Heartland announces full year profit of $73.6 million
Distribution Notice
Updated as at 8 May 2019
Section 1: Issuer information
Name of issuer Heartland Group Holdings Limited
Financial product name/description Ordinary Shares
NZX ticker code HGH
ISIN (If unknown, check on NZX
website)
NZHGHE0007S9
Type of distribution
(Please mark with an X in the
relevant box/es)
Full Year X Quarterly
Half Year Special
DRP applies X
Record date 23/08/2019
Ex-Date (one business day before
the Record Date)
22/08/2019
Payment date (and allotment date for
DRP)
06/09/2019
Total monies associated with the
distribution
$37,006,952
Source of distribution (for example,
retained earnings)
Retained earnings
Currency NZD
Section 2: Distribution amounts per financial product
Gross distribution $0.090
Total cash distribution $0.065
Excluded amount (applicable to listed
PIEs)
$NIL
Supplementary distribution amount $0.011
Section 3: Imputation credits and Resident Withholding Tax
Is the distribution imputed Fully imputed – YES
Partial imputation
No imputation
If fully or partially imputed, please
state imputation rate as % applied
28%
Imputation tax credits per financial
product
$0.025
Resident Withholding Tax per
financial product
$0.005
Section 4: Distribution re-investment plan (if applicable)
DRP % discount (if any)
2.0%
Start date and end date for
determining market price for DRP
26/08/2019 30/08/2019
Date strike price to be announced (if
not available at this time)
02/09/2019
Specify source of financial products
to be issued under DRP programme
(new issue or to be bought on
market)
New issue
DRP strike price per financial product
$
Last date to submit a participation
notice for this distribution in
accordance with DRP participation
terms
26/08/2019, 5:00pm (NZT)
Section 5: Authority for this announcement
Name of person
authorised to make
this announcement
Michael Drumm
Contact person for this
announcement
Michael Drumm
Contact phone number 09 927 9136
Contact email address michael.drumm@heartland.co.nz
Date of release through MAP
15/08/2019
---
Results announcement
(for Equity Security issuer/Equity and Debt Security issuer)
Updated as at 8 May 2019
Results for announcement to the market
Name of issuer Heartland Group Holdings Limited
Reporting Period 12 months to 30 June 2019
Previous Reporting Period 12 months to 30 June 2018
Currency NZD
Amount (000s) Percentage change
Revenue from continuing
operations
$205,842 4.60%
Total Revenue $205,842 4.60%
Net profit/(loss) from
continuing operations
$73,617 9.04%
Total net profit/(loss) $73,617 9.04%
Interim/Final Dividend
Amount per Quoted Equity
Security
$0.065
Imputed amount per Quoted
Equity Security
$0.025
Record Date 23 August 2019
Dividend Payment Date 6 September 2019
Current period Prior comparable period
Net tangible assets per
Quoted Equity Security
$1.04 $1.05
A brief explanation of any of
the figures above necessary
to enable the figures to be
understood
Please refer to the audited financial statements that accompany
this announcement for a further explanation of these figures.
Authority for this announcement
Name of person
authorised
to make this announcement
Michael Drumm
Contact person for this
announcement
Michael Drumm
Contact phone number 09 927 9136
Contact email address michael.drumm@heartland.co.nz
Date of release through MAP
15/08/2019
Audited financial statements accompany this announcement.
---
NZX/ASX Release
ASX Listing Rule 1.15.3 Statement
15 August 2019
Heartland Group Holdings Limited (ASX/NZX: HGH) (an ASX Foreign Exempt Listing) confirms, for the
purposes of ASX Listing Rule 1.15.3, that it has complied with and continues to comply with the
Listing Rules of NZX Limited, which is its overseas home exchange.
- Ends -
For further information, please contact:
Michael Drumm
General Counsel
Heartland Group Holdings Limited
DDI 09 927 9136
---
r
2019 Annual
Results
15 August 2019
Important notice
oThis presentation has been prepared by Heartland Group Holdings Limited (NZX/ASX: HGH) (the Company or Heartland) for
the purpose of briefings in relation to its financial statements.
oThe presentation and the briefing (together the Presentation) contain summary information only, and you should not rely on
the information in the Presentation in isolation from the full detail in the financial statements.
oThe information in the Presentation has been prepared with due care and attention. However, no person (including the
Company and its directors, shareholders and employees) will be liable to any other person for any loss arising in connection
with the Presentation.
oThe Presentation outlines a number of the Company’s forward-looking plans and projections. Those plans and projections
reflect current expectations, but are inherently subject to risk and uncertainty, and may change at any time. There is no
assurance that those plans will be implemented or that projections will be realised.
oNo person is under any obligation to update this presentation at any time after its release to you or to provide you with
further information about the Company.
oThe information in this presentation is of a general nature and does not constitute financial product advice, investment
advice or any recommendation. Nothing in this presentation constitutes legal, financial, tax or other advice.
oThis announcement is based on the 30 June 2019 audited full year consolidated financial statements of Heartland Group
Holdings Limited (HGH). Following a corporate restructure on 31 October 2018, Heartland Bank Limited (HBL) became a
100% controlled subsidiary of HGH and ownership of the Australian group companies (comprising Heartland Australia
Holdings Pty Limited and its subsidiaries) transferred from HBL to HGH. The interim consolidated financial statements of
HGH comprise results for HBL and its subsidiaries up to 31 October 2018, and HGH and its subsidiaries from 1 November
2018 to 30 June 2019. As common control has remained the same both before and after the corporate restructure,
management believe that the operations of HGH from 1 November 2018 are directly comparable to those of HBL prior to 1
November 2018. All comparative results are based on 30 June 2018 audited full year consolidated financial statements of
HBL.
2
3
FY2019
Highlights
2019 Financial Highlights
oGross finance receivables (Receivables) increased 10.5% to $4.4b (excl. FX
(1)
).
oNet profit after tax (NPAT) increased 9.0% to $73.6m.
oFinal dividend increased 1.0 cents per share (cps) to 6.5cps, taking total dividends
for FY2019 to 10.0cps.
4
1.Excluding the impact of changes in foreign currency exchange rates (FX) of $34.5m.
Receivables ($m) NPAT ($m)
Business and Strategic Highlights
oReceivables growth
•Australian reverse mortgages up 24.0%.
•New Zealand reverse mortgages up 11.4%.
•Open for Business up 48.2%.
•Business Intermediated up 31.4%.
•Motor up 13.3%.
•Harmoney and other personal lending up 32.9% (excl. Retail mortgages).
oCorporate restructure successfully completed.
oASX foreign exempt listing successfully completed.
oDiversification and expansion of Australian funding.
oHeartland Bank issued $125m of five-year unsubordinated unsecured notes.
5
Business
Strategic
oUptake of the Heartland Mobile App continues to rise, increasing by 72% since January 2019.
o2 Canstar Savings product awards, and 1 money magazine reverse mortgage product award.
oWork plan submitted to the FMA and RBNZ in response to the recent Conduct and Culture Review.
oHeartland launched its new mātāpono (values) with a focus on customer outcomes. The mātāpono
are: Mahi Tika – do the right thing, Mahi Tahi – be one team, Mahi Toa – have big ambition and
Mahi Tipu – be always evolving.
oIncrease in gender diversity among people in key leadership roles, currently 62.5% female and
37.5% male.
oInternship initiative has contributed to Māori constituting 4.0% of Heartland’s population. This is
positive compared to the sector where 2.3% of people in the financial and insurances services
sector identify as Māori
(1)
.
Customer
Customer and Culture Highlights
6
1.Source: New Zealand Census 2013, Statistics New Zealand.
People and Culture
7
Financial
Results
Growth in Profitability
8
1.Included in FY2018 lease, fee and other income, were one-off gains of $4.8m on sale of property, and $0.6m on sale of the invoice finance business.
2.One-off items (net of tax) include corporate restructure and ASX listing costs of $1.8 million, adverse impact of foreign currency movements of $0.9m,
and Tier 2 break fees of $0.8m.
FY2018 v FY2019 NPAT ($m)
1.1
Growth in Receivables
9
1.The graph shows growth in Receivables, excluding the impact of changes in foreign currency exchange rates (FX) of $34.5m and IFRS9 adjustments of
($2.0m) which are shown separately.
2.There was a $54.7m transfer from AU Reverse Mortgages to NZ Reverse Mortgages which has been excluded in the above.
FY2018 v FY2019 Receivables ($m)
Key Performance Measures
10
Impairment Expense Ratio
(1)
Non Performing Loans Ratio
Net Interest Margin Operating Expense Ratio
4.34%
4.50%
4.46%
4.42%
4.33%
Jun-15Jun-16Jun-17Jun-18Jun-19
Heartland's ratioKPMG FIPS Quarterly Results - major banks average
2.18%
1.Impairment expense ratio is calculated as impaired asset expense / average gross finance receivables
IFRS9
oNew accounting standard IFRS9 came into effect on 1 July 2018.
oRequires impairments to be provided for on an expected loss basis at the date of loan
origination, not just those loans that are past due or impaired.
oExcluding the impact of IFRS9 adoption, the impairment expense ratio was 0.42%
(1)
.
oThe initial adoption of IFRS9 also resulted in opening adjustments to provisions for
impairments of $25.3 million and retained earnings of $17.9 million, after allowance for
a deferred tax benefit.
oIFRS9 also introduced a change in the way Reverse Mortgages are valued.
oUnder IFRS they are classified as ‘fair value through profit or loss’.
oCurrently, it has been determined that fair value equals current carrying value.
However, should consistent evidence of a market value emerge, this may result in a
revaluation.
11
1.Impairment expense ratio is calculated as impaired asset expense / average gross finance receivables
Impairment
Fair Value
oReturn on equity 11.1% (11.7% excluding one-off costs and 12.2% for H2 FY2019).
oEarnings per share 13.0cps (14.4cps for H2 FY2019).
oFinal dividend declared 6.5cps, up 1.0cps on FY2018 and takes total dividends for FY2019 to 10.0cps
(11% growth).
oThe dividend reflects consistent performance from the Bank, and an inaugural contribution to the
dividend from Australian business following growth in assets and profitability, and enhanced capital
efficiency.
oDividend yield of 8.6%
(1)
.
Dividend per share (cps)
Shareholder Return
12
1.FY2019 total fully imputed dividends divided by share price as at 14 August 2019 of $1.62.
13
Divisional
summary
NZ Reverse Mortgages
oReceivables increased 11.4% to $561.2m.
oNet Operating Income increased 13.3% to $20.9m.
oIncreased brand awareness and digital distribution
through marketing activity.
14
NZ Reverse
Mortgages
$561.2m
As at 30 June 2019
11.4% growth
From FY2018
Business
oTotal Receivables increased 3.5% to $1,118.2m.
oNet Operating Income increased 5.0% to $55.9m.
oCore Business Intermediated Receivables increased
31.4% to $425.4m.
oNon-Core Business Relationship lending reduced
$107.0m as part of a managed reduction in low margin
risk concentration.
15
Business
$1,118.2m
As at 30 June 2019
3.5% growth excl. FX
From FY2018
Motor
oReceivables increased 13.3% to $1,088.6m.
oNet Operating Income increased 8.0% to $57.1m.
oContinued focus on broadening intermediary
relationships.
oNew and used vehicle sales reduced in H2 FY2019 by 6%
and 8% respectively.
oNew distributor relationships.
16
Motor
$1,088.6m
As at 30 June 2019
13.3% growth
From FY2018
Rural
oTotal Receivables decreased 0.6% to $656.4m.
oNet Operating Income decreased 1.9% to $31.7m.
oLivestock Receivables increased 18.8% in the year to
$121.6m.
oNon-Core Rural Relationship Receivables decreased 4.2%
to $534.8m as part of a managed reduction in low margin
risk concentration.
17
Rural
$656.4m
As at 30 June 2019
0.6% decrease
From FY2018
other personal lending
oNZ Harmoney Receivables increased 40.0% to $149.7m.
oAU Harmoney Receivables increased 52.0% to $39.8m
(excl. FX).
oOther Personal Lending reduced 24.1% to $16.8m.
oNet Operating Income increased 6.8% to $18.9m.
18
Harmoney and
Harmoney and other
personal lending
$206.3m
As at 30 June 2019
32.9% growth excl. FX
From FY2018
Deposits
oDeposits increased 9.4% to $3,153.7m.
oHeartland Mobile App downloads increased by 72% from
January 2019.
oAwarded Canstar’s Bank of the Year – Savings Awards (second
year running).
oAwarded Canstar’s 5-Star Rating for Outstanding Value
Savings Account for the Direct Call Account (fourth year
running).
oLaunched new product, YouChoose – a savings account with
an arranged overdraft.
19
20
Strategic
update
New Zealand Banking
oDelivering best or only products to depositors and borrowers through continued growth in
niche markets:
•Reverse Mortgages – supporting people to live a more comfortable retirement by
releasing equity from their homes.
•Motor Finance – helping New Zealanders to purchase safer, more reliable cars.
•SME Lending – supporting small businesses to grow with fast secured or unsecured
finance – so they don’t necessarily have to own a home or other big asset to receive a
loan.
•Business – re-positioned to intermediated channels targeting manufacturers and
distributors of plant and equipment.
•Livestock Finance – helping farmers to purchase and trade livestock without having to
mortgage their farm.
•Deposits – providing New Zealanders with competitive on call and term deposit rates to
reach their savings goals.
•Non-Core – continued reduction in low margin, risk concentrations in Business and
Rural.
21
Australia
oHeartland is the leading originator of reverse mortgages in Australia.
oMarket share grew to 24.0%
(1)
, and is expected to continue to grow.
oReceivables increased 24.0% to $757.6m.
oNet Operating Income increased 10.7% to $22.7m.
oTVC launched to build awareness, and website refreshed to deliver a
better user experience and customer journey under a refreshed brand.
oContinued diversification of funding with a focus on matching asset
duration, increasing leverage and improving capital efficiency:
•Established A$ medium-term note programme, A$50m issued.
•New A$250m committed reverse mortgage funding facility.
•Additional funding in progress with a potential new funder.
•Long term reverse mortgage-backed structure being developed.
oO4B pilot in Australia.
22
Australian Reverse
Mortgages
$757.6m
As at 30 June 2019
24.0% growth excl.
FX and transfers
From FY2018
1.Based on APRA ADI Property Exposure statistics, plus Heartland Seniors Finance, as at 31 March 2019.
Digital
oA Financial Technology group with a bank licence, not a conventional bank.
oHigh-quality customer outcomes depend on providing superior customer experiences through delivery of
simple and fast access to products and services.
oEnsure our products are available to customers online or via an app, providing simple frictionless and fast
on-boarding and processing.
oAchieve low cost reach to the broadest target market, through online and smartphone access and highly
automated processes.
oHeartland Mobile App installed more than 5,900 times (72% increase since January 2019).
oYouChoose launched, an online offering providing both debit and credit capabilities.
oOnline EFTPOS allowing customers greater flexibility to shop online without an EFTPOS or Debit Card.
oO4B webpage visits increased by 163%
(1)
, and the number of online applications increased by 160%
(2)
.
oDomain Authority increased 16%
(3)
.
23
Vision
Digital Strategy
Key Objectives
Major Achievements
1.Google Analytics, 30 June 2019.
2.Proprietary data collection platform, 30 June 2019.
3.https//moz.com.
Open for Business
oReceivables increased 48.2% to $133.3m.
oNet Operating Income increased 85.3% to $9.6m.
oInvestment in awareness and processing capacity
required for next phase of growth.
24
Open for Business
$133.3m
As at 30 June 2019
48.2% growth excl. FX
From FY2018
Regulatory update
FMA and RBNZ review of conduct and culture in New Zealand retail banks
(1)
oThe review found no conduct and culture issues of material concern but urged
banks to strengthen management of conduct risks.
oOn 29 March 2019, Heartland submitted a workplan addressing the findings.
oThe findings are consistent with Heartland’s constant internal focus on positive
customer outcomes and the values of Mahi Tika.
RBNZ capital review
oIn December 2018, the RBNZ released a consultation paper seeking public
feedback on the minimum amount of regulatory capital required for locally
incorporated banks.
oA final decision is expected to be made by the RBNZ in November 2019.
25
1.“Bank Conduct and Culture – Findings from an FMA and RBNZ review of conduct and culture in New Zealand retail banks” report, dated November 2018
and published by the FMA and RBNZ.
Capital
oFocus remains on improved return on equity through capital efficiency while
ensuring Heartland Bank’s capital needs are supported.
oHeartland Bank would require approximately $60m of additional regulatory
capital
(1)
($12m p.a. over the 5 year transition period) were the proposed RBNZ
capital changes implemented in current form.
oThis transition, along with growth could be supported from:
•Retained earnings;
•Contribution from managed reduction in relationship lending;
•Available Group leverage; and/or
•Improvement in Australian capital efficiency.
26
1.Based on Heartland Bank’s risk weighted exposures, and regulatory capital as at 30 June 2019.
Strategic Outlook
oHigh-quality customer outcomes.
oContinued stability and growth in Core Banking activities.
oGrowth in Australia.
oContinued shift to fast and simple on-boarding and processing under a ‘Digital’
strategy.
oCapital efficiency and improved return on equity.
27
FY2020 Outlook
oContinued asset growth in core lending, particularly reverse mortgages in New Zealand and Australia, and
O4B.
oManaged reduction of low margin Business and Rural Relationship lending to reduce concentration risk.
oIncreased costs associated with investment in:
•Awareness for O4B and reverse mortgages in both Australia and New Zealand.
•Capacity and processing volume to meet growing demand and opportunities in core strategic areas.
•Finance and Compliance reflecting increased regulatory complexity and heightened and demands.
oMany of these costs are accelerated or one-off and will generate asset growth and income in ensuing
years.
oAccordingly, we expect the cost to income ratio increase to 41.9%, before reverting to its current
trajectory.
oHeartland expects net profit after tax for the year ending 30 June 2020 to be in the range of $77 million to
$80 million.
28
29
Appendices
Appendix – Financial Position
oReceivables increased 10.5%, excluding the impact of FX, resulting in reported
growth of 9.7%.
oRetail deposits increased 9.4% to $3,153.7m.
30
Appendix – Impact of one-off items
Reported Impact Excl. Impact
Net profit after tax $73.6m $3.5m $77.1m
Net interest margin 4.33% 0.02% 4.35%
Cost to income ratio 41.6% (1.7%) 39.9%
Return on equity 11.1% 0.6% 11.7%
Earnings per share 13.0cps 0.7cps 13.7cps
31
oOne-off items include post-tax impact of:
•Corporate restructure and ASX listing costs of $1.8m.
•Adverse impact of foreign currency movements of $0.9m.
•Tier 2 break fees of $0.8m.
Appendix – H1 FY2019 v H2 FY2019
32
H1 FY2019 H2 FY2019 FY 2019
Net operating income $102.1m $103.7m $205.8m
Operating expenses $43.4m $42.2m $85.6m
Impaired asset expense $13.3m $7.4m $20.7m
Tax expense $12.4m $15.5m $27.9m
Net profit after tax $33.1m $40.5m $73.6m
Net interest margin 4.36% 4.30% 4.33%
Cost to income ratio 42.5% 40.7% 41.6%
Return on equity 10.3% 12.2% 11.1%
Earnings per share 11.7cps 14.4cps 13.0cps
Thank you
33
---
1
NZX/ASX Release
Heartland announces full year profit of $73.6 million
15 August 2019
Heartland Group Holdings Limited (Heartland) (NZX/ASX: HGH) achieved a net profit after tax
(NPAT) of $73.6 million for the financial year ended 30 June 2019 (FY2019), an increase of 9.0% from
the previous financial year ended 30 June 2018 (FY2018)
1
.
Achievements for the year ended 30 June 2019
Financial:
o Gross Finance Receivables (Receivables)
2
$4.4 billion, up 10.5% (excluding the
impact of changes in foreign currency exchange rates).
o Net profit after tax $73.6 million, up 9.0%.
o FY2019 Final Dividend 6.5 cents per share (cps), taking FY2019 total dividends to
10.0cps. A 1.0cps increase on FY2018, up 11%, and a dividend yield of 8.6%
3
.
o Return on equity (ROE) 11.1%, unchanged from FY2018.
o Earnings per share (EPS) 13.0cps, unchanged from FY2018.
o Net interest margin (NIM) 4.33%, down 0.09% from 4.42%.
o Net operating income $205.8 million up 4.6%.
o Cost to income ratio 39.9% (excluding costs associated with the corporate
restructure), improved from 40.9%.
Business:
o New Zealand Reverse Mortgage Receivables increased $52.0 million (11.4% growth
excluding the impact of foreign exchange and transfers).
o Motor Receivables increased $127.6 million (13.3% growth).
o Harmoney and other personal lending Receivables increased $45.1 million (24.9%
growth excluding the impact of foreign exchange).
1
This announcement is based on the audited consolidated financial statements of Heartland for FY2019.
Following a corporate restructure on 31 October 2018, Heartland Bank Limited (Heartland Bank) became a
100% controlled subsidiary of Heartland, and ownership of the Australian group of companies (comprising
Heartland Australia Holdings Pty Limited and its subsidiaries) transferred from Heartland Bank to Heartland.
The unaudited consolidated financial statements of Heartland for the six months ended 31 December 2018
comprise results for Heartland Bank and its subsidiaries up to 31 October 2018, and Heartland and its
subsidiaries from 1 November 2018 to 30 June 2019. As common control has remained the same both before
and after the corporate restructure, management believes that the operations of Heartland from 1 November
2018 are directly comparable to those of Heartland Bank prior to 1 November 2018. All comparative results
are based on 30 June 2018 audited full year consolidated financial statements of Heartland Bank.
2
Receivables includes Finance Receivables and Finance Receivables - Reverse Mortgages.
3
Share price of $1.62 as at 14 August 2019.
2
o Business Receivables increased $38.1 million (3.5% growth), with Business
Intermediated lending up $101.7 million (31.4% growth) and Open for Business
lending up $43.4 million (48.2% growth).
o Australian Reverse Mortgage Receivables increased $163.0 million (24.0% excluding
the impact of foreign exchange and transfers).
Strategic:
o Corporate restructure successfully completed – creating funding flexibility.
o ASX foreign exempt listing successfully completed.
o Diversification and expansion of Australian funding through an A$50 million
medium-term note issue and a new A$250 million reverse mortgage funding facility.
o Heartland Bank issue of $125 million five-year unsubordinated unsecured fixed rate
notes.
Customer outcomes:
o Uptake of the Heartland Mobile App continues to rise, increasing by 72% in the last
six months
4
.
o Awarded Canstar’s 2019 Bank of the Year – Savings Award for the second year
running.
o Awarded Canstar’s 5-Star Rating for Outstanding Value Savings Account for
Heartland’s Direct Call Account for the fourth year in a row.
o Heartland Seniors Finance Australia awarded Best Reverse Mortgage 2019 by Money
Magazine for the fourth consecutive year.
o Work plan submitted to the Financial Markets Authority (FMA) and Reserve Bank of
New Zealand (RBNZ) in response to the recent Conduct and Culture Review.
Culture:
o Increase in gender diversity among people in the strategic management group,
currently 37.5% male and 62.5% female.
o Internship initiative has contributed to Māori constituting 4% of Heartland’s
population. This is positive compared to the sector where 2.3% of people in the
financial and insurances services sector identify as Māori
5
.
o Heartland launched its new mātāpono (values) with a focus on customer outcomes.
The mātāpono are: Mahi Tika – do the right thing, Mahi Tahi – be one team, Mahi
Toa – have big ambition and Mahi Tipu – be always evolving.
FINANCIAL POSITION
Net Receivables increased by $424.8 million (10.7% growth). However, reported net receivables
increased by $363.1 million (9.1% growth) to $4,348 million due to an adverse foreign exchange
impact on Australian receivables of $34.5 million, and the impact of the adoption of IFRS9 of $27.3
million.
4
Based on the combined cumulative number of Heartland Mobile App installs from the Android Google Play
Store and Apple App Store in June 2019, compared with the combined cumulative installs across both stores in
January 2019.
5
Source: New Zealand Census 2013, Statistics New Zealand.
3
Total assets increased by $429.6 million (9.6% growth) primarily due to the increase in net finance
receivables. Cash and cash equivalents increased by $31.0 million and investments increased by
$14.3 million.
Total borrowings
6
increased by $414.3 million (10.9% growth).
During the reporting period, Net Assets increased by $11.5 million to $675.7 million after taking into
account a reduction of $19.3 million as a result of the initial adoption of IFRS9. Net Tangible Assets
(NTA) increased by $9.0 million to $593.5 million. NTA per share was $1.04, unchanged from FY2018.
FINANCIAL PERFORMANCE
Profitability
NPAT was $73.6 million for FY2019, an increase of $6.1 million (9.0% growth).
ROE was 11.1%, unchanged from FY2018, however, ROE in the second half of FY2019 improved to
12.2% from 10.3% in the first half.
EPS was 13.0 cents per share, unchanged from FY2018 due to the full year impact of the December
2017 rights issue on average shares.
FY2019 performance was impacted by costs associated with the corporate restructure. The impact
on key metrics is set out in the following table.
Reported
Impact of
restructure and ASX
Excluding impact of
Restructure and
ASX
Net interest margin 4.33% 0.02% 4.35%
Cost income ratio 41.6% -1.7% 39.9%
ROE 11.1% 0.6% 11.7%
NPAT $73.6 million $3.5 million $77.1 million
Net Operating Income
Net Operating Income (NOI) was $205.8 million, an increase of $8.2 million (4.6% growth).
Heartland’s NIM for FY2019 was 4.33% compared to 4.42% for FY2018. NIM was impacted by the
proportional changes in Receivables, in particular the strong growth in reverse mortgages which has
a lower NIM relative to other products (but with correspondingly lower impairments). NIM was
impacted by $1.1 million of break cost incurred due to the early repayment of the Tier 2 Australian
dollar subordinated bond. Excluding these costs, NIM was 4.35%.
Costs
6
Total borrowings includes Retail deposits and Other borrowings.
4
Operating costs were $85.6 million, an increase of $5.1 million (6.4% growth). Higher operating
expenses were due to growth, one-off corporate restructure and ASX listing costs of $1.8 million and
one-off foreign currency costs of $1.3 million also incurred in relation to the corporate restructure.
7
The cost to income ratio increased to 41.6%, compared to 40.9% in FY2018. However, excluding one-
off costs related to the corporate restructure and ASX listing referred to above, the cost to income
ratio was 39.9%.
Impairments
The new accounting standard relating to impairments, IFRS9, came into effect on 1 July 2018. This
new standard requires impairments to be provided for on an expected loss basis at the date of loan
origination. As a result, FY2019 impairment expense is not directly comparable to FY2018 primarily
due to the new requirement to provide for impairment losses on all loans, not just those past due or
impaired. This particularly impacted Harmoney and Motor which had high growth and, in the case of
Harmoney, higher expected loss rates than other segments.
Impaired asset expense increased by $1.1 million (5.2%) to $20.7 million. $3.1 million of that was the
result of increases in provisions on loans not past due or impaired as a result of the application of
the new IFRS9 methodology. This would not have been recognised in FY2019 under the previous
applicable accounting standard.
Impaired asset expense as a percentage of average Receivables decreased from 0.58% in FY2018 to
0.49% in FY2019. Excluding the impact of IFRS9, the ratio was 0.42% in FY2019.
Impairment and collection rates in Motor improved during the year following changes to collection
processes, and as a result reduced impairment expense by $2.1 million.
Impaired and past due loans over 90 days decreased by $3.0 million to $70.9 million, and decreased
from 1.84% to 1.61% as a percentage of Receivables.
IFRS adjustments
The initial adoption of IFRS9 also resulted in opening adjustments to provisions for impairments of
$25.3 million and retained earnings of $17.9 million, after allowance for a deferred tax benefit. IFRS9
also introduced a change in the way Reverse Mortgages are valued. Under IFRS9 they are ‘fair-
valued’. Currently, it has been determined that fair value equals current carrying value. However,
should consistent evidence of a market value emerge, this may result in a revaluation.
BUSINESS PERFORMANCE
New Zealand Reverse Mortgages
New Zealand Reverse Mortgages net operating income was $20.9 million, an increase of $2.4 million
(13.3% growth).
7
These costs arose from adverse foreign currency movements due to a foreign exchange exposure at the time
of the corporate restructure. This exposure has subsequently been hedged, removing the potential for any
further negative impact.
5
New Zealand Reverse Mortgage Receivables increased $52.0 million (11.4% growth). Reported
growth was $104.4 million (22.8% growth) to $561.2 million due to $54.7 million of Australian
Reverse Mortgages transferred from Australia to New Zealand, offset by an adverse foreign
exchange impact of $2.0 million.
Motor
Motor net operating income was $57.1 million, an increase of $4.2 million (8.0% growth).
Motor Receivables increased $127.6 million (13.3% growth) to $1,088.6 million through Motor
dealer lending (car dealerships, brokers and partnerships such as Holden and Jaguar/Land Rover).
Harmoney and other personal lending
Harmoney and other personal lending net operating income was $18.9 million, an increase of $4.1
million (27.6% growth).
Harmoney and other personal lending Receivables increased $45.1 million (24.9% growth), excluding
the impact of changes in foreign currency exchange rates. New Zealand Harmoney and other
personal lending increased $31.5 million (20.3% growth) to $186.3 million and Australia Harmoney
increased $13.6 million (52.0% growth), excluding the impact of changes in foreign currency
exchange rates, to $38.3 million.
Business
Business lending net operating income was $55.9 million, an increase of $3.5 million (6.8% growth).
Business Receivables increased by $38.0 million (3.5% growth) to $1,118.2 million. Heartland’s
growth focus continues to be on Intermediated Business and lending through our digital platform,
Open for Business. These markets continue to deliver results with Business Intermediated lending up
$101.7 million (31.4% growth) to $425.4 million and Open for Business lending up $43.4 million
(48.2% growth) to $133.3 million. Business Relationship lending continues to be managed down as
part of our strategy to reduce low margin risk concentration resulting in Business Relationship
Receivables reducing by $107.0 million.
Rural
Rural lending net operating income was $31.7 million, a decrease of $0.6 million (1.9% reduction).
Rural Receivables decreased by $4.1 million (0.6% reduction) to $656.4 million. We continue to
manage down large Rural Relationship lending to reduce low margin risk concentration in this area
resulting in Rural Relationship Receivables reducing by $23.4 million. Livestock Receivables increased
by $19.3 million (18.8% growth) to $121.6 million.
Australia
Net operating income from Australian operations was $22.7 million, an increase of $2.2 million
(10.7% growth).
6
Australian Reverse Mortgage Receivables increased $163.0 million (24.0% growth) excluding the
impact of changes in foreign currency exchange rates and reverse mortgage transfers to New
Zealand. Reported growth was $79.6 million (11.7% growth) to $757.6 million due to $54.7 million of
reverse mortgage transfers to New Zealand and an adverse foreign exchange impact of $31.0
million.
FUNDING AND LIQUIDITY
Heartland operates a diversified funding base that continues to grow with the business.
Deposits increased by $271.9 million (9.4% growth) to $3.2 billion. Heartland continues to provide
market leading call and competitive term deposit offerings, providing customers with competitive
interest rates and unlimited on call access to their money through the Heartland Direct Call Account.
In August 2018, the Asset-Backed Commercial Paper programme was replaced with a new externally
rated auto loan warehouse which is bank funded. The facility was utilised during the year but
undrawn as at 30 June 2019.
In April 2019, Heartland Bank issued $125 million of five-year unsubordinated unsecured fixed rate
notes, which included $50 million of oversubscriptions.
Australian borrowings increased $97.0 million, through $47.0 million of reverse mortgage
borrowings and an A$50 million medium-term (2-year) note issued by Heartland Australia Group Pty
Limited in March 2019.
In May 2019, Heartland introduced leverage capacity to the holding company with a $50 million
corporate debt facility, which was undrawn as at 30 June 2019.
CORPORATE RESTRUCTURE AND ASX LISTING
The corporate restructure was completed in October 2018. The Tier 2 Notes (A$20 million) were
repaid as part of this corporate restructure.
Under the corporate restructure, all of the shares in Heartland Bank were exchanged for shares in
Heartland, and Heartland Bank became a wholly owned subsidiary of Heartland. In addition, the
Australian group companies were transferred from Heartland Bank to Heartland.
The corporate restructure provides Heartland greater flexibility to explore and take advantage of
future growth opportunities and funding options in New Zealand and Australia outside of the
banking group.
REGULATORY UPDATE
The financial services sector has seen considerable regulatory activity with the FMA and RBNZ
reporting on their findings following a review of conduct and culture in New Zealand retail banks.
The “Bank Conduct and Culture – Findings from an FMA and RBNZ review of conduct and culture in
New Zealand retail banks” report, dated November 2018 and published by the FMA and RBNZ, which
summarised the results of their joint review on conduct and culture found that “conduct and culture
issues do not appear to be widespread in banks in New Zealand”. However, the findings did reveal
7
opportunities to strengthen the governance and management of conduct risks industry-wide.
Heartland supports the review and is committed to continuous improvement in all areas identified
by the FMA and RBNZ. On 29 March 2019, as required of all banks, Heartland submitted a workplan
to the FMA and RBNZ addressing improvement in conduct and culture and is currently working
through the plan and focusing on iterative improvement of conduct and culture across the
organisation. Embedding Heartland’s mātāpono (values) is one of the workplan activities.
In December 2018, the RBNZ released a consultation paper seeking public feedback on the minimum
amount of regulatory capital required for locally incorporated banks. Heartland Bank submitted a
proposal in support of the RBNZ’s goal to promote a sound and efficient financial system. The RBNZ
published a summary of submissions to its website in July 2019 and a response and final decision is
expected to be made in November 2019.
Due to regulatory demands, Heartland is only at the start of our journey to better understand our
environmental impact. While we have taken some small steps toward this, we know we need to do
more and will be evaluating our overall Environmental, Social and Governance (ESG) strategy in
FY2020.
STRATEGIC PRIORITIES
Heartland’s activity comprises three areas of strategic focus: New Zealand, Australia and Digital.
New Zealand
Heartland Bank’s focus remains on delivering best or only products to depositors and borrowers
through continued growth in niche markets:
Reverse Mortgages – supporting people to live a more comfortable retirement by releasing
equity from their homes
Motor Finance – helping New Zealanders to purchase safer, more reliable cars
Business Lending – supporting small businesses to grow with secured or unsecured finance –
so they don’t necessarily have to own a home or other big asset to receive a loan
Business Intermediated – targeting manufacturers and distributors of plant and equipment
Livestock Finance – helping farmers to purchase and trade livestock without having to
mortgage their farm
Deposits – providing New Zealanders with competitive on call and term deposit rates to
reach their savings goals.
There are significant growth opportunities for New Zealand Reverse Mortgages and increased
investment in marketing is underway to raise product awareness.
FY2019 also saw Heartland Bank enter into a new Retail market with its YouChoose product – a
savings account with an arranged overdraft. YouChoose offers customers the flexibility to save when
they can and spend when they want to.
Recognising areas of significant growth opportunity, Heartland is investing in supporting future
processing capacity. This includes investing in customer service capability and technology in
Ashburton to support customers from across the business.
8
Australia
Heartland is the primary originator of reverse mortgages in Australia. The combination of population
demographics
8
, limited active originators and a product focused on simplicity and customer needs,
positions Heartland well in the larger Australian market. Heartland expects to expand its market
share further from its current 24%
9
.
Heartland intends to increase product awareness through dedicated marketing initiatives in the
coming financial year. In July 2019, the Heartland Seniors Finance website was refreshed to reflect
an updated brand and deliver a better user experience and customer journey. This was timed with
the launch of a television campaign (TVC) to help reach the total estimated market of approximately
A$6 billion.
10
To support this growth opportunity, Heartland continues to diversify its sources of funding with a
focus on expanding capacity and improving capital efficiency. This includes the following.
In February 2019, Heartland established an A$ medium-term note programme and
conducted its first A$50 million issuance in March 2019.
In July 2019, Heartland completed a new A$250 million committed reverse mortgage
funding facility.
An additional reverse mortgage funding facility is being developed with a potential new
funder.
Heartland is actively working on a long-term reverse mortgage-backed securitisation
structure.
Digital
Heartland continues to evolve into a Financial Technology group with a bank licence, as opposed to a
conventional bank.
This is an important distinction, because superior customer experiences are increasingly important
to high quality customer outcomes, in particular, by delivering simple and fast access to products
and services. This is the essence of our digital strategy.
Alongside this, Heartland must remain responsive to all customer needs and recognise that, even in
a digital world, people to people contact is important. Accordingly, increased investment is being
made in telephony and customer service capability in Ashburton.
Heartland’s digital strategy has two key objectives:
to make our products available to customers online or via an app, providing simple,
frictionless and fast on-boarding and processing; and
8
The number of Australians aged over 65 is projected to grow from 15% of the population in 2017 to 22% by
2057.
9
Based on APRA ADI Property Exposure statistics, plus Heartland Seniors Finance, as at 31 March 2019.
10
Based on peak penetration from the Deloitte annual reverse mortgage report 2015, combined with current
Australian Bureau of Statistics population and housing statistics and APRA and Heartland Seniors Finance
reverse mortgage data.
9
to achieve low cost reach to the broadest target market, through online and smartphone
access and highly automated processes.
Major achievements include the following.
In Deposits, the Heartland Mobile App has been installed more than 5,900 times – an
increase of 72% since January 2019.
YouChoose was launched, an online offering that provides both debit and credit capabilities.
Online EFTPOS has also been added, allowing YouChoose customers greater flexibility to
shop online without an EFTPOS or Direct Debit card.
O4B, Heartland’s digital-led small business lending product, has continued to grow. The
number of people visiting the O4B webpages in FY2019 increased by 163%
11
and the
number of online applications increased by 160%
12
.
The O4B platform has reached a stage where increased marketing is required to develop awareness
and extend reach into a target market estimated to be $5.6 billion
13
. In July 2019 a new television
campaign, accompanied by other marketing activity, was launched to help achieve this.
FINAL DIVIDEND
Heartland is pleased to declare a 2019 final dividend of 6.5cps. This represents a 1.0cps increase on
the FY2018 final dividend, and takes total dividend for FY2019 to 10.0cps (11% growth). Dividend
yield was 8.6%
14
. The dividend increase reflects the continues consistent performance of the bank
and an inaugural contribution from the Australian business following growth in assets and
profitability.
The final dividend will be paid on Friday 6 September 2019 (Payment Date) to shareholders on the
company’s register as at 5.00pm on Friday 23 August 2019 (Record Date) and will be fully imputed.
In December 2018, Heartland established a Dividend Reinvestment Plan (DRP), giving eligible
shareholders the opportunity to reinvest some or all of their dividend payments into new ordinary
shares. The DRP will apply to the final dividend with a 2.0% discount
15
.
The DRP offer document and participation form is available on our shareholder website at:
https://shareholders.heartland.co.nz/shareholder-resources/dividends.
11
Data source: Google Analytics, 30 June 2019.
12
Data source: Proprietary data collection platform, 30 June 2019.
13
Based on the number of SMEs in New Zealand (Ministry of Business, Innovation and Employment Small
Business Fact Sheet 2017) with turnover, risk profile and needs consistent with O4B.
14
FY2019 total fully imputed dividends divided by share price as at 14 August 2019 of $1.62.
15
That is, the strike price under the DRP will be 98.0% of the volume weighted average sale price of Heartland
shares over the five trading days following the Record Date. For the full details of the DRP and the Strike Price
calculation, refer to Heartland Group Holdings Limited DRP offer document dated 10 December 2018.
10
LOOKING FORWARD
We expect to see continued asset growth from core lending activities in FY2020, particularly in
Australian and New Zealand reverse mortgages and small business lending, combined with the
continuation of a managed reduction in Business and Rural relationship lending.
Investment in growth will be made to build awareness for reverse mortgages (in Australia and New
Zealand) and O4B, and to increase processing capacity in the areas of new growth. Some of these
costs are anticipated to be one-off and will contribute to growth beyond FY2020.
Additional investment is also planned in Finance and Compliance reflecting increased regulatory
requirements and heightened demands in these areas.
Heartland expects its NPAT for the year ending 30 June 2020 to be in the range of $77 million to $80
million.
- Ends -
For further information, please contact:
Jeff Greenslade Cherise Barrie
Chief Executive Officer Chief Financial Officer
M 021 563 593 M 027 503 6119
For investor enquiries, please contact: For media enquiries, please contact:
Andrew Dixson Nicola Foley
Head of Corporate Finance Senior Communications Manager
M 021 263 2666 M 027 345 6809
---
Financial
Statements
For the 12 months ended 30 June 2019
Heartland Group Holdings Limited Consolidated Financial Statements 2
Contents
GENERAL INFORMATION ................................................................................................................................................................. 4
DIRECTORS....................................................................................................................................................................................... 4
AUDITOR ......................................................................................................................................................................................... 5
OTHER MATERIAL MATTERS ............................................................................................................................................................ 5
DIRECTORS STATEMENTS ................................................................................................................................................................. 6
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME............................................................................................................. 7
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY ...................................................................................................................... 8
CONSOLIDATED STATEMENT OF FINANCIAL POSITION ..................................................................................................................... 9
CONSOLIDATED STATEMENT OF CASH FLOWS ............................................................................................................................... 10
NOTES TO THE FINANCIAL STATEMENTS ........................................................................................................................................ 12
1 Financial statements preparation ............................................................................................................................................. 12
PERFORMANCE .............................................................................................................................................................................. 17
2 Segment reporting .................................................................................................................................................................... 17
3 Net interest income .................................................................................................................................................................. 19
4 Net operating lease income ...................................................................................................................................................... 19
5 Other income ............................................................................................................................................................................ 20
6 Operating expenses ................................................................................................................................................................... 20
7 Impaired asset expense ............................................................................................................................................................. 21
8 Taxation ..................................................................................................................................................................................... 22
9 Earnings per share ..................................................................................................................................................................... 23
FINANCIAL POSITION ..................................................................................................................................................................... 24
10 Investments ............................................................................................................................................................................... 24
11 Investment properties ............................................................................................................................................................... 24
12 Derivative financial instruments ............................................................................................................................................... 25
13 Finance receivables ................................................................................................................................................................... 26
14 Operating lease vehicles ........................................................................................................................................................... 30
15 Borrowings ................................................................................................................................................................................ 31
16 Share capital and dividends....................................................................................................................................................... 32
17 Other balance sheet items ........................................................................................................................................................ 32
18 Other Reserves .......................................................................................................................................................................... 34
19 Related party transactions and balances .................................................................................................................................. 34
20 Fair value ................................................................................................................................................................................... 35
RISK MANAGEMENT ...................................................................................................................................................................... 39
21 Enterprise risk management program ...................................................................................................................................... 39
22 Credit risk exposure .................................................................................................................................................................. 42
23 Liquidity risk .............................................................................................................................................................................. 45
24 Interest rate risk ........................................................................................................................................................................ 47
OTHER DISCLOSURES ..................................................................................................................................................................... 49
25 Significant subsidiaries .............................................................................................................................................................. 49
Heartland Group Holdings Limited Consolidated Financial Statements 3
26 Structured entities .................................................................................................................................................................... 49
27 Staff share ownership arrangements ........................................................................................................................................ 50
28 Concentrations of funding ......................................................................................................................................................... 53
29 Contingent liabilities and commitments ................................................................................................................................... 53
30 Events after the reporting date ................................................................................................................................................. 53
AUDITOR’S REPORT .................................................................................................................................Error! Bookmark not defined.
Heartland Group Holdings Limited Consolidated Financial Statements 4
GENERAL INFORMATION
These financial statements are issued by Heartland Group Holdings Limited and its subsidiaries (the Group) for the year ended 30
June 2019.
Heartland Group Holdings Limited (HGH) is incorporated in New Zealand and registered under the Companies Act 1993. The shares in
HGH are listed on the NZX Main Board and the Australian Securities Exchange under a Foreign Exempt Listing.
On 31 October 2018 HGH acquired Heartland Bank Limited (HBL) and subsidiaries (HBL Group) pursuant to a corporate restructure
approved by the shareholders of HBL. Under this restructure all the shares of HBL were exchanged for shares in HGH. At the same
time, the Australian group of companies owned by HBL were transferred to HGH. HGH was incorporated solely for the purpose of
undertaking this transaction.
As common control remained after the restructure, the financial statements presented for the year ended 30 June 2019 are for the
Group as if it had operated for the entire period. Comparative figures shown are for the consolidated HBL Group.
Name and address for service
The Group’s address for service is Level 3, Heartland House, 35 Teed Street, Newmarket, Auckland.
Details of incorporation
HGH was incorporated under the Companies Act 1993 on 19 July 2018.
DIRECTORS
All Directors of the HGH Group reside in New Zealand with the exception of Ellen Comerford who resides in Australia.
Communications to the Directors can be sent to Heartland Group Holdings Limited, 35 Teed Street, Newmarket, Auckland. At the
time of the signing of these Financial Statements the Directors of the Group and their details were:
Chairman - Board of Directors
Name: Geoffrey Thomas Ricketts CNZM Qualifications: LLB(Hons), LLD (honoris causa), CFInstD
Type of Director: Independent Non-Executive Director Occupation: Company Director
External Directorships:
Asteron Life Limited, Janmac Capital Limited, Maisemore Enterprises Limited, MCF2 Message4U Limited, MCF 2 Nexus
Limited, MCF 7 Limited, MCF 8 Limited, MCF 9 Limited, MCF 10 Limited, MCF2 (Fund 1) Limited, MCF2A General Partner
Limited, MCF2 GP Limited, MCF3 GP Limited, MCF3B General Partner Limited, MCF3A General Partner Limited, MCF2 FFF-GK
Limited, MC Medical Properties Limited, Mercury Capital No.1 Fund Limited, Mercury Capital No. 1 Trustee Limited, Mercury
Pharmacy Holdings Limited, Mercury Medical Holdings Limited, New Zealand Catholic Education Office Limited, NZCEO
Finance Limited, O & E Group Services Limited, Oceania and Eastern Finance Limited, Oceania and Eastern Group Funds
Limited, Oceania and Eastern Holdings Limited, Oceania and Eastern Limited, Oceania and Eastern Securities Limited, Oceania
North Limited, Oceania Securities Limited, Quartet Equities Limited, Suncorp Group Holdings (NZ) Ltd, Suncorp Group New
Zealand Limited, Suncorp Group Services NZ Limited, The Centre for Independent Studies Limited, The Todd Corporation
Limited, Todd Management Services Limited, Todd Offshore Limited, Vero Insurance New Zealand Limited, Vero Liability
Insurance Limited.
Name: Jeffrey Kenneth Greenslade Qualifications: LLB
Type of Director: Non-Independent Executive Director Occupation: Chief Executive Officer
External Directorships:
Nil
Heartland Group Holdings Limited Consolidated Financial Statements 5
Name: Ellen Frances Comerford
Qualifications: BEc
Type of Director: Independent Non-Executive Director Occupation: Chief Financial Officer of Hollard Insurance
Company Pty Ltd
External Directorships:
Comerford Gohl Holdings Pty Limited, Hollard Holdings Australia Pty Limited, The Hollard Insurance Company Pty Limited.
Name: Sir Christoper Robert Mace KNZM
Qualifications: CMInstD
Type of Director: Independent Non-Executive Director Occupation: Company Director
External Directorships:
Akitu Equities Limited, Akitu Capital Limited, Akitu Group Company No 1 Limited, Akitu Group Company No 2 Limited, Akitu
Group Company No 3 Limited, Akitu Health Services Limited, Akitu Investments Limited, Akitu Investments No 2 Limited,
Goldburn Resources Limited, Helicopter Enterprises Limited, Janik Equities Limited, Janmac Capital Limited, J N S Capital Limited,
Mace Capital Limited, Mace Construction Limited, Mace Developments Limited, Mace Enterprises Limited, Mace Investments
Limited, Maisemore Enterprises Limited, Nuffield Forestry Limited, Oceania and Eastern Finance Limited, Oceania and Eastern
Group Funds Limited, Oceania and Eastern Holdings Limited, Oceania and Eastern Limited, Oceania and Eastern Securities
Limited, O & E Group Services Limited, Paroa Bay Station Limited, PPT Trustee (NZ) Limited, Quartet Equities Limited, St. Just
Enterprises Limited, Te Puia Tapapa GP Limited.
Name: Gregory Raymond Tomlinson
Qualifications: AME
Type of Director: Independent Non-Executive Director Occupation: Company Director
External Directorships:
Alta Cable Holdings Limited, Argenta Limited, Chippies Vineyard Limited, Forte Health Group Limited, Forte Health Limited,
Impact Capital Management Limited, Impact Capital Limited, Indevin Group Limited, Little Ngakuta Trust Company Limited,
Mountbatten Trustee Limited, Nearco Stud Limited, Ngakuta Trust Company Limited, Oceania Healthcare Limited, Pelorus
Finance Limited, St Leonards Limited, The Icehouse Limited, Tomlinson Group NZ Limited, Tomlinson Holdings Limited,
Tomlinson Group Investments Limited, Tomlinson Ventures Limited.
AUDITOR
KPMG
KPMG Centre
18 Viaduct Harbour Avenue
Auckland
OTHER MATERIAL MATTERS
There are no material matters relating to the business or affairs of the Group that are not contained elsewhere in these Consolidated
Financial statements which would, if disclosed in these Consolidated Financial Statements, materially affect the decision of a person
to subscribe for debt securities of which the Group is the issuer.
Heartland Group Holdings Limited Consolidated Financial Statements 6
DIRECTORS STATEMENTS
The Consolidated Financial Statements are dated 15 August 2019 and have been signed by all the Directors.
G T Ricketts (Chair) E F Comerford
J K Greenslade Sir C R Mace
G R Tomlinson
Heartland Group Holdings Limited Consolidated Financial Statements 7
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the year ended 30 June 2019
$000's
NOTE
June 2019June 2018
Interest income
3
334,330 309,284
Interest expense
3
136,747 125,483
Net interest income197,583 183,801
Operating lease income
4
5,262 5,675
Operating lease expenses
4
3,427 4,005
Net operating lease income1,835 1,670
Lending and credit fee income3,1172,351
Other income
5
3,3078,972
Net operating income205,842 196,794
Operating expenses
6
85,589 80,433
Profit before impaired asset expense and income tax120,253 116,361
Fair value movement on investment property
11
1,936-
Impaired asset expense
7
20,676 22,067
Profit before income tax101,513 94,294
Income tax expense
8
27,896 26,781
Profit for the year73,617 67,513
Other comprehensive income
Items that are or may be reclassified subsequently to profit or loss:
Effective portion of changes in fair value of derivative financial instruments, net of income tax(4,762) 72
Movement in fair value reserve, net of income tax2,968 981
Movement in foreign currency translation reserve(5,281) 2,315
Items that will not be reclassified to profit or loss:
Movement in defined benefit reserve, net of income tax(86) 340
Other comprehensive income for the year, net of income tax(7,161) 3,708
Total comprehensive income for the year66,456 71,221
Earnings per share
Basic earnings per share9
13c13c
Diluted earnings per share913c13c
Total comprehensive income for the year is attributable to the owners of the Group.
The notes on pages 12 to 53 are an integral part of this consolidated financial statement.
Heartland Group Holdings Limited Consolidated Financial Statements 8
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
For the year ended 30 June 2019
$000's
Note
Share Capital
Reserves
Retained
Earnings
Total Equity
Share Capital
Reserves
Retained
Earnings
Total Equity
Balance at beginning of year
542,315
4,585
117,260
664,160
470,516
1,437
97,642
569,595
NZ IFRS 9 adjustment
1
-
-
(19,283)
(19,283)
-
-
-
-
Restated balance at beginning of year
542,315
4,585
97,977
644,877
470,516
1,437
97,642
569,595
Total comprehensive income for the
year
Profit for the year
-
-
73,617
73,617
-
-
67,513
67,513
Other comprehensive income/(loss)
net of income tax
-
(7,161)
-
(7,161)
-
3,708
-
3,708
Total comprehensive income for the
year
-
(7,161)
73,617
66,456
-
3,708
67,513
71,221
Contributions by and distributions to
owners
Dividends paid
16
-
-
(50,599)
(50,599)
-
-
(47,895)
(47,895)
Dividend reinvestment plan
16
14,333
-
-
14,333
12,745
-
-
12,745
Issue of share capital
-
-
-
-
59,225
-
-
59,225
Transaction costs associated with
capital raising
(18)
-
-
(18)
(910)
-
-
(910)
Share based payments
-
619
-
619
-
666
-
666
Shares vested
2,340
(2,340)
-
-
739
(1,226)
-
(487)
Total transactions with owners
16,655
(1,721)
(50,599)
(35,665)
71,799
(560)
(47,895)
23,344
Balance at the end of the year
558,970
(4,297)
120,995
675,668
542,315
4,585
117,260
664,160
June 2019
June 2018
The notes on pages 12 to 53 are an integral part of this consolidated financial statement.
Heartland Group Holdings Limited Consolidated Financial Statements 9
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
As at 30 June 2019
$000's
NOTE
June 2019
June 2018
Assets
Cash and cash equivalents
80,584
49,588
Investments
10
354,928
340,546
Investment properties
11
11,132
9,196
Derivative financial instruments
12
12,675
923
Finance receivables
13
3,029,231
3,984,941
Finance receivables - reverse mortgages
13
1,318,819
-
Operating lease vehicles
14
15,516
17,524
Other assets
17
21,309
14,411
Intangible assets
17
72,679
74,401
Deferred tax asset
8
9,531
5,319
Total assets
4,926,404
4,496,849
Liabilities
Retail deposits
15
3,153,681
2,881,805
Other borrowings
15
1,056,653
914,253
Tax liabilities
7,532
11,459
Derivative financial instruments
12
10,372
2,562
Trade and other payables
17
22,498
22,610
Total liabilities
4,250,736
3,832,689
Equity
Share capital
16
558,970
542,315
Retained earnings and other reserves
116,698
121,845
Total equity
675,668
664,160
Total equity and liabilities
4,926,404
4,496,849
Total interest earning and discount bearing assets
4,773,180
4,361,937
Total interest and discount bearing liabilities
4,208,879
3,790,067
The notes on pages 12 to 53 are an integral part of this consolidated financial statement.
Heartland Group Holdings Limited Consolidated Financial Statements 10
CONSOLIDATED STATEMENT OF CASH FLOWS
For the year ended 30 June 2019
$000's
Note
June 2019
June 2018
Cash flows from operating activities
Interest received
304,991
280,471
Operating lease income received
4,761
4,941
Lending, credit fees and other income received
4,587
10,398
Operating inflows
314,339
295,810
Payments to suppliers and employees
89,607
73,672
Interest paid
135,404
123,783
Taxation paid
25,895
23,818
Operating outflows
250,906
221,273
Net cash flows from operating activities before changes in operating assets and liabilities
63,433
74,537
Proceeds from sale of operating lease vehicles
4,641
5,577
Purchase of operating lease vehicles
(5,495)
(7,163)
Net movement in finance receivables
(384,367)
(431,863)
Net movement in deposits
271,876
307,733
Net cash flows applied to operating activities
(49,912)
(51,179)
Cash flows from investing activities
Net proceeds from sale of investment properties
-
3,185
Proceeds from equity investments
-
300
Total cash provided from investing activities
-
3,485
Purchase of property plant equipment and intangible assets
4,513
8,837
Net increase in investments
11,468
23,107
Purchase of investment properties
-
7,472
Total cash applied to investing activities
15,981
39,416
Net cash flows applied to investing activities
(15,981)
(35,931)
Cash flows from financing activities
Net increase/(decrease) in wholesale funding
31,000
(93,507)
Proceeds from issue of Unsubordinated Notes
125,000
150,000
Increase in share capital
-
58,315
Total cash provided from financing activities
156,000
114,808
Dividends paid
16
36,265
35,150
Repayment of subordinated notes
15
22,846
-
Total cash applied to financing activities
59,111
35,150
Net cash flows from financing activities
96,889
79,658
Net increase/(decrease) increase in cash held
30,996
(7,452)
Opening cash and cash equivalents
49,588
57,040
Closing cash and cash equivalents
80,584
49,588
The notes on pages 12 to 53 are an integral part of this consolidated financial statement.
Heartland Group Holdings Limited Consolidated Financial Statements 11
CONSOLIDATED STATEMENT OF CASH FLOWS
For the year ended 30 June 2019
Reconciliation of profit after tax to net cash flows from operating activities
$000's
Note
June 2019
June 2018
Profit for the year
73,617
67,513
Add / (less) non-cash items:
Depreciation and amortisation expense
5,760
4,638
Depreciation on lease vehicles
3,363
3,771
Capitalised net interest income
(29,417)
(26,373)
Impaired asset expense
7
20,676
22,067
Investment property fair value movement
(1,936)
-
Total non-cash items
(1,554)
4,103
Add / (less) movements in operating assets and liabilities:
Finance receivables
(384,367)
(431,863)
Operating lease vehicles
(1,354)
(2,257)
Other assets
(8,260)
(635)
Current tax
(3,927)
1,603
Derivative financial instruments
(8,701)
(1,638)
Deferred tax
3,759
2,533
Deposits
271,876
307,733
Other liabilities
8,999
1,729
Total movements in operating assets and liabilities
(121,975)
(122,795)
Net cash flows applied to operating activities
(49,912)
(51,179)
The notes on pages 12 to 53 are an integral part of this consolidated financial statement.
Heartland Group Holdings Limited Consolidated Financial Statements 12
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 30 June 2019
1 Financial statements preparation
Reporting entity
The financial statements presented are the consolidated financial statements comprising Heartland Group Holdings Limited (HGH)
and its subsidiaries (the Group). Refer note 25 – Significant subsidiaries for further details.
On 31 October 2018 HGH acquired Heartland Bank Limited (HBL) pursuant to a corporate restructure approved by the shareholders
of HBL. Under this restructure all the shares of HBL were exchanged for shares in HGH. At the same time, the Australian group of
companies owned by HBL were transferred to HGH. HGH was incorporated solely for the purpose of undertaking this transaction.
HGH is a Financial Markets Conduct (FMC) reporting entity for the purposes of the Financial Markets Conduct Act 2013.
As common control remained after the restructure, the financial statements presented for the year ended 30 June 2019 are for the
Group as if it had operated for the entire period. Comparative figures shown are for the consolidated HBL Group.
As at 30 June 2019, the Group is a company incorporated in New Zealand under the Companies Act 1993.
Basis of preparation
The financial statements have been prepared in accordance with Generally Accepted Accounting Practice in New Zealand (NZ GAAP)
and the NZX Main Board Listing Rules and the ASX Listing Rules. The financial statements 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 Group’s currency. Unless otherwise indicated, amounts
are rounded to the nearest thousand.
The financial statements have been prepared on the basis of historical cost, except for certain financial instruments and investment
property, 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.
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.
Principles of consolidation
The consolidated financial statements of the Group incorporate the assets, liabilities and results of all controlled entities. Controlled
entities are all entities in which the Group 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.
Assets and liabilities with transactional currency that 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 Consolidated Statement of Comprehensive Income.
Changes in accounting policy
The Group adopted NZ IFRS 9 - Financial instruments (NZ IFRS 9) and NZ IFRS 15 - Revenue from contracts with customers (NZ IFRS
15) from 1 July 2018. There have been no changes in previously reported financials.
NZ IFRS 9 Financial instruments
In accordance with the transition provisions of NZ IFRS 9 the classification and measurement requirements of this standard have
been applied retrospectively by adjusting affected opening balances at the date of initial application with no restatement of
comparative periods.
The following changes have been made to accounting policies as result of the application of NZ IFRS 9.
Heartland Group Holdings Limited Consolidated Financial Statements 13
1 Financial Statements preparation (continued)
Impairment of finance receivables
At each reporting date, the Group applies a three stage approach to measuring expected credit losses (ECL) to Finance receivables
not carried at fair value. The ECL model assesses whether there has been a significant increase in credit risk since initial recognition
The ECL model is a forward looking model where impairment allowances are recognised before losses are actually incurred. On
initial recognition, an impairment allowance is made, based on events that are possible in the next 12 months.
After initial recognition, the Group applies a three stage test to measuring ECL's. Assets may migrate through the following stages
based on their change in credit quality.
Stage 1 - 12 months ECL (past due 30 days or less)
Where there has been no evidence of increased credit risk since initial recognition, and are not credit impaired upon
origination, the portion of the lifetime ECL associated with the probability of default events occurring within the next 12
months is recognised.
Stage 2 - Lifetime ECL not credit impaired (greater than 30 but less than 90 days past due)
Where there has been a significant increase in credit risk.
Stage 3 - Lifetime ECL credit impaired (90 days past due or more)
Objective evidence of impairment, so are considered to be in default or otherwise credit impaired.
In determining whether credit risk has increased all available information relevant to the assessment of economic conditions at the
reporting date are taken into consideration. To do this the Group considers its historical loss experience and adjusts this for current
observable data. In addition to this the Group uses reasonable and supportable forecasts of future economic conditions including
experienced judgement to estimate the amount of an expected impairment loss. Future economic conditions consider
macroeconomic factors such as unemployment, interest rate, gross domestic product, and inflation, and requires an evaluation of
both the current and forecast direction of the economic cycle. The methodology and assumptions including any forecasts of future
economic conditions are reviewed regularly as incorporating forward-looking information increases the level of judgement as to how
changes in these macroeconomic factors will affect the ECL.
The calculation of expected credit loss is modelled for portfolios of like assets. For portfolios which are either new or too small to
model, judgement is used to determine impairment provisions.
Impairment of investments
The requirements of NZ IFRS 9 also apply to the Groups Investments. The impact of which has been assessed as not material.
The table below shows the changes to classification and measurement of the Group’s financial assets due to the adoption of NZ IFRS
9. There are no changes in the classification or measurement category of the Group’s financial liabilities.
Financial Instruments NZ IAS 39
Measurement
category
NZ IFRS 9
Measurement
category
NZ IAS 39
Carrying value
June 2018
NZ IFRS 9
Carrying value
1 July 2018
Financial assets
Bank bonds and floating
rate notes
Available for sale
(AFS)
Fair value through
other comprehensive
income (FVOCI)
230,754 230,754
Public sector securities and
Corporate bonds
AFS FVOCI 57,818 57,818
Local authority stock AFS FVOCI 42,280 42,280
Equity investments Fair value through
profit or loss (FVTPL)
FVOCI 9,694 9,694
Finance receivables -
reverse mortgages
Amortised cost FVTPL 1,129,956 1,132,838
Finance receivables Amortised cost Amortised cost 2,854,985 2,824,819
Trade receivables Amortised cost Amortised cost 1,613 1,613
Heartland Group Holdings Limited Consolidated Financial Statements 14
1 Financial Statements preparation (continued)
The table below is a reconciliation of the balance sheet detailing the changes from NZ IAS 39 to NZ IFRS 9.
AuditedImpact of Restated
12 months to
NZ IFRS 9
1 July 2018
$000's
June 2018Restatement
Assets
Cash and cash equivalents
49,588- 49,588
Investments
340,546- 340,546
Investment properties
9,196- 9,196
Derivative financial instruments
923- 923
Finance receivables
3,984,941(27,284)3,957,657
Operating lease vehicles
17,524- 17,524
Other assets
14,411- 14,411
Intangible assets
74,401- 74,401
Deferred tax asset
5,3198,00113,320
Total assets4,496,849(19,283)4,477,566
Liabilities
Retail deposits
2,881,805- 2,881,805
Other borrowings
914,253- 914,253
Tax liabilities
11,459- 11,459
Derivative financial instruments
2,5622,562
Trade and other payables
22,610- 22,610
Total liabilities
3,832,689- 3,832,689
Equity
Share capital
542,315- 542,315
Retained earnings and reserves
121,845(19,283)102,562
Total equity
664,160(19,283)644,877
Total equity and liabilities4,496,849- 4,477,566
Impact of NZ IFRS 9 adjustment on adoption
Additional provision for impairment recognised at 1 July 2018 on:
- Finance receivables
28,085
- Finance receivables - reverse mortgages
(2,824)
Provision for impairment at 1 July 2018
25,261
Change in valuation basis - reverse mortgages
2,023
Income tax expense
(8,001)
Net impact on retained earnings
19,283
NZ IFRS 15 Revenue from contracts with customers
The Group adopted NZ IFRS 15 on 1 July 2018. This standard provides a principles based approach for revenue recognition and
introduces the concept of recognising revenue for performance obligations as they are satisfied.
The Group has adopted this standard retrospectively with the cumulative effect of initial application recognised as an adjustment to
opening balances and has applied all practical expedients applicable. There have been no changes to previously reported financials.
Heartland Group Holdings Limited Consolidated Financial Statements 15
1 Financial Statements preparation (continued)
Accounting standards issued but not yet effective
Standard and description
Effective for annual
years beginning on
or after
Expected to be
initially applied in
year ending
NZ IFRS 16 Leases: contains guidance on identification, recognition,
measurement, presentation and disclosure of leases by lessees and
lessors.
1 January 2019 30 June 2020
NZ IFRS 9 Financial instruments: contains relaxed requirements for hedge
effectiveness, and expanded disclosures.
1 January 2019 To be confirmed
NZ IFRS 17 Insurance contracts: establishes principles for the recognition,
measurement, presentation and disclosure of insurance contracts.
1 January 2021 30 June 2022
NZ IFRS 16 Leases
NZ IFRS 16 Leases replaces NZ IAS 17 Leases and will be adopted by the Group from 1 July 2019. NZ IFRS 16 requires that a right of
use asset and lease liability is recognised at lease commencement date. The value of the lease liability is the present value of all
future payments arising from a lease contract. The right of use asset will be depreciated over the life of the lease. This could affect
the timing on expenses of leased assets. This change will primarily affect leases relating to properties and car leases. Currently the
Group accounts for these as operating leases.
The Group intends to apply the simplified transition approach and will not restate comparative amounts for the year prior to first
adoption. All practical expedients available to the Group around short term leases, and low value leases will be applied. Right-of-use
assets will be measured on transition as if the new rules had always been applied, using the transition discount rate. The cumulative
effect of adopting NZ IFRS 16 is estimated at $2 million and will be recognised as an adjustment to the opening balance of retained
earnings at 1 July 2019, with no restatement of comparative information.
NZ IFRS 9 Financial instruments
NZ IFRS 9 introduces new hedge accounting requirements which more closely align accounting with risk management activities
undertaken when hedging financial and non-financial risks. NZ IFRS 9 provides the Group with an accounting policy choice to
continue to apply the NZ IAS 39 hedge accounting requirements until the International Accounting Standards Board’s ongoing project
on macro hedge accounting is completed. The Group’s current expectation is that it will continue to apply the hedge accounting
requirements of NZ IAS 39.
Heartland Group Holdings Limited Consolidated Financial Statements 16
1 Financial Statements preparation (continued)
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 involve 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
13 - Finance receivables for further details.
Fair value of reverse mortgages – Fair value is quantified by the transaction price and management’s subsequent best estimate
of the risk profile of the reverse mortgage portfolio. Refer to Note 20 – Fair value 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 17 - Other balance sheet items.
Assumptions made at each reporting date (e.g: the calculation of the provision for impairment and fair value adjustments) are based
on best estimates as at that date. Although the Group has internal controls in place to ensure that estimates can be reliably
measured, actual amounts may differ from these estimates. The estimates and judgements used in the preparation of the Group’s
financial statement 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. Revisions to accounting estimates are recognised in the reporting
period in which the estimates are revised and in any future periods affected.
Financial assets and liabilities
The Group initially recognises finance receivables and borrowings 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, cancelled or expire.
The Group enters into transactions whereby it transfers assets recognised on its Statement of Financial Position, but retains either all
risks or 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.
Offsetting financial instruments
The Group offsets financial assets and financial liabilities and reports the net balance in the balance sheet where there is currently a
legally enforceable right to set off and there is an intention to settle on a net basis or to realise the asset and settle the liability
simultaneously.
Heartland Group Holdings Limited Consolidated Financial Statements 17
PERFORMANCE
2 Segment reporting
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.
Operating segments
The Group operates predominantly within New Zealand and Australia and comprises the following main operating segments:
Motor Providing motor vehicle finance.
Reverse Mortgages Providing reverse mortgage lending within NZ.
Other Personal Providing a comprehensive range of financial services – including term, transactional and savings
based deposit accounts and personal loans.
Business Providing term debt, plant and equipment finance, commercial mortgage lending and working
capital solutions for small-to-medium businesses.
Rural 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.
Australia Providing reverse mortgage lending and other financial services within Australia.
Certain operating expenses, such as premises, IT and support centre costs are not allocated to operating segments and are included
in Other.
Internal structures have changed during the current year. Previously reported Household segment has been disaggregated to show
Motor, Reverse Mortgages and Other Personal. Prior year numbers have been restated accordingly.
Heartland Group Holdings Limited Consolidated Financial Statements 18
2 Segment reporting (continued)
$000's
Motor
Reverse
Mortgages
Other
Personal
Business
Rural
Australia
Other
Total
June 2019
Net interest income
54,753
20,673
16,345
54,334
30,865
21,148
(535)
197,583
Net other income
2,313
224
2,563
1,524
816
1,582
(763)
8,259
Net operating income
57,066
20,897
18,908
55,858
31,681
22,730
(1,298)
205,842
Operating expenses
2,543
2,279
5,602
9,163
3,263
5,115
57,624
85,589
Profit/(loss) before impaired asset
expense and income tax
54,523
18,618
13,306
46,695
28,418
17,615
(58,922)
120,253
Fair value movement on investment
property
1,936
1,936
Impaired asset expense
5,009
268
8,429
7,102
(132)
-
-
20,676
Profit/(loss) before income tax
49,514
18,350
4,877
41,529
28,550
17,615
(58,922)
101,513
Income tax expense
-
-
-
-
-
5,016
22,880
27,896
Profit/(loss) for the year
49,514
18,350
4,877
41,529
28,550
12,599
(81,802)
73,617
Total assets
1,074,446
561,211
215,253
1,096,253
643,278
758,268
577,695
4,926,404
Total liabilities
-
-
-
-
-
740,111
3,510,625
4,250,736
$000'sMotor
Reverse
Mortgages
Other
Personal
Business RuralAustraliaOtherTotal
June 2018 (restated)
Net interest income 50,32818,18912,42151,18932,12220,215(663)183,801
Net other income2,5152622,3921,1241633106,22712,993
Net operating income52,84318,45114,81352,31332,28520,5255,564196,794
Operating expenses2,9141,6706,5528,1304,3514,14252,67480,433
Profit/(loss) before impaired asset
expense and income tax
49,92916,7818,26144,18327,93416,383(47,110)116,361
Impaired asset expense7,779(362)5,7416,2752,400234- 22,067
Profit/(loss) before income tax42,15017,1432,52037,90825,53416,149(47,110)94,294
Income tax expense- - - - - - 26,78126,781
Profit/(loss) for the year42,15017,1432,52037,90825,53416,149(73,891)67,513
Total assets
955,088453,119178,3091,048,239654,935695,251511,9084,496,849
Total liabilities- - - - - - 3,832,6893,832,689
Heartland Group Holdings Limited Consolidated Financial Statements 19
3 Net interest income
Policy
Interest income and expense is recognised in 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 profit or loss at the same time as the hedged item or when the hedge relationship is subsequently
deemed to be ineffective, should this occur.
$000's
June 2019
June 2018
Interest income
Cash and cash equivalents
717
842
Investments
10,864
9,515
Finance receivables
242,556
231,848
Finance receivables - reverse mortgages
80,193
67,079
Total interest income
334,330
309,284
Interest expense
Retail deposits
97,119
90,880
Other borrowings
36,382
31,976
Net interest expense on derivative financial instruments
3,246
2,627
Total interest expense
136,747
125,483
Net interest income
197,583
183,801
4 Net operating lease income
Policy
Leases’ where the Group retains substantially all the risks and rewards of ownership of an asset are classified as operating leases.
Rental income and expense 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 assets are included as part of
operating lease income. Current year depreciation and losses on the sale of operating lease assets are included as part of
operating lease expenses. The leased assets are depreciated over their useful lives on a basis consistent with similar assets.
$000'sJune 2019June 2018
Operating lease income
Lease income4,7615,004
Gain on disposal of lease assets501671
Total operating lease income5,2625,675
Operating lease expense
Depreciation on lease assets3,3633,771
Direct lease costs64234
Total operating lease expenses3,4274,005
Net operating lease income1,8351,670
Heartland Group Holdings Limited Consolidated Financial Statements 20
5 Other income
Policy
Investment property
Rental income from investment properties is recognised on a straight-line basis over the term of the relevant lease.
Other income
Other items of income are recognised at the fair value of the consideration received or receivable.
$000'sJune 2019June 2018
Rental income from investment properties662739
Insurance income2,4362,238
Gain on sale of investments173156
Other income
1
365,839
Total other income3,3078,972
1
In June 2018 Other income includes
A $0.6 million gain on the sale of the HBL’s invoice finance business.
A $4.8 million gain in relation to the sale of property pertaining to a loan previously written off for which the bank had entered into a profit share
arrangement with third parties.
6 Operating expenses
Policy
Operating expenses are recognised as the underlying service is rendered or over a period in which an asset is consumed or once
a liability is incurred.
$000'sJune 2019June 2018
Personnel expenses46,34645,539
Directors' fees1,099972
Superannuation1,081921
Audit and review of financial statements
1
614433
Other assurance services paid to auditor
2
5236
Other fees paid to auditor
3
- 171
Depreciation - property, plant and equipment1,8671,386
Amortisation - intangible assets3,8933,252
Operating lease expense as a lessee1,8072,033
Legal and professional fees3,1302,267
Other operating expenses 25,70023,423
Total operating expenses85,58980,433
1
Audit and review of financial statement includes fees paid for both audit of financial statement and review of interim financial statement.
2
Other assurance services paid to the auditor comprise review of regulatory returns, trust deed reporting, registry audits and other agreed upon procedures
engagements.
3
Other fees paid to the auditor include professional fees in connection with regulatory advisory services and health and safety framework review.
Heartland Group Holdings Limited Consolidated Financial Statements 21
7 Impaired asset expense
Policy
Impairment of finance receivables
At each reporting date, the Group applies a three stage approach to measuring expected credit losses (ECL) to Finance receivables
not carried at fair value. The ECL model assesses whether there has been a significant increase in credit risk since initial
recognition.
The ECL model is a forward looking model where impairment allowances are recognised before losses are actually incurred. On
initial recognition, an impairment allowance is made, based on events that are possible in the next 12 months.
After initial recognition, the Group applies a three stage test to measuring ECL's. Assets may migrate through the following stages
based on their change in credit quality.
Stage 1 - 12 months ECL (past due 30 days or less)
Where there has been no evidence of increased credit risk since initial recognition, and are not credit impaired upon origination,
the portion of the lifetime ECL associated with the probability of default events occurring within the next 12 months is recognised.
Stage 2 - Lifetime ECL not credit impaired (greater than 30 but less than 90 days past due)
Where there has been a significant increase in credit risk.
Stage 3 - Lifetime ECL credit impaired (90 days past due or more)
Objective evidence of impairment, so are considered to be in default or otherwise credit impaired.
In determining whether credit risk has increased all available information relevant to the assessment of economic conditions at
the reporting date are taken into consideration. To do this the Group considers its historical loss experience and adjusts this for
current observable data. In addition to this the Group uses reasonable and supportable forecasts of future economic conditions
including experienced judgement to estimate the amount of an expected impairment loss. Future economic conditions consider
macroeconomic factors such as unemployment, interest rate, gross domestic product, and inflation, and requires an evaluation of
both the current and forecast direction of the economic cycle. The methodology and assumptions including any forecasts of
future economic conditions are reviewed regularly as incorporating forward-looking information increases the level of judgement
as to how changes in these macroeconomic factors will affect the ECL.
The calculation of expected credit loss is modelled for portfolios of like assets. For portfolios which are either new or too small to
model, judgement is used to determine impairment provisions.
$000'sJune 2019June 2018
Non-securitised
Individually impaired expense1,3115,190
Collectively impaired expense19,02416,889
Total non-securitised impaired asset expense20,33522,079
Securitised
Collectively impaired expense341(12)
Total securitised impaired asset expense341(12)
Total
Individually impaired expense1,3115,190
Collectively impaired expense19,36516,877
Total impaired asset expense
20,67622,067
Heartland Group Holdings Limited Consolidated Financial Statements 22
8 Taxation
Policy
Income tax
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 it relates to items recognised directly in other comprehensive income, in which
case it is recognised in equity or other comprehensive income.
Current tax
Current tax is the expected tax receivable or payable on the taxable income for the year, using the tax rate 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 is unpaid (or refundable).
Deferred tax
Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying
amounts of assets and liabilities for accounting purposes and the amounts used for taxation purposes. As required by NZ IAS 12
Income Taxes, a deferred tax asset is recognised only to the extent that it is probable that a future taxable profit will be available.
Goods and services tax (GST)
Revenues, expenses and assets are recognised net of the amount of GST. As the Group is predominantly involved in providing
financial services, only a proportion of GST paid on inputs is recoverable. The non-recoverable proportion of GST is treated as
part of the cost of assets at the time of acquisition or is expensed.
Income tax expense
$000'sJune 2019June 2018
Income tax recognised in profit and loss
Current tax
Current year
25,181
24,861
Adjustments for prior year
(1,989)
(332)
Tax other rates
277
-
Deferred tax
Current year
3,306
1,898
Tax other rates
54
-
Adjustments for prior year
1,067
354
Total income tax expense recognised
27,896 26,781
Income tax recognised in other comprehensive income
Current tax
Derivatives at fair value reserve
(82)
(261)
Deferred tax
Defined benefit plan
(34)
(132)
Fair value movements of cash flow hedges
(238)
(149)
Total income tax expense recognised in other comprehensive income
(354)(542)
Reconciliation of effective tax rate
Profit before income tax
101,513
94,294
Prima facie tax @ 28%
28,424
26,402
Higher tax rate for overseas jurisdiction
331
299
Plus tax effect of items not taxable/deductible
63
58
Adjustments for prior year
(922)
22
Total income tax expense
27,896 26,781
Heartland Group Holdings Limited Consolidated Financial Statements 23
8 Taxation (continued)
Deferred tax assets comprise the following temporary differences:
$000's
June 2019
June 2018
Employee expenses
1,286
1,240
Provision for impairment
14,574
8,427
Investment properties
4
546
Intangibles and property, plant and equipment
(4,182)
(2,100)
Deferred acquisition costs
(1,321)
(1,476)
Operating lease vehicles
(800)
(850)
Other temporary differences
(30)
(468)
Total deferred tax assets
9,531
5,319
Opening balance of deferred tax assets
5,319
7,852
Movement recognised in profit or loss
(4,537)
(2,252)
Movement recognised in other comprehensive income
(272)
(281)
Foreign exchange and other
777
-
Movement recognised in retained earnings
8,244
-
Closing balance of deferred tax assets
9,531
5,319
Imputation credit account
$000's
June 19
June 18
Imputation credit account
9,116
6,717
9 Earnings per share
Earnings per
share cents
Net profit after
tax $000's
Weighted
average no. of
shares
000's
Earnings per
share cents
Net profit after
tax $000's
Weighted
average no. of
shares
000's
Basic earnings13 73,617 563,364 1367,513 538,594
Diluted earnings13 73,617 563,364 1367,513 538,594
June 2019June 2018
Heartland Group Holdings Limited Consolidated Financial Statements 24
FINANCIAL POSITION
10 Investments
Policy
The Group holds investments in bank deposits, bank bonds and floating rate notes, local authority stock, public securities,
corporate bonds and equity investments. The fair values are derived by reference to published price quotations in an active
market or modelled using observable market rates. Investments are classified as being fair value through other comprehensive
income.
$000's
June 2019
June 2018
Bank deposits, bank bonds and floating rate notes
246,724
230,754
Public sector securities and corporate bonds
82,370
57,818
Local authority stock
13,399
42,280
Equity investments
12,435
9,694
Total investments
354,928
340,546
11 Investment properties
Policy
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 last valuation.
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).
$000'sJune 2019June 2018
Opening balance
9,1964,909
Acquisition
- 7,472
Fair value movement
1,936-
Disposals
- (3,185)
Closing balance
11,1329,196
A $1.9 million increase in the fair value of non-core legacy property assets has been recognised, reflecting Management’s view on
the current market value of this portfolio.
Heartland Group Holdings Limited Consolidated Financial Statements 25
12 Derivative financial instruments
Policy
Derivative financial instruments are contracts whose value is derived from changes in one or more underlying financial
instruments or indices. They include forward contracts, swaps, options and combinations of these instruments.
Derivatives are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently
measured at their fair value. All derivatives are carried as assets when fair value is positive and as liabilities when fair value is
negative.
Fair values are obtained from quoted market prices in active markets, including recent market transactions, and valuation
techniques, including discounted cash flow models and options pricing models, as appropriate. Fair values include adjustment for
counterparty credit risk. The method of recognising the resulting fair value gain or loss depends on whether the derivative is
designated as a hedging instrument, and if so, the nature of the item being hedged. A hedge instrument is a designated
derivative, the changes in fair values or cash flows of which are expected to offset changes in the fair value of cash flows of a
designated hedged item.
A hedged item is an asset, liability, firm commitment or highly probable forecast transaction that exposes the Group to risk of
changes in fair value or cash flows, and that is designated as being hedged. The Group applies fair value hedge accounting to
hedge movements in the value of fixed interest rate assets and liabilities subject to interest rate risk. The Group applies cash flow
hedge accounting to hedge the variability in highly probable forecast future cash flows attributable to interest rate risk on variable
rate assets and liabilities.
Fair value hedge accounting
The criteria that must be met for a relationship to qualify for hedge accounting include:
the hedging relationship must be formally designated and documented at inception of the hedge,
effectiveness testing must be carried out to ensure the hedge is effective, consistent with the originally documented risk
management strategy, and
the instruments must involve a party external to the Group.
The Group documents, at the inception of the transaction, the relationship between hedged items and hedging instruments, as
well as its risk management objective and strategy for undertaking various hedge transactions. The Group also documents its
assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions
are highly effective on offsetting changes in fair value of hedged items.
Subsequent to initial designation, changes in the fair value of derivatives that are designated and qualify for fair value hedge
accounting are recorded in the Consolidated Statement of Comprehensive Income together with any changes in the fair value of
the hedged asset or liability that are attributable to the hedged risk. The movement in fair value of the hedged item attributable
to the hedged risk is made as an adjustment to the carrying value of the hedged asset or liability.
When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, the adjustment
to carrying amount of a hedged item is amortised to the Consolidated Statement of Comprehensive Income on an effective yield
basis over the remaining period to maturity of the hedged item. Where the hedged item is derecognised from the balance sheet,
the adjustment to the carrying amount of the asset or liability is immediately transferred to the Consolidated Statement of
Comprehensive Income.
Cash flow hedge accounting
The criteria that must be met for a relationship to qualify for hedge accounting include:
the hedging relationship must be formally designated and documented at inception of the hedge,
effectiveness testing must be carried out to ensure the hedge is effective, consistent with the originally documented risk
management strategy, and
the instruments must involve a party external to the Group.
The Group documents, at the inception of the transaction, the relationship between hedged items and hedging instruments, as
well as its risk management objective and strategy for undertaking various hedge transactions. The Group also documents its
assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions
are highly effective on offsetting changes in cash flows of hedged items.
A fair value gain or loss associated with the effective portion of a derivative designated as a cash flow hedge is recognised initially
in the hedging reserve. The ineffective portion of a fair value gain or loss is recognised immediately in the Consolidated Statement
of Comprehensive Income.
Heartland Group Holdings Limited Consolidated Financial Statements 26
12 Derivative financial instruments (continued)
When a hedging derivative expires or is sold, the hedge no longer meets the criteria for hedge accounting, or the Group elects to
revoke the hedge designation, the cumulative gain or loss on the hedging derivative remains in the cash flow hedging reserve
until the forecast transaction occurs and affects income, at which point it is transferred to the corresponding income or expense
line. If a forecast transaction is no longer expected to occur, the cumulative gain or loss on the hedging derivative previously
reported in the cash flow hedging reserve is immediately transferred to the Consolidated Statement of Comprehensive Income.
$000's
Notional
principal
Fair value
assets
Fair value
liabilities
Notional
principal
Fair value
assets
Fair value
liabilities
Held for risk management
Interest rate related contracts
Swaps1,958,083 11,232 10,230 744,822 923 2,562
Foreign currency related contracts
Forwards222,769 315 142 - - -
Options177,255 1,128 - - - -
Total derivative financial instruments2,358,107 12,675 10,372 744,822 923 2,562
June 2019June 2018
13 Finance receivables
(a) Finance receivables held at amortised cost
Policy
Finance receivables are initially recognised at fair value plus incremental direct transaction costs and are subsequently measured
at amortised cost using the effective interest method, less any impairment loss. .
Fees and direct costs relating to loan origination, financing and loan commitments are deferred and amortised to interest income
over the life of the loan using the effective interest method. Lending fees not directly related to the origination of a loan are
recognised over the period of service.
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.
In determining whether credit risk has increased all available information relevant to the assessment including information about
past events, current conditions and reasonable and supportable forecasts of economic conditions at the reporting date are taken
into consideration.
The calculation of expected credit loss is modelled for portfolios of like assets. For portfolios which are either new or too small to
model, judgement is used to determine impairment provisions.
Heartland Group Holdings Limited Consolidated Financial Statements 27
13 Finance receivables (continued)
$000's
June 2019
June 2018
Non-securitised
Neither at least 90 days past due nor impaired - at amortised cost
3,016,844
3,863,764
At least 90 days past due- at amortised cost
44,466
27,893
Individually impaired - at amortised cost
26,412
45,186
Gross finance receivables
3,087,722
3,936,843
Less provision for impairment
(58,491)
(29,367)
-
(2,824)
Total non-securitised finance receivables
3,029,231
3,904,652
Securitised
Neither at least 90 days past due nor impaired - at amortised cost
-
79,809
At least 90 days past due- at amortised cost
-
784
Individually impaired - at amortised cost
-
-
Gross finance receivables
-
80,593
Less provision for impairment
-
(304)
Total securitised finance receivables
-
80,289
Total
Neither at least 90 days past due nor impaired - at amortised cost
3,016,844
3,943,573
At least 90 days past due - at amortised cost
44,466
28,677
Individually impaired - at amortised cost
26,412
45,186
Gross finance receivables
3,087,722
4,017,436
Less provision for impairment
(58,491)
(29,671)
-
(2,824)
Total finance receivables
3,029,231
3,984,941
Less fair value adjustment for present value of future losses over expected life
Less fair value adjustment for present value of future losses over expected life
Heartland Group Holdings Limited Consolidated Financial Statements 28
13 Finance receivables (continued)
$000's
12 month ECL
Lifetime ECL
Not credit
impaired
Lifetime ECL
Credit
impaired
Collective
provision June
2018
Specific
provisionTotal
Non-securitised
Impairment allowance as at 30 June 2018
- - - 20,3019,06629,367
Restated for adoption of NZ IFRS 9
31,7841,36514,945(20,301)(169)27,624
Restated impairment allowance as at 1 July 201831,7841,36514,945- 8,89756,991
Changes in loss allowance
Transfer to 12 month
1,144(1,071)(73)- - -
Transfer to lifetime not credit impaired
(2,134)2,268(134)- - -
Transfer to lifetime credit impaired
(29)(1,399)1,428- - -
Transfer to specific provision
(1,443)(36)(1,169)- 2,648-
Effect of changes in foreign exchange rate
(52)(3)(1)- - (56)
Impaired asset expense
91160717,505- 1,31120,334
Write offs
- - (15,720)- (4,993)(20,713)
Transfer to/from securitised
24049817- - 1,106
Recovery of amounts written off
- - 829- - 829
Closing impairment allowance
30,421 1,780 18,427
-
7,863 58,491
Securitised
Impairment allowance as at 30 June 2018
- - - 304- 304
Restated for adoption of NZ IFRS 9
40020345(304)- 461
Restated impairment allowance as at 1 July 201840020345- - 765
Changes in loss allowance
Transfer to 12 month
35(34)(1)- - -
Transfer to lifetime not credit impaired
(42)44(2)- - -
Transfer to lifetime credit impaired
(1)(17)18- - -
Transfer to specific provision
- - - - - -
Effect of changes in foreign exchange rate
- - - - - -
Impaired asset expense
(152)36457- - 341
Write offs
- - - - - -
Transfer to/from non-securitised
(240)(49)(817)- - (1,106)
Recovery of amounts written off
- - - - -
-
Closing impairment allowance
- - -
- -
-
Total
Impairment allowance as at 30 June 2018
- - - 20,6059,06629,671
Restated for adoption of NZ IFRS 9
32,1841,38515,290(20,605)(169)28,085
Restated impairment allowance as at 1 July 201832,1841,38515,290- 8,89757,756
Changes in loss allowance
Transfer to 12 month
1,179(1,105)(74)- - -
Transfer to lifetime not credit impaired
(2,176)2,312(136)- - -
Transfer to lifetime credit impaired
(30)(1,416)1,446- - -
Transfer to specific provision
(1,443)(36)(1,169)- 2,648-
Effect of changes in foreign exchange rate
(52)(3)(1)- - (56)
Impaired asset expense
75964317,962- 1,31120,675
Write offs
- - (15,720)- (4,993)(20,713)
Transfers
- - - - - -
Recovery of amounts written off
- - 829- - 829
Closing impairment allowance
30,421 1,780 18,427
-
7,863 58,491
Heartland Group Holdings Limited Consolidated Financial Statements 29
13 Finance receivables (continued)
Summary of impairment allowance
Non-securitisedTotal
$000'sJune 2019June 2019
Collective allowance measured on a 12 month ECL
30,42130,421
Collective allowance not credit impaired
1,7801,780
Collective allowance credit impaired
18,42718,427
Specific allowance
7,8637,863
Total impairment allowance
58,49158,491
Impact of changes in gross carrying amounts of ECL
The following provides an explanation of how significant change in the gross carrying value of the finance receivables have
contributed to the changes in the provision for impairment. The provision for impairment reflects ECL measured using the 3 stage
approach under NZ IFRS 9 (refer Note 1 Financial statement preparation).
Overall the net increase in the total provision for impairment was $0.7 million which was primarily driven by an increase in stage 2
and 3 collective provisions offset by a reduction in stage 1 provisions and specific provisions.
Collective 12 month ECL provisions (stage 1) decreased $1.8m. Net growth in receivables of $339 million added $3.0m to stage 1
provisions. This was offset by a reduction in provisions of $2.1m as a result of changes to expected loss rates in the Motor book
following changes to and investment in collection processes. Stage 1 provisions were further reduced on $289m loans moving from
stage 2 to stage 3 or specifically provided, offset by $134m of loans moving from stage 2 and 3 or specifically provided.
Collective lifetime not credit impaired provisions (stage 2) increased $0.4m. $282 million of receivables transferred to stage 2 due to
deterioration in credit quality and $8m transferred from stage 3 due to improvement in asset quality. These were offset by $209m
which was repaid or transferred to stage 1 due to improvement in credit quality and $90m transferred to stage 3 or specifically
provided due to deterioration in credit quality.
Collective lifetime credit impaired provisions (stage 3) increased $3.1m driven primarily by a net increase in receivables of $17
million. This was due to a net increase transferred to stage 3 of $57m offset by $40m of loans that were repaid or written off in the
period.
The reduction in specific provisions of $1.0 million was primarily the result of provisions on $24m of loans transferred from
collectively provided off set by the release of provisions on $14m of loans that were repaid or written off in the period.
(b) Finance receivables held at fair value
Policy
Finance receivables – reverse mortgages are initially recognised, and subsequently measured, at fair value through profit or loss
Advances relating to reverse equity mortgages are recognised in the financial statements at fair value through profit or loss,
therefore carrying amount equals fair value. Note 20 (a) Fair Value of the financial statements discloses further information
regarding the Group’s valuation policy
Note 22 Credit Risk Exposure of the financial statements discloses further information regarding how reverse mortgages operate
Heartland Group Holdings Limited Consolidated Financial Statements 30
13 Finance receivables (continued)
$000'sJune 2019June 2018
Finance receivables - reverse mortgages
1,318,819-
Total Finance receivables - reverse mortgages at fair value
1,318,819-
Credit risk adjustments on financial assets designated at fair value through Profit or loss
There were no credit risk adjustments on individual financial assets.
Credit risk adjustments on financial assets designated at fair value through Profit or loss are presented in the following table.
Non-securitised
Total
$000's
June 2019
June 2019
Opening balance as at 30 June 2018
2,824
2,824
Restated for adoption of NZ IFRS 9
(2,824)
(2,824)
Restated opening balance as at 1 July 2018
-
-
Closing balance as at 30 June 2019
-
-
14 Operating lease vehicles
Policy
Operating lease vehicles are stated at cost less accumulated depreciation.
Operating lease vehicles are depreciated on a straight line basis over their expected life after allowing for any residual values. The
estimated lives of these vehicles vary up to five years. Vehicles held for sale are not depreciated but are tested for impairment.
$000's
June 2019
June 2018
Cost
Opening balance
24,703
28,137
Acquisitions
5,495
7,163
Disposals
(8,575)
(10,597)
Closing balance
21,623
24,703
Accumulated depreciation
Opening balance
7,179
9,099
Depreciation charge
3,363
3,771
Disposals
(4,435)
(5,691)
Closing balance
6,107
7,179
Opening NBV
17,524
19,038
Closing NBV
15,516
17,524
The future minimum lease payments receivable under non-cancellable operating leases not later than one year is $3.952 million
(2018: $4.380 million), within one to five years is $3.137 million (2018: $3.897 million) and over five years is nil (2018: nil).
Heartland Group Holdings Limited Consolidated Financial Statements 31
15 Borrowings
Policy
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.
$000's
June 2019
June 2018
Deposits
3,153,681
2,881,805
Total borrowings relating to deposits
3,153,681
2,881,805
Subordinated bonds
-
3,378
Subordinated notes
-
22,172
Unsubordinated notes
337,680
151,853
Bank borrowings
25,002
35,004
Certificate of deposit
34,836
39,832
Securitised borrowing
659,135
662,014
Total borrowings other
1,056,653
914,253
Deposits and unsubordinated notes rank equally and are unsecured.
The subordinated notes (settled early on 31 October 2018) and subordinated bonds ranked below all other general liabilities of the
Group.
The Group from time to time issues unsubordinated notes. At 30 June 2019 the Group had the following unsubordinated notes
outstanding:
Issuer HBL
$125 million five year unsubordinated notes issued 12 April 2019, interest payable six monthly, maturing 12 April
2024.
$150 million five year unsubordinated notes issued 21 September 2017, interest payable six monthly, maturing 21
September 2022.
Issuer Heartland Australia Group Pty Limited
AU $50 million two year unsubordinated notes issued 8 March 2019, interest payable quarterly, maturing 8 March
2021.
The Group from time to time securitises loans. At 30 June 2019 the Group had the following securitised borrowings outstanding:
Heartland Auto Receivables Warehouse Trust 2018 - 1 securitisation facility $150 million, undrawn. Securitised
borrowings held by investors are secured over the securitised assets of the Heartland Auto Receivables Warehouse
Trust 2018-1.
Heartland ABCP Trust 1 (ABCP Trust) securitisation facility nil (2018: $100 million, drawn $47 million). Heartland ABCP
Trust 1 was dissolved 29 August 2018.
Senior Warehouse Trust securitisation facility AU $650 million (2018: AU $600 million). Drawn AU $631 million (2018:
AU $562 million). The bank facility is secured over the assets of Australian Seniors Finance Pty Limited (ASF) group
(comprising ASF, the ASF Settlement Trust and the Seniors Warehouse Trust). The bank facility has a maturity date of
30 September 2022.
HGH has a $50 million undrawn bank facility at 30 June 2019 (2018: nil).
Heartland Group Holdings Limited Consolidated Financial Statements 32
16 Share capital and dividends
Policy
Ordinary shares are classified as equity, incremental costs directly attributable to the issue of ordinary shares and share options
are recognised as a deduction from equity, net of any tax effect.
Number of sharesNumber of shares
000'sJune 2019June 2018
Issued shares
Opening balance
560,588516,236
Shares issued during the year
- 37,224
Dividend reinvestment plan
9,1917,128
Cancelled shares
(441)-
Closing balance
569,338560,588
Less treasury shares- (2,299)
Net closing balance
569,338558,289
The table above shows shares in HBL up until 31 October 2018 when HGH acquired HBL, and shares in HGH from that date. At 31
October 2018 HBL had issued 565,430 shares, all of which were exchanged for shares in HGH on a one for one basis.
Under dividend reinvestment plans, 5,282,619 new shares were issued at $1.6250 per share on 21 September 2018 and 3,907,858 at
$1.4709 per share on 1 April 2019, (June 2018: 4,163,008 new shares at $1.8004 per share on 21 September 2017 and 2,965,048 new
shares at $1.7707 per share on 3 April 2018).
Dividends paid
Date declared
Cents
per share
$000's
Date declared
Cents
per share
$000's
Final dividend
15 August 2018
5.5
30,808
14 August 2017
5.5
28,393
Interim dividend
19 February 2019
3.5
19,791
20 February 2018
3.5
19,502
Total dividends paid
50,599
47,895
June 2019
June 2018
17 Other balance sheet items
Policy
Property, plant and equipment are stated at cost less accumulated depreciation and impairment (if any). Depreciation is
calculated on a straight line basis to write off the net cost or other revalued amount of each asset over its expected life to its
estimated residual value.
$000's
June 2019
June 2018
Other Assets
Trade receivables
3,277
1,613
GST receivable
3,837
1,553
Prepayments
4,734
2,261
Property, plant and equipment
9,461
8,984
Total other assets
21,309
14,411
Policy
Intangible assets
Intangible assets with finite useful lives
Software acquired or internally developed by the Group is stated at cost less accumulated amortisation and any accumulated
impairments 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 the assets’ estimated
useful lives. The expected useful life of the software has been determined to be ten years. All other expenditure is expensed
immediately as incurred.
Goodwill
Goodwill arising on acquisition represents the excess of cost of the acquisition over the Group’s interest in the fair value of the
identifiable net assets of a controlled entity. 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.
Heartland Group Holdings Limited Consolidated Financial Statements 33
17 Other balance sheet items (continued)
$000'sJune 2019June 2018
Computer software
Cost
37,96536,215
Accumulated depreciation
10,4296,957
Net carrying value of computer software
27,53629,258
Goodwill
45,14345,143
Total intangible assets
72,67974,401
Goodwill was tested for impairment on 31 May 2019. In assessing impairment, an internal valuation model was developed to
indicate the value of the business. This value is 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 2019 (30 June 2018:
nil).
For the purposes of impairment testing, goodwill is allocated to cash generation units (CGU’s). A CGU is the smallest identifiable
group of assets that generate independent cash inflows. The Group has assessed that goodwill should be allocated to HBL and ASF
as the smallest identifiable CGU.
Policy
Employee benefits
Annual leave entitlements are accrued at amounts expected to be paid. Long service leave is accrued by calculating the probable
future value of the entitlements and discounting back to present value. Obligations to defined contribution superannuation
schemes are recognised as an expense when the contribution is paid.
$000's
June 2019
June 2018
Trade and other payables
Trade payables
11,787
10,406
Insurance liability
5,699
6,333
Employee benefits
5,012
5,871
Total trade and other payables
22,498
22,610
Heartland Group Holdings Limited Consolidated Financial Statements 34
18 Other Reserves
$000's
Employee
benefits
reserve
Foreign
currency
translation
reserve
(FCTR)
Fair value
reserve
Defined
benefit
reserve
Cash flow
hedge
reserve
Total
June 2019
Balance as at 1 July 2018
2,559
1,260
1,590
257
(1,081)
4,585
Other comprehensive income net of tax
(5,281)
2,968
(86)
(4,762)
(7,161)
Share based payments
619
619
Shares vested
(2,340)
(2,340)
Balance as at 30 June 2019
838
(4,021)
4,558
171
(5,843)
(4,297)
June 2018
Balance as at 1 July 2017
3,119
(1,055)
609
(83)
(1,153)
1,437
Other comprehensive income net of tax
-
2,315
981
340
72
3,708
Share based payments
666
-
-
-
-
666
Shares vested
(1,226)
-
-
-
-
(1,226)
Balance as at 30 June 2018
2,559
1,260
1,590
257
(1,081)
4,585
19 Related party transactions and balances
Transactions with key management personnel
Key management personnel (KMP), being directors of the Group, the Chief Executive Officer (CEO) and those executive staff
reporting directly to the CEO. Transactions with immediate family members of KMP are also disclosed below.
Loans made to KMP are made in the ordinary course of business on normal commercial terms and conditions no more favourable
than those given to other employees or customers, including the term of the loan, security required and the interest rate.
All other transactions with KMP and transactions with related entities of KMP are made on terms equivalent to those that prevail in
arm's length transactions.
$000's
June 2019
June 2018
Transactions with key personnel
Interest income
-
5
Interest expense
(76)
(128)
Key personnel compensation
Short-term employee benefits
(4,633)
(6,194)
Share-based payment expense
(703)
(640)
Total transactions with key personnel
(5,412)
(6,957)
Due(to)/from key personnel
Borrowings - deposits
(3,019)
(2,412)
Total due(to)/from key personnel
(3,019)
(2,412)
Heartland Group Holdings Limited Consolidated Financial Statements 35
20 Fair value
Policy
Fair value is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date.
On initial recognition, the transaction price generally represents the fair value of the financial instrument, unless there is
observable information from an active market that provides a more appropriate fair value.
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.
The Group measures fair values using the fair value hierarchy, which reflects the significance of the inputs used in making the
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 (derived from prices).
Level 3 – Inputs for the asset or liability that are not based on observable market data (unobservable inputs).
The Group recognises transfers between levels of the fair value hierarchy as at the end of the reporting period during which the
change has occurred.
(a) Financial instruments measured at fair value
The following assets and liabilities of the Bank are measured at fair value on a recurring basis in the Consolidated Statement of
Financial Position.
Investments
Investments in public sector securities and corporate bonds are classified as being fair value through other comprehensive income
with the fair value being based on quoted market prices (Level 1 under the fair value hierarchy) or modelled using unobservable
market inputs (Level 2 under the fair value hierarchy).
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 flow analysis.
Investments in unlisted equity securities are classified as being FVOCI and are valued under Level 3 of the fair value hierarchy, with
the fair value being based on unobservable inputs.
Finance receivables – reverse mortgages
Reverse mortgage loans are classified at fair value through profit or loss.
On initial recognition the Group considers the transaction price to represent the fair value of the loan.
For subsequent measurement the Group has considered if the fair value can be determined by reference to a relevant active market
or observable inputs, but has concluded relevant support is not currently available. In the absence of such market evidence the
Group has used valuation techniques including actuarial assessments to consider the fair value.
When the Group enters into a reverse mortgage loan the Group has set expectations regarding the loan’s current and future risk
profile and expectation of performance. This expectation references a wide range of assumptions including:
mortality and move to care;
voluntary exits;
house price changes;
no negative equity guarantee; and
interest rate margin.
Heartland Group Holdings Limited Consolidated Financial Statements 36
20 Fair Value (continued)
At balance date the Group does not consider any of the above expectations to have moved outside of the original expectation range.
Therefore the Group has continued to estimate the fair value of the portfolio at transaction price. There has been no fair value
movement recognised in profit or loss during the period. Given the nature of the loan terms and the current market conditions the
fair value as recorded is not sensitive to changes in house prices or interest rates.
The Group will continue to reassess the existence of a relevant active market and movements in expectations on an on-going basis.
There have been no losses on reverse mortgage loans during the current year (2018: Nil).
Derivative financial instruments
Interest rate and foreign currency related contracts are recognised in the financial statements at fair value. Fair values are
determined from observable market prices as at the reporting date, discounted cash flow models or option pricing models as
appropriate. (Level 2 under the fair value hierarchy).
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.
$000's
Level 1
Level 2
Level 3
Total
June 2019
Investments
255,875
86,618
12,435
354,928
Derivative financial instruments
-
12,675
-
12,675
Finance receivables - reverse mortgage
-
-
1,318,819
1,318,819
Total assets measured at fair value
255,875
99,293
1,331,254
1,686,422
Derivative financial instruments
-
10,372
-
10,372
Total liabilities measured at fair value
-
10,372
-
10,372
June 2018
Investments
140,282
190,570
9,694
340,546
Derivative financial instruments
-
923
-
923
Finance receivables - reverse mortgage
-
454
-
454
Total assets measured at fair value
140,282
191,947
9,694
341,923
Derivative liabilities held for risk management
-
2,562
-
2,562
Total liabilities measured at fair value
-
2,562
-
2,562
The movement in Level 3 assets measured at fair value are below:
$000's
Finance
receivables -
reverse
mortgages
Investments
Total
June 2019
As at 1 July 2018
1,129,956
9,694
1,139,650
Adjustment for NZ IFRS 9
2,882
-
2,882
New loans
284,819
-
284,819
Repayments
(104,644)
-
(104,644)
Capitalised Interest
29,417
-
29,417
Purchase of investments
-
2,741
2,741
Other
(23,611)
-
(23,611)
As at 30 June 2019
1,318,819
12,435
1,331,254
Heartland Group Holdings Limited Consolidated Financial Statements 37
20 Fair Value (continued)
(b) Financial instruments measured not at fair value
The following assets and liabilities of the Group are not measured at fair value in the Consolidated Statement of Financial Position.
Cash and cash equivalents and other financial assets and liabilities
Cash and cash equivalents and other financial assets and liabilities are considered equivalent to their carrying value due to their short
term nature.
Finance receivables
The fair value of the Group’s financial 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 8.88% (2018: 8.12%).
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.
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 the debt of similar maturities. The current market rate used to fair value
borrowings is 2.59% (2018: 3.09%).
Other financial assets and financial liabilities
Financial instruments such as short-term trade receivables and payables are considered equivalent to their carrying value due to
their short term nature.
The following table sets financial instruments not measured at fair value and analyses them by the level in the fair value hierarchy.
$000'sLevel 1Level 2Level 3
Total Fair
Value
Total Carrying
Value
June 2019
Cash and cash equivalents
80,584- - 80,58480,584
Finance receivables
- 3,017,327- 3,017,3273,029,231
Other financial assets
- - 3,2773,2773,277
Total financial assets
80,5843,017,3273,2773,101,1883,113,092
Retail deposits
- 3,160,426- 3,160,4263,153,681
Other borrowings
- 1,056,653- 1,056,6531,056,653
Other financial liabilities
- - 22,49822,49822,498
Total financial liabilities
- 4,217,07922,4984,239,5774,232,832
June 2018
Cash and cash equivalents
49,588- - 49,58849,588
Finance receivables
- 3,972,072- 3,972,0723,984,487
Other financial assets
- - 1,6131,6131,613
Total financial assets
49,5883,972,0721,6134,023,2734,035,688
Retail deposits
- 2,877,885- 2,877,8852,881,805
Other borrowings
- 914,253- 914,253914,253
Other financial liabilities
- - 22,61022,61022,610
Total financial liabilities
- 3,792,13822,6103,814,7483,818,668
Heartland Group Holdings Limited Consolidated Financial Statements 38
20 Fair Value (continued)
(c) Classification of financial instruments
The following table summarise the categories of financial instruments and the carrying and fair value of all financial instruments of
the Group.
$000's
FVOCI
FVTPL
Amortised
cost
Total
carrying
Value
Total fair
value
June 2019
Cash and cash equivalents
-
-
80,584
80,584
80,584
Investments
354,928
-
-
354,928
354,928
Finance receivables
-
-
3,029,231
3,029,231
3,017,327
Finance receivables - reverse mortgages
-
1,318,819
-
1,318,819
1,318,819
Derivative financial instruments
2,758
9,917
-
12,675
12,675
Other financial assets
-
-
3,277
3,277
3,277
Total financial assets
357,686
1,328,736
3,113,092
4,799,514
4,787,610
Retail deposits
-
-
3,153,681
3,153,681
3,160,426
Other borrowings
-
-
1,056,653
1,056,653
1,056,653
Derivative financial instruments
9,159
1,213
-
10,372
10,372
Other financial liabilities
-
-
22,498
22,498
22,498
Total financial liabilities
9,159
1,213
4,232,832
4,243,204
4,249,949
June 2018
Cash and cash equivalents
-
-
49,588
49,588
49,588
Investments
330,852
9,694
-
340,546
340,546
Finance receivables
-
-
3,984,487
3,984,487
3,972,072
Finance receivables - reverse mortgages
-
-
454
454
454
Derivative financial instruments
923
-
-
923
923
Other financial assets
-
-
1,613
1,613
1,613
Total financial assets
331,775
9,694
4,036,142
4,377,611
4,365,196
Retail deposits
-
-
2,881,805
2,881,805
2,877,885
Other borrowings
-
-
914,253
914,253
914,253
Derivative financial instruments
2,562
-
-
2,562
2,562
Other financial liabilities
-
-
22,610
22,610
22,610
Total financial liabilities
2,562
-
3,818,668
3,821,230
3,817,310
Heartland Group Holdings Limited Consolidated Financial Statements 39
RISK MANAGEMENT
21 Enterprise risk management program
The board of directors (the Board) sets and monitors the Group’s risk appetite across the primary risk domains of, credit, capital,
liquidity, market (including interest rate), operational and compliance and general business risk. Management are, in turn,
responsible for ensuring appropriate structures, policies, procedures and information systems are in place to actively manage these
risk domains, as outlined within the Enterprise Risk Management Framework (ERMF). Collectively, these processes are known as the
Group’s Enterprise Risk Management Programme (RMP).
Role of the Board and the Board Risk Committee
The Board, through its Board Risk Committee (BRC) is responsible for oversight and governance of the development of the RMP, the
role of the BRC is to assist the Board to formulate its risk appetite, and to monitor the effectiveness of the RMP. The BRC has the
following specific responsibilities;
To advise the Board on the formulation of the Boards Risk Appetite Statement at least annually.
To review reports from management concerning the RMP in the context of the Risk Appetite Statement in order to assure the
Board of the programme’s effectiveness.
To review reports from management concerning changes anticipated in the economic, business and regulatory environment
(including consideration of emerging trends) and other factors considered relevant to the risk appetite statement, in order to
monitor them and advise the Board of any new risks or opportunities that could have significant financial, regulatory or
reputational impact.
To review reports from management concerning the Bank’s internal compliance policies in order to advise the Board of their
effectiveness and recommend their approval or variation (or, where the BRC has been delegated authority to itself approve or
vary them).
To review the lending standards developed by the Chief Risk Officer of HBL (CRO) at least annually.
The BRC consists of at least three non-executive directors. A member of the BRC sits on the Audit Committee. In addition the CEO,
CRO and Chief Financial Officer of HBL (CFO) (or their nominee, subject to the Chair’s prior approval) attend the BRC meetings, and
the directors who are not members of the BRC are entitled to attend meetings and to receive copies of the BRC papers.
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. In certain circumstances, Internal Audit will provide risk and control advice to management provided the work
does not impede the independence of the Internal Audit function. The function assists the Group in accomplishing its objectives by
bringing a systematic and disciplined approach to evaluate and improve the effectiveness of risk management, control and
governance process.
Internal Audit is allowed full, free and unfettered access to any and all the organisations records, personnel and physical properties
deemed necessary to accomplish its activities.
A regular cycle of review has been implemented to cover all areas of the business, focused on assessment, management and control
of risks. The audit plan ensures a cyclical review process of various business units and operational areas, as well as identified areas of
higher identified risk. The audit methodology is designed to meet the International Standards for the Professional Practice of
Internal Auditing of the Institute of Internal Auditors.
Each audit has specific audit procedures tailored to the area of business that is being reviewed. The audit procedures are updated
during each audit to reflect any process changes. Audit work papers are completed to evidence the testing preformed in accordance
with audit procedures.
Audit reports are addressed to the manager of the relevant area that is being audited in addition to other relevant stakeholders
within the Group. Management comments are obtained from the process owner(s) and are included in the report.
Heartland Group Holdings Limited Consolidated Financial Statements 40
21 Enterprise risk management program (continued)
The Head of Internal Audit has a direct reporting line to the Chairman of the Audit Committee whilst administratively reporting to
the CFO. Internal audit has accountability to the Audit Committee of the Group. A schedule of all outstanding internal control issues
is maintained and presented to the Audit Committee to assist the Audit Committee 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.
The Audit Committee focuses on financial reporting and the application of accounting policies as part of the internal control and risk
assessment framework. The Audit Committee monitors 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 Committee receives regular reports from internal audit.
Charters for both the BRC and Audit Committee ensure suitable cross representation to allow effective communication pertaining to
identified issues with oversight by the Board.
Asset and Liability Committee (ALCO)
The ALCO comprises the CEO (Chair), CEO HBL, Chief Digital Officer HGH, CFO , CRO , Chief Sales and Distribution Officer HBL, Head of
Corporate Finance HGH, Deputy CFO – Finance HBL, Deputy CFO – Treasury HBL, Treasurer HBL. The ALCO generally meets monthly,
and provides reports to the BRC. ALCO's specific responsibilities include 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
Executive Risk Committee (ERC)
The ERC comprises of the CEO (Chair), CEO of HBL, CRO, General Counsel HGH, CFO of HBL and Head of Internal Audit. The ERC has
responsibility for overseeing risk aspects not considered by ALCO, including that the internal control environment is managed so that
residual risk is consistent with the Group's risk appetite. The ERC generally meets monthly, and provides minutes to the BRC. ERC’s
specific responsibilities include decision making and oversight of operational and compliance risk, and credit risk.
The Group’s exposure to operational and compliance risk is governed by a risk appetite statement approved by the Board and is used
to guide management activities by the ERC. This statement sets out the nature of risk which may be taken and aggregate risk limits,
and the ERC monitors adherence to this.
Operational and compliance risk
Operational and 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 and 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, adverse customer outcomes, unfavourable media attention, injury
to or loss of staff or clients or as a breach of laws or banking regulations. Where appropriate, risks are mitigated by insurance.
To ensure appropriate responsibility is allocated for the management, reporting and escalation of operational and compliance risk,
the Group operates a “three lines of defence” model which outlines principles for the roles, responsibilities and accountabilities for
operational and compliance risk management:
The first line of defence is the business line management of the identification, management and mitigation of the risks associated
with the products and processes of the business. This accountability includes regular testing and attestation of the adequacy and
effectiveness of controls and compliance with the Group’s policies.
The second line of defence is the Risk and Compliance function, responsible for the design and ownership of the operational risk
management framework. It incorporates key processes including risk and control self-assessment , incident, issue and complaints
management, independent evaluation of the adequacy and effectiveness of the internal control framework and the attestation
process
The third line of defence is Internal Audit which is responsible for independently assessing how effectively the Group is managing
its risk according to stated risk appetite.
Heartland Group Holdings Limited Consolidated Financial Statements 41
21 Enterprise risk management program (continued)
Market risk
Market risk is the possibility of experiencing losses or gains due to factors affecting the overall performance of financial markets in
which the Group is exposed. The primary market risk exposures for the Group are interest rate risk and foreign exchange risk. The
risk being that market interest rates or foreign exchange rates will change and adversely impact on the Group’s earnings due to
either adverse moves in foreign exchange market rates or in the case of interest rate risks mismatches between repricing dates of
interest bearing assets and liabilities and/or differences between customer pricing and wholesale rates.
Interest rate risk
Interest rate risk is principally generated through interest rate risk in the customer loans and deposits (the bank book). This risk
arises from three key sources:
Mismatches between the repricing dates of interest bearing assets and liabilities;
Banking products repricing differently to changes in wholesale market rates (basis risk); and
The investment of capital in interest bearing assets.
Refer Note 24 - Interest rate risk for further details regarding interest rate risk.
Foreign exchange 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 Australian subsidiaries (which have
a functional currency of AUD), 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.
Foreign exchange revaluation gains and losses are booked to the foreign currency translation reserve. Foreign exchange rate
movements in any given year may have an 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.
Counterparty credit risk
The Group has on-going credit exposures associated with:
Cash and cash equivalents;
Finance receivables
Holding of investment securities; and
Payments owed to the Group from risk management instruments.
Counterparty credit risk is managed against limits set in the market risk policy, including credit exposure on the derivative contracts,
bilateral set-off arrangements, cash and cash equivalents and investment securities.
Heartland Group Holdings Limited Consolidated Financial Statements 42
22 Credit risk exposure
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 make. The
risk is primarily 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 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
commercial judgement as described below.
To manage this risk the ERC oversees the formal credit risk management strategy. The ERC reviews the Group’s credit risk exposures
typically on a monthly basis. The credit risk management strategies aim to ensure that:
Credit origination meets agreed levels of credit quality at point of approval.
Sector concentration are monitored.
Maximum total exposure to any one debtor is actively managed.
Changes to credit risk are actively monitored with regular credit reviews.
The BRC also oversees the Group’s credit risk exposures to monitor overall risk metrics having regard to risk appetite set by the
Board.
The Group has adopted a detailed credit risk framework. The framework is supported further by lending standards that provide
criteria for finance products within each business sector.
The BRC has authority from the Board for approval of all credit exposures. Lending authority has been provided to the Group’s Credit
Committees, and to the business units under a detailed delegated lending authority framework. Application of credit discretions in
the business operation are monitored through a defined review and hindsight structure as outlined in the credit risk oversight policy.
Delegated lending authorities are provided to individual officers with due cognisance of their experience and ability. Larger and
higher risk exposures require approval of senior management, the credit committees and ultimately through to the BRC.
The Group employs a process of hind sighting loans to ensure that credit policies and the quality of credit processes are maintained.
Reverse mortgage loans and negative equity risk
Reverse mortgage 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
by the Group 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 the Credit Risk Oversight Policy in conjunction with associated lending
standards specific for this product. In addition to usual criteria regarding the type, and location, of security property that the Group
will accept for reverse mortgage lending, a key aspect of the Group’s policy is that a borrower’s age on origination of the reverse
mortgage loan will dictate the loan-to-value ratio of the reserve mortgage on origination. Both New Zealand and Australia reverse
mortgage operations are similarly aligned. The policy is managed and reviewed periodically to ensure appropriate consistency across
locations.
Maximum exposure to credit risk at the equivalent reporting dates
The following table represents the maximum credit risk exposure, without taking account of any collateral held. The exposures set
out below are based on net carrying amounts as reported in the Statement of Financial Position.
$000'sJune 2019June 2018
Cash and cash equivalents
80,58449,588
Investments
342,493330,852
Finance receivables
3,029,2313,984,941
Finance receivables reverse mortgages
1,318,819-
Derivative financial instruments
12,675923
Other financial assets
3,2771,613
Total on balance sheet credit exposures
4,787,0794,367,917
Heartland Group Holdings Limited Consolidated Financial Statements 43
22 Credit risk exposure (continued)
Concentration of credit risk by geographic region
$000's
June 2019
June 2018
New Zealand
Auckland
1,130,673
1,085,421
Wellington
246,028
250,933
Rest of North Island
1,214,744
1,123,324
Canterbury
505,990
484,685
Rest of South Island
587,723
598,933
Australia
Queensland
175,914
154,145
New South Wales
427,437
322,705
Victoria
206,551
162,214
Western Australia
45,557
35,672
South Australia
31,888
25,356
Rest of Australia
18,914
13,951
Rest of the World
1
254,151
143,073
4,845,570
4,400,412
Provision for impairment
(58,491)
(29,671)
Less fair value adjustment
-
(2,824)
Total on balance sheet credit exposures
4,787,079
4,367,917
1
These overseas assets are primarily NZD denominated investments in AA+ and higher rated securities issued by offshore supranational agencies
(“Kauri Bonds”)
Concentration of credit risk by industry sector
$000's
June 2019
June 2018
Agriculture
741,947
741,666
Forestry and fishing
80,642
87,955
Mining
13,697
19,222
Manufacturing
69,709
71,391
Finance and insurance
440,194
338,164
Wholesale trade
40,875
33,195
Retail trade
237,427
205,380
Households
2,430,084
2,105,437
Property and business services
406,781
402,169
Transport and storage
237,553
211,005
Other
146,661
184,828
4,845,570
4,400,412
Provision for impairment
(58,491)
(29,671)
Less fair value adjustment
-
(2,824)
Total on balance sheet credit exposures
4,787,079
4,367,917
Commitments to extend credit
$000's
June 2019
June 2018
Undrawn facilities available to customers
102,285
180,940
Conditional commitments to fund at a future date
89,317
94,239
As at 30 June 2019 there was nil of undrawn lending commitments available to counterparties for whom drawn balances was
classified as individually impaired (2018: $0.196 million).
Heartland Group Holdings Limited Consolidated Financial Statements 44
22 Credit risk exposure (continued)
Credit risk grading
The Group's Finance receivables are monitored either by account behaviour (Behavioural portfolio) or a regular assessment of their
credit risk grade based on an objective review of defined risk characteristics (Judgemental portfolio).
Finance receivables reverse mortgages have no arrears characteristics and are assessed on origination against a pre-determined
criteria.
The Judgemental portfolio consists mainly of business and rural lending where an on-going and detailed working relationship with
the customer has been developed while the Behavioural portfolio consists of consumer, retail and smaller business receivables.
Judgemental loans are individually risk graded based on loan status, financial information, security and debt servicing ability.
Exposures in the Judgemental portfolio are credit risk graded by an internal risk grading mechanism where grade 1 is the strongest
risk. Grade and grade 9 is the weakest risk grade where a loss is probable. Behavioural loans are managed based on their arrears
status.
Upon adoption of NZ IFRS 9 all loans past due but not impaired have been categorised into three impairments stages (Note 1
financial statements preparation) which are in most cases based on arrears status. If a Judgemental loan is risk graded 6 or above it
will be classified as stage 2 as a minimum and carry a provision based on lifetime expected credit losses.
The arrears profile is driving the behavioural portfolio categorisation for the credit risk grading.
$000's
12 months ECL
Lifetime ECL
Not credit
impaired
Lifetime ECL
Credit
impaired
Specifically
provided
Fair value
June 2019
Total
June 2018
Judgemental portfolio
Grade 1 - Very strong
7
-
-
-
-
7
29
Grade 2 - Strong
8,685
-
-
-
-
8,685
10,172
Grade 3 - Sound
86,109
-
71
-
-
86,180
72,447
Grade 4 - Adequate
478,682
3,707
5,478
-
-
487,867
352,411
Grade 5 - Acceptable
851,307
4,835
4,854
-
-
860,996
687,174
Grade 6 - Monitor
-
142,122
5,031
-
-
147,153
145,706
Grade 7 - Substandard
-
22,913
3,450
-
-
26,363
22,961
Grade 8 - Doubtful
566
-
-
15,391
-
15,957
28,607
Grade 9 - At risk of loss
-
-
-
11,021
-
11,021
10,580
Total judgemental portfolio
1,425,356
173,577
18,884
26,412
-
1,644,229
1,330,087
Total behavioural portfolio
1,372,029
33,305
38,159
-
1,318,819
2,762,312
2,687,349
Gross finance receivables
2,797,385
206,882
57,043
26,412
1,318,819
4,406,541
4,017,436
Provision for impairment
(30,421)
(1,780)
(18,427)
(7,863)
-
(58,491)
(29,671)
FV adjustment for PV of
future losses
-
-
-
-
-
-
(2,824)
Total finance receivables
2,766,964
205,102
38,616
18,549
1,318,819
4,348,050
3,984,941
Heartland Group Holdings Limited Consolidated Financial Statements 45
23 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 in all banking operations and is closely monitored by the Group.
Measurement 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 the 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 a mix of assets and liabilities given its expectations of future cash
flows, liquidity constraints and capital adequacy. The Group employs asset and liability cash flow modelling to determine
appropriate liquidity and funding strategies.
The Group holds the following financial assets for the purpose of managing liquidity risk:
$000's
June 2019
June 2018
Cash and cash equivalents
80,584
49,588
Investments
342,493
330,852
Undrawn committed bank facilities
219,631
52,500
Total liquidity
642,708
432,940
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 Consolidated Statement of Financial Position.
The contractual cash flows presented below may differ significantly from the actual cash flows. This occurs as a result of future
actions by the Group and its counterparties, such as early repayment or refinancing of term loans and borrowings. 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.
The Group does not manage its liquidity risk on a contractual liquidity basis.
Heartland Group Holdings Limited Consolidated Financial Statements 46
23 Liquidity risk (continued)
Contractual liquidity profile of financial assets and liabilities (continued)
$000's
On demand
0-6 months
6-12
months
1-2 years
2-5 years
5+ years
Total
June 2019
Financial Assets
Cash and cash equivalents
80,584
-
-
-
-
-
80,584
Investments
-
44,979
94,307
56,129
152,870
8,330
356,615
Finance receivables
-
931,670
513,162
799,266
1,168,678
327,719
3,740,495
Finance receivables - reverse mortgages
-
27,559
38,654
48,524
212,268
5,194,951
5,521,956
Derivative financial instruments
-
12,675
-
-
-
-
12,675
Other financial assets
-
3,277
-
-
-
-
3,277
Total financial assets
80,584
1,020,160
646,123
903,919
1,533,816
5,531,000
9,715,602
Financial Liabilities
Retail deposits
895,290
1,415,994
605,804
224,545
73,034
1,680
3,216,348
Other borrowings
-
75,198
15,032
81,915
977,044
-
1,149,189
Derivative financial liabilities
-
10,372
-
-
-
-
10,372
Other financial liabilities
-
30,030
-
-
-
-
30,030
Total financial liabilities
895,290
1,531,594
620,836
306,460
1,050,078
1,680
4,405,939
Net financial (liabilities)/assets
(814,706)
(511,434)
25,287
597,459
483,738
5,529,320
5,309,664
102,285
-
-
-
-
-
102,285
219,631
-
-
-
-
-
219,631
June 2018
Financial Assets
Cash and cash equivalents
49,588
-
-
-
-
-
49,588
Investments
-
53,474
85,376
134,654
71,592
9,694
354,790
Finance receivables
-
554,170
384,245
1,204,534
1,356,798
5,029,371
8,529,118
Finance receivables -reverse mortgages
11
11
18
76
2,066
2,182
Derivative financial instruments
-
923
-
-
-
-
923
Other financial assets
-
1,613
-
-
-
-
1,613
Total financial assets
49,588
610,191
469,632
1,339,206
1,428,466
5,041,131
8,938,214
Financial Liabilities
Retail deposits
924,072
1,219,540
559,208
159,765
62,361
-
2,924,946
Other borrowings
-
101,527
13,523
627,070
189,333
-
931,453
Derivative financial instruments
-
1,639
-
-
-
-
1,639
Other financial liabilities
-
22,610
-
-
-
-
22,610
Total financial liabilities
924,072
1,345,316
572,731
786,835
251,694
-
3,880,648
Net financial (liabilities)/assets
(874,484)
(735,125)
(103,099)
552,371
1,176,772
5,041,131
5,057,566
180,940
-
-
-
-
-
180,940
52,500
-
-
-
-
-
52,500
Undrawn facilities available to customers
Undrawn committed bank facilities
Undrawn committed bank facilities
Undrawn facilities available to customers
Heartland Group Holdings Limited Consolidated Financial Statements 47
24 Interest rate risk
The Group’s market risk is derived primarily of exposure to interest rate risk, predominately 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 Groups 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 change scenarios to assess potential risk exposure. The Group also manage interest rate risk by:
Monitoring maturity profiles and seeking to match the re-pricing of assets and liabilities (physical hedging),
Monitoring interest rates daily and regularly (at least monthly) reviewing interest rate exposure; and
Entering into forward rate agreements and interest rate swaps and options to hedge against movements in interest rates.
Contractual repricing analysis
The interest rate risk profile of financial assets and liabilities that follows has been prepared on the basis of maturity or next repricing
date, whichever is earlier.
$000's
0-3 months
3-6 months
6-12
months
1-2 years
2+ years
Non-
interest
bearing
Total
June 2019
Financial assets
Cash and cash equivalents
80,578
-
-
-
-
6
80,584
Investments
24,097
15,368
91,248
62,048
149,732
12,435
354,928
Due from related parties
-
-
-
-
-
-
-
Finance receivables
1,551,851
206,801
337,236
537,300
386,870
9,173
3,029,231
Finance receivables - reverse mortgages
1,318,819
-
-
-
-
-
1,318,819
Derivative financial instruments
11,232
11,232
Other financial assets
-
-
-
-
-
3,277
3,277
Total financial assets
2,986,577
222,169
428,484
599,348
536,602
24,891
4,798,071
Financial liabilities
Retail deposits
1,614,124
519,676
729,734
212,575
65,887
11,685
3,153,681
Other borrowings
771,219
-
-
-
285,434
-
1,056,653
Derivative financial instruments
10,230
-
-
-
-
-
10,230
Other financial liabilites
-
-
-
-
-
30,031
30,031
Total financial liabilites
2,395,573
519,676
729,734
212,575
351,321
41,716
4,250,595
(36,789)
162,749
38,975
(313,184)
148,249
-
-
Net financial (liabilities)/assets
554,215
(134,758)
(262,275)
73,589
333,530
(16,825)
547,476
Effect of derivatives held for risk
Heartland Group Holdings Limited Consolidated Financial Statements 48
24 Interest rate risk (continued)
Contractual repricing analysis (continued)
$000's
0-3 months
3-6 months
6-12
months
1-2 years
2+ years
Non-
interest
bearing
Total
June 2018
Financial Assets
Cash and cash equivalents
49,580
-
-
-
-
8
49,588
Investments
44,483
22,935
82,149
111,355
69,930
9,694
340,546
Finance receivables
2,687,543
165,901
284,847
418,800
423,037
4,359
3,984,487
Finance receivables - reverse mortagages
454
-
-
-
-
-
454
Derivative financial instruments
923
-
-
-
-
-
923
Other financial assets
-
-
-
-
-
1,613
1,613
Total financial assets
2,782,983
188,836
366,996
530,155
492,967
15,674
4,377,611
Financial Liabilities
Retail deposits
1,663,258
482,447
543,746
150,230
33,571
8,553
2,881,805
Other borrowings
736,850
3,378
-
-
174,025
-
914,253
Derivative financial instruments
2,562
-
-
-
-
-
2,562
Other financial liabilites
-
-
-
-
-
22,610
22,610
Total financial liabilites
2,402,670
485,825
543,746
150,230
207,596
31,163
3,821,230
361,760
(44,735)
(75,365)
(242,090)
430
-
-
Net financial (liabilities)/assets
742,073
(341,724)
(252,115)
137,835
285,801
(15,489)
556,381
Effect of derivatives held for risk
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 Groups’
financial assets and liabilities to various standard and nonstandard 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 a no material impact on Profit or loss in
terms of a fair value change from movement in market interest rates. Furthermore there is no material cash flow impact on the
Consolidated Statement of Cash flows from a 100 basis point change in interest rates.
Heartland Group Holdings Limited Consolidated Financial Statements 49
OTHER DISCLOSURES
25 Significant subsidiaries
Significant subsidiaries
Country of
incorporation and
place of business
Nature of business
June 2019
June 2018
Heartland Bank Limited
New Zealand
Bank
100%
100%
VPS Properties Limited
New Zealand
Investment property holding
company
100%
100%
MARAC Insurance Limited
New Zealand
Insurance services
100%
100%
Heartland Australia Group Pty
Limited
Australia
Financial services
100%
100%
Australian Seniors Finance Pty
Limited
Australia
Management services
100%
100%
Proportion of ownership and voting
power held
26 Structured entities
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
hold 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 (Heartland PIE Fund)
The Group controls the operations of the Heartland PIE Fund which is a portfolio investment entity that invests in the Group’s
deposits. Investments of Heartland PIE Fund are represented as follows.
$000's
June 2019
June 2018
Deposits
146,094
115,095
(b) Seniors Warehouse Trust (SW Trust) and ASF Settlement Trust (ASF Trust)
SW Trust and ASF Trust form part of the ASF reverse mortgage business and 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 reverse mortgage loans held by the Trusts
were set aside for the benefit of the investors in the SW Trust and ASF Trust.
$000's
June 2019
June 2018
Cash and cash equivalents
35,356
12,207
Finance receivables - reverse mortgages
759,749
676,837
Other Borrowings
(711,471)
(614,510)
Heartland Group Holdings Limited Consolidated Financial Statements 50
26 Structured entities (continued)
(c) Heartland ABCP Trust 1 (ABCP Trust)
At 30 June 2018 the Group had securitised a pool of receivables comprising commercial and motor vehicle loans to ABCP Trust.
The Group continued to recognise the securitised assets and associated borrowings in the Consolidated Statement of Financial
Position. Although the Group recognised those interests in the ABCP Trust, the loans sold to the Trust were set aside for the benefit
of investors in the ABCP Trust.
On 29 August 2018 the assets of the ABCP Trust were purchased by HBL and the ABCP Trust dissolved.
$000's
June 2019
June 2018
Cash and cash equivalents
-
3,625
Finance receivables - securitised
-
80,289
Borrowings - securitised
-
(47,504)
Derivative financial liabilities - securitised
-
(496)
(d) Heartland Auto Receivables Warehouse Trust (Auto Warehouse)
On 29 August 2018 the Group established the Auto Warehouse in order to securitise commercial and motor loan receivables as a
source of funding.
The Group continues to recognise the securitised assets and associated borrowings in the Consolidated Statement of Financial
Position. Although the Group recognises those interests in Auto Warehouse, the loans sold to the Trust are set aside for the benefit
of investors in Auto Warehouse and other depositors and lenders to the Group have no recourse to those assets.
$000's
June 2019
June 2018
Cash and cash equivalents
555
-
Other liabilities
(559)
-
27 Staff share ownership arrangements
The Group operates a number of share-based compensation plans that are equity settled. The fair value determined at the grant
date 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 employee benefits
reserve.
(a) Share-based compensation plan details
Heartland LTI net share settled plan (LTI plan)
The LTI plan was allotted under three tranches (referred to as the 2013, 2014 and 2015 tranches). Under the LTI plan participants
were granted an option to acquire shares in the Group. 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 participants' continued employment with the Group for the service period of 3 years which begins on
1 July 2014 for the 2015 plan. Participants in the 2015 tranche were able to exercise their options between September 2017 and 1
July 2019.
2015 Special grant (LTI SG)
Participants of the LTI SG were able to exercise options in the period beginning on the date the market price of the Group shares was
equal to $1.50 and ending on 1 July 2017. Market price was calculated based on the VWAP of a Heartland share for the 10 business
days immediately before (but excluding) the exercise date for those options.
Heartland Group Holdings Limited Consolidated Financial Statements 51
27 Staff share ownership arrangements (continued)
The options were subject to the participants' continued employment with the Group for the service period of 3 years which began on
1 July 2014. Following exercise a lock up period until 1 July 2020 applies during which participants are restricted from disposing of
shares.
The reference price was the amount by which the market price of the Group shares, at the time of exercise, exceeded $1.00 (based
on a volume weighted average price of Heartland shares for the prior 20 business days), plus the aggregate amount of cash dividends
(cents per the Group share) paid by the Group in the period from 1 April 2015 until and including the date the options were
exercised. However, for the purpose of calculating the settlement amount, the market price of the Group shares was capped at $1.50
and any increase above this amount was disregarded.
Senior executive scheme (SES)
The SES was established in June 2016 as a replacement of the LTI plan and LTI SG for certain affected participants only (senior
executives). Under the SES, senior executives forfeited their options under the 2014 and 2015 tranches of the LTI plan and the LTI SG
and purchased the Group shares with proceeds from a settlement amount paid to them by the Group. The shares were unable to be
sold or otherwise disposed of by the senior executive until 30 June 2019.
The SES has been treated as a modification of the senior executive entitlements under the 2014 and 2015 tranches of the LTI Plan
and the LTI SG. The incremental fair value granted is $0.49 million based on the value of shares acquired under the SES less the fair
value of the benefits forfeited under the 2014 and 2015 tranches of the LTI Plan and the LTI SG.
Heartland performance rights plant (PR plan)
The PR plan was established to enhance the alignment of participants' interests with those of the Group’s shareholders. Under the
PR plan participants are issued performance rights which will entitle them to receive shares in the Group.
PR Plan 2016 tranche (PR plan 2016)
The number of performance rights offered is determined by the participant's LTI value over the VWAP of the Group's ordinary shares
on the NZX Main Board for the 10 business days immediately before (and including) the issue date. The issue date is 31 August 2016.
Performance rights do not entitle participants to dividends or voting rights.
The performance rights are issued subject to the participants' continued employment with the Group until the measurement date
and the Group achieving its total shareholder return (TSR) target. The measurement date is defined as 10 business days following the
date on which the Group announces its full year results for the financial year ended 2019. The TSR target has been set at an annual
rate of 11%, compounding and is determined primarily by share price movements and cash dividends. Performance rights will vest
on the measurement date where these criteria have been met.
PR Plan 2017 tranche (PR plan 2017)
The number of performance rights offered is determined by the participant’s LTI value over the VWAP of the Groups ordinary shares
on the NZX Main Board for the 20 business days immediately before (and excluding) the issue date. The issue date is 12 September
2017. Performance rights do not entitle participants to dividends or voting rights.
The performance rights are issued subject to the participants’ continued employment with the Group until the measurement date
and the Group achieving its share price and/or market capitalisation targets. The targets are dynamic and may be adjusted by the
Board from time to time in order to account for unanticipated capital changes during the performance period. The measurement
date is 10 business days following the date on which the Group announces its full year results for the financial year ended 2021.
Performance rights will vest on the measurement date to the extent these criteria have been met, but subject to caps and also to
retesting on a later measurement date if the criteria are not met on the initial measurement date.
PR Plan 2018 tranche (PR plan 2018)
The number of performance rights offered is determined by the participant’s LTI value over the VWAP of the Groups ordinary shares
on the NZX Main Board for the 20 business days immediately before (and excluding) the issue date. The issue date is 13 September
2018. Performance rights do not entitle participants to dividends or voting rights.
The performance rights are issued subject to the participants’ continued employment with the Group until the measurement date
and the Group achieving its share price and/or market capitalisation targets. The targets are dynamic and may be adjusted by the
Board from time to time in order to account for unanticipated capital changes during the performance period. The measurement
date is 10 business days following the date on which the Group announces its full year results for the financial year ended 2021.
Performance rights will vest on the measurement date to the extent these criteria have been met, but subject to caps and also to
retesting on a later measurement date if the criteria are not met on the initial measurement date.
Heartland Group Holdings Limited Consolidated Financial Statements 52
27 Staff share ownership arrangements (continued)
PR Plan
SES
LTI Plan
Number of
rights
Number of
shares
Number of
options
1 July 2018
3,180,298
1,858,676
-
Granted
-
(1,858,676)
-
Issued
293,759
-
-
Forfeited
(352,717)
-
-
30 June 2019
3,121,340
-
-
1 July 2017
888,300
1,858,676
7,492,753
Granted
2,291,998
-
-
Exercises
-
-
(7,300,488)
Forfeited
-
-
(192,265)
30 June 2018
3,180,298
1,858,676
-
The fair value of performance rights granted during the period is $0.072 million (2018: $1.06 million). This fair value was derived
using the Monte Carlo model. The key inputs used in the model are:
- Volatility 18% -22% (calculated based on the historical movement in the group’s shares)
- Risk free rate 2.08% pa
- Initial measurement date 10 September 2021
- VWAP on issue Date $1.72
- Share price at valuation $1.67
The weighted average share price exercised in 2018 was $1.83.
(b) Effect of share-based payment transactions
$000's
June 2019
June 2018
Award of shares
SES
327
328
LTI plan
-
(34)
PR plan
341
372
Total expense recognised
668
666
As at 30 June 2019 $0.590 million of the share scheme awards remain unvested and not expensed (2018: $1.02 million). This
expense will be recognised over the vesting period of the awards.
(c) Number of options/rights outstanding at 30 June 2019
$000's
Rights
outstanding
Remaining years
PR plan 2016
823-
PR plan 2017
2,0392
PR plan 2018
2592
Total
3,121
Heartland Group Holdings Limited Consolidated Financial Statements 53
28 Concentrations of funding
(a) Concentrations of funding by industry
$000'sJune 2019June 2018
Agriculture
68,55969,245
Forestery and Fishing
25,36023,403
Mining
6138
Manufacturing
11,23310,691
Finance and Insurance
1,148,119979,871
Wholesale Trade
11,5209,967
Retail Trade
18,04814,102
Households
2,340,7642,260,330
Property and business services
88,744110,385
Transport and storage
4,4164,853
Other
155,830139,148
3,872,6543,622,033
Subordinated notes
- 22,172
Unsubordinated notes
337,680151,853
Total borrowings
4,210,3343,796,058
(b) Concentrations of funding by geographical area
$000's
June 2019
June 2018
Auckland
1,094,639
969,518
Wellington
303,595
270,096
Rest of North Island
773,960
686,208
Canterbury
969,778
885,005
Rest of South Island
261,276
245,830
Overseas
1
807,086
739,401
Total borrowings
4,210,334
3,796,058
1
Included in overseas funding are facilities totalling (AU $650 million) (2018: AU $600 million), Refer to note 15 – Borrowings for
more information.
29 Contingent liabilities and commitments
Contingent liabilities are possible obligations, whose existence will be confirmed only by uncertain future events, or present
obligations where the transfer of economic benefit is uncertain or cannot be reliably measured. Contingent liabilities are not
recognised, but are disclosed, unless they are remote. Where some loss is probable, provisions have been made.
Contingent liabilities and credit related commitments arising in respect of the Group’s operations were:
$000's
June 2019
June 2018
6,757
6,847
Total contingent liabilities
6,757
6,847
Undrawn facilities available to customers
102,285
180,940
Conditional commitments to fund at future dates
89,317
94,239
Total commitments
191,602
275,179
Letters of credit, guarantee commitments and performance bonds
30 Events after the reporting date
The Group declared a fully imputed dividend of 6.5cents per share on 15 August 2019, to be paid to shareholders on 6 September
2019.
A funding facility of AU $250 million for Seniors Warehouse Trust No. 2 was secured on 2 July 2019 being the date of establishment
of that Trust.
© 2019 KPMG, a New Zealand partnership and a member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity.
54
Independent Auditor’s Report
To the shareholders
of Heartland Group Holdings Limited
Report on the audit of the consolidated financial statements
Opinion
In our opinion, the accompanying consolidated
financial statements of Heartland Group Holdings
Limited (the “Company”) and its subsidiaries (the
“Group”) on pages 7 to 53:
i.present fairly in all material respects the Group’s
financial position as at 30 June 2019 and its
financial performance and cash flows for the
year ended on that date; and
ii.comply with New Zealand Equivalents to
International Financial Reporting Standards and
International Financial Reporting Standards.
We have audited the accompanying consolidated
financial statements which comprise:
— the consolidated statement of financial position
as at 30 June 2019;
— the consolidated statements of comprehensive
income, changes in equity and cash flows for
the year then ended; and
— notes, including a summary of significant
accounting policies and other explanatory
information.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (New Zealand) (“ISAs (NZ)”). We
believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
We are independent of the Group in accordance with Professional and Ethical Standard 1 (Revised) Code of
Ethics for Assurance Practitioners issued by the New Zealand Auditing and Assurance Standards Board and the
International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants (“IESBA
Code”), and we have fulfilled our other ethical responsibilities in accordance with these requirements and the
IESBA Code.
Our responsibilities under ISAs (NZ) are further described in the auditor’s responsibilities for the audit of the
consolidated financial statements section of our report.
Our firm has also provided other services to the Company and Group in relation to review of the Group’s
consolidated interim financial statements, review of regulatory returns, trust deed reporting, registry audits and
other agreed upon procedures engagements. Subject to certain restrictions, partners and employees of our firm
may also deal with the Group on normal terms within the ordinary course of trading activities of the business of
the Group. These matters have not impaired our independence as auditor of the Group. The firm has no other
relationship with, or interest in, the Group.
Emphasis of matter
We draw attention to the financial statements preparation note of the consolidated financial statements which
explains the corporate restructure on 31 October 2018 when the Group acquired Heartland Bank Limited. As
common control remained after the restructure, the consolidated financial statements have been prepared as if
the Group had operated for the entire period. Comparative figures shown are for the consolidated Heartland
Bank Limited. Our opinion is not qualified in respect of this matter.
55
Materiality
The scope of our audit was influenced by our application of materiality. Materiality helped us to determine the
nature, timing and extent of our audit procedures and to evaluate the effect of misstatements, both individually
and on the consolidated financial statements as a whole. The materiality for the consolidated financial
statements as a whole was set at $5,070,000 determined with reference to a benchmark of the Group’s profit
before tax. We chose the benchmark because, in our view, this is a key measure of the Group’s performance.
We agreed with the Audit Committee that we would report misstatements identified during our audit, to them,
above $250,000, as well as misstatements below that amount that, in our view, warranted reporting for
qualitative reasons.
Key audit matters
Key audit matters are those matters that, in our professional judgement, were of most significance in our audit
of the consolidated financial statements in the current period. We summarise below those matters and our key
audit procedures to address those matters in order that the shareholders as a body may better understand the
process by which we arrived at our audit opinion. Our procedures were undertaken in the context of and solely
for the purpose of our statutory audit opinion on the consolidated financial statements as a whole and we do not
express discrete opinions on separate elements of the consolidated financial statements.
The key audit matter How the matter was addressed in our audit
Provision for impairment of finance receivables
Refer to notes 13 and 22 to the consolidated financial statements
The provision for impairment of finance
receivables is a key audit matter owing to
their financial significance and the high
degree of complexity and judgement applied
by management in determining the value.
NZ IFRS 9 Financial Instruments was
adopted for the first time on 1 July 2018.
This added effort to our audit due to the
complexity of the accounting standard and
its expected pervasive impact on the
industry.
The provision for individually impaired assets
is based on the application of management
judgement, with the assessment of
expected future cash flows being inherently
uncertain. The provision for individually
impaired assets for ‘rural’ and other
‘corporate’ loans is of particular audit focus,
owing to its financial significance and
inherent uncertainties of expected future
cash flows, which may include estimated
timing and proceeds from the future sale of
assets securing the debt, in addition to
repayments from borrowers.
Based on the assigned risk grading or arrears
status, an estimate of ECL will be applied to
Together with KPMG credit risk specialists we assessed the Group’s
adoption of NZ IFRS 9, individual provisions and collective
provisions. Our procedures included::
Assessing the Group’s governance and oversight, including the
continuous reassessment of overall provisioning;
Assessing the Group’s significant accounting policies and
expected credit loss (“ECL”) modelling methodology against the
requirements of the standards and underlying accounting records;
Assessing the disclosures in the consolidated financial
statements against the requirements of NZ IFRS;
Testing key controls over arrears calculations, customer loan
ratings, annual loan reviews, credit risk reviews and model
validations;
Evaluating credit assessments for a sample of ‘rural’ and other
‘corporate’ loans that are either individually above $10 million or
on management’s credit watchlist. This included inspection of the
latest correspondence with the borrower, assessment of the
provision estimates prepared by credit risk officers, and
consideration of the resolution strategy; including challenging
assumptions based on our experience and industry knowledge,
and assessing collateral values by comparing them to valuations
performed by independent valuers;
Assessing individually significant loans in arrears not specifically
56
The key audit matter How the matter was addressed in our audit
determine the collective provision based on
historical data, adjusted for forward looking
information.
Additionally management apply judgement in
the determination of provision overlays to
adjust for future market conditions.
The level of judgement involved in
determining the provision for collectively
impaired assets requires us to challenge the
appropriateness of management’s
assumptions.
provided for, to determine whether they were being appropriately
monitored and incorporated into the provision for collectively
impaired assets;
Testing key inputs used in the ECL calculation for significant
portfolios. This included testing data reconciliation controls
between the ECL models and source systems;
Challenging the key assumptions in the models such as
probability of default, loss given default and forward-looking
assumptions for a sample of models. We compared modelled
estimates against actual losses incurred by the Group and
forward-looking assumptions against external economic
information; and
Assessing management’s judgement in the application of
overlays by applying sensitivities to assumptions underlying the
overlays, and evaluating current economic and climatic conditions
linked to the overlays, not captured in the Group’s models.
The estimates and assumptions used to determine the provision for
impairment of finance receivables are reasonable, with no evidence of
management bias or influence identified from our procedures.
We did not identify any material issues or exceptions from our
procedures.
Valuation of finance receivables - reverse mortgages
Refer to notes 13 and 20 to the consolidated financial statements.
The Group’s reverse mortgage portfolio is
held at fair value.
The fair value calculation is based on the
application of management judgement. In
assessing the fair value the Group
continuously considers evidence of a
relevant active market. In the absence of
such a market, in the current period, the
Group considered changes since the original
lending and an independent actuarial
assessment of future cash flows.
The inherent uncertainties include estimated
future mortality and move to care rates,
voluntary exits, house price changes and
interest rate margin.
Together with KPMG valuation specialists, our procedures over the
fair value loan portfolios included:
Testing key controls over the accuracy of historic data impacting
the fair value assessment;
Assessing evidence of a relevant active market or observable
inputs; and
Challenging the key assumptions used by the Group in
determining the portfolio’s fair value.
The estimates and assumptions used to determine the valuation of
finance receivables are reasonable, with no evidence of management
bias or influence identified from our procedures.
We did not identify any material issues or exceptions from our
procedures.
Operation of IT systems and controls
The Group is heavily dependent on complex IT
systems for the processing and recording of
significant volumes of transactions and other
core banking activity.
For significant financial statement balances,
such as finance receivables and deposits, our
Our audit procedures, amongst others, included:
Gaining an understanding of business processes, key controls,
and IT systems relevant to significant financial statement
balances, including technology services provided by a third
party;
57
The key audit matter How the matter was addressed in our audit
audit involves an assessment of the design of
the Group’s internal control environment
relevant to the preparation of these
consolidated financial statements. There are
some areas of the audit where we seek to test
and place reliance on IT systems, automated
controls and reporting.
The effective operation of these controls is
dependent upon the Group’s general IT control
environment, which incorporates controls
relevant to IT system changes and
development, IT operations, developer and
user access controls.
Assessing the effectiveness of the IT control environment,
including core banking IT systems, key automated controls and
reporting; and
Evaluating general IT controls relevant to IT system changes
and development, IT operations, developer and user access
controls.
In performing our work, we identified design and operating
effectiveness control observations that impacted the level of
reliance we could place on IT systems, automated controls and
reports.
In response, we performed additional compensating control tests
and substantive audit procedures:
We carried out substantive testing on IT systems and controls
to assess:
(i) the accuracy of automated controls and IT system
calculated transactions and balances, such as interest
income and expense;
(ii) the reliability of automated reporting, such as IT system
generated arrears reporting; and
(iii) the operation of technology dependent manual controls;
We performed additional control testing on compensating
controls, including management and governance review
controls; and
We completed further substantive audit procedures over
significant financial statement balances, where required to
support our audit.
We did not identify any material issues or exceptions from those
additional procedures.
Other information
The Directors, on behalf of the Group, are responsible for the other information included in the entity’s Annual
Report. Other information may include the Annual Review and information included in the Financial Report. Our
opinion on the consolidated financial statements does not cover any other information and we do not express any
form of assurance conclusion thereon.
The Annual Report is expected to be made available to us after the date of this Independent Auditor's Report. Our
responsibility is to read the Annual Report when it becomes available and consider whether the other information
it contains is materially inconsistent with the consolidated financial statements, or our knowledge obtained in the
audit, or otherwise appears misstated. If so, we are required to report such matters to the Directors.
Use of this independent auditor’s report
This independent auditor’s report is made solely to the shareholders as a body. Our audit work has been
undertaken so that we might state to the shareholders those matters we are required to state to them in the
independent auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept
or assume responsibility to anyone other than the shareholders as a body for our audit work, this independent
auditor’s report, or any of the opinions we have formed.
58
Responsibilities of the Directors for the consolidated financial
statements
The Directors, on behalf of the Company, are responsible for:
— the preparation and fair presentation of the consolidated financial statements in accordance with generally
accepted accounting practice in New Zealand (being New Zealand Equivalents to International Financial
Reporting Standards) and International Financial Reporting Standards;
— implementing necessary internal control to enable the preparation of a consolidated set of financial
statements that is fairly presented and free from material misstatement, whether due to fraud or error; and
— assessing the ability to continue as a going concern. This includes disclosing, as applicable, matters related
to going concern and using the going concern basis of accounting unless they either intend to liquidate or to
cease operations, or have no realistic alternative but to do so.
Auditor’s responsibilities for the audit of the consolidated financial
statements
Our objective is:
— to obtain reasonable assurance about whether the consolidated financial statements as a whole are free
from material misstatement, whether due to fraud or error; and
— to issue an independent auditor’s report that includes our opinion.
Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance
with ISAs NZ will always detect a material misstatement when it exists.
Misstatements can arise from fraud or error. They are considered material if, individually or in the aggregate,
they could reasonably be expected to influence the economic decisions of users taken on the basis of these
consolidated financial statements.
A further description of our responsibilities for the audit of these consolidated financial statements is located at
the External Reporting Board (XRB) website at:
http://www.xrb.govt.nz/standards-for-assurance-practitioners/auditors-responsibilities/audit-report-1/
This description forms part of our independent auditor’s report.
The engagement partner on the audit resulting in this independent auditor's report is Graeme Edwards.
For and on behalf of
KPMG
Auckland
15 August 2019
Data sourced from publicly available filings. Our datasets may not be complete. Automated analysis can produce errors. If you believe any data on this page is incorrect, please contact us at hello@nzxplorer.co.nz. For informational purposes only. Not investment advice.
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