Mechanics Expands Margin as Deposit Costs Ease
The regional lender’s net interest margin widened to 3.62% as certificates of deposit repriced and ran off.
Mechanics Bancorp (MCHB), the California regional lender, expanded its net interest margin 1 bp QoQ and 18 bps YoY to 3.62% as deposit costs eased. Net interest income slipped $1.9 million QoQ to $177.2 million as average interest-earning assets contracted, while the HomeStreet merger kept the measure 36% above its year-earlier level.
Funding costs provided the margin lift. The cost of interest-bearing liabilities fell 4 bps QoQ to 2.05%, outweighing a 2-bp decline in earning-asset yields and widening the net interest spread 2 bps to 2.81%. Average certificate balances fell $436.2 million to $2.04 billion, and their cost dropped 35 bps to 2.45%.
The runoff also reduced the balance sheet. Total deposits declined $153.3 million QoQ to $18.09 billion as $199.2 million of certificate runoff exceeded $45.9 million of core-deposit growth. Noninterest-bearing deposits fell to $6.42 billion, lowering their share of total deposits by 1 percentage point to 35%.
Average loans declined 2.2% QoQ to $13.69 billion, though they remained 46.7% higher YoY following the HomeStreet transaction. Period-end loans fell $276.0 million to $13.58 billion as repayments exceeded originations, extending their contraction from $14.59 billion in September 2024.
Fee income and merger savings supported operating leverage. Noninterest income increased 13.2% QoQ to $23.8 million, helped by the sale of the Fannie Mae DUS business and a mortgage-servicing-rights valuation adjustment. Noninterest expense fell 4.6% to $124.5 million as headcount reductions lowered compensation costs, improving the efficiency ratio 330 bps to 61.9%.
Mechanics strengthened its capital position and increased distributions. Its CET1 ratio rose 47 bps QoQ to 14.39%, while total risk-based capital increased 54 bps to 16.70%. The Class A dividend rose 75% to $0.70 a share, and the company paid $162 million in cash dividends during the quarter.
Credit costs shifted to a $2.8 million provision reversal from a $7.8 million provision in the prior quarter, and annualized net charge-offs improved 2 bps to 0.10% of average loans. Delinquencies moved in the other direction, rising 14 bps to 0.70% of loans after two matured commercial-real-estate credits became past due, while nonperforming assets increased 3 bps to 0.28% of assets. The quarter ended with cheaper funding and a wider margin alongside continued loan contraction and higher problem-asset measures.