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Second Quarter 2018
OCTOBER 2019
Bank Watch
ARTICLE
2019 Core Deposit Intangibles Update
In This Issue
2019 Core Deposit Intangibles Update 1
Public Market Indicators 6
MA Market Indicators 7
Regional Public
Bank Peer Reports 8
About Mercer Capital 9
2. © 2019 Mercer Capital // www.mercercapital.com 1
Mercer Capital’s Bank Watch October 2019
2019 Core Deposit Intangibles Update
In our annual update of core deposit trends published a year ago, we described an
increasing trend in core deposit intangible asset values in light of rising interest rates.
At the time several more short-term rate hikes by the Fed were expected during 2018
and 2019. However, the equity and high yield credit markets disagreed as both fell
sharply during the fourth quarter in anticipation of the December rate hike that the Fed
later implemented.
A year later the Fed has cut three times in 2019 and thereby erased three of the four
hikes it implemented in 2018. As 2019 unfolded, intermediate- and long-term U.S.
Treasury rates declined from what appears to be cycle highs reached in November 2018
through August 2019. As a result, the U.S. Treasury curve inverted with short-rates
that are closely tied to the Fed’s policy rates exceeding intermediate- and long-term
rates. By late August 3-month bills yielded about 50bps more than the 10-year bond.
Also, the spread between 10-year and 2-year Treasuries, commonly cited as an indicator
of impending recessions when negative, was nominally negative. During October
intermediate- and long-term rates rose modestly in anticipation of the third Fed rate cut
supporting economic growth and thereby flattened the curve.
Alongside these fluctuations in the interest rate environment, the banking industry has
seen increasing competition for deposits in recent years. Improved loan demand in
the post-recession period has led to greater funding needs, while competition from
traditional banking channels has been compounded by the increased prevalence of
online deposit products, often offering higher rates. All of these trends have combined to
make strong core deposit bases increasingly valuable in bank acquisitions in the post-
recession years. One question to ponder, however, is how much the value attributable to
core deposits may ease given the reduction in rates that has occurred recently.
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
1-Month
1-Year
2-Year
3-Year
5-Year
7-Year
10-Year
20-Year
30-Year
3Q19 (Current) 2Q19 (Previous) 3Q18 (Previous Year)
Source: Federal Reserve Statistical Release H.15
Note: Figures shown are the average yield for the last month of the quarter.
Figure 1 :: U.S.Treasury Yield Curve
3. © 2019 Mercer Capital // www.mercercapital.com 2
Mercer Capital’s Bank Watch October 2019
Using data compiled by SP Global Market Intelligence, we analyzed trends in core
deposit intangible (CDI) assets recorded in whole bank acquisitions completed from 2000
through September 2019. CDI values represent the value of the depository customer
relationships obtained in a bank acquisition. CDI values are driven by many factors,
including the “stickiness” of a customer base, the types of deposit accounts assumed,
and the cost of the acquired deposit base compared to alternative sources of funding.
For our analysis of industry trends in CDI values, we relied on SP Global Market
Intelligence’s definition of core deposits.1
In analyzing core deposit intangible assets
for individual acquisitions, however, a more detailed analysis of the deposit base would
consider the relative stability of various account types. In general, CDI assets derive
most of their value from lower-cost demand deposit accounts, while often significantly
less (if not zero) value is ascribed to more rate-sensitive time deposits and public funds,
or to non-retail funding sources such as listing service or brokered deposits which are
excluded from core deposits when determining the value of a CDI.
Trends in CDI Values
Figure 2 summarizes the trend in CDI values since the start of the 2008 recession,
compared with rates on 5-year FHLB advances. Over the post-recession period, CDI
values have largely followed the general trend in interest rates. As alternative funding
became more costly during 2017 and 2018, CDI values generally ticked up as well, rela-
tive to post-recession average levels. During 2019, the trend reversed as CDI values
have exhibited a declining trend in light of yield curve inversion and Fed rate cuts at its
last three meetings.
This decline in CDI values has been somewhat slower than the drop in benchmark
interest rates, however, in part because deposit costs typically lag broader move-
ments in market interest rates. In general, banks were slow to raise deposit rates
in the period of contractionary monetary policy through 2018 and, as a result, rates
remain below benchmark levels leaving banks less room to reduce rates further.
For CDs, the lagging trend is even more pronounced given their nature as time
Figure 2 :: CDI as % of Acquired Core Deposits
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
2008
Q3
2009
Q1
2009
Q3
2010
Q1
2010
Q3
2011
Q1
2011
Q3
2012
Q1
2012
Q3
2013
Q1
2013
Q3
2014
Q1
2014
Q3
2015
Q1
2015
Q3
2016
Q1
2016
Q3
2017
Q1
2017
Q3
2018
Q1
2018
Q3
2019
Q1
2019
Q3
5-YrFHLB
CDI
CDI 5-Yr FHLB
Figure 3 :: CDI as % of Acquired Core Deposits
0.00%
0.25%
0.50%
0.75%
1.00%
1.25%
1.50%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
2016
Q4
2017
Q1
2017
Q2
2017
Q3
2017
Q4
2018
Q1
2018
Q2
2018
Q3
2018
Q4
2019
Q1
2019
Q2
2019
Q3
U.S.Avg.DepositRate
CDI
CDI 1 Yr CD Money Market Reg. Savings
1
SP Global Market Intelligence defines core deposits as, “Deposits, less time deposit accounts with balances over $100,000 and foreign deposits if available or deposits, less all deposit accounts with balances over $100,000 and foreign deposits.”
4. © 2019 Mercer Capital // www.mercercapital.com 3
Mercer Capital’s Bank Watch October 2019
deposits. Many banks attempted to “lock-in” rates by increasing reliance on CDs when
expectations were for continued rate increases as late as year-end 2018. Now that rates
are on the decline, banks have been stuck with CDs that cannot be repriced until their
maturities even as benchmark rates fall. While time deposits typically are not considered
“core deposits” in an acquisition and thus would not directly influence CDI values, they
do significantly influence a bank’s overall cost of funds, and while funding costs remain
high a strong core deposit base remains a valuable asset to acquirers.
Even as CDI assets remain above post-recession average levels at approximately 2.0-
2.5%, they are still below long-term historical levels which averaged closer to 2.5-3.0%
in the early 2000s.
Accounting for CDI Assets
Based on the data for acquisitions for which core deposit intangible detail was
reported, a majority of banks selected a ten-year amortization term for the CDI values
booked. Less than 10% of transactions for which data was available selected amortiza-
tion terms longer than ten years. Amortization methods were somewhat more varied,
but an accelerated amortization method was selected in more than half of these transac-
tions.
Trends in Deposit Premiums Relative to CDI Asset Values
Core deposit intangible assets are related to, but not identical to, deposit premi-
ums paid in acquisitions. While CDI assets are an intangible asset recorded in ac-
quisitions to capture the value of the customer relationships the deposits repre-
sent, deposit premiums paid are a function of the purchase price of an acquisition.
Deposit premiums in whole bank acquisitions are computed based on the excess of the
purchase price over the target’s tangible book value, as a percentage of the core deposit
base. While deposit premiums often capture the value to the acquirer of assuming the
established funding source of the core deposit base (that is, the value of the deposit
franchise), the purchase price also reflects factors unrelated to the deposit base, such
Figure 4 :: Selected Amortization Term (Years)
0%
10%
20%
30%
40%
50%
60%
70%
3 4 5 6 7 8 9 10 11 12 13 14 15 16 18 20
Transactions Completed 2008 - Sep. 30, 2019
Figure 5 :: Selected Amortization Method
0%
10%
20%
30%
40%
50%
60%
Accelerated Straight-line Sum-of-years Digits
5. © 2019 Mercer Capital // www.mercercapital.com 4
Mercer Capital’s Bank Watch October 2019
as asset quality in the acquired loan base, unique synergy opportunities anticipated by
the acquirer, etc. Any additional factors may influence the purchase price to an extent
that the calculated deposit premium doesn’t necessarily bear a strong relationship to the
value of the core deposit base to the acquirer. This influence is often less relevant in
branch transactions where the deposit base is the primary driver of the transaction and
the relationship between the purchase and the deposit base is more direct.
Deposit premiums paid in whole bank acquisitions have shown more volatility than CDI
values. Despite improved deal values in recent years, current deposit premiums in the
high single digits remain well below the pre-financial crisis levels when premiums for
whole bank acquisitions averaged closer to 20%.
Deposit premiums paid in branch transactions have generally been less vol-
atile than tangible book value premiums paid in whole bank acquisitions.
Branch transaction deposit premiums have averaged in the 5.5%-7.5% range during
2019, up from the 2.0-4.0% range observed in the financial crisis, and have continued to
rise in recent quarters in light of increasing deposit competition.
For more information about Mercer Capital’s core deposit valuation services, please
contact us.
Madeleine G. Davis
901.322.9715 | davism@mercercapital.com
Figure 6 :: CDI Recorded vs. Deposit Premiums Paid Figure 7 :: Average Deposit Premiums Paid
0%
3%
6%
9%
12%
15%
18%
21%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
20002001200220032004200520062007200820092010201120122013201420152016201720182019
DepositPremium
CDI
CDI Deposit Premium Paid
0%
2%
4%
6%
8%
10%
12%
14%
16%
2008
Q3
2009
Q1
2009
Q3
2010
Q1
2010
Q3
2011
Q1
2011
Q3
2012
Q1
2012
Q3
2013
Q1
2013
Q3
2014
Q1
2014
Q3
2015
Q1
2015
Q3
2016
Q1
2016
Q3
2017
Q1
2017
Q3
2018
Q1
2018
Q3
2019
Q1
2019
Q3
Whole Bank Acquisitions Branch Transactions
6. © 2019 Mercer Capital // www.mercercapital.com 5
Mercer Capital’s Bank Watch October 2019
What We’re Reading
Florida and Illinois have been the two hottest bank MA markets over 2018-19.
Bank Director reviews recent MA activity in the two states and other active
markets over the last two years.
Lower inflation expectations are creating problems for the Fed according to
The Wall Street Journal.
Christopher Whalen of the Institutional Risk Analyst reviews third quarter bank
earnings and the impact of funding costs.
Pinnacle Financial Partners
Nashville, Tennessee
has acquired
Advocate Capital, Inc.
Nasvhille, Tennessee
Mercer Capital served as exclusive
financial advisor to Advocate
Capital, Inc.
– July 2019 –
Recent Transaction
On July 2, 2019, Pinnacle Bank, a wholly-
owned subsidiary of Pinnacle Financial
Partners Inc. (NASDAQ: PNFP), acquired
Nashville, Tennessee-based Advocate
Capital Inc. for $59.0 million of cash
consideration. Mercer Capital served as
the exclusive financial advisor to Advocate
Capital.
Learn More about our Transaction
Advisory Services
7. © 2019 Mercer Capital // Data provided by SP Global Market Intelligence 6
Mercer Capital’s Bank Group Index Overview Return Stratification of U.S. Banks
by Asset Size
Median Valuation Multiples
MedianTotal Return as of September 30, 2019 Median Valuation Multiples as of September 30, 2019
Indices
Month-to-
Date
Quarter-to-
Date
Year-to-
Date
Last 12
Months
Price/LTM
EPS
Price / 2019
(E) EPS
Price / 2020
(E) EPS
Price / Book
Value
Price / Tan-
gible Book
Value Dividend Yield
Atlantic Coast Index 6.8% 2.7% 14.9% -1.2% 13.6x 14.0x 12.9x 125% 140% 2.3%
Midwest Index 6.3% 0.3% 11.4% -5.6% 12.6x 11.9x 11.0x 128% 146% 2.4%
Northeast Index 5.9% -2.1% 7.2% -6.7% 13.7x 12.5x 11.3x 121% 133% 2.6%
Southeast Index 5.9% 2.0% 10.0% -3.0% 14.1x 12.6x 12.3x 117% 137% 2.0%
West Index 1.8% -2.6% 2.4% -15.6% 12.6x 13.0x 12.7x 118% 135% 2.2%
Community Bank Index 5.8% 0.3% 8.1% -6.7% 13.2x 12.4x 11.7x 121% 136% 2.3%
SNL Bank Index 7.1% 2.8% 18.4% -1.2%
Mercer Capital’s Public Market Indicators October 2019
Assets
$250 -
$500M
Assets
$500M -
$1B
Assets $1 -
$5B
Assets $5 -
$10B
Assets
$10B
Month-to-Date 1.14% 3.81% 5.35% 5.63% 7.24%
Quarter-to-Date 0.63% 3.26% 0.41% -1.31% 2.98%
Year-to-Date 10.91% 13.25% 10.17% 11.68% 18.94%
Last 12 Months -1.96% -1.43% -7.64% -4.22% -0.96%
-10%
0%
10%
20%
30%
AsofSeptember30,2019
70
75
80
85
90
95
100
105
110
9/30/201810/31/201811/30/201812/31/20181/31/20192/28/20193/31/20194/30/20195/31/20196/30/20197/31/20198/31/20199/30/2019
September28,2018=100
MCM Index - Community Banks SNL Bank SP 500
8. © 2019 Mercer Capital // Data provided by SP Global Market Intelligence 7
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
LTM
2019
U.S. 20.0% 18.4% 12.0% 6.9% 6.3% 5.4% 4.3% 5.5% 7.5% 7.5% 6.1% 10.0% 9.6% 9.0%
0%
5%
10%
15%
20%
25%
CoreDepositPremiums
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
LTM
2019
U.S. 243% 228% 196% 145% 141% 132% 130% 134% 155% 148% 143% 170% 178% 169%
0%
50%
100%
150%
200%
250%
300%
350%
Price/TangibleBookValue
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
LTM
2019
U.S. 22.0 22.1 19.9 19.3 21.7 21.9 17.0 16.5 17.5 18.8 18.1 19.5 22.4 16.1
0
5
10
15
20
25
30
Price/Last12Months
Earnings
Regions
Price /
LTM
Earnings
Price/
Tang.
BV
Price /
Core Dep
Premium
No.
of
Deals
Median
Deal
Value
($M)
Target’s
Median
Assets
($000)
Target’s
Median
LTM
ROAE
Atlantic Coast 17.7x 173% 9.5% 23 94.6 471,912 9.9%
Midwest 15.2x 165% 8.1% 84 57.7 192,846 10.0%
Northeast 18.3x 171% 9.1% 11 85.3 562,635 9.8%
Southeast 14.9x 169% 8.8% 35 41.7 248,139 10.1%
West 16.5x 184% 11.3% 18 76.5 310,777 11.0%
National Community
Banks
16.1x 169% 9.0% 171 67.1 256,311 10.0%
Median Valuation Multiples for MA Deals
Target Banks’ Assets $5B and LTM ROE 5%, 12 months ended September 2019
Median Core Deposit Multiples
Target Banks’ Assets $5B and LTM ROE 5%
Median Price/Tangible Book Value Multiples
Target Banks’ Assets $5B and LTM ROE 5%
Median Price/Earnings Multiples
Target Banks’ Assets $5B and LTM ROE 5%
Mercer Capital’s MA Market Indicators October 2019
Source: SP Global Market Intelligence
9. Updated weekly, Mercer Capital’s Regional Public Bank Peer Reports offer a
closer look at the market pricing and performance of publicly traded banks
in the states of five U.S. regions. Click on the map to view the reports from
the representative region.
© 2019 Mercer Capital // Data provided by SP Global Market Intelligence 8
Atlantic Coast Midwest Northeast
Southeast West
Mercer Capital’s
Regional Public
Bank Peer Reports
Mercer Capital’s Bank Watch October 2019
10. Mercer Capital assists banks, thrifts, and credit unions with significant corporate valuation requirements,
transaction advisory services, and other strategic decisions.
Mercer Capital pairs analytical rigor with industry knowledge to deliver unique insight into issues facing banks. These insights underpin the valuation analyses that are at the
heart of Mercer Capital’s services to depository institutions.
»» Bank valuation
»» Financial reporting for banks
»» Goodwill impairment
»» Litigation support
»» Stress Testing
»» Loan portfolio valuation
»» Tax compliance
»» Transaction advisory
»» Strategic planning
Depository Institutions Team
MERCER CAPITAL
Depository Institutions Services
BUSINESS VALUATION
FINANCIAL ADVISORY SERVICES
Jeff K. Davis, CFA
615.345.0350
jeffdavis@mercercapital.com
Andrew K. Gibbs, CFA, CPA/ABV
901.322.9726
gibbsa@mercercapital.com
Jay D. Wilson, Jr., CFA, ASA, CBA
469.778.5860
wilsonj@mercercapital.com
Eden G. Stanton, CFA
901.270.7250
stantone@mercercapital.com
Mary Grace Arehart, CFA
901.322.9720
arehartm@mercercapital.com
Madeleine G. Davis
901.322.9715
davism@mercercapital.com
Brian F. Adams
901.322.9706
adamsb@mercercapital.com
Copyright © 2019 Mercer Capital Management, Inc. All rights reserved. It is illegal under Federal law to reproduce this publication or any portion of its contents without the publisher’s permission. Media quotations with source attribution are encouraged.
Reporters requesting additional information or editorial comment should contact Barbara Walters Price at 901.685.2120. Mercer Capital’s Bank Watch is published monthly and does not constitute legal or financial consulting advice. It is offered as an
information service to our clients and friends. Those interested in specific guidance for legal or accounting matters should seek competent professional advice. Inquiries to discuss specific valuation matters are welcomed. To add your name to our mailing list
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