NOTE 11: INTANGIBLE ASSETS

Goodwill

Goodwill is presumed to have an indefinite useful life and is tested for impairment, rather than amortized, at the reporting unit level, at least once a year. There were no changes in the carrying amount of goodwill during the years ended December 31, 2016 or 2015. Goodwill totaled $2.4 billion at each of these dates.

Core Deposit Intangibles

CDI is a measure of the value of checking and savings deposits acquired in a business combination. As previously noted, the Company has recognized CDI stemming from its various business combinations with other banks and thrifts. The fair value of the CDI stemming from any given business combination is based on the present value of the expected cost savings attributable to the core deposit funding acquired, relative to an alternative source of funding. CDI is amortized over the estimated useful lives of the existing deposit relationships acquired, but does not exceed 10 years. The Company evaluates such identifiable intangibles for impairment when an indication of impairment exists. No impairment charges were required to be recorded in 2016, 2015, or 2014. If an impairment loss is determined to exist in the future, the loss will be recorded in “Non-interest expense” in the Consolidated Statements of Operations and Comprehensive Income (Loss) for the period in which such impairment is identified.

Analysis of Core Deposit Intangibles

The following table summarizes the gross carrying and accumulated amortization amounts of the Company’s CDI as of December 31, 2016:


(in thousands)	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Core deposit intangibles	$	234,364	$	(234,156	)	$	208

For the year ended December 31, 2016, amortization expenses related to CDI totaled $2.4 million. The Company assessed the useful lives of its intangible assets at December 31, 2016 and deemed them to be appropriate.

In 2017, the expense stemming from the amortization of CDI (i.e., $208,000) is expected to be fully amortized.

Mortgage Servicing Rights

The Company records a separate servicing asset representing the right to service third-party loans. Such MSRs are initially recorded at their fair value as a component of the sale proceeds. The fair values of MSRs are based on an analysis of discounted cash flows that incorporates estimates of (1) market servicing costs, (2) market-based estimates of ancillary servicing revenue, (3) market-based prepayment rates, and (4) market profit margins.

MSRs are subsequently measured at either fair value or amortized in proportion to, and over the period of, estimated net servicing income. The Company elects one of those methods on a class basis. A class is determined based on (1) the availability of market inputs used in determining the fair value of servicing assets, and/or (2) the Company’s method for managing the risks of servicing assets.

The Company had MSRs of $234.0 million and $247.7 million, respectively, at December 31, 2016 and 2015. Both period-end balances consisted of two classes of MSRs for which the economic risk is managed separately: residential MSRs (i.e., MSRs on one-to-four family loans sold, servicing retained) and participation MSRs (i.e., MSRs on loans sold through participations).

The total unpaid principal balance of loans serviced for others was $25.1 billion and $24.2 billion at December 31, 2016 and 2015, respectively.

Residential MSRs are carried at fair value, with changes in fair value recorded as a component of non-interest income in each period. The Company uses various derivative instruments to mitigate the income statement-effect of changes in fair value due to changes in valuation inputs and assumptions regarding its residential MSRs. The effects of changes in the fair value of the derivatives are recorded as “Mortgage banking income,” which is included in “Non-interest income” in the Consolidated Statements of Operations and Comprehensive Income (Loss). MSRs do not trade in an active open market with readily observable prices. Accordingly, the Company utilizes a third-party valuation specialist to determine the fair value of its MSRs. This specialist determines fair value based on the present value of estimated future net servicing income cash flows, and incorporates assumptions that market participants would use to estimate fair value, including estimates of prepayment speeds, discount rates, default rates, refinance rates, servicing costs, escrow account earnings, contractual servicing fee income, and ancillary income. The specialist and the Company evaluate, and periodically adjust, as necessary, these underlying inputs and assumptions to reflect market conditions and changes in the assumptions that a market participant would consider in valuing MSRs.

The value of residential MSRs at any given time is significantly affected by the mortgage interest rates that are then available in the marketplace. These, in turn, influence mortgage loan prepayment speeds. The rate of prepayment of serviced residential loans is the most significant estimate involved in the measurement process. Actual prepayment rates may differ from those projected by management due to changes in a variety of economic factors, including prevailing interest rates and the availability of alternative financing sources to borrowers.

During periods of declining interest rates, the value of residential MSRs generally declines as an increase in mortgage refinancing activity results in an increase in prepayments and a decrease in the carrying value of residential MSRs through a charge to earnings in the current period. Conversely, during periods of rising interest rates, the value of residential MSRs generally increases as mortgage refinancing activity declines and the actual prepayments of loans being serviced occur more slowly than had been expected. This results in the carrying value of residential MSRs and servicing income being higher than previously anticipated. Accordingly, the value of residential MSRs that is actually realized could differ from the value initially recorded.

The collective amount of contractually specified servicing fees, late fees, and ancillary fees, which is recorded as “Mortgage banking income” in the Consolidated Statements of Operations and Comprehensive Income (Loss), were $1.3 million, $941,000, and $1.4 million for the years ended December 31, 2016, 2015, and 2014, respectively.

Participation MSRs are initially carried at fair value and are subsequently amortized and carried at the lower of their fair value or amortized amount. The amortization is recorded in proportion to, and over the period of, estimated net servicing income, with impairment of those servicing assets evaluated through an assessment of their fair value via a discounted cash-flow method. The net carrying value is compared to the discounted estimated future net cash flows to determine whether adjustments should be made to carrying values or amortization schedules. Impairment of participation MSRs is recognized through a valuation allowance and a charge to current-period earnings if it is considered to be temporary, or through a direct write-down of the asset and a charge to current-period earnings if it is considered to be other than temporary. The predominant risk characteristics of the underlying loans that are used to stratify the participation MSRs for measurement purposes generally include the (1) loan origination date, (2) loan rate, (3) loan type and size, (4) loan maturity date, and (5) geographic location. Changes in the carrying value of participation MSRs due to amortization or declines in fair value (i.e., impairment), if any, are reported in “Other income” in the period during which such changes occur. In the twelve months ended December 31, 2016, there was no impairment related to the Company’s participation MSRs.

The following table presents the changes in the balances of residential MSRs and participation MSRs for the years ended December 31, 2016 and 2015:


	For the Years Ended December 31,
	2016						2015⁽¹⁾
(in thousands)	Residential			Participation			Residential			Participation
Carrying value, beginning of year	$	243,389		$	4,345		$	227,297		$	—
Additions		45,588			3,774			48,990			5,063
Increase (decrease) in fair value:
Due to changes in interest rates		3,341			—			11,981			—
Due to model assumption changes ⁽²⁾		(13,088	)		—			(1,506	)		—
Due to loan payoffs		(33,425	)		—			(27,288	)		—
Due to passage of time and other changes		(17,706	)		—			(16,085	)		—
Amortization		—			(2,257	)		—			(718	)

Carrying value, end of period	$	228,099		$	5,862		$	243,389		$	4,345

(1)

The presentation of the 2015 amounts has been modified to conform with the 2016 presentation.

(2)

Represents changes in fair value driven by changes to the inputs to the valuation model related to assumed prepayment speeds.

The following table presents the key assumptions used in calculating the fair value of the Company’s residential MSRs at the dates indicated:


	December 31,
	2016			2015
Expected weighted average life		82 months			92 months
Constant prepayment speed		8.70	%		7.35	%
Discount rate		10.05			10.01
Primary mortgage rate to refinance		4.11			4.03
Cost to service (per loan per year):
Current	$	64		$	63
30-59 days or less delinquent		214			213
60-89 days delinquent		364			313
90-119 days delinquent		464			413
120 days or more delinquent		864			563

Reflecting the aging of the portfolio and increasing home price appreciation, the expected weighted average life of the Company’s residential MSRs decreased and, conversely, the constant prepayment speed rose. The year-over-year increase in the constant prepayment speed was primarily attributable to three factors: (1) The progressive aging of the servicing portfolio; (2) An increase in the housing price index used by our third-party valuation specialist suggesting that homebuyer demand has increased and newly created equity could lead to more refinancing; and (3) High consumer confidence indicators and lower unemployment rates, suggesting that a near-term reversal in home prices or affordability trends is unlikely.