Mechanics Bank Q1 FY2026 earnings call

• Productive first quarter with $44.1 million net income. - Recorded $6.5 million provision related to geopolitical uncertainty. - Incurred $5 million merger-related expenses. - $1.7 million tax provision due to re-measurement of deferred tax asset. - Core net income adjusted for non-core items was $53.8 million. - Deposit seasonality with $137 million non-maturity deposit decrease from food and ag customers. - $640 million reduction in CD balances, expecting 1.4 billion cumulative reduction in CDs. - Legacy home street construction loans decreased nearly $100 million. - Successfully converted legacy HomeStreet customers onto core banking platform. - Expect to substantially complete merger integration in Q2, realize expense synergies. - $130 million sale of dust business line expected to close in Q2. - Expect to pay approximately 70 cents per share in dividends in Q2. - Build-outs of wealth, commercial banking, and treasury sales teams substantially complete. - Expect relatively flat NIM for next 2-3 quarters, then growth in 2027.

Net income was $44.1 million. Earnings per share was $0.19 on a fully diluted basis. Tangible book value per share ended at $7.53. Net interest income declined $3.9 million or 2.2% to $179 million. Non-interest income declined $57.5 million or 73% to $21 million. Non-interest expense increased $0.9 million or 0.7% to $130.4 million. Loan interest income declined $12.9 million or 6.7% to $181.2 million. Securities interest income increased $3.5 million or 7% to $53.1 million. Total deposits declined $782 million. Cost of deposits was 1.28% in Q1, down 15 bps from Q4. NIM was 3.61% for the quarter, up 11 bps sequentially. CRE concentration ratio was 348%.

• Expect effective tax rate to be approximately 26.5% in 2026. - Projected 17% to 18% ROTC and 1.3% to 1.4% ROAA in 2027 and beyond. - Projected gap debt income range of $275 to $300 million for 2027. - Earnings guidance reduced due to removing two Fed rate cuts and smaller balance sheet. - Expect outstanding construction loans to decline to roughly $300 billion over rest of year. - Expect cost of deposits to continue to drop in Q2 before flattening remainder of year. - Expect 2027 efficiency ratio to be approximately 50%.

• Geopolitical uncertainty from Iran War led to $6.5 million provision. - Heightened global risk from Iran War potential impact on U.S. economy. - Competition for loans and deposits remains stiff. - Elevated time deposit runoff has negative impact on earnings. - Legacy home street construction loans not priced appropriately relative to credit exposure. - Uncertainty around timing and impact of selling auto loans.

Q: Regarding net interest margin, why is it expected to be flat over next couple quarters and glide path to hit 275-300 million net income in 2027?

A: Spot cost of deposits down but has bifurcated deposit base, not getting Fed rate cuts, flat forward curve, $3 billion gap between rate-sensitive liabilities and floating rate assets, auto loans running off, but offset in non-interest expense.

Q: On balance sheet, after deposit runoff and planned CD reduction, how is balance sheet size thought?

A: Expect core deposit growth, once through CD reductions and first quarter deposit low, should be close to nadir and start growing.

Q: Thoughts on additional M&A once past core conversion?

A: Always looking at situational opportunities within footprint, has to make bank better, deposit costs important, nothing on front burner now due to focus on integration.

Q: On loan book growth and NII trend, thoughts?

A: Expect consumer loan growth, construction balances to decrease, commercial real estate originations with plan to get below 300%, NII stable then picking up in 2027.

Q: On trust business expansion, status?

A: Delaware office expected to open in May, build-out of team complete, opportunity to grow.

Q: On capital, thoughts on payout and flexibility?

A: Expect dividend of ~$160-162 million this quarter, some excess capital held back, CDI amortization creates additional capital generation.