Lynn Fuller - Chairman and CEO Bryan McKeag - CFO Kenneth Erickson - EVP and Chief Credit Officer.

Jeffrey Rulis - D.A. Davidson Andrew Liesch - Sandler O'Neill Chris McGratty - Keefe, Bruyette & Woods Jon Arfstrom - RBC Capital Markets Daniel Cardenas - Raymond James.

Greetings, and welcome to the Heartland Financial USA Inc., Fourth Quarter 2014 Conference Call. This afternoon, Heartland distributed its fourth quarter press release and hopefully you've had a chance to review the results. If there is anyone on this call 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, Chairman and Chief Executive Officer; Bryan McKeag, Chief Financial Officer; and Ken Erickson, Executive Vice President and Chief Credit Officer. Management will provide a brief summary of the quarter 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 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 concerning the company's hopes, beliefs, expectations and 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 may be obtained on the company's website or the SEC's website. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded.

At this time, I will now turn the call over to Mr. Lynn Fuller at Heartland. Please go ahead, sir..

Thank you, Mike and good afternoon. We appreciate everyone joining us today as we discuss Heartland's performance for the fourth quarter and the full year of 2014. For the next few minutes, I'll touch on the highlights for the quarter and the year.

I will then turn the call over to Bryan McKeag, our Executive Vice President and CFO, who will provide additional color on Heartland's quarterly results. And then, Ken Erickson, our Executive Vice President and Chief Credit Officer, will offer insights on credit-related topics.

I’m very pleased to begin with news that Heartland has just completed an excellent fourth quarter as well as an excellent full year. 2014 was Heartland’s second best year in its 34-year history.

For the year net income available to common stockholders was $41.1 million, a 15% increase over 2013 net income available to common shareholders of $35.7 million. On a per share basis, Heartland earned $2.19 per diluted common share for 2014 compared with earnings per share of $2.04 per diluted common share for 2013.

And for the fourth quarter we earned $0.64 per diluted common share compared to $0.42 per diluted common share for the same quarter last year. Well, of the many quarterly and annual highlights, net interest margin stands out, holding up well at 3.94% for the quarter and 3.96% for the year.

It was bolstered by solid loan growth and continued improvement in our funding cost. Net interest income in dollars was up significantly over last year. For several quarters I've commented on our favorable loan growth. The trend continued in the fourth quarter with loan growth of $78.4 million.

Over the last year, Heartland has experienced organic loan growth of $380 million, a rate of 10.9% and around twice that of our peer group. We’re very pleased to see that the investment we've made in sales management and sales training is paying off.

With loan growth as our top priority, we are very pleased with both the quantity as well as the quality of loan growth and commend our commercial and retail banking themes for these excellent results. Well, also with respect to loans, our credit quality is exceptional and continues to improve.

At December 31st, non-performing loans to total loans was 63 basis points. At this level we’re approaching pre-recession levels. Non-performing assets ended the quarter at $44 million, down over $6 million from the third quarter and down over $28 million for the year and that’s a 39% reduction.

Our ratio of non-performing assets to total assets dropped during the quarter as well from 85 basis points down to 73 basis points. Our allowance for loan and lease losses as a percent of non-performing loans and leases is a 169%. Continuing with the balance sheet, total assets increased during the quarter to $6.1 billion.

Our securities portfolio represents 28% of total assets and we are maintaining our strategy of converting cash flow from our securities portfolio into quality loans. Presently, the tax equivalent yield on this securities portfolio is 2.87% while our duration has been shortened from 4.29 years down to 3.98 years as of December 31st.

Now, moving on to deposits, we saw slight increase during the quarter and continue to experience improved mix. Total deposits are represented by 27.2% in non-interest demand, 56.4% in savings and money market demand accounts and only 16.4% in time deposits. Non-time deposits were up 5.5% for the year.

In terms of capital our tangible capital ratio improved to 6.16% for the quarter, and that’s the best level we've achieved on this measure in the last seven quarters, up 87 basis points for the year and within our target range of 6% to 7%. Book value and tangible book value per share ended the year at $22.40 and $19.99 respectively.

For the year both values grew by approximately $3 per share. Annualized return on average common equities for the fourth quarter was 11.77% and year-to-date was 10.62%. And the annualized return on average tangible common equity for Q4 was 13.22% and year-to-date was 12.04% which is within our target range of 12% to 15%.

Also during the quarter, I'm sure, you noticed that we received a BBB- rating on our 75 million in subordinated note issuance and that was at 5.75% fixed for 10 years.

Now, I would like to provide an update on the progress of our residential real estate division where we are making diligent efforts to increase production while seeking efficiencies in the back office. For 2014 we originated approximately $1.1 billion in new loans.

We are pleased with recent and current levels of mortgage production aided to some extent from a mini refi boom. Looking forward to the year ahead, the mortgage business looks promising with anticipated originations of approximately $350 million per quarter.

And if long-term interest rates continue at present levels, we would expect continued refinance activity. Now that said, our primary focus is on purchase business and for the year our mix was 70% purchase and 30% refi. In December our mix shifted a bit to 60% purchase and 40% refi.

Heartland’s mortgage servicing portfolio continues to grow, reaching 3.5 billion at year end. We show 25 million of mortgage servicing rights on our books which is approximately 9 million less than our valuation.

Another area of emphasis is non-interest expense which showed significant improvement as we implemented a variety of process improvement initiatives, efficiency projects and FTE reductions. As a result, our efficiency ratio has shown marked improvement over the last five quarters.

Q4 of 2013 was at a high of nearly 80% with Q4 of 2014 at 70%, that’s down 10%. We continue to identify and track a host of initiatives that we believe will move Heartland’s efficiency ratio to our committed goal of 65% by 2016.

While expansion of our banking franchise through M&A remains a high priority for Heartland, in the fourth quarter we announced the acquisition of Community Banc-Corp of Sheboygan, Inc., a profitable commercial banking company in Sheboygan, Wisconsin with assets of 525 million and a strong deposit market share.

The Community Banc-Corp acquisition was completed this month with the systems integration planned for the second quarter of this year. Upon closing Community Bank & Trust was merged into Wisconsin Bank & Trust, our subsidiary, and have added 10 banking centers to our footprint in Wisconsin.

Wisconsin is now Heartland’s third state with banking assets greater than $1 billion.

Community Bank & Trust brings an expertise in SBA lending to our company and that combined with Wisconsin Bank & Trust focused on government guaranteed lending, we now have sufficient scale to map government guaranteed lendings to us all member banks as a line of business.

Well, as a matter of the New Year, our deep pipeline of acquisition opportunities allows us to be very selective with respect to both fit and price. Building on our M&A experience, Heartland is in a great position to leverage new acquisitions and realize cost savings. As with Community Banc-Corp these are expected to be primarily stock transactions.

Well, with three banks now above $1 billion in assets, we see opportunity to get the couple more Heartland banks to that level in 2015 and to that end we completed the merger of Galena State Bank & Trust Co. into Illinois Bank & Trust effective January 23, 2015, bringing that entity to approximately $780 million total assets.

Through acquisitions and organic growth our goal remains to reach $1 billion in each state were Heartland operates. Well, along with the New Year Heartland welcomed a new Executive to our Senior Management team, our new President Bruce K.

Lee joined us from Fifth Third Bancorp where he held numerous leadership positions with progressive responsibilities and most recently serving as Executive Vice President and Chief Credit Officer.

Bruce brings more than 30 years of experience in banking, including community banking experience as part of the management team that started and built a noble institution into a billion dollar asset bank in 10 years. As Heartland continues its steady growth in assets towards $10 billion and beyond, we recognized the need to add management talent.

Having managed at both ends of the asset spectrum, Bruce brings the kind of experience that makes him an excellent fit for our organization. Well, in concluding my comments today, I'm pleased to report that at January meeting the Heartland Board of Directors elected to maintain our dividend at $0.10 for common share payable on March 6, 2015.

It’s worth mentioning that Heartland is paid a level of increased dividend in every quarter since the company’s inception in 1981. I will now turn the call over Bryan McKeag for more detail on our quarterly results and then Bryan will introduce Ken Erickson who will provide commentary on the credit side.

Bryan?.

Thanks Lynn and good afternoon everyone. I will take a few minutes to discuss the main performance drivers of our quarterly results and provide updates on some of our key operating metrics. I will start with balance sheet.

The available for sale investment portfolio increased $32 million during the quarter and the held for maturity portfolio increased $29 million. Security portfolio is predominantly long-term bank qualified munis and we do not anticipate any further growth in this portfolio.

The total portfolio ended the quarter at just under $1.7 billion, representing 28% of assets, down from 32% at the end of 2013. Tax equivalent yield on the portfolio declined again this quarter to 2.87% from 3.02% in the prior quarter, the duration of the portfolio also declined to four years from 4.3 years last quarter.

Moving to the loan portfolio, loans held for sale declined $22 million to end the quarter at $71 million as mortgage activity slowed during the quarter. Loans held for maturity grew $78 million or 8% annualized this quarter, ending the quarter at $3.9 billion. Growth has been very strong over the past 12 months at $380 million or 11%.

On the liability side, other borrowings increased $62 million during the quarter as a result of our $75 million sub-debt issuance in December offset by pay downs of $8 million senior notes and $5 million in FHLB advances.

Shifting to the income statement, net interest margin contracted two basis points to 3.94% for the quarter compared to 3.96% in the prior quarter. The decline reflects the previously mentioned reduction in investment yield, a four basis point decline in liability interest cost and a three basis points drop in loan yields.

However and more importantly, net interest income continued to grow reaching a new high of $52.2 million this quarter, up $51.5 million in the prior quarter. Our interest rate risk modeling continues to show that we are asset sensitive which we believe is appropriate given the current interest rate and economic environment.

Ken Erickson will provide detail on credit quality including the provision for loan and lease losses which totaled $2.9 million for the quarter. Non-interest income totaled $21.2 million for the fourth quarter, up $600,000 compared to last quarter.

This quarter we saw increases in many fee categories and as service charges were up $200,000, trust fees were up $200,000 and brokerage and insurance fees were up a $100,000. We also had higher gain on sale securities which were up $400,000 as we realized some opportunities presented by the volatility in the markets during the quarter.

Gain on sale of loans declined $700,000 or about 7% in the prior quarter as mortgage loan application activity was down 14% quarter-over-quarter and the volume of mortgage loan sold, which totaled 281 million for the quarter, was comparable to the prior quarter.

The service loan portfolio also continued to grow adding a $136 million this quarter, ending the quarter just under $3.5 billion. The portfolio has grown $453 million or 15% over the past 12 months. Shifting to non-interest expense, total expenses were $53.9 million, a decrease of $700,000 from the prior quarter.

Most expense categories were either flat or up slightly compared to last quarter, except salaries and benefits which decreased $2.1 million quarter-over-quarter, primarily due to adjustments to retirement plan accruals and lower commission expense. All other categories combined increased 1.4 million from the prior quarter.

Increases in these categories were mainly the result of higher legal and professional expenses related to merger, debt issuance and recruiting activities.

Taxes for the quarter, again, included the impact of historical tax credits, resulting in effective tax rate of 26% up from last quarter’s rate of 19.6%, which included a higher level of tax credits. Excluding these tax credits, the effective rate would have been about 30% this quarter, which we believe is a good base rate to use going forward.

As a result of slightly lower non-interest expense and increased revenue, the efficiency ratio this quarter declined to 70% from 70.76% last quarter and 79.43% in the fourth quarter of 2013. And as shown in the table from the press release, this is the fourth consecutive quarterly decline in the efficiency ratio.

To wrap up I would add the following relative to our anticipated performance in 2015. First, loan growth for 2015 is expected to be somewhat similar to 2014. We plan to continue to fund the large portion of our loan growth with investment portfolio cash flow.

Net interest income should continue to increase as we continue to grow loans with the net interest margin expected to remain between 3.9% and 4%. Gain on sale of loans next quarter would normally be expected to show the effects of a first quarter seasonal slowdown in purchase mortgage activity.

However, due to the recent decline in interest we are seeing a pickup in refi activity that will offset some of this normal seasonal slowdown and therefore gain on sale of loans should be somewhere the last quarter.

Finally, the benefits of our recently Community Bank & Trust merger in Wisconsin will not be fully realized until after the systems are converted into the second quarter of 2015.

The first quarter impact is expected to first increased loans by about $375 million after estimated loan marks, increased deposits by about $440 million, increased the number of shares outstanding by 1.970 million.

With estimated transaction and other one-time costs and purchase accounting adjustments, the net impact on Q1 EPS should be relatively neutral and given that the purchase price was fully funded with equity and factoring in estimated purchase accounting adjustments, our tangible common equity ratio should be minimally impacted.

And with that I will turn the call over to Ken Erickson, Executive Vice President and Chief Credit Officer. .

Thank you, Bryan and good afternoon. I will begin by discussing the change in non-performing loans and other real estate owned. This quarter resulted in non-performing loans falling to 0.63% of total loans. There are only three non-performing loans with individual loan balances exceeding $1 million.

In aggregate these three loans totaled $6.8 million or 28% of our total non-performing loans. Two of these totaling 2.9 million are factored to be resolved by the end of the first quarter. No additional losses are expected on any of these loans. 30 to 89 days delinquencies remained low at 0.21%.

All the real estate owned was reduced by $1.5 million in the fourth quarter, reducing it to $19 million. As a result, non-performing assets as a percent of total assets was reduced from 85 basis points to 73 basis points. On January 16th, Community Bank & Trust was merged into Wisconsin Bank & Trust.

Community Bank have reported on December 31st, non-performing loans of $6.3 million and other real estate owned of $346,000. This should not be a material impact on our non-performing loans and non-performing asset ratio.

Reductions in our non-performing assets in the first quarter are estimated to be approximately the same of the increase from this acquisition. Other real estate owned continues to sell at or near book value.

$1.5 million in cumulative sales of 14 other real estate properties was recorded in the fourth quarter, which represented 7.4% of the other real estate owned as of September 30th. Net loss on repossessed assets, which included the gain or loss upon sale of assets, was $116,000. Collection, ORE and repo expense was $524,000 for the quarter.

The reduction year-over-year as a result of the reduced levels of other real estate owned and the cost associated with carrying these properties. Our existing portfolio of other real estate is made up of 14 residential properties aggregating $1.9 million and 60 commercial properties that aggregate to $17.1 million.

Provision expense was $2.9 million in the fourth quarter. $840,000 of the provision expense supported the fourth quarter loan growth. $943,000 of this provision relates to our consumer finance company Citizen's Finance. The majority of the remainder covered an additional impairment established in the final quarter of the year.

While the provision expense was somewhat elevated this quarter, I do not see any weaknesses in the portfolio that would suggest the increased provision and charge offs in the last quarter are indications of higher provisioning expense moving into 2015.

Our relatively low level of non-performing loans and delinquency should be an indicator of the lower risk profile of our portfolio. It is our practice to recognize potential problems early and to address any financial impact related to those issues immediately.

As shown in the earnings release, our coverage ratio of allowance for loan and lease losses as a percent of nonperforming loans and leases was 168.6%, up from 138.4% as shown at the end of September. The coverage ratio should continue to increase as non-performing loans see further reductions in future quarters.

The allowance for loan and lease losses as a percent of loans and leases decreased from 1.1% to 1.07% this quarter. A valuation reserve of $2.3 million is recorded for those loans obtained in acquisition.

Excluding those loans would result in a ratio of 1.13%, which would compare to 1.17% for September, 1.21% for June, 1.21% for March, and 1.37% for last year end. As mentioned by both Lynn and Bryan, we had another quarter of good loan growth. Loans held to maturity increased by $78 million for the fourth quarter and $380 million for the year.

As shown in the earnings release, 43% of the growth, $33.6 million, was in our commercial and commercial real estate portfolio. The other three loan categories also had solid growth as represented by $20 million in residential mortgage, $19.4 million in agricultural loans and $4.4 million in consumer.

Within the consumer and agricultural portfolios, 30% of the new loan production in the fourth quarter was in C&I, and 33% was in commercial real estate, of which 65% of the commercial real estate loans are owner-occupied.

24% of the production came from New Mexico Bank & Trust and 11% each from Dubuque Bank & Trust and Arizona Bank & Trust, with the remainder coming from our other seven banks. While we have been successful in moving some business from our competitors, 72% of the new money disbursed in the fourth quarter was for new projects or expansions.

We have not made any changes to our risk tolerance to obtain this growth nor expanded our interest rate risk posture. The metrics of the loans booked in the fourth quarter mirror very closely the overall portfolio in regards to average rated risk rating, loan-to-value, interest rate, and fixed to variable balance.

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

Very good. Thanks Ken, thanks Bryan, we'll open the phones up for questions now..

Thank you. We'll now be conducting a live question-and-answer session. [Operator Instructions] Thank you. And our first question comes from the line of Jeff Rulis with D.A. Davidson. Please proceed..

Thanks good afternoon. .

Good afternoon. Hi..

Question maybe for Bryan on the -- I guess any balance sheet restructuring expected for the Community deal or -- in terms of running off any borrowings or anything like that?.

I think there might be a little bit depending upon when you look at their historical statements. They did have some debt that got paid off and we are assuming their TruPS. So, there might be a little bit depending upon what date you are looking at. I don't think there's a lot on the asset side.

We will obviously be looking at the investment portfolio, but I don't think - last I heard that there's a big change coming there either..

Just to confirm the 3.90 to 4.00 margin guidance includes the deal as well?.

It does. We've some purchase accounting that roll off over the course of next year from our previous mergers.

This one will come on now in the first quarter and their run rate coming in wasn't that far off of our run rate for net interest margin at the bank level which is most of what we are picking up after the debt at the holding company is paid off. So, it should be pretty close..

Jeff, the only thing I would add to what Bryan shared with you is that from an investment portfolio standpoint at Community Bank, we'll be liquidating their munis and saving that tax equivalent opportunity for tax credits and other tax related investments that will do better than munis when we mark in the market.

So, we will be liquidating the munis and the rest of the investment portfolio we will keep pretty darn short. They are reasonably well loaned up and if you recall, they have about $4 million in gain on sale of SBA loans per year.

So, we'll be preserving the liquidity and hopefully continue to have strong SBA production that will be sold off for gain on sale..

Great.

And then my other question was on the cost side I think both, Bryan or Butch you guys both referenced the efficiency ratio goals, but I guess timing of this -- you said the conversion coming into Q2 I guess as you proceed through 2015 is there a near term goal to exit 2015 in terms of efficiency ratio or any kind of guidance on where you see that cost run rate headed towards the back half of the year?.

Yeah, I think what we hope is – what you will probably see if our budgets are correct and our timing is correct is the first quarter, maybe a little bit in the second quarter, you could see our efficiency ratio tick up just a little bit because of the front-loaded one-time costs and things we do prior to conversion.

Once that conversion heads we should take a step down in the efficiency ratio and we would hope to exit the year maybe up to 2% lower than we're exiting this year if everything works. So, -- and that will put us on a good pace toward getting to the 65% that we're shooting for in 2016..

Great. Some of -- Jeff some of that depends on -- we've got an awful deep pipeline of acquisitions right now. So, if we're bringing on another couple of acquisitions in 2015 that could change the [indiscernible].

But the initiatives that we've identified for both cost reduction and revenue enhancement should continue to help the efficiency ratio moved down toward that 68% hopefully by year-end..

Got you. That's good detail. Thank you..

Thank you. And our next question comes from the line of Andrew Liesch with Sandler O'Neill. Please proceed..

Curious what was the -- and it looks like a lot was in professional fees, the merger-related costs that came in in the fourth quarter?.

I don't have a specific number because it hit in a lot of different categories. But really those three activities I referenced there was some cost in the merger-related. We had some costs that we didn't capitalize on the debt issuance, and then we also had some recruiting expense that was a little bit higher than what we normally see in the quarter.

So, the combination of those three might've been $600,000, $700,000..

Okay.

And then do you have any expectations for additional merger cost this quarter that might be a little bit outsized?.

Yeah. It will be. Those things can move around, sometimes we don't get the quarterly timing right, but I think there could be $750,000 plus or minus in the first quarter and maybe a little bit more in the second quarter but somewhere around that range..

Okay.

And then just the salaries and benefits, sounds like there was maybe a true down this quarter, should we expect that to come back a little bit here in the first quarter?.

I think a little bit, probably $1 million or so back maybe a little bit more. Again it's a little bit hard because you're going to get the combination of Sheboygan coming in as well, but probably on the basis, it's probably going to come back $1 million-ish or so..

Okay, great. Thanks so much..

Thank you. And our next question comes from the line of Chris McGratty with KBW. Please proceed..

Hey, good afternoon, everybody..

Hey, Chris..

Bryan or Butch, on the efficiency commentary that you gave us, it's helpful how you stepped down. I'm interested in order to get to the 65% level that you guys are shooting for.

I assume that's at some point in 2016, are you guys contemplating or including any kind of benefit from higher interest rates given that you guys were talking about being asset sensitive?.

No, we haven't-based anything -- we budget off of a flat interest rate. We don't really try to -- obviously we stress test, but what we have shared with you doesn't have an increase in interest income.

We left that flat, and it does not include acquisitions, so that's why that number is a little squishy because you throw in another three to four acquisitions between now and the end of 2016, it moves things around. But as we've looked at the acquisition activity in our pipeline, we've got pretty good cost take-outs.

So, as you recall, we require that every acquisition is accretive to our current shareholders earnings per share and gives us at least a 15% or better internal rate of return. So, I would hope that the acquisitions would be beneficial to our efficiency ratio..

Understood..

That said we've an awful lot of initiatives underway for both the cost reduction side and revenue enhancement. Most of the revenue enhancement is coming from wealth management, brokerage, it's coming from mortgage, it's coming from treasury management and card services..

Okay. That's helpful. Bryan, on the margins, you obviously have a few acquisitions already on and your guidance I assume includes the acquisition.

But if you strip out the accretable yield, do you happen to have what the contribution might've been this quarter versus last quarter and then giving a little bit of detail on next year what the core trend is versus the purchase accounting benefit?.

Yeah. I would say that if you look at our run rates that the benefit that we've been seeing on the margins probably been running from10 basis points probably now down more to eight to seven basis points here in the last quarter.

And that has a life that will run out sometime mid next year with the current acquisitions we have and then we'll have the new one coming on which is about at that same level. So, you will see some turnover and maybe some overlap in the first couple of quarters.

So, you may see a little uptick early in the year and we should probably come back down with that unwinding as well as just a continual grind that will happen if rates stay low..

Okay. That's helpful. And last one and I will hop out. I just wanted to make sure I heard the loan growth commentary.

You said similar organic loan growth in 2015 versus 2014 which I think you said it was $380 million, is that a correct number to budget?.

I think that's a fair number to put in for the full year. How it comes by quarter and all that, we'll see, but our hope is we can do as well next year as this year.

And Butch, do you have anything to add on that?.

No. Again, if rates go lower because the economy drifts into a slowdown, that's going to have an impact on us. But I feel pretty good about what we've done on the retail and commercial side to free up our best salespeople to spend more time on the street and working with our current clients to sell deeper into those clients.

We've got a lot of initiatives that have really freed up our best salespeople to generate the business, and that's made a big difference..

All right. Very helpful. Thank you..

Is anyone there?.

Yes. My apologies. My line was on mute. Our next question comes from the line from Jon Arfstrom with RBC Capital Markets. Please proceed..

Thanks Jeff. Good afternoon, guys. Just a couple quick ones.

Ken for you on the provision, I believe you said there was a $1 million incremental expense in the provision for an impairment, and you were saying that will not recur in Q1 and we should just focus in on the Citizen's and the growth portion of the provision, is that right?.

That's correct. What happened in the fourth quarter is not recurring..

Okay. Good. And then, Butch, you use the term deep pipeline for acquisitions. Just curious, I may have asked you this a couple quarters ago, but I will ask you again.

How do you stack rank your priorities in terms of where you want to be from an acquisition point of view? And just remind us what kind of capacity do you think you have for the number of deals in a year?.

Well, let me start out at a high level. At a high level, we try to maintain contact with anywhere from 15 to 20 acquisition opportunities. The vast majority of those run across our current footprint.

From time-to-time, we will have a strategic acquisition opportunity that is outside of our footprint in markets that we would see as strategically attractive, but they have to be very similar to what we found with Kansas City and Morrill and Janes' thing where we had a sizable transaction and something close to $1 billion with very strong management, strong earnings that we feel that in a short period of time we can get them over $1 billion.

But as I said, the vast majority of the transactions that are in our pipeline would be end market transactions, and the way we prioritize them is by which ones provide us the best returns.

From time-to-time, we will have smaller transactions that are fill-ins where we like the overlap of our branches where possibly we can close one or two of the acquired or our branches and consolidate. We have a goal to try to get 80% of our banking centers to $50 million in deposits or greater.

So, if we can take an acquired entity's $25 million that sits right down the street from one of ours that is $25 million, it's pretty significant cost savings. And we have a $50 million dollar branch, and we can grow that from that point forward.

But the primary way that we try to prioritize these is first and foremost, end market is better than other market unless it meets those extraordinary requirements I shared with you. And then which ones provide us the best returns..

How about capacity?.

Capacity, we think we're capable of doing as many as three deals a year. Now, it depends on the size. If it's a sizable transaction, I'd say maybe one to two, but for every size of the deal to be done, anywhere from $150 million to call it $500 million, we could do easily two of those a year..

Especially if they are in market, those are much easier to do than if it's outside of our current footprint because typically that's a new charter for us and that's a little more complex..

Okay.

On the SBA potential, what are you guys thinking in terms of the potential magnitude of that?.

Well, like I said, and I will have Ken talk about this a bit as well, they are currently showing about $4 million of gain on sale of government guaranteed loans per annum.

Now we may back that off a little bit, and Wisconsin Bank & Trust historically has been one of the top producers of USBA loans, and in the rural markets in Wisconsin, we do a lot of FSA loans.

I would hope that with the expertise at both Wisconsin Bank & Trust and the new additions from Community Bank that we would be able to create a center that we can really streamline our processes for processing and selling government guaranteed loans.

We've got enough scale in that area now that we should be able to do that and get the rest of our member banks to focus harder on SBA and USBA originations. Ken, I'd let you add to that..

Yeah. Our first priority will be to bring those two individual credit unions from Wisconsin Bank & Trust and Community Bank together and make sure we're on the same plane in supporting both of those former banks now under one umbrella.

We had a number of conversations already with the President, Kevin Tenpas, of Wisconsin Bank & Trust of how do we now start to introduce that to a greater level to all of our member banks.

They have supported in a limited degree our banks that we have as of now, but we certainly don't have the focus or probably the government guaranteed expertise in those member banks. Or looking at what strategies do we need to have to be able to utilize that and leverage the back room side of it now across all the banks.

So, I would say if we are getting ramped up in that in the third and fourth quarters at member banks I think that's a realistic target. We certainly want to not stub our toe in bringing those two bank cultures together and continue to support the two that are providing us the strongest government guaranteed production currently..

Ken you might want to touch on our small business unit and what they are doing to get ramped up for smaller size than $350,000 SBA loans..

Yeah, we temporized our platform for small business almost two years ago. We rolled it out in February 2013. We initially went out with a size of $250,000 making sure we had the people in place, the platform in place, and understood score assisted underwriting. We have just recently increased that at the beginning of the fourth quarter to $350,000.

We're now looking at what we can do for SBA lending through that unit. A lot of work has been done. We would expect by midyear that we will be able to utilize SBA Express for all of our banks in there, and we will plan on using the processing side of Community Bank which has just joined us to support seven, eight production through that unit as well.

So we have things in place to be able to drive the SBA lending down into that unit throughout 2015..

For the larger credits, Jon, I instructed all of our bank Presidents and our Heads of Commercial at the member banks, when they have their business case discussion with their commercial relationship managers that I want them to ask is there any possibility to read into government guaranteed structure into the credit facilities.

So, they're all becoming much more sensitized to using that tool as a value-added approach to structuring credit..

It seems like a natural, so that makes sense. Okay, I'm all set, thank you..

Thanks, Jon..

Thank you. And our next question comes from the line of Daniel Cardenas with Raymond James. Please proceed..

Good afternoon, guys..

Hi, Dan..

Hi, Dan..

Maybe just a little bit of color of the amount of goodwill the Sheboygan transaction added?.

We're still -- we have estimates that I'm not sure I'm prepared at the moment to give those to you unfortunately because we still have marks that we need to work through. So, I'm probably just not quite ready to figure out what that is..

All right, no problem.

And maybe a comment on deposits, I mean what is the initiative for this year? And are you seeing a pickup in your competitive pressures in any of your markets?.

Well, deposit growth is a priority at all of our banks obviously because that's where the franchise value is in our mind. So, when we run through our budgeting process with all the member banks this year, we got all of them really focused on deposit growth in the categories of non-interest-bearing demand and savings.

It's great to stay at these low levels. You just don't see a lot of time deposit growth, but there's a significant focus on that. And I think as I mentioned for 2014, non-time deposits grew by 5.5% and of course, loans grew at twice that rate. But we funded it primarily with cash flow out of the investment account.

So I think we would envision that same strategy continuing through 2015..

Right.

And you're not seeing anybody get totally aggressive on the pricing side in any part of your footprint, are you?.

In some of the communities we see the credit unions being a bit more aggressive, but quite honestly, loan growth -- although we had great loan growth, the industry is about half that rate. So I'm not real sure why they would want to be overly aggressive on deposit growth.

There is no return to speak off in the bond portfolio and that’s obviously a debt trap if rate starts to go up. So we do see a little bit what we would consider to be overly aggressive pricing from credit unions, but beyond that not a lot..

Okay, great. Thanks guys. Good quarter..

Yeah..

Thanks..

Thanks Dan..

Thank you. We do not see any other questions in the queue at this time. [Operator Instructions].

Any other questions Mike?.

There are no other questions in the queue at this time. I would like to turn the floor back over for any closing comments. .

Thanks Mike. Well, in closing, I'm obviously very pleased with Heartland’s excellent financial performance for the year of 2014.

A successful year is a result of several factors, including solid loan growth, noteworthy improvement in our efficiency ratio, strong net interest margin, amiable credit quality and a track record of successful acquisitions in a favorable M&A environment. And to that end we think Heartland is extremely well positioned for the future.

I would like to thank everybody for joining us today and hope you can join us again for our next quarterly conference call which will be on April 27, 2015. So with that everyone thanks again and have a great evening. .

This includes our teleconference. You may disconnect your lines at this time and we thank you all for your participation..