Western Alliance Bancorp. in Las Vegas has a lot of plans for the $200 million of capital it just raised.
But unlike others that have indulged in stock offerings lately, one thing the $5.3 billion-asset company is not planning to do is repay its government capital.
Dale Gibbons, the chief financial officer, said in an interview Thursday that the company now has exactly what it needs to absorb losses and to fuel growth.
Though one industry investor criticized Western Alliance for its "excessively large" stockpile, Gibbon said said it intends to take advantage as others falter, whether by buying banks on the cheap or wooing talent.
"A number of institutions are focused on integrations and others have serious asset-quality issues that still persist," Gibbons said. "It's a good time to pick up teams from other banking institutions and to acquire, in that regard."
Western Alliance took in a third more capital this week than it initially set out to raise.
Its common shares sold at $6 each, a 25.5% discount to the stock's closing price on May 12 just before the company announced the offering.
Besides the $191 million that it netted, Western Alliance also has $140 million in capital from the Treasury Department's Troubled Asset Relief Program — which Gibbons said it would keep.
"We still consider it to be a cheap source of capital for lending or acquisitions," he said.
Gibbons said the company had enough of a cushion "to make it to the other side of this meltdown" before its capital raise. But Western Alliance — which posted a first-quarter loss of $88.9 million, including its $1.75 million expense for Tarp dividends — wanted to ensure that it had enough extra capacity for growth.
In a stress test it conducted on itself, the worst-case scenario showed that one-third of the Tarp funds could be needed to cover losses, Gibbons said.
Still, Thomas Brown, the chief executive officer of the financial services hedge fund Second Curve Capital and the Web site Bankstocks.com, complained that the company went too far with its recent offering, diluting shareholders at rock-bottom prices with capital that is going to be difficult to deploy. The capital raise is expected to be more than 45% dilutive to common shareholders.
"I think it is a tremendous overreaction on the part of the company's management," said Brown, who does not own Western Alliance stock. "When your stock is depressed because of uncertainty you don't go out and raise twice as much as your stress test would suggest that you would need."
Given the recent frenzy of stock offerings, Brown said he fears other companies might follow Western Alliance's lead. "What I am worried about is the attitude that we saw on display in Western Alliance's capital raise will become more prevalent among other bank CEOs. The reason I am fearful of this is it happened to us before, in 1991 and 1992. Bank management came in and raised too much equity, and then four years later, banks were out buying stock back at three times higher than what they sold it for."
Western Alliance analysts and other industry watchers defended the company, saying there is no such thing as too much capital these days. They called it a sign of strength that Western Alliance was able to raise so much money in such a challenging environment.
Randy Dennis, the president of DD&F Consulting Group in Little Rock, said a company trying to raise too much capital would get tripped up. "The market will limit you before you get to the point of raising too much," he said.
Dennis also said companies in Western Alliance's geography — it operates five banks in Nevada, Arizona and California — will have plenty of acquisition opportunities in coming quarters. He said there will be both distressed banks looking to sell and failed banks being offered through the Federal Deposit Insurance Corp.
Jonathan Elmi, an analyst at Fox-Pitt Kelton Cochran Caronia Waller, said that in a worst-case scenario, the company could have as much as $178 million in losses through 2010, and that the fresh capital would enable it to remain well capitalized and continue growing.
He said that even under that worst-case scenario, because the losses would be spread across multiple quarters, the company would have roughly $80 to $85 million left over for growth.
Growth is no pipe dream either, Elmi said. The company operates in markets where economists expect the population to continue to grow and the economy to rebound as the down cycle tapers off.
"If you look out a couple of years, economists are predicting growth in their core markets," Elmi said. "You could argue they will be one of the few small bank franchises left in that area once things do start to clear up."
At the end of the first quarter, Western Alliance had a total risk-based capital ratio of 11.9%. With the added capital, Elmi estimated that the ratio would be 16.1%.
Brad Milsaps, a managing director at Sandler O'Neill & Partners LP, agreed the new capital would be useful.
"It gives them a tremendous cushion to absorb losses and to be aggressive bidding for a number of FDIC-assisted deals," he said. "From that standpoint, they are in a unique position to take advantage of distressed-financial-institution acquisition opportunities that may arise from time to time."