How does item morale work?

[Paksenarrion]

Another example:
-----
Hammer of the King
The hammer once belonging to the king of dwarves.
Race: dwarves
Level: 4
Cost: 45’000 +4 attacks
-10 % of the requirement of leadership for gnomes. (See in addition)
(Moral=50, Normal)
Grows: +5 in army of the hero were only gnomes. +1 in army of the hero were both gnomes and beings of other races.
Falls: -4 in army of the hero there was no gnome. -10 in army of the enemy there were gnomes.
This hammer belonged Torn Digor - to the king of gnomes earlier. It has presented this hammer to you as a gift, as a sign on the respect. Gnomes well know this hammer, and willingly enter army of its owner. Shaped personally hands of one them dwarven kings, the hammer despises all other races, and prefers to go into battle with soldiers of the mountain people.
-----
So, if you do not fight with dwarves, I guess the item morale would go down.

Also, I noticed the Druid staff loses morale when anything of wood (Ent) are killed.