Mechanics Bank Q2 FY2026 earnings call

• Merger & Integration Progress • The HomeStreet merger integration is substantially complete, with full completion of core system conversion. • Full-time headcount reduced from 1890 to 1756 QoQ, driven by post-merger consolidation, with $5.9 million in one-time Q2 merger expenses (primarily severance). • Cost synergy targets remain on track, with annual run-rate non-interest expense (excluding CDI amortization) expected to hit $430 million by Q4 2026.

• Balance Sheet & Capital Management • The DUS business line sale to Fifth Third closed in early May, generating excess capital that supported a large 70 cent per share special Q2 dividend. • Capital ratios remain very robust: 14.4% CET1 ratio, 8.7% Tier 1 leverage ratio, with ~$100 million in excess capital above the 8.25% Tier 1 leverage ratio target as of quarter-end. • Management plans to execute a Q3 2026 restructuring of low-yielding available-for-sale (AFS) securities: sell ~$310 million of 1.78% yielding securities, reinvest in ~5.5% yielding agency MBS, incurring a $25 million after-tax loss that will be earned back over 4-5 years to boost NIM over time. • Management is evaluating a potential sale of the remaining run-off auto loan portfolio, which would incur a modest loss if completed; the portfolio is currently performing in line with expectations.

• Deposit Performance & Strategy • Total deposits declined $153 million QoQ, driven by a planned $199 million reduction in high-cost legacy HomeStreet CDs; the pace of CD decline slowed substantially from Q1. Non-maturity deposits grew $46 million, with a mix shift from non-interest bearing accounts to higher-cost money market accounts. • The deposit base is structurally attractive: average account size of $43,000, average customer relationship tenure of 19 years, 49% consumer, 43% business, 8% public funds, with no broker deposits.

• Credit Quality • Net charge-offs remain very low at 0.6 basis points ($220,000) for non-auto loans; auto loan charge-offs continue to decline as the portfolio seasons. • Allowance for credit losses (ACL) is 1.12% of total loans, equal to 2.57x total non-performing assets, representing a robust credit buffer. • The CRE portfolio is conservatively underwritten: multifamily (71% of CRE) has an average LTV of 56% and average debt coverage ratio of 1.55x; higher-risk legacy HomeStreet syndicated CRE exposure has declined from $142 million in Q3 2025 to $69 million at Q2 2026; office exposure is only 8% of total CRE with conservative credit terms.

The call does not break out financial performance for distinct product segments; all results are reported at the consolidated bank level. Consolidated Q2 2026 results: $57.7 million GAAP net income, 25 cents fully diluted EPS; $59 million adjusted core net income, 1.1% core ROAA, 14.7% core ROATCE. Net interest income: $177.2 million, down 1% QoQ, with net interest margin (NIM) up 1 basis point QoQ to 3.62%. Non-interest income: $23.8 million, up 13% QoQ, driven by $2.2 million in non-recurring items. Non-interest expense: $124.5 million, down 4.6% QoQ; efficiency ratio improved to 58.4% from 61.6% QoQ. Balance sheet: $21.2 billion total assets, $13.6 billion gross loans, $18.1 billion total deposits, $1.75 billion tangible shareholders' equity. Commercial Real Estate (CRE) portfolio makes up 342% of tangible equity (97% excluding lower-risk multifamily loans; multifamily itself represents 71% of total CRE).

• Core profitability: Reaffirms long-term target of 17% to 18% ROATCE and 1.3% to 1.4% ROAA for 2027 and beyond, and maintains the prior 2027 GAAP net income guidance range of $275 million to $300 million. • Expenses: Confirms the annual run-rate non-interest expense (excluding CDI amortization) target of $430 million by Q4 2026, with most synergy savings hitting Q3 2026 results. • Dividends: Expects a 25 cent per Class A share dividend in Q3 2026, and a special dividend of $75 million to $100 million in Q4 2026, subject to board and regulatory approval. Expects 2027 total cash dividends of $250 million, implying a 7% expected dividend yield. • Deposits: Expects high-cost CDs to continue declining modestly in Q3, but total deposits have bottomed and will begin growing at a 1% to 2% annual rate moving forward, with continued modest mix shift pressure on deposit costs. • Net Interest Margin: Expects modest NIM improvement in a flat interest rate environment; rate hikes would create a modest near-term drag, while rate cuts would boost NIM (the bank is modestly liability sensitive). Long-term margin expansion is expected as $4.8 billion in low-yielding (3.12% average) existing assets reprice and roll off over the next five years. • Balance sheet composition: Expects CRE concentrations to continue declining modestly, with management targeting a CRE concentration below 300% over time.

• Industry-wide competitive pressure: Stiff competition for deposits is pushing up deposit costs, with ongoing mix shift from low-cost non-interest bearing deposits to higher-yield money market accounts creating moderate margin pressure. • Interest rate sensitivity: As a modestly liability sensitive bank, near-term Federal Funds rate hikes would reduce net interest income, though this impact diminishes over time as assets reprice. • Competitive credit pricing: Management notes that credit pricing is currently irrational in many market segments, creating pressure to either accept uncompensated risk or forgo loan growth. • Execution risk: The planned AFS securities restructuring and any potential auto loan portfolio sale will incur near-term after-tax losses, which may offset near-term earnings even as they improve long-term profitability.

Q: How will deposit mix shift and cost pressures trend through the second half of 2026, and how should asset allocation change given the tight spread between low-yielding multifamily loans and new higher-yielding securities?

A: Management expects modest ongoing mix shift into money market accounts and continued high-cost CD runoff, leading to a small, incremental increase in deposit costs for the rest of the year. CD renewal rates have rebounded to historical levels after a period of intentional low renewal to push out non-core rate-seeking deposits, and the remaining deposit base has higher average relationship tenure, leaving management confident in the base's stability. Given the very tight spread between multifamily loan yields and agency MBS yields, management will continue to slowly reduce CRE concentrations, targeting a level below 300%, and will reinvest CRE runoff into lower-risk higher-yielding securities rather than chasing loan growth with uncompensated risk.

Q: What are the puts and takes for NIM over the next few quarters, when will balance sheet size stabilize, and what is management's current approach to M&A after HomeStreet integration?

A: Management expects modest NIM improvement in a flat rate environment: long-term margin tailwinds from embedded repricing of $4.8 billion in low-yielding assets and the planned AFS restructuring will be partially offset by modest deposit cost pressure. Balance sheet size is expected to stabilize around the current $21.2 billion level, with deposits starting to grow 1-2% annually after reaching the bottom of the planned decline. Management will not pursue M&A just for growth; any deal must improve the core deposit franchise and meet a high return hurdle, which is difficult to find in the current West Coast market, so the focus will remain on internal optimization for the foreseeable future.

Q: Is the prior 2027 net income guidance range still valid, and how much excess capital cushion will management maintain after the Q4 special dividend?

A: Management reaffirms the prior 2027 net income guidance range of $275 to $300 million, which aligns with the long-standing 17-18% ROATCE target. Offsetting impacts — modestly higher deposit cost pressure fully offset by the planned AFS restructuring and continued cost synergy realization — leave the guidance unchanged. Management targets a Tier 1 leverage ratio of 8.25%, which translates to an effective operating ratio of ~8.5-8.6%, and will maintain a capital cushion above peer average levels (which average ~11-12% CET1, compared to Mechanics' 14.4% CET1) to retain flexibility for future capital return and balance sheet optimization.