GOODWILL, CORE DEPOSIT PREMIUM AND OTHER INTANGIBLE ASSETS

Heartland had goodwill of $391.7 million at both March 31, 2019, and December 31, 2018. 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.

The core deposit intangibles recorded with the First Bank Lubbock Bancshares, Inc. and Signature Bancshares, Inc. 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. and Signature Bancshares, Inc. 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 March 31, 2019, and December 31, 2018, are presented in the table below, in thousands:



	March 31, 2019						December 31, 2018
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Amortizing intangible assets:
Core deposit intangibles	$	83,640	$	39,236	$	44,404	$	83,640	$	36,403	$	47,237
Customer relationship intangibles	1,177		944		233		1,177		935		242
Mortgage servicing rights	41,473		14,001		27,472		42,228		12,865		29,363
Commercial servicing rights	6,902		5,406		1,496		6,834		5,125		1,709
Total	$	133,192	$	59,587	$	73,605	$	133,879	$	55,328	$	78,551

On April 26, 2019, Dubuque Bank and Trust Company signed an agreement to sell substantially all its servicing rights to PNC Bank, N.A., headquartered in Pittsburgh, Pennsylvania. The servicing portfolio had a book value of $21.0 million, and the portfolio contained approximately 20,300 serviced residential mortgage loans with unpaid principal balances of $3.35 billion as of March 31, 2019. The serviced loans are primarily owned by Fannie Mae and Freddie Mac. The transaction was approved by Fannie Mae and Freddie Mac and closed on April 30, 2019. Based upon the terms of the agreement, proceeds from the transaction were approximately $37.0 million. As part of the agreement, Dubuque Bank and Trust Company will subservice the loans until the transfer date in August 2019. The transaction qualified as a sale, and $21.0 million of mortgage servicing rights were de-recognized on the consolidated balance sheet as of April 30, 2019 when the transaction closed.

The following table shows the estimated future amortization expense for amortizable intangible assets, excluding the mortgage servicing rights portfolio for Dubuque Bank and Trust Company, in thousands:



	Core Deposit Intangibles		Customer Relationship Intangibles		Mortgage Servicing Rights		Commercial Servicing Rights		Total
Nine months ending December 31, 2019	$	6,949	$	28	$	736	$	310	$	8,023
Year ending December 31,
2020	8,230		36		1,431		331		10,028
2021	7,036		35		1,226		293		8,590
2022	5,634		35		1,022		246		6,937
2023	4,933		34		818		159		5,944
2024	4,008		33		613		86		4,740
Thereafter	7,614		32		613		71		8,330
Total	$	44,404	$	233	$	6,459	$	1,496	$	52,592

Projections of amortization expense for mortgage servicing rights are based on existing asset balances and the existing interest rate environment as of March 31, 2019. Heartland's actual experience may be significantly different depending upon changes in mortgage interest rates and market conditions. Mortgage loans serviced for others at First Bank & Trust were approximately $692.3 million at March 31, 2019 compared to $648.9 million at December 31, 2018. Mortgage loans serviced for others at Dubuque Bank and Trust Company were $3.35 billion and $3.45 billion at March 31, 2019 and December 31, 2018, respectively. Custodial escrow balances maintained in connection with the mortgage loan servicing portfolio for First Bank & Trust were approximately $8.7 million at March 31, 2019 and $5.9 million at December 31, 2018. Custodial escrow balances maintained in connection with the mortgage loan servicing portfolio for Dubuque Bank and Trust Company totaled $23.3 million at March 31, 2019 and $17.7 million at December 31, 2018. At March 31, 2019, the fair value of First Bank and Trust's mortgage servicing rights was estimated at $6.5 million compared to $7.1 million at December 31, 2018. The fair value of Dubuque Bank and Trust Company's mortgage servicing rights at March 31, 2019 was estimated at $37.1 million compared to $41.5 million at December 31, 2018.

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 for the First Bank & Trust valuation was 12.00% as of March 31, 2019 compared to 10.30% at December 31, 2018. The discount rate for the First Bank & Trust valuation was 9.03% at both March 31, 2019 and December 31, 2018. The average capitalization rate for First Bank & Trust during the first three months of 2019 ranged from 92 to 98 basis points compared to a range of 93 to 117 basis points since acquisition on May 18, 2018. Fees collected for the servicing of mortgage loans for others were $427,000 for the three-months ended March 31, 2019.

The following table summarizes, in thousands, the changes in capitalized mortgage servicing rights for the three months ended March 31, 2019, and March 31, 2018:



	2019			2018
Balance at January 1,	$	29,363		$	23,248
Originations	198			1,162
Amortization	(1,500		)	(1,245		)
Valuation adjustment	(589		)	—
Balance at period end	$	27,472		$	23,165
Mortgage servicing rights, net to servicing portfolio	0.68		%	0.72		%

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 $95.0 million at March 31, 2019 and $107.4 million at December 31, 2018. 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 $380,000 and $420,000 for the three-months ended March 31, 2019, and March 31, 2018, 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 11.37% to 14.44% as of March 31, 2019, compared to 11.01% to 13.50% as of December 31, 2018. The discount rate range was 12.71% to 16.13% for the March 31, 2019, valuations compared to 13.44% to 16.96% for the December 31, 2018, valuations. The capitalization rate for both 2019 and 2018 ranged from 310 to 445 basis points. The total fair value of Heartland's commercial servicing rights was estimated at $1.9 million as of March 31, 2019, and $2.1 million as of December 31, 2018.

The following table summarizes, in thousands, the changes in capitalized commercial servicing rights for the three-months ended March 31, 2019, and March 31, 2018:



	2019			2018
Balance at January 1,	$	1,709		$	2,609
Originations	68			21
Amortization	(281		)	(322		)
Valuation allowance on commercial servicing rights	—			(2		)
Balance at period end	$	1,496		$	2,306
Fair value of commercial servicing rights	$	1,926		$	2,781
Commercial servicing rights, net to servicing portfolio	1.58		%	1.84		%

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 March 31, 2019, a $589,000 valuation allowance was required on mortgage servicing rights and at December 31, 2018, a $58,000 valuation allowance was required on mortgage servicing rights. At March 31, 2019, 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, 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.

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 March 31, 2019, and December 31, 2018:



March 31, 2019	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	$	1,982	$	4,648	$	—	$	19,031	$	32,420	$	—
First Bank & Trust	1,644		1,519		125		5,462		4,940		522
Total	$	3,626	$	6,167	$	125	$	24,493	$	37,360	$	522
December 31, 2018
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

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 March 31, 2019, and December 31, 2018:



March 31, 2019	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	$	—	$	—	$	—	$	—	$	—	$	—
Premier Valley Bank	37		65		—		168		178		—
Wisconsin Bank & Trust	212		387		—		1,079		1,296		—
Total	$	249	$	452	$	—	$	1,247	$	1,474	$	—
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	$	—