Heartland Financial USA 10Q 2005 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For quarterly period ended June 30, 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 x No o

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 No o

Indicate the number of shares outstanding of each of the classes of Registrant's common stock as of the latest practicable date: As of August 8, 2005, the Registrant had outstanding 16,414,171 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 (Unaudited) (Dollars in thousands, except per share data)
	June 30, 2005			December 31, 2004
ASSETS
Cash and due from banks	$	75,720		$	68,919
Federal funds sold and other short-term investments		9,291			4,830
Cash and cash equivalents		85,011			73,749
Time deposits in other financial institutions		-			1,178
Securities:
Trading, at fair value		488			521
Available for sale, at fair value (cost of $503,325 at June 30, 2005, and $547,585 at December 31, 2004)		507,497			552,763
Loans held for sale		50,329			32,161
Gross loans and leases:
Loans and leases		1,854,926			1,772,954
Allowance for loan and lease losses		(26,676	)		(24,973	)
Loans and leases, net		1,828,250			1,747,981
Assets under operating leases		41,045			35,188
Premises, furniture and equipment, net		88,440			79,353
Other real estate, net		1,611			425
Goodwill		35,398			35,374
Other intangible assets, net		9,568			10,162
Other assets		64,391			60,200
TOTAL ASSETS	$	2,712,028		$	2,629,055
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Deposits:
Demand	$	329,577		$	323,014
Savings		764,918			750,870
Time		957,918			909,962
Total deposits		2,052,413			1,983,846
Short-term borrowings		231,532			231,475
Other borrowings		211,654			196,193
Accrued expenses and other liabilities		34,183			41,759
TOTAL LIABILITIES		2,529,782			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; issued 16,547,482 shares)		16,547			16,547
Capital surplus		40,329			40,446
Retained earnings		125,841			117,800
Accumulated other comprehensive income (loss)		2,451			2,889
Treasury stock at cost (148,012 shares at June 30, 2005, and 106,424 shares at December 31, 2004, respectively)		(2,922	)		(1,900	)
TOTAL STOCKHOLDERS’ EQUITY		182,246			175,782
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	2,712,028		$	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						Six Months Ended
	June 30, 2005			June 30, 2004			June 30, 2005			June 30, 2004
INTEREST INCOME:
Interest and fees on loans and leases	$	32,596		$	23,897		$	62,584		$	45,657
Interest on securities:
Taxable		3,567			2,698			7,098			6,306
Nontaxable		1,333			1,064			2,658			2,090
Interest on federal funds sold and other short-term investments		57			9			104			14
Interest on interest bearing deposits in other financial institutions		79			46			147			90
TOTAL INTEREST INCOME		37,632			27,714			72,591			54,157
INTEREST EXPENSE:
Interest on deposits		10,282			6,987			19,464			13,556
Interest on short-term borrowings		1,709			699			2,973			1,296
Interest on other borrowings		2,540			2,741			5,046			5,175
TOTAL INTEREST EXPENSE		14,531			10,427			27,483			20,027
NET INTEREST INCOME		23,101			17,287			45,108			34,130
Provision for loan and lease losses		1,636			991			3,000			2,347
NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES		21,465			16,296			42,108			31,783
NONINTEREST INCOME:
Service charges and fees		2,778			2,468			5,467			4,595
Trust fees		1,605			1,121			3,200			2,141
Brokerage commissions		255			350			478			628
Insurance commissions		129			158			266			382
Securities gains (losses), net		(20	)		327			33			1,867
Gain (loss) on trading account securities		(26	)		(10	)		(8	)		75
Rental income on operating leases		3,845			3,461			7,416			6,923
Gain on sale of loans		868			845			1,580			1,372
Valuation adjustment on mortgage servicing rights		(34	)		186			(18	)		113
Other noninterest income		640			682			1,341			1,213
TOTAL NONINTEREST INCOME		10,040			9,588			19,755			19,309
NONINTEREST EXPENSES:
Salaries and employee benefits		11,529			9,270			22,711			18,091
Occupancy		1,534			1,215			3,160			2,278
Furniture and equipment		1,542			1,325			2,909			2,452
Depreciation on equipment under operating leases		3,141			2,869			6,069			5,730
Outside services		1,888			1,471			3,816			2,972
FDIC deposit insurance assessment		69			61			139			112
Advertising		767			637			1,576			1,176
Core deposit premium amortization		237			144			507			232
Other noninterest expenses		2,752			2,220			5,323			4,185
TOTAL NONINTEREST EXPENSES		23,459			19,212			46,210			37,228
INCOME BEFORE INCOME TAXES		8,046			6,672			15,653			13,864
Income taxes		2,640			2,097			4,983			4,223
NET INCOME	$	5,406		$	4,575		$	10,670		$	9,641
EARNINGS PER COMMON SHARE-BASIC	$	0.33		$	0.29		$	0.65		$	0.63
EARNINGS PER COMMON SHARE - DILUTED	$	0.32		$	0.29		$	0.64		$	0.62
CASH DIVIDENDS DECLARED PER COMMON SHARE	$	0.08		$	0.08		$	0.16		$	0.16

See accompanying notes to consolidated financial statements

HEARTLAND FINANCIAL USA, INC. 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							9,641									9,641
Unrealized loss on securities available for sale arising during the period										(7,840	)					(7,840	)
Reclassification adjustment for net security gains realized in net income										(1,867	)					(1,867	)
Unrealized loss on derivatives arising during the period, net of realized losses of $447										620						620
Income taxes										3,014						3,014
Comprehensive income																3,568
Cash dividends declared:
Common, $.16 per share							(2,423	)								(2,423	)
Purchase of 151,023 shares of common stock													(2,762	)		(2,762	)
Issuance of 1,440,404 shares of common stock		1,285		20,727									2,890			24,902
Balance at June 30, 2004	$	16,547	$	40,792		$	109,802		$	(1,279	)	$	(1,654	)	$	164,208

Balance at January 1, 2005	$	16,547	$	40,446		$	117,800		$	2,889		$	(1,900	)	$	175,782
Net income							10,670									10,670
Unrealized loss on securities available for sale arising during the period										(973	)					(973	)
Reclassification adjustment for net security gains realized in net income										(33	)					(33	)
Unrealized gain on derivatives arising during the period, net of realized losses of $169										341						341
Income taxes										227						227
Comprehensive income																10,232
Cash dividends declared:
Common, $.16 per share							(2,629	)								(2,629	)
Purchase of 203,919 shares of common stock													(4,071	)		(4,071	)
Issuance of 162,332 shares of common stock				(359	)								3,049			2,690
Commitments to issue common stock for restricted stock awards				242												242
Balance at June 30, 2005	$	16,547	$	40,329		$	125,841		$	2,451		$	(2,922	)	$	182,246

See accompanying notes to consolidated financial statements.

HEARTLAND FINANCIAL USA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in thousands, except per share data)

	Six Months Ended
	June 30, 2005			June 30, 2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	10,670		$	9,641
Adjustments to reconcile net income to net cash (used) provided by operating activities:
Depreciation and amortization		9,652			8,114
Provision for loan and lease losses		3,000			2,347
Provision for deferred taxes		(1,864	)		1,017
Net amortization of premium on securities		1,524			1,685
Securities gains, net		(33	)		(1,867	)
Decrease in trading account securities		33			969
Loans originated for sale		(126,426	)		(116,454	)
Proceeds on sales of loans		109,838			101,306
Net gain on sales of loans		(1,580	)		(1,372	)
(Increase) decrease in accrued interest receivable		(1,284	)		153
Increase (decrease) in accrued interest payable		534			(68	)
Other, net		(8,712	)		119
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES		(4,648	)		5,590
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the maturity of time deposits		1,178			-
Proceeds from the sale of securities available for sale		18,100			100,968
Proceeds from the maturity of and principal paydowns on securities available for sale		76,822			51,725
Purchase of securities available for sale		(52,104	)		(122,838	)
Net increase in loans and leases		(83,462	)		(85,740	)
Increase in assets under operating leases		(11,926	)		(7,379	)
Capital expenditures		(11,976	)		(13,375	)
Net cash and cash equivalents received in acquisition of subsidiaries, net of cash paid		-			2,171
Proceeds on sale of OREO and other repossessed assets		564			239
NET CASH USED BY INVESTING ACTIVITIES		(62,804	)		(74,229	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits and savings accounts		20,611			23,845
Net increase in time deposit accounts		47,956			27,548
Net increase in short-term borrowings		57			30,981
Proceeds from other borrowings		36,006			35,576
Repayments of other borrowings		(20,545	)		(21,783	)
Purchase of treasury stock		(4,071	)		(2,762	)
Proceeds from issuance of common stock		1,329			732
Dividends paid		(2,629	)		(2,423	)
NET CASH PROVIDED BY FINANCING ACTIVITIES		78,714			91,714
Net increase in cash and cash equivalents		11,262			23,075
Cash and cash equivalents at beginning of year		73,749			71,869
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	85,011		$	94,944
Supplemental disclosures:
Cash paid for income/franchise taxes	$	5,660		$	1,419
Cash paid for interest	$	26,949		$	19,339
Acquisitions:
Net assets acquired	$	-		$	19,961
Cash paid for purchase of stock	$	-		$	10,416
Cash acquired		-			12,590
Net cash received in acquisitions	$	-		$	2,174
Common stock issued for acquisitions	$	-		$	24,082

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 periods ended June 30, 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- and six-month periods ended June 30, 2005 and 2004, are shown in the tables below:

	Three Months Ended
(Dollars in thousands)	6/30/05		6/30/04
Net income	$	5,406	$	4,575
Weighted average common shares outstanding for basic earnings per share (000’s)		16,420		15,597
Assumed incremental common shares issued upon exercise of stock options (000’s)		302		239
Weighted average common shares for diluted earnings per share (000’s)		16,722		15,836
Earnings per common share - basic	$	0.33	$	0.29
Earnings per common share - diluted	$	0.32	$	0.29

	Six Months Ended
(Dollars in thousands)	6/30/05		6/30/04
Net income	$	10,670	$	9,641
Weighted average common shares outstanding for basic earnings per share (000’s)		16,450		15,382
Assumed incremental common shares issued upon exercise of stock options (000’s)		304		243
Weighted average common shares for diluted earnings per share (000’s)		16,754		15,625
Earnings per common share - basic	$	0.65	$	0.63
Earnings per common share - diluted	$	0.64	$	0.62

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				Six Months Ended
(Dollars in thousands, except per share date)	6/30/05		6/30/04		6/30/05		6/30/04
Net income as reported	$	5,406	$	4,575	$	10,670	$	9,641
Pro forma		5,406		4,568		10,460		9,441
Earnings per share - basic as reported	$	0.33	$	0.29	$	.65	$	.63
Pro forma		0.33		0.29		.64		.61
Earnings per share - diluted as reported	$	0.32	$	0.29	$	.64	$	.62
Pro forma		0.32		0.29		.62		.60

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.

In May 2005, the FASB issued Statement No. 154, Accounting Changes and Error Corrections (FAS 154), replacing APB Opinion No. 20, Accounting for Changes, and FAS 3, Reporting Accounting Changes in Interim Financial Statements. Unless specified in an accounting standard, FAS 154 requires retrospective application to prior periods’ financial statements for changes in accounting principle and correction of errors. APB Opinion No. 20 previously provided that most changes in accounting principle be recognized by including in net income the cumulative effect of changing to the new principle in the period of adoption. FAS 154 is effective for fiscal years beginning after December 15, 2005. Heartland will adopt the provisions of FAS 154 on January 1, 2006.

NOTE 2: CORE DEPOSIT PREMIUM AND OTHER INTANGIBLE ASSETS

The gross carrying amount of intangible assets and the associated accumulated amortization at June 30, 2005, and December 31, 2004, are presented in the table below, in thousands:

	June 30, 2005				December 31, 2004
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Intangible assets:
Core deposit intangibles	$	9,217	$	3,684	$	9,217	$	3,205
Mortgage servicing rights		4,402		1,237		4,257		1,005
Customer relationship intangible		917		47		917		19
Total	$	14,536	$	4,968	$	14,391	$	4,229
Unamortized intangible assets			$	9,568			$	10,162

Projections of amortization expense for mortgage servicing rights are based on existing asset balances and the existing interest rate environment as of June 30, 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 $57 thousand at June 30, 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

Six months ended December 31, 2005	$	479	$	585	$	28	$	1,092

Year ended December 31,
2006		856		737		54		1,647
2007		787		614		53		1,454
2008		787		491		52		1,330
2009		704		368		50		1,122
2010		435		246		48		729
Thereafter		1,485		124		585		2,194

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 second quarter ended June 30, 2005, was $5.4 million, or $0.32 per diluted share, compared to net income of $4.6 million, or $0.29 per diluted share, during the second quarter of 2004. Return on average equity was 12.12% and return on average assets was 0.81% for the second quarter of 2005, compared to 12.23% and 0.84%, respectively, for the same quarter in 2004.

For the first six months of 2005, net income was $10.7 million, or $0.64 per diluted share, compared to $9.6 million, or $0.62 per diluted share, for the same period in 2004. The year-to-date earnings during 2004 included securities gains of $1.9 million. Exclusive of securities gains, year-to-date 2005 pre-tax income increased $3.6 million or 30% over year-to-date 2004 pre-tax income. Return on average equity was 12.09% and return on average assets was 0.81% for the first six months of 2005, compared to 13.22% and 0.92%, respectively, for the same period in 2004.

A contributing factor to the improved earnings during 2005 compared to 2004 was the acquisition of Rocky Mountain Bank. Since this acquisition was completed on June 1, 2004, only one month of their earnings was included in Heartland’s earnings for the three- and six-month periods ended on June 30, 2004. Rocky Mountain Bank’s contribution to net income during the second quarter of 2005 was $527 thousand compared to $260 thousand during the second quarter of 2004. On a year-to-date basis, Rocky Mountain Bank’s contribution to net income was $984 thousand during 2005 and $260 thousand during 2004. 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 remaining quarters of 2005. Conversion to our mainframe software was completed in April 2005, 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.

Contributing to the improved earnings during the second quarter of 2005 was the $5.8 million or 34% growth in net interest income, due primarily to growth in earning assets. Average earning assets went from $1.95 billion during the second quarter of 2004 to $2.38 billion during the same quarter in 2005, a change of $436.0 million or 22%. Half of this change resulted from internal growth and the other half from the acquisition of Rocky Mountain Bank. Noninterest income improved by $452 thousand or 5% during the second quarter of 2005 compared to the same quarter in 2004. The categories experiencing improvement were service charges and fees, trust fees and rental income on operating leases. The increase in these categories was partially offset by the reduction experienced in securities gains and valuation adjustment on mortgage servicing rights. For the second quarter of 2005, noninterest expense increased $4.2 million or 22%, reflecting the inclusion of the costs related to the operations at Heartland’s most recent acquisitions, Rocky Mountain Bank and the Wealth Management Group of Colonial Trust Company. Additionally, Arizona Bank & Trust opened a second branch in May 2004 and a third branch in May 2005.

The improved earnings during the first six months of 2005 were primarily due to the $11.0 million or 32% growth in net interest income. Average earning assets for the six-month period increased from $1.86 billion during 2004 to $2.36 billion during 2005, with $274.2 million of the $491.3 million change attributable to Rocky Mountain Bank. Exclusive of securities gains, noninterest income for the six-month period improved $2.3 million or 13%, driven primarily by service charges and fees, trust fees and rental income on operating leases. Noninterest expense for the six-month period experienced an increase of $9.0 million or 24%, primarily due to costs associated with expansion efforts.

At June 30, 2005, total assets reached $2.71 billion, an increase of $83.0 million or 3% since year-end 2004. The majority of this growth occurred during the second quarter. Total loans and leases were $1.85 billion at June 30, 2005, an increase of $82.0 million or 5% since year-end 2004. Loan demand picked up during the second quarter of 2005 and management remains optimistic that it will continue during the remaining quarters of 2005. Total deposits at June 30, 2005, were $2.05 billion, an increase of $68.6 million or 3% since year-end 2004. Over 90% of this growth occurred during the second quarter. All deposit categories experienced growth. The time deposits category had the largest increase, $48.0 million or 5%. Of particular note is that $17.6 million of brokered deposits that matured during the first six months 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 June 30, 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 4.03% during the second quarter of 2005 compared to 3.71% for the second quarter of 2004 and 3.97% for the first quarter of 2005. Net interest income totaled $23.1 million during the second quarter of 2005, an increase of $5.8 million or 34% from the $17.3 million recorded during the second quarter of 2004. Contributing to this increase was the 22% growth in average earning assets, of which half resulted from internal growth and the other half from the acquisition of Rocky Mountain Bank. Net interest income at Rocky Mountain Bank during the second quarter of 2005 was $3.6 million compared to the $1.1 million recorded during the one month of operations under Heartland’s umbrella during the second quarter of 2004.

For the first six months of 2005, net interest margin was 4.00% compared to 3.82% during the first six months of 2004. Net interest income totaled $45.1 million during the first six months of 2005, an increase of $11.0 million or 32% from the $34.1 million recorded during the same period in 2004. Again, this improvement resulted from the growth in average earning assets which increased from $1.86 billion during 2004 to $2.36 billion during 2005, with $274.2 million of the $491.3 million change attributable to Rocky Mountain Bank.

Heartland manages its balance sheet to minimize the effect a change in interest rates has on its net interest margin. During 2005, Heartland will continue to work toward 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 reflect an asset sensitive posture leading to stronger earnings performance in a rising rate environment. Should the current rising rate environment reverse, net interest income would likely decline. In order to mitigate the negative impact a downward movement in interest rates would have on net interest income, Heartland entered into an interest rate floor transaction on July 8, 2005, at a cost of $44 thousand. This two-year contract was acquired on prime at a strike level of 5.5% on a notional amount of $100.0 million. Changes in the fair market value of this hedge transaction will flow through Heartland’s income statement.

Interest income, on a tax-equivalent basis, in the second quarter of 2005 totaled $38.5 million compared to $28.4 million in the second quarter of 2004, an increase of $10.1 million or 36%. Rocky Mountain Bank’s portion of this interest income was $5.4 million during 2005 and $1.6 million during 2004. On a six-month comparative basis, interest income, on a tax-equivalent basis, was $74.2 million during 2005 and $55.4 million during 2004, an increase of $18.8 million or 34%. Rocky Mountain Bank’s portion of this interest income was $10.4 million during the first six months of 2005 and $1.6 million during the first six months of 2004. The increases in interest income resulted from the growth in earning assets, as well as, the changes that have occurred in the prime interest rate since the first quarter of 2004. A little over half of Heartland’s commercial and commercial real estate loan portfolio is comprised of variable-rate loans that change as the prime rate changes.

Interest expense for the second quarter of 2005 was $14.5 million compared to $10.4 million in the second quarter of 2004, an increase of $4.1 million or 39%. Rocky Mountain Bank’s portion of the interest expense was $1.6 million during the second quarter of 2005 and $484,000 during the second quarter of 2004. For the six-month period ended on June 30, interest expense was $27.5 million for 2005 and $20.0 million for 2004, an increase of $7.5 million or 37%. Rocky Mountain Bank’s portion of this interest expense was $3.1 million during 2005 and $484,000 during 2004. The increases in interest expense resulted from the 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 3.00% during the second 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 the first six months of 2005, does place pressure on the rates paid on these products to maintain existing balances.

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 June 30, 2005 and 2004 (Dollars in thousands)
	2005							2004
	Average Balance			Interest		Rate		Average Balance			Interest		Rate
EARNING ASSETS
Securities:
Taxable	$	408,720		$	3,567	3.50	%	$	355,576		$	2,698	3.05	%
Nontaxable¹		118,125			2,052	6.97			90,279			1,637	7.29
Total securities		526,845			5,619	4.28			445,855			4,335	3.91
Interest bearing deposits		7,574			79	4.18			5,861			46	3.16
Federal funds sold		8,508			57	2.69			3,296			9	1.10
Loans and leases:
Commercial and commercial real estate¹		1,211,184			19,453	6.44			986,723			14,072	5.74
Residential mortgage		233,383			3,474	5.97			180,334			2,642	5.89
Agricultural and agricultural real estate¹		228,259			3,993	7.02			187,422			3,094	6.64
Consumer		179,474			3,828	8.56			143,619			2,927	8.20
Direct financing leases, net		13,002			278	8.58			13,559			208	6.17
Fees on loans		-			1,681	-			-			1,020	-
Less: allowance for loan and lease losses		(26,496	)		-	-			(20,906	)		-	-
Net loans and leases		1,838,806			32,707	7.13			1,490,751			23,963	6.47
Total earning assets		2,381,733			38,462	6.48			1,945,763			28,353	5.86
NONEARNING ASSETS		298,702			-	-			254,814			-	-
TOTAL ASSETS	$	2,680,435		$	38,462	5.76	%	$	2,200,577		$	28,353	5.18	%
INTEREST BEARING LIABILITIES
Interest bearing deposits
Savings	$	754,578		$	2,553	1.36	%	$	619,816		$	1,266	0.82	%
Time, $100,000 and over		196,886			1,500	3.06			147,569			944	2.57
Other time deposits		749,708			6,229	3.33			590,045			4,777	3.26
Short-term borrowings		234,301			1,709	2.93			201,690			699	1.39
Other borrowings		211,427			2,540	4.82			193,563			2,741	5.70
Total interest bearing liabilities		2,146,900			14,531	2.71			1,752,683			10,427	2.39
NONINTEREST BEARING LIABILITIES
Noninterest bearing deposits		321,707			-	-			257,502			-	-
Accrued interest and other liabilities		32,934			-	-			39,996			-	-
Total noninterest bearing liabilities		354,641			-	-			297,498			-	-
STOCKHOLDERS’ EQUITY		178,894			-	-			150,396			-	-
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	2,680,435		$	14,531	2.17	%	$	2,200,577		$	10,427	1.91	%
Net interest income¹				$	23,931						$	17,926
Net interest income to total earning assets¹						4.03	%						3.71	%
Interest bearing liabilities to earning assets		90.14	%						90.08	%

¹Tax equivalent basis is calculated using an effective tax rate of 35%.

ANALYSIS OF AVERAGE BALANCES, TAX EQUIVALENT YIELDS AND RATES¹ For the six months ended June 30, 2005 and 2004 (Dollars in thousands)
	2005							2004
	Average Balance			Interest		Rate		Average Balance			Interest		Rate
EARNING ASSETS
Securities:
Taxable	$	412,730		$	7,099	3.47	%	$	354,099		$	6,306	3.58	%
Nontaxable¹		117,508			4,089	7.02			88,493			3,215	7.31
Total securities		530,238			11,188	4.25			442,592			9,521	4.33
Interest bearing deposits		7,274			147	4.08			5,452			90	3.32
Federal funds sold		8,183			104	2.56			2,668			14	1.06
Loans and leases:
Commercial and commercial real estate¹		1,194,366			37,445	6.32			935,999			26,907	5.78
Residential mortgage		227,295			6,907	6.13			167,250			4,910	5.90
Agricultural and agricultural real estate¹		224,372			7,634	6.86			177,421			5,819	6.60
Consumer		174,698			7,372	8.51			138,922			5,768	8.35
Direct financing leases, net		14,696			505	6.93			13,485			417	6.22
Fees on loans		-			2,894	-			-			1,959	-
Less: allowance for loan and lease losses		(25,920	)		-	-			(19,881	)		-	-
Net loans and leases		1,809,507			62,757	6.99			1,413,196			45,780	6.51
Total earning assets		2,355,202			74,196	6.35			1,863,908			55,405	5.98
NONEARNING ASSETS		296,690			-	-			238,589			-	-
TOTAL ASSETS	$	2,651,892		$	74,196	5.64	%	$	2,102,497		$	55,405	5.30	%
INTEREST BEARING LIABILITIES
Interest bearing deposits
Savings	$	752,642		$	4,593	1.23	%	$	594,220		$	2,433	.82	%
Time, $100,000 and over		181,686			2,687	2.98			142,183			1,791	2.53
Other time deposits		747,583			12,184	3.29			566,361			9,332	3.31
Short-term borrowings		231,781			2,973	2.59			185,528			1,296	1.40
Other borrowings		207,022			5,046	4.92			188,536			5,175	5.52
Total interest bearing liabilities		2,120,714			27,483	2.61			1,676,828			20,027	2.40
NONINTEREST BEARING LIABILITIES
Noninterest bearing deposits		318,507			-	-			241,941			-	-
Accrued interest and other liabilities		34,686			-	-			37,081			-	-
Total noninterest bearing liabilities		353,193			-	-			279,022			-	-
STOCKHOLDERS’ EQUITY		177,985			-	-			146,647			-	-
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	2,651,892		$	27,483	2.09	%	$	2,102,497		$	20,027	1.92	%
Net interest income¹				$	46,713						$	35,378
Net interest income to total earning assets¹						4.00	%						3.82	%
Interest bearing liabilities to earning assets		90.04	%						89.96	%

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 provision for loan losses during the second quarter of 2005 was $1.6 million, an increase of $645 thousand or 65% when compared to the same quarter of 2004. During the first six months of 2005, the provision for loan losses was $3.0 million, an increase of $653 thousand or 28%. These increases resulted primarily from the loan growth experienced during those periods along with an increase in nonperforming loans. During its first full month of operation as a Heartland bank subsidiary in 2004, Rocky Mountain Bank recorded no provision for loan losses. During 2005, provision for loan losses recorded at Rocky Mountain Bank was $93 thousand for the second quarter and $218 thousand for the first six months of the year. 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. 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
	June 30, 2005			June 30, 2004			Change			% Change
NONINTEREST INCOME:
Service charges and fees	$	2,778		$	2,468		$	310			12.56	%
Trust fees		1,605			1,121			484			43.18
Brokerage commissions		255			350			(95	)		(27.14	)
Insurance commissions		129			158			(29	)		(18.35	)
Securities gains (losses), net		(20	)		327			(347	)		(106.12	)
Gain (loss) on trading account securities		(26	)		(10	)		(16	)		160.00
Rental income on operating leases		3,845			3,461			384			11.10
Gain on sale of loans		868			845			23			2.72
Valuation adjustment on mortgage servicing rights		(34	)		186			(220	)		(118.28	)
Other noninterest income		640			682			(42	)		(6.16	)
TOTAL NONINTEREST INCOME	$	10,040		$	9,588		$	452			4.71	%

	Six Months Ended
	June 30, 2005			June 30, 2004		Change			% Change
NONINTEREST INCOME:
Service charges and fees	$	5,467		$	4,595	$	872			18.98	%
Trust fees		3,200			2,141		1,059			49.46
Brokerage commissions		478			628		(150	)		(23.89	)
Insurance commissions		266			382		(116	)		(30.37	)
Securities gains, net		33			1,867		(1,834	)		(98.23	)
Gain (loss) on trading account securities		(8	)		75		(83	)		(110.67	)
Rental income on operating leases		7,416			6,923		493			7.12
Gain on sale of loans		1,580			1,372		208			15.16
Valuation adjustment on mortgage servicing rights		(18	)		113		(131	)		(115.93	)
Other noninterest income		1,341			1,213		128			10.55
TOTAL NONINTEREST INCOME	$	19,755		$	19,309	$	446			2.31	%

Noninterest income increased $452 thousand or 5% during the second quarter of 2005 when compared to the same quarter in 2004. Exclusive of securities gains, noninterest income increased $799 thousand or 9% for the quarters under comparison. On a year-to-date comparative basis, noninterest income increased $446 thousand or 2%. Exclusive of securities gains, noninterest income increased $2.3 million or 13% during the first six months of 2005 compared to the same six months in 2004. During both periods under review, the categories experiencing the most significant growth were service charges and fees, trust fees and rental income on operating leases. The increases in these categories were partially offset by reductions experienced in securities gains and valuation adjustments on mortgage servicing rights. Rocky Mountain Bank recorded $198 thousand in noninterest income during its first month of operations under the Heartland umbrella of community banks. Rocky Mountain Bank recorded noninterest income of $575 thousand during the second quarter of 2005 and $1.1 million during the first six months of 2005.

Service charges and fees increased $310 thousand or 13% during the quarters under comparison. On a six-month comparative basis, service charges and fees increased $872 thousand or 19%. During 2004, Rocky Mountain Bank recorded service charges and fees of $132 thousand during it first month of operations as a Heartland bank subsidiary. During 2005, Rocky Mountain Bank recorded service charges and fees of $328 thousand for the quarter and $620 thousand for the six-month period ended June 30, 2005. Included in this category are service charges on deposit products, which increased $99 thousand or 7% for the quarters and $281 thousand or 11% for the six-month periods under comparison, primarily 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 $154 thousand or 26% for the quarters under comparison and $303 thousand or 26% for the six-month periods under comparison, with no significant impact resulting from the Rocky Mountain Bank acquisition. Fees generated by activity on Heartland’s ATM network increased $106 thousand or 38% during the quarters and $142 thousand or 25% during the six-month periods under comparison. Partially offsetting the increases in the above mentioned categories of service charges and fees, was a reduction in the amount of fees generated by HTLF Capital Corp., our investment banking subsidiary formed in April of 2003. Fees recorded at HTLF Capital Corp. were $15 thousand during the second quarter of 2005 compared to $178 thousand during the same quarter of 2004. On a six-month comparative basis, the fees generated by HTLF Capital Corp. were $123 thousand during 2005 and $212 thousand during 2004. Fees at HTLF Capital Corp. are recorded when transactions close and, as a result, can vary significantly from any one reporting period to the next.

Trust fees improved $484 thousand or 43% during the second quarter of 2005 and $1.1 million or 49% for the first six months of 2005. Additional fees generated by the accounts acquired from the Wealth Management Group of Colonial Trust Company on August 31, 2004, totaled $379 thousand for the second quarter of 2005 and $704 thousand for the six-month period ended on June 30, 2005.

Rental income on operating leases increased $384 thousand or 11% during the quarters under comparison and $493 thousand or 7% during the six-month periods under comparison as a result of activity at Heartland’s fleet management subsidiary, ULTEA, Inc.

During the second quarter of 2005, $20 thousand in securities losses was recorded compared to $327 thousand in securities gains during the same period in 2004. On a six-month comparative basis, securities gains totaled $33 thousand during 2005 and $1.9 million during 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 $34 thousand during the second quarter of 2005 and $18 thousand during the first six months of 2005. During the corresponding three- and six-month periods in 2004, decreases in the valuation allowance were recorded in the amounts of $186 thousand and $113 thousand, respectively. Heartland utilizes the services of an independent third-party to perform a valuation analysis of its servicing portfolio each quarter. At June 30, 2005, the remaining valuation allowance totaled $57 thousand.

NONINTEREST EXPENSE

	Three Months Ended
	June 30, 2005		June 30, 2004		Change		% Change
NONINTEREST EXPENSE:
Salaries and employee benefits	$	11,529	$	9,270	$	2,259		24.37	%
Occupancy		1,534		1,215		319		26.26
Furniture and equipment		1,542		1,325		217		16.38
Depreciation on equipment under operating leases		3,141		2,869		272		9.48
Outside services		1,888		1,471		417		28.35
FDIC deposit insurance assessment		69		61		8		13.11
Advertising		767		637		130		20.41
Core deposit premium amortization		237		144		93		64.58
Other noninterest expenses		2,752		2,220		532		23.96
TOTAL NONINTEREST EXPENSE	$	23,459	$	19,212	$	4,247		22.11	%

	Six Months Ended
	June 30, 2005		June 30, 2004		Change		% Change
NONINTEREST EXPENSE:
Salaries and employee benefits	$	22,711	$	18,091	$	4,620		25.54	%
Occupancy		3,160		2,278		882		38.72
Furniture and equipment		2,909		2,452		457		18.64
Depreciation on equipment under operating leases		6,069		5,730		339		5.92
Outside services		3,816		2,972		844		28.40
FDIC deposit insurance assessment		139		112		27		24.11
Advertising		1,576		1,176		400		34.01
Core deposit premium amortization		507		232		275		118.53
Other noninterest expenses		5,323		4,185		1,138		27.19
TOTAL NONINTEREST EXPENSE	$	46,210	$	37,228	$	8,982		24.13	%

For the second quarter of 2005, noninterest expense increased $4.2 million or 22%. On a year-to-date basis, noninterest expense increased $9.0 million or 24%. These increases reflected the inclusion of the costs related to the operations at the Heartland’s most recent acquisitions, Rocky Mountain Bank and the Wealth Management Group of Colonial Trust Company, completed during the second and third quarters of 2004. Additionally, Arizona Bank & Trust opened a second branch in May 2004 and a third branch in May 2005. Noninterest expense at Rocky Mountain Bank totaled $3.3 million during the second quarter and $6.6 million during the first six months of 2005. During its one month of operations under Heartland’s umbrella in 2004, Rocky Mountain Bank recorded noninterest expense of $905 thousand.

Salaries and employee benefits, the largest component of noninterest expense, increased $2.3 million or 24% for the quarters under comparison and $4.6 million or 26% for the six months under comparison. This category made up more than 50% of the total increases in noninterest expense during the periods under comparison. Salaries and employee benefits at Rocky Mountain Bank totaled $1.5 million during the second quarter and $3.0 million during the first six months of 2005 compared to $441 thousand during the one month of operations under Heartland in 2004. 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 and third branch locations in Chandler and Phoenix, Arizona. Additionally, merit increases for all salaried employees are made on January 1 of each year. Total full-time equivalent employees increased to 884 at quarter-end 2005 from 825 at quarter-end 2004. Included in these totals were the full-time equivalent employees at Rocky Mountain Bank of 127 at quarter-end 2004 and 118 at quarter-end 2005. The acquired trust operations in Arizona was responsible for 13 full-time equivalent employees as of quarter-end 2005. Another factor contributing to the increased salaries and employee benefits during the second quarter of 2005 was compensation expense associated with restricted stock awards granted under the 2005 Long-Term Incentive Plan approved at Heartland’s annual stockholders’ meeting held this May, which totaled $242 thousand and related to the six-month period ended on June 30, 2005.

Occupancy and furniture and equipment expense, in aggregate, increased $536 thousand or 21% for the quarters under comparison and $1.3 million or 28% for the six-month periods 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 $478 thousand of these expenses during the second quarter of 2005 and $940 thousand during the six-month period of 2005. During 2004, these expenses totaled $157 thousand during the one month of operations at Rocky Mountain Bank as a Heartland bank subsidiary.

Depreciation on equipment under operating leases increased $272 thousand or 9% during the quarters under comparison and $339 thousand or 6% during the six months under comparison as a result of activity at Heartland’s fleet management subsidiary, ULTEA, Inc.

Fees for outside services increased by $417 thousand or 28% for the quarters under comparison and $844 thousand or 28% for the six months under comparison. Rocky Mountain Bank recorded fees for outside services of $351 thousand during the second quarter of 2005 and $769 thousand during the six-month period of 2005. These same fees were $149 thousand at Rocky Mountain Bank during its first month of operations as a Heartland bank subsidiary.

Other noninterest expenses increased $532 thousand or 24% for the quarters under comparison with $280 thousand attributable to the increase in other noninterest expenses recorded at Rocky Mountain Bank during the comparable second quarters of 2005. On a six-month comparative basis, other noninterest expense increased $1.1 million or 27% with $614 thousand of the increase attributable to the increase at Rocky Mountain Bank.

INCOME TAX EXPENSE

Income tax expense for the second quarter of 2005 increased $543 thousand or 26% when compared to the same period in 2004, resulting in an effective tax rate of 32.81% for 2005 compared to 31.43% for 2004. Income tax expense for the first six months of 2005 increased $760 thousand or 18% when compared to the same period in 2004. Heartland’s effective tax rate for the six-month comparative period was 31.83% for 2005 compared to 30.46% for 2004. The lower effective rates during 2004 were the result of anticipated federal historic rehabilitation tax credits and low-income housing tax credits totaling $840 thousand for the year. During the year 2005, these credits are anticipated to total $436 thousand. The tax-equivalent adjustment for tax-exempt interest income was $830 thousand during the second quarter of 2005 compared to $639 thousand during the same quarter in 2004. On a year-to-date comparative basis, the tax-equivalent adjustment for tax-exempt interest income was $1.6 million during 2005 and $1.2 million during 2004.

FINANCIAL CONDITION

LOANS AND ALLOWANCE FOR LOAN AND LEASE LOSSES

Total loans and leases were $1.85 billion at June 30, 2005, an increase of $82.0 million or 5% since year-end 2004. Loan demand picked up during the second quarter of 2005. Our lending officers continue to build their loan pipelines and the anticipated 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 banks experienced loan growth during the first six months of 2005, with the major contributors being Dubuque Bank and Trust Company, Galena State Bank and Trust Company and Arizona Bank & Trust. All the loan categories experienced some growth during the first six months of 2005.

The commercial and commercial real estate loan portfolio increased $37.3 million or 3% during the first six months of 2005. Nearly 80% of this growth was the result of additional loans at Dubuque Bank and Trust Company and Galena State Bank and Trust Company.

Agricultural and agricultural real estate loans grew $13.7 million or 6% during the first six months of 2005, primarily as a result of seasonal advances and the continued calling efforts at Dubuque Bank and Trust Company and Rocky Mountain Bank.

The residential mortgage loan portfolio experienced an increase of $14.5 million or 7%. Half of this growth was the result of construction financing on residential property by Arizona Bank & Trust. The remaining portion of the growth occurred at Dubuque Bank and Trust Company, Wisconsin Community Bank and New Mexico 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 $14.8 million or 9% during the first six months of 2005. Home equity lines of credit and junior lien financing at Arizona Bank & Trust and Rocky Mountain Bank made up $7.9 million or 53% of this growth. Citizens Finance Co. experienced $4.6 million growth in consumer loans outstanding since year-end 2004, due primarily to the opening of an office in Crystal Lake, Illinois, on December 24, 2004.

The table below presents the composition of the loan portfolio as of June 30, 2005, and December 31, 2004.

LOAN PORTFOLIO (Dollars in thousands)
	June 30, 2005							December 31, 2004
	Amount			Percent			Amount			Percent
Commercial and commercial real estate	$	1,199,450			64.55	%	$	1,162,103			65.43	%
Residential mortgage		227,377			12.24			212,842			11.98
Agricultural and agricultural real estate		231,548			12.46			217,860			12.26
Consumer		181,907			9.79			167,109			9.41
Lease financing, net		17,922			0.96			16,284			0.92
Gross loans and leases		1,858,204			100.00	%		1,776,198			100.00	%
Unearned discount		(1,784	)					(1,920	)
Deferred loan fees		(1,494	)					(1,324	)
Total loans and leases		1,854,926						1,772,954
Allowance for loan and lease losses		(26,676	)					(24,973	)
Loans and leases, net	$	1,828,250					$	1,747,981

Loans held for sale increased $18.2 million or 56% since year-end 2004. Half of this increase was 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. The remainder of the growth in loans held for sale was in 15- and 30-year fixed-rate mortgage loans, which are usually sold into the secondary market.

The process utilized by Heartland to determine 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 $1.7 million or 7% during the first six months of 2005. The allowance for loan and lease losses at June 30, 2005, was 1.44% of loans and 179% of nonperforming loans, compared to 1.41% of loans and 252% of nonperforming loans at December 31, 2004. A majority of the increase in the allowance for loan and lease losses was the result of provision associated with the loan growth experienced.

Nonperforming loans increased to $14.9 million or 0.80% of total loans and leases compared to $9.9 million or 0.56% of total loans and leases at December 31, 2004. Contributing to this increase was a $3.4 million loan at Rocky Mountain Bank. The overall increase in nonperforming loans at Rocky Mountain Bank since acquisition was not unexpected as nearly all of these loans were identified as potential problem loans during due diligence. Because of the net realizable value of collateral, guarantees and other factors, anticipated losses on Heartland’s nonperforming loans, including those at Rocky Mountain Bank, are not expected to be significant and have been specifically provided for in the allowance for loan and lease losses.

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)
	Six Months Ended June 30,
	2005			2004
Balance at beginning of period	$	24,973			$	18,490
Provision for loan and lease losses		3,000				2,347
Recoveries on loans and leases previously charged off		799				543
Loans and leases charged off		(1,777	)			(1,728	)
Reclass for unfunded commitments to other liabilities		(319	)			-
Additions related to acquisitions		-				4,249
Balance at end of period	$	26,676			$	23,901
Net charge offs to average loans and leases		0.05	%			0.08	%

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 June 30,						As of December 31,
	2005			2004			2004			2003
Nonaccrual loans and leases	$	14,523		$	7,168		$	9,837		$	5,092
Loan and leases contractually past due 90 days or more		378			392			88			458
Total nonperforming loans and leases		14,901			7,560			9,925			5,550
Other real estate		1,611			433			425			599
Other repossessed assets		386			299			313			285
Total nonperforming assets	$	16,898		$	8,292		$	10,663		$	6,434
Nonperforming loans and leases to total loans and leases		0.80	%		0.45	%		0.56	%		0.42	%

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 19% of total assets at June 30, 2005, and 21% of total assets at December 31, 2004. During the first six months 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 June 30, 2005, and December 31, 2004.

AVAILABLE FOR SALE SECURITIES PORTFOLIO (Dollars in thousands)
	June 30, 2005						December 31, 2004
	Amount		Percent			Amount		Percent
U.S. government corporations and agencies	$	212,897		41.95	%	$	219,670		39.74	%
Mortgage-backed securities		144,508		28.48			164,580		29.78
States and political subdivisions		128,005		25.22			123,624		22.36
Other securities		22,087		4.35			44,889		8.12
Total available for sale securities	$	507,497		100.00	%	$	552,763		100.00	%

DEPOSITS AND BORROWED FUNDS

Total deposits at June 30, 2005, were $2.05 billion, an increase of $68.6 million or 3% since year-end 2004. Over 90% of this growth occurred during the second quarter. All deposit categories experienced growth. Consistent with prior years, demand deposits began to increase during the second quarter of the year after experiencing a decline during the first quarter of the year due to normal seasonal fluctuations that many banks experience. Heartland’s two newer de novo banks, New Mexico Bank & Trust and Arizona Bank & Trust have been the most successful at attracting new demand deposits. The time deposits category had the largest increase, $48.0 million or 5%. Except for Wisconsin Community Bank, all of Heartland’s subsidiary banks were able to increase deposits in this category. Of particular note is that $17.6 million of brokered deposits that matured during the first six months were replaced with time deposits from the local markets. During this period, New Mexico Bank & Trust was the only Heartland bank to experience growth in all deposit categories.

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 six-month period ended June 30, 2005, the amount of short-term borrowings remained static at $231.5 million.

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 from $169.5 million at year-end 2004 to $159.8 million at quarter-end 2005, a decrease of $9.7 million or 6%.

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 June 30, 2005, a total of $55.7 million was outstanding on these credit lines compared to $43.0 million on December 31, 2004. Additional borrowings were needed during the first six months of 2005 to provide funding for the growth at Citizens Finance Co., the 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 had increased $15.5 million or 8% since year-end 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 June 30, 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, Seattle 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 June 30, 2005, had increased to $139.6 million from $123.5 million at December 31, 2004. During the first quarter of 2005, $18.0 million of fixed-rate advances for an original term of ten years were obtained, a portion of which was to replace the $11.5 million in FHLB advances coming due in the following three months. Total FHLB borrowings at June 30, 2005, had an average rate of 3.95% and an average maturity of 3.13 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 its bank 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)
	June 30, 2005						December 31, 2004
	Amount		Ratio			Amount		Ratio
Risk-Based Capital Ratios¹
Tier 1 capital	$	197,386		9.20	%	$	187,424		9.23	%
Tier 1 capital minimum requirement		85,814		4.00	%		81,251		4.00	%
Excess	$	111,572		5.20	%	$	106,173		5.23	%
Total capital	$	229,280		10.69	%	$	219,839		10.82	%
Total capital minimum requirement		171,628		8.00	%		162,503		8.00	%
Excess	$	57,652		2.69	%	$	57,336		2.82	%
Total risk-adjusted assets	$	2,145,344				$	2,031,286
Leverage Capital Ratios²
Tier 1 capital	$	197,386		7.48	%	$	187,424		7.26	%
Tier 1 capital minimum requirement³		105,533		4.00	%		103,225		4.00	%
Excess	$	91,853		3.48	%	$	84,199		3.26	%
Average adjusted assets (less goodwill and other intangible assets)	$	2,638,317				$	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 initial 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, that 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. On January 1, 2000, one-third of the payment was made in cash and the remaining two-thirds in stock options on Heartland’s common stock exercisable in January 2005 and January 2006. The obligation was accrued over the performance period from January 1, 2000, to December 31, 2003.

During the remaining half of 2005 and first half of 2006, we plan to continue the expansion of our existing banks. In the West, we plan to add four 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 $18 million in the aggregate. A majority of these projects will not be completed until the last quarter of the year or the first quarter of 2006.

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 were $62.8 million during the first six months of 2005, compared to $74.2 million during the same six months 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 six months 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.

Net cash provided by financing activities was $78.7 million during the first six months of 2005 compared to $91.7 million during same six 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 six months 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 six months of 2005, there was a net increase in time deposit accounts of $48.0 million compared to $27.5 million during the first six months of 2004.

Total cash used by operating activities was $4.6 million during the first six months of 2005 compared to total cash provided by operating activities of $5.6 million during the same six months of 2004. Nearly half of this change was the result of vehicles held for sale at ULTEA.

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 June 30, 2005, Heartland’s revolving credit agreement with third-party banks provided a maximum borrowing capacity of $70.0 million, of which $55.7 million had been borrowed. A portion of these lines provides funding for the operations of Citizens and ULTEA. At June 30, 2005, the borrowings on these lines for Citizens and ULTEA were $10.0 million and $22.9 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 June 30, 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 June 30, 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 variable-rate 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 $225 thousand on June 30, 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 June 30, 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 June 30, 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.

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.

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 June 30, 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⁽¹⁾
04/01/05- 04/30/05	17,050	$19.74	17,050	$3,354,464
05/01/05- 05/31/05	98,816	$19.65	98,816	$1,791,222
06/01/05- 06/30/05	356	$19.47	356	$2,077,464
Total:	116,222	$19.66	116,222	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

The Company’s annual meeting of stockholders was held on May 18, 2005. At the meeting, James F. Conlan and Thomas L. Flynn were elected to serve as Class III directors (term expires in 2008). Continuing as Class I directors (term expires in 2006) are Lynn B. Fuller and John W. Cox, Jr. Continuing as Class II directors (term expires in 2007) are Mark C. Falb, John K. Schmidt and Ronald A. Larson. The stockholders approved the adoption of the Heartland Financial USA, Inc. 2005 Long-Term Incentive Plan and the Heartland Financial USA, Inc. 2006 Employee Stock Purchase Plan. Additionally, the stockholders approved the appointment of KPMG LLP as the Company's independent public accountants for the year ending December 31, 2005.

There were 16,494,483.535 issued and outstanding shares of common stock entitled to vote at the annual meeting. The voting results on the above described items were as follows:

Election of Directors
		For	Withheld
	James F. Conlan	14,141,894.429	229,140.566
	Thomas L. Flynn	14,140,385.429	230,649.566

	For	Against	Abstain	Broker Non-Votes
Adoption of the Heartland Financial USA, Inc. 2005 Long-Term Incentive Plan	12,270,792.474	512,821.284	1,587,421.237	2,123,448.540
Adoption of the Heartland Financial USA, Inc. 2006 Employee Stock Purchase Plan	12,530,644.402	279,050.670	1,561,339.923	2,123,448.540
Appointment of KPMG LLP	14,322,586.144	19,274.000	29,174.851	2,123,448.540

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

and Chief Financial Officer

Dated: August 9, 2005

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Heartland Financial USA (HTLF) 10-Q2005 Q2 Quarterly report

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