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DATE

Thursday, April 30, 2026 at 11 a.m. ET

CALL PARTICIPANTS

  • President and Chief Executive Officer — [Name not provided]
  • Chief Financial Officer — [Name not provided]
  • Executive Chair — [Name not provided]

TAKEAWAYS

  • Net Income -- $44.1 million reported, with core net income of $53.8 million after adjusting for the CECL provision, merger expenses, and deferred tax asset remeasurement.
  • Earnings Per Share -- $0.19 fully diluted; $0.40 per share in dividends distributed during the quarter.
  • Tangible Book Value Per Share -- $7.53 at period-end following the dividend payment.
  • Allowance for Credit Losses -- Increased to 1.13% of loans ($157 million), primarily from a $6.5 million CECL provision "entirely related to qualitative CECL factors tied to geopolitical uncertainty stemming from the Iran war.".
  • Net Charge-Offs -- 0 basis points, excluding auto portfolio; auto loans in runoff and "performing well as it winds down."
  • Merger-Related Expenses -- $4.8 million incurred this quarter as integration with HomeStreet advances toward completion.
  • Deposit Trends -- Total deposits down $782 million, with $640 million deliberate reduction in CDs, $137 million outflow attributed to seasonality in food and ag clients, and $232 million decline in noninterest-bearing demand deposits, offset by money market growth.
  • Certificates of Deposit (CDs) -- Accelerated runoff expected to reach a $1.4 billion cumulative reduction by year‑end, with an additional near $150 million reduction anticipated next quarter and expected stabilization at a $2 billion run‑rate.
  • Cost of Deposits -- 1.28% for the quarter, down 15 basis points sequentially; spot cost at period-end was 1.21%.
  • Net Interest Margin (NIM) -- 3.61%, increased by 11 basis points from prior quarter, attributed mainly to lower deposit costs and CD runoff; projected to remain "relatively flat" for the next 2–3 quarters.
  • Noninterest Income -- $21 million, a $57.5 million decrease sequentially primarily due to lapping a $55.1 million one‑time gain from the prior quarter’s DUS intangible asset write‑up.
  • Noninterest Expense -- $130.4 million, up $0.9 million quarter over quarter; excluding merger costs, noninterest expense fell by $0.4 million sequentially.
  • Efficiency Ratio -- 61.6%, up from 46.7% last quarter, "reflecting the absence of the prior-quarter bargain purchase gain rather than any deterioration in underlying operating efficiency."
  • Capital and Liquidity -- Common Equity Tier 1 (CET1) ratio at 13.9%; Tier 1 leverage ratio at 8.7%; available liquidity of $16.3 billion.
  • CRE Concentration Ratio -- 348% at quarter-end; multifamily comprises about 70% of CRE, with average LTV at 56% and average debt coverage ratio at 1.55x.
  • DUS Business Sale -- $130 million sale to Fifth Third expected to close in Q2, providing approximately $165 million of excess capital for a planned $0.70 special dividend per share, subject to approvals.
  • Merger Integration -- "Successfully converted all legacy HomeStreet customers onto our core banking platform in March," with remaining integration and expense synergy targets on track for completion by Q4.
  • Guidance -- 2027 ROTCE anticipated at 17%-18%, and ROAA at 1.3%-1.4%, with net income projected at $275 million-$300 million in 2027; guidance was "reduced primarily due to removing two Fed rate cuts from our projections as well as from a modestly smaller balance sheet."
  • Dividend Policy -- Long-term payout ratio expected to be around 80% of net income following elevated 2026 special payouts.
  • Loan Origination and Portfolio Shifts -- $546 million in new loan commitments; $54 million in loans sold; ongoing strategy to reduce legacy HomeStreet construction loans and manage CRE exposure below 300% over time.
  • Asset Quality -- Nonperforming assets at 0.25% of total assets, up from 0.23% sequentially; "majority of our historical charge-offs were auto-related" and that portfolio continues to "outperform expectations."
  • Shareholder Alignment -- Ford Financial Fund holds 74% ownership.

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RISKS

  • CEO said, "competition for loans and deposits remains quite stiff," indicating potential ongoing pressure on pricing and margins.
  • Projected net income guidance for 2027 was "reduced primarily due to removing two Fed rate cuts from our projections as well as from a modestly smaller balance sheet due to the lower CD balances."
  • Allowance for credit losses increased "entirely related to qualitative CECL factors tied to geopolitical uncertainty stemming from the Iran war," reflecting management’s conservative response to heightened macroeconomic risk.
  • Management described credit spreads as "Credit spreads are extremely tight. In my way of thinking, this is not the time to necessarily be pressing the accelerator too hard for loan growth, and with the overlay of our CRE concentration, we have to be very mindful of that," suggesting increased lending risk in a highly competitive environment.

SUMMARY

Mechanics Bancorp (MCHB 2.73%) reported core net income of $53.8 million, with asset quality remaining solid and no material deterioration outside auto loans. Deposit outflows, primarily from intentional CD runoff and seasonal factors, contributed to a $782 million decline in total deposits, as the bank continued to prioritize lower-risk funding sources. Integration of the HomeStreet transaction is nearly complete, enabling substantial cost reductions and unlocking merger synergies expected to bring annual noninterest expense, excluding CDI, to an annual run-rate of $430 million by year-end. Management guided for a 2027 ROTCE of 17%-18% and a 1.3%-1.4% return on average assets, with net income projected at $275 million-$300 million; both figures were trimmed in light of fewer anticipated Fed cuts and a smaller balance sheet resulting from accelerated CD runoff. The $130 million sale of the DUS business line is pending closure in the second quarter, which will enable a special $0.70 per share dividend and leave Mechanics with a substantial $165 million capital surplus.

  • Core deposit mix remains favorable at 36% noninterest-bearing, ranking third among 77 U.S. peer banks with $10 billion-$100 billion in assets.
  • Risk-weighted assets represent 59% of total assets, the second-lowest percentage among peers, reflecting the bank’s low risk asset strategy.
  • Noninterest expense reductions will accelerate in Q2 and Q3, targeting a cumulative $44 million annualized reduction to Q4, enhancing efficiency ratio outlook.
  • Management expects auto loan runoff to pressure NIM in the near term, but believes repricing of legacy loans and HTM portfolio will provide multi-year margin tailwinds as low-yielding assets amortize.
  • Strategic focus remains on core funding growth, disciplined lending, managing CRE concentration below 300%, and pursuing further profitability gains as integration concludes.

INDUSTRY GLOSSARY

  • CECL: Current Expected Credit Loss, a forward-looking accounting standard for estimating loan loss reserves rooted in projected credit trends and macroeconomic factors.
  • DUS: Delegated Underwriting and Servicing; Fannie Mae's multifamily lending platform allowing approved lenders to underwrite, close, and service loans on its behalf.
  • CDI: Core Deposit Intangible, an accounting asset reflecting the value of acquired core deposit relationships.
  • CRE Concentration Ratio: The ratio of commercial real estate loans to total risk-based capital—regulatory benchmark for monitoring bank real estate concentration risk.
  • Noninterest Expense: Operating costs excluding interest paid on deposits or other funding sources, such as salaries, technology, and occupancy.

Full Conference Call Transcript

Unknown Speaker: Thank you, operator, and good morning, everyone. We appreciate you joining our earnings conference call. With me here today are our President and CEO and our executive chair. The related earnings press release and earnings presentation are available on the News and Events section of our Investor Relations website. Before we begin, I would like to remind everyone that any forward-looking statements are subject to those risks, uncertainties, and other factors that could cause actual results to differ materially from those anticipated future results. Please see our Safe Harbor statements in our earnings press release and in our earnings presentation. All comments expressed or implied during today's call are subject to the Safe Harbor statement.

Any forward-looking statements made during this call are made only as of today's date, and we do not undertake any duty to update such forward-looking statements except as required by law. Additionally, during today's call, we may discuss certain non-GAAP financial measures which we believe are useful in evaluating our performance. A reconciliation of these non-GAAP financial measures to the most comparable GAAP financial measure can also be found in our earnings release and in the earnings presentation. Thank you, and good morning. We appreciate everyone joining our call and for your interest in Mechanics Bank. I will kick things off today and will summarize the highlights of our first quarter performance.

I will also provide another strategic update on the bank before handing things off to our CFO to review our financials in more detail. We will then open up the call for your questions. With that, let us turn to Slide 4. We had a productive first quarter reporting $44.1 million in net income. On a fully diluted basis, our earnings per share were $0.19. Our tangible book value per share ended the quarter at $7.53, with $0.40 per share of dividends paid to investors in Q1. As anticipated, this was another noisy quarter, so I will walk you through some of the major items.

First, we recorded a £6.5 million provision entirely related to qualitative CECL factors tied to geopolitical uncertainty stemming from the Iran war. Importantly, this was not driven by any specific credit deterioration within our loan portfolios. Asset quality metrics remain strong, and I am pleased to report that we have 0 basis points of net charge-offs when you exclude our auto net charge-offs. Our run-off auto portfolio, by the way, is also performing well as it winds down. This provision was a conservative response to the heightened global risk of the Iran war and its potential impact on the U.S. economy, particularly given higher oil prices.

Second, we incurred just under £5 million of merger-related expenses as we continue to work through the final phases of our HomeStreet integration. These costs were in line with our expectations and are nearing completion. The third non-core item was a $1.7 million tax provision related to the remeasurement of our deferred tax asset due to a lower anticipated effective tax rate moving forward for the company. For forecasting purposes, we expect our effective tax rate to be approximately 26.5% in 2026, but this could still move around a bit.

When you adjust for the non-core items, it adds up to $53.8 million of core net income for the quarter representing a core ROAA of 1% and a core ROTCE of 13%. First quarter is always the seasonally weakest for us for both noninterest expenses and core deposits. On the deposit front, our seasonality primarily stems from our $860 million of food and ag deposit customers who see large inflows in December and outflows in January. This quarter, $137 million of our non-maturity deposit decrease was from these customers, which is normal course activity. Otherwise, core deposits are roughly flat. Importantly, we did see a $640 million reduction in CD balances during the quarter.

This was deliberate as we continue to hold the line on CD pricing and let hotter money from legacy HomeStreet customers leave the bank. When we modeled the merger over a year ago, we expected $1 billion in CD runoff by the end of 2026. However, runoff has been greater than anticipated, and we now expect a $1.4 billion cumulative reduction in CDs, with overall Mechanics CD balances expected to stabilize at a $2 billion run rate. This implies an additional reduction in CDs of just under $150 million in Q2. Notably, the vast majority of CDs leaving the bank were from single-account households, and our core deposit retention from the merger has been very strong.

Also, nearly all of our CDs have repriced once at our lower rates and have maturities of seven months or less. While this elevated time deposit runoff has a negative impact on earnings, it is higher-risk, low-ROE, non-core money that is better to not have in our bank. Getting a bit smaller also generates excess capital, which provides strategic flexibility. Staying on the topic of risk reduction, legacy HomeStreet construction loans also decreased nearly $100 million during the quarter, as we made the strategic decision to let certain business go that we felt was not priced appropriately relative to the credit exposure we were taking in the bank. In general, competition for loans and deposits remains quite stiff.

We are okay getting a bit smaller in the near term to minimize risk to the company and position ourselves for long-term success. Our total assets are now £21.4 billion with total gross loans of $13.9 billion, total deposits of $18.2 billion, and tangible shareholders' equity of $1.7 billion. We remain 100% core funded with no brokered deposits or FHLB borrowings at 03/31/2026, and we paid off $65 million of high-cost senior debt in March that was acquired from legacy HomeStreet. Primarily because of the Iranian war provision, our ACL grew 5 basis points this quarter to 1.13% of loans and now totals $157 million.

Our allowance is also a very robust 2.95x our total nonperforming assets as of 03/31/2026, with NPAs generally flat for the quarter. Our capital ratios remain healthy with a 13.9% CET1 ratio and an 8.7% Tier 1 leverage ratio. Our cost of deposits was 1.28% in the first quarter, down 15 bps from Q4, and our spot cost of deposits at 03/31/2026 was 1.21%. Our NIM was 3.61% for the quarter, up 11 bps sequentially, and our CRE concentration ratio was 348%. Turning to Slide 5. I would like to provide you with an update on some of the key strategic initiatives happening at the bank.

I am very happy to report that we successfully converted all legacy HomeStreet customers onto our core banking platform in March. This major milestone was achieved thanks to a tremendous amount of planning and hard work from all our employees. We will substantially complete our merger integration during the second quarter and expect to realize significant additional expense synergies moving forward as we will not be paying two core providers. Other redundant contracts will be terminated and final headcount reductions occur. We remain on track to deliver on our budgeted cost synergies from the merger, and reiterate our prior guidance of achieving an annual run-rate noninterest expense excluding CDI of approximately $430 million by the fourth quarter of this year.

The $130 million sale of our DUS business line to Fifth Third has taken a bit longer than expected, but we have a high degree of confidence that it will close in the second quarter. Given the pending DUS sale, our first quarter earnings, and our modestly smaller balance sheet, we will have significant excess capital, and we expect to pay approximately $0.70 per share in dividends in Q2, subject to regulatory and Board approval. Merger integration is almost behind us after a very full year of work, and the buildouts of our wealth, commercial banking, and treasury sales teams are substantially complete.

It will be nice to move past integration work and focus entirely on growing each of our core business lines with a technology roadmap for the bank that is increasingly focused on leveraging AI tools to improve enterprise productivity. As for the big picture, we expect a relatively flat NIM for the next two to three quarters as auto loan runoff remains a drag, our deposit costs stop declining given we no longer expect any Fed rate cuts, and our CD repricing moderates.

Our NIM should begin expanding again in early 2027, as the impact of auto fades, driven by legacy Mechanics Bank earning asset repricing, which will continue to occur over the next five years and will provide a tailwind to earnings growth. We now expect to deliver a 17% to 18% ROTCE and a 1.3% to 1.4% ROAA in 2027 and beyond, with a projected GAAP net income range of $275 million to $300 million for 2027. Our earnings guidance has been reduced primarily due to removing two Fed rate cuts from our projections as well as from a modestly smaller balance sheet due to the lower CD balances.

We also expect outstanding construction loans to be roughly $300 million over the rest of the year versus $500 million previously. Let us go to Slide 6, which shows an overview of Mechanics Bank today. Again, we have £21.4 billion in assets, 166 branches, and very competitive deposit market share. We are the fourth largest community bank in both California and on the West Coast, with a branch map that is nearly impossible to replicate. We fully expect Mechanics Bank to be a high-performing bank despite taking very little risk with our earning asset strategy.

On the left-hand side of the page, we compare Mechanics Bank to all publicly traded banks with $10 billion to $100 billion in assets, which, including us, now has 77 banks in the comparative group. As you can see, cost of deposits for the first quarter was 1.28% versus the median of the 77 banks of 1.76%, giving us a rank of number 10, and I expect our cost of deposits to continue to drop in the second quarter before flattening the remainder of the year. Next, our noninterest-bearing deposit mix is 36%, which is third out of 77, up one spot from a quarter ago, and the greatest store of value for our company.

Our CET1 ratio of 13.9% ranks nineteenth, and our risk-weighted assets to total assets is just 59% versus the group median at 76%, which is the second lowest out of our 77 competitor banks nationwide. Despite this low-risk profile, our expected 2027 ROTCE of 17% ranks eighth of the 77 banks, which would be exceptional. Finally, our 2027 efficiency ratio is now projected to be approximately 50%, which ranks twenty-second out of 77 despite our operating in higher-cost markets and with the majority of our deposits comprised of small-balance consumer accounts. Slide 7 is key to our investment thesis and another way of visualizing some of the important statistics from Page 6.

The strength of our deposits and the efficiency with which we run our bank, both from an expense and a capital management standpoint, will allow us to post very strong returns despite having nearly the lowest risk mix of assets in the country. These charts provide a great visual in my opinion, especially the risk-weighted assets to total assets comparison. In fact, we expect our risk-weighted assets as a percentage of total assets to continue to come down over time as our auto loans run off and our CRE concentration ratio is managed below 300%.

While we will pay substantial dividends in 2026, we expect moving forward that our dividend payout ratio will be closer to 80% of net income as we retain some capital to support core growth and preserve strategic optionality. To wrap up my section, let us turn to Slide 8. This slide summarizes our investment highlights. First and foremost, we have very strong market share across the West Coast, with a branch footprint that is nearly impossible to replicate. We also expect to have very strong profitability due to our top-notch deposits and efficient business model despite taking very little credit risk.

We are 100% core funded with no wholesale borrowings or brokered deposits, and are highly capitalized with a very liquid balance sheet, with a 70% loan-to-deposit ratio forecast for 2027. We are efficient with our capital and plan to pay out substantial dividends, which would imply a very attractive yield at today's share price. There is also firm alignment between our public and private investors as Ford Financial Fund owns 74% of the company. Finally, we have an experienced management team with a strong operating and M&A track record. Overall, the future prospects of Mechanics Bank are quite bright.

I am looking forward to finishing the job with the HomeStreet integration and moving on to the next chapter of growth for our great company. With that, let me turn the call over to our CFO to dig into more detail on our first quarter results.

Unknown Speaker: Thank you. Starting on Slide 10, for the first quarter, net interest income declined $3.9 million, or 2.2%, to $179 million compared to $183 million in 2025. Our net interest margin expanded 11 basis points to 3.61%, driven primarily by the reduction in deposit costs and the $640 million runoff of higher-cost legacy HomeStreet CDs. First quarter interest income included $12.7 million of discount accretion on loans acquired in the HomeStreet transaction, and we have approximately $150 million of remaining discount on those loans as of 03/31/2026. Lastly, the earning asset mix shifted modestly during the quarter, reflecting lower cash balances as CDs continue to roll off. Turning to Slide 11.

Noninterest income declined $57.5 million, or 73%, to $21 million compared to $78.5 million in the linked quarter. As a reminder, the fourth quarter included a $55.1 billion bargain purchase gain related to the write-up of the DUS intangible asset acquired in the HomeStreet merger. Excluding that item, underlying noninterest income declined $2.4 million quarter over quarter, primarily driven by lower trust fees, lower gain on sale of loans, and reduced OREO income. Turning to Slide 12, noninterest expense increased $900,000, or 0.7%, to $130.4 million compared to $129.5 million in the fourth quarter. Merger-related expenses totaled $4.8 million, up modestly from $3.5 million last quarter, and were primarily comprised of professional services and severance costs.

Excluding these one-time merger expenses, noninterest expense declined $400,000 versus the linked quarter. The efficiency ratio increased to 61.6% compared to 46.7% in Q4, reflecting the absence of the prior-quarter bargain purchase gain rather than any deterioration in underlying operating efficiency. Turning to Slide 13. Loan interest income declined $12.9 million, or 6.7%, to $181.2 million, and loan yields declined 9 basis points to 5.25%, driven by slightly lower contractual yields and reduced discount accretion. Multifamily and single-family residential yields declined modestly by 6 and 3 basis points, respectively. The CRE concentration ratio increased to 348% at quarter end.

During the quarter, we originated $546 million of loan commitments, predominantly in SFR and other consumer categories, and sold $54 million of loans, primarily DUS, multifamily, and residential real estate. Turning to Slide 14. The commercial real estate portfolio remains well diversified and continues to reflect our longstanding focus on lower-risk multifamily lending. Multifamily represents approximately 70% of the total CRE portfolio, with an average loan size of $3.8 million, an average LTV of 56%, and an average debt coverage ratio of 1.55x. The remainder of the CRE portfolio is broadly distributed across retail, office, industrial, hotel, and mixed-use categories, each with modest exposure and conservative credit characteristics.

At the end of the first quarter, our CRE concentration was 348%, which would be 101% when excluding our multifamily portfolio. We also continue to manage down the higher-risk segments of the legacy HomeStreet portfolio. During the last six months, we made progress reducing our HomeStreet syndicated loan exposure, with balances declining from approximately $142 million at 09/30/2025 to about $68 million at 03/31/2026. During the first quarter, we sold roughly $9 million of unpaid principal balance, or $18 million of commitments. On Slide 15, you can see both legacy Mechanics Bank asset quality trends and the impact of the HomeStreet merger.

Mechanics Bank has historically maintained excellent credit quality with minimal non-auto charge-offs and a very low level of nonperforming assets. As shown on the slide, the majority of our historical charge-offs were auto-related, and as mentioned earlier, that portfolio is in runoff and continues to outperform expectations. As a reminder, the increase in the non-auto charge-offs in 2025 was due to a charge-off of a legacy HomeStreet acquired loan that had specific reserves established, and the actual charge-off was slightly lower than the original anticipated loss. At March 31, nonperforming assets represented 0.25% of total assets, modestly higher from 0.23% in the fourth quarter.

The increase reflects the impact of lower loan balances in total and a slight increase in the non-auto nonperforming assets of $2 million. Loan loss reserves to loans held for investment were 1.13% at quarter end compared to 1.08% in the prior quarter. The increase in the allowance reflects incorporation of qualitative factor adjustments, including a $6.35 million pre-tax provision driven by the heightened economic uncertainty related to geopolitical developments. Turning to Slide 16. Securities interest income increased $3.5 billion, or 7%, to $53.1 million from $49.5 million in the fourth quarter. The increase was driven by higher yields on the portfolio, which increased by 11 basis points to 3.97% as compared to the fourth quarter.

The increase in the portfolio's yield was due to the full-quarter impact of the $650 million of securities purchased in 2025 at accretive yields to the portfolio. The overall securities portfolio decreased by $83 million in the first quarter due to paydowns and a $33 million reduction in fair value due to higher interest rates. Turning to Slide 17. Total deposits declined $782 million during the quarter, driven by a $640 million reduction in higher-cost time deposits and a $232 million reduction in noninterest-bearing demand and $137 million in seasonal non-maturity deposit outflows, partially offset by money market growth.

This mix shift and balance reduction contributed to a $10.7 million, or 15%, decline in the deposit interest expense compared to the prior quarter. The total cost of deposits improved to 1.28%, down 15 basis points from the prior quarter, driven primarily by the continued runoff of the higher-cost legacy HomeStreet time deposits. Spot cost of deposits at March 31 was 1.21%, reflecting ongoing repricing benefits. Noninterest-bearing deposits represented 36% of total deposits, continuing to support our low-cost funding profile. Turning to capital and liquidity on Slide 19. We remain very well capitalized with a 13.9% CET1 ratio and an 8.7% Tier 1 leverage ratio at March 31. Available liquidity totaled approximately $16.3 billion.

Book value per share at quarter end was $12.61 and tangible book value per share was $7.53. During the first quarter, we paid a $0.40 per share dividend on our Class A common stock. As discussed earlier, we expect the $130 million sale of our Fannie Mae Delegated Underwriting and Servicing business to Fifth Third to be approved and closed shortly. Pro forma for that transaction, we expect to have approximately $165 million of excess capital, which we intend to return to shareholders through a special dividend of approximately $0.70 per share in the second quarter, subject to regulatory and Board approval. That concludes our prepared remarks. Operator, please open the line for questions.

Operator: We will now open the call for questions. We will now begin the question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. To withdraw your question, press star 1 again. Please pick up your handset when asking a question. You are muted locally; please remember to unmute your device. Please stand by while we compile the Q&A roster. It is star 1 on your telephone keypad to ask a question. Your first question comes from Woody Lay with KBW.

Operator: Please go ahead.

Woody Lay: Hey, thanks for taking my questions. I wanted to start on the net interest margin. Based off the spot rate of deposits you gave, I am a little surprised margin would be flat, or relatively flat, next quarter. Could you walk through the puts and takes to the flat margin over the next couple of quarters and the glide path we need to see in order to hit the $275 million to $300 million of net income in 2027?

Unknown Speaker: Sure. Good morning, Woody. I will start, and maybe let our CFO comment as well. Yes, the spot cost of deposits is down, and that will provide a bit of a tailwind, but we expect our deposit cost to be not quite at 1.21%, probably a little higher than that for the quarter overall, as we are really through most of our CD repricing. We also have a bit of a day-count issue with the first quarter and February and how we do some of our yields. The 3.61%, especially in February, which is a short month, is a bit elevated. So that gets some of it. We are very liability sensitive.

We are going to add a bit more disclosure around that in our next investor deck in the second quarter, but we do have, of our $18 billion of deposits, $10 billion at basically 1 basis point, noninterest-bearing or very low cost. But we do have $7 billion that is at 2.85% today, and so it is a bit of a barbell for the deposit base. Not getting the rate cuts, having a flat forward curve, is a bit of a negative for us, clearly. We do have about $4 billion of floating-rate assets. So there is a $3 billion gap between our rate-sensitive liabilities and our floating-rate assets, and we have been working to narrow that gap.

It has come down; it will continue to come down, but that is putting some pressure on the margin during the year, especially as we still have $600 million or so of auto loans at a 6.5% yield. Those are running off to zero. That is putting pressure on the margin. The offset is we have outsourced the expense for that, and as those loans run off, our NIE continues to proportionally run off with that as well. We have $12 million right now that we are paying, and so as those balances run down, the $12 million also comes down. So the offset to the margin impact is going to show up in noninterest expense.

Do you want to add anything to that?

Unknown Speaker: Yes, I think you covered most of it. A couple of other items I would add: you gave updated guidance on the construction land balances, which is one of our highest-yielding assets, so there is an impact there. In addition, we have seen interest-bearing transaction costs pick up. Part of that is some of the CD runoff from HomeStreet. Strategically, we have been pushing some of that into interest-bearing transaction accounts, and so we expect that to pick up during the second quarter, along with everything else that you discussed already.

Woody Lay: Got it. And then maybe with some of the moving pieces, is there a margin range you expect in 2027 in order to achieve the NII run rate you expect?

Unknown Speaker: I would say probably 3.7% to 3.8% in 2027 would be my estimate. Obviously, that is still a ways down the road, and things can change, so I hesitate to give too much there. What I do know is we are 100% core funded, and our deposit costs should be pretty stable, especially if we can grow core deposits, which we think we can do. I think our deposit cost should remain pretty stable once we get through the second quarter. We have at least $5 billion of low-yielding legacy Mechanics Bank assets that are a hangover from the COVID era that will continue to amortize, prepay, cash flow, and reprice.

We are going to add some disclosure around that as well in the second quarter, but that is going to be a tailwind. That is happening, and that will push our margin higher every year for the next five years. Eventually this would be a bank that is north of a 4% NIM, and there are levers we can pull to accelerate that. We are going to be continuing to generate excess capital as we are a little smaller, and we have low-yielding loans and low-yielding securities. We may consider a restructure on some of that. It would be small. Eventually, we are going to sell these auto loans.

I do not know when that will be, but it is going to be back half of this year, early next year. We are still trying to determine the ideal timing of it, and we may take a modest loss when that occurs, but it will be a pickup to earnings for sure, because that line is losing us money at the moment as we continue our runoff. So there are a lot of levers we can pull, and the underlying earnings power of this bank is very strong, thanks to our rate deposits, and we have not embedded any of that kind of stuff in our guidance.

Woody Lay: Maybe just shifting to the balance sheet real quick. As you noted, some of the deposit runoff is coming a little bit more than expected, and I think you said there is another $150 million of planned CDs from HomeStreet that is coming off next quarter. Once we get through that tranche, how are you thinking about the size of the balance sheet? Should it remain pretty stable off those levels, or just given the sale of the auto—potential sale of the auto—portfolio, could we see some additional shrinkage in the back half of the year?

Unknown Speaker: Once we get through any remaining CD reductions in the second quarter—and again, the first quarter is also the seasonal low for deposits with us; every first quarter that is the case—expect core deposit growth. We think we should grow 2% to 4% a year in line with our economies, and we have a ton of focus at the bank on growing core deposits. The non-core stuff is basically all out. If we sell auto loans, we will get the proceeds and reinvest somewhere else, so that will not change the size of the balance sheet. I view this as very close to the low. We should be growing; we are budgeting to grow.

We have momentum on deposit pipelines and things like that, so I would not expect much, if any, more balance sheet shrinkage—maybe a bit in the second quarter, but that should be the near-term low.

Woody Lay: Got it. And then maybe just last for me. You all noted in your opening remarks an 80% payout ratio in 2027 that provides some capital to be strategic with. You noted you could look at restructures, but I was also interested in your thoughts on additional M&A from here, especially once we get past the official core conversion.

Unknown Speaker: Good morning, Woody. I think that you have to look at our past to somewhat predict our future. We have always been extremely acquisitive. We are always looking at situational opportunities. Obviously, the opportunities have to be within our footprint. We are not looking to really expand our West Coast footprint, and we do not want to do an M&A transaction simply to get bigger. It has to make us better. And I think the overlay to that is making us better with an M&A transaction gets harder and harder and harder. You heard the 1.28% deposit cost for the quarter and the 1.21% spot rate. We protect these deposits judiciously.

I am not talking about our time deposits—the story there is we have run those down intentionally—but it really gets harder and harder to move the needle. I am not saying that we have to buy another bank or acquire another opportunity that has a like deposit cost, but we think the value of a bank—the franchise value of a bank—is demonstrated predominantly by its liability structure and its deposit cost, and so we have to take that into consideration. Frankly, there just are not a lot of banks out there. We are always looking. There are a scant few opportunities that we constantly monitor. Something in our favor is we are trading at a pretty good multiple.

All I can say is we are keen to the opportunity set; we are always looking. Being extremely transparent, there is nothing right now on the front burner, and that is simply because there is nothing more important for our bandwidth today than getting this integration right. We only acquired HomeStreet, which significantly increased our size and our footprint, eight months ago, and we are now in the midst of getting our cost out and we spoke to the conversion. Those are the very important things that we have to get done and get right first, and we are getting in the later innings of doing that. Then we will certainly see what is out there.

Woody Lay: Awesome. I appreciate you taking my questions and all the color you provided.

Unknown Speaker: Of course. Thanks for the questions, Woody.

Operator: A reminder, if you would like to ask a question, please press star 1 on your keypad. Your next question is from Dave Rochester with Cantor. Please go ahead.

Dave Rochester: Hey, good morning, guys.

Unknown Speaker: Good morning, Dave.

Dave Rochester: Back on your comments on growth in core deposits, it sounds like you feel pretty good about doing that through the end of this year. I was curious, just given the headwinds in auto and construction, if you think you could still grow the loan book this year. And then I am trying to triangulate into an NII trend with a stable NIM. It sounds like you are still expecting NII to grow through the end of this year as well with—whether it is loan growth or securities growth—through the end of the year, just given that you are growing core deposits. I wanted to get your thoughts on that.

Unknown Speaker: From a loan growth standpoint, we expect to grow our consumer loans. We had modest growth in single family; we expect that to pick up throughout the year. Mortgages and HELOCs—we have seen good demand and growth. We are also lending against the cash surrender value of whole-life policies through our partner, Incline. That is growing rapidly. We are now at, I think, $670 million of drawn balances. We expect that over the course of the year to get to $1 billion drawn and really like that business from a risk-adjusted return standpoint, especially given its short duration and a good counter to some of that gap I talked about earlier between our rate-sensitive deposits and our floating-rate assets.

So the consumer should grow. We have talked before about our construction balances—we expect those to decrease around $300 million. The homebuilder team that came over from HomeStreet does a great job; they really are a strong team, but that business was thinly priced in some areas, and we are getting it deliberately a little bit smaller. So that will be a bit of a headwind through the year, but we are de-risking. Not doing construction lending can obviously go great for a while, then it can go the other way very quickly, so I think that is prudent. On commercial real estate, we are originating loans, but the plan is still to get that below 300%.

I would model us over the next couple of years getting below 300%, so there will be a modest decrease in outstanding multifamily CRE. C&I should be—deliberately we sold some of the syndicated loans that HomeStreet had; that is part of the balance reduction there. That should be close to a nadir and should be starting to grow again.

Unknown Speaker: I would add one other comment, and that is the market is extremely—everyone says the same thing, and we have been monitoring earnings releases, and some have had modest loan growth—but I would say the competitive landscape on both term and pricing is as thin and as tight as I have ever seen it. We are tough on credit, and I think that would be an opinion shared by a lot of our lenders that are out in the market today.

We are seeing some things out there that may trend to this thing just getting really, really competitive to the extent that it is probably not all that healthy, particularly as it relates to term, which I equate to underwriting. Credit spreads are extremely tight. In my way of thinking, this is not the time to necessarily be pressing the accelerator too hard for loan growth, and with the overlay of our CRE concentration, we have to be very mindful of that.

Dave Rochester: Appreciate that. Are you, at this point, still expecting NII growth from the first quarter through the end of the year, or is it more stable along with the margin?

Unknown Speaker: It should be pretty stable, I would say, for a couple of quarters, and then start to pick up. The balance sheet is going to be getting a little bit smaller in the second quarter and then should start to grow, but the growth will be modest. I would guide to stable NII and then picking up, I think, pretty materially in 2027.

Dave Rochester: You mentioned the upside in the margin as you get into the early part of 2027. Where are you seeing that roll-on, roll-off differential in the earning asset buckets you have at this point?

Unknown Speaker: We have a lot of lower-yielding mortgages. Our legacy Mechanics Bank single-family is probably a low 4% coupon. A fair amount of that is starting to prepay and amortize, coming back on the books at, call it, 6%. Multifamily—we have $2.4 billion or something north of $2 billion of multifamily loans that yield low 4% in aggregate. That business today is closer also to 5.75% to 6%. That entire book will reprice—it is all adjustable, five, seven, ten; it was mostly originated in 2021 and 2022. By 2032, it will all have reset to market rates closer to 6%. So there are a lot of tailwinds there. We also have an HTM portfolio that is a drag.

It is $1.3 billion today, yielding 1.61%, and $100 million of that amortizes a year. Slower, longer duration, but over time, it will continue to be a tailwind. There is a lot of upside to the bank over time; as time passes, we will have a natural tailwind just from that occurring. This year will be a bit more flat, though, given the flat curve—no Fed cuts—and the final drag of auto. We will make up for some of that in our pretty substantial expense reductions that are coming here in the second and third quarters.

Dave Rochester: It looks like between now and the fourth quarter, you are looking at least a $10 million reduction on a quarterly run-rate basis on expenses, right? How much of that are you expecting to get in 2Q?

Unknown Speaker: We are at $474 million, excluding CDI annualized, in the first quarter. We expect to get to $430 million by the fourth quarter. That is $44 million annual—over $10 million a quarter. In the second quarter, we should see—a lot. I do not know the exact number, but there is going to be a significant amount of cost reductions coming off, and that will persist into the third quarter. By the fourth, we will be there.

Dave Rochester: Good, that will be good. Switching to the fee side for a minute on the trust business: you were opening an office in Delaware. I think it was this quarter. Is that up and running? If you could just remind us what that does for you and what other expansion you are planning in that business going forward, that would be great.

Unknown Speaker: We got a little bit delayed. It is now expected to open in May. We are almost there on the Delaware trust business. We have some demand waiting for us to open that. That is a major step for our wealth group, so that is exciting, but it has been delayed a quarter. Overall, our buildout of the team is complete. We have a great team; a number of folks came over from First Republic after that bank failed right in our backyard. We have been laying the groundwork.

We have been very busy with the integration and the merger, and we picked up some private bankers and other new clients from HomeStreet on the deposit side through it, and I think there is opportunity on the trust and wealth side to continue to grow. I am optimistic that business will continue to grow and be a very accretive business line for us, but the trust business did take longer than we thought. We are at the finish line.

Dave Rochester: Maybe just one last one on capital. You mentioned the big payout next quarter—I think it was $165 million of excess that you are looking at. Does that get you down to your target 8.25% Tier 1 leverage, or do you keep a little bit of extra there for flexibility going forward? How are you thinking about that?

Unknown Speaker: The way we have been managing capital is 8.25%, but one quarter in arrears, so it is more effectively like 8.5% to 8.6% leverage. This quarter, we are at 8.7%. To your comment, we are going to have excess—my rough math is maybe $35 million this quarter—that we are not paying out. Our dividend is going to be close to $160 million to $162 million this quarter, but there is still some that we are holding back, and we will think about how best to use that. That will persist as we go into the third quarter due to the lag on leveraged assets as the bank gets a bit smaller.

Leveraged assets take a quarter to catch up fully, and so we will have some excess capital. The other thing I will point out is there is a lot of CDI amortization that does not show up in GAAP earnings, but it does compound in capital generation for the bank. That is another source of excess capital that we create above and beyond the actual GAAP net income.

Dave Rochester: Alright, great. Thanks, appreciate it.

Unknown Speaker: Thanks, Dave.

Operator: There are no further questions at this time. This concludes today's call. Thank you for attending, and you may now disconnect.