HGH - Heartland Group Holdings

[winner69]

That shareholder who asked why his dividend had not increased this year got shortchanged in the answer he go.

We are growth mode and we’re holding more back for growth was the response in a rather gruff tone ....so there you stupid shareholder

Interesting the dividend payout ratio this year was much the same as last year (~75%) and as such the total dividend paid was $4m than previous year

The real reason for holding the dividend at 9.0 cents per share was the significantly increased number of shares......this reinvesting for growth is just a convenient story. More credence would be given tonthat story if they actually cut the dividend.

[Snow Leopard]

...The one big disturbing factor that is stopping me in my tracks is Oracle.
I have worked for extensive periods in two companies that used it, and in my most humble of opinion it is a complete and utter sack of sh!t.....

The very important question here is:
Were these two companies both financial institutions using the Oracle FLEXCUBE product or two companies whose software systems which used an Oracle database as the datastore?

If the former then may be it is an issue otherwise it is not.

Name a database and I can give you a few disaster stories involving them, though usually the problem was not the database per se.

[winner69]

I really hope as a shareholder it doesn't keep "teething" on us and that the $22 million spent on it proves its worth.Could be more clarity and detail clarifying its really fixed and not patched imo.




"Teething" problems after Oracle roll-out cost Heartland Bank ...

Could be as bad as that mega costly experience Kiwibank are having

[beetills]

Also closing their Hamilton Branch after spending heaps to refurbish it.

[percy]

Also closing their Hamilton Branch after spending heaps to refurbish it.

I think we can all see that HBL have seen opportunities they want to take advantage of.
Branch network is not, and has never been, where they see their future.

[Vaygor1]

The very important question here is:
Were these two companies both financial institutions using the Oracle FLEXCUBE product or two companies whose software systems which used an Oracle database as the datastore?

If the former then may be it is an issue otherwise it is not.

Name a database and I can give you a few disaster stories involving them, though usually the problem was not the database per se.

Hi Snow Leopard.

I agree with your sentiments and was aware upon posting that I may receive a response similar to yours. I am well aware that crap in = crap out when it comes to data and data-structure, and not necessarily the fault of the database engine itself.

The company that dumped their system was a hydrocarbons processing facility in NZ that employed an Oracle system as their Computerised Maintenance Management System (CMMS) and also made an attempt to implement Oracle HR. I think it was the failure of the Oracle HR rollout that was the straw that broke the camels back. Tens of millions spent but they had to cut their losses I think.

The company I worked for that may (or may not) be continuing to use their Oracle system was an Australian international Engineering and Design Company with offices in 80 countries employing about 40,000 staff at the time I left.

Around then (about 10 years ago) the main selling point of Oracle was the concept of a central repository for all data, and an engine that would not slow down even with massive data volumes.

The system was so cumbersome, slow, user unfriendly, and ugly (referring to the MMI... able to be tailored a bit but not in terms of real look & feel). Even the internal staff employed to maintain the system cost large sums of money (they had to have Oracle experience) and these staff would invariably form a 'Oracle is everything and nothing else comes close and MUST be banned' attitude, even with unrelated systems... likely due to (in my opinion) Oracle being their life, plus a healthy element of job protectionism.

Oracle may have come out with new products and new architecture since back then, but I assume they would always use their Engine which I imagine lies at the heart of their empire. I think I probably need to be personally exposed to an Oracle success story before reviewing my current feelings about them.

[Beagle]

^^^ Lots of talk this boat had some pretty fancy Oracle software to make the comeback of all time...does that success story count https://www.cbsnews.com/news/oracle-...-americas-cup/

[minimoke]

^^^ Lots of talk this boat had some pretty fancy Oracle software to make the comeback of all time...does that success story count https://www.cbsnews.com/news/oracle-...-americas-cup/

Only to be undone by a poxy flightless bird from some place down south no one has heard of https://en.wikipedia.org/wiki/2017_America%27s_Cup

[Beagle]

Only to be undone by a poxy flightless bird from some place down south no one has heard of https://en.wikipedia.org/wiki/2017_America%27s_Cup

I suspect there might be one or two of those silly flightless birds that enjoyed that series " a little" more than the previous one

[Snoopy]

The objective of this post is to consider cashflow, both in and out over the subsequent one year period after reporting date. This will help evaluate the ability of Heartland to repay debentures due for repayment in the 12 months following the end of year account reporting date.

The following information for FY2017 is derived from note 20 in AR2017 on 'Liquidity Risk'.

1/ Contractual information is extracted from the table titled 'Contractual Liquidity Profile of Financial Assets and Liabilities.
2/ Expected information is calculated by multiplying the 'Contracted' risk by the Expected Behaviour Multiple.
3/ The Expected Behaviour Multiple is dervied from Heartlands own results, back in the day they printed both 'Contracted' and 'Expected' behaviour.

Loan Maturity	Expected Behaviour Multiple	FY2014 Financial Receivables Maturity: Contracted/ Expected	FY2015 Financial Receivables Maturity: Contracted/ Expected	FY2016 Financial Receivables Maturity: Contracted/ Expected	FY2017 Financial Receivables Maturity: Contracted/ Expected
On Demand	100%	$50.254m / $50.254m	$37.012m / $37.012m	$84.154m / $84.154m	$57.040m / $57.040m
0-6 months	132%	$477.190m / $629.445m	$664.557m / $877.215m	$743.389m / $961.274m	$618.271m / $816.118m
6-12 months	132%	$367.564m / $483.727m	$450.638m / $594.842m	$484.420m / $639.962m	$521.215m / $688.004m

Note that in the above table, a 'loan maturity' represents an expected inflow of cash from a Heartland bank perspective.

Deposit Maturity	Expected Behaviour Multiple	FY2014 Financial Liabilities Maturity: Contracted/ Expected	FY2015 Financial Liabilities Maturity: Contracted/ Expected	FY2016 Financial Liabilities Maturity: Contracted/ Expected	FY2017 Financial Liabilities Maturity: Contracted/ Expected
On Demand	3.01%	$629.125m / $18.922m	$748.332m / $22.450m	$718.587m / $21.630m	$836.829m / $25.189m
0-6 months	32.4%	$748.129m / $242.431m	$1,213.450m / $395.102m	$892.944m / $289.314m	$1,191.957m / $386.194m
6-12 months	36.4%	$538.050m / $195.682m	$686.159m / $249.762m	$837.844m / $304.975m	$729.145m / $265.409m

Note that in the above table, a 'financial liability (debenture) maturity' represents an expected outflow of cash from a Heartland bank perspective.

If we now take the expected cash inflows and subtract from those the expected cash outflows we can examine the expected net cashflow from a 'one year in advance' perspective.

Deposit Maturity	FY2014: 'Expected' combined Loan and Deposit Cashflow	FY2015: 'Expected' combined Loan and Deposit Cashflow	FY2016: 'Expected' combined Loan and Deposit Cashflow	FY2017: 'Expected' combined Loan and Deposit Cashflow
On Demand	$31.332m	$14.562m	$62.524m	$31.851m
0-6 months	$387.014m	$482.113m	$691.960m	$429.924m
6-12 months	$288.045m	$345.080m	$334.987m	$422.595m
Total	$706.391m	$841.755m	$1,089.471m	$884.370m

Once again lots of numbers here. Now there are four years of consecutive data on display, we can start to get a view on what 'normal' numbers should look like. So what numbers in the above table(s) are worthy of further attention?

The purpose of this exercise is to work out if Heartland has an identifiable chance of running out of cash. A customer might not be happy if Heartland decides not to offer them a loan. But they will likely be even more unhappy if they have loaned Heartland money, be it in a short term debenture or a cash account, and Heartland does not have the cash to pay them back. Whether cash is available depends on the balance between cash coming into the company and cash going out. This 'balance' is reflected in the bottom table, and this is the table that deserves our attention.

If a cash depositing customer is denied their cash on maturity, this would be equally annoying whether it happened on a 6-12 month term deposiit a 3-6 month term deposit or a cash deposit. So it is the individual figures in the tables that are important, not the totals. Even if an individual figure comes out negative (which none have), it is not certain that Heartland will default. It is not certain because 'expected' behaviour can be changed with incentives: Incentives like offering a higher than market interest rate for a defined period of management concern, for example.

From an historical perspective, the 'On Demand' net position outlook for FY2015 looked a little weak. IIRC there was serious promotion of Heartland's 'on call' account at the time and new money flowed in. Some of this money belonged to members of this forum who responded to the incentive of Heartland offering 3% at the time (? - please correct me forum members if I have remember this figure incorrectly) on their call money just as the big banks were reducing their on call deposit rates to near zero (ANZ, BNZ and Westpac now offer just 0.1% on 'at call' deposit money). By EOFY2016 there was a relative abundance of 'net on call cash available' ($62.5m) and that nearly halved to a still acceptable (beacuse Heartland hasn't seen fit to boost it) $31.9m at EOFY2017. I see that the 'on deposit' rate at Heartland was reduced to 2.75% last year, which no doubt took a lot of the froth out of the cash market from those seeing stars when the rate was 3% and above.

Another anomaly was the 0-6 month maturity outlook from EOFY2016 (30th June 2016). IIRC this was a period when there was real uncertainty about the milk price and Heartland may have shied away from short term loan deals to dairy customers over this time, and thus created a higher than originally planned for net maturity of 0-6 month debentures. That 'bump' also looks to be ironed out in the FY2017 figures.

I see Percy is once again 'on the ball' and has replied to this post before I have finished it. You are right about us having this discussion before Percy, this is at least the fourth time. But that doesn't mean it is a waste of time. Short term cash flow is an issue that never goes away. And an imbalance in these figures is an indicator that Heartland might need to offer higher interest rates in the future to fix any upcoming cashflow situation. Offering above market interest rates, if only for a time, means lower profits for shareholders. And that is something that shareholders should know about! Given all of this information is now historical, we can compare what was indicated with what actually happened. It looks like Heartland was not forecasting any unusual cash shortfall on the 'net' existing loan book for FY2018, so no unusually high interest rate deals would be on offer to customers over the 30th June 2017 to 30th June 2018 period. Is that what happened (I haven't kept close tabs of Heartland deposit rates over the year)?

The objective of this post is to consider cashflow, both in and out over the subsequent one year period after reporting date. This will help evaluate the ability of Heartland to repay debentures due for repayment in the 12 months following the end of year account reporting date.

The following information for FY2017 is derived from note 20 in AR2017 on 'Liquidity Risk'.

1/ Contractual information is extracted from the table titled 'Contractual Liquidity Profile of Financial Assets and Liabilities.
2/ Expected information is calculated by multiplying the 'Contracted' risk by the Expected Behaviour Multiple.
3/ The Expected Behaviour Multiple is derived from Heartlands own results, back in the day they printed both 'Contracted' and 'Expected' behaviour.

Loan Maturity	Expected Behaviour Multiple	FY2014 Financial Receivables Maturity: Contracted/ Expected	FY2015 Financial Receivables Maturity: Contracted/ Expected	FY2016 Financial Receivables Maturity: Contracted/ Expected	FY2017 Financial Receivables Maturity: Contracted/ Expected	FY2018 Financial Receivables Maturity: Contracted/ Expected
On Demand	100%	$50.254m / $50.254m	$37.012m / $37.012m	$84.154m / $84.154m	$57.040m / $57.040m	$49.588m / $49.588m
0-6 months	132%	$477.190m / $629.445m	$664.557m / $877.215m	$743.389m / $961.274m	$618.271m / $816.118m	$609.268m / $804.234m
6-12 months	132%	$367.564m / $483.727m	$450.638m / $594.842m	$484.420m / $639.962m	$521.215m / $688.004m	$469.632m / $619.914m

Note that in the above table, a 'loan maturity' represents an expected inflow of cash from a Heartland bank perspective.

Deposit Maturity	Expected Behaviour Multiple	FY2014 Financial Liabilities Maturity: Contracted/ Expected	FY2015 Financial Liabilities Maturity: Contracted/ Expected	FY2016 Financial Liabilities Maturity: Contracted/ Expected	FY2017 Financial Liabilities Maturity: Contracted/ Expected	FY2017 Financial Liabilities Maturity: Contracted/ Expected
On Demand	3.01%	$629.125m / $18.922m	$748.332m / $22.450m	$718.587m / $21.630m	$836.829m / $25.189m	$924.072m / $27.815m
0-6 months	32.4%	$748.129m / $242.431m	$1,213.450m / $395.102m	$892.944m / $289.314m	$1,191.957m / $386.194m	$1,345.316m / $435.882m
6-12 months	36.4%	$538.050m / $195.682m	$686.159m / $249.762m	$837.844m / $304.975m	$729.145m / $265.409m	$572.731m / $208.474m

Note that in the above table, a 'financial liability (debenture) maturity' represents an expected outflow of cash from a Heartland bank perspective.

If we now take the expected cash inflows and subtract from those the expected cash outflows we can examine the expected net cashflow from a 'one year in advance' perspective.

Deposit Maturity	FY2014: 'Expected' combined Loan and Deposit Cashflow	FY2015: 'Expected' combined Loan and Deposit Cashflow	FY2016: 'Expected' combined Loan and Deposit Cashflow	FY2017: 'Expected' combined Loan and Deposit Cashflow	FY2018: 'Expected' combined Loan and Deposit Cashflow
On Demand	$31.332m	$14.562m	$62.524m	$31.851m	$21.765m
0-6 months	$387.014m	$482.113m	$691.960m	$429.924m	$368.352m
6-12 months	$288.045m	$345.080m	$334.987m	$422.595m	$411.440m
Total	$706.391m	$841.755m	$1,089.471m	$884.370m	$801.557m

Once again lots of numbers here. Now there are five years of consecutive data on display, we can start to get a view on what 'normal' numbers should look like. So what numbers in the above table(s) are worthy of further attention?

The purpose of this exercise is to work out if Heartland has an identifiable chance of running out of cash. The above table(s) are indicative of what might be expected to happen if Heartland management took a 'hands off the tiller' approach to cashflow management. Heartland management does not do this. Instead:

1/Heartland management is a frequent raiser of new capital. That boosts cashflow in.
2/ Heartland management can manipulate 'expected' behaviour of customers by offering higher interest rates for debenture depositors over time periods that cash is needed (for example).

So while the above tables will not be an accurate picture of what really happens to cashflow over the next twelve months, they are useful in hinting where deposit rates (a customer nudge factor) might be heading for 'current period' deposits.

A customer might not be happy if Heartland decides not to offer them a loan. But they will likely be even more unhappy if they have loaned Heartland money, be it in a short term debenture or a cash account, and Heartland does not have the cash to pay them back. Whether cash is available depends on the balance between cash coming into the company and cash going out. This 'balance' is reflected in the bottom table, and this is the table that deserves our attention.

If a cash depositing customer is denied their cash on maturity, this would be equally annoying whether it happened on a 6-12 month term deposit a 3-6 month term deposit or a cash deposit. So it is the individual figures in the tables that are important, not the totals. Even if an individual figure comes out negative (which none have), it is not certain that Heartland will default. It is not certain because 'expected' behaviour can be changed with incentives: Incentives like offering a higher than market interest rate for a defined period of management concern, for example.

The 'On Demand' net position outlook is the weakest since FY2015. This bodes well Heartland's 'on call' account holders who might expect the generous (with respect to finance industry peers) 'on call' rates to continue as a result.

The following current 'on call' rates, from institutions with comparable credit ratings, I have lifted from the 'interest.co.nz' website:

Heartland 'Direct Call' (no restriction)	2.75%
Co-Operative bank ($100,000 minimum)	1.00%
SBS bank ($100,000 minimum)	1.00%
UDC Finance ($100,000 minimum)	1.00%

However with Heartland now committed to raising a lot more wholesale funding in Australia post restructure and with 'cash' balances an expected source of long term funding (sounds ironic but it is true!) I wouldn't be surprised if Heartland call interest rates in New Zealand are reduced significantly over the next twelve months, back to the level of their peers. I doubt you shareholders who voted for the restructure realised you were voting for the end of your generous call account terms in New Zealand going forwards, but I am calling it. Remember you read it here first!

Expected cashflow for the 0-6 months is the weakest on record. Granted it is still significant in absolute terms. So once again we can expect Heartland's rates offered for six month term deposits to be toward the top end of their comparative peer group.

Heartland ($1,000 minimum)	3.25%
Co-Operative bank ($2,000 minimum)	3.05%
SBS bank ($5,000 minimum)	3.25%
UDC Finance ($5,000 minimum)	3.35%

And so it proves to be....

SNOOPY