Goodwill, Core Deposit Premium and Other Intangible Assets

3 Months Ended

Mar. 31, 2015

Goodwill and Intangible Assets Disclosure [Abstract]

Goodwill, Core Deposit Premium and Other Intangible Assets

GOODWILL, CORE DEPOSIT PREMIUM AND OTHER INTANGIBLE ASSETS

Heartland had goodwill of $51.1 million at March 31, 2015, and $35.6 million December 31, 2014. Heartland conducts its annual internal assessment of the goodwill both collectively and at its subsidiaries as of September 30.

Heartland recorded $15.5 million of goodwill in connection with the acquisition of Community Banc-Corp of Sheboygan, Inc., the parent company of Community Bank & Trust, based in Sheboygan, Wisconsin on January 16, 2015. The goodwill associated with this transaction is not deductible for tax purposes. As part of this acquisition, Heartland recognized core deposit intangibles of $6.0 million that are expected to be amortized over a period of 10 years. The core deposit intangibles associated with this transaction are not deductible for tax purposes. In addition, Heartland recognized commercial servicing rights of $4.3 million that are expected to be amortized over a period of 10 years.

Other intangible assets consist of core deposit intangibles, mortgage servicing rights, customer relationship intangible, and commercial servicing rights. The gross carrying amount of other intangible assets and the associated accumulated amortization at March 31, 2015, and December 31, 2014, are presented in the table below, in thousands:



	March 31, 2015						December 31, 2014
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Amortizing intangible assets:
Core deposit intangibles	$	27,109	$	13,145	$	13,964	$	21,069	$	12,525	$	8,544
Mortgage servicing rights	38,893		13,398		25,495		37,825		12,841		24,984
Customer relationship intangible	1,177		784		393		1,177		773		404
Commercial servicing rights	4,387		215		4,172		—		—		—
Total	$	71,566	$	27,542	$	44,024	$	60,071	$	26,139	$	33,932

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



	Core Deposit Intangibles		Mortgage Servicing Rights		Customer Relationship Intangible		Commercial Servicing Rights		Total
Nine months ending December 31, 2015	$	2,078	$	6,480	$	32	$	641	$	9,231
Year ending December 31,
2016	2,467		4,754		41		828		8,090
2017	2,180		4,075		40		776		7,071
2018	1,925		3,396		39		672		6,032
2019	1,667		2,716		38		519		4,940
2020	1,423		2,037		37		318		3,815
Thereafter	2,224		2,037		166		418		4,845

Projections of amortization expense for mortgage servicing rights are based on existing asset balances and the existing interest rate environment as of March 31, 2015. Heartland's actual experience may be significantly different depending upon changes in mortgage interest rates and market conditions. Mortgage loans serviced for others were $3.58 billion and $3.50 billion as of March 31, 2015, and December 31, 2014, respectively. The fair value of Heartland's mortgage servicing rights was estimated at $34.5 million at March 31, 2015, and $34.2 million at December 31, 2014.

Heartland's mortgage servicing rights portfolio is comprised of loans serviced for the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, and the Government National Mortgage Association. The servicing rights portfolio is separated into 15- and 30-year tranches. At both March 31, 2015, and December 31, 2014, no valuation allowance was required for any of the tranches.

The fair value of mortgage servicing rights is calculated based upon a discounted cash flow analysis. Cash flow assumptions, including prepayment speeds, servicing costs and escrow earnings are considered in the calculation. The average constant prepayment rate was 11.66% and 11.40% for the March 31, 2015 and December 31, 2014, valuations, respectively. The discount rate was 9.21% and 9.20% for the March 31, 2015 and December 31, 2014, valuations, respectively. The average capitalization rate for the first three months of 2015 ranged from 0.75 to 1.30 basis points compared to 0.75 and 1.39 basis points for 2014. Fees collected for the servicing of mortgage loans for others were $2.5 million and $2.1 million for the three months ended March 31, 2015, and March 31, 2014, respectively.

The following table summarizes, in thousands, the changes in capitalized mortgage servicing rights for the three month period ended March 31, 2015 and 2014:



	2015			2014
Balance at January 1	$	24,984		$	21,788
Originations	2,686			1,435
Amortization	(2,175		)	(1,079		)
Balance at March 31	$	25,495		$	22,144
Fair value of mortgage servicing rights	$	34,492		$	32,032
Mortgage servicing rights, net to servicing portfolio	0.71		%	0.71		%

Heartland's commercial servicing rights portfolio was acquired with the Community Banc-Corp of Sheboygan, Inc. transaction that closed on January 16, 2015. The commercial servicing portfolio is comprised of loans serviced for the Small Business Administration and United States Department of Agriculture, which totaled $145.1 million. Fees collected for the servicing of commercial loans for others were $149,000. The fair value of Heartland's commercial servicing rights was estimated at $4.4 million as of March 31, 2015.

The following table summarizes, in thousands, the changes in capitalized commercial servicing rights for the three month period ended March 31, 2015 and 2014:



	2015			2014
Balance at January 1	$	—		$	—
Acquired	4,255			—
Originations	132			—
Amortization	(215		)	—
Balance at March 31	$	4,172		$	—

Mortgage and commercial servicing rights are initially recorded at fair value in net gains on sale of loans held for sale when they are acquired through loan sales. Fair value is based on market prices for comparable servicing contracts, when available, or based on a valuation model that calculates the present value of estimated future net servicing income.

Mortgage and commercial servicing rights are subsequently measured using the amortization method, which requires the asset to be amortized into noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans. Servicing rights are evaluated for impairment based upon the fair value of the assets as compared to the carrying amount. Impairment is recognized through a valuation allowance for individual grouping to the extent that fair value is less than carrying amount. At March 31, 2015, no valuation allowance was recorded.

- Definition

The entire disclosure for the aggregate amount of goodwill and a description of intangible assets, which may include (a) for amortizable intangible assets (also referred to as finite-lived intangible assets), the carrying amount, the amount of any significant residual value, and the weighted-average amortization period, (b) for intangible assets not subject to amortization (also referred to as indefinite-lived intangible assets), the carrying amount, and (c) the amount of research and development assets acquired and written off in the period, including the line item in the income statement in which the amounts written off are aggregated, if not readily apparent from the income statement. Also discloses (a) for amortizable intangibles assets in total and by major class, the gross carrying amount and accumulated amortization, the total amortization expense for the period, and the estimated aggregate amortization expense for each of the five succeeding fiscal years, (b) for intangible assets not subject to amortization the carrying amount in total and by major class, and (c) for goodwill, in total and for each reportable segment, the changes in the carrying amount of goodwill during the period (including the aggregate amount of goodwill acquired, the aggregate amount of impairment losses recognized, and the amount of goodwill included in the gain (loss) on disposal of a reporting unit). If any part of goodwill has not been allocated to a reportable segment, discloses the unallocated amount and the reasons for not allocating. For each impairment loss recognized related to an intangible asset (excluding goodwill), discloses: (a) a description of the impaired intangible asset and the facts and circumstances leading to the impairment, (b) the amount of the impairment loss and the method for determining fair value, (c) the caption in the income statement or the statement of activities in which the impairment loss is aggregated, and (d) the segment in which the impaired intangible asset is reported. For each goodwill impairment loss recognized, discloses: (a) a description of the facts and circumstances leading to the impairment, (b) the amount of the impairment loss and the method of determining the fair value of the associated reporting unit, and (c) if a recognized impairment loss is an estimate not finalized and the reasons why the estimate is not final. May also disclose the nature and amount of any significant adjustments made to a previous estimate of an impairment loss.

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