Mechanics Bancorp (MCHB)

ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited consolidated financial statements and related notes appearing elsewhere in this Quarterly Report and in our Annual Report on Form 10-K for the year ended December 31, 2025 (“2025 Annual Report on Form 10-K”) filed with the SEC. This Quarterly Report contains forward-looking statements that involve risks and uncertainties, including those described in the section entitled “Cautionary Note Regarding Forward-Looking Statements.” There are a number of important risks and uncertainties that could cause our actual results to differ materially from those discussed in these forward-looking statements. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in our other disclosures and filings.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, including information incorporated by reference herein, contains, and future oral and written statements of the Company and its management may contain, forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”). All statements, other than statements of historical fact, contained or incorporated by reference in this Quarterly Report, including statements regarding our plans, objectives, expectations, strategies, beliefs, or future performance or events, are forward-looking statements. Generally, forward-looking statements include the words “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “look,” “may,” “optimistic,” “plan,” “potential,” “projection,” “should,” “will,” and “would” and similar expressions (or the negative of these terms), although not all forward-looking statements contain these identifying words. Forward-looking statements involve known and unknown risks, uncertainties, assumptions, estimates, and other important factors that could cause actual results to differ materially from any results, performance or events expressed or implied by such forward-looking statements.

We caution readers that actual results may differ materially from those expressed in or implied by the Company’s forward-looking statements. Factors that could affect the Company’s future results from those expressed or implied in any forward-looking statements include, but are not limited to:

•substantial non-recurring and integration costs, which may be greater than anticipated due to unexpected events;

•failure to realize the anticipated benefits of the Merger;

•our ability to effectively manage our expanded operations;

•negative developments and events impacting the financial services industry;

•the soundness of other financial institutions;

•our ability to maintain sufficient liquidity, or an increase in the cost of liquidity;

•unpredictable economic, market and business conditions;

•interest rate risk, and fluctuations in interest rates;

•inflationary pressures and rising prices;

•adverse changes in real estate market values;

•the impact of climate change, including indirectly through impacts on our customers;

•the adequacy of our allowances for credit losses for loans and debt securities;

•incurring losses in our loan portfolio despite strict adherence to our underwriting practices;

•fluctuations in our mortgage origination business based upon seasonal and other factors;

•our geographic concentration, which may magnify the adverse effects and consequences of any regional or local economic downturn;

•the accuracy of independent appraisals to determine the value of the real estate that secures a substantial portion of our loans;

•the ability of our small- to medium-sized borrowers to weather adverse business developments;

•our ability to fully identify and mitigate exposure to the various risks that we face, including interest rate, credit, liquidity and market risk;

•our ability to mitigate our exposure to interest rate risk;

•negative publicity regarding us, or financial institutions in general;

•environmental liability risk associated with our lending activities;

•our ability to manage risks associated with new lines of business, products, product enhancements and services;

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•our ability to adapt our services to changes in the marketplace related to mortgage servicing or origination, technology or in changes in the requirements of governmental authorities and customers;

•our ability to develop, implement and maintain an effective system of internal control over financial reporting;

•the potential that we may identify material weaknesses in our internal control over financial reporting in the future, which may result in material misstatements of our financial statements;

•the potential that we may write off goodwill and other intangible assets resulting from business combinations;

•dependence on our management team;

•exposure to fraudulent and negligent acts by our customers and the parties they do business with, as well as from employees, contractors and vendors;

•legal claims and litigation, including potential securities law liabilities;

•employee class action lawsuits or other legal proceedings;

•our ability to raise additional capital, if needed;

•competition from other financial institutions and financial service companies;

•regulatory restrictions that may delay, impede or prohibit our ability to consider certain acquisitions and opportunities;

•extensive supervision and regulation that could restrict our activities and impose financial requirements or limitations on the conduct of our business and limit our ability to generate income;

•our ability to comply with stringent capital requirements;

•the impact of federal and state regulators’ examination of our business;

•our ability to comply with the Bank Secrecy Act and other anti-money laundering statutes and regulations;

•our reliance on dividends from Mechanics Bank;

•our ability to raise debt or capital to pay off our debts upon maturity;

•our level of indebtedness following the completion of the Merger;

•increasing and continually evolving cybersecurity and other technological risks;

•our ability to adapt to rapid technological change;

•our ability to effectively implement new technological solutions or enhancements to existing systems or platforms;

•our ability to manage risks and challenges relating to the development and use of artificial intelligence;

•our dependence on our computer and communications systems;

•our ability to effectively manage and aggregate data;

•Ford Financial Funds and their controlled affiliates control approximately 77% of the voting power of Mechanics Bancorp, and have the ability to elect all of our directors and control most other matters submitted to our shareholders for approval;

•we are a “controlled company” within the meaning of the rules of Nasdaq and, as a result, we qualify for, and rely on, exemptions from certain corporate governance standards;

•future sales of shares by existing shareholders could cause our stock price to decline;

•our reliance on certain entities affiliated with the Ford Financial Funds for services;

•reduced disclosure requirements as a smaller reporting company; and

•certain of our shareholders have registration rights, the exercise of which could adversely affect the trading price of our common stock.

A discussion of the factors, risks and uncertainties that could affect our financial results, business goals and operational and financial objectives is also contained in Item 1A “Risk Factors” included in our 2025 Annual Report on Form 10-K, filed with the SEC. We strongly recommend readers review those disclosures in conjunction with the discussions herein. Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, and should not be relied upon as a prediction of actual results or future events.

Forward-looking statements in this Quarterly Report are based on management’s expectations at the time such statements are made and speak only as of the date made. We do not assume any obligation or undertake to update any forward-looking statements after the date of this Quarterly Report as a result of new information, future events or developments, except as required by federal securities or other applicable laws, although we may do so from time to time.

All future written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to above. New risks and uncertainties arise from time to time, and factors that we currently deem immaterial may become material, and it is impossible for us to predict these events or how they may affect us.

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Overview

Mechanics Bancorp is a financial holding company and primarily operates through 121-year-old Mechanics Bank, a full-service community bank with 166 branches throughout California, Washington, Oregon and Hawaii. Following the strategic Merger of HomeStreet Bank with and into Mechanics Bank on September 2, 2025, with Mechanics Bank surviving the Merger as a wholly owned subsidiary of the Company, the assets, liabilities and operations of HomeStreet Bank became the assets, liabilities and operations of Mechanics Bank. Headquartered in Walnut Creek, California, Mechanics Bank provides a wide range of products and services in consumer and business banking, commercial lending, cash management services, private banking, and comprehensive wealth management and trust services.

General

The Company’s management’s discussion and analysis of results of operations and financial condition (“MD&A”) is intended to assist the reader in understanding and assessing significant changes and trends related to the results of operations and financial condition of the Company. This discussion and analysis should be read in conjunction with the consolidated financial statements and accompanying footnotes in this Quarterly Report on Form 10-Q.

Recent Developments

Presentation of Results - HomeStreet Bank Merger

On September 2, 2025, we completed the Merger of HomeStreet Bank, the wholly-owned subsidiary of Mechanics Bancorp (formerly known as “HomeStreet, Inc.”) with and into Mechanics Bank, with Mechanics Bank as the surviving bank. Mechanics Bank is the accounting acquirer (“legal acquiree”), HomeStreet Bank is the accounting acquiree and Mechanics Bancorp is the legal acquirer. In this Quarterly Report on Form 10-Q, our financial results for all periods ended prior to September 2, 2025 reflect Mechanics Bank’s results on a standalone basis until the closing of the Merger on September 2, 2025 and results of the combined company beginning September 2, 2025. The number of shares issued and outstanding, earnings per share, and all references to share quantities or metrics of Mechanics Bancorp have been retrospectively restated to reflect the equivalent number of shares issued in the Merger since the Merger was accounted for as a reverse acquisition. As the accounting acquirer, Mechanics Bank remeasured the identifiable assets acquired and liabilities assumed in the Merger as of September 2, 2025 at their acquisition date fair values. The estimates of fair value were recorded based on initial valuations at the Merger date. These estimates are considered prelim

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ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with

our audited consolidated financial statements and related notes appearing elsewhere in this Annual Report. This Annual

Report contains forward-looking statements that involve risks and uncertainties, including those described in the section

entitled “Forward-Looking Statements.” There are a number of important risks and uncertainties that could cause our

actual results to differ materially from those discussed in these forward-looking statements. We may not actually achieve

the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance

on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and

expectations disclosed in the forward-looking statements we make. Factors that could cause or contribute to such

differences include, but are not limited to, those identified below and those discussed in the section entitled “Risk Factors”

under Part I, Item 1A. of this Annual Report, and those discussed in our other disclosures and filings.

Overview

Mechanics Bancorp is a financial holding company and primarily operates through 121-year-old Mechanics Bank, a full-

service community bank with 166 branches throughout California, Washington, Oregon and Hawaii. Following the

strategic Merger of HomeStreet Bank with and into Mechanics Bank on September 2, 2025, with Mechanics Bank

surviving the Merger as a wholly owned subsidiary of the Company, the assets, liabilities and operations of HomeStreet

Bank became the assets, liabilities and operations of Mechanics Bank. Headquartered in Walnut Creek, California,

Mechanics Bank provides a wide range of products and services in consumer and business banking, commercial lending,

cash management services, private banking, and comprehensive wealth management and trust services.

Other Recent Developments

Presentation of Results - HomeStreet Bank Merger

On September 2, 2025, we completed the Merger of HomeStreet Bank, the wholly-owned subsidiary of Mechanics

Bancorp (formerly known as “HomeStreet, Inc.”) with and into Mechanics Bank, with Mechanics Bank as the surviving

bank. Mechanics Bank is the accounting acquirer (“legal acquiree”), HomeStreet Bank is the accounting acquiree and

Mechanics Bancorp is the legal acquirer. In this Annual Report on Form 10-K, our financial results for all periods ended

prior to September 2, 2025 reflect Mechanics Bank’s historical financial results on a standalone basis. In addition, our

reported financial results for 2025 reflect Mechanics Bank’s financial results on a standalone basis until the closing of the

Merger on September 2, 2025 and results of the combined company from September 2, 2025 through December 31, 2025.

The number of shares issued and outstanding, earnings per share, and all references to share quantities or metrics of

Mechanics Bancorp have been retrospectively restated to reflect the equivalent number of shares issued in the Merger since

the Merger was accounted for as a reverse acquisition. As the accounting acquirer, Mechanics Bank remeasured the

identifiable assets acquired and liabilities assumed in the Merger as of September 2, 2025 at their acquisition date fair

values. The estimates of fair value were recorded based on initial valuations at the Merger date. These estimates are

considered preliminary as of December 31, 2025, are subject to change for up to one year after the Merger date, and any

changes could be material.

Unless we state otherwise or the content otherwise requires, references in this Annual Report on Form 10-K to

“Mechanics,” “we,” “our,” “us” or the “Company” refer collectively to Mechanics Bancorp, Mechanics Bank (the “Bank”)

and other direct and indirect subsidiaries of Mechanics Bancorp, following completion of the Merger. In some instances,

we refer to Mechanics Bank prior to the effective time of the Merger as “legacy Mechanics Bank,” HomeStreet Bank prior

to the effective time of the Merger as “legacy HomeStreet Bank,” and HomeStreet, Inc. prior to the effective time of the

Merger as “legacy HomeStreet, Inc.”

Asset Sale

On December 3, 2025, Mechanics Bank and Fifth Third Bank, National Association (“Fifth Third”), a wholly-owned,

indirect subsidiary of Fifth Third Bancorp, entered into an asset purchase agreement (the “Agreement”), pursuant to and

subject to the terms and conditions of which Mechanics Bank has agreed to sell, and Fifth Third has agreed to purchase,

Mechanics Bank’s Fannie Mae Delegated Underwriting and Servicing (“DUS”) business line (the “Transaction”), which

was acquired in the HomeStreet acquisition, for cash consideration. In connection with the Agreement, Fifth Third will

acquire the DUS servicing portfolio, including the DUS multifamily mortgage servicing rights. The aggregate purchase

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price in the Transaction is approximately $130 million, subject to adjustment for changes in the fair value at closing of the

DUS multifamily mortgage servicing rights being transferred in connection with the Transaction.

The closing of the Transaction is subject to customary closing conditions, including (a) approval of the Transaction by

Fannie Mae and other regulatory approvals to the extent applicable, (b) the absence of any order, injunction, decree or law

making the Transaction illegal or otherwise preventing the consummation of the Transaction, (c) the accuracy of each

party’s representations and warranties as of the closing date, subject to materiality qualifications, and (d) each party’s

performance of its covenants under the Agreement in all material respects. The sale is expected to close in the first or

second quarter of 2026.

Critical Accounting Estimates

The following discussion and analysis of financial condition and results of operations are based upon our consolidated

financial statements and the notes thereto, which have been prepared in accordance with GAAP and accounting practices in

the banking industry. Certain of those accounting policies are considered critical accounting policies because they require

us to make estimates and assumptions regarding circumstances or trends that could materially affect the value of those

assets, such as economic conditions or trends that could impact our ability to fully collect our loans or ultimately realize the

carrying value of certain of our other assets. Those estimates and assumptions are made based on current information

available to us regarding those economic conditions or trends or other circumstances. If changes were to occur in the

events, trends or other circumstances on which our estimates or assumptions were based, these changes could have a

material adverse effect on the carrying value of assets and liabilities and on our results of operations. As a result of the

Merger, the Company updated critical accounting estimates. Management believes the ACL policy and estimate, the

valuation of single family MSRs and business combinations estimates are important to the portrayal of the Company’s

financial condition and results of operations and requires difficult, subjective, or complex judgments and, therefore,

management considers the following to be critical accounting estimates.

ACL

The Company utilizes a blend of economic forecast scenarios from Moody’s Analytics, specifically, the baseline, upside

(“S1”), and downside (“S3”) scenarios, as key inputs in estimating our ACL. These scenarios are refreshed quarterly and

provide forward-looking assumptions on key macroeconomic indicators such as Gross Domestic Product (“GDP”) growth,

unemployment rates, commercial real estate conditions, interest rates and other market risk factors. Within this framework,

our current expected credit loss models generate PD and LGD at the individual loan or pooled segment level. These

components are modeled using borrower characteristics, loan terms, and scenario-specific economic conditions. The

product of PD and LGD results in the expected credit loss for each instrument, which aggregates into the Bank’s total

ACL. In addition to model-driven outputs, we incorporate qualitative adjustments where management determines other

considerations may be warranted. These adjustments consider factors not fully captured in the models and are reassessed

regularly to ensure reserves remain appropriate. Changes in the Company’s assumptions and economic forecasts could

significantly affect its estimate of expected credit losses, which could potentially lead to significant changes in the estimate

from one reporting period to the next.

MSRs

MSRs are recognized as separate assets when servicing rights are acquired through the sale of loans or through purchases

of MSRs. For sales of mortgage loans, the fair value of the MSR is estimated and capitalized. Purchased MSRs are

capitalized at the cost to acquire. Initial and subsequent fair value measurements are determined using a discounted cash

flow model that is owned and operated by a third party valuation firm. To determine the fair value of the MSR, the present

value of expected net future cash flows is estimated. Assumptions used include market discount rates, anticipated

prepayment speeds, delinquency and foreclosure rates, and ancillary fee income net of servicing costs. The model

assumptions and the MSR fair value estimates are also compared to observable trades of similar portfolios as well as to

MSR broker valuations and industry surveys, as available. We also utilize a separate third-party valuation firm to value our

MSRs on a periodic basis, the results of which we use to evaluate the reasonableness of the modeled values. Actual market

conditions could vary significantly from current conditions which could result in the estimated life of the underlying loans

being different which would change the fair value of the MSR. We carry our single family residential MSRs at fair value

and report changes in fair value through earnings. MSRs for loans other than single family loans are adjusted to fair value

if the carrying value is higher than fair value and are amortized into noninterest income in proportion to, and over the

period of, the estimated future net servicing income of the underlying financial assets.

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Business Combinations

The Company accounts for business combinations using the acquisition method of accounting. Under this accounting

method, the acquired company’s assets and liabilities are recorded at fair value at the date of the acquisition, except as

provided for by the applicable accounting guidance, and the results of operations of the acquired company are combined

with the acquiree’s results from the date of the acquisition forward. The difference between the purchase price and the fair

value of the net assets acquired (including identifiable intangible assets) is recorded as goodwill or bargain purchase gain.

Management uses significant estimates and assumptions to value such items, including projected cash flows, repayment

rates, default rates and losses assuming default, discount rates, and realizable collateral values. The allowance for credit

losses for PCD loans and PSL is recognized within acquisition accounting. Fair value adjustments are amortized or

accreted into the statement of operations over the estimated life of the acquired assets or assumed liabilities. The purchase

date valuations and any subsequent adjustments determine the amount of goodwill or bargain purchase gain recognized in

connection with the acquisition. The use of different assumptions could produce significantly different valuation results,

which could have material positive or negative effects on our results of operations.

The determination o

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