In 2016, Mercer Capital published an article on core deposit trends through November 1 just before the presidential election. At that time, core deposit intangible (CDI) values remained near historical lows. Following the financial crisis, CDI values decreased as deposits have less worth, so to speak, in a very low rate environment than in a “normal” environment as existed before the crisis. Despite a rate increase by the FOMC in December 2015, the costs of alternative funds such as FHLB advances had not materially increased and were not expected to increase more than the gradual pace the Fed had targeted for short-term interest rates since late 2015. The persistent low rate environment limited both deposit premiums paid in acquisitions and CDI values booked.
A week later, the presidential election defied market expectations and drove bond yields higher almost immediately on expectations of stronger economic growth and rising inflation. Three more rate increases by the FOMC followed in December 2016, March 2017, and June 2017. Since the post-election run-up, the yield curve has flattened, but overall yields remain well above pre-election levels.
In the latest issue of Mercer Capital’s Bank Watch, we update our analysis of trends in CDI assets recorded in whole bank acquisitions completed from 2008 through the third quarter of 2017. CDIs represent the benefit of having a low-cost, stable funding source, and in times when alternative sources of funds have higher rates, core deposits have greater “worth” to an acquirer.
- Core Deposit Intangible Asset Values Remain Low (November 2016)
- Getting It Right: Loan Valuation and Credit Marks in Today’s M&A Market
- Bank Valuation: Financial Issues, Valuation Implications
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