Intangible Assets

9 Months Ended

Sep. 30, 2016

Goodwill and Intangible Assets Disclosure [Abstract]

The Corporation has the following types of intangible assets: goodwill, core deposit intangible assets, non-compete intangible assets and loan servicing rights (LSRs). Goodwill, core deposit intangible assets, and non-compete intangible assets arose as a result of business combinations or other acquisitions. LSRs arose as a result of selling residential mortgage and commercial real estate loans in the secondary market while retaining the right to service these loans and receive servicing income over the life of the loan and from acquisitions of other banks that had LSRs. Loans serviced for others are not reported as assets in the Consolidated Statements of Financial Position. Amortization is recorded on the core deposit intangible assets, non-compete intangible assets and LSRs where there has not been an accounting election to account under the fair value method.

Goodwill recorded is primarily attributable to the synergies and economies of scale expected from combining the operations of the Corporation and other acquisitions. The Corporation recorded goodwill in the amount of $850.3 million related to the merger with Talmer completed on August 31, 2016. The Corporation recorded additional goodwill in the first quarter of 2016 of $0.5 million related to the 2015 acquisition of Lake Michigan resulting from adjustments to the original acquisition date valuation of acquired assets and liabilities. Goodwill is not amortized but is evaluated at least annually for impairment. The Corporation’s most recent annual goodwill impairment review performed in the fourth quarter of 2015 did not indicate that an impairment of goodwill existed. The Corporation also determined that no triggering events have occurred that indicated impairment from the most recent valuation date through September 30, 2016 and that the Corporation's goodwill was not impaired at September 30, 2016.

The following table shows the net carrying value of the Corporation’s intangible assets:



(Dollars in thousands)	September 30, 2016		December 31, 2015
Goodwill	$	1,137,166	$	287,393
Loan servicing rights	51,393		11,122
Other intangible assets:
Core deposit intangible assets	$	35,618	$	26,654
Non-compete intangible assets	82		328
Total other intangible assets	$	35,700	$	26,982

The following table sets forth the carrying amount and accumulated amortization of core deposit intangible assets that are amortizable and arose from business combinations or other acquisitions:



(Dollars in thousands)	September 30, 2016		December 31, 2015
Gross original amount	$	52,454	$	40,055
Accumulated amortization	16,836		13,401
Net carrying amount	$	35,618	$	26,654

Amortization expense recognized on core deposit intangible assets was $1.2 million and $1.2 million for the three months ended September 30, 2016 and 2015, respectively, and $3.4 million and $2.9 million for the nine months ended September 30, 2016 and 2015, respectively.

The estimated future amortization expense on core deposit intangible assets for periods ending after September 30, 2016 is as follows: 2016 — $1.4 million; 2017 — $5.2 million; 2018 — $5.0 million; 2019 — $4.8 million; 2020 — $4.2 million; 2021 and thereafter — $15.0 million. The non-compete intangible assets will be fully amortized during 2016.

The Corporation elected to account for LSRs acquired related to the merger with Talmer effective August 31, 2016 under the fair value method. Loan servicing rights are established and recorded at the estimated fair value by calculating the present value of estimated future net servicing cash flows, taking into consideration actual and expected mortgage loan prepayment rates, discount rates, servicing costs, and other economic factors, which are determined based on current market conditions. The following table represents the activity for LSRs accounted for under the fair value method and the related fair value changes:



(Dollars in thousands)	Three and nine months ended September 30, 2016
	Commercial Real Estate			Mortgage			Total
Fair value, beginning of period	$	—		$	—		$	—
Acquired in Talmer Bancorp, Inc. merger	365			42,097			42,462
Additions from loans sold with servicing retained	—			810			810
Changes in fair value due to:
Reductions from pay-offs, pay downs and run-off	(2		)	(685		)	(687		)
Changes in estimates of fair value (1)	—			(657		)	(657		)
Fair value, end of period	$	363		$	41,565		$	41,928
Principal balance of loans serviced for others that have servicing capitalized	$	79,405		$	5,523,423		$	5,602,828

(1) Represents estimated LSR value change resulting primarily from market-driven changes in interest rates.

The Corporation continues to account for all other LSRs using the amortization method. The following shows the net carrying value and fair value of LSRs and the total loans that the Corporation is servicing for others accounted for under the amortization method:



(Dollars in thousands)	September 30, 2016		December 31, 2015
Net carrying value of LSRs	$	9,465	$	11,122
Fair value of LSRs	$	12,434	$	15,542
Valuation allowance	$	214	$	—
Loans serviced for others that have servicing rights capitalized	$	1,981,157	$	2,082,899

LSRs accounted for under the amortization method are stratified into servicing assets originated by the Corporation and those acquired in acquisitions of other institutions and further stratified into relatively homogeneous pools based on products with similar characteristics. There was a valuation allowance of $0.2 million as of September 30, 2016 related to impairment within certain pools attributable to the Corporation's servicing portfolios that were acquired in the Northwestern and Monarch transactions. There was no impairment valuation allowance recorded on the Corporation's LSRs at December 31, 2015.

The following table shows the activity for capitalized LSRs accounted for under the amortization method:



(Dollars in thousands)	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
Balance at beginning of period	$	9,677		$	12,307		$	11,122		$	12,217
Acquired in Monarch acquisition	—			—			—			1,284
Additions	695			303			1,612			1,118
Amortization	(1,105		)	(1,070		)	(3,055		)	(3,279		)
Change in valuation allowance	198			—			(214		)	200
Balance at end of period	$	9,465		$	11,540		$	9,465		$	11,540

The Company realized total loan servicing fee income of $2.1 million and $1.4 million for the three months ended September 30, 2016 and 2015, respectively, and $4.7 million and $4.1 million for the nine months ended September 30, 2016 and 2015, respectively.

Expected and actual loan prepayment speeds are the most significant factors driving the fair value of loan servicing rights. The following table presents assumptions utilized in determining the fair value of loan servicing rights as of September 30, 2016 and December 31, 2015.



	Commercial Real Estate		Mortgage
As of September 30, 2016
Prepayment speed	0.00 - 22.47%		0.00 - 38.28%
Weighted average (“WA”) discount rate	16.46	%	10.09		%
Cost to service/per year	$467-$500		$65-$90
Ancillary income/per year	N/A		$	28
WA float range	0.53	%	0.68		%
As of December 31, 2015
Prepayment speed	N/A		6.96 - 17.65%
WA discount rate	N/A		10.04		%
Cost to service/per year	N/A		$70-$85
Ancillary income/per year	N/A		$	20
WA float range	N/A		1.72		%

- 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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