Just days after the Federal Reserve and other bank regulatory agencies finalized the “Volcker Rule” under the Dodd-Frank Act, one large bank has reacted in a big way.

Zions Bancorporation has determined that substantially all of its portfolio of bank and insurance trust preferred collateralized debt obligation (CDO) securities, and certain other asset-backed CDO securities, would be considered disallowed investments under the Volcker Rule.

Because it would no longer have the ability to hold disallowed securities until the anticipated recovery of their amortized cost – the final rule requires divestiture of disallowed investments by July 21, 2015, with possible extensions to July 21, 2017 – Zions has decided that it now would reclassify all covered CDOs that it is holding as “Held to Maturity” into “Available for Sale” and that it would adjust the value of all of its covered CDOs.

The bank said that, applying this accounting treatment to its September 30, 2013 financial statements on a pro forma basis, and using its valuation of these securities as of that date, would result in:

• • An estimated pro forma one-time non-cash charge to earnings of $629 million, pre-tax, and $387 million, after tax.  (These estimates do not reflect any changes in the valuation of the securities, other than actual cash principal payments received, since September 30, Zions said.)
  • Zions’ pro forma September 30, 2013 common equity Tier 1 ratio under Basel I rules would approximately equal 9.74 percent, down from the actual 10.47 percent, and relatively unchanged from 9.80 percent at December 31, 2012.
  • Zions’ pro forma September 30, 2013 GAAP tangible common equity to tangible assets would approximately equal 7.84 percent, down from the actual 7.90 percent, and up from 7.09 percent at December 31, 2012.

These and other capital ratios are summarized in the following table: 

12/ 31/2012                 9/30/ 2013       9/30/2013

                                                            Actual                         Actual             Pro forma

Common Equity Tier 1 Capital           9.80%                          10.47%            9.74%

Tier 1 Risk-Based Capital                   13.38%                        13.10%            12.40%

Total Risk-Based Capital                    15.05%                        14.82%            14.13%

Tangible common equity ratio            7.09%                          7.90%              7.84%                                   

According to Zions, all regulatory ratios were calculated under the Basel I rules and all pro forma September 30, 2013 ratios were calculated using actual balances of CDOs as of December 13, 2013, but using valuation assumptions from the third quarter of 2013. 

In a statement, Zions said that it was “unclear” what impact, if any, the divestitures mandated by the Volcker Rule across the bank and insurance trust preferred CDO asset class might have on trading prices, which it uses in determining Zions’ fair value marks.  Accordingly, Zions said, the actual impact of the Volcker Rule may be materially greater or less than the impact it has estimated.

Contact the author at smeyerow@optonline.net. 

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