Mechanics Bancorp

Good morning, ladies and gentlemen, and welcome to the Mechanics Bancorp Second Quarter 2026 Earnings Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions with instructions to follow at that time. As a reminder, this conference call is being recorded. I would now like to turn the call over to Nathan Duda, Chief Financial Officer of Mechanics. Please go ahead.

Thank you, Operator, and good morning, everyone. We appreciate you joining our earnings conference call. With me here today are CJ Johnson, our President and CEO, and Carl Webb, our Executive Chairman. 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'd like to remind everyone that any forward-looking statements are subject to 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 made during today's call are subject to those safe harbor statements. 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 measures can also be found in our earnings release and in the earnings presentation. CJ, let me hand it over to you. Thank you, Nathan, and good morning.

We appreciate everyone joining our call and for your interest in Mechanics Bancorp. I'll start today by summarizing the highlights of our second quarter performance. I'll also provide another strategic update on the bank before handing things off to Nathan to review our financials in more detail. Carl, Nathan, and I will then open up the call for your questions. With that, let's turn to slide four. We had a nice second quarter, reporting 57.7 million in net income. On a fully diluted basis, we earned 25 cents per share, and our tangible book value per share increased to $7.56. This quarter, we paid a large dividend of 70 cents per share, with the major driver being the successful closure of our dust business line sale to Fifth Third in early May. Q2 did have a few non-core items, which I'll walk you through quickly. We had three one-time non-interest income adjustments, including a 1.8 million MSR valuation gain, a final true-up of $900,000 related to the dust sale, and a $600,000 loss on a sale of an old branch property that's been closed for a while. We also incurred $5.9 million of merger expenses, primarily severance, as we finished up our home street integration and had a significant amount of headcount reduction as a result. We also had a negative provision of $2.8 million, which we backed out of our core results. When you adjust for these items, we earned $59 million of core net income for the quarter, representing a core ROAA of 1.1% and a core ROATCE of 14.7%. Our total assets are now $21.2 billion, with total gross loans of $13.6 billion, total deposits of $18.1 billion, and tangible shareholders' equity of $1.75 billion. Our deposits decreased $153 million this quarter, with $199 million of the decline from high-cost CD balances, and with the pace of CD decline down substantially from Q1. Non-maturity balances grew 46 million, but we did see some mix shift into money market accounts from non-interest bearing accounts. We expect CDs to continue declining modestly in the third quarter, but overall, we think total deposits should begin to grow from here on out. Notably, intangibles decreased 107 million in Q2, driven by the dust business line sale. Our capital ratios remain robust with a 14.4% CET1 ratio and an 8.7% Tier 1 leverage ratio. Net charge-offs for the quarter were minimal again, with only 0.6 basis points, or 220,000, of non-auto net charge-offs. Also, our runoff auto loans continue to perform in line with expectations, with net charge-offs continue to drop each quarter as the auto portfolio seasons. Our ACL dropped one basis point to 1.12% of loans, driven by the modest negative provisions I mentioned a bit ago. Our allowance remains a very robust 2.57 times our total non-performing assets as of 6-30. Our cost of deposits was 1.25% in the second quarter, down three bips from Q1, but our spot cost of deposits at 6-30 was back to 1.28%, primarily due to mixed shift and stiff deposit competition. Our NIM was 3.62% for the quarter, up one basis point, and our CRE concentration ratio drops to 342% from 348% in Q1. It is only 97% if you exclude lower risk multifamily loans. Turning to slide five, I'd like to provide you with an update on some of the key strategic initiatives happening at the bank. We have now substantially completed our HomeStreet integration and it's good to get back to business as usual. By any measure, the merger with HomeStreet was a financial and strategic success. but it certainly was a heavy lift operationally, and I want to once again thank our dedicated employees for a job well done. As I mentioned previously, we had 5.9 million of one-time merger charges in the quarter, which was mostly severance as our FTE went from 1890 to 1756, Q over Q. A lot of that expense reduction benefit will show up in our Q3 NIE figures. 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 non-interest expense, excluding CDI, of approximately $430 million by the fourth quarter of this year. Strong earnings, deleveraging of the balance sheet post-merger, and the successful DUS business line sale generated substantial capital in the first half of 2026, with $255 million, or $1.10 per Class A share in dividends, paid to investors so far this year. That, on its own, implies a dividend yield of roughly 7% year-to-date. In addition, we continue to have approximately $100 million of excess capital above our 8.25% Tier 1 leverage ratio target at 630. We expect to pay a $56 million dividend, or 25 cents per Class A share, in Q3, and then another larger $75 million to $100 million dividend in Q4 subject to board and regulatory approval. We can also efficiently use our excess capital generated by a smaller, less risky balance sheet to enhance future earnings and expect to execute a modest restructuring of our remaining low yielding AFS securities in Q3. The highlights of our planned restructuring include selling approximately 310 million of 1.78% yielding AFS securities and reinvesting in MBS at current market rates close to 5.5%, which will result in a $25 million after-tax loss that would be earned back in four to five years. The AFS restructuring will improve our near-term NIM, but we expect that benefit to be somewhat offset over time by increased deposit pricing pressure and auto runoff. Our modeling assumptions continue to assume a flat forward curve with no short-term rate hikes or cuts We will also evaluate a sale of our remaining auto loans in the coming quarters, and if we decide to sell, it will be at a modest loss. We also could decide to continue servicing the auto loans out through maturity. We continue to expect a 17% to 18% ROATCE and a 1.3% to 1.4% ROAA in 2027 and beyond. Let's flip to slide six, which shows an overview of Mechanics Bancorp today. We have 21.2 billion in assets with 166 branches and great deposit market share across the West Coast, with a branch map spanning from Mexico to Canada and out to Hawaii. Our key stats compare very favorably to all publicly traded banks, 10 to 100 billion in assets. But the ones I like to focus on the most are risk-weighted assets to total assets of 58%, which ranks second, and a new one this quarter, our expected 2027 dividend yield of approximately 7%, which assumes cash dividends next year of 250 million. Our 7% expected dividend yield ranks first by a wide margin, despite taking very little risk with either our funding base or our earning assets. Stopping briefly on slide seven, we continue to be the fourth largest West Coast and California bank by deposits when measuring community banks with less than 250 billion in assets. Our unique franchise has been built over many years and, without a doubt, has tremendous scarcity value. It's been a few quarters since we included slide eight, but I wanted to refresh new investors on our market share breakdown in many highly attractive West Coast MSAs, including top 10 ranks in San Francisco, Seattle, and all across the Central Coast of California. California is an economically vibrant state that has the fifth largest GDP in the world, if it was its own country. and Seattle is one of the fastest growing large cities in the United States. We really like our market positioning post-merger and are looking forward to focusing on core deposit growth now that the integration is behind us. Slide nine is a detailed look at the evolution of our unique deposit base, which we believe is one of the most attractive on the West Coast. Our average deposit size is only 43,000 per account with an average relationship tenure of 19 years. We also have a highly diversified customer base with 49% consumer accounts, 43% business accounts, and 8% public funds with no broker deposits. Our focus is on profitably growing core relationships. The top right chart shows this as prior to our merger with HomeStreet, we grew core deposits over 600 million since the third quarter of 2019, despite closing 32 branches after our acquisition of Rabobank's California franchise. After merging with HomeStreet, we deliberately let non-core hot CDs leave the bank as we prioritize capital efficiency and look to minimize risk. The two charts on the bottom left and the bottom right highlight the strong relative position of our deposit base versus the broader US banking industry. Slide 10 looks back over the past decade on the exceptional credit quality of our commercial loan portfolio. Since 2016, We've had no losses on construction or multifamily loans, and only a few minor charge-offs on acquired commercial loans from both Rabobank and HomeStreet. Our credit team has a tremendous amount of experience managing through economic cycles, and we fully expect to continue our strong credit performance in the coming years. I've reworked slide 11 a bit, but this really is key to our investment thesis. The strength of our deposits and the efficiency with which we run our bank from both an expense and a capital management standpoint, allow us to post great returns despite having one of the lowest risk mix of assets in the country. In turn, our strong financial performance allows us to pay a market leading dividend yield of approximately 7%. The point I will continue to emphasize is that we will pay these significant dividends despite a very conservative balance sheet and credit profile relative to our banking peers. Over time, we hope to earn a premium earnings multiple given the superior risk-adjusted returns and the lower risk cash flows we generate for our investors. To wrap up my section, let's turn to slide 12, which summarizes the investment highlights of Mechanics Bancorp. First and foremost, we have fantastic market share across the West Coast with a branch footprint and customer mix that's nearly impossible to replicate. We are also very profitable due to our top-notch deposits and simple, efficient business model despite taking relatively little risk. We are a core funded bank with an exceptional track record of credit outperformance, and we are also very well capitalized with a liquid balance sheet. We are prudent with our capital and will continue to pay out substantial dividends with a market leading dividend yield. There's also complete alignment between our public and private investors as Ford Financial Fund owns 74% of the company. Finally, we have an experienced management team with strong operating and M&A track records. With that, let me turn the call over to Nathan to dig into more detail on our second quarter results. We've also added a few new pages this quarter, which I think you will find helpful. Nathan?