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, 2017 or 2016. 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. As of December 31, 2017, all CDI was fully amortized. For the year ended December 31, 2017, amortization expenses related to CDI totaled $208,000. The Company evaluates such identifiable intangibles for impairment when an indication of impairment exists. No impairment charges were required to be recorded in 2017, 2016, or 2015. 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.

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 are 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 completed the sale of its mortgage banking business in the third quarter of 2017, and consequently sold substantially all of its mortgage servicing assets. Accordingly, the value of the MSR asset declined to $6.1 million at December 31, 2017, compared to $234.0 million at December 31, 2016. These balances consisted of two classes of MSRs for which the Company separately manages the economic risk: residential MSRs and participation MSRs (i.e., MSRs on loans sold through participations).

Residential MSRs are carried at fair value, and at December 31, 2017 reflected only loans sold through the FHLB’s Mortgage Partnership Finance Program, with changes in fair value recorded as a component of non-interest income in each period. 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 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), was $1.2 million and $1.3 million, and $941,000 for the years ended December 31, 2017, 2016, and 2015, 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 years ended December 31, 2017 and 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, 2017 and 2016:


	For the Years Ended December 31,
	2017						2016
(in thousands)	Residential			Participation			Residential			Participation
Carrying value, beginning of year	$	228,099		$	5,862		$	243,389		$	4,345
Additions		18,054			710			45,588			3,774
Sales		(208,827	)		—			—			—
Increase (decrease) in fair value:
Due to changes in interest rates		(2,096	)		—			3,341			—
Due to model assumption changes ⁽¹⁾		—			—			(13,088	)		—
Due to loan payoffs		(22,610	)		—			(33,425	)		—
Due to passage of time and other changes		(9,891	)		—			(17,706	)		—
Amortization		—			(3,201	)		—			(2,257	)

Carrying value, end of period	$	2,729		$	3,371		$	228,099		$	5,862

(1)

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,
	2017			2016
Expected weighted average life		87 months			82 months
Constant prepayment speed		9.81	%		8.70	%
Discount rate		12.00			10.05
Primary mortgage rate to refinance		4.02			4.11
Cost to service (per loan per year):
Current		$ 70			$ 64
30-59 days or less delinquent		220			214
60-89 days delinquent		370			364
90-119 days delinquent		470			464
120 days or more delinquent		870			864

The increase in the constant prepayment speed was primarily attributable to an increase in the housing price index used by the Company’s third-party valuation specialist, suggesting that homebuyer demand has increased and newly created equity could lead to more refinancing.

Reflecting the sale of the mortgage banking business the total unpaid principal balance of loans serviced for others declined to $3.7 billion at December 31, 2017 from $25.1 billion at December 31, 2016.