Company: MCHB
Filing Date: 2025-04-15
Form Type: ARS
Source: 0001518715-25-000069
Chunk: 37

Company: Mechanics Bancorp
Filing Date: 2025-04-15
Form: ARS
Chunk 37
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 factors (“Q-Factors”) that assess the current loan portfolio and forecasted economic environment. The Q- Factors adjust the expected historic loss rates for current and forecasted conditions that are not provided for in the historical loss information. The Q-Factors require management to make significant judgment about the assumptions that are inherently uncertain. The significant qualitative adjustment relates to the economic Q-Factor. We identified auditing of the qualitative adjustment for the economic Q-Factor as a critical audit matter because of the significant judgments applied by management in determining the qualitative adjustment. In addition, auditing the Company’s qualitative adjustment for the economic Q-Factor required a high degree of auditor judgment and an increased extent of effort. The primary audit procedures we performed to address this critical audit matter included the following: • Tested the design and operating effectiveness of controls over Q-Factor adjustments within the ACL model, including controls addressing: ▪ Management’s review of the reasonableness of assumptions and judgments, including the qualitative risk adjustments used to derive the economic Q-Factor. ▪ Management’s review of the calculation of Q-Factor adjustments, including the application of the economic Q-Factor. ▪ Management’s evaluation of the relevance and reliability of data utilized in the calculation of the economic Q-Factor. • Tested the mathematical accuracy of economic Q-Factor adjustments within the ACL model. • Tested the relevance and reliability of the data used in the determination of economic Q-Factor adjustments. • Evaluated the reasonableness of management’s assumptions and judgments used in the determination of the economic Q-Factor adjustments and the resulting allocation to the qualitative allowance for the ACL on loans. Single Family Mortgage Servicing Rights — Projected Prepayment Speed and Discount Rate Assumptions — Refer to Notes 1, 9, and 13 to the financial statements The Company initially records, and subsequently measures, single family mortgage servicing rights (“MSRs”) at fair value and categorizes its single family MSRs as “Level 3” financial instruments. Changes in the fair value of single family MSRs result from changes in (1) model inputs and assumptions and (2) modeled amortization, representing the collection and realization of expected cash flows and curtailments over time. The model inputs used to estimate the fair value of single family MSRs include assumptions regarding projected prepayment speeds and discount rates. The Company's methodology for estimating the fair value of single family MSRs is highly sensitive to changes in these assumptions. We identified the auditing of the projected prepayment speed and discount rate assumptions used in the single family MSRs