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The role of core deposit intangibles in banking

Kate Randazzo
January 17, 2025
0 min read

This article covers these key topics: 

Using the core deposit intangible to assess value at banks & credit unions 

When evaluating a potential acquisition, banks must assess the core deposit intangible (CDI). Read on to learn about the importance of this metric, especially in today's dynamic environment.

What is a core deposit intangible?

A core deposit intangible (CDI) represents the value of financial institutions’ long-term relationships with their core deposit customers. These reliable customers provide a stable, low-cost funding source that is critical for financial institutions’ operations.

The CDI describes the intangible value of the depository relationships held at a financial institution. One way to easily envision this, according to Abrigo Advisory Services Manager Manuel Aya, is to think of it as the value that arises from retaining depositors, and hence deposits, at an institution versus needing to go into the open market to fund activities.

In other words, it represents the current cost of maintaining deposit accounts relative to the alternative cost of funds from sources such as advances from the Federal Home Loan Bank or overnight funding.

What is the impact?

Historically, rapid and large increases in interest rates drive CDI levels higher. Higher interest rates reflect a higher cost of borrowing from the market relative to the cost of maintaining cheaper deposits, which can make the value of deposit relationships soar.

During times of financial system stress, banks may adjust deposit rates more aggressively, bringing the cost of deposits closer to falling market rates. This could reduce the intangible value of deposit-related assets. As a result, lower CDI values may lessen the financial burden for acquirers, improving their capital efficiency.

In today’s uncertain financial landscape, deal values are likely to continue showing very different results between the initial due diligence process and the completion of a transaction, said Aya. “Under the uncertain circumstances expected to continue in the near term, financial institutions need to understand the potential magnitude and direction of changing values,” he said. “They also need to assess what the expected balance sheet impact will be.”

Why are core deposit intangibles important?

Core deposits are the foundation for many banks' funding strategies. They enable institutions to:

  • Lower funding costs: Core deposits typically have interest rates below market alternatives like CDs or wholesale funding, reducing overall costs.
  • Enhance financial stability: The stickiness of these deposits provides a predictable liquidity source, even during market disruptions.
  • Support growth: Banks can leverage core deposits to fund loans and other income-generating assets.

Recognizing these benefits, regulatory bodies and accounting standards allow banks to record CDIs as separate assets after acquisitions, underscoring their importance in evaluating a bank's worth.

Accounting treatment and amortization

Financial Accounting Standards Board (FASB) guidelines and regulatory agencies permit banks to report CDIs as intangible assets. The method of amortizing a CDI aligns with how the asset's economic benefits are realized. If the usage pattern is unclear, a straight-line amortization approach is adopted, ensuring consistency in financial reporting. CDIs are distinct from deposit premiums. While CDIs represent the intrinsic value of customer relationships, deposit premiums reflect the price paid during an acquisition to secure those deposits. 

Factors that affect core deposit intangibles

Several variables influence the value and utility of CDIs:

  • Interest rate environment: Rising or falling interest rates impact the cost advantage of core deposits.
  • Customer behavior: Changes in customer preferences or economic conditions can affect deposit stability.
  • Competitive landscape: Increased competition from fintechs and non-bank entities can diminish the stickiness of core deposits.

Using CDIs in mergers and acquisitions

Core deposit intangibles are crucial in fair value accounting, especially during mergers and acquisitions. By quantifying the economic benefits of core deposits, institutions can present a more accurate valuation of their assets. Abrigo’s core deposit advisory team and valuation team are able to help ensure CDIs are valued appropriately, assist financial institutions in managing fair value calculations, and ensure compliance and operational efficiency.

When planning transactions and determining assumptions for acquisition modeling, banks should evaluate how the CDI will be calculated and the current CDI value levels. Failure to thoroughly consider the final resulting value can lead acquirers to experience future earnings that fall short of projections due to outdated assumptions. Reviewing available data should help acquirers better understand what policies are being used.

Core deposit intangibles are more than accounting entries; they are strategic assets that underpin a financial institution’s success. By valuing and managing CDIs effectively, banks can optimize their funding strategies, demonstrate their stability to stakeholders, and position themselves for sustained growth.

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FAQs

What are core deposit intangibles (CDIs) in banking?

Core deposit intangibles (CDIs) represent the value of stable, low-cost deposit relationships acquired in a merger or acquisition. CDIs quantify the economic benefit of funding advantages compared to alternative market rates. Asset liability management (ALM) software and deposit analytics tools help institutions model deposit behavior and support valuation assumptions.

Why do core deposit intangibles matter for financial institutions?

CDIs affect purchase accounting, earnings accretion, and long-term balance sheet strategy. They reflect the stability and cost advantage of core funding sources. ALM software for banks and credit unions supports deposit analysis and interest rate risk modeling tied to core funding assumptions.

How are core deposit intangibles calculated?

CDIs are typically calculated by estimating the present value of future cost savings from core deposits relative to alternative funding sources. Assumptions include deposit attrition rates, interest rate forecasts, and servicing costs. Deposit analytics and ALM software centralize these assumptions for documentation and audit support.

How do interest rate changes impact CDI valuations?

Interest rate volatility can significantly affect deposit retention, repricing behavior, and funding costs. Rising rates may reduce the relative value of low-cost deposits, while stable deposits can increase franchise value. ALM software models rate scenarios to assess deposit sensitivity and long-term funding risk.

How can institutions support CDI assumptions during audits or exams?

Institutions can support CDI assumptions with documented deposit studies, historical attrition analysis, and interest rate risk modeling. Clear linkage between valuation inputs and balance sheet strategy is essential. ALM and deposit analytics software provide audit trails and board-ready reporting to strengthen defensibility.

Optimize ALM operations and tailor them to your unique bank or credit union.

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About the Author

Kate Randazzo

Content Marketing Manager
Kate Randazzo is a Content Marketing Manager at Abrigo, where she works with industry thought leaders to create digital content that helps financial institutions better serve their customers. Before joining Abrigo, Kate managed social media and produced articles for Campbell University’s quarterly magazine and other university content initiatives. She earned

Full Bio

About Abrigo

Abrigo enables U.S. financial institutions to support their communities through technology that fights financial crime, grows loans and deposits, and optimizes risk. Abrigo's platform centralizes the institution's data, creates a digital user experience, ensures compliance, and delivers efficiency for scale and profitable growth.

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