One analyst raises Western Alliance’s rating as another hammers deal

By Steve Green

Published Thursday, May 21, 2009 | 10:46 a.m.

Updated Thursday, May 21, 2009 | 6:51 p.m.

A stock analyst raised his rating Thursday on Western Alliance Bancorporation of Las Vegas after its $191 million secondary stock offering -- contradicting a critic of the deal who said it was bad for shareholders.

Analyst Jonathan Elmi of Fox-Pitt Kelton Cochran Caronia Waller lifted his rating on the stock from underperform to in-line with a price target of $6.

"Although our estimates assume credit costs will continue to rise into 2010, we believe this offering provides sufficient capital for Western Alliance to withstand our highly stressed loss scenario (as well as the Treasury’s stress test) and still maintain excess capital to grow its balance sheet," Elmi wrote.

Elmi estimated Western Alliance, parent company of Bank of Nevada, faces after-tax losses of $178 million due to bad loans in its core markets of Nevada and Arizona -- both hit hard by declines in real estate values caused by the recession.

"Despite these outsized losses, we estimate that subsequent to its ... common equity raise the company would remain well capitalized from a regulatory standpoint" and should be able to acquire one or more weaker banks in its markets, Elmi said.

"When the Las Vegas and Phoenix economies eventually recover, we believe the company will have a degree of scarcity value as one of the last remaining independent regional franchises, and even today should be able to use a portion of its new capital to take advantage of the current dislocation via market share gains," he wrote.

And growth is exactly what Western Alliance is planning to do, said Dale Gibbons, executive vice president and chief financial officer.

"This (capital raise) lets us play offense," he said. "We think there's going to be a lot of opportunity to acquire bank franchises at lower prices than we've seen."

Earlier this week, a critic charged the deal raising $191 million in the secondary public stock offering at $6 per share was unnecessary and appeared to be engineered mainly to generate fees for one of Western Alliance's investment banks, Keefe, Bruyette & Woods Inc. (KBW) of New York.

The critic, banking industry commentator and hedge fund manager Thomas Brown of Bankstocks.com, charged in a commentary that when the stock offering was announced May 13, the offering wasn't needed because Western Alliance had been telling investors it was in good financial shape.

Yet existing shareholders were punished when their share prices fell and the secondary offering was made at a substantial discount to the book value of the company, said Brown. Brown said his fund has no short or long positions in the securities of either KBW or Western Alliance.

The stock of Western Alliance, parent company of Bank of Nevada, fell 22 percent that day to $6.24. It has since improved and closed today at $6.39.

"I believe management blatantly misled investors with its comments about capital prior to the deal," Brown charged.

A KBW spokesman had no immediate comment and Gibbons said, "We obviously think that what we're doing makes sense for the shareholders."

Gibbons also questioned the credibility of Brown because of past losses in one of his hedge funds.

Brown's Second Curve Capital hedge fund had a "stunning" reversal of fortune with big losses in 2007, BusinessWeek reported at the time. Despite any problems with his funds, Brown today is widely quoted in national news stories on banking issues.

Western Alliance said Wednesday that the stock offering, originally intended to raise $150 million, ended up raising more than $200 million, or $191 million after expenses.

Western Alliance said the deal improved its capital position.

"Western Alliance is one of only a few community banks capable of raising significant capital today," Robert Sarver, chairman and chief executive, said in a statement. "Our ability to raise $200 million in the current market underscores the value of our franchise and further differentiates us from our competitors."

Industry analyst Brown, however, further charged Western Alliance's lead investment bank for the deal, KBW, had a conflict when its research department upgraded the stock after the secondary offering.

"In getting that deal done, KBW and Western availed themselves of every trick in the book, in my opinion. Misleading disclosure by management? Check! An unnecessarily large dilutive equity offering? Check! Whorish rating changes? Check! I’m surprised they didn’t go ahead and hire burglars to break into shareholders' homes and rifle through their dressers," Brown said in his commentary.

"By the time it was all done, Western holders were diluted by more than 40 percent, via an offering that raised capital the company (by its own account) didn’t need, and that will likely serve no useful purpose. And, sure enough, two days after the deal was priced, KBW’s research `analyst' saw fit to upgrade Western’s stock to a buy. Such a coincidence!" Brown charged. "Before I get into the details of this fiasco, let me say this is all par for the course for KBW. The company acts as if the Spitzer-era reforms of earlier this decade didn’t happen. The firm seems to view the current environment as a once-in-a-couple-decades opportunity to con banks into doing unnecessary deals."

The KBW research department on Monday upgraded Western Alliance from market perform to outperform with a stock price target of $7.50, saying the extra capital provides a capital cushion as well as funds for potential growth.

Western Alliance said the issuance of 33,440,700 shares lifted its risk-based capital ratio to more than 15 percent, ranking it in the top 10 percent of all publicly held banking companies in its markets. The company said its capital ratios exceed the thresholds required to be considered "well capitalized" under federal banking regulations.

The capital ratios are important because for many banks, they have been deteriorating due to problem real estate loans -- with banks exposed to Nevada being particularly hard hit because of the recession.

Western Alliance reported a first quarter loss of $86.5 million, or $2.33 per share vs. a profit in the year-ago quarter of $4.14 million or 14 cents per share. Those numbers included a provision for loan losses of $19.98 million, up from $8.06 million in the 2008 quarter, a securities impairment charge of $36.4 million and a noncash goodwill impairment charge of $45 million. Some of the charges relate to credit agency downgrades of stock in other banks held by Western Alliance.

Besides Bank of Nevada, Western Alliance owns First Independent Bank of Nevada, Alliance Bank of Arizona, Torrey Pines Bank, Alta Alliance Bank, Miller/Russell & Associates, Shine Investment Advisory Services, Premier Trust and PartnersFirst.