Costs of proposed 'Heartland Bank' merger push CBS Canterbury to NZ$1.69 mln half-year loss

CBS Canterbury is urging shareholders and depositholders to support its plans to merge with Marac Finance and Southern Cross Building Society (SCBS) as it slips to an unaudited half-year loss largely due to costs incurred in putting the merger proposal together.

CBS says it lost NZ$1.69 million after tax in the six months to September compared with a NZ$1 million profit in the same period of last year. It absorbed NZ$1.53 million of restructuring costs including NZ$1.3 million of costs, such as bills from lawyers and consultants, related to the planned merger. CBS also spent NZ$263,802 on establishing a loan warehouse funding facility with Westpac as it sourced funding through residential mortgage backed securities.

CBS's profit before restructuring costs and tax was NZ$206,957. Revenue rose 4.4% to NZ$17 million. Due to the impact of the merger costs, CBS said it wouldn't pay an interim dividend.

Chairman Gary Leech said the merger proposal, designed to ultimately create a sharemarket listed "Heartland Bank" if the partners can obtain a banking licence from the Reserve Bank, was potentially the most significant chapter in CBS' history. The merger plans envisage a Christchurch headquartered bank that would aim to double its NZ$2.2 billion asset base within five years through growing family, small business and agricultural lending.

Leech said the difficult economic climate continued to pressure margins, which combined with increasing compliance costs, produced the "modest' pre-tax profit of NZ$206,957.

"The result clearly outlines the operational scale required in today’s banking environment and further reinforces the directors reasoning in recommending to shareholders that by far the best option for the future is to proceed with the current merger plan and its objective to obtain a banking licence, ” said Leech.

Leech said depositor reinvestment rates continued to range between 80% and 90%. Total deposits stood at NZ$483.3 million at September 30, down from NZ$486.3 million at March 31.

Total provisions for impairment losses were NZ$275,210 for the six months to September, down from NZ$351,423 in the same period of last year. Loans overdue by at least three months stood at NZ$2.9 million at September 30 up from NZ$2.5 million at March 31.

Equity stood at NZ$49.88 million at September 30 compared with NZ$51.55 million at March 31. Total assets were NZ$537.48 million, and total liabilities NZ$487.60 million.

 Lending fell by NZ$4.06 million from March 31 which Leech said was an "understandable and satisfactory" outcome given the "flat" property market nationally, the competitive behaviour of the banks, and turmoil caused by the September 4 Canterbury earthquake.

“The second half of this financial year will remain challenging and be clearly dependant on the result of the merger vote by shareholders and depositors," Leech added.

Shareholders are due to vote in Ashburton next Wednesday (November 24) and depositors next Friday (November 26). Other stakeholder groups from Marac, Marac's parent Pyne Gould Corporation (PGC) and SCBS are also due to vote next week. Taking into account an 11.56% stake in CBS held by SCBS, CBS shareholders will own 13.04% of the merged entity, SCBS shareholders 14.75% and PGC shareholders 72.21%.

"The CBS Canterbury directors, the independent reports, and our merger partners agree that a successful merger will have significant benefits for all parties," said Leech.

"For CBS Canterbury to be a part of a new financial services entity serving heartland New Zealand is an exciting opportunity that awaits the Building Society and endorses the long-term vision the board has strived to achieve over the past decade. CBS Canterbury directors strongly encourage all shareholders to vote 'yes' in support of the merger."