Heartland Bank Half Year Disclosure Statement
NZX Release
Heartland Bank Half Year Disclosure Statement
28 February 2020
Heartland Bank Limited (Heartland) (NZX: HBL) has released its disclosure statement for the six
months ended 31 December 2019. A copy of the disclosure statement is attached.
-ENDS-
For further information, please contact:
Chris Flood
Chief Executive Officer
Heartland Bank Limited
DDI 09 927 9139
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2
Contents
GENERAL INFORMATION ................................................................................................................................................................................. 3
PRIORITY OF CREDITORS’ CLAIMS.................................................................................................................................................................... 3
GUARANTEE ARRANGEMENTS ........................................................................................................................................................................ 3
DIRECTORS ..................................................................................................................................................................................................... 3
AUDITOR ........................................................................................................................................................................................................ 3
DIRECTORS' STATEMENTS ............................................................................................................................................................................... 4
CONSOLIDATED INTERIM STATEMENT OF COMPREHENSIVE INCOME ...................................................................... 5
CONSOLIDATED INTERIM STATEMENT OF CHANGES IN EQUITY ............................................................................... 6
CONSOLIDATED INTERIM STATEMENT OF FINANCIAL POSITION .............................................................................. 8
CONSOLIDATED INTERIM STATEMENT OF CASH FLOWS ........................................................................................... 9
NOTES TO THE INTERIM FINANCIAL STATEMENTS .................................................................................................. 11
1 Financial statements preparation ........................................................................................................................................................ 11
PERFORMANCE ...................................................................................................................................................... 13
2 Segmental analysis ............................................................................................................................................................................. 13
3 Net interest income ............................................................................................................................................................................ 15
4 Operating expenses ............................................................................................................................................................................ 15
5 Impaired asset expense ...................................................................................................................................................................... 16
6 Discontinued operations ..................................................................................................................................................................... 16
FINANCIAL POSITION ............................................................................................................................................. 18
7 Finance Receivables ............................................................................................................................................................................ 18
8 Borrowings ......................................................................................................................................................................................... 23
9 Share capital and dividends ................................................................................................................................................................ 24
10 Related party transactions and balances ............................................................................................................................................. 24
11 Fair value ............................................................................................................................................................................................ 26
RISK MANAGEMENT .............................................................................................................................................. 28
12 Enterprise risk management program ................................................................................................................................................. 28
13 Credit risk exposure ............................................................................................................................................................................ 28
14 Asset quality ....................................................................................................................................................................................... 30
15 Liquidity risk ....................................................................................................................................................................................... 32
16 Interest rate risk ................................................................................................................................................................................. 33
17 Concentrations of funding .................................................................................................................................................................. 34
Other Disclosures ................................................................................................................................................... 35
18 Structured entities .............................................................................................................................................................................. 35
19 Capital adequacy ................................................................................................................................................................................ 36
20 Insurance business, securitisation, funds management, other fiduciary activities ................................................................................ 41
21 Contingent liabilities and commitments .............................................................................................................................................. 41
22 Events after the reporting date ........................................................................................................................................................... 41
CONDITIONS OF REGISTRATION .................................................................................................................................................................... 42
CREDIT RATINGS ........................................................................................................................................................................................... 43
OTHER MATERIAL MATTERS .......................................................................................................................................................................... 43
Auditor’s Independent Review Report .................................................................................................................... 44
3
GENERAL INFORMATION
This Disclosure Statement has been issued by Heartland Bank Limited (the Bank) and its subsidiaries (collectively the Banking
Group) for the six months ended 31 December 2019 in accordance with the Registered Bank Disclosure Statements (New Zealand
Incorporated Registered Banks) Order 2014 (as amended) (the Order). The interim financial statements of the Banking Group for
the six months ended 31 December 2019 form part of, and should be read in conjunction with, this Disclosure Statement.
Words and phrases defined by the Order have the same meanings when used in this Disclosure Statement.
The Bank's address for service is Level 3, Heartland House, 35 Teed Street, Newmarket, Auckland.
PRIORITY OF CREDITORS’ CLAIMS
In the event of the Bank becoming insolvent or ceasing business, certain claims set out in legislation are paid in priority to others.
These claims include secured creditors, taxes, certain payments to employees and any liquidator’s costs. After payment of those
creditors, the claims of all other creditors are unsecured and would rank equally, with the exception of holders of subordinated
bonds and notes which rank below all other claims.
GUARANTEE ARRANGEMENTS
As at the date this Disclosure Statement was signed, no material obligations of the Banking Group were guaranteed.
DIRECTORS
All Directors of the Bank reside in New Zealand with the exception of Ellen Comerford who resides in Australia. Communications to
the Directors can be sent to Heartland Bank Limited, 35 Teed Street, Newmarket, Auckland.
There have been no changes in the composition of the Board of Directors of the Bank since 30 June 2019 to the six months ended
31 December 2019.
Vanessa C M Stoddart has resigned from the Board of Directors effective 1 January 2020.
Shelley M Ruha was appointed to the Board of Directors as an independent non-executive director effective 1 January 2020.
AUDITOR
KPMG
KPMG Centre
18 Viaduct Harbour Avenue
Auckland
4
DIRECTORS' STATEMENTS
Each Director of the Bank states that he or she believes, after due enquiry, that:
As at the date on which this Disclosure Statement is signed:
a. The Disclosure Statement contains all the information that is required by the Order; and
b. The Disclosure Statement is not false or misleading.
During the six months ended 31 December 2019:
a. The Bank has complied with the conditions of registration applicable during the period except as noted on page 42.
b. Credit exposures to connected persons were not contrary to the interests of the Banking Group; and
c. The Bank had systems in place to monitor and control adequately the material risks of the Banking Group, including
credit risk, concentration of credit risk, interest rate risk, currency risk, equity risk, liquidity risk, operational risk and
other businesses risks, and that those systems were being properly applied.
This Disclosure Statement is dated 28 February 2020 and has been signed by all the Directors.
B R Irvine (Chair) K Morrison
J K Greenslade G T Ricketts
E J Harvey S M Ruha
E F Comerford
5
CONSOLIDATED INTERIM STATEMENT OF COMPREHENSIVE INCOME
For the six months ended 31 December 2019
Unaudited Unaudited Audited
6 months to 6 months to 12 months to
$000's
NOTE
December 2019 December 2018 June 2019
Interest income
3
148,680 143,367 288,370
Interest expense
3
55,708 57,244 112,678
Net interest income
92,972 86,123 175,692
Operating lease income
2,910 2,871 5,262
Operating lease expenses
1,962 1,801 3,427
Net operating lease income
948 1,070 1,835
Lending and credit fee income
5,079 1,271 2,675
Other income
2,324 1,702 3,518
Net operating income
101,323 90,166 183,720
Operating expenses
4
44,498 41,159 78,210
Profit before impaired asset expense and income tax
56,825 49,007 105,510
Fair value gain on investment property
- - 1,936
Impaired asset expense
5
8,975 13,164 20,554
Profit before income tax
47,850 35,843 86,892
Profit before income tax from discontinued operations
6
- 6,169 6,169
Income tax expense
12,954 11,616 24,762
Profit for the period/year 34,896 30,396 68,299
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
1,843 781 (4,762)
Movement in fair value reserve, net of income tax (968) 170 2,968
Movement in foreign currency translation reserve, net of
income tax
- (4,229) (4,229)
Items that will not be reclassified to profit or loss:
Movement in defined benefit reserve, net of income tax - - (86)
Other comprehensive expense for the year, net of income tax 875 (3,278) (6,109)
Total comprehensive income for the period/year 35,771 27,118 62,190
Total comprehensive income for the period is attributable to the owner(s) of the Bank.
The notes on pages 11 to 41 are an integral part of this consolidated interim financial statement.
6
CONSOLIDATED INTERIM STATEMENT OF CHANGES IN EQUITY
For the six months ended 31 December 2019
$000's
NOTE
Share
Capital
Employee
Benefits
Reserve
Foreign
Currency
Translation
Reserve
Fair
Value
Reserve
Defined
Benefit
Reserve
Cash
Flow
Hedge
Reserve
Retained
Earnings
Total
Equity
Unaudited - December 2019
Balance at 1 July 2019 553,239 - - 4,558 171 (5,843) 51,265 603,390
NZ IFRS 16 adjustment 1 - - - - - - (639) (639)
Restated balance at beginning of
period
553,239 - - 4,558 171 (5,843) 50,626 602,751
Total comprehensive income for
the period
Profit for the period - - - - - - 34,896 34,896
Other comprehensive
income/(loss) net of income tax
- - - (968) - 1,843 - 875
Total comprehensive income for
the period
- - - (968) - 1,843 34,896 35,771
Contributions by and distributions
to owners
Dividends paid 9 - - - - - - (65,000) (65,000)
Total transactions with owners - - - - - - (65,000) (65,000)
Balance as at 31 December 2019 553,239 - - 3,590 171 (4,000) 20,522 573,522
Unaudited - December 2018
Balance at 1 July 2018 542,315 2,559 1,260 1,590 257 (1,081) 117,260 664,160
NZ IFRS 9 adjustment (Restated) - - - - - - (19,283) (19,283)
Restated balance at beginning of
period
542,315 2,559 1,260 1,590 257 (1,081) 97,977 644,877
Total comprehensive income for
the period
Profit for the period - - - - - - 30,396 30,396
Other comprehensive
income/(loss) net of income tax
- - (4,229) 170 - 781 - (3,278)
Total comprehensive income for
the period
- - (4,229) 170 - 781 30,396 27,118
Contributions by and distributions
to owners
Dividends paid 9 - - - - - - (30,808) (30,808)
Dividends to Heartland Group
Holdings Limited
9 - - - - - - (61,444) (61,444)
Sale of business - - 2,969 - - - (2,969) -
Dividend reinvestment plan 9 8,584 - - - - - - 8,584
Shares based payments - 383 - - - - - 383
Total transactions with owners 8,584 383 2,969 - - - (95,221) (83,285)
Balance as at 31 December 2018 550,899 2,942 - 1,760 257 (300) 33,152 588,710
The notes on pages 11 to 41 are an integral part of this consolidated interim financial statement.
7
CONSOLIDATED INTERIM STATEMENT OF CHANGES IN EQUITY
For the six months ended 31 December 2019 (continued)
$000's
NOTE
Share
Capital
Employee
Benefits
Reserve
Foreign
Currency
Translation
Reserve
Fair
Value
Reserve
Defined
Benefit
Reserve
Cash
Flow
Hedge
Reserve
Retained
Earnings
Total
Equity
Audited – June 2019
Balance at 1 July 2018 542,315 2,559 1,260 1,590 257 (1,081) 117,260 664,160
NZ IFRS 9 adjustment - - - - - - (19,283) (19,283)
Restated balance at beginning of
year
542,315 2,559 1,260 1,590 257 (1,081) 97,977 644,877
Total comprehensive income for
the year
Profit for the year - - - - - - 68,299 68,299
Other comprehensive
income/(loss) net of income tax
- - (4,229) 2,968 (86) (4,762) - (6,109)
Total comprehensive income for
the year
- - (4,229) 2,968 (86) (4,762) 68,299 62,190
Contributions by and distributions
to owners
Dividends paid
9
- - - - - - (30,808) (30,808)
Dividends to Heartland Group
Holdings Limited
9
- - - - - - (81,234) (81,234)
Transfer of ownership - (297) - - - - - (297)
Sale of business - - 2,969 - - - (2,969) -
Dividend reinvestment plan 9 8,584 - - - - - - 8,584
Share based payments - 78 - - - - - 78
Shares vested 2,340 (2,340) - - - - - -
Total transactions with owners 10,924 (2,559) 2,969 - - - (115,011) (103,677)
Balance as at 30 June 2019 553,239 - - 4,558 171 (5,843) 51,265 603,390
The notes on pages 11 to 41 are an integral part of this consolidated interim financial statement.
8
CONSOLIDATED INTERIM STATEMENT OF FINANCIAL POSITION
As at 31 December 2019
Unaudited Unaudited Audited
6 months to 6 months to 12 months to
December 2019 December 2018 June 2019
$000's
NOTE
(Restated)
Assets
Cash and cash equivalents
122,737
75,770 45,228
Investments
307,958
318,961 354,928
Investment properties
11,132
9,196 11,132
Derivative financial instruments
10,806 1,238
12,650
Due from related parties 10(c)
2,063
47,923 21,177
Finance receivables 7(a)
3,101,366
2,984,609 3,029,231
Finance receivables - reverse mortgages 7(b)
586,003
478,037 561,211
Right of use assets
19,225
- -
Operating lease vehicles
18,549
16,430 15,516
Other assets
14,969
15,265 20,379
Intangible assets
56,781
58,123 57,335
Deferred tax asset
10,019
12,077 9,948
Total assets
4,261,608
4,017,629 4,138,735
Liabilities
Retail deposits 8
3,244,035
2,988,365 3,153,681
Other borrowings 8
385,163
424,401 345,273
Due to related parties 10(c)
2,138
- -
Lease liabilities
20,623
- -
Tax liabilities
6,133
851 5,667
Derivative financial instruments
9,843
148 10,372
Trade and other payables
20,151
15,154 20,352
Total liabilities
3,688,086
3,428,919 3,535,345
Equity
Share capital 9
553,239
550,899 553,239
Retained earnings and other reserves
20,283
37,811 50,151
Total equity
573,522
588,710 603,390
Total equity and liabilities
4,261,608
4,017,629 4,138,735
Total interest earning and discount bearing assets
-
4,113,206 3,840,471 4,003,982
Total interest and discount bearing liabilities 3,617,793 3,396,306 3,497,499
The notes on pages 11 to 41 are an integral part of this consolidated interim financial statement.
9
CONSOLIDATED INTERIM STATEMENT OF CASH FLOWS
For the six months ended 31 December 2019
Unaudited Unaudited Audited
6 months to 6 months to 12 months to
$000's NOTE December 2019 December 2018 June 2019
Cash flows from operating activities
Interest received
159,811 144,412 292,851
Operating lease income received
2,449 2,961 2,930
Lending, credit fees and other income received
4,712 1,871 4,761
Operating inflows
166,972
149,244 300,542
Interest paid (55,889) (76,833) (121,748)
Payments to suppliers and employees (44,656) (48,639) (84,682)
Taxation paid (9,888) (15,907) (21,888)
Operating outflows (110,433) (141,379) (228,318)
Net cash flows from operating activities before changes
in operating assets and liabilities
56,539 7,865 72,224
Proceeds from sale of operating lease vehicles 1,101 2,414 4,641
Purchase of operating lease vehicles (6,613) (2,996) (5,495)
Net movement in finance receivables (103,358) (224,748) (368,561)
Net movement in deposits 90,354 105,529 271,876
Net cash flows from / (applied to) operating activities 38,023 (111,936) (25,315)
Cash flows from investing activities
Sale of equity investments 12,477 - -
Net decrease in investments 34,493 21,928 -
Total cash provided from investing activities 46,970 21,928 -
Purchase of office fit-out, equipment and intangible
assets
(5,027) (2,379) (4,188)
Net increase in investments - - (11,468)
Total cash applied to investing activities (5,027) (2,379) (15,656)
Net cash flows from / (applied to) investing activities
41,943 19,549 (15,656)
Cash flows from financing activities
Net increase in wholesale funding
41,876 232,404 45,236
Proceeds from issue of Unsubordinated Notes
- - 125,000
Proceeds from related party repayments 21,252 - -
Total cash provided from financing activities
63,128 232,404 170,236
Dividends paid 9 (65,000) (22,224) (42,014)
Repayments of subordinated Notes
- (22,846) (22,846)
Repayments of leasing liabilities
(585) - -
Total cash applied to financing activities (65,585) (45,070) (64,860)
Net cash flows from / (applied to) financing activities (2,457) 187,334 105,376
Net increase in cash held 77,509 94,947 64,405
Opening cash and cash equivalents 45,228 49,588 49,588
Cash transferred on corporate restructure - (68,765) (68,765)
Closing cash and cash equivalents 122,737 75,770 45,228
The notes on pages 11 to 41 are an integral part of this consolidated interim financial statement.
10
CONSOLIDATED INTERIM STATEMENT OF CASH FLOWS
For the six months ended 31 December 2019 (continued)
Unaudited Unaudited
Audited
6 months to 6 months to 12 months to
$000's NOTE December 2019 December 2018 June 2019
Profit for the period 34,896 30,396 68,299
Add / (less) non-cash items:
Depreciation and amortisation expense 4,204 2,692 5,754
Depreciation on lease vehicles 1,962 1,681 3,363
Capitalised net interest income (6,692) (13,944) (11,886)
Impaired asset expense 8,975 13,164 21,181
Provision transfer on demerger - 619 (1,936)
Total non-cash items 8,449 4,212 16,476
Add / (less) movements in operating assets and liabilities:
Finance receivables (103,357) (224,748) (368,561)
Operating lease vehicles (4,652) (582) (1,354)
Other assets (6,370) (3,356) (6,584)
Right of use asset 19,225 - -
Current tax (79) (8,561) (3,744)
Derivative financial instruments revaluation 348 (1,948) (8,676)
Deferred tax (71) (7,006) 1,547
Deposits 90,354 105,529 271,876
Other liabilities (720) (5,872) 5,406
Total movements in operating assets and liabilities (5,322) (146,544) (110,090)
Net cash flows from / (applied to) operating activities 38,023 (111,936) (25,315)
The notes on pages 11 to 41 are an integral part of this consolidated interim financial statement.
11
NOTES TO THE INTERIM FINANCIAL STATEMENTS
For the 6 months ended 31 December 2019
1 Financial statements preparation
Basis of reporting
The interim financial statements of the Banking Group incorporated in this Disclosure Statement have been prepared in
accordance with the Order, Generally Accepted Accounting Practice in New Zealand (NZ GAAP) as defined in the Financial
Reporting Act 2013, NZ IAS 34 Interim Financial Reporting as appropriate for publicly accountable for-profit entities and IAS 34
Interim Financial Reporting.
The disclosure statement does not include all notes of the type normally included in an annual financial report. Accordingly, this
report is to be read in conjunction with the Disclosure Statement for the year ended 30 June 2019 and any public announcements
made by the bank during the interim reporting period.
The interim financial statements presented here are for the following periods:
6 month period ended 31 December 2019 – Unaudited
6 month period ended 31 December 2018 – Unaudited
12 month period ended 30 June 2019 – Audited
The accounting policies adopted are consistent with those of the previous financial year and corresponding interim reporting
period with the exception of the adoption of new and amended standards as set out below.
Impact of adopting NZ IFRS 16 Leases
The Banking Group has adopted NZ IFRS 16 retrospectively from 1 July 2019, but has not restated comparatives for the 2019
reporting period, as permitted under the specific transitional provisions in the standard. The reclassifications and the adjustments
arising from the new leasing rules are therefore recognised in the opening balance sheet on 1 July 2019.
Accounting treatment for leasing activities
The Bank leases office space, car parks, equipment and cars. Rental contracts are typically made for fixed periods but may have
extension options. Lease terms are negotiated on an individual basis and contain a wide range of different terms and conditions.
Until 30 June 2019, leases of property, plant and equipment were classified as either finance or operating leases. Payments made
under operating leases (net of any incentives received from the lessor) were charged to profit or loss.
From 1 July 2019, leases are recognised as a right-of-use asset and a corresponding liability at the date at which the leased asset is
available for use by the Banking Group. The right-of-use assets are initially measured at cost, comprising the amount of the initial
measurement of lease liability, any lease payments made at or before the commencement date less any lease incentives received,
any initial direct costs and restoration costs. The right-of-use asset is depreciated over the shorter of the asset's estimated useful
life and the lease term on a straight-line basis. The estimated useful lives of right-of-use assets are determined on the same basis
as those of property, plant and equipment.
In determining the lease term, management considers all facts and circumstances that create an economic incentive to exercise an
extension option. Extension options are only included in the lease term if the lease is reasonably certain to be extended.
Payments associated with short-term leases and leases of low-value assets are recognised on a straight-line basis as an expense in
profit or loss. Short-term leases are leases with a lease term of 12 months or less.
On adoption of NZ IFRS 16, the Banking Group recognised lease liabilities in relation to leases which had previously been classified
as ‘operating leases’ under the principles of NZ IAS 17 Leases. These liabilities were measured at the present value of the remaining
lease payments, discounted using the lessee’s incremental borrowing rate as at 1 July 2019. The weighted average lessee’s
incremental borrowing rate applied to the lease liabilities on 1 July 2019 was 2.9%.
12
1 Financial statements preparation (continued)
The Banking Group elected not to reassess whether a contract is, or contains a lease at the date of initial application. Instead, for
contracts entered into before the transition date, the Banking Group relied on its assessment made applying NZ IAS 17 and NZ
IFRIC 4 Determining whether an Arrangement contains a Lease.
$000’s
Operating lease commitments as at 30 June 2019 11,573
Discounted using the Banking Group's incremental borrowing rate on initial application (1,019)
Adjustments relating to changes in the index or rate effective variable payments 316
Lease liability recognised as at 1 July 2019 10,870
Of which are:
Current lease liabilities 1,762
Non-current lease liabilities 9,108
Total lease liabilities 10,870
The associated right-of-use assets of which are substantially in relation to property leases were measured on a retrospective basis
as if the new rules had always been applied. There were no onerous lease contracts that would have required an adjustment to the
right-of-use assets at the date of initial application.
The change in accounting policy affected the following items in the balance sheet on 1 July 2019.
Right-of-use assets: increased by $10.0 million
Deferred tax assets: increased by $0.2 million
Lease liabilities: increased by $10.8million
The net impact on retained earnings on 1 July 2019 was a decrease of $0.6 million.
The adoption of NZ IFRS 16 has no material impact to the Banking Group’s leasing business where the Banking Group acts as the
lessor.
There have been no other changes to accounting policies or other new or amended standards that are issued and effective that are
expected to have a material impact on the Banking Group.
Accounting standards issued but not yet effective
NZ IFRS 17 Insurance Contracts was issued in July 2017 and is applicable to general and life insurance contracts. NZ IFRS 17 will
replace NZ IFRS 4 Insurance Contracts. In mid-2019 an Exposure Draft on amendments to NZ IFRS 17 was issued and proposed that
the effective date of NZ IFRS 17 be deferred by one year. As such it is expected that the standard will be effective for the Banking
Group for the financial year ending 30 June 2023. The Banking Group is in the process of restructuring its insurance business and
will assess the impact arising from NZ IFRS 17 in conjunction with the restructure. Further information on the restructure is
included in Note 20 of this Disclosure Statement.
Other amendments to existing standards that are not yet effective are not expected to have a material impact to the Group.
13
PERFORMANCE
2 Segmental analysis
Segment information is presented in respect of the Banking Group's operating segments which are those used for the Banking
Group's management and internal reporting structure.
Operating segments
Motor Motor vehicle finance.
Reverse Mortgages Reverse mortgage lending.
Other Personal A comprehensive range of financial services – including term, transactional and savings-based deposit
accounts and personal loans to individuals.
Business Term debt, plant and equipment finance, commercial mortgage lending and working capital solutions
for small-to-medium businesses.
Rural 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.
Certain operating expenses and assets, such as premises, IT and support centre costs are not allocated to operating segments and
are included in Other.
The Banking Group's operating segments are different from the industry categories detailed in Note 14- Asset quality. The
operating segments are primarily categorised by sales channel, whereas Note 14 - Asset quality is based on credit risk
concentrations.
Motor
Reverse
Mortgages
Other
Personal
Business Rural Other Total
$000's
31 December 2019 (Unaudited)
Net interest income 28,204 12,176 9,238 28,026 15,380 (52) 92,972
Net other income 1,895 2,824 646 1,317 535 1,134 8,351
Net operating income 30,099 15,000 9,884 29,343 15,915 1,082 101,323
Operating expenses 1,615 3,331 1,934 5,980 1,396 30,242 44,498
Profit/(loss) before impaired
asset expense and income tax
28,484 11,669 7,950 23,363 14,519 (29,160) 56,825
Impaired asset expense 3,611 - 3,345 1,880 139 - 8,975
Profit/(loss) before income tax
from continuing operations
24,873 11,669 4,605 21,483 14,380 (29,160) 47,850
Income tax expense - - - - - 12,954 12,954
Profit/(loss) for the period 24,873 11,669 4,605 21,483 14,380 (42,114) 34,896
Total assets
1,127,408 586,003 244,498 1,148,614 615,072 540,013 4,261,608
Total liabilities - - - - - 3,688,086 3,688,086
14
2 Segmental analysis (continued)
Motor
Reverse
Mortgages
Other
Personal
Business Rural Other Total
$000's
31 December 2018 (Unaudited)
Net interest income 27,716 9,937 8,304 26,904 15,426 (2,164) 86,123
Net other income 467 112 1,195 723 404 1,142 4,043
Net operating income 28,183 10,049 9,499 27,627 15,830 (1,022) 90,166
Operating expenses 1,203 1,261 2,975 4,539 1,899 29,282 41,159
Profit / (loss) before impaired
asset expense and income tax
26,980 8,788 6,524 23,088 13,931 (30,304) 49,007
Impaired asset expense /
(benefit)
4,654 - 5,036 3,812 (135) (203) 13,164
Profit / (loss) before income tax 22,326 8,788 1,488 19,276 14,066 (30,101) 35,843
Profit before income tax from
discontinued operations
- - - - - 6,169 6,169
Income tax expense - - - - - 11,616 11,616
Profit / (loss) for the period 22,326 8,788 1,488 19,276 14,066 (35,548) 30,396
Total assets (Restated) 1,021,673 478,037 200,823 1,083,029 634,486 599,581 4,017,629
Total liabilities - - - - - 3,428,919 3,428,919
Motor
Reverse
Mortgages
Other
Personal
Business Rural Other Total
$000's
30 June 2019 (Audited)
Net interest income 54,753 20,673 16,345 54,334 30,865 (1,278) 175,692
Net other income 2,313 224 2,563 1,524 816 588 8,028
Net operating income 57,066 20,897 18,908 55,858 31,681 (690) 183,720
Operating expenses 2,543 2,279 5,602 9,163 3,263 55,360 78,210
Profit/(loss) before impaired
asset expense and income tax
54,523 18,618 13,306 46,695 28,418 (56,050) 105,510
Fair value movement on
investment property
- - - - - 1,936 1,936
Impaired asset expense /
(benefit)
5,009 268 8,307 7,102 (132) - 20,554
Profit/(loss) before income tax
from continuing operations
49,514 18,350 4,999 39,593 28,550 (54,114) 86,892
Profit before income tax from
discontinued operations
- - - - - 6,169 6,169
Income tax expense - - - - - 24,762 24,762
Profit/(loss) for the year 49,514 18,350 4,999 39,593 28,550 (72,707) 68,299
Total assets
1,074,446 561,211 215,253 1,096,253 643,278 548,294 4,138,735
Total liabilities - - - - - 3,535,345 3,535,345
15
3 Net interest income
Unaudited Unaudited Audited
6 months to 6 months to 12 months to
$000's
December 2019 December 2018 June 2019
Interest income
Cash and cash equivalents 301 312 717
Investments 4,448 4,906 10,864
Finance receivables 124,658 120,521 242,556
Finance receivables - reverse mortgages 19,273 17,628 34,233
Total interest income 148,680 143,367 288,370
Interest expense
Retail deposits 47,741 48,595 97,119
Other borrowings 6,568 7,239 12,313
Net interest expense on derivative financial instruments 1,399 1,410 3,246
Total interest expense 55,708 57,244 112,678
Net interest income 92,972 86,123 175,692
4 Operating expenses
Unaudited Unaudited Audited
6 months to 6 months to 12 months to
$000's
December 2019 December 2018 June 2019
Personnel expenses 23,457 21,267 41,730
Directors' fees 310 439 822
Audit and review of financial statements
1
317 319 472
Other assurance services paid to auditor
2
31 15 47
Amortisation - intangible assets 2,102 1,803 3,893
Depreciation - property, plant and equipment 1,061 889 1,861
Depreciation - right of use asset 1,041 - -
Operating lease expense as a lessee - 831 1,646
Legal and professional fees 1,657 1,226 2,278
Other operating expenses 14,522 14,370 25,461
Total operating expenses 44,498 41,159 78,210
1
Audit and review of financial statements includes fees paid for both audit of financial statements and review of interim financial statements.
2
Other assurance services paid to the auditor comprise review of regulatory returns, trust deed reporting, registry audits and other agreed upon procedures
engagements.
16
5 Impaired asset expense
At each reporting date, the Banking Group applies a three stage approach to measuring expected credit loss (ECL) to finance
receivables not carried at fair value. The following table details impairment charges of those finance receivables for the six months
ended 31 December 2019.
Unaudited Unaudited Audited
6 months to 6 months to 12 months to
$000’s December 2019 December 2018 June 2019
Non-securitised
Individually impaired expense / (benefit)
553 (425) 1,311
Collectively impaired expense
8,421 14,245 19,529
Total non-securitised impaired asset expense
8,974 13,820 20,840
Securitised
Collectively impaired expense
1 (29) 341
Total securitised impaired asset expense
1 (29) 341
Total
Individually impaired expense
553 (425) 1,311
Collectively impaired expense
8,422 14,216 19,870
Total impaired asset expense
8,975 13,791 21,181
Reconciliation of impaired asset expense:
Impaired asset expense
8,975 13,164 20,554
Impaired asset expense for discontinued operations
- 627 627
Total impaired asset expense
8,975 13,791 21,181
6 Discontinued operations
Discontinued operations
At the Annual Shareholder Meeting in September 2018, the Bank’s shareholders approved a corporate restructure that resulted in
the Bank becoming a wholly owned subsidiary of a new company, Heartland Group Holdings Limited (HGH). On 31 October 2018,
shares in the Bank were exchanged for shares in HGH, and the Australian group of companies were transferred from the Bank to
HGH.
Discontinued operations are shown separately from continuing operations in the comparative consolidated statements.
Results of discontinued operation
The profit before income tax from the discontinued operations of $6.2 million is attributable entirely to the Banking Group. The
income tax expense for the discontinued operation was $1.6 million and profit after tax for the period was
$4.6 million.
17
6 Discontinued operations (continued)
Financial position of discontinued operation
Unaudited
$000's
October 2018
Financial position of assets of discontinued operation
Cash and cash equivalents
68,766
Finance receivables
725,146
Other assets
917
Deferred tax asset/liability
1,133
Total discontinued operations assets 795,962
Financial position of liabilities of discontinued operation
Other borrowings
665,950
Tax liabilities
2,047
Due to related parties
81,865
Total discontinued operations liabilities 749,862
Cash flow of discontinued operation
Unaudited
$000's
October 2018
Cash flows from discontinued operations
Net cash flows applied to operating activities
(8,060)
Net cash flow from investing activities
-
Net cash flows from financing activities
57,883
Net cash flows for the period 49,823
Profit on disposal
Unaudited
$000's
October 2018
In specie dividend to Heartland Group Holdings Limited 61,444
Total consideration received
61,444
Net assets
46,100
Goodwill
15,344
Gain on disposal
-
18
FINANCIAL POSITION
7 Finance Receivables
(a) Finance receivables held at amortised cost
Unaudited Unaudited Audited
December 2019 December 2018 June 2019
$000’s
(Restated)
Non-securitised
Neither 90 days past due nor impaired 3,049,814 2,817,843 3,016,844
At least 90 days past due 46,780 34,854 44,466
Individually impaired 28,433 35,889 26,412
Gross finance receivables 3,125,027 2,888,586 3,087,722
Less provision for impairment (60,381) (57,803) (58,491)
Total non-securitised finance receivables 3,064,646 2,830,783 3,029,231
Securitised
Neither 90 days past due nor impaired 36,843 154,642 -
At least 90 days past due - 197 -
Individually impaired - - -
Gross finance receivables 36,843 154,839 -
Less provision for impairment (123) (1,013) -
Total securitised finance receivables 36,720 153,826 -
Total
Neither 90 days past due nor impaired 3,086,657 2,972,485 3,016,844
At least 90 days past due 46,780 35,051 44,466
Individually impaired 28,433 35,889 26,412
Gross finance receivables 3,161,870 3,043,425 3,087,722
Less provision for impairment (60,504) (58,816) (58,491)
Total finance receivables 3,101,366 2,984,609 3,029,231
Refer to Note 14 – Asset quality for further analysis of finance receivables by credit risk concentration.
19
7 Finance Receivables (continued)
(a) Finance receivables held at amortised cost (continued)
Movement in provision
The following table details the movement from the opening balance to the closing balance of provision for impairment by class.
$000’s
12- month
ECL
Lifetime
ECL
Not credit
impaired
Lifetime
ECL
Credit
impaired
Specific
provision Total
Unaudited - December 2019
Non-securitised
Impairment allowance as at 1 July 2019
30,421 1,780 18,427 7,863 58,491
Changes in loss allowance
Transfer between stages
(925) (127) 1,046 - (6)
New and increased provision (net of collective
provision releases)
168 665 8,196 1,638 10,667
Recovery of amounts written off
- - (1,767) - (1,767)
Credit impairment charge
(757) 538 7,475 1,638 8,894
Recovery of amounts previously written off
- - 1,767 - 1,767
Write offs
- - (8,671) (100) (8,771)
Impairment allowance as at 31 December 2019 29,664 2,318 18,998 9,401 60,381
Securitised
Impairment allowance as at 1 July 2019
- - - - -
Changes in loss allowance
Transfer between stages
122 - - - 122
New and increased provision (net of collective
provision releases)
- 1 - - 1
Recovery of amounts written off
-
- - - -
Credit impairment charge
122 1 - - 123
Recovery of amounts previously written off
- - - - -
Write offs
- - - - -
Impairment allowance as at 31 December 2019 122 1 - - 123
Total
Impairment allowance as at 1 July 2019
30,421 1,780 18,427 7,863 58,491
Changes in loss allowance
Transfer between stages
(803) (127) 1,046 - 116
New and increased provision (net of collective
provision releases)
168 666 8,196 1,638 10,668
Recovery of amounts written off
-
- (1,767) - (1,767)
Credit impairment charge
(635) 539 7,475 1,638 9,017
Recovery of amounts previously written off
- - 1,767 - 1,767
Write offs
- - (8,671) (100) (8,771)
Impairment allowance as at 31 December 2019 29,786 2,319 18,998 9,401 60,504
20
7 Finance Receivables (continued)
(a) Finance receivables held at amortised cost (continued)
$000’s
12-month
ECL
(Restated)
Lifetime
ECL
Not credit
impaired
(Restated)
Lifetime
ECL
Credit
impaired
(Restated)
Collective
provision
June
2018
Specific
provision
(Restated)
Total
(Restated)
Unaudited - December 2018
Non-securitised
Impairment allowance as at 30 June 2018
- - - 20,301 9,066 29,367
Restated for adoption of NZ IFRS 9
31,784 1,365 14,945 (20,301) (169) 27,624
Restated impairment allowance as at 1 July 2018
31,784 1,365 14,945 - 8,897 56,991
Changes in loss allowance
Transfer between stages
(607) (108) 637 - - (78)
New and increased provision (net of
collective provision releases)
106 354 11,095 - 1,791 13,346
Recovery of amounts written off
- - (293) - (13) (306)
Credit impairment charge
(501) 246 11,439 - 1,778 12,962
Recovery of amounts previously written off
- - 293 - 13 306
Write offs
- - (7,953) - (4,503) (12,456)
Impairment allowance as at 31 December 2018 31,283 1,611 18,724 - 6,185 57,803
Securitised
Impairment allowance as at 30 June 2018
- - - 304 - 304
Restated for adoption of NZ IFRS 9
400 20 345 (304) - 461
Restated impairment allowance as at 1 July 2018
400 20 345 - - 765
Changes in loss allowance
Transfer between stages
616 - (369) - - 247
New and increased provision (net of
collective provision releases)
- 1 - - - 1
Recovery of amounts written off
- - - - - -
Credit impairment charge
616 1 (369) - - 248
Recovery of amounts previously written off
- - - - - -
Write offs
- - - - - -
Impairment allowance as at 31 December 2018 1,016 21 (24) - - 1,013
Total
Impairment allowance as at 30 June 2018
- - - 20,605 9,066 29,671
Restated for adoption of NZ IFRS 9
32,184 1,385 15,290 (20,605) (169) 28,085
Restated impairment allowance as at 1 July 2018
32,184 1,385 15,290 - 8,897 57,756
Changes in loss allowance
Transfer between stages
9 (108) 268 - - 169
New and increased provision (net of
collective provision releases)
106 355 11,095 - 1,791 13,347
Recovery of amounts written off
- - (293) - (13) (306)
Credit impairment charge
115 247 11,070 - 1,778 13,210
Recovery of amounts previously written off
- - 293 - 13 306
Write offs
- - (7,953) - (4,503) (12,456)
Impairment allowance as at 31 December 2018 32,299 1,632 18,700 - 6,185 58,816
21
7 Finance Receivables (continued)
(a) Finance receivables held at amortised cost (continued)
$000’s
12-month
ECL
Lifetime
ECL
Not credit
impaired
Lifetime
ECL
Credit
impaired
Collective
provision
June
2018
Specific
provision Total
Audited - June 2019
Non-securitised
Impairment allowance as at 30 June 2018
- - - 20,301 9,066 29,367
Restated for adoption of NZ IFRS 9
31,784 1,365 14,945 (20,301) (169) 27,624
Restated impairment allowance as at 1 July 2018
31,784 1,365 14,945 - 8,897 56,991
Changes in loss allowance
Transfer between stages
(1,071) (205) 11,671 - (43) 10,352
New and increased provision (net of
collective provision releases)
(292) 620 7,531 - 4,002 11,861
Recovery of amounts written off
- - (829) - - (829)
Credit impairment charge
(1,363) 415 18,373 - 3,959 21,384
Recovery of amounts written off
- - 829 - - 829
Write offs
- - (15,720) - (4,993) (20,713)
Impairment allowance as at 30 June 2019 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
400 20 345 (304) - 461
Restated impairment allowance as at 1 July 2018
400 20 345 - - 765
Changes in loss allowance
Transfer between stages
(400) (21) (345) - - (766)
New and increased provision (net of
collective provision releases)
- 1 - - - 1
Recovery of amounts written off
-
- - - - -
Credit impairment charge
(400)
(20) (345) - - (765)
Recovery of amounts written off
- - - - - -
Write offs
- - - - -
-
Impairment allowance as at 30 June 2019 - - - - - -
Total
Impairment allowance as at 30 June 2018
- - - 20,605 9,066 29,671
Restated for adoption of NZ IFRS 9
32,184 1,385 15,290 (20,605) (169) 28,085
Restated impairment allowance as at 1 July 2018
32,184 1,385 15,290 - 8,897 57,756
Changes in loss allowance
Transfer between stages
(1,471) (226) 11,326 - (43) 9,586
New and increased provision (net of
collective provision releases)
(292) 621 7,531 - 4,002 11,862
Recovery of amounts written off
- - (829) - - (829)
Credit impairment charge
(1,763) 395 18,028 - 3,959 20,619
Recovery of amounts written off
- - 829 - - 829
Write offs
- - (15,720) - (4,993) (20,713)
Impairment allowance as at 30 June 2019 30,421 1,780 18,427 - 7,863 58,491
22
7 Finance Receivables (continued)
(a) Finance receivables held at amortised cost (continued)
Impact of changes in gross finance receivables held at amortised cost on ECL
$000’s
12-
month
ECL
Lifetime
ECL
Lifetime
ECL
Specific
provision
Total
Not credit
impaired
Credit
impaired
Unaudited - December 2019
Gross finance receivables as at 1 July 2019 2,794,414 197,630 69,266 26,412 3,087,722
Transfer between stages (40,590) 9,697 27,069 3,824 -
Additions 922,101 62,329 6,788 - 991,218
Net Repayments (224,169) (15,773) (6,567) (1,803) (248,312)
Deletions (579,628) (58,431) (20,818) - (658,877)
Write offs (1,590) (1,960) (6,331) - (9,881)
Gross finance receivables as at 31 December 2019 2,870,538 193,492 69,407 28,433 3,161,870
(b) Finance receivables held at fair value
When the Bank enters into a reverse mortgage loan the Bank 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.
At balance date the Bank does not consider any of the above expectations to have moved outside of the original expectation range.
Therefore the Bank 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 loan terms and the current market conditions the fair value as
recorded is not considered to be sensitive to changes in house prices or interest rates.
$000’s
Unaudited
6 months to
December 2019
Unaudited
6 months to
December 2018
Audited
12 months to
June 2019
Gross finance receivables - reverse mortgages
586,003 478,037
561,211
Finance receivables - reverse mortgages
586,003 478,037 561,211
23
8 Borrowings
Unaudited Unaudited Audited
6 months to 6 months to 12 months to
$000’s
December 2019 December 2018 June 2019
Deposits
3,244,035 2,988,365 3,153,681
Total borrowings relating to deposits
3,244,035 2,988,365 3,153,681
Unsubordinated notes
285,337 151,902 285,435
Bank borrowings
- - 25,002
Certificate of deposits
69,811 144,555 34,836
Borrowings - securitised
30,015 127,944 -
Total other borrowings
385,163 424,401 345,273
Total borrowings
3,629,198 3,412,766 3,498,954
Deposits and unsubordinated notes rank equally and are unsecured.
The Group has the following unsubordinated notes on issue at balance sheet date:
Principal Valuation NOTE Issue date Maturity Date Frequency
$125 million Fair value 11(a) 12 April 2019 12 April 2024 Half yearly
$150 million Fair value 11(a) 21 September 2017 21 September 2022 Half yearly
24
9 Share capital and dividends
Unaudited Unaudited Audited
December 2019 December 2018 June 2019
000’s
Number of shares Number of shares Number of shares
Issued shares
Opening balance 565,430 560,588
560,588
Dividend reinvestment plan - 5,283
5,283
Shares issued during the period - -
-
Cancelled shares - (441)
(441)
Closing balance 565,430 565,430 565,430
There were no new shares issued during the period. The Bank had previously issued 5,282,619 new shares at $1.6250 per share on
21 September 2018 under the Dividend Reinvestment Plans for the financial year ended 30 June 2019.
Dividends paid
December 2019 June 2019
Date declared
Cents per
share
$000’s Date declared
Cents per
share
$000’s
Final dividend 15 August 2018 5.5 30,808
In specie dividend to HGH 31 October 2018 - 61,444
Interim dividends to HGH 01 August 2019 - 35,000 19 February 2019 - 19,790
29 November 2019 - 20,000
16 December 2019 - 10,000
Total dividends paid 65,000 112,042
10 Related party transactions and balances
A person or entity that is a related party under the following circumstances:
a) A person or a close member of that person’s family if that person:
i) Has control or joint control over the Bank;
ii) Has significant influence over the Bank; or
iii) Is a member of the key management personnel of the Bank.
b) An entity is related to the Bank if any of the following conditions applies:
i) The entity and the Bank are members of the same group.
ii) One entity is an associate or joint venture of the other entity.
iii) Both entities are joint ventures of the same third party.
iv) One entity is a joint venture of a third entity and the other entity is an associate of the third entity.
v) The entity is a post-employment benefit plan for the benefit of employees of either the reporting entity or an entity
related to the Bank.
vi) The entity is controlled, or jointly controlled by a person identified in (a).
vii) A person identified in (a)(i) has significant influence over the entity or is a member of the key management personnel
of the entity (or of a parent of the entity).
25
10 Related party transactions and balances (continued)
(a) Transactions with key management personnel
Key management personnel (KMP), are those who, directly or indirectly, have authority and responsibility for planning, directing
and controlling the activities of HGH and HBL. This includes all Executives and Non-Executive Directors and their immediate family
members are included below.
KMP receive personal banking and financial investment services from the Group in the ordinary course of business. The terms and
conditions, for example interest rates and collateral, and the risks to the Bank are comparable to transactions with other
employees and did not involve more than the normal risk of repayment or present other unfavourable features.
Unaudited Unaudited Audited
$000’s
6 months to
December 2019
6 months to
December 2018
12 months to
June 2019
Transactions with key management personnel
Interest income - - -
Interest expense (55) (31) (76)
Total transactions with key management personnel (55) (31) (76)
Due from / (to) key personnel
Borrowings - deposits (2,322) (2,960) (3,019)
Total due (to) key management personnel (2,322) (2,960) (3,019)
(b) Transaction with related parties
The Banking Group’s ultimate parent company is HGH.
The Bank has regular transactions with its ultimate parent company, fellow subsidiaries and subsidiaries (collectively known as the
Heartland Group) on agreed terms. The transactions include the provision of administrative services, tax transactions, and
customer operations and call centre. Banking facilities are provided by the Bank to other Heartland Group entities on normal
commercial terms as with other customers. There is no lending from the Banking Group to HGH.
Related party transactions between the Banking Group eliminate on consolidation.
Unaudited Unaudited Audited
$000’s
6 months to
December 2019
6 months to
December 2018
12 months to
June 2019
Heartland Group Holdings Limited
Deposits 10,010 - -
Interest expense 10 - -
Dividends 65,000 92,252 112,042
Disposal of investment in Harmoney Corp Limited 11,900 - -
Heartland Australia Group Pty Limited
Interest income 678 639 1,846
Funding repaid to the Bank 27,225 - -
(c) Due from/to related parties
Unaudited Unaudited Audited
6 months to 6 months to 12 months to
$000’s
December 2019 December 2018 June 2019
Due from
Heartland Group Holdings Limited 2,063 - -
Heartland Australia Group Pty Limited (Restated) - 47,923 24,179
Total due from related parties 2,063 47,923 24,179
Due to
Heartland Group Holdings Limited - - 3,002
Heartland Australia Group Pty Limited (Restated) 2,138 - -
Total due to related parties 2,138 - 3,002
26
11 Fair value
(a) Financial instruments measured at fair value
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
Unaudited - December 2019
Assets
Investments 282,428 16,572 1,988 300,988
Derivative financial assets - 10,806 - 10,806
Finance receivables - reverse mortgages - - 586,003 586,003
Total financial assets measured at fair value 282,428 27,378 587,991 897,797
Liabilities
Derivative financial liabilities - 9,843 - 9,843
Unsubordinated notes - 285,337 - 285,337
Total financial liabilities measured at fair value - 295,180 - 295,180
Unaudited - December 2018
Assets
Investments 209,048 100,219 9,694 318,961
Derivative financial assets - 1,238 - 1,238
Finance receivables - reverse mortgages - - 478,037 478,037
Total financial assets measured at fair value 209,048 101,457 487,731 798,236
Liabilities
Derivative financial liabilities - 148 - 148
Unsubordinated notes (restated) - 151,902 - 151,902
Total financial liabilities measured at fair value - 152,050 - 152,050
Audited - June 2019
Assets
Investments 255,875 86,618 12,435 354,928
Derivative financial assets - 12,650 - 12,650
Finance receivables - reverse mortgage - - 561,211 561,211
Total financial assets measured at fair value 255,875 99,268 573,646 928,789
Liabilities
Derivative financial liabilities - 10,372 - 10,372
Unsubordinated notes (restated) - 285,435 - 285,435
Total financial liabilities measured at fair value - 295,807 - 295,807
27
11 Fair value (continued)
(b) Financial instruments measured not at fair value
The following assets and liabilities of the Banking Group are not measured at fair value in the Consolidated Statement of Financial
Position.
Unaudited Unaudited Audited
Fair value
Hierarchy
Total Fair
Value
Total
Carrying
Value
Fair value
Hierarchy
Total Fair
Value
(Restated)
Total
Carrying
Value
(Restated)
Fair value
Hierarchy
Total Fair
Value
(Restated)
Total
Carrying
Value
(Restated)
$000's Dec-19 Dec-19 Dec-18 Dec-18 Jun-19 Jun-19
Assets
Cash and cash
equivalents
Level 1 122,737 122,737 Level 1 75,770 75,770 Level 1 45,228 45,228
Investments
1
Level 2 6,961 6,970 Level 2 - - Level 2 - -
Due from related parties Level 3 2,063 2,063 Level 2 47,923 47,923 Level 2 27,248 21,177
Finance receivables Level 2 3,082,052 3,101,366 Level 2 2,971,370 2,984,609 Level 2 3,017,327 3,029,231
Other financial assets Level 3 1,784 1,784 Level 3 1,337 1,337 Level 3 3,215 3,215
Total financial assets 3,215,597 3,234,920 3,096,400 3,109,639 3,093,018 3,098,851
Liabilities
Retail deposits Level 2 3,255,204 3,244,035 Level 2 2,993,208 2,988,365 Level 2 3,160,426 3,153,681
Borrowings - securitised Level 2 30,015 30,015 Level 2 127,944 127,944 Level 2 - -
Other borrowings Level 2 69,811 69,811 Level 2 144,555 144,555 Level 2 59,838 59,838
Due to related parties Level 3 2,138 2,138 Level 3 - - Level 3 - -
Other financial liabilities Level 3 10,897 10,897 Level 3 5,981 5,981 Level 3 10,769 10,769
Total financial liabilities 3,368,065 3,356,896 3,271,688 3,266,845 3,231,033 3,224,288
1
Included within investments are bank deposits which are held to support its contractual cash flows. Such investments are
measured at amortised cost.
Further information on valuation techniques and assumptions used for determining fair value is included in Note 21 of the Bank’s
Disclosure Statement for the year ended 30 June 2019.
28
RISK MANAGEMENT
12 Enterprise risk management program
There have been no material changes in the Banking group’s policies for managing risk, or material exposures to any new types of
risk since the reporting date of the previous disclosure statement, refer to the Bank’s disclosure statement for the year ended 30
June 2019.
13 Credit risk exposure
(a) 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.
Unaudited
$000's December 2019
Cash and cash equivalents 122,737
Investments 307,958
Finance receivables 3,101,366
Finance receivables - reverse mortgages 586,003
Derivative financial assets 10,806
Due from related parties 2,063
Other financial assets 1,784
Total on balance sheet credit exposures 4,132,717
(b) Concentration of credit by geographical region
Unaudited
$000's December 2019
New Zealand:
Auckland 1,187,425
Wellington 253,439
Rest of North Island 1,186,936
Canterbury 521,223
Rest of South Island 605,396
Australia:
Queensland 10,707
New South Wales 66,489
Victoria
22,970
Western Australia 9,495
South Australia 3,993
Rest of Australia 2,870
Rest of the world
1
322,278
4,193,221
Provision for impairment (60,504)
Total on balance sheet credit exposures 4,132,717
1
These overseas assets are primarily NZD denominated investments in AA+ and higher rated securities issued by offshore supranational agencies (“Kauri
Bonds”)
29
13 Credit risk exposure (continued)
(c) Concentration of credit by industry sector
Unaudited
$000’s Dec-19
Agriculture
709,731
Forestry and Fishing
90,469
Mining
14,185
Manufacturing
86,612
Finance & Insurance
28,675
Wholesale Trade
40,768
Retail Trade
138,997
Households
1,468,802
Property and Business Services
249,981
Transport and Storage
256,182
Other
1
1,108,819
4,193,221
Collective provision (60,504)
Total on balance sheet credit exposures
4,132,717
1
Industry sectors classified within Other include religious services, parking services, laundry and dry cleaning, other machinery and
equipment repair and maintenance.
As at 31 December 2019 there was nil of undrawn lending commitments available to counterparties for whom drawn balances
were classified as individually impaired.
(d) Credit exposures to individual counterparties
As at 31 December 2019 the Banking Group had 1 period end or peak end-of-day over the relevant six month period credit
exposures over 10% of equity to individual counterparties (not being members of groups of closely related counterparties) or
groups of closely related counterparties (excluding central government of any country with a long-term credit rating of A- or A3 or
above, or its equivalent, or any bank with a long-term credit rating of A- or A3 or above, or its equivalent, and connected persons).
The exposure information in the table below excludes exposures to connected persons, the central government or central bank of
any country with a long-term credit rating of A- or A3 or above, or its equivalent and any supranational or quasi-sovereign agency
with a long-term credit rating of A- or A3 or above, or its equivalent.
$000's
As at
31 December 2019
Peak end-of-day
over 6 months to
31 December 2019
Exposures to banks
Total number of exposures to banks that are greater than 10% of CET1
capital
1 1
with a long-term credit rating of A- or A3 or above, or its equivalent
1 1
with a credit rating of at least BBB- or Baa3, or its equivalent, and at the
most BBB+
- -
or Baa1 or its equivalent
- -
Exposures to non-banks
Total number of exposures to banks that are greater than 10% of CET1
capital -
-
with a long-term credit rating of A- or A3 or above, or its equivalent -
-
with a credit rating of at least BBB- or Baa3, or its equivalent, and at the
most BBB+ -
-
or Baa1 or its equivalent
30
14 Asset quality
The disclosures in this note are categorised by the following credit risk concentrations:
Corporate Business lending including rural lending
Residential Lending secured by a first ranking mortgage over a residential property used primarily for residential purposes
either by the mortgagor or a tenant of the mortgagor
All other This relates primarily to consumer lending to individuals
(a) Finance receivables by credit risk concentration
Corporate Residential All Other Total
$000's
Unaudited - December 2019
Neither 90 days past due nor impaired 1,894,580 610,775 1,167,305 3,672,660
At least 90 days past due 34,281 512 11,987 46,780
Individually impaired 28,433 - - 28,433
Gross Finance Receivables 1,957,294 611,287 1,179,292 3,747,873
Provision for impairment (35,593) (146) (24,765) (60,504)
Total net finance receivables 1,921,701 611,141 1,154,527 3,687,369
(b) Past due but not impaired
Unaudited - December 2019
Less than 30 days past due 32,847 996 39,835 73,678
At least 30 days but less than 60 days past due 9,796 141 14,125 24,062
At least 60 days but less than 90 days past due 3,335 461 21,552 25,348
At least 90 days past due 34,281 512 11,987
46,780
Total past due but not impaired 80,259 2,110 87,499 169,868
(c) Individually impaired assets
Unaudited - December 2019
Opening 26,412 - - 26,412
Additions 3,638 - - 3,638
Deletions (1,517) - - (1,517)
Write offs (100) - - (100)
Closing gross individually impaired assets 28,433 - - 28,433
Less: provision for individually impaired assets (9,401) (9,401)
Total net impaired assets 19,032 - - 19,032
31
14 Asset quality (continued)
(d) Movements in credit loss allowance
$'000s
12
month
ECL
Lifetime
ECL Not
credit
impaired
Lifetime
ECL
Credit
impaired
Specific
provision Total
Corporate
Impairment allowance as at 1 July 2019
21,404 670 4,533 7,863 34,470
Changes in loss allowance
Transfer between stages
18 41 58 - 117
New and increased provision (net of collective provision releases)
(400) 540 460 1,638 2,238
Recovery of amounts written off
- - - - -
Credit Impairment Charge
(382) 581 518 1,638 2,355
Add back recovery of amounts previously written off
- - - - -
Write offs
- - - (100) (100)
Impairment allowance as at 31 December 2019
21,022 1,251 5,051 9,401 36,725
Residential
Impairment allowance as at 1 July 2019
21 3 80 - 104
Changes in loss allowance
Transfer between stages
- (2) 2 - 0
New and increased provision (net of collective provision releases)
(4) 0 50 - 46
Recovery of amounts written off
- - - - -
Credit Impairment Charge
(4) (2) 52 - 46
Add back recovery of amounts previously written off
- - - - -
Write offs
- - - - -
Impairment allowance as at 31 December 2019
17 1 132 - 150
All Other
Impairment allowance as at 1 July 2019
8,996 1,107 13,814 - 23,917
Changes in loss allowance
Transfer between stages
(821) (166) 986 - (1)
New and increased provision (net of collective provision releases)
572 126 7,686 - 8,384
Recovery of amounts written off
- - (1,767) - (1,767)
Credit Impairment Charge
(249) (40) 6,905 - 6,616
Add back recovery of amounts previously written off
- - 1,767 - 1,767
Write offs
- - (8,671) - (8,671)
Impairment allowance as at 31 December 2019
8,747 1,067 13,815 - 23,629
Total
Impairment allowance as at 1 July 2019
30,421 1,780 18,427 7,863 58,491
Changes in loss allowance
Transfer between stages
(803) (127) 1,046 - 116
New and increased provision (net of collective provision releases)
168 666 8,196 1,638 10,668
Recovery of amounts written off
- - (1,767) - (1,767)
Credit Impairment Charge
(635) 539 7,475 1,638 9,017
Add back recovery of amounts previously written off
- - 1,767 - 1,767
Write offs
- - (8,671) (100) (8,771)
Impairment allowance as at 31 December 2019
29,786 2,319 18,998 9,401 60,504
(e) Other assets under administration
Other assets under administration are any loans, not being individually impaired or 90 days or more past due, where the customer
is in any form of voluntary or involuntary administration, including receivership, liquidation, bankruptcy or statutory management.
As at 31 December 2019, the Banking Group had $3.5 million assets under administration (December 2018: $2.29 million; June
2019: $5.8 million).
32
15 Liquidity risk
The Banking Group holds the following financial assets for the purpose of managing liquidity risk:
$000's
Unaudited
December 2019
Cash and cash equivalents 122,737
Investments 305,970
Undrawn committed bank facilities 119,985
Total liquidity 548,692
Contractual liquidity profile of financial assets and liabilities
The following tables present the Banking 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 Banking 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 Banking Group.
The Banking Group does not manage its liquidity risk on a contractual liquidity basis.
On 0-6 6-12 1-2 2-5 5+
$000's Demand Months Months Years Years Years Total
Unaudited - 31 December 2019
Financial assets
Cash and cash equivalents 122,737 - - - - - 122,737
Investments - 98,350 18,643 62,779 130,199 5,145 315,116
Finance receivables - 1,059,953 487,984 891,643 1,163,939 219,428 3,822,947
Finance receivables - reverse
mortgages
- 7,207 7,207 13,476 47,692 1,704,128 1,779,710
Due from related parties - 2,063 - - - - 2,063
Derivative financial instruments 10,806 - - - - - 10,806
Other financial assets - 1,784 - - - - 1,784
Total financial assets 133,543 1,169,357 513,834 967,898 1,341,830 1,928,701 6,055,163
Financial liabilities
Borrowings 1,001,355 1,545,821 473,418 257,706 393,160 - 3,671,460
Borrowings – securitised - 30,048 - - - - 30,048
Due to related parties - 2,138 - - - - 2,138
Lease liabilities - 1,056 1,284 2,622 10,597 8,139 23,698
Derivative financial instruments 9,843 - - - - - 9,843
Other financial liabilities - 10,897 - - - - 10,897
Total financial liabilities 1,011,198 1,589,960 474,702 260,328 403,757 8,139 3,748,084
Net financial (liabilities) / assets (877,655) (420,603) 39,132 707,570 938,073 1,920,562 2,307,079
Undrawn facilities available to
customers
134,743 - - - - - 134,743
Undrawn committed bank facilities 119,985 - - - - - 119,985
33
16 Interest rate risk
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.
The tables above illustrate the periods in which the cash flows from interest rate swaps are expected to occur and affect profit or
loss.
$000's
0-3
Months
3-6
Months
6-12
Months
1-2 Years 2+ Years
Non-
interest
bearing
Total
Unaudited - 31 December 2019
Financial assets
Cash and cash equivalents 122,734 - - - - 3 122,737
Investments 34,690 60,279 15,534 59,787 135,680 1,988 307,958
Finance receivables 1,543,914 215,723 355,919 563,825 417,055 4,930 3,101,366
Finance receivables - reverse
mortgages
586,003 - - - - - 586,003
Due from related parties 2,063 - - - - - 2,063
Derivative financial assets - - - - - 10,806 10,806
Other financial assets - - - - - 1,784 1,784
Total financial assets 2,289,404 276,002 371,453 623,612 552,735 19,511 4,132,717
Financial liabilities
Borrowings - Retail
deposits
1,698,288 602,765 597,217 235,773 96,449 13,543 3,244,035
Other borrowings 71,665 968 - - 282,515 - 355,148
Borrowings - securitised 30,015 - - - - - 30,015
Derivative financial liabilities - - - - - 9,843 9,843
Due from related parties 2,138 - - - - - 2,138
Lease liabilities - - - - - 20,623 20,623
Other financial liabilities - - - - - 10,897 10,897
Total financial liabilities 1,802,106 603,733 597,217 235,773 378,964 54,906 3,672,699
Effect of derivatives held for risk
management
380,373 (437) (94,721) (291,712) 6,497 - -
Net financial assets / (liabilities)
867,671 (328,168) (320,485) 96,127 180,268 (35,395) 460,018
The management of interest rate risk against interest rate gap limits is supplemented by monitoring the sensitivity of the Banking
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 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.
34
17 Concentrations of funding
(a) Regulatory liquidity ratios
The table below shows the arithmetic 3 month average of the respective daily ratio values in accordance with RBNZ’s Liquidity
Policy (BS13/BS13A) (“BS13”) and the Banks conditions of registration relating to liquidity-risk management.
The one week mismatch ratio is a measure of the Banking Group’s one week mismatch amount over its total funding, where the
one-week mismatch amount represents the Banking Group’s portfolio of primary liquid assets plus expected cash inflows minus
expected cash outflows during a one-week period of stress. The Bank is required to maintain this ratio at not less than the
minimum level of zero percent on a daily basis. The one-week mismatch ratio = 100 x (one-week mismatch dollar/total funding).
The one-month mismatch ratio is a measure of the Banking Group’s one-month mismatch over its total funding, where the one-
month mismatch amount represents the Banking Group’s portfolio of primary and secondary liquid assets plus expected cash
inflows, minus expected cash outflows during a one-month period of stress. The Bank is required to maintain this ratio at not less
than the minimum level of zero percent on a daily basis. The one-month mismatch ratio = 100 x (one-month mismatch dollar
value/total funding).
The one year core funding ratio measures the extent to which loans and advances are funded by the funding that is considered
stable. The one-year core funding ratio = 100 x (one-year core funding dollar amount/BS13 total loans and advances) and must
currently remain at not less than 75% on a daily basis.
Average for the 3 months ended
31 December 2019 30 September 2019
One-week mismatch ratio 8.72% 8.91%
One-month mismatch ratio 10.58% 10.84%
Core funding ratio 93.94% 94.42%
Concentrations of funding by industry
Unaudited
$000's 31 December 2019
Agriculture 76,107
Forestry and Fishing 28,798
Mining 165
Manufacturing 9,033
Finance & Insurance 631,118
Wholesale Trade 13,333
Retail Trade 21,214
Households 2,351,276
Property and Business Services 91,678
Transport and Storage 4,567
Other 116,572
3,343,861
Unsubordinated notes 285,337
Total borrowings 3,629,198
Concentrations of funding by geographical area
Unaudited
$000's 31 December 2019
Auckland 1,116,071
Wellington 335,935
Rest of North Island 805,225
Canterbury 965,854
Rest of South Island 274,089
Overseas 132,024
Total borrowings 3,629,198
35
Other Disclosures
18 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 Banking Group controls the structured entity.
(a) Heartland Cash and Term PIE (Heartland PIE Fund)
The Banking Group controls the operations of the Heartland PIE Fund which is a portfolio investment entity that invests in the
Bank’s deposits. Investments of Heartland PIE Fund are represented as follows:
Unaudited Unaudited Audited
$000's 31 December 2019 31 December 2018 30 June 2019
Deposits 165,602 140,012 146,094
(b) Heartland Auto Receivables Warehouse Trust 2018-1 (Auto Warehouse)
The Banking Group had securitised a pool of receivables comprising commercial and motor vehicle loans sold to Auto Warehouse.
The Banking Group continues to recognise the securitised assets and associated borrowings in the Consolidated Statement of
Financial Position as the bank remains exposed to and has the ability to affect variable returns from those assets and liabilities.
Although the Banking 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 Banking Group have no recourse to those assets.
Unaudited Unaudited Audited
$000's
31 December 2019 31 December 2018 30 June 2019
Finance receivables - securitised 36,720 153,826 -
Borrowings - securitised (30,015) (127,944) -
36
19 Capital adequacy
The capital adequacy tables set out on the following pages summarise the composition of regulatory capital and the capital
adequacy ratios for the Banking Group as at 31 December 2019.
Internal Capital Adequacy Assessment Process (ICAAP)
The Banking Group has an ICAAP which complies with the requirements set out in the "Guidelines on a Bank's Internal Capital
Adequacy Assessment Process (ICAAP)" BS12 and is in accordance with its Conditions of Registration.
The Board has overall responsibility for ensuring the Banking Group has adequate capital in relation to its risk profile and
establishes minimum internal capital levels and limits above the regulatory minimum. The Banking Group has established a Capital
Management Policy (CMP) to determine minimum capital levels for Tier 1 and Total capital under Basel III and in accordance with
its Conditions of Registration. The documented process ensures that the Banking Group has sufficient available capital to meet
minimum capital requirements, even in stressed events. It describes the risk profile of the Banking Group and the risk appetite and
tolerances under which it operates, and assesses the level of capital held against the material risks of the Banking Group (both
Pillar 1 and Pillar 2).
The ICAAP identifies the capital required to be held against other material risks, being strategic / business risk, reputational risk,
regulatory risk and additional credit risk.
Compliance with minimum capital levels is monitored by the ALCO and reported to the Board. The ICAAP and CMP is reviewed
regularly by the Board.
Unaudited
$000's
December
2019
Tier 1 capital
CET1 capital
Paid-up ordinary shares issued by the Bank 553,239
Retained earnings (net of appropriations) 20,522
Accumulated other comprehensive income and other disclosed reserves (239)
Less deductions from CET1 capital
Intangible assets (56,781)
Deferred tax assets (10,019)
Hedging reserve 4,000
Defined benefit superannuation fund asset (715)
Reverse residential mortgage loan greater than value of security (58)
Adjustment under the corresponding deduction approach (500)
Total CET1 capital 509,449
AT1 capital -
Total Tier 1 capital 509,449
Tier 2 capital -
Total Tier 2 capital -
Total capital 509,449
(a) Capital structure
The following details summarise each instrument included within Total Capital. None of these instruments are subject to phase-
out from eligibility as capital under the RBNZ’s Basel III transitional arrangements.
Ordinary shares
In accordance with BS2A, ordinary share capital is classified as CET1 capital. The ordinary shares have no par value. Each ordinary
share of the Bank carries the right to vote on a poll at meetings of shareholders, the right to an equal share of dividends authorised
by the Board and the right to an equal share in the distribution of the surplus assets of the Bank in the event of liquidation.
37
19 Capital adequacy (continued)
Retained earnings
Retained earnings is the accumulated profit or loss that has been retained in the Banking Group. Retained earnings is classified as
CET1 capital.
Reserves classified as CET1 capital
Fair value reserve The debt instrument fair value reserve comprises the changes in the fair value of
investments, net of tax.
Defined benefit reserve The defined benefit reserve represents the excess of the fair value of the assets of
the defined benefit superannuation plan over the net present value of the defined
benefit obligations.
Cash flow hedge reserve The hedging reserve comprises the fair value gains and losses associated with the
effective portion of designated cash flow hedging instruments.
(b) Credit risk
(i) On balance sheet exposures
Total
exposure after
credit risk
mitigation
Average
Risk
weight
Risk
weighted
exposure
Minimum Pillar
1 capital
requirement
$000’s % $000’s $000’s
Unaudited - December 2019
Cash 3 0% - -
Multilateral development banks 125,080 0% - -
Multilateral development banks 126,710 20% 25,342 2,027
Banks - Tier 1 134,886 20% 26,977 2,158
Banks - Tier 2 11,422 50% 5,711 457
Banks - Tier 3 18,102 100% 18,102 1,448
Public sector entity (AA- and above) 9,361 20% 1,872 150
Public sector entity (A- and above) - 50% - -
Corporates (AA- and above) - 20% - -
Corporates (A- and above) 1,024 50% 512 41
Corporates (BBB- and above) 4,126 100% 4,126 330
Corporates other 1,624,582 100% 1,624,582 129,967
Welcome Home Loans - loan to value ratio (LVR) <= 90%
1
2,928 35% 1,025 82
Welcome Home Loans - LVR 90% >= 100%
1
- 50% - -
Welcome Home Loans - LVR > 100%
1
- 100% - -
Reverse Residential mortgages <= 60% LVR 572,566 50% 286,283 22,903
Reverse Residential mortgages 60 <= 80% LVR 10,558 80% 8,446 676
Reverse Residential mortgages > 80% LVR 2,322 100% 2,322 186
Reverse Residential mortgages > 100% LVR 499 100% 499 40
Non Property Investment Mortgage Loan <=80% LVR 13,389 35% 4,686 375
Non Property Investment Mortgage Loan 80 <= 90% LVR - 50% - -
Non Property Investment Mortgage Loan 90 <= 100% LVR 433 75% 325 26
Non Property Investment Mortgage Loan > 100% LVR 590 100% 590 47
Property Investment Mortgage Loan <= 80% LVR 6,331 40% 2,532 203
Property Investment Mortgage Loan 80 <= 90% LVR 1,005 70% 703 56
Property Investment Mortgage Loan 90 <= 100% LVR - 90% - -
Property Investment Mortgage Loan < 100% LVR - 100% - -
Past due residential mortgages 464 100% 464 37
Other past due assets - provision >= 20% 14,398 100% 14,398 1,152
Other past due assets - provision < 20% 18,250 150% 27,374 2,190
All other equity holdings 1,488 400% 5,950 476
Other assets 1,495,025 100% 1,495,025 119,602
Not risk weighted assets 68,074 0% - -
Total on balance sheet exposures 4,263,616 3,557,846 284,629
1
The LVR classification above is calculated in line with the Bank’s Pillar 1 Capital requirement which includes relief for Welcome Home loans that are
guaranteed by the Crown.
38
19 Capital adequacy (continued)
(ii) Off balance sheet exposures
Total
exposure
Credit
conversion
factor
Credit
equivalent
amount
Average
risk
weight
Risk
weighted
exposure
Minimum
Pillar 1 capital
requirement
$000’s % $000’s % $000’s $000’s
Unaudited - December 2019
Off balance sheet exposures
Direct credit substitute 408 100% 408 100% 408 33
Performance-related contingency 2,558 50% 1,279 100% 1,279 102
Other commitments where original maturity
is more than one year
145,336 50% 72,668 100% 72,668 5,813
Other commitments where original maturity
is more than one year
7,565 50% 3,783 50% 1,892 151
Other commitments where original maturity
is less than or equal to one year
2,569 20% 514 100% 514 41
Market related contracts:
1
Interest rate contracts (< 1 year) 781,178 n/a - 20% - -
Interest rate contracts (> 1 year) 2,721,317 0.5% 13,607 20% 2,721 218
FX forward contracts (< 1 year) 158,422 1.0% 1,584 20% 317 25
Total off balance sheet exposures 3,819,353 93,843 79,799 6,383
The credit equivalent amount for market related contracts was calculated using the current exposure method.
(c) Additional mortgage information – LVR range
On balance
sheet
exposures
Off balance
sheet
exposures
Total
exposures
$000's
Unaudited - December 2019
Does not exceed 80% 602,842 1,879 604,721
Exceeds 80% but not 90% 6,255 - 6,255
Exceeds 90% 2,044 - 2,044
Total exposures 611,141 1,879 613,020
1
Off balance sheet exposures means unutilised limits
At 31 December 2019 Nil Welcome Home loans whose credit risk is mitigated by the Crown is included in “Exceeds 90% residential
mortgages”. Other loans in the exceeds 90% LVR range is primarily business and rural lending where residential mortgage security
is only a part of the total security. For capital adequacy calculations only the value of the first mortgages over residential property
is included in the LVR calculation, in accordance with BS2A. All new residential mortgages in respect of non-property investments
lending have a loan-to-valuation ratio of less than or equal to 80%.
(d) Reconciliations of mortgage related amounts
Unaudited
$000's
NOTE
December
2019
Gross finance receivables - reverse mortgages 7(b) 586,003
Loans and advances - loans with residential mortgages 25,284
On balance sheet residential mortgage exposures subject to the standardised approach 14(a) 611,287
Less: collective provision for impairment (146)
Off balance sheet mortgage exposures subject to the standardised approach 1,879
Total residential exposures subject to the standardised approach 613,020
39
19 Capital adequacy (continued)
(e) Credit risk mitigation
As at 31 December 2019 the Banking Group had $2.928 million of Welcome Home Loans, whose credit risk was mitigated by the
Crown. Other than this the Banking Group does not have any exposures covered by eligible collateral, guarantees and credit
derivatives.
(f) Operational risk
Implied risk weighted
exposure
Total operational risk
capital requirement
$000's
Unaudited - December 2019
Operational risk 269,662 21,573
Operational risk is calculated based on the previous 12 quarters of the Banking Group.
(g) Market risk
Market risk is the risk that market interest rates or foreign exchange rates will change and impact on the Banking Group’s earnings
due to either mismatches between repricing dates of interest-bearing assets and liabilities and/or differences between customer
pricing and wholesale rates.
Implied risk weighted
exposure
Aggregate capital
charge
$000's
Unaudited - December 2019
Market risk end-of-period capital charge Equity rate risk only 1,488 119
Market risk peak end-of-day capital charge Equity rate risk only 1,488 119
Market risk end-of-period capital charge Interest rate risk only 141,539 11,323
Market risk peak end-of-day capital charge Interest rate risk only 141,539 11,323
Market risk end-of-period capital charge Foreign currency risk only 7,324 586
Market risk peak end-of-day capital charge Foreign currency risk only 10,056 804
Peak end of day aggregate capital charge at the end of the period is derived by following the risk methodology for measuring
capital requirements within Part 10 of the standardised approach. Peak-end-of-day aggregate capital charge is derived by
determining the maximum end of month capital charge over the reporting period. Based on the portfolio of the Banking Group’s
risk exposures, it is considered by management that the difference between end of month aggregate capital charge and end-of-day
aggregate capital charge is insignificant.
(h) Total capital requirements
Total exposure after
credit risk mitigation
Risk weighted exposure
or implied risk weighted
exposure
Total capital requirement
$000's
Unaudited - December 2019
Total credit risk
On balance sheet 4,263,616 3,557,846 284,629
Off balance sheet 3,819,353 79,799 6,383
Operational risk n/a 269,662 21,573
Market risk n/a 150,351 12,028
Total n/a 4,057,658 324,613
40
19 Capital adequacy (continued)
(i) Capital ratios
Unaudited Unaudited
December
2019
December
2018
Capital ratios compared to minimum ratio requirements
Common Equity Tier 1 capital expressed as a percentage of total risk weighted exposures 12.56% 13.25%
Minimum Common Equity Tier 1 capital as per Conditions of Registration 4.50% 4.50%
Tier 1 capital expressed as a percentage of total risk weighted exposures 12.56% 13.25%
Minimum Tier 1 capital as per Conditions of Registration 6.00% 6.00%
Total capital expressed as a percentage of total risk weighted exposures 12.56% 13.25%
Minimum Total capital as per Conditions of Registration 8.00% 8.00%
Buffer ratio 4.56%
5.25%
Buffer ratio requirement 2.50% 2.50%
(j) Solo capital adequacy
Unaudited Unaudited
December
2019
December
2018
Common Equity Tier 1 capital expressed as a percentage of total risk weighted exposures 12.62% 13.74%
Tier 1 capital expressed as a percentage of total risk weighted exposures 12.62% 13.74%
Total capital expressed as a percentage of total risk weighted exposures 12.62% 13.74%
For the purposes of calculating capital adequacy on a solo basis, subsidiaries which are both wholly owned and wholly funded by
the Bank are to be consolidated with the Bank. Therefore, capital adequacy on a solo basis is calculated based on the Bank and its
subsidiaries excluding Auto Warehouse.
(k) Capital for other material risks
In addition to the material risks included in the calculation of the capital ratios, the Banking Group has identified other material
risks to be included in the capital allocation (being strategic/business risk, regulatory and additional credit risk). As at 31 December
2019, the Banking Group has made an internal capital allocation of $7.0 million to cover these risks (2018: $48.2 million)
41
20 Insurance business, securitisation, funds management, other fiduciary activities
Insurance business
The Banking Group conducts insurance business through its subsidiary MARAC Insurance Limited (MIL).
The Banking Group's aggregate amount of insurance business comprises the total consolidated assets of MIL of $11.6 million,
which is 0.27% of the total consolidated assets of the Banking Group.
Since the reporting date of the previous disclosure statement the Banking Group has undertaken a strategic review of its insurance
business in line with its core banking business. The Bank has entered into a distribution agreement with DPL Insurance Limited
(DPL) to distribute DPL’s insurance products through the Banking Group’s network and has stopped writing insurance policies in
December 2019. The Banking Group will gradually exit from the insurance business as the existing written policies expire over time.
Securitisation, funds management and other fiduciary activities
Changes to the Banking Group’s involvement in securitisation activities are set out in Note 18(b). There have been no material
changes to the Banking Group’s involvement in funds management and other fiduciary activities, in either case since the reporting
date of the previous disclosure statement.
Risk management
The Banking Group has in place policies and procedures to ensure that the fiduciary activities identified above are conducted in an
appropriate manner. It is considered that these policies and procedures will ensure that any difficulties arising from these activities
will not impact adversely on the Banking Group. There has been no material changes to those policies and procedures since the
reporting date of the previous disclosure statement.
Provision of financial services and asset purchases
Over the accounting period, financial services provided by the Banking Group to entities which were involved in the activities above
(including trust, custodial, funds management and other fiduciary activities) were provided on arm's length terms and conditions
and at fair value.
Any assets purchased from such entities have been purchased on arm's length terms and conditions and at fair value.
21 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.
There are no pending legal proceedings or arbitrations concerning any member of the Banking Group at the date of this Disclosure
Statement that may have a material adverse effect on the Bank or the Banking Group.
Contingent liabilities and credit related commitments arising in respect of the Banking Group's operations were:
Unaudited Unaudited Audited
$000's December 2019 December 2018 June 2019
Letters of credit, guarantee commitments and performance bonds
5,990 6,417 6,757
Total contingent liabilities 5,990 6,417 6,757
Undrawn facilities available to customers 134,743 78,535 102,285
Conditional commitments to fund at a future date
20,726 18,797 22,921
Total commitments 155,469 97,332 125,206
22 Events after the reporting date
There are no material events after the reporting date that are not already included in this Disclosure Statement.
42
CONDITIONS OF REGISTRATION
NON-COMPLIANCE WITH CONDITIONS OF REGISTRATION
As reported in the 30 June 2019 Disclosure Statement, the Bank had not been calculating its regulatory liquidity and capital ratios
in compliance with the Conditions of Registration. The Bank engaged an external consultant to undertake reviews of its
calculations which has identified some discrepancies with the calculation of the Banks regulatory liquidity and capital ratios. The
reviews are largely complete and further updates will be provided if necessary. The Bank has remained above all RBNZ ratio
requirements at all times.
Condition of Registration 1
In December 2019, the Bank disclosed to the RBNZ that the independent review of regulatory capital ratios identified that the Bank
has incorrectly calculated market risk and operational risk across a number of areas. Further the review identified that in respect
of credit risk there were a number of incorrect calculations. Together this resulted in the regulatory capital ratios being up to 24
basis points lower than originally reported. As a result of the errors the Bank was not compliant with BS2A in prior periods before
31 December 2018. The calculation errors have now been corrected and are reflected in the regulatory capital reported for the six
months ended 31 December 2019. At all times the Bank remained above all RBNZ ratio requirements.
Condition of Registration 11
In November 2019, the Bank disclosed to the RBNZ that the independent review of regulatory liquidity ratios identified that the
Bank has incorrectly calculated its One-week mismatch ratio, One-month mismatch ratio and One-year core funding ratio across a
number of areas with the ratios being up to 15, 42 and 140 basis points respectively lower than previously reported. As a result of
the errors the Bank was non-compliant with condition of registration 11 in prior periods. To the extent the Bank is able to correct
the calculation errors this has been reflected in the regulatory liquidity ratios from 30 November 2019. There remains some areas
of non-compliance which the Bank is consulting with the RBNZ in respect of.
CHANGES TO CONDITIONS OF REGISTRATION
There are no changes to the conditions of registration since the reporting date for the previous disclosure statement.
43
CREDIT RATINGS
As at the date of signing this Disclosure Statement, the Bank's credit rating issued by Fitch Australia Pty Ltd (Fitch Ratings) was BBB
stable. This BBB credit rating was issued on 14 October 2015 and is applicable to long term unsecured obligations payable in New
Zealand, in New Zealand dollars. This BBB stable credit rating was affirmed by Fitch Ratings on 24 October 2019.
The following is a summary of the descriptions of the ratings categories for rating agencies for the rating of long-term senior
unsecured obligations:
Fitch Ratings Standard &
Poor’s
Moody’s
Investors
Service
Description of Grade
AAA AAA AAA Ability to repay principal and interest is extremely strong. This is the
highest investment category.
AA AA Aa Very strong ability to repay principal and interest in a timely
manner.
A A A Strong ability to repay principal and interest although somewhat
susceptible to adverse changes in economic, business or financial
conditions.
BBB BBB Baa Adequate ability to repay principal and interest. More vulnerable to
adverse changes.
BB BB Ba Significant uncertainties exist which could affect the payment of
principal and interest on a timely basis.
B B B Greater vulnerability and therefore greater likelihood of default.
CCC CCC Caa Likelihood of default considered high. Timely repayment of
principal and interest is dependent on favourable financial
conditions.
CC – C CC – C Ca - C Highest risk of default.
RD to D D - Obligations currently in default.
Credit ratings from Fitch Ratings and Standard & Poor’s may be modified by the addition of a plus or minus sign to show relative
status within the major rating categories. Moody’s Investors Service apply numerical modifiers 1, 2, and 3 to show relative standing
within the major rating categories, with 1 indicating the higher end and 3 the lower end of the rating category.
OTHER MATERIAL MATTERS
Changes to the Capital Adequacy Framework for Registered Banks in New Zealand
The Reserve Bank of New Zealand (RBNZ) released a consultation paper in December 2018 in relation to proposed changes to the
Capital Adequacy Framework for Registered Banks in New Zealand (the Framework). On 5 December 2019, the RBNZ released its
final decision on the revised Framework.
The revised Framework requires Heartland Bank Limited (Heartland Bank), as a standardised registered bank, to increase its Total
Capital ratio to 16% over a seven year transitional period. Heartland Bank’s Total Capital ratio was 12.56% as at 31 December 2019.
This means the revised Framework requires Heartland to increase its Total Capital ratio by 3.44% over the transitional period. This
equates to an increase of 0.49% per year, based on Heartland Bank’s financial position as at 31 December 2019.
The Bank does not expect the revised Framework to result in any changes to the underlying business model or its approach to
raising equity, given:
• the quantum of the capital requirement;
• that some of the capital requirement may be satisfied through hybrid capital instruments rather than common equity;
• the length of the transitional period;
• The Bank’s existing capital position.
The corporate structure of Heartland Group Holdings Limited (HGH), the ultimate parent company provides the Banking Group
with flexibility to mitigate the impact of the revised Framework. Various capital raising options available include using HGH’s
dividend reinvestment plan, or raise debt and use the proceeds to subscribe for new capital in the Bank.
The Bank will continue to assess the options available to it to meet the requirements of the revised Framework over the
transitional period.
There are no other material matters relating to the business or affairs of the Bank or the Banking Group that are not already
contained elsewhere in this Disclosure Statement which would, if disclosed in this Disclosure Statement, materially affect the
decision of a person to subscribe for debt securities of which the bank or any member of the Banking Group is the issuer.
© 2020 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.
Independent Review Report
To the shareholder of Heartland Bank Limited
Report on the consolidated half year disclosure statement of Heartland Bank Limited (the “Bank”) and
its controlled entities (the “Banking Group”)
Conclusion
Based on our review of the consolidated interim
financial statements and supplementary information
of the Bank and the Banking Group on pages 5 to
41, nothing has come to our attention that causes
us to believe that:
i.the consolidated interim financial
statements do not present fairly in all
material respects the Banking Group’s
financial position as at 31 December 2019
and its financial performance and cash
flows for the 6 month period ended on
that date;
ii.the consolidated interim financial
statements (excluding the supplementary
information disclosed in accordance with
Schedules 5, 7, 9, 13, 16 and 18 of the
Registered Bank Disclosure Statements
(New Zealand Incorporated Registered
Banks) Order 2014 (as amended) (the
“Order”)), have not been prepared, in all
material respects, in accordance with NZ
IAS 34 Interim Financial Reporting (“NZ
IAS 34”);
iii.the supplementary information, does not
fairly state, in all material respects, the
matters to which it relates in accordance
with Schedules 5, 7, 9, 13, 16 and 18 of
the Order; and
iv.the supplementary information relating to
capital adequacy and regulatory liquidity
requirements, has not been prepared, in all
material respects, in accordance with the
Registered Banks conditions of
registration, Capital Adequacy Framework
(Standardised Approach) (BS2A) and
disclosed in accordance with Schedule 9
of the Order.
We have completed a review of the accompanying
consolidated half year disclosure statement which
comprises:
— the consolidated interim financial statements
formed of:
-the consolidated interim s tatement of
financial position as at 31 December 2019;
-the consolidated interim statements of
comprehensive income, changes in equity
and cash flows for the 6 month period then
ended; and
-notes to the interim financial statements,
including a summary of significant
accounting policies and other explanatory
information.
— the supplementary information prescribed in
Schedules 5, 7, 9, 13, 16 and 18 of the Order.
45
Emphasis of matter
We draw attention to the conditions of registration on page 42 of the consolidated interim financial statements
which reference the Banking Group’s identification of adjustments to the capital and liquidity ratios, as required
under conditions of registration 1 and 11. Our opinion is not modified in respect of this matter.
Basis for conclusion
A review of the consolidated half year disclosure statement in accordance with NZ SRE 2410 Review of
Financial Statements Performed by the Independent Auditor of the Entity (“NZ SRE 2410”) is a limited
assurance engagement. The auditor performs procedures, consisting of making enquiries, primarily of persons
responsible for financial and accounting matters, and applying analytical and other review procedures.
As the auditor of Heartland Bank Limited, NZ SRE 2410 requires that we comply with the ethical requirements
relevant to the audit of the annual financial statements.
Our firm has also provided other services to the Banking Group in relation to an assessment of the Banking
Group’s compliance with the quantitative requirements of BS13. Subject to certain restrictions, partners and
employees of our firm may also deal with the Banking Group on normal terms within the ordinary course of
trading activities of the business of the Banking Group. These matters have not impaired our independence as
reviewer of the Banking Group. The firm has no other relationship with, or interest in, the Banking Group.
Use of this i ndependent r eview r eport
This independent review report is made solely to the shareholder as a body. Our review work has been
undertaken so that we might state to the shareholder those matters we are required to state to them in the
independent r eview 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 shareholder as a body for our review work, this independent
review report, or any of the opinions we have formed.
Responsibilities of the Directors for the consolidated half year
disclosure statement
The Directors, on behalf of the Banking Group, are responsible for:
— the preparation and fair presentation of the consolidated half year disclosure statement in accordance with
NZ IAS 34 and Schedules 3, 5, 7, 13, 16 and 18 of the Order;
— the preparation and fair presentation of the supplementary information in regards to capital adequacy and
regulatory liquidity requirements in accordance with the Registered Banks conditions of registration, Capital
Adequacy Framework (Standardised Approach) (BS2A) and Schedule 9 of the Order;
— implementing necessary internal control to enable the preparation of a consolidated half year disclosure
statement 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.
46
Auditor’s responsibilities for the review of the consolidated half year
disclosure statement
Our responsibility is to express a conclusion on the consolidated half year disclosure statement based on our
review. We conducted our review in accordance with NZ SRE 2410. NZ SRE 2410 requires us to conclude
whether anything has come to our attention that causes us to believe that:
— the consolidated interim financial statements do not present fairly in all material respects the Banking
Group’s financial position as at 31 December 2019 and its financial performance and cash flows for the 6
month period ended on that date;
— the consolidated interim financial statements do not, in all material respects, comply with NZ IAS 34;
— the supplementary information does not fairly state, in all material respects, the matters to which it relates
in accordance with Schedules 5, 7, 13, 16 and 18 of the Order; and
— the supplementary information relating to capital adequacy and regulatory liquidity requirements is not
prepared, in all material respects, in accordance with the Registered Banks Conditions of Registration,
Capital Adequacy Framework (Standardised Approach) (BS2A) and disclosed in accordance with Schedule 9
of the Order.
The procedures performed in a review are substantially less than those performed in an audit conducted in
accordance with International Standards on Auditing (New Zealand). Accordingly we do not express an audit
opinion on the consolidated half year disclosure statement.
KPMG
Auckland
28 February 2020
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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