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Western Alliance Bancorporation

(WAL) - Get Western Alliance Bancorp Report

has weathered the brutal real estate meltdown in Arizona and Nevada, and is now ready to "restore top-tier profitability," according to Credit Suisse analyst Matthew Clark.

Credit Suisse on Friday initiated its coverage of the Phoenix-based lender, with an "outperform" rating and a price target of $22, which would represent a 21% gain from Thursday's closing share price of $18.16.

Western Alliance had $8.6 billion in total assets as of June 30, mainly through three bank subsidiaries, including

Western Alliance Bank

of Phoenix,

Bank of Nevada

of Las Vegas and

Torrey Pines Bank

of San Diego.

The holding company owes $141 million to the Small Business Lending Fund, which is a program run by the U.S. Treasury, enabling participating banks to repay federal bailout funds received through the Troubled Assets Relief Program, or TARP. Western Alliance is the largest participant in SBLF, and has certainly been meeting the goals of the program, by growing its commercial loan portfolio at a strong pace.

Total loans were $6.41 billion as of June 30, increasing 24% from $5.16 billion a year earlier, although the growth included a $343 million increase from the acquisition of Centennial Bank of Fountain Valley, Calif., in April.

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SBLF has turned out to be a very low-cost source of capital for Western Alliance, since the dividend on the preferred shares held by the Treasury is just 1% for banks achieving an annual growth rate of 10% for commercial and industrial loans or loans secured by owner-occupied commercial real estate to businesses with less than $50 million in annual revenue. In April 2016, the annual dividend on SBLF preferred shares for all participants is set to increase to 9%.

"We expect WAL to pay back the SBLF with retained earnings before the reset date and still maintain Tier 1 capital in excess of 9.50% under Basel III," Clark wrote in a note to investors on Friday.

Bank of Nevada was operating under a regulatory memorandum of understanding (MOU) that required the bank to maintain higher-than-normal capital ratios and obtain regulators' approval of any dividend payments to the holding company. This MOU was lifted in July, removing the last regulatory order for any of Western Alliance's subsidiary banks.

Clark sees many advantages to the company, which he describes as "a growth-oriented commercial lender in the Southwest that still has the ability to improve profitability with its industry-leading revenue performance and good expense control, and without facing a mortgage headwind given its limited reliance on the business."

A distinct advantage for Western Alliance comes from "being among the few local, independent players and having the ability to navigate the credit approval process more efficiently than the larger banks," including

Wells Fargo

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Bank of America

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, according to Clark. Lending to small businesses often requires a "personal touch," with long-term multiproduct relationships resulting from the close acquaintance of local commercial lenders with area businesses and industries.

Western Alliance Bancorporation reported second-quarter earnings of $34 million, or 39 cents a share, increasing from $21 million, or 24 cents a share, in the first quarter, and $14 million, or 15 cents a share, in the second quarter of 2012. Excluding "a $10.0 million bargain purchase gain from the acquisition of Centennial Bank, a $3.3 million trust preferred fair value revaluation charge, and a $1.1 million gain on

repossessed real estate valuation," net income for the most recent quarter would have been $27.7 million, according to the company.

The earnings improvement reflected a decline in the provision for loan losses -- the amount added to loan loss reserves, thus lowering pre-tax earnings -- to $3.5 million during the second quarter, from $5.4 million the previous quarter and $13.3 million a year earlier.

Western Alliance's nonperforming assets, including nonaccrual loans and repossessed assets, totaled $159.4 million as of June 30, declining from $171.7 million the previous quarter and $181 million a year earlier. Nonperforming assets (NPA) made up 1.85% of total assets as of June 30, which was not an excessive amount, considering where we are in the credit cycle and the long-term credit slide in the Phoenix and Las Vegas areas. As the company has worked through its problem assets over the past year, its annualized ratio of net charge-offs to average loans has declined steadily to 0.17% in the second quarter from 1.11% a year earlier. Loan loss reserves appear more than adequate, covering 1.50% of gross loans as of June 30.

Clark believes it's possible for Western Alliance's credit quality improvement to accelerate as its loan growth ramps up. "Better activity on the strip should enhance growth since WAL's Las Vegas presence has been a source of problems and run-off. Stronger activity should also help to reduce nonearning assets, with 65% of its NPAs in the Las Vegas office, retail, and

repossessed properties," he wrote.

Second-quarter return figures were distorted by extraordinary items, but for the first quarter, the bank's return on average assets (ROA) was a solid 1.08% and its return on tangible common equity (ROTCE) was 13.91%.

The second-quarter net interest margin was an impressive 4.36%, matching the margin in the first quarter, but declining from 4.46% a year earlier. In comparison, the second-quarter net interest margin for all U.S. banks was 3.26%.

Clark wrote that his price target and earnings estimates reflect his firm's belief that Western Alliance "has the ability to restore industry-leading returns, including a 15-17% ROTCE and 1.20% ROA."

Credit Suisse estimates Western Alliance will earn $1.22 a share for all of 2013, with EPS growing to $1.33 in 2014 and $1.45 in 2015.

At Thursday's close, the shares traded for 12.5 times Clark's 2015 EPS estimate, making Western Alliance one of the cheapest stocks among the small to mid-sized regional banks covered by Credit Suisse.

"We believe a top-tier revenue growth and profitability outlook should allow WAL to trade at a premium relative to the group," Clark wrote.

-- Written by Philip van Doorn in Jupiter, Fla.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.