More Community Banks Feel Volcker Rule's Sting

More community banks are coming forward to say the recent change to the Volcker Rule failed to shield them from financial hits.

Cortland Bancorp (CLDB), First Defiance Financial (FDEF) and Webster Financial (WBS) recorded impairment charges during the fourth-quarter to address investments they made in collateralized debt obligations backed by trust-preferred securities issued by insurance companies.

Those securities were excluded from the carve-out regulators announced as part of last week's interim final regulation tied to the Volcker Rule. In that rule, regulators decided to exempt CDOs backed by trust-preferred securities issued by banks with less than $15 billion of assets.

The decision left a number of bankers disappointed and still upset about the unintended consequences of the controversial Dodd-Frank Act clause.

"It's one of those things that we were hoping with the guidance that came out that the whole issue would be resolved," Don Hileman, First Defiance's president and chief executive. "It was very frustrating. It was a scramble to try to figure out exactly which ones which ones were covered."

The Defiance, Ohio, company recorded a $337,000 other-than-temporary loss tied to $1.9 million in CDOs. The move reduced the $2.1 billion-asset company's quarterly profit by 4%, to $5.1 million.

Webster recorded a nearly $5 million charge in the fourth quarter tied to the Volcker Rule, accounting for four CDOs backed by debt issued by insurers.

The $20.8 billion-asset company recently sold those securities at a $4.3 million gain, Glenn MacInnes, Webster's chief financial officer, said during a conference call last week. The Waterbury, Conn., company will record that gain when it reports first-quarter earnings.

Cortland, a $537 million-asset company in Ohio, disclosed last week that it holds positions in nine trust-preferred CDOs issued by insurers that have, on average, contributed more than $200,000 of annual interest income. The securities, now classified as available for sale, have performed since their origination date, the company said.

Because of the Volcker Rule, Cortland said it will have to record a $1.3 million after-tax charge to its 2013 earnings. Three other CDOs, backed by banks or thrifts, were exempted by the interim final rule, the company said.

One of the biggest peeves expressed by bankers is that they are taking impairment charges on performing securities. "I don't think there should be a distinction based on who issued it, especially if it is still performing," Ashley Dennis, chief financial officer at the $415 million-asset Hardin County Bank, said last week.

The Savannah, Tenn., bank was one of the first financial institutions to disclose how the interim final rule failed to address its pain. Dennis said that the bank expects to take a roughly $125,000 writedown on a $500,000 CDO, an amount that is equal to about 11% of quarterly net income.

The situation may help explain why the American Bankers Association has yet to drop its lawsuit against the regulators. The ABA sued in late December, asking a court for emergency action before banks had to file fourth-quarter earnings. It said in a statement last week that it was dropping the request for emergency relief, but had yet to decide if it would stop the lawsuit entirely.

Rob Blackwell contributed to this report.