in relation to the Options Plan. Share Settled Options Plan – Special Grant A special grant under the Options Plan was made to selected employees. For the purposes of this special grant, the existing terms of the Options Plan applied subject to the following modifications: •  The exercise period for the Options begins on the date the market price of Heartland shares is equal to $1.50 and ends on 1 July 2017 (subject to continued employment by the Heartland group). For this purpose, the market price of Heartland shares on any day will be regarded as the VWAP for the prior 10 business days. The tables below detail the nature and amount of the remuneration and the value of other benefits received by J K Greenslade during FY15. Fixed Remuneration and Short-Term Incentive (STI) Fixed $887,254 Variable STI* $447,500 Total $1,334,754 * The short term incentive remuneration is comprised of a cash payment relating to the year ended 30 June 2015 (which is determined and paid in the first quarter of the next financial year) and the transfer of 50,000 shares on 1 September 2014 (share price $0.95) relating to the year ended 30 June 2014. Long-Term Incentive (LTI) Number of options issued during year Value of options/ entitlements* issued and amortising during year ($) Value of options/ entitlements* issued in past years and amortising during year ($) LTI Cash Entitlements Plan 2013 Share Settled Options 2014 Share Settled Options - - - - - - Special Grant – Share Settled Options 2,604,201 147,500 470,925 106,800 120,000 - * The value of the options disclosed above is the portion of the fair value of options allocated to the reporting period. The fair value of the options is likely to be different from the market value of the options at the date when (and if) they vest. The value of the entitlements disclosed above under the LTI Cash Entitlements Plan represents the actual value received in the reporting period (as opposed to the fair value allocated) due to the entitlements being settled prior to the original settlement date (see the description of the LTI Cash Entitlements Plan for further details). M D Jonas (Head of Strategic & Product Development) The remuneration and value of other benefits received by M D Jonas during FY15 comprised of a fixed remuneration component of $600,000 and long-term incentives as specified in the table below. M D Jonas resigned as a director of Heartland Bank Limited on 5 August 2015. Long-Term Incentive (LTI) Number of options issued during year Value of options/ entitlements* issued and amortising during year ($) Value of options/ entitlements* issued in past years and amortising during year ($) LTI Cash Entitlements Plan 2013 Share Settled Options 2014 Share Settled Options - - - - - - Special Grant – Share Settled Options 1,302,101 73,750 348,834 44,500 70,000 - * The value of the options disclosed above is the portion of the fair value of options allocated to the reporting period. The fair value of the options is likely to be different from the market value of the options at the date when (and if) they vest. The value of the entitlements disclosed above under the LTI Cash Entitlements Plan represents the actual value received in the reporting period (as opposed to the fair value allocated) due to the entitlements being settled prior to the original settlement date (see the description of the LTI Cash Entitlements Plan for further details). 78 Heartland New Zealand Limited - Annual Report 2015 Executive Remuneration Shareholder Information www.heartland.co.nz 79 Executive Remuneration Shareholder Information The number of employees of the Company and its subsidiaries (including former employees), other than directors, who received remuneration, including non-cash benefits, in excess of $100,000 during the year ended 30 June 2015 is set out in the remuneration bands detailed below. Spread of Shares Set out below are details of the spread of shareholders of the Company as at 21 August 2015. 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 $210,000 to $219,999 $220,000 to $229,999 $240,000 to $249,999 $260,000 to $269,999 $270,000 to $279,999 $280,000 to $289,999 $290,000 to $299,999 $300,000 to $309,999 $320,000 to $329,999 $360,000 to $369,999 $390,000 to $399,999 $490,000 to $499,999 $580,000 to $589,999 $630,000 to $639,999 $650,000 to $659,999 $1,240,000 to $1,249,999 Number of Staff 17 11 15 18 9 4 2 3 3 1 4 2 1 3 3 1 1 1 2 1 1 1 1 1 1 1 1 Total 109 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 1,009 2,627 1,769 3,297 599 417 9,718 616,925 7,242,590 13,498,032 75,153,993 42,146,529 331,232,211 469,890,280 0.13 1.54 2.87 15.99 8.97 70.49 100% Twenty Largest Shareholders1 Set out below are details of the 20 largest shareholders of the Company as at 21 August 2015. 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 FNZ Custodians Limited JPMorgan Chase Bank Oceania & Eastern Limited Philip Maurice Carter Citibank Nominees (NZ) Ltd Leveraged Equities Finance Limited National Nominees New Zealand Limited Investment Custodial Services Limited Forsyth Barr Custodians Limited New Zealand Permanent Trustees Limited Heartland Trust Investment Custodial Services Limited Jarden Custodians Limited HSBC Nominees (New Zealand) Limited HSBC Nominees (New Zealand) Limited Custodial Services Limited GUY Perry & D A Thompson Trustee Limited Cogent Nominees Limited 48,224,352 25,032,601 19,643,526 14,382,406 12,289,728 9,500,000 9,393,743 7,971,302 7,916,590 7,290,726 7,218,516 6,915,000 5,693,728 4,550,955 4,500,000 4,322,922 3,729,077 3,459,523 3,370,000 3,365,577 10.26 5.33 4.18 3.06 2.62 2.02 2.00 1.70 1.68 1.55 1.54 1.47 1.21 0.97 0.96 0.92 0.79 0.74 0.72 0.72 TOTAL FOR TOP 20 HOLDERS 208,770,272 44.43 1 Any person wishing to acquire an interest in 10% or more of the Company’s shares must obtain the consent of the Reserve Bank of New Zealand before they do so. 80 Heartland New Zealand Limited - Annual Report 2015 Shareholder Information Other Information www.heartland.co.nz 81 Substantial Product Holders At 30 June 2015, the following product holders had given notice in accordance with Sections 276 and 277 of the Financial Markets Conduct Act 2013 that they were substantial product holders in the Company. The number of shares shown below are as advised in the most recent substantial product holder notices to the Company and may not be their holding as at 30 June 2015. Name Number of Shares Class of Shares Total Number of Shares in Class Harrogate Trustee Limited and Gregory Raymond Tomlinson Accident Compensation Corporation, Nicholas Bagnall, Guy Elliffe, Paul Robertshawe, Blair Tallott, Blair Cooper and Jason Familton Blair Cooper (includes ACC’s relevant interest) Blair Tallott (includes ACC’s relevant interest) 40,285,070 Ordinary 469,890,280 27,035,156 Ordinary 469,890,280 27,067,714 27,083,180 Ordinary Ordinary 469,890,280 469,890,280 The total number of Heartland New Zealand Limited ordinary shares on issue as at 30 June 2015 was 469,890,280. Other Information Auditors’ Fees KPMG has continued to act as auditors of the Company and its subsidiaries. The amount payable by the Company and its subsidiaries to KPMG as audit fees during the year ended 30 June 2015 was $454,000. The amount of fees payable to KPMG for non-audit work during the year ended 30 June 2015 was $125,000. These non-audit fees were primarily for regulatory compliance services and they complied with the Company’s External Auditor Independence Policy. Credit Rating As at 1 September 2015, Heartland Bank Limited had a Fitch Australia Pty Limited long-term credit rating of BBB (outlook stable). Exercise of NZX Disciplinary Powers NZX Limited did not exercise any of its powers under Listing Rule 5.4.2 in relation to the Company during the year ended 30 June 2015. NZX Waivers The Company did not rely upon any waivers granted by NZX Limited during the year ended 30 June 2015. 82 Heartland New Zealand Limited - Annual Report 2015 Directory Directory1 Heartland New Zealand Limited Heartland Bank Limited Chairman Managing Director Director Director Director Director Directors Geoffrey Ricketts Jeffrey Greenslade Graham Kennedy Chris Mace Jane Taylor Gregory Tomlinson Registered Office 35 Teed Street Newmarket Auckland 1023 PO Box 9919 Newmarket Auckland, 1149 T 0508 432 785 E info@heartland.co.nz W www.heartland.co.nz Heartland Executives Directors Bruce Irvine Jeffrey Greenslade Nicola Greer John Harvey Graham Kennedy Geoff Ricketts Richard Wilks Auditors Chairman Managing Director Director Director Director Director Director KPMG KPMG Centre, 18 Viaduct Harbour, Auckland 1010 T 09 367 5800 Share Registry Link Market Services Limited Level 7, Zurich House, 21 Queen Street, Auckland 1010 T 09 375 5998 F 09 375 5990 E enquiries@linkmarketservices.com W www.linkmarketservices.com Jeffrey Greenslade Managing Director Laura Byrne Group General Counsel Chris Flood Head of Banking Richard Lorraway Chief Risk Officer James Mitchell Chief Operating Officer Rochelle Moloney Senior Manager – Corporate Communications Simon Owen Chief Financial Officer Sarah Selwood Head of Human Resources 1Correct as at 1 September 2015. 

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