Lynn Fuller - Chairman and CEO Bruce Lee - President Bryan McKeag - EVP and CFO Drew Townsend - EVP and Chief Credit Officer.

Jeff Rulis - DA Davidson Andrew Liesch - Sandler O’Neill Damon DelMonte - KBW Steve Moss - FRB Nathan Race - Piper Jaffray Daniel Cardenas - Raymond James.

Greetings and welcome to the Heartland Financial USA, Inc Fourth Quarter 2017 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; Bruce Lee, President; Bryan McKeag, Executive Vice President and Chief Financial Officer; and Andrew Townsend, 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 questions from analysts.

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 on 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, Kevin and good afternoon and welcome to Heartland’s fourth quarter 2017 earnings conference call. We appreciate everyone joining us today as we discussed the company’s performance for the quarter and year just ended. For the next minutes, I'll touch on the highlights for the year and fourth quarter.

I’ll then turn the call over to Heartland’s President, Bruce Lee, who will cover progress on our key operating strategies. Then Bryan McKeag, our EVP and CFO will provide additional color on Heartland's quarterly results followed by Andrew Townsend, our EVP and Chief Credit Officer who will offer insights on credit related topics.

Well, I'm very pleased to being this afternoon call with news that excluding our one time fourth quarter tax adjustment, Heartland's earnings set new records for the quarter and full year of 2017.

Now after the deferred tax asset charge fourth quarter net income available to common shareholders was 13.7 million or $0.45 per diluted common share and for the full year 2017 net income available to common shareholders was 75.2 million or $2.65 per diluted share.

In response to the passage of the tax cut and Jobs Act we recorded a reduction in the value of our deferred tax asset resulting in a onetime non-cash charge to income of 10.4 million or $0.35 per diluted share.

Excluding the deferred tax charge fourth quarter '17 net income available to common shareholders was $24.1 million or $0.80 per diluted common share, and for the full-year net income available to common shareholders was 85.6 million a 7% increase over 2016 marking Heartland's fifth straight year of annual earnings increases.

Now going forward Heartland will realize a tax benefit from the reduction in the corporate tax rate from 35% to 21%. We estimate the 2018 benefit should more than cover the tax charge taken this quarter.

In addition, the favorable tax impact will improve the earnings per share accretion and internal rates of return for the 12 acquisitions closed since 2012, as they were all modeled at 35% tax rate. Bryan will provide further color on effects of the tax cut in a few minutes.

In addition to delivering solid earnings for 2017 Heartland completed two successful acquisitions, Founder's Bancorp in California and Citywide Banks of Colorado notably Citywide is Heartland's largest acquisition to date.

And to top off our year in the fourth quarter we announced affinity merger agreements with Symmetry Bancshares Inc., a 409 million asset bank in Minneapolis and FirstBank Bancshares Inc. a commercial bank operating in Texas with over 929 million in assets.

When these two acquisitions are completed in the first half of this year Heartland's assets will exceed 11 billion providing an excellent start for 2018 and taking us closer to our goal of 12 billion in assets by mid-2019.

As we discussed in the recent quarterly calls our plan was to strategically manage our balance sheet to remain below 10 billion in assets through 2017. We are pleased to have accomplished that goal through some strategic shifts on both sides of the balance sheet primarily in investments and short-term borrowings.

In Q1 2018, both will return to their Q3 '17 levels. For 2017 most of our growth in loans and deposits was acquired although organic loan growth was positive in Q3 and Q4 of 2017. Organic non-time deposits contracted slightly for the year with net organic growth occurring in the second half of the year.

In a moment Bruce Lee will discuss loans and deposits in more detail. Heartland's tangible common equity ratio was 7.53% for the quarter moving above the midpoint of our current target range of 7% to 8% prior to the deferred tax asset charge Heartland's equity went over 1 billion for the first time.

Book value and tangible book value for common share continued to increase ending the quarter at $33.07 and $23.99 respectively. Net interest margin moved up to 4.3% for the quarter benefiting from the effect of purchase accounting. Nevertheless at 4.22% for the year we are very pleased with our margin at this enviable level.

Net interest income in dollars has increased for each of the last four quarters. Now with respect to Heartland's efficiency ratio we've made significant progress over the past year with the fourth quarter at 62.26% and the full year at 65.4%. This represents a year over year improvement of 85 basis points.

As we realize cost savings from acquisitions and investments in new technology we would expect to see further improvement in this ratio going forward. Following Bruce Lee's comments Ryan will address non-interest expense in more detail.

Now moving on to the balance sheet, total assets increased during the year by nearly 1.6 billion or 19%, largely the result of the Founders and Citywide bank acquisitions. Heartland's security portfolio currently represents 25% of assets. We expect to see this ratio decline towards 20% as we have plenty of room for loan growth.

Currently our available for sale portfolio duration is four to four and a half years with the portfolio yield now at 2.91%. Credit quality was positive for the quarter with all credit related metrics improving.

I congratulate our credit teams for their diligent efforts and also want to praise our newest additions, Founders and Citywide for the addition of their superb portfolios. In a few minutes Drew Townsend will provide more detail on these and other credit related topics.

Now moving on to M&A the expansion of our banking franchise through mergers and acquisitions remains a high priority for Heartland, looking into 2018 we continue to evaluate several attractive opportunities. The increase in Heartland's share price improves our ability to pursue these and other M&A opportunities going forward.

We remain committed to achieving our goal to reach 1 billion or more in assets in each state where Heartland operates. Building on our M&A experience, Heartland is in a great position for additional accretive acquisitions.

Now with respect to our dividend I'm very pleased to report that in December, the Heartland Board declared a special dividend of $0.07 per common share in recognition of the company's record financial performance in 2017.

And at this month's January meeting the Board approved a $0.02 increase in the regular quarterly dividend to $0.13 per common share payable on March 2nd, 2018.This boosts our annual regular dividend to $0.52 per share.

Now in closing my portion of today's call I want to add that Heartland has again received recognition from Forbes as one of the best banks in America. Based on 10 financial metrics related to growth, profitability, capital adequacy and asset quality, Heartland ranked number 60 on Forbes' list of the 100 largest US banks.

I'll now turn the call over to Bruce Lee, Heartland's President who will provide an overview on the company's strategic initiatives.

Bruce?.

Thank you, Lynn. Good afternoon. As Lynn described Heartland's financial performance for the year and the quarter was strong in all respects. Now I'm pleased to comment on those results in more detail. I'll begin with loans where I'm pleased to report that we delivered another quarter of organic loan growth.

In the fourth quarter we added $18 million of organic loan growth across Heartland. During the second half of the year organic growth exceeded $80 million and in our highest priority category commercial lending, we experienced net organic loan growth of over $100 million.

We expect this momentum to carry into 2018 on the strength of tax cuts, and strong economic tailwinds. As I meet with our bankers and our clients across the country I'm encouraged by their optimism as they describe the current business climate is quite positive.

Specifically, we're hearing that the tax cut, low interest rates and lower energy costs are fueling future expansion plans. The Heartland banks are well positioned to capitalize on this optimism, and are looking for it to translate into stronger loan demand and deposit growth. Now I'll turn to deposit.

In the second half of 2017 we carefully monitored and managed our deposit portfolio to ensure we can strategically delay crossing the $10 billion asset mark until 2018. During the fourth quarter organic non-time deposit growth was virtually flat. Year-over-year our non-time deposits increased $1.2 billion or 21.5%.

We also delivered a 7% increase in highly valued non-interest-bearing deposits and when including acquired deposits we were successful in improving our deposit mix year-over-year with non-time deposits now representing 89% of the total.

In retail banking we're getting excellent results through the online channel for the fourth quarter promotion producing a 42% increase in new checking account. To maintain our new account momentum Heartland is stepping up its digital marketing efforts. We will add online account opening for small business in the first quarter of 2018.

Turning to non-interest income in our income-producing businesses. In 2017 commercial card was a standout in the portfolio, with a 68% revenue increase year-over-year and a 22% increase compared to the fourth quarter of 2016. Trust fees increased 6% year-over-year and service charges and fees showed an increase of 24% from December 2016.

In regard to residential real estate Heartland's mortgage loan production was seasonally slower in the fourth quarter. We remain far from satisfied with the performance of our mortgage unit and are implementing plans that focus on delivering consistently profitable results. Heartland's mortgage servicing portfolio total $3.6 billion as of December 31.

We have $23 million of MSRs on our books which have a fair value of approximately $37 million or $14 million more than book value. In 2017 Heartland again demonstrated our strong competency in acquisition activity.

So, to briefly recap in February we completed the Founders bank core acquisition merging approximately $213 million in assets into Premier Valley Bank in California.

Also, in February we announced our largest acquisition to date with $1.49 billion in assets Citywide Banks in Colorado joined Heartland in July, followed by a nearly flawless systems conversion in October.

With all our acquisition we carefully watched deposit balances before and after conversion and are extremely pleased with 97% of Citywide's deposits accounts base retained. Indeed, throughout the integration process we intensely focus on retention of all loan and deposit clients and also retention of the employees, who serve those clients.

Our track record is strong in this respect and we continue to focus on seamless conversations and integrations.

To expand on Lynn's earlier comments in an active fourth quarter we announced the pending acquisition of Signature Bank shares in Minnetonka, in Minnesota and its merger into Minnesota Bank & Trust, adding one location and creating an entity with approximately $600 million in assets.

We really appreciate the potential for these two well matched banks in serving the specialized financial needs of business, professionals and private clients.

Then in December we announced the pending acquisition of FirstBank Lubbock Bancshares with over $929 million in assets which will significantly increase our presence in Texas and become Heartland's 11th community bank charter. FirstBank and Trust Company brings a solid commercial banking unit balanced with strong retail and mortgage organizations.

We expect the FirstBank and Trust Company team with their considerable acquisition experience to take the lead in facilitating additional acquisitions in attractive Texas markets.

2018 is already shaping up to be another active year for conversions and integrations with Signature transaction expected to close in February and the FirstBank Lubbock Bancshares transaction scheduled to close in the second quarter.

In concluding my remarks, I'm pleased to state that our banks are well positioned to reach new heights as we begin the year and we expect 2018 in an exciting year of growth and strong performance. With that I will turn the call over to our CFO, Bryan McKeag for more detail on our financial results..

Thanks Bruce and good afternoon everyone. Well as Lynn and Bruce has described this was another eventful quarter. So, I will try to add some more color and clarity to our quarterly results.

Starting with the tangible common equity ratio which increased 7 basis points to 7.53%, the already mentioned $10.4 million write down of deferred tax assets reduce the ratio by 1 basis points, which was offset by a small 1 basis point add from changes in market value of our investments and derivatives and a 17-basis point increase from quarterly retained earnings.

Lynn and Bruce have already commented on loans and deposits, so I will only comment on a few other balance sheet items. First, other borrowings decreased $60 million as a result of our repurchase and retirement of $15 million of Heartland's statutory trust for preferred securities.

Second, you'll note that we had reductions in several non-earning asset line items. More specifically premises and equipment declined 4.7 million and other real-estate declined 2.4 million as we sold one large bank building, wrote down another bank property we intend to sell and sold one large OREO deal property.

Other assets were also down 16.2 million largely due to the reduction in our deferred tax assets. Moving to the income statement net interest income totaled 92.9 million this quarter up 3 million from the prior quarters. The primary driver of the increase was a $2.9 million increase in the creation of purchase accounting discounts on acquired loans.

The net interest margin on a tax equivalent basis improved again to 4.3% which is a 4-basis point increase from last quarter. Loan yields increased 16 basis points during the quarter due to the higher accretion of purchase accounting discounts.

Offsetting the higher loan yields was a 22-basis point decline in investment yields related primarily to lower mix of higher yielding tax exempt securities. And we also have slightly higher interest cost on deposits and borrowings which increased 1 basis point compared to last year.

This quarter the net interest margin includes 28 basis points from the accretion of purchase accounting discounts which compares to 16 basis points in the prior quarter. Non-interest income totaled 25.5 million for the quarter up 551,000 from last quarter.

When compared to last quarter gain on sale of securities was down 300,000 and gain on the sale of loans was down 700,000. Service charges and fees also declined slightly this quarter, down 250,000 from last quarter.

However, trust fees were up by 500,000 reflecting strong market value increases and other non-interest income was up 987,000 primarily due to the inclusion of 1.3 million gain from the repurchase and retirement of the trust preferred securities as I previously mentioned.

Switching to non-interest expense, total non-interest expense was 77.8 million this quarter, a decrease of 881,000 from the prior quarter. This includes M&A and system conversion related costs which decreased from $2.8 million last quarter to $1 million this quarter.

Our largest expense category, salary and benefits decreased $1.9 million compared to last quarter. The main drivers of the decrease were a lower full time equivalent employee count, which decreased by 16 and favorable incentive and benefit accrual adjustments during the fourth quarter.

Advertising cost were up 700,000 over the last quarter primarily was due to cost associated with fourth quarter deposit campaign which Bruce previously mentioned and additional advertising in the Denver market surrounding the Citywide conversion that occurred this quarter.

Professional fees increased slightly or 100,000 as M&A and conversion related costs in this category were 700,000 this quarter which is a similar level as last quarter. Finally, other non-interest income -- expense was up 600,000 over the last quarter as this quarter included costs for tax credit investments of nearly 1 million.

The reported effective tax rate for the quarter was 61.1% however adjusting for the 10.4 million deferred tax asset write down the rate was 31.6% up from 28.7 last quarter. We believe with the new tax law which became effective January 1st 2018 that a normalized tax rate of around 20 to 22% is reasonable going forward.

I'll end my comments with a list of expectations for Heartland's core results for 2018 which exclude our two pending acquisitions starting with loan and deposit growth on an annualized percentage basis is expected to be in the mid-single digits.

The net interest margin on a tax equivalent basis for 2018 should be in the 4.05 to 4.15% range as the new tax rate -- as the new tax law will lessen the tax advantage on municipal bond interest and also, we expect a decrease in purchase accounting accretion.

Provision for loan loss is expected to be slightly higher for the full year as we expect higher loan growth provisioning to be partially offset by lower net charge offs and lower purchase accounting related provisions.

Mortgage production is expected to improve significantly after a disappointing 2017 as we gain traction in several of our newer and larger markets and will follow normal seasonal patterns.

Core fee income excluding mortgage and security gains is expected to show increases nearing 10% from current run rates as we continue to have strong corporate credit card growth and sell into our newly acquired customer basis.

And lastly, core expenses excluding M&A related costs should remain well controlled and show low single digit percent growth from current run rates. And with that I'll turn the call over to Drew Townsend our Executive Vice President and Chief Credit Officer. .

Thank you, Bryan. This afternoon I'll begin my remarks by discussing the highlights of the key credit metrics for Heartland. I'm pleased to report that we have been able to continue to improve credit quality while growing our loan portfolio by over $1 billion in 2017.

Better credit quality is demonstrated by one, continued reduction in non-performing assets; two, the lowest delinquency ratio in the last three years; and three, continued low levels in total non-pass rated loans. I will also discuss total charge-offs and the allowance for loan loss. Allow me to provide more details on each of these.

Total non-performing loans were further reduced during the fourth quarter and now represent less than 1% of total loans.

These loans are primarily concentrated in seven relationships representing 42% of the total non-performing loans and in the government guaranteed repurchased residential mortgage loans equating to 21% of the total non-performing loans.

More broadly non-performing assets as a percent of total assets also continued to decrease and now represent only 0.76% of total assets. Delinquency totals are at the lowest levels reported in the last three years and for fourth quarter 2017 are 0.27% of total loans.

At 6% non-pass rated loans are at a level which compares very favorably to recent quarters as well as levels over the past several years.

Continuing net charge-offs for the fourth quarter of 2017 were 4.5 million primarily attributable to 3.1 million of charge-offs related to two previously reserved agri business and commercial loan relationships, at the Dubuque Bank and Trust and The Mexico Bank and Trust respectively.

Finally, the allowance for loan losses as a percent of total loans remained relatively unchanged for the fourth quarter at 0.87%. As mentioned in previous quarters 1.5 billion of loans from our most recent acquisitions are covered by the valuation and PCI reserves, totaling $36.4 million.

As credit decisions are made on these acquired loans in future quarters provision expense will be necessary to establish the associated allowance for these acquired loans. Excluding these loans from total loans would result in allowance to loans ratio of 1.13% as of December 31.

Lastly, I'm pleased to report that only 8.5% of the total allowance is attributed to loans that are considered individually impaired. Summarizing we ended 2017 with a very favorable position with respect to credit quality.

In addition to our focus on loan growth in 2018 we are working closely with our member banks to optimize our credit processes and achieve a better customer experience. That concludes my remarks I will turn the call back to Lynn and remain available for questions..

Thanks, Drew. Now we will open the phone lines for questions from our analysts..

[Operator Instructions] Our first question is with Jeff Rulis with DA Davidson. Please proceed with your question..

Bryan maybe a follow up on the guidance there.

Do you have a just a core fee income and at expense number that we could work off of or at least what was non-core one of the two?.

For fee income [I think here] [ph] So we reported -- check my number here, 25.5 million. I think from that -- you guys usually get both back out the security gains and I would probably back out 1.2 million so of the gain that we had on the trusts. The rest should be core for the support [ph]..

So, you are talking on run rate off of the -- just annualized that figure.

And then the on the expense side, same?.

Yes, the expense side kind of -- there is a lot going on. It tends to net itself out. When I looked at it you get some M&A cost you got tax credits but then we had a fair amount of adjustments to the accruals. So, I think the core really is pretty close to what was recorded that the 78 when you tick everything in it out of there.

And so, I think if you took that and grew that from there the low single digits I think that would -- which is a ballpark..

And then just another one on the margin itself. So that the 405 to 415 are you -- it's sort of excluding accretions..

Yes, well, so the way I get there if you start with the 430 and I think our tax equivalent adjustment for the quarter if you analyzed is about 6 basis points going from 35% tax to a 21% tax rate.

So that gets you to 424 and then this quarter we had 28 basis points of purchase accounting accretion, we had a lot of loans that moved this quarter, I would normalize that back down to -- we have been running at the 16 basis points to 14 basis point range, so if we took that up that puts right at 410, 411 and kind of in the mid-point of that 405 to 415 for the next year.

.

And then I guess so layering later in, I guess does that include any accretion on the deals to close, Q1 or Q2. .

Right, I don’t know that number just yet, I would tell you that the two banks that we're acquiring their core interest margins are in the 15 to 420 may be slightly plus. So, they are right in the ballpark with us, so I think pulling them in shouldn’t have a big impact on our margin, should be about the same. .

Our next question is with Andrew Liesch with Sandler O’Neill. Please proceed with your question. .

Just a couple of questions here on the charge-offs this has been running higher then I was expecting in the last couple of quarters, are you seeing anything else in the portfolio that’s giving you any concern. .

I don’t believe so Andrew, we had these identified, clear honestly, they weren’t surprises and back on what as we kind of turn the corner or turn the page, we feel like we have everything pretty well identified at this point. .

Okay, and Bruce just to circling bank to your comments on loan growth earlier, what are there any markets that your bankers have been giving you even more optimism than others. .

Andrew while it doesn’t appear growth was fabulous during the fourth quarter, we did have growth in seven of our 10 markets and one of the markets Citywide we did go backwards there and its actually attributed to the accretion that Bryan was talking about as we had several of our large construction loans have scheduled payoffs there.

But I would say most of the western markets right now feel pretty good. Actually, I was just in Denver last week and they feel very positive about the momentum they have. We feel really good about what's going out in Arizona, California feels good. So, I would say it's really across the board, it feels very, very positive.

I think that we got a boost here at the end of the year with the tax cut and I think that has increased the optimism from where we were about a month ago. .

Okay and then Bruce, just one follow up from you, just curious these two deals pending, when would you be comfortable announcing the transaction?.

Well, I would hope we have had another announcement before the end of '18, but I really can't give you a date per se. We got to the deals in and hopefully we can still announce in other deal by the end of '18, may be sooner..

Our next question is with Damon DelMonte with KBW. Please proceed with your question. .

So, first question regarding the provision, Bryan I think you said we could expect a higher provision kind of in step with loan growth.

Could you kind of frame that I mean based on the last couple of quarters we were in that low-to-mid 5 million per quarter range and there wasn’t really a meaningful amount of growth, guess that was more or just credit driven.

why would you feel comfortable for maybe for a full-year or at least a range on a quarterly basis?.

Yes, I think if you took what we had this year I think was about 15.6 million that's roughly 4 a quarter, it could be 4.5 I think on average but it's going on be lumpy depending upon loan growth and if we do have any bumps something pops up so I think somewhere in the 4 maybe 4.5 in a couple of quarters would get you there..

And then it looks like the securities jumped up this quarter like the balances were up maybe that on an average on end period basis what was the thought behind that?.

Well, I think a couple of things one, we were as we got to the end of the year we have some deposits that ran off and so you'll see two things happen one we kind of bumped up our short-term borrowings because of that and we loved the securities go over quarter end where we might have taken some of those in other quarters things kind of tend to slow down at the end of the year.

So now as we've gone into the next year you'll see next quarter where the borrowings will come back in line and as our supply come back down more where they were. .

Damon in my comments I said that those two items securities and short-term borrowings will return to the levels that you saw in Q3 of '17..

And then -- and kind of looking through the individual subsidiary banks it looks like you reported a loss in Arizona Bank & Trust this quarter? Is that accurate..

Yes. one of the things that we had to do obviously was to spread out our deferred tax asset adjustment and relative to their size I think they got a little bit more, I don’t know the exact reason but when we did it by bank I think they ended up and caused them to go negative..

It wasn’t like there was material loss of some sort, this is part of the [Indiscernible].

Yes, if we would not have had the DTA write-off I think all the banks would have been positive..

And I guess one final question is to clarify on the merger charges.

I think you said there was about 1 million of merger expense this quarter?.

Yes..

And that was kind of spread out into….

There is about seven or maybe just a tad bit more ended up in professional fees, the other three probably ended up mostly in travel and entertainment expenses for our folks traveling..

And then was there some kind of offsets in there. You had said to us -- not sure which, one of the folks asking questions but you had said that 77.9 million is probably a good rate because the one-time merger charges were offset by something else..

Well we had -- so few getting my notes here, so if you backed a 1 million of that out a 1 million of the tax credits out it gets you about 70 almost to 76 million but we had salary adjustments that went in there, we've adjusted bonus true things up and so when you kind of take the put and takes I get back to 78 million for there..

I missed the comment on the salary adjustments. .

Unfortunately, it tends to be a little noisy in the expense categories..

Our next question is with Steve Moss with FRB, please proceed with your question..

Good afternoon. Most of my questions have been answered here, just one follow up on the investment securities portfolio little different way of asking it and thinking about it.

Given the flatter real curve and the change in tax rate is there any change in the investment strategy going forward?.

Well I would say right now there's not a lot of value going out long on the curve so we're staying relatively short. And muni spreads have at least at the end of the year early into this year have been pretty narrow.

So as long as those stay narrow and the curve stays flat I think we’ll be operating closer to the front end of the curve in anything we might do..

And investment Steve in -- investments that throw up good deal of cash flow in anticipating some rate hikes this year mortgage backs that have given us a lot of cash flow and SBA floaters.

A lot less appetite for munis, but munis taxable equivalents have been trading right on top of treasury, so we had an opportunity to shed some of the muni inventory before year end..

Okay that's helpful and just in terms of thinking about the portfolio would it be -- going forward if they were to pay down borrowings or run off CDs or just kind of maintain balances here at roughly current levels..

I think first as we probably would reduce some of the short-term borrowings that you saw in the balance sheet at the end of the year and then it's a matter of how our deposits go really as to where we would go next. Whether we have to fund loan growth out of that investments or whether we can use the deposits..

Our next question is with Nathan Race with Piper Jaffray, please proceed with your question..

Let's just go back to the discussion on the Colorado operations in 4Q, I appreciate your comments in terms of you know some of the construction fundings in the quarter, you know that came down and so forth as those projects completed but I guess I'm just curious as well if there was any credit aspect to the shrinkage.

I know historically you guys have tended to string some of these required loan books as some of the credits may not have fit within your kind of credit criteria. Was that the case at all here in Colorado and any expectations in terms of Colorado growth specifically for 2018..

Nathan none of the shrinkage was a result of any credit actions or portfolio changes that we wanted, we're very happy with the portfolio that Citywide had and brought to us well as Centennial prior to that.

So we like the mix that we have in that portfolio and they expect actually to be in that mid-single digit to actually potentially the upper range of that in Colorado as we look out to 2018, as I mentioned I was in Colorado last week for a couple of days participating in some of their prospect meetings and pipeline meetings and I would say that they have a very robust pipeline right now and we feel very-very positive about what's going on out there and the loan growth potential not only for the first half of the year but for all of '18..

Got it, its great color and just going back to the charge-off discussion, appreciate your commentary in terms of the items that you have the charge-offs this quarter so I guess I'm just curious and looking at precise class five trends during the fourth quarter, and just looking the context of your expectations for charge-off levels as we go through 2018?.

Yes, again I would say first the criticized classified levels we are pretty stable, we meet frequently with the banks and have I think good insight into their portfolios and seeing very limited downgrades.

The only sector that I would point out is Ag and we are continuing to work on a handful of those relationships but I don't -- I wouldn’t expect loss in any material way, really not sure I expect any loss in the Ag portfolio because of government guarantees et cetera.

And again, with respect to charge-offs we have got a handful of larger ones that have been somewhat sticky and again for the first time I feel some optimism. We have some strategies in place that are multiple quarters out. And so, I think in that space we are going to see some improvement.

So, I like to see charge-offs down quite frankly, I know there's nothing right now that would not make me feel optimistic putting net charge-offs will come down in 2018..

And Bryan just thinking about the proforma of efficiency ratio for 2018, obviously you guys got two pretty sizable deals coming online here so any thoughts on kind of where the efficiency ratio could checkout maybe 12 to 18 months from now?.

Yes, I think that’s really hard to gauge but I would say at least a core -- so let's start with the core. We did -- for this year we did 65.4 for the full year.

If you make the adjustment for the tax -- taxable income adjustment that we do that would have added another almost 1% to that ratio had we reported under 21% tax rate, so that push it in the low 66s.

And I think our goal has been to get that down under 65, I think we can get it under 65 even under this ratio which really is under 64 under the old tax rate. So, I think somewhere between 65 and 60 maybe a little bit better than that for next year.

That when you get into adding the two new entities you are going to have onetime items that will hit upfront and it will take us a while then to realize the benefit of the cost saves. So, I'm saying that’s maybe a push, it could hurt it just a little bit..

But Nathan if you would look out -- your question 18 months after we have fully absorbed those we would expect to -- those acquisitions will reduce our efficiency ratio and we would expect it to be much closer to 60, 18 to 24 months out..

If I just look on at 4Q just around 62% on an adjusted basis that would imply, essential to get another 200 bps lower once we get the full cost save realized from acquisitions so I appreciate I got that commentary Bruce..

Our next question is with Daniel Cardenas with Raymond James. Please proceed with your question. .

For the provision that we had this quarter, the 5.4 million how much of that was related to the moment of loans out of the purchase accounting pool into the regular portfolio. .

I think a quarter over quarters the quarter change and so I looked to this in quarter change and trying to explain the difference. We had about almost a million dollars more of provisions for loans moving into the portfolio than we had last quarter. .

And so, then as we look at the first half of 2018, are you kind of expecting the same types of movement out of the purchase accounting portfolio. .

I think would probably normalize back to what it would have been may be last quarter, so that’s where I think you can get in that and we had a couple of downgrades this quarter that aren’t specific reserves but just change the numbers underlying our old [indiscernible] five calculations.

So that’s why I think with some loan growth, I think we could be in that 4.5 round their range without loan growth, organic loan growth, we're probably in that four, may be a tad bit under range in a given quarter, all things being equal. .

We do not expect the same level of payoffs or pay downs that we had at Citywide, in the fourth quarter we don’t expect that to reoccur in the first quarter. .

I think you can go back to third quarter levels and then when signature and when FirstBank come in, you will see that number pick up again in terms of both the margins and probably having to provide a little more as well. .

And then just in terms of pay downs and pay offs what kind of impact did that have on Marlon James this quarter?.

I always look at in on an individual bank basis. .

No problem, I mean it's looking at quarter to quarter when you are down, roughly 20 million. .

Give me one second, I think I have it here. .

One thing that does happen Dan within our portfolio if their deposits and dropped a little bit, we sometimes will move some participations out of a bank to kind of help. .

That was about half, I believe and they still did have that negative loan growth. .

I got this growth numbers but I don’t have a pay down. And we move some loans out of them..

That’s right, half of their reduction was done on purpose as we moved participations. .

You can see that if you look at the back counts, I think their deposits have been down as back half for the year and so we have been helping them with very liquidity by moving some loans around to our other banks as they come up. .

Right good, and then just kind given tax reform, I mean what are your initial thoughts in terms of putting the windfall to work.

Are you looking at increasing minimum wages or one-time contributions, the HSAs or anything like that?.

Dan, we feel really good about our benefits packages and we provide our employees a number of things that we do that some of the larger banks don’t do for their employees.

We really think, where we're going to see the ads are in technology and talent, so we're not doing a one timer per say but we are going to continue to be very active as we have been in the past and communicating the benefits that we do offer to our employees and continuing to support the communities through both financial support with communities as well as our people's time and volunteering on charitable organization, so as a consortium of community banks that's something that we've been very proud of so little bit different than what you've seen from the largest banks in the country..

There seems to be no further at this time. So, I would like to turn the floor back over to Mr. Fuller for closing comments..

End of Q&A:.

Thank you, Daven.

In closing, we were very pleased with our excellent financial performance for 2017 and the fourth quarter and I'll just recap excluding the fourth quarter impact for the deferred tax charge Heartland's earnings set new records for the quarter and for the full-year of 2017 and over the past 4 years Heartland's net income has more than doubled growing by 132% with EPS growing by 48% and assets increasing by 66%.

The 12 acquisitions closed since 2012 were very accretive at a 35% tax rate and now even more accretive at a 21% tax rate. Heartland's net interest margin increased to an enviable level of 4.22% for 2017 and our efficiency ratio continues to improve reaching 62.26% for the quarter with ongoing efforts for further reduction.

And based on our continued financial success in 2017 our Board of Directors approved a special dividend as well as an increase to our regular quarterly dividend which boosts our annual cash dividend to $0.52 for common share.

And finally, our two successful acquisitions in 2017 really sets the stage for an exceptional year ahead and with two more solid banks joining Heartland early this year we have a lot of positive momentum and are poised to reach new heights in 2018.

I'd like to thank everyone for joining us today and hope you can join us again for our next quarterly conference call which is schedule for April 30th 2018. Thank you and have a good evening everyone..

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation..