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Financial Services Firms: Governance, Regulations, Valuations, Mergers, and Acquisitions, 3rd Edition by Zabihollah Rezaee

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Chapter Seventeen

Core Deposits as a Special Type of Intangible Asset Valuation

The core deposit base is an intangible asset unique to banks. It is usually the single largest potentially amortizable intangible asset associated with a bank acquisition. Recent tax court and Supreme Court rulings have made the amortization deduction opportunities clearer, but the whole issue still must be approached carefully. This chapter presents a variety of issues related to core deposits as an intangible asset and some different points of view on definition and measurement of their value.

Concept of Core Deposit Base as an Intangible Asset

Deposits are a liability of a bank, but their existence may create an intangible asset. On the surface this can appear to be a contradiction, but it is not. Deposits are the lifeblood of a bank, without which there would be no funds for loans and investments. When a bank is acquired, the buyer receives a built-in base of usually stable customer relationships. This customer base has demonstrable economic benefits to the buyer.

Clearly, bankers place value on deposits and depositors. In order to attract depositors, branches are built and staffed, premiums are offered, and advertising is undertaken. These activities are all evidence that deposits have value, and banks are willing to pay more than just the interest cost to attract them. Core deposits can be valued a number of ways. Generally a cost savings method, an income approach, is utilized when valuing an ...

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