Thank you, and good afternoon, everyone. Thank you for joining us on Heartland Financial USA conference call to discuss fourth quarter and year-end 2011 results.

This afternoon, we distributed a copy of the press release, and hopefully you've had a chance to review the results. If there is anyone online who did not receive a copy, you may access it at Heartland's website at www.htlf.com.

With us today from management are Lynn Fuller, President and Chief Executive Officer; John Schmidt, Chief Operating Officer and Chief Financial Officer; and Ken Erickson, Executive Vice President and Chief Credit Officer. Management will provide a brief summary of the quarter and year, and then we will open up the call to your questions.

Before we begin the presentation, I would like to remind everyone that some of the information that management will be providing today falls under the guidelines of forward-looking statements as defined by the Securities and Exchange Commission. As part of these guidelines, I must point out that any statements made during this presentation bearing the company's hopes, beliefs, expectations or predictions of the future are forward-looking statements, and actual results could differ materially from those projected.

Additional information on these factors is included from time to time in the company's 10-K and 10-Q filings, which can be obtained on the company's website or the SEC's website.

At this time, I would like to turn the call over to Lynn Fuller. Please go ahead.

Thank you, Han, and good afternoon, everyone. We certainly appreciate everyone joining us this afternoon as we review Heartland's performance for the fourth quarter and the full year of 2011.

For the next few minutes, I'll touch on the highlights for the quarter, and we'll then turn the call over to John Schmidt, our Chief Operating Officer and CFO, who will provide further detail on Heartland's quarterly results. And then Ken Erickson, our EVP and Chief Credit Officer, will cover our progress on the credit side.

I'll open my remarks this afternoon with news that Heartland reported solid fourth quarter net income of $6.2 million, compared to $5.2 million for the same quarter last year. On a per share basis, Heartland earned $0.31 per diluted common share in the fourth quarter.

For 2011, we were pleased to see an 18% increase in net income to $28 million, or $1.23 per diluted common share, compared to $23.8 million, or $1.13 per diluted common share, earned for 2010. In 2011, our pretax pre-provision earnings were strong at $67.7 million compared to $66.1 million for 2010.

Heartland's favorable results continue to be driven by a solid net interest margin of 4.08% for the quarter. This marks 10 consecutive quarters with margin exceeding 4%.

We continue to focus on margin management, trimming deposit interest rates in step with national markets and local competitors, and improving deposit mix through significant growth in noninterest demand deposits. 2011 results were positively influenced by solid performances at several of our operating units.

Specifically, 4 of our subsidiaries, Dubuque Bank and Trust, Galena State Bank, Wisconsin Community Bank and Citizens Finance, all had record earnings. Our Minnesota Bank & Trust de novo reached its 3-year anniversary in 2011 and moved very close to profitability.

I'm also pleased to report some very good news from the credit lending side of our business. During the quarter, we made substantial headway in reducing nonperforming loans, which has been, and will continue to be, Heartland's #1 priority.

Nonperforming loans ended the year at 2.3% of total loans, a decrease of 37% from their peak at year-end 2010.

We had a small increase in OREO, but we continue to see good sales activity. Delinquencies are at their lowest level in over 3 years.

And as a result, we don't see a resurgence of new nonperforming loans on the horizon at this time. In a few minutes, Ken Erickson will provide more detail on credit administration topics.

Most economic indicators support our belief that we are in a stable to improving credit environment. We learned this week that our flagship city of Dubuque, Iowa, is one of only 26 cities in the U.S.

that has regained all of the jobs lost during the recession. Three of our markets, Dubuque, Iowa; Billings, Montana and Madison, Wisconsin, all have unemployment rates under 5%.

Santa Fe, New Mexico, and Minneapolis, Minnesota are in the 5% range. With the exception of Rockford, Illinois, every other Heartland market is below the U.S.

average of 8.2%. This is a good example of how Heartland's geographic diversification bodes well for reduced risk and future growth.

Looking now at the balance sheet. Total assets ended the year at a new record high of nearly $4.3 billion.

For 2011, loans increased $137 million or 5.9%. Loan demand picked up during the second half of the year, and in the fourth quarter, we were particularly pleased with loan growth of $107 million.

We believe this is the beginning of a very positive trend for sustained growth of quality loans.

With securities at 30% of total assets, our plan is to convert securities into quality loans. I might add that our participation in the Small Business Lending Fund provides an added incentive for our banks to originate small business loans, which we would expect to increase employment and, in turn, sustain economic recovery.

To support our loan growth goals, we've invested in sales training for our commercial and business bankers. And on the deposit side, we continue to develop treasury management products and services that add value to our commercial deposit clients.

While deposit growth of 5.8% for 2011 matched our loan growth, we continue to see a very favorable shift in our deposit mix through the growth of non-time deposits. Specifically, demand deposits increased by 27% year-over-year.

The increase in demand deposits was effectively matched with a corresponding decrease in time deposits. The result is an improving mix of total deposits with demand deposits representing 23%, savings and money markets representing 52% and time deposits representing only 25% of total deposits.

In terms of capital, our tangible capital ratio remained within our target range at 5.69% for the quarter. Risk-based capital and Tier 1 capital ratios continue at nearly double the required levels.

Over the past year, Heartland had completed $27.5 million in private placement debt, providing long-term, low-cost funding for opportunities that may arise. The cost of this funding is fixed at an after-tax average cost of 4.1% laddered over the next 4 years.

At present, we're sitting on $27 million in cash reserves at the holding company.

Noninterest income for the year was strong at $59 million compared to $52 million last year. We're pleased to see increased revenue from service charges, trust fees, investment services and gains on sale of loans and securities.

Another wave of residential refinancing, actively combined with the expansion of our mortgage unit, resulted in a 41% increase in gain on sale of loans compared to 2010.

After a full year of operation, our new Heartland Mortgage and National Residential unit has significantly ramped up and greatly enhanced our mortgage origination capabilities. Within Heartland's footprint, we've added new lending teams in Phoenix, Albuquerque, Denver, Billings and Minneapolis.

Outside of our footprint, we're serving Austin, Texas; San Diego, California and Reno, Nevada. The human resource expenses associated with this expansion accounted for much of the year-over-year increase in noninterest expense.

For 2011, we originated over $530 million in mortgages, and expect this number to grow substantially in 2012. We're optimistic that we can double our originations and shift our mix from refinance to purchase originations, which will significantly increase bottom line profitability.

While expansion of our banking franchise through mergers and acquisitions continues to be a high priority, we continue to see opportunities in nearly all of our markets, and I would anticipate at least 1, if not 2 acquisitions, in 2012. In terms of how and where we invest our capital, we are selectively pursuing only the most profitable growth opportunities with a bias for transactions within our current footprint.

I'm also pleased to comment on the excellent progress of our consumer finance subsidiary, Citizens Finance. With loans exceeding $59 million, Citizens posted record earnings in 2011 of $2.4 million, a 24% increase over 2010.

Currently, with 10 locations, Citizens continues to evaluate new markets and plans to open new offices within its current footprint of Iowa, Illinois and Wisconsin.

In concluding my comments today, I'm pleased to report that at its January meeting, the Heartland Board of Directors approved a quarterly dividend of $0.10 per common share payable on March 9, 2012. Proud to say that for every quarter since Heartland's inception in 1981, our dividend has either increased or remained stable.

Well, I'll now turn the call over to John Schmidt for more detail on our quarterly results, and then John will introduce Ken Erickson who will provide commentary on credit quality and real estate exposure. John?

Thanks, Lynn, and good afternoon. In my remarks for this quarter, I'll look to add to Lynn's comments relative to the fourth quarter performance and provide some benchmarks for 2012 performance, starting with the balance sheet.

I'd again like to start my comments by focusing on the stellar performance of the investment portfolio.

Certainly, this quarter reflected another robust quarter with gains totaling almost $4.2 million. At the same time, appreciation, while down from the third quarter high, is still a rather robust $25.5 million.

There are no sales of Z tranche securities included in this quarter's gains.

Given current market conditions, we would anticipate new additions to the investment portfolio, yielding on average 1.75% to 2%. Additionally, given market volatility, we feel that we'll continue to recognize bond gains in 2012.

Our balance sheet strategy would still focus on funding the majority of our loan production out of the investment portfolio. Again, with 30% of our asset base in securities, we feel that we can easily accommodate our 2012 loan growth goal.

Loan growth in the fourth quarter exceeded $100 million -- our $100 million annual growth goal. Not included in these totals was a $17 million increase from loans held for sale, reflecting the continued build of our mortgage pipeline.

While the loans comprising these balances will change, we anticipate increased balances and interest income as our mortgage production continues to ramp up.

While certainly, the fourth quarter of 2011 will be difficult to replicate, we'd still forecast loan growth in the $150 million to $200 million range for 2012. Relative to loans which would qualify under the SBLF program, we now have originated just over $17 million.

While Heartland ultimately needs to originate $92 million in qualifying loans for our rate to be reduced from the current 5% to the optimal 1%, $6 million of the additional production -- of additional production would provide a 25-basis-point reduction in our cost. Relative to parent company funding, we have agreed to issue an additional $10 million of our privately placed senior debt with the same 5% rate as the origination in December of 2010, bringing the total to $37.5 million.

Additionally, we have extended the maturities on the existing senior notes such that we will have $7 million due in 5 years, $7 million due in 6 years and $6 million due in 7 years or 2/1 of '19. $17.5 million remains with 4 years left of the original 5-year term.

$5 million of proceeds will be used to call a $5 million trust preferred with a 10.6% coupon we acquired with the Rocky Mountain Bank acquisition. Considering the $302,000 early call charge, which we recognized in the first quarter, payback is calculated to be just over one year.

Let's move on to the income statement. Slight pressure from the asset side of the balance sheet.

Our margin has held up remarkably well. Our margin expressed as a percentage of average earning assets decreased to 4.08% in the fourth quarter.

At the same time, with the expansion of the balance sheet, net interest income increased by $602,000 or 6.65% on an annualized basis. Anticipating the forecast of loan growth I spoke to earlier, we would expect our margin to hold around 4% during the first quarter of 2012.

For the year, we would forecast the margins would average in the 3.9% to 4% range, again anticipating the aforementioned loan growth.

refinance activity expansion in our legacy commercial banking markets, and the expansion into new markets such as San Diego.

To reiterate my comments from last quarter, while we certainly took -- will take advantage of the current refinance activity, ultimately we see as much as 70% of our production being related to purchase transactions, and also suggest that we would anticipate our production in 2012 to double 2011's total of $538 million, assuming a similar rate environment. Loan servicing income increased by $923,000 as production was by and large comprised of new customers to Heartland versus existing customers.

While certainly this line item can be impacted by interest rates, with the increase in mortgage production anticipated in 2012, we look for a corresponding increase in this area.

The other noninterest income area has continued to show volatility as recoveries on previously charged off covered credits were shown as a reduction in other noninterest income, reflecting the required payment to the FDIC. The fourth quarter is more reflective of a true run rate as we didn't experience any recoveries on covered credits.

Focusing on noninterest expense. Certainly, the fourth quarter was a significant quarter in terms of the expansion of noninterest expense.

The largest component of this increase was in the salaries and employee benefit area, which increased by $4.4 million quarter-over-quarter. Contributors to this increase include the following.

Increased mortgage production that had a corresponding increase in commission expense. Of the increase in this compensation area, commissions represent $2.3 million.

Of this, $676,000 represents signing bonuses. Commission costs totaled $6.8 million for all of 2011 versus $4.3 million for 2010.

The bonus accrual increased by $500,000 with multiple loan growth goals being achieved in the fourth quarter. The board's decision to increase the company's contribution to the discretionary portion of our retirement plan impacted the quarter by $467,000.

We wouldn't anticipate additional increases in this area at this time.

For modeling purposes, salary increases were held at 3% on existing personnel for 2012. With the anticipated mortgage production in 2012, commission costs would increase dramatically.

That said, we would suggest that gross fees in production should total approximately 2.25% with net before tax revenue totaling about 80 basis points. Included in this net are as much as $2 million in signing bonuses, most of which will be paid in the first half of the year.

As a result, we would suggest that the first half of the year will show a lower net, ramping up to over 1% by year end.

In summary, in the noninterest expense area, we saw significant expansion of our fixed costs in 2011, particularly in the mortgage area. For 2012, we would anticipate that our growth in noninterest income would outpace the increase in noninterest expense.

In closing, I provide the following relative to anticipated 2012 performance metrics. Loan growth in 2012 is anticipated to be in the $150 million to $200 million range.

Deposit growth, so much slower than 2011, focused on the demand and non-maturity deposit area. As a result, balance sheet growth is likely 2/3 of 2011 growth.

Margin for the year in the 3.95% to 4% range, significantly higher gains in sale of loans and mortgage servicing income, consistent with the $1 billion of production. Profitability in the mortgage area, constrained in first half of the year by signing costs and the ramp-up of new personnel, primarily in existing markets.

Finally, anticipated lower -- we are anticipating lower provision costs.

With that, I'd turn over to Ken Erickson, our Executive Vice President and Chief Credit Officer.

Thank you, John, and good afternoon. All of my comments this afternoon, unless otherwise stated, will be exclusive of those assets covered under the loss share agreements.

I'll begin by discussing the change in nonperforming loans in the fourth quarter.

As already mentioned, Heartland experienced a $15.2 million reduction in nonperforming loans in the fourth quarter, including those loans under the loss share agreements. New credits added to nonperforming loans totaled $21.6 million, of which $16.8 million, or 77.8%, was related to 4 credits.

Of these credits totaling -- or one of these credits totaling $10 million was originated in the Midwest, and the other 3, totaling $6.8 million, in the West. We were able to remove $37.4 million from nonperforming loans during the quarter, $14.5 million through foreclosures, $15.2 million was charged off, while the remaining $7.7 million was resolved through payment, restoration to accrual status or sale of collateral.

Please refer to the table within the press release that reconciles the changes in nonperforming assets for the quarter.

I'll now turn the discussion to total nonperforming loans. As stated in our earnings release, $32.7 million of the $57.4 million of nonperforming loans resides in 15 credits, where individual exposures are greater than $1 million.

The release details the markets that originated these credits. The nonperforming loans greater than $1 million are down $12.1 million from last quarter.

In comparison, we had 25 credits greater than $1 million, representing $56 million in nonperforming loans at the end of 2010.

The industries for these credits are also detailed within the release. The largest concentration within these nonperforming loans is in lot and land development, which represents 44% or $32.7 million.

$2.7 million of our nonperforming loans are covered by government guarantees through Rural Development, FBA or FSA.

$6.2 million by Riverside Community Bank; $2.7 million by Arizona Bank & Trust; $1.9 million by New Mexico Bank & Trust; and $1.8 million by both Rocky Mountain Bank and Summit Bank & Trust. Out of the $15.2 million in net charge-offs recorded by our member banks in the fourth quarter, $10.5 million was in construction, land development and other land loan categories.

In the fourth quarter of 2011, Heartland recorded a provision expense of $7.8 million. With net charge-offs of $15.2 million, the allowance decreased by $7.4 million.

This reduction in the allowance resulted primarily from a reduction in the balances on loans previously determined to be impaired. The impairment component of our allowance was reduced by $8.4 million, which represented 35 basis points of the allowance.

These reductions were made as we either brought to closure, or are close to closure, the collection of some of our nonperforming loans. And it directly correlates to the reduction in those loans.

While the allowance as a percent of loans decreased from 1.86% to 1.48% in this quarter, the coverage ratio of the allowance as a percent of nonperforming loans increased from 60.85% to 64.09%. We will continue to see the coverage ratio increase as nonperforming loans continue to be reduced.

Delinquencies in each of the portfolio segments improved significantly in the fourth quarter. The trend of 30- to 89-day delinquencies for the last 5 quarter ends, beginning with December of 2010, was detailed in the earnings release.

30- to 89-day delinquencies were 0.23% or $6 million.

Regarding expected resolution of the nonperforming loans, I can state that our collection efforts in the first quarter of 2012 are expected to result in a reduction of $14.5 million in nonperforming loans recorded at December 31. Of this amount, $12.4 million is expected to move to other real estate and $2.1 million to be paid down or restored to accrual status.

Relative to other real estate, including those assets covered under loss share, as shown in the table inserted in the press release, other real estate increased by $5.2 million in the fourth quarter. Total owned residential real estate, including all properties intended to be used as 1-4 family residences, is $10 million, while owned, commercial or agricultural real estate is $34.4 million.

During the fourth quarter, $14 million was moved into other real estate. Sales resulted in $5.5 million, while OREO write-downs were in the amount of $3.3 million.

Since the end of the fourth quarter, $6.2 million of other real estate owned has already been sold or contracted for sale, with closing expected in the first quarter.

Regarding portfolio diversification, we remain well diversified with $1.7 billion, or 70% of our loans, are either fully or partially secured by real estate. Of the $856 million in loans categorized as nonfarm, nonresidential, 59%, or $508 million, is owner occupied.

A review of the $347 million commercial real estate nonowner occupied portfolio at December 31 shows that $7.8 million, or 2.3% of that portfolio, is classified as nonperforming, a reduction from $19.1 million, or 5.9%, as of September 30. These loans carry an impairment reserve of $66,000.

Our exposure to nonowner occupied properties increased by $20.8 million in the past quarter.

We've got a total of $116 million in construction, land and land development loans. $15.6 million, or 13.4%, of this portfolio segment is on nonaccrual.

Consistent with our allowance and impairment methodologies, the expected losses on these loans have already been recorded by a charge to the allowance. Our exposure in construction, land and land development loans is down by $8.3 million from September 30.

My final comments will be directed at our retail portfolios. They continue to perform quite well.

Losses in the fourth quarter for residential real estate loans were 0.58%. Foreclosures on 5 residential properties worth $739,000 were completed in the fourth quarter.

30 foreclosures on $2.4 million of loans are currently in process. But historically, several of these get resolved prior to final action.

Citizens Finance, our consumer finance company, performed well in the fourth quarter. Net loan outstandings are now at $59 million, net charge-offs for the year were 2.99%.

Delinquencies were 3.79% at end of the year, with only 0.88% being over 90 days.

In conclusion, I am optimistic regarding the positive trends we're seeing in the portfolio. Our nonperforming loans are the lowest they've been since the third quarter of 2008.

Our nonpast credits are the lowest they've been since the fourth quarter of 2008.

Loans deemed to be impaired are under $100 million. As mentioned earlier, we expect a significant reduction in nonperforming loans in the first quarter as we gain control over assets and move those to other real estate owned.

Our 30- to 89-day delinquencies rest at 0.23% or $6 million. And we are exiting this economic period with only $44 million in other real estate owned, with a fair amount of sales activity within that portfolio.

Without a fallback in the economy, this should set us up for a much stronger 2012.

With that, I'll turn the call back to you, Lynn, and remain available for questions.

Thank you, Ken, and now we'll open the phone lines for your questions.

John, a question on the growth kind of guidance. If I'm doing my math right, did you say $150 million of net loan growth, but the increase in total assets would be 2/3 of the amount from 2011?

So that suggests about $100 million of net asset growth in '12.

Well, I think a little bit more, stronger than that probably, Chris. So assuming $150 million, our total growth for the year is about $250 million.

So there's going to be some increase in the securities book, too, yes?

Yes, there will be. And by and large, well, we're anticipating that move from the security book into the loan book.

So we're -- we'll see an expansion of the overall asset base via the deposit side, primarily, but we still see that somewhat slower than 2011.

Okay. Just a question on the margin.

Your CD costs are still, relative to peers, pretty elevated, which means you've got some -- suggests that you had a little bit of room. Is that part of your kind of optimism on the margin, near 4%?

I think that as we think we have still some room on the CD side, again that book, as you point out, still are longer than some of the -- maybe some of our competitors or some of our peer group. So there's some room there.

We feel on the non-maturity side we'd probably push about as far as we can. But I'd say that, combined with the loan growth that you certainly saw in the fourth quarter and we're anticipating in 2012, I think that imbalance is what creates some enthusiasm for that sustaining the margin, 3.95% to 4%.

Okay. And then what about in the effective tax rate?

I'd still probably shoot for that 28% overall.

Okay. And then -- and Lynn, one for you.

You -- I think you said in your comment 1 or 2 deals in '12. Can you talk about size and geography?

We are pretty focused on our existing footprint. We are seeing M&A opportunities in every market with the exception of New Mexico.

New Mexico, we would expect stronger organic growth there but not really acquisitions. The size of the deals, I would say anywhere from $150 million on up to call it $500 million.

We're not seeing any real super large deals. If we have -- I mean, we talk to people at the $1 billion level, but those are probably going to be pushed out longer.

Okay. And then in the context of your capital levels, just remind me where you're comfortable with running the bank?

While we'd like to keep it at this general range, we've said in the past anywhere from $500 million to $600 million on tangible common. But if we're looking at an acquisition of any size, we're probably going to be looking at a stock deal with some need for cash.

I think John referred to $37 million in private placement notes. So that puts us above $30 million in cash at the holding company.

That happened after year end. My cash quote was at December year end.

Yes. So just to be clear, we'll be closing that transaction.

We're closing it as of today. So that's underway, that additional $10 million.

Overall, again, as Lynn points out, Chris, an acquisition of size would either be a stock-for-stock deal or a follow-on offering at some time. Yes, just to point out, that -- I'm sorry, that transaction closes tomorrow.

A question for you, Lynn, on loan growth. It seems like you guys are quite a bit more optimistic, and it's obviously showing up in the numbers.

And I'm just curious if you can give us a little bit more color on the loan growth outlook. I know, John, you've given us numbers, but give us an idea of what's happening.

And then the Midwest is obviously the driver, but it looks like the growth has picked up a little bit in the West as well. So maybe compare and contrast those 2 geographies as well.

Yes. Well, John, actually, I'd tell you, I'm more optimistic than John Schmidt is.

But John's trying to be conservative. I would be disappointed if we only had that kind of loan growth with what we're doing with respect to some restructuring on the commercial platform, sales training and sales management we're investing in.

I just think that with better talent in those various markets, and a better focus and creating -- we're creating a small business unit so we can offload some of the smaller credits into that more automated system and free up our best salespeople to do a better job at originating credits. So every year, we do our budgeting, and we ask our presidents and their commercial people what they can originate.

And we're seeing pretty good improvement in the Midwest, but we're also starting to see some bright spots out West.

Okay. Ken, you also used the term optimistic.

So maybe, Schmidt is the only guy that's not using the term optimistic.

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I think John is conservative.

You want a CFO like that. But Ken, on the OREO comment, it sounds like the increase you described, you already have half of it gone.

And you made some pretty positive comments about your ability to move the OREO. And I think I probably ask about this every quarter or every other quarter, but it seems like you're a little more positive on it.

And just give us an idea of what you're seeing in terms of the bids for your OREO properties. Are they approaching reasonable again?

And how quickly can you walk down those balances?

Yes, we've got -- I mentioned that we did have some write-downs in the fourth quarter. We get some appraisals on a couple of larger pieces in the fourth quarter which led to that.

Plus we had one that I opted to sell at an online auction, a property that was pretty much just bare dirt. We didn't think the upside on that was going to come for a while, so we ended up taking a little over $300,000 write-down on that one in the fourth quarter when we made the decision should we accept that offer or not.

We have a pretty good mix in our portfolio between commercial and residential. The residential stuff moved fairly quickly.

The vertical-built commercial, we can usually get offers on relatively soon. That, that is just bare ground, either undeveloped or developed lots.

They're slower to move. So we've got some of that.

But I would say we're probably in the neighborhood of, I would say, 25% to maybe 1/3 of it. It's going to be a little harder to move, but when we're sitting on $44 million, roughly 1% of our assets, we got about 1/3 of that at most.

It's going to be tough to move out quickly. But the balance is being readily marketed, and it's coming in close to what our book values are.

Okay. And on the land, you referenced that you feel like the reserves are appropriate or there's still a little bit more room to go on those.

We update those on no less than annual appraisals. Like I said, we did see a write-down in one larger land development, I think we took, well, $800,000 to $900,000 as the write-down on that in the fourth quarter.

But we are seeing movement out of that. There's lots that are sold out of that subdivision on a quarterly basis.

A similar property in the Southwest, we did see an annual updated appraisal on that, that actually showed a rebound in value albeit very slight. But it did not further deteriorate, which gives me some sense to believe that we have either reached the bottom or close to reaching the bottom on valuations on those types of properties.

John, just on some of the other noninterest expenses. Obviously, net loss on repossessed assets and other noninterest expense were up materially quarter-over-quarter.

I mean, directionally, where do those go in the first quarter or into next year?

I think when you look at the trend, I mean, for last 5 quarters we display, I think that's probably more indicative. Again, as Ken just pointed out, John, we had some appraisals come through this quarter, including one property that we've historically appraised minimally, I guess, every November, and that displayed another write-down again this November.

But if you look at last March, it was back to about $1.6 million. So hopefully, that's more indicative of where we'll see Q1 of 2012 look like.

Okay. So you talk about material increases in mortgage banking.

You say double versus 2012. I just want to make sure we're not talking a double off of the run rate from the fourth quarter.

We're talking about a double off of the $11 million gain that you booked for the year, right?

Yes, if we had -- I would say again, we would hope conservatively, but we would assume that we'd be able to double the $538 million of annual production we saw in 2011.

Two things that are at work there, John. Not only do we believe we can double the originations, but as we continue to shift our mix from refinance to purchase, and as we are able to improve the spread on -- the gross spread on the mortgages sold because we're batching them versus selling individual loans because we've got our positions properly hedged so forth and so on, you -- my comment on doubling was doubling the production.

But I think profitability will do better than that.

Okay, fair enough.

And just to reinforce, John, well, as you open that door, again if you think about the overall doubling of the $538 million and take on that number of 2.25%, that yields $24 million of additional income. And comparing to this year's total of 13 -- sorry, $11.366 million, so it'll be about $224 million.

And we would assume on an annual basis 80 basis points net or so before tax. But again, there's a ramping that occurs throughout the year, so Q1 it won't be certainly as robust as that as we take on some of the costs associated with expansion of existing markets, i.e., these sign-on bonuses.

So as you ramp up, an average throughout the year about 80 basis points. But towards the end of the year, it'd be about 1% or north of that.

Okay, fair enough. The margin guidance at 3.90% or 4%, does that include any potential margin benefit from using the securities booked to fund loans?

Absolutely. I mean, and that was a caveat hopefully I conveyed throughout that it does anticipate the movement, the overall movement of securities into loans.

And certainly, we were still counting on that $150 million to $200 million of loan growth. And so baked into all that is that movement of securities, first and foremost, into the loan side and the benefit that ensues from that.

Okay. As far as the SBLF goes, where do you hit your -- obviously, you made $17 million of the $92 million that you need to qualify for the lowest rate structure.

But where do you hit the tiers to move down between there?

Yes, the first tier, John, is the $23 million. The second tier is at $46 million, and on from there.

So $69 million will be the third tier.

Okay. And you moved down 1% on each tier, right?

As -- but remember, it's only on the production. So if we're $23 million, that $23 million then was at 4%, the remaining part of the...

$81.7 million.

...$80.7 million -- then it's 25% of the $81.7 million. So $20 million goes down to 4%.

The next move then would be -- it'd be $40 million at 3%, and the remaining $40 million, $40.5 million would still be at 5%.

Okay. As far as the trust preferred issue go, can you go over that again for me?

I didn't get all the information as to what you're doing.

What we've done is to issue an additional $10 million of senior debt. And at the same time, we stretched out the senior debt such that we now have -- and I will pause to include this later, but let me go through it again.

We'll now have, well, a total of $37.5 million, of which $7 million is due in 5 years, $7 million due in 6 years, 6 and 7 years, which then suggests a maturity of 2/1 of '19. $17.5 million remains of the original issuance and has 4 years left.

Of the $10 million we've issued, $5 million will be then used to call a $5 million trust preferred, which has 10-60 coupon that we acquired with the Rocky Mountain Bank transaction. We're going incur a $300,000 early call premium on that, that we'll recognize in the first quarter.

And then the payback, all in, then will be about a year on the overall transaction. So it makes a lot of sense from that perspective.

Ken, I just wondered if you had -- and I apologize if I missed this in your comments, but the balance of accruing TDRs at the end of the year?

I didn't put that in my comment, but we have $34.5 million in TDRs. And $25.7 million of that is on accrual.

$8.4 million, nonaccrual.

Okay. And the large net charge-off that you had during the quarter, I think you mentioned, and it was in the release, $6.1 million.

That was -- you already had that fully reserved for. Can you give us a little more color on kind of what type of loan?

Any chance of recovery there?

It was a lot in land development. It was reserved for in the third quarter of last year.

As we continue to move through the collection process on that, we felt that, that -- to move that from -- take the impairment in the fourth quarter. And yes, there is some potential of recovery on that in years to come here.

Okay. And then just additionally, obviously you guys feel very good where you sit in regards to credit.

Just looking to reserve -- and I get that your coverage is improving, but your -- looking out with your loan growth reserve sitting around 146 of loans, that's kind of a low point even looking back over almost 10 years. Where do you guys feel comfort in that regard?

I know you've made some updates to your model over the last couple of years that may change versus 10 years ago. So just kind of curious in terms of the reserve as a percentage of loans.

I guess I'll answer that first. You're right, we do drive -- apply our new methodology very hard.

And that's why I commented that the reduction in the allowance this quarter came from that portion which backs up to the old FAS 114, whatever the new number is on that. But the whole reduction came in that impaired loan bucket.

The others increased very slightly on that. We will see dollar increases in that as loans go up nationally.

But I would expect that we may even see a little more reduction in the percentage. But I also commented that we are under $100 million in loans that have been deemed impaired.

So that portion of the allowance has shrunk significantly. I guess the important part on that was seeing that the coverage ratio went up.

Still 64% isn't where the banking industry was historically. But with the majority of the dollars out of the impaired loans right now, further improvement in the nonperforming loans, we'll see that continue to increase.

And I mentioned we've got between $10 million and $15 million of nonperforming loans that should move through the pipeline and reduce here this quarter. So with that and very little impairment against those, that we'd see another increase in that in this quarter, in the coverage ratio.

Okay. Okay.

And final question. John, you talked about $2.3 million increase in commissions this quarter.

That included about $700,000 in signing bonuses, and there was about another $1 million in profit sharing and I guess a greater bonus accrual. And there's maybe another $1 million or so dollars in higher personnel costs kind of in a linked-quarter basis.

Just kind of curious. Any additional color there?

I know you mentioned 3% raises in 2012. Do you guys any have any other sort of cost-cutting measures planned sort of in light of the revenue environment we're in?

Right. Well, I think cost-cutting measures and I think trying to ramp up the production side is certainly the first effort.

And Lynn also mentioned this small business underwriting is an effort that we're very much focused on and we'll be implementing to try to accelerate the overall production side. Assuming we can't get that done, then we'll certainly look to the cost side.

It's going to be a combination thereof at that point. But yes, the linked quarter, I'd still say there's probably some additional personnel and there are some other extraordinaries.

I just listed the major ones at that point, Brad. Again, I think we're very focused on that line item, and it has our attention as well.

Just to add one bit of color, too, that in the earlier question there was a question on the real estate costs and our overhead, not addressed aside from the gain or loss from sale of the properties in our other expense area. Fourth quarter, we had $900,000 of expenses associated with other real estate, i.e.

taxes, et cetera, versus a total for 2011 of $2.5 million. So we have a little bit of an aberration there.

This is going to cross the subsidiary banks and the loans were up, I guess, 7 out of the 9. And looking at some of the Western banks, commercial real estate has been a chunk of the loan portfolios.

Just seeing what kind of growth are you getting out there. Where is it coming from?

Well, we're clearly not focused on real estate. It's coming from operating companies.

So that has been a focus. We've had to make some shifts in personnel to get people on board that are more in tune with financing operating companies because we have shied away from real estate.

And probably not readily evident from those numbers is the fact that we have participation between our banks. I think disproportionately, the loans that were funded in Q4 would still be from the Midwest versus the West.

Okay, all right. And you mentioned the, I guess, the potential for loan growth from $150 million to $200 million.

Any thoughts or ideas on what portion of that might be SBLF qualified?

That's a tough number to grab, Stephen. What we've seen, when we originated that $107 million for the quarter, you'd think more would've come through.

But some of the credits we're working through, certainly, that we may move out of the bank may have qualified for SBLF in the original total. Now they move out and leave the bank, so there's a decrease.

I would say one thing we talked about pretty consistently in all our meetings is that the loans that qualify for SBLF really are bread and butter for this organization still. So we would anticipate that the growth from that $150 million to $200 million would certainly qualify -- a significant portion of that would qualify for SBLF.

It's just hard to tell when you're sitting here at the front of the year relative to how much will be qualifying for SBLF.

Historically, our mix was about 50-50. 50% qualified, 50% would be too large to qualify or wouldn't qualify because they were government guaranteed, et cetera.

It may be difficult to maintain that 50-50 balance. In the fourth quarter, we saw larger credits coming through, so I would hope that at minimum, we'd have 1/3 of our growth would be qualifying.

But we've encouraged the bank Board of Directors and the bank management teams to really focus hard on targeting qualifying loans. So the goal has been established.

Whether we can execute on that is -- time will tell.

I think, again, we're focused on them. Just, I think, the other side of the equation is given our size -- and it's something we've talked about as an organization and I think we've talked pretty consistently to the public as well is that given our size now, we -- some of the larger credits are coming to us versus some of the bigger organizations, given how we approach credit and the overall capabilities we bring as far as our lenders, so.

Just Stephen, it's Ken. I'd go back and add a little more color to the question about the loan growth and where is it coming from.

Just so that you don't see some growth in commercial real estate here in the next quarter or 2, and say, "Geez, I thought you guys weren't doing anything there," we have identified 6 of our 9 banks are quite a bit under the commercial real estate thresholds that -- guidelines we have from the regulatory guidance. And we told our banks that they don't need to shy away from targeting some of the better commercial real estate properties out there, particularly in this environment where there's a lot of banks trying to move those out.

So we told those we would entertain some growth in commercial real estate in some of our markets. And we targeted it at the range of $50 million to $80 million growth would still be only be about 1/3 of the total capacity that we had.

Or we've said if there are some very good commercial real estate within their markets, we would entertain. But again, looking at the higher quality of those.

Do you have a preference?

We would have a preference for owner occupied, sure.

Yes. Okay.

And I guess last question, it's kind of a small question. Just curious.

The $613,000 repurchase reserve for potential buybacks, is that after a fully completed review? Do you feel pretty good about what that number right now?

I think we feel pretty good about the number. I mean, it's -- the intensity from the other side, i.e., the Fannie and Freddies of the world, particularly in our case, Fannie, is certainly out there, would suggest that of the over $10,000 -- or 10,000 mortgages that we service, only 130 are more than 30 days past due.

So from that metric alone, Stephen, we feel pretty good about our overall book. And I would also tell you that given the better capabilities that had brought to bear since we brought the mortgage group on, I think our underwriting has certainly improved and our risk of repurchases has reduced as well.

So at this juncture, we feel pretty good about it. And the number we booked was some legacy and, at this point, we feel to be a pretty representative number.

Thank you, Han. In conclusion, Heartland made excellent progress in 2011.

We achieved solid earnings improvement. We had a substantial reduction in nonperforming loans, and delinquencies are at a 3-year low.

We've had an increasing trend in loan growth, and the fourth quarter was very encouraging. We had marked improvement in our deposit mix and good growth in noninterest income.

With most every performance measure moving in a positive direction, I'm very optimistic about Heartland's future in the coming year.

Finally, we are well positioned and eager to pursue acquisitions that are accretive to earnings and either meet or exceed our M&A criteria and, as I said, with a preference on our current markets. I'd like to thank everyone for joining us today and hope you can join us again for our next quarterly conference call, which will take place in late April.

So with that, have a pleasant evening, everyone. Thank you.