GOODWILL, CORE DEPOSIT INTANGIBLES AND OTHER INTANGIBLE ASSETS

Heartland had goodwill of $391.7 million at December 31, 2018, and $236.6 million at December 31, 2017. Heartland conducts its annual internal assessment of the goodwill both collectively 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.

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 December 31, 2018, and December 31, 2017, are presented in the table below, in thousands:



	December 31, 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	$	83,640	$	36,403	$	47,237	$	62,008	$	27,086	$	34,922
Customer relationship intangible	1,177		935		242		1,177		896		281
Mortgage servicing rights	42,228		12,865		29,363		42,139		18,891		23,248
Commercial servicing rights	6,834		5,125		1,709		6,719		4,110		2,609
Total	$	133,879	$	55,328	$	78,551	$	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 Intangible		Mortgage Servicing Rights		Commercial Servicing Rights		Total
Year ending December 31,
2019	$	9,452	$	38	$	7,341	$	463	$	17,294
2020	8,230		37		6,292		365		14,924
2021	7,036		35		5,243		320		12,634
2022	5,634		34		4,195		267		10,130
2023	4,934		34		3,146		163		8,277
Thereafter	11,951		64		3,146		131		15,292
Total	$	47,237	$	242	$	29,363	$	1,709	$	78,551

Projections of amortization expense for mortgage servicing rights are based on existing asset balances and the existing interest rate environment as of December 31, 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 $4.10 billion and $3.56 billion as of December 31, 2018, and December 31, 2017, respectively. Custodial escrow balances maintained in connection with the mortgage loan servicing portfolio were approximately $23.7 million and $17.3 million as of December 31, 2018, and December 31, 2017, respectively. The fair value of Heartland's mortgage servicing rights was estimated at $48.7 million and $37.1 million at December 31, 2018, and December 31, 2017, respectively.

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 range of average constant prepayment rates for the valuations was 7.52% and 10.30% as of December 31, 2018 compared to 9.73% at December 31, 2017. The range of discount rates for the valuations was 9.03% and 9.04% at December 31, 2018 compared to 9.06% at December 31, 2017. The average capitalization rate for 2018 ranged from 84 to 125 basis points and for 2017 from 91 to 150 basis points. Fees collected for the servicing of mortgage loans for others were $9.9 million, $11.6 million and $12.1 million for the years ended December 31, 2018, 2017 and 2016, respectively.

The following table summarizes, in thousands, the changes in capitalized mortgage servicing rights for the twelve months ended December 31, 2018, and December 31, 2017:



	2018			2017
Balance at January 1	$	23,248		$	32,088
Originations	5,045			7,149
Amortization	(5,867		)	(9,049		)
Sale of mortgage servicing rights	—			(6,940		)
Acquired mortgage servicing rights	6,995			—
Valuation allowance on servicing rights	(58		)	—
Balance at December 31	$	29,363		$	23,248
Fair value of mortgage servicing rights	$	48,680		$	37,081
Mortgage servicing rights, net to servicing portfolio	0.72		%	0.65		%

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 $107.4 million at December 31, 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 $1.6 million and $1.7 million for the years ended December 31, 2018 and 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 portfolio valuations was 11.01% and 13.50% as of December 31, 2018 compared to 7.27% and 8.88% as of December 31, 2017. The discount rate range was 13.44% and 16.96% for the December 31, 2018 valuations compared to 13.04% and 15.49% for the December 31, 2017 valuations. The capitalization rate ranged from 310 to 445 basis points at both December 31, 2018 and 2017. The total fair value of Heartland's commercial servicing rights portfolios was estimated at $2.1 million as of December 31, 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 twelve months ended December 31, 2018, and December 31, 2017:



	2018			2017
Balance at January 1,	$	2,609		$	3,690
Originations	115			209
Amortization	(1,027		)	(1,311		)
Purchased commercial servicing rights	—			—
Valuation allowance on servicing rights	12			21
Balance at December 31,	$	1,709		$	2,609
Fair value of commercial servicing rights	$	2,134		$	3,221
Commercial servicing rights, net to servicing portfolio	1.59		%	1.87		%

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 December 31, 2018, a $20,000 valuation allowance was required on the mortgage servicing rights 15-year tranche and a $38,000 valuation allowance was required on the mortgage servicing rights 30-year tranche. At December 31, 2017, no valuation allowance was required on the 15- and 30-year tranches for mortgage servicing rights. At December 31, 2018, no valuation allowance was required on commercial servicing rights with an original term of less than 20 years and no valuation allowance was required on commercial servicing rights with an original term of greater than 20 years. At December 31, 2017, no valuation allowance was required on commercial servicing rights with an original term of less than 20 years and a $12,000 valuation allowance was required on commercial servicing rights with an original term of 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 December 31, 2018 and December 31, 2017:



December 31, 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	$	2,195	$	4,636	$	—	$	20,025	$	36,901	$	—
First Bank & Trust	1,685		1,665		20		5,516		5,478		38
Total	$	3,880	$	6,301	$	20	$	25,541	$	42,379	$	38
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 December 31, 2018 and December 31, 2017:



	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
December 31, 2018
Citywide Banks	$	1	$	6	$	—	$	18	$	20	$	—
Premier Valley Bank	45		74		—		178		184		—
Wisconsin Bank & Trust	249		411		—		1,218		1,439		—
Total	$	295	$	491	$	—	$	1,414	$	1,643	$	—
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