annual report 2011 - nzcu south · pdf fileannual report 2011 nzcu south is not a registered...

Annual Report 2011

NZCU South is not a registered bank.

Money CoachingReceive on-going ‘one to one’ professional help. Become debt free and achieve those financial goals with this valuable service. Your money, your goals, our help.

Personal LoansNZCU South personal loans are provided at competitive rates for any worthwhile purpose. Loan Repayment Insurance is available to cover sickness, disability, and involuntary loss of earnings.

Home LoansWhether you’re buying for the first time, refinancing or already have a home loan, we can offer you a home loan package for all your needs.

Life and Income InsuranceThis is an easy to arrange life insurance cover with many optional extra benefits including trauma, sickness and accident cover. After a few simple steps, we can also provide you with income replacement and any other general insurance.

Car InsuranceInstant approval for your motor vehicle insurance. Our car insurance will match any other insurer’s premium. Roadside assistance is also available.

Credicare Bereavement FundMembership of this unique fund provides peace of mind for you and your family. On death, your next of kin receives an immediate tax-free payment.

Accessweb (Internet Banking)Carry out your banking transactions for free on your home PC, or indeed, from anywhere in the world via:www.nzcusouth.co.nz

Money Transfer ServiceOvernight transfer of your Credit Union funds to any bank account of your choice.

WebsiteAccess to products, services, interest rates, loan applications, and the latest in happenings at your Credit Union. An ideal way to link to your Internet banking page: www.nzcusouth.co.nz

Tax CheckOur tax check service is able to find out if you are due a tax refund in any one of the last five years. If you have underpaid your tax in a particular year, a return will not be filed for that year. Forms are available from our website www.nzcusouth.co.nz or your local branch.

Credit Union KiwiSaverNZ Credit Unions are KiwiSaver scheme providers. A long-term retirement savings account to help you provide for a secure retirement. Attractive incentives are offered by Government to assist you to save. Application forms, Investment and Disclosure Statements are available from your Credit Union.

Accesstxt®Check your savings, loan, investment balances, pay bills or transfer funds between your Credit Union accounts with your cell phone.

NZCU myphone - talk more pay lessLandline, mobile telephone and broadband services purchased through your Credit Union and exclusive to our members.

Visa Debit CardBuy things on-line, overseas, over the phone or by mail order and pay with your own money.

Clever Me A financial coaching programme designed to help employees become smarter with their money and live financially worry-free lives.

A copy of our current Investment Statement and our Prospectus is available free of charge from any of our Branches. NZCU South deposits are secured by a First Ranking registered Trust Deed. NZCU South is a registered Credit Union, not a registered bank.


ANNUAL GENERAL MEETING AGENDA 2011Members are cordially invited to attend the 24th Annual General Meeting of Credit Union South, to be held on Tuesday 20 September 2011 at the Forsyth Barr Stadium, Dunedin commencing at 6.30 p.m.

• Welcome to Members and Guests

• Apologies

• Confirmation of Minutes of the 23rd Annual General Meeting held on 21 September 2010

• Receipt and adoption of: (a) Chair's Report (b) Chief Executive Officer’s Report (c) Presentation of the Audited Financial Statements (d) Trustees' Report (e) Audit and Risk Committee Report (f) Independent Auditors’ Report

• Specific Business - Confirmation of Appointment of Auditor • General Business

• Election of Officers - Election of Trustees

5 August 2011

By Order of the Board

ANNUAL REPORT 2011CONTENTS PAGE

Credit Union South Directory 2

Director Profiles 3

Report of the Chair 5

Report of the Chief Executive Officer 7

Report of the Trustees 9

Report of the Audit and Risk Committee 10

Statement of Comprehensive Income 11

Statement of Changes in Equity 11

Balance Sheet 12

Statement of Cash Flows 13

Notes to the Financial Statements 14

Independent Auditors’ Report 43

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Board of Directors

Bevan E Killick Chair

Wade Devine Secretary

Peter C L Taylor Treasurer

Shona K Cumming Director

Dominique F Dowding Director

Peter L McKnight Director

Bevan R Moreton Director

John M Sheard Director

Trustee

Bevan R Moreton

Management

Andrew D Leys Chief Executive Officer

Gary W Dalton Operations Manager, South Island

Daryl A Soal Finance Manager

Marilyn G Richardson Lending Manager

Jonet F Warhurst Marketing Manager

Helen Malcolm Collections Manager

Auditors

PricewaterhouseCoopers, Dunedin

Bankers

NZ Association of Credit Unions' Transactional Banking Facility

Westpac Banking Corporation, Dunedin North

Solicitors

Farry & Co, Dunedin

Lane Neave Lawyers, Christchurch (Prospectus and Security Regulations Compliance)

Prudential Supervisor

Trustees Executors Limited, Auckland

Affiliations New Zealand Association of Credit Unions

Credit Union Institute of New Zealand

Sovereign Home Loans and Life Insurance

CREDIT UNION SOUTHDIRECTORY

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CREDIT UNION SOUTHDIRECTOR PROFILES

Name Experience & Qualifications Special Responsibilities

Bevan Killick Director Credit Union South since 2010 Chair of Board Bachelor of Commerce Member of Audit and Risk Committee Chartered Accountant NZICA Chartered Insurance Practitioner CII Member Institute of Directors IOD Certificate in Company Direction IOD Course in Chairing the Board IOD Associate Chartered Insurance Institute CII Member Insurance Institute of London IIL

Advanced Diploma in Insurance CII Lloyd's Market Certificate Lloyd's of London Associate Member CUINZ Occupation: Independent Director and Consultant

Wade Devine Director Credit Union South since 2007 Vice Chair of Board Director Southland Credit Union 1996 to 2007 Secretary Certificate in Director Development NZACU Chair of Audit and Risk Committee Certificate in Risk Management AICUD Certificate in Credit Union Leadership AICUD Director Education Training NZACU Roles & Responsibilities of Credit Union Directors NZACU Audit Committee Training IOD Risk Management Training Cuscal

Understanding Financial Statements Training Cuscal Certificate in Corporate Governance AICUD Fellow CUINZ Occupation: Maintenance Systems Officer

Peter Taylor Director of Credit Union South Since 2008 Treasurer Master of Business Administration Member of Audit and Risk Committee Master of Arts General Manager Credit Union Canterbury 2004 - 2007 Associate Member CUINZ Occupation: Managing Director

Shona Cumming Director Credit Union South since 2010 Member of Governance Committee Bachelor of Laws Associate Member CUINZ Occupation: Solicitor

Dominique Dowding Director Credit Union South since 2009 Member of Governance Committee Bachelor of Commerce (Hons) Certificate in Company Direction IOD Associate Member CUINZ Occupation: Company Director


CREDIT UNION SOUTHDIRECTOR PROFILES

Name Experience & Qualifications Special Responsibilities

Peter McKnight Director Credit Union South since 2007 Member of Audit and Risk Committee Director/Trustee Southland Credit Union 1997 - 2007 Member of Credit Committee Certificate in Director Development NZACU Certificate in Risk Management AICUD Certificate in Internal Audits NZ Quality College Member CUINZ Occupation: Electrical Crew Leader

Bevan Moreton Director Credit Union South since 2007 Trustee Director/Chair/Trustee for Credit Union Otago 1988 - 2007 Chair of Governance Committee Certificate in Director Development NZACU Chair of Credit Committee Certificate in Director Development AICUD Certificate in Chair - Management Relations Certificate in Board Auditing AICUD Certificate in Corporate Governance AICUD Certificate in Financial Management 1 AICUD

Course in Chairing the Board IOD Certificate in Credit Union Leadership AICUD Certificate in Risk Management AICUD Fellow AMI Member IOD Member CUINZ Occupation: Firefighter

John Sheard Director Credit Union South since 2007 Member of Credit Committee Director/Chair of Coast Health and Community Member of Audit and Risk Committee Credit Union 1988-2001 Director/Chair Credit Union Westland 2001 - 2007 Associate Member CUINZ Certificate in Director Development NZACU Technical Expert Medical Testing IANZ (International Accreditation New Zealand) Occupation: Registered Medical Laboratory Scientist

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ATTENDANCE REGISTER 1 July 2010 to 30 June 2011 - 12 Meetings Held

Number of Meetings Number of MeetingsDIRECTOR Eligible to Attend Attended

Bevan Killick 12 12Wade Devine 12 12Peter Taylor 12 11Shona Cumming 9 9Dominique Dowding 12 12Peter McKnight 12 12Bevan Moreton 12 12John Sheard 12 11Alex King 3 3


CREDIT UNION SOUTHREPORT OF THE CHAIR

FOR THE YEAR ENDED 30 JUNE 2011

Setting the StandardNZCU South has travelled on a substantial journey over the last four years, following the merger of five large South Island based Credit Unions in 2007. It has been essential for the board to lead this journey. More about the board later - First I want to acknowledge and thank two very special groups of people. People are at the centre of this organisation – more than any other organisation I know!

Our Loyal MembersThank you for your continued support and for telling your friends and colleagues about us. A review of the comments on our Facebook page is a great testament to what we do for South Islanders, their families and the community. Many groups of our credit union family

have endured difficulties over the past year. I particularly think of our Members in Christchurch and those associated with the Pike River tragedy. While these have been tough times we strive to help Members to cope and to, at very least, remove financial stress from the equation.

Our Dedicated staffNZCU South is a people focussed organisation. I want to thank our dedicated staff. For delivering solid results in a difficult year. Many staff members have been with us for decades. These last few years have seen the credit union change with the times. I realise that change is sometimes uncomfortable. Change is necessary if we are to have critical mass for the future. Evolution teaches us that you either change or become extinct. Our evolving state enables us to manage the challenges and rigour of credit rating agencies, regulators, best practice risk management, political lobbying and similar challenges of being a financial services provider in modern times. While we now employ over 100 staff over 15 branches, the quality and dedication of our staff around the South Island ensures that our Members continue to enjoy the most personal experience of any financial service provider. As a board we are only responsible for one employee, the CEO Andrew Leys. This year I believe one of our greatest achievements has been empowering Andrew to achieve great things for the Members of NZCU South. Thank you Andrew for all your hard work and the solid results NZCU South has achieved as an organisation and for our Members this year.

Our Dynamic BoardThe board has probably changed more than any part of NZCU South in recent years. In previous years the board had the courage to engage with the Institute of Directors and subject itself to external reviews. This initially resulted in the appointment of two appointed directors to complement the existing skills at the board table. This year our board consisted of six elected Members and two appointed directors. At this AGM the board will become five elected member directors and two appointed directors.

Commentators point to our board as an example of good governance. Features they point to as best practice include:

• Being representative of our membership – member directors, elected by the membership for the membership

• Six out of eight directors elected by the membership – some cooperatives have none

• Directors from outside the movement for broader views when making decisions – some boards have none

• Gender diversity – two women (one elected, one appointed – elected and appointed for their skills) – many boards have none

• Age diversity – our board has a range of ages of around 25 years – few boards can beat this

• Cultural and ethnic diversity – while in terms of skin colour the board appears pale, the board has a richness of cultural experiences and many directors have lived and worked abroad

• Our Chief Executive reports to the board and, while he attends board meetings, he does not sit on the board. Some organisations have a Managing Director who is both a board member and the Chief Executive Officer of the organisation

• The Chief Executive has no influence over who is elected onto or appointed to the board.

I challenge anyone to find a board that has a more appropriate structure and composition.

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Considerable work has been completed establishing a solid structure for the board. A solid structure is one thing – having the board operate well is the next essential step. This year, in order to review how well this was working we engaged the Institute of Directors to run an evaluation of three aspects of our governance. These three surveys were of the Board as a whole, the Chairman and the Chief Executive. A similar exercise was performed in May 2008. Progress against various aspects of our governance function could be measured and evaluated. Overall the results were pleasing and we held a formal review of the results facilitated by an external facilitator who challenged us on our responses, results and assumptions. From this review we have taken away, both areas to improve, and a sense of achievement in the quality of the governance arrangements.

I take this opportunity to formally thank the board for their support of me as Chairman and for the high standards they have set themselves. Let us continue to aim high – for us as a board, for NZCU South and for our Members.

Setting the strategyOne of the functions of the board is to set strategy for the organisation. When I became chairman, there was a well developed strategy. This allowed us to evaluate whether the strategy was still relevant and appropriate and enabled us to fine tune these where necessary and focus on execution of these goals. The last year has been challenging but we have produced solid results and are still focussed on these goals for the future. Part of this change has been to become less of a secret and really promote what we do so that we can help more people. You will have hopefully seen the new television adverts and the slight change to our logo, new and improved services and new and refurbished branches. We need to become more mainstream and visible as a financial service provider. Please keep referring your friends and family to NZCU South.

Looking to the future.The economic outlook is challenging. The board expects 2012 to be a tough year. Often in times of economic hardship credit unions and mutuals find they attract more Members. Individuals, families and communities want to keep their hard earned cash close to home and within their own communities. We believe people are more likely to deal with organisations that are owned by them and keep profits in local communities. As an organisation we are returning to the areas where we have historically had strong membership bases. We will have a sharp focus on large industrial sites and workforces who earn good incomes. These workers are traditionally sold financial arrangements by competitors of NZCU South where the interests of individuals are not put first. As a member owned organisation with a goal to make individuals, families and communities financially stronger, our goals are aligned with our Members’ goals. What other financial service provider can achieve that?

Once again, thanks to everyone who helped us help make individuals, families and communities financially stronger.

For and on behalf of your Board,Stay strong and stay together!

Bevan KillickChair of the Board

CREDIT UNION SOUTHREPORT OF THE CHAIR



CREDIT UNION SOUTHREPORT OF THE CHIEF EXECUTIVE OFFICER


It is my pleasure to present the 2010/11 CEO’s report for NZCU South.

This past year has seen many challenges for both Members and their credit union. The slow recovery of the economy drifts on while a great many were impacted more acutely by the Canterbury earthquakes and the downstream economic issues. Despite these challenges we have continued to focus on “Why” we exist. Our primary goal is to “help our Members to become financially stronger.”

Our Purpose:It is one thing to talk about “why” we exist; it is another thing entirely to “walk the talk”. Many organisations can “talk the talk”. We owe it to you our Members to make sure we are providing a very real and meaningful difference in your lives.

Some evidence we can point to that indicates we are making a difference includes: (To the year ended 30 June 2011)

• 20% year on year increase in Member Christmas Savings

• 38% increase in the number of Members using our “Money Coaching” service

• 77% increase in Members participating in our Credit Union Kiwisaver Scheme (NZCU South Members were over 50% of all participating Credit Union Members)

• 88% increase in Member Kiwisaver balances

• 50 Members helped with our new Sovereign Homeloan service.

These are all good “numbers” that indicate we are working hard with individual Members to find ways we can help you become “financially stronger”. However, of far more significance in the past 12 months has been the huge endorsement received from Members via such things as comments left on our Facebook page, e-mails, surveys, and letters of thanks. These are real stories about real Members who are making real changes to their financial situation and therefore their financial prospects by working with us more. We would like to take this chance to thank all those Members who shared their stories with us. It is extremely motivational for our team to know we are making a difference. We just need to keep the momentum going with your help.

One of the heartening stories of 2011 has been how New Zealand Credit Unions rallied to support Members affected by the February 22nd Christchurch Earthquake. People Helping People is the international Credit Union motto. It was rewarding to be in a position to help Members with a small cash grant at a time of such critical need. I’d particularly like to thank the Christchurch staff for their continued commitment to member service during such difficult times, and all other staff who pitched in to do whatever they could to help out.

Finances:It is always important to remember that while it is great to have such a motivational purpose; it will all amount to nothing if we don’t run a financially sound Credit Union. In fact, I believe that because we are owned by you the Member, we have a higher obligation to run your credit union prudently to ensure your interests are preserved.

The year’s financial reports can be found on pages 11 to 42. When looking at the financial statements it is important to remember that the comparative figures shown for the period ended 30 June 2010 are for 15 months as we changed our annual balance date to June last year.

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CREDIT UNION SOUTHREPORT OF THE CHIEF EXECUTIVE OFFICER


Key results from the financials for the year ended 30 June 2011:• Operating Surplus of $851,000 up $137,000 on last year

• Bad & Doubtful Debts expenses $1,567,000, down $687,000

• Total reserves up 5% to $18.1m

• Total Assets up $3.6m

• Liquid Assets up $7.5m (39.1%)

• Loans to Members down $4m (4.6%).

Overall another solid financial result during what continues to be difficult trading conditions. Key challenges for us in the past 12 months include a decline in loan demand in the second half of this financial year which has given rise to an overall decline in total loans for the full year. While in some ways this decline is reflective of a general trend by Members to reduce debts, most of the decline was in our mortgages as we changed to providing Members mortgages through our relationship with Sovereign Homeloans during the year.

Another challenge for us was the closure of our Christchurch Palms office on February 22nd after a major aftershock. It is planned to be reopened on the 8th of September. With the opening of a new branch in Hornby Mall at the beginning of July, we are now in a position to help many more Christchurch based Members. We look forward to once again seeing you at our offices as we all work to put this behind us and look forward to a brighter future.

We continued to invest in our member offices during the year including:• a significant refurbishment of our Invercargill branch

• the shift of our Richmond, Nelson branch to much larger premises,

• the upgrade of our Timaru and Greymouth offices, and as mentioned

• the opening of a new office in Hornby, Christchurch.

Promotions & Branding:While it is reassuring to have a solid financial result, and to be making good progress on our core purpose of “helping individuals & families in our communities to become financially stronger”, we have still remained one of the “best kept secrets”. Because we are so passionate about our core purpose it is unacceptable to think that there are potential members out there missing out because they just don’t know about the great things we do.

To rectify this we have undertaken a brand review during the past year. This has led to the launch of the “Easy Banking” positioning. We have also worked with six North Island based Credit Unions under the NZCU branding to launch a National Television campaign which commenced in July 2011. This will be combined with other local activities planned for the current financial year, including the growth of our Business Development Team which will be working to re-establish close links with local employers and their employees. We are confident that we are well on the way to losing the “Best Kept Secret” title… for all the right reasons.

I would like to take this opportunity to thank Members for their ongoing support of your credit union. The past year has been challenging as the economy has continued to change. However it has been reassuring to see the continued support Members have for their Credit Union. We remain confident that even more individuals across the South Island will benefit from having access to our services in the coming year. We continue to focus on providing the best possible service for our Members.

I’d like to thank the board, management team and staff for their invaluable support as we bring our core purpose to reality, “helping individuals & families in our communities to become financially stronger”. Together we will achieve great things and maintain as a primary focus helping individual Members secure a better financial future through their membership of our Credit Union. Andrew LeysChief Executive Officer

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CREDIT UNION SOUTHREPORT OF THE TRUSTEES


It is with pleasure that I present the report on the activities of the Trustee and the Credit Committee for the year ending 30 June 2011. Over the last 12 months we have been met with many challenges due to the recession and the resulting downturn in the economy. This has seen loan demand fall off as Members have been reducing their level of debt.

We are still lending on the usual things such as debt consolidation, motor vehicles, home improvements, family, travel and other personal items albeit at a reduced level.

During the year we have been advancing personal loans in the region of $2 to $2.5 million each month with lending peaking at $70.5 million in December 2010/ January 2011 and reducing to $67.57 million in personal loans and $18.01 million in mortgages at 30 June 2011. The return on loans was $12.97 million for the year. The provision for bad and doubtful loans increased from $2.09 to $2.43 million during the year.

With the current economic situation, I would ask that Members, when facing financial pressures, contact the nearest Credit Union branch and have a chat with the staff. We are here to help you to become financially stronger, and will always do our best to achieve that result.

I wish to thank fellow directors John Sheard and Peter McKnight and senior managers, Marilyn Richardson and Helen Malcolm for their assistance on the Credit Committee.

Bevan MoretonChair of Trustees

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CREDIT UNION SOUTHREPORT OF THE AUDIT AND RISK COMMITTEE


NZCU South is now in its 4th year of operation as a merged entity formed from the original five South Island community Credit Unions. It is with pleasure that I, on behalf of the Audit and Risk Committee of NZCU South introduce the 2011 Audit and Risk report.

The Audit and Risk Committee is currently made up of five directors appointed from the board of directors. The Committee elects a chair.

Our role is to have oversight of NZCU South’s Members’ interest by providing an open communication link between board, internal and external auditors, staff and Members by:-

• Ensuring that the accounting function of NZCU South is accurate and meets the standards required by the board of directors, relevant legislation, and the Trust Deed

• Monitoring financial goals set by the board of directors

• To ensue sound processes exist for risk monitoring and reporting

• Liaising with the internal and external auditors on all matters that effect the prudent management of our organisation as required

• Periodically review the performance of the external auditors and the effectiveness of the audit process, taking into consideration relevant professional and regulatory requirements

• Review and approve the fees and other compensation to be paid to the internal and external auditors

• Ensuring that NZCU South has an effective risk management system

• Address the effectiveness of the Credit Unions internal control systems with management and with the internal and external auditors

• Working for continuous improvement in all aspects of material risk.

We have met as a committee most months throughout the year.

The ongoing success of your Credit Union is a reflection of the work carried out on a daily basis by the staff, management and directors behind the scenes.

I acknowledge and thank my fellow committee members Peter McKnight, John Sheard, Peter Taylor, Bevan Killick and the Credit Committee for their work during the year.

Finally, I wish to thank our auditors, PricewaterhouseCoopers for their work and advice and whose report on pages 43 and 44.

Wade DevineChairAudit and Risk Committee


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CREDIT UNION SOUTH - STATEMENT OF COMPREHENSIVE INCOMEFOR THE YEAR ENDED 30 JUNE 2011

Note 2011 2010 $'000 $'000 (12 months) (15 months) TOTAL OPERATING REVENUE 18,483 21,760 Interest revenue 3(a) 13,880 16,396 Interest expense 3(b) 3,478 4,137

Net Interest Revenue 10,402 12,259 Other Income 3(c) 4,603 5,364 15,005 17,623 OTHER EXPENSES Bad and doubtful loans 3(d) 1,567 2,254 Employee benefits 3(e) 4,829 5,410 Occupancy - operating leases 525 669 Depreciation 3(f) 722 863 Other administration expenses 3(g) 6,511 7,713 14,154 16,909 OPERATING SURPLUS 851 714 TOTAL COMPREHENSIVE INCOME 851 714

CREDIT UNION SOUTH - STATEMENT OF CHANGES IN EQUITYFOR THE YEAR ENDED 30 JUNE 2011

Note General Retained Reserve Earnings Total $'000 $'000 $'000 Balance at 1 July 2010 4 6,306 10,984 17,254 Operating surplus - 851 851 Total comprehensive income - 851 851

Balance at 30 June 2011 6,306 11,799 18,105 Balance at 1 April 2009 4 6,306 10,234 16,540 Operating surplus - 714 714 Total comprehensive income - 714 714 Balance at 30 June 2010 6,306 10,948 17,245

The attached notes to the financial statements form part of and should be read in conjunction with the financial statements.


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CREDIT UNION SOUTH - BALANCE SHEETAS AT 30 JUNE 2011

June 2011 June 2010 MEMBERS' FUNDS Note $'000 $'000

Retained earnings 4 11,799 10,948 General reserve 4 6,306 6,306

TOTAL MEMBERS' FUNDS 18,105 17,254 ASSETS Cash and cash equivalents 5 2,845 3,698 Deposits at New Zealand Association of Credit Unions 6 23,000 15,600 Deposits at Registered Banks 6a 1,000 - Trade and other receivables 7 463 444 Loans to members 8-9 83,856 87,864 New Zealand Association of Credit Union Capital Notes 11 3,096 3,096 Property, plant and equipment 12 1,947 1,942 TOTAL ASSETS 116,207 112,644 LIABILITIES Trade and other payables 13 2,163 1,887 Employee entitlements 638 568 Derivatives - interest rate swaps 10 191 283 Members' deposits 14 95,110 92,652 TOTAL LIABILITIES 98,102 95,390

NET ASSETS 18,105 17,254


These Financial Statements have been authorised for issue by:

Bevan E. Killick Peter C.L.Taylor DIRECTOR DIRECTOR

19 August 2011 19 August 2011


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CREDIT UNION SOUTH - STATEMENT OF CASH FLOWSFOR THE YEAR ENDED 30 JUNE 2011

Note 2011 2010 $'000 $'000 (12 months) (15 months) CASH FLOWS FROM OPERATING ACTIVITIES Interest received 13,639 16,242 Dividends received 224 102 Fees and commissions received 4,603 5,364 Bad loans recovered 81 83 Interest paid (3,303) (4,208)Payments to suppliers and employees (11,788) (13,927) Net cash provided by operating activities 23 3,456 3,656

CASH FLOWS FROM INVESTING ACTIVITIES Net (increase)/decrease in members' loans 2,359 (2,797) Sale of Plant and Equipment - 55 Payments for plant and equipment 12 (726) (743)Increase in deposits with the New Zealand Association of Credit Unions (7,400) (4,600)Increase in deposits with Banks within New Zealand (1,000) - Net cash (used in) investing activities (6,767) (8,085)

CASH FLOWS FROM FINANCING ACTIVITIES Net increase in members' deposits 2,458 4,623 Net cash provided by financing activities 2,458 4,623 Total net increase/(decrease) in cash held (853) 194 Cash at the beginning of the period 3,698 3,504 Cash at the end of the period 2,854 3,698



CREDIT UNION SOUTH - NOTES TO THE FINANCIAL STATEMENTSFOR THE YEAR ENDED 30 JUNE 2011

1 GENERAL INFORMATION

Reporting EntityThe Credit Union is a financial institution that is registered as a credit union under the Friendly Societies and Credit Unions Act 1982. The purpose of the Credit Union is to promote savings among its members and to use those savings for their mutual benefit. The Credit Union operates primarily in the South Island of New Zealand and is incorporated in New Zealand with its registered office at 26 Filleul Street, Dunedin. As the Credit Union is providing a community and social benefit, it is designated a public benefit entity.

The Credit Union is restricted in its borrowings and members contribute to the Credit Union by way of share subscriptions. The shares cannot be transferred or sold. Members are able to withdraw their funds subject to certain conditions. The Credit Union makes loans to members or invests funds on the members’ behalf. Interest and other income are received by the Credit Union and interest is paid to depositing members in the form of interest on shares.

The Credit Union operates predominantly in one industry, being the investment of members’ funds.

Effective 30 June 2010, the Credit Union changed its balance date to 30 June to coincide with the balance date of the New Zealand Association of Credit Unions. Consequently, these annual financial statements are for the twelve months ended 30 June 2011 whereas the comparative figures shown are for the fifteen months ended 30 June 2010.

Trust DeedTo meet the requirements of The Securities Act 1978 a Trust Deed was entered into on 7 February 2001 between the Trustees of the Credit Union and Trustees Executors Limited. Trustees Executors Limited as the Prudential Supervisor was appointed to act in the interests of the members of the Credit Union by monitoring the compliance by the Credit Union of its obligations, its Rules, the Trust Deed and the Friendly Societies and Credit Unions Act 1982. In addition, the Prudential Supervisor is under duty to exercise reasonable diligence to ascertain whether the Credit Union has committed any breach of the Trust Deed or any of the conditions of issue of the shares; and has sufficient assets to meet its obligations to members, as they fall due.

2 STATEMENT OF ACCOUNTING POLICIES

The following are the material accounting policies adopted by the Credit Union in the preparation of the financial statements. Except where stated, the accounting policies have been consistently applied to all periods presented.

(a) Basis of PreparationThe Credit Union is an issuer for the purposes of the Financial Reporting Act 1993. The financial report is a general purpose financial report which has been prepared in accordance with the Financial Reporting Act 1993, the Friendly Societies and Credit Unions Act 1982 and the Securities Regulations 2009.

These financial statements were authorised for issue by the Directors on 19 August 2011.

These financial statements are required to be registered to keep the prospectus current and have been prepared in accordance with New Zealand Generally Accepted Accounting Practice. They comply with the New Zealand equivalents to International Financial Reporting Standards ('NZ IFRS') and other applicable Financial Reporting Standards as appropriate for public benefit entities. The comparative figures shown for 30 June 2010 have been taken from the corresponding audited financial statements.

The financial statements have been prepared in accordance with the historical cost convention, as modified for derivative financial instruments which are stated at their fair value. Accounting policies are selected and applied in a manner which ensures that the resulting financial information satisfies the concepts of relevance and reliability, thereby ensuring that the substance of the underlying transactions or other events is reported.

The application of NZ IFRS required management to make judgements, estimates and assumptions about the carrying values of assets and liabilities not readily available from other sources. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to the accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of revision and future periods if the revision affects both current and future periods.

The presentational and functional currency is New Zealand dollars and figures are rounded to the nearest thousand dollars ($'000) unless otherwise stated.

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CREDIT UNION SOUTH - NOTES TO THE FINANCIAL STATEMENTSFOR THE FIFTEEN MONTHS ENDED 30 JUNE 2011

2 STATEMENT OF ACCOUNTING POLICIES - continued

(b) Segmental ReportingManagement have determined that an operating segment is a group of assets and operations engaged in business activities that are subject to risks and returns sufficiently different from other activities within the Credit Union to be separately identified in management reporting and to require separate resource and performance reviews. Management have considered both geographic and product perspectives, and all operations have been reported as one segment. The reportable segment derives all its revenue from financial service products.

(c) Revenue RecognitionInterest Revenue on loansInterest revenue on loans is calculated on the daily loan balance outstanding and is charged at each payment date. This is the effective interest method which allocates the interest over the term of the loans to which they relate. Interest income on impaired loans is recognised using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss.

Investment RevenueInvestment interest revenue is recognised on an effective interest method which allocates the interest over the period that it relates to. Dividends on the New Zealand Association of Credit Unions Capital Notes are recorded as income once an entitlement to the income is notified to the Credit Union

Fees & Commissions RevenueFees and commissions are brought to account on an accrual basis when the service has been provided.

(d) Expense RecognitionInterest expenseInterest on members shares' is recognised as an expense in the period that it relates to using the effective interest method, which allocates the interest expense over the term of the members' shares to which they relate.

Other expensesOther expenses are recorded in the period to which they relate.

(e) Income TaxNo amounts have been provided for Income Tax as the Credit Union’s income from members is exempt under section CW 44 of the Income Tax Act 2007. Income derived other than from members does not result in a taxable profit.

(f) Goods & Services TaxThe Credit Union has not registered for GST as at 30 June 2011. GST is included in the amounts recognised as income, expenses, assets and liabilities (where applicable). The Credit Union registered for GST effective 1 July 2011 as several new products will take total taxable supplies made above the exemption threshold.

(g) LeasesLeases of property, plant and equipment are operating leases as the substantial risks and benefits incidental to ownership of the asset, are retained by the legal owner. Lease payments for operating leases are charged as expenses in the periods in which they are incurred on a straight line method. Lease incentives under operating leases are recognised as a liability and are amortised on a straight line basis over the life of the lease term.

(h) Cash and cash equivalentsCash and cash equivalents includes cash on hand, deposits held at call with banks, other short-term highly liquid investments with original maturities of three months or less, and bank overdrafts repayable on demand.

(i) Deposits at New Zealand Association of Credit Unions and Registered BanksDeposits at the New Zealand Association of Credit Unions and Registered Banks are recorded at cost, less any impairment losses.

(j) Trade and Other ReceivablesThese amounts represent amounts due for interest owing and other services performed by the Credit Union prior to the end of the financial period which are not received. The amounts are expected to be received within a year of recognition. They are initially recorded at fair value and subsequently measured at cost less any impairment provision.


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(k) Loans to MembersLoans to members are loans which are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are initially recognised at fair value plus transaction costs and subsequently measured at amortised cost, using the effective interest method, less provision for impairment.

(l) Impairment of Loans An assessment is made at each balance date whether there is objective evidence that loans are impaired. A loan is impaired and impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a 'loss event') and that loss event (or events) has an impact on the estimated future cash flows of the loan and can be reliably estimated. Objective evidence that a mortgage receivable is impaired includes observable data that comes to the attention of the directors about the following loss events:

• significant financial difficulty of the member;• a breach of contract, such as a default or delinquency in interest or principal payments;• a concession granted to the borrower that the lender would not otherwise consider for economic or legal reasons

relating to the borrower's financial difficulty; or• it becoming probable that the borrower will enter bankruptcy or other financial reorganisation.

The amount provided for impairment of loans is determined by management and the directors. The Prudential Standards issued by the New Zealand Association of Credit Unions enable the minimum provision to be based on specific percentages of the loan balance, contingent upon the length of time the repayments are in arrears, and the security held. This approach is adopted by the Credit Union. In addition, the directors make a provision for loans in arrears where the collectability of the debts is considered doubtful by estimation of expected losses in relation to loan portfolios where specific identification is impracticable. Loans which are known to be uncollectible are written off as an expense in the statement of comprehensive income. Such loans are written off after all the necessary procedures have been completed and the amount of the loss has been determined.

If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised (such as an improvement in the debtors credit rating), the previously recognised impairment loss is reversed by adjusting the allowance amount, with the reversal being recognised in the statement of comprehensive income.

The various components of impaired assets are as follows:

Individually impaired loans are loans and advances for which there is reasonable doubt that the Credit Union will be able to collect all amounts of principal and interest in accordance with the terms of the agreement and for which an individual assessment of impairment is made.

Collectively impaired loans are loans and advances that are not individually assessed for which a collective assessment of impairment is made based on the length of time the loan is in arrears.

Restructured loans are loans where the original contractual terms have been modified to provide for concessions of interest, principal or repayment for reasons related to financial difficulties of the member.

Assets acquired through the enforcement of security are assets acquired in full or partial settlement of a loan or similar facility through the enforcement of security arrangements.

Past-due loans are loans or similar facilities in arrears when a member has failed to make payment when contractually due which are not impaired loans. 90 day past due loans are loans which have not been operated by the member within its' key terms for at least 90 days and which are not impaired loans.


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(m) Derivative financial instruments Derivatives (interest rate swaps) have been entered into for the purpose of economically managing the interest rate risk of the Credit Union's fixed interest mortgage portfolio. All interest rate swaps held at balance date are recognised at fair value through profit or loss. The derivatives do not qualify for hedge accounting in the reporting periods.

(n) New Zealand Association of Credit Unions Capital NotesThe Capital Notes are held as "available for sale" equity instruments and are initially recognised at cost price, which is their fair value at the date of acquisition.

Dividend income from "available for sale" equity instruments is separately recognised in the statement of comprehensive income as part of other income when the Credit Union's right to receive payments is established (ex-dividend date)."Available for sale" equity instruments are normally carried at fair value in subsequent periods with changes in fair value being recognised in the statement of comprehensive income as part of other comprehensive income. However, as the Capital Notes are equity instruments and do not have a quoted market price in an active market and the fair value cannot be measured reliably, they are measured at cost price in terms of the accounting standard NZ IAS 39. Note that this concession is likely to be removed in future with a requirement to record fair value.

The Credit Union assesses at each balance sheet date whether there is objective evidence that a financial asset or a group of financial assets is impaired. In the case of Capital Notes classified as "available for sale" equity instruments, a significant or prolonged decline in the fair value of the instrument below its cost is considered in determining whether the investment is impaired. If any such evidence exists for "available for sale" equity instruments, the cumulative loss, measured as the difference between the acquisition cost and the current fair value, is carried in the statement of comprehensive income

(o) Property, plant and equipmentAll property, plant and equipment is stated at historical cost less depreciation and any impairment losses. Historical cost includes expenditure that is directly attributable to the acquisition of the items.

Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Credit Union and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the statement of comprehensive income during the financial period in which they are incurred.

The buildings, plant and equipment are depreciated on a straight line basis. Depreciation of buildings, plant and equipment is calculated using rates which are estimated to expense the cost of the assets over their useful lives. The rates are as follows:

Buildings 4-10% per annum on cost Motor Vehicles 20% per annum on costLeasehold Improvements Term of Lease Plant, Equipment & Computer Equipment 20-33% per annum on cost

Asset purchases of less than $500 are not capitalised.

The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at least at each financial period for any impairment in value.

An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount.

Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included in the statement of comprehensive income.

(p) Impairment Testing of Assets (excluding Property, plant and equipment and Loans)At each reporting date, the Credit Union reviews the carrying values of its tangible assets to determine whether there is any indication that those assets have been impaired. If such an indication exists, the recoverable amount of the asset, being the higher of the asset’s fair value less costs to sell and value in use, is compared to the asset's carrying value. Any excess of the asset's carrying value over its recoverable amount is expensed to the statement of comprehensive income.


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(q) Trade and Other PayablesThese amounts represent liabilities for goods and services provided to the Credit Union prior to the end of the financial period which are unpaid. The amounts are unsecured and are usually paid within 30 days of recognition. Trade payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method.

(r) Employee Benefits Liabilities for wages and salaries, including non monetary benefits, annual leave and long service leave expected to be settled within 12 months of the reporting date are recognised in other payables in respect of employees' service up to the reporting date and are measured at the amounts expected to be paid when the liabilities are settled. Liabilities for non-accumulating sick leave are recognised when the leave is taken and measured at the rates paid or payable. The liability for employee entitlements is carried at the present value of the estimated future cash flows. Employee benefits payable later than one year have been measured at the present value of the estimated future cash outflows to be made if material.

(s) Members' DepositsMembers’ deposits are the members' shares in the Credit Union. For the purposes of financial reporting, members' shares are recognised as debt instruments. They are recorded initially at fair value and subsequently at amortised cost. All payments of dividends on these shares are recorded as interest payments. Members have the right to one vote at the meetings of the Credit Union, regardless of the number of shares held. Members' deposits are initially brought to account at the fair value of the consideration and subsequently measured at cost. Interest on deposits is brought to account on an accrual basis. Interest accrued at balance date is shown as a part of trade and other payables.

(t) Financial Instruments RecognitionFinancial instruments are initially measured at fair value on trade date, which includes transactions costs, when the related contractual rights or obligations exist. Subsequent to initial recognition these instruments are measured as set out below.

Financial assets at fair value through profit or lossA financial asset is classified in this category only when the Credit Union becomes a party to the contractual provisions of the financial asset and if acquired principally for the purpose of selling in the short term or if so designated by management. Realised and unrealised gains and losses arising from changes in the fair value of these assets are included in the statement of comprehensive income in the period in which they arise.

Loans and receivablesLoans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and are stated at amortised costs using the effective interest rate method.

Held-to-maturity investmentsThese investments have fixed maturities, and it is the Credit Union’s intention to hold these investments to maturity. Any held-to-maturity investments held by the Credit Union are stated at amortised cost using the effective interest rate method.

Available for sale equity instrumentsInvestments in New Zealand Association of Credit Unions Capital Notes provide equity for the Association to enable it to provide essential services to the Credit Unions. They are held as "available-for-sale assets" under NZ IAS 39. This classification recognises that they do not meet the definition of "loans and receivables" or "held-to-maturity" investments because they do not have a fixed or determinable interest or dividend rate attached to them.

Financial liabilities Non-derivative financial liabilities are recognised at amortised cost, comprising original debt less principal payments and amortisation using the effective interest rate method.

DerivativesDerivatives are financial instruments which have a value that changes in response to a specified variable. They comprise interest rate swaps. They require no initial net investment and are settled at a future date. Derivative financial instruments are recognised at fair value through profit or loss.




(u) Statement of Cash FlowsDefinitions of terms used in the statement of cash flows:

Cash includes coins and notes, demand deposits and other highly liquid investments readily convertible into cash and includes at call borrowings such as bank overdrafts, used by the organisation as part of its day-to-day cash management.

Investing Activities are those activities relating to the acquisition and disposal of current and non current investments and any other non current assets. They include loans to members and repayments of loans by members.

Financing Activities are those activities relating to changes in the size and composition of the capital structure of the Credit Union.

Operating Activities include all transactions and other events that are not investing or financing activities.

Certain cash flows have been netted in order to provide more meaningful disclosure as many of the cash flows are received and disbursed on behalf of members and reflect the activities of the members rather than those of the Credit Union. These include members' loans and borrowings.

(v) Critical Estimates, Judgements and Assumptions in Applying the Accounting PoliciesEstimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. This has an impact on the one critical estimate, being the impairment provision for doubtful loans.

The Credit Union makes estimates and assumptions concerning the future when assessing the impairment provision on loans. The Credit Union reviews its loan portfolio to assess impairment at least monthly. The impairment provision is adjusted based on evidence relating to borrowers circumstances including the period that the loans are in arrears. The resulting accounting estimates will seldom equal the related actual results and there is a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year. Also the Credit Union has used judgement concerning the future discounted cash flows of the New Zealand Association of Credit Unions Group when assessing whether there is any impairment loss on the New Zealand Association of Credit Unions' Capital Notes.

(w) Standards, Interpretations and Amendments to Published Standards that are not yet effective.Various new and amended standards, amendments and interpretations have been issued by the Accounting Standards Review Board but have not been adopted by the Credit Union as they are not yet effective for the year ended 30 June 2011.

These are:

NZ IAS 24: Related Party Disclosures (revised 2009) (effective for periods beginning 1 January 2011)The amendment to the standard affected primarily the definition of a related party. Whilst the change to that definition is significant, application of the amended criteria would not have resulted in identification of any further parties related to the Credit Union. Also, the amended disclosure requirements include commitments. The existing process of identification of related party transactions within the Credit Union has not included a review of commitments. The frequency of such transactions occurring is likely to be low. All the other disclosures required in the amended standard are already being made by the Credit Union.

NZ IFRS 9: Financial Instruments (effective for periods beginning after 1 January 2015)The new standard simplifies the classification criteria for financial assets, comparing to the current requirements of IAS 39, which results in a reduced number of categories of financial assets and some consequential amendments to disclosures required by NZ IAS 1: Presentation of Financial Statements and IFRS 7: Financial Instruments: Disclosures. The Credit Union's financial assets currently fall into the category of loan receivables within IAS 39 classification. If IFRS 9 was adopted, these assets would have met the definition of the category of financial assets measured at amortised cost. However, their measurement and disclosure would not have been affected. The Credit Union would not have any transactions to disclose under the new IAS 1 and IFRS 7 disclosure requirements relating to gain or loss arising on derecognition of financial assets measured at amortised cost.

It is not expected that any of the above standards and interpretations will have a significant impact on the accounting policies or the recognition and measurement of assets, liabilities, equity, income and expenses of the Credit Union. All relevant standards and interpretations will be adopted by the Credit Union on their effective dates.

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3 REVENUE AND EXPENDITURE 2011 2010 $'000 $'000 (12 months) (15 months)

(a) Interest Revenue Interest on Loans 12,973 15,596 Interest on Investments 665 588 Dividends on New Zealand Association of Credit Union Capital Notes 242 212

Total Interest Revenue $13,880 $16,396 (b) Interest Expense

Interest on Members' Call Shares 1,214 1,420 Interest on Members' Term Shares 2,147 2,586 Loss on Interest Rate Swaps (Derivatives) 117 131

Total Interest Expense $3,478 $4,137 (c) Other Income

Accesscard - Eftpos Card Transaction Fees 1,559 1,848 Loan Application Fees 815 1,192 Cost Recovery Fees 196 269 Commissions Earned 814 743 Other Fees Charged 1,040 1,312 Proceeds from Distribution of NZACU Stabilisation Fund 177 -

Other Income 2 -

Total Other Income $4,603 $5,364 (d) Bad and Doubtful Loans

Bad Loans Written Off 1,311 1,883 Provision for Loan Impairments 337 454 Bad Loans Recovered (81) (83)

Total Bad and Doubtful Loans $1,567 $2,254 (e) Employee Benefits

Salaries 4,508 5,051 Other 321 359

Total Employee Benefits $4,829 $5,410 (f) Depreciation

Buildings 45 31 Leasehold Improvements 373 386 Plant and Equipment 278 412 Motor Vehicles 26 34 Total Depreciation $722 $863


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3 REVENUE AND EXPENDITURE - Continued 2011 2010 $'000 $'000

(g) Other Administration Expenses (12 months) (15 months) Auditors' Remuneration - PricewaterhouseCoopers

External Audit - Audit of Financial Statements 34 53 Internal Audit 27 32 Accesscard Charges 1,018 1,313 Advertising and Marketing 1,098 1,286 Bank and Cash Delivery Charges 528 646 Credit Checks and Debt Recovery 252 255 Data Processing Charges 1,105 1,211 Other Occupancy Costs 128 123 Directors' Fees 175 130 Directors' Expenses and Training 143 111 Donations Made / Community Support 10 1 Credit Union Group Guarantee Costs - 310 Loyalty Fee Rebate 757 897 Staff Training and Seminars 138 86 Office Expenses 107 213 Telephone 306 326 Printing, Stationery & Postage 221 315 Other Sundry Expenses 464 405 Total Other Administration Expenses $6,511 $7,713

(h) Interest Rates Interest is paid to members and relates to the Credit Union’s ability to pay the interest. At times during the period the Credit Union may offer depositors special accounts that have a pre-set interest rate. Interest rates applied to members’ deposits for the period were (% per annum):

30 June 30 JuneCall Shares 2011 2010

S1 Everyday Account 1.50% 1.50% S2 Billpay and S3 Autopay Accounts 0.00% 0.00% S5 Goal Saver Account 2.00% 2.00% S6 Loyalty Saver Account 2.00 - 3.00% 2.00 - 3.00% S7 Christmas Saver and S8 Christmas Hamper Accounts 2.00% 2.00% S10 Success Saver Account 3.50% 4.00% S11 Money Management Account 0.00% 0.00% S12 Seasonal Saver Account 0.00% 0.00% Term Shares

I1 Term Deposit (I-2 months) 2.00 - 5.00% 2.00 - 3.00% I2 Term Deposit (2 months) 2.00 - 3.50% 2.00 - 3.00% I3 Term Deposit (3 months) 3.00 - 4.00% 3.00 - 4.50% I4 Term Deposit (4 months) 2.75 - 3.75% 2.75 - 3.75% I5 Term Deposit (5 months) 2.75 - 3.75% 2.75 - 3.75% I6 Term Deposit (6 months) 3.25 - 5.75% 3.75 - 5.50% I8 Term Deposit (8 months) 3.50 - 4.50% 3.00% I9 Term Deposit (9 months) 3.50 - 4.50% 3.50 - 4.50% I12 Term Deposit (12 months) 3.75 - 6.00% 3.75 - 6.00% I18 Term Deposit (18 months) 4.00% 3.00 - 5.50% I24 Term Deposit (24 months) 4.25 - 6.25% 3.00 - 6.00% I60 Term Deposit (60 months) 6.00% 6.00%


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4 RESERVES Reserves as at 30 June 2011

Reserves as at 30 June 2010

Retained EarningsRetained earnings arise from retained surpluses accumulated from operations.

General ReserveA General Reserve has been established in accordance with Section 119 of the Friendly Societies and Credit Unions Act 1982 which requires the Credit Union to transfer 5% of gross earnings to the General Reserve until the General Reserve is the equivalent of 5% of total assets, and thereafter maintained at a minimum of 5% of total assets. The reserve may not be distributed until the Credit Union is being wound up or dissolved, but may be applied for the following purposes:a) To offset losses made by the Credit Union on loans to members, andb) To such persons of such amounts in such special circumstances as the Registrar, on application, may approve.

Total ReservesThe Trust Deed requires that the total reserves, including retained earnings, amount to at least 10% of the total assets of the Credit Union.

Retained General Total Earnings Reserve Members' Reserves $'000 $'000 $'000

Balance brought forward 10,948 6,306 17,254

Operating profit for the period 851 - 851

Balance carried forward 11,799 6,306 18,105

Reserve % to Total Assets 10.15% 5.43% 15.58%

Retained General Total Earnings Reserve Members' Reserves $'000 $'000 $'000

Balance brought forward 10,234 6,306 16,540

Operating profit for the period 714 - 714

Balance carried forward 10,948 6,306 17,254

Reserve % to Total Assets 9.72% 5.60% 15.32%


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5 CASH AND CASH EQUIVALENTS

Average Interest Rates 2011 2010 p.a. $'000 $'000

Cash on hand 0.00% 1,626 1,720 Bank Balances 0.50% 1,219 1,978

2,845 3,698

6 DEPOSITS AT NEW ZEALAND ASSOCIATION OF CREDIT UNIONS

Average Interest Rates 2011 2010 p.a. $'000 $'000

Call Deposits 2.55% 7,000 3,600 Term Deposits 4.03% 16,000 12,000

23,000 15,600

The Credit Union does not hold tradeable securities. Effective interest rates are the original contracted values. All balances are available within 3 months. The deposits with the New Zealand Association of Credit Unions' central banking facility are excess funds held on behalf of the Credit Union. The New Zealand Association of Credit Unions minimises its exposure to credit risk by maintaining a diversified portfolio with the majority of investments being deposits in banks and money market securities. Movements in market rates will not affect the recorded value of these investments

6a DEPOSITS AT REGISTERED BANKS Average Interest Rates 2011 2010 p.a. $'000 $'000

Term Deposits - Kiwibank - deposit maturing 10 October 2011 4.50% 1,000 -

1,000 -

7 TRADE AND OTHER RECEIVABLES 2011 2010

$'000 $'000

Accrued Interest 335 336 Accrued Dividends - Capital Notes 90 108 Sundry Receivables 38 -

463 444

All trade and other receivables are due within 1 year.


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8 LOANS TO MEMBERS Loans are made in accordance with the Lending Policy of the Credit Union and are repayable on demand. A provision for impairment has been made at the end of the reporting period.Bad loans are written off as an expense and the provision adjusted accordingly.

2011 2010 (a) Loans to members comprises: $'000 $'000

Neither Past Due nor Impaired 78,503 83,348 Past Due but Not Impaired

Up to 30 days 3,427 3,031 Impaired individually 1,178 1,026 Impaired collectively 3,176 2,549 Gross Loans 86,284 89,954 Less:

Allowance for impairment individually 1,178 1,026 Allowance for impairment collectively 1,250 1,064 2,428 2,090

Net Loans 83,856 87,864

(b) Credit quality - Security dissection

Secured by first mortgage over real estate 18,645 21,108 Secured by second mortgage over real estate 65 74 Secured by first mortgage over other security 134 - Secured by members' shares in the Credit Union 13,882 13,641 Unsecured loans 53,558 55,131

86,284 89,954

It is impracticable to provide a valuation of the collateral security held against loans because of the large number of loans that the Credit Union has at any one time. A breakdown of the quality of the security on a portfolio basis is:

2011 2010 $'000 $'000 Security held as mortgage against real estate is on the basis of: - loan to valuation ratio of less than 80% 13,467 15,768 - loan to valuation ratio of more than 80% 640 - - loan to valuation ratio of more than 80% 4,603 5,414 (insured under the Welcome Home Loan Scheme) 18,710 21,182


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8 LOANS TO MEMBERS - Continued

2011 2010(c) Credit quality - Concentration of loans $'000 $'000 (i) Loans to individual or related groups of members which exceed 10% of equity Nil Nil (ii) Loans to members concentrated to individuals employed in any particular industry Nil Nil (iii) Loans to members concentrated solely in New Zealand which is the common bond of the Credit Union 100% 100% (iv) Loans drawn down by member type

Loans to natural persons Residential loans and facilities 18,844 21,182

Personal loans and facilities 67,440 68,772 Loans to Charitable Trusts and Incorporated Societies - -

86,284 89,954

9 IMPAIRMENT OF LOANS AND ADVANCES

2011 2010 (a) Provision for Impairment $'000 $'000

Opening balance 2,090 1,636 Increase in provision for impairment in period 338 454

Balance carried forward 2,428 2,090

(b) Key assumptions in determining the provision for impairment In the course of the preparation of these financial statements the Credit Union has determined the likely

impairment loss on loans which have not maintained loan repayments in accordance with the loan contract, or where there is other evidence of potential impairment such as industrial restructuring, job losses or economic circumstances.


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9 IMPAIRMENT OF LOANS AND ADVANCES - Continued

In identifying the impairment likely from these events the Credit Union is required to estimate the potential impairment. This can be based on the individual circumstances of the member (individually impaired loans) or based on the length of time the loan is in arrears (collectively impaired loans). The impairment provision on collectively impaired loans is based on the following formula:

Period of Impairment % of balance 31 days to 90 days 20% 91 days to 180 days 40% 181 days to 270 days 60% 271 days to 365 days 80% Over 365 days 100%

This provision is checked to historical write offs and an additional provision is made if necessary.

2011 2010 (c) Impairment of Loans $'000 $'000

Individually Impaired Loans

Loans with individual provision for impairment 1,178 1,026 Provision for Impairment (1,178) (1,026)

- - Collectively Impaired Loans

Loans with collective provision for impairment 3,176 2,549 Provision for Impairment (1,250) (1,064)

1,926 1,485 Restructured Loans and Loans with Enforcement of Security

There were no restructured loans, no loans where real estate or other assets were acquired through the enforcement of security at 30 June 2011 (30 June 2010 Nil). All 90 day past due assets are included in the individually impaired and collectively impaired loan categories.

(d) Interest and Other Revenue recognised and foregone

Interest revenue on non-accrual and restructured loans 154 159 Interest foregone on non-accrual and restructured loans 141 146


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10 DERIVATIVES - INTEREST RATE SWAPS 2011 2010 $'000 $'000 Interest rate swap contracts (191) (283)

Derivatives are current assets/(liabilities). The nominal value of the swaps is $4,515,500 (30 June 2010 $4,515,500) and they mature at various dates until 28 March 2013. Derivative instruments used by the Credit Union

The Credit Union entered into derivative transactions through the New Zealand Association of Credit Unions in the normal course of business as a partial hedge to reduce the exposure to fluctuations in interest rates in accordance with the Credit Union's financial risk management policies

Fair value measurements of financial instruments are classified using a Fair Value Hierarchy (with Levels 1-3) that reflects the significance of the inputs used in making the measurements. The fair value of financial instruments that are not traded in an active market is determined by using valuation techniques. These valuation techniques maximise the use of observable market data where it is available and rely as little as possible on entity specific estimates. If all significant inputs required to fair value an instrument are observable, the instrument is included in Level 2. Management considers the derivatives held by Credit Union South to be included in Level 2.

11 NEW ZEALAND ASSOCIATION OF CREDIT UNIONS CAPITAL NOTES

New Zealand Association of Credit Unions Capital Notes, classified as "available-for-sale" financial assets, are issued by the New Zealand Association of Credit Unions' Business Services Division as Trust Base Capital Notes (Capital Notes). These represent monies invested with the NZACU Business Services Division Trust for an open-ended term. The Capital Notes constitute unsecured obligations of the Business Services Division Trust and rank equally and without priority or preference among themselves. The Capital Notes rank after creditors in the event of the winding up of the Business Services Division Trust. Capital Notes may only be sold or transferred to another Credit Union that is a member of the Business Services Division Trust and with the consent of the Business Services Division Trust's Board of Directors. The Capital Notes are redeemable in full, with five years notice, by the Association. However, the Credit Union has no intention of redeeming the investments in the forseeable future.

There is no active market for these securities which have no guaranteed rate of return. Dividends are payable on a six monthly basis subject to the profitability of the Business Services Division

Trust. Capital Notes are non current assets.

As a result of past losses incurred by the New Zealand Association of Credit Unions Group in recent years, the net tangible assets of the Group have reduced, resulting in the net tangible asset backing for the Capital Notes falling below par. This is an indicator of potential impairment for these Capital Notes. However, an analysis of arms length transactions of Capital Notes supports the view that the Capital Notes are appropriately valued at their face value and it is determined that no impairment loss has arisen at balance date. Consequently, the carrying value of the Capital Notes approximates their fair value at balance date.

Investments in Capital Notes 2011 2010 $'000 $'000 Total Capital Notes at fair value 3,096 3,096

Total Available for sale investments 3,096 3,096


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12 PROPERTY, PLANT AND EQUIPMENT (a) Classes of Property, Plant & Equipment 2011 2010 $'000 $'000 Land

At cost 300 300

300 300 Buildings

At cost 623 623 Accumulated depreciation (296) (271)

327 352 The latest rateable value of Land and Buildings is

50 Don Street, Invercargill $930,000 1-Jul-08 82 Main Street, Gore $280,000 1-Aug-10

Leasehold improvements

At cost 2,211 1,680 Accumulated depreciation (1,372) (979)

839 701 Plant & Equipment

At cost 3,159 2,989 Accumulated depreciation (2,776) (2,498)

383 491 Motor Vehicles

At cost 156 162 Accumulated depreciation (57) (64)

99 98

Total Property, Plant & Equipment 1,947 1,942


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12 PROPERTY, PLANT AND EQUIPMENT - Continued (b) Movements in Carrying Amounts

Reconciliation of the carrying amounts of each class of property, plant and equipment between the beginning and end of each period:

30 June 2011 Land and Leasehold Plant & Buildings Improvements Equipment Motor Vehicles Total $'000 $'000 $'000 $'000 $'000

Balance at 1 July 2010 652 701 491 98 1,942 Additions 222 308 169 27 726 Disposals - - - - - Depreciation Expense (31) (387) (277) (26) (722)

Carrying amount at 843 622 383 98 1,947 30 June 2011

30 June 2010 Land and Leasehold Plant & Buildings Improvements Equipment Motor Vehicles Total $'000 $'000 $'000 $'000 $'000

Balance at 1 April 2009 683 732 591 104 2,111 Additions - 354 312 77 743 Disposals - - - (49) (49) Depreciation Expense (31) (386) (412) (34) (863)

Carrying amount at 652 701 491 98 1,942 30 June 2010

13 TRADE AND OTHER PAYABLES 2011 2010 $'000 $'000

Accrued Interest Payable 778 695 Resident Withholding Tax 41 41 Sundry Creditors and Accrued Expenses 647 630 Accesscard - ATM and Eftpos Card Settlement 697 521

2,163 1,887 Trade and other payables are current liabilities.


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14 MEMBERS' DEPOSITS 2011 2010Call Shares $'000 $'000Savings Accounts 28,159 29,117 Christmas Club and Christmas Hamper Account 3,000 2,516Loyalty Account 20,308 19,566

Total Call Shares (all current assets) 51,467 51,199

Term Shares Original Maturity Terms 0-3 months 2,256 3,542 4-6 months 18,377 17,070 7-9 months 189 23410-12 months 14,735 15,585 Greater than 12 months 8,086 5,022

Total Term Shares 43,643 41,453

Total Members' Deposits 95,110 92,652

Deposits from members are accepted on the basis of a fixed value of $1 per share. Deposits not in whole dollars are deemed to be advance subscriptions for shares. Dividends not paid in cash, and reinvested by members, are deemed to be subscriptions for shares and add to the members’ share balance in the Credit Union. The Directors believe the reported values reflect fair value.

Members’ shares are secured by a first ranking equitable assignment by way of security over the whole of the Credit Union’s present and future undertaking, property, assets and revenues, including the proceeds received for the subscription for shares and unpaid capital (if any). The equitable assignment by way of security was granted in favour of Trustees Executors Limited, the Prudential Supervisor of the Credit Union, under a Trust Deed dated 7 February 2001, which has been registered with the Registrar of Companies.

The Credit Union has also granted to Trustees Executors Limited a security interest in all its present and after-acquired personal property as additional security for the members’ shares. Trustees Executors Limited has registered a financing statement under the Personal Property Securities Act 1999 in respect of the same. The grant of this security interest was recorded in a Deed of Modification to Trust Deed dated 15 October 2002, which has been registered with the Registrar of Companies.

Members' deposits were covered by the Crown deed of Guarantee for a period of two years which ended on 12 October 2010. This guarantee has not been renewed beyond 12 October 2010.

On 19 February 2010 the Credit Union obtained a long-term issuer credit rating of BB with a stable outlook from Standard & Poors.

The Credit Union complies with the "Deposit Takers (Credit Ratings, Capital Ratios, and Related Party Exposures) Regulations 2010" which came into effect on 1 December 2010. These Regulations require a minimum of 8% capital ratio (equity to assets) and the Credit Union meets the requirement of these Regulations.


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15 COMMITMENTS

(a) Future Capital Commitments 2011 2010 $'000 $'000 As at balance date, the Credit Union has contracted to purchase property, plant and equipment to the value of: 164 -

(b) Operating Lease CommitmentsAs at balance date, the Credit Union has entered into the operating lease agreements for the premises of all its branches in South Island. 2011 2010 Operating leases contracted for but not capitalised $'000 $'000 in the financial statements, payable:

Not longer than 1 year 413 457 Longer than 1 and not longer than 5 years 1,139 1,161 Longer than 5 years 451 588

2,003 2,206 Each lease is for a three year term, with varying rights of renewal and with rent payable monthly in advance. 2011 2010 (c) Outstanding Loan Commitments $'000 $'000 Loans and credit facilities approved but not paid out at the end of the financial period: Loans approved but not paid out 316 546 Undrawn overdraft, line of credit and Accesscredit 362 358

678 904

16 STANDBY BORROWING FACILITIES The Credit Union has a gross borrowing facility (as an overdraft facility) with the New Zealand Association of Credit Unions at 30 June 2011 of $2,500,000 (30 June 2010 $2,500,000). There are no borrowings against this facility. The interest rate is 5.40% p.a. (30 June 2010 8.50%) and the penalty rate is 7.00% p.a. (30 June 2010 12.75%). There are no material terms of use.

17 CONTINGENT LIABILITIES

There are no material contingent liabilities at 30 June 2011 (30 June 2010, Nil).


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18 FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES

The board has endorsed a policy of compliance and risk management to match the risk profile of the Credit Union. Key risk management policies encompassed in the overall risk management framework include:

- Market Risk and Hedging Policy management

- Credit risk management

- Liquidity risk management

- Capital adequacy management

The Credit Union has undertaken the following strategies to minimise the risks arising from financial instruments: Market Risk and Hedging PolicyThe Credit Union is not exposed to currency risk, and other price risk. The Credit Union does not trade in the financial instruments it holds on its books.

The Credit Union is exposed to interest rate risk arising from changes in market interest rates.

The policy of the Credit Union to manage the risk is to maintain a balanced "on book" strategy by ensuring the net interest rate gaps between members' loans and members' shares are not excessive. The measured gap in each 3 month range is to be maintained between 7.5% and 9.00% of the difference between interest on loans and members deposits. The gap is measured monthly to identify any large exposures to the interest rate movements and to rectify the excess through targeted fixed rate interest products available through investment assets, and term deposit liabilities to rectify the imbalance to within acceptable levels. The Credit Union's exposure to interest rate risk is set out in Note 21 which details the contractual interest rate change profile and note 10 sets out the interest rate swaps used to minimise interest rate risk.

Based on the calculations as at 30 June 2011, the net profit impact for a 1% movement in interest rates on members loans would be +/- $862,838 (30 June 2010 +/- $899,538), and the impact on equity would be the same amount. The net profit impact for a 1% movement in interest rates on members shares would be +/- $951,099 (30 June 2010 +/- $926,250), and the impact on equity would be the same amount. The net profit impact for a 1% movement in interest rates on the New Zealand Association of Credit Unions deposits would be +/- $230,000 (30 June 2010 +/- $156,000), and the impact on equity would be the same amount.


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18 FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES - Continued

The Credit Union performs sensitivity analysis to measure market risk exposures. The method used in determining the sensitivity was to evaluate the profit based on the timing of the interest repricing on the banking book of the Credit Union for the next 12 months. In doing the calculation the assumptions applied were that:

- The interest rate change would be applied equally over the loan products

- The rate change would be as at the beginning of the 12 month period and no other rate changes would

be effective during the period

- The term deposits would all reprice to the new interest rate at the term maturity, or be replaced by

deposits with similar terms and rates applicable

- All loans would be repaid in accordance with the current average repayment rate (or contractual

repayment terms)

- The value and mix of call savings to term deposits will be unchanged

- The value and mix of personal loans to mortgage loans will be unchanged

There has been no change to the Credit Union's exposure to market risk or the way the entity manages and measures market risk in the reporting period.

Credit Risk - LoansCredit risk is the risk that the other party to a financial instrument will fail to discharge their obligation resulting in the Credit Union incurring a financial loss. This usually occurs when debtors fail to settle their obligations owing to the entity. There is no individual concentration of credit risk with respect of loans and receivables as the Credit Union has a large number of customers. The credit policy is that loans are only made to members that are credit worthy.

The Credit Union has established policies or procedures over the:

- Credit assessment and approval of loans and facilities covering acceptable risk assessment and

security requirements

- Limits of exposure over the value to individual borrowers, non mortgage secured loans, commercial

lending and concentrations to geographic and industry groups considered at high risk of default

- Reassessing and review of the credit exposures on loans and facilities

- Establishing appropriate provisions to recognise the impairments of loans

- Debt recovery procedures

- Review of compliance with the above policies.

Regular reviews of compliance are conducted as part of the internal audit scope.


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The risk of losses from the loans undertaken is primarily reduced by the nature and quality of the security taken. The board policy is to lend no more than 35% of the loans in secured residential mortgages which carry an 80% Loan to Valuation ratio or better. All loans over $25,000 require collateral security which the Credit Union can enforce by disposing of the secured assets in the event of default.

Daily reports monitor the loan repayments to detect delays in repayments and recovery action is undertaken after 7 days if not rectified. For loans where repayments are doubtful, external consultants are engaged to conduct recovery action once the loan is over 90 days in arrears. The exposures to losses arise predominantly in the non secured personal loans and facilities.

The significant accounting judgements are related to the determination of the provision for impairment of loans are set out in Note 9.

Credit Risk - Liquid InvestmentsCredit risk is the risk that the other party to a financial instrument will fail to discharge their obligation resulting in the Credit Union incurring a financial loss. This usually occurs when members fail to settle their loan obligations to the Credit Union.

There is a concentration of credit risk with respect to investment receivables with the placement of investments in the New Zealand Association of Credit Unions. The credit policy is that investments are only made to institutions that are credit worthy.

The risk of losses from the liquid investments undertaken is reduced by the nature and quality of the independent rating of the investee and the limits to concentration on one entity.

The board policy is to place the majority of investments with the New Zealand Association of Credit Unions, an association set up to support the member Credit Unions. The association has a credit rating of BB (Standard & Poors) and invests principally in bank deposits and money market securities.Any other investments may only be with New Zealand registered Banks.

Credit Risk - Equity InvestmentsThe Credit Union does not have equity investments.

Liquidity RiskLiquidity risk is the risk that the Credit Union may encounter difficulties raising funds to meet commitments associated with financial instruments, e.g. borrowing repayments. It is the policy of the Board of Directors that the Credit Union maintains adequate cash reserves and committed credit facilities so as to meet the member withdrawal demands when requested.

The Credit Union manages liquidity risk by:

- Continuously monitoring forecast and actual daily cash flows

- Reviewing the maturity profiles of financial assets and liabilities

- Maintaining adequate reserves, liquidity support facilities and reserve borrowing facilities

- Regularly monitoring loan repayments and comparing to forecast cash flows.

The Credit Union's policy is to maintain at least 8% of total assets as liquid assets capable of being converted to cash within seven days. The ratio is checked daily. Should the liquidity ratio fall below this level, the management and board are to address the matter and ensure that the liquid funds are obtained from new deposits or borrowing facilities available.


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The maturity profile of the financial liabilities, based on the contractual repayment terms, is set out in the specific note 19. Whilst there is liquidity deficiency for the within one month period of $39,835,000 as at 30 June 2011 (30 June 2010 $45,265,000), based on the contractual arrangements, the Directors can manage any potential mismatch and meet its' obligations as they fall due. All loans to members are repayable on demand. In addition, the profile assumes that all members' shares are repaid when they mature. In the ordinary course of business of the Credit Union normally retains the members deposits which are due within 1 month ensuring that it does not need to demand repayment of the members loans.

The ability to demand repayment of all member loans provides the Credit Union with ready access to funds if some or all members shares required repayment. The Credit Union also has the right at any time to require a sixty day notice period for repayment of members shares and has an undrawn overdraft facility of $2,500,000 with the New Zealand Association of Credit Unions.

Capital ManagementThe Credit Union is regulated under the Friendly Societies and Credit Union Act 1982. There is a statutory requirement over the minimum reserves required to be maintained. In addition the Credit Union operates under a Trust Deed which requires the minimum reserves to be held by the Credit Union to be 10% of total assets. The Credit Union reserves as at the end of the reporting period are stated in note 4.

The Credit Union's capital is determined as follows: 2011 2010 $'000 $'000Retained earnings 11,799 10,948General reserve 6,306 6,306

Total reserves $18,105 $17,254

To manage the Credit Union's capital, which can be affected by excessive growth and by changes in total assets, the Credit Union regularly reviews the capital adequacy ratio and monitors major movements in the asset levels. Policies have been implemented to require reporting to the board and the trustee if the capital ratio falls below 10%. Further, an annual capital budget projection of the capital level is maintained to address how strategic decisions or trends may impact on the capital level.


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19 MATURITY PROFILE OF FINANCIAL ASSETS AND LIABILITIES Monetary assets and liabilities have differing maturity profiles depending on the contractual term, and in the case of loans the repayment amount and frequency. The associated table shows the period in which different monetary assets and liabilities held will mature and be eligible for renegotiation or withdrawal. In the case of loans, the table shows the period over which the principal outstanding will be repaid based on the remaining period to the repayment date assuming contractual repayments are maintained. Interest on members' loans and interest on members' shares are included in the totals below. $'000

$'000

The expected liquidity is as per the contractual table above except that the members deposits which are due within one month are not expected to be repaid but to continue at the same level to provide continuing funds for the Credit Union.

30 June 2011Monetary Assets Receivable Cash, Bank andNZACU Deposits Trade and other receivables Loans to members

Future Intereston Loans

Capital Notes

Total Monetary Assets Receivable

Within 1-3 3 - 6 6 - 12 1-2 2 - 5 Over Total 1 Month Months Months Months Years Years 5 Years

14,845 11,000 1,000 - - - - 26,845

463 - - - - - - 463

2,516 4,500 6,685 12,871 21,861 23,155 14,696 86,283

1,025 1,990 2,765 4,749 6,624 6,942 8,883 32,978

- - - - - - 3,096 3,096

18,849 17,490 10,450 17,620 28,485 30,097 26,675 149,666

30 June 2011 Monetary Liabilities Payable

Trade and other payables

Employee Entitlements Members Deposits

Derivatives

Future Intereston Deposits

Total Monetary Liabilities Payable

Liquidity Deficiency/(Excess)


2,163 - - - - - - 2,163

638 - - - - - - 638

55,567 9,115 16,666 8,099 5,319 345 - 95,111

191 - - - - - - 191

125 328 595 438 411 18 - 1,915

58,684 9,443 17,261 8,537 5,730 363 - 100,018

39,835 (8,047) 6,811 (9,083) (22,755) (29,734) (26,675) (49,648)


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19 MATURITY PROFILE OF FINANCIAL ASSETS AND LIABILITIES continued

$'000

$'000

30 June 2010 Monetary Liabilities Payable

Trade and other payables

Employee Entitlements Members Deposits

Derivatives

Future Intereston Deposits

Total Monetary Liabilities Payable

Liquidity Deficiency/(Excess)


1,911 - - - - - - 1,911

544 - - - - - - 544

55,309 9,129 14,542 10,773 2,649 250 - 92,652

- 283 - - - - - 283

107 292 533 1,737 168 36 - 2,873

57,871 9,704 15,075 12,510 2,817 286 - 98,263

45,265 (3,638) 5,828 (4,783) (26,341) (33,567) (29,251) (46,487)

30 June 2010Monetary Assets Receivable Cash, Bank andNZACU Deposits Trade and other receivables Loans to members

Future Intereston Loans

Capital Notes

Total Monetary Assets Receivable


8,600 7,000 - - - - - 15,600

444 - - - - - - 444

2,516 4,304 6,397 12,327 21,981 25,907 16,522 89,954

1,046 2,038 2,850 4,966 7,177 7,946 9,633 35,656

- - - - - - 3,096 3,096

12,606 13,342 9,247 17,293 29,158 33,853 29,251 144,750


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20 INTEREST RATE RISK The Credit Union’s exposure to interest rate risk, which is the risk that a financial instrument’s value will fluctuate as

a result of changes in market interest rates and the effective weighted average interest rate on classes of financial assets and financial liabilities, is as follows:

(a) NZACU Capital Notes do not have any predetermined earning rate. A dividend is payable on a six-monthly basis in arrears subject to the profitability of the NZACU Business Services Trust. The last dividend payment was for the 12 months ended 30 June 2010 and was at 5.79% per annum.

The expected dividend for the 12 months ended 30 June 2011 is 5.83% per annum.

Monetary Assets

Cash 1,626 1,720 1,626 1,720 N/A N/A

Bank Balances 1,219 1,978 1,219 1,978 0.50% 0.50%

Deposits at NZACU 23,000 15,600 23,000 15,600 4.03% 3.77%

Deposits at Banks 1,000 - 1,000 0 4.50% N/A

Trade and other receivables 463 444 463 444 N/A N/A

Loans to members 86,284 89,954 89,284 89,954 14.49% 14.20%

NZACU Capital Notes - see (a) 3,096 3,096 3,096 3,096 5.83% 5.79%

Total Monetary Assets 86,284 89,954 25,219 17,578 0 0 0 0 0 0 0 0 3,096 3,096 2,089 2,164 116,688 112,792

Monetary Liabilities

Deposits - Call 51,467 51,199 51,467 51,199 2.45% 2.68%

Deposits - Term 13,215 13,239 16,666 14,542 8,099 10,773 5,319 2,649 345 250 43,644 41,453 5.28% 3.80%

Derivatives 191 283 191 283 N/A N/A

Other payables 2,801 2,455 2,801 2,455 N/A N/A

Total Monetary Liabilities 0 0 64,873 64,721 16,666 14,542 8,099 10,773 5,319 2,649 345 250 0 0 2,801 2,455 98,103 95,390

2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010

$'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 % %

Floating interest rate

Fixed Interest Rate Maturing in:

0 to 3 months 3 to 6 months 6 to 12 months 1 to 2 years 2 to 5 years Over 5 years

Repricing period at Repricing period at



* The weighted average effective interest rate has been calculated on the interest sensitive financial instruments in each category. N/A = Not Applicable.

Monetary Assets

Cash 1,626 1,720 1,626 1,720 N/A N/A

Bank Balances 1,219 1,978 1,219 1,978 0.50% 0.50%

Deposits at NZACU 23,000 15,600 23,000 15,600 4.03% 3.77%

Deposits at Banks 1,000 - 1,000 0 4.50% N/A

Trade and other receivables 463 444 463 444 N/A N/A

Loans to members 86,284 89,954 89,284 89,954 14.49% 14.20%

NZACU Capital Notes - see (a) 3,096 3,096 3,096 3,096 5.83% 5.79%

Total Monetary Assets 86,284 89,954 25,219 17,578 0 0 0 0 0 0 0 0 3,096 3,096 2,089 2,164 116,688 112,792

Monetary Liabilities

Deposits - Call 51,467 51,199 51,467 51,199 2.45% 2.68%

Deposits - Term 13,215 13,239 16,666 14,542 8,099 10,773 5,319 2,649 345 250 43,644 41,453 5.28% 3.80%

Derivatives 191 283 191 283 N/A N/A

Other payables 2,801 2,455 2,801 2,455 N/A N/A

Total Monetary Liabilities 0 0 64,873 64,721 16,666 14,542 8,099 10,773 5,319 2,649 345 250 0 0 2,801 2,455 98,103 95,390

2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010

$'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 % %

Weighted average effective

interest rate*

Fixed Interest Rate Maturing in: Non-interest sensitive

Total

0 to 3 months 3 to 6 months 6 to 12 months 1 to 2 years 2 to 5 years Over 5 years

Repricing period at Repricing period at

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21 OTHER CREDIT RISKS

(a) Maximum Credit Risk Exposure

The Credit Union’s maximum credit risk exposure, without taking into account the value of any collateral or other security, in the event other parties fail to perform their obligations under financial instruments in relation to each class of recognised financial asset, is the carrying amount of those assets as indicated in the balance sheet.

(b) Concentrations of Credit Risk

The Credit Union minimises concentrations of credit risk in relation to loans by undertaking transactions with a large number of customers. Credit risk is currently managed in accordance with the Prudential Standards to reduce the Credit Union’s exposure to potential failure of counterparties to meet their obligations under the contract or arrangement. All loans are to members of the Credit Union who are concentrated mainly within the South Island of New Zealand.

(c) Large Counterparties

The Credit Union has exposure to counter-parties in excess of 10% of equity as follows:

In relation to loans to members, where a member has shares as security or deemed security, the security has not been taken into account when calculating the percentage of exposure. The exposure greater than 100% is the monies invested at the New Zealand Association of Credit Unions.

(d) Loans to Members

Loans can only be made to Credit Union members. Loan interest rates range from 9.00% to 29.25% p.a. (30 June 2010 9.00% to 29.25% p.a.) including those delinquent loans with penalty interest of 5.00%. The Credit Union has a credit risk policy that requires various levels and types of security for loans and provides that a portion of loans may be secured over the borrowing member's shares. The Friendly Societies and Credit Unions Act 1982 limits the risk of any one member and provides, along with the loan agreement that any and all shares might be used to offset an individual loan to the limit of their liability. Under section 110 of the Act, the maximum indebtedness and repayment terms of a member shall not, without the prior consent of the Registrar, exceed the following limits:

Unsecured Loan - 5% of the value of the assets of the Credit Union and a maximum term of 5 yearsSecured Loan - 10% of the value of the assets of the Credit Union and a maximum term of 10 years

The Registrar of Friendly Societies and Credit Unions has approved an extension of the secured loan term from 10 to 30 years for loans on first mortgage.

Number of Counterparties

2011 2010

Greater than 100% of equity 1 1

Between 90% and 100% of equity - -










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21 OTHER CREDIT RISKS continued

(e) Fair ValuesAll financial assets and liabilities, with the exception of loans to members are short-term instruments where their carrying amount in the balance sheet equates to their fair values. As detailed in the accounting policies, loans are carried at estimated realisable value after providing for impairments. The directors believe that any differences between carrying value and fair value are not material because the loan periods are relatively short and can be changed to "on demand" by the trustees. In addition, interest rate differences between lending dates and balance date are not significant.

22 CONCENTRATION OF FUNDING

The Credit Union’s source of funding is from members’ deposits. Accordingly, funding is concentrated in and limited to the area of the 'common bond' of the Credit Union. Consequently funding is from individuals (residing or working within New Zealand), registered charitable trusts and incorporated societies within New Zealand with the majority of members within the South Island. The funding from members is recorded as Members’ Shares in the balance sheet.

23 CASH FLOW STATEMENT RECONCILIATION 2011 2010 Reconciliation of Cash Flow from operating $'000 $'000 activities with operating profit (12 months) (15 months)

Operating surplus 851 714 Non Cash Items Depreciation 722 863 Bad Loans expense 1,311 1,883 Provision for Loan Impairment 337 454 Changes in Assets and Liabilities Interest Rate Swaps - Derivatives (92) (316) Increase in Trade and Other Receivables (19) (52) Decrease in Trade and Other Payables 346 110 Net Cash Provided by Operating Activities 3,456 3,656

24 RELATED PARTY DISCLOSURES

The Credit Union deals with Directors and Trustees on the same terms and conditions applied to all members (including interest rates on loans and shares):

2010 2009 Directors’ holdings at balance date are: $'000 $'000

Owing to Directors (Shares) 77 230 Owing by Directors (Loans) 669 233 Interest expense (On Shares) 2 8

Interest income (On Loans) 50 33

There are no shares from directors exceeding 12 months and all directors' loans are repayable on demand. The directors received fees of $175,463 (2010, $129,862) for their services.


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24 RELATED PARTY DISCLOSURES - Continued Key management persons are those with authority and responsibility for planning, directing and controlling the activities of the Credit Union, directly or indirectly, including any director (whether executive or otherwise) of the entity. Control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. Key management persons comprise the directors and the two executive managers responsible for the day to day financial and operational management of the Credit Union. 2011 2010 Key management remuneration: $'000 $'000 (12 months) (15 months)Short term employee benefits 289 490 Long term employee benefits - -

Total remuneration 289 490

Remuneration shown as short term benefits means (where applicable) wages, salaries, paid annual leave, sick leave, bonuses and the value of fringe benefits received, but excludes out of pocket expense reimbursements. Peter Taylor a director of Credit Union South, is also a director of Scrunch Limited and was a director of Peter Taylor & Associates that provides marketing services to the credit union which cost $2,550 in 2011 (2010 $2,400). Alex King, a director of Credit Union South (to September 2010), provides IT and computer consulting services to the credit union which cost $20,854 in 2011 (2010 $43,154). Andrew Leys, the Chief Executive Officer of Credit Union South is a beneficial owner of Taxcheck.co.nz Limited, a company that provides tax refund services to members of the credit union. The credit union received $20,598 in commissions in 2011 ($20,600 in 2010). All of these services were provided in normal commercial terms.

25 CLASSIFICATION OF FINANCIAL ASSETS AND LIABILITIES 2011 2010The following financial assets are required to be disclosed $'000 $'000 Classified as "loans and receivables" 109,538 105,886 Classified as "available for sale" 3,096 3,096

112,634 108,982 Total of financial liabilities classified as "financial liabilities measured at amortised cost" 98,102 95,390

26 EVENTS OCCURRING AFTER BALANCE DATE

There are no known events subsequent to 30 June 2011 which would materially affect these financial statements (2010 Nil).

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Report on the Financial StatementsWe have audited the financial statements of Credit Union South on pages 11 to 42, which comprise the balance sheet as at 30 June 2011, the statement of comprehensive income, statement of changes in equity and statement of cash flows for the year then ended, and the notes to the financial statements that include a summary of significant accounting policies and other explanatory information. Directors’ Responsibility for the Financial StatementsThe Directors are responsible for the preparation of these financial statements in accordance with generally accepted accounting practice in New Zealand and that give a true and fair view of the matters to which they relate and for such internal controls as the Directors determine are necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ ResponsibilityOur responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing (New Zealand) and International Standards on Auditing. These standards require that we comply with relevant ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors' judgement, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider the internal controls relevant to the Credit Union’s preparation and fair presentation of financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Credit Union’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

We have no relationship with, or interests in, Credit Union South other than in our capacities as auditors and providers of taxation and other assurance services. These services have not impaired our independence as auditors of the Credit Union.

Independent Auditors’ Report to the members of Credit Union South

PricewaterhouseCoopers, Level 1, Westpac Building, 106 George Street, Dunedin, New ZealandT: +64 (3) 470 3600, F: +64 (3) 470 3601, www.pwc.com/nz

44

Independent Auditors’ Reportto the members of Credit Union South

OpinionIn our opinion, the financial statements on pages 11 to 42 :

(i) comply with generally accepted accounting practice in New Zealand;

(ii) comply with International Financial Reporting Standards; and

(iii) give a true and fair view of the financial position of the Credit Union as at 30 June 2011, and its financial performance and cash flows for the year then ended.

Report on Other Legal and Regulatory RequirementsWe also report in accordance with Sections 16(1)(d) and 16(1)(e) of the Financial Reporting Act 1993. In relation to our audit of the financial statements for the year ended 30 June 2011:

(i) we have obtained all the information and explanations that we have required; and

(ii) in our opinion, proper accounting records have been kept by the Credit Union as far as appears from an examination of those records.

Restriction on Distribution or UseThis report is made solely to the members, as a body. Our audit work has been undertaken so that we might state to the members those matters which we are required to state to them in an auditors’ 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 members as a body, for our audit work, for this report, or for the opinions we have formed.

DunedinChartered Accountants19 August 2011

PricewaterhouseCoopers, Level 1, Westpac Building, 106 George Street, Dunedin, New ZealandT: +64 (3) 470 3600, F: +64 (3) 470 3601, www.pwc.com/nz

Success Saver AccountEarn high rates of interest while your savings are on-call. Interest on the daily balance and paid monthly.

Loyalty Saver AccountEnsures priority for loans and creates your Credit Union’s lending pool.

Everyday AccountEFTPOS (or ATM) real time service available via Accesscard. 24 hour, 7 day “access” to your funds worldwide.

Accesscash® ATMFree ATM access to your funds. Our ATM’s also “talk” to assist our visually impaired members.

Term Share InvestmentsThree, six, nine and twelve month terms at ”Market Related“ interest rates. Rates for other terms are available on application.

Professional Financial Planning ServiceMembers’ planning to ensure their future financial independence can have their initial plan prepared at no charge.

AccessphoneOur Accessphone provides 24 hour access to your accounts. Simply use your telephone to obtain balances, transaction details, interest details, pay bills and transfer funds etc.

Billpay AccountTo provide for those regular bills. We take the hassle out of paying accounts.

Accesscredit® CardA worldwide Maestro branded pin-based card with a continuous revolving credit limit and an interest rate that is lower than most other credit cards.

Travel ServiceTravelex overseas currency and “Cash Passport” are available on request.

Christmas Saver AccountTo provide for that much needed cash at Christmas time.

Bfree Youth AccountA youth savings account especially for 11-18 year olds.

Automatic Payments / Direct DebitsAutomatic Payments or Direct Debits for your insurances, rent, hire purchase, mortgage repayments, etc.

Transactional BankingConvenient Direct Debits are available for your regular payments. Personal cheque accounts are also available.

Jimmy J Saver / School Banking ServiceSavings accounts for the children - to help develop the savings habit. Our school banking service is available at various schools.

Goal Saver AccountAn account for the serious saver who is interested in maximising their savings. Your interest rate increases as your balance increases. An easy way to save towards your “Special” goal.

Charity AccountNZCU South have teamed up with the Salvation Army Food Banks, to provide food parcels to those who need it most. Members specify the interval and the amount to be transferred.

Friendly AdviceYour staff are always available to give you helpful, confidential assistance with your money management - WE CARE!!

Legal ServiceMembers’ home conveyancing and other legal requirements can be serviced with favourable conditions from your Credit Union’s legal advisors.

A copy of our current Investment Statement and our Prospectus is available free of charge from any of our Branches. NZCU South deposits are secured by a First Ranking registered Trust Deed. NZCU South is a registered Credit Union, not a registered bank.

South Island Branches

Invercargill Branches:Central City Corner Kelvin & Don Streets 03 211 3950South City Mall247 Elles Road 03 218 7417

Gore82 Main Street 03 208 3721Lawrence11 Ross Place 03 485 9233Dunedin 26 Filleul Street 03 477 1473Palmerston54 Tiverton Street 03 465 1106Oamaru39 Thames Street 03 434 2240Timaru33 Canon Street 03 688 9514

Christchurch Branches:Palms Mall Shop 90, Corner Marshland

& New Brighton Roads 03 375 7200Hub Hornby Mall 418 Main South Road 03 375 7200

Hokitika 51 Tancred Street 03 755 6363Westport112 Palmerston Street 03 789 4285Greymouth34 Mackay Street 03 768 0184Nelson Shop 2A, 126 Trafalgar Street 03 539 1700RichmondShop 3, 250 Queen Street 03 539 1700

NZCU South is not a registered bank. NZCU South deposits are shares secured by a first ranking registered Trust Deed. NZCU South has a BB (Stable) credit rating from Standard & Poor’s. A current investment statement and prospectus is available on request.

26 Filleul Street, PO Box 6294, Dunedin 9059, New Zealand

South Island Freephone: 0800 86 56 36

Facsimile: 03 477 6910

Email: [email protected]

www.nzcusouth.co.nz

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