KBRA Assigns Ratings to Mechanics Bancorp; Upgrades and Subsequently Withdraws Ratings for HomeStreet, Inc.
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senior unsecured debtfinancial
A senior unsecured debt is a loan or bond that a company must repay before other unsecured obligations but is not backed by specific assets as collateral. Think of it as being earlier in line for repayment, like a preferred ticket in a queue, but without a guarantee you’ll get property if the company fails; that priority reduces risk compared with junior debt and affects expected interest rates and recovery prospects for investors.
subordinated debtfinancial
Subordinated debt is a type of loan that is paid back after other debts have been settled if a company encounters financial trouble. It is considered riskier for lenders because they have lower priority in getting repaid, similar to being last in line during a payout. For investors, this means higher potential returns in exchange for taking on more risk.
short-term debtfinancial
Short-term debt is money a company must pay back within one year, including loans, notes, and commercial paper. It matters to investors because it shows near-term cash demands and how well a company can cover those payments with available cash or regular income; like a household managing a credit card bill, heavy short-term debt can raise the risk of running short of cash or needing costly refinancing, while manageable levels suggest stronger short-term financial health.
loan-to-deposit ratiofinancial
Loan-to-deposit ratio measures how much a bank has lent out compared with the money customers have deposited, expressed as a percentage. Think of it like the share of a household’s savings that has been loaned to others: a higher ratio can boost earnings but reduce cash on hand and increase risk, while a lower ratio means more liquidity but potentially lower returns—key for investors assessing a bank’s balance of profit and safety.
core ROAfinancial
Core ROA (core return on assets) measures how efficiently a company turns its assets into regular, ongoing profit by using a profit figure that excludes one-time gains, losses or unusual items. Investors use it like a “clean” miles-per-gallon reading for a car: it shows the sustainable earning power of the business’s asset base, making it easier to compare performance across periods or between companies without distortion from rare events.
risk-based capitalfinancial
Risk-based capital is the amount of money a regulated financial or insurance company is required to hold so it can absorb losses from the specific risks it faces, such as investments, loans, or insurance claims. Think of it as a safety cushion sized to the company's risk profile; a larger cushion reduces the chance of insolvency and regulatory intervention. Investors watch this figure because it signals financial strength, the ability to meet obligations, and how much freedom the firm has to pay dividends or grow.
NEW YORK--(BUSINESS WIRE)--
KBRA assigns a senior unsecured debt rating of BBB+, a subordinated debt rating of BBB, and a short-term debt rating of K2 to Walnut Creek, California-based Mechanics Bancorp (NASDAQ: MCHB) ("Mechanics" or "the company"). In addition, KBRA assigns deposit and senior unsecured debt ratings of A-, a subordinated debt rating of BBB+, and short-term deposit and debt ratings of K2 to its main subsidiary, Mechanics Bank ("the bank"). The Outlook for all long-term ratings is Stable.
Additionally, KBRA upgrades the senior unsecured debt rating to BBB+ from BBB-, the subordinated debt rating to BBB from BB+, and the short-term debt rating to K2 from K3 for HomeStreet, Inc. ("HomeStreet" or "HMST"). Furthermore, KBRA upgrades the deposit and senior unsecured debt ratings to A- from BBB, the subordinated debt rating to BBB+ from BBB-, and the short-term deposit and debt ratings to K2 from K3 for its subsidiary, HomeStreet Bank. Subsequently, KBRA withdraws all ratings for HomeStreet, Inc. and HomeStreet Bank following the completion of its merger with Mechanics on September 2, 2025.
The ratings are supported by Mechanics’ strong ownership and experienced management team, led by Ford Financial Fund ("the fund"), which acquired the bank in 2015 and remains the majority shareholder (~74% ownership following the HomeStreet merger). The fund has a proven record of success in the community banking sector, and under its leadership, Mechanics has achieved meaningful scale (~$23 billion in assets) and a solid deposit market share across attractive West Coast markets, with a continued focus on preserving a high-quality deposit franchise. The funding base compares favorably to similarly rated peers, characterized by a high share of noninterest-bearing deposits (35% of total), solid granularity, and minimal reliance on wholesale funding (only remaining regulatory non-core sources are jumbo CDs and capital instruments such as subordinated debt). The total cost of funds was 1.45% in 3Q25, among the lowest in the KBRA-rated universe, reflecting the runoff of HomeStreet’s higher-cost FHLB advances and CDs, with additional runoff expected over the next two to three quarters. This favorable funding mix underpins a healthy NIM and, in turn, solid profitability, despite a conservative balance sheet structure characterized by lower-yielding but low-risk loan segments and disciplined liquidity management (loan-to-deposit ratio of 75%). Earnings are expected to improve further from the respectable 3Q25 core ROA level (~1.2%), which is projected to rise to ~1.4% in 2026, reflective of anticipated cost synergies and the continued runoff of higher-cost funding inherited from HomeStreet, which along with loan repricing opportunities should facilitate further NIM expansion. While revenues remain largely spread-dependent (fee income contributing ~12% of total revenue in 3Q25), management continues to target growth in noninterest income, particularly in wealth management and related advisory businesses.
On the asset quality front, outside of legacy indirect auto losses — a portfolio now in runoff (~7% of total loans as of 3Q25) — Mechanics’ loan book demonstrates strong credit performance supported by a granular, conservatively underwritten CRE portfolio. Credit metrics are expected to remain sound, aided by what we could consider prudent underwriting at legacy HMST and a disciplined credit mark on acquired loans (1.4% of HMST total loans). That said, concentration risk remains an ongoing consideration, with an above average investor CRE concentration (~370% of total risk-based capital following the closing of HMST). However, management expects this ratio to drop below 300% by 2028 as the balance sheet evolves. Similarly, the portfolio’s geographic and product concentrations — notably in multifamily and residential lending (nearly 65% of total loans, largely in California) — present exposure to regional market trends. However, persistent housing supply constraints in California have continued to support collateral values and rent performance, and the company has recognized negligible losses in these segments since the fund's acquisition. In the event of unforeseen credit deterioration, loss-absorbing capacity is robust, backed by healthy earnings, solid reserves, and a favorable capital position. The CET1 ratio remained solid on a pro forma basis, which was 13.4% at 3Q25, and is projected to rise toward 14% by year-end 2026, even with elevated dividend payouts (targeting an 80%-90% payout ratio) due to a stable or modestly smaller balance sheet prospectively. Overall, Mechanics’ conservative balance sheet positioning, including healthy capital and liquidity levels, is a core rating strength that reinforces its below-average risk profile.
To access ratings and relevant documents, click here.
Further information on key credit considerations, sensitivity analyses that consider what factors can affect these credit ratings and how they could lead to an upgrade or a downgrade, and ESG factors (where they are a key driver behind the change to the credit rating or rating outlook) can be found in the full rating report referenced above.
A description of all substantially material sources that were used to prepare the credit rating and information on the methodology(ies) (inclusive of any material models and sensitivity analyses of the relevant key rating assumptions, as applicable) used in determining the credit rating is available in the Information Disclosure Form(s) located here.
Information on the meaning of each rating category can be located here.
Further disclosures relating to this rating action are available in the Information Disclosure Form(s) referenced above. Additional information regarding KBRA policies, methodologies, rating scales and disclosures are available at www.kbra.com.
About KBRA
Kroll Bond Rating Agency, LLC (KBRA), one of the major credit rating agencies (CRA), is a full-service CRA registered with the U.S. Securities and Exchange Commission as an NRSRO. Kroll Bond Rating Agency Europe Limited is registered as a CRA with the European Securities and Markets Authority. Kroll Bond Rating Agency UK Limited is registered as a CRA with the UK Financial Conduct Authority. In addition, KBRA is designated as a Designated Rating Organization (DRO) by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus. KBRA is also recognized as a Qualified Rating Agency by Taiwan’s Financial Supervisory Commission and is recognized by the National Association of Insurance Commissioners as a Credit Rating Provider (CRP) in the U.S.
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