HEARTLAND FINANCIAL USA INC - 10-Q Quarterly Report

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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 September 30, 2004

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 November 8, 2004, the Registrant had outstanding 16,344,328 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)

	9/30/04 (Unaudited)			12/31/03
ASSETS
Cash and due from banks	$	82,817		$	68,424
Federal funds sold and other short-term investments		12,236			3,445
Cash and cash equivalents		95,053			71,869
Time deposits in other financial institutions		1,166			1,132
Securities:
Trading, at fair value		212			1,073
Available for sale, at fair value (cost of $495,869 at September 30, 2004, and $441,606 at December 31, 2003)		503,563			450,680
Loans held for sale		33,731			25,678
Gross loans and leases:
Loans and leases		1,737,614			1,322,549
Allowance for loan and lease losses		(24,520	)		(18,490	)
Loans and leases, net		1,713,094			1,304,059
Assets under operating leases		34,410			31,636
Premises, furniture and equipment, net		77,619			49,842
Other real estate, net		361			599
Goodwill, net		37,271			20,167
Other intangible assets, net		10,215			5,069
Other assets		60,675			56,562
TOTAL ASSETS	$	2,567,370		$	2,018,366
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Deposits:
Demand	$	300,811		$	246,282
Savings		761,926			569,286
Time		919,711			676,920
Total deposits		1,982,448			1,492,488
Short-term borrowings		180,395			176,835
Other borrowings		194,650			173,958
Accrued expenses and other liabilities		39,324			34,162
TOTAL LIABILITIES		2,396,817			1,877,443
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 September 30, 2004, and 16,000,000 at December 31, 2003; issued 16,547,482 shares at September 30, 2004, and 15,261,714 shares at December 31, 2003)		16,547			15,262
Capital surplus		40,789			20,065
Retained earnings		112,514			102,584
Accumulated other comprehensive income (loss)		4,418			4,794
Treasury stock at cost (211,409 shares at September 30, 2004, and 98,211 shares at December 31, 2003, respectively)		(3,715	)		(1,782	)
TOTAL STOCKHOLDERS’ EQUITY		170,553			140,923
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	2,567,370		$	2,018,366

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						Nine Months Ended
	Sept. 30, 2004			Sept. 30, 2003			Sept. 30, 2004		Sept. 30, 2003
INTEREST INCOME:
Interest and fees on loans and leases	$	28,041		$	21,527		$	73,698	$	64,269
Interest on securities:
Taxable		3,248			1,497			9,554		6,728
Nontaxable		1,183			998			3,273		2,909
Interest on federal funds sold and other short-term investments		33			149			47		279
Interest on interest bearing deposits in other financial institutions		66			38			156		135
TOTAL INTEREST INCOME		32,571			24,209			86,728		74,320
INTEREST EXPENSE:
Interest on deposits		8,413			6,866			21,969		20,971
Interest on short-term borrowings		693			581			1,989		1,759
Interest on other borrowings		2,998			1,953			8,173		5,815
TOTAL INTEREST EXPENSE		12,104			9,400			32,131		28,545
NET INTEREST INCOME		20,467			14,809			54,597		45,775
Provision for loan and lease losses		1,053			950			3,400		3,176
NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES		19,414			13,859			51,197		42,599
NONINTEREST INCOME:
Service charges and fees		2,688			1,452			7,283		4,208
Trust fees		1,196			951			3,337		2,761
Brokerage commissions		213			236			841		599
Insurance commissions		174			141			556		557
Securities gains (losses), net		(61	)		527			1,806		1,685
Gain (loss) on trading account securities		(32	)		80			43		329
Impairment loss on equity securities		-			(69	)		-		(239	)
Rental income on operating leases		3,425			3,447			10,348		10,342
Gain on sale of loans		814			2,446			2,186		5,667
Valuation adjustment on mortgage servicing rights		(73	)		1,360			40		368
Other noninterest income		337			631			1,550		1,811
TOTAL NONINTEREST INCOME		8,681			11,202			27,990		28,088
NONINTEREST EXPENSE:
Salaries and employee benefits		10,597			8,579			28,688		24,414
Occupancy		1,337			1,021			3,615		2,877
Furniture and equipment		1,423			1,064			3,875		2,912
Depreciation on equipment under operating leases		2,798			2,859			8,528		8,471
Outside services		2,026			1,286			4,998		3,558
FDIC deposit insurance assessment		65			54			177		161
Advertising		829			679			2,005		1,765
Other intangibles amortization		257			101			489		303
Other noninterest expenses		3,361			1,763			7,546		5,577
TOTAL NONINTEREST EXPENSE		22,693			17,406			59,921		50,038
INCOME BEFORE INCOME TAXES		5,402			7,655			19,266		20,649
Income taxes		1,384			2,391			5,607		6,654
NET INCOME	$	4,018		$	5,264		$	13,659	$	13,995
EARNINGS PER COMMON SHARE-BASIC	$	0.24		$	0.35		$	0.87	$	0.94
EARNINGS PER COMMON SHARE - DILUTED	$	0.24		$	0.34		$	0.86	$	0.92
CASH DIVIDENDS DECLARED PER COMMON SHARE	$	0.08		$	0.07		$	0.24	$	0.20

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, 2003	$	9,906	$	16,725	$	94,048		$	4,230		$	(868	)	$	124,041
Net income						13,995									13,995
Unrealized gain (loss) on securities available for sale arising during the period									953						953
Unrealized gain (loss) on derivatives arising during the period, net of reclassification of $12									20						20
Reclassification adjustment for net security gains realized in net income									(1,446	)					(1,446	)
Income taxes									161						161
Comprehensive income															13,683
Cash dividends declared:
Common, $.20 per share						(2,987	)								(2,987	)
Purchase of 410,618 shares of common stock												(7,687	)		(7,687	)
Issuance of 768,720 shares of common stock		268		3,803								6,001			10,072
Balance at September 30, 2003	$	10,174	$	20,528	$	105,056		$	3,918		$	(2,554	)	$	137,122

Balance at January 1, 2004	$	15,262	$	20,065	$	102,584		$	4,794		$	(1,782	)	$	140,923
Net income						13,659									13,659
Unrealized gain (loss) on securities available for sale arising during the period									888						888
Unrealized gain (loss) on derivatives arising during the period, net of reclassification of $208									349						349
Reclassification adjustment for net security gains realized in net income									(1,806	)					(1,806	)
Income taxes									193						193
Comprehensive income															13,283
Cash dividends declared:
Common, $.24 per share						(3,729	)								(3,729	)
Purchase of 279,812 shares of common stock												(5,037	)		(5,037	)
Issuance of 1,452,382 shares of common stock		1,285		20,724								3,104			25,113
Balance at September 30, 2004	$	16,547	$	40,789	$	112,514		$	4,418		$	(3,715	)	$	170,553

See accompanying notes to consolidated financial statements

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

	Nine Months Ended
	Sept. 30, 2004			Sept. 30, 2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	13,659		$	13,995
Adjustments to reconcile net income to net cash (used) provided by operating activities:
Depreciation and amortization		12,728			11,455
Provision for loan and lease losses		3,400			3,176
Provision for income taxes less than payments		386			1,152
Net amortization of premium on securities		2,948			5,810
Net gains on sales of securities		(1,806	)		(1,685	)
Net decrease (increase) in trading account securities		861			(33	)
Loss on impairment of equity securities		-			239
Loans originated for sale		(183,061	)		(382,521	)
Proceeds on sales of loans		177,194			391,622
Net gain on sales of loans		(2,186	)		(5,667	)
Increase in accrued interest receivable		(1,957	)		(336	)
Decrease in accrued interest payable		(104	)		(367	)
Other, net		(1,105	)		(651	)
NET CASH PROVIDED BY OPERATING ACTIVITIES		20,957			36,189
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of time deposits in other financial institutions		-			(95	)
Proceeds from maturities of time deposits in other financial institutions		-			600
Proceeds from the sale of securities available for sale		106,117			56,393
Proceeds from the maturity of and principal paydowns on securities available for sale		75,543			145,277
Purchase of securities available for sale		(186,712	)		(197,078	)
Net increase in loans and leases		(137,374	)		(98,464	)
Purchase of bank-owned life insurance policies		-			(15,000	)
Increase in assets under operating leases		(11,302	)		(9,104	)
Capital expenditures		(15,984	)		(14,011	)
Net cash and cash equivalents received in acquisition of subsidiaries, net of cash paid		2,174			-
Net cash and cash equivalents paid in acquisition of trust assets		(2,125	)		-
Proceeds on sale of foreclosed assets		260			414
NET CASH USED BY INVESTING ACTIVITIES		(169,403	)		(131,068	)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposits and savings accounts		99,693			68,909
Net increase in time deposit accounts		104,270			50,271
Net increase (decrease) in short-term borrowings		(13,908	)		6,188
Proceeds from other borrowings		42,993			32,750
Repayments of other borrowings		(53,599	)		(5,855	)
Purchase of treasury stock		(5,037	)		(7,687	)
Proceeds from sale of common stock		947			1,314
Dividends paid		(3,729	)		(2,987	)
NET CASH PROVIDED BY FINANCING ACTIVITIES		171,630			142,903
Net increase in cash and cash equivalents		23,184			48,024
Cash and cash equivalents at beginning of year		71,869			100,992
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	95,053		$	149,016
Supplemental disclosures:
Cash paid for income/franchise taxes	$	2,190		$	5,647
Cash paid for interest	$	31,479		$	28,912
Acquisitions:
Assets acquired	$	373,209		$	-
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, 2003, included in Heartland Financial USA, Inc.’s ("Heartland") Form 10-K filed with the Securities and Exchange Commission on March 15, 2004. 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 September 30, 2004, are not necessarily indicative of the results expected for the year ending December 31, 2004.

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 nine-month periods ended September 30, 2004 and 2003, are shown in the tables below:

	Three Months Ended
(Dollars in thousands)	9/30/04		9/30/03
Net income	$	4,018	$	5,264
Weighted average common shares outstanding for basic earnings per share (000's)		16,420		15,213
Assumed incremental common shares issued upon exercise of stock options (000’s)		243		266
Weighted average common shares for diluted earnings per share (000’s)		16,663		15,479
Earnings per common share - basic	$	0.24	$	0.35
Earnings per common share - diluted	$	0.24	$	0.34

	Nine Months Ended
(Dollars in thousands)	9/30/04		9/30/03
Net income	$	13,659	$	13,995
Weighted average common shares outstanding for basic earnings per share (000’s)		15,707		14,940
Assumed incremental common shares issued upon exercise of stock options (000's)		243		277
Weighted average common shares for diluted earnings per share (000’s)		15,950		15,217
Earnings per common share - basic	$	0.87	$	0.94
Earnings per common share - diluted	$	0.86	$	0.92

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				Nine Months Ended
(Dollars in thousands, except per share date)	9/30/04		9/30/03		9/30/04		9/30/03
Net income as reported	$	4,018	$	5,264	$	13,659	$	13,995
Pro forma		4,018		5,264		13,459		13,779
Earnings per share - basic as reported	$	0.24	$	0.35	$	.87	$	.94
Pro forma		0.24		0.35		.86		.92
Earnings per share - diluted as reported	$	0.24	$	0.34	$	.86	$	.92
Pro forma		0.24		0.34		.84		.91

Effect of New Financial Accounting Developments

On March 9, 2004, Securities and Exchange Commission Staff Accounting Bulletin 105 (SAB 105), "Application of Accounting Principles to Loan Commitments", was issued. SAB 105 summarizes the views of the staff regarding the application of generally accepted accounting principles to loan commitments accounted for as derivative instruments. The adoption of the guidance in SAB 105 for all new loan commitments signed after April 1, 2004, did not have a material effect on Heartland’s financial statements.

NOTE 2: OTHER INTANGIBLE ASSETS

The gross carrying amount of other intangible assets and the associated accumulated amortization, in thousands, at September 30, 2004, and December 31, 2003, are presented in the table below:

	September 30, 2004				December 31, 2003
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Intangible assets:
Core deposit premium	$	9,218	$	2,692	$	4,492	$	2,460
Mortgage servicing rights		4,070		926		3,712		675
Other		805		4		-		-
Total	$	14,093	$	3,878	$	8,204	$	3,135
Unamortized intangible assets			$	10,215			$	5,069

As a result of the August 31, 2004, acquisition of the Wealth Management Group of Colonial Trust Company, customer relationship intangibles of $809 thousand were recorded as other intangibles assets.

Projections of amortization expense for mortgage servicing rights are based on existing asset balances and the existing interest rate environment as of September 30, 2004. 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 $91 thousand at September 30, 2004, and $131 thousand at December 31, 2003.

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

	Core Deposit Premium		Mortgage Servicing Rights		Other		Total

Three months ended December 31, 2004	$	256	$	216	$	13	$	485

Year ended December 31,
2005		959		865		49		1,872
2006		856		721		48		1,625
2007		787		577		46		1,411
2008		787		433		45		1,265
2009		704		288		44		1,036

NOTE 3: ACQUISITIONS

On August 31, 2004, Heartland completed its acquisition of the Wealth Management Group of Colonial Trust Company, a publicly held Arizona trust company based in Phoenix. The Wealth Management Group, Colonial Trust Company’s personal trust division, had trust assets of $154.0 million and projected annual revenues of $1.2 million at August 31, 2004. This transaction provides a unique opportunity for us to grow our trust business in the Southwestern marketplace. Colonial’s seasoned management team and strong account base, combined with Heartland’s strong support services, depth of expertise, and long track record of investment performance should prove to be a winning combination as we seek to elevate the profile of our newest subsidiary bank, Arizona Bank & Trust. The purchase price was $2.1 million , all in cash. With this acquisition, total Heartland trust assets exceeded $1.1 billion. The resultant acquired customer relationship intangible of $809 thousand is being amortized over a period of 22 years. The remaining excess purchase price over the fair value of tangible and identifiable intangible assets acquired of $1.4 million was classified as goodwill on Heartland’s consolidated financial statements.

On June 1, 2004, Heartland consummated its acquisition of 100% of the outstanding common stock of the Rocky Mountain Bancorporation, the one-bank holding company of Rocky Mountain Bank with eight locations in the Montana communities of Bigfork, Billings, Bozeman, Broadus, Plains, Plentywood, Stevensville and Whitehall. Consistent with its strategy, the Heartland board believed that this expansion into the Rocky Mountain region provided an opportunity to extend its presence into the western portion of the United States, an area that they believe has good growth potential. The board also believed that Rocky Mountain Bank’s dedication to customer relationship building at the community level is a strategic fit with Heartland’s culture. Rocky Mountain Bank had total assets of $353.5 million, total loans of $27 8.1 million and total deposits of $285.7 million immediately prior to close on May 31, 2004. The purchase price for Rocky Mountain Bancorporation of $34.5 million consisted of $10.4 million cash and 1,387,227 shares of Heartland common stock valued at $18.34 per share. The results of operations of Rocky Mountain Bank are included in the consolidated financial statements from the acquisition date. The resultant acquired deposit base intangible of $4.7 million is being amortized over a period of 10 years. The remaining excess purchase price over the fair value of tangible and identifiable intangible assets acquired of $14.9 million was classified as goodwill on Heartland’s consolidated financial statements.

NOTE 4: OTHER BORROWINGS

On September 30, 2004, Heartland Financial Capital Trust I, a trust subsidiary of Heartland, redeemed all of its $25.0 million 9.60% trust preferred securities and its 9.60% common securities at a redemption price equal to the $25.00 liquidation amount of each security plus all accrued and unpaid interest per security. The redeemed trust preferred securities were originally issued in 1999 and were listed on the American Stock Exchange under the symbol "HFT".

On March 17, 2004, Heartland completed an offering of $25.0 million of variable rate cumulative trust preferred securities representing undivided beneficial interests in Heartland Financial Statutory Trust IV. The proceeds from the offering were used by the trust to purchase junior subordinated debentures from Heartland. The proceeds will be used for general corporate purposes, including future acquisitions or the retirement of debt. Interest is payable quarterly on March 17, June 17, September 17 and December 17 of each year. The debentures will mature and the trust preferred securities must be redeemed on March 17, 2034. Heartland has the option to shorten the maturity date to a date not earlier than March 17, 2009. Heartland may not shorten the maturity date without prior approval of the Board of Governors of th e Federal Reserve System, if required. Prior redemption is permitted under certain circumstances, such as changes in tax or regulatory capital rules. In connection with this offering, the balance of deferred issuance costs included in other assets was $15 thousand as of September 30, 2004. These deferred costs are amortized on a straight-line basis over the life of the debentures.

Heartland has an irrevocable obligation to repurchase the common shares of Arizona Bank & Trust owned by minority shareholders on August 18, 2008. The minority shareholders are obligated to sell their shares to Heartland on that same date. The minimum amount payable is the amount originally paid by the minority shareholders plus a compounded annual return of 6%. The maximum amount payable will be based on the greater of the fair value of those shares based upon an appraisal performed by an independent third party or a predetermined range of multiples of the bank’s trailing twelve month earnings. Through September 30, 2004, Heartland accrued interest on the amount due to the minority shareholders at 6%. The obligation to repay the original investment is payable in cash or Heartland stock or a combination of cash and stock at the option of the minority shareholder. The remainder of the obligation to the minority shareholders is payable in cash or Heartland stock or a combination of cash and stock at the option of Heartland. Additionally, the minority shareholders may put their shares to Heartland at any time through August 18, 2008, at an amount equal to the amount originally paid plus 6% compounded annually. The amount of the obligation as of September 30, 2004, included in other borrowings is $2.1 million.

NOTE 5: JUNIOR SUBORDINATED DEBENTURES

Prior to the redemption of the 9.60% trust preferred securities, Heartland had five wholly-owned trust subsidiaries that were formed to issue trust preferred securities. At March 31, 2004, as a result of the adoption of Financial Accounting Standards Board Interpretation No. 46 (Revised December 2003) (FIN 46R), "Consolidation of Variable Interest Entities", we deconsolidated the trust subsidiaries. As a result of the deconsolidation, an additional $2.5 million of junior subordinated debentures previously issued by Heartland to the trust subsidiaries was included in other borrowings on the consolidated balance sheet at March 31, 2004. The acquisition of Rocky Mountain Bancorporation increased the amount of junior subordinated debentures included in other borrowings on the consolidated balance sheet at June 30, 2004 , to $2.7 million. At September 30, 2004, this had decreased to $2.0 million due to the aforementioned redemption. The common stock issued by the trust subsidiaries was recorded in securities available for sale in the consolidated balance sheet effective March 31, 2004. Prior to March 31, 2004, the trust subsidiaries were consolidated subsidiaries and the trust preferred securities were included in other borrowings. The common securities and debentures, along with the related income effects were eliminated in the consolidated financial statements.

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 d ate 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 salaries and employee benefits, occupancy and equipment costs, depreciation on equipment under operating leases and provision for loan and lease losses.

Net income for the third quarter of 2004 was $4.0 million, or $0.24 per diluted share, a decrease of $1.2 million or 24%, over net income of $5.3 million, or $0.34 per diluted share, during the third quarter of 2003. On an annualized basis, return on average equity was 9.65% and return on average assets was 0.64% for the third quarter of 2004, compared to 15.52% and 1.10%, respectively, for the same quarter in 2003.

The reduction in net income was impacted by a number of items, including comparisons to unusually high gains on sales of loans and a significant reversal in the valuation allowance on our mortgage servicing rights during the 2003 third quarter. In addition, remaining unamortized issuance costs on our trust preferred securities redemption were expensed during the 2004 third quarter. Taken together, these items represented an approximate $4.0 million pre-tax, or $0.16 per diluted share after-tax, swing on our income statement. A positive influence on earnings for the third quarter was the 38% increase in net interest income over third-quarter 2003, primarily as a result of a 31% growth in average earnings assets.

The acquisition of the Wealth Management Group of Colonial Trust Company, a publicly held Arizona trust company based in Phoenix, was completed on August 31, 2004. The total purchase price of Colonial's Wealth Management Group was $2.1 million, consisting of all cash. With the acquisition, total Heartland trust assets exceed $1.1 billion.

Heartland Financial Capital Trust I, a trust subsidiary of Heartland, redeemed all of its $25.0 million 9.60% trust preferred securities on September 30, 2004. The trust preferred securities were issued in 1999 and listed on the American Stock Exchange under the symbol "HFT". Remaining unamortized issuance costs associated with these securities of $959,000, or $.04 per diluted share, were expensed under the noninterest expense category upon redemption. As a result of this redemption, net interest income would be expected to increase by approximately $1.5 million annually under the current rate environment.

Noninterest income totaled $8.7 million during the third quarter of 2004, a decrease of 23% from the noninterest income of $11.2 million recorded during the third quarter of 2003. The three categories contributing to this decrease were securities gains (losses), gains on sale of loans and valuation adjustments on mortgage servicing rights. The decrease in these three noninterest income categories was partially offset by an increase in service charges and fees, as the amortization on mortgage rights decreased and service charges on deposit accounts increased. Rocky Mountain Bank was a major contributor to the additional service charges on deposit accounts.

For the third quarter of 2004, noninterest expense increased 30% to $22.7 million, reflecting increased costs related to the opening of Arizona Bank & Trust and its further expansion efforts. Also contributing to the increased costs was the recently completed acquisition of Rocky Mountain Bank and the recognition of the remaining unamortized issuance costs on the trust preferred securities redeemed. Total full-time equivalent employees increased by 171 or 26% from 667 at quarter-end 2003 to 838 at quarter-end 2004. Of that increase, 127 are full-time equivalent employees at Rocky Mountain Bank.

For the nine-month period ended on September 30, 2004, net income was $13.7 million or $.86 per diluted share compared to $14.0 million or $.92 per diluted share during the same period in 2003, a decline of $336 thousand or 2%. On an annualized basis, return on average equity was 11.93% and return on average assets was 0.82% for the first nine months of 2004, compared to 14.43% and 1.02%, respectively, for the same period in 2003.

Heartland completed a number of its recent growth initiatives during the first nine months of 2004. In addition to the acquisition of the Wealth Management Group of Colonial Trust Company, expansion in the Phoenix area included Arizona Bank & Trust’s opening of its second location in May. Effective June 1, 2004, Heartland expanded into the Rocky Mountain region through the acquisition of Rocky Mountain Bancorporation, a one-bank holding company headquartered in Billings, Montana. As a result of this acquisition, Rocky Mountain Bank joined the Heartland family of community banks, providing banking services in eight communities throughout the state of Montana. In June, a majority of Heartland’s operations resources moved into a new state-of-the-art operations center in Dubuque, Iowa. Additionally, Wisco nsin Community Bank opened a loan production office in Rockland, Massachusetts in October. While the startup costs incurred in expansion efforts can initially be a drag on current earnings, we are confident they will provide a firm foundation for future success.

The addition of Rocky Mountain Bank to the Heartland family of community banks had a positive impact on earnings for the quarter and year-to-date. At September 30, 2004, Rocky Mountain Bank had total assets of $380.1 million, total loans of $277.2 million and total deposits of $293.6 million. Net income at Rocky Mountain Bank totaled $821 thousand for the third quarter of 2004 and $1.1 million for the first four months of operations as a Heartland subsidiary bank.

The slight reduction in earnings during the first nine months of 2004 was primarily due to the recognition of the remaining issuance costs on the redeemed trust preferred securities and a reduction in gains on sale of loans. Net interest income during the first nine months of 2004 improved significantly, increasing $8.8 million or 19% over the same period in 2003. The noninterest income category to experience growth during that same period was service charges and fees. Noninterest expense for the nine-month period experienced an increase of $9.9 million or 20%, primarily due to costs associated with expansion efforts, the issuance costs on the redeemed trust preferred securities and the costs surrounding implementation of internal control provisions of the Sarbanes-Oxley Act of 2002.

Total assets exceeded $2.57 billion at September 30, 2004, up $549.0 million since year-end 2003. Total loans and leases were $1.74 billion at September 30, 2004, an increase of $415.1 million since year-end 2003. Exclusive of Rocky Mountain Bank, Dubuque Bank and Trust Company, Wisconsin Community Bank, Arizona Bank & Trust and New Mexico Bank & Trust were major contributors to the $137.9 million or 10% growth in loans, primarily in the commercial and commercial real estate category. Total deposits at September 30, 2004, were $1.98 billion, an increase of $490.0 million since year-end 2003. Exclusive of Rocky Mountain Bank, the $196.4 million or 13% growth in deposits came primarily from New Mexico Bank & Trust and Arizona Bank & Trust.

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 lo an 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 September 30, 2004. 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 further deteriorate, borrowers may experience difficulty, and the level of nonperf orming 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 3.81% during the third quarter of 2004 compared to 3.62% for the same period in 2003 and 3.71% for the second quarter of 2004. Net interest income totaled $21.2 million during the third quarter of 2004, an increase of $5.8 million or 38% from the $15.4 million recorded during the third quarter of 2003. Contributing to this increase was the 31% growth in average earning assets, which were $2.21 billion during the third quarter of 2004 compared to $1.68 billion during the third quarter of 2003. Rocky Mountain Bank’s contribution to net interest income during the third quarter of 2004 was $3.6 million. Interest income in the third quarter of 2004 totaled $33.3 million compared to $24.8 million in the third quarter of 2003, primarily as a result of growth in the loan portfolio. Interest expense for the third quarter of 2004 was $12.1 million compared to $9.4 million in the third quarter of 2003. A portion of the growth in interest expense was a result of the issuance of $20.0 million of 8.25% cumulative trust preferred securities on October 20, 2003, and $25.0 million of variable-rate cumulative trust preferred securities on March 17, 2004. Rocky Mountain Bank had interest income of $5.1 million and interest expense of $1.4 million during the third quarter of 2004.

As a result of the redemption of all of Heartland’s $25.0 million 9.60% trust preferred securities on September 30, 2004, net interest income would be expected to increase by approximately $1.5 million annually under the current rate environment.

During the third quarter of 2004, Heartland implemented a $30.0 million leverage strategy which included the purchase of mortgage-backed and municipal securities funded primarily by newly issued brokered deposits with an average maturity of 24 months. Management’s analysis indicates that this strategy should create an additional $570 thousand in net interest income annually.

For the nine-month period ended September 30, 2004, net interest income increased $9.1 million or 19%, going from $47.5 million in 2003 to $56.6 million in 2004. This improvement was due primarily to a $339.7 million or 21% growth in average earning assets, which were $1.98 billion during the first nine months of 2004 compared to $1.64 billion during the same period in 2003. Interest income increased $12.7 million or 17%, due primarily to growth in the loan portfolio. Interest expense increased $3.6 million or 13% as a result of the recent issuances of trust preferred securities. For the first four months of operations under Heartland’s umbrella of community banks, Rocky Mountain Bank recorded net interest income of $4.7 million, comprised of $6.7 million of interest income and $1.9 million of interest expense .

On both August 10 and September 21, 2004, the Federal Open Market Committee decided to raise its target for the federal funds rate by 25 basis points, taking the target rate to 1.75%. Correspondingly, the national prime rate rose to 4.75%. Management has been successful in the utilization of floors on its commercial loan portfolio to minimize the affect downward rates have on Heartland’s interest income. Conversely, as rates edge upward, Heartland will not see a corresponding increase in its interest income until rates have moved above the floors in place on these loans. With these most recent increases in rates, Heartland should begin to experience a benefit if rates edge upward, as many of the floors in place are now at or below the current prime rate. On the liability side, management continues to focus eff orts on improving the mix of its funding sources to minimize its interest costs. Heartland’s interest rate risk modeling indicates that a 200 basis point parallel shift upward in rates, assuming the balance sheet remains static, would potentially result in a less than 1% reduction in net interest margin over a 12 month period. Growth in Heartland’s balance sheet and improvement in the mix of its funding should help mitigate the pressure on net interest margin in a rising rate environment.

The table below sets forth certain information relating to Heartland’s average consolidated balance sheets and reflects the yield on average earning assets and the cost of average interest bearing liabilities for the quarters and six-month periods 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 September 30, 2004 and 2003} (Dollars in thousands)
	2004							2003
	Average Balance			Interest		Rate		Average Balance			Interest		Rate
EARNING ASSETS
Securities:
Taxable	$	377,667		$	3,248	3.42	%	$	296,108		$	1,497	2.01	%
Nontaxable¹		100,578			1,820	7.20			81,986			1,536	7.43
Total securities		478,245			5,068	4.22			378,094			3,033	3.18
Interest bearing deposits		7,720			66	3.40			7,407			38	2.04
Federal funds sold		8,735			33	1.50			63,203			149	0.94
Loans and leases:
Commercial and commercial real estate¹		1,123,182			16,473	5.83			788,919			11,959	6.01
Residential mortgage		224,162			3,330	5.91			164,133			2,552	6.17
Agricultural and agricultural real estate¹		222,300			3,642	6.52			164,461			2,721	6.56
Consumer		160,315			3,187	7.91			126,153			2,842	8.94
Direct financing leases, net		13,557			196	5.75			9,849			179	7.21
Fees on loans		-			1,302	-			-			1,312	-
Less: allowance for loan and lease losses		(24,267	)		-	-			(17,676	)		-	-
Net loans and leases		1,719,249			28,130	6.51			1,235,839			21,565	6.92
Total earning assets		2,213,949			33,297	5.98			1,684,543			24,785	5.84
NONEARNING ASSETS		290,300			-	-			214,980			-	-
TOTAL ASSETS	$	2,504,249		$	33,297	5.29	%	$	1,899,523		$	24,785	5.18	%
INTEREST BEARING LIABILITIES
Interest bearing deposits
Savings	$	718,154		$	1,591	0.82	%	$	541,036		$	1,124	0.82
Time, $100,000 and over		162,899			1,044	2.57			141,373			928	2.60
Other time deposits		725,477			5,778	3.17			534,190			4,814	3.58
Short-term borrowings		172,597			693	1.60			149,788			581	1.54
Other borrowings		218,989			2,998	5.45			149,239			1,953	5.19
Total interest bearing liabilities		1,998,116			12,104	2.41			1,515,626			9,400	2.46
NONINTEREST BEARING LIABILITIES
Noninterest bearing deposits		302,599			-	-			216,964			-	-
Accrued interest and other liabilities		37,916			-	-			32,381			-	-
Total noninterest bearing liabilities		340,515			-	-			249,345			-	-
STOCKHOLDERS’ EQUITY		165,618			-	-			134,552			-	-
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	2,504,249		$	12,104	1.92	%	$	1,899,523		$	9,400	1.96	%
Net interest income¹				$	21,193						$	15,385
Net interest income to total earning assets¹						3.81	%						3.62	%
Interest bearing liabilities to earning assets		90.25	%						89.97	%

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

ANALYSIS OF AVERAGE BALANCES, TAX EQUIVALENT YIELDS AND RATES¹ For the nine monthe ended September 30, 2004 and 2003 (Dollars in thousands)
	2004							2003
	Average Balance			Interest		Rate		Average Balance			Interest		Rate
EARNING ASSETS
Securities:
Taxable	$	361,956		$	9,554	3.53	%	$	304,763		$	6,728	2.95	%
Nontaxable¹		92,521			5,036	7.27			78,740			4,476	7.60
Total securities		454,477			14,590	4.29			383,503			11,204	3.91
Interest bearing deposits		6,208			156	3.36			8,144			135	2.22
Federal funds sold		4,690			47	1.34			35,266			279	1.06
Loans and leases:
Commercial and commercial real estate¹		998,394			43,378	5.80			776,740			36,090	6.21
Residential mortgage		186,220			8,239	5.91			158,108			7,591	6.42
Agricultural and agricultural real estate¹		192,381			9,461	6.57			164,120			8,177	6.66
Consumer		146,053			8,958	8.19			121,261			8,480	9.35
Direct financing leases, net		13,509			613	6.06			10,843			609	7.51
Fees on loans		-			3,260	-			-			3,438	-
Less: allowance for loan and lease losses		(21,343	)		-	-			(17,120	)		-	-
Net loans and leases		1,515,214			73,909	6.52			1,213,952			64,385	7.09
Total earning assets		1,980,589			88,702	5.98			1,640,865			76,003	6.19
NONEARNING ASSETS		255,825			-	-			195,524			-	-
TOTAL ASSETS	$	2,236,414		$	88,702	5.30	%	$	1,836,389		$	76,003	5.53	%
INTEREST BEARING LIABILITIES
Interest bearing deposits
Savings	$	635,531		$	4,023	.85		$	520,960		$	3,609	.93
Time, $100,000 and over		149,088			2,835	2.54			140,980			2,830	2.68
Other time deposits		619,400			15,111	3.26			524,069			14,532	3.71
Short-term borrowings		181,208			1,989	1.47			147,557			1,759	1.59
Other borrowings		198,697			8,173	5.49			140,671			5,815	5.53
Total interest bearing liabilities		1,783,924			32,131	2.41			1,474,237			28,545	2.59
NONINTEREST BEARING LIABILITIES
Noninterest bearing deposits		262,160			-	-			197,339			-	-
Accrued interest and other liabilities		37,360			-	-			35,170			-	-
Total noninterest bearing liabilities		299,520			-	-			232,509			-	-
STOCKHOLDERS’ EQUITY		152,970			-	-			129,643			-	-
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	2,236,414		$	32,131	1.92	%	$	1,836,389		$	28,545	2.08	%
Net interest income¹				$	56,571						$	47,458
Net interest income to total earning assets¹						3.82	%						3.87	%
Interest bearing liabilities to earning assets		90.07	%						89.85	%

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 third quarter of 2004 was $1.1 million, an increase of $103 thousand or 11% when compared to the same quarter of 2003. During the first nine months of 2004, the provision for loan losses was $3.4 million, an increase of $224 thousand or 7%. 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
	Sept. 30, 2004			Sept. 30, 2003			Change			% Change
NONINTEREST INCOME:
Service charges and fees	$	2,688		$	1,452		$	1,236			85.12	%
Trust fees		1,196			951			245			25.76
Brokerage commissions		213			236			(23	)		(9.75	)
Insurance commissions		174			141			33			23.40
Securities gains (losses), net		(61	)		527			(588	)		(111.57	)
Gain (loss) on trading account securities		(32	)		80			(112	)		(140.00	)
Impairment loss on equity securities		-			(69	)		69			(100.00	)
Rental income on operating leases		3,425			3,447			(22	)		(0.64	)
Gain on sale of loans		814			2,446			(1,632	)		(66.72	)
Valuation adjustment on mortgage servicing rights		(73	)		1,360			(1,433	)		(105.37	)
Other noninterest income		337			631			(294	)		(46.59	)
TOTAL NONINTEREST INCOME	$	8,681		$	11,202		$	(2,521	)		(22.50	)%

	Nine Months Ended
	Sept. 30, 2004		Sept. 30, 2003			Change			% Change
NONINTEREST INCOME:
Service charges and fees	$	7,283	$	4,208		$	3,075			73.08	%
Trust fees		3,337		2,761			576			20.86
Brokerage commissions		841		599			242			40.40
Insurance commissions		556		557			(1	)		(0.18	)
Securities gains, net		1,806		1,685			121			7.18
Gain (loss) on trading account securities		43		329			(286	)		(86.93	)
Impairment loss on equity securities		-		(239	)		239			(100.00	)
Rental income on operating leases		10,348		10,342			6			0.06
Gain on sale of loans		2,186		5,667			(3,481	)		(61.43	)
Valuation adjustment on mortgage servicing rights		40		368			(328	)		(89.13	)
Other noninterest income		1,550		1,811			(261	)		(14.41	)
TOTAL NONINTEREST INCOME	$	27,990	$	28,088		$	(98	)		(0.35	)%

Noninterest income decreased $2.5 million or 23% during the third quarter of 2004 when compared to the same quarter in 2003. The three categories contributing to this decrease were securities gains (losses), gains on sale of loans and valuation adjustments on mortgage servicing rights. The decrease in these three noninterest income categories was partially offset by an increase in service charges and fees. On a year-to-date comparative basis, noninterest income decreased $98 thousand or less than 1%. The noninterest income category reflecting significant improvement during the nine-month comparative period was service charges and fees, which was offset by a reduction in the gains on sale of loans. Rocky Mountain Bank recorded $643 thousand in noninterest income during the third quarter of 2004 and $841 thousand dur ing its first four months of operations under the Heartland umbrella of community banks.

Service charges and fees increased $1.2 million or 85% during the quarters under comparison. On a nine-month comparative basis, service charges and fees increased $3.1 million or 73%. Included in this category are service fees collected on the mortgage loans Heartland sold into the secondary market, while retaining servicing. Heartland’s mortgage loan servicing portfolio grew from $521.1 million at September 30, 2003, to $562.7 million at September 30, 2004, generating additional mortgage loan servicing fees of $64 thousand for the quarter and $230 thousand for the nine-month period, increases of 23% and 29%, respectively. The most significant impact to service charges and fees was the $581 thousand or 72% reduction for the quarter and $1.2 million or 59% reduction for the nine-month period in the amortization on the mortgage servicing rights associated with the mortgage loan servicing portfolio. During 2004, prepayment activity in the portfolio caused by refinancing activity slowed, resulting in a lower amortization rate. Service charges on deposit products are also included in this category. Rocky Mountain Bank contributed $298 thousand during the third quarter of 2004 and $403 thousand during its first four months of operations as a subsidiary of Heartland to the service charges on deposit products category. Also contributing to the improvement in service charges on deposit products was an overdraft privilege feature on our checking account product line that resulted in the generation of additional service charge revenue of approximately $143 thousand for the quarter and $434 thousand for the nine-month period, increases of 18% and 20%, respectively. Additionally, included in the service charges and fees category were fees generated by HTLF Capital Corp., our investment banking subsidiary formed in May of 2003 , in the amount of $18 thousand during the third quarter of 2004 and $230 thousand during the first nine months of 2004.

Gains on sale of loans experienced reductions of $1.6 million or 67% and $3.5 million or 61% during the quarter and nine months under comparison, respectively, as refinancing activity on residential mortgage loans was at historically high levels during 2003. During low rate environments, customers frequently elect to take fifteen- and thirty-year, fixed-rate mortgage loans, which Heartland usually elects to sell into the secondary market.

Valuation adjustments on mortgage servicing rights experienced a $1.4 million reversal of the valuation allowance during the third quarter of 2003 compared to a $73 thousand increase in the valuation allowance during the same quarter of 2004. On a year-to-date comparative basis, the total valuation adjustment on mortgage servicing rights resulted in reversals totaling $40 thousand during 2004 and $368 thousand during 2003. Heartland utilizes the services of an independent third-party to perform a valuation analysis of its servicing portfolio each quarter. At September 30, 2004, the remaining valuation allowance totaled $91 thousand.

During the third quarter of 2003, securities gains totaled $527 thousand compared to losses of $61 thousand during the third quarter of 2004. During the first nine months of 2004, securities gains were $1.8 million compared to $1.7 million during the first nine months of 2003. 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. The partial liquidation of the available for sale equity securities portfolio resulted in $542 thousand of securities gains during the first quarter of 2004. Management has elected to liquidate a majority of this portfolio and redirect those funds to its expansion efforts.

NONINTEREST EXPENSE

	Three Months Ended
	Sept. 30, 2004		Sept. 30, 2003		Change			% Change
NONINTEREST EXPENSE:
Salaries and employee benefits	$	10,597	$	8,579	$	2,018			23.52	%
Occupancy		1,337		1,021		316			30.95
Furniture and equipment		1,423		1,064		359			33.74
Depreciation on equipment under operating leases		2,798		2,859		(61	)		(2.13	)
Outside services		2,026		1,286		740			57.54
FDIC deposit insurance assessment		65		54		11			20.37
Advertising		829		679		150			22.09
Other intangibles amortization		257		101		156			154.46
Other noninterest expenses		3,361		1,763		1,598			90.64
TOTAL NONINTEREST EXPENSE	$	22,693	$	17,406	$	5,287			30.37	%

	Nine Months Ended
	Sept. 30, 2004		Sept. 30, 2003		Change		% Change
NONINTEREST EXPENSE:
Salaries and employee benefits	$	28,688	$	24,414	$	4,274		17.51	%
Occupancy		3,615		2,877		738		25.65
Furniture and equipment		3,875		2,912		963		33.07
Depreciation on equipment under operating leases		8,528		8,471		57		0.67
Outside services		4,998		3,558		1,440		40.47
FDIC deposit insurance assessment		177		161		16		9.94
Advertising		2,005		1,765		240		13.6
Other intangibles amortization		489		303		186		61.39
Other noninterest expenses		7,546		5,577		1,969		35.31
TOTAL NONINTEREST EXPENSE	$	59,921	$	50,038	$	9,883		19.75	%

For the third quarter of 2004, noninterest expense increased $5.3 million or 30%, reflecting increased costs related to the acquisition of Rocky Mountain Bank and the recognition of the remaining unamortized issuance costs on the trust preferred securities redeemed. For the first nine months of 2004, noninterest expense increased $9.9 million or 20%. In addition to the items mentioned above, Wisconsin Community Bank’s March 2003 opening of an additional branch in the Madison, Wisconsin market, the April 2003 formation of HTLF Capital Corp., the August 2003 opening of Arizona Bank & Trust and its opening of a second branch in May 2004 also contributed to this increase. Rocky Mountain Bank accounted for $2.9 million or 55% of the increase during the quarter and $3.8 million or 39% for the nine-month period.

Salaries and employee benefits, the largest component of noninterest expense, increased $2.0 million or 24% for the quarters under comparison and $4.3 million or 18% for the nine months under comparison. This category made up more than 38% of the total increase in noninterest expense during the quarter and 43% during the nine-month period under comparison. In addition to staffing increases at the holding company to provide support services to the growing number of bank subsidiaries, these increases were also attributable to the opening of Arizona Bank & Trust’s first branch location in Mesa, Arizona and its second branch location in Chandler, Arizona, Wisconsin Community Bank’s new loan production office in Rockland, Massachusetts and the addition of Rocky Mountain Bank. Salaries and employee benefits expense at Rocky Mountain Bank totaled $1.5 million during the third quarter and $1.9 million during its first four months as a subsidiary of Heartland. Total full-time equivalent employees increased by 171 or 26% from 667 at quarter-end 2003 to 838 at quarter-end 2004. Of that increase, 127 are full-time equivalent employees at Rocky Mountain Bank.

Occupancy and furniture and equipment expense, in aggregate, increased $675 thousand or 32% for the quarters under comparison and $1.7 million or 29% for the nine-month periods under comparison. These increases were primarily the result of the expansion efforts and the completion of Heartland’s state-of-the-art operations center in Dubuque, Iowa. Rocky Mountain Bank was responsible for $436 thousand and $592 thousand of these expenses during the quarter and nine-month periods, respectively.

Fees for outside services increased by $740 thousand or 58% for the quarters under comparison and $1.4 million or 40% for the nine-month periods under comparison. Contributing to these increases were the following:

·	Additional professional fees were incurred in 2004 for services related to the implementation and compliance with internal control provisions of the Sarbanes-Oxley Act of 2002.

·	Early in 2004, Heartland embarked upon the implementation of Citrix technology across all its bank subsidiaries.

·	Legal and professional fees related to Heartland’s continuing expansion through branch and de novo bank formations, in addition to the exploration of potential acquisitions, continued to increase during 2004.

·	Rocky Mountain Bank recorded fees for outside services of $445 thousand during the third quarter of 2004 and $595 thousand during its first four months as a subsidiary of Heartland.

Other noninterest expenses increased $1.6 million or 91% for the quarters under comparison and $2.0 million or 35% for the nine-month periods under comparison. Remaining unamortized issuance cost on the $25.0 million 9.60% trust preferred securities redeemed on September 30, 2004, totaled $959 thousand and were fully expensed during the third quarter of 2004.

INCOME TAX EXPENSE

Income tax expense for the third quarter of 2004 decreased $1.0 million or 42% when compared to the same period in 2003, resulting in an effective tax rate of 25.62% for 2004 compared to 31.23% for 2003. Income tax expense for the first nine months of 2004 decreased $1.0 million or 16% when compared to the same period in 2003. Heartland’s effective tax rate for the nine-month comparative period was 29.10% for 2004 compared to 32.22% for 2003. The reduced effective rate was the result of federal historic rehabilitation tax credits of $550 thousand and state historic rehabilitation tax credits of $325 thousand. Additionally, tax-exempt interest income went from 15% of pre-tax income during the first nine months of 2003 to 19% during the same period in 2004. A large portion of this change in tax-exempt income occ urred during the third quarter of 2004.

FINANCIAL CONDITION

LOANS AND ALLOWANCE FOR LOAN AND LEASE LOSSES

Total loans and leases increased $415.1 million or 31% since year-end 2003. Rocky Mountain Bank had total loans and leases of $274.2 million as of September 30, 2004. Internal growth, defined as total loans and leases exclusive of Rocky Mountain Bank, was $140.9 million or 11%. All the loan portfolios except for agricultural and agricultural real estate and lease financing experienced growth.

Exclusive of $143.5 million at Rocky Mountain Bank, the commercial and commercial real estate loan portfolio grew $114.4 million or 13% internally during the first nine months of 2004. Activity at Dubuque Bank and Trust Company, Wisconsin Community Bank, New Mexico Bank & Trust and Arizona Bank & Trust was responsible for nearly $97.1 million or 85% of the growth.

Agricultural and agricultural real estate loans decreased $9.4 million or 6% since year-end 2003 when excluding the $67.4 million of agricultural and agricultural real estate loans at Rocky Mountain Bank as of September 30, 2004. While growth occurred at Dubuque Bank and Trust Company and First Community Bank, a decline of $8.5 million was experienced at New Mexico Bank & Trust’s Clovis branch due to payoffs on a few large credits.

The residential mortgage loan portfolio experienced internal growth of $22.4 million or 15% when excluding the $50.9 million residential mortgage loan portfolio at Rocky Mountain Bank at September 30, 2004. A majority of this growth occurred in adjustable-rate mortgage and residential construction loans at Arizona Bank & Trust, Wisconsin Community Bank, Riverside Community Bank and New Mexico Bank & Trust as they expanded their mortgage lending capabilities. 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 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 the excell ent service they expect.

Exclusive of Rocky Mountain Bank’s consumer loan portfolio of $12.3 million at quarter-end, consumer loans increased $14.2 million or 10% during the first nine months of 2004, primarily in home equity lines of credit at all of the Heartland bank subsidiaries except First Community Bank. Also contributing to this growth was Citizens Finance Co., which experienced an increase of $2.4 million or 11% in its consumer loan portfolio.

The table below presents the composition of the loan portfolio as of September 30, 2004, and December 31, 2003.

LOAN PORTFOLIO (Dollars in thousands)
	September 30, 2004							December 31, 2003
	Amount			Percent			Amount			Percent
Commercial and commercial real estate	$	1,118,421			64.26	%	$	860,552			64.93	%
Residential mortgage		221,697			12.74			148,376			11.19
Agricultural and agricultural real estate		224,226			12.88			166,182			12.54
Consumer		163,107			9.37			136,601			10.31
Lease financing, net		13,030			.75			13,621			1.03
Gross loans and leases		1,740,481			100.00	%		1,325,332			100.00	%
Unearned discount		(1,843	)					(1,836	)
Deferred loan fees		(1,024	)					(947	)
Total loans and leases		1,737,614						1,322,549
Allowance for loan and lease losses		(24,520	)					(18,490	)
Loans and leases, net	$	1,713,094					$	1,304,059

Loans held for sale increased $8.1 million or 31% since year-end 2003. Rocky Mountain Bank was responsible for $2.9 million or 36% of this change. Activity in 15- and 30-year fixed-rate mortgage loans, which are usually sold into the secondary market, made up another $2.9 million or 36% of the change. The remainder of the growth in loans held for sale was commercial and commercial real estate loans at Wisconsin Community Bank that were structured to meet the USDA and SBA loan guaranty program requirements. We continue to explore opportunities to expand this area of our business, as demonstrated by the opening of a loan production office, primarily focused on this type of specialty lending, by Wisconsin Community Bank in Minneapolis, Minnesota last fall and Rockland, Massachusetts this fall.

The allowance for loan and lease losses increased by $6.0 million or 33% during the first nine months of 2004, of which $4.2 million was a result of the Rocky Mountain Bank acquisition. The allowance for loan and lease losses at September 30, 2004, was 1.41% of loans and 229% of nonperforming loans, compared to 1.40% of loans and 333% of nonperforming loans at December 31, 2003. Nonperforming loans increased to $10.7 million or 0.62% of total loans and leases compared to $5.6 million or 0.42% of total loans and leases at December 31, 2003. Exclusive of the $3.2 million in total nonperforming loans at Rocky Mountain Bank, total nonperforming loans increased $1.9 million, due primarily to one large credit in the Dubuque market.

During the first nine months of 2004, Heartland recorded net charge offs of $1.6 million compared to $1.2 million for the same period in 2003. One nonperforming credit in the Albuquerque market was responsible for $642 thousand of the net charge-offs in 2004.

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)
	Nine Months Ended September 30,
	2004			2003
Balance at beginning of period	$	18,490			$	16,091
Provision for loan and lease losses		3,400				3,176
Recoveries on loans and leases previously charged off		853				488
Loans and leases charged off		(2,472	)			(1,714	)
Additions related to acquisitions		4,249				-
Balance at end of period	$	24,520			$	18,041
Net charge offs to average loans and leases		0.11	%			0.44	%

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 September 30,						As of December 31,
	2004			2003			2003			2002
Nonaccrual loans and leases	$	10,205		$	4,612		$	5,092		$	3,944
Loan and leases contractually past due 90 days or more		491			862			458			541
Total nonperforming loans and leases		10,696			5,474			5,550			4,485
Other real estate		361			1,082			599			452
Other repossessed assets		321			346			285			279
Total nonperforming assets	$	11,378		$	6,902		$	6,434		$	5,216
Nonperforming loans and leases to total loans and leases		0.62	%		0.44	%		0.42	%		0.39	%
Nonperforming assets to total assets		0.44	%		0.35	%		0.32	%		0.29	%

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 September 30, 2004, and 22% of total assets at December 31, 2003.

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. 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. A partial liquidation of the available for sale equity securities portfolio was initiated during the first quarter of 2004, as manag ement elected to use the proceeds to fund acquisitions and its internal expansion efforts.

Rocky Mountain Bank’s securities portfolio at September 30, 2004, totaled $60.6 million, with slightly over half of its portfolio being comprised of U.S. government agency securities. Exclusive of the securities at Rocky Mountain Bank, there was a shift in the portfolio from U.S. agency securities and mortgage-backed securities into municipal securities, particularly during the third quarter when a leverage strategy was implemented that included the purchase of $30.0 million in securities.

The table below presents the composition of the available for sale securities portfolio by major category as of September 30, 2004, and December 31, 2003.

AVAILABLE FOR SALE SECURITIES PORTFOLIO (Dollars in thousands)
	September 30, 2004						December 31, 2003
	Amount		Percent			Amount		Percent
U.S. Treasury securities	$	497		0.10	%	$	499		0.11	%
U.S. government agencies		200,614		39.84			182,435		40.48
Mortgage-backed securities		154,545		30.69			151,233		33.56
States and political subdivisions		119,074		23.65			93,210		20.68
Other securities		28,833		5.72			23,303		5.17
Total available for sale securities	$	503,563		100.00	%	$	450,680		100.00	%

DEPOSITS AND BORROWED FUNDS

Total deposits at September 30, 2004, were $1.98 billion, an increase of $490.0 million or 33% since year-end 2003. Rocky Mountain Bank had total deposits of $293.6 million at September 30, 2004. Internal growth, defined as total deposits exclusive of Rocky Mountain Bank, was $196.4 million or 13%. The deposit category to experience the least increase since year-end was demand, with an internal growth of $8.9 million or 4%, exclusive of the $45.7 million at Rocky Mountain Bank. New Mexico Bank & Trust experienced the most significant growth in demand deposits during the first nine months of 2004. Savings deposit account balances grew by $86.5 million or 15%, exclusive of the $106.1 million at Rocky Mountain Bank, primarily as a result of growth in the money market account product at Arizona Bank & Trust. Ex clusive of $141.8 million of time deposits at Rocky Mountain Bank, certificate of deposit account balances increased by $101.0 million or 15% during the first nine months of 2004. Nearly all this increase was due to the issuance of brokered certificates of deposit, as many of our local markets were not able to attract certificate of deposit customers under the current rate environment. Additionally, during the third quarter of 2004, a leverage strategy was implemented that included the issuance of $30.0 million in brokered certificates of deposit to fund purchases of securities.

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 nine-month period ended September 30, 2004, the amount of short-term borrowings increased $3.6 million or 2%. 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 va riation, the account relationships represented by these balances are principally local. Repurchase agreement balances declined $7.1 million or 6% since year-end 2003, exclusive of the $10.4 million held by Rocky Mountain Bank at September 30, 2004.

Also included in short-term borrowings are Heartland’s credit lines with unaffiliated banks. On January 31, 2004, Heartland entered into a credit agreement with three unaffiliated banks to replace the existing revolving credit lines as well as to increase availability under a revolving credit line. Under the new revolving credit line, Heartland may borrow up to $70.0 million. The previous credit line provided up to $50.0 million. The additional $20.0 million credit line was established primarily to provide working capital to the nonbanking subsidiaries and replace similar-sized lines currently in place at those subsidiaries. At September 30, 2004, a total of $38.0 million was outstanding on these credit lines compared to $25.0 million on December 31, 2003. Additional borrowings were needed during the third qua rter of 2004 to facilitate the redemption of the $25.0 million in trust preferred securities.

Other borrowings include all debt arrangements Heartland and its subsidiaries have entered into with original maturities that extend beyond one year. These borrowings were $194.7 million on September 30, 2004, compared to $174.0 million on December 31, 2003. Balances outstanding on trust preferred capital securities issued by Heartland are included in total other borrowings. On September 30, 2004, $25.0 million 9.60% trust preferred capital securities, originally issued in 1999, were redeemed. On March 17, 2004, Heartland completed an additional issuance of $25.0 million in variable rate cumulative capital securities. This variable rate issuance matures on March 17, 2034 and bears interest at the rate of 2.75% per annum over the three-month LIBOR rate, as calculated each quarter. As a result of the Rocky Mountain Bancorporation acquisition, Heartland assumed the outstanding obligation on $5.0 million of trust preferred capital securities. A schedule of Heartland’s trust preferred offerings outstanding as of September 30, 2004, was as follows:

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	Variable	12/18/31	12/18/06
5,000,000	06/27/02	Variable	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	Variable	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, except for Arizona Bank & Trust, own stock in the FHLB of Des Moines, Chicago, Dallas or Seattle, enabling them to borrow funds from their respective FHLB for short- or long-term purposes under a variety of programs. Total FHLB borrowings at September 30, 2004, increased to $130.6 million from $101.5 million at December 31, 2003. Of this increase, $19.2 million was attributable to Rocky Mountain Bank. A majority of these borrowings are fixed-rate advances for original terms between three and five years. To fund a portion of the fixed-rate commercial and residential loan growth experienced, Heartland entered into these FHLB advances.

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)
	September 30, 2004						December 31, 2003
	Amount		Ratio			Amount		Ratio
Risk-Based Capital Ratios⁽¹⁾
Tier 1 capital	$	176,911		8.99	%	$	158,346		10.29	%
Tier 1 capital minimum requirement		78,704		4.00	%		61,536		4.00	%
Excess	$	98,207		4.99	%	$	96,810		6.29	%
Total capital	$	211,202		10.73	%	$	191,060		12.42	%
Total capital minimum requirement		157,408		8.00	%		123,072		8.00	%
Excess	$	53,794		2.73	%	$	67,988		4.42	%
Total risk-adjusted assets	$	1,967,598				$	1,538,406
Leverage Capital Ratios⁽²⁾
Tier 1 capital	$	176,911		7.19	%	$	158,346		8.07	%
Tier 1 capital minimum requirement⁽³⁾		98,416		4.00	%		78,464		4.00	%
Excess	$	78,495		3.19	%	$	79,882		4.07	%
Average adjusted assets (less goodwill and other intangible assets)	$	2,460,396				$	1,961,588

(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.

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%. A portion of Arizona Bank & Trust’s common stock is still available to interested local investors. In no case will Heartland’s ownership interest be allowed to fall below 80%. All minority stockholders, both initial and subsequent, have or will enter into a stock transfer agreement that imposes certain restrictions on the investor's sale, transfer or other disposition of their shares and obligates Heartland to repurchase the shares from the investor in 2008. See footnote four to the consolidate d financial statements for additional information on this obligation.

Heartland had an incentive compensation agreement with certain employees of one of its 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 15, 2004, one-third of the payment was made in cash and the remaining two-thirds in stock options to purchase Heartland’s common stock exercisable in 2005 and 2006. The obligation was accrued over the performance period from January 1, 2000, to December 31, 2003.

Heartland continues to explore opportunities to expand its consortium of independent community banks through mergers and acquisitions as well as de novo and branching opportunities. The acquisition of Rocky Mountain Bank represents Heartland’s expansion into a new region of the United States and allows Heartland to expand its geographic footprint. An important factor in the decision to acquire Rocky Mountain Bank was its dedication to customer relationship building at the community level, which is deeply ingrained in Heartland’s culture and one of the major factors considered when pursuing expansion opportunities. Likewise, the acquisition of the Wealth Management Group of Colonial Trust Company provides the opportunity to grow our trust business within our key Southwestern marketplace. Future expenditure s relating to expansion efforts 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 $169.4 million during the first nine months of 2004, compared to $131.1 million during the same nine months of 2003. The net increase in loans and leases increased $38.9 million in 2004, as most of the bank subsidiaries experienced growth. During 2003, net cash outflows from investing activities was affected by the $15.0 million purchase of bank-owned life insurance, which was subsequently reduced to $10.0 million.

Net cash provided by financing activities was $171.6 million during the first nine months of 2004 compared to $142.9 million during same nine months in 2003. The net increase in deposits grew from $119.2 million in 2003 to $204.0 million in 2004, an $84.8 million change. This positive increase in net cash provided by financing activities was partially offset by repayments on both long- and short-term borrowings.

Total cash provided by operating activities was $21.0 million during the first nine months of 2004 compared to $36.2 million during the same nine months of 2003. 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 September 30, 2004, Heartland’s revolving credit agreement with third-party banks provided a maximum borrowing capacity of $70.0 million, of which $38.0 million had been borrowed. These agreements contain specific covenants which, among other things, limit dividend payments and restrict the sale of assets by Heartland under certain circumstances. Also contained within the agreements 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 September 30, 2004, Heartland was in compliance with the covenants contained in these credit agreements.

RECENT REGULATORY DEVELOPMENTS

On August 20, 2004, Illinois Governor Blagojevich signed legislation that permits state-chartered banks and national banks that are headquartered outside of Illinois to establish de novo branches and to acquire branches in Illinois, provided that the states in which they are headquartered grant reciprocal privileges to banks that are headquartered in Illinois. This legislation will allow state-chartered banks and national banks headquartered in Illinois to establish de novo branches and to acquire branches in states that have similar reciprocity laws. On September 13, 2004, the Illinois Department of Financial and Professional Regulation published guidance, in the form of Interpretive Letter 2004-01, that lists those states that have similar reciprocity laws.

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 2004 changed significantly when compared to 2003.

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 September 30, 2004, 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 $863 thousand on September 30, 2004.

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 September 30, 2004. 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.

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.

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, 2004, 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⁽²⁾	(d) Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs
07/01/04- 07/31/04	85,619	$17.81	N/A	N/A
08/01/04- 08/31/04	40,701	$17.41	N/A	N/A
09/01/04- 09/30/04	2,469	$18.06	N/A	N/A
Total:	128,789⁽¹⁾	$17.69	N/A	N/A

(1)	Heartland purchased these shares in open market transactions.

(2)	Heartland’s board of directors has not adopted a formal stock repurchase program.

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.

November 9, 2004

/s/ Lynn B. Fuller			/s/ John K. Schmidt
Lynn B Fuller			John K. Schmidt
President			Executive Vice President, COO & CFO