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GOODWILL, CORE DEPOSIT PREMIUM AND OTHER INTANGIBLE ASSETS
 6 Months Ended
Jun. 30, 2020
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 $446.3 million at both June 30, 2020, and December 31, 2019. 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 annual assessment. Due to the COVID-19 pandemic and economic conditions, an interim quantitative assessment of goodwill was performed during the second quarter of 2020, and no goodwill impairment was identified.

Heartland recorded $19.2 million of goodwill and $1.8 million of core deposit intangibles in connection with the acquisition of substantially all of the assets and substantially all of the deposits and certain other liabilities of Rockford Bank and Trust Company, headquartered in Rockford, Illinois on November 30, 2019.

Heartland recorded $35.4 million of goodwill and $11.4 million of core deposit intangibles in connection with the acquisition of Blue Valley Ban Corp., parent company of Bank of Blue Valley, headquartered in Overland Park, Kansas on May 10, 2019.

The core deposit intangibles recorded with the Blue Valley Ban Corp. acquisition is not deductible for tax purposes and is expected to be amortized over a period of 10 years on an accelerated basis.

Goodwill related to the Blue Valley Ban Corp. acquisition resulted from expected operational synergies, increased market presence, cross-selling opportunities, and expanded business lines and is not deductible for tax purposes.

The core deposit intangibles and goodwill recorded with the Rockford Bank and Trust Company acquisition of substantially all of the assets and substantially all of the deposits and certain other liabilities, is deductible for tax purposes and the core deposit intangibles are expected to be amortized over a period of 10 years on an accelerated basis.
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 June 30, 2020, and December 31, 2019, are presented in the table below, in thousands:

 June 30, 2020December 31, 2019
 Gross
Carrying
Amount		Accumulated
Amortization		Net
Carrying
Amount		Gross
Carrying
Amount		Accumulated
Amortization		Net
Carrying
Amount
Amortizing intangible assets:    
Core deposit intangibles$96,821  $53,996  $42,825  $96,821  $48,338  $48,483  
Customer relationship intangibles1,177  991  186  1,177  972  205  
Mortgage servicing rights9,375  4,890  4,485  7,886  2,265  5,621  
Commercial servicing rights6,990  6,006  984  6,952  5,837  1,115  
Total$114,363  $65,883  $48,480  $112,836  $57,412  $55,424  

On April 30, 2019, Dubuque Bank and Trust Company closed on the sale of substantially all its servicing rights portfolio, which contained loans with an unpaid principal balance of $3.31 billion to PNC Bank, N.A. The transaction qualified as a sale, and $20.6 million of mortgage servicing rights were de-recognized on the consolidated balance sheet as of June 30, 2019. Cash of approximately $36.6 million was received during 2019, and Heartland recorded a gain on the sale of this portfolio of approximately $14.5 million. In the agreement, which included customary terms and conditions, Dubuque Bank and Trust Company provided interim servicing of the loans until the transfer date, which was August 1, 2019.

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
Six months ending December 31, 2020$4,918  $18  $1,524  $141  $6,601  
Year ending December 31, 
20218,691  35  740  261  9,727  
20227,102  34  635  232  8,003  
20236,202  34  529  157  6,922  
20245,108  33  423  98  5,662  
20254,265  32  317  95  4,709  
Thereafter6,539  —  317  —  6,856  
Total$42,825  $186  $4,485  $984  $48,480  

Projections of amortization expense for mortgage servicing rights are based on existing asset balances and the existing interest rate environment as of June 30, 2020. 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 $661.7 million at June 30, 2020 compared to $616.7 million at December 31, 2019. Custodial escrow balances maintained in connection with the mortgage loan servicing portfolio were approximately $12.7 million at June 30, 2020 and $5.0 million at December 31, 2019.

At June 30, 2020, the fair value of the mortgage servicing rights was estimated at $4.5 million compared to $5.6 million at December 31, 2019. 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 of the mortgage servicing rights are considered in the calculation. The average constant prepayment rate was 17.10% for the June 30, 2020 valuation compared to 14.20% for the December 31, 2019 valuation. The discount rate was 9.02% for June 30, 2020 compared to 9.03% at December 31, 2019 valuations. The average capitalization rate for the first six months of 2020 ranged from 76 to 116 basis points compared to a range of 81 to 98 basis points for the first six months of 2019. Fees collected for the servicing of mortgage loans for others were $410,000 and $427,000 for the quarter ended June 30, 2020 and June 30, 2019, respectively, and $819,000 and $854,000 for the six-months ended June 30, 2020 and June 30, 2019.
The following table summarizes, in thousands, the changes in capitalized mortgage servicing rights for the six months ended June 30, 2020, and June 30, 2019:

 20202019
Balance at January 1,$5,621  $29,363  
Originations1,490  342  
Amortization(1,070) (2,395) 
Sale of mortgage servicing rights—  (20,556) 
Valuation allowance (1,556) (953) 
Balance at period end$4,485  $5,801  
Mortgage servicing rights, net to servicing portfolio0.68 %0.92 %

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 $74.2 million at June 30, 2020 and $82.1 million at December 31, 2019. 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 $54,000 and $230,000 for the quarter ended June 30, 2020 and June 30, 2019, respectively, and $172,000 and $610,000 for the six-months ended June 30, 2020 and June 30, 2019.

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 15.22% to 19.56% as of June 30, 2020, compared to 14.25% to 18.08% as of December 31, 2019. The discount rate range was 8.04% to 14.40% for the June 30, 2020, valuations compared to 10.65% to 13.94% for the December 31, 2019, valuations. The capitalization rate for both 2020 and 2019 ranged from 310 to 445 basis points. The total fair value of Heartland's commercial servicing rights was estimated at $1.4 million as of June 30, 2020, and $1.6 million as of December 31, 2019.

The following table summarizes, in thousands, the changes in capitalized commercial servicing rights for the six-months ended June 30, 2020, and June 30, 2019:

20202019
Balance at January 1,$1,115  $1,709  
Originations38  73  
Amortization(169) (403) 
Balance at period end $984  $1,379  
Fair value of commercial servicing rights $1,417  $1,851  
Commercial servicing rights, net to servicing portfolio 1.32 %1.52 %

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 June 30, 2020, a $516,000 valuation allowance was required on the mortgage servicing rights 15-year tranche and a $2.0 million valuation allowance was required on the mortgage servicing rights 30-year tranche. At December 31, 2019, a $114,000 valuation allowance was required on the mortgage servicing rights 15-year tranche and a $797,000 valuation allowance was required on the mortgage servicing rights 30-year tranche. At both June 30, 2020 and December 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.
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 June 30, 2020, and December 31, 2019:

June 30, 2020Book Value 15-Year TrancheFair Value 15-Year TrancheImpairment 15-Year TrancheBook Value 30-Year TrancheFair Value 30-Year TrancheImpairment 30-Year Tranche
First Bank & Trust1,533  1,017  516  5,478  3,469  2,009  
Total$1,533  $1,017  $516  $5,478  $3,469  $2,009  
December 31, 2019
First Bank & Trust1,482  1,368  114  5,050  4,253  797  
Total$1,482  $1,368  $114  $5,050  $4,253  $797  

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 June 30, 2020, and December 31, 2019:

June 30, 2020Book 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
Premier Valley Bank1  11  —  111  140  —  
Wisconsin Bank & Trust99  236  —  773  1,030  —  
Total$100  $247  $—  $884  $1,170  $—  
December 31, 2019
Premier Valley Bank1  13  —  135  161  —  
Wisconsin Bank & Trust128  272  —  851  1,148  —  
Total$129  $285  $—  $986  $1,309  $—