GOODWILL, CORE DEPOSIT PREMIUM AND OTHER INTANGIBLE ASSETS

Heartland had goodwill of $391.7 million at September 30, 2018, and $236.6 million at December 31, 2017. Heartland conducts its annual internal assessment of the goodwill both at the consolidated level and at its subsidiaries as of September 30. There was no goodwill impairment as of the most recent assessment.

Heartland recorded $121.4 million of goodwill and $13.9 million of core deposit intangibles in connection with the acquisition of First Bank Lubbock Bancshares, Inc., parent company of First Bank & Trust Company, headquartered in Lubbock, Texas on May 18, 2018.

Heartland recorded $33.7 million of goodwill and $7.7 million of core deposit intangibles in connection with the acquisition of Signature Bancshares, Inc., parent company of Signature Bank, headquartered in Minnetonka, Minnesota on February 23, 2018.

Heartland recorded $95.2 million of goodwill and $16.0 million of core deposit intangibles in connection with the acquisition of Citywide Banks of Colorado, Inc., parent company of Citywide Banks, headquartered in Aurora, Colorado on July 7, 2017.

Heartland recorded $13.8 million of goodwill and $2.5 million of core deposit intangibles in connection with the acquisition of Founders Bancorp, parent company of Founders Community Bank, based in San Luis Obispo, California on February 28, 2017.

The core deposit intangibles recorded with the First Bank Lubbock Bancshares, Inc., Signature Bancshares, Inc., Citywide Banks of Colorado, Inc., and Founders Bancorp acquisitions are not deductible for tax purposes and are expected to be amortized over a period of 10 years on an accelerated basis.

Goodwill related to the First Bank Lubbock Bancshares, Inc., Signature Bancshares, Inc., Citywide Banks of Colorado, Inc., and Founders Bancorp acquisitions resulted from expected operational synergies, increased market presence, cross-selling opportunities, and expanded business lines and is not deductible for tax purposes.

Heartland's intangible assets consist of core deposit intangibles, mortgage servicing rights, customer relationship intangibles, and commercial servicing rights. The gross carrying amount of these intangible assets and the associated accumulated amortization at September 30, 2018, and December 31, 2017, are presented in the table below, in thousands:



	September 30, 2018						December 31, 2017
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Amortizing intangible assets:
Core deposit intangibles	$	83,639	$	33,820	$	49,819	$	62,008	$	27,086	$	34,922
Customer relationship intangibles	1,177		925		252		1,177		896		281
Mortgage servicing rights	42,616		12,445		30,171		42,139		18,891		23,248
Commercial servicing rights	6,800		4,932		1,868		6,719		4,110		2,609
Total	$	134,232	$	52,122	$	82,110	$	112,043	$	50,983	$	61,060

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



	Core Deposit Intangibles		Customer Relationship Intangibles		Mortgage Servicing Rights		Commercial Servicing Rights		Total
Three months ending December 31, 2018	$	2,583	$	10	$	1,642	$	139	$	4,374
Year ending December 31,
2019	9,452		38		7,132		485		17,107
2020	8,230		37		6,113		379		14,759
2021	7,036		35		5,094		331		12,496
2022	5,634		34		4,076		270		10,014
2023	4,933		34		3,057		154		8,178
Thereafter	11,951		64		3,057		110		15,182
Total	$	49,819	$	252	$	30,171	$	1,868	$	82,110

Projections of amortization expense for mortgage servicing rights are based on existing asset balances and the existing interest rate environment as of September 30, 2018. Heartland's actual experience may be significantly different depending upon changes in mortgage interest rates and market conditions. Mortgage loans serviced for others were approximately $4.16 billion and $3.56 billion as of September 30, 2018, and December 31, 2017, respectively. Custodial escrow balances maintained in connection with the mortgage loan servicing portfolio were approximately $43.2 million and $17.3 million as of September 30, 2018, and December 31, 2017, respectively. The fair value of Heartland's mortgage servicing rights was estimated at $47.6 million at September 30, 2018, and $37.1 million at December 31, 2017.

Heartland acquired the right to service mortgage loans totaling $640.7 million and a fair value of $7.0 million with the First Bank Lubbock Bancshares, Inc. transaction that closed on May 18, 2018. Heartland's mortgage servicing rights portfolio is comprised of loans serviced for the Federal National Mortgage Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC"). Prior to the third quarter of 2017, Heartland also serviced loans for the Government National Mortgage Association ("GNMA"). The servicing rights portfolio is separated into 15- and 30-year tranches, and the servicing rights portfolio is an asset of two of Heartland's subsidiaries.

During the third quarter of 2017, Heartland entered into an agreement to sell substantially all of its GNMA servicing portfolio, which contained loans with an unpaid principal balance of approximately $773.9 million. The transaction qualified as a sale, and $6.9 million of mortgage servicing rights were de-recognized on the consolidated balance sheet as of December 31, 2017.

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 8.46% and 9.73% for the September 30, 2018, and December 31, 2017, valuations, respectively. The discount rate was 9.19% and 9.06% for the September 30, 2018, and December 31, 2017, valuations, respectively. The average capitalization rate for the first nine months of 2018 ranged from 89 to 125 basis points compared to the range of 94 to 150 basis points for 2017. Fees collected for the servicing of mortgage loans for others were $2.6 million and $2.9 million for the quarters ended September 30, 2018, and September 30, 2017, respectively, and $7.3 million and $9.3 million for the nine-months ended September 30, 2018, and September 30, 2017, respectively.

The following table summarizes, in thousands, the changes in capitalized mortgage servicing rights for the nine months ended September 30, 2018, and September 30, 2017:



	2018			2017
Balance at January 1,	$	23,248		$	32,088
Originations	4,322			5,778
Amortization	(4,394		)	(7,184		)
Valuation allowance on mortgage servicing rights	—			—
Sale of mortgage servicing rights	—			(6,940		)
Acquired mortgage servicing rights	6,995			—
Balance at period end	$	30,171		$	23,742
Fair value of mortgage servicing rights	$	47,581		$	35,002
Mortgage servicing rights, net to servicing portfolio	0.73		%	0.67		%

Heartland's commercial servicing portfolio is comprised of loans guaranteed by the Small Business Administration and United States Department of Agriculture that have been sold with servicing retained by Heartland, which totaled $114.5 million at September 30, 2018 and $139.9 million at December 31, 2017. The commercial servicing rights portfolio is separated into two tranches at the respective Heartland subsidiary, loans with a term of less than 20 years and loans with a term of more than 20 years. Fees collected for the servicing of commercial loans for others were $401,000 and $394,000 for the quarter ended September 30, 2018, and September 30, 2017, respectively, and $1.2 million for both the nine-months ended September 30, 2018, and September 30, 2017, respectively.

The fair value of each commercial servicing rights portfolio is calculated based upon a discounted cash flow analysis. Cash flow assumptions, including prepayment speeds and servicing costs, are considered in the calculation. The range of average constant prepayment rates for the valuations was 9.64% to 11.94% as of September 30, 2018, compared to 7.27% to 8.88% as of December 31, 2017. The discount rate range was 13.28% to 16.55% for the September 30, 2018, valuations compared to 13.04% to 15.49% for the December 31, 2017, valuations. The capitalization rate for both 2018 and 2017 ranged from 310 to 445 basis points. The total fair value of Heartland's commercial servicing rights was estimated at $2.5 million as of September 30, 2018, and $3.2 million as of December 31, 2017.

The following table summarizes, in thousands, the changes in capitalized commercial servicing rights for the nine-months ended September 30, 2018, and September 30, 2017:



	2018			2017
Balance at January 1,	$	2,609		$	3,690
Originations	82			215
Amortization	(835		)	(1,077		)
Valuation allowance on commercial servicing rights	12			29
Balance at period end	$	1,868		$	2,857
Fair value of commercial servicing rights	$	2,529		$	3,458
Commercial servicing rights, net to servicing portfolio	1.63		%	1.98		%

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 at each Heartland subsidiary based upon the fair value of the assets as compared to the carrying amount. Impairment is recognized through a valuation allowance for specific tranches to the extent that fair value is less than carrying amount at each Heartland subsidiary. At both September 30, 2018 and December 31, 2017, no valuation allowance was required on mortgage servicing rights. At September 30, 2018, no valuation allowance was required on commercial servicing rights with a term less than 20 years and no valuation allowance was required on commercial servicing rights with a term greater than 20 years. At December 31, 2017, no valuation allowance was required on commercial servicing rights with a term less than 20 years and a $12,000 valuation allowance was required on commercial servicing rights with a term greater than 20 years.

The following table summarizes, in thousands, the book value, the fair value of each tranche of the mortgage servicing rights and any recorded valuation allowance at each respective subsidiary at September 30, 2018, and December 31, 2017:



September 30, 2018	Book Value 15-Year Tranche		Fair Value 15-Year Tranche		Impairment 15-Year Tranche		Book Value 30-Year Tranche		Fair Value 30-Year Tranche		Impairment 30-Year Tranche
Dubuque Bank and Trust Company	$	2,371	$	4,747	$	—	$	20,632	$	35,610	$	—
First Bank & Trust	1,685		1,741		—		5,483		5,483		—
Total	$	4,056	$	6,488	$	—	$	26,115	$	41,093	$	—
December 31, 2017
Dubuque Bank and Trust Company	$	2,858	$	4,988	$	—	$	20,390	$	32,093	$	—
Total	$	2,858	$	4,988	$	—	$	20,390	$	32,093	$	—

The following table summarizes, in thousands, the book value, the fair value of each tranche of the commercial servicing rights and any recorded valuation allowance at each respective subsidiary at September 30, 2018, and December 31, 2017:



September 30, 2018	Book Value Less than 20 Years		Fair Value Less than 20 Years		Impairment Less than 20 Years		Book Value More than 20 Years		Fair Value More than 20 Years		Impairment More than 20 Years
Citywide Banks	$	2	$	6	$	—	$	30	$	33	$	—
Premier Valley Bank	53		82		—		188		203		—
Wisconsin Bank & Trust	260		519		—		1,335		1,686		—
Total	$	315	$	607	$	—	$	1,553	$	1,922	$	—
December 31, 2017
Citywide Banks	$	8	$	11	$	—	$	34	$	37	$	—
Premier Valley Bank	83		110		—		303		291		12
Wisconsin Bank & Trust	446		619		—		1,747		2,153		—
Total	$	537	$	740	$	—	$	2,084	$	2,481	$	12