Services : ASC 805 Core Deposit Intangible Valuation

MPS ASC 805 Valuations provide acquisition accounting entries required for compliance with ASC 805.  Custom estimates of the core deposit intangible (CDI) and economic life associated with acquired core deposits are produced using peer decay data and transaction specific value inputs.  Value estimates can also be determined for acquired CD’s and loans and selected specialized financial instruments.

Where a purchase price is not established in the transaction, such as a credit union merger, an entity valuation can be produced.  The primary value methodology applied is a transaction specific discounted cash flow (DCF) fair value analysis.  The calculated DCF entity value is placed in perspective with recent comparable M&A value ratio metrics and examination of ongoing balance sheet composition and performance trends.

Loan credit quality adjustments are available.  MPS provides loan fair values net of uncollectible cash flows due to high probability of default loans.  An advanced statistical process is employed to fully quantify all drivers of credit quality.  Institution-specific, portfolio level probabilities of default are estimated by loan category.  Cut-off points are selected, defining expected uncollectible versus collectable cash flows.  Loans with a high probability of default, net of expected recoverable balances, are excluded from fair valued loan balances.

With this MPS service, your institution is empowered to:

  • Determine the core deposit intangible and useful economic life values required to complete the accounting entries for ASC 805 compliance
  • Establish the values of acquired CD's and loans, to correctly set up purchased accounting treatments for these elements of transaction value
  • Present a multi-faceted entity valuation where this input is necessary.
  • Test prior core deposit intangible and useful economic life values for impairment when required
  • Understand core deposit valuation from the buyer's and seller's perspectives to aid in negotiations
  • Support the value paid for acquired core deposits in any transaction to investors, stock analysts, and other capital market participants

MPS Core Deposit Intangible Valuation Report

This report presents the CDI value and useful economic life of acquired core deposits (e.g. branch or whole-institution purchase/merger) needed to meet requirements for ASC 805 reporting.  CD’s and loans, and selected specialized funding instruments such as sub-debt, can also be fair valued.

CDI valuations match specific characteristics of the acquired core deposit base to the fair value calculations with custom inputs for value drivers such as non-interest expense and immediate balance outflows.  Runoff balances (decay) populate the present value model, define useful economic lives, and set an amortization method (e.g. straight line or accelerated).  Peers are uniquely assigned, selected by geographic location, asset size, and other characteristics. 

Peer runoff balances data are derived from MPS core deposit forecasts produced by statistical analyses of client specific data.  CDI runoff inputs are based on aggregated information representing billions of dollars of deposits and the individual decisions of millions of depositors, as reflected in specific monthly records. No other core deposit intangible valuation service employs such precise and audit defensible term related data.

As a default, MPS employs a “financial instrument” approach for calculating CDI values, customized with local FHLB district term advance rates or user specified inputs as discount rates.  That methodology has been accepted by clients, their accounting firms and regulators in hundreds of reports over the last eight years.  As required, however, a traditional cost advantage valuation approach can be used.

CD and loan fair values are obtained from industry standard present value models, with key value inputs customized to the valued balances.  Credit quality analyses of acquired loans are available.

Entity valuations are produced using a transaction specific DCF model.  The valuation is based on the expected future path of net earnings, derived from an existing business plan or other input sources.  A capital contribution set aside is applied to growth balances.

To provide perspective for the DCF valuation, comparable M&A transaction value ratio metrics are included.  Comparison transactions are those recently occurring in the same general geographical area as the transaction, and sharing as many operating characteristics (e.g. asset size, retail /commercial focus) as possible.

Further insights into innate fair value are established by presenting recent balance sheet composition and performance trends.  This illustrates the historic basis for the valuation.

CDI Impairment Testing of prior CDI values are reassessed at the point of impairment testing using industry best practice methodologies.