Mortgage

Behind the Western Alliance's $ 1 billion wager on a mortgage lender

Western Alliance Bancorp's proposed acquisition of a major mortgage company is in line with a forecast for 2021: banks are buying fee-paying companies to counter low interest rates and limited commercial credit opportunities.

The Western Alliance on Tuesday agreed to buy Aris Mortgage Holding, Thousand Oaks, Calif., Parent company of AmeriHome Mortgage, in a $ 1 billion deal that will share the fee for the $ 35 billion company 5% of sales should increase to 31%. after completion of the acquisition in the second quarter.

AmeriHome's model "diversifies the current commercially focused spread-based income of the Western Alliance to achieve a more balanced business mix," said Ken Vecchione, president and CEO of the Phoenix company, during a conference call Tuesday to discuss the deal. "This leads to a significant increase in non-interest income."

The acquisition also solves another problem for the Western Alliance by providing an opportunity to reinvest $ 6 billion in liquidity currently parked with the Federal Reserve, Vecchione said in a post-conference call interview.

"After we close, we should be able to … take out additional loans that we keep on our books," he added. "Instead of earning 10 basis points, we earn the grade on each of these mortgages."

AmeriHome, the third largest correspondence mortgage lender in the country, mainly buys home loans from a network of 720+ originators and then sells the mortgages to investors. The company also manages a portfolio of services worth $ 99 billion.

AmeriHome, which would become a unit of Western Alliance Bank, would gain access to low-cost deposits and potentially cut its financing costs by as much as $ 53 million in 2022. That, in turn, could buy more credit.

AmeriHome's goal was to work with a bank, said Jim Furash, the company's founder and CEO, in an interview.

"The things they bring us at AmeriHome are going to make me incredibly more competitive in the correspondence space," said Furash. "Access to liquidity, to the balance sheet for certain products, if we choose to, will set me apart in the market and deepen my relationships with my sellers."

Furash had an interim plan that included going public.

With the support of Apollo Global Management, Aris began planning an IPO last year and filed a prospectus on October 1st. While the offering was postponed less than a month later due to the volatility in the stock markets, Aris updated the prospectus in January, signaling that it was still interested in the IPO.

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

"I think AmeriHome went through the S-1 process and the pricing helped set a very reasonable price, rather than having two parties say I want higher and the other say lower," Vecchione said. "What we've done here is to say," We know what the value is, the market told us. "We negotiated on the edges of it."

Vecchione credited Steve Curley, who heads the Western Alliance's mortgage storage group, with planting the seeds for the deal. AmeriHome has been a Western Alliance customer for over four years.

"Steve has been calling Jim for a few years," said Vecchione. “He said, 'You should get to know Jim and his team. They are a little different. You remind me of us. I think you will get along very well. "We did that. We got on well."

"In terms of business, it is very rare for two CEOs to get along and basically share the same philosophy and business strategy for a combined company," said Furash. “You combine that with four years of work experience that proves all the things that we believed in four years ago. Nothing has changed, it's just deepened. "

The deal was well received by those following the 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 customer announcement. "We expect immediate EPS growth when the deal closes."

However, some industry experts noted the Western Alliance's long-term commitment to a cyclical business – mortgages – that several banks left before the coronavirus pandemic broke out. However, interest rates are expected to remain low for the foreseeable future, which should further fuel demand for home loans.

Brad Milsaps, an analyst at Piper Sandler, was "financially convincing" and wrote in a note to clients that he was not "overly excited about adding volatility" to adding mortgages to the Western Alliance model.

Nonetheless, the proposed merger could prompt other banks and mortgage lenders to review their merger and acquisition options.

"We believe this transaction could be a catalyst for the market to rethink similar deals," wrote Kevin Barker, an analyst at Piper Sandler, which covers mortgage lenders, in a statement to clients. The Western Alliance rationale for the deal "provides insight into possible synergies for banks."

AmeriHome should be "a stronger competitor to peers as the cost of financing should drop to [less than 10 basis points] and it will be able to offer more products outside of government or conventional credit," added Barker.

AmeriHome fits in seamlessly with the Western Alliance's strategy of investing in national credit platforms. Western Alliance also has three-year employment contracts with Furash and the rest of AmeriHome's senior management team.

"I want to say that we are a national bank with regional presence in Arizona, California and Nevada," said Vecchione. “We have the ability to move our capital and liquidity across the country and across different lines of business. Jim's group is another line of business. "

Paul Davis contributed to this report.

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