Successfully reported this slideshow.
We use your LinkedIn profile and activity data to personalize ads and to show you more relevant ads. You can change your ad preferences anytime.

Mercer Capital's Bank Watch | October 2019 | 2019 Core Deposit Intangibles Update

54 views

Published on

Brought to you by the Financial Institutions Team of Mercer Capital, this monthly newsletter is focused on bank activity in five U.S. regions. Bank Watch highlights various banking metrics, including public market indicators, M&A market indicators, and key indices of the top financial institutions, providing insight into financial institution valuation issues.

Published in: Economy & Finance
  • Be the first to comment

  • Be the first to like this

Mercer Capital's Bank Watch | October 2019 | 2019 Core Deposit Intangibles Update

  1. 1. www.mercercapital.com 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. 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. 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. 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. 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. 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. 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 $10B Month-to-Date 1.14% 3.81% 5.35% 5.63% 7.24% Quarter-to-Date 0.63% 3.26% 0.41% -1.31% 2.98% Year-to-Date 10.91% 13.25% 10.17% 11.68% 18.94% Last 12 Months -1.96% -1.43% -7.64% -4.22% -0.96% -10% 0% 10% 20% 30% AsofSeptember30,2019 70 75 80 85 90 95 100 105 110 9/30/201810/31/201811/30/201812/31/20181/31/20192/28/20193/31/20194/30/20195/31/20196/30/20197/31/20198/31/20199/30/2019 September28,2018=100 MCM Index - Community Banks SNL Bank SP 500
  8. 8. © 2019 Mercer Capital // Data provided by SP Global Market Intelligence 7 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 LTM 2019 U.S. 20.0% 18.4% 12.0% 6.9% 6.3% 5.4% 4.3% 5.5% 7.5% 7.5% 6.1% 10.0% 9.6% 9.0% 0% 5% 10% 15% 20% 25% CoreDepositPremiums 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 LTM 2019 U.S. 243% 228% 196% 145% 141% 132% 130% 134% 155% 148% 143% 170% 178% 169% 0% 50% 100% 150% 200% 250% 300% 350% Price/TangibleBookValue 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 LTM 2019 U.S. 22.0 22.1 19.9 19.3 21.7 21.9 17.0 16.5 17.5 18.8 18.1 19.5 22.4 16.1 0 5 10 15 20 25 30 Price/Last12Months Earnings Regions Price / LTM Earnings Price/ Tang. BV Price / Core Dep Premium No. of Deals Median Deal Value ($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. 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. 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 to receive this complimentary publication, visit our web site at www.mercercapital.com. www.mercercapital.com
  11. 11. Mercer Capital www.mercercapital.com

×