STOCK PLANS

ASC Topic 718, “Compensation-Stock Compensation” requires the measurement of the cost of employee services received in exchange for an award of equity instruments based upon the fair value of the award on the grant date. The cost of the award is recognized in the income statement over the vesting period of the award.

On May 18, 2005, the Heartland 2005 Long-Term Incentive Plan was adopted, replacing the 2003 Stock Option Plan. Under the 2005 Long-Term Incentive Plan, 1,000,000 shares have been reserved for issuance. The 2005 Long-Term Incentive Plan is administered by the Nominating and Compensation Committee (the “Compensation Committee”) of the Board of Directors. All employees and directors of, and service providers to, Heartland or its subsidiaries are eligible to become participants in the 2005 Long-Term Incentive Plan, except that non-employees may not be granted incentive stock options. The 2005 Long-Term Incentive Plan provides for the grant of non-qualified and incentive stock options, stock appreciation rights (“SARS”), stock awards and cash incentive awards. The Compensation Committee determines the specific employees who will be granted awards under the 2005 Long-Term Incentive Plan and the type and amount of any such awards. Options may be granted that are either intended to be "incentive stock options" as defined under Section 422 of the Internal Revenue Code or not intended to be incentive stock options ("non-qualified stock options"). The exercise price of stock options granted is established by the Compensation Committee, but the exercise price for the stock options may not be less than the fair market value of the shares on the date that the option is granted or, if greater, the par value of a share of stock. Each option granted is exercisable in full at any time or from time to time, subject to vesting provisions, as determined by the Compensation Committee and as provided in the option agreement, but such time may not exceed ten years from the grant date. At December 31, 2011, there were 321,894 shares available for issuance under new awards that may be granted in the future under the 2005 Long-Term Incentive Plan. At December 31, 2010, there were 377,960 shares available for issuance under new awards that may be granted in the future under the 2005 Stock Option Plan. Shares available for options forfeited under the 2003 Option Plan are transferable to shares available under the 2005 Long-Term Incentive Plan.

Under the 2005 Long-Term Incentive Plan, stock awards may be granted as determined by the Heartland Compensation Committee. On January 18, 2011, restricted stock units (“RSUs”) totaling 101,150 were granted to key policy-making employees. On January 19, 2010, RSUs totaling 98,200 were granted to key policy-making employees. These RSUs were granted at no cost to the employee. These RSUs represent the right to receive shares of Heartland common stock at a specified date in the future based on specific vesting conditions; vest over five years in three equal installments on the third, fourth and fifth anniversaries of the grant date; will be settled in common stock upon vesting; will not be entitled to dividends until vested; will terminate upon termination of employment, but will continue to vest after retirement if retirement occurs after the employee attains age 62 and has provided ten years of service to Heartland and will continue to vest after retirement if retirement occurs after the second anniversary of the grant date.

On October 11, 2011, performance-based RSUs totaling 21,200 were granted to key policy-making employees. These RSUs were granted at no cost to the employee. These RSUs represent the right to receive shares of Heartland common stock at a specified date in the future based on specific vesting conditions; vest over three years in three equal installments on the first, second and third anniversaries of the grant date; will be settled in common stock upon vesting; will not be entitled to dividends until vested; will terminate upon termination of employment, but will continue to vest after retirement if retirement occurs after the employee attains age 62 and has provided five years of service to Heartland.

In 2005, stock awards totaling 136,500 were granted to key policy-making employees. These stock awards were granted at no cost to the employees. These awards were contingent upon the achievement of performance objectives through December 31, 2011, and additional compensation expense was recorded through 2011.

Options have been granted with an exercise price equal to the fair market value of Heartland common stock on the date of grant and expire ten years after the date of grant. Vesting is generally over a five-year service period with portions of a grant becoming exercisable at three years, four years and five years after the date of grant. A summary of the stock option activity under equity incentive plans for the years ending December 31, 2011, 2010, and 2009 follows:



	2011 Shares		2011 Weighted- Average Exercise Price		2010 Shares		2010 Weighted- Average Exercise Price		2009 Shares		2009 Weighted- Average Exercise Price
Outstanding at beginning of year	672,721		$	20.27	704,471		$	20.02	743,363		$	19.79
Granted	—		—		—		—		—		—
Exercised	(53,625	)	9.65		(20,500	)	10.68		(22,875	)	11.84
Forfeited	(48,334	)	22.73		(11,250	)	21.63		(16,017	)	21.38
Outstanding at end of year	570,762		$	21.06	672,721		$	20.27	704,471		$	20.02
Options exercisable at end of year	436,245		$	20.86	399,071		$	18.80	311,771		$	16.26

At December 31, 2011, vested stock options totaled 436,245 shares with a weighted average exercise price of $20.86 per share and a weighted average remaining contractual life of 3.55 years. The intrinsic value for the vested stock options as of December 31, 2011, was $223,000. The intrinsic value for the total of all stock options exercised during the year ended December 31, 2011, was $305,000. The total fair value of shares under stock options and awards vested during the year ended December 31, 2011, was $1.3 million. As of December 31, 2011 and 2010, options outstanding under equity incentive plans had exercise prices ranging from $8.80 to $29.65 per share and a weighted-average remaining contractual life of 4.07 and 4.80 years, respectively.

No options were granted in 2011, 2010 and 2009. Cash received from options exercised for the year ended December 31, 2011 was $517,000, with a related tax benefit of $108,000. Cash received from options exercised for the year ended December 31, 2010 was $219,000, with a related tax benefit of $28,000.

Total compensation costs recorded for RSUs, stock options and restricted stock awards were $1.3 million, $926,000, and $862,000 for 2011, 2010 and 2009, respectively. As of December 31, 2011, there was $2.6 million of total unrecognized compensation costs related to the 2005 Long-Term Incentive Plan for RSUs and stock options which is expected to be recognized through 2015. In addition, for the years ended December 31, 2011, 2010 and 2009, the shares of stock awarded to Heartland directors in return for services performed were 5,200, 5,000, and 5,000, respectively. The related compensation expense recorded was $83,000, $87,000, and $84,000 for the respective years.

At Heartland’s annual meeting of stockholders on May 18, 2005, the 2006 Employee Stock Purchase Plan (the “2006 ESPP”), was adopted, effective January 1, 2006. The 2006 ESPP permits all eligible employees to purchase shares of Heartland common stock at a price of not less than 85% of the fair market value on the determination date (as determined by the Compensation Committee). A maximum of 500,000 shares is available for sale under the 2006 ESPP. For the year ended December 31, 2011, Heartland approved a purchase price of 100% of fair market value as determined by the closing price on December 31, 2010. For the year ended December 31, 2010, Heartland approved a purchase price of 100% of fair market value as determined by the closing price on December 31, 2009. At December 31, 2011, 3,500 shares were purchased under the 2006 ESPP and at December 31, 2010, 19,360 shares were purchased under the 2006 ESPP. Under ASC Topic 718, compensation expense of $39,000 was recorded in 2011 and $73,000 was recorded in 2010, because the price of the shares purchased was set at the beginning of the year for the purchases at the end of the year.