Mechanics Bank Q1 FY2023 earnings call

Banking Industry Turmoil

• Experienced marginal deposit outflow in March due to deposit competition, but abated in April. Uninsured deposits were 14% of total deposits. Took steps to improve liquidity, including holding more cash at quarter-end and using the Fed bank term funding program.

Deposit and Loan Activity

• Acquired 3 retail deposit branches from Union Bank, but faced deposit run-off. Utilized IntraFi ICS and CDARS programs for FDIC insurance coverage. Reduced loan originations and offered competitive promotional deposits.

Liquidity and Funding

• Contingent funding availability was $6 billion at quarter-end, representing 6x uninsured deposits and 85% of total deposits. Plan to reduce borrowings and focus on certificates of deposit to manage funding.

Credit Quality

• Loan portfolio grew $60 million, non-performing assets were low. Delinquencies slightly higher, but credit quality remained solid with conservatively underwritten loans.

Financial Results

• Net income decreased, efficiency ratio was 87.2%, return on average tangible equity was 4.1%, and return on average assets was 22 basis points.

In the first quarter of 2023, HomeStreet Bank's net income was $5.1 million or $0.27 per share, compared to $8.5 million or $0.45 per share in the fourth quarter of 2022. Net interest income was $6.3 million lower due to a net interest margin decrease from 2.53% to 2.23%. Non-interest income increased primarily due to a $1.1 million rise in single family lending gain-on-sale activities. Non-interest expenses increased by $2.1 million, mainly due to higher compensation and benefit costs. The provision for credit losses was $0.6 million in Q1 2023 compared to $3.8 billion in Q4 2022. The loan portfolio grew by $60 million, with non-performing assets remaining low at 15 basis points.

The significant uncertainty around future interest rates, deposit flows, and the economic environment makes providing specific financial guidance difficult at this time. HomeStreet Bank expects to return to providing guidance once these uncertainties have substantially subsided.

• Deposit competition and rate-based competition continuing to impact the net interest margin. Potential for deposit outflows due to market anxiety. Impact of interest rate changes on the balance sheet and profitability, including ongoing pressure on net interest margin until rates stabilize.

Q: Matthew Clark asked about the average margin in March, acquired branch deposits' weighted average cost, plan for $2 billion of borrowings, classified trends, expenses, and balance sheet shrinkage.

A: Mark Mason and John Michel responded, discussing margin non-disclosure, acquired deposit costs, plans to reduce borrowings, stable classified trends, ongoing expense management, and balance sheet shrinkage efforts.

Q: Unidentified Analyst asked about strategic presence in California, buyback, goodwill, and FDIC insurance for large deposits.

A: Mark Mason addressed California presence as a large market, buyback not feasible currently, goodwill amortization, and use of IntraFi products for FDIC insurance.

Q: Woody Lay asked about deposits, acquired balances, broker deposits, and capital position.

A: Mark Mason and John Michel discussed deposit dynamics, stabilized acquired balances, broker deposit dynamics, and capital position with focus on Tier 1 capital ratio.