Mechanics Bank Q2 FY2023 earnings call

• Goodwill impairment: A $39.9 million goodwill impairment charge was recorded due to significant stock price decline. This is noncash, no impact on core earnings, etc. - Net interest margin: Decreased due to higher cost of interest bearing liabilities partially offset by higher yields on interest earning assets. - Deposit strategies: Pursuing promotional CDs and money market accounts to retain deposits; deposits stabilized in June and July. - Loan portfolio: Limiting growth, focusing on floating rate products; non-performing assets increased due to one customer relationship; credit quality solid overall. - Capital and dividends: Strong capital ratios; $0.10 per share dividend approved.

In the second quarter of 2023, HomeStreet Bank recorded a net loss of $31.4 million or $1.67 per share due to a $39.9 million goodwill impairment charge. Core earnings excluding the goodwill impairment charge were $3.2 million or $0.17 per share. Net interest income was $5.9 million lower than the first quarter due to a net interest margin decrease from 2.23% to 1.93%. Annualized return on average tangible equity was 2.9%, core earnings annualized return on average assets was 13 basis points, and efficiency ratio was 93.7%. Negative provision for credit losses was $0.4 million in Q2 2023. Common equity Tier 1 and total risk-based capital ratios were 9.14% and 12.16% respectively as of June 30, 2023.

• Anticipate slight deposit runoff in guidance but see stability in June/July; margin pressure expected to continue until rates stabilize. - Expect loan portfolio to remain stable through H2 2023. - Tax rate expected to be low due to tax-exempt investments, around 15%.

• Impact of significant increase in short-term interest rates on net interest margin. - Potential deposit repricing and migration to promotional products affecting deposit costs. - Credit risk related to one customer relationship with $27 million loans for redevelopment projects.

Q: About margin, asked for spot rate on deposits at end of June and average margin in June.

A: Don't disclose discreet numbers, deposit balance end of period in Q.

Q: On borrowings down, question on margin expansion.

A: Borrowings decreased as paid down from end of March situation; guidance is conservative on deposit flows.

Q: On expenses, headcount down, expense-to-average asset ratio.

A: Expenses expected stable, variable expense tied to single-family lock volume.

Q: Willingness to sell dust license?

A: Generally uninterested, integrated with multifamily business.

Q: Loan-to-deposit ratio, max level willing to take.

A: Comfortable with current levels, prioritizing liquidity and net interest margin.

Q: CD portfolio maturity over next six months.

A: ~$600 million to roll, majority roll into similar tenor CDs.

Q: Tax rate going forward.

A: Expected to be low, around 15% due to tax-exempt investments.

Q: Credit, color on NPA jump and macro assumptions.

A: NPA jump from one customer relationship with two development projects; macro assumptions use Moody's baseline with qualitative factors adjusting down.