Behind Western Alliance’s $ 1 Billion Mortgage Bet


Western Alliance Bancorp’s planned purchase of major mortgage company fits a story planned for 2021 – banks buy remunerated companies to counter low interest rates and limited commercial lending opportunities.

Western Alliance agreed on Tuesday to buy Aris Mortgage Holding, The Thousand Oaks, Calif., Parent company of AmeriHome Mortgage, in a $ 1 billion deal that is expected to drop the company’s $ 35 billion asset fee proportion from 5% of revenue business at 31% after closing of the acquisition in the second quarter.

AmeriHome’s model “diversifies revenues based on Western Alliance’s current trade spreads to deliver a more balanced business mix,” said Ken Vecchione, President and CEO of The Phoenix Company, at a conference phone Tuesday to discuss the deal. “This creates a significant increase in non-interest income.”

The acquisition also resolves another lingering problem for Western Alliance by providing the means to reinvest $ 6 billion in cash currently stationed at the Federal Reserve, Vecchione said in an interview after the conference call.

“Once we close, we should be able to… get additional loans that we’ll keep on our books,” he added. “Instead of earning 10 basis points, we’ll earn the rate of the note on each of these mortgages.”

AmeriHome, the country’s third-largest correspondent mortgage lender, primarily buys home loans from a network of over 720 originators and then sells the mortgages to investors. It also manages a $ 99 billion service portfolio.

AmeriHome, which would become a unit of Western Alliance Bank, would have access to low-cost deposits, potentially reducing its funding costs by $ 53 million in 2022. This would allow it to purchase more loans.

AmeriHome’s goal throughout was to partner with a bank, Jim Furash, founder and CEO of the company, said in an interview.

“The things they bring to us at AmeriHome are going to make me incredibly more competitive in the corresponding space,” Furash said. “Access to liquidity, to the balance sheet for specific products, if we choose to do so, will set me apart in the market and deepen my relationships with my salespeople.”

Furash had an interim plan that involved going public.

Backed by Apollo Global Management, Aris started planning an initial public offering last year, filing of a prospectus October 1. postponed less than a month later Due to stock market volatility, Aris updated the prospectus in January, signaling that he was still interested in the IPO.

Vacchione said the proposed IPO made it easier for Western Alliance to raise the price of the mortgage company.

“I think AmeriHome goes through the S-1 process and the price discovery has helped set a very reasonable price, rather than having two parties come to it with a saying I want it higher and the other saying lower, “Vecchione said. “What we’ve done here is say, ‘We know what the value is, the market has told us.’ We negotiated on the sidelines of that.

Vecchione credited Steve Curley, who heads Western Alliance’s mortgage warehouse lending group, with sowing the seeds for the deal. AmeriHome has also been a Western Alliance customer for over four years.

“Steve has been using Jim for a number of years,” Vecchione said. “He said, ‘You should get to know Jim and his team. They are a little different. They remind [me] from U.S. I think you will get along very well. We did it. We hit it off.

“On the deal side, it’s very rare that you have two CEOs who get along, basically sharing the same philosophy and business strategy regarding a combined entity,” Furash said. “You combine that with four years of professional experience which proves everything we believed four years ago. Nothing has changed, it’s only deepened.

The deal has been well received by those who follow Western Alliance.

Western Alliance “adds a high-volume mortgage producer in a plug-and-play transaction,” wrote Timothy Coffey, analyst at Janney Montgomery Scott, in his client note. “We expect EPS growth to grow immediately when the deal is closed.”

Yet some industry experts have noted that Western Alliance engages in a long-term cyclical activity – mortgages – that several banks released before the coronavirus pandemic hit. But interest rates are expected to remain low for the foreseeable future, which should fuel request for home loans.

Although “compelling from a financial point of view,” Brad Milsaps, analyst at Piper Sandler, wrote in a note to clients that he was “not too keen on adding volatility” to the business. ‘addition of mortgages to the Western Alliance model.

Nonetheless, the proposed merger could cause other banks and mortgage lenders to consider their M&A options.

“We believe this transaction could be a catalyst for the market to reconsider” similar deals, wrote Kevin Barker, an analyst at Piper Sandler who covers mortgage lenders, in a note to clients. The rationale for the deal by Western Alliance “provides insight into potential synergies for the banks.”

AmeriHome is expected to be a “stronger competitor vis-à-vis its peers as its cost of funding is expected to drop to [less than 10 basis points] and it will have the ability to offer more products outside of government or conventional loans, ”added Barker.

AmeriHome fits perfectly with Western Alliance’s strategy of investing in national lending platforms. Western Alliance also has three-year employment contracts with Furash and the rest of the AmeriHome management team.

“I like to say that we are a national bank with a regional footprint in Arizona, California and Nevada,” Vecchione said. “We have the ability to move our capital and liquidity across the country and into different business segments. Jim’s group is another business segment. “

Paul Davis contributed to this report.


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