The combined bank will have $23 billion in assets and remain publicly listed, the companies said.
The deal, which marks a crucial step in HomeStreet's efforts to regain profitability, comes months after it sold nearly $990 million of its multifamily commercial real estate loans to Bank of America (BAC.N).
HomeStreet has been looking to reduce its exposure to lower-yielding loans and pay down some of the costly sources of funding.
The bank had agreed to a merger with FirstSun Capital Bancorp (FSUN.O) last year, but regulators halted the deal in October.
At the time, HomeStreet CEO Mark Mason had said the "external environment and landscape regarding regulatory approvals for bank mergers of this nature has become more challenging".
HomeStreet shares climbed 11.3% before the bell on Monday and were poised to open at their highest since mid-February, if premarket gains hold.
The deal with Mechanics is expected to close in the third quarter, the companies said.
Separately, FB Financial (FBK.N) said it had signed a deal to buy Southern States Bancshares (SSBK.O) valuing it at $381 million.
