FAS 141 and its subsequent clarifications mandate that the core deposit intangible (CDI) and other premium information associated with an acquisition be quantified to provide the entries required for purchase accounting compliance. Estimates of CDI fair value and economic life, and rationalization for the choice of amortization method must be specifically produced. Value/premium estimates for any acquired CD’s and loans must also be estimated. Values for other financial assets and liabilities (e.g. investments and wholesale borrowings) can come from market based sources.
CDI valuations need to match specific characteristics of the acquired core deposits to the analysis by using custom inputs for value drivers such as non-interest expense and expected immediate outflows. Run off balances used to calculate useful economic lives and verify amortization method should preferably be unique to each analysis and must have a strong empirical content.
Based on all available information, FASB prefers an “alternative funding” method for calculating CDI values, customized by applying transaction specific cost of alternative funds as discount rates (e.g. local FHLB district term advance rates).