Mercer Capital's Bank Watch | September 2022| 2022 Core Deposit Intangibles Update

www.mercercapital.com
Second Quarter 2018
SEPTEMBER 2022
Bank Watch
2022 Core Deposit Intangibles Update
BUSINESS VALUATION &
FINANCIAL ADVISORY SERVICES
In This Issue
ARTICLE
2022 Core Deposit Intangibles Update1
Public Market Indicators 7
MA Market Indicators 8
Regional Public
Bank Peer Reports 9
About Mercer Capital 10

© 2022 Mercer Capital // www.mercercapital.com 1
Mercer Capital’s Bank Watch September 2022
2022 Core Deposit Intangibles Update
On September 21, 2022, the Federal Reserve increased the target federal funds rate
by 75 basis points, capping off a collective increase of 300 basis points since March
2022. With the expectation of additional rate increases this year, it’s a good time to
evaluate recent trends in core deposit values and discuss expectations for deposit
valuations in the coming months.
Mercer Capital previously published articles on core deposit trends in August 2020
during the early stages of the pandemic and again in August 2021. In those articles,
we described a decreasing trend in core deposit intangible asset values. In response
to the pandemic, the Fed cut rates effectively to zero, and the yield on the benchmark
10-year Treasury reached a record low. While many factors are pertinent to analyzing
a deposit base, a significant driver of value is market interest rates. As shown below,
we find ourselves in a very different interest rate environment today.
Trends In CDI Values
Using data compiled by SP Capital IQ Pro, we analyzed trends in core deposit
intangible (CDI) assets recorded in whole bank acquisitions completed from 2000
through mid-September 2022. CDI values represent the value of the depository
customer relationships recorded by acquirers as an intangible asset. CDI values are
driven by many factors, including the “stickiness” of a customer base, the types of
deposit accounts assumed, the level of noninterest income generated, 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 Capital IQ Pro’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. Non-retail funding
sources such as listing service or brokered deposits are excluded from core deposits
when determining the value of a CDI.
Figure 2 (on the next page) 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 recorded by acquirers became more costly in 2017
and 2018, CDI values generally ticked up as well, relative to post-recession average
levels. Throughout 2019, CDI values exhibited a declining trend in light of yield curve
inversion and Fed cuts to the target federal funds rate during the back half of 2019.
This trend accelerated in March 2020 when rates were effectively cut to zero.
1
SP Capital IQ Pro defines core deposits as, “Deposits in U.S. offices excluding time deposits over $250,000 and brokered deposits of $250,000 or less.”
Figure 1 :: U.S.Treasury Yield Curve
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
1-Month
1-Year
2-Year
3-Year
5-Year
7-Year
10-Year
20-Year
30-Year
Sept '22 June '22 Sept '21
Source: Federal Reserve Statistical Release H.15
Note: Figures shown are the average yield for each month

CDI values have showed some recovery in the past few quarters (with an average
CDI value of 93 basis points year-to-date in 2022 as compared to 64 basis points for
all of 2021). Despite the recent uptick, CDI values remain below the post-recession
average of 1.29% in the period presented in the chart and meaningfully lower than
long-term historical levels which averaged closer to 2.5% to 3.0% in the early 2000s.
They are also markedly lower than one might expect, given the current cost of
wholesale funding.
As shown above, reported CDI values have not increased in tandem with the recent
increase in FHLB rates. The average CDI value increased just 25 basis points from
September 2021 to September 2022, while the five-year FHLB advance increased a
dramatic 228 basis points over the same period. In late-2018 the 5-year FHLB rate
approximated the current, mid-September 2022 level, but the average CDI value at
that time was 2.42% (compared to the third quarter 2022 average value of 0.75%).
The CDI values in recent quarters are somewhat counterintuitive. There are likely
three drivers for the relationship between recently reported CDI values and market
interest rates:
» Reporting time lag. The increase in the 5-year FHLB rate has occurred
rapidly over the past few months. The deals that closed in the second
and third quarters of 2022 were announced in an extremely low interest
rate environment. Following third quarter 2022 filings, we expect some
upward migration in CDI values to occur as recently announced deals are
completed, which reflect the Federal Reserve’s recent rate actions.
Figure 2 :: CDI as % of Acquired Core Deposits
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
2008
Q2
2008
Q4
2009
Q2
2009
Q4
2010
Q2
2010
Q4
2011
Q2
2011
Q4
2012
Q2
2012
Q4
2013
Q2
2013
Q4
2014
Q2
2014
Q4
2015
Q2
2015
Q4
2016
Q2
2016
Q4
2017
Q2
2017
Q4
2018
Q2
2018
Q4
2019
Q2
2019
Q4
2020
Q2
2020
Q4
2021
Q2
2021
Q4
2022
Q2
CDI 1 Yr CD Money Market Reg. Savings 5-Yr FHLB
Source: SP Capital IQ Pro

» Deposit levels. Since the beginning of the pandemic, banks have been
inundated with deposits. It was initially expected that the increase in deposits
would be transient in nature as the economy re-opened, PPP funds were
spent or invested, and consumer confidence improved. However, deposit
growth continued through 2021 for nearly all banks and into 2022 for some
banks. The growth rate in deposit balances is slowing, and September
2022 balances ($17.95 trillion) were lower than August 2022 balances
($18.0 trillion). Given the low average loan-to-deposit ratios, banks have
not been in a hurry to increase deposit rates. With the excess of deposits,
there may have been a tendency for bank acquirers to discount core deposit
value given the lack of immediate funding needs or concern that, with higher
market rates, the long anticipated reversal of the pandemic-related deposit
influx may finally occur.
» Uncertain Rate Outlook. While rates are expected to continue rising in the
near-term, some market participants may remain concerned that a zero rate
environment will remain the long-term norm. If this view is correct, which
implicitly assumes that the Federal Reserve can choke inflation, CDI values
will remain constrained.
Nineteen deals were announced in August and September 2022, and five of those
deals provided either investor presentations or earnings calls containing CDI
estimates. These CDI estimates ranged from 1.5% to 2.0%, which is more in line with
the numbers we have observed in our valuation analyses. We expect CDI values to
continue rising in concert with market interest rates. However, market interest rates
are not the only driver of CDI value, and there are some potentially mitigating factors
to CDI values in the near term.
» Deposit levels. Over the past year, consumers were likely hesitant to go
to the trouble of seeking higher interest rates as the marginal benefit of a
rate enhancement would have been low in comparison to the necessary
expenditure of effort. This inertia is not expected to last indefinitely. There
is already evidence that excess deposit balances are beginning to exit the
system. Higher attrition rates, all else equal, translate into a lower CDI value.
» Deposit mix. Over the past decade, nationwide average deposit mix
has shifted in favor of noninterest bearing deposits. In 2007, retail time
deposits constituted an average of 31% of financial institution deposits with
noninterest bearing deposits comprising 16%. In 2022, this mix is nearly
reversed (28% of balances in noninterest-bearing accounts and 15% in
retail time deposits). As banks face increasing interest rate pressure, the
deposit mix is likely to begin shifting in favor of interest-bearing deposits that
have lower CDI values.
» Service charge income. The industry is facing pressure from regulators
and the public to reduce overdraft charges and other fees. Lower service
charge income produces lower CDI values, all else equal.
Figure 3 :: Deposit Mix Over Time
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2022
2021
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
NIB DDAs NOW, ATS, Other MMDAs Savings Retail CDs

» Deposit interest rate betas. Historical average deposit betas may
be insufficient to forecast future deposit interest rates over the life of an
acquired deposit base. For example, deposit betas for money market
accounts have historically averaged approximately 50%. At September 23,
2022 the national average money market rate was 0.15%. A 50% beta
may not be aggressive enough to yield a reasonable ongoing interest rate
for an acquired deposit base with a starting interest rate of 0.15%. Using
an inappropriately low beta would artificially enhance core deposit value by
understating future interest rates on the acquired deposit base.
Trends In Deposit Premiums Relative To CDI Asset
Values
Core deposit intangible assets are related to, but not identical to, deposit premiums
paid in acquisitions. While CDI assets are an intangible asset recorded in acquisitions
to capture the value of the customer relationships the deposits represent, 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 as the quality of the acquired loan portfolio, unique synergy
opportunities anticipated by the acquirer, etc. As shown in Figure 4, deposit premiums
paid in whole bank acquisitions have shown more volatility than CDI values. Deposit
premiums in the range of 6% to 10% remain well below the pre-Great Recession
levels when premiums for whole bank acquisitions averaged closer to 20%.
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 price and the deposit base is more direct. Figure
5 (on the next page) presents deposit premiums paid in whole bank acquisitions as
compared to premiums paid in branch transactions.
Deposit premiums paid in branch transactions have generally been less volatile than
tangible book value premiums paid in whole bank acquisitions. Branch transaction
deposit premiums averaged in the 3.0% to 7.5% range during 2020, up from the 2.0%
to 4.0% range observed in the financial crisis. During 2021 and the first quarter of
2022, branch transaction deposit premiums averaged 2.5% to 5.25%. Unfortunately,
none of the branch transactions completed in the second or third quarters of 2022
reported franchise premium data.
Figure 4 :: CDI Recorded vs. Deposit Premiums Paid
0.0%
3.0%
6.0%
9.0%
12.0%
15.0%
18.0%
21.0%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
2022
Deposit
Premium
CDI
CDI Deposit Premium Paid

Some disconnect appears to exist between the prices paid in branch transactions
and the CDI values recorded in bank MA transactions. Beyond the relatively small
sample size of branch transactions, one explanation might be the excess capital that
continues to accumulate in the banking industry, resulting in strong bidding activity
for the MA opportunities that arise–even in situations where the potential buyers
have ample deposits.
Figure 5 :: Average Deposit Premiums Paid
0%
2%
4%
6%
8%
10%
12%
14%
16%
2008
Q
2
2008
Q
4
2009
Q
2
2009
Q
4
2010
Q
2
2010
Q
4
2011
Q
2
2011
Q
4
2012
Q
2
2012
Q
4
2013
Q
2
2013
Q
4
2014
Q
2
2014
Q
4
2015
Q
2
2015
Q
4
2016
Q
2
2016
Q
4
2017
Q
2
2017
Q
4
2018
Q
2
2018
Q
4
2019
Q
2
2019
Q
4
2020
Q
2
2020
Q
4
2021
Q
2
2021
Q
4
2022
Q
2
Whole Bank Acquisitions Branch Transactions
WHAT WE’RE READING
Recent economic reports paint a complex picture of demand with rising
new home sales and declining new orders for durable goods.
Overall new business volume for the equipment finance sector was up
4% year-over-year in August and up 5% year-to-date, according to the
Equipment Leasing Finance Association.
Acting Comptroller of the Currency Michael Hsu expressed concerns
about bank-fintech partnerships in a recent speech, signaling the OCC’s
interest in increasing engagement with nonbank technology firms.

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
amortization terms longer than ten years. Amortization methods were somewhat
more varied, but an accelerated amortization method was selected in approximately
half of these transactions.
For more information about Mercer Capital’s core deposit valuation services, please
contact a member of our Depository Institution Services Team.
Figure 6 :: Selected Amortization Term (Years)
Transactions Completed 2008 - September 25, 2022
0%
10%
20%
30%
40%
50%
60%
70%
3 4 5 6 7 8 9 10 11 12 13 14 15 16 18 20
Figure 7 :: Selected Amortization Method
0%
10%
20%
30%
40%
50%
60%
Accelerated Straight-line Sum-of-years Digits
Eden G. Stanton, CFA, ASA
stantone@mercercapital.com | 901.270.7250

© 2022 Mercer Capital // Data provided by SP Capital IQ Pro. 7
Mercer Capital’s Public Market Indicators September 2022
Mercer Capital’s Bank Group Index Overview Return Stratification of U.S. Banks
by Market Cap
Total Return Regional Index Data as of September 26, 2022
Month-
to-Date
Quarter-
to-Date
Year-to-
Date
Last 12
Months
Price /
LTM
EPS
Price /
2022 (E)
EPS
Price /
2023 (E)
EPS
Price /
Book
Value
Price /
Tangible
Book Value
Dividend
Yield
Atlantic Coast Index -2.9% 2.3% -9.2% -5.5% 9.2x 9.5x 8.8x 123% 133% 2.8%
Midwest Index -2.1% -1.2% -4.9% 3.7% 9.3x 9.8x 8.5x 106% 123% 3.1%
Northeast Index -1.8% 0.9% -3.3% 4.8% 8.7x 8.9x 8.1x 112% 122% 3.1%
Southeast Index -3.4% -5.9% -2.0% 0.1% 10.4x 9.3x 7.6x 115% 124% 3.0%
West Index 0.4% 3.1% -9.6% 3.3% 9.7x 9.4x 7.3x 106% 119% 2.9%
Community Bank Index -1.8% 0.6% -6.1% 1.7% 9.4x 9.3x 8.2x 112% 123% 3.0%
SP U.S. BMI Banks -6.4% -0.8% -23.0% -21.5% na na na na na na
SP U.S. Banks
Market Cap Under
$250 Million
SP U.S. Banks
Market Cap
Between $250
Million - $1 Billion
SP U.S. Banks
Market Cap
Between $1 Billion
- $5 Billion
SP U.S. Banks
Market Cap Over
$5 Billion
Month-to-Date -2.18% -2.11% -3.00% -7.00%
Quarter-to-Date -0.05% 1.81% 4.78% -1.72%
Year-to-Date -5.93% -10.86% -11.91% -24.96%
Last 12 Months 1.12% -0.70% -4.23% -24.42%
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
As
of
September
26,
2022
75
85
95
105
115
9
/
2
4
/
2
0
2
1
1
0
/
2
4
/
2
0
2
1
1
1
/
2
4
/
2
0
2
1
1
2
/
2
4
/
2
0
2
1
1
/
2
4
/
2
0
2
2
2
/
2
4
/
2
0
2
2
3
/
2
4
/
2
0
2
2
4
/
2
4
/
2
0
2
2
5
/
2
4
/
2
0
2
2
6
/
2
4
/
2
0
2
2
7
/
2
4
/
2
0
2
2
8
/
2
4
/
2
0
2
2
9
/
2
4
/
2
0
2
2
September
24,
2021
=
100
MCM Index - Community Banks SP U.S. BMI Banks SP 500
Source: SP Capital IQ Pro.

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
LTM
2022
U.S. 18.4%12.0% 6.9% 6.3% 5.4% 4.3% 5.5% 7.5% 7.5% 6.1% 10.0% 9.6% 9.3% 5.5% 6.9% 7.8%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
Core
Deposit
Premiums
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
LTM
2022
U.S. 228% 196% 145% 141% 132% 130% 134% 155% 148% 143% 170% 178% 168% 150% 152% 160%
0%
50%
100%
150%
200%
250%
Price
/
Tangible
Book
Value
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
LTM
2022
U.S. 22.1 19.9 19.3 21.7 21.9 17.0 16.5 17.5 18.8 18.1 19.5 22.4 16.3 13.9 14.5 13.8
0
5
10
15
20
25
30
Price
/
Last
12
Months
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 13.8x 191% 9.3% 12 168.3 857,181 9.1%
Midwest 14.3x 155% 7.8% 53 72.2 218,209 10.4%
Northeast 14.8x 128% 3.4% 6 63.0 493,278 8.5%
Southeast 13.2x 165% 7.3% 19 140.0 330,778 14.1%
West 14.1x 169% 9.4% 17 75.0 411,408 12.5%
National Community
Banks
13.8x 160% 7.8% 107 91.4 290,026 10.9%
Median Valuation Multiples for MA Deals
Target Banks’ Assets $5B and LTM ROE 5%, 12 months ended September 27
, 2022
Median Core Deposit Premiums
Target Banks’ Assets $5B and LTM ROE 5%
Median Price/Tangible Book Value Multiples
Median Price/Earnings Multiples

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.
© 2022 Mercer Capital // Data provided by SP Global Market Intelligence 9
Mercer Capital’s
Regional Public
Bank Peer Reports
Atlantic Coast Midwest Northeast
Southeast West

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.
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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, ASA
901.270.7250
stantone@mercercapital.com
Mary Grace Arehart, CFA
901.322.9720
arehartm@mercercapital.com
William C.Tobermann, CFA
901.322.9783
tobermannw@mercercapital.com
Heath A. Hamby, CFA
615.457.8723
hambyh@mercercapital.com
Copyright © 2022 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
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Mercer Capital's Bank Watch | September 2022| 2022 Core Deposit Intangibles Update

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Mercer Capital's Bank Watch | September 2022| 2022 Core Deposit Intangibles Update