GOODWILL, CORE DEPOSIT PREMIUM AND OTHER INTANGIBLE ASSETS

Heartland had goodwill of $236.6 million at September 30, 2017, and $127.7 million at December 31, 2016. 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 $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.

Heartland recorded $29.8 million of goodwill in connection with the acquisition of CIC Bancshares, Inc., parent company of Centennial Bank, based in Denver, Colorado on February 5, 2016. In addition, Heartland recognized core deposit intangibles of $6.4 million and commercial servicing rights of $190,000 with this acquisition.

The core deposit intangibles recorded with the Citywide Banks of Colorado, Inc., Founders Bancorp, and CIC 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 Citywide Banks of Colorado, Inc., Founders Bancorp, and CIC 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 September 30, 2017, and December 31, 2016, are presented in the table below, in thousands:



	September 30, 2017						December 31, 2016
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Amortizing intangible assets:
Core deposit intangibles	$	62,008	$	25,271	$	36,737	$	43,504	$	21,049	$	22,455
Customer relationship intangibles	1,177		886		291		1,177		857		320
Mortgage servicing rights	41,903		18,161		23,742		50,467		18,379		32,088
Commercial servicing rights	6,719		3,862		2,857		6,504		2,814		3,690
Total	$	111,807	$	48,180	$	63,627	$	101,652	$	43,099	$	58,553

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, 2017	$	1,815	$	10	$	2,463	$	184	$	4,472
Year ending December 31,
2018	6,712		39		5,319		701		12,771
2019	5,915		38		4,560		566		11,079
2020	5,191		37		3,800		442		9,470
2021	4,425		35		3,040		380		7,880
2022	3,391		34		2,280		307		6,012
Thereafter	9,288		98		2,280		277		11,943
Total	$	36,737	$	291	$	23,742	$	2,857	$	63,627

Projections of amortization expense for mortgage servicing rights are based on existing asset balances and the existing interest rate environment as of September 30, 2017. 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 $3.56 billion and $4.31 billion as of September 30, 2017, and December 31, 2016, respectively. Custodial escrow balances maintained in connection with the mortgage loan servicing portfolio were approximately $24.3 million and $21.4 million as of September 30, 2017, and December 31, 2016, respectively. The fair value of Heartland's mortgage servicing rights was estimated at $35.0 million at September 30, 2017, and $45.2 million at December 31, 2016.

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 one 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 qualifies as a sale, and $6.9 million of mortgage servicing rights have been de-recognized on the consolidated balance sheet as of September 30, 2017. Cash of approximately $5.1 million was received during the third quarter, and Heartland recorded an estimated loss on the sale of this portfolio of approximately $183,000. A receivable of approximately $1.6 million was recorded due to the timing of the servicing transfer per the terms of the sale agreement and to address indemnification claims and mortgage loan documentation deficiencies.

The fair value of mortgage servicing rights is calculated based upon either a discounted cash flow analysis or market indication. Cash flow assumptions, including prepayment speeds, servicing costs and escrow earnings are considered in the calculation. The average constant prepayment rate was 10.93% and 9.63% for the September 30, 2017, and December 31, 2016, valuations, respectively. The discount rate was 9.06% and 9.26% for the September 30, 2017, and December 31, 2016, valuations, respectively. The average capitalization rate for the first nine months of 2017 ranged from 91 to 150 basis points compared to the range of 88 to 135 basis points for 2016. Fees collected for the servicing of mortgage loans for others were $2.9 million and $3.1 million for the quarters ended September 30, 2017, and September 30, 2016, respectively and $9.3 million and $9.0 million for the nine months ended September 30, 2017, and September 30, 2016, respectively.

The following table summarizes, in thousands, the changes in capitalized mortgage servicing rights for the nine months ended September 30, 2017, and September 30, 2016:



	2017			2016
Balance at January 1,	$	32,088		$	30,314
Originations	5,778			9,323
Amortization	(7,184		)	(7,795		)
Sale of mortgage servicing rights	(6,940		)	—
Balance at period end	$	23,742		$	31,842
Fair value of mortgage servicing rights	$	35,002		$	38,127
Mortgage servicing rights, net to servicing portfolio	0.67		%	0.75		%

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 $144.4 million at September 30, 2017 and $164.6 million at December 31, 2016. 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 $394,000 and $230,000 for the quarter ended September 30, 2017, and September 30, 2016, respectively, and $1.2 million and $685,000 for the nine months ended September 30, 2017, and September 30, 2016, 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 6.66% to 7.99% as of September 30, 2017, compared to 6.96% to 7.88% as of December 31, 2016. The discount rate range was 12.52% to 14.65% for the September 30, 2017, valuations compared to 12.44% to 13.88% for the December 31, 2016, valuations. The capitalization rate for 2017 ranged from 310 to 445 basis points compared to 310 to 445 basis points for 2016. The total fair value of Heartland's commercial servicing rights was estimated at $3.5 million as of September 30, 2017, and $4.1 million as of December 31, 2016.

The following table summarizes, in thousands, the changes in capitalized commercial servicing rights for the nine months ended September 30, 2017, and September 30, 2016:



	2017			2016
Balance at January 1,	$	3,690		$	4,611
Purchased commercial servicing rights	—			190
Originations	215			533
Amortization	(1,077		)	(1,229		)
Valuation allowance on commercial servicing rights	29			(41		)
Balance at period end	$	2,857		$	4,064
Fair value of commercial servicing rights	$	3,458		$	4,397
Commercial servicing rights, net to servicing portfolio	1.98		%	2.38		%

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 September 30, 2017, no valuation allowance was required on commercial servicing rights with a term less than 20 years and a $4,000 valuation allowance was required on commercial servicing rights with a term greater than 20 years. At December 31, 2016, no valuation allowance was required on commercial servicing rights with a term less than 20 years and a $33,000 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 commercial servicing rights and any recorded valuation allowance at each respective subsidiary at September 30, 2017, and December 31, 2016:



September 30, 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
Citywide Banks	$	12	$	15	$	—	$	54	$	61	$	—
Premier Valley Bank	95		124		—		317		313		4
Wisconsin Bank & Trust	515		688		—		1,868		2,257		—
Total	$	622	$	827	$	—	$	2,239	$	2,631	$	4
December 31, 2016
Citywide Banks	$	19	$	23	$	—	$	107	$	114	$	—
Premier Valley Bank	156		180		—		359		326		33
Wisconsin Bank & Trust	833		997		—		2,249		2,487		—
Total	$	1,008	$	1,200	$	—	$	2,715	$	2,927	$	33