Business Context and Reporting Period
Company: Western Alliance Bancorporation
Filing Type: Form 8-K (Current Report)
Date of Report: December 5, 2008
Event: Material impairments of investment securities recognized in the fourth quarter of 2008.
Key Financial Metrics and Impairments
- CDO Impairment Charge: Expected after-tax charge of approximately $65 million to $70 million related to 18 collateralized debt obligations (CDOs).
- Preferred Securities Impairment Charge: Expected after-tax charge of approximately $7 million related to adjustable rate preferred securities issued by Morgan Stanley and Zions Bancorporation.
- Total Expected After-Tax Charge: Approximately $72 million to $77 million.
- Cash Impact: The Company does not anticipate that these impairment charges will result in any future cash expenditures.
- Capital Ratios: Total risk-based capital ratio is expected to increase in the fourth quarter, primarily due to preferred stock issuance under the TARP Capital Purchase Program.
Material Changes and Portfolio Status
The Company determined that its CDO portfolio was other-than-temporarily impaired due to U.S. economic weakness, declining market values, increased deferrals/defaults by underlying issuers, and Fitch Ratings watch downgrades.
- CDO Portfolio Status: Of the 18 CDOs held, 13 are current on interest payments, while 5 are deferring interest and capitalizing it.
- Ratings: Fitch continues to rate the 18 CDOs as investment grade, but all have been placed on "Rating Watch Negative."
- Preferred Securities: The Company determined it no longer meets the conditions of intent and ability to hold certain preferred securities to recovery, triggering the impairment recognition.
Outlook, Management Commentary, and Risks
Despite the significant impairment charges, management expects the Company and its subsidiary banks to continue exceeding the "well capitalized" standards promulgated by federal banking regulators. The anticipated increase in the risk-based capital ratio is attributed to capital raised through the TARP Capital Purchase Program.
Risks Identified: Continued weakness in the U.S. economy, decline in market value of CDOs, and increased deferrals and defaults by issuers of underlying securities.
Investor Verification Checklist
- Verify the final impairment charge amount recorded in the Q4 2008 financial statements against the $65-$70 million (CDO) and $7 million (preferred) estimates.
- Confirm the status of the 5 CDOs currently deferring interest payments and the likelihood of future defaults.
- Review the impact of the TARP Capital Purchase Program on the Company's total risk-based capital ratio in the subsequent 10-Q or 10-K.
- Monitor Fitch Ratings updates regarding the "Rating Watch Negative" status of the 18 CDOs.