Heartland Financial USA (HTLF) 10-Q 2005 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For quarterly period ended March 31, 2005

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For transition period __________ to __________

Commission File Number: 0-24724

HEARTLAND FINANCIAL USA, INC.

(Exact name of Registrant as specified in its charter)

Delaware

(State or other jurisdiction of incorporation or organization)

42-1405748

(I.R.S. employer identification number)

1398 Central Avenue, Dubuque, Iowa 52001

(Address of principal executive offices)(Zip Code)

(563) 589-2100

(Registrant's telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.Yes xNoo

Indicate by check mark whether the Registrant is an accelerated filer (as defined by Rule 12b-2 of the Securities Exchange Act of 1934).Yes x Noo

Indicate the number of shares outstanding of each of the classes of Registrant's common stock as of the latest practicable date: As of May 5, 2005, the Registrant had outstanding 16,440,476 shares of common stock, $1.00 par value per share.

HEARTLAND FINANCIAL USA, INC.

Form 10-Q Quarterly Report

Part I
Item 1.	Financial Statements
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Quantitative and Qualitative Disclosures About Market Risk
Item 4.	Controls and Procedures
Part II
Item 1.	Legal Proceedings
Item 2.	Unregistered Sales of Issuer Securities and Use of Proceeds
Item 3.	Defaults Upon Senior Securities
Item 4.	Submission of Matters to a Vote of Security Holders
Item 5.	Other Information
Item 6.	Exhibits
	Form 10-Q Signature Page

PART I

ITEM 1. FINANCIAL STATEMENTS

HEARTLAND FINANCIAL USA, INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except per share data)
	March 31,2005 (Unaudited)			December 31, 2004
ASSETS
Cash and due from banks	$	69,442		$	68,919
Federal funds sold and other short-term investments		14,091			4,830
Cash and cash equivalents		83,533			73,749
Time deposits in other financial institutions		1,190			1,178
Securities:
Trading, at fair value		539			521
Available for sale, at fair value (cost of $525,664 at March 31, 2005,    and $547,585 at December 31, 2004)		523,909			552,763
Loans held for sale		41,710			32,161
Gross loans and leases:
Loans and leases		1,783,256			1,772,954
Allowance for loan and lease losses		(26,011	)		(24,973	)
Loans and leases, net		1,757,245			1,747,981
Assets under operating leases		37,379			35,188
Premises, furniture and equipment, net		85,234			79,353
Other real estate, net		423			425
Goodwill		35,398			35,374
Other intangible assets, net		9,855			10,162
Other assets		55,322			60,200
TOTAL ASSETS	$	2,631,737		$	2,629,055
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Deposits:
Demand	$	314,430		$	323,014
Savings		750,982			750,870
Time		925,163			909,962
Total deposits		1,990,575			1,983,846
Short-term borrowings		221,081			231,475
Other borrowings		215,423			196,193
Accrued expenses and other liabilities		28,659			41,759
TOTAL LIABILITIES		2,455,738			2,453,273
STOCKHOLDERS’ EQUITY:
Preferred stock (par value $1 per share; authorized, 184,000 shares; none      issued or outstanding)		-			-
Series A Junior Participating preferred stock (par value $1 per share;      authorized, 16,000 shares; none issued or outstanding)		-			-
Common stock (par value $1 per share; authorized, 20,000,000 shares at      March 31, 2005, and December 31, 2004; issued 16,547,482 shares at March      31, 2005, and December 31, 2004)		16,547			16,547
Capital surplus		40,303			40,446
Retained earnings		121,746			117,800
Accumulated other comprehensive income (loss)		(1,257	)		2,889
Treasury stock at cost (66,400 shares at March 31, 2005, and 106,424 shares at      December 31, 2004, respectively)		(1,340	)		(1,900	)
TOTAL STOCKHOLDERS’ EQUITY		175,999			175,782
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	2,631,737		$	2,629,055
See accompanying notes to consolidated financial statements

HEARTLAND FINANCIAL USA, INC. CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (Dollars in thousands, except per share data)
	Three Months Ended
	March 31, 2005			March 31, 2004
INTEREST INCOME:
Interest and fees on loans and leases	$	29,988		$	21,760
Interest on securities:
Taxable		3,531			3,608
Nontaxable		1,325			1,026
Interest on federal funds sold and other short-term investments		47			5
Interest on interest bearing deposits in other financial institutions		68			44
TOTAL INTEREST INCOME		34,959			26,443
INTEREST EXPENSE:
Interest on deposits		9,182			6,569
Interest on short-term borrowings		1,264			597
Interest on other borrowings		2,506			2,434
TOTAL INTEREST EXPENSE		12,952			9,600
NET INTEREST INCOME		22,007			16,843
Provision for loan and lease losses		1,364			1,356
NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE      LOSSES		20,643			15,487
NONINTEREST INCOME:
Service charges and fees		2,707			2,127
Trust fees		1,595			1,020
Brokerage commissions		223			278
Insurance commissions		137			224
Securities gains, net		53			1,540
Gain on trading account securities		18			85
Rental income on operating leases		3,571			3,462
Gain on sale of loans		712			527
Valuation adjustment on mortgage servicing rights		(2	)		(73	)
Other noninterest income		701			531
TOTAL NONINTEREST INCOME		9,715			9,721
NONINTEREST EXPENSES:
Salaries and employee benefits		11,182			8,821
Occupancy		1,626			1,063
Furniture and equipment		1,367			1,127
Depreciation on equipment under operating leases		2,928			2,861
Outside services		1,928			1,501
FDIC deposit insurance assessment		70			51
Advertising		809			539
Other intangibles amortization		270			88
Other noninterest expenses		2,571			1,965
TOTAL NONINTEREST EXPENSES		22,751			18,016
INCOME BEFORE INCOME TAXES		7,607			7,192
Income taxes		2,343			2,126
NET INCOME	$	5,264		$	5,066
EARNINGS PER COMMON SHARE-BASIC	$	0.32		$	0.33
EARNINGS PER COMMON SHARE - DILUTED	$	0.32		$	0.33
CASH DIVIDENDS DECLARED PER COMMON SHARE	$	0.08		$	0.08
See accompanying notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (Unaudited) (Dollars in thousands, except per share data)
	Common Stock		Capital Surplus			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total
Balance at January 1, 2004	$	15,262	$	20,065		$	102,584		$	4,794		$	(1,782	)	$	140,923
Net income							5,066									5,066
Unrealized gain on securities available       for sale arising during the period										3,947						3,947
Reclassification adjustment for net }      security gains realized in net income										(1,540	)					(1,540	)
Unrealized loss on derivatives arising      during the period, net of realized      losses of $213										(170	)					(170	)
Income taxes										(814	)					(814	)
Comprehensive income																6,489
Cash dividends declared:
Common, $.08 per share							(1,211	)								(1,211	)
Purchase of 44,842 shares of      common stock													(867	)		(867	)
Issuance of 38,605 shares of      common stock				(233)									798			565
Balance at March 31, 2004	$	15,262	$	19,832		$	106,439		$	6,217		$	(1,851	)	$	145,899
Balance at January 1, 2005	$	16,547	$	40,446		$	117,800		$	2,889		$	(1,900	)	$	175,782
Net income							5,264									5,264
Unrealized loss on securities available      for sale arising during the period										(6,986	)					(6,986	)
Reclassification adjustment for net      security gains realized in net income										(53	)					(53	)
Unrealized gain on derivatives arising      during the period, net of realized      losses of $116										337						337
Income taxes										2,556						2,556
Comprehensive income																1,118
Cash dividends declared:
Common, $.08 per share							(1,318	)								(1,318	)
Purchase of 87,697 shares of      common stock													(1,786	)		(1,786	)
Issuance of 127,721 shares of      common stock				(143	)								2,346			2,203
Balance at March 31, 2005	$	16,547	$	40,303		$	121,746		$	(1,257	)	$	(1,340	)	$	175,999

See accompanying notes to consolidated financial statements.

HEARTLAND FINANCIAL USA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in thousands, except per share data)
	Three Months Ended
	March 31, 2005			March 31, 2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	5,264		$	5,066
Adjustments to reconcile net income to net cash (used) provided by operating      activities:
Depreciation and amortization		4,681			3,912
Provision for loan and lease losses		1,364			1,356
Provision for deferred taxes		(1,221	)		1,381
Net amortization of premium on securities		814			335
Securities gains, net		(53	)		(1,540	)
(Increase) decrease in trading account securities		(18	)		586
Loans originated for sale		(57,648	)		(54,640	)
Proceeds on sales of loans		48,811			35,376
Net gain on sales of loans		(712	)		(527	)
(Increase) decrease in accrued interest receivable		(418	)		102
Decrease in accrued interest payable		(1,342	)		(733	)
Other, net		(1,837	)		(2,495	)
NET CASH USED BY OPERATING ACTIVITIES		(2,315	)		(11,821	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale of securities available for sale		13,146			54,888
Proceeds from the maturity of and principal paydowns on securities available for sale		34,412			24,563
Purchase of securities available for sale		(26,282	)		(77,779	)
Net increase in loans and leases		(10,341	)		(17,440	)
Increase in assets under operating leases		(5,119	)		(5,268	)
Capital expenditures		(7,259	)		(5,017	)
Proceeds on sale of OREO and other repossessed assets		136			461
NET CASH USED BY INVESTING ACTIVITIES		(1,307	)		(25,592	)
CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in demand deposits and savings accounts		(8,472	)		(13,553	)
Net increase (decrease) in time deposit accounts		15,201			(5,743	)
Net increase (decrease) in short-term borrowings		(10,394	)		13,298
Proceeds from other borrowings		30,863			41,576
Repayments of other borrowings		(11,633	)		(8,755	)
Purchase of treasury stock		(1,786	)		(859	)
Proceeds from sale of common stock		945			480
Dividends paid		(1,318	)		(1,211	)
NET CASH PROVIDED BY FINANCING ACTIVITIES		13,406			25,233
Net increase (decrease) in cash and cash equivalents		9,784			(12,180	)
Cash and cash equivalents at beginning of year		73,749			71,869
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	83,533		$	59,689
Supplemental disclosures:
Cash paid for income/franchise taxes	$	617		$	470
Cash paid for interest	$	14,294		$	10,333
See accompanying notes to consolidated financial statements.

HEARTLAND FINANCIAL USA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1: BASIS OF PRESENTATION

The interim unaudited consolidated financial statements contained herein should be read in conjunction with the audited consolidated financial statements and accompanying notes to the financial statements for the fiscal year ended December 31, 2004, included in Heartland Financial USA, Inc.’s ("Heartland") Form 10-K filed with the Securities and Exchange Commission on March 14, 2005. Accordingly, footnote disclosures, which would substantially duplicate the disclosure contained in the audited consolidated financial statements, have been omitted.

The financial information of Heartland included herein have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial reporting and have been prepared pursuant to the rules and regulations for reporting on Form 10-Q and Rule 10-01 of Regulation S-X. Such information reflects all adjustments (consisting of normal recurring adjustments), that are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations for the periods presented. The results of the interim period ended March 31, 2005, are not necessarily indicative of the results expected for the year ending December 31, 2005.

Basic earnings per share is determined using net income and weighted average common shares outstanding. Diluted earnings per share is computed by dividing net income by the weighted average common shares and assumed incremental common shares issued. Amounts used in the determination of basic and diluted earnings per share for the three-month periods ended March 31, 2005 and 2004, are shown in the tables below:

	Three Months Ended
(Dollars in thousands)	3/31/05		3/31/04
Net income	$	5,264	$	5,066
Weighted average common shares outstanding for basic earnings      per share (000’s)		16,479		15,167
Assumed incremental common shares issued upon exercise of      stock options (000’s)		226		259
Weighted average common shares for diluted earnings per share (000’s)		16,705		15,426
Earnings per common share - basic	$	0.32	$	0.33
Earnings per common share - diluted	$	0.32	$	0.33

Heartland applies APB Opinion No. 25 in accounting for its Stock Option Plan and, accordingly, no compensation cost for its stock options has been recognized in the financial statements. Had Heartland determined compensation cost based on the fair value at the grant date for its stock options under FAS No. 148, Heartland’s net income would have been reduced to the pro forma amounts indicated below:

	Three Months Ended
(Dollars in thousands, except per share data)	3/31/05		3/31/04
Net income as reported	$	5,264	$	5,066
Pro forma		5,054		4,873
Earnings per share - basic as reported	$	0.32	$	0.33
Pro forma		0.31		0.32
Earnings per share - diluted as reported	$	0.32	$	0.33
Pro forma		0.30		0.32

EFFECT OF NEW FINANCIAL ACCOUNTING DEVELOPMENTS

In March 2005, the U.S. Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 107,Share-Based Payment, which expressed views of the SEC staff regarding the application of Statement No. 123 (revised 2004) (123(R)),Share-Based Payment, issued by the Financial Accounting Standards Board (FASB).  In April 2005, the SEC issued release No. 33-8568,Amendment to Rule 4-01(a)of Regulation S-X Regarding the Compliance Date for Statement 123(R).  Among other things, SAB 107 and release No. 33-8568 provided interpretive guidance related to the interaction between Statement 123(R) and certain SEC rules and regulations, provided the SEC staff's views regarding the valuation of share-based payment arrangements for public companies and changed the required adoption date of the standard.  Statement 123(R) is effective for fiscal years beginning after December 15, 2005.  As required, effective January 1, 2006, Heartland plans to adopt Statement 123(R) using the "modified prospective" transition method.

NOTE 2: CORE DEPOSIT PREMIUM AND OTHER INTANGIBLE ASSETS

The gross carrying amount of intangible assets and the associated accumulated amortization, in thousands, at March 31, 2005, and December 31, 2004, are presented in the table below:

	March 31, 2005				December 31, 2004
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Intangible assets:
Core deposit intangibles	$	9,217	$	3,461	$	9,217	$	3,205
Mortgage servicing rights		4,330		1,115		4,257		1,005
Customer relationship intangible		917		33		917		19
Total	$	14,464	$	4,609	$	14,391	$	4,229
Unamortized intangible assets			$	9,855			$	10,162

Projections of amortization expense for mortgage servicing rights are based on existing asset balances and the existing interest rate environment as of March 31, 2005. What Heartland actually experiences may be significantly different depending upon changes in mortgage interest rates and market conditions. The valuation allowance on mortgage servicing rights was $41 thousand at March 31, 2005, and $39 thousand at December 31, 2004.

The following table shows the estimated future amortization expense for amortized intangible assets, in thousands:

	Core Deposit Intangibles		Mortgage Servicing Rights		Customer Relationship Intangible		Total
Nine months ended December 31, 2005	$	719	$	904	$	42	$	1,665
Year ended December 31,
2006		856		660		54		1,570
2007		787		550		53		1,390
2008		787		440		51		1,278
2009		704		330		50		1,084
2010		435		220		49		704

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SAFE HARBOR STATEMENT

This report contains, and future oral and written statements of Heartland and its management may contain, forward-looking statements, within the meaning of such term in the Private Securities Litigation Reform Act of 1995, with respect to the financial condition, results of operations, plans, objectives, future performance and business of Heartland. Forward-looking statements, which may be based upon beliefs, expectations and assumptions of Heartland’s management and on information currently available to management, are generally identifiable by the use of words such as "believe", "expect", "anticipate", "plan", "intend", "estimate", "may", "will", "would", "could", "should" or other similar expressions. Additionally, all statements in this document, including forward-looking statements, speak only as of the date they are made, and Heartland undertakes no obligation to update any statement in light of new information or future events.

Heartland’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations and future prospects of Heartland and its subsidiaries include, but are not limited to, the following:

·   The strength of the United States economy in general and the strength of the local economies in which Heartland conducts its operations which may be less favorable than expected and may result in, among other things, a deterioration in the credit quality and value of Heartland’s assets.

·   The economic impact of past and any future terrorist threats and attacks, acts of war or threats thereof, and the response of the United States to any such threats and attacks.

·   The effects of, and changes in, federal, state and local laws, regulations and policies affecting banking, securities, insurance and monetary and financial matters.

·   The effects of changes in interest rates (including the effects of changes in the rate of prepayments of Heartland’s assets) and the policies of the Board of Governors of the Federal Reserve System.

·   The ability of Heartland to compete with other financial institutions as effectively as Heartland currently intends due to increases in competitive pressures in the financial services sector.

·   The inability of Heartland to obtain new customers and to retain existing customers.

·   The timely development and acceptance of products and services, including products and services offered through alternative delivery channels such as the Internet.

·   Technological changes implemented by Heartland and by other parties, including third party vendors, which may be more difficult or more expensive than anticipated or which may have unforeseen consequences to Heartland and its customers.

·   The ability of Heartland to develop and maintain secure and reliable electronic systems.

·   The ability of Heartland to retain key executives and employees and the difficulty that Heartland may experience in replacing key executives and employees in an effective manner.

·   Consumer spending and saving habits which may change in a manner that affects Heartland’s business adversely.

·   Business combinations and the integration of acquired businesses may be more difficult or expensive than expected.

·   The costs, effects and outcomes of existing or future litigation.

·   Changes in accounting policies and practices, as may be adopted by state and federal regulatory agencies and the Financial Accounting Standards Board.

·   The ability of Heartland to manage the risks associated with the foregoing as well as anticipated.

These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Additional information concerning Heartland and its business, including other factors that could materially affect Heartland’s financial results, is included in Heartland’s filings with the Securities and Exchange Commission.

GENERAL

Heartland’s results of operations depend primarily on net interest income, which is the difference between interest income from interest earning assets and interest expense on interest bearing liabilities. Noninterest income, which includes service charges, fees and gains on loans, rental income on operating leases and trust income, also affects Heartland’s results of operations. Heartland’s principal operating expenses, aside from interest expense, consist of compensation and employee benefits, occupancy and equipment costs, depreciation on equipment under operating leases and provision for loan and lease losses.

Net income for the first quarter ended March 31, 2005, was $5.3 million, or $0.32 per diluted share, compared to net income of $5.1 million, or $0.33 per diluted share, during the first quarter of 2004. Return on average equity was 12.06% and return on average assets was 0.81% for the first quarter of 2005, compared to 14.26% and 1.02%, respectively, for the same quarter in 2004. The first quarter 2004 earnings included securities gains of $1.5 million. Exclusive of securities gains, first-quarter 2005 pre-tax income increased $1.9 million or 34% over the first quarter 2004 pre-tax income.

A major contributing factor to the improved earnings for the first quarter of 2005 compared to the first quarter of 2004 was the acquisition of Rocky Mountain Bank. Since this acquisition was completed on June 1, 2004, its earnings were not included in the first quarter 2004 results. Rocky Mountain Bank’s contribution to net income during the first quarter of 2005 was $457 thousand.

We were able to maintain our net interest margin as a percentage of average earning assets near the levels of the fourth quarter of 2004 even as earning assets grew more slowly over the same time period. Typically, growth during the first quarter of the year is slower from a seasonal perspective. Our net interest income simulations suggest that Heartland’s balance sheet is well protected from near term exposure to both rising and falling rate scenarios.

Contributing to the improved earnings during the first quarter of 2005 was the $5.2 million or 31% growth in net interest income, due primarily to growth in earning assets. Average earning assets went from $1.78 billion during the first quarter of 2004 to $2.33 billion during the same quarter in 2005, a change of $546.6 million or 31%. Rocky Mountain Bank’s total average earning assets during the first quarter of 2005 were $325.2 million or 59% of this change. Noninterest income remained flat at $9.7 million. Exclusive of $1.5 million securities gains, noninterest income increased $1.5 million or 19% during the first quarter of 2005 compared to the same quarter in 2004. The two categories contributing to this increase were service charges and fees and trust fees. Noninterest expense increased $4.7 million or 26%, reflecting increased costs related to the acquisitions of Rocky Mountain Bank and the Wealth Management Group of Colonial Trust Company. Additionally, Arizona Bank & Trust opened a second branch in May 2004. Total full-time equivalent employees increased to 859 at quarter-end 2005 from 677 at quarter-end 2004. Of that increase, 123 are full-time equivalent employees at Rocky Mountain Bank and 13 are full-time equivalent employees of the acquired trust operations in Arizona.

The acquisition of Rocky Mountain Bank will continue to contribute to improved earnings as full integration into the Heartland community banking model proceeds during the second and third quarters of 2005. Conversion to our mainframe software was completed this April, providing Rocky Mountain Bank the opportunity to offer enhanced products and services to its customer base. Costs associated with the full integration have been somewhat of a drag on earnings and should begin to diminish as the year proceeds.

At March 31, 2005, total assets remained steady at $2.63 billion when compared to total assets at year-end 2004. Total loans and leases were $1.78 billion at March 31, 2005, an increase of $10.3 million since year-end 2004. Loan demand tapered off during the first quarter of 2005, but management is optimistic that it will pick up during the remaining quarters of 2005. Total deposits at March 31, 2005, were $2.0 billion, an increase of $6.7 million since year-end 2004. Demand deposits experienced a decline of $8.5 million, in large part, due to normal seasonal fluctuations that many banks experience during the first quarter of the year. The time deposits category did experience an increase of $15.2 million during the quarter. Of particular note is that $15.8 million of brokered deposits that matured during the quarter were replaced with time deposits from the local markets.

CRITICAL ACCOUNTING POLICIES

The process utilized by Heartland to estimate the adequacy of the allowance for loan and lease losses is considered a critical accounting practice for Heartland. The allowance for loan and lease losses represents management’s estimate of identified and unidentified probable losses in the existing loan portfolio. Thus, the accuracy of this estimate could have a material impact on Heartland’s earnings. The adequacy of the allowance for loan and lease losses is determined using factors that include the overall composition of the loan portfolio, general economic conditions, types of loans, loan collateral values, past loss experience, loan delinquencies, substandard credits, and doubtful credits. The adequacy of the allowance for loan and lease losses is monitored on an ongoing basis by the loan review staff, senior management and the banks’ boards of directors. Factors considered by the allowance committee included the following:

·   Heartland has continued to experience growth in more- complex commercial loans as compared to relatively lower-risk residential real estate loans.

·   Heartland has entered new markets in which it had little or no previous lending experience.

There can be no assurances that the allowance for loan and lease losses will be adequate to cover all losses, but management believes that the allowance for loan and lease losses was adequate at March 31, 2005.While management uses available information to provide for loan and lease losses, the ultimate collectibility of a substantial portion of the loan portfolio and the need for future additions to the allowance will be based on changes in economic conditions. Even though there have been various signs of emerging strength in the economy, it is not certain that this strength will be sustainable. Should the economic climate deteriorate, borrowers may experience difficulty, and the level of nonperforming loans, charge-offs, and delinquencies could rise and require further increases in the provision for loan and lease losses. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan and lease losses carried by the Heartland subsidiaries. Such agencies may require Heartland to make additional provisions to the allowance based upon their judgment about information available to them at the time of their examinations.

NET INTEREST INCOME

Net interest margin, expressed as a percentage of average earning assets, was 3.97% during the first quarter of 2005 compared to 3.94% for the first quarter of 2004 and 3.99% for the fourth quarter of 2004. Net interest income totaled $22.0 million during the first quarter of 2005, an increase of $5.2 million or 31% from the $16.8 million recorded during the first quarter of 2004. Contributing to this increase was the $546.6 million or 31% growth in average earning assets, of which $221.4 million or 13% resulted from internal growth and $325.2 million or 18% from the acquisition of Rocky Mountain Bank. Additionally, the early redemption of all $25.0 million of our 9.60% trust preferred securities on September 30, 2004, contributed to the improvement in net interest margin. Rocky Mountain Bank’s net interest income during the first quarter of 2005 was $3.5 million. Another component that can have a significant impact on Heartland’s net interest margin is the premium amortization of our mortgage-backed securities portfolio, which fluctuates as the prepayment activity picks up or slows down. The adjustment for prepayment activity resulted in additional interest income of approximately $9 thousand during the first quarter of 2005 and $900 thousand during the first quarter of 2004.

Interest income, on a tax-equivalent basis, in the first quarter of 2005 increased $8.7 million or 32% when compared to the first quarter of 2004. Rocky Mountain Bank’s portion of the interest income during 2005 was $5.0 million. Exclusive of Rocky Mountain Bank, interest income increased $3.7 million or 14%, primarily as a result of the internal growth in earning assets.

Interest expense for the first quarter of 2005 increased $3.3 million or 35% when compared to the first quarter of 2004. Rocky Mountain Bank’s portion of the interest expense during 2005 was $1.4 million. Exclusive of Rocky Mountain Bank, interest expense increased $1.9 million or 20%, primarily as a result of growth in interest-bearing deposit accounts as well as the rising rate environment. The federal funds rate has increased from 1.00% during the first quarter of 2004 to 2.75% during the first quarter of 2005. Rates on Heartland’s deposit accounts do not immediately reprice as a result of increases in the federal funds rate, but continual increases in the federal funds rate, as experienced during the last half of 2004 and early in 2005, does place pressure on the rates paid on these products to maintain existing balances.

Heartland manages its balance sheet to minimize the effect a change in interest rates has on its net interest margin.

During 2005, Heartland expects to continue improving both its earning asset and funding mix through targeted organic growth strategies, which we believe will result in additional net interest income.Our net interest income simulations suggest that Heartland’s balance sheet is well protected from near term exposure to both rising and falling rate scenarios.

The table below sets forth certain information relating to Heartland’s average consolidated balance sheets and reflects the yield on average earnings asserts and the cost of average interest bearing liabilities for the quarters indicated. Dividing income or expense by the average balance of assets or liabilities derives such yield and costs. Average balances are derived from daily balances. Nonaccrual loans and loans held for sale are included in each respective loan category.

ANALYSIS OF AVERAGE BALANCES, TAX EQUIVALENT YIELDS AND RATES1 For the quarters ended March 31, 2005 and 2004 (Dollars in thousands)
	2005							2004
	Average Balance			Interest		Rate		Average Balance			Interest		Rate
EARNING ASSETS
Securities:
Taxable	$	416,740		$	3,531	3.44	%	$	352,623		$	3,608	4.12	%
Nontaxable1		116,890			2,039	7.07			86,707			1,578	7.32
Total securities		533,630			5,570	4.23			439,330			5,186	4.75
Interest bearing deposits		6,973			67	3.90			5,045			44	3.51
Federal funds sold		7,859			47	2.43			2,039			5	0.99
Loans and leases:
Commercial and commercial real estate1		1,177,548			17,992	6.20			885,276			12,834	5.83
Residential mortgage		221,207			3,433	6.29			154,165			2,268	5.92
Agricultural and agricultural real estate1		220,484			3,641	6.70			167,420			2,725	6.55
Consumer		169,922			3,544	8.46			134,224			2,842	8.52
Direct financing leases, net		16,390			227	5.62			13,412			209	6.27
Fees on loans		-			1,213	-			-			938	-
Less: allowance for loan and lease losses		(25,343	)		-	-			(18,857	)		-	-
Net loans and leases		1,780,208			30,050	6.85			1,335,640			21,816	6.57
Total earning assets		2,328,670			35,734	6.22			1,782,054			27,051	6.11
NONEARNING ASSETS		294,679			-	-			222,362			-	-
TOTAL ASSETS	$	2,623,349		$	35,734	5.52	%	$	2,004,416		$	27,051	5.43	%
INTEREST BEARING LIABILITIES
Interest bearing deposits
Savings	$	750,706		$	2,040	1.10	%	$	568,624		$	1,167	0.83
Time, $100,000 and over		166,486			1,187	2.89			136,796			848	2.49
Other time deposits		745,458			5,955	3.24			542,677			4,554	3.38
Short-term borrowings		229,261			1,264	2.24			169,367			597	1.42
Other borrowings		202,617			2,506	5.02			183,510			2,434	5.33
Total interest bearing liabilities		2,094,528			12,952	2.51			1,600,974			9,600	2.41
NONINTEREST BEARING LIABILITIES
Noninterest bearing deposits		315,307			-	-			226,380			-	-
Accrued interest and other liabilities		36,439			-	-			34,165			-	-
Total noninterest bearing liabilities		351,746			-	-			260,545			-	-
STOCKHOLDERS’ EQUITY		177,075			-	-			142,897			-	-
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	2,623,349		$	12,952	2.00	%	$	2,004,416		$	9,600	1.93	%
Net interest income1				$	22,782						$	17,451
Net interest income to total earning assets1						3.97	%						3.94	%
Interest bearing liabilities to earning assets		89.95	%						89.84	%
1Tax equivalent basis is calculated using an effective tax rate of 35%.

PROVISION FOR LOAN AND LEASE LOSSES

The allowance for loan and lease losses is established through a provision charged to expense to provide, in Heartland’s opinion, an adequate allowance for loan and lease losses. The $1.4 million provision for loan losses made during the first quarter of 2005 was consistent with the $1.4 million made during the same quarter in 2004.The adequacy of the allowance for loan and lease losses is determined by management using factors that include the overall composition of the loan portfolio, general economic conditions, types of loans, loan collateral values, past loss experience, loan delinquencies, substandard credits, and doubtful credits. A weak economy will inevitably result in increased problem loans, but Heartland expects the problems to be manageable and of a lesser scope for Heartland than for the industry as a whole. For additional details on the specific factors considered, refer to the critical accounting policies and allowance for loan and lease losses sections of this report.

NONINTEREST INCOME

	Three Months Ended
	March 31, 2005			March 31, 2004			Change			% Change
NONINTEREST INCOME:
Service charges and fees	$	2,707		$	2,127		$	580			27	%
Trust fees		1,595			1,020			575			56
Brokerage commissions		223			278			(55	)		(20	)
Insurance commissions		137			224			(87	)		(39	)
Securities gains, net		53			1,540			(1,487	)		(97	)
Gain on trading account securities		18			85			(67	)		(79	)
Rental income on operating leases		3,571			3,462			109			3
Gain on sale of loans		712			527			185			35
Valuation adjustment on mortgage servicing rights		(2	)		(73	)		71			97
Other noninterest income		701			531			170			32
TOTAL NONINTEREST INCOME	$	9,715		$	9,721		$	(6	)		(0	)%

Noninterest income totaled $9.7 million during the first quarters of both 2005 and 2004. Exclusive of securities gains, noninterest income increased $1.5 million or 18% during the first quarter of 2005 compared to the same quarter in 2004. The two categories contributing to this increase were service charges and fees and trust fees.

Service charges and fees increased $580 thousand or 27% during the first quarter of 2005, of which $292 thousand was due to the addition of Rocky Mountain Bank to the Heartland family of bank subsidiaries. Included in this category are service charges on deposit products, which increased $181 thousand or 15% as a result of the activity at Rocky Mountain Bank. Also included in this category are service fees collected on loans Heartland sold with servicing retained. These servicing fees increased $149 thousand or 27% for the quarters under comparison with no significant impact resulting from the Rocky Mountain Bank acquisition. Fees generated by HTLF Capital Corp., our investment banking subsidiary formed in April of 2003, in the amount of $108 thousand during the first quarter of 2005 compared to $34 thousand during the first quarter of 2004.

Trust fees improved during the first quarter of 2005 by $575,000 or 56%, primarily as a result of the $379,000 additional fees generated by the accounts acquired from the Wealth Management Group of Colonial Trust Company on August 31, 2004.

During the first quarter of 2005, securities gains were $53 thousand compared to $1.5 million during the first quarter of 2004. Nearly $1.0 million of the gains recorded during the first quarter of 2004 were due to the active management of our bond portfolio. As the yield curve steepened during the first quarter of 2004, agency securities nearing maturity were sold at a gain and replaced with a combination of like-term and longer-term agency securities that provided enhanced yields.

Valuation adjustments on mortgage servicing rights experienced increases in the valuation allowance of $2 thousand during the first quarter of 2005 compared to $73 thousand during the same quarter of 2004. Heartland utilizes the services of an independent third-party to perform a valuation analysis of its servicing portfolio each quarter. At March 31, 2005, the remaining valuation allowance totaled $41 thousand.

NONINTEREST EXPENSE

	Three Months Ended
	March 31, 2005		March 31, 2004		Change		% Change
NONINTEREST EXPENSE:
Salaries and employee benefits	$	11,182	$	8,821	$	2,361		27	%
Occupancy		1,626		1,063		563		53
Furniture and equipment		1,367		1,127		240		21
Depreciation on equipment under operating leases		2,928		2,861		67		2
Outside services		1,928		1,501		427		28
FDIC deposit insurance assessment		70		51		19		37
Advertising		809		539		270		50
Other intangibles amortization		270		88		182		207
Other noninterest expenses		2,571		1,965		606		31
TOTAL NONINTEREST EXPENSE	$	22,751	$	18,016	$	4,735		26	%

For the first quarter of 2005, noninterest expense increased $4.7 million or 26%, reflecting increased costs related to the acquisitions of Rocky Mountain Bank and the Wealth Management Group of Colonial Trust Company. Additionally, Arizona Bank & Trust opened a second branch in May 2004 in Chandler, Arizona. Noninterest expense at Rocky Mountain Bank totaled $3.3 million during the first quarter of 2005.

Salaries and employee benefits, the largest component of noninterest expense, increased $2.4 million or 27% for the quarters under comparison. This category made up nearly 50% of the total increase in noninterest expense. Salaries and employee benefits at Rocky Mountain Bank totaled $1.5 million during the first quarter of 2005. In addition to the acquisitions of Rocky Mountain Bank and the trust operations in Arizona, the increase in salaries and employee benefits expense was attributable to additional staffing at the holding company to provide support services to the growing number of bank subsidiaries and the opening of Arizona Bank & Trust’s second branch location in Chandler, Arizona. Additionally, merit increases for all salaried employees are made on January 1 of each year. Total full-time equivalent employees increased to 859 at quarter-end 2005 from 677 at quarter-end 2004. Of that increase, 123 were full-time equivalent employees at Rocky Mountain Bank and 13 were full-time equivalent employees of the acquired trust operations in Arizona.

Occupancy and furniture and equipment expense, in aggregate, increased $803 thousand or 37% for the quarters under comparison. These increases were primarily the result of the expansion efforts and the completion of Heartland’s operations center in Dubuque, Iowa last summer. Rocky Mountain Bank incurred $462 thousand of these expenses during the first quarter of 2005.

Fees for outside services increased by $427 thousand or 28% for the quarters under comparison. Rocky Mountain Bank recorded fees for outside services of $435 thousand during the first quarter of 2005.

Other noninterest expenses increased $606 thousand or 31% for the quarters under comparison with $334 thousand attributable to other noninterest expenses recorded at Rocky Mountain Bank during the first quarter of 2005.

INCOME TAX EXPENSE

Income tax expense for the first quarter of 2005 increased $217 thousand or 10% when compared to the same period in 2004. Heartland’s effective tax rate was 30.80% for the first quarter of 2005 compared to 29.56% during the first quarter of 2004. The lower effective rate during the first quarter of 2004 was the result of anticipated federal historic rehabilitation tax credits and low-income housing tax credits totaling $840 thousand for the year. During 2005, these credits are anticipated to total $436 thousand for the year. Tax-exempt interest income went from 15.71% of pre-tax income during the first quarter of 2004 to 18.94% during the same quarter of 2005. The tax-equivalent adjustment for this tax-exempt interest income was $776 thousand during the first quarter of 2005 compared to $608 thousand during the same quarter in 2004.

FINANCIAL CONDITION

LOANS AND ALLOWANCE FOR LOAN AND LEASE LOSSES

Total loans and leases were $1.78 billion at March 31, 2005, an increase of $10.3 million since year-end 2004. Loan demand tapered off during the first quarter of 2005, but management is optimistic that it will pick up during the remaining quarters of 2005. Our lending officers continue to build their pipelines and the addition of new branches during the remainder of this year lead us to believe we should achieve $200 million in loan growth for the year. All the loan categories, except for commercial and commercial real estate, experienced some growth during the first quarter of 2005.

The commercial and commercial real estate loan portfolio decreased $6.1 million or 1% during the first three months of 2005. Unscheduled paydowns were received on a few large loans at Wisconsin Community Bank and Rocky Mountain Bank. Partially offsetting a portion of these paydowns was growth at Dubuque Bank and Trust Company, Galena State Bank and Trust Company and Arizona Bank & Trust.

Agricultural and agricultural real estate loans grew $5.7 million or 3% during the first three months of 2005. Dubuque Bank and Trust Company, Heartland’s flagship bank in Dubuque, Iowa, was responsible for $5.3 million of this growth as farmers geared up for the planting season.

The residential mortgage loan portfolio experienced an increase of $3.4 million or 2%. A majority of this growth occurred at Dubuque Bank and Trust Company, New Mexico Bank & Trust and Arizona Bank & Trust. We do not anticipate continued growth in our residential mortgage loan portfolio, as many of the loans made, especially the 15- and 30-year fixed-rate loans, are usually sold into the secondary market. Servicing is retained on a portion of these loans so that the Heartland bank subsidiaries have an opportunity to continue providing their customers with the excellent service they expect.

Consumer loans increased $7.4 million or 4% during the first three months of 2005, primarily in home equity lines of credit at all of the Heartland bank subsidiaries except First Community Bank. This product line was enhanced to build new customer relationships. Additionally, Citizens Finance Co.’s recent opening of an office in Crystal Lake, Illinois, contributed to the growth during the first quarter.

The table below presents the composition of the loan portfolio as of March 31, 2005, and December 31, 2004.

LOAN PORTFOLIO (Dollars in thousands)
	March 31, 2005							December 31, 2004
	Amount			Percent			Amount			Percent
Commercial and commercial real estate	$	1,155,975			64.71	%	$	1,162,103			65.43	%
Residential mortgage		216,247			12.11			212,842			11.98
Agricultural and agricultural real estate		223,528			12.51			217,860			12.26
Consumer		174,488			9.77			167,109			9.41
Lease financing, net		16,139			0.90			16,284			0.92
Gross loans and leases		1,786,377			100.00	%		1,776,198			100.00	%
Unearned discount		(1,826	)					(1,920	)
Deferred loan fees		(1,295	)					(1,324	)
Total loans and leases		1,783,256						1,772,954
Allowance for loan and lease losses		(26,011	)					(24,973	)
Loans and leases, net	$	1,757,245					$	1,747,981

Loans held for sale also increased $9.5 million or 30% during the first quarter of 2005. This increase was primarily the result of additional variable-rate commercial and commercial real estate loans at Wisconsin Community Bank structured to qualify under the United States Small Business Administration’s Certified Development Company (504) Loan Program, which Heartland may elect to sell.

The process utilized by Heartland to estimate the adequacy of the allowance for loan and lease losses is considered a critical accounting practice for Heartland.The allowance for loan and lease losses represents management’s estimate of identified and unidentified probable losses in the existing loan portfolio. For additional details on the specific factors considered, refer to the critical accounting policies section of this report. 

The allowance for loan and lease losses increased by $1.0 million or 4% during the first three months of 2005. The allowance for loan and lease losses at March 31, 2005, was 1.46% of loans and 195% of nonperforming loans, compared to 1.41% of loans and 252% of nonperforming loans at December 31, 2004. During the first quarter of 2005, a charge-off was recorded on a fraudulent loan at Wisconsin Community Bank. A claim was immediately filed with Heartland’s insurance carrier and the anticipated recovery was recorded. If the claim is denied, the net after-tax impact to Heartland’s net income would be a loss of $274 thousand.

Nonperforming loans increased to $13.4 million or 0.75% of total loans and leases compared to $9.9 million or 0.56% of total loans and leases at December 31, 2004. This increase was due primarily to a few large loans, one at Dubuque Bank and Trust Company, two at New Mexico Bank & Trust and one at Rocky Mountain Bank. Because of the net realizable value of collateral, guarantees and other factors, anticipated losses on these loans are not expected to be significant and have been specifically provided for in the allowance for loan and lease losses. Eight loans make up $8.7 million or 65% of total nonperforming loans at March 31, 2005, two of which a resolution is expected by the end of the second quarter of this year.

The table below presents the changes in the allowance for loan and lease losses during the periods indicated:

ANALYSIS OF ALLOWANCE FOR LOAN AND LEASE LOSSES (Dollars in thousands)
	Three Months Ended March 31,
	2005			2004
Balance at beginning of period	$	24,973		$	18,490
Provision for loan and lease losses from continuing operations		1,364			1,356
Recoveries on loans and leases previously charged off		636			405
Loans and leases charged off		(962	)		(1,080	)
Balance at end of period	$	26,011		$	19,171
Net charge offs to average loans and leases		0.02	%		0.05	%

The table below presents the amounts of nonperforming loans and leases and other nonperforming assets on the dates indicated:

NONPERFORMING ASSETS (Dollars in thousands)
	As of March 31,						As of December 31,
	2005			2004			2004			2003
Nonaccrual loans and leases	$	12,825		$	4,909		$	9,837		$	5,092
Loan and leases contractually past due 90 days      or more		538			471			88			458
Total nonperforming loans and leases		13,363			5,380			9,925			5,550
Other real estate		423			503			425			599
Other repossessed assets		196			214			313			285
Total nonperforming assets	$	13,982		$	6,097		$	10,663		$	6,434
Nonperforming loans and leases to total loans      and leases		0.75	%		0.40	%		0.56	%		0.42	%
Nonperforming assets to total assets		0.53	%		0.30	%		0.41	%		0.32	%

SECURITIES

The composition of Heartland's securities portfolio is managed to maximize the return on the portfolio while considering the impact it has on Heartland’s asset/liability position and liquidity needs. Securities represented 20% of total assets at March 31, 2005, and 21% of total assets at December 31, 2004. During the first quarter of 2005, a portion of the proceeds from securities sales, paydowns and maturities was retained in short-term investments in anticipation of loan growth in the following quarters.

The table below presents the composition of the available for sale securities portfolio by major category as of March 31, 2005, and December 31, 2004.

AVAILABLE FOR SALE SECURITIES PORTFOLIO (Dollars in thousands)
	March 31, 2005						December 31, 2004
	Amount		Percent			Amount		Percent
U.S. government corporations and agencies		222,220		42.42			219,670		39.74
Mortgage-backed securities		152,436		29.09			164,580		29.78
States and political subdivisions		121,705		23.23			123,624		22.36
Other securities		27,548		5.26			44,889		8.12
Total available for sale securities	$	523,909		100.00	%	$	552,763		100.00	%

DEPOSITS AND BORROWED FUNDS

Total deposits at March 31, 2005, were $2.0 billion, an increase of $6.7 million since year-end 2004. The only banks to experience growth in all deposit categories were New Mexico Bank & Trust and First Community Bank. Demand deposits experienced a decline, in large part, due to normal seasonal fluctuations that many banks experience during the first quarter of the year. The Company’s two newerde novo banks, New Mexico Bank & Trust and Arizona Bank & Trust, were able to grow demand deposits during this typically slow quarter. The time deposits category experienced an increase of $15.2 million during the quarter. Except for Wisconsin Community Bank, all of the Company’s subsidiary banks were able to grow deposits in this category. Of particular note is that $15.8 million of brokered deposits that matured during the quarter were replaced with time deposits from the local markets.

Short-term borrowings generally include federal funds purchased, treasury tax and loan note options, securities sold under agreement to repurchase and short-term Federal Home Loan Bank ("FHLB") advances. These funding alternatives are utilized in varying degrees depending on their pricing and availability. Over the three-month period ended March 31, 2005, the amount of short-term borrowings decreased $10.4 million or 4%.

All of the bank subsidiaries provide repurchase agreements to their customers as a cash management tool, sweeping excess funds from demand deposit accounts into these agreements. This source of funding does not increase the bank’s reserve requirements, nor does it create an expense relating to FDIC premiums on deposits. Although the aggregate balance of repurchase agreements is subject to variation, the account relationships represented by these balances are principally local. Repurchase agreement balances declined $9.0 million or 5% since year-end 2004.

Also included in short-term borrowings are Heartland’s credit lines with unaffiliated banks. Under these revolving credit lines, Heartland may borrow up to $70.0 million. At March 31, 2005, a total of $51.7 million was outstanding on these credit lines compared to $43.0 million on December 31, 2004. Additional borrowings were needed during the first quarter of 2005 to provide funding for the growth at Citizens Finance Co., purchase of additional assets for operating leases at ULTEA and treasury stock purchases.

Other borrowings include all debt arrangements Heartland and its subsidiaries have entered into with original maturities that extend beyond one year. These borrowings were $215.4 million on March 31, 2005, compared to $196.2 million on December 31, 2004. Balances outstanding on trust preferred capital securities issued by Heartland are included in total other borrowings. The following is a schedule of Heartland’s trust preferred offerings outstanding as of March 31, 2005:

Amount Issued	Issuance Date	Interest Rate	Maturity Date	Callable Date
$                               5,000,000	08/07/00	10.60%	09/07/30	09/07/10
8,000,000	12/18/01	3.60% over libor	12/18/31	12/18/06
5,000,000	06/27/02	3.65% over libor	06/30/32	06/30/07
20,000,000	10/10/03	8.25%	10/10/33	10/10/08
25,000,000	3/17/04	2.75% over libor	3/17/34	3/17/09
$                             63,000,000

Also in other borrowings are the bank subsidiaries’ borrowings from the FHLB. All of the Heartland banks own stock in the FHLB of Chicago, Dallas, Des Moines or San Francisco, enabling them to borrow funds from their respective FHLB for short- or long-term purposes under a variety of programs. Total FHLB borrowings at March 31, 2005, had increased to $143.7 million from $123.5 million at December 31, 2004, $18.0 million of which was fixed-rate advances for an original term of ten years. A portion of these advances were obtained to replace the $11.5 million in FHLB advances coming due in the following three months. Total FHLB borrowings at March 31, 2005, had an average rate of 3.95% and an average maturity of 3.53 years.

CAPITAL RESOURCES

Bank regulatory agencies have adopted capital standards by which all bank holding companies will be evaluated. Under the risk-based method of measurement, the resulting ratio is dependent upon not only the level of capital and assets, but also the composition of assets and capital and the amount of off-balance sheet commitments. Heartland and itsbank subsidiaries have been, and will continue to be, managed so they meet the well-capitalized requirements under the regulatory framework for prompt corrective action. To be categorized as well capitalized under the regulatory framework, bank holding companies and banks must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios of 10%, 6% and 4%, respectively. The most recent notification from the FDIC categorized Heartland and each of its bank subsidiaries as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed each institution’s category.

Heartland's capital ratios were as follows for the dates indicated:

CAPITAL RATIOS (Dollars in thousands)
	March 31, 2005						December 31, 2004
	Amount		Ratio			Amount		Ratio
Risk-Based Capital Ratios1
Tier 1 capital	$	193,718		9.40	%	$	187,424		9.23	%
Tier 1 capital minimum requirement		82,390		4.00	%		81,251		4.00	%
Excess	$	111,328		5.40	%	$	106,173		5.23	%
Total capital	$	225,407		10.94	%	$	219,839		10.82	%
Total capital minimum requirement		164,780		8.00	%		162,503		8.00	%
Excess	$	60,627		2.94	%	$	57,336		2.82	%
Total risk-adjusted assets	$	2,059,750				$	2,031,286
Leverage Capital Ratios2
Tier 1 capital	$	193,718		7.51	%	$	187,424		7.26	%
Tier 1 capital minimum requirement3		103,240		4.00	%		103,225		4.00	%
Excess	$	90,478		3.51	%	$	84,199		3.26	%
Average adjusted assets (less goodwill and other      intangible assets)	$	2,580,988				$	2,580,626

(1) Based on the risk-based capital guidelines of the Federal Reserve, a bank holding company is required to maintain a Tier 1 capital to risk-adjusted assets ratio of 4.00% and total capital to risk-adjusted assets ratio of 8.00%.

(2) The leverage ratio is defined as the ratio of Tier 1 capital to average adjusted assets.

(3) Management of Heartland has established a minimum target leverage ratio of 4.00%. Based on Federal Reserve guidelines, a bank holding company generally is required to maintain a leverage ratio of 3.00% plus additional capital of at least 100 basis points.

Commitments for capital expenditures are an important factor in evaluating capital adequacy. In February of 2003, Heartland entered into an agreement with a group of Arizona business leaders to establish a new bank in Mesa.The new bank began operations on August 18, 2003. Heartland’s investment in Arizona Bank & Trust was $12.0 million, which currently reflects an ownership percentage of 86%. All minority stockholders have entered into a stock transfer agreement that imposes certain restrictions on the investor's sale, transfer or other disposition of their shares and requires Heartland to repurchase the shares from the investor in 2008.

Heartland had an incentive compensation agreement with certain employees of one of the bank subsidiaries, none of whom is an executive officer of Heartland, which required a total payment of $3.5 million to be made no later than February 29, 2004, to those who remained employed with the subsidiary on December 31, 2003. One-third of the payment was made in cash in both January 2004 and January 2005. The remaining one-third in stock options on Heartland’s common stock will become exercisable in January 2006. The obligation was accrued over the performance period.

During 2005, we plan to continue the expansion of our existing banks. In the West, we plan to add three branch locations in the Albuquerque/Santa Fe corridor under the New Mexico Bank & Trust umbrella, two branch locations in the Eastern Valley of the Phoenix area under the Arizona Bank & Trust umbrella and two branch locations in the state of Montana under the Rocky Mountain Bank franchise. Additionally, in the Midwest, we plan to add one branch location in Madison, Wisconsin under the Wisconsin Community Bank franchise and one branch location in the Rockford, Illinois market under the Riverside Community Bank umbrella. The addition of more branches in the West is consistent with our long-range goal to have at least 50% of our assets in this fast growing region of the United States. Currently, our presence in the West comprises 36% of Heartland’s banking assets. Costs related to the construction of these facilities are anticipated to be approximately $17 million in the aggregate. A majority of these projects will not be completed until the last half of the year.

Heartland continues to explore opportunities to expand its umbrella of independent community banks through mergers and acquisitions as well as de novo and branching opportunities. Future expenditures relating to expansion efforts, in addition to those identified above, are not estimable at this time

LIQUIDITY

Liquidity measures the ability of Heartland to meet maturing obligations and its existing commitments, to withstand fluctuations in deposit levels, to fund its operations and to provide for customers' credit needs. The liquidity of Heartland principally depends on cash flows from operating activities, investment in and maturity of assets, changes in balances of deposits and borrowings and its ability to borrow funds in the money or capital markets.

Net cash outflows from investing activities was $1.3 million during the first quarter of 2005, compared to $25.6 million during the same quarter of 2004. The majority of this change was a result of activities within the securities portfolio. As the yield curve steepened during the first quarter of 2004, agency securities nearing maturity were sold and replaced with a combination of like-term and longer-term agency securities that provided enhanced yields.Additionally, management purchased some longer-term municipal securities to take advantage of the unusually steep slope in the yield curve and the spread of the tax-equivalent yield on municipal securities over the yield on agency securities with the same maturities. During the first quarter of 2005, a portion of the proceeds from securities sales, paydowns and maturities was retained in short-term investments in anticipation of loan growth in the following quarters. Slower loan growth during the first three months of 2005 compared to the same three months in 2004 also affected the change in net cash outflows from investment activities.

Net cash provided by financing activities was $13.4 million during the first three month of 2005 compared to $25.2 million during same three months in 2004. The decrease in net cash provided by financing activities during 2005 was primarily a result of the March 17, 2004, issuance of $25.0 million in trust preferred securities. Heartland was not as aggressive in its pricing on time deposits during the first quarter of 2004 when compared to the same period in 2005, as the trust preferred issuance provided excess funding in the short-term. During the first quarter of 2005, there was a net increase in total deposits of $6.7 million compared to a net decrease of $19.3 million during the first quarter of 2004.

Total cash used by operating activities was $2.3 million during the first quarter of 2005 compared to $11.8 million during the same quarter of 2004. The significant change occurred as a result of activity in loans originated for sale.

Management of investing and financing activities, and market conditions, determine the level and the stability of net interest cash flows. Management attempts to mitigate the impact of changes in market interest rates to the extent possible, so that balance sheet growth is the principal determinant of growth in net interest cash flows.

Heartland’s short-term borrowing balances are dependent on commercial cash management and smaller correspondent bank relationships and, as such, will normally fluctuate. Heartland believes these balances, on average, to be stable sources of funds; however, it intends to rely on deposit growth and additional FHLB borrowings in the future.

In the event of short-term liquidity needs, the bank subsidiaries may purchase federal funds from each other or from correspondent banks and may also borrow from the Federal Reserve Bank. Additionally, the subsidiary banks' FHLB memberships give them the ability to borrow funds for short- and long-term purposes under a variety of programs.

At March 31, 2005, Heartland’s revolving credit agreement with third-party banks provided a maximum borrowing capacity of $70.0 million, of which $51.7 million had been borrowed. A portion of these lines provides funding for the operations of Citizens and ULTEA. At March 31, 2005, the borrowings on these lines for Citizens and ULTEA were $13.5 million and $14.9 million, respectively. The revolving credit agreement contains specific covenants which, among other things, limit dividend payments and restrict the sale of assets by Heartland under certain circumstances. Also contained within the agreement are certain financial covenants, including the maintenance by Heartland of a maximum nonperforming assets to total loans ratio, minimum return on average assets ratio and maximum funded debt to total equity capital ratio. In addition, Heartland and each of its bank subsidiaries must remain well capitalized, as defined from time to time by the federal banking regulators. At March 31, 2005, Heartland was in compliance with the covenants contained in the credit agreement.

RECENT REGULATORY DEVELOPMENTS

Effective April 11, 2005, the Board of Governors of the Federal Reserve System amended the risk-based capital standards for bank holding companies to allow the continued inclusion of outstanding and prospective issuances of trust preferred securities in the Tier 1 capital of bank holding companies, subject to stricter standards. The new regulations limit the amount of trust preferred securities (combined with all other restricted core capital elements) that a bank holding company may include as Tier 1 capital to 25% of the sum of all core capital elements, net of goodwill less any associated deferred tax liability. Amounts in excess of the limits described above generally may be included in Tier 2 capital. The regulations also provide a transition period for bank holding companies to conform their capital structures to the revised quantitative limits. These limits will first become applicable to bank holding companies beginning on March 31, 2009.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the risk of loss arising from adverse changes in market prices and rates. Heartland’s market risk is comprised primarily of interest rate risk resulting from its core banking activities of lending and deposit gathering. Interest rate risk measures the impact on earnings from changes in interest rates and the effect on current fair market values of Heartland’s assets, liabilities and off-balance sheet contracts. The objective is to measure this risk and manage the balance sheet to avoid unacceptable potential for economic loss. Management continually develops and applies strategies to mitigate market risk. Exposure to market risk is reviewed on a regular basis by the asset/liability committees at the banks and, on a consolidated basis, by the Heartland board of directors. Management does not believe that Heartland’s primary market risk exposures and how those exposures have been managed to-date in 2005 changed significantly when compared to 2004.

Derivative financial instruments include futures, forwards, interest rate swaps, option contracts and other financial instruments with similar characteristics. Heartland’s use of derivative financial instruments relates to the management of the risk that changes in interest rates will affect its future interest payments. Heartland utilizes an interest rate swap contract to effectively convert a portion of its variable rate interest rate debt to fixed interest rate debt. Under the interest rate swap contract, Heartland agrees to pay an amount equal to a fixed rate of interest times a notional principal amount, and to receive in return an amount equal to a specified variable rate of interest times the same notional principal amount. The notional amounts are not exchanged and payments under the interest rate swap contract are made monthly. Heartland is exposed to credit-related losses in the event of nonperformance by the counterparty to the swap contract, which has been minimized by entering into the contract with a large, stable financial institution. As of March 31, 2005, Heartland had an interest rate swap contract to pay a fixed rate of interest and receive a variable rate of interest on $25.0 million of indebtedness. This contract expires on November 1, 2006. The fair market value of the interest rate swap contract was recorded as a liability in the amount of $229 thousand on March 31, 2005.

ITEM 4. CONTROLS AND PROCEDURES

An evaluation was performed under the supervision and with the participation of Heartland’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of Heartland’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of March 31, 2005. Based on that evaluation, Heartland’s management, including the Chief Executive Officer and Chief Financial Officer, concluded that Heartland’s disclosure controls and procedures were effective. There have been no significant changes in Heartland’s internal controls or in other factors that could significantly affect internal controls. There have been no changes in Heartland’s disclosure controls or internal controls over financial reporting during the quarter ended March 31, 2005, that have materially affected, or are reasonably likely to materially affect, Heartland’s disclosure controls or internal controls over financial reporting.

PART II

ITEM 1. LEGAL PROCEEDINGS

There are no material pending legal proceedings to which Heartland or its subsidiaries is a party other than ordinary routine litigation incidental to their respective businesses. While the ultimate outcome of current legal proceedings cannot be predicted with certainty, it is the opinion of management that the resolution of these legal actions should not have a material effect on Heartland's consolidated financial position or results of operations.

ITEM 2. UNREGISTERED SALES OF ISSUER SECURITIES AND USE OF PROCEEDS

The following table provides information about purchases by Heartland and its affiliated purchasers during the quarter ended March 31, 2005, of equity securities that are registered by Heartland pursuant to Section 12 of the Exchange Act:

Period	(a) Total Number of Shares Purchased	(b) Average Price Paid per Share	(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(1)	(d) Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
01/01/05- 01/31/05	30,198	$20.58	30,198	$3,816,442
02/01/05- 02/28/05	31,599	$20.49	31,599	$3,737,996
03/01/05- 03/31/05	25,900	$19.93	25,900	$3,660,239
Total:	87,697	$20.36	87,697	N/A

(1)   On October 19, 2004, Heartland’s board of directors increased the dollar value of its common stock that management is authorized to acquire and hold as treasury shares from $4.0 million to $5.0 million.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS

Exhibits

31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a).
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a).
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned there unto duly authorized.

HEARTLAND FINANCIAL USA, INC.

(Registrant)

Principal Executive Officer

/s/ Lynn B. Fuller

--------------------

By:  Lynn B. Fuller

President

Principal Financial and Accounting Officer

/s/ John K. Schmidt

--------------------

By: John K. Schmidt

Executive Vice President, Chief Operating Officer and Chief Financial Officer

Dated: May 9, 2005