Warren Buffett takes on CDI amortization


Warren Buffett, the venerable sage of Omaha, loves Wells Fargo (NYSE:WFC).

Berkshire Hathaway increased its ownership of the nation's premier mortgage bank to 8.7 percent, up from 7.6 percent a year earlier. It's fair to say that Buffett would love the bank even more were it not for accounting rules regarding the so-called CDI, or core deposit intangible. 

According to FAS rules, banks must calculate this value as it relates to deposits and amortize them accordingly. This intangible can emerge as a significant accounting issue in an acquisition when an acquired bank has a stable deposit base derived long-term customer relationships. Indeed, CDIs are common, as most acquired banks have such stable deposits, and CDIs account for a significant percentage of a bank's overall intangible value.

When a CDI is acquired, the accounting treatment is similar whether the acquisition is structured as a stock deal or asset purchase: The CDI is amortized over the economic lives of the various core deposit types. Typically, this calls for an amortization period of five to ten years.

In the cases of banks that have acquired quite a few banks, the amortization charge can be significant. Buffett thinks this charge is weighing down the bank unnecessarily.

"The earnings that Wells Fargo reports are heavily burdened by an 'amortization of core deposits' charge, the implication being that these deposits are disappearing at a fairly rapid clip," Buffett wrote in Berkshire Hathaway's annual report, as noted by the American Banker.

"Yet core deposits regularly increase. The charge last year was about $1.5 billion. In no sense, except GAAP accounting, is this whopping charge an expense."

One might argue that the idea behind the rule is to amortize the premium paid for core deposits. One could see this as akin to goodwill, though others will be quick to point out that goodwill is no longer considered depreciable. 

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